TSUBAKI NAKASHIMA CO.,LTD. FY2026 Q2 Earnings Report

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Executive Summary

Although profitability at the operating level clearly improved, the Company remained in the red at the net income level due to interest expenses and a high effective tax rate. Revenue increased 2.2% YoY to ¥368.6B, while Operating Income rose 66.7% YoY to ¥13.2B. However, financial expenses of ¥10.9B absorbed most of EBIT of ¥13.2B, leaving Profit Before Tax at only ¥3.2B. In addition, the recognition of income taxes and other taxes of ¥4.5B resulted in Net Income of ¥-1.2B, representing a narrowed loss from ¥-9.7B in the previous year. While cost improvements, reflected in a gross margin of 17.9% (+2.3pt YoY), drove the increase in Operating Income, the structure in which interest and tax burdens weigh on net income remains unchanged.

Factors Affecting Performance

【Revenue】Revenue was ¥368.6B, representing a modest 2.2% increase YoY. By segment, the core PrecisionComponents business led overall performance with revenue of ¥363.6B, accounting for 98.6% of total revenue and increasing 2.3% YoY. BlowerAndRealEstate remained flat at ¥5.0B, accounting for 1.4% of total revenue and recording YoY ±0.0%. Although revenue growth was moderate, the structure indicates a high concentration in the core business.

【Profit and Loss】Operating Income increased significantly by 66.7% YoY to ¥13.2B, primarily because the gross margin improved to 17.9%, up +2.3pt from the previous year. SG&A expenses increased to ¥55.5B, with the SG&A ratio rising +1.2pt YoY to 15.1%; however, the improvement in gross profit exceeded this increase and contributed to higher Operating Income. Nevertheless, financial expenses of ¥10.9B offset most of EBIT of ¥13.2B, reducing Profit Before Tax to ¥3.2B. Furthermore, the recognition of income taxes and other taxes of ¥4.5B resulted in Net Income of ¥-1.2B, as the tax burden exceeded Profit Before Tax and the net loss continued. The structure is one in which operating-level improvements are offset by interest and tax burdens; consequently, the Company reported higher revenue and higher Operating Income but continued to post a net loss.

Segment Analysis

PrecisionComponents recorded revenue of ¥363.6B, representing 98.6% of total revenue, and Operating Income of ¥13.4B, up +90.5% YoY, resulting in an operating margin of 3.7% and effectively generating all of the Company’s Operating Income. BlowerAndRealEstate generated only ¥5.0B in revenue, representing 1.4% of total revenue, while Operating Income declined to ¥-0.2B, with the loss expanding by 127.1% YoY. Profit dependence on a single segment is extremely high, leaving overall performance highly sensitive to supply-demand and pricing trends in the core business.

Key Financial Indicators

【Profitability】The Operating Margin was 3.6%, improving from approximately 2.2% in the previous year, while the Net Income Margin was -0.3%. The improvement in gross margin to 17.9% (+2.3pt YoY) contributed to higher Operating Income, whereas financial expenses and the tax burden continued to weigh on net income.【Cash Flow Quality】Operating Cash Flow (OCF) was ¥-0.3B, indicating weak cash generation even relative to Net Income of ¥-1.2B. The increase in accounts receivable (equivalent to +¥21.0B) and the decrease in inventories (equivalent to -¥8.9B) were the primary drivers of changes in working capital.【Investment Efficiency】ROE was -0.3%, total assets were ¥1545.1B, and the Equity Ratio was 25.3%, improving from 24.4% in the previous year. Asset efficiency remains low due to the impact of the net loss.【Financial Soundness】The Equity Ratio of 25.3% remains low. With short-term borrowings of ¥545.1B versus cash and deposits of ¥349.8B, continued attention to short-term liquidity management is necessary.

