ISEKI & CO.,LTD. FY2026 Q2 Earnings Report

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Executive Summary

Revenue and earnings increased during the quarter, but challenges remain regarding earnings quality, including the shift of Operating Cash Flow (OCF) into negative territory. Revenue was ¥1019.2B (+1.0% YoY), Operating Income was ¥55.8B (+28.0%), and Ordinary Income was ¥52.0B (+37.1%), with the rate of earnings growth accelerating. However, Net Income remained limited to ¥34.5B (+1.3%), weighed down by the absence of the gain on the sale of fixed assets recorded in the previous year (¥11.1B) and extraordinary losses of ¥3.9B, including ¥2.1B in impairment losses. The primary driver of earnings growth was an improvement in the gross profit margin resulting from a lower cost ratio (31.5%, +2.4pt YoY), which offset the increase in the SG&A ratio (26.0%).

Factors Affecting Earnings

【Revenue】Revenue was ¥1019.2B, representing a modest 1.0% increase YoY. As the Company operates as a single segment, namely the Agricultural-Related Business, a breakdown by business is not disclosed. However, progress against the full-year plan of ¥1800.0B was 56.6%; considering the forecast of a second-half-weighted performance (full-year YoY -3.1%), progress can be regarded as broadly in line with the plan.

【Profit and Loss】The cost of sales ratio improved from 70.9% in the previous year to 68.5%, and the gross profit margin increased to 31.5% (+2.4pt YoY). SG&A expenses increased to ¥265.4B (SG&A ratio 26.0%, +0.5pt YoY), but the improvement in gross profit exceeded this increase, resulting in Operating Income of ¥55.8B (+28.0% YoY; Operating Income margin 5.5%). Ordinary Income was ¥52.0B (+37.1% YoY), supported by non-operating income such as dividend income of ¥2.0B, although interest expense of ¥7.8B remained a significant burden. Net Income growth slowed to ¥34.5B (+1.3% YoY), affected by extraordinary losses of ¥3.9B, comprising impairment losses of ¥2.1B and losses on the disposal and sale of fixed assets of ¥1.8B. Overall, Revenue and earnings increased, but the primary driver of earnings growth was cost control, while Net Income growth was relatively constrained by temporary factors.

Segment Analysis

The Company operates as a single segment, the “Agricultural-Related Business,” and does not disclose performance by segment.

Key Financial Indicators

【Profitability】The Operating Income margin improved to 5.5%, up +1.2pt from 4.3% in the same period of the previous year, while the gross profit margin also increased to 31.5% (+2.4pt YoY). Meanwhile, the Net Income margin remained broadly unchanged at 3.4%, compared with 3.4% in the previous year, as the occurrence of extraordinary losses offset the improvement in margins. 【Cash Quality】ROE was 4.1%; given that OCF was negative ¥26.4B, there appears to be a delay in converting Net Income into cash. 【Investment Efficiency】Total assets expanded to ¥2239.2B (+6.9% YoY), while Revenue growth remained limited to +1.0%, indicating that investment is leading from the perspective of asset efficiency. 【Financial Soundness】The Equity Ratio improved to 37.3% from 35.2% in the previous year, and Net Assets increased to ¥835.4B (+6.5% YoY). However, long-term borrowings were ¥188.4B, and short-term borrowings are also trending upward, indicating a level at which interest expense requires monitoring.

Cash Flow Analysis

OCF deteriorated substantially to negative ¥26.4B from positive ¥45.1B in the previous year, and cash conversion also lagged when compared with Net Income of ¥34.5B. The primary factor was an increase in trade receivables (-¥89.7B), as higher shipments during the demand season and a lengthening collection cycle placed pressure on working capital. Investing Cash Flow was -¥88.9B, with active capital investment continuing, centered on the acquisition of property, plant and equipment and intangible assets (-¥88.4B). As a result, Free Cash Flow was substantially negative at -¥115.4B, while Financing Cash Flow was +¥53.4B, funded by short- and long-term borrowings. Cash and deposits declined to ¥71.3B, reinforcing a structure in which investment and increased working capital are supported by external financing.

