ORGANO (6368) FY2026 Q3 Earnings Report

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Executive Summary

Operating income and net income grew at rates substantially exceeding revenue growth, resulting in earnings that demonstrated significant operating leverage. Revenue was ¥127.73B (+10.4% year on year), operating income was ¥26.11B (+32.2%), ordinary income was ¥26.25B (+31.6%), and net income was ¥18.00B (+28.9%). The operating margin improved by approximately 3.3pt to 20.4%, from 17.1% in the same period of the previous year (calculated figure), with gross profit expansion and control of the SG&A ratio driving earnings growth.

Factors Affecting Performance

【Revenue】Revenue increased 10.4% year on year to ¥127.73B. It is progressing at a pace exceeding the full-year company forecast growth rate of 7.2%, suggesting that project progress is ahead of plan. Contract liabilities (customer advances) amounted to ¥5.00B, indicating an accumulation of order-related funds supporting future revenue recognition.

【Profit and Loss】Gross profit expanded at a pace exceeding the increase in cost of sales of ¥82.08B, resulting in a gross profit margin of 35.7%. SG&A expenses were controlled at ¥19.54B (SG&A ratio: 15.3%), and the incremental gross profit was efficiently converted into operating income, resulting in a 32.2% increase in operating income. Non-operating income and expenses resulted in a net gain of only ¥0.14B, leaving ordinary income at ¥26.25B, almost on par with operating income. Extraordinary income of ¥0.13B (including a ¥0.09B gain on the sale of investment securities) was a temporary factor, but was small relative to net income. After deducting income taxes and other taxes of ¥8.37B (effective tax rate of approximately 31.7%), net income of ¥18.00B was primarily supported by improved profitability in the core business. The results represent increases in both revenue and earnings.

Key Financial Metrics

【Profitability】The operating margin of 20.4% and net profit margin of 14.1% both improved from the same period of the previous year (operating margin of approximately 17.1% and net profit margin of approximately 12.1%). The combination of a gross profit margin of 35.7% and an SG&A ratio of 15.3% indicates that incremental gross profit is being efficiently converted into operating income.【Cash Flow Quality】Net extraordinary income and expenses amounted to a gain of ¥0.12B, representing only approximately 0.7% of net income, with the majority of earnings derived from the core business. Non-operating income and expenses also resulted in a small net gain of ¥0.14B, and the divergence between ordinary income and operating income is limited.【Investment Efficiency】ROE was 13.8%, a favorable level relative to net assets of ¥130.74B. Accounts receivable of ¥73.91B and work in process of ¥21.95B represent high proportions of total assets, making asset turnover a constraint on investment efficiency.【Financial Soundness】The equity ratio improved to 63.1% from 62.2% in the same period of the previous year. Current assets of ¥175.85B substantially exceeded current liabilities of ¥64.23B, indicating strong short-term payment capacity. Meanwhile, short-term borrowings accounted for ¥24.74B, or approximately 78%, of interest-bearing debt of ¥31.74B, indicating a relatively high dependence on short-term financing.

Cash Flow Analysis

Although detailed disclosure of the cash flow statement is not available, fund movements can be assessed from changes in the balance sheet. Cash and deposits increased to ¥22.07B from ¥16.75B in the same period of the previous year, indicating an accumulation of cash on hand against the backdrop of earnings growth. Meanwhile, accounts receivable of ¥73.91B (down from ¥79.45B in the same period of the previous year) and work in process of ¥21.95B (a substantial increase from ¥11.69B in the same period of the previous year) indicate funds tied up in working capital, with the accumulation of work in process accompanying project progress affecting capital efficiency. Short-term borrowings were ¥24.74B, up from ¥18.88B in the same period of the previous year, suggesting that the expansion of working capital is being partially financed through short-term borrowings. Long-term borrowings also nearly doubled to ¥7.00B from ¥3.68B in the same period of the previous year, indicating progress in medium-term financing for capital investment and working capital.

Earnings Quality

Of current-period net income of ¥18.00B, the majority consisted of profit derived from the core business after excluding extraordinary income of ¥0.13B (primarily the ¥0.09B gain on the sale of investment securities) and extraordinary losses of ¥0.01B. The contribution of net extraordinary income and expenses to net income was small at approximately 0.7%. Non-operating income and expenses were also balanced between interest income of ¥0.17B and interest expenses of ¥0.20B. Non-operating income totaled ¥0.36B and non-operating expenses totaled ¥0.22B, with the overall scale limited. Ordinary income of ¥26.25B was therefore almost in line with operating income of ¥26.11B. Comprehensive income was ¥18.15B, with the divergence from net income of ¥18.00B limited to ¥0.15B. Foreign currency translation adjustments of +¥0.20B and valuation differences on available-for-sale securities and retirement benefit adjustments were all small. Accordingly, earnings quality is supported by improved profitability in the core business, and dependence on temporary factors is considered low.

