TEIKOKU (6333) FY2027 Q1 Earnings Report

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Executive Summary

Although the Company secured higher revenue in the quarter, profit declined substantially due to rising costs and the reversal of one-time gains recorded in the previous year. Revenue increased modestly to ¥6.36B (+2.1% YoY), while Operating Income declined to ¥0.83B (-27.8%), Ordinary Income to ¥0.93B (-22.3%), and Net Income to ¥0.65B (-36.1%, on a consolidated basis), with the decline widening at each level. The gross profit margin fell 4.4pt to 41.7% from 46.1% in the previous year, while SG&A expenses increased at a faster pace than revenue, which was the primary factor behind the decline in Operating Income. In addition, special gains, including gains on the sale of investment securities, totaling ¥0.41B on a net basis, recorded in the same period of the previous year did not recur in the current period, further widening the decline in Profit Before Tax and Net Income.

Factors Affecting Earnings

【Revenue】Revenue was ¥6.36B, representing a modest 2.1% YoY increase. The Company operates a single segment, the Pump Business, and does not disclose the breakdown of changes by segment. Work in process increased 20.3% YoY, while accounts payable increased 21.9%, indicating that production activity itself has become more active, although acceptance inspections and revenue recognition may be concentrated in the second half of the fiscal year. Progress against the full-year revenue forecast of ¥31.01B was 20.5%, below the 25% benchmark for even quarterly progress.

【Profit and Loss】Operating Income was ¥0.83B (-27.8% YoY). The gross profit margin declined 4.4pt to 41.7% from 46.1% in the previous year, while SG&A expenses increased to ¥1.82B (¥1.71B in the previous year, +6.0%), exceeding the 2.1% growth in revenue. Consequently, the Operating Income margin contracted 5.5pt to 13.1% from 18.6% in the previous year. Ordinary Income was ¥0.93B (-22.3%), with non-operating income and expenses making a modest positive contribution, mainly due to dividends received and foreign exchange gains. Profit Before Tax was ¥0.93B, approximately the same level as Ordinary Income; however, in the previous year, the Company recorded net special gains of ¥0.41B, including a ¥0.31B gain on the sale of investment securities, resulting in Profit Before Tax of ¥1.60B exceeding Ordinary Income of ¥1.197B. No such special gains or losses were recorded in the current period, resulting in consolidated Net Income of ¥0.65B (-36.1%). Higher revenue but lower profit.

Key Financial Indicators

【Profitability】The Operating Income margin was 13.1% (18.6% in the previous year), the Net Income margin was 10.3% (16.4% in the previous year, based on consolidated Net Income), and ROE was 2.0%; all declined from the previous year. 【Cash Flow Quality】Comprehensive Income was ¥1.08B, exceeding Net Income of ¥0.65B by ¥0.43B, primarily due to foreign currency translation adjustments of +¥0.37B. Cash and deposits were ¥11.11B, down from ¥11.72B in the previous year, while inventories, comprising products, work in process, and raw materials, increased 12.2% YoY to ¥9.39B. 【Investment Efficiency】Total assets were ¥40.39B, nearly flat with a 0.5% YoY increase, while property, plant and equipment increased gradually to ¥8.26B from ¥7.95B in the previous year. 【Financial Soundness】The Equity Ratio was 79.5%, a modest decline from 80.2% in the previous year but still at a high level. Current assets of ¥30.51B compared with current liabilities of ¥7.14B resulted in a substantial Current Ratio of 427.4%. Interest expense was ¥0.007B and interest income was ¥0.028B, indicating that the burden of interest-bearing debt was minimal.

Cash Flow Analysis

Cash and deposits were ¥11.11B, down ¥0.61B from ¥11.72B in the same period of the previous year. Inventories, comprising products, work in process, and raw materials, were ¥9.39B, up 12.2% YoY, with the accumulation of production serving as a source of working capital absorption. Meanwhile, accounts receivable were ¥8.40B, down 8.1% from ¥9.14B in the previous year, indicating that collections progressed more than in the previous year. Accounts payable were ¥2.15B, up 22.0% from ¥1.76B in the previous year, suggesting greater scope for utilizing trade payables. Overall, the increase in inventories was the primary cause of funds being tied up, while movements in accounts receivable and accounts payable supported cash efficiency.

