DAIKIN INDUSTRIES,LTD. FY2027 Q1 Earnings Report

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Executive Summary

Despite substantial revenue growth, the Company did not achieve an increase in final profit due to changes in its cost structure and tax burden, resulting in earnings in which the momentum of revenue growth did not flow through to net income. Revenue was ¥14,268.1B (¥12,138.2B in the previous year, YoY+17.5%), Operating Income was ¥1,305.6B (+7.6%), and Ordinary Income was ¥1,208.1B (+1.6%), with increases in both revenue and profit secured at each level. However, Net Income attributable to owners of the parent declined slightly to ¥801.4B (¥815.3B in the previous year, YoY-1.7%). The increase in revenue was driven by expansion in both the core Air Conditioning and Refrigeration Business and the Chemicals Business. The Operating Income margin declined to 9.2% from 10.0% in the previous year, indicating that the quality of the revenue and profit growth requires scrutiny from a profitability perspective.

Factors Affecting Earnings

【Revenue】Revenue was ¥14,268.1B, representing a YoY increase of +17.5%. By segment, the core Air Conditioning and Refrigeration Business generated ¥13,256.0B (+17.0%, 92.9% of revenue), the Chemicals Business generated ¥855.5B (+28.0%, 6.0%), and Other Businesses generated ¥248.8B (+15.8%, 1.7%), with all businesses achieving double-digit revenue growth. By region, the United States was the largest market at approximately ¥527.9B (37.0% of revenue, YoY+18.6%), while Europe (+21.6%) and Asia and Oceania (+20.5%) also recorded strong growth. China grew +9.9%, a relatively moderate pace.

【Profit and Loss】Operating Income increased to ¥1,305.6B (YoY+7.6%), but the growth rate remained less than half that of Revenue. The gross profit margin declined 1.1pt to 34.6% from 35.7% in the previous year. Although the SG&A expense ratio improved 0.2pt to 25.5% from 25.7%, this was insufficient to offset the deterioration in the gross profit margin, and the Operating Income margin declined 0.85pt to 9.2% from 10.0%. Ordinary Income rose to ¥1,208.1B (YoY+1.6%), but increases in interest expense of ¥122.0B (¥99.6B in the previous year, +22.4%) and foreign exchange losses of ¥33.7B (¥17.9B in the previous year, +88.4%) weighed on non-operating results, causing growth to fall below that of Operating Income. Extraordinary gains and losses were minor, with a net gain of +¥9.5B. Against Profit Before Tax of ¥1,217.6B (YoY+1.3%), income taxes increased to ¥387.6B (¥359.9B in the previous year, +7.7%). As a result, the effective tax rate rose from 29.9% to 31.8%, and Net Income attributable to owners of the parent declined slightly to ¥801.4B (YoY-1.7%). In conclusion, although revenue and profit increased at the Operating Income and Ordinary Income levels, the higher tax burden resulted in a structure close to revenue growth accompanied by a decline in final profit.

Segment Analysis

The core Air Conditioning and Refrigeration Business generated Revenue of ¥13,256.0B (YoY+17.0%), Operating Income of ¥1,182.3B (YoY+3.1%), and an Operating Income margin of 8.9% (down 1.2pt from 10.1% in the previous year). Although it is the largest business by scale, its profit growth has slowed and it is the primary factor behind the decline in the Company-wide profit margin. The Chemicals Business generated Revenue of ¥855.5B (YoY+28.0%), Operating Income of ¥114.6B (YoY+75.6%), and an Operating Income margin of 13.4% (up 3.6pt from 9.8% in the previous year), demonstrating a significant improvement in profitability and supporting the Company-wide profit margin despite its smaller scale. Other Businesses, including the Oil Hydraulic, Special Machinery, and Electronic Systems businesses, generated Revenue of ¥248.8B (YoY+15.8%) and Operating Income of ¥8.6B, representing a significant recovery from the ¥1.0B recorded in the previous year. The composition of Operating Income was 90.6% from Air Conditioning and Refrigeration, 8.8% from Chemicals, and 0.7% from Other Businesses, indicating that dependence on Air Conditioning and Refrigeration remains high.

