SEIKO ELECTRIC CO.,LTD. FY2026 Q1 Earnings Report

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Executive Summary

The Company achieved higher revenue and earnings, driven by the expansion of the Environmental Energy Business and Services Business, resulting in a favorable earnings report in which profit growth outpaced revenue growth. Revenue was ¥95.7B (+12.6% YoY), Operating Income was ¥12.8B (+16.3%), Ordinary Income was ¥14.6B (+25.4%), and Net Income was ¥10.6B (+41.7%). The primary reason that the growth rates of Ordinary Income and Net Income exceeded that of Operating Income was an improvement in non-operating income and expenses, including a ¥1.6B gain on the sale of securities.

Factors Affecting Business Performance

【Revenue】Revenue was ¥95.7B, representing a +12.6% increase YoY. By segment, the Environmental Energy Business increased substantially to ¥39.4B (41.2% of total, +10.6% YoY), while the Services & Engineering Business rose significantly to ¥22.6B (23.6% of total, +45.7%), driving overall performance. In contrast, the Power Business declined to ¥24.3B (25.4% of total, ▲2.7% YoY), while the IT System Solutions Business remained at ¥5.5B (+8.3% YoY). By revenue recognition category, revenue transferred over time accounted for 70.1% of the total, and project management based on the percentage-of-completion method remains a major factor affecting business performance.

【Profit and Loss】Operating Income was ¥12.8B (+16.3% YoY), and the Operating Income margin improved to 13.4% from approximately 12.9% in the prior-year period. Operating Income in the Environmental Energy Business doubled to ¥6.5B (+111.0% YoY), with its profit margin also improving significantly to 16.6%, making it the primary driver of Company-wide earnings growth. In contrast, the Power Business recorded Operating Income of ¥4.8B (▲14.8% YoY), while the IT System Solutions Business posted ¥0.1B (▲79.6% YoY), resulting in lower earnings and a widening gap in profitability among segments. Ordinary Income increased by 25.4% YoY to ¥14.6B, exceeding Operating Income growth, owing to the contribution from the ¥1.6B gain on the sale of securities included in non-operating income. Net Income was ¥10.6B (+41.7% YoY), resulting in higher revenue and earnings.

Segment Analysis

The Environmental Energy Business recorded Revenue of ¥39.4B (+10.6% YoY) and Operating Income of ¥6.5B (+111.0% YoY). Its profit margin improved substantially to 16.6% from approximately 8.7% in the prior year, making it the core business generating approximately 51% of Company-wide Operating Income. The Power Business recorded Revenue of ¥24.3B (▲2.7% YoY) and Operating Income of ¥4.8B (▲14.8% YoY). Its profit margin of 19.7% remains high but declined from the prior year. The Services & Engineering Business grew substantially, with Revenue of ¥22.6B (+45.7% YoY), but Operating Income remained at ¥0.5B (+27.8% YoY), resulting in a low profit margin of 2.0%. The Information Business (IT System Solutions) recorded higher Revenue of ¥5.5B (+8.3% YoY), but Operating Income declined sharply to ¥0.1B (▲79.6% YoY), highlighting deteriorating profitability. The Other category contracted, with Revenue of ¥7.1B (▲8.4% YoY) and Operating Income of ¥0.9B (▲34.8% YoY). While improved profitability in the Environmental Energy Business is driving Company-wide growth, earnings declines in other segments are weakening the uniformity of the overall earnings profile.