Quality of Earnings

No special gains or losses were recorded in the current period, and Ordinary Income of ¥0.93B was approximately equal to Profit Before Tax of ¥0.93B, indicating that most profit comprised recurring earnings. In contrast, the same period of the previous year included net special gains of ¥0.41B, including a ¥0.31B gain on the sale of investment securities and a ¥0.10B gain on the sale of fixed assets. As a result, Profit Before Tax of ¥1.60B exceeded Ordinary Income of ¥1.197B. Due to the reversal of these one-time gains in the current period, Profit Before Tax declined 42.0% YoY, a larger decrease than the 22.3% decline in Ordinary Income. The difference between Ordinary Income of ¥0.93B and consolidated Net Income of ¥0.65B was primarily attributable to the deduction of income taxes and other taxes of ¥0.28B (an effective tax rate of approximately 29.8%) and profit attributable to non-controlling interests of ¥0.05B; no unusual structural factors were identified. Comprehensive Income was ¥1.08B, exceeding Net Income, with the substantial contribution of +¥0.37B in foreign currency translation adjustments indicating that yen-based valuation gains and losses lifted Comprehensive Income in the current period.

Earnings Forecast and Guidance

Against the full-year earnings forecasts of revenue of ¥31.01B, Operating Income of ¥5.02B, Ordinary Income of ¥5.23B, and Net Income attributable to owners of the parent of ¥3.75B, progress in the current quarter was 20.5% for revenue, 16.6% for Operating Income, 17.8% for Ordinary Income, and 16.1% for Net Income (on an attributable-to-owners-of-the-parent basis, actual result of ¥0.603B). All were below the 25% benchmark for even quarterly progress. Neither the earnings forecast nor the dividend forecast has been revised, and the Company’s plan may assume progress weighted toward the second half of the fiscal year. Recovery in the gross profit margin and margin improvement will be key to achieving the plan from the second half onward.

Shareholder Returns

The full-year dividend forecast remains unchanged at ¥132 per share. Based on the Company’s forecast EPS of ¥244.53, calculated on the basis of profit attributable to owners of the parent, the Payout Ratio is approximately 54.0%. With an Equity Ratio of 79.5% and a Current Ratio of 427.4%, the Company has a strong financial foundation, providing relatively strong support for its dividend funding capacity. The actual dividend in the same period of the previous year was ¥55 per share; however, as the breakdown between the interim and year-end dividends is not clear from the materials, the assessment is limited to the full-year forecast basis.

Risk Factors

1. Risk of uneven project progress and acceptance timing: Progress toward the full-year plan was 20.5% for revenue and 16.6% for Operating Income, both below the 25% benchmark for even quarterly progress. Concentration of acceptance inspections in the second half is therefore a prerequisite for achieving the plan.

2. Risk of working capital becoming tied up: Inventories, comprising products, work in process, and raw materials, were ¥9.39B, up 12.2% YoY. Additional inventory accumulation may affect capital efficiency.

3. Risk of continued margin pressure: The gross profit margin declined 4.4pt to 41.7% from 46.1% in the previous year, while SG&A expenses increased 6.0% YoY, faster than the 2.1% growth in revenue. Developments in the cost and expense structure will be subject to monitoring.

Industry Benchmark (For Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

Both the Operating Income margin and Net Income margin exceeded the industry median, indicating that profitability was relatively high within the industry.

Growth and Capital Efficiency

The Revenue Growth Rate was below the industry median, indicating a relatively slower pace of revenue growth within the industry.

※Source: Compiled by the Company

Key Points from the Financial Results

1. Despite higher revenue, the Operating Income margin declined 5.5pt from 18.6% in the previous year to 13.1%, indicating structural margin compression due to deterioration in the gross profit margin and an increase in SG&A expenses.

2. Special gains, including gains on the sale of investment securities, totaling ¥0.41B on a net basis in the same period of the previous year, did not recur in the current period. This reversal amplified the 36.1% YoY decline in Net Income.

3. Progress toward the full-year plan was below the 25% benchmark for the major indicators, indicating a plan weighted toward the second half. The recovery trend in the gross profit margin will be a factor determining whether the full-year plan can be achieved.

Theoretical Share Price (Reference Value)

This is a reference range mechanically calculated solely from 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: ¥2,195–¥2,320 at ±1% for the Cost of Equity, and ¥2,252–¥2,261 at ±0.1 for ω.

Notes:

• Net assets as of the end of the quarter 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 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 responsibility, after consulting a professional as necessary.

