NTN (6472) FY2027 Q1 Earnings Report

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Executive Summary

NTN reported higher revenue and profit, achieving profit growth exceeding its revenue growth rate and demonstrating improved operating leverage. Revenue was ¥2,122.8B (+6.7% YoY), Operating Income was ¥83.2B (+19.2%), Ordinary Income was ¥63.5B (+57.5%), and Net Income was ¥22.2B (+53.2%). The primary driver of revenue growth was expanded sales in all regions except Japan, while the primary driver of profit growth was a significant earnings recovery in the Japan segment. However, the Operating Income margin remained at just 3.9%, and the absolute level of profitability remains low.

Factors Affecting Business Performance

【Revenue】Revenue was ¥2,122.8B, an increase of +6.7% YoY, with higher revenue in all regions. By segment, including intersegment revenue, Japan generated ¥863.5B (+3.1%), the Americas ¥692.7B (+7.2%), Europe ¥514.0B (+8.7%), and Asia and Other Regions ¥424.8B (+7.2%). Growth in Europe, the Americas, and Asia and Other Regions exceeded that of Japan.

【Profit and Loss】Operating Income was ¥83.2B (+19.2%), and the Operating Income margin improved to 3.9% from the previous year as profit growth exceeded revenue growth. Regional Operating Income was led by Japan at ¥41.7B, a significant increase from ¥4.2B in the previous year, and Asia and Other Regions at ¥43.4B (+13.2%). Meanwhile, the Americas generated ¥5.2B, a 68.1% decline from ¥16.3B in the previous year, while Europe remained in the red with a loss of ¥3.5B. Despite recording ¥17.7B in interest expenses and ¥5.2B in foreign exchange losses as non-operating expenses, Ordinary Income increased significantly to ¥63.5B (+57.5%). The company recorded ¥11.7B in extraordinary losses, including ¥10.5B in restructuring expenses. Profit Before Tax was ¥54.5B, while the effective tax rate was high at approximately 59%, reducing the conversion rate to Net Income. In conclusion, the company achieved higher revenue and profit.

Segment Analysis

Segment Operating Income, measured against revenue including intersegment sales, was highest in Asia and Other Regions at ¥43.4B, with a margin of 10.2%, accounting for approximately half of total segment profit of ¥86.8B. Japan recorded ¥41.7B in Operating Income and a margin of 4.8%, a significant increase from ¥4.2B in the previous year, demonstrating a pronounced earnings recovery. In contrast, the Americas generated only ¥5.2B, with a margin of 0.7% and a 68.1% YoY decline, while Europe remained in the red with a loss of ¥3.5B. The company is highly dependent on Asia and Other Regions and Japan for profit, making profitability improvements in the Americas and Europe key to enhancing company-wide earnings.

Key Financial Metrics

【Profitability】The Operating Income margin of 3.9% improved from the previous year, but remains low in absolute terms. The 19.2% gross profit margin and 15.3% SG&A expense ratio indicate a structure with limited profit buffer. The Net Income margin remained at just 0.9%, with interest expenses and the high tax burden eroding profit between the operating and net income levels. 【Cash Flow Quality】Operating Cash Flow (OCF) was ¥264.6B, exceeding 10 times Net Income, supported by ¥99.0B in depreciation and amortization expense and a ¥66.7B increase in trade payables, indicating solid cash conversion. 【Investment Efficiency】ROE was 0.7% on a quarterly basis. Capital expenditures of ¥97.9B were approximately in line with depreciation and amortization, indicating an investment scale closer to maintenance and replacement than capacity expansion. 【Financial Soundness】The Equity Ratio was 36.3%, largely unchanged from 35.9% in the previous year. Interest-bearing debt amounted to approximately ¥2,724B, while short-term borrowings of ¥1,262.6B constituted a significant portion of current liabilities, and interest expenses of ¥17.7B placed pressure on Ordinary Income.

Cash Flow Analysis

Operating Cash Flow increased significantly by +42.2% YoY to ¥264.6B, supported by ¥99.0B in depreciation and amortization expense and a ¥66.7B increase in trade payables. Investing Cash Flow represented an outflow of ¥117.8B, primarily consisting of ¥97.9B in capital expenditures, a scale close to the level required to maintain and replace existing facilities. Financing Cash Flow represented an outflow of ¥221.0B, mainly due to ¥200.0B in repayments of long-term borrowings and a net decrease in short-term borrowings. As a result, Free Cash Flow was positive at ¥146.8B, indicating that funds generated from operating activities more than covered capital expenditures. Cash and cash equivalents decreased by ¥60.9B on a net basis, leaving an ending balance of ¥1,251.6B.

