ORGANO CORPORATION FY2027 Q1 Earnings Report

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Executive Summary

This quarter saw higher revenue but lower operating income. Although foreign exchange gains secured an increase in ordinary income, net income declined due to a higher tax burden, indicating a softening in core earnings power. Revenue was ¥421.8B (+10.7% YoY), operating income was ¥66.1B (-4.9%), ordinary income was ¥67.6B (+4.5%), and net income was ¥34.4B (-5.7%). The primary factors were operating-level margin compression resulting from a decline in the gross profit margin and an increase in the SG&A ratio. Swings in non-operating foreign exchange gains and losses partially offset this impact, while an increase in the effective tax rate ultimately reduced net income.

Factors Affecting Earnings

【Revenue】The Water Treatment Engineering Business (82.6% of revenue) recorded revenue of ¥349.2B (+8.8%), while the Functional Products Business (17.4%) recorded revenue of ¥73.6B (+20.6%). Both businesses achieved revenue growth, with the Functional Products Business posting relatively stronger growth.

【Profit and Loss】Gross profit was ¥137.8B, resulting in a gross profit margin of 32.7%, down 1.8pt from 34.5% in the same period last year. SG&A expenses were ¥71.7B, representing 17.0% of revenue, up 0.8pt from 16.2% in the same period last year. Consequently, the operating margin declined 2.6pt to 15.7% from 18.2%, and operating income declined to ¥66.1B (-4.9%). By segment, operating income in the Water Treatment Engineering Business was ¥57.0B (-6.7%), with a margin of 16.3% versus 19.0% in the same period last year; deteriorating profitability in the core business weighed on company-wide results. Meanwhile, the Functional Products Business achieved higher operating income of ¥9.1B (+7.9%), with a margin of 12.4%. In non-operating items, a foreign exchange loss of ¥4.8B in the same period last year turned into a foreign exchange gain of ¥1.4B in the current period, resulting in ordinary income growth of 4.5% to ¥67.6B. No extraordinary gains or losses were recorded. However, the recognition of income taxes of ¥33.2B caused the effective tax rate to rise to 49.2% from 44.1%, resulting in a 5.7% decline in net income to ¥34.4B. In summary, the company recorded higher revenue but lower profit.

Segment Analysis

The Water Treatment Engineering Business recorded revenue of ¥349.2B (+8.8%), operating income of ¥57.0B (-6.7%), and a margin of 16.3%, down 2.7pt from 19.0% in the same period last year. The Functional Products Business recorded revenue of ¥73.6B (+20.6%), operating income of ¥9.1B (+7.9%), and a margin of 12.4%, down 1.6pt from 14.0% in the same period last year. While both businesses achieved revenue growth, margins declined in both, suggesting that cost increases and changes in project mix affected both segments. The revenue mix was 82.6% for the Water Treatment Engineering Business and 17.4% for the Functional Products Business, indicating a structure with a high degree of concentration in the core business.

Key Financial Indicators

【Profitability】Both the operating margin, at 15.7% (18.2% in the same period last year), and the net profit margin, at 8.1% (9.6%), declined. The starting point of this deterioration was the decline in the gross profit margin to 32.7% from 34.5%. 【Cash Quality】Cash and deposits declined to ¥278.4B from ¥310.6B in the same period last year, while accounts receivable declined to ¥787.7B from ¥811.9B. In contrast, work in progress increased 21.5% to ¥65.4B from ¥53.9B, indicating an accumulation of ongoing projects. Contract liabilities (advance payments) increased to ¥39.1B from ¥35.2B, expanding the cash cushion provided by advance receipts. 【Investment Efficiency】ROE was 2.4% (quarterly basis), consisting of a net profit margin of 8.2% × total asset turnover of 0.19 × financial leverage of 1.56. The low total asset turnover is constraining capital efficiency. 【Financial Soundness】The equity ratio was 64.0% (63.6% in the same period last year), the current ratio was 273.4%, and interest coverage was 68.9x, indicating a strong financial base. However, short-term borrowings of ¥313.6B account for approximately 84% of interest-bearing debt, indicating a relatively high degree of dependence on short-term funding.

Cash Flow Analysis

Cash and deposits were ¥278.4B, a decrease of ¥32.2B from the end of the previous fiscal year. Accounts receivable declined by ¥24.2B to ¥787.7B, suggesting progress in receivables collection, while work in progress increased by ¥11.6B (+21.5%) to ¥65.4B, indicating funds tied up in ongoing projects. Accounts payable declined by ¥28.5B to ¥171.0B, increasing cash outflow pressure on the payment side. Meanwhile, short-term borrowings increased by ¥29.6B to ¥313.6B, suggesting that working capital funding was supplemented through short-term borrowings. Contract liabilities (advance payments) increased by ¥3.9B to ¥39.1B, providing a certain cash cushion from advance receipts. Overall, working capital appears to have expanded due to the accumulation of ongoing projects and the reduction in accounts payable, thereby exerting downward pressure on cash levels.

