OKAMOTO MACHINE TOOL WORKS (6125) FY2026 Q3 Earnings Report

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Executive Summary

Cumulative results for FY2026 Q3 reflected a substantial decline in operating income, driven by lower revenue and deteriorating operating leverage. Revenue was ¥293.8B (-2.4% YoY), operating income was ¥7.4B (-50.5%), ordinary income was ¥6.7B (-44.9%), and net income was ¥3.2B (-55.6%). The primary factor was the core Machine Tools segment falling into the red, which could not be offset by higher revenue and earnings from semiconductor-related equipment.

Factors Affecting Performance

【Revenue】Revenue was ¥293.8B, down 2.4% year on year. The Machine Tools segment, which accounted for 67.7% of the revenue mix, declined to ¥198.8B (-6.7%), while semiconductor-related equipment secured higher revenue of ¥94.9B (+8.0%); however, the increase was insufficient to offset the Company-wide revenue decline.

【Profit and Loss】Operating income was ¥7.4B (-50.5%), representing a substantially larger decline than the decrease in revenue. The Machine Tools segment shifted from a segment profit of ¥3.2B to a loss of ¥3.5B. Semiconductor-related equipment maintained an almost unchanged earnings level at ¥20.9B (-2.5%), but Company-wide expenses also increased to ¥10.0B, further pressuring profits. Ordinary income was ¥6.7B (-44.9%), affected by non-operating expenses including a foreign exchange loss of ¥0.9B, while net income was ¥3.2B (-55.6%), additionally impacted by the high effective tax rate of 51.0%. The Company recorded lower revenue and lower earnings.

Segment Analysis

The Machine Tools segment reported revenue of ¥198.8B (-6.7% YoY), while segment results shifted from the previous year's profit of ¥3.2B to a loss of ¥3.5B, with deteriorating profitability in the core business weighing on Company-wide performance. The semiconductor-related equipment segment reported revenue of ¥94.9B (+8.0%), segment profit of ¥20.9B (-2.5%), and a high segment profit margin of 22.0%, maintaining strong profitability and serving as the substantive source of operating income. Company-wide expenses (adjustments) were ¥10.0B, up from ¥9.7B in the previous year, compressing the profits of both segments. The current structure relies on the high profitability of semiconductor-related equipment to offset the Machine Tools segment's losses and Company-wide expenses, making an improvement in Machine Tools profitability the key focus going forward.

Key Financial Indicators

【Profitability】The operating margin was 2.5%. Against a gross margin of 27.6%, the SG&A ratio reached 25.1%, with most of gross profit absorbed by SG&A expenses. The net profit margin remained at 1.1%, while the high effective tax rate of 51.0% further compressed the bottom-line margin.【Cash Flow Quality】As Operating Cash Flow (OCF) and investing cash flow were not disclosed, direct cash-generation capacity cannot be confirmed. However, comprehensive income of ¥17.4B substantially exceeded net income of ¥3.2B, primarily due to the temporary factor of foreign currency translation adjustments of ¥14.2B.【Investment Efficiency】ROE was 0.8%, and the Company's ability to generate earnings against total assets of ¥641.5B was limited, with low asset turnover constraining efficiency.【Financial Soundness】The equity ratio was 64.3% (improving from 60.7% in the previous year), while the current ratio was approximately 248%, indicating stable short-term liquidity. Meanwhile, short-term borrowings accounted for slightly more than 30% of interest-bearing debt, warranting monitoring of refinancing trends.

Cash Flow Analysis

As figures for OCF, investing cash flow, and financing cash flow were not disclosed in this earnings report, funding trends are analyzed based on balance sheet movements. Cash and deposits were ¥99.8B, remaining broadly flat from ¥99.0B in the previous year, while short-term investment securities declined significantly from ¥65.0B to ¥12.0B, suggesting that part of the liquid assets may have been reallocated. Inventories increased to ¥74.4B from ¥50.5B in the previous year, and work in process was particularly high at ¥83.5B, suggesting that delays in product completion and shipment have led to funds becoming tied up. Accounts receivable were ¥99.9B, equivalent to ¥99.9B in the previous year, with no material change; however, the accumulation of inventory requires close monitoring from the perspective of working capital efficiency.

