Nippon Electric Glass (5214) FY2026 Q2 Earnings Report

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Executive Summary

Despite higher revenue, profitability from the core business deteriorated significantly, while non-operating factors supported ordinary income. Revenue was ¥1564.1B (+1.7% YoY), operating income was ¥113.7B (-31.8%), ordinary income was ¥162.9B (+14.7%), and net income was ¥65.6B (-36.5%). The primary factors behind the decline in operating income were a lower gross margin and higher SG&A expenses. The increase in ordinary income resulted from expanded non-operating income, including a ¥30.7B foreign exchange gain, while extraordinary losses, primarily the ¥129.7B cost of business structural reform, weighed on net income.

Factors Affecting Earnings

【Revenue】Revenue was ¥1564.1B, an increase of +1.7% YoY. Cost of sales increased to ¥1206.8B (+5.1%), resulting in gross profit of ¥357.3B. The gross margin of 22.8% declined by approximately 2.5pt from 25.3% in the same period of the previous year. Although the Company secured revenue growth, the increase in costs exceeded the benefit of higher revenue.

【Profit and Loss】SG&A expenses increased by +9.5% YoY to ¥243.6B, expanding at a pace substantially exceeding the 1.7% revenue growth rate. Consequently, operating income declined to ¥113.7B (-31.8%), and the operating margin contracted to 7.3% from 10.8% in the previous year. In non-operating items, in addition to ¥9.5B in dividend income, a ¥30.7B foreign exchange gain contributed to an increase in non-operating income to ¥63.5B, resulting in ordinary income of ¥162.9B (+14.7%). However, extraordinary losses of ¥141.7B, including ¥129.7B in business structural reform costs, were recorded against extraordinary gains of ¥90.3B, including a ¥49.3B gain on the sale of investment securities and an ¥18.8B gain on the sale of fixed assets. The resulting net extraordinary loss of ¥51.4B compressed profit before tax to ¥111.5B. As a result, net income attributable to owners of the parent was ¥64.1B (-36.4%), representing higher revenue but lower profit.

Key Financial Indicators

【Profitability】The operating margin of 7.3% declined by approximately 3.6pt from 10.8% in the same period of the previous year. The deterioration in the gross margin to 22.8% from 25.3% and the increase in the SG&A ratio to 15.6% from 14.5% progressed simultaneously. The net profit margin was 4.1%, while the effective tax rate was approximately 41.2%, indicating a heavy tax burden. 【Cash Flow Quality】Operating Cash Flow (OCF) of ¥241.3B was approximately 3.8 times net income of ¥64.1B, indicating strong cash generation. OCF/EBITDA was approximately 0.97 times, reflecting favorable cash conversion; however, this includes the impact of adding back non-cash expenses such as impairment losses and collecting funds from inventories and trade receivables. 【Investment Efficiency】Annualized ROE was 2.6% and ROIC was only 2.9%. Improving asset efficiency remains a challenge amid a capital-intensive structure in which property, plant and equipment account for 53.6% of total assets. 【Financial Soundness】The equity ratio was 74.1%, the debt-to-equity ratio was 0.35 times, and cash and deposits totaled ¥1006.6B, indicating a conservative capital structure and a strong financial base.

Cash Flow Analysis

Operating Cash Flow was ¥241.3B, an increase of +29.3% YoY, demonstrating cash generation substantially exceeding net income of ¥65.6B. This increase was supported by the addition of non-cash expenses related to impairment and the collection of funds from inventories of ¥49.8B and trade receivables of ¥47.4B; therefore, it is not entirely indicative of recurring earnings strength. Meanwhile, trade payables were a factor reducing cash flow by ¥83.6B, partially weighing on OCF. Investing Cash Flow was an outflow of ¥96.0B, primarily due to the acquisition of fixed assets and other items. Free cash flow of ¥145.2B was secured. Financing Cash Flow was an outflow of ¥360.8B, with uses of funds including ¥100.0B in share repurchases, ¥60.2B in dividends, and ¥100.0B in bond redemptions. Cash and cash equivalents decreased by ¥200.6B, but the balance at the end of the period remained at ¥1002.6B.

Earnings Quality

The increase in profit was limited to the ordinary income level, primarily due to the expansion of non-operating income, including the ¥30.7B foreign exchange gain. At the operating level, profit declined because of the deterioration in the gross margin and higher SG&A expenses. It should therefore be noted that the increase in ordinary income does not reflect an improvement in the core business. In addition, extraordinary gains of ¥90.3B, including a ¥49.3B gain on the sale of investment securities and an ¥18.8B gain on the sale of fixed assets, and extraordinary losses of ¥141.7B, including ¥129.7B in business structural reform costs, occurred simultaneously, weighing on net income on a net basis. Given the substantial scale of extraordinary gains and losses, net income of ¥65.6B was strongly affected by temporary factors, indicating a significant gap from the underlying earning power of the core business. Comprehensive income was ¥201.2B, exceeding net income, primarily due to a ¥114.7B increase in foreign currency translation adjustments.

