HISAKA WORKS,LTD. FY2027 Q1 Earnings Report

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Executive Summary

This was a results period marked by higher revenue and profit, supported by operating leverage from an improved gross margin and restrained SG&A expenses. Revenue was ¥102.1B (+8.0% YoY), Operating Income was ¥8.0B (+35.9%), Ordinary Income was ¥11.0B (+42.1%), and Net Income attributable to owners of the parent was ¥8.5B (+48.1%). The reason profit growth significantly outpaced revenue growth was a 10bp improvement in the gross margin, in addition to SG&A expenses declining year on year. Ordinary Income exceeding Operating Income by ¥3.0B was attributable to non-operating income, including ¥2.6B in dividends received, making dependence on investment income a key point in assessing earnings quality.

Factors Affecting Performance

【Revenue】Revenue was ¥102.1B, up +8.0% YoY. By segment, Process Engineering (VitalIndustryDivision) drove overall growth with a substantial increase in revenue to ¥46.2B (+26.7%), while Heat Exchanger (HeatExchangerDivision) and Valve (ValveDivision) recorded modest declines in revenue to ¥43.4B (-4.2%) and ¥12.5B (-0.6%), respectively.

【Profit and Loss】Operating Income was ¥8.0B (+35.9%), and the Operating Income margin improved to 7.8% from 6.2% in the same period of the previous year. By segment, Heat Exchanger’s profit margin improved to 8.7% from 6.0% in the previous year, with profit reaching ¥3.8B (+37.7%). Valve’s profit margin also improved to 11.5%, with profit reaching ¥1.4B (+56.5%). Meanwhile, despite higher revenue, Process Engineering recorded a decline in profit to ¥2.95B (-17.1%) and in its profit margin to 6.4% from 9.8% in the previous year, resulting in higher revenue but lower profit. Ordinary Income reached ¥11.0B (+42.1%), supported by ¥3.1B in non-operating income, including ¥2.6B in dividends received. There were no extraordinary gains or losses, and Net Income reached ¥8.5B (+48.1%) after ¥2.4B in income taxes and other taxes. Overall, the Company recorded higher revenue and profit, driven by improved profitability in the core Heat Exchanger and Valve businesses, while the combination of higher revenue and lower profit in Process Engineering remains a structural issue.

Segment Analysis

Process Engineering recorded a substantial increase in revenue to ¥46.2B (+26.7%), but segment profit declined to ¥2.95B (-17.1%), with its profit margin falling from 9.8% to 6.4%, resulting in higher revenue but lower profit. Changes in project mix and fluctuations in costs and profitability based on project progress are believed to have contributed. Heat Exchanger recorded lower revenue of ¥43.4B (-4.2%), but profit increased to ¥3.8B (+37.7%) and the profit margin improved to 8.7% from 6.0% in the previous year, confirming improved profitability resulting from improvements in the cost structure. Valve’s revenue was essentially flat at ¥12.5B (-0.6%), while profit increased to ¥1.4B (+56.5%), representing the highest profit margin among the reported segments at 11.5%. Company-wide, improved profitability in the two core businesses offset the decline in Process Engineering’s profit margin and drove overall profit growth.

Key Financial Indicators

【Profitability】The Operating Income margin was 7.8%, improving by 1.6pt from 6.2% in the same period of the previous year, while the Net Income margin also improved to 8.3% from 6.0%, an improvement of 2.3pt. The gross margin was 25.4%, slightly up from 25.3% in the previous year, while the SG&A ratio of 17.5% declined year on year. Absorption of fixed costs amid revenue growth was the primary driver of the improvement in profit margins.【Cash Quality】Ordinary Income exceeded Operating Income by ¥3.0B, but the majority of this amount, ¥2.6B, consisted of dividends received. Attention is therefore required regarding the Company’s high dependence on investment income outside its core operations.【Investment Efficiency】Annualized ROE was 5.4%. Returns remain limited relative to the substantial capital base represented by an Equity Ratio of 77.5%, with sales-generation efficiency relative to total assets (total asset turnover) acting as a constraint.【Financial Soundness】The Equity Ratio increased to 77.5% from 75.9% in the previous year. The Company held cash and deposits of ¥102.7B against long-term borrowings of ¥5.8B and bonds of ¥23.4B, indicating a high level of financial safety.

Cash Flow Analysis

Although the cash flow statement was not disclosed, fund movements can be inferred from changes in the balance sheet. Cash and deposits declined from ¥120.1B in the same period of the previous year to ¥102.7B, while investment securities increased from ¥152.4B to ¥166.0B, suggesting that capital allocation to investment activities is progressing. Work in process increased from ¥59.4B to ¥64.7B and accounted for a high 52.7% of total inventories, suggesting that production progress and the timing of acceptance inspections in the made-to-order business may be contributing to funds being tied up. Accounts payable declined modestly from ¥32.0B to ¥31.0B. The expansion of working capital, centered on trade receivables and work in process, warrants attention from the perspective of cash-generation efficiency during a period of profit growth.