Key Financial Indicators

【Profitability】The Operating Income margin of 13.4% improved from approximately 12.9% in the prior-year period, while the Net Income margin also increased to 11.0% from approximately 8.8% in the prior year. The Gross Profit margin was 22.7% and the SG&A expense ratio was 9.3%; the increase in revenue absorbed fixed costs, generating operating leverage.【Cash Flow Quality】Comprehensive Income of ¥15.1B exceeded Net Income of ¥10.6B by ¥4.6B, with a significant contribution from the ¥4.7B valuation difference on available-for-sale securities. A portion of Net Income, namely the ¥1.6B gain on the sale of securities, represents non-recurring investment income; distinguishing this from Operating Income growth is important when evaluating earnings quality.【Investment Efficiency】ROE was 5.5%, while the Equity Ratio was 53.1% (up from 51.2% in the prior year), indicating that capital efficiency remains low relative to the improvement in profitability. Accounts receivable of ¥134.5B accounted for 37.1% of total assets of ¥362.6B, constraining asset turnover efficiency.【Financial Soundness】Short-term liquidity was sound, with Cash and deposits of ¥40.8B and Current Assets of ¥206.8B compared with Current Liabilities of ¥134.0B. Interest-bearing debt was primarily composed of Short-term borrowings of ¥32.6B, while Long-term borrowings were limited to ¥2.7B, resulting in a borrowing structure concentrated in the short term.

Cash Flow Analysis

Although a cash flow statement was not disclosed, the movement of funds can be assessed from changes in the balance sheet. Cash and deposits increased to ¥40.8B, up ¥8.2B from ¥32.6B in the prior year. While Accounts receivable declined to ¥134.5B from ¥149.4B in the prior year, Work in process also decreased to ¥15.5B from ¥18.5B, suggesting a shift in assets associated with project progress. Accounts payable declined substantially to ¥39.3B from ¥61.1B in the prior year, possibly indicating that payments for procurement and subcontracting expenses preceded collections. Short-term borrowings increased significantly to ¥32.6B from ¥6.6B in the prior year, suggesting that working capital funding may have been financed through short-term borrowings. Net assets increased to ¥192.7B from ¥180.9B in the prior year, supported by the accumulation of retained earnings and an increase in valuation and translation adjustments.

Earnings Quality

Ordinary Income for the current period of ¥14.6B included a ¥1.6B gain on the sale of investment securities recorded in non-operating income; excluding this gain, adjusted Ordinary Income would be approximately ¥12.9B. Total non-operating income of ¥1.9B represented only 2.0% of Revenue, but because the gain on sale accounted for most of this amount, the 25.4% growth in Ordinary Income exceeded the 16.3% growth in Operating Income. After-tax proceeds from this gain accounted for a certain portion of Net Income of ¥10.6B, meaning that part of the +41.7% growth in Net Income depended on non-recurring investment income. Meanwhile, Comprehensive Income of ¥15.1B exceeded Net Income, reflecting an increase in valuation differences on securities; however, this is also subject to fluctuations in market prices. Operating Income growth of +16.3% indicates improvement in the underlying business activities, and the sustainability of Operating Income should be emphasized when evaluating earnings quality.

Earnings Forecast and Guidance

The Full-Year earnings forecast remains unchanged at Revenue of ¥360.0B (+14.7% YoY), Operating Income of ¥30.0B (+14.7% YoY), and Ordinary Income of ¥34.0B (+8.8% YoY). Q1 progress rates were 26.6% for Revenue, 42.7% for Operating Income, and 42.8% for Ordinary Income, substantially exceeding the standard quarterly progress rate of 25%. However, because Q1 Ordinary Income included the ¥1.6B gain on the sale of securities, the Ordinary Income progress rate excluding this gain was approximately 38.0%. The fact that earnings progress exceeds revenue progress reflects the contribution of highly profitable projects in the Environmental Energy Business. Going forward, the recovery of profitability in the Power and Information Businesses and the leveling of project progress will be key to achieving the Full-Year targets.

Shareholder Returns

The Full-Year dividend forecast is ¥55.0 per share, implying a forecast Payout Ratio of approximately 32.3% against the Full-Year forecast EPS of ¥170.05. The forecast annual dividend total calculated using the average number of shares outstanding during the period of 13,525 thousand shares is approximately ¥7.4B, representing a limited burden relative to the Full-Year forecast Net Income of ¥23.0B. The prior-year dividend was ¥25 per share, so the forecast would represent a dividend increase if achieved. This figure represents the Payout Ratio based solely on dividends and is not the Total Return Ratio, which includes share repurchases.

