The Japan Steel Works,Ltd. FY2027 Q1 Earnings Report

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Executive Summary

Although revenue declined, improvements in the gross margin and segment mix resulted in increases in Operating Income, Ordinary Income, and Net Income, making this a quarter of lower revenue but higher profits. Revenue was ¥581.7B (-13.9% YoY), Operating Income was ¥58.6B (+11.2%), Ordinary Income was ¥61.1B (+8.8%), and Net Income attributable to owners of the parent was ¥59.3B (+35.4%). The primary driver of the profit increase was the improvement in the gross margin to 27.4% from 22.6% in the previous year, due to a decline in the cost-of-sales ratio. In addition, the recording of a ¥20.6B gain on the sale of investment securities as extraordinary income boosted Net Income growth.

Factors Affecting Results

【Revenue】Revenue of ¥581.7B declined 13.9% YoY. The Industrial Machinery Business, which accounted for 81.7% of the revenue mix, was the primary cause of the decline, with revenue of ¥487.0B (-16.3%). By product category, Plastics Manufacturing and Processing Machinery declined significantly to ¥179.8B (-17.8%), and Other Industrial Machinery fell to ¥58.1B (-58.1%), while Defense-Related Equipment increased to ¥87.4B (+20.8%). The Materials and Engineering Business was essentially flat at ¥109.0B (+0.4%).

【Profit and Loss】Operating Income was ¥58.6B (+11.2%), and the Operating Income margin improved by 2.3pt to 10.1% from 7.8% in the previous year. The improvement in the gross margin to 27.4% (+4.8pt) more than offset the increase in the SG&A ratio to 17.4% (+2.5pt). After adding net non-operating income of ¥2.5B, including ¥4.1B in dividend income, Ordinary Income increased 8.8% to ¥61.1B. As a result of recording a ¥20.6B gain on the sale of investment securities as extraordinary income, Profit Before Tax expanded 39.2% to ¥79.9B, while Net Income attributable to owners of the parent increased 35.4% to ¥59.3B. The substantial growth in Net Income was heavily supported by the temporary contribution of extraordinary income, and core earnings power should be assessed based on the improvement in Operating Income. Lower revenue but higher profits.

Segment Analysis

The Industrial Machinery Business recorded lower revenue of ¥487.0B (-16.3%), but secured higher Operating Income of ¥45.5B (+5.4%), with its margin improving to 9.3% from 7.5% in the previous year (+1.8pt). Amid a combination of growth in Defense-Related Equipment and demand adjustments in Plastics Machinery, improved cost profitability appears to have contributed. The Materials and Engineering Business was essentially flat, with revenue of ¥109.0B (+0.4%), while Operating Income increased 11.1% to ¥18.7B. Its margin was 17.1% (18.2% in the previous year, -1.1pt), remaining the highest level among the Company’s businesses. The high margin of this business contributed to lifting the Company-wide Operating Income margin. From a segment-mix perspective, changes in the revenue contribution of the Materials and Engineering Business will be a factor determining future profitability.

Key Financial Indicators

【Profitability】The Operating Income margin was 10.1%, improving by 2.3pt from 7.8% in the previous year. The Ordinary Income margin was 10.5%, while the Net Income margin, based on income attributable to owners of the parent, was 10.2%, improving by 3.7pt from 6.5% in the previous year. However, it should be noted that the improvement in the Net Income margin includes the boost from extraordinary income.【Cash Flow Quality】Work in process increased to ¥1,339.5B from ¥1,233.3B in the previous year (+8.6%), while accounts receivable declined to ¥479.3B (-24.9%), and contract liabilities (advance payments) decreased to ¥518.3B (-8.7%). The timing mismatch between project progress and acceptance is reflected in the working capital composition.【Investment Efficiency】ROE was 2.8% on a quarterly actual-results basis, remaining at a level with room for improvement in terms of capital efficiency.【Financial Soundness】The Equity Ratio was 50.4%, and the current ratio was 232.9%, both high levels. With interest expense of ¥3.3B, the Operating Income-based interest coverage ratio was approximately 17.9x, indicating substantial resilience to interest burdens.

Cash Flow Analysis

As individual line items in the cash flow statement have not been disclosed, cash trends are assessed based on changes in the balance sheet. Cash and deposits amounted to ¥760.0B, down 2.3% from ¥776.3B in the previous year. While work in process increased by ¥106.3B (+8.6%), accounts receivable decreased by ¥158.8B (-24.9%), indicating progress in collections, although the accumulation of work-in-process inventory remains a burden on working capital. Contract liabilities (advance payments) decreased by ¥49.2B (-8.7%), indicating that the cash cushion from advance receipts is diminishing. Long-term borrowings decreased by ¥100.7B (-13.6%), reflecting progress in the repayment of interest-bearing debt. Investment securities decreased by ¥30.8B (-11.6%), and the Company recorded ¥20.6B in extraordinary income from partial sales. Taken together, the pace of cash generation going forward will depend on the consumption of work in process and progress in customer acceptance.

