KATO WORKS CO.,LTD. FY2027 Q1 Earnings Report

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Executive Summary

Although revenue declined 19.4% year on year, earnings improved substantially at every level, indicating that profitability has bottomed out. Revenue was ¥10.02B (¥12.43B in the same period of the previous year, -19.4%), operating income was ¥-0.08B (¥-0.63B in the previous year, +87.6%), ordinary income was ¥0.01B (¥-0.47B in the previous year, a return to profitability), and net income was ¥-0.02B (¥-0.52B in the previous year, +96.7%). The primary factor behind the revenue decline was weaker demand for construction cranes, hydraulic excavators, and other products in the core Japan segment, while improved gross margin and reductions in SG&A expenses supported the earnings improvement.

Factors Affecting Performance

【Revenue】Revenue was ¥10.02B, down -19.4% year on year. By segment, Japan accounted for the majority at ¥9.69B (93.3% composition ratio, YoY -11.7%), while Europe declined substantially to ¥0.69B (YoY -20.0%) and China to ¥0.01B (YoY -99.4%). By product, construction cranes, hydraulic excavators, and other products all declined, with an overall slowdown in demand weighing on revenue.

【Earnings】Gross margin improved to 16.1% from 10.4% in the previous year, an improvement of +573bp, apparently reflecting progress in cost reductions and corrective pricing and product mix measures. SG&A expenses declined to ¥1.69B from ¥1.92B in the previous year; however, the SG&A ratio increased to 16.9% from 15.5% due to the revenue decline, indicating continued weakness in fixed-cost absorption. The operating loss narrowed to ¥-0.08B, while non-operating income, including ¥0.08B in foreign exchange gains, contributed to a return to profitability at the ordinary income level, which reached ¥0.01B. Net loss narrowed substantially to ¥-0.02B from ¥-0.52B in the previous year. In conclusion, this was not a decline in both revenue and earnings, but rather a decline in revenue accompanied by earnings growth, or an improvement in profitability.

Segment Analysis

Japan generated revenue of ¥9.69B (93.3% composition ratio), and its operating loss narrowed to ¥-0.01B from ¥-0.06B in the previous year, making it the region with the most significant improvement. Europe generated revenue of ¥0.69B and an operating loss of ¥-0.07B (profit margin -10.3%); although the loss narrowed slightly from the previous year, its loss-making structure persists. China’s revenue fell sharply by -99.4% year on year, while its operating loss expanded to ¥-0.04B (profit margin -800%). China is a newly established segment that was separated from “Other” compared with the previous quarter. Although its scale is small, its deterioration in profitability is notable. Overall, improvement in Japan drove performance, while Europe and China continued to present challenges.

Key Financial Metrics

【Profitability】The operating margin improved to -0.8% from -5.1% in the previous year, and the net profit margin improved to -0.2% from -4.1%, indicating improvement at each earnings level. However, the SG&A ratio of 16.9% exceeded the gross margin of 16.1%, and the Company has not yet achieved operating profitability. 【Cash Quality】ROE was -0.0%, essentially at zero, due to the small net loss and low asset turnover. 【Investment Efficiency】The ratio of revenue to total assets, equivalent to total asset turnover, remained low. Inventories of ¥42.55B accounted for 46.8% of total assets of ¥90.84B, weighing on asset efficiency. 【Financial Soundness】The equity ratio was stable at 46.2% (46.0% in the previous year), while short-term borrowings of ¥20.25B were approximately 2.0 times cash and deposits of ¥10.19B, indicating a high degree of reliance on short-term funding.

Cash Flow Analysis

Although detailed cash flow statement information has not been disclosed, an analysis of funding trends based on balance sheet movements indicates that accounts receivable and notes receivable declined substantially to ¥12.24B (down -29.4% year on year), potentially reflecting progress in collections or the conversion of receivables into cash amid slower demand. Meanwhile, inventories remained high at ¥42.55B, and the lack of progress in inventory reduction could constrain cash management. Cash and deposits were ¥10.19B (slightly down from the ¥10.19B level in the previous year), leaving limited room to increase short-term borrowings of ¥20.25B. Interest paid of ¥0.19B indicates a structure in which the interest burden is weighing on cash-generating capacity. Going forward, inventory reduction and normalization of the cash conversion cycle will be key to improving cash efficiency.

