NITTO KOGYO (6651) FY2027 Q1 Earnings Report

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Executive Summary

Nitto Kogyo's Q1 FY2027 results reflected a substantial increase in operating income well above revenue growth, driven by improved profit margins across all three segments. Revenue was ¥455.4B (+8.8% YoY), operating income was ¥29.8B (+60.7%), ordinary income was ¥31.8B (+56.3%), and net income attributable to owners of the parent was ¥15.5B (+67.2%). The operating margin improved to 6.5% from 4.4% in the same period of the previous year; however, due to the high effective tax rate of 50.7%, the net profit margin was limited to 3.4%, down from 5.6% in the same period of the previous year.

Factors Affecting Results

【Revenue】Revenue of ¥455.4B increased +8.8% YoY. The core Electrical and Information Infrastructure-Related Manufacturing, Construction, and Services Business (revenue mix: 61.6%) increased +4.5%, the Distribution Business (31.1%) increased +16.1%, and the Electronic Components-Related Manufacturing Business (10.0%) increased +20.2%, resulting in revenue growth across all segments. In particular, the Electronic Components-Related Manufacturing Business recorded the highest growth rate.

【Profit and Loss】Operating income of ¥29.8B (+60.7% YoY) was primarily attributable to the suppression of the cost-of-sales ratio and improved profit margins across each business. Segment profit margins were 5.8% for the Manufacturing, Construction, and Services Business, 5.1% for the Distribution Business, and 14.1% for the Electronic Components-Related Manufacturing Business, all improving from the same period of the previous year. Non-operating income and expenses resulted in a net gain of ¥2.0B, including dividend income of ¥1.6B and foreign exchange gains of ¥0.3B, thereby lifting ordinary income to ¥31.8B (+56.3% YoY). Extraordinary items consisted only of an extraordinary loss of ¥0.1B and had a negligible impact. Meanwhile, income taxes of ¥16.1B represented a high effective tax rate of 50.7% against pretax income of ¥31.6B, and the increase in net income to ¥15.6B (+70.6%) was therefore slightly below the pace of growth at the operating and ordinary income levels. In summary, the Company achieved both revenue and profit growth, with a clear improvement in profitability at the operating income level.

Segment Analysis

The Electrical and Information Infrastructure-Related Manufacturing, Construction, and Services Business generated revenue of ¥280.8B (+4.5% YoY) and operating income of ¥16.2B (+42.0%), with a profit margin of 5.8%. As the core business, it made the largest contribution to profits, accounting for approximately 54% of total segment profit. The Electrical and Information Infrastructure-Related Distribution Business generated revenue of ¥141.5B (+16.1%) and operating income of ¥7.2B (+105.4%), showing an outstanding rate of profit growth, while its profit margin improved to 5.1%. The Electronic Components-Related Manufacturing Business generated revenue of ¥45.3B (+20.2%) and operating income of ¥6.4B (+97.2%). Its profit margin of 14.1% was the highest among the three businesses, giving it an advantage in both growth and profitability. All three businesses achieved revenue and profit growth, and the Company's dependence on any single business is low.

Key Financial Indicators

【Profitability】The operating margin improved to 6.5% from 4.4% in the same period of the previous year, while the net profit margin declined to 3.4% from 5.6%, with the high effective tax rate of 50.7% weighing on the bottom-line margin.【Cash Quality】Cash and deposits were ¥357.7B, remaining almost flat YoY, while accounts receivable and notes receivable of ¥376.3B accounted for 20.1% of total assets, a level at which the working capital burden associated with revenue growth warrants attention.【Investment Efficiency】ROE was 1.2% for the cumulative quarter-to-date period, or approximately 5% on an annualized basis, while the equity ratio was 66.6%, remaining almost flat compared with 66.8% in the same period of the previous year.【Financial Soundness】The Company maintained ample liquidity, with current assets of ¥1060.6B compared with current liabilities of ¥381.5B. Cash and deposits of ¥357.7B exceeded long-term borrowings of ¥190.0B, leaving the Company in a net cash position.

Cash Flow Analysis

As the financial summary does not disclose a cash flow statement, cash flow trends are analyzed based on changes in the balance sheet. Cash and deposits were ¥357.7B, nearly unchanged from ¥357.4B in the same period of the previous year, indicating stable cash levels. Meanwhile, accounts receivable and notes receivable were ¥376.3B, down from ¥418.4B in the same period of the previous year, while inventories were ¥136.4B, up from ¥111.9B. The increase in inventories appears to have resulted from procurement and production activities in response to expanding revenue, and the changes in the composition of working capital were balanced by higher inventories and lower receivables. Long-term borrowings were ¥190.0B, slightly down from ¥200.0B in the same period of the previous year, suggesting a trend toward reducing interest-bearing debt. Overall, the Company is not experiencing tight liquidity conditions and is responding to business expansion while maintaining its cash and deposits.

