TSURUMI MANUFACTURING (6351) FY2027 Q1 Earnings Report

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Executive Summary

The company posted mixed results, with higher revenue but lower operating income, while ordinary income and net income increased substantially due to non-operating factors. Revenue rose to ¥194.8B (+7.5% YoY), while operating income declined to ¥28.5B (-5.0%), as higher SG&A expenses offset the benefit of increased revenue. Meanwhile, ordinary income rose substantially to ¥36.8B (+57.0%), and net income to ¥27.1B (+99.5%), primarily due to foreign exchange gains of ¥4.0B and improved interest income and expense. However, attention should be paid to the fact that operating income, which reflects the earning power of the core business, weakened from the previous year.

Factors Affecting Financial Performance

【Revenue】Revenue was ¥194.8B, representing a +7.5% increase YoY. By region, North America (+38.1%) and Asia (+20.8%) continued to achieve strong growth, while Japan, the core market, remained solid at +12.0%. Europe posted a +12.5% increase in revenue but remained loss-making. Japan accounted for 53.2% of the revenue mix, indicating that regional concentration remains high.

【Profit and Loss】Operating income was ¥28.5B, down -5.0% YoY. The gross margin was 38.4%, broadly flat compared with approximately 38.7% in the previous year, but SG&A expenses increased to ¥46.3B, equivalent to an SG&A ratio of 23.8%, and could not be fully absorbed by the increase in revenue. Meanwhile, ordinary income increased substantially to ¥36.8B (+57.0%), supported by ¥8.8B in non-operating income, comprising foreign exchange gains of ¥4.0B, dividend income of ¥2.7B, and interest income of ¥1.4B. Net income was ¥27.1B (consolidated net income, +99.5%), also benefiting from extraordinary income of ¥1.2B and the convergence of the tax burden within the expected range. Net income attributable to owners of the parent was ¥26.4B (+114.5%). In summary, the results exhibited a structure in which higher revenue accompanied lower operating income, while higher revenue accompanied higher ordinary income and net income. Although the profitability of the core business softened somewhat, non-operating factors boosted final earnings.

Segment Analysis

By segment, Japan remained the largest source of earnings, with revenue of ¥147.7B (+12.0%), operating income of ¥24.5B (+8.7%), and a profit margin of 16.6%. North America achieved strong revenue growth of ¥48.6B (+38.1%), but operating income was ¥4.3B (+6.2%) and the profit margin was 8.9%, indicating that profitability has not kept pace with growth. Asia achieved both expansion and improved profitability, with revenue of ¥47.7B (+20.8%), operating income of ¥6.1B (+44.9%), and a profit margin of 12.9%. Europe posted revenue of ¥15.8B (+12.5%) and remained loss-making with an operating loss of ¥0.8B, although the size of the loss narrowed from the previous year (+26.7%). A notable feature is the widening profitability gap among regions: Japan and Asia maintain double-digit margins, North America remains in the single digits, and Europe remains loss-making.

Key Financial Indicators

【Profitability】The operating margin was 14.6%, down from 16.6% in the same period of the previous year, primarily because SG&A expenses increased by +11.5% YoY, outpacing revenue growth of +7.5%. Meanwhile, the net margin rose significantly from the previous year to approximately 13.9% (net income of ¥27.1B ÷ revenue of ¥194.8B), supported by foreign exchange gains and improved interest income and expense. 【Cash Flow Quality】Extraordinary income of ¥1.2B accounted for only approximately 4.5% of net income, indicating that the impact of one-off factors was limited. 【Investment Efficiency】ROE was 2.6% on a quarterly basis, with the improvement in net margin partially offsetting the low asset turnover. 【Financial Soundness】The equity ratio improved to 76.9% from 73.8% in the previous year. With cash and deposits of ¥360.9B against long-term borrowings of ¥78.3B, the company maintains a net cash position and a solid financial foundation.

