THK (6481) FY2026 Q1 Earnings Report

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Executive Summary

The most important takeaway from the current-period results is that, on a continuing-operations basis excluding the Transportation Equipment Business as a discontinued operation, both revenue and profit increased, while the operating margin improved substantially. Revenue was ¥69.04B (+27.4% YoY), Operating Income was ¥7.62B (+364.4%), and net income attributable to owners of the parent was ¥4.49B, a substantial increase from ¥0.32B in the previous year. In addition to revenue growth, an improved gross margin and lower SG&A ratio combined to produce strong operating leverage, which was the primary driver of the sharp increase in profit.

Factors Affecting Performance

【Revenue】Revenue was ¥69.04B, up +27.4% YoY. By region, China recorded the largest growth at ¥22.11B (+44.1%), while revenue increased in all regions: Europe +15.9%, the Americas +13.7%, and Japan +12.7%. The structure is one in which high growth in China is driving the company-wide top line.

【Profit and Loss】Operating Income was ¥7.62B (+364.4% YoY), and the operating margin improved substantially to 11.0% from 3.0% in the same period of the previous year. The gross margin improved to 33.1% from 28.9%, while the SG&A ratio declined to 21.1% from 25.7%. These developments occurred simultaneously and generated profit growth substantially exceeding the revenue increase. By region, Japan and China were the primary earnings drivers, with segment profit of ¥3.16B and ¥3.23B, respectively. In contrast, Europe recorded a segment loss of ¥0.68B, with the deficit widening from ¥0.31B in the previous year. Net financial expenses of ¥0.92B and a loss from discontinued operations of ¥0.51B meant that net income growth was less pronounced than Operating Income growth. Overall, the results reflect both revenue and profit growth, accompanied by a qualitative improvement in profitability.

Segment Analysis

Segment profit was driven by China at ¥3.23B (14.6% margin, +107.8% YoY) and Japan at ¥3.16B (10.6% margin, +224.2% YoY). The Americas generated only ¥0.42B of profit on revenue of ¥24.48B, representing a 1.7% margin. Europe recorded a segment loss of ¥0.68B on revenue of ¥19.42B, with the deficit widening from ¥0.31B in the previous year. Despite revenue growth in all regions, Europe alone has not progressed toward profitability, and the widening gap in profitability among regions is a structural characteristic.

Key Financial Metrics

【Profitability】Significant improvement was observed at each stage, with an operating margin of 11.0% (3.0% in the same period of the previous year), a gross margin of 33.1% (28.9% in the previous year), and a net profit margin of 6.6% (0.9% in the previous year). 【Cash Quality】Operating Cash Flow (OCF) was limited to ¥2.99B, and its ratio to net income attributable to owners of the parent was approximately 0.67x, below 1x. The primary factors were increases of ¥6.04B in trade receivables and ¥4.06B in inventories. The increase in working capital during a period of earnings growth is delaying the conversion of profit into cash. 【Investment Efficiency】ROE was 1.8% on a quarterly basis. Given an equity ratio of 52.6%, there remains room to improve returns on capital. Free cash flow was negative ¥0.55B, indicating that investments and dividends during the quarter were not funded solely from internal funds. 【Financial Soundness】The equity ratio was 52.6%. Of the total ¥140.0B in bonds and borrowings, ¥60.0B was recorded as current liabilities, indicating an increase in the short-term concentration of debt. Cash and cash equivalents were ¥93.49B, while cash and deposits were ¥118.88B, providing ample liquidity and ensuring short-term financial resilience.

Cash Flow Analysis

Operating Cash Flow was ¥2.99B, down -55.8% YoY. Despite an increase in Profit Before Tax of 6,702, increases of ¥6.04B in trade receivables and ¥4.06B in inventories pressured OCF, while a ¥5.34B increase in trade payables provided a partial offset. Investing Cash Flow was -¥3.55B, of which capital expenditures accounted for ¥3.01B. Financing Cash Flow was -¥2.72B. While ¥3.00B was raised through short-term borrowings, outflows included ¥10.0B in bond redemptions, ¥13.49B in dividend payments, and ¥6.56B related to changes in equity attributable to non-controlling interests. As a result, free cash flow was -¥0.55B. Investments and dividends during the quarter were not funded solely by operating activities, although ample liquidity of ¥93.49B in cash and cash equivalents provided support.

