NIPPON THOMPSON CO.,LTD. FY2027 Q1 Earnings Report

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Executive Summary

The most important point this quarter was that, in addition to revenue growth, profit margins normalized significantly due to improvements in pricing and product mix and disciplined expense management. Revenue was ¥19.85B (+32.9% YoY), Operating Income was ¥2.79B (+281.9%), Ordinary Income was ¥3.16B (+311.8%), and Net Income was ¥2.44B (+243.7%). The gross margin improved to 35.8%, while SG&A expense growth (+9.2%) remained substantially below revenue growth, resulting in strong operating leverage.

Factors Affecting Performance

【Revenue】Revenue was ¥19.85B, an increase of +32.9% from ¥14.94B in the prior-year period. The Company operates as a single segment (the manufacturing and sales business for bearings and other machinery components), and the revenue increase appears to have been driven by a recovery in demand, price revisions, and improvements in product mix.

【Profit and Loss】Cost of sales was limited to ¥12.74B (64.2% of revenue), and the gross margin improved to 35.8% from the prior year. SG&A expenses increased by +9.2% to ¥4.31B, remaining substantially below the rate of revenue growth; consequently, the operating margin rose to 14.1%. In non-operating income, dividend income of ¥0.20B and foreign exchange gains of ¥0.17B lifted Ordinary Income to ¥3.16B (+311.8%). Net Income was ¥2.44B (+243.7%), and the effective tax rate was approximately 24.4%. The Company achieved both revenue and profit growth, with the primary drivers of profit growth being improved gross margins in the core business and disciplined expense management.

Segment Analysis

The Group operates as a single segment comprising the manufacturing and sales business for bearings and other machinery components, and does not disclose results by segment.

Key Financial Indicators

【Profitability】The operating margin improved substantially to 14.1% (4.9% in the prior year), while the net margin was 12.3%, and the gross margin also rose to 35.8%. The primary drivers of the improvement were better pricing and product mix and relative control of SG&A expenses.【Cash Quality】Accounts receivable increased to ¥19.71B (+¥2.55B YoY), and work in process increased to ¥10.79B (+¥0.23B YoY), suggesting that the pace of cash conversion from collections and inventory has not kept pace with revenue growth. Meanwhile, finished-goods inventories declined from the prior year to ¥15.53B.【Investment Efficiency】ROE was 2.8%, with the improvement in the net margin serving as the primary driver. Total asset turnover remained stable at a low level, while financial leverage was approximately 1.46x, with no significant change.【Financial Soundness】The equity ratio improved to 68.4% (from 66.2% in the prior year), and cash and deposits were ample at ¥23.12B, providing sufficient capital capacity relative to long-term borrowings of ¥13.17B and bonds of ¥5.00B.

Cash Flow Analysis

As the Company does not disclose a statement of cash flows, funding trends are analyzed based on changes in the balance sheet. Cash and deposits declined to ¥23.12B from ¥25.00B in the prior year, likely reflecting the absorption of funds through increases in accounts receivable (+¥2.55B) and work in process (+¥0.23B). Meanwhile, investment securities increased to ¥17.76B (+¥3.37B), indicating not only accumulated valuation gains but also additional investments. Long-term borrowings increased slightly to ¥13.17B (+¥0.88B), but funding capacity remains sufficient given the equity ratio of 68.4% and high current ratio. Overall, a key characteristic is that the expansion of working capital is placing pressure on cash relative to profit growth.

Quality of Earnings

Current-period profit growth was supported by improvements in the core business, and earnings quality can be assessed as relatively high. Of ¥0.49B in non-operating income, dividend income of ¥0.20B and foreign exchange gains of ¥0.17B were the primary components; however, their ratio to Ordinary Income of ¥3.16B was limited, and the main source of profit growth was the increase in Operating Income. Extraordinary income of ¥0.06B (gain on sale of investment securities) was a temporary factor and had a limited impact relative to profit before tax of ¥3.23B. Meanwhile, comprehensive income of ¥5.18B substantially exceeded Net Income of ¥2.44B, primarily due to +¥2.31B in valuation difference on securities. This divergence was attributable to market conditions and should be distinguished from the earnings power of the core business. In addition, increases in accounts receivable and work in process suggest future accruals (the divergence between accounting profit and cash), requiring attention to the timing of cash conversion.