Risk Factors

1. Prolonged collection period for trade receivables: Accounts receivable of ¥134.5B represented 37.1% of total assets, while annualized DSO was 128 days, substantially exceeding the generally cautious level of approximately 60 days. Delays in project acceptance or changes in customer payment terms could have a significant impact on working capital and cash management.

2. Reliance on short-term borrowings: Short-term borrowings of ¥32.6B accounted for 92.5% of interest-bearing debt of ¥35.3B. Cash and deposits of ¥40.8B and a Current Ratio of 154% provide a buffer, but changes in the refinancing environment warrant attention.

3. Profitability gap among segments: The Power Business recorded Revenue of ▲2.7% and Operating Income of ▲14.8%, while the Information Business recorded Operating Income of ▲79.6% despite higher revenue. Reliance on the Environmental Energy Business for earnings is increasing, creating a structure in which deterioration in that segment’s profitability would have a significant Company-wide impact.

Industry Benchmark (For Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

Both the Operating Income margin and Net Income margin substantially exceeded the industry median, placing profitability at a high level within the industry.

Growth and Capital Efficiency

The Revenue growth rate also exceeded the industry median, showing a high level of growth close to the upper bound of the IQR.

※Source: Compiled by the Company

Key Takeaways from the Earnings Report

1. The Operating Income margin of 13.4% improved from the prior-year period, and the substantial increase in the Environmental Energy Business profit margin to 16.6% led the improvement in Company-wide profitability. At the same time, profitability deteriorated in the Power and Information Businesses, and the increasing concentration of earnings sources is a structural change warranting attention.

2. The strong growth in Ordinary Income and Net Income included the ¥1.6B gain on the sale of investment securities. The sustainability of performance should therefore be assessed by distinguishing this from Operating Income growth of +16.3%.

3. Accounts receivable of ¥134.5B (37.1% of total assets) and reliance on Short-term borrowings (92.5% of interest-bearing debt) are items requiring monitoring from both working capital and financing-structure perspectives.

Theoretical Stock Price (Reference Value)

Sensitivity: ¥1,478–¥1,564 at ±1% for the cost of equity, and ¥1,518–¥1,523 at ±0.1 for ω.

Notes:

• Because Net Income progress against the Full-Year forecast (46%) exceeds the standard level (25%), forecast EPS has been adjusted upward within a maximum range of +10% (because companies with progress ahead of forecast tend to exceed their forecasts. The adjustment may be excessive for businesses with strong seasonality).
• Net assets as of the quarter-end have been used (there is a timing difference relative to the Full-Year forecast).
• Because Net assets include non-controlling interests, the theoretical value may be calculated somewhat higher.

(Calculation model: Residual Income Model (Ohlson-type, explicit 5-year fade) / Interest rate reference month: 2026-07 / Mechanically calculated using only publicly disclosed data; this is not a forecast of the market price or a recommendation of any specific investment action, and does not forecast or guarantee future stock 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 benchmark is reference information compiled by the Company based on publicly disclosed earnings data. Investment decisions should be made at your own discretion and responsibility, after consulting a professional as necessary.