Earnings Quality

The profit growth in the current period was supported by core operating factors, namely an improved gross margin and restrained SG&A expenses. Operating Income increased +35.9% YoY, substantially exceeding the +8.0% revenue growth rate, indicating favorable operating leverage. Meanwhile, the majority of the ¥3.0B by which Ordinary Income exceeded Operating Income consisted of ¥2.6B in dividends received. Although this represents stable income from investment securities, it must be evaluated separately from the earnings power of the business operations themselves. No extraordinary gains or losses were recorded, and there was no profit increase attributable to temporary factors. Comprehensive income was ¥18.0B, exceeding Net Income of ¥8.5B. This difference was primarily attributable to valuation differences on investment securities (valuation difference on securities of ¥9.2B), an accounting fluctuation reflecting changes in market prices and therefore different in nature from recurring earnings power.

Earnings Forecasts and Guidance

The full-year Company plan calls for Revenue of ¥440.0B (-2.0% compared with the previous fiscal year), Operating Income of ¥33.0B (-0.1%), and Ordinary Income of ¥36.0B (-0.6%), representing a plan for results to remain roughly flat to slightly lower year on year. Progress during Q1 was 23.2% for Revenue, 24.2% for Operating Income, and 30.6% for Ordinary Income. Revenue and Operating Income remained close to the standard benchmark of approximately 25%. The advanced progress of Ordinary Income was largely due to the contribution of non-operating income, including dividends received. Accordingly, caution is warranted in simply extrapolating the high profit growth rate in Q1 to the full year. There were no revisions to either the earnings forecast or the dividend forecast.

Shareholder Returns

The full-year dividend forecast is ¥55.00 per share, implying a Payout Ratio of approximately 60.0% based on projected full-year EPS of ¥91.66. The increase from the previous year’s actual dividend of ¥27 per share (interim) suggests a policy of increasing dividends over the full year. Given the Equity Ratio of 77.5% and low debt levels—long-term borrowings of ¥5.8B and bonds of ¥23.4B—the Company has sufficient financial capacity to support its dividend. However, in light of annualized ROE of 5.4%, a Payout Ratio of 60% is a level that requires continued monitoring of progress toward achieving the earnings plan.

Risk Factors

1. Higher revenue but lower profit in Process Engineering: Revenue increased +26.7% YoY to ¥46.2B, but segment profit declined -17.1% to ¥2.95B, and the profit margin fell from 9.8% to 6.4%. Changes in project mix and fluctuations in costs and profitability based on project progress may hinder the conversion of revenue growth into profit.

2. Working capital tied up: Work in process was ¥64.7B, accounting for 52.7% of inventories and increasing from ¥59.4B in the same period of the previous year. The provision for contract losses also increased from ¥3.6B to ¥5.4B. Delays in production processes or the emergence of unprofitable projects may affect capital efficiency and profitability.

3. Dependence on investment income: Dividends received accounted for ¥2.6B of the ¥3.0B excess of Ordinary Income over Operating Income. Changes in the dividend policies of investee companies or in market conditions may affect the level of Ordinary Income.

Industry Benchmark (For Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

The Operating Income margin is slightly below the industry median, while the Net Income margin exceeds the median. Overall profitability, including non-operating income, is relatively high within the industry.

Growth and Capital Efficiency

The Revenue growth rate exceeds the industry median, placing the Company relatively high within the industry from a growth perspective.

※Source: Compiled by the Company

Key Points in the Financial Results

1. Operating Income increased +35.9% against revenue growth of 8.0%, clearly demonstrating operating leverage from gross margin improvement and SG&A expense control. Meanwhile, Process Engineering recorded higher revenue but lower profit, making differences in profitability among segments a key area of focus going forward.

2. The fact that the majority of the excess of Ordinary Income over Operating Income, ¥2.6B, consisted of dividends received indicates the need to distinguish between business-derived profit and investment income when evaluating the composition of earnings in the financial results.

3. The work-in-process ratio of 52.7% and the increase in the provision for contract losses (¥3.6B→¥5.4B) will be closely monitored in future financial results as indicators of process management and project profitability in the made-to-order business.

Theoretical Share Price (Reference Value)

Sensitivity: ¥2,016–¥2,129 for Cost of Equity ±1%, and ¥2,060–¥2,079 for ω±0.1.

Notes:

• Since progress of Net Income against the full-year forecast (35%) exceeds the standard level (25%), forecast EPS has been adjusted upward within a maximum range of +10% (because companies whose progress is ahead of schedule tend to exceed forecasts. Adjustments may be excessive for businesses with strong seasonality).
• Since forecast ROE is below the Cost of Equity, the theoretical value is below Book Value per Share.
• Net assets as of the end of the quarter are used (there is a time lag relative to the full-year forecast).

(Calculation model: Residual Income Model (Ohlson-type; explicit 5-year fade) / Interest rate reference month: 2026-07 / Mechanically calculated value based solely on publicly disclosed data; this is not a forecast of the market share price or a recommendation of any specific investment action, and does not predict or guarantee future share prices.)

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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 financial results. Investment decisions should be made at your own responsibility, after consulting a professional as necessary.

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