NACHI-FUJIKOSHI CORP. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥124.83B
• Operating Income: ¥6.77B
• Net Income: ¥3.37B
• EPS: ¥155.86

Income Statement

Balance Sheet

Cash Flow Statement

Profitability Ratios

Year-over-Year Comparison

Share Information

Dividend Information

Segment Information

Full Year Forecast

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AI Financial Analysis

Executive Summary

FY2026 Q2 was a solid beat on profitability with strong YoY growth across the P&L despite weak operating cash flow. Revenue grew 7.7% YoY to 1,248.3, while operating income rose 60.7% to 67.7, driving operating margin to 5.4%. Net income increased 81.0% YoY to 33.9, lifting net margin to 2.7%. Operating margin expanded by roughly 179 bps YoY (from 3.6% to 5.4%), and net margin expanded by about 110 bps (from 1.6% to 2.7%). Gross profit increased to 297.9 with a gross margin of 23.9%, reflecting better mix and cost control relative to prior year. Ordinary income more than doubled to 61.3, supported by improved operating leverage and a lighter non-operating drag versus last year. Segment-wise, Components and Machining both posted growth, with Components delivering the larger profit contribution. Earnings quality was mixed: EBITDA was healthy at 156.2 (12.5% margin) and accruals ratio was a low 1.1%, but operating cash flow was -4.7 as working capital absorbed cash. The OCF/Net Income ratio of -0.14x and cash conversion of -0.03x indicate cash realization lagged earnings due mainly to payables contraction and higher receivables. Leverage remains elevated with Debt/EBITDA at 4.21x, though liquidity is ample (current ratio 216.6%, cash/short-term debt 2.76x). Extraordinary losses of 10.86 (notably impairments and asset disposals) weighed on below-the-line items, creating a sizable gap between ordinary income and net income. Free cash flow was -79.9 after 61.0 of capex, with capex at 0.69x depreciation, indicating maintenance-level to light reinvestment. Guidance appears attainable at mid-year: revenue progress is 49% and operating income 44%, both broadly in line with a first-half run-rate, though cash conversion and working capital will be key in H2. The dividend is 0 at Q2, with a full-year DPS forecast of ¥110 (payout c.32% vs EPS guidance ¥344.2), which looks serviceable given current liquidity and expected H2 earnings. Forward, sustaining margin gains while normalizing the cash conversion cycle and managing leverage are the primary execution priorities.

Profitability Analysis

ROE (1.9%) = Net Profit Margin (2.7%) × Asset Turnover (0.364) × Financial Leverage (1.89x). The biggest YoY improvement came from net profit margin, rising ~110 bps on the back of a 179 bps expansion in operating margin as SG&A grew slower than gross profit. Business drivers included stronger segment profitability (Components +70.5% YoY OI; Machining +32.9% YoY OI) and lower non-operating drag vs last year. The improvement is partly sustainable given segment mix and cost control, but below-the-line extraordinary losses and a higher effective tax rate (34.0%) cap net margin durability. Operating leverage is evident: revenue +7.7% YoY vs operating income +60.7% YoY, indicating fixed-cost absorption benefits. Watch for any reversal if demand softens or if pricing tailwinds fade. SG&A grew to 230.2, but remained contained relative to gross profit increases, supporting margin expansion.

Growth Assessment

Top-line grew 7.7% YoY to 1,248.3 with broad-based gains in Components (+7.4%) and Machining (+6.0%). Operating income rose 60.7% YoY to 67.7, outpacing sales, as margins expanded on improved mix and cost discipline. EBITDA reached 156.2 (12.5% margin), providing cushion for reinvestment albeit with near-term cash conversion headwinds. Extraordinary losses totaled 10.86 (impairment 1.78 included), which reduced net income but are non-recurring by nature. The YoY improvement in ordinary income (+107.3%) underscores healthier core profitability excluding extraordinary items. Inventory remains high, signaling potential to unlock cash if sales momentum sustains and production planning tightens. With forecast sales of 2,550 and OP of 153, first-half progress of 49% (sales) and 44% (OP) appears consistent with a typical back-half weighting. Near-term growth sustainability depends on maintaining order momentum in Components, stabilizing payables, and accelerating collections to reduce the CCC.

