AGC Inc. FY2026 Q2 Earnings Report

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Executive Summary

This quarter recorded increases in both revenue and operating income, along with significant growth in net income, driven primarily by higher earnings in Chemicals and the normalization of the tax burden. Revenue was ¥11,006.1B (+10.6% YoY), while operating income was ¥646.6B (+19.7%), securing earnings growth above the revenue growth rate. The operating margin improved to 5.9% from 5.4% in the prior-year period. Profit before tax was ¥603.3B (+78.8%), net income attributable to owners of the parent was ¥355.1B (+155.4%), and net income including the portion attributable to non-controlling interests was ¥413.7B (+125.3%). The primary factor behind the amplified growth in net income was the decline in the effective tax rate from 45.6% in the prior year to 31.4% in the current period.

Factors Affecting Performance

【Revenue】Revenue was ¥11,006.1B, an increase of +10.6% YoY. By segment, Chemicals (30.1% of revenue, +16.8%) and Lifescience (6.5%, +15.4%) recorded strong growth. Automotive (25.5%, +9.6%) and Glass (20.8%, +9.1%) also contributed to the revenue increase, while Electronics (15.7%, +3.5%) showed slower growth and CeramicsOthers (1.5%) recorded an 8.7% decline. Cost of sales was ¥8,388.7B (+10.4%), broadly in line with revenue growth, and the gross margin improved slightly to 23.8% from 23.7% in the prior year.

【Profit and Loss】Operating income was ¥646.6B (+19.7%), representing earnings growth above the revenue growth rate. Although SG&A expenses increased to ¥2,008.8B (+9.5%), the SG&A ratio declined slightly to 18.3% from 18.4%, indicating that cost management generally remained effective. By segment, Chemicals generated ¥281.7B (+25.0%, 8.5% margin), accounting for approximately 44% of consolidated operating income and serving as the primary earnings contributor. Glass improved significantly to ¥87.7B (+170.9%) due to market conditions and cost corrections. Conversely, Electronics (¥187.1B, -23.4%) and Automotive (¥133.4B, -11.8%) recorded lower earnings. Lifescience continued to post a loss of ¥60.6B, although this represented a 49.2% improvement from the prior year. Profit before tax was ¥603.3B (+78.8%), while net income attributable to owners of the parent was ¥355.1B (+155.4%). The increase exceeding the growth in profit before tax was attributable to the decline in the effective tax rate (45.6% in the prior year → 31.4% in the current period). Overall, the company recorded higher revenue and earnings, with improvements in Chemicals and Glass absorbing declines in Automotive and Electronics.

Segment Analysis

Among the six segments, Chemicals was the largest in both revenue and earnings, accounting for 30.1% of revenue and ¥281.7B in operating income (approximately 43.6% of consolidated operating income), and drove overall performance through higher revenue and earnings. Glass accounted for 20.8% of revenue and recorded a significant increase in operating income to ¥87.7B (+170.9%), although its margin of 3.8% remains relatively low among the segments. Automotive (25.5% of revenue, ¥133.4B in operating income, -11.8%) and Electronics (15.7%, ¥187.1B, -23.4%) recorded lower earnings despite higher revenue, reflecting the impact of supply-demand adjustments on their margins (Automotive margin: 4.8%; Electronics margin: 10.8%). Lifescience achieved a high revenue growth rate of +15.4%, but continued to report an operating loss of ¥60.6B, with monetization remaining an issue given its -8.5% margin. CeramicsOthers recorded an 8.7% decline in revenue but improved profitability, with operating income of ¥15.0B (+154.6%) and a 9.2% margin.