Cash Flow Analysis

Operating Cash Flow (OCF) was ¥-0.3B, deteriorating substantially from ¥39.5B in the previous year. Although OCF before changes in working capital was secured at ¥10.3B, the increase in accounts receivable, which had a cash flow impact of -¥16.9B, was the primary factor causing OCF to turn negative. Meanwhile, the decrease in inventories of +¥13.9B contributed positively to cash generation. Investing Cash Flow was positive at ¥1.0B, as proceeds from the sale of fixed assets and other items offset capital expenditures of ¥9.4B. Financing Cash Flow was ¥-1.7B; although funding shifted toward long-term borrowings, cash outflows remained limited. As a result, free cash flow (Operating Cash Flow + Investing Cash Flow) was modestly positive at ¥0.7B. However, this was insufficient to fully cover interest payments of ¥5.8B, making the recovery of cash-generating capacity a key future issue.

Quality of Earnings

Operating Income of ¥13.2B was supported by the recurring factor of gross margin improvement. However, other income of ¥10.9B and other expenses of ¥8.0B had a certain impact on EBIT, and their net amount may contain a somewhat temporary component. The primary factor pushing Net Income into negative territory was the recognition of income taxes and other taxes of ¥4.5B against Profit Before Tax of ¥3.2B, resulting in an effective tax rate exceeding 100%; fluctuations in the tax burden are strongly temporary in nature. OCF of ¥-0.3B, which was weak relative to Net Income of ¥-1.2B, indicates that accruals associated with the increase in accounts receivable—the accumulation of uncollected revenue—created a divergence between earnings and cash flow, suggesting a delay in the conversion of earnings into cash.

Earnings Forecast and Guidance

The full-year Company forecasts are Revenue of ¥700.0B, Operating Income of ¥25.0B, and EPS of ¥13.07. Revenue of ¥368.6B and Operating Income of ¥13.2B in the first half correspond to progress rates of 52.7% and 52.8%, respectively, representing generally standard progress when seasonality is taken into account. However, while the full-year Net Income forecast is ¥5.0B, the first half recorded a loss of ¥-1.2B. Normalization of the tax burden and containment of interest expenses in the second half are therefore prerequisites for achieving the plan. Neither the earnings forecast nor the dividend forecast was revised during the current quarter.

Shareholder Returns

The dividend for Q2 was ¥0, and the full-year dividend forecast also remains ¥0, with no dividend planned. In addition to the first-half net loss, free cash flow is insufficient to fully cover interest payments, making the calculation of a Payout Ratio of limited significance at this stage. The resumption of shareholder returns will require a return to profitability for the full year and a recovery in cash-generating capacity.

Risk Factors

1. Business concentration risk: PrecisionComponents accounts for 98.6% of revenue and virtually all Operating Income, creating a structure in which performance is highly dependent on supply-demand and pricing trends in a single business.

2. Interest burden risk: Financial expenses of ¥10.9B account for most of EBIT of ¥13.2B, and the EBIT/financial expenses ratio is approximately 1.2x, indicating limited resilience to rising interest rates or changes in borrowing terms.

3. Working capital and liquidity risk: Cash and deposits of ¥349.8B are held against short-term borrowings of ¥545.1B. In addition, the increase in accounts receivable (equivalent to +¥21.0B YoY) is weighing on OCF, requiring monitoring of the Company’s liquidity position.

Industry Benchmark (Reference; Company Analysis)

Profitability and Returns

Profitability is significantly below the industry median and ranks at the lower end within the manufacturing sector.

Growth and Capital Efficiency

Revenue growth also falls below the industry median, and the pace of top-line expansion is relatively moderate.

※Source: Company aggregation

Key Takeaways from the Earnings Results

1. Although an improvement in profitability at the operating level has been confirmed, the structure in which interest and tax burdens pressure net income continues. Whether the structural improvement of +2.3pt in gross margin can be sustained is a key point of focus.

2. OCF was ¥-0.3B, creating a divergence from Net Income, while changes in working capital associated with the increase in accounts receivable constrained cash generation. Trends in working capital efficiency warrant close monitoring.