Earnings Outlook and Guidance

The full-year plan calls for Revenue of ¥80.00B (YoY +26.9%), Operating Income of ¥11.50B (YoY +180.3%), and Ordinary Income of ¥11.70B (YoY +126.7%). Progress in Q1 was 24.8% for Revenue, 24.3% for Operating Income, and 27.0% for Ordinary Income, representing standard quarterly progress levels. The fact that the earnings forecast was revised during the quarter indicates that management is highly focused on the full-year outlook. There was no revision to the dividend forecast, which is planned at ¥32 per year.

Shareholder Returns

The annual dividend forecast announced by the Company is ¥32. Based on forecast full-year EPS of ¥136.92, the Payout Ratio is approximately 23.4%, a conservative level. Given the solid financial foundation, including cash and deposits of ¥23.12B and an equity ratio of 68.4%, dividend sustainability is considered high. As there is no disclosure regarding share repurchases, shareholder returns currently consist solely of dividends.

Risk Factors

1. Working capital expansion risk: Accounts receivable increased to ¥19.71B (+¥2.55B YoY, +14.8%), and work in process increased to ¥10.79B (+¥0.23B YoY). Expansion of working capital at a pace exceeding revenue growth could delay the timing of cash generation.

2. Volatility in securities valuations: Investment securities increased to ¥17.76B (+¥3.37B YoY), while valuation difference on securities of +¥2.31B boosted comprehensive income. This valuation difference could reverse depending on changes in market conditions.

3. Higher funding costs in a rising interest-rate environment: The Company has long-term borrowings of ¥13.17B (+¥0.88B YoY) and bonds of ¥5.00B. Although interest coverage is currently high (EBIT/interest expense is at a high multiple), changes in the interest-rate environment could affect future financial expenses.

Industry Benchmark (Reference; Company Analysis)

Industry Benchmark (manufacturing)

Profitability and Returns

Both the operating margin and net margin exceed the industry median, placing the Company at a high level within the industry.

Growth and Capital Efficiency

The revenue growth rate substantially exceeds the industry median, representing top-tier growth within the industry.

※Source: Company analysis

Key Earnings Highlights

1. The gross margin improved from the prior year, while the operating margin rose to 14.1%, indicating progress toward normalization of the earnings profile through improvements in pricing and product mix and disciplined expense management. The contribution of non-operating factors was limited, and the primary source of profit growth was improvement in the core business.

2. Meanwhile, accounts receivable and work in process have been increasing faster than revenue, making the expansion of working capital a key area of focus for future cash generation. Inventory turnover and collection periods will be monitoring items from the next quarter onward.

3. Against a solid financial foundation, including an equity ratio of 68.4% and cash and deposits of ¥23.12B, the Payout Ratio remains at a conservative level of approximately 23.4%, supporting the sustainability of shareholder returns.

Theoretical Share Price (Reference Value)

This is a reference range mechanically calculated solely from publicly disclosed data using a residual income model (Ohlson-type model with an explicit 5-year fade). It is not a forecast of the market share price or a recommendation of any specific investment action.

Sensitivity: ¥1,283–¥1,359 at ±1% for the cost of equity, and ¥1,318–¥1,323 at ±0.1 for ω.

Note:

• Net assets as of the end of the quarter are used (there is a timing difference from the full-year forecast).

(Calculation model: Residual Income Model / Interest-rate reference month: 2026-07 / This value does not forecast 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 available earnings data. Investment decisions should be made at your own responsibility and, where necessary, after consulting with a professional advisor.