Quality of Earnings

The current-period profit increase was supported by improved operating margins across all three segments. Since the impact of extraordinary items was negligible, consisting only of an extraordinary loss of ¥0.1B, the quality of earnings generated by recurring business activities can be viewed favorably. Of ¥3.0B in non-operating income, dividend income of ¥1.6B represents stable income from investment securities of ¥98.8B, while the foreign exchange gain of ¥0.3B is a volatile item. However, the effective tax rate of 50.7% exceeded the level recorded in the same period of the previous year, suppressing net income growth relative to the +51.9% increase in pretax income. Comprehensive income was ¥29.4B, exceeding net income attributable to owners of the parent of ¥15.5B. The primary reason for this difference was a ¥13.6B increase in valuation difference on securities. This divergence resulted from an increase in the market value of held shares and should be distinguished from the Company's underlying earnings power.

Earnings Forecast and Guidance

Progress against the full-year earnings forecasts was 21.7% for revenue, 17.8% for operating income, 18.7% for ordinary income, and 13.4% for profit attributable to owners of the parent, all below the simple 25% benchmark. The particularly slow progress of the profit indicators appears to have been primarily attributable to the high Q1 effective tax rate of 50.7%. The full-year forecasts call for revenue growth of +7.3%, operating income growth of +8.1%, and ordinary income growth of +4.5% compared with the previous fiscal year. Compared with the Q1 operating income growth of +60.7%, the full-year plan can be interpreted as a conservative plan that assumes a slowdown in profit growth toward the second half of the fiscal year. There were no revisions to the earnings or dividend forecasts during the quarter.

Shareholder Returns

The full-year dividend forecast is ¥154.00 per share. Based on forecast full-year EPS of ¥305.77, the payout ratio is approximately 50.4%, calculated using dividends alone as the numerator. Compared with the dividend of ¥62 in the same period of the previous year, an increase in dividends is expected. The Company's net cash position, with cash and deposits of ¥357.7B exceeding long-term borrowings of ¥190.0B, provides financial support for continuing dividend payments.

Risk Factors

1. Concentration of profits in the core business: The Electrical and Information Infrastructure-Related Manufacturing, Construction, and Services Business accounts for approximately 54% of total segment profit. Consequently, fluctuations in construction demand and customer investment plans in this field have a substantial impact on consolidated profits.

2. Risk of persistently high tax burden: The effective tax rate of 50.7% was high compared with the same period of the previous year, suppressing net income growth relative to the +51.9% increase in pretax income. Whether this level continues will affect the potential for expanding shareholder returns.

3. Working capital risk related to receivables and inventories: Accounts receivable and notes receivable of ¥376.3B account for 20.1% of total assets, while inventories also increased from the same period of the previous year to ¥136.4B. The impact of increased working capital investment accompanying revenue growth on capital efficiency must be monitored.

Industry Benchmark (Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

Both the operating margin and net profit margin are below the industry median, placing the Company's profitability at a somewhat low level within the industry.

Growth and Capital Efficiency

The revenue growth rate exceeds the industry median, placing the Company's growth at a relatively favorable level within the industry.

※Source: Compiled by the Company

Key Takeaways from the Results

1. The operating margin improved by approximately 2.1pt YoY to 6.5%, while the net profit margin declined due to the impact of the 50.7% effective tax rate. The fact that operating improvements have not been fully reflected in net income is an important point when assessing the quality of the results.

2. All three segments achieved revenue and profit growth. In particular, the Electronic Components-Related Manufacturing Business exceeded the other businesses in both growth and profitability, with revenue growth of +20.2% and a profit margin of 14.1%.

3. The operating income progress rate against the full-year plan was 17.8%, below the standard level for Q1. However, the full-year plan itself assumes moderate profit growth of +8.1% YoY, making consistency between the high Q1 growth rate and the full-year plan an important point for future monitoring.

Theoretical Share Price (Reference Value)

Sensitivity: ¥3,222–¥3,406 at a ±1% change in the cost of equity, and ¥3,312–¥3,313 at a ±0.1 change in ω.

Notes:

• Net assets as of the quarter-end are used; there is a time lag between these figures and the full-year forecasts.
• Since net assets include non-controlling interests, the theoretical values may be calculated somewhat higher.