Earnings Quality

While the increase in earnings for the period was primarily supported by an improvement in recurring earning power, Net Income was significantly affected by temporary factors. Non-operating income was ¥8.2B, centered on relatively stable items such as dividend income of ¥2.0B and foreign exchange gains of ¥1.2B. However, interest expense of ¥7.8B accounted for a recurring burden within non-operating expenses of ¥11.9B. Extraordinary income was ¥0.6B, compared with extraordinary losses of ¥3.9B, comprising impairment losses of ¥2.1B and losses on the disposal and sale of fixed assets of ¥1.8B, thereby weighing on net profit. The absence of the one-time gain on the sale of fixed assets of ¥11.1B recorded in the previous year also contributed to the slowdown in Net Income growth. Comprehensive Income was ¥63.1B, substantially exceeding Net Income of ¥34.5B, primarily due to a ¥27.6B increase from valuation differences on securities. As this difference reflects valuation factors arising from market fluctuations and does not necessarily represent the Company’s recurring earning power, the gap from Net Income should be distinguished as an impact of asset valuation.

Earnings Forecast and Guidance

The full-year forecast is Revenue of ¥1800.0B (-3.1% YoY), Operating Income of ¥60.0B (+42.0%), and Ordinary Income of ¥49.0B (+18.9%), with no revision during the quarter. Progress against the full-year forecast was 56.6% for Revenue, 92.9% for Operating Income, and 106.1% for Ordinary Income, indicating that progress on the earnings front is ahead of schedule. This suggests that the benefits of cost improvements in the first half emerged earlier than expected, and that the full-year plan may conservatively estimate a slowdown in demand during the second half.

Shareholder Returns

The full-year dividend forecast is ¥45.00, resulting in a Payout Ratio of approximately 33.9% against the full-year EPS forecast of ¥132.59. There was no revision to the dividend forecast during the quarter. While cash dividend payments amounted to ¥9.08B, Free Cash Flow was substantially negative at -¥115.4B, indicating that the dividend for the period was effectively supported not by cash generated from operating activities but by external financing, including borrowings. No share repurchases have been disclosed, and the shareholder return policy is centered on dividends.

Risk Factors

1. Deterioration in working capital efficiency: Trade receivables increased 34.2% YoY to ¥355.5B, becoming the primary cause of negative OCF (-¥26.4B). A lengthening collection cycle could affect liquidity and cash management.

2. Financial expense burden: Interest expense was ¥7.8B, while short-term borrowings increased 26.2% YoY, strengthening the Company’s reliance on interest-bearing debt. Changes in the interest-rate environment could affect future earnings.

3. Volatility in temporary gains and losses: The Company recorded extraordinary losses of ¥3.9B during the period, including impairment losses of ¥2.1B. If one-time gains such as the ¥11.1B gain on the sale of fixed assets recorded in the previous year do not recur, they may become a source of volatility in Net Income.

Industry Benchmark (For Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

The Company’s profitability is below the industry median and ranks relatively low within the manufacturing sector.

Growth and Capital Efficiency

Revenue growth also remains substantially below the industry median, indicating a moderate level of top-line growth within the industry.

※Source: Compiled by the Company

Key Points from the Financial Results

1. In terms of profitability, the Operating Income margin improved +1.2pt YoY, while the gross profit margin increased +2.4pt, confirming an improvement in profitability centered on cost control. Progress toward the full-year earnings forecast is also running ahead of schedule.

2. Meanwhile, OCF was negative ¥26.4B, creating a substantial divergence from Net Income of ¥34.5B. The increase in trade receivables, the primary cause, should be viewed as a point of concern regarding the conversion of earnings into cash.

3. Investing Cash Flow was -¥88.9B, indicating that active capital investment is continuing, with the funding supplemented by increased borrowings. Going forward, the realization of investment benefits and structural improvement in cash flow will be key points.

Theoretical Share Price (For Reference)

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

Sensitivity: ¥2,865–¥3,031 at ±1% for the Cost of Equity, and ¥2,929–¥2,957 at ±0.1 for ω.

Notes:

• As Net Income progress against the full-year forecast (103%) exceeds the standard level (50%), forecast EPS has been adjusted upward within a maximum range of +10% (because companies with progress ahead of schedule tend to outperform their forecasts; the adjustment may be excessive for businesses with strong seasonality).
• Net Income is substantially compressed relative to Operating Income due to the tax burden, acquisition-related expenses, and non-controlling interests, among other factors (Net Income ÷ Operating Income 50%). This value reflects that compression at face value; if the factors are temporary, underlying earning power may be higher.
• As forecast ROE is below the Cost of Equity, the theoretical value is below Book Value per Share.
• Net Assets at the end of the quarter are used (there is a timing difference from the full-year forecast).

(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 based on XBRL financial results 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 data. Investment decisions should be made at your own responsibility, and after consulting a professional adviser as necessary.

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