Earnings Forecasts and Guidance

The full-year Company forecasts are revenue of ¥3000.0B (-3.7% YoY), operating income of ¥200.0B (-41.4%), and ordinary income of ¥250.0B (-33.8%). First-half progress rates were 52.1% for revenue, 56.9% for operating income, and 65.2% for ordinary income, all exceeding the 50% benchmark for the first half. However, the background to the operating income progress rate is the continued decline in operating income during the first half, and the assumptions for the second half are even more challenging than those of the previous year. The high progress rate for ordinary income includes non-operating factors such as foreign exchange gains and must be evaluated separately from the degree of recovery in the core business. Although the earnings forecast was revised during the quarter, there was no revision to the dividend forecast.

Shareholder Returns

The Q2 dividend was ¥80.00 per share, and the full-year dividend forecast is ¥160.00 per share. Compared with interim net income of ¥64.1B, the interim dividend amount, approximately ¥60.2B on a half-year basis, was high, resulting in a payout ratio exceeding 100% based on dividends alone. Share repurchases of ¥100.0B were conducted, bringing total shareholder returns, including dividends and share repurchases, to approximately ¥160.2B, exceeding free cash flow of ¥145.2B. The financial base, including cash and deposits of ¥1006.6B and a low debt-to-equity ratio of 0.35 times, supported the high level of shareholder returns during the period. However, the total return ratio relative to net income was high, and the continuation of shareholder returns will depend partly on the recovery of operating income.

Risk Factors

1. Decline in core business profitability: The operating margin was 7.3%, down approximately 3.6pt from 10.8% in the same period of the previous year. The simultaneous deterioration in the gross margin to 22.8% from 25.3% and increase in the SG&A ratio to 15.6% from 14.5% have created a structure in which operating income declines even when revenue increases.

2. Pressure on net income from extraordinary losses: Extraordinary losses of ¥141.7B were incurred, primarily consisting of ¥129.7B in business structural reform costs. Even after offsetting extraordinary gains of ¥90.3B, the resulting burden of ¥51.4B weighed on net income. Whether additional structural reform costs will arise remains a key focus.

3. Dependence of ordinary income growth on foreign exchange: The ¥30.7B foreign exchange gain was equivalent to approximately 27% of operating income, indicating that the increase in ordinary income was highly dependent on this non-operating factor. Ordinary income is structurally susceptible to fluctuations in currency movements.

Industry Benchmark (Reference; Company Analysis)

Industry Benchmark (manufacturing)

Profitability and Returns

The Company's profitability indicators are below the industry median, with both its operating margin and net profit margin positioned relatively low within the industry.

Growth and Capital Efficiency

The revenue growth rate was also substantially below the industry median, and the Company's revenue growth was more modest than that of its peers.

※Source: Company analysis

Key Takeaways from the Financial Results

1. Despite higher revenue, the operating margin declined by approximately 3.6pt YoY. The simultaneous deterioration in the gross margin and increase in SG&A expenses indicate room for improvement in cost management and pricing and product mix.

2. The increase in ordinary income was highly dependent on non-operating factors, including foreign exchange gains, and does not necessarily reflect the underlying strength of the core business. The recovery trend in operating income during the second half will be a key focus in assessing earnings quality.

3. Extraordinary losses, primarily the ¥129.7B in business structural reform costs, significantly compressed net income. Meanwhile, OCF was strong, increasing +29.3% YoY, and the financial base was conservative, with an equity ratio of 74.1% and a debt-to-equity ratio of 0.35 times. Shareholder returns, combining dividends and share repurchases, were close to the level of free cash flow, and the Company's ability to continue such returns will depend on the degree of recovery in operating income.

Theoretical Share Price (Reference Value)

Sensitivity: ¥5,561–¥5,873 at ±1% for the cost of equity, and ¥5,680–¥5,735 at ±0.1 for ω.

Notes:

• Because forecast ROE is below the cost of equity, the theoretical value is below book value per share.
• Net assets as of the quarter-end are used; there is a timing mismatch with the full-year forecast.
• Because net assets include non-controlling interests, the theoretical value may be calculated somewhat higher.

(Calculation model: Residual Income Model (Ohlson-type; explicit five-year fade) / Interest rate reference month: 2026-07 / Mechanically calculated solely from publicly disclosed data; this is not a forecast of the market share price or a recommendation of any specific investment action, and does not predict or guarantee future share prices.)

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This report is an earnings analysis document automatically generated by AI based on XBRL earnings report 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, after consulting professionals as necessary.

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