By regional Revenue, on a consolidated reported amount basis, the United States was the largest market at ¥527.9B (37.0% of revenue, YoY+18.6%), followed by Europe at ¥231.8B (16.3%, YoY+21.6%), Japan at ¥217.3B (15.2%, YoY+15.3%), Asia and Oceania at ¥200.8B (14.1%, YoY+20.5%), China at ¥156.3B (11.0%, YoY+9.9%), and Other Regions at ¥92.7B (6.5%, YoY+14.9%). Strong growth in the United States and Europe drove overall Group revenue growth, while growth in China was relatively moderate, resulting in differences in growth rates across regions.

Key Financial Indicators

【Profitability】The Operating Income margin was 9.2%, down 0.85pt from 10.0% in the previous year, while the Net Income margin, based on income attributable to owners of the parent, was 5.6%, down 1.1pt from 6.7%. Thus, profitability is trending downward despite revenue growth. 【Cash Flow Quality】Operating Cash Flow (OCF) was ¥1,532.4B, equivalent to 1.91 times Net Income attributable to owners of the parent of ¥801.4B, indicating that net income was supported by cash generation. 【Investment Efficiency】ROE was 2.7% on a quarterly basis, reflecting a level reached while net assets declined YoY due to share repurchases. 【Financial Soundness】The Equity Ratio was 51.3%, while net assets declined to ¥30,564.0B from ¥33,165.4B in the previous year, indicating that substantial shareholder returns had a certain impact on the capital base.

Cash Flow Analysis

Operating Cash Flow was ¥1,532.4B, a substantial increase of +140.3% from ¥637.8B in the previous year. Against OCF before changes in working capital of ¥1,960.2B, an increase in inventories of ¥334.3B and an increase in trade receivables of ¥393.3B restrained cash conversion, while an increase in trade payables of ¥478.2B partially offset these effects. Investing Cash Flow was -¥905.5B, of which capital expenditures accounted for ¥613.8B, indicating a continued investment stance aimed at business expansion. Financing Cash Flow was -¥1034.3B, with share repurchases of ¥3,500.0B and dividend payments of ¥512.8B serving as the primary sources of cash outflow. These were partially covered by increases in short-term borrowings and commercial paper. Free Cash Flow was ¥626.9B, turning positive from -¥215.2B in the previous year. However, total shareholder returns (dividend payments of ¥512.8B + share repurchases of ¥3,500.0B = ¥4,012.8B) substantially exceeded FCF, with the difference effectively covered by short-term financing.

Earnings Quality

Extraordinary gains of ¥22.0B and extraordinary losses of ¥12.5B resulted in a net gain of +¥9.5B, representing only a minor impact of approximately 1.2% of Net Income attributable to owners of the parent. Accordingly, most of the earnings were based on recurring business activities. Non-operating income was ¥92.6B, including dividend income of ¥24.1B, representing only 0.6% of Revenue. Non-operating expenses of ¥190.1B, including interest expense of ¥122.0B and foreign exchange losses of ¥33.7B, exceeded this amount and resulted in a net burden of ¥97.5B, which was the primary reason Ordinary Income did not reach the growth rate of Operating Income. Comprehensive Income was ¥1,454.8B, substantially exceeding consolidated Net Income of ¥830.0B. The difference was primarily attributable to foreign currency translation adjustments of +¥567.8B at overseas subsidiaries, which represent an accounting fluctuation separate from period earnings from business operations. The fact that OCF reached 1.91 times Net Income attributable to owners of the parent demonstrates strong cash support for earnings. At the same time, the increase in working capital, particularly inventories and trade receivables, compressed OCF before changes in working capital and is a monitoring point when assessing earnings quality.

Earnings Forecast and Guidance

Q1 progress against the Full-Year plan was 27.7% for Revenue (¥1,426.8B/¥5,150.0B), 29.9% for Operating Income (¥1,305.6B/¥4,360.0B), 29.2% for Ordinary Income (¥1,208.1B/¥4,140.0B), and 28.8% for Net Income attributable to owners of the parent (¥801.4B/¥2,780.0B). All were progressing at a pace exceeding the simple quarterly benchmark of 25%. Seasonality in air-conditioning demand, improvement in pricing and product mix in the HVAC Business, and improved profitability in the Chemicals Business are considered to have supported progress. There were no revisions to the earnings forecast or dividend forecast during the quarter, and the Full-Year plan remains unchanged.

