YAMASHIN-FILTER (6240) FY2027 Q1 Earnings Report

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Executive Summary

The key feature of the quarter was higher revenue but lower profit, as increases in SG&A expenses and start-up costs for new businesses weighed on earnings. Revenue increased to ¥54.0B (+6.1% YoY), while Operating Income declined to ¥4.9B (-26.2%), Ordinary Income to ¥4.8B (-25.8%), and Net Income to ¥3.4B (-19.2%). The core Construction Equipment Filter Business contributed to revenue growth, but a decline in the gross margin and upfront expenses for the newly established “Functional Materials Business” reduced Operating Income.

Factors Affecting Performance

【Revenue】Revenue increased to ¥54.0B (+6.1% YoY). By segment, the Construction Equipment Filter Business led performance with revenue of ¥48.5B (+6.5%), accounting for 89.7% of the revenue mix, while the Air Business remained solid at ¥5.6B (+2.8%). The newly established Functional Materials Business generated ¥0.0B and remains in the initial start-up phase.

【Profit and Loss】Operating Income declined to ¥4.9B (-26.2%). The gross margin was 42.3%, down approximately 2.0pt from the previous year, while the SG&A ratio also deteriorated by approximately 2.0pt to 33.3%. As a result, the Operating Income margin declined to 9.0% from 12.9% in the previous year. By segment, the Construction Equipment Filter Business recorded ¥6.0B (+18.5% decline, 12.4% margin), while the Air Business reduced its loss to ¥-0.2B. However, the Functional Materials Business recorded a loss of ¥-0.9B, weighing on company-wide earnings. Ordinary Income was ¥4.8B (-25.8%) following a ¥0.2B foreign exchange loss in non-operating expenses. Net Income was ¥3.4B (-19.2%) after ¥1.4B in income taxes and other taxes (effective tax rate of approximately 29.7%). In conclusion, the Company posted higher revenue but lower profit.

Segment Analysis

The Construction Equipment Filter Business generated revenue of ¥48.5B (+6.5% YoY) and Operating Income of ¥6.0B (-18.5%), with a 12.4% margin. Although it remains the core business, its margin deteriorated from the previous year. The Air Business generated revenue of ¥5.6B (+2.8%) and an Operating Loss of ¥0.2B; the loss narrowed by 68.9% YoY, indicating an improvement trend. The newly established Functional Materials Business generated revenue of ¥0.0B and an Operating Loss of ¥0.9B. As it was identified as a new reportable segment beginning in the current quarter, no comparative data for the same period of the previous year is available. Significant differences in profitability among segments are evident, and the high degree of dependence on the core business is a structural characteristic.

Key Financial Metrics

【Profitability】The Operating Income margin was 9.0%, down approximately 3.9pt from 12.9% in the previous year, while the Net Income margin was 6.2%, down approximately 2.0pt from 8.2% in the previous year. ROE was 1.5%, primarily due to the decline in the Net Income margin.【Cash Flow Quality】Cash and deposits were ¥68.8B, an increase from the end of the previous year. Current assets of ¥163.7B versus current liabilities of ¥68.0B resulted in a robust current ratio of approximately 240%. Inventories were ¥23.2B, consisting primarily of finished-goods inventory.【Investment Efficiency】Total assets were ¥294.0B and net assets were ¥219.3B. The Equity Ratio declined to 74.6% from 81.3% in the previous year, but remained high relative to the industry.【Financial Soundness】Short-term borrowings were ¥36.0B, a significant increase from ¥16.0B at the end of the previous year. With Profit Before Tax of ¥4.8B against interest expense of ¥0.1B, the Company’s debt-servicing capacity itself remains secure.

Cash Flow Analysis

As detailed data from the statement of cash flows is not included in this report, fund movements are analyzed based on changes in the balance sheet. Cash and deposits increased to ¥68.8B from ¥67.2B at the end of the previous year, indicating that liquidity on hand has been maintained. Meanwhile, short-term borrowings increased from ¥16.0B to ¥36.0B, indicating a growing reliance on short-term borrowings for financing. Trade receivables were ¥48.0B and inventories were ¥23.2B, both increasing from the end of the previous year, suggesting expanding funding requirements associated with operating activities. Treasury stock increased from ¥1.75B to ¥7.65B, potentially indicating that treasury stock repurchases were conducted as part of shareholder returns. These movements suggest a structure in which increases in operating assets are being funded through short-term borrowings and a portion of cash on hand.