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AI Financial Analysis

Executive Summary

FY2026 Q1 was a strong start, with double-digit sales growth, operating-margin expansion, and materially faster net-income growth. Revenue increased 12.6% YoY to ¥9.574bn. Operating income rose 16.3% to ¥1.280bn. Gross profit increased to ¥2.171bn, lifting the gross margin to 22.7% from 22.3%, an expansion of 34bp. The operating margin improved 42bp to 13.4% from 13.0%, as revenue growth outpaced the 11.4% increase in SG&A expenses. Net income rose 41.6% to ¥1.057bn, and the net margin expanded 227bp to 11.0%. The largest earnings contributor was the Environment & Energy segment, which generated ¥3.929bn of revenue and ¥652m of segment profit. Its profit growth more than offset lower profit in the Power and Information segments. Revenue recognized over time increased 27.6% YoY to ¥6.714bn, while revenue recognized at a point in time declined 11.7% to ¥2.856bn, indicating a more project- and contract-execution-led quarterly sales mix. Ordinary income grew 25.4%, faster than operating income, supported by a ¥164m gain on sales of investment securities. This gain represented 15.5% of net income and enhanced reported earnings, although it is non-recurring relative to core operating performance. The annualized ROE was 21.9%, supported by an 11.0% net margin, 1.056x asset turnover, and 1.88x financial leverage. Liquidity remained sound, with a 154.3% current ratio and ¥4.078bn of cash against ¥3.262bn of short-term loans. However, the sharp increase in short-term borrowing and the 92.5% short-term debt mix heighten refinancing dependence. The full-year operating-income forecast implies a substantially lower 8.3% margin than the Q1 result, suggesting management retains a conservative full-year earnings profile or expects a less favorable sales mix later in the year. Q1 sales, operating income, and net income have reached 26.6%, 42.7%, and 46.0%, respectively, of full-year guidance, placing profit progress materially ahead of the standard 25% Q1 run rate. The central issues for subsequent quarters are whether Environment & Energy profitability can be maintained, whether the Power and Information businesses recover, and whether working-capital execution improves.

Profitability Analysis

The annualized DuPont ROE of 21.9% decomposes into an 11.0% net profit margin, 1.056x asset turnover, and 1.88x financial leverage. The principal driver of the strong return profile is profitability: the 11.0% net margin is above the 10% excellent benchmark, while leverage is moderate rather than aggressive on a debt-capital basis. Gross margin rose 34bp YoY to 22.7%, showing that the additional ¥1.070bn of revenue translated into a ¥271m increase in gross profit. SG&A expenses rose 11.4% YoY to ¥890m, below the 12.6% revenue growth rate, producing positive operating leverage and a 42bp improvement in operating margin to 13.4%. Operating margin is in the upper end of the 8-15% good benchmark range. The gap between ordinary-income growth of 25.4% and operating-income growth of 16.3% was driven primarily by the ¥164m investment-securities sales gain, compared with ¥84m in the prior-year quarter. Consequently, core operating momentum is solid but the 41.6% net-income growth rate overstates the improvement in recurring earnings. The tax burden was 0.726, equivalent to a 27.4% effective tax rate, which is within a normal range. Interest burden was 1.137x because non-operating income exceeded interest expense; interest coverage was an exceptionally strong 142.2x. By segment, Environment & Energy was the core business by operating-profit contribution, with revenue up 10.5% YoY to ¥3.929bn and segment profit up 111.0% to ¥652m; its segment margin was approximately 16.6%. Power revenue declined 2.7% to ¥2.434bn and segment profit fell 14.8% to ¥479m, reducing its margin to approximately 19.7% from 22.5%. Service revenue rose 53.4% to ¥2.138bn and profit increased 27.8% to ¥46m, but its approximately 2.2% margin remains modest. Information revenue increased 13.7% to ¥439m, while profit dropped 79.6% to ¥11m, indicating sharp margin compression. Other businesses recorded revenue of ¥631m, down 5.1%, and profit of ¥90m, down 34.8%.

