NITTO KOGYO CORPORATION FY2027 Q1 Earnings Report

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Executive Summary

In Q1, in addition to the core Electrical and Information Infrastructure-related businesses, the Distribution and Electronic Components-related businesses drove performance, resulting in substantial increases in both revenue and profit, accompanied by improved profit margins. 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 gross profit margin improved to 27.7% (26.7% in the same period of the previous year), while the SG&A expense ratio declined to 21.2% (22.2%), resulting in a 2.1pt expansion in the operating margin to 6.5% (4.4%).

Factors Affecting Performance

【Revenue】Revenue was ¥455.4B, representing an increase of +8.8% YoY. The core Electrical and Information Infrastructure-related Manufacturing, Construction, and Services Business (61.6% of revenue) generated ¥280.8B (+4.5%); the Electrical and Information Infrastructure-related Distribution Business (31.1%) generated ¥141.5B (+16.1%); and the Electronic Components-related Manufacturing Business (9.9%) generated ¥45.3B (+20.2%). All three businesses secured revenue growth. Strong growth in the Distribution and Electronic Components businesses drove the overall revenue growth rate higher.

【Profit and Loss】Operating Income was ¥29.8B (+60.7% YoY), and the operating margin improved to 6.5% from 4.4% in the same period of the previous year, an improvement of 2.1pt. While the gross profit margin improved to 27.7% (+1.1pt), the SG&A expense ratio declined to 21.2% (-1.0pt), and operating leverage worked in conjunction with the effect of higher revenue. By segment, the Electronic Components-related Manufacturing Business posted ¥6.4B in profit (+97.2%, 14.1% margin), while the Distribution Business posted ¥7.2B (+105.4%, 5.1% margin), both representing substantial profit growth. The core Manufacturing, Construction, and Services Business also grew to ¥16.2B (+42.0%, 5.8% margin). Ordinary Income was ¥31.8B (+56.3%), representing growth broadly in line with Operating Income. Extraordinary gains and losses consisted solely of a ¥0.1B loss on the disposal and sale of fixed assets, and the impact of temporary factors was limited. Net Income attributable to owners of the parent was ¥15.5B (+67.2%). Although the effective tax rate on pretax income of ¥31.6B declined slightly to 50.7% from 56.1% in the same period of the previous year, it remained at a high level and continued to weigh on the conversion rate from Ordinary Income to Net Income. Overall, the results reflected higher revenue and higher profit.

Segment Analysis

The Electrical and Information Infrastructure-related Manufacturing, Construction, and Services Business generated revenue of ¥280.8B (+4.5%) and segment profit of ¥16.2B (+42.0%, 5.8% margin), contributing to overall profit growth as the core business accounting for 61.6% of total revenue. The Electrical and Information Infrastructure-related Distribution Business generated revenue of ¥141.5B (+16.1%) and profit of ¥7.2B (+105.4%, 5.1% margin), more than doubling profit while also achieving double-digit revenue growth and an improved margin. The Electronic Components-related Manufacturing Business generated revenue of ¥45.3B (+20.2%) and profit of ¥6.4B (+97.2%, 14.1% margin), achieving both the highest growth rate and the highest profit margin among the three businesses. Although the Electronic Components Business accounted for only 9.9% of total company revenue, growth in this high-margin business contributed to the improvement in the company-wide profit margin.

Key Financial Indicators

【Profitability】The operating margin improved by 2.1pt to 6.5% (4.4% in the same period of the previous year), while the net margin (attributable to owners of the parent) improved by 1.2pt to 3.4% (2.2%). The gross profit margin was 27.7% (26.7%), and the SG&A expense ratio was 21.2% (22.2%), with the absorption of fixed costs accompanying revenue growth supporting the improvement in profit margins.【Cash Quality】Cash and deposits were ¥357.7B, virtually flat at +1.1% YoY, while the inventory-to-revenue ratio rose to 30.0% (26.8%). In contrast, the accounts receivable-to-revenue ratio declined to 82.6% (100.0%), indicating a change in the working capital composition.【Investment Efficiency】ROE was 1.2% (quarterly basis, before annualization), the quarterly revenue-to-total-assets ratio was 24.3%, and financial leverage (total assets/equity) was 1.52x.【Financial Soundness】The equity ratio was 66.6% (67.6% in the same period of the previous year), and interest-bearing debt was ¥230B, a decrease of -4.2% YoY, indicating strong financial resilience. The current ratio was 278% and the quick ratio was 242%, providing substantial short-term liquidity capacity.

Cash Flow Analysis

Because the statement of cash flows has not been disclosed, cash trends are reviewed based on changes in the balance sheet. Cash and deposits were ¥357.7B, virtually flat at +1.1% compared with ¥353.8B in the same period of the previous year. Interest-bearing debt (the total of long-term borrowings and current portions of long-term borrowings) was ¥230B, a decrease of -4.2% from ¥240B in the previous year, indicating progress in debt reduction. Meanwhile, inventories increased by +21.9% YoY to ¥136.4B, and the inventory-to-revenue ratio rose to 30.0%, suggesting a tendency for funds to remain tied up in inventory. Accounts receivable declined by -10.1% YoY to ¥376.3B, and the accounts receivable-to-revenue ratio declined to 82.6%, indicating improvement in collections. Retained earnings were ¥989.7B, down -1.9% from ¥1008.7B in the previous year, suggesting that dividend payments exceeded the accumulation of quarterly profit.