3. Revenue and Operating Income progress toward the full-year forecasts are approximately 53%, which is standard. However, achieving the Net Income forecast of ¥5.0B requires normalization of the tax burden in the second half. Trends in the effective tax rate from the next quarter onward will influence the likelihood of achieving the earnings forecast.

Theoretical Share Price (Reference Value)

Sensitivity: ¥768–¥813 at ±1% for the cost of equity, and ¥783–¥795 at ±0.1 for ω.

Notes:

• Net Income is substantially compressed relative to Operating Income due to the tax burden, acquisition-related expenses, minority interests, and other factors (Net Income ÷ Operating Income 20%). This value reflects that compression at face value; if these factors are temporary, normalized earnings power may be higher.
• 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.

(Calculation model: Residual Income Model (Ohlson-type; 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 through analysis of XBRL earnings summary data. It does not constitute a recommendation to invest in any specific security. The industry benchmarks are reference information aggregated 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 Q2 showed a meaningful operating recovery, but the group remained loss-making at the net-income level and cash conversion deteriorated sharply. Revenue increased 2.2% year on year to ¥36.86bn. Operating income rose 66.7% to ¥1.32bn, driven by a ¥0.99bn, or 17.7%, increase in gross profit that materially exceeded the ¥0.57bn, or 11.4%, increase in SG&A. The operating margin expanded by 140bp year on year to 3.6% from 2.2%. Gross margin improved by 240bp to 17.9% from 15.5%, indicating better gross-profit capture despite modest top-line growth. Nevertheless, the 3.6% EBIT margin remains below the 5% level generally associated with an adequate earnings buffer for a manufacturer. Finance costs of ¥1.09bn absorbed approximately 76% of EBIT, leaving profit before tax at only ¥0.32bn. A tax expense of ¥0.45bn then resulted in a net loss of ¥0.12bn, although this was substantially narrower than the prior-year loss of ¥0.97bn. The effective tax rate was an unusually high 138.3%, making the path from operating profit to net profit particularly weak. Operating cash flow was negative ¥0.03bn, versus positive ¥3.95bn a year earlier. The deterioration reflected a ¥1.70bn receivables outflow, ¥1.39bn inventory-related outflow and ¥0.35bn of other working-capital outflows, alongside ¥0.58bn each of tax and interest payments. Receivable days of 102, inventory days of 150 and a 210-day cash conversion cycle are material working-capital constraints for a manufacturing business. Cash remained substantial at ¥34.98bn, but gross borrowings totaled ¥94.12bn and the reported debt-to-equity ratio of 2.95x denotes aggressive leverage. Equity increased ¥2.05bn year on year to ¥39.09bn, helped principally by ¥2.13bn of other comprehensive income, notably translation differences, rather than retained earnings generation. Management retained full-year guidance of ¥70.0bn in revenue, ¥2.50bn in operating income and ¥0.50bn in net income attributable to owners. Q2 cumulative revenue and operating-income progress are broadly in line with the 50% seasonal benchmark, but the first-half net loss means a return to full-year profitability requires a materially stronger second half. No dividend is planned or paid, which is appropriate given negative earnings, negative operating cash flow and leverage. Overall, the quarter validates operational margin recovery but leaves the investment case dependent on sustained gross-margin improvement, working-capital normalization, lower financing drag and tax-rate normalization.