Earnings Quality

The Company's recurring earnings capacity was represented by operating income of ¥7.4B. Extraordinary income and losses were relatively small, consisting of extraordinary income of ¥0.1B and extraordinary losses of ¥0.2B, and were not temporary factors that materially changed the movement from ordinary income to net income. Non-operating income and expenses comprised income of ¥2.1B against expenses of ¥2.8B, with interest expenses of ¥1.0B and a foreign exchange loss of ¥0.9B weighing on ordinary income. Comprehensive income of ¥17.4B substantially exceeded net income of ¥3.2B, primarily because other comprehensive income included foreign currency translation adjustments of ¥14.2B; this does not directly represent the Company's core earnings capacity for the current period. The high tax burden, reflected in an effective tax rate of 51.0%, also reduced the conversion efficiency from pretax income to net income and should be considered when evaluating earnings quality.

Earnings Forecast and Guidance

Progress against the Company's full-year forecast was 67.5% for revenue, 38.7% for operating income, 37.2% for ordinary income, and 26.7% for net income. Progress for all profit indicators was substantially below the standard benchmark of approximately 75% for cumulative Q3 results. To achieve the full-year forecast, standalone Q4 operating income of ¥11.6B and net income of ¥8.8B would be required, both substantially exceeding the respective quarterly averages for cumulative Q3. Achieving the forecast presupposes a sharp improvement in profitability during the latter half of the second half, including a recovery in the profitability of the Machine Tools segment.

Shareholder Returns

The interim dividend was ¥80 per share, resulting in a payout ratio of 167.6% against cumulative net income (¥3.2B, EPS ¥48.5), with dividends exceeding the earnings level for the cumulative period. Based on the Company's annual dividend forecast of ¥160 and forecast EPS of ¥181.52, the forecast payout ratio is approximately 88.1%, indicating a high payout ratio under either measure. As no information regarding share repurchases was identified, this assessment is based on the payout ratio, and no reference is made to the total return ratio. Dividend stability will depend on the extent of earnings recovery in the second half.

Risk Factors

1. Deterioration in Machine Tools segment profitability: Against revenue of ¥198.8B (-6.7% YoY), segment results shifted from the previous year's profit of ¥3.2B to a loss of ¥3.5B. If recovery in orders and product profitability is delayed, the downward pressure on Company-wide performance may continue.

2. Dependence on the semiconductor capital expenditure cycle: Semiconductor-related equipment has a high segment profit margin of 22.0% and is the substantive source of operating income. If the semiconductor capital expenditure cycle reverses, fluctuations in Company-wide earnings may increase.

3. Prolonged working capital cycle and dependence on short-term liabilities: Inventories accumulated to ¥74.4B (including work in process of ¥83.5B), resulting in further funds being tied up. Short-term borrowings account for a certain proportion of interest-bearing debt, and changes in the refinancing environment may affect funding costs.

Industry Benchmark (Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

Both the operating margin and net profit margin were substantially below the industry median, placing the Company in the lower tier of its industry.

Growth and Capital Efficiency

Revenue growth was also below the industry median, leaving the Company in an inferior position relative to peers that are on a revenue growth trajectory.

※Source: Compiled by the Company

Key Takeaways from the Earnings Results

1. The starting point of the deterioration in performance was the Machine Tools segment falling into the red, while the high profitability of semiconductor-related equipment (22.0% profit margin) now substantively supports Company-wide earnings. The gap in profitability between the segments may become a primary driver of future performance fluctuations.

2. Progress against the full-year forecast remained low at 38.7% for operating income and 26.7% for net income, requiring a significant improvement in earnings in Q4. Quarterly progress going forward will be an important checkpoint for assessing the feasibility of achieving the earnings forecast.

3. The payout ratio based on the interim dividend was high at 167.6%, making the pace of earnings recovery directly relevant to dividend sustainability. The high tax burden, reflected in an effective tax rate of 51.0%, will also be an important factor determining the extent to which improvements in operating income flow through to net income.

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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 available earnings data. Investment decisions should be made at your own discretion and responsibility, after consulting professionals as necessary.

