NACHI-FUJIKOSHI CORP. FY2026 Q2 Earnings Report

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Executive Summary

For the first half of FY2026, Revenue was ¥1,248.3B (YoY +¥89.4B +7.7%), Operating Income was ¥67.7B (YoY +¥25.6B +60.7%), Ordinary Income was ¥61.3B (YoY +¥31.7B +107.3%), and Net Income attributable to owners of parent was ¥33.7B (YoY +¥16.2B +93.2%). Revenue and profit increased, with Operating Margin improving to 5.4% (prior year 3.6%, +1.8pt) and Ordinary Income Margin to 4.9% (prior year 2.6%, +2.3pt). Gross margin improved to 23.9% (prior year 21.8%), reflecting contribution from operating leverage. On the non-operating side, interest expense of ¥5.2B and foreign exchange losses of ¥3.5B were drags, resulting in net non-operating loss of ▲¥6.4B. Extraordinary items were net ▲¥10.2B (including impairment losses of ¥1.8B), which compressed Net Income. On cash, Operating Cash Flow (OCF) turned negative to ▲¥4.7B despite Net Income of ¥33.7B, mainly driven by working capital deterioration from Accounts Receivable increase (▲¥333B) and Accounts Payable decrease (▲¥1,031B). Free Cash Flow was ▲¥79.9B and funding was covered by increased long- and short-term borrowings and CP issuance (Financing CF +¥79.1B). Progress against full-year plan is 49% for Revenue and 44% for Operating Income, indicating operating-stage lag and a need for recovery in H2.

Factors Driving Performance

[Revenue] Revenue was ¥1,248.3B (YoY +7.7%), with Components (¥768.4B +7.4%) and Machining (¥397.5B +6.0%) both growing. Components accounted for 61.5% of group sales and led growth as the core business. Gross profit was ¥297.9B (gross margin 23.9%), up ¥25.7B YoY and gross margin improved +2.1pt from 21.8% a year earlier. Drivers of improvement are inferred to be price pass-through progress, improved product mix, and fixed-cost absorption from higher utilization. Segment sales mix: Components 61.5%, Machining 31.8%, Others 6.7%, broadly unchanged from prior year.

[Profitability] SG&A was ¥230.2B (SG&A ratio 18.4%), up 9.6% YoY and outpacing revenue growth of 7.7%. Operating Income was ¥67.7B (Operating margin 5.4%), up 60.7% YoY. Operating margin improved from 3.6% to 5.4% (+1.8pt), with economies of scale and higher gross margin delivering operating leverage. Non-operating results were net ▲¥6.4B: non-operating income ¥9.5B (interest income ¥1.5B, dividend income ¥4.7B, FX gains ¥0.8B etc.) versus non-operating expenses ¥15.9B including interest expense ¥5.2B and FX losses ¥3.5B. Ordinary Income was ¥61.3B (Ordinary Income margin 4.9%), up 107.3% YoY and improved +2.3pt from prior year. Extraordinary items were net ▲¥10.2B (extraordinary gains ¥0.7B, extraordinary losses ¥10.9B), where impairment losses ¥1.8B and disposal of fixed assets loss ¥0.7B compressed Net Income. Profit before tax was ¥51.1B and income taxes ¥17.4B, implying an effective tax rate of 34.0%. Net Income attributable to owners of parent was ¥33.7B (Net margin 2.7%), up 93.2% YoY and Net margin improved +1.1pt from 1.6% prior year. In conclusion, revenue and profit increased with notable margin improvement at the operating stage, but non-operating expenses and extraordinary losses constrained final profit growth.

Segment Analysis

Components: Revenue ¥768.4B (YoY +7.4%), Operating Income ¥37.4B (YoY +70.5%), Operating margin 4.9% (prior year 3.1%) — substantial improvement in both absolute and margin terms. It is the core business, contributing 55.3% of group Operating Income. Machining: Revenue ¥397.5B (YoY +6.0%), Operating Income ¥21.9B (YoY +32.9%), Operating margin 5.5% (prior year 4.1%) — Machining has higher margin but Components drove absolute profits. Both segments delivered revenue and profit growth, improving portfolio-wide profitability.