Earnings Forecast and Guidance

Progress against the full-year company forecast was 73.0% for revenue, at ¥127.73B/¥175.00B; 72.5% for operating income, at ¥26.11B/¥36.00B; 72.9% for ordinary income; and 66.7% for net income, at ¥18.00B/¥27.00B. Although progress for revenue and operating income was slightly below the standard 75% level, the Q3 cumulative operating margin of 20.4% was almost in line with the full-year planned operating margin of 20.6% (360.0/1750.0), indicating a high degree of consistency with the plan in terms of profitability. The somewhat lower progress rate for net income suggests that the composition of earnings in the second half may differ due to the contribution of extraordinary income in the first half. The pace of revenue recognition and the maintenance of project profitability in Q4 will be the key factors in achieving the full-year plan.

Shareholder Returns

The Q2 dividend was ¥95 per share, and the full-year dividend forecast is ¥190. Based on the average number of shares outstanding during the period of 45,974,958 shares, the full-year forecast total dividend is approximately ¥8.74B, resulting in an expected payout ratio of approximately 32.4% against the full-year net income forecast of ¥27.00B. The company plans to increase the dividend from the dividend of ¥71 in the same period of the previous year. In light of the Q3 cumulative EPS growth of +28.9% to ¥391.51, the company appears to be enhancing shareholder returns in line with earnings growth. No data on share repurchases has been disclosed; therefore, this assessment concerns the payout ratio and not the total return ratio.

Risk Factors

1. Accounts Receivable Collection and Working Capital Tie-Up Risk: Accounts receivable of ¥73.91B represents 35.7% of total assets, while work in process of ¥21.95B also increased substantially year on year. Delays in project acceptance and collection could affect both liquidity and asset turnover.

2. Dependence on Short-Term Borrowings: Short-term borrowings of ¥24.74B account for approximately 78% of interest-bearing debt of ¥31.74B. Cash and deposits of ¥22.07B are only approximately 0.89 times short-term borrowings, requiring monitoring of refinancing terms and short-term interest rate trends.

3. Project Profitability and Construction Schedule Volatility Risk: Because the accumulation of work in process is linked to construction progress, changes in customer specifications, construction delays, or cost increases could affect the timing of revenue recognition and project profitability. The provision for construction losses remains small at ¥0.033B.

Industry Benchmark (For Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

Profitability substantially exceeds the industry median, with both the operating margin and net profit margin at upper-tier levels within the industry.

Growth and Capital Efficiency

Revenue growth also exceeds the industry median, representing a relatively high pace of growth within the industry.

※Source: Compiled by the Company

Key Points from the Earnings Results

1. The operating margin of 20.4% improved from the same period of the previous year, resulting in increases in both revenue and earnings driven by operating leverage from gross profit expansion and SG&A expense control.

2. Full-year progress was slightly below the standard level, at approximately 73% for revenue and operating income. However, the operating margin was close to the full-year planned level, making project progress and the maintenance of profitability in the second half the key factors for achieving the plan.

3. While financial soundness is favorable, as indicated by an equity ratio of 63.1% and a high current ratio, the funds tied up in accounts receivable and work in process, as well as dependence on short-term borrowings, should be monitored as indicators of capital efficiency during the growth phase.

Theoretical Share Price (Reference Value)

Sensitivity: ¥3,885–¥4,120 for a ±1% change in the cost of equity, and ¥3,970–¥4,046 for a ±0.1 change in ω.

Notes:

• Net assets as of the end of the quarter are used (there is a timing difference relative to the full-year forecast).
• Because net assets include non-controlling interests, the theoretical value may be calculated somewhat higher.

(Calculation model: Residual income model (Ohlson-type model with an explicit 5-year fade) / Interest rate reference month: 2026-07 / Mechanically calculated value based solely on 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 summary 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, after consulting with professionals as necessary.