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AI Financial Analysis

Executive Summary

FY2026 Q3 performance was weak, with modest revenue contraction translating into a disproportionate decline in operating and net profit. Revenue was ¥29.38bn, down 2.4% YoY. Operating income fell 50.5% YoY to ¥0.74bn. Ordinary income declined 44.9% to ¥0.67bn. Net income declined 55.6% to ¥0.32bn. The gross margin contracted to 27.6% from 29.0% in the prior-year period, a deterioration of approximately 145bp. The operating margin fell to 2.5% from 4.9%, a compression of approximately 244bp. The net margin fell to 1.1% from 2.4%, down approximately 131bp. SG&A expense increased 1.6% YoY to ¥7.36bn despite lower revenue, raising the SG&A-to-sales ratio by approximately 99bp to 25.1%. The machine-tool segment moved to a ¥0.35bn segment loss from a ¥0.32bn profit as segment revenue fell 6.7% YoY. Semiconductor-related equipment remained the core business by segment-profit contribution, generating ¥2.09bn of segment profit on ¥9.49bn of sales. However, semiconductor-related equipment segment profit declined 2.5% YoY even as sales rose 8.0%, indicating some margin pressure. Corporate and unallocated expenses rose to ¥1.00bn from ¥0.97bn, further limiting the conversion of segment profit into consolidated operating income. Foreign-exchange losses of ¥0.91bn were material relative to operating income and contributed to the gap between operating and ordinary income. The 51.0% effective tax rate also materially reduced conversion from pre-tax profit to net income. Comprehensive income increased 6.8% YoY to ¥1.74bn, supported principally by foreign-currency translation adjustments, but this does not offset the deterioration in operating profitability. Management's full-year forecast requires a substantial Q4 earnings recovery: cumulative Q3 operating income represents only 38.7% of the ¥1.90bn full-year target, versus a normal 75% progress point. The investment focus is therefore on whether machine-tool demand, production throughput and working-capital discipline improve quickly enough to support the forecast.

Profitability Analysis

The reported annualized DuPont ROE is 1.0%, comprising a 1.1% net profit margin, 0.611x asset turnover and 1.56x financial leverage. The principal constraint is profitability rather than balance-sheet leverage: the net margin is below the 3% concern threshold, while leverage remains moderate. The operating margin of 2.5% is also below the 5% low-efficiency threshold and is the clearest driver of weak returns. Gross margin compressed by about 145bp YoY, indicating weaker gross-profit conversion despite revenue declining only 2.4%. Operating-margin compression was larger, at about 244bp, because SG&A increased 1.6% while sales fell. This adverse operating leverage is especially visible in the machine-tool business, where sales fell to ¥19.88bn from ¥21.30bn and segment earnings swung from a ¥0.32bn profit to a ¥0.35bn loss. Semiconductor-related equipment generated a 22.0% segment margin, down from 24.3% a year earlier, and remains the earnings base despite a 2.5% decline in its segment profit. The machine-tool segment's negative margin contrasts sharply with the semiconductor equipment segment and demonstrates that group profitability is highly dependent on the latter. Unallocated corporate costs increased to ¥1.00bn, equivalent to 3.4% of revenue, versus ¥0.97bn in the prior-year period. The five-factor DuPont analysis shows a 0.490 tax burden, meaning only 49.0% of pre-tax income reached net income. Interest burden was 0.887, reflecting that interest and other non-operating costs modestly reduced pre-tax earnings from EBIT. Interest coverage of 7.29x remains adequate, but low operating profit leaves less cushion if the earnings downturn persists. The reported ROIC of 1.3% is also below the 5% alert threshold, indicating that returns on operating capital are presently insufficient. Sustainable improvement requires recovery in machine-tool utilization and margins, as well as tighter control of corporate overhead relative to revenue.

Growth Assessment

Revenue trends are mixed across the two operating segments. Consolidated revenue declined 2.4% YoY to ¥29.38bn because the 6.7% decline in machine-tool revenue outweighed 8.0% growth in semiconductor-related equipment sales. Semiconductor-related equipment therefore provides the more resilient growth engine, although its segment-profit decline shows that top-line growth has not fully translated into earnings growth. The machine-tool segment's loss suggests weak fixed-cost absorption, pricing pressure, unfavorable product mix, or a combination of these factors. Inventory conditions require close monitoring in this production-cycle business: inventories increased 47.3% YoY to ¥7.44bn while consolidated sales declined. The reported working-capital alerts show receivable days of 93 days, inventory days of 258 days and a cash-conversion cycle of 319 days; a separate reported inventory-days alert is 96 days. Regardless of the reported inventory-day methodology, the alerts indicate a long working-capital cycle relative to manufacturing benchmarks. Work in process was ¥8.35bn and represented 41.6% of the reported inventory composition used in the quality alert, above the 40% warning level, pointing to potential production bottlenecks or extended project lead times. Full-year revenue guidance is ¥43.50bn, and Q3 cumulative revenue progress is 67.5%, 7.5 percentage points below the standard 75% Q3 pace. Operating-income progress is 38.7%, 36.3 percentage points below the standard pace. Ordinary-income progress is 37.2%, also 37.8 percentage points below the standard pace. Net-income progress is only 26.7% against the ¥1.20bn full-year forecast. To achieve guidance, Q4 would need to generate approximately ¥14.13bn of revenue, ¥1.16bn of operating income, ¥1.13bn of ordinary income and ¥0.88bn of net income. That implied Q4 operating margin is approximately 8.2%, well above the 2.5% cumulative Q3 margin, making the forecast dependent on a sharp recovery in mix, volumes, cost absorption or timing of project completions. The full-year forecast itself calls for a 0.5% revenue decline and a 37.0% operating-income decline, indicating management already expects a weaker full year, but the required Q4 profit step-up remains demanding.