(Calculation model: Residual Income Model (Ohlson type; explicit five-year fade) / Interest rate reference month: 2026-07 / Mechanically calculated values based solely on publicly disclosed data; these are not forecasts of the market share price or recommendations of any specific investment action, and do 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 financial summary 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 a professional as necessary.

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AI Financial Analysis

Executive Summary

FY2027 Q1 was a strong start, with revenue growth translating into substantially faster operating and net-profit growth. Revenue increased 8.8% year on year to ¥45.54bn. Operating income rose 60.7% to ¥2.98bn. Ordinary income increased 56.3% to ¥3.18bn. Profit attributable to owners of the parent rose 67.2% to ¥1.55bn, and EPS reached ¥40.96 from ¥24.49 a year earlier. Gross margin improved to 27.7% from 26.6%, an expansion of approximately 110bp. Operating margin expanded to 6.5% from 4.4%, a material improvement of approximately 210bp. Net margin rose to 3.4% from 2.2%, or approximately 120bp. The margin outcome indicates that the 8.8% sales increase was accompanied by favorable gross-profit conversion and disciplined overhead absorption. SG&A expense increased only 3.9% to ¥9.66bn, materially below revenue growth, supporting operating leverage. Segment profit growth was broad-based, with all three reporting businesses delivering higher revenue and profit. The electrical and information infrastructure manufacturing, construction and service business remained the core business, generating ¥2.69bn of external revenue and ¥1.62bn of segment profit. The distribution business posted the sharpest incremental profit improvement, while the electronic-components manufacturing business also delivered strong growth. Non-operating income of ¥0.30bn was modest relative to revenue and was mainly supported by ¥0.16bn of dividend income. Earnings were not reliant on extraordinary gains; the reported extraordinary loss was limited to ¥0.01bn. The principal earnings-quality issue is the elevated effective tax rate of 50.7%, which reduced the tax burden to 0.491 and restrained conversion of pre-tax profit into net income. The balance sheet remains conservatively financed, with a 278.0% current ratio, 242.3% quick ratio and 65.8% capital adequacy ratio. Management left full-year earnings and dividend forecasts unchanged, but Q1 net-income progress against the full-year forecast is below the usual seasonal benchmark and makes subsequent-quarter delivery important.

Profitability Analysis

The reported annualized DuPont ROE is 5.0%, decomposed into a 3.4% net profit margin, 0.973x annualized asset turnover and 1.50x financial leverage. The principal Q1 improvement was margin-led: operating margin increased approximately 210bp year on year to 6.5%, while gross margin increased approximately 110bp to 27.7%. This indicates that both gross-profit conversion and SG&A absorption contributed, rather than leverage being the main driver. SG&A grew 3.9%, well below the 8.8% increase in revenue, creating positive operating leverage. Operating income consequently increased 60.7%, far faster than sales. The electrical and information infrastructure manufacturing, construction and service segment was the core profit contributor, producing segment profit of ¥1.62bn on external sales of ¥26.93bn, implying an approximate 6.0% segment margin. Electrical and information infrastructure distribution generated ¥0.72bn of segment profit on ¥14.08bn of external sales, or roughly 5.1%. Electronic-components manufacturing earned ¥0.64bn on ¥4.53bn of external sales, implying the highest segment margin at roughly 14.2%, albeit on the smallest revenue base. Year on year, segment profit increased 42.0% in the core manufacturing/construction/service business, 105.4% in distribution and 97.2% in electronic-components manufacturing. The tax burden is the main drag within the five-factor DuPont framework: the effective tax rate was 50.7%, leaving a tax burden of 0.491 versus a normal level above 0.70. Interest burden was favorable at 1.062, and interest coverage was strong at 36.33x, indicating that financing cost is not constraining profitability. While the Q1 margin recovery is encouraging, the annualized 5.0% ROE remains below the 8% benchmark generally associated with an adequate return profile.