Cash Flow Analysis

As the cash flow statement has not been disclosed, funding trends are analyzed based on changes in the balance sheet. Cash and deposits totaled ¥360.9B, an increase of +¥8.0B from the previous year, indicating that liquidity is being accumulated. Accounts receivable and notes receivable totaled ¥235.3B, a decrease of -¥23.8B from the previous year, suggesting that collections may have progressed. Meanwhile, inventories increased by +¥4.8B to ¥238.5B, indicating continued accumulation. Accounts payable and notes payable decreased by -¥10.5B to ¥63.9B, potentially representing a short-term cash outflow factor due to shorter payment terms. Overall, although operating assets have shifted, the funding base remains stable, supported by an equity ratio of 76.9% and a balance sheet with substantial cash holdings.

Earnings Quality

Against operating income of ¥28.5B, non-operating income was ¥8.8B, equivalent to 4.5% of revenue. This primarily comprised foreign exchange gains of ¥4.0B, dividend income of ¥2.7B, and interest income of ¥1.4B, incorporating both recurring asset-management income and market-dependent foreign exchange factors. The approximately 26% gap between ordinary income of ¥36.8B and net income of ¥27.1B is largely explained by income taxes of ¥10.9B, representing an effective tax rate of approximately 28.6%, and ¥0.8B attributable to non-controlling interests. Extraordinary income of ¥1.2B accounted for approximately 4.5% of net income, so the impact of one-off factors was limited. However, foreign exchange gains made a considerable contribution to the +57.0% growth in ordinary income. Since repeatability for the full year will depend on market conditions, the quality of this earnings growth relied more heavily on the non-operating environment than on improvement in the core business.

Earnings Forecast and Guidance

Progress against the full-year forecast was 25.0% for revenue (¥194.8B/¥778.0B), 30.3% for operating income (¥28.5B/¥94.0B), and 35.1% for ordinary income (¥36.8B/¥105.0B), indicating that the profit metrics are progressing ahead of revenue. The full-year forecasts are somewhat conservative, with revenue forecast to increase +0.7% YoY, operating income to decrease -12.3%, and ordinary income to decrease -22.8%. No revisions were made to the earnings or dividend forecasts during the current quarter. The particularly strong progress in ordinary income was attributable to non-operating factors, such as foreign exchange gains recorded in Q1, and repeatability for the full year will depend on future foreign exchange trends.

Shareholder Returns

The company’s full-year dividend forecast is ¥36, implying a payout ratio of approximately 23.4% against forecast EPS of ¥153.84. No revision was made to the dividend forecast during the current quarter. Taking into account the stock split effective October 2025 (1 share → 2 shares), the annual dividend for FY2026 ended March is ¥29. The company holds treasury shares equivalent to approximately 6.0% of issued shares (3,049 thousand shares). Supported by substantial liquidity, including cash and deposits of ¥360.9B, dividend sustainability is considered to be secured.

Risk Factors

1. Increased foreign exchange sensitivity: Foreign exchange gains of ¥4.0B contributed to the increase in ordinary income to ¥36.8B, meaning that a certain portion of the +57.0% growth in ordinary income depends on foreign exchange market conditions. A reversal could become a source of volatility in ordinary income.

2. Profitability of the European business: The Europe segment remains loss-making, with revenue of ¥15.8B (+12.5%) against an operating loss of ¥0.8B, representing a profit margin of -4.9%. Although the loss narrowed YoY, the delay in achieving profitability remains a structural issue.

3. Lower operating leverage due to higher costs: SG&A expenses increased by approximately +11.5% from the previous year to ¥46.3B, exceeding the revenue growth rate of +7.5%. Continued structural increases in personnel, logistics, and other costs could lead to a further decline in the operating margin.

Industry Benchmark (Reference; Company Analysis)

Key Points from the Earnings Results

1. The defining feature of the results was the combination of higher revenue but lower operating income, while ordinary income and net income increased substantially due to non-operating factors such as foreign exchange gains. The difference between the earning power of the core business and the growth in final earnings is an important point when assessing the quality of the results.

