NITTO KOGYO CORPORATION FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥88.96B
• Operating Income: ¥5.29B
• Net Income: ¥3.40B
• EPS: ¥90.26

Income Statement

Balance Sheet

Cash Flow Statement

Profitability Ratios

Year-over-Year Comparison

Share Information

Dividend Information

Full Year Forecast

Disclaimer

This data was automatically extracted from XBRL files. Please refer to the original disclosure documents for accuracy.

AI Financial Analysis

Executive Summary

Verdict: Solid top-line and operating profit growth with clear operating margin expansion, but bottom line declined sharply due to a high tax burden and below-the-line items, keeping capital efficiency subdued. Revenue rose 8.5% YoY to 889.6, while operating income increased 30.2% YoY to 52.9, indicating healthy operating leverage. Ordinary income climbed 26.8% YoY to 56.2, supported by net non-operating income of 3.28. However, profit before tax was 53.8 (below ordinary income), implying extraordinary losses or adjustments, and net income declined 34.3% YoY to 34.2, pressuring EPS to 90.26. Operating margin improved to 5.95% from roughly 4.95% a year earlier, an expansion of about 100 bps. Net margin contracted to about 3.9% from ~6.3% as the effective tax rate rose to 36.8% and special items weighed on PBT. Gross margin stood at 26.8%, consistent with effective cost control relative to revenue growth, while SG&A leverage was favorable as operating profit outpaced sales growth. Cash flow quality was good: operating cash flow of 42.7 exceeded net income (OCF/NI = 1.25x), indicating reasonable earnings conversion. The balance sheet remains very strong with a current ratio of 291% and a D/E of 0.51x, and interest coverage is robust at 35.8x. That said, ROE is low at 3.0% and ROIC is 3.1%, well below a typical cost of capital, highlighting capital efficiency challenges. Financing cash outflow of -57.1 suggests meaningful shareholder returns and/or debt service, but dividend details are unreported and the calculated payout ratio of 189.1% raises sustainability questions. Non-operating income contributed 14.5% relative to operating profit, but core operating momentum was the main earnings driver. Forward-looking, sustaining operating margin gains while normalizing the tax rate and minimizing extraordinary losses would be key to recovering net profit. Improving ROIC above 5% should be a management focus through mix optimization, pricing, and tighter invested capital. Overall, the quarter demonstrates healthier core operations but diluted bottom-line optics and low capital efficiency temper the quality of the print.

Profitability Analysis

ROE decomposition (DuPont): ROE 3.0% = Net Profit Margin 3.9% × Asset Turnover 0.509 × Financial Leverage 1.51x. The biggest change YoY is the net profit margin, which fell from ~6.3% to ~3.9% (roughly -240 bps), despite an operating margin expansion of ~100 bps (from ~4.95% to ~5.95%). Business drivers: stronger operating performance (revenue +8.5%, operating income +30.2%) reflects positive operating leverage and cost control, while the higher effective tax rate (36.8%) and negative extraordinary impact (PBT below ordinary income) compressed net margin. Asset turnover is modest at 0.51x, typical for a manufacturer with sizable asset base; leverage is conservative at 1.51x, limiting ROE amplification. Sustainability: operating margin gains look more sustainable given revenue growth and SG&A discipline; however, net margin recovery depends on normalizing taxes and reducing one-time losses. Watch for any reversal in price/cost spread or SG&A creep; a red flag would be SG&A growth exceeding sales growth, which is not evident this quarter. Overall, the ROE shortfall is primarily margin-driven at the net level and secondarily by conservative leverage and moderate asset turns.

Growth Assessment

Revenue growth of 8.5% YoY to 889.6 indicates healthy demand, likely supported by pricing and/or volume in core electrical equipment lines. Operating income growth of 30.2% confirms positive operating leverage and improved cost efficiency. Ordinary income rose 26.8%, aided by a net non-operating contribution of 3.28, but profit before tax fell below ordinary income due to extraordinary items. Net income dropped 34.3% YoY to 34.2, driven by a 36.8% effective tax rate and special losses, masking the underlying operating improvement. EBITDA was 84.4, with a 9.5% margin, offering additional cushion for reinvestment. Medium-term outlook hinges on sustaining gross margin (26.8%) and operating margin (~6%) while pursuing mix upgrades and price pass-through. With a strong balance sheet, the company has capacity to invest in automation and product differentiation to support growth. However, the low ROIC at 3.1% flags the need to optimize invested capital to convert growth into value creation. Given data gaps in order backlog and segment detail, revenue sustainability is cautiously positive but unproven.