Key Financial Metrics

[Profitability] Operating margin 5.4% (prior year 3.6%), Net margin 2.7% (prior year 1.6%), EBITDA margin 12.5% — margins at the operating stage improved. ROE 1.9% is decomposed as Net margin 2.7% × Asset turnover 0.364 × Financial leverage 1.89x. Gross margin 23.9% improved +2.1pt from 21.8% due to price pass-through and product mix, while SG&A ratio 18.4% rose +0.3pt from 18.1% reflecting cost inflation. [Cash Quality] Operating CF / Net Income is ▲0.14x, OCF / EBITDA is ▲0.03x, indicating very weak cash backing of profits. DSO 170 days, DIO 268 days, and CCC 377 days indicate significant working capital strain and deteriorating cash conversion. [Investment Efficiency] Total asset turnover 0.364 (annualized 0.728), Fixed asset turnover 1.162 (annualized 2.324), reflecting a capital-intensive business and low levels. Capex was ¥61.0B, below depreciation of ¥88.5B, indicating restrained investment. [Financial Soundness] Equity Ratio 53.0%, Current Ratio 216.6%, Quick Ratio 173.3% — liquidity is ample. However, Debt/EBITDA 4.21x and Debt-to-Equity ratio 0.89x indicate leverage remains somewhat elevated. Short-term borrowings doubled to ¥121.2B (prior year ¥57.1B) and CP increased to ¥150B (prior year ¥100B), raising short-term funding dependence. Interest coverage (EBIT / Interest expense) is 13.0x, showing headroom, but Interest burden ratio (Interest expense / Operating Income) 0.755 signals sensitivity to rising interest rates.

Cash Flow Analysis

Operating CF was ▲¥4.7B, a decline of ▲110.3% relative to Net Income ¥33.7B, showing rapid deterioration in cash quality. Main cause was working capital expansion: Accounts Receivable increase ▲¥333B (DSO 170 days and receivable buildup), Accounts Payable decrease ▲¥1,031B (compression of payables), and Inventory increase ▲¥61B (DIO 268 days and inventory buildup) which strained cash. Operating CF before working capital changes was ¥76.7B, but tax payments ▲¥15.3B and working capital movement turned it negative. Investing CF was ▲¥75.3B, of which Capex was ▲¥61.0B, below depreciation ¥88.5B, indicating a conservative investment stance. Free Cash Flow was ▲¥79.9B, causing short-term funding shortfall. Financing CF was +¥79.1B: long-term borrowings raised +¥80B, net short-term borrowings +¥62B, and net CP issuance +¥50B funded repayments of long-term borrowings ▲¥86B and dividend payments ▲¥22B. Cash and deposits were ¥334.3B (prior year ¥322.0B), a slight increase, but CCC at 377 days remains prolonged; compressing working capital to free cash is an urgent issue.

Quality of Earnings

Recurring earnings consist of Operating Income ¥67.7B and non-operating income ¥9.5B (dividend income ¥4.7B, interest income ¥1.5B, FX gains ¥0.8B, etc.), with non-operating income accounting for 0.8% of sales — low dependency. Non-operating expenses ¥15.9B included interest expense ¥5.2B and FX losses ¥3.5B, with interest and FX pressuring profits. Extraordinary items were net ▲¥10.2B: extraordinary gains ¥0.7B (gain on sale of investment securities ¥0.5B, gain on sale of fixed assets ¥0.2B) versus extraordinary losses ¥10.9B (impairment losses ¥1.8B, loss on disposal of fixed assets ¥0.7B etc.), where one-off losses reduced Net Income. Comprehensive income was ¥96.3B, well above Net Income ¥33.7B, with foreign currency translation adjustments +¥30.9B and valuation difference on available-for-sale securities +¥33.4B recognized in other comprehensive income. Given OCF is substantially below Net Income, accrual (difference between accrual-based profit and cash profit) has widened, requiring cautious assessment of earnings quality.