Financial Health

Liquidity is strong on reported balance-sheet measures. The current ratio is 248.4% and the quick ratio is 204.7%, both well above standard minimum thresholds. Working capital was ¥25.28bn, providing a substantial near-term liquidity buffer. Cash and deposits were ¥9.98bn, covering short-term loans of ¥3.56bn by 2.80x. Total interest-bearing debt was ¥7.00bn, comprising ¥3.56bn of short-term loans and ¥3.44bn of long-term loans. Debt-to-equity was 0.56x and debt-to-capital was 14.5%, indicating a conservative absolute leverage profile. Total liabilities represented 35.7% of total assets, while equity represented 64.3%, supporting balance-sheet resilience. However, the short-term debt ratio of 50.9% is above the 40% refinancing-risk warning threshold. The root cause is that more than half of interest-bearing debt is short term, creating a greater reliance on rolling facilities than the absolute leverage level alone would imply. This maturity structure is manageable given strong cash coverage and the current ratio, but it should be monitored if operating profit remains depressed or working capital absorbs cash. Short-term loans declined 39.9% YoY, from ¥5.93bn to ¥3.56bn, which improves short-term leverage and partially mitigates refinancing risk. Long-term loans also declined to ¥3.44bn from ¥4.12bn. Inventories increased 47.3% YoY to ¥7.44bn, a significant balance-sheet movement that ties up capital while sales declined. Contract liabilities declined to ¥4.94bn from ¥5.74bn, reducing an important source of customer-funded working capital. Property, plant and equipment increased to ¥19.06bn from ¥16.93bn, increasing fixed-asset exposure, although it remains a moderate 29.7% of total assets. Asset retirement obligations were ¥0.12bn, equivalent to about 0.5% of total liabilities, which is not material relative to the stated environmental-liability benchmark. Net defined-benefit liabilities were ¥1.31bn and should remain part of the assessment of non-debt obligations. No material goodwill exposure is indicated by the reported intangible-assets balance of ¥0.39bn, or 0.6% of total assets.

Notable B/S Changes

Inventories: +¥2.39bn (+47.3%) to ¥7.44bn - inventory increased despite a 2.4% decline in revenue, increasing working-capital absorption and elevating risks around production throughput, delivery timing and inventory conversion. Short-term loans: -¥2.36bn (-39.9%) to ¥3.56bn - near-term borrowings declined materially, improving the immediate leverage profile, although short-term debt still represents 50.9% of interest-bearing debt. Property, plant and equipment: +¥2.13bn (+12.6%) to ¥19.06bn - fixed-asset investment increased and now represents 29.7% of total assets, increasing the importance of adequate capacity utilization and return on invested capital. Contract liabilities: -¥0.80bn (-13.9%) to ¥4.94bn - lower customer advances reduce a source of operating funding and warrant monitoring alongside elevated inventory and receivable metrics. Accumulated other comprehensive income: +¥1.42bn (+49.5%) to ¥4.30bn - primarily supported by foreign-currency translation adjustments, contributing to higher comprehensive income and equity but not substituting for operating earnings.

Cash Flow Quality

Dividend Sustainability

The Q2 dividend was ¥80 per share. Against cumulative Q3 net income of ¥0.32bn, the calculated dividend payout ratio is 167.6%, exceeding the 100% warning threshold. The root cause is the sharp decline in net income rather than an unusually high absolute interim dividend. This payout is not covered by cumulative earnings and reduces retained-capital flexibility if profitability remains weak. The full-year dividend forecast is ¥160 per share, implying an additional ¥80 year-end dividend. Based on forecast EPS of ¥181.52, the forecast dividend payout ratio is approximately 88.1%, below 100% but still elevated relative to the less-than-60% sustainability benchmark. The company has substantial liquidity and moderate debt, which provide balance-sheet capacity to maintain the dividend in the near term. However, the required Q4 net-income recovery is substantial, and dividend sustainability is consequently linked to achievement of the full-year earnings forecast and normalization of working capital. No share-buyback amount is identified; therefore, the analysis refers to the dividend payout ratio rather than a total return ratio.