Earnings Quality

The improvement in Operating Income and gross margin appears to reflect a recurring enhancement in earning power supported by revenue growth and an improved cost structure, rather than temporary extraordinary gains or losses. In non-operating items, financial expenses of ¥1.20B exceeded financial income of ¥0.28B, resulting in net financial expenses of ¥0.92B that weighed on Profit Before Tax. A ¥0.51B loss from discontinued operations, namely the Transportation Equipment Business, compressed quarterly profit and created a gap from the ¥5.09B profit from continuing operations. The fact that OCF was only 0.67x net income warrants attention from an accrual perspective, as the expansion of working capital through increases in trade receivables and inventories is delaying the conversion of earnings into cash. Although there are few signs that accounting earnings on an accrual basis have expanded abnormally, the accumulation of working capital behind the earnings growth is an important observation when assessing earnings quality.

Earnings Forecast and Guidance

The full-year forecast calls for Revenue of ¥276.00B and Operating Income of ¥31.00B (+114.7% YoY). Progress in Q1 was 25.0% for Revenue and 24.6% for Operating Income, broadly in line with standard quarterly progress of approximately 25%. Meanwhile, Q1 EPS was ¥40.09 against forecast EPS of ¥202.64, representing a relatively low progress rate of approximately 19.8%. Financial income and expenses and the loss from discontinued operations are suppressing progress at the net income level. The earnings forecast was revised during the quarter, apparently reflecting the impact of business restructuring, including the transfer of the Transportation Equipment Business.

Shareholder Returns

The basic dividend policy is a dividend on equity (DOE) ratio of 8%, and dividend payments during the quarter amounted to ¥13.49B. Based on the full-year dividend forecast of ¥184 and full-year EPS forecast of ¥202.64, the implied forecast Payout Ratio is approximately 90.8%, above the general benchmark of 60%. Share repurchases were zero during the quarter, making dividends the primary form of shareholder returns for the period. The high Payout Ratio amid free cash flow of only -¥0.55B was accompanied by a decline in retained earnings, which decreased by ¥9.43B from the beginning of the period. Monitoring the recovery of OCF, among other factors, is advisable in assessing the sustainability of the DOE policy.

Risk Factors

1. Profitability of the European Business: Europe recorded a segment loss of ¥0.68B on revenue of ¥19.42B, with the deficit widening from ¥0.31B in the previous year. While other regions recorded higher profits, Europe alone has not progressed toward profitability.

2. Working Capital Increase and Cash Conversion: OCF was only approximately 0.67x net income, primarily due to increases in trade receivables and inventories. On an annualized basis, days sales outstanding and inventory turnover days are relatively long for a manufacturing company, warranting attention to inventory adjustment risk during periods of demand volatility.

3. Changes in Comparability Due to Business Restructuring: In connection with the transfer of the Transportation Equipment Business, ¥53.85B in assets held for sale and ¥29.24B in related liabilities were recorded. Following completion of the transfer, attention is required because the comparability of the business composition, capital structure, and regional profitability will change.

Industry Benchmark (For Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

Both the operating margin and net profit margin exceed the industry median, indicating that profitability is relatively high within the industry.

Growth and Capital Efficiency

The revenue growth rate is substantially above the industry median, positioning the company as a high-growth player within the industry.

Source: Compiled by the Company

Key Takeaways from the Results

1. The operating margin improved by approximately 8 points, from 3.0% in the same period of the previous year to 11.0%. The simultaneous improvement in gross margin and decline in the SG&A ratio, resulting in strong operating leverage, is a defining feature of the results.

2. OCF was only 0.67x net income, with trade receivables and inventories increasing behind the earnings growth. The extent to which earnings growth converts into cash generation will be a key area of observation going forward.

3. By region, China and Japan are driving profit, while the European deficit is widening. Trends in regional profitability, together with changes in the business composition following the transfer of the Transportation Equipment Business, will warrant attention.

