Harmonic Drive Systems (6324) FY2026 FY Earnings Report

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Executive Summary

During the current period, Operating Income turned profitable due to expanded sales centered on precision reduction gears and improved profitability, while Net Income was effectively in a recovery phase after excluding the nonrecurring gain on the sale of investment securities recorded in the previous year. Revenue was ¥5.956B (+7.0% YoY), Operating Income was ¥0.257B (a significant improvement from ¥0.001B in the previous year), and Ordinary Income was ¥0.254B (+469.9% YoY). Net Income, meanwhile, was ¥0.161B (-82.8% YoY); however, this reflected the reversal of the ¥5.87B gain on the sale of investment securities recorded in the previous year, and the underlying business structure was improving after excluding this nonrecurring factor.

Factors Affecting Performance

【Revenue】Revenue was ¥5.956B, up +7.0% YoY. By region, Japan posted the strongest growth at ¥2.663B (+22.5%), followed by North America at ¥1.211B (+4.1%) and Europe at ¥1.678B (+0.7%), while revenue in China continued to decline, down -28.0% YoY. By product, the core precision reduction gear business drove overall performance with revenue of ¥4.633B (+9.5%), while mechatronics products declined slightly to ¥1.322B (-0.9%).

【Profit and Loss】The gross margin improved to 30.4% (+3.7pt from 26.7% in the previous year), while the SG&A ratio declined to 26.1% (-0.6pt YoY). As a result, positive operating leverage took effect and Operating Income recovered to ¥0.257B. For Ordinary Income, interest expense of ¥0.026B exceeded interest income of ¥0.021B, resulting in a small non-operating loss. In addition, against Profit Before Tax of ¥0.229B, net extraordinary gains and losses of -¥0.025B, including a ¥0.051B gain on the sale of fixed assets and a ¥0.053B impairment loss, had an impact. Net Income of ¥0.161B was down -82.8% YoY; however, excluding the nonrecurring ¥5.87B gain on the sale of investment securities in the previous year, the underlying trend was toward profit growth. In conclusion, performance can be assessed as higher revenue and higher profit on an underlying basis, excluding nonrecurring factors.

Segment Analysis

Segment profit is presented on an Ordinary Income basis and differs in definition from consolidated Operating Income, as it does not include ¥0.271B in company-wide expenses. The Japan segment posted revenue of ¥2.663B (+22.5%), profit of ¥0.369B (+66.1%), and a profit margin of 13.9%, demonstrating the highest profitability and leading the improvement in company-wide earnings. Europe was nearly flat in terms of revenue at ¥1.678B (+0.7%), while profit improved substantially to ¥0.064B from ¥0.004B in the previous year, indicating progress toward profitability. North America recorded higher revenue of ¥1.211B (+4.1%), but profit declined to ¥0.053B (-5.0%). The fact that revenue growth has not translated into profit growth warrants close monitoring.

Key Financial Indicators

【Profitability】The Operating Income margin of 4.3% improved significantly from the nearly zero level in the previous year, although it remains low in absolute terms. The Net Income margin of 2.7% and ROE of 2.0% also remained low. 【Cash Flow Quality】Operating Cash Flow (OCF) was ¥0.642B, approximately 4.0 times Net Income of ¥0.161B, indicating strong cash-generation capacity relative to accounting profit. However, the OCF-to-EBITDA ratio remained at 0.65x against estimated EBITDA of ¥0.993B, while the increase in accounts receivable (+¥0.179B) and decrease in accounts payable (-¥0.087B) placed pressure on working capital. 【Investment Efficiency】Capital expenditures of ¥0.569B were below depreciation and amortization expense of ¥0.736B, indicating a net reduction in existing assets. Free Cash Flow was limited to ¥0.148B. 【Financial Soundness】With an Equity Ratio of 72.2% and cash and deposits of ¥2.156B, resilience in terms of liquidity and leverage remains high.

Cash Flow Analysis

Operating Cash Flow was ¥0.642B, down -14.5% YoY, but substantially exceeded Net Income of ¥0.161B, indicating solid cash backing for reported earnings. In terms of working capital, accounts receivable increased by ¥0.179B in line with higher revenue, while accounts payable decreased by ¥0.087B. Consequently, working capital movements compressed the subtotal of ¥0.836B to OCF of ¥0.642B. Investing Cash Flow was -¥0.494B, primarily reflecting capital expenditures of ¥0.569B. As capital expenditures were below depreciation and amortization expense of ¥0.736B, the spending was more selective replacement investment than capacity expansion. Financing Cash Flow was -¥0.587B, mainly due to repayments of long-term borrowings, dividend payments of ¥0.189B, and share repurchases of ¥0.081B. As a result, Free Cash Flow remained at ¥0.148B and was insufficient on a standalone basis to cover total dividends and share repurchases of ¥0.270B. Cash and deposits therefore decreased by ¥0.334B to ¥2.156B.