Earnings Quality

The growth in Ordinary Income (+57.5%) exceeded the growth in Operating Income (+19.2%). However, this was also a reversal of the prior-year structure, in which non-operating burdens such as foreign exchange losses were relatively lower, and the improvement in recurring earnings power was primarily supported by higher Operating Income. Meanwhile, extraordinary losses of ¥11.7B included the one-time factor of ¥10.5B in restructuring expenses. After deducting extraordinary income of ¥2.7B, extraordinary items resulted in a net loss of ¥8.9B, weighing on Net Income. Against Profit Before Tax of ¥54.5B, income taxes and other taxes of ¥32.3B were recorded, resulting in an effective tax rate of approximately 59%, substantially above the normal level and impairing conversion efficiency to Net Income. While OCF significantly exceeded Net Income, inventories stood at ¥1,307.2B, representing 15% of total assets, indicating that inventory levels remain elevated. Attention is therefore warranted because the strength of OCF depends to a certain extent on the increase in trade payables.

Earnings Forecast and Guidance

The full-year earnings forecast remains unchanged, with Revenue of ¥8,100B (-2.0% YoY), Operating Income of ¥330B (+6.3%), and Ordinary Income of ¥210B (-10.6%). Q1 progress rates were 26.2% for Revenue and 25.2% for Operating Income, representing a standard start near the 25% level, while the Ordinary Income progress rate was somewhat ahead at 30.2%. Net Income attributable to owners of the parent was ¥19.3B, representing a progress rate of only 12.9% against the full-year forecast of ¥150B, reflecting the impact of restructuring expenses and the high effective tax rate. Achieving the full-year plan will require a reduction in extraordinary items and normalization of the tax burden toward the second half of the fiscal year.

Shareholder Returns

The full-year dividend forecast is ¥13.00 per share, with no revision to the dividend forecast during the current quarter. Based on the average number of shares outstanding during the period of 594.5 million shares, the estimated annual total dividend is approximately ¥77.3B, resulting in a Payout Ratio of approximately 51.5% against the full-year Net Income forecast of ¥150B. Q1 OCF of ¥264.6B and Free Cash Flow of ¥146.8B both exceeded the forecast annual dividend amount, while the actual dividend payment of ¥32.8B during the current quarter was also funded within cash flow. As no share buyback activity has been confirmed, the company is evaluated based on its Payout Ratio rather than its Total Return Ratio.

Risk Factors

1. Regional profitability disparity: While Asia and Other Regions made the largest contribution, with segment profit of ¥43.4B, the Americas recorded a 68.1% YoY decline to ¥5.2B, and Europe continued to report an Operating loss of ¥3.5B. The earnings disparity among regions is weighing on the company-wide profit margin.

2. Financial leverage and short-term refinancing: Interest-bearing debt amounted to approximately ¥2,724B, including ¥1,262.6B in short-term borrowings. Interest expenses were ¥17.7B, equivalent to approximately 21% of Operating Income, and changes in interest rates or refinancing terms could affect earnings.

3. One-time expenses and high tax burden: Extraordinary losses of ¥11.7B included ¥10.5B in restructuring expenses, while the effective tax rate was high at approximately 59%. These factors reduced the conversion of Profit Before Tax into Net Income and contributed to the low progress rate against the full-year Net Income plan.

Industry Benchmark (Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

Profitability is substantially below the industry median in terms of both the Operating Income margin and the Net Income margin.

Growth and Capital Efficiency

The Revenue growth rate slightly exceeded the industry median, indicating that top-line growth is broadly in line with the industry average.

※Source: Compiled by the Company

Key Points from the Earnings Results

1. Operating Income growth of 19.2%, exceeding the 6.7% Revenue growth rate, indicates improved operating leverage through fixed-cost absorption. However, the Operating Income margin of 3.9% remains substantially below the industry median, leaving significant room for margin improvement.

2. The full-year Operating Income progress rate of 25.2% represents a standard start, whereas the Net Income progress rate of 12.9% is substantially lower due to the impact of restructuring expenses and the effective tax rate of approximately 59%. Trends in extraordinary items and the tax burden in the second half of the year will be key to achieving the full-year Net Income plan.

3. The significant decline in the Americas and the continued Operating loss in Europe are increasing the company’s dependence on Asia and Other Regions and Japan for profit. The extent to which regional profitability becomes more balanced will be an important factor in evaluating future profitability.

Theoretical Share Price (Reference Value)

Sensitivity: ¥457–¥483 at Cost of Equity ±1%, and ¥468–¥471 at ω±0.1.