Profitability Analysis

The reported annualized DuPont ROE was negative 0.6%, comprising a negative 0.3% net profit margin, 0.477x asset turnover and 3.95x financial leverage. The negative net margin was the binding constraint: leverage amplified, rather than offset, the loss attributable to shareholders. Asset turnover was modest for the asset base and did not compensate for the thin operating margin. Operating performance improved materially, with EBIT margin rising 140bp year on year to 3.6% and gross margin rising 240bp to 17.9%. The margin expansion reflects gross profit growing 17.7%, well ahead of revenue growth of 2.2%. SG&A increased 11.4%, which was faster than revenue growth and therefore remains a negative operating-leverage signal; however, gross-profit growth was sufficient to absorb this cost inflation during the half. The principal earnings leakage occurred below operating income. The interest burden was 0.245, meaning only about one-quarter of EBIT remained after net finance costs, and the tax burden was negative because tax expense exceeded the small pre-tax profit. Finance income of ¥0.09bn was immaterial relative to ¥1.09bn of finance costs. Other income of ¥1.09bn and other expenses of ¥0.80bn produced a net ¥0.29bn contribution, but this was insufficient to offset financing costs. The operating recovery is potentially sustainable only if the improved gross margin can be maintained while SG&A growth moderates closer to revenue growth. With a 3.6% EBIT margin, the company has limited resilience against pricing pressure, input-cost inflation, foreign-exchange movements or volume softness.

Growth Assessment

First-half revenue growth of 2.2% was modest, while operating income growth of 66.7% demonstrates a favorable profit recovery from the low prior-year base. Gross profit increased ¥0.99bn despite revenue rising only ¥0.81bn, indicating that unit economics improved. The full-year revenue target of ¥70.0bn implies first-half progress of 52.7%, 2.7 percentage points above the standard 50% midpoint. Operating-income progress was similarly 52.8% against the ¥2.50bn full-year target, also modestly ahead of the midpoint. These progress rates suggest management's sales and operating-profit targets are achievable if second-half conditions are broadly stable. However, the full-year net-income target of ¥0.50bn requires a ¥0.62bn profit in the second half after a ¥0.12bn first-half loss. This turnaround depends on preserving operating-profit momentum while sharply reducing the drag from finance costs and/or achieving a more normal tax outcome. Receivables increased ¥2.10bn year on year, or 11.3%, substantially faster than sales, while receivable days reached 102. Inventory declined ¥0.90bn year on year, or 3.5%, but inventory days remained high at 150, implying slow conversion through the production and sales cycle. For a precision-components manufacturer, demand volatility in automotive, industrial machinery and bearing-related end markets, together with customer inventory adjustments, could challenge volume and pricing recovery. The unchanged forecast signals management confidence, but the absence of a first-half net profit leaves limited room for an operational setback.

Financial Health

Liquidity is adequate on a headline basis but weakens materially when inventories are excluded. Current assets were ¥90.64bn and estimated current liabilities were ¥68.65bn, producing a current ratio of approximately 1.32x. This is above 1.0x, so there is no immediate current-ratio warning, but it is below the 1.5x healthy benchmark. Cash of ¥34.98bn and trade receivables of ¥20.69bn imply an estimated quick ratio of approximately 0.81x, below 1.0x. Inventories account for ¥24.83bn, or 27.4% of current assets, making liquidity partly dependent on inventory conversion. Short-term borrowings were ¥54.51bn, materially exceeding cash plus receivables of ¥55.67bn only by a narrow margin and leaving limited headroom after considering other current liabilities. Total borrowings were ¥94.12bn, comprising ¥54.51bn current and ¥39.61bn non-current. The reported debt-to-equity ratio of 2.95x exceeds the 2.0x warning threshold and indicates aggressive debt financing. This high leverage is particularly concerning because interest costs consume approximately 76% of EBIT. Compared with the prior period, short-term borrowings fell ¥17.48bn while non-current borrowings increased ¥18.76bn, consistent with a substantial extension of debt maturities; this reduces near-term refinancing pressure but does not reduce total leverage, which increased ¥1.27bn. Total equity rose ¥2.05bn, or 5.5%, to ¥39.09bn, and the equity ratio improved to 25.3% from 24.4%. The improvement in equity was driven mainly by other comprehensive income, including ¥2.17bn of translation gains, rather than retained-profit accumulation. Retained earnings remained negative ¥12.16bn, underscoring the limited accumulated earnings buffer. Net defined-benefit liabilities of ¥1.66bn are an additional fixed obligation, though small relative to total liabilities. The central balance-sheet risk is therefore not an immediate cash shortage, but a highly levered capital structure combined with weak interest coverage and slow working-capital conversion.

