BROTHER INDUSTRIES,LTD. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥437.78B
• Operating Income: ¥38.72B
• Net Income: ¥28.28B
• EPS: ¥111.30

Income Statement

Balance Sheet

Cash Flow Statement

Profitability Ratios

Year-over-Year Comparison

Share Information

Dividend Information

Full Year Forecast

Disclaimer

This data was automatically extracted from XBRL files. Please refer to the original disclosure documents for accuracy.

AI Financial Analysis

Executive Summary

Brother Industries (6448) delivered a stable FY2026 Q2 result with modest top-line growth and essentially flat operating profit, indicating resilient core demand but limited operating leverage. Revenue rose 2.5% YoY to 4,377.8, while operating income edged up 0.5% YoY to 387.2, and net income increased 0.4% YoY to 282.7. Gross profit was 1,889.9, translating to a gross margin of 43.2%, consistent with a value-added product mix. Operating margin printed at 8.85%; given revenue growth outpaced operating profit growth, we infer a slight YoY margin compression of roughly 17–20 bps. Net margin stood at 6.46% (aligned with the provided 6.5% DuPont input), with an effective tax rate of 30.1%. Cash generation was solid, with operating cash flow of 337.2, equating to an OCF/Net Income ratio of 1.19x, which supports earnings quality. Free cash flow reached 116.5 after 167.0 of capex, but shareholder returns (dividends 128.1 and buybacks 82.3) exceeded FCF, implying reliance on the balance sheet for distributions this period. The balance sheet remains strong: equity ratio is 75.5% and D/E is a conservative 0.32x, providing ample financial flexibility. Inventories of 2,375.5 and receivables of 1,367.8 are sizable, reflecting working capital intensity; however, positive OCF suggests working capital was managed constructively in the half. ROE is a subdued 4.0% (DuPont: 6.5% margin × 0.466x turnover × 1.32x leverage), constrained by low asset turnover and conservative leverage. ROIC at 3.8% is below the 5% warning threshold, flagging capital efficiency as a key improvement area. Non-operating contributions were limited (equity method income 3.07, 0.8% of total), indicating earnings are primarily driven by core operations rather than affiliates or one-offs. EBITDA was 649.9 (14.8% margin), offering a buffer against input cost volatility, though SG&A discipline will be essential to re-expand operating margin. Cash and equivalents stood at 1,594.5, reinforcing liquidity, though current ratio cannot be computed due to missing current liability details. Overall, the quarter underscores resilient demand and good cash conversion, but slight margin compression and low capital efficiency temper the outlook. Forward-looking, re-accelerating operating leverage, progress on inventory normalization, and ROIC uplift will be the pivotal watchpoints for sustaining shareholder returns.

Profitability Analysis

ROE (4.0%) = Net Profit Margin (6.5%) × Asset Turnover (0.466x) × Financial Leverage (1.32x). The weakest component structurally is asset turnover at 0.466x, which most constrains ROE, followed by modest net margin. Operating margin of 8.85% implies slight YoY compression (≈17–20 bps) because operating income growth (＋0.5%) lagged revenue growth (＋2.5%). Likely drivers include higher SG&A to support demand and FX/input cost mix effects; SG&A details are unreported, but the growth gap suggests opex intensity elevated slightly. EBITDA margin at 14.8% versus operating margin at 8.85% highlights D&A burden (262.6), consistent with a manufacturing footprint and ongoing product development. The change appears operating-cost driven rather than one-off, given minimal non-operating contributions (equity-method income 3.07). Sustainability: margin pressure could ease with price discipline and mix, but absent visible cost takeout, near-term re-expansion may be incremental. Concerning trend flag: revenue grew faster than operating profit, indicating muted operating leverage; we will monitor if SG&A growth is running above revenue once disclosures are available.

Growth Assessment

Top-line growth was +2.5% YoY, indicating steady demand across core categories. Operating profit growth of +0.5% YoY lagged, implying limited operating leverage this half. Net income grew +0.4% YoY, consistent with flat margins after tax. Equity-method income was immaterial (3.07; 0.8% of profit mix), so growth quality is largely operational rather than investment-driven. Gross margin at 43.2% suggests pricing/mix are holding, but operating expense intensity weighed on operating margin to 8.85%. EBITDA growth was not disclosed, but current EBITDA margin (14.8%) provides cushion for cost variability. Outlook: incremental growth should be supported by secular and replacement demand in printing/labeling and industrial equipment, but further operating profit upside likely depends on SG&A control, inventory normalization, and potential pricing actions. FX could be a modest tailwind to revenue but mixed on costs. Absent segment disclosures, we assume balanced growth across Printing & Solutions and Industrial businesses with cautious margin trajectory.