Theoretical Share Price (Reference Value)

Sensitivity: ¥2,218–¥2,339 at ±1% for the cost of equity, and ¥2,276–¥2,277 at ±0.1 for ω.

Notes:

• 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 (Ohlson-type, explicit 5-year fade) / Interest rate reference month: 2026-07 / These are mechanically calculated values based solely on publicly disclosed data and do not constitute a forecast of the market share price or a recommendation of any specific investment action, nor do they 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 release 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 responsibility, after consulting professionals as necessary.

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AI Financial Analysis

Executive Summary

THK delivered a strong FY2026 Q1 operating recovery, although cash conversion and working-capital intensity remain material constraints. Revenue increased 27.4% year on year to ¥69.04bn. Operating income rose 364.4% to ¥7.62bn, lifting the operating margin to 11.0% from 3.0% a year earlier, an expansion of approximately 800bp. Gross profit increased to ¥22.88bn and the gross margin improved to 33.1% from 28.9%, or roughly 420bp. SG&A rose only 4.4% to ¥14.54bn, materially below revenue growth, reducing the SG&A-to-sales ratio to 21.1% from 25.7%, or approximately 460bp. This combination indicates substantial positive operating leverage as industrial demand recovered. Profit before tax rose to ¥6.70bn from ¥1.71bn despite a net finance cost of ¥0.92bn. Finance income fell sharply year on year while finance costs remained elevated at ¥1.20bn, limiting conversion from operating profit to pretax income. Quarterly profit attributable to owners increased to ¥4.49bn from ¥0.32bn, while total quarterly profit rose to ¥4.58bn from ¥0.47bn. Continuing operations generated ¥5.10bn of profit, but the discontinued transport-equipment operation recorded a ¥0.51bn loss. Operating cash flow was positive at ¥3.00bn but trailed net income of ¥4.58bn, resulting in an OCF/net-income ratio of 0.67x. Receivables and inventories each increased during the quarter, absorbing cash and contributing to negative free cash flow of ¥0.55bn after ¥3.01bn of capital expenditure. The balance sheet retains considerable liquidity, with ¥118.88bn of cash and deposits and a 52.6% equity ratio. However, short-term borrowings increased substantially to ¥60.00bn as the company refinanced part of its debt structure. Full-year revenue forecast progress was exactly 25.0% in Q1, while operating-income progress was 24.6%, broadly consistent with a normal quarterly run rate. Profit attributable to owners progress was lower at 19.8% of the full-year forecast, reflecting the discontinued-operation loss and below-operating-line costs. The announced sale of the transport-equipment business is strategically important because assets held for sale expanded to ¥53.85bn and the reported Q1 results are presented after separating that business as discontinued operations. The near-term investment case is therefore anchored in sustaining the recovery in core industrial-components demand, converting working capital into cash, and completing the business disposal without incremental losses or balance-sheet disruption.

Profitability Analysis

Annualized DuPont ROE is 7.1%, decomposed into a 6.5% net profit margin, 0.575x asset turnover, and 1.90x financial leverage. The principal driver of the profitability improvement is margin recovery rather than leverage: annualized asset turnover remains moderate for a capital-intensive precision-components manufacturer, while financial leverage is not excessive. Operating margin reached 11.0%, placing profitability within the stated 8-15% good benchmark range and materially above the prior-year 3.0% level. Gross-margin expansion of roughly 420bp indicates improved factory utilization, product mix, pricing, or a combination of these factors. SG&A growth of 4.4% was far below 27.4% revenue growth, creating strong operating leverage and contributing roughly 460bp of SG&A-ratio improvement. Regionally, China was the largest contributor to segment profit at ¥3.23bn, narrowly ahead of Japan at ¥3.16bn; China therefore represents the core earnings contributor in the reported geographic portfolio. Japan recorded revenue of ¥298.01bn before discontinued-operation reclassification within the segment presentation, up 12.7% year on year, and segment profit increased to ¥3.16bn from ¥0.98bn. The Americas generated revenue of ¥244.76bn, up 13.7%, with segment profit improving to ¥0.42bn from ¥0.13bn. Europe generated revenue of ¥194.25bn, up 15.9%, but its segment loss widened to ¥0.68bn from a ¥0.31bn loss, making it the principal regional earnings drag. China generated revenue of ¥221.11bn, up 44.1%, with segment profit more than doubling to ¥3.23bn from ¥1.55bn. Other regions generated revenue of ¥64.74bn, up 32.8%, and segment profit of ¥0.69bn versus ¥0.16bn. The divergence between strong Chinese profitability and deeper European losses highlights that the group recovery is uneven by geography. The annualized tax burden was 0.670, equivalent to a 24.0% effective tax rate, while the interest burden was 0.880, showing that finance costs remain a meaningful, though not critical, deduction from EBIT. Margin sustainability depends on maintaining sales volume and mix while containing the European loss and preventing renewed fixed-cost deleveraging.