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AI Financial Analysis

Executive Summary

FY2026 Q3 results were strong, with profit growth materially outpacing revenue growth and operating profitability reaching an excellent level. Cumulative revenue increased 10.4% year on year to ¥127.7bn. Operating income rose 32.2% to ¥26.1bn, substantially exceeding the sales growth rate. Net income attributable to owners increased 28.9% to ¥18.0bn, equivalent to EPS of ¥391.51. The gross margin improved to 35.7% from 32.2% a year earlier, an expansion of approximately 354 basis points. The operating margin rose to 20.4% from 17.1%, an expansion of approximately 337 basis points. The net margin increased to 14.1% from 12.1%, improving by approximately 202 basis points. This margin performance indicates that improved project mix, execution, and/or pricing more than offset modest cost growth. SG&A expenses rose 11.9%, slightly faster than revenue growth, but this was more than absorbed by the gross-profit increase. Ordinary income of ¥26.2bn was close to operating income of ¥26.1bn, demonstrating that earnings were predominantly generated from core operations. Interest expense of ¥0.2bn was immaterial relative to EBIT, resulting in very strong interest coverage of 129.9x. Net income included a modest ¥1.3bn extraordinary gain, principally a ¥0.9bn gain on sales of investment securities, but core operating profit remains the main earnings driver. The balance sheet remains highly liquid, with a 273.8% current ratio and ¥111.6bn of working capital. However, working-capital intensity is a material monitoring point, reflected in 158 days of receivables, 120 days of inventory, and a 215-day cash-conversion cycle, all on an annualized basis. The large work-in-process balance, accounting for 61.2% of manufacturing inventory, indicates substantial project execution exposure. Q3 progress against the full-year forecast is broadly in line with the normal 75% seasonal benchmark: revenue is at 73.0%, operating income at 72.5%, and net income at 66.7%. The full-year plan therefore implies a seasonally stronger Q4 for net income, while the earnings trajectory and current margin level support the importance of continued execution and working-capital conversion through year-end.

Profitability Analysis

Annualized DuPont ROE is 18.4%, comprising a 14.1% net profit margin, 0.822x asset turnover, and 1.58x financial leverage. The primary strength is profitability rather than leverage: the company generates an excellent net margin while maintaining moderate financial leverage. The EBIT margin was 20.4%, and the tax burden was 0.682, consistent with an effective tax rate of 31.7%. The interest burden was 1.010 because profit before tax slightly exceeded EBIT following positive net non-operating and extraordinary items; financing costs are not a constraint on returns. Margin expansion was the most significant driver of earnings growth, as operating income grew 32.2% against 10.4% revenue growth. Gross profit increased 22.5% to ¥45.7bn, lifting the gross margin by approximately 354 basis points. SG&A rose 11.9% to ¥19.5bn, marginally above revenue growth, creating a modest negative operating-leverage element below gross profit. Nevertheless, gross-profit expansion was sufficiently strong to lift operating income by ¥6.4bn and operating margin by approximately 337 basis points. Asset turnover of 0.822x is reasonable for a project-oriented water-treatment and engineering business but is constrained by sizeable receivables and work in process. The 18.4% annualized ROE exceeds the 15% excellent benchmark and appears supported mainly by core operating profitability, not balance-sheet leverage. Sustainability depends on preserving project margins and converting the elevated project-related working capital into cash.

Growth Assessment

Revenue growth of 10.4% to ¥127.7bn demonstrates continued expansion in the cumulative nine-month period. Operating income growth of 32.2% and net income growth of 28.9% show that growth has been highly profitable rather than volume-led alone. The increase in gross margin to 35.7% is central to the improved earnings profile. Full-year company guidance calls for revenue of ¥175.0bn, up 7.2%, and operating income of ¥36.0bn, up 15.7%. Q3 revenue progress of 73.0% and operating-income progress of 72.5% are within 2.5 percentage points of the standard 75% Q3 run rate. Net-income progress is 66.7% of the ¥27.0bn forecast, 8.3 percentage points below the standard pace, implying greater dependence on Q4 profit realization. The forecast implies Q4 revenue of ¥47.3bn, operating income of ¥9.9bn, and net income of ¥9.0bn. The implied Q4 operating margin is approximately 20.9%, broadly consistent with the cumulative 20.4% level, indicating that the operating-profit target does not require a material margin reset. Contract liabilities nearly doubled year on year to ¥5.0bn, which may provide some support for future project revenue recognition. However, the sharp increase in work in process to ¥21.9bn makes schedule adherence, customer acceptance, and project completion important determinants of both revenue timing and cash conversion.