2. The operating margin declined by approximately 2pt from the previous year to 14.6%. If the structure in which SG&A expense growth outpaces revenue growth continues, higher revenue may continue to translate less effectively into operating income.

3. By region, Japan and Asia maintained double-digit margins, while North America achieved a high growth rate but remained at a single-digit margin, and Europe continued to report losses. The impact of changes in the business mix on the overall profit margin will therefore remain an area of focus.

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). It is not a forecast of the market share price or a recommendation to undertake any specific investment action.

Sensitivity: ¥2,030〜¥2,150 at cost of equity ±1%, and ¥2,084〜¥2,092 at ω±0.1.

Notes:

• Because progress of net income against the full-year forecast is 36%, exceeding the standard 25%, forecast EPS has been adjusted upward within a maximum range of +10% (because companies whose progress is ahead of plan tend to outperform their forecasts; adjustments may be excessive for businesses with strong seasonality).
• 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, resulting in a timing mismatch with the full-year forecast.
• Since 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 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 benchmark is 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.

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AI Financial Analysis

Executive Summary

FY2027 Q1 was a solid top-line quarter, but operating earnings softened as gross-margin pressure and inventory-related adjustments offset strong regional demand. Revenue rose 7.5% YoY to ¥19.48bn. Operating income declined 5.0% YoY to ¥2.85bn despite the revenue increase. The operating margin compressed 193bp to 14.6% from 16.6% in the prior-year quarter. Gross profit increased 4.6% YoY to ¥7.48bn, but the gross margin declined 109bp to 38.4%. SG&A expense increased 11.5% YoY to ¥4.63bn, faster than sales growth, raising the SG&A-to-sales ratio by 85bp to 23.8%. Ordinary income nevertheless surged 57.0% YoY to ¥3.68bn, supported principally by ¥0.40bn of foreign-exchange gains, ¥0.27bn of dividend income and ¥0.14bn of interest income. Profit attributable to owners rose 114.5% YoY to ¥2.64bn. The sharp net-profit growth also reflects a favorable comparison with the prior-year quarter, which contained a ¥0.26bn impairment loss, while the current quarter recorded ¥0.12bn of extraordinary income. North America was the principal sales-growth engine, with external revenue rising 38.1% YoY to ¥4.86bn. Asia also delivered strong growth, with revenue up 11.0% and segment profit up 45.0%. Japan remained the largest and core business by segment profit contribution, producing ¥2.45bn of segment profit, up 8.7% YoY, despite a 0.6% decline in external revenue. Europe remained loss-making, although its segment loss narrowed from ¥0.11bn to ¥0.08bn. Consolidated operating profit was restrained by inventory-related segment adjustments of ¥0.43bn, versus only ¥0.03bn a year earlier. The balance sheet remains exceptionally liquid, with a 414.5% current ratio, cash of ¥36.09bn and net cash of approximately ¥22.45bn after interest-bearing debt. However, annualized working-capital efficiency requires close monitoring: DSO was 110 days, DIO was 181 days and the annualized cash conversion cycle was 243 days. Q1 progress against full-year guidance is 25.0% for sales, 30.3% for operating income, 35.1% for ordinary income and 35.9% for profit attributable to owners, indicating an initially favorable profit run-rate relative to the standard 25% quarterly pace. The durability of this outperformance will depend on normalization of foreign-exchange gains, containment of inventory adjustments, working-capital discipline and preservation of the still-high operating margin.

