RINNAI CORPORATION FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥216.41B
• Operating Income: ¥22.73B
• Net Income: ¥19.22B
• EPS: ¥113.77

Income Statement

Balance Sheet

Cash Flow Statement

Profitability Ratios

Year-over-Year Comparison

Share Information

Dividend Information

Segment Information

Full Year Forecast

Disclaimer

This data was automatically extracted from XBRL files. Please refer to the original disclosure documents for accuracy.

AI Financial Analysis

Executive Summary

Rinnai FY2026 Q2 delivered a solid beat on profitability with modest top-line growth. Revenue grew 2.0% YoY to 2,164.2, while operating income rose 8.2% to 227.3, indicating positive operating leverage. Ordinary income expanded 13.2% YoY to 252.7, aided by higher non-operating gains, and net income jumped 30.0% to 159.2. Gross margin printed at 35.1%, reflecting improved pricing/mix and/or easing input costs versus last year’s inflationary headwinds. Operating margin reached 10.5%, up an estimated ~61 bps YoY (from ~9.9% estimated), as SG&A discipline and scale effects outpaced revenue growth. Net margin improved to 7.4%, up roughly 159 bps YoY on stronger operations and non-operating income tailwinds. Cash generation was strong: operating cash flow was 226.3, equating to 1.42x net income, signaling high earnings quality. Balance sheet resilience remains a key strength, with a current ratio of 354.8%, quick ratio of 313.9%, and an estimated equity ratio around 77%. Interest coverage is exceptionally high at 505x, reinforcing minimal financial risk. Non-operating income (28.6), notably interest income (15.7) and dividends (5.2), contributed meaningfully to ordinary income, though the core operating engine still drove the bulk of profits. ROE is modest at 3.5% from DuPont (NPM 7.4% × AT 0.369 × leverage 1.30x), highlighting low leverage and moderate asset turnover as structural constraints despite better margins. ROIC at 5.9% remains below the 7–8% management KPI benchmark, suggesting further capital efficiency improvements are needed. Free cash flow, estimated at 169.6 (OCF minus capex), supports ongoing shareholder returns including buybacks (73.6) and likely dividends. The reported payout ratio of 72.3% appears elevated versus a <60% sustainability benchmark, but near-term FCF coverage looks adequate. Forward-looking, margin momentum and cash discipline provide a buffer against macro softness, but achieving ROIC >7% will require continued mix/pricing execution, cost control, and asset turn improvements. Key watch items are demand trends in housing-related gas appliances, input cost and FX tailwinds durability, and the balance between shareholder returns and investment for growth.

Profitability Analysis

ROE decomposition (DuPont): Net Profit Margin 7.4% × Asset Turnover 0.369 × Financial Leverage 1.30x = ROE 3.5% (matches reported). The biggest positive delta this quarter was net profit margin, with net income up 30.0% vs revenue +2.0%, implying margin expansion supported by a ~61 bps rise in operating margin and additional non-operating gains. Business drivers likely included improved price-cost spread (steel and components inflation easing), mix upgrades, and SG&A discipline (SG&A ratio ~24.6%), with tailwinds from higher interest income and dividend income. Asset turnover appears broadly stable given modest revenue growth and a large asset base; leverage remains conservative, limiting ROE uplift from gearing. Sustainability: margin gains from cost normalization and pricing can persist near term, but non-operating income (notably interest income) is partly cyclical and could normalize if rates fall. Watch for SG&A growth: while absolute SG&A rose to 532.1, it increased slower than revenue, aiding margins; any reversal (e.g., wage inflation) could compress operating margin. Overall, ROE remains constrained by low leverage and moderate turnover; further improvement hinges more on asset efficiency and sustained operating margin than on financial leverage.

Growth Assessment

Top line grew 2.0% YoY to 2,164.2, a steady outcome against a soft housing and renovation backdrop. Operating income grew 8.2% to 227.3, outpacing sales and indicating positive operating leverage. Ordinary income rose 13.2% to 252.7, aided by higher interest and dividend receipts; net income surged 30.0% to 159.2 on stronger operations and a normalizing tax rate (effective 27.1%). Gross margin at 35.1% and operating margin at 10.5% signal improved price-cost dynamics and scale. Growth quality is good: non-operating income contributed but operating profit remains the core earnings driver. Outlook: assuming stable input costs and demand normalization in overseas markets, Rinnai can defend mid-10% operating margins near term. Risks to growth include softer housing starts, electrification substitution (heat pumps), and FX swings; offsets include service/aftermarket, mix upgrades (high-efficiency/eco models), and cost control.

