NGK Corporation FY2027 Q1 Earnings Report

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Executive Summary

The first quarter of FY2026 resulted in higher revenue and higher earnings, with growth in Operating Income and Net Income significantly outpacing revenue growth. Against Revenue of ¥1841.5B (up +10.6% YoY), Operating Income was ¥326.3B (up +37.2%), Ordinary Income was ¥337.2B (up +38.3%), and Net Income attributable to owners of the parent (hereinafter the same) was ¥293.7B (up +64.1%), highlighting the strong growth in profit items. The primary factor was the expansion of the gross margin to 33.0% from 28.6% in the previous year, an increase of +4.4pt, which more than offset the +1.0pt rise in the SG&A expense ratio and improved the Operating Income margin to 17.7% from 14.3% in the previous year. In addition, the decline in the effective tax rate from 23.9% in the previous year to 11.5% also contributed to the increase in Net Income.

Factors Affecting Results

【Revenue】Consolidated Revenue was ¥1841.5B, an increase of +10.6% YoY. By segment, Environment, the core segment, achieved stable growth with Revenue of ¥1071.2B (composition ratio 58.2%, YoY +8.8%), while DigitalSociety contributed to growth through strong expansion, with Revenue of ¥626.6B (composition ratio 34.0%, YoY +32.8%). Meanwhile, EnergyAndIndustry recorded Revenue of ¥149.8B (composition ratio 8.1%, YoY -29.5%), including the impact of a change in the segment classification of low-level radioactive waste treatment equipment, which was transferred from Environment.

【Profit and Loss】Operating Income was ¥326.3B, up +37.2% YoY. The Operating Income margin improved to 17.7% from 14.3% in the previous year, an improvement of +3.4pt, as the expansion in the gross margin (33.0%, up +4.4pt YoY) more than offset the increase in the SG&A expense ratio (15.3%, up +1.0pt YoY). Ordinary Income was ¥337.2B, up +38.3% YoY. Non-operating income and expenses made only a net positive contribution of ¥11.0B, calculated as income of ¥30.1B, including dividend income of ¥10.8B and foreign exchange gains of ¥7.0B, less expenses of ¥19.1B, including interest expense of ¥7.5B. Extraordinary items were limited, comprising extraordinary income of ¥0.9B and extraordinary losses of ¥1.8B, and the impact of temporary factors was therefore limited. Net Income of ¥293.7B, up +64.1% YoY, significantly exceeded the +38.3% growth in Ordinary Income. This was primarily due to the decline in the effective tax rate from 23.9% in the previous year to 11.5% in the current period. Accordingly, the results can be characterized as higher revenue and higher earnings driven by both improved profitability at the operating level and a lower tax burden.

Segment Analysis

Environment recorded Revenue of ¥1071.2B (YoY +8.8%) and Operating Income of ¥228.7B (YoY +19.0%), with a margin of 21.3%, improved from 19.6% in the previous year. It is the core business, generating 70.1% of total Company Operating Income (segment total). DigitalSociety recorded Revenue of ¥626.6B (YoY +32.8%) and Operating Income of ¥82.4B (YoY +53.2%), with a margin of 13.2%, up from 11.4% in the previous year. It demonstrated both strong growth and a notable margin improvement, while the reversal of the ¥9.8B impairment loss on fixed assets recorded in the same quarter of the previous year also contributed to the substantial increase in earnings. EnergyAndIndustry recorded lower Revenue of ¥149.8B (YoY -29.5%), but returned to profitability, improving from a segment loss of (-¥7.9B) in the same period of the previous year to Operating Income of ¥15.3B, with its margin improving to 10.2%. It should be noted that the transfer of low-level radioactive waste treatment equipment between segments due to organizational changes (Environment→EnergyAndIndustry) affected the Revenue scale.

Key Financial Indicators

【Profitability】The Operating Income margin of 17.7% (14.3% in the previous year), gross margin of 33.0% (28.6% in the previous year), and Net Income margin of 15.9% (¥293.7B/¥1841.5B) all improved from the previous year, indicating a steady improvement in profitability.【Cash Quality】While liquidity remains ample, with cash and deposits of ¥1867.2B and current securities of ¥990.7B, inventories of ¥2387.0B and accounts receivable of ¥1441.5B account for approximately 31% of total assets, indicating that working capital remains highly tied up.【Investment Efficiency】ROE was 3.6%. Given total assets of ¥12224.4B and net assets of ¥8184.2B, quarterly Net Income remains limited in scale, indicating room for improvement in asset efficiency.【Financial Soundness】The Equity Ratio was 66.9% (65.0% in the previous year). Cash and deposits of ¥1867.2B exceeded long-term borrowings of ¥1378.8B and bonds of ¥620.0B, while short-term borrowings were substantially reduced to ¥14.6B (down -80.1% from ¥73.6B in the previous year), indicating a conservative and stable financial base.