Forecasts & Guidance

Full-year forecast has been revised this quarter to Revenue ¥2,550.0B (YoY +8.1%), Operating Income ¥153.0B (YoY +56.6%), Ordinary Income ¥133.0B (YoY +58.9%), and Net Income attributable to owners of parent ¥75.0B. H1 progress rates vs full year are Revenue 49.0%, Operating Income 44.2%, Ordinary Income 46.1%, Net Income 45.3%. Revenue is close to the typical 50% level and generally on track, but Operating Income at 44.2% is about 11.6% behind the standard 50% pace. Ordinary and Net Income show similar lag, driven by non-operating expenses and extraordinary losses. Achieving the full-year plan depends on H2 working capital unwind through inventory/accounts receivable compression and sustaining operating margins.

Shareholder Returns

No interim dividend. Full-year dividend forecast is ¥110 per share, implying a payout ratio of approximately 32% based on full-year forecast EPS ¥344.2, a sustainable level. H1 share buybacks were minor at ¥1.4B, and dividend payments were ¥22.0B. Total shareholder return (dividend + buybacks) amounted to ¥23.4B, representing a Total Return Ratio of about 69% relative to Net Income ¥33.7B. Current Free Cash Flow is negative at ▲¥79.9B, meaning dividends are funded by external financing for now, but cash of ¥334.3B supports short-term dividend-paying ability. If full-year profit targets are met and working capital normalizes, dividend coverage from internal funds would be feasible.

Risk Factors

1. Working capital expansion risk: DSO 170 days, DIO 268 days, CCC 377 days indicate large cash tie-up and OCF / Net Income ▲0.14x shows extremely weak cash conversion. Accounts Receivable increase ▲¥333B and Accounts Payable decrease ▲¥1,031B have strained liquidity; prolonged receivable/inventory stagnation risks obsolescence and credit costs. Failure to compress working capital would sustain external funding dependence and reduce financial flexibility.

2. Rising leverage risk: Debt/EBITDA 4.21x, short-term borrowings ¥121.2B (prior year ¥57.1B) doubled, CP ¥150B (prior year ¥100B) increased, raising short-term funding dependence. Rollover and interest reset risks are heightened, and market shifts or rising rates could increase funding costs. Interest burden ratio 0.755 indicates roughly 75% of Operating Income is sensitive to interest impacts.

3. Profitability volatility risk: Operating margin 5.4% is 3.3pt below industry median 8.8%, and SG&A ratio is trending up due to cost inflation. FX losses ¥3.5B and interest expense ¥5.2B have pressured recurring profits; continued volatility in FX/rates or rises in raw material and labor costs could reverse margin improvements. If demand weakens in the capital goods cycle, utilization could fall and fixed costs could reverse operating leverage.

Industry Benchmark (Reference, Company Aggregation)

Profitability & Returns

Profitability is below industry median, indicating room to improve both Operating and Net margins.

Growth & Capital Efficiency

Revenue growth is below industry median; top-line expansion pace is mid-to-lower within the industry.

※ Source: Company aggregation

Earnings Highlights to Watch

1. While Revenue and Operating/Ordinary margins improved, the turn to negative OCF and working capital expansion (DSO 170 days, DIO 268 days, CCC 377 days) have severely weakened cash conversion — a key monitoring point. Accounts Receivable increase ▲¥333B and Accounts Payable decrease ▲¥1,031B have tightened liquidity; the degree to which receivables are collected and inventories are reduced in H2 will determine financial flexibility.

2. Doubling of short-term borrowings (¥121.2B) and increased CP (¥150B) have raised short-term funding reliance and kept Debt/EBITDA at 4.21x. Interest burden ratio 0.755 implies high sensitivity to interest rate shifts; managing rollover and interest-reset risks is important.

3. Operating Income progress vs full-year plan is 44% (vs standard 50%), about 11.6% behind; achieving H2-weighted targets requires maintaining operating margins and unwinding working capital. Compression of FX losses and interest expense and sustaining gross margin improvement are H2 focal points.

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This report is an AI-generated earnings analysis document based on XBRL earnings disclosure data. It does not constitute a recommendation to invest in any specific security. Industry benchmarks are reference information compiled by the firm from public financial statements. Investment decisions are your responsibility; consult a professional advisor as needed.

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