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AI Financial Analysis

Executive Summary

FY2027 Q1 was a very strong start for Nippon Thompson, with broad-based earnings recovery and materially improved operating leverage. Revenue rose 32.9% year on year to ¥19.85bn. Operating income surged 281.9% to ¥2.79bn, substantially outpacing sales growth. Ordinary income increased 311.8% to ¥3.16bn, while net income rose 243.7% to ¥2.44bn. The gross margin expanded to 35.8% from 31.3% a year earlier, a 450bp improvement. The operating margin expanded to 14.1% from 4.9%, a 920bp improvement. The net margin improved to 12.3% from 4.8%, a 750bp improvement. This combination indicates that the sales recovery was accompanied by improved production absorption and a favorable fixed-cost contribution. SG&A expense increased 9.5% to ¥4.31bn, far below revenue growth, demonstrating substantial operating leverage. Non-operating income of ¥0.49bn supported ordinary income, led by ¥0.20bn of dividend income and ¥0.17bn of foreign-exchange gains. Net income also included a ¥0.06bn gain on the sale of investment securities, equivalent to only 2.5% of net income, so the quarter's earnings were predominantly supported by operating performance. Annualized ROE was 11.2%, within the good 10-15% range, supported by a 12.3% net margin and annualized asset turnover of 0.622x. The balance sheet remains conservative, with a 413.6% current ratio, 0.46x debt-to-equity ratio, and 13.1% debt-to-capital ratio. However, the reported working-capital alerts, including DSO of 91 days, DIO of 244 days and a 303-day cash conversion cycle, warrant close attention because they may constrain cash conversion even during a period of strong accounting earnings. Q1 sales and operating-income progress against the revised full-year plan are broadly consistent with a normal first-quarter run rate. The main forward-looking issue is whether demand momentum and elevated margins can be sustained while inventory and receivables are converted into cash.

Profitability Analysis

The annualized DuPont ROE of 11.2% is decomposed into a 12.3% net profit margin, 0.622x annualized asset turnover, and 1.46x financial leverage. The principal driver of the year-on-year improvement is margin expansion rather than balance-sheet leverage, as the company maintains a low debt-to-equity ratio of 0.46x. Revenue grew 32.9%, while operating income grew 281.9%, producing a 920bp operating-margin expansion to 14.1%. Gross margin increased 450bp to 35.8%, indicating a meaningful improvement in the relationship between selling prices, mix, volumes and production costs. SG&A rose only 9.5%, versus 32.9% sales growth, adding approximately 470bp of incremental operating leverage through improved fixed-cost absorption. The 14.1% EBIT margin is in the upper end of the good range and is close to the 15% excellent threshold. Interest coverage of 32.48x indicates that interest expense of ¥0.86bn is readily covered by operating income. The tax burden factor of 0.756 is normal, while the interest-burden factor of 1.155 reflects net non-operating income rather than debt-driven earnings dilution. Non-operating income was 2.5% of revenue and therefore was supportive but not the central source of profitability. Foreign-exchange gains were ¥0.17bn, equivalent to 6.2% of operating income, which is meaningful but below the level that would dominate operating profit. The ¥0.06bn gain on investment-security sales was modest relative to net income. Profitability appears operationally strong, but the durability of the margin gain should be judged against future sales volumes, pricing conditions and manufacturing cost trends.

Growth Assessment

The Q1 revenue increase of 32.9% indicates a pronounced recovery in demand for the group's bearings and machinery-components business. As the group operates as a single segment, the earnings recovery is concentrated in its core manufacturing operation. Full-year revenue guidance is ¥80.0bn, implying 26.9% year-on-year growth. Q1 revenue represents 24.8% of the full-year forecast, essentially in line with the standard 25% first-quarter progress rate. Full-year operating-income guidance is ¥11.5bn, implying growth of 180.3%. Q1 operating income represents 24.3% of full-year guidance, also close to the standard first-quarter progress rate. Ordinary-income progress is 27.0% of the ¥11.7bn full-year target, 2.0 percentage points ahead of a standard Q1 pace. Net-income progress is 25.7% of the ¥9.5bn plan, modestly ahead of the standard pace. The company has revised its forecast, and the current Q1 run rate supports the revised targets rather than indicating a material shortfall. Revenue growth exceeded the increase in SG&A expenses by a wide margin, supporting the view that profit growth is being generated with efficient overhead absorption. Investment securities increased to ¥17.76bn and contributed dividend income, but operating income remains the primary source of earnings expansion. Manufacturing demand remains exposed to industrial production cycles, customer inventory adjustments, export conditions and foreign-exchange movements. Maintaining the current gross margin and converting the sales increase into cash are important tests of the quality and sustainability of growth.