Cash Flow Analysis

As a cash flow statement has not been disclosed, cash trends are analyzed based on changes in the balance sheet. Cash and deposits were ¥1867.2B, a decrease of -¥114.5B (-5.8%) from ¥1981.7B in the same period of the previous year, while current securities also decreased by -¥256.8B (-20.6%) to ¥990.7B. Meanwhile, inventories increased by +¥58.6B (+2.5%) YoY to ¥2387.0B, and accounts receivable remained broadly flat at ¥1441.5B (+¥2.2B). On the liabilities side, short-term borrowings decreased by -¥59.0B (-80.1%) YoY to ¥14.6B, suggesting a contraction in short-term funding requirements. Treasury stock was ¥176.4B, an increase of +¥71.8B from ¥104.6B in the previous year, suggesting that a portion of available funds may have been used for share repurchases or debt repayment. The combination of declining available liquidity and inventories remaining at elevated levels indicates that working capital turnover efficiency may become a factor influencing future cash generation.

Quality of Earnings

Operating Income of ¥326.3B accounted for the majority of Ordinary Income of ¥337.2B. Non-operating income and expenses made only a net positive contribution of ¥11.0B, calculated by deducting expenses of ¥19.1B, including interest expense of ¥7.5B, from income of ¥30.1B, including dividend income of ¥10.8B and foreign exchange gains of ¥7.0B. This indicates that the earnings structure is primarily driven by recurring operating business profits. Extraordinary items were limited, consisting of extraordinary income of ¥0.9B and extraordinary losses of ¥1.8B, and had a limited impact on Profit Before Tax of ¥336.4B. Meanwhile, income taxes were ¥38.7B, and the effective tax rate was approximately 11.5%, a significant decline from approximately 23.9% in the previous year. This was the primary reason that the Net Income growth rate (+64.1%) exceeded the Ordinary Income growth rate (+38.3%). Comprehensive Income was ¥441.6B, a divergence of approximately ¥144B from Net Income of ¥297.7B. The primary factors were fair-value and translation-related items, including foreign currency translation adjustments of ¥67.6B and valuation difference on securities of ¥81.1B. These fluctuations differ in nature from Net Income, which represents the recurring earning power of the business.

Earnings Forecast and Guidance

The full-year forecast is Revenue of ¥7100.0B (YoY +6.0%), Operating Income of ¥1070.0B (YoY +12.6%), and Ordinary Income of ¥1050.0B (YoY +10.3%). As of Q1, the progress rates were 25.9% for Revenue, 30.5% for Operating Income, and 32.1% for Ordinary Income, exceeding the standard 25% pace, with profit items particularly ahead of schedule. As of the current quarter, no revisions had been made to either the earnings forecast or the dividend forecast.

Shareholder Returns

The Company’s forecast annual dividend is ¥53 per share (¥38 in the previous year), representing a Payout Ratio of approximately 18.2% against forecast EPS of ¥290.67. Treasury stock was ¥176.4B, an increase of +¥71.8B from ¥104.6B in the previous year, suggesting that share repurchases were conducted. The dividend-only payout ratio is approximately 18%, which is not excessive. Given the financial base of cash and deposits of ¥1867.2B and an Equity Ratio of 66.9%, there appears to be room to support the sustainability of shareholder returns.

Risk Factors

1. Segment concentration risk: Environment accounts for 58.2% of Revenue and 70.1% of segment Operating Income. Accordingly, changes in demand trends and the regulatory environment for this business are likely to have a relatively significant impact on consolidated results.

2. Tied-up working capital: Inventories of ¥2387.0B and accounts receivable of ¥1441.5B account for approximately 31% of total assets. While cash and current securities have declined YoY, these balances remain at elevated levels.

3. Effective tax rate volatility: The effective tax rate for the current period was approximately 11.5%, a significant decline from approximately 23.9% in the previous year. The impact of the tax burden on the Net Income growth rate requires ongoing monitoring.

Industry Benchmark (For Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

Both the Operating Income margin and Net Income margin are substantially above the industry median, placing profitability in the upper tier of the industry.

Growth and Capital Efficiency

The Revenue growth rate also exceeds the industry median, but remains below the upper IQR of 14.8%.

※Source: Compiled by the Company

Key Takeaways from the Results

1. Both the gross margin and Operating Income margin improved simultaneously (+4.4pt and +3.4pt, respectively), confirming a structural improvement in profitability reflecting an improved earnings mix in Environment and DigitalSociety. Progress against the full-year forecast is also ahead of schedule, with Operating Income at 30.5%.

2. Profit dependence on Environment remains high, accounting for 70.1% of segment Operating Income. The degree of diversification in the business portfolio therefore remains an area to monitor based on the earnings data.

3. While cash and current securities have declined YoY, inventories and accounts receivable remain at elevated levels. Working capital efficiency is therefore a structural factor that may influence future cash generation.

Theoretical Share Price (Reference Value)

This is a reference range mechanically calculated solely from 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 share price or a recommendation of any specific investment action.

Sensitivity: ¥2,994–¥3,175 at ±1% for the cost of equity, and ¥3,078–¥3,089 at ±0.1 for ω.

Notes:

• Net assets as of the end of the quarter are used (there is a time-period gap relative to the full-year forecast).
• Because net assets include non-controlling interests, the theoretical value may be calculated somewhat higher.

(Calculation model: Residual Income Model / Interest rate reference month: 2026-06 / This value does not forecast or guarantee the future share price)

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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, after consulting professionals as necessary.

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