Foster Electric Company,Limited FY2027 Q1 Earnings Report

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Executive Summary

This was a quarter in which earnings declined despite higher revenue due to a lower gross margin and increased expenses. Although foreign exchange gains in non-operating income relatively mitigated the decline at the ordinary income level, the substantial decrease in net income was the most important point. Revenue increased to ¥351.0B (+9.2% YoY), while operating income was limited to ¥5.8B (-66.9%), ordinary income to ¥11.0B (-43.3%), and net income to ¥4.3B (-77.3%). Deteriorating profitability in the core Speaker Business reduced the Company-wide profit margin, and the strong performance of the Mobile Audio Business was insufficient to offset the decline.

Factors Affecting Business Performance

【Revenue】Revenue was ¥351.0B, representing a +9.2% YoY increase. By segment, the Speaker Business generated ¥286.1B (+7.5%, 81.5% of revenue), while the Mobile Audio Business generated ¥35.7B (+14.4%); both segments reported higher revenue.

【Profitability】Operating income declined substantially to ¥5.8B (-66.9%). The increase in cost of sales (+13.5%) exceeded revenue growth (+9.2%), causing the gross margin to decline to 14.2% (from approximately 17.5% in the previous year). In addition, SG&A expenses increased to 12.5% (approximately 12.0% in the previous year), resulting in negative operating leverage. By segment, Speaker Business profit fell sharply to ¥0.7B (-95.5%, 0.2% margin), while Mobile Audio Business profit was strong at ¥3.1B (+55.2%, 8.7% margin), widening the disparity between the portfolios. Ordinary income was ¥11.0B (-43.3%), supported by ¥5.1B in foreign exchange gains within non-operating income. Net income was ¥4.3B (-77.3%), as income taxes and other taxes of ¥6.8B (approximately 61.8% effective tax rate) and ¥3.0B in net income attributable to non-controlling interests imposed a significant burden, resulting in a substantial contraction from ordinary income. The quarter ended with higher revenue but lower earnings.

Segment Analysis

The Speaker Business generated revenue of ¥286.1B (+7.5%, 81.5% of total revenue), but operating income declined to ¥0.7B (-95.5%, 0.2% margin), reflecting a significant deterioration in profitability and serving as the primary factor weighing down the Company-wide profit margin. In contrast, the Mobile Audio Business reported both higher revenue and higher earnings, with revenue of ¥35.7B (+14.4%) and operating income of ¥3.1B (+55.2%, 8.7% margin), driving more than half of total segment profit. The gap in profit margins between the two segments reached 8.5 points, making pricing and cost-of-sales improvements in the Speaker Business—which accounts for more than 80% of revenue composition—the key to restoring Company-wide profitability.

Key Financial Indicators

【Profitability】The operating margin was 1.7%, a substantial deterioration from approximately 5.5% in the previous year, while the net margin also declined to approximately 1.2%. ROE remained low at 0.6%.【Cash Flow Quality】Operating Cash Flow (OCF) was ¥4.7B, exceeding net income of ¥4.3B and providing support for the accounting profit; however, OCF declined -64.8% YoY, with an inventory increase (-¥8.4B) and a decrease in accounts payable (-¥14.9B) creating headwinds for working capital.【Investment Efficiency】Investing Cash Flow was -¥20.2B, including capital expenditures of ¥19.7B, approximately 2.1 times depreciation and amortization of ¥9.3B; consequently, free cash flow was negative at -¥15.6B.【Financial Soundness】The equity ratio remained high at 67.5% (68.5% in the previous year), and the Company maintained cash and deposits of ¥195.7B, indicating a stable financial foundation.