Quality of Earnings

The return to ordinary income of ¥0.01B resulted from non-operating income of ¥0.41B, including foreign exchange gains of ¥0.08B and rental income, offsetting the operating loss of ¥-0.08B. As the core operating business has not yet returned to profitability, the Company remains somewhat reliant on temporary factors. Interest paid of ¥0.19B was the primary outflow among non-operating expenses, and the interest burden continues to weigh on earnings. Comprehensive income was ¥-0.13B, and the difference from net income of ¥-0.02B was primarily attributable to foreign currency translation adjustments of ¥-0.21B, reflecting valuation differences arising from the translation of overseas subsidiaries’ assets and liabilities into yen. Equity-method income contributed ¥0.02B, providing a certain degree of support as a source of earnings outside the core business. Overall, the drivers of earnings improvement comprise both the structural factor of gross margin recovery and the temporary factor of foreign exchange movements.

Earnings Forecast and Guidance

The full-year forecast is revenue of ¥61.00B (up +8.3% year on year), operating income of ¥0.60B, ordinary income of ¥0.12B, and a dividend of ¥70. The Q1 revenue progress rate was 16.4% (¥10.02B/¥61.00B), below the simple one-quarter progress benchmark of 25%, indicating a delay. Operating income was negative at ¥-0.08B for the current period, and achieving full-year operating income of ¥0.60B will require substantial earnings improvement over the remaining three quarters. The Company has not revised either its earnings forecast or dividend forecast, suggesting that its plan assumes a back-loaded second half.

Shareholder Returns

The Company’s dividend forecast is ¥70 per share. With current-period net income at a small loss of ¥-0.02B, the payout ratio cannot be calculated based on current-period actual results. Accumulated cash and deposits of ¥10.19B and retained earnings of ¥30.74B indicate a certain degree of capacity to fund continued dividends. However, given that operating earnings remain in negative territory and the Company relies on short-term borrowings, dividend sustainability will depend on the future recovery of operating cash flow generation. No data on share repurchases has been identified.

Risk Factors

1. Inventory accumulation risk: Inventories of ¥42.55B accounted for 46.8% of total assets and increased from ¥39.94B in the previous year. If inventory reduction does not progress, this could lead to inventory write-downs and higher storage costs.

2. Interest burden and short-term funding dependence risk: Short-term borrowings of ¥20.25B were approximately 2.0 times cash and deposits of ¥10.19B, while interest paid reached ¥0.19B. An interest burden amid continued operating losses could constrain financial flexibility.

3. Geographic concentration and overseas profitability risk: The Japan segment accounted for 93.3% of revenue, while Europe (operating margin -10.3%) and China (operating margin -800.0%) remained loss-making. If profitability in the overseas businesses does not improve, they could become a source of volatility in overall earnings.

Industry Benchmark (For Reference; Compiled by the Company)

Profitability and Returns

The Company’s profitability is substantially below the industry median, indicating significant room for profitability improvement even within the manufacturing sector.

Growth and Capital Efficiency

The revenue growth rate was substantially below the industry median, indicating that the impact of contracting demand was relatively significant even among peers.

※Source: Compiled by the Company

Key Takeaways from the Results

1. Despite the revenue decline, gross margin improved from 10.4% to 16.1%, and both the operating loss and ordinary income improved substantially from the previous year. This suggests that revisions to the cost structure and pricing and product mix are progressing.

2. Inventories accounted for 46.8% of total assets, while accounts receivable declined -29.4% year on year, indicating changes in the balance between inventory and collections. The trend in inventory levels is a structural observation point that will influence future cash-generating capacity.

3. Q1 revenue progress against the full-year plan was only 16.4%, and operating income was negative for the quarter. Accordingly, achieving the full-year target presupposes a recovery in shipments and profitability during the second half.

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 five-year fade). It is not a forecast of the market share price or a recommendation of any specific investment action.

Sensitivity: 2,633円〜2,782円 at ±1% in the cost of equity, and 2,675円〜2,726円 at ±0.1 in 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 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 / Interest rate reference month: 2026-07 / This value does not predict 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 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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