Growth Assessment

Revenue growth of 8.8% was broad-based across the portfolio. Core electrical and information infrastructure manufacturing, construction and service revenue increased 3.6% year on year to ¥26.93bn. Electrical and information infrastructure distribution revenue increased 16.6% to ¥14.08bn. Electronic-components manufacturing revenue increased 20.1% to ¥4.53bn. The segment mix therefore added faster growth from distribution and electronic components to the larger core infrastructure franchise. Profit growth outpaced sales in every segment, suggesting improved utilization, mix, pricing and/or cost absorption, although the reported data does not isolate these drivers. Full-year guidance calls for revenue of ¥210.0bn, up 7.3%, operating income of ¥16.7bn, up 8.1%, ordinary income of ¥17.0bn, up 4.5%, and profit attributable to owners of ¥11.6bn. Q1 revenue represents 21.7% of the full-year sales forecast, modestly below the standard 25% first-quarter progress rate. Q1 operating income represents 17.8% of the full-year target and ordinary income represents 18.7%, both below a straight-line seasonal benchmark. Q1 profit attributable to owners represents 13.4% of the full-year target, 11.6 percentage points below the 25% benchmark. The lower net-income progress partly reflects the unusually high Q1 tax rate, while operating-profit delivery will need to accelerate through the remaining quarters to meet the full-year plan. The unchanged guidance indicates management has not revised its outlook despite the first-quarter shortfall versus straight-line annual progress.

Financial Health

Liquidity is strong. Current assets of ¥106.06bn exceeded current liabilities of ¥38.15bn by ¥67.92bn, producing working capital of ¥67.92bn and a current ratio of 278.0%. The quick ratio was also robust at 242.3%, demonstrating that liquidity is not dependent on inventory realization. Cash and deposits totaled ¥35.77bn, equivalent to 93.8% of current liabilities. Trade receivables were ¥37.63bn and inventories were ¥13.64bn. The reported debt-to-equity ratio was 0.50x and debt-to-capital was 13.2%, both consistent with a conservative solvency profile. Long-term loans were ¥19.00bn, while the current portion of long-term loans was ¥4.00bn; available cash is ample relative to this near-term refinancing requirement. Interest coverage of 36.33x further supports debt-servicing capacity. Total liabilities represented 33.4% of total assets, while total equity was ¥124.73bn and represented the principal source of funding. Goodwill was only ¥0.17bn, equal to 0.1% of equity and 0.1% of assets, leaving negligible acquisition-related balance-sheet dependency. Intangible assets were 1.6% of total assets, also indicating limited intangible-asset concentration. Asset retirement obligations were ¥0.04bn, immaterial relative to total liabilities.

Notable B/S Changes

Investment securities: +¥1.96bn (+24.7%) to ¥9.88bn - increased marketable-investment exposure and contributed to the rise in accumulated other comprehensive income. Inventories: +¥2.45bn (+21.9%) to ¥13.64bn - finished-goods inventory increased, requiring monitoring against shipment momentum and demand conditions. Accounts receivable: -¥4.21bn (-10.1%) to ¥37.63bn - favorable absolute reduction despite sales growth, although annualized DSO remains elevated at 75 days. Current liabilities: +¥2.90bn (+8.2%) to ¥38.15bn - primarily reflects higher short-term operating obligations, while liquidity remains ample. Accumulated other comprehensive income: +¥1.39bn (+13.0%) to ¥12.06bn - mainly reflects a higher valuation difference on securities. Provision for bonuses: -¥1.71bn (-56.7%) to ¥13.02bn - lower accrued bonus provision reduced current liabilities relative to the prior-year quarter. Total equity: -¥0.51bn (-0.4%) to ¥124.73bn - Q1 comprehensive income of ¥2.94bn was offset by other equity movements and distributions.

Cash Flow Quality

Cash-flow quality cannot be quantified from the reported figures because operating, investing and financing cash-flow totals are not presented. Accordingly, OCF/net-income conversion, free-cash-flow generation and dividend cash coverage cannot be calculated. Earnings quality within the income statement is nevertheless supported by the fact that operating income increased 60.7% and the extraordinary loss was only ¥0.01bn. Non-operating income was limited to 0.7% of revenue, so reported ordinary income was principally driven by operating performance rather than below-the-line income. The main working-capital watchpoint is receivables: the quality alert identifies annualized DSO of 75 days, above the 60-day warning threshold. Elevated DSO can lengthen cash conversion and raises the importance of collection discipline, particularly in project, distribution and infrastructure-related activities. However, trade receivables declined 10.1% year on year to ¥37.63bn despite revenue growth, which is directionally favorable in absolute-balance terms. Inventories increased 21.9% year on year to ¥13.64bn, led by finished goods, and should be monitored against demand and production plans. Raw materials increased 10.6% to ¥10.58bn and work in process increased 1.0% to ¥5.37bn. The high Q1 tax expense also depressed net-income conversion from pre-tax profit, although this is an accounting earnings issue rather than evidence of weak operating cash generation.