Growth Assessment

Revenue growth of 27.4% demonstrates a meaningful rebound in demand for THK's LM guides, ball screws, and related mechanical components. China was the most important growth engine, with 44.1% regional revenue growth and a ¥1.67bn increase in segment profit. Japan, the Americas, and other regions also posted double-digit revenue growth, providing breadth to the recovery. Europe grew revenue but remained loss-making, indicating that revenue growth alone is not yet sufficient to restore profitability in that region. The company forecasts FY2026 revenue of ¥276.00bn, operating income of ¥31.00bn, and profit attributable to owners of ¥22.70bn. Q1 revenue progress of 25.0% is exactly in line with the standard first-quarter benchmark. Q1 operating-income progress of 24.6% is also broadly in line, supporting the internal consistency of the full-year operating forecast at this early stage. Q1 owner-attributable profit progress of 19.8% is 5.2 percentage points below the standard 25% benchmark, reflecting losses in discontinued operations and the burden of net finance costs. The company has disclosed a forecast revision, which elevates the importance of subsequent management communication on demand conditions and the basis for the updated outlook. The disposal of the transport-equipment business should sharpen the group focus on industrial equipment, but it also makes continued-operation growth and margin development the more relevant performance indicators. Continued-operation profit was ¥5.10bn versus ¥0.60bn a year earlier, showing that the core continuing business has improved materially. The principal sustainability test is whether order conversion can continue without further extension of receivable and inventory cycles.

Financial Health

Liquidity is sound on reported balances. Current assets of ¥294.04bn exceeded current liabilities of ¥131.22bn, implying a current ratio of approximately 2.24x, well above the 1.0x warning threshold. Cash and deposits were ¥118.88bn, providing a sizable liquidity reserve relative to short-term borrowings of ¥60.00bn. Debt-to-equity was reported at 0.90x, below the 2.0x aggressive-leverage warning threshold. The 52.6% equity ratio remains solid, although it declined from 55.3% at FY2025 year-end. Total assets increased by ¥7.63bn during the quarter, while total equity declined by ¥13.04bn to ¥252.71bn. The equity reduction was principally associated with ¥13.78bn of dividends, a ¥6.56bn outflow related to changes in ownership interests in subsidiaries, partly offset by quarterly comprehensive income of ¥7.30bn. Short-term bonds and borrowings increased by ¥26.80bn to ¥60.00bn, while noncurrent bonds and borrowings declined by ¥10.00bn to ¥80.00bn. This shift toward shorter-dated funding increases refinancing dependence, although current assets and cash provide substantial coverage. Reported current assets also include ¥53.85bn of assets held for sale and current liabilities include ¥29.24bn directly associated with those assets, so liquidity should be assessed in conjunction with the planned transport-equipment disposal. Interest costs were ¥1.20bn against operating income of ¥7.62bn, indicating that interest servicing is manageable but materially affects pretax earnings. The balance sheet is therefore resilient, but investors should monitor post-disposal cash proceeds, the maturity profile of borrowings, and the final capital allocation of disposal-related funds.