Key Financial Indicators

【Profitability】The operating margin improved to 5.9% from 5.4% in the prior year, while the gross margin of 23.8% (23.7% in the prior year) confirms some easing in cost pressures. The consolidated net margin was 3.8%, while the net margin based on net income attributable to owners of the parent was 3.2%; both improved significantly from the prior year. ROE was 2.4%, calculated using net income attributable to owners of the parent of ¥355.1B and average equity attributable to owners of the parent. Although it improved from approximately 1.0% in the same period of the prior year, it remains low in absolute terms.【Cash Quality】Operating Cash Flow (OCF) was ¥1,048.9B, equivalent to approximately 2.95 times net income attributable to owners of the parent of ¥355.1B, indicating strong cash conversion. However, increases in inventories (-¥258.1B) and trade receivables (-¥143.6B) placed pressure on working capital and require monitoring from the perspective of cash generation efficiency.【Investment Efficiency】Capital expenditures were ¥1,027.2B (¥917.4B in the prior year, +12.0%), indicating continued proactive investment, while free cash flow declined to ¥100.6B from ¥294.1B in the prior year. Total assets were ¥30,062.7B (+1.9% YoY), while revenue increased +10.6%, suggesting a gradual improvement in asset efficiency.【Financial Soundness】The equity ratio was 50.8%, up +0.5pt from 50.3% in the prior year, maintaining a conservative capital structure. Total interest-bearing debt was approximately ¥5,194.0B, and net debt, after considering cash and deposits of ¥875.7B, was approximately ¥4,318.3B. Interest coverage, measured by EBIT/financial expenses, was approximately 7.4x, indicating sufficient capacity.

Cash Flow Analysis

OCF was ¥1,048.9B, down -10.5% from ¥1,171.4B in the prior year, but remained substantially above net income attributable to owners of the parent of ¥355.1B. OCF before changes in working capital totaled ¥1,341.4B, with the increase in inventories (-¥258.1B) and the increase in trade receivables (-¥143.6B) serving as the primary factors reducing actual OCF. Investing Cash Flow was -¥948.3B, including capital expenditures of ¥1,027.2B, up from ¥917.4B in the prior year, reflecting continued proactive investment. As a result, free cash flow (OCF + investing cash flow) was ¥100.6B, down significantly from ¥294.1B in the prior year. Financing Cash Flow was -¥208.9B, with dividend payments of ¥223.0B representing the primary cash outflow; share repurchases were minimal at ¥0.1B. Cash and cash equivalents were ¥875.7B, down from ¥946.7B in the prior year, as cash holdings declined slightly because investment and shareholder returns exceeded free cash flow.

Earnings Quality

Earnings quality was supported by strong OCF. OCF of ¥1,048.9B was approximately 2.95 times net income attributable to owners of the parent of ¥355.1B, indicating good consistency between earnings and cash flow. Among non-operating items, financial income of ¥51.1B was offset by financial expenses of ¥87.0B, resulting in a net negative contribution. Equity-method investment gains improved to ¥38.0B from ¥15.0B in the prior year. The primary reasons for the sharp increase in net income were improved earnings power in the business and the decline in the effective tax rate from 45.6% in the prior year to 31.4% in the current period. Attention is warranted because the tax-rate change, which has a non-recurring characteristic, contributed to the result. Comprehensive income was ¥736.2B, including ¥653.4B attributable to owners of the parent, substantially exceeding consolidated net income of ¥413.7B. The difference was primarily attributable to foreign currency translation adjustments (+¥246.9B in the current period versus -¥548.7B in the prior year). This contrasts with the same period of the prior year, when comprehensive income was negative (-¥428.5B) despite positive net income, confirming the significant impact of foreign exchange movements on comprehensive income.

Earnings Forecast and Guidance

Progress against the full-year plan was 50.0% for revenue, at ¥11,006.1B against the full-year forecast of ¥22,000.0B, representing a standard pace. Operating income was ¥646.6B, or 43.1% of the full-year forecast of ¥1,500.0B, lagging the standard progress rate of 50% by -6.9pt. Consolidated net income was ¥413.7B, or 46.0% of the full-year forecast of ¥900.0B. Net income attributable to owners of the parent was ¥355.1B, or 46.1% of the full-year forecast of ¥770.0B. Both were progressing slightly behind revenue. The lag in operating income progress suggests that the plan assumes an acceleration in earnings growth during the second half, making a recovery in second-half profitability critical to achieving the plan. No revisions were made to the earnings or dividend forecasts during the quarter.