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AI Financial Analysis

Executive Summary

FY2027 Q1 was a weak earnings start despite modest top-line growth, as gross-margin compression and higher SG&A more than offset a 2.1% YoY increase in revenue. Revenue increased to ¥6.36bn from ¥6.23bn in the prior-year quarter. Operating income declined 27.8% YoY to ¥0.84bn. Ordinary income fell 22.3% to ¥0.93bn. Profit attributable to owners of the parent declined 37.4% to ¥0.60bn, equivalent to EPS of ¥39.38. Gross profit fell ¥0.22bn to ¥2.65bn even though sales increased, implying that the earnings pressure originated principally in the cost base. The gross margin contracted 440bp YoY to 41.7% from 46.1%. SG&A expenses rose 6.0% YoY to ¥1.82bn and increased to 28.5% of revenue from 27.5%, a further 105bp burden. Consequently, the operating margin compressed 540bp to 13.1% from 18.6%, although it remains within the benchmark range considered good for a manufacturer. The Q1 net margin was 9.5%, just below the 10% threshold generally associated with excellent profitability. Current profit before tax was broadly aligned with ordinary income at ¥0.93bn, indicating limited current-period extraordinary-item influence. The prior-year comparison, however, benefited from ¥0.41bn of extraordinary income, including a ¥0.31bn gain on sales of investment securities, which amplified the reported YoY decline in profit before tax and net income. The annualized ROE was 7.5%, below the 8% threshold typically regarded as satisfactory, reflecting the weaker margin rather than balance-sheet leverage. The balance sheet remains exceptionally liquid, with a 427.5% current ratio, ¥11.11bn of cash and deposits, and D/E of just 0.26x. The principal operational concern is capital tied up in the working-capital cycle: annualized DSO was 120 days, DIO was 231 days, and the annualized cash conversion cycle was 299 days. Management maintained its full-year guidance, but Q1 progress of 20.5% for sales and 16.6% for operating income is below the standard 25% first-quarter run rate. Achieving the full-year plan will therefore require a material acceleration in revenue conversion and, especially, restoration of gross margin during the remaining quarters.

Profitability Analysis

The annualized DuPont analysis produces ROE of 7.5%, decomposed into a 9.5% net profit margin, 0.630x asset turnover, and 1.26x financial leverage. The low financial-leverage component is deliberate rather than problematic: the company is financed predominantly by equity, with total equity of ¥32.12bn against total liabilities of ¥8.27bn. The principal limiting factor for return generation is margin, not leverage. Revenue grew 2.1% YoY, but gross profit fell 7.7% YoY because gross margin declined to 41.7% from 46.1%. SG&A increased 6.0% YoY, outpacing sales growth by 3.9 percentage points, and this operating deleverage contributed to the operating-margin decline to 13.1% from 18.6%. The absolute decline in gross profit of ¥0.22bn and the ¥0.10bn increase in SG&A together explain the ¥0.32bn decline in operating income. The extended DuPont tax burden was 0.648, consistent with a 29.8% effective tax rate, while the interest burden was 1.115 because non-operating income exceeded financing costs. Interest expense was only ¥0.07bn and interest coverage was a very strong 119.83x. Net non-operating income was positive at approximately ¥0.09bn, supported by ¥0.28bn of interest income and ¥0.27bn of foreign-exchange gains. This support modestly cushioned operating-profit weakness but does not alter the conclusion that core profitability weakened. The pump business is the sole reportable segment and therefore the core business; all reported revenue and operating income are effectively attributable to this business. The sustainability of the margin recovery will depend on pricing, project mix, procurement costs, and the ability to prevent SG&A from continuing to grow faster than revenue.

Growth Assessment

Sales growth of 2.1% YoY indicates continued demand conversion, but the low growth rate did not provide sufficient scale benefits to absorb the weaker gross margin and rising SG&A burden. The single-segment pump-business structure concentrates performance on industrial and project-related demand conditions, order timing, and execution. Full-year company guidance calls for revenue of ¥31.01bn, up 6.6% YoY, and operating income of ¥5.02bn, up 0.7% YoY. Q1 revenue represents 20.5% of the full-year sales target, 4.5 percentage points below the standard 25% Q1 progress rate. Q1 operating income represents 16.6% of the full-year operating-income target, 8.4 percentage points below the standard rate. Ordinary-income progress is 17.8% against the ¥5.23bn forecast, also below the normal seasonal run rate. Profit attributable to owners has reached 16.1% of the ¥3.75bn full-year forecast. The implied full-year operating margin is 16.2%, above the Q1 margin of 13.1%, so the maintained plan requires approximately 310bp of margin improvement over the balance of the year. Management has not revised its earnings forecast, suggesting it expects subsequent-quarter volume, product mix, or cost conditions to improve. The rise in total comprehensive income to ¥1.08bn, despite lower net income, was supported by positive foreign-currency translation and securities valuation movements; these gains strengthen reported equity but are not substitutes for operating-profit growth.