Profitability Analysis

Annualized DuPont ROE is 9.9%, comprising a 13.6% net profit margin, 0.563x asset turnover and 1.30x financial leverage. The limited financial leverage confirms that returns are primarily generated by operating profitability and asset utilization rather than debt-funded balance-sheet expansion. The net margin is above the 10% benchmark, but it was materially assisted by non-operating income and a favorable extraordinary-item comparison. Operating-margin performance was less favorable: the 14.6% margin remained within the good-to-near-excellent range but fell 193bp YoY. Gross-margin compression of 109bp accounts for much of the decline, while SG&A grew 11.5%, exceeding 7.5% revenue growth and adding a further 85bp of cost-ratio pressure. Segment performance was uneven. Japan is the core business by operating-profit contribution, generating ¥2.45bn of segment profit, or 66% of total pre-adjustment segment profit, with its segment margin improving despite slightly lower external sales. North America generated ¥4.86bn of revenue and ¥0.43bn of segment profit, with revenue up 38.1% YoY but profit up only 6.2%, implying significant margin dilution from mix, costs or ramp-up effects. Asia combined 11.0% sales growth with a 45.0% rise in segment profit to ¥0.61bn, representing the strongest positive operating-leverage outcome. Europe generated ¥1.42bn of revenue, up 6.4%, and reduced its segment loss to ¥0.08bn from ¥0.11bn, but it has not yet reached profitability. The increase in inventory-related adjustments to ¥0.43bn from ¥0.03bn was the largest negative swing in the segment reconciliation and directly constrained reported operating income. Ordinary income exceeded operating income by ¥0.83bn, or 4.3% of sales, primarily due to FX gains, dividends and interest income; this contribution should not be treated as fully recurring operating profitability. Interest coverage of 71.3x is very strong, and the 1.333x interest-burden ratio reflects net financial income rather than financing stress. The effective tax rate was 28.6%, producing a tax burden of 0.694, broadly consistent with the reported tax charge.

Growth Assessment

Revenue growth of 7.5% was broad enough to demonstrate continued demand momentum, led by North America and Asia. North America's ¥1.34bn YoY sales increase accounted for nearly all consolidated growth, indicating that execution in this region is central to the near-term revenue trajectory. Asia added ¥0.23bn of sales and showed materially stronger profit conversion, supporting its strategic importance. Japan's revenue declined modestly by ¥0.06bn, although higher segment profit suggests resilient domestic pricing, mix or cost control. Other operations, including China and other local entities, saw revenue decline 18.2% YoY to ¥1.02bn and segment profit fall 37.2% to ¥0.27bn, creating a partial offset to growth elsewhere. The company's FY2027 full-year forecast calls for revenue of ¥77.80bn, only 0.7% above the prior year, and operating income of ¥9.40bn, down 12.3% YoY. Q1 sales progress is exactly 25.0% of full-year guidance, consistent with a standard quarterly run-rate. Q1 operating-income progress is 30.3%, 5.3 percentage points above the standard 25% pace, but this does not exceed the 10-percentage-point threshold for a material pace deviation. Ordinary-income progress of 35.1% is 10.1 percentage points above the standard pace, while owners' profit progress of 35.9% is 10.9 percentage points above it. The elevated ordinary-income and net-income progress partly reflects ¥0.40bn of FX gains and the absence of the prior-year impairment charge, so it should not be extrapolated mechanically. The outlook requires operating profitability to absorb continued cost and mix pressure, especially because management's full-year operating-income forecast implies a more challenging earnings profile than the Q1 revenue result alone suggests.

Financial Health

Financial health is strong. Current assets of ¥86.98bn exceeded current liabilities of ¥20.99bn by ¥65.99bn, resulting in working capital of ¥65.99bn and a 414.5% current ratio. The quick ratio of 300.8% confirms that liquidity is robust even without relying on inventory monetization. Cash and deposits of ¥36.09bn were 6.21x short-term borrowings of ¥5.81bn. Interest-bearing debt totaled ¥13.64bn, while cash exceeded debt by approximately ¥22.45bn, leaving the company in a net-cash position. Debt-to-equity was conservative at 0.30x, debt-to-capital was 11.4%, and liabilities represented only 23.1% of total assets. Long-term loans of ¥7.83bn exceed short-term loans of ¥5.81bn, limiting maturity concentration risk, while current assets substantially cover all short-term obligations. The 42.6% short-term debt ratio is above the 40% refinancing-risk alert threshold, but the practical refinancing risk is mitigated substantially by high cash holdings, strong liquidity ratios and very high interest coverage. Total equity increased ¥2.72bn versus the prior-year quarter to ¥106.29bn, supported by earnings and accumulated other comprehensive income. Investment securities of ¥16.10bn equal 11.6% of assets and contribute to financial-asset exposure, including potential market-value volatility. Goodwill is immaterial at ¥0.03bn, or effectively 0.0% of equity and assets, so acquisition-related impairment dependence is negligible. Net defined benefit liability and directors' retirement provision are small relative to total liabilities.