Earnings Quality

Profit Before Tax of ¥0.229B for the current period included extraordinary income of ¥0.060B, consisting of a ¥0.051B gain on the sale of fixed assets and a ¥0.009B gain on the sale of investment securities, as well as extraordinary losses of ¥0.085B, primarily an impairment loss of ¥0.053B. The impact of nonrecurring items was therefore relatively significant. Since the previous year included a large nonrecurring gain of ¥5.87B on the sale of investment securities, the -82.8% YoY change in Net Income does not readily reflect the underlying state of the core business, and comparisons require caution. Non-operating income and expenses resulted in a small net loss, as interest expense of ¥0.026B exceeded interest income of ¥0.021B. From an accrual perspective, OCF of ¥0.642B substantially exceeded Net Income of ¥0.161B, indicating a limited divergence between accounting profit and cash generation. However, the OCF-to-EBITDA ratio was 0.65x, and the increase in accounts receivable and decrease in accounts payable delayed cash conversion. This point should be considered when assessing earnings quality.

Earnings Forecast and Guidance

The company has announced the following Full-Year forecasts: Revenue of ¥6.800B (+14.2% YoY), Operating Income of ¥0.620B (+141.5% YoY), Ordinary Income of ¥0.620B (+144.1% YoY), and Net Income of ¥0.380B (+428.2% YoY). Compared simply with the current-period results, the company is planning for Revenue growth of +14.2% versus the current-period growth rate of +7.0%, while Operating Income is assumed to increase substantially from ¥0.257B to ¥0.620B on a Full-Year basis. If quarterly profit allocation is assumed to remain at the same level as in the previous fiscal year, the plan requires a significant improvement in the profit margin in the second half. The pace of profitability improvement in the second half will therefore be key to achieving the plan.

Shareholder Returns

The annual dividend was ¥20 per share, double the previous year's ¥10, and total dividend payments were ¥0.189B. The disclosed Payout Ratio of 1.2% is a reference figure based on forecast EPS. Dividing total dividends of ¥0.189B by Current-Period Net Income of ¥0.161B results in an actual Payout Ratio of approximately 118%. The company also carried out share repurchases of ¥0.081B, resulting in a Total Return Ratio equivalent to approximately 168% when dividends and share repurchases are combined. Total dividends and share repurchases of ¥0.270B exceeded Free Cash Flow of ¥0.148B, meaning that shareholder returns during the current period could not be funded solely by cash generated from operating activities and involved a drawdown of cash and deposits. Assuming forecast EPS of ¥47.54 and a dividend of ¥20 for the next period, the forecast Payout Ratio is expected to decline to approximately 42%.

Risk Factors

1. Demand cycle and geographic concentration risk: Precision reduction gears account for 77.8% of total revenue, and fluctuations in capital investment cycles for robots, semiconductor manufacturing equipment, and related industries have a significant impact on performance. Revenue in China was ¥0.405B, down -28.0% YoY, and the pace of recovery differs by region.

2. Working capital efficiency risk: Accounts receivable increased +22.1% YoY, while accounts payable declined, leaving OCF at 0.65x EBITDA. In North America, revenue increased +4.1% while profit declined -5.0%, indicating that pressure on pricing and the cost structure may be affecting profitability.

3. Earnings quality risk: The impact of extraordinary gains and losses, including the ¥0.053B impairment loss and the ¥0.051B gain on the sale of fixed assets, was relatively significant compared with Profit Before Tax of ¥0.229B. The nonrecurring ¥5.87B gain on the sale of investment securities in the previous year requires caution when interpreting the YoY comparison of Net Income.

Industry Benchmark (For Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

Both the Operating Income margin and Net Income margin are below the industry median, placing profitability relatively low within the industry.

Growth and Capital Efficiency

The Revenue growth rate exceeds the industry median, placing top-line growth relatively high within the industry.

※Source: Compiled by the company

Key Takeaways from the Earnings Results

1. With Revenue up +7.0%, the gross margin up +3.7pt, and the SG&A ratio down -0.6pt, Operating Income recovered from the previous year's nearly zero level to ¥0.257B, confirming the effect of positive operating leverage.

2. The -82.8% YoY decline in Net Income reflects the reversal of the nonrecurring ¥5.87B gain on the sale of investment securities in the previous year. The results should therefore be interpreted from the perspective of improved profitability in the core business excluding extraordinary gains and losses.

3. OCF remained at 0.65x EBITDA, with working capital factors—an increase in accounts receivable and a decrease in accounts payable—delaying cash conversion. The fact that achieving the company's Operating Income forecast of ¥0.620B requires profitability improvement in the second half is a key point to confirm in earnings disclosures from the next period onward.

Theoretical Share Price (Reference Value)

Sensitivity: ¥741–¥783 at ±1% for the cost of equity, and ¥759–¥763 at ±0.1 for ω.

Notes:

• As forecast ROE is below the cost of equity, the theoretical value is below book value per share.

(Calculation model: Residual Income Model (Ohlson type; explicit 5-year fade) / Interest-rate reference month: 2026-07 / Mechanically calculated using only 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 earnings data. Investment decisions should be made at your own responsibility, and, where necessary, after consulting with a professional advisor.

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