Growth Assessment

Growth was led by Environment & Energy and Service, with the former providing both scale and the majority of incremental segment profit. The shift toward revenue recognized over time, which increased to 70.1% of consolidated sales from 61.9% a year earlier, supports visibility during project execution but also makes earnings sensitive to construction progress, milestone timing, and contract profitability. Environment & Energy's ¥343m increase in segment profit accounted for more than the consolidated ¥179m operating-income increase, demonstrating its importance to the earnings trajectory. Service also made a positive contribution through revenue growth, although its low profit margin limits the absolute earnings benefit. Power remains profitable but experienced lower revenue and lower segment profit, while Information requires recovery in project profitability to become a meaningful contributor. Q1 revenue progress of 26.6% is broadly consistent with the normal 25% first-quarter pace. In contrast, operating-income progress of 42.7% and net-income progress of 46.0% exceed the standard pace by 17.7ppt and 21.0ppt, respectively. The elevated profit progress reflects strong Q1 execution and the securities-sale gain, so it should not be extrapolated mechanically. Management maintained full-year guidance of ¥36.0bn revenue, ¥3.0bn operating income, ¥3.4bn ordinary income, and ¥2.3bn net income. The forecast implies 14.7% YoY growth in both revenue and operating income, so the unchanged outlook still assumes a favorable full-year demand and execution environment. The forecast operating margin of 8.3% is 5.0ppt below Q1's 13.4%, leaving room for seasonal cost absorption, project mix normalization, or prudence in management assumptions.

Financial Health

Financial health is sound overall, supported by total equity of ¥19.265bn and an equity ratio of 53.1%. The current ratio of 154.3% and quick ratio of 148.0% exceed healthy liquidity benchmarks, while working capital was ¥7.281bn. Interest-bearing debt was ¥3.528bn, equal to 15.5% of capital, and interest coverage of 142.2x indicates that current interest-servicing capacity is very strong. Cash deposits of ¥4.078bn covered short-term loans of ¥3.262bn by 1.25x. Nevertheless, refinancing risk is a material financial consideration because 92.5% of interest-bearing debt is short term, well above the 40% alert threshold. Short-term loans increased ¥2.607bn, or 398.0% YoY, to ¥3.262bn, while long-term loans declined slightly to ¥266m. This maturity concentration means that liquidity depends on continued bank-facility access and timely conversion of project receivables into cash. Accounts payable fell ¥2.178bn, or 35.7%, to ¥3.928bn, while electronic payables stood at ¥1.851bn; the reduction in supplier financing alongside higher short-term loans may indicate a greater reliance on bank funding for working capital. Accounts receivable remained large at ¥13.447bn, representing 37.1% of total assets. The quality alert for annualized DSO of 128 days is significant: it is well above the 60-day warning threshold and exposes liquidity to collection timing and project acceptance risk. This may be partly characteristic of long-cycle electrical, environmental, and infrastructure projects, but the balance-sheet funding structure makes collection discipline especially important. The reported debt-to-equity ratio is 0.88x, below the 2.0x warning threshold, and debt/capital is conservative at 15.5%.

Notable B/S Changes

Short-term loans: +¥2.607bn (+398.0%) to ¥3.262bn - sharp increase in bank-funded short-term financing; with 92.5% of debt short term, refinancing and working-capital management require close monitoring. Accounts payable: -¥2.178bn (-35.7%) to ¥3.928bn - lower supplier financing coincided with higher short-term borrowing, potentially increasing dependence on bank liquidity. Cash and deposits: +¥818m (+25.1%) to ¥4.078bn - supports liquidity and covers short-term loans by 1.25x, though the cash buffer must be assessed alongside sizeable receivables. Property, plant and equipment: +¥1.808bn (+24.3%) to ¥9.253bn - a sizeable increase in productive assets, representing 25.5% of total assets and indicating a more capital-intensive asset base. Investment securities: +¥684m (+13.1%) to ¥5.899bn - portfolio remains material at 16.3% of total assets; valuation movements and realizations can affect OCI and non-operating earnings. Total assets: +¥1.542bn (+4.4%) to ¥36.257bn - asset growth was driven principally by higher PPE, investment securities, and cash, while receivables declined from the prior-year quarter.

Cash Flow Quality

Dividend Sustainability

The full-year dividend forecast is ¥55 per share, unchanged from the disclosed forecast. Based on forecast EPS of ¥170.05, the implied dividend payout ratio is 32.3%, comfortably below the 60% sustainability benchmark. This leaves a substantial earnings buffer for working capital, capital investment, debt reduction, and retained earnings. Retained earnings were ¥10.263bn at quarter-end, equivalent to more than half of total equity. Dividend sustainability will principally depend on the conversion of project earnings and receivables into cash, given the elevated annualized DSO and reliance on short-term debt. The maintained dividend forecast is consistent with the strong Q1 earnings progress, but the non-recurring securities-sale gain should not be treated as a recurring source of dividend capacity.