Financial Health

Liquidity is strong based on available data: cash and equivalents of 1,594.5 and current assets of 5,810.1, though current ratio and quick ratio cannot be calculated due to unreported current liabilities. No warning on Current Ratio < 1.0 can be made given missing data. Solvency is robust with total equity of 7,094.3 and an equity ratio of 75.5%. Debt-to-equity is conservative at 0.32x; interest-bearing debt details are unreported but overall leverage appears low. Working capital is ample, though reported 'working capital' equals current assets due to missing current liabilities; nonetheless, inventories (2,375.5) and receivables (1,367.8) are material and should be monitored for turnover risk. Maturity mismatch risk cannot be assessed precisely without current vs. long-term debt breakdown; financing cash outflows suggest distributions and potentially debt reduction, but details are limited. No off-balance sheet obligations were disclosed in the dataset.

Cash Flow Quality

OCF of 337.2 versus net income of 282.7 yields OCF/NI of 1.19x, indicating good earnings quality with positive working capital contribution. Free cash flow was 116.5 after capex of 167.0, positive but below aggregate shareholder returns (dividends 128.1 + buybacks 82.3). FCF coverage of dividends was 0.45x, implying reliance on cash on hand or balance sheet strength this period to fund buybacks and a portion of dividends. No clear signs of working capital manipulation are evident from the limited data; however, high inventories relative to half-year COGS suggest potential to unlock cash if demand stays firm. The sustainability of FCF depends on maintaining OCF at or above current levels and disciplined capex; given EBITDA margin of 14.8% and low leverage, FCF should be defendable, but distribution pace may need to align more closely with cash generation.

Dividend Sustainability

The calculated payout ratio is shown as 91.2% (methodology not disclosed), which appears elevated relative to typical sustainability benchmarks (<60%). On a cash basis, FCF coverage of dividends is 0.45x this period, indicating distributions exceeded organic cash generation. Dividends paid were 128.1 against FCF of 116.5, and additional buybacks of 82.3 further stretched cash outflows. Balance sheet strength (equity ratio 75.5%, D/E 0.32x) provides capacity to support dividends near term, but medium-term sustainability would benefit from improved ROIC (currently 3.8%, below 5% warning) and tighter working capital. Without reported DPS and policy guidance in this dataset, we assume a progressive but disciplined payout policy; monitoring FCF trajectory and payout discipline is key.

Risk Assessment

Business Risks:

• Margin pressure from SG&A intensity; operating income grew slower than revenue, implying limited operating leverage.
• Inventory risk: high inventory balance relative to half-year COGS may elevate obsolescence/discount risk if demand softens.
• Input cost and FX volatility can pressure gross/operating margins despite current 43.2% gross margin.
• Product cycle and replacement demand uncertainty in printing and industrial equipment.

Financial Risks:

• FCF shortfall relative to shareholder returns (FCF coverage of dividends at 0.45x) could necessitate balance sheet draw or adjustment of buybacks.
• Low ROIC at 3.8% (<5%) indicates capital efficiency risk and potential value dilution if reinvestment returns do not improve.
• Maturity mismatch can’t be assessed due to missing current liability and debt tenor data.

Key Concerns:

• Capital efficiency: ROE 4.0% and ROIC 3.8% are below desired thresholds, requiring either margin expansion or asset turnover improvement.
• Slight operating margin compression (~17–20 bps) suggests cost discipline needs strengthening.
• Data gaps (non-operating items, SG&A breakdown, current liabilities) limit full assessment of earnings drivers and liquidity.

Investment Implications

Key Takeaways:

• Steady revenue growth (+2.5% YoY) with flat operating profit (+0.5% YoY) implies muted operating leverage.
• Operating margin at 8.85% likely compressed ~17–20 bps YoY; EBITDA margin of 14.8% provides buffer.
• Earnings quality is sound (OCF/NI 1.19x), but FCF did not fully fund shareholder returns.
• Balance sheet is strong (equity ratio 75.5%, D/E 0.32x), supporting flexibility.
• Capital efficiency is the key issue: ROE 4.0%, ROIC 3.8% below benchmarks.

Metrics to Watch:

• Operating margin trajectory and SG&A-to-sales ratio once disclosed
• Inventory and receivable turnover (working capital release potential)
• ROIC progression versus 7–8% management-style targets
• OCF and FCF coverage of dividends and buybacks
• FX impacts on revenue and costs

Relative Positioning: Within Japanese capital goods and office equipment peers, Brother shows strong balance sheet quality and consistent cash generation but lags on capital efficiency and near-term operating leverage; improving ROIC and inventory turns would close the gap with higher-ROIC peers.

Disclaimer

This analysis was auto-generated by AI. Please note the following:

• No Guarantee of Accuracy: The accuracy and completeness of this analysis are not guaranteed. For accurate financial data, please refer to the original disclosure documents published on TDnet or other official sources
• Not Investment Advice: This analysis is for general informational purposes only and does not constitute investment advice under applicable securities laws. It is not a recommendation to buy or sell any specific securities
• At Your Own Risk: Investment decisions should be made at your own discretion and risk. We assume no liability for any losses incurred based on this analysis