Notable B/S Changes

Assets held for sale: +¥17.73bn (+49.1%) to ¥53.85bn - reflects the planned disposal of the transport-equipment business and makes transaction completion a material balance-sheet event. Short-term bonds and borrowings: +¥26.80bn (+80.7%) to ¥60.00bn - indicates a material shift toward shorter-dated funding and raises refinancing-profile sensitivity. Noncurrent bonds and borrowings: -¥10.00bn (-11.1%) to ¥80.00bn - partly offsets the increase in short-term debt but reinforces the maturity shift. Cash and cash equivalents: -¥16.51bn (-15.0%) to ¥93.49bn - reflects dividends, investment spending, ownership-interest transactions, and operating working-capital absorption. Inventories: +¥3.18bn (+4.9%) to ¥68.36bn - adds to already elevated annualized inventory days of 135 and heightens inventory-management risk. Trade receivables: +¥3.83bn (+6.0%) to ¥67.36bn - is consistent with the 89-day annualized DSO alert and reduced Q1 cash conversion. Total equity: -¥13.04bn (-4.9%) to ¥252.71bn - dividends and subsidiary ownership-interest transactions exceeded comprehensive income during the quarter. Non-controlling interests: -¥43.94bn to ¥0.22bn - reflects the ¥6.56bn cash outflow and associated ownership-interest changes, materially simplifying the non-controlling interest balance.

Cash Flow Quality

Cash-flow quality warrants close monitoring. Operating cash flow was ¥3.00bn versus net income of ¥4.58bn, producing an OCF/net-income ratio of 0.67x, below the 0.8x concern threshold. The root cause was working-capital absorption: receivables increased by ¥6.04bn and inventories increased by ¥4.06bn during the quarter. Higher payables of ¥5.34bn partly offset these outflows, meaning operating cash flow benefited from supplier financing even as customer and inventory balances consumed cash. The impact is that reported earnings were not fully converted into cash in Q1, limiting internally funded capacity for capital expenditure and distributions. The 0.3% accruals ratio remains low and does not itself indicate aggressive accrual accounting; the issue is principally the balance-sheet cash tied up in the operating cycle. Annualized receivable days of 89 are above the 60-day warning threshold. The root cause of this alert is slow collection relative to the level of annualized revenue, and the impact is higher credit exposure and greater sensitivity of cash flow to collections. Annualized inventory days of 135 are above both the 90-day broad manufacturing warning threshold and the 60-day efficiency benchmark. The root cause is a large inventory base relative to annualized cost of sales, and the impact is elevated obsolescence, demand-forecast, and inventory write-down risk in a cyclical industrial-components business. The annualized cash conversion cycle of 182 days is above the 120-day warning threshold. This long cycle combines high receivable and inventory intensity and means cash generation is vulnerable if demand slows or customers defer purchases. Capital expenditure was ¥3.01bn, and operating cash flow did not fully cover it, resulting in free cash flow of negative ¥0.55bn. The negative free cash flow is manageable given the cash balance, but recurring working-capital outflows would weaken the quality of the operating recovery.

Dividend Sustainability

THK's stated policy is to target a dividend on equity ratio of 8%. Cash dividends paid in Q1 were ¥13.50bn, substantially exceeding Q1 net income and Q1 free cash flow, so the quarterly cash distribution was not covered by period earnings or internally generated free cash flow. This quarterly comparison should be interpreted cautiously because Japanese dividend payment timing often concentrates cash payments in a particular quarter. Based on the FY2026 forecast, planned DPS of ¥184 implies a dividend payout ratio of approximately 90.8% versus forecast EPS of ¥202.64. That payout is below 100% but above the stated 60% sustainability benchmark, leaving limited earnings retention if the full-year forecast is not achieved. There were no share repurchases in the current quarter; accordingly, the relevant distribution measure is the dividend payout ratio rather than a total return ratio. The company has adequate cash and a sound current ratio, which support near-term payment capacity. However, the combination of negative Q1 free cash flow, a high forecast payout ratio, and declining equity means that sustained distributions depend on improved cash conversion in subsequent quarters. The DOE-based policy can cause dividends to remain comparatively high even when earnings are volatile. Dividend sustainability will therefore be most sensitive to delivery of the ¥22.70bn full-year owner-attributable profit target, normalization of receivables and inventory, and the cash consequences of the transport-equipment business sale.