Financial Health

Financial health is strong. Current assets of ¥30.51bn exceeded current liabilities of ¥7.14bn by ¥23.38bn, producing working capital of ¥23.38bn and a 427.5% current ratio. The quick ratio was also 427.5%, demonstrating that liquidity is not dependent on inventory liquidation. Cash and deposits were ¥11.11bn, equal to 27.5% of total assets and substantially exceeding current liabilities. Total liabilities represented only 20.5% of total assets, while total equity represented 79.5%. D/E of 0.26x is conservative and far below the 2.0x level that would signal aggressive debt financing. There is no maturity-mismatch concern, as current assets are more than four times current liabilities. Accounts payable increased ¥0.39bn YoY to ¥2.15bn, while electronically recorded obligations were ¥0.31bn. Non-current liabilities increased ¥0.25bn YoY to ¥1.13bn, including a ¥0.38bn net defined-benefit liability. Product-warranty provisions were ¥0.50bn, equal to approximately 0.8% of quarterly revenue, within the benchmark range associated with manageable quality-related obligations. Owners' equity decreased modestly by ¥0.20bn YoY to ¥31.17bn, but total equity remained high at ¥32.12bn, supported by accumulated other comprehensive income of ¥4.44bn.

Notable B/S Changes

Inventories: +¥0.94bn (+11.2%) to ¥9.32bn - growth materially exceeded sales growth, consistent with the elevated 231-day annualized inventory period and requiring monitoring of delivery conversion and obsolescence risk. Property, plant and equipment: +¥0.31bn (+3.9%) to ¥8.26bn - indicates continued fixed-asset investment or asset-base expansion in the pump manufacturing operation. Accounts payable: +¥0.39bn (+22.0%) to ¥2.15bn - supplier financing increased, but annualized payable days remain approximately 52 days and within normal manufacturing practice. Non-current liabilities: +¥0.25bn (+28.4%) to ¥1.13bn - increase includes pension-related obligations; the absolute level remains modest relative to ¥32.12bn of total equity. Cash and deposits: -¥0.61bn (-5.2%) to ¥11.11bn - liquidity remains very strong, though the decrease alongside higher inventories underscores the importance of working-capital management. Accumulated other comprehensive income: +¥0.41bn (+10.2%) to ¥4.44bn - primarily supported by positive foreign-currency translation and securities valuation movements, which increase equity but may be market-sensitive.

Cash Flow Quality

Working-capital efficiency is the key earnings-quality and cash-conversion risk. Annualized DSO of 120 days is well above the 60-day warning threshold. The root cause is the substantial receivables balance associated with trade receivables and electronically recorded monetary claims, totaling ¥10.21bn. In the context of a pump manufacturer, project-based sales and customer acceptance schedules can lengthen collection periods, but 120 days remains materially above efficient manufacturing norms. The impact is that reported revenue and earnings may take longer to convert into cash, increasing exposure to customer-credit risk and reducing financial flexibility available for investment or shareholder returns. Annualized DIO of 231 days is also well above the 90-day warning threshold. Inventories totaled ¥9.32bn and increased 11.2% YoY, substantially faster than 2.1% sales growth. Finished goods were ¥3.41bn, work in process was ¥3.30bn, and raw materials were ¥2.68bn, equivalent to 36.6%, 35.4%, and 28.8% of total inventory, respectively. The sizeable finished-goods and work-in-process balances may reflect long production lead times and project execution, but they also raise risks of slower demand conversion, production bottlenecks, and inventory obsolescence. The annualized cash conversion cycle of 299 days is the most material quality alert and far exceeds the 120-day warning level. Annualized payable days are approximately 52 days, within the 30-60 day benchmark range, so the long cycle arises from receivables and inventory rather than unusually rapid supplier payments. The combination of elevated DSO and DIO means that working-capital release is an important determinant of cash generation and should be monitored alongside order completion and customer collections.