Financial Health

Liquidity is strong: current ratio 216.6% and quick ratio 173.3%. Interest-bearing debt is 658.1, D/E is 0.89x, and Debt/Capital 26.6%, which is conservative on capital but elevated on cash flow capacity given Debt/EBITDA at 4.21x. Short-term funding rose notably: short-term loans 121.2 (+112% YoY) and commercial paper 150.0 (+50% YoY), but these are well-covered by cash (334.3) and current assets (1,766.5), limiting near-term maturity mismatch risk. Interest expense is 5.19 with EBIT coverage of 13.0x and EBITDA-based coverage of 30.1x, indicating sufficient service capacity. Working capital is ample at 950.8; however, high DSO and DIO lengthen the CCC and pressure OCF. No off-balance sheet obligations were indicated.

Notable B/S Changes

Short-term loans: +64.1 (from 57.1 to 121.2, +112%) - increased reliance on short-term bank funding to bridge working capital and capex. Commercial paper: +50.0 (from 100.0 to 150.0, +50%) - additional short-term market funding raises rollover management needs. Electronically recorded obligations (trade payables): -102.3 (from 168.9 to 66.6, -60.6%) - significant reduction in supplier financing contributed to OCF outflow and a longer CCC. Valuation difference on securities (equity): +33.4 (from 154.4 to 187.8, +21.6%) - market valuation gains boosted equity, implying higher OCI sensitivity.

Cash Flow Quality

OCF was -4.65 vs net income of 33.95 (OCF/NI -0.14x), driven by a 10.31 working capital outflow from lower payables (-10.31), higher receivables (-3.33), and higher inventories (-0.61), partly offset by EBITDA of 156.2. Free cash flow was -79.9 after 61.0 of capex. Cash conversion (OCF/EBITDA) was -0.03x, highlighting timing and working capital strain. Interest and tax cash payments (interest paid ~0.55, income taxes paid 1.53) also weighed. CapEx/Depreciation is 0.69x, below maintenance-to-growth thresholds, supportive of near-term FCF but raising medium-term asset renewal questions. No signs of aggressive working capital manipulation are evident; the OCF shortfall is largely attributable to reduced supplier financing (electronically recorded obligations down sharply) and receivables growth.

Dividend Sustainability

Q2 DPS is 0, with full-year DPS guided at ¥110 against EPS guidance of ¥344.2, implying a payout ratio of ~32%, comfortably within a sustainable range. Estimated annual cash dividend outlay is roughly ¥2.4bn (based on ~21.8m shares excluding treasury), which is readily covered by current liquidity (cash 33.4bn) and forecast earnings. Interim FCF is negative due to working capital absorption; sustainability hinges on H2 cash generation and potential normalization of the CCC. Share repurchases were modest (0.14), well within cash capacity. Absent a material deterioration in OCF, the dividend plan appears serviceable.

Risk Assessment

Business risks include Segment concentration: Components accounts for 65.9% of revenue, heightening exposure to that business cycle, Demand cyclicality in capital goods and automotive-related end-markets affecting Machining and Components, FX fluctuation risk impacting export competitiveness and translation effects.

Financial risks include High leverage on a cash flow basis: Debt/EBITDA 4.21x, Weak cash conversion: OCF/NI -0.14x and CCC 377 days, stressing liquidity if prolonged, Interest burden: EBT/EBIT 0.755 indicates meaningful sensitivity to financing costs, Underinvestment risk: CapEx/Depreciation 0.69x could impair medium-term competitiveness if sustained.

Key concerns include Working capital intensity: DSO 170 days and DIO 268 days (and 135 days under an alternative measure) extend the cash cycle, Ordinary-to-net income gap driven by extraordinary losses (10.86) and a 34% effective tax rate, Short-term funding reliance increased (short-term loans +112%, CP +50%), requiring disciplined rollover management.

Investment Implications

Key takeaways include Material margin expansion: operating margin up ~179 bps YoY to 5.4%, Profitability inflection: OP +60.7% YoY and OI +107.3% YoY on improved mix and cost control, Cash conversion weak: OCF negative due to payables contraction and receivables build, Leverage elevated vs earnings capacity: Debt/EBITDA 4.21x despite strong liquidity, Guidance tracking: revenue 49% and OP 44% of FY plan at H1, broadly on pace.

Metrics to watch include Cash conversion cycle and components (DSO, DIO, DPO) trajectory in H2, Operating margin sustainability vs input costs and pricing, Debt/EBITDA trend and short-term funding mix (CP, short-term loans), CapEx/Depreciation normalization toward ≥1.0x for asset renewal, Ordinary income to net income gap narrowing as extraordinary items abate.

Regarding relative positioning, Within Japanese capital goods/components peers, profitability recovery is encouraging but cash conversion and leverage position the company mid-to-lower tier on quality metrics; liquidity is solid, offering time to execute working capital normalization.