Quality of Earnings

The current quarter’s earnings were primarily generated by recurring business activities. Extraordinary losses were limited to a minor ¥0.0B loss on the disposal of fixed assets, and the impact of temporary factors was limited. Non-operating income and expenses were broadly balanced at ¥0.3B each, with the principal expense item being a ¥0.2B foreign exchange loss. The difference between Ordinary Income of ¥4.8B and Net Income of ¥3.4B was primarily attributable to ¥1.4B in income taxes and other taxes, resulting in an effective tax rate of approximately 29.7%, with no particular abnormalities observed. Comprehensive Income was ¥3.9B, and the ¥0.5B difference from Net Income of ¥3.4B was attributable to foreign currency translation adjustments. The positive contribution of the foreign exchange sensitivity of overseas assets and businesses to Comprehensive Income warrants attention.

Earnings Forecast and Guidance

The full-year plan calls for Revenue of ¥225.6B (+7.7% YoY), Operating Income of ¥28.2B (+9.0%), and Ordinary Income of ¥27.8B (+9.5%). There were no revisions to the earnings forecast or dividend forecast for the current quarter. Progress rates were 24.0% for Revenue, 17.2% for Operating Income, 17.3% for Ordinary Income, and 16.8% for Net Income. Revenue was broadly in line with the simple 25% progress benchmark, while all profit measures were approximately 10pt below that benchmark. The delayed progress was attributable to the decline in the gross margin and upfront expenses for the newly established business. The full-year plan is structured on the assumption of improved profitability in the second half.

Shareholder Returns

The full-year dividend plan is ¥20.00 per share, representing a policy of increasing the dividend from ¥8 in the previous year (the level before combining the interim and year-end dividends). Based on average shares outstanding during the period of 69,223 thousand shares, the Payout Ratio against projected full-year Net Income of ¥20.05B is approximately 68%, a relatively high level. Given the financial base of cash and deposits of ¥68.8B and an Equity Ratio of 74.6%, there appears to be no immediate impediment to funding dividends. However, the Payout Ratio itself should be monitored because of its high sensitivity to fluctuations in performance.

Risk Factors

1. Risk of prolonged losses in the new business: The Functional Materials Business recorded an Operating Loss of ¥0.9B in the current quarter, expanding to a level equivalent to approximately 18% of company-wide Operating Income of ¥4.9B. Although upfront start-up costs are expected, delays in monetization require ongoing monitoring as a factor that could continue to pressure company-wide margins.

2. Risk of reliance on short-term financing: Short-term borrowings increased +125.0% from ¥16.0B at the end of the previous year to ¥36.0B, accounting for approximately 53% of current liabilities of ¥68.0B. Cash and deposits of ¥68.8B are at a level sufficient to cover these borrowings, but the concentration of the financing structure in short-term funding warrants attention.

3. Risk of continued deterioration in profitability: The gross margin was 42.3%, down approximately 2.0pt from the previous year, while the SG&A ratio increased approximately 2.0pt to 33.3%. The Operating Income margin narrowed to 9.0% from 12.9% in the previous year. The growth rate of SG&A expenses (approximately 12.7% YoY) exceeded the Revenue growth rate (+6.1%), meaning that operating leverage is currently working in a negative direction.

Industry Benchmark (For Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

The Operating Income margin is slightly above the industry median, while the Net Income margin is below the median, indicating relative underperformance at the non-operating income and tax burden stages.

Growth and Capital Efficiency

The Revenue growth rate is broadly in line with the industry median, placing the Company in the middle range of the industry in terms of growth.

※Source: Compiled by the Company

Key Points from the Financial Results

1. Despite higher revenue, the Operating Income margin declined from 12.9% in the previous year to 9.0%. The simultaneous deterioration in the gross margin and increase in SG&A expenses are notable developments indicating a change in the earnings structure.

2. The newly established Functional Materials Business recorded a ¥0.9B loss in the current quarter, confirming its impact on company-wide earnings. The loss in the existing Air Business narrowed by 68.9% YoY, indicating the coexistence of improvement and upfront investment within the business portfolio.

3. While progress toward the full-year plan was broadly favorable for Revenue, progress rates for Operating Income and Net Income remained in the 17% range. Accordingly, achieving the plan structurally assumes improved profitability in the second half.

Theoretical Share Price (Reference Value)

This is a mechanically calculated reference range based solely on publicly disclosed data using a residual income model (Ohlson-type model with an explicit 5-year fade period). It is not a forecast of the market share price or a recommendation of any specific investment action.