Notes:

• Net Income is substantially compressed relative to Operating Income due to the tax burden, acquisition-related expenses, and non-controlling interests, among other factors (Net Income ÷ Operating Income 45%). This value reflects that compression at face value; if these factors are temporary, underlying 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 quarter-end are used, resulting in a timing gap relative to the full-year forecast.
• Because net assets include non-controlling interests, the theoretical value may be calculated somewhat higher.

(Model: Residual Income Model (Ohlson-type, explicit 5-year fade) / Interest Rate Reference Month: 2026-07 / Mechanically calculated using only 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 discretion and responsibility, after consulting a professional adviser as necessary.

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AI Financial Analysis

Executive Summary

NTN delivered a constructive FY2027 Q1 operating result, with revenue growth and operating-profit growth exceeding sales growth, although the balance-sheet leverage and working-capital profile remain material constraints. Revenue rose 6.7% year on year to ¥212.3bn. Operating income increased 19.2% to ¥8.3bn. Operating margin improved by 40bp to 3.9% from 3.5% in the prior-year quarter. Gross profit increased 13.1% to ¥40.8bn, and gross margin expanded by 110bp to 19.2% from 18.1%. SG&A rose 11.2% to ¥32.4bn, faster than revenue growth, but the gross-margin recovery was sufficient to support operating-margin expansion. Ordinary income rose 57.5% to ¥6.4bn as non-operating expenses declined materially. Profit attributable to owners of the parent increased 61.9% to ¥1.9bn, though the resulting 0.9% net margin remains low. The gap between the 3.9% EBIT margin and 0.9% net margin reflects a meaningful financing burden and a high effective tax rate. Interest expense of ¥1.8bn absorbed 21.3% of operating income, while the reported tax burden was only 35.4%, equivalent to a 59.3% effective tax rate. Operating cash flow was robust at ¥26.5bn, or 13.7x profit attributable to owners, and exceeded EBITDA of ¥18.2bn. Free cash flow was positive at ¥14.7bn after ¥9.8bn of capital expenditure. Cash generation was aided by cash inflows from trade payables and cash collection from receivables, while inventories increased by ¥2.4bn. Regionally, Japan and Asia other were the principal earnings contributors, while Europe remained loss-making. The full-year forecast implies a deceleration in reported revenue but continued operating-profit improvement, making margin delivery, European recovery, inventory normalization, and debt reduction the central issues for subsequent quarters.

Profitability Analysis

The reported annualized DuPont ROE is 2.5%, comprising a 0.9% net profit margin, 0.979x asset turnover, and 2.75x financial leverage. The weakest component is net margin rather than asset utilization: annualized asset turnover is close to 1.0x, whereas the conversion of sales into earnings remains limited. Financial leverage lifts shareholder returns mechanically, but at the current low margin it also magnifies downside risk rather than demonstrating strong capital efficiency. The five-factor decomposition shows an EBIT margin of 3.9%, an interest burden of 0.655, and a tax burden of 0.354. Thus, 34.5% of EBIT was lost before tax through net financing and other below-EBIT items, and 64.6% of pre-tax income was absorbed by tax expense. EBIT margin is below the 5% concern threshold and is the primary structural profitability issue. Gross-margin improvement to 19.2% was the key positive operating driver, but the level remains just below the 20% low-gross-margin alert threshold. SG&A increased 11.2%, versus 6.7% revenue growth, indicating adverse operating leverage below the gross-profit line; sustained margin expansion therefore requires SG&A discipline in addition to pricing, mix, and manufacturing-cost improvement. EBITDA was ¥18.2bn, producing an 8.6% EBITDA margin, which better captures operating cash earnings for this capital-intensive bearing manufacturer than net margin alone. CapEx was broadly matched to depreciation at 0.99x, indicating maintenance/replacement investment rather than a meaningful capacity-expansion phase. Annualized ROIC of 3.6% is below 5%, reinforcing that the improvement in Q1 profitability has not yet generated an adequate return on the capital base.