Notable B/S Changes

Short-term borrowings: -¥17.48bn (-24.3%) year on year to ¥54.51bn; near-term refinancing exposure improved, although the debt burden remains high. Non-current borrowings: +¥18.76bn (+90.0%) year on year to ¥39.61bn; indicates debt maturity extension, but also leaves total borrowings higher by ¥1.27bn. Trade receivables: +¥2.10bn (+11.3%) year on year to ¥20.69bn; growth far exceeded revenue growth and is consistent with the elevated 102-day DSO and negative operating cash-flow contribution. Total equity: +¥2.05bn (+5.5%) year on year to ¥39.09bn; improvement was principally supported by other comprehensive income rather than retained earnings. Other components of equity: +¥2.13bn (+9.0%) year on year to ¥25.65bn; translation differences were the principal contributor, increasing sensitivity of reported equity to foreign-exchange movements.

Cash Flow Quality

Cash-flow quality was weak in the first half. Operating cash flow was negative ¥0.03bn, a deterioration from positive ¥3.95bn in the prior-year period, despite the near-breakeven net loss of ¥0.12bn. The reported OCF-to-net-income ratio was 0.27x, below the 0.8x concern threshold, indicating that accounting earnings were not well converted into operating cash. The negative operating cash flow was driven by a ¥1.70bn receivables outflow, a ¥1.39bn inventory-related outflow, a ¥0.13bn payables outflow and ¥0.35bn of other working-capital outflows. These working-capital movements totaled approximately ¥3.43bn of cash use. The 102-day DSO, 150-day DIO and 210-day annualized cash conversion cycle corroborate that cash is tied up for an extended period in customer collections and inventory. The accruals ratio of negative 0.1% is not, by itself, an adverse accrual-quality signal, but it does not offset the weak operating cash generation. Capital expenditures were ¥0.94bn, equivalent to 2.6% of first-half revenue; the reported free cash flow was ¥0.67bn. Investing cash flow was positive ¥0.10bn because ¥1.07bn of proceeds from property, plant and equipment sales more than offset capital expenditure and intangible purchases. Accordingly, the reported free-cash-flow outcome benefited from asset-sale proceeds and should not be treated as evidence of recurring cash self-funding. Interest paid of ¥0.58bn was substantial relative to EBIT of ¥1.32bn and further constrained internal cash generation. Cash increased ¥3.51bn, aided by ¥0.46bn of foreign-exchange effects and the cash-flow mix, but this increase does not remove the need to restore recurring operating cash generation. Sustainable improvement requires a reduction in receivable days, inventory days and the cash conversion cycle, rather than reliance on investing inflows.

Dividend Sustainability

The Q2 dividend per share was ¥0 and the full-year dividend forecast is also ¥0. As no dividend is planned, there is no dividend payout burden on first-half earnings or cash flow. The absence of a dividend is financially prudent given the ¥0.12bn net loss, negative ¥0.03bn operating cash flow, high leverage and weak interest coverage. It also preserves liquidity while the company works through a 210-day cash conversion cycle. Dividends paid were immaterial at ¥0.01bn. Any future dividend reinstatement would need to be supported by consistently positive net income, stronger operating cash conversion and a demonstrable reduction in leverage or financing costs. At present, debt service and working-capital funding should take precedence over shareholder distributions.

Risk Assessment

Business risks include High priority: Manufacturing demand and pricing risk. A 3.6% EBIT margin leaves limited protection against lower volumes, customer inventory adjustments, pricing pressure or raw-material and energy-cost inflation., High priority: Working-capital execution risk. DSO of 102 days, DIO of 150 days and a 210-day cash conversion cycle indicate slow conversion of production and sales into cash., Medium priority: Margin sustainability risk. Gross margin improved 240bp year on year, but SG&A increased 11.4% against only 2.2% revenue growth; further cost growth could reverse operating leverage., Medium priority: Export and global manufacturing exposure. Translation differences generated ¥2.17bn of OCI, demonstrating that exchange-rate movements can materially affect reported equity and balance-sheet metrics..