Risk Assessment

Business risks include Cyclical industrial-demand risk: the Q1 margin recovery depends on continued sales volume and factory utilization across machine tools, automation, and industrial equipment end markets., China concentration risk: China generated the largest segment profit at ¥3.23bn and the strongest growth, making group earnings sensitive to Chinese industrial activity, local competition, and geopolitical or trade-policy developments., European turnaround risk: Europe produced a ¥0.68bn segment loss despite 15.9% revenue growth, creating risk that pricing, utilization, or cost actions remain inadequate., Working-capital and inventory risk: annualized DIO of 135 days raises the risk of inventory obsolescence or future valuation pressure if demand decelerates., Transport-equipment disposal execution risk: the business is classified as discontinued operations and carried within assets held for sale; delays, price adjustments, or separation costs could affect cash flow and reported results., Manufacturing-specific input and supply-chain risk: precision-component production remains exposed to materials, energy, labor availability, logistics disruption, product-quality issues, and export-market currency movements..

Financial risks include Cash-conversion risk: OCF/net income of 0.67x is below the 0.8x threshold because receivables and inventories absorbed cash., Collection risk: annualized DSO of 89 days is above the 60-day warning threshold, increasing customer-credit exposure and the risk of delayed cash realization., Long cash-cycle risk: annualized CCC of 182 days exceeds the 120-day warning threshold and increases funding needs through the cycle., Refinancing-profile risk: short-term bonds and borrowings rose to ¥60.00bn from ¥33.21bn, increasing reliance on shorter-dated funding despite adequate liquidity., Below-operating-line risk: net finance costs of ¥0.92bn reduced pretax profit, and the annualized interest burden of 0.880 is below the 0.90 low-debt benchmark..

Key concerns include Highest priority is conversion of the earnings rebound into cash, particularly normalization of receivables and inventories., Second priority is the sustainability of the 11.0% operating margin, including whether China can maintain its profit contribution and Europe can reduce losses., Third priority is the financial and operational completion of the transport-equipment disposal and its effect on the capital structure., The 8% DOE-oriented dividend framework and forecast payout ratio of approximately 90.8% heighten the importance of achieving forecast earnings and restoring free-cash-flow coverage..

Investment Implications

Key takeaways include Q1 operating performance improved sharply: revenue rose 27.4%, operating income rose 364.4%, and operating margin expanded by approximately 800bp to 11.0%., The recovery is driven by both gross-margin improvement and disciplined SG&A growth, evidencing strong operating leverage., China and Japan were the leading earnings contributors, while Europe remained loss-making., The core concern is cash conversion: OCF/net income was 0.67x, free cash flow was negative ¥0.55bn, and annualized CCC was 182 days., The full-year revenue and operating-profit forecasts are broadly supported by Q1 progress, whereas owner-attributable profit progress is behind the standard Q1 pace., The planned disposal of the transport-equipment business should simplify the portfolio but introduces execution and separation-risk considerations..

Metrics to watch include Operating margin and gross margin by quarter, particularly the durability of the 11.0% Q1 operating margin, China segment profit and European segment loss, Annualized DSO of 89 days, DIO of 135 days, and CCC of 182 days, Operating cash flow, free cash flow, and OCF/net-income conversion, Short-term borrowings of ¥60.00bn and post-disposal funding structure, Progress versus FY2026 forecasts: revenue ¥276.00bn, operating income ¥31.00bn, and owner-attributable profit ¥22.70bn, Completion terms and cash-flow consequences of the transport-equipment business sale.

Regarding relative positioning, THK's Q1 operating margin of 11.0% is in the good manufacturing profitability range and its 52.6% equity ratio and approximately 2.24x current ratio indicate a stronger liquidity position than a highly leveraged industrial peer. Conversely, annualized ROE of 7.1% remains below the 8% concern threshold, and the 89-day DSO, 135-day DIO, and 182-day CCC are weak against manufacturing working-capital benchmarks. Relative positioning therefore depends on whether the company can convert a strong cyclical operating rebound into durable cash returns while resolving the regional profitability gap in Europe.