Growth Assessment

Revenue growth was broad-based geographically, with external sales increasing in Japan by 3.1% to ¥53.4bn, the Americas by 7.3% to ¥69.1bn, Europe by 8.9% to ¥50.4bn, and Asia other by 7.7% to ¥39.3bn. The Americas remained the largest external-sales region, representing 32.6% of consolidated sales. Japan recorded the largest improvement in segment profit, with segment income rising to ¥4.2bn from ¥0.5bn. Asia other remained the core business by segment operating-income contribution, generating ¥4.3bn, up 13.2%, with a 11.0% segment margin. Japan's segment margin improved sharply to 7.8% from 0.9%. The Americas generated ¥0.5bn of segment income, down 68.1%, and its margin fell to 0.8% from 2.5%, despite revenue growth. Europe recorded a ¥0.4bn segment loss, slightly worse than the prior-year loss, despite higher sales; its negative margin remains a material drag on group returns. The regional dispersion indicates that revenue growth alone is insufficient and that earnings recovery depends on restoring Americas profitability and returning Europe to break-even. The FY2027 forecast calls for full-year revenue of ¥810.0bn, down 2.0% year on year, operating income of ¥33.0bn, up 6.3%, ordinary income of ¥21.0bn, down 10.6%, and profit attributable to owners of ¥15.0bn. Q1 progress against forecast is 26.2% for sales, 25.2% for operating income, 30.2% for ordinary income, and 12.9% for profit attributable to owners. Sales and operating-profit progress are broadly consistent with the standard 25% Q1 run rate. Ordinary-income progress is 5.2 percentage points ahead of the seasonal benchmark, while net-income progress is 12.1 percentage points below it, consistent with the elevated tax burden in Q1. Management has not revised either its earnings or dividend forecast.

Financial Health

Liquidity is adequate on reported balance-sheet measures, with a current ratio of 150.7%, a quick ratio of 113.8%, and working capital of ¥179.8bn. Cash and deposits of ¥127.8bn slightly exceed short-term loans of ¥126.3bn, producing a cash-to-short-term-debt ratio of 1.01x. However, short-term debt represents 46.4% of total interest-bearing debt, triggering a refinancing-risk alert because a substantial portion of funding requires regular rollover. Total interest-bearing debt is ¥272.4bn, comprising ¥126.3bn of short-term loans, ¥146.1bn of long-term loans, and ¥30.0bn of bonds. Debt-to-equity is 1.75x, below the explicit 2.0x aggressive-leverage warning level but still elevated for a company generating a 3.9% EBIT margin. Debt-to-capital is 46.4%, which is above the 40% investment-grade reference point but below the 60% severe-concern threshold. Debt/EBITDA of 15.0x is the most significant credit concern and substantially exceeds both the 4.0x high-yield benchmark and the 8.0x heightened-financial-risk threshold. The duplicate REIT financial-risk alert is directionally applicable to the leverage metric, although NTN is a manufacturing company rather than a REIT. EBIT interest coverage is 4.70x, slightly below the 5x strong-coverage benchmark, while EBITDA interest coverage is a more comfortable 10.29x. The maturity structure is manageable only so long as bank and capital-market access remains available; cash covers short-term loans, but does not cover all current borrowing obligations including current bonds. The capital adequacy ratio improved to 34.6% from 33.8%, and total equity increased by ¥3.6bn year on year to ¥315.0bn, providing a modest offset to leverage risk.

Cash Flow Quality

Cash-flow quality was strong in Q1 based on the reported OCF/net-income ratio of 13.72x, the negative 2.8% accruals ratio, and OCF/EBITDA cash conversion of 1.45x. Operating cash flow of ¥26.5bn comfortably exceeded EBITDA of ¥18.2bn and profit attributable to owners of ¥1.9bn. This does not indicate weak earnings quality under the stated OCF/net-income test; rather, it reflects strong cash conversion and the low accounting-profit base after financing costs and tax. Working-capital movements were supportive in aggregate: trade payables increased by ¥6.7bn and trade receivables generated a ¥3.2bn cash inflow. Inventory increased by ¥2.4bn, absorbing cash and requiring monitoring given the inventory alerts. Reported annualized inventory days of 131 days exceed the 90-day warning threshold, and the separate reported 70-day inventory-days alert also exceeds its 60-day benchmark. The reported annualized cash conversion cycle of 144 days exceeds the 120-day warning threshold, implying capital remains tied up in production and inventory for a prolonged period. For a bearing manufacturer, this raises risks of demand volatility, product-mix obsolescence, and future discounting or production adjustments if end-market demand weakens. Raw materials were ¥56.6bn and work in process was ¥58.2bn, while reported finished goods were ¥130.7bn; the concentration in finished goods heightens the importance of inventory turnover and demand forecasting. Free cash flow was ¥14.7bn after ¥9.8bn of capital expenditure, and CapEx represented 99% of depreciation, supporting asset maintenance without creating an outsized near-term cash burden. Financing cash flow was negative ¥22.1bn, driven primarily by ¥20.0bn of long-term debt repayments and a ¥9.6bn reduction in short-term loans, partly offset by ¥12.0bn of new long-term borrowings. Consequently, cash declined by ¥6.1bn during the quarter to ¥125.2bn of cash and cash equivalents.