Financial Health

Liquidity is robust with a current ratio of 354.8% and quick ratio of 313.9%; no warning thresholds triggered (both >> benchmarks). Cash and deposits of 1,712.2 exceed current liabilities of 979.7, implying no near-term funding stress. Debt metrics are conservative: D/E 0.30x and interest coverage 505x; no D/E >2.0 warning. Estimated equity ratio is strong at ~77.1% (total equity 4,517.1 / total assets 5,861.7). Maturity mismatch risk appears low as current assets (3,476.2) comfortably cover current liabilities (979.7). No off-balance sheet obligations were disclosed in the provided data. Overall solvency and liquidity provide ample buffer for capex, working capital needs, and shareholder returns.

Cash Flow Quality

OCF/Net Income is 1.42x (>1.0 benchmark), indicating strong earnings quality with cash conversion supported by working capital discipline. Estimated free cash flow is 169.6 (OCF 226.3 minus capex 56.8), comfortably funding buybacks (73.6) and likely dividends, with residual capacity for reinvestment. Financing cash outflow of -150.5 reflects active shareholder returns; importantly, these appear covered by internally generated cash rather than incremental debt. No clear signs of working capital manipulation are evident from the snapshot: inventories (400.6) and receivables (808.1) look manageable relative to sales and OCF. Sustainability: barring a sharp demand downturn or input cost spike, FCF generation should remain adequate to support the company’s capital allocation priorities.

Dividend Sustainability

The reported payout ratio of 72.3% exceeds the <60% benchmark for conservative sustainability, suggesting a somewhat elevated distribution policy relative to current ROE (3.5%) and ROIC (5.9%). However, cash coverage appears adequate: estimated FCF of 169.6, plus a strong cash balance (1,712.2), provides near-term flexibility. With financing cash outflows of -150.5 including buybacks of -73.6, aggregate shareholder returns appear within cash generation capacity this period. Medium term, to maintain or raise dividends sustainably, further improvement in ROIC toward 7–8% and continued stable OCF will be important. Given missing disclosures on actual dividends paid and DPS, our assessment is based on the provided payout ratio and FCF estimate.

Risk Assessment

Business Risks:

• Demand sensitivity to housing starts and renovation cycles in core gas appliance markets
• Competitive pricing pressure in domestic and overseas appliance categories
• Input cost volatility (steel, components) potentially compressing gross margins
• Product substitution risk from electrification/heat pump adoption and decarbonization policies
• Aftermarket/service utilization variability impacting recurring revenue

Financial Risks:

• ROIC at 5.9% below the 7–8% target range, implying capital efficiency gap
• Elevated payout ratio (72.3%) relative to earnings power/ROE could constrain reinvestment if cash flow weakens
• Non-operating income reliance (interest/dividends) adds some earnings cyclicality to ordinary income
• FX exposure on overseas operations affecting revenue and input costs

Key Concerns:

• Sustaining margin gains if input cost tailwinds fade
• Translating strong balance sheet into higher asset turnover and ROE without raising financial risk
• Potential normalization of interest income reducing non-operating tailwinds
• Execution on innovation to counter electrification/heat pump substitution

Investment Implications

Key Takeaways:

• Profitability improved meaningfully with operating margin up ~61 bps and net margin up ~159 bps YoY
• Earnings quality is high with OCF/NI at 1.42x and robust FCF despite active buybacks
• Balance sheet is exceptionally strong (equity ratio ~77%, current ratio ~355%, interest cover 505x)
• ROIC at 5.9% and ROE at 3.5% lag ideal thresholds, highlighting scope for asset efficiency gains
• Payout ratio appears elevated; near-term cash coverage is fine but longer-term sustainability hinges on ROIC uplift

Metrics to Watch:

• Operating margin and gross margin trend (price-cost spread)
• ROIC progression toward >7–8%
• OCF/NI ratio and FCF after capex
• Inventory and receivables turns versus sales growth
• Non-operating income sensitivity (interest/dividend income) and effective tax rate
• FX (USD/JPY, AUD/JPY, CNY/JPY) impacts on revenue and costs
• Shareholder return mix (dividends vs buybacks) versus cash generation

Relative Positioning: Within Japan’s housing equipment/appliance peers, Rinnai stands out for balance sheet strength and improving margins, but trails best-in-class on capital efficiency (ROIC/ROE). Execution on mix upgrades and asset utilization will be key to closing the gap while maintaining conservative financial risk.

Disclaimer

This analysis was auto-generated by AI. Please note the following:

• No Guarantee of Accuracy: The accuracy and completeness of this analysis are not guaranteed. For accurate financial data, please refer to the original disclosure documents published on TDnet or other official sources
• Not Investment Advice: This analysis is for general informational purposes only and does not constitute investment advice under applicable securities laws. It is not a recommendation to buy or sell any specific securities
• At Your Own Risk: Investment decisions should be made at your own discretion and risk. We assume no liability for any losses incurred based on this analysis