Sensitivity: 310円〜327円 for Cost of Equity ±1%, and 318円〜318円 for ω±0.1.

Notes:

• As 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 difference from 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: 2026-07 / 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 through analysis of 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, and, where necessary, after consulting with a professional advisor.

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AI Financial Analysis

Executive Summary

FY2027 Q1 was a mixed start: revenue growth remained positive, but profit growth deteriorated materially as gross-margin and cost pressures outweighed sales expansion. Revenue increased 6.1% YoY to ¥5.405bn. Gross profit rose only 1.3% YoY to ¥2.288bn, causing the gross margin to decline by 200bp to 42.3%. SG&A expenses increased 12.7% YoY to ¥1.802bn, more than twice the pace of revenue growth. Consequently, operating income fell 26.2% YoY to ¥486m. The operating margin compressed 390bp to 9.0% from 12.9% in the prior-year quarter. Ordinary income decreased 25.8% YoY to ¥480m. Net income declined 19.2% YoY to ¥337m, with the net margin falling 200bp to 6.2%. The core construction-machinery filter business delivered ¥4.850bn of revenue, up 6.5% YoY, but segment profit fell 18.5% to ¥603m and its margin declined to 12.4% from 16.2%. The air-filter business improved its segment loss to ¥25m from a ¥80m loss, although it remains loss-making. The newly established functional-materials segment recorded only ¥0.4m of revenue and a ¥91m segment loss, creating an early-stage earnings drag. Foreign-exchange losses of ¥20m were meaningful relative to Q1 operating income, equivalent to roughly 4% of EBIT. The balance sheet remains liquid, with cash of ¥6.881bn exceeding short-term borrowings of ¥3.600bn by ¥3.281bn. However, the entire interest-bearing debt balance is short-term, following a ¥2.0bn YoY increase in short-term loans, which raises refinancing dependence despite strong liquidity. Working-capital intensity is a key issue, with quality alerts indicating elevated receivable days, inventory days, and a long cash-conversion cycle. Full-year guidance implies that profitability must improve substantially after Q1: revenue progress is broadly normal at 24.0%, whereas operating-income progress is only 17.2% and net-income progress is 16.8%.

Profitability Analysis

Annualized DuPont ROE is 6.2%, composed of a 6.2% net profit margin, 0.735x asset turnover, and 1.34x financial leverage. The low-to-moderate annualized ROE is principally constrained by profitability rather than leverage: the balance sheet is conservatively capitalized, while the Q1 net margin declined to 6.2% from approximately 8.2% a year earlier. Margin deterioration was the most important adverse movement. Gross margin fell 200bp to 42.3%, indicating that revenue growth did not fully absorb production costs or unfavorable sales/product mix. Operating margin fell more sharply, by 390bp to 9.0%, because SG&A increased 12.7% YoY against only 6.1% revenue growth. This negative operating leverage is the central earnings issue in the quarter. The construction-machinery filter operation remains the profit engine, generating ¥603m of segment profit, but its segment margin fell 380bp to 12.4%. The air-filter operation's reduced loss is a favorable development, but it has not yet reached breakeven. The functional-materials business is strategically new under VISION 2030, but its ¥91m Q1 loss diluted consolidated profitability. The five-factor DuPont components show a normal tax burden of 0.702 and a very limited financing burden, with an interest burden of 0.987 and interest coverage of 58.14x. Thus, the Q1 profit decline is operational rather than caused by debt-servicing stress. FX losses of ¥20m also reduced ordinary income, but the principal earnings pressure remains lower operating profitability.

Growth Assessment

Top-line momentum was positive, with Q1 revenue up 6.1% YoY to ¥5.405bn. The construction-machinery filter business, representing approximately 89.7% of consolidated revenue, grew 6.5% YoY to ¥4.850bn and remains the key determinant of group growth. Air-filter revenue increased 2.8% YoY to ¥555m, a modest improvement that accompanied a smaller operating loss. Functional materials has begun reporting as a separate segment from FY2027, reflecting management's VISION 2030 expansion strategy, but its initial revenue base is immaterial and its Q1 operating loss requires monitoring as investment and commercialization proceed. Full-year sales guidance is ¥22.560bn, up 7.7% YoY, and Q1 revenue progress of 24.0% is close to the standard 25% pace. In contrast, Q1 operating-income progress is 17.2% versus the standard 25%, while net-income progress is 16.8%. The full-year operating-income forecast of ¥2.825bn therefore requires a marked acceleration in quarterly profitability, with the implied full-year operating margin of 12.5% materially above Q1's 9.0%. Achieving guidance depends on restoration of gross margin, SG&A discipline, sustained construction-machinery demand, and continued narrowing of losses in the air-filter and functional-materials businesses. The lack of a forecast revision indicates management has maintained its expectations, but the Q1 earnings shortfall against normal seasonal progress raises execution sensitivity for the remainder of the year.