Notable B/S Changes

Accounts receivable: -¥2.38bn (-9.2%) YoY to ¥23.53bn - absolute collections exposure declined, although annualized DSO remains elevated at 110 days. Accounts payable: -¥1.05bn (-14.1%) YoY to ¥6.39bn - lower supplier credit contributes to the extended annualized cash conversion cycle. Short-term loans: -¥1.09bn (-15.7%) YoY to ¥5.81bn - deleveraging improves liquidity, while short-term debt still accounts for 42.6% of total debt. Total liabilities: -¥2.72bn (-7.8%) YoY to ¥31.98bn - balance-sheet risk has reduced as equity expanded. Total equity: +¥2.72bn (+2.6%) YoY to ¥106.29bn - retained earnings and comprehensive-income accumulation strengthened capital. Treasury stock: -¥0.38bn (15.9% larger deduction) YoY to -¥2.78bn - indicates an increased treasury-share balance and reduces reported equity. Accumulated other comprehensive income: +¥0.90bn (+6.4%) YoY to ¥14.89bn - equity benefited from valuation and foreign-currency translation movements, which may remain market-sensitive.

Cash Flow Quality

The reported balance-sheet profile indicates that cash conversion and working-capital management are the central earnings-quality issues for this quarter. Annualized DSO of 110 days is above both the 60-day quality-alert threshold and the manufacturing benchmark, indicating slow collection relative to sales. Annualized DIO of 181 days is substantially above the 90-day warning level and the 60-day manufacturing efficiency benchmark, raising inventory carrying-cost, obsolescence and demand-forecast risk. The annualized cash conversion cycle of 243 days is well above the 120-day warning threshold, tying up a substantial amount of capital in receivables and inventory. These metrics are particularly important for a pump manufacturer because project timing, distributor inventories and overseas delivery cycles can lengthen conversion periods, but the scale of the cycle warrants close monitoring. Accounts receivable declined 9.2% YoY to ¥23.53bn, which is directionally positive in absolute terms, although the annualized sales-based DSO remains elevated. Inventories rose 2.1% YoY to ¥23.85bn despite a 5.0% decline in operating income, and inventory-related segment adjustments increased sharply to ¥0.43bn. This combination suggests that inventory valuation, mix or internal-profit elimination had a meaningful adverse effect on reported operating earnings. Accounts payable declined 14.1% YoY to ¥6.39bn, reducing supplier financing and contributing to the extended conversion cycle. Cash increased 2.3% YoY to ¥36.09bn, demonstrating strong liquidity, but the key issue is whether future operating cash generation can sustainably reduce the high working-capital intensity. Non-operating FX gains of ¥0.40bn, equal to 14.1% of operating income, also mean that ordinary-income growth was more cash-flow and market-condition sensitive than the operating result alone.

Dividend Sustainability

The full-year dividend forecast is ¥36.00 per share. Based on forecast EPS of ¥153.84, the implied dividend payout ratio is approximately 23.4%. This is comfortably below the 60% sustainability benchmark and leaves substantial earnings retention capacity. The company's net-cash position of approximately ¥22.45bn, 414.5% current ratio and 0.30x debt-to-equity ratio provide a strong balance-sheet cushion for dividend continuity. The forecast dividend is supported by Q1 profit attributable to owners of ¥2.64bn, already 35.9% of the full-year forecast. Dividend capacity is therefore not constrained by leverage or near-term liquidity. The main factor for dividend durability is operating cash conversion, given the elevated annualized DSO, DIO and cash conversion cycle. A sustained increase in inventory or receivables could absorb cash that would otherwise be available for shareholder distributions and manufacturing investment. The stated dividend forecast implies a conservative distribution stance relative to forecast earnings.