Shareholder Returns

The interim dividend was ¥105 per share, unchanged from ¥105 in the same period of the prior year. Dividend payments were ¥223.0B, and the payout ratio, calculated by dividing this amount by net income attributable to owners of the parent of ¥355.1B, was 62.8%. The full-year dividend forecast is ¥210, implying an estimated payout ratio of approximately 58% based on the full-year forecast for net income attributable to owners of the parent of ¥770.0B. Share repurchases were minimal at ¥0.1B, and shareholder returns were primarily dividend-based. Free cash flow of ¥100.6B was below dividend payments of ¥223.0B, indicating that shareholder returns during the period were primarily supported by OCF and cash on hand.

Risk Factors

1. Segment Earnings Concentration: Chemicals accounted for 43.6% of consolidated operating income, resulting in a high degree of dependence on pricing and cost-spread trends in that segment. Automotive (4.8% margin, -11.8%) and Electronics (10.8% margin, -23.4%) continued to record lower earnings, and the impact of supply-demand adjustments is affecting the balance of overall performance.

2. Working Capital Accumulation: Inventories increased to ¥4,958.6B (+6.5% YoY), while trade receivables increased to ¥3,429.7B (+5.7%), both weighing on OCF. If inventory and receivables continue to increase relative to revenue growth (+10.6%), the impact on cash generation capacity may persist.

3. Lagging Progress Against the Full-Year Plan: Operating income progress was 43.1%, behind the standard 50% level, and assumes an acceleration in earnings growth during the second half. Market conditions and pricing and cost trends in the second half will affect achievement of the plan.

Industry Benchmark (Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

Growth and Capital Efficiency

※Source: Company compilation

Key Takeaways from the Financial Results

1. Improvements in Chemicals and Glass drove consolidated earnings growth, and the operating margin improved by +0.45pt to 5.9% from 5.4% in the prior year. However, a -3.8pt gap versus the industry median of 9.7% indicates room for further profitability improvement.

2. One factor behind the sharp increase in net income was the decline in the effective tax rate (45.6% in the prior year → 31.4% in the current period). The combination of improved business earnings and tax-related factors warrants attention when assessing tax-rate trends in subsequent periods.

3. Revenue progress against the full-year plan was 50.0% and on track, while operating income progress was 43.1% and lagging. Accordingly, the degree to which earnings growth accelerates in the second half will determine the achievement of the full-year plan.

Theoretical Stock Price (Reference Value)

This is a mechanically calculated reference range based solely on publicly disclosed data using a residual income model (Ohlson-type model with an explicit 5-year fade). It is not a forecast of the market price or a recommendation of any specific investment action.

Sensitivity: ¥6,328–¥6,689 at ±1% for the cost of equity, and ¥6,482–¥6,519 at ±0.1 for ω.

Notes:

• Net income is significantly compressed relative to operating income due to the tax burden, acquisition-related expenses, and non-controlling interests, among other factors (net income ÷ operating income 51%). This value reflects that compression at face value; if the factors are temporary, the underlying earnings power may be higher.
• Because forecast ROE is below the cost of equity, the theoretical value is below book value per share.
• Net assets as of the end of the quarter are used, resulting in a timing gap relative to the full-year forecast.

(Calculation model: Residual Income Model / Interest Rate Reference Month: 2026-06 / This value does not forecast or guarantee future stock prices)

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This report is an earnings analysis document automatically generated by AI based on XBRL earnings release data. It does not recommend investment in any specific security. The industry benchmarks are reference information compiled by the Company based on publicly disclosed earnings data. Investment decisions should be made at your own responsibility, and you should consult a professional adviser as necessary.

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