Financial Health

Liquidity is very strong. Current assets of ¥78.47bn exceed current liabilities of ¥18.97bn by ¥59.50bn, producing a current ratio of 413.6%. The quick ratio of 331.8% confirms that liquidity is not dependent on inventory realization. Cash and deposits were ¥23.12bn, exceeding the ¥7.24bn current portion of long-term loans by more than three times. Total equity was ¥87.25bn, representing 68.3% of total assets, up from 66.2% a year earlier. Total liabilities declined to ¥40.39bn from ¥42.27bn, despite total assets increasing to ¥127.64bn. Debt-to-equity of 0.46x and debt-to-capital of 13.1% indicate conservative leverage and no breach of the 2.0x debt-to-equity warning threshold. Long-term loans increased by ¥0.88bn year on year to ¥13.17bn, but the balance remains manageable relative to equity and cash resources. Bonds payable were ¥5.00bn. The maturity profile appears well covered by current assets, and there is no evident short-term funding mismatch. Investment securities account for 13.9% of total assets and generated dividend income, but also expose equity and comprehensive income to market-value movements. Comprehensive income of ¥5.18bn exceeded net income because valuation differences on securities and foreign-currency translation adjustments were positive.

Notable B/S Changes

Investment securities: +¥3.37bn (+23.4%) to ¥17.76bn — increased marketable-investment exposure; valuation gains contributed to the rise in comprehensive income and create sensitivity to market-price movements. Long-term loans: +¥0.88bn (+7.1%) to ¥13.17bn — debt increased modestly, but remains conservative relative to ¥87.25bn of total equity and ¥23.12bn of cash and deposits. Current liabilities: -¥3.55bn (-15.7%) to ¥18.97bn — reduced short-term obligations strengthened already high liquidity and improved the current ratio. Total equity: +¥4.07bn (+4.9%) to ¥87.25bn — earnings retention and positive other comprehensive income strengthened the capital base. Valuation difference on securities: +¥2.31bn (+33.4%) to ¥9.22bn — a significant unrealized-gain movement within equity, reinforcing exposure to financial-market volatility.

Cash Flow Quality

The reported working-capital indicators are the main earnings-quality risk in the quarter. The HIGH_RECEIVABLE_DAYS alert identifies annualized DSO of 91 days, above the 60-day warning level. This indicates that a substantial portion of reported sales is tied up in customer receivables for an extended period, increasing sensitivity to collection timing and customer credit conditions. Receivables increased ¥2.55bn year on year to ¥19.71bn, broadly consistent with the strong revenue increase but still requiring close monitoring. The first HIGH_INVENTORY_DAYS alert identifies annualized DIO of 244 days, substantially above the 90-day warning benchmark. The second HIGH_INVENTORY_DAYS alert identifies 111 days, also above the 60-day manufacturing benchmark. Both inventory alerts point to elevated inventory commitment, irrespective of the differing reported thresholds, and imply risks of slower conversion, demand volatility and potential obsolescence in a cyclical components business. The LONG_CCC alert identifies an annualized 303-day cash conversion cycle, far above the 120-day warning level. A long conversion cycle can absorb liquidity and reduce the extent to which accounting profit translates into internally generated cash. This is particularly relevant for a manufacturer because raw materials, work in process and finished goods require funding before customer collections are received. Inventories declined ¥1.42bn year on year to ¥15.54bn on the balance sheet, while raw materials were ¥7.75bn and work in process was ¥10.79bn, indicating substantial production-related inventory commitments. The root cause of the alerts is the combination of slow customer collection and high inventory days relative to manufacturing benchmarks. The potential impact is that working-capital demands could limit free cash flow and increase the importance of disciplined production planning, order visibility and receivables collection. The company's high cash balance and strong quick ratio provide a significant near-term buffer against this risk.