Financial Health

Liquidity is strong, with current assets of ¥175.9bn against current liabilities of ¥64.2bn, producing a current ratio of 273.8%. The quick ratio of 260.0% also indicates that liquidity does not depend on inventory liquidation. Working capital totals ¥111.6bn, and cash and deposits increased 31.7% year on year to ¥22.1bn. Total equity increased to ¥130.7bn from ¥121.2bn, supported by earnings retention, and the equity ratio improved to 63.1% from 62.2%. Gross interest-bearing debt was ¥31.7bn, consisting of ¥24.7bn in short-term loans and ¥7.0bn in long-term loans. Debt-to-equity of 0.58x and debt-to-capital of 19.5% remain conservative and are well below cautionary leverage thresholds. Interest coverage of 129.9x provides substantial protection against financing-cost pressure. Refinancing risk nevertheless warrants attention because 77.9% of interest-bearing debt is short term, above the 40% quality-alert threshold. Short-term loans increased ¥5.9bn, or 31.0%, year on year, while long-term loans increased ¥3.3bn, or 90.2%. Cash covers 0.89x of short-term debt, so the company is not fully cash-covered against short-term borrowings on a standalone basis. This maturity profile is mitigated by ¥175.9bn of current assets and a strong quick ratio, but it increases reliance on timely collection of project receivables and continued access to bank funding. Net defined benefit liabilities of ¥5.0bn represent a long-term obligation but are modest relative to total equity. Intangible assets are only 0.8% of total assets, limiting balance-sheet dependence on acquired intangible values.

Notable B/S Changes

Work in process: +¥10.9bn (+96.5%) to ¥21.9bn - substantial build in unfinished projects; reinforces execution, acceptance, cost-control, and cash-conversion monitoring. Long-term loans: +¥3.3bn (+90.2%) to ¥7.0bn - part of a broader increase in interest-bearing debt, though leverage remains conservative. Short-term loans: +¥5.9bn (+31.0%) to ¥24.7bn - increases refinancing exposure because short-term debt represents 77.9% of total debt. Cash and deposits: +¥5.3bn (+31.7%) to ¥22.1bn - improves liquidity, although cash remains below the short-term loan balance. Contract liabilities: +¥2.4bn (+95.2%) to ¥5.0bn - may indicate increased customer advances or project backlog conversion support. Intangible assets: +¥0.5bn (+44.2%) to ¥1.6bn - remains immaterial at 0.8% of total assets and does not create meaningful intangible-asset concentration. Accounts payable: -¥4.5bn (-19.3%) to ¥18.9bn - reduced supplier financing may contribute to the extended operating cash cycle.

Cash Flow Quality

The key cash-conversion consideration is the elevated working-capital cycle rather than reported operating-cash-flow generation. Annualized receivable days are 158, materially above the 60-day warning threshold, indicating slow collection relative to reported revenue. Annualized inventory days are 120, above the 90-day warning threshold. The annualized cash-conversion cycle is 215 days, well above the 120-day warning threshold, tying up capital for an extended period. Work in process is ¥21.9bn and represents 61.2% of manufacturing inventory, exceeding the 40% warning level. This composition is consistent with a project-based manufacturing and engineering model, but it heightens exposure to milestone timing, cost overruns, inspection delays, and customer acceptance. Trade receivables declined ¥5.5bn year on year to ¥73.9bn, which is directionally positive, although their absolute level remains high at 35.7% of total assets. Electronic monetary claims add ¥4.6bn to customer-related receivables. Work in process rose ¥10.9bn year on year, making inventory build and execution discipline the principal cash-conversion risk. Accounts payable declined ¥4.5bn to ¥18.9bn, reducing supplier financing and potentially lengthening the effective operating cash cycle. Cash and deposits increased ¥5.3bn to ¥22.1bn, providing a near-term liquidity buffer. The conversion of WIP into completed and accepted projects, followed by collection of receivables, is the principal determinant of cash-flow quality through Q4.

Dividend Sustainability

The company has paid an interim dividend of ¥95 per share and forecasts a full-year dividend of ¥190 per share. Based on forecast EPS of ¥587.28, the indicated full-year dividend payout ratio is approximately 32.4%. This is comfortably below the 60% sustainability benchmark and leaves substantial earnings retention capacity. The interim ¥95 dividend represents a calculated 24.5% payout against cumulative Q3 net income. Retained earnings total ¥110.5bn, providing a substantial equity buffer for dividends and operating investment. The balance sheet is also supportive, with a 63.1% equity ratio and strong current liquidity. Dividend sustainability is therefore primarily linked to the conversion of project-related working capital rather than to earnings coverage or solvency. Continued growth in WIP and long receivable collection periods would raise the importance of disciplined cash management despite the conservative payout level.