Financial Health

Liquidity is strong: current ratio 291.1% and quick ratio 253.8% comfortably exceed benchmarks, with cash and deposits at 288.2 versus current liabilities of 337.3. No warning on current ratio (<1.0) or D/E (>2.0); D/E is conservative at 0.51x and equity ratio is approximately 66.2% (1,157.9 / 1,748.8). Maturity profile appears balanced: short-term loans are only 0.52, while long-term loans are 220.1, and current assets (982.1) far exceed current liabilities (337.3), limiting near-term refinancing risk. Interest coverage is very strong at 35.8x, indicating ample buffer against rate increases. There are no disclosed off-balance-sheet obligations in the provided data. Overall solvency and liquidity risk are low.

Cash Flow Quality

OCF/Net Income is 1.25x, indicating solid earnings conversion and limited accrual risk this period. Operating cash flow of 42.7 comfortably covers interest expense (1.48) and supports ordinary operating needs. Free cash flow cannot be assessed due to unreported capex/investing cash flows. Financing cash flow of -57.1 suggests dividends, share repurchases, and/or debt repayment exceeded sources, leading to net cash outflow absent investing inflows. Without working capital delta detail, we cannot confirm any manipulation; the strong OCF relative to NI is a positive indicator. Sustainability hinges on maintaining current profitability and disciplined working capital; any inventory build or receivable stretch would pressure OCF.

Dividend Sustainability

Dividend amounts are unreported, but the calculated payout ratio stands at 189.1%, which would be unsustainably high if reflective of ongoing policy. With OCF at 42.7 and financing outflow at -57.1, cash returns to shareholders may have exceeded internally generated cash this period. Given unreported FCF and DPS, we cannot confirm coverage, but on the face of the payout metric, current distribution levels would likely require balance sheet support if maintained. The strong equity base and low leverage provide capacity, but sustained payouts above earnings are not advisable absent clear visibility on profit normalization. Policy outlook likely emphasizes stability, with potential for recalibration as net income recovers and extraordinary losses abate.

Risk Assessment

Business Risks:

• Margin risk from input cost inflation and limited price pass-through, potentially compressing gross margin (currently 26.8%).
• Demand cyclicality in construction, industrial equipment, and capital expenditure end-markets affecting revenue (8.5% YoY growth may not persist).
• Execution risk on cost control and SG&A discipline needed to sustain ~6% operating margin.
• Product mix shifts that could dilute margin if lower-value products grow faster.

Financial Risks:

• Low capital efficiency: ROIC at 3.1% (<5% warning) and ROE at 3.0% may trail cost of capital.
• Tax rate volatility: high effective tax rate (36.8%) materially depresses net income.
• Exposure to extraordinary items: PBT below ordinary income suggests potential one-off losses.
• Potential cash return-policy mismatch: calculated payout ratio of 189.1% may exceed sustainable levels.

Key Concerns:

• Net margin compression (~-240 bps YoY) despite operating improvement.
• Reliance on below-the-line normalization (taxes/extraordinary losses) for EPS recovery.
• Unreported investing cash flows and capex obscure FCF visibility.
• Maintaining order momentum to support operating leverage in H2.

Investment Implications

Key Takeaways:

• Core operations strengthened: operating margin expanded ~100 bps on 8.5% sales growth and 30.2% OI growth.
• Bottom-line fell 34.3% due to a 36.8% tax rate and extraordinary items, not core weakness.
• Balance sheet and liquidity are very strong (current ratio 2.91x, D/E 0.51x, interest cover 35.8x).
• Capital efficiency is weak (ROIC 3.1%, ROE 3.0%), requiring asset turn or margin improvements.
• Cash conversion is solid this quarter (OCF/NI 1.25x), but FCF unknown; financing outflows were sizable (-57.1).
• Dividend sustainability is questionable if the 189% payout ratio reflects actual distributions.

Metrics to Watch:

• Operating margin trajectory and gross margin stability.
• Effective tax rate normalization and any new extraordinary gains/losses.
• Working capital days (DSO, DIO, DPO) and OCF/NI > 1.0 maintenance.
• ROIC uplift toward >5% via mix, pricing, and invested capital discipline.
• Capex cadence and investing CF disclosure to assess FCF.
• Order backlog and book-to-bill (if disclosed) to validate demand.

Relative Positioning: Against domestic electrical equipment peers, liquidity and leverage are best-in-class, operating execution improved this quarter, but capital efficiency (ROIC/ROE) and net margin resilience lag due to tax and extraordinary impacts; a path to ROIC >5% is needed to close the gap with higher-quality peers.

Disclaimer

This analysis was auto-generated by AI. Please note the following:

• No Guarantee of Accuracy: The accuracy and completeness of this analysis are not guaranteed. For accurate financial data, please refer to the original disclosure documents published on TDnet or other official sources
• Not Investment Advice: This analysis is for general informational purposes only and does not constitute investment advice under applicable securities laws. It is not a recommendation to buy or sell any specific securities
• At Your Own Risk: Investment decisions should be made at your own discretion and risk. We assume no liability for any losses incurred based on this analysis