Dividend Sustainability

The full-year dividend forecast is ¥32.0 per share. Against forecast EPS of ¥136.92, the implied dividend payout ratio is 23.4%. This is well below the 60% sustainability benchmark and leaves substantial earnings retention capacity. Q1 EPS was ¥34.93, which is broadly consistent with the full-year EPS forecast on a quarterly run-rate basis. Retained earnings were ¥492.81bn? No, retained earnings were ¥49.28bn, providing a substantial equity buffer for dividends, investment and cyclical volatility. Equity increased to ¥87.25bn from ¥83.18bn a year earlier. The conservative capital structure, with debt-to-equity of 0.46x, supports financial flexibility. Dividend sustainability is therefore supported by forecast earnings coverage, accumulated retained earnings and strong liquidity. The principal factor to monitor is working-capital conversion, since elevated receivable and inventory days could reduce cash availability during a demand slowdown even if reported earnings remain positive. The stated dividend forecast has not been revised.

Risk Assessment

Business risks include Cyclical industrial-demand risk: the 32.9% sales increase and substantial operating leverage are favorable in Q1, but bearing and machinery-component demand can reverse if customers reduce production or inventories., Manufacturing margin risk: the 450bp gross-margin improvement may be vulnerable to input-cost inflation, selling-price competition, product mix changes and lower plant utilization., Foreign-exchange risk: Q1 included ¥0.17bn of foreign-exchange gains; currency movements can affect both reported earnings and the competitiveness of export-oriented manufacturing operations., Inventory-management risk: reported DIO alerts of 244 days and 111 days indicate elevated exposure to demand forecasting errors, inventory obsolescence and slower production-to-cash conversion..

Financial risks include Receivables-collection risk: annualized DSO of 91 days exceeds the 60-day warning level, increasing exposure to collection delays and customer credit deterioration., Cash-conversion risk: the annualized 303-day cash conversion cycle is substantially above the 120-day warning level and could restrain free cash generation., Market-value risk in investment securities: investment securities of ¥17.76bn represent 13.9% of total assets, while valuation differences on securities materially contributed to comprehensive income..

Key concerns include Likelihood: medium; impact: high — normalization of volume growth or plant utilization would have a disproportionate effect on earnings because Q1 profit growth relied significantly on operating leverage., Likelihood: medium; impact: medium — high receivable and inventory days may delay cash realization and create a divergence between earnings growth and cash generation., Likelihood: medium; impact: medium — foreign-exchange gains and investment-income contributions are helpful but less recurring than operating profit., Likelihood: low; impact: medium — leverage and near-term liquidity risk are limited by a 413.6% current ratio, 331.8% quick ratio and 0.46x debt-to-equity ratio..

Investment Implications

Key takeaways include Q1 revenue growth of 32.9% and operating-income growth of 281.9% demonstrate a strong earnings recovery., Operating margin reached 14.1%, up 920bp year on year, driven by a 450bp gross-margin gain and SG&A growth materially below sales growth., Annualized ROE of 11.2% is supported by profitability rather than aggressive balance-sheet leverage., Q1 progress toward full-year guidance is broadly normal: sales 24.8%, operating income 24.3%, ordinary income 27.0% and net income 25.7%., Balance-sheet liquidity and solvency are strong, but working-capital efficiency is the key counterweight to the earnings recovery., The forecast dividend implies a conservative 23.4% payout ratio based on full-year EPS guidance..

Metrics to watch include Operating margin and gross margin relative to the Q1 levels of 14.1% and 35.8%, Quarterly revenue progress versus the ¥80.0bn full-year forecast, Receivable days, particularly versus the reported 91-day level, Inventory days and inventory composition, given the reported 244-day and 111-day alerts, Cash conversion cycle versus the reported 303-day level, Foreign-exchange effects relative to operating profit, Investment-security valuation movements and their effect on comprehensive income.

Regarding relative positioning, Nippon Thompson combines a strong Q1 profitability recovery with a conservative balance sheet: its 14.1% operating margin is near the excellent threshold, annualized ROE of 11.2% is good, and liquidity is exceptionally high. Relative to manufacturing efficiency benchmarks, however, the reported receivable, inventory and cash-conversion-cycle alerts are weak and represent the principal area requiring operational improvement.