Financial Health

Liquidity is strong. The current ratio is 240.6% and the quick ratio is 206.5%, supported by ¥16.366bn of current assets against ¥6.802bn of current liabilities. Working capital totals ¥9.564bn. Cash and deposits of ¥6.881bn cover short-term loans of ¥3.600bn by 1.91x, leaving net cash of ¥3.281bn before considering other liabilities. Debt-to-equity is a conservative 0.34x, while debt-to-capital is 14.1%, both well within conservative solvency parameters. Interest coverage of 58.14x indicates no meaningful current interest-servicing strain. Nevertheless, the maturity profile warrants attention: 100% of interest-bearing debt is short-term, and short-term borrowings increased ¥2.000bn YoY, or 125.0%, to ¥3.600bn. This creates refinancing risk because the company is dependent on recurring short-term funding availability, although the immediate risk is mitigated by cash exceeding debt. Total equity decreased ¥895m YoY to ¥21.928bn, despite positive Q1 comprehensive income, while treasury stock increased by ¥590m to negative ¥765m; this indicates a material capital outflow through share repurchases or other treasury-share activity. Intangible assets increased ¥149m YoY, or 52.3%, to ¥435m, but remain only 1.5% of total assets and do not represent material intangible-asset concentration. Asset retirement obligations total ¥220m, equal to about 2.9% of total liabilities, an elevated but manageable level that should be monitored as a manufacturing-related environmental obligation.

Notable B/S Changes

Short-term loans: +¥2.000bn (+125.0%) to ¥3.600bn - all interest-bearing debt is short-term, increasing refinancing dependence despite cash coverage of 1.91x. Treasury stock: increased by ¥590m to negative ¥765m - material treasury-share activity reduced equity capital available for reinvestment or balance-sheet flexibility. Intangible assets: +¥149m (+52.3%) to ¥435m - primarily software-related assets; the balance remains modest at 1.5% of total assets, limiting amortization and impairment concentration. Inventories: +¥194m (+9.1%) to ¥2.321bn - growth exceeded revenue growth and is consistent with reported elevated inventory-day alerts and cash-conversion risk. Property, plant and equipment: ¥11.109bn, or 37.8% of total assets - the substantial fixed-asset base underscores manufacturing utilization and return-on-capital sensitivity.

Cash Flow Quality

Operating cash flow and investing cash flow were not reported in the provided financial data, so cash conversion, free cash flow, and OCF-to-net-income quality cannot be quantified. Balance-sheet working-capital signals nonetheless indicate that cash realization should be a focus. Accounts receivable rose 2.1% YoY to ¥4.797bn while revenue increased 6.1% YoY. Inventories rose 9.1% YoY to ¥2.321bn, faster than revenue growth, and comprise finished goods of ¥2.321bn; raw materials were ¥1.806bn. Quality alerts identify annualized receivable days of 81 days, above the 60-day warning threshold, suggesting relatively slow collection or customer/payment-term exposure. The alerts also identify inventory days of 121 days, well above the 90-day warning threshold, and separately flag inventory days of 68 days above the 60-day manufacturing benchmark. Both reported inventory-day alerts point to inventory efficiency as a material monitoring item. The reported 153-day cash-conversion cycle is above the 120-day warning threshold, meaning more capital is tied up in the operating cycle for an extended period. These working-capital conditions can cause operating cash flow to trail accounting earnings if receivables or inventories continue to build. Trade payables increased 8.9% YoY to ¥1.654bn, partly funding working-capital growth, but not enough to eliminate the cash-conversion concern. There is no basis to assess whether internally generated free cash flow covers capital expenditures, dividends, or treasury-share activity.