Dividend Sustainability

The full-year dividend forecast is ¥154 per share, unchanged from management's prior plan. Based on forecast EPS of ¥305.77, the indicated dividend payout ratio is approximately 50.4%. This is below the 60% sustainability benchmark and leaves a meaningful portion of forecast earnings available for reinvestment and balance-sheet resilience. The company enters the year with substantial liquidity, including ¥35.77bn of cash and deposits, and a conservative debt-to-capital ratio of 13.2%. Interest coverage of 36.33x also indicates that debt servicing should not compete materially with ordinary shareholder distributions. Retained earnings were ¥98.97bn, providing a substantial accumulated equity buffer. Dividend sustainability will ultimately depend on operating cash generation and capital-expenditure requirements, which cannot be quantified from the reported cash-flow data. The forecast payout is therefore financially reasonable on an earnings and balance-sheet basis, while cash realization and working-capital discipline remain the relevant execution variables.

Risk Assessment

Business risks include Demand and project-timing risk in the electrical and information infrastructure manufacturing, construction and service business, which is the largest segment by both revenue and segment profit., Cyclicality in electronic-components manufacturing, despite Q1 external revenue growth of 20.1% and segment profit growth of 97.2%., Manufacturing input-cost, energy-cost, supply-chain and production-utilization risk, which could reverse the Q1 gross-margin expansion., Customer collection risk: annualized DSO of 75 days exceeds the 60-day warning threshold and can extend the cash-conversion cycle., Foreign-exchange exposure remains present, with ¥0.03bn of foreign-exchange gains recognized in Q1..

Financial risks include The effective tax rate of 50.7% is materially above the 40% alert threshold, reducing Q1 pre-tax-to-net-income conversion., Q1 profit attributable to owners reached only 13.4% of the full-year forecast, 11.6 percentage points below the standard 25% first-quarter progress benchmark., Inventories increased 21.9% year on year to ¥13.64bn, particularly finished goods, creating inventory-management and demand-forecasting sensitivity., A ¥4.00bn current portion of long-term loans requires routine refinancing or repayment management, although liquidity is strong..

Key concerns include HIGH_TAX_BURDEN: the 0.491 tax burden reflects a 50.7% effective tax rate, materially above a normal corporate tax level. This was the largest factor restraining the conversion of strong operating and pre-tax profit growth into net income. If persistent, it would lower sustainable EPS and ROE; its normalization is important for full-year earnings delivery., HIGH_RECEIVABLE_DAYS: annualized DSO of 75 days is above the 60-day warning level. This is a concern because slower collection can absorb operating cash and increase exposure to customer credit conditions. The absolute receivables balance fell 10.1% year on year, which provides some offsetting context, but collection efficiency remains a key operating metric., The annualized 5.0% ROE remains below the 8% benchmark despite the sharp Q1 margin improvement, indicating that stronger returns on the sizable asset and equity base are still required..

Investment Implications

Key takeaways include Q1 delivered broad-based growth, with revenue up 8.8%, operating income up 60.7% and profit attributable to owners up 67.2%., Operating-margin expansion of approximately 210bp to 6.5% was supported by a 110bp gross-margin improvement and SG&A growth below sales growth., The core electrical and information infrastructure manufacturing, construction and service segment remained the largest profit generator, while distribution and electronic components provided faster growth., Balance-sheet resilience is high, supported by a 278.0% current ratio, 65.8% capital adequacy ratio, 13.2% debt-to-capital ratio and 36.33x interest coverage., The elevated effective tax rate and below-seasonal Q1 progress toward full-year profit guidance are the principal factors to monitor in assessing the durability of the earnings recovery..

Metrics to watch include Operating-margin retention after the Q1 increase to 6.5%, Full-year operating-income forecast progress versus the ¥16.7bn target, Effective tax rate and tax burden normalization from 50.7% and 0.491, respectively, Annualized DSO versus the current 75 days, Finished-goods inventory trend following the 21.9% year-on-year increase, Core infrastructure segment revenue and segment-profit growth, Distribution and electronic-components segment margins, Dividend payout ratio versus the forecast 50.4%.

Regarding relative positioning, The company combines improving operating leverage with a conservatively capitalized balance sheet and negligible goodwill exposure. Its Q1 operating margin of 6.5% is improved but remains below the 8% level generally considered a strong profitability profile, while the annualized 5.0% ROE remains below an 8% adequacy benchmark. Relative performance is therefore characterized by sound financial resilience and improving earnings momentum, offset by tax drag, receivables efficiency risk and the need for stronger remaining-quarter progress to achieve full-year earnings targets.