Risk Assessment

Business risks include Project-execution risk: 70.1% of Q1 revenue was recognized over time, exposing revenue and margin to construction progress, customer acceptance, cost overruns, and loss-making contract risk. The company carried a ¥42m provision for loss on construction contracts., Environment & Energy concentration: the segment generated ¥652m, or 50.9%, of consolidated segment profit. A slowdown in public infrastructure, energy-transition investment, or project awards would have a disproportionate earnings impact., Power-segment softness: revenue declined 2.7% YoY and segment profit declined 14.8%, indicating weaker near-term momentum in a historically high-margin business., Information-segment profitability risk: revenue grew 13.7%, but segment profit fell 79.6%, suggesting adverse project mix, execution costs, or pricing pressure., Manufacturing work-in-process risk: the quality alert identifies WIP as 54.7% of inventory, above the 40% warning level. This points to a potential production bottleneck, delayed project completion, or heightened exposure to cost escalation and obsolescence..

Financial risks include Refinancing risk: 92.5% of interest-bearing debt is short term, and short-term loans increased 398.0% YoY to ¥3.262bn. Although cash covers short-term loans, the maturity profile requires ongoing refinancing access., Collection risk: annualized DSO of 128 days materially exceeds the 60-day warning threshold. Receivables of ¥13.447bn are large relative to cash and can delay liquidity conversion if customer payments or project inspections slip., Supplier-credit and funding risk: accounts payable fell 35.7% YoY while short-term borrowing rose sharply, increasing reliance on bank funding rather than trade-credit financing., Market-value risk in investment securities: investment securities totaled ¥5.899bn, or 16.3% of total assets, and a ¥164m gain on securities sales supported Q1 earnings. Changes in equity-market valuations can affect OCI and the availability of future realized gains..

Key concerns include The annualized DSO alert and elevated WIP ratio together indicate that working-capital intensity is the highest-priority operational-financial risk., Q1 net-income growth was boosted by a ¥164m gain on investment securities sales; recurring operating performance improved, but less rapidly than headline net income., The short-term debt ratio is high despite otherwise healthy liquidity and low debt/capital, making maturity management more important than absolute leverage., The substantial decline in Power and Information segment profitability should be monitored against the strong Environment & Energy result..

Investment Implications

Key takeaways include Q1 operating performance was favorable: revenue rose 12.6%, operating income rose 16.3%, and operating margin expanded to 13.4%., Environment & Energy is the core earnings engine, contributing ¥652m of segment profit and delivering a roughly 16.6% segment margin., Headline net income benefited from a ¥164m investment-securities sale gain, equal to 15.5% of Q1 net income., Liquidity ratios are healthy, but funding and cash-conversion risk are elevated by a 92.5% short-term debt mix and 128-day annualized DSO., The full-year profit outlook is maintained, and Q1 operating-income progress of 42.7% is well ahead of a typical first-quarter pace..

Metrics to watch include Environment & Energy revenue growth, segment margin, and project execution, Power and Information segment-profit recovery, Annualized DSO, receivables balance, and collection timing, WIP proportion, construction-loss provisions, and project-cost discipline, Short-term debt balance, refinancing terms, and cash versus short-term loans, Frequency and magnitude of investment-securities gains relative to ordinary and net income, Achievement of the ¥36.0bn revenue and ¥3.0bn operating-income full-year forecasts.

Regarding relative positioning, The company combines above-benchmark Q1 profitability, an annualized ROE of 21.9%, solid liquidity ratios, and low debt/capital with a working-capital profile that is less efficient than manufacturing benchmarks. Relative earnings quality is supported by expanding gross and operating margins, but is moderated by securities-sale gains and the need to fund long collection cycles through predominantly short-term borrowings.