Risk Assessment

Business risks include Project execution and acceptance risk is elevated by ¥21.9bn of work in process, representing 61.2% of manufacturing inventory. This exceeds the 40% warning threshold and may indicate a production or completion bottleneck. Delays in commissioning, customer inspection, or cost recovery could defer revenue, compress margins, and delay cash collection., Collection-cycle risk is high: annualized DSO is 158 days, well above the 60-day warning threshold. In a large-scale water-treatment and engineering business, milestone billing can structurally lengthen DSO, but the level increases exposure to customer payment timing and the need for working-capital financing., Inventory-cycle risk is elevated, with annualized DIO of 120 days versus the 90-day warning threshold. The high WIP mix suggests that inventory risk is more related to unfinished project execution than finished-goods obsolescence, but prolonged project duration can expose the company to cost inflation and schedule slippage., The annualized 215-day cash-conversion cycle exceeds the 120-day warning threshold. This is the combined result of slow receivable collection and high inventory/WIP intensity, and it can cause cash generation to lag accounting earnings even during a strong profit cycle., Industry-specific risk includes customer capital-expenditure cyclicality in semiconductor, electronics, industrial, and water-infrastructure-related investment, as well as execution risk in highly customized water-treatment systems. Changes in customer investment plans or project specifications can affect order timing, project margins, and WIP conversion..

Financial risks include Refinancing risk is elevated by the 77.9% short-term debt ratio, versus the 40% warning threshold. Short-term loans of ¥24.7bn increased 31.0% year on year, requiring regular rollover or repayment from operating cash inflows., Cash-to-short-term-debt is 0.89x, meaning cash deposits of ¥22.1bn do not fully cover ¥24.7bn of short-term loans. Strong current and quick ratios mitigate this risk, but liquidity depends in part on collection of receivables., Total interest-bearing debt increased to ¥31.7bn as both short-term and long-term borrowings rose. Leverage remains conservative at 0.58x debt-to-equity and 19.5% debt-to-capital, so the risk is maturity concentration rather than excessive absolute leverage..

Key concerns include The quality alerts are concentrated in working capital: high DSO, high DIO, a long cash-conversion cycle, and a high WIP ratio. Their common root cause is capital tied up in long-duration project production and collection cycles., The investment case depends on the sustainability of a 20.4% operating margin. While the cumulative margin improvement is substantial, continued WIP growth means margin realization remains dependent on cost control and successful project completion., Extraordinary income was limited at ¥1.3bn, including a ¥0.9bn securities-sale gain, so it does not dominate earnings; however, core operating performance should remain the primary measure of recurring profitability., Risk severity is highest for project execution and cash conversion because these factors can affect revenue timing, cash generation, and short-term funding needs simultaneously. Refinancing risk is lower in immediate solvency terms because liquidity ratios and interest coverage remain strong..

Investment Implications

Key takeaways include Revenue grew 10.4%, while operating income and net income grew 32.2% and 28.9%, respectively, demonstrating strong profit conversion., Operating margin reached 20.4%, up approximately 337 basis points year on year, and annualized ROE is 18.4%., The balance sheet is robust, with a 273.8% current ratio, 260.0% quick ratio, 63.1% equity ratio, and 129.9x interest coverage., The principal counterweight to high profitability is working-capital intensity: annualized DSO of 158 days, DIO of 120 days, and CCC of 215 days., Full-year operating-income progress is 72.5% versus the 75% Q3 seasonal benchmark, making Q4 project completion and margin preservation central to plan delivery., The forecast ¥190 annual dividend implies an approximately 32.4% payout ratio based on forecast EPS, leaving room for retained earnings and balance-sheet resilience..

Metrics to watch include Operating margin relative to the 20.4% cumulative Q3 level, Q4 revenue and operating-income delivery versus the ¥175.0bn and ¥36.0bn full-year forecasts, Receivable collection and annualized DSO relative to 158 days, Work-in-process conversion, inventory days, and cash-conversion-cycle improvement, Short-term loan balance, cash-to-short-term-debt coverage, and debt maturity mix, Project cost control, customer acceptance timing, and construction-loss provisions.

Regarding relative positioning, The company screens as a high-profitability, conservatively leveraged Japanese project-manufacturing business, with operating margin, net margin, and annualized ROE all above the stated excellent benchmarks. Its relative weakness is working-capital efficiency rather than balance-sheet solvency: unusually long receivable and project-inventory cycles create a greater dependence on execution discipline and cash conversion than is typical for businesses with similarly strong reported margins.