Dividend Sustainability

The full-year dividend forecast is ¥132 per share, unchanged from the company plan. Against forecast EPS of ¥244.53, the implied dividend payout ratio is approximately 54.0%. This is below the 60% sustainability benchmark and appears compatible with the company’s strong capital base and low leverage. Retained earnings were ¥21.84bn, providing a substantial accumulated earnings buffer. The forecast dividend is nevertheless dependent on delivery of the full-year earnings plan, because Q1 EPS of ¥39.38 represents only 16.1% of forecast annual EPS. No dividend revision has been announced. The unusually long working-capital cycle means the practical cash coverage of dividends will depend on collections and inventory monetization as well as accounting profitability.

Risk Assessment

Business risks include Margin recovery risk: Gross margin fell 440bp YoY to 41.7% and operating margin fell 540bp to 13.1%. Cost inflation, adverse project mix, pricing pressure, or execution inefficiency could prevent the margin improvement needed to meet the full-year plan., Pump-industry project-cycle risk: The single reportable pump business is exposed to capital-spending cycles, customer project delays, acceptance timing, and demand fluctuations in end markets served by industrial pumping equipment., Inventory risk: Inventory increased 11.2% YoY to ¥9.32bn while sales rose only 2.1%. The 231-day annualized DIO increases risks of slower turnover, valuation pressure, and production scheduling inefficiency., Customer collection risk: Annualized DSO of 120 days indicates slow conversion of invoiced sales into cash. Long customer payment or project-acceptance cycles could defer cash realization and heighten counterparty exposure., Foreign-exchange exposure: Foreign-exchange gains of ¥0.27bn contributed to non-operating income. Currency movements may reverse and add volatility to ordinary income..

Financial risks include Long cash conversion cycle: The 299-day annualized CCC materially exceeds the 120-day warning threshold. Its root cause is the combined effect of high receivable and inventory days rather than supplier-payment terms. The impact is potentially weaker operating cash conversion, despite the currently strong liquidity position., Forecast execution risk: Q1 sales progress of 20.5% and operating-income progress of 16.6% are below the standard 25% Q1 pace. The full-year operating-margin target of roughly 16.2% requires improvement from the Q1 13.1% level., Comprehensive-income volatility: Positive translation and securities valuation movements supported comprehensive income, but these market-driven equity movements are less predictable than operating earnings..

Key concerns include High receivable days alert: 120-day annualized DSO is twice the 60-day warning level. While longer collection terms can occur in engineered-equipment projects, the metric constrains cash conversion and should improve as projects are accepted and paid., High inventory days alert: 231-day annualized DIO is more than double the 90-day warning level. The increase in finished goods and work in process should be assessed against delivery schedules, backlog conversion, and potential obsolescence., Long CCC alert: 299-day annualized CCC is substantially above the 120-day warning threshold. With annualized DPO of approximately 52 days remaining normal, management needs to improve collections and inventory turnover rather than rely on extending supplier terms., Operating deleverage: SG&A grew faster than revenue and compounded gross-margin pressure. Sustained SG&A discipline is needed for earnings to recover..

Investment Implications

Key takeaways include Q1 revenue growth was positive, but profitability weakened materially: operating income fell 27.8% YoY and operating margin declined to 13.1%., The balance sheet is a major stabilizer, supported by ¥11.11bn of cash, a 427.5% current ratio, and conservative 0.26x D/E., The main operational issue is working-capital intensity, with annualized DSO of 120 days, DIO of 231 days, and CCC of 299 days., Maintained full-year guidance requires a significant improvement in margin and quarterly earnings pace after Q1., The planned ¥132 annual dividend implies a 54.0% payout ratio on forecast EPS and appears supportable if forecast earnings and cash conversion are achieved..

Metrics to watch include Gross margin and operating margin versus the Q1 levels of 41.7% and 13.1%, Revenue and operating-income progress toward the ¥31.01bn and ¥5.02bn full-year targets, Annualized receivable days, inventory days, and cash conversion cycle, Inventory balance, particularly finished goods of ¥3.41bn and work in process of ¥3.30bn, SG&A growth relative to revenue growth, Foreign-exchange contribution to non-operating income.

Regarding relative positioning, The company combines above-average liquidity and low leverage with a currently mid-range operating margin for manufacturing. Its financial resilience is stronger than that of highly leveraged peers, but its working-capital efficiency is materially weaker than standard manufacturing benchmarks and is the central factor affecting cash-conversion quality.