Dividend Sustainability

The FY2027 forecast dividend is ¥20.00 per share, versus forecast EPS of ¥28.71, implying a dividend payout ratio of approximately 69.7%. This exceeds the 60% sustainability benchmark and leaves a narrower earnings retention buffer than a lower-payout policy. Forecast net income of ¥2.005bn would cover the indicated dividend on an earnings basis. Q1 EPS was ¥4.87, representing 17.0% of forecast full-year EPS, broadly consistent with the 16.8% net-income progress rate. The maintained dividend forecast therefore relies on a substantial recovery in earnings over the remaining quarters. The company has substantial liquidity, with cash of ¥6.881bn, which provides near-term support for shareholder distributions. However, the increase in treasury stock by ¥590m YoY indicates meaningful additional capital deployment, and dividends plus buybacks should be evaluated as a total return ratio rather than through the dividend payout ratio alone. A total return ratio cannot be calculated from the reported data because the period's repurchase cash amount is not provided. The sustainability of the dividend will depend principally on operating-margin recovery and the eventual conversion of receivables and inventories into cash.

Risk Assessment

Business risks include Construction-machinery filter demand risk: the core segment represents approximately 89.7% of Q1 revenue, leaving group performance highly exposed to construction-equipment production cycles and customer demand., Margin recovery risk: gross margin declined 200bp and operating margin declined 390bp YoY; failure to pass through costs, improve mix, or raise utilization would challenge full-year profit guidance., New-business execution risk: the functional-materials segment generated only ¥0.4m of Q1 revenue but recorded a ¥91m segment loss, creating uncertainty around commercialization timing and investment payback., Air-filter turnaround risk: the segment loss narrowed to ¥25m, but breakeven has not yet been achieved., Foreign-exchange risk: Q1 FX losses were ¥20m, equivalent to roughly 4% of operating income, exposing ordinary earnings to currency movements., Manufacturing working-capital risk: elevated receivable and inventory days can reflect slower customer collections, production/sales mismatch, or inventory obsolescence exposure..

Financial risks include Refinancing risk: 100% of ¥3.600bn interest-bearing debt is short-term. The ¥2.000bn YoY rise in short-term loans increases dependence on short-term financing markets., Cash-conversion risk: reported receivable days of 81, inventory days of 121 and 68 under separate reported benchmarks, and a 153-day cash-conversion cycle indicate a material amount of cash tied up in operations., Capital-allocation risk: the forecast dividend payout ratio is approximately 69.7%, above the 60% benchmark, while treasury stock increased by ¥590m YoY., Environmental-obligation risk: asset retirement obligations of ¥220m equal about 2.9% of total liabilities, an elevated manufacturing-related obligation requiring ongoing monitoring..

Key concerns include Highest priority: Q1 operating-income progress of 17.2% is materially below the standard 25% pace despite unchanged full-year guidance., Highest priority: SG&A grew 12.7% YoY, faster than 6.1% revenue growth, amplifying the decline in operating profit., High priority: short-term debt increased 125.0% YoY, even though current liquidity remains strong., High priority: elevated inventory and receivable metrics may restrain operating cash generation and increase obsolescence or collection risk., Moderate priority: the new functional-materials segment must demonstrate a credible path from start-up losses to scalable revenue and profitability..

Investment Implications

Key takeaways include Revenue growth remains intact, but Q1 earnings show significant operational deleveraging., The construction-machinery filter business is the core business and retains positive revenue growth, but its segment-profit margin has compressed materially., The balance sheet is liquid and conservatively leveraged overall, with cash exceeding short-term debt., The all-short-term debt structure and rapid increase in borrowings create a maturity-profile issue despite the company's net-cash position., Full-year guidance requires a material improvement in profit margins after Q1., Working-capital efficiency is a central determinant of earnings quality and capital intensity..

Metrics to watch include Construction-machinery filter segment revenue growth and segment margin, Consolidated gross margin and SG&A-to-sales ratio, Air-filter segment progress toward breakeven, Functional-materials revenue ramp and operating-loss trajectory, Receivable days, inventory days, and cash-conversion cycle, Short-term loan balance, cash-to-short-term-debt coverage, and refinancing terms, Progress toward full-year operating-income guidance of ¥2.825bn, Dividend payout ratio and total capital returned through dividends and treasury-share activity.

Regarding relative positioning, The company combines a healthy liquidity profile, low balance-sheet leverage, and a high-margin core filtration franchise with weaker near-term earnings execution. Its Q1 operating margin of 9.0% remains within the broad 8-15% good benchmark range, but is below its own prior-year level and well short of the margin required to make the full-year forecast appear comfortably achievable. Relative financial resilience is favorable; relative working-capital efficiency and near-term margin momentum are less favorable.