Quality of Earnings

The ¥20.6B gain on the sale of investment securities recorded as extraordinary income was equivalent to approximately 34.7% of Net Income attributable to owners of the parent of ¥59.3B, indicating that temporary factors made a substantial contribution to the increase in Net Income for the period. Non-operating income was ¥7.2B, or 1.2% of revenue, primarily consisting of ¥4.1B in dividend income, while non-operating expenses were ¥4.7B, including ¥3.3B in interest expense. The difference between the Ordinary Income margin of 10.5% and the Operating Income margin of 10.1% was primarily attributable to net non-operating income. Accordingly, the profitability of the core business should appropriately be assessed based on the improvement in Operating Income, including the +4.8pt improvement in the gross margin. The increasing trend in work in process indicates work underway for future revenue recognition, while also suggesting that the pace of cash conversion of earnings is gradual. From an accrual perspective, the quality of Operating Income should therefore continue to be closely monitored.

Earnings Forecast and Guidance

The Company’s full-year plan calls for revenue of ¥3,100B (+12.8% YoY), Operating Income of ¥270B (+6.7%), and Ordinary Income of ¥260B (-0.2%). Q1 progress rates were 18.8% for revenue, 21.7% for Operating Income, 23.5% for Ordinary Income, and 31.2% for Net Income attributable to owners of the parent. Progress in revenue and Operating Income was slightly below the simple quarterly linear progress benchmark of 25%, apparently due to seasonality arising from the concentration of project acceptance timing in the second half. The relatively high progress rate for Net Income was attributable to the temporary contribution of the gain on the sale of investment securities. Evaluation against the full-year plan should therefore focus primarily on progress in core earnings, based on Operating Income and Ordinary Income. No revisions were made to the earnings forecast or dividend forecast during the quarter.

Shareholder Returns

The annual dividend under the Company’s plan is ¥92 per share, and the Payout Ratio calculated using forecast EPS of ¥258.11 is approximately 35.6%. Supported by a financial base consisting of cash and deposits of ¥760.0B and an Equity Ratio of 50.4%, the forecast dividend level for the current period appears to be within a range that can be maintained on a stable basis. Data concerning share repurchases have not been disclosed, and shareholder returns appear to remain within the scope of the Company’s basic policy centered on dividends.

Risk Factors

1. Working Capital Expansion: Work in process increased to ¥1,339.5B from ¥1,233.3B in the previous year (+8.6%), while contract liabilities (advance payments) decreased to ¥518.3B (-8.7%). If the mismatch between project progress and customer acceptance timing persists, delays in cash conversion may emerge as a working capital burden.

2. Business Concentration Risk: The Industrial Machinery Business accounts for 81.7% of revenue, with substantial demand fluctuations in Plastics Manufacturing and Processing Machinery and Other Industrial Machinery (-17.8% and -58.1% YoY, respectively). The impact of the demand cycle in this business on Company-wide results is relatively significant.

3. Dependence on Temporary Gains: The increase in Net Income includes a ¥20.6B gain on the sale of investment securities, equivalent to approximately 34.7% of Net Income. As this extraordinary income is non-recurring in nature, whether Net Income growth can continue at a similar level from the next period onward must be assessed based on trends in Operating Income.

Industry Benchmark (Reference; Compiled by the Company)

Both the Operating Income margin and Net Income margin are above the industry median.

The revenue growth rate is substantially below the industry median and is also below the lower bound of the IQR (-1.1%).

※Source: Compiled by the Company

Key Takeaways from the Financial Results

1. Even amid declining revenue, the Company secured higher Operating Income (+11.2%) through an improved gross margin (+4.8pt) and an improved segment mix, indicating a qualitative improvement in its earnings structure.

2. The increase in Net Income attributable to owners of the parent (+35.4%) was heavily dependent on the ¥20.6B gain on the sale of investment securities, equivalent to approximately 34.7% of Net Income. This must be viewed separately from recurring earnings power.

3. Work in process increased (+8.6%) while contract liabilities decreased (-8.7%), making trends in project progress and customer acceptance timing key areas to monitor in assessing future cash flow trends.

Theoretical Share Price (Reference Value)

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

Sensitivity: ¥2,867–¥3,036 at Cost of Equity ±1%, and ¥2,949–¥2,951 at ω±0.1.

Notes:

• Net assets as of the quarter-end are used (there is a timing gap relative to the full-year forecast).
• As 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 summary 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 a professional as necessary.

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