Dividend Sustainability

The full-year dividend forecast is ¥13.00 per share, unchanged, versus forecast EPS of ¥25.23. This implies a forecast dividend payout ratio of approximately 51.5%, within the below-60% sustainability benchmark. Forecast cash dividends would be approximately ¥7.7bn based on 594.5 million average shares. Q1 free cash flow of ¥14.7bn exceeds this forecast annual dividend amount, providing a favorable near-term cash-coverage indication. However, dividend resilience should be assessed against normalized full-year free cash flow because Q1 operating cash flow benefited from favorable receivable and payable movements. The principal constraint is not the stated dividend payout ratio but elevated debt/EBITDA of 15.0x and the need to maintain refinancing capacity. Continued positive free cash flow, normalization of the cash conversion cycle, and progress in reducing gross debt would strengthen the distribution profile. No share-buyback information is provided, so the analysis is limited to the dividend payout ratio rather than a total return ratio.

Risk Assessment

Business risks include Europe remains loss-making at negative ¥0.4bn of segment income despite 8.9% sales growth, creating a risk that restructuring, pricing, or utilization measures fail to restore profitability., Americas segment profit declined 68.1% to ¥0.5bn while sales increased 7.3%, indicating margin pressure from mix, pricing, production costs, or customer conditions., The bearing-manufacturing business is exposed to automotive and industrial-production cycles, customer inventory corrections, raw-material and energy-cost inflation, supply-chain disruption, product-quality claims, and foreign-exchange volatility., Reported annualized inventory days of 131 days and a 144-day cash conversion cycle raise the likelihood of inventory write-downs, discounting, or production cuts should end-market demand weaken., Low gross margin of 19.2% leaves limited capacity to absorb adverse input costs or price competition..

Financial risks include Debt/EBITDA of 15.0x is substantially above high-yield and heightened-risk benchmarks, making deleveraging and EBITDA preservation critical., Short-term debt accounts for 46.4% of interest-bearing debt, creating refinancing exposure even though cash slightly exceeds short-term loans., The 0.655 interest burden means 34.5% of EBIT is lost before tax through financing and other below-EBIT items; rising rates or weaker EBIT would pressure net income disproportionately., EBIT interest coverage of 4.70x is below the 5x strong-coverage benchmark., The 59.3% effective tax rate reduced conversion from ¥5.5bn pre-tax profit to ¥1.9bn profit attributable to owners..

Key concerns include Highest priority: leverage reduction, because the combination of 15.0x debt/EBITDA and a 3.9% EBIT margin leaves limited tolerance for cyclical earnings weakness., High priority: working-capital normalization, particularly inventory, because the long cash conversion cycle can reverse Q1 operating-cash-flow strength., High priority: recovery in the Americas and Europe, where aggregate segment profitability is materially below Japan and Asia other., Medium priority: sustaining gross-margin gains while containing SG&A growth, which exceeded revenue growth in Q1., Medium priority: normalization of the effective tax rate, which is unusually high relative to pre-tax earnings and suppresses reported returns..

Investment Implications

Key takeaways include Q1 showed a genuine operating improvement: revenue increased 6.7%, operating income increased 19.2%, and operating margin expanded 40bp to 3.9%., Japan and Asia other generated nearly all regional segment earnings, while Americas margin deterioration and continuing European losses limit consolidated profitability., Cash conversion was strong in Q1, with ¥26.5bn of OCF and ¥14.7bn of free cash flow, but favorable payables and receivables movements mean this performance should be tested over subsequent quarters., Leverage remains the dominant valuation and credit sensitivity, with debt/EBITDA at 15.0x despite a D/E ratio below 2.0x., The unchanged FY forecast requires operating-margin expansion despite a 2.0% anticipated revenue decline, increasing the importance of cost execution and regional turnaround..

Metrics to watch include Operating margin and gross margin relative to the 3.9% and 19.2% Q1 levels, Americas and Europe segment income, including Europe’s path from a ¥0.4bn Q1 loss toward break-even, Debt/EBITDA, short-term debt ratio, and EBIT interest coverage, Annualized inventory days, cash conversion cycle, and inventory cash absorption, Effective tax rate and conversion of ordinary income into profit attributable to owners, Free cash flow after capital expenditure and progress toward the ¥13.00 per-share dividend commitment.

Regarding relative positioning, NTN's Q1 EBITDA margin of 8.6% and improving gross margin demonstrate operating recovery potential, but its 3.9% EBIT margin, 2.5% annualized ROE, 3.6% annualized ROIC, prolonged working-capital cycle, and 15.0x debt/EBITDA position it below financially stronger global industrial-component peers on profitability, capital efficiency, and balance-sheet resilience.