Risk Assessment

Business risks include Machine-tool demand and operating leverage: segment revenue fell 6.7% YoY and the segment moved from a ¥0.32bn profit to a ¥0.35bn loss. Given the fixed-cost nature of manufacturing, a prolonged volume shortfall could continue to suppress consolidated margins., Semiconductor-equipment cycle and margin risk: sales grew 8.0% YoY, but segment profit fell 2.5% and margin declined to 22.0% from 24.3%. The core business remains exposed to customer capital-expenditure timing, semiconductor-cycle volatility, pricing and project execution., Production and inventory risk: inventories rose 47.3% YoY while sales fell, and the reported high-WIP-ratio alert of 41.6% indicates potential production bottlenecks, extended lead times or delayed shipment conversion., FX risk: foreign-exchange losses were ¥0.91bn, exceeding operating income of ¥0.74bn. Currency volatility can materially affect ordinary income even where operating performance is unchanged., Working-capital risk: reported DSO of 93 days, DIO alerts of 258 days and 96 days, and a 319-day cash-conversion cycle are all above relevant warning thresholds. The root cause is slow cash conversion through receivables and inventories; this is particularly consequential for a capital-equipment manufacturer with long production and acceptance cycles..

Financial risks include Low operating efficiency: the 2.5% EBIT margin is below the 5% alert threshold. Its impact is weak profit resilience, limited capacity to absorb cost inflation and reduced scope for deleveraging through earnings., Low capital efficiency: reported ROIC of 1.3% is below the 5% warning threshold. This indicates that returns are currently low relative to the capital committed to operations and raises the hurdle for value-accretive investment., High tax burden: the effective tax rate was 51.0%, producing a tax burden factor of 0.490. This materially reduced earnings conversion, with ¥0.33bn of tax expense against ¥0.65bn of pre-tax income., Refinancing risk: 50.9% of interest-bearing debt is short term. Although cash covers short-term loans by 2.80x and D/E is only 0.56x, continued reliance on short-term funding would become more important if working capital remains elevated., Dividend coverage risk: the cumulative payout ratio of 167.6% exceeds net income, and the forecast full-year payout ratio is approximately 88.1%, limiting retained earnings if the Q4 recovery does not materialize..

Key concerns include The highest-priority issue is the gap between cumulative profitability and the full-year forecast: Q3 operating-income progress is 38.7% versus a normal 75% progress point., The second priority is the inventory and cash-conversion profile, because rising inventory alongside lower sales can pressure cash generation and may ultimately require margin-reducing actions if demand does not recover., The third priority is whether the machine-tool segment can return to profitability; its loss is the main operational driver of consolidated earnings deterioration., Foreign-exchange losses and the elevated effective tax rate amplify volatility below operating income., The reported liquidity position provides an important buffer, but it does not by itself resolve low returns on capital or the need for a sharply stronger Q4..

Investment Implications

Key takeaways include Consolidated revenue was relatively resilient, but operating income fell by half because gross-margin pressure, adverse SG&A leverage and a machine-tool segment loss sharply reduced earnings conversion., Semiconductor-related equipment is the core business, contributing ¥2.09bn of segment profit, but its margin declined despite sales growth., The balance sheet is liquid and conservatively leveraged, with a 248.4% current ratio, 0.56x D/E and ¥9.98bn of cash and deposits., Inventory growth and long reported working-capital metrics are central operational issues, particularly given lower group sales., Full-year guidance requires an unusually strong Q4 recovery, including an implied operating margin of about 8.2%..

Metrics to watch include Machine-tool segment revenue, segment margin and return to profitability, Semiconductor-related equipment segment margin and order/shipment conversion, Inventory balance, work-in-process ratio and inventory days, Receivable days, contract liabilities and cash-conversion-cycle improvement, Q4 operating-income delivery relative to the ¥1.90bn full-year forecast, Foreign-exchange gains/losses relative to operating income, Effective tax rate and net-income conversion, Short-term debt share and cash coverage of near-term borrowings, Dividend payout ratio relative to actual full-year EPS.

Regarding relative positioning, The company combines a stronger-than-average liquidity and leverage profile with currently weak earnings and capital efficiency. Its semiconductor-related equipment business has materially better profitability than the machine-tool business and anchors group earnings, but the group-wide 2.5% operating margin, 1.0% reported annualized ROE and 1.3% reported ROIC place current operating performance below standard manufacturing profitability benchmarks.