Earnings Quality

No extraordinary gains or extraordinary losses were recorded during the current period, and earnings consisted of recurring operating profit and loss together with non-operating profit and loss. Non-operating profit and loss swung significantly as the foreign exchange loss of ¥4.8B in the same period last year turned into a foreign exchange gain of ¥1.4B in the current period. This contributed to the 4.5% increase in ordinary income, but foreign exchange fluctuations are market-dependent and have limited repeatability. Against ordinary income of ¥67.6B, net income was only ¥34.4B. The recognition of income taxes of ¥33.2B caused the effective tax rate to rise to 49.2% from 44.1%, and the higher tax burden pressured the final profit margin. Comprehensive income was ¥37.6B, ¥3.2B higher than net income of ¥34.4B, primarily due to foreign currency translation adjustments of +¥3.3B. The increase in work in progress (+21.5%) represents a temporary accumulation of working capital associated with ongoing projects, and the conversion into cash through progress in inspections and acceptance of completed work will be a key focus going forward.

Earnings Forecast and Guidance

Progress against the full-year forecast was 21.1% for revenue (¥421.8B/¥2,000B), 16.5% for operating income (¥66.1B/¥400B), 16.9% for ordinary income (¥67.6B/¥400B), and 11.5% for net income (¥34.4B/¥300B). All were below the 25% benchmark for average progress in Q1, with the delay in net income particularly pronounced. The company did not revise its earnings forecast during the current quarter, and its plan is understood to reflect the seasonality of concentrated inspections and deliveries of construction projects in the second half of the fiscal year. Going forward, the pace of operating margin recovery and the normalization of the tax burden will be key points for monitoring progress toward achieving the full-year plan.

Shareholder Returns

The company plans to conduct a 5-for-1 stock split of its common shares, effective October 1, 2026. The year-end dividend for the fiscal year ending March 2027 is disclosed on an amount adjusted for the impact of the stock split, and the total annual dividend is indicated as “–”. Excluding the impact of the stock split, the projected year-end dividend for the fiscal year ending March 2027 is ¥110, and the annual dividend is ¥220. Based on the pre-split annual dividend of ¥220 and the average number of shares outstanding during the period (approximately 45.98 million shares before the split), the total annual dividend is calculated at approximately ¥10.1B, resulting in a payout ratio of approximately 34% against the full-year net income forecast of ¥30.0B. No revision was made to the dividend forecast during the current quarter.

Risk Factors

1. Business Segment Concentration Risk: The Water Treatment Engineering Business accounts for 82.6% of revenue and generates the majority of company-wide operating income. Accordingly, overall earnings are relatively sensitive to fluctuations in project progress and order trends in this business.

2. Dependence on Short-Term Funding: Short-term borrowings of ¥313.6B account for approximately 84% of total interest-bearing debt. Cash and deposits of ¥278.4B are only 0.89x short-term borrowings, requiring monitoring of changes in the funding environment when refinancing becomes necessary.

3. Persistently High Tax Burden: The effective tax rate rose to 49.2% from 44.1% in the same period last year. Despite a 4.5% increase in ordinary income, net income declined 5.7%. Fluctuations in the tax burden have a significant impact on net income, and trends toward normalization will be closely watched.

Industry Benchmark (Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

Both the operating margin and net profit margin exceed the industry median, indicating that profitability is relatively high within the industry.

Growth and Capital Efficiency

The revenue growth rate exceeds the industry median, placing the company’s revenue growth pace in the relatively high range within the industry.

※Source: Compiled by the Company

Key Points from the Financial Results

1. The gross profit margin declined 1.8pt to 32.7% from 34.5% in the same period last year, while the SG&A ratio increased 0.8pt to 17.0%. As a result, the operating margin declined 2.6pt to 15.7%. Margin compression despite revenue growth indicates the impact of cost management and changes in project mix on the earnings structure.

2. The 4.5% increase in ordinary income was primarily due to a swing in foreign exchange gains and losses (foreign exchange loss of ¥4.8B in the same period last year → foreign exchange gain of ¥1.4B in the current period), with non-operating factors offsetting the softening in operating profit and loss.

3. Progress against the full-year plan was 21.1% for revenue, 16.5% for operating income, and 11.5% for net income. As of Q1, the delay in net income is particularly notable. While taking into account the seasonality of concentrated project inspections and acceptance in the second half of the fiscal year, improvements in the gross profit margin and normalization of the tax burden will be the focus for achieving the full-year plan.

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 of any specific investment action.

Sensitivity: ¥2,616–¥2,769 at ±1% for the cost of equity, and ¥2,677–¥2,699 at ±0.1 for ω.

Notes:

• Because 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 (there is a timing difference relative to the full-year forecast).
• Because non-controlling interests are included in net assets, 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 the future share price)

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This report is an earnings analysis document automatically generated by AI based on XBRL financial results 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 financial results data. Investment decisions should be made at your own responsibility, after consulting professionals as necessary.

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