Earnings Quality

Profit in Q1 was driven primarily by the core business (Operating Income), with only limited contributions from non-operating income and extraordinary gains and losses. Non-operating income of ¥3.0B consisted of ¥1.6B in dividend income, ¥0.3B in foreign exchange gains, and ¥0.6B in other income. Non-operating expenses of ¥1.0B were primarily interest expenses of ¥0.8B, and the impact of non-recurring items on Ordinary Income of ¥31.8B was limited. Extraordinary gains and losses consisted solely of a ¥0.1B loss on the disposal and sale of fixed assets, which was not material. Meanwhile, income taxes of ¥16.1B against pretax income of ¥31.6B resulted in an effective tax rate of 50.7% (56.1%), which remained high relative to the statutory effective tax rate and continued to pressure the conversion from Ordinary Income to Net Income. Comprehensive income was ¥29.4B, exceeding Net Income attributable to owners of the parent of ¥15.5B by ¥13.9B. The primary reason for the difference was a ¥13.6B valuation difference on investment securities. This divergence resulted from unrealized gains on securities, which are not directly related to the earnings power of the core business; therefore, caution is warranted regarding the difference in levels relative to Net Income.

Earnings Forecast and Guidance

Q1 progress against the full-year company forecast was 21.7% for Revenue (¥455.4B/¥2100.0B), 17.8% for Operating Income (¥29.8B/¥167.0B), 18.7% for Ordinary Income (¥31.8B/¥170.0B), and 13.4% for Net Income attributable to owners of the parent (¥15.5B/¥116.0B). Based on a simple benchmark of one-fourth (25%), progress on the profit side was somewhat slower than revenue progress, with Net Income showing the lowest progress rate in particular. The full-year forecast calls for higher revenue and profit, with Revenue +7.3%, Operating Income +8.1%, and Ordinary Income +4.5%. The revenue and profit growth rates recorded in Q1 were both ahead of the pace implied by the full-year outlook. No revisions were made to the earnings forecast or dividend forecast during the quarter.

Shareholder Returns

The Company has announced an annual dividend forecast of ¥154 per share for the current fiscal year (FY ending March 2027), implying a payout ratio of 50.4% based on the full-year EPS forecast of ¥305.77. The annual dividend paid in the previous fiscal year (FY ending March 2026) was ¥62 per share, and the current forecast represents a planned dividend increase. Given the financial base of cash and deposits of ¥357.7B, an equity ratio of 66.6%, and interest-bearing debt of ¥230B (-4.2% YoY), the Company has substantial financial capacity to fund dividends. No revision was made to the dividend forecast as of the end of the quarter.

Risk Factors

1. Segment concentration risk: The core Electrical and Information Infrastructure-related Manufacturing, Construction, and Services Business accounts for 61.6% of Revenue (¥280.8B), resulting in a high degree of earnings sensitivity to the investment cycle in power and telecommunications infrastructure. The operating margin of this business is 5.8%, below the company-wide average of 6.5%, creating a structure in which changes in the business mix can readily affect overall profitability.

2. Changes in working capital composition: Inventories increased by +21.9% YoY to ¥136.4B, and the inventory-to-revenue ratio rose to 30.0% (26.8%). Meanwhile, accounts receivable declined by -10.1% YoY to ¥376.3B, and changes in the balance between inventory and receivables could affect capital efficiency going forward.

3. High effective tax rate: The effective tax rate in Q1 remained high at 50.7% (56.1% in the same period of the previous year) relative to the statutory effective tax rate, continuously pressuring the conversion rate from Ordinary Income to Net Income. If this level continues throughout the full year, Net Income growth could fall below Ordinary Income growth (full-year forecast of +4.5%).

Industry Benchmark (Reference; Compiled by the Company)

Profitability and Returns

Both the operating margin and net margin are below the industry median, indicating that profitability is relatively low within the industry.

Growth and Capital Efficiency

The revenue growth rate is above the industry median, indicating a relatively high level of growth within the industry.

Source: Compiled by the Company

Key Points from the Results

1. Clear improvement in profitability: The operating margin expanded by 2.1pt to 6.5% (4.4% in the same period of the previous year), supported by both a +1.1pt improvement in the gross profit margin and a -1.0pt decline in the SG&A expense ratio. The simultaneous progress in revenue growth and profitability improvement is a defining feature of these results.

2. Changes in segment mix: Growth in the high-profit-margin Electronic Components-related Manufacturing Business (14.1% margin) and the Distribution Business (5.1% margin, profit +105.4%) exceeded that of the core business (5.8% margin). The impact of changes in the business mix on the company-wide profit margin should continue to be monitored.

3. Full-year progress and working capital: Progress against the full-year forecast was 21.7% for Revenue and 13.4% for Net Income, below a simple one-fourth benchmark. In addition, inventories increased by +21.9% YoY. The potential for acceleration in profit progress and the trend in inventory levels will be key points to monitor in assessing achievement of the full-year plan.

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 five-year fade). It is not a forecast of the market share price or a recommendation of any specific investment action.

Sensitivity: ¥3,222–¥3,406 at Cost of Equity ±1%, and ¥3,312–¥3,313 at ω±0.1.

Notes:

• Net assets as of the end of the quarter are used (there is a timing difference relative to the full-year forecast).
• Because non-controlling interests are included in net assets, the theoretical value may be calculated somewhat higher.

(Calculation model: Residual Income Model / Interest Rate Reference Month: 2026-07 / This value does not 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 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 with a professional as necessary.

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