Risk Assessment

Business risks include Working-capital risk is high: annualized DSO of 110 days, DIO of 181 days and a 243-day cash conversion cycle indicate a large cash commitment to receivables and inventory. For a manufacturing exporter, slower project completion, distributor destocking or weaker end-market demand could increase inventory obsolescence and collection risk., Operating-margin risk is evident: gross margin fell 109bp and operating margin fell 193bp YoY, while SG&A rose 11.5% against 7.5% sales growth. Continued adverse product mix, input-cost inflation, production inefficiency or overseas ramp-up costs could pressure earnings., Regional execution risk is concentrated in North America, where revenue rose 38.1% but segment profit increased only 6.2%. The divergence suggests weaker incremental profitability and requires monitoring of pricing, logistics, labor and local cost absorption., Europe remains loss-making, with a ¥0.08bn segment loss despite a narrower deficit. A prolonged path to profitability would dilute group returns., Foreign-exchange exposure is material: Q1 FX gains of ¥0.40bn represented 14.1% of operating income. Exchange-rate reversal would reduce ordinary income and make reported earnings more volatile., Manufacturing-specific risks include raw-material and component-price volatility, supply-chain disruption, product-quality or warranty exposure, export-market competition, trade-policy changes and cyclical capital-spending demand..

Financial risks include The short-term debt ratio of 42.6% exceeds the 40% quality-alert threshold. This indicates a relatively meaningful share of debt maturing within one year, although ¥36.09bn of cash, a 6.21x cash-to-short-term-debt ratio and high interest coverage substantially mitigate refinancing risk., Investment securities of ¥16.10bn, or 11.6% of assets, create exposure to equity-market valuation movements and may contribute to comprehensive-income volatility., The high cash conversion cycle may reduce free cash availability during periods of inventory build or weaker collections, despite the company's currently strong net-cash balance..

Key concerns include Inventory-related adjustments increased to ¥0.43bn from ¥0.03bn YoY and were a major reason consolidated operating income declined despite higher sales., Ordinary-income growth was materially supported by FX gains, dividend income and interest income rather than solely by operating expansion., The full-year forecast calls for a 12.3% YoY decline in operating income, signaling management caution regarding margin conditions after the Q1 result..

Investment Implications

Key takeaways include Q1 revenue growth was robust at 7.5%, led by North America and Asia, but operating income fell 5.0% as margins compressed., Japan remains the core profit contributor, while Asia showed the strongest profit growth and Europe remains a turnaround item., The balance sheet is a major strength, combining net cash of approximately ¥22.45bn, 75.7% capital adequacy and conservative leverage., High annualized receivable days, inventory days and cash conversion cycle are the most important operating-finance metrics to monitor., Q1 progress is ahead of the standard pace for ordinary income and owners' profit, but non-operating FX gains and prior-year impairment comparisons reduce the repeatability of the headline net-profit growth., The forecast dividend implies a conservative 23.4% payout ratio based on management's FY2027 EPS forecast..

Metrics to watch include Operating margin and gross margin, following Q1 compression to 14.6% and 38.4%, respectively, Inventory-related adjustments and absolute inventory growth, Annualized DSO, DIO and cash conversion cycle, North American incremental segment margin and Asian segment-profit conversion, European segment path to breakeven, FX gains or losses relative to operating income, Progress toward FY2027 operating-income guidance of ¥9.40bn.

Regarding relative positioning, Tsurumi Manufacturing combines a strong net-cash balance sheet, high liquidity and a still-healthy 14.6% operating margin with weaker working-capital efficiency than typical manufacturing benchmarks. Its profitability is supported by a strong domestic profit base and growing North American and Asian operations, but near-term relative performance will depend on restoring operating leverage and converting inventory and receivables into cash.