Financial risks include High priority: High leverage. The reported D/E ratio of 2.95x exceeds the 2.0x warning threshold, raising refinancing sensitivity and limiting financial flexibility., High priority: High interest burden. Finance costs of ¥1.09bn consumed approximately 76% of ¥1.32bn EBIT, leaving very limited pre-tax earnings capacity., High priority: Tax burden. A ¥0.45bn tax expense on ¥0.32bn of pre-tax profit produced a 138.3% effective tax rate and converted operating recovery into a net loss., Medium priority: Liquidity quality. The current ratio is approximately 1.32x, but the estimated quick ratio is only approximately 0.81x, making liquidity reliant on inventory realization and collection of receivables., Medium priority: Earnings-to-cash divergence. OCF/NI of 0.27x is below the 0.8x warning threshold and operating cash flow was negative..

Key concerns include The reported HIGH_LEVERAGE alert is material: leverage is elevated relative to equity, and its impact is visible in the high financing-cost burden. Maturity extension from short-term to non-current borrowings improves the near-term debt profile, but total indebtedness remains high., The EARNINGS_QUALITY alert is material: weak operating cash flow reflects heavy working-capital absorption, rather than a cash-backed earnings recovery. This raises the importance of collection discipline and inventory normalization., The HIGH_TAX_BURDEN alert is material: the 138.3% effective tax rate prevented a positive pre-tax result from translating into net income. Unless normalized, it impairs the credibility of the full-year net-income target., The HIGH_INTEREST_BURDEN alert is material: only around 24.5% of EBIT remained before tax after net finance costs. A higher interest-rate environment or weaker EBIT would pressure debt-servicing capacity., The LOW_OPERATING_EFFICIENCY and LOW_GROSS_MARGIN alerts are material: EBIT margin of 3.6% and gross margin of 17.9% remain below stated benchmarks despite year-on-year improvement., The HIGH_RECEIVABLE_DAYS, HIGH_INVENTORY_DAYS and LONG_CCC alerts are interconnected and material: 102-day receivables, 150-day inventory and a 210-day cash conversion cycle imply elevated funding needs and potential exposure to customer-demand or inventory-valuation risk..

Investment Implications

Key takeaways include Operating recovery is evident: revenue rose 2.2%, gross margin expanded 240bp and operating income increased 66.7% to ¥1.32bn., Below-the-line costs remain the critical impediment: ¥1.09bn of finance costs and a 138.3% effective tax rate turned a ¥0.32bn pre-tax profit into a ¥0.12bn net loss., The full-year operating-income forecast appears broadly on track at 52.8% first-half progress, but delivery of ¥0.50bn net income requires a clear second-half improvement., Balance-sheet risk is elevated: reported D/E is 2.95x, equity is only 25.3% of assets, and debt servicing absorbs most operating profit., Cash conversion is the key operational test: first-half OCF was negative and working-capital days are well above manufacturing benchmarks., No dividend supports capital preservation and is consistent with current profitability, cash-flow and leverage conditions..

Metrics to watch include EBIT margin and gross margin, especially whether EBIT margin can rise sustainably above 5%., Finance costs and the interest burden relative to EBIT., Effective tax rate and the reconciliation of pre-tax income to net income., DSO, DIO and cash conversion cycle, with particular focus on reducing the 102-day DSO and 150-day DIO., Operating cash flow relative to net income and capital expenditures., Gross borrowings, reported D/E ratio, short-term debt refinancing and equity ratio., Second-half progress required to achieve ¥0.50bn full-year net income..

Regarding relative positioning, The company is showing a stronger operating trajectory than in the prior year, but its 3.6% EBIT margin, 17.9% gross margin, 2.95x reported D/E ratio and 210-day cash conversion cycle position it as financially and operationally more constrained than a conservatively financed, efficiently run manufacturing peer.