Shareholder Returns

The Full-Year dividend forecast is ¥360 per share, resulting in a Payout Ratio of 37.9% based on the Full-Year EPS forecast of ¥949.32. Dividend payments in cash flow during the quarter were ¥512.8B (¥424.8B in the previous year). In addition, the Company conducted share repurchases of ¥3,500.0B, bringing total returns combining dividends and share repurchases to ¥4,012.8B. This total return amount substantially exceeded Free Cash Flow of ¥626.9B, with the shortfall financed through increases in short-term borrowings and commercial paper. While actively expanding total returns, the Equity Ratio declined to 51.3% from the previous year. The sustainability of the funding sources for shareholder returns will depend on the level of Operating Cash Flow and trends in working capital efficiency.

Risk Factors

1. Increased dependence on short-term financing: Short-term borrowings increased substantially to ¥5,003.0B (¥2,861.0B in the previous year, +74.9%), while commercial paper increased to ¥1,433.8B (¥283.9B in the previous year, +405.1%). Total shareholder returns, including share repurchases of ¥3,500.0B, exceeded Free Cash Flow, and the resulting funding needs were covered through short-term financing. Consequently, sensitivity to interest rate conditions and changes in the market-based funding environment has increased.

2. Decline in cash conversion efficiency due to increased working capital: Inventories increased by ¥334.3B and trade receivables increased by ¥393.3B, compressing cash flow against OCF before changes in working capital of ¥1,960.2B. These increases reflect the expansion of inventories and credit associated with revenue growth, and future trends in inventory and collection cycles will affect the level of OCF.

3. Increase in non-operating expenses, including interest and foreign exchange costs: Interest expense increased to ¥122.0B (¥99.6B in the previous year, +22.4%), while foreign exchange losses increased to ¥33.7B (¥17.9B in the previous year, +88.4%). Both contributed to Ordinary Income growth of +1.6% falling below Operating Income growth of +7.6%. Interest rate levels and foreign exchange fluctuations may continue to affect profit and loss at the Ordinary Income level.

Industry Benchmark (For Reference; Compiled by the Company)

Profitability and Returns

Growth and Capital Efficiency

Source: Compiled by the Company

Key Earnings Highlights

1. While Revenue increased +17.5%, Operating Income increased only +7.6%, and the Operating Income margin declined 0.85pt to 9.2% from 10.0% in the previous year. The primary factor was the decline in the gross profit margin from 35.7% to 34.6%, confirming that cost absorption has not kept pace with the speed of revenue growth.

2. Although Ordinary Income increased +1.6%, Net Income attributable to owners of the parent declined slightly to ¥801.4B (YoY-1.7%) due to the increase in the effective tax rate from 29.9% to 31.8%. The fact that the substance of revenue and profit growth differs across profit levels is an important consideration when assessing earnings quality.

3. The Operating Income margin of the Chemicals Business improved from 9.8% to 13.4%, supporting the Company-wide profit margin despite the segment’s small scale. At the same time, total shareholder returns, including share repurchases of ¥3,500.0B, exceeded Free Cash Flow of ¥626.9B, while short-term borrowings and commercial paper increased substantially. This indicates that shareholder returns and changes in the funding structure are progressing simultaneously.

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

Sensitivity: ¥11,251–¥11,918 at a ±1% change in the cost of equity, and ¥11,563–¥11,599 at a change of ±0.1 in ω.

Notes:

• Goodwill amortization of ¥199.7 per share is added back to earnings (to reflect a non-cash expense and improve comparability with IFRS companies).
• Net assets as of the quarter-end are used (there is a timing difference from the Full-Year forecast).
• Because net assets include non-controlling interests, the theoretical value may be calculated somewhat higher.

(Calculation model: Residual Income Model / Interest Rate Reference Month: 2026-06 / 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 benchmarks are reference information compiled by the Company based on publicly available earnings data. Investment decisions should be made at your own discretion and responsibility, after consulting professionals as necessary.

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