Cash Flow Analysis

Operating Cash Flow was ¥4.7B, exceeding net income of ¥4.3B and securing cash generation, although it declined -64.8% from ¥13.2B in the previous year. An ¥8.4B increase in inventories and a ¥14.9B decrease in accounts payable created working-capital headwinds and contributed to the contraction in OCF. Investing Cash Flow was -¥20.2B, reflecting aggressive investment, with capital expenditures of ¥19.7B amounting to approximately twice depreciation and amortization of ¥9.3B. As a result, free cash flow was -¥15.6B, with financing cash flow of ¥13.6B—primarily reflecting an increase in short-term borrowings—supplementing the funding. Cash and deposits were ¥195.7B, down from ¥202.4B in the previous year, but financial stability was maintained on the basis of an equity ratio of 67.5%.

Earnings Quality

The current period’s earnings were supported by significant foreign exchange gains of ¥5.1B within non-operating income of ¥6.5B, compared with operating income from the core business of ¥5.8B. This indicates that approximately half of ordinary income of ¥11.0B was supported by foreign exchange, a non-recurring factor. Although non-operating income was limited to approximately 1.9% of revenue, foreign exchange gains were larger than operating income, indicating a reduced dependence on the core business’s earning power. The divergence between ordinary income and net income resulted from income taxes and other taxes of ¥6.8B (approximately 61.8% effective tax rate) and the deduction of ¥3.0B in net income attributable to non-controlling interests; the substantial tax burden and portion attributable to minority shareholders compressed net income attributable to owners of the parent. OCF exceeded net income, maintaining consistency between accounting profit and cash flow, although changes in inventories and accounts payable weakened earnings quality from a working-capital perspective.

Earnings Forecast and Guidance

The Q1 progress rate against the full-year plan was 25.1% for revenue (¥351.0B/¥1400.0B), indicating standard progress, while operating income was 7.3% (¥5.8B/¥80.0B) and ordinary income was 14.7% (¥11.0B/¥75.0B), both substantially behind schedule. The full-year operating income forecast calls for a +4.3% YoY increase, indicating that the plan assumes a recovery in the gross margin and cost improvements in the second half. There were no revisions to either the earnings forecast or the dividend forecast, and management maintained its full-year plan as of Q1.

Shareholder Returns

The annual dividend forecast is ¥115, and based on the full-year net income plan attributable to owners of the parent of ¥50.0B and the average number of shares outstanding during the period, the payout ratio is expected to be approximately in the 50% range. Compared with the previous year’s dividend of ¥35 (a portion of the interim and year-end dividends), the full-year forecast of ¥115 represents a planned increase in the dividend level. As of Q1, there had been no revision to the dividend forecast, and no share repurchases had been confirmed.

Risk Factors

1. Deteriorating profitability in the Speaker Business: Operating income in the core segment, which accounts for 81.5% of revenue composition, declined to ¥0.7B (0.2% margin), significantly weighing down the Company-wide operating margin of 1.7%.

2. High dependence on foreign exchange: Foreign exchange gains of ¥5.1B in non-operating income accounted for approximately 46% of ordinary income of ¥11.0B, indicating a high dependence on factors outside the core business. There is a risk that these gains could dissipate due to market fluctuations.

3. Deterioration in working capital: An ¥8.4B increase in inventories and a ¥14.9B decrease in accounts payable caused OCF to contract -64.8% YoY, resulting in negative free cash flow of -¥15.6B.

Industry Benchmark (For Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

Profitability was substantially below the industry median, with both the operating margin and net margin positioned in the lower tier of the industry.

Growth and Capital Efficiency

The revenue growth rate exceeded the industry median, indicating that top-line growth was relatively strong within the industry.

※Source: Compiled by the Company

Key Takeaways from the Financial Results

1. Although top-line growth remains above the industry average, the operating margin has declined substantially below the industry median due to gross margin deterioration and increased SG&A expenses. The coexistence of higher revenue and lower earnings characterizes the quality of the current-period results.

2. The deterioration in profitability of the core Speaker Business (0.2% margin) contrasts with the strong performance of the Mobile Audio Business (8.7% margin), indicating that correcting the segment mix will be key to restoring the Company-wide profit margin.

3. While progress against the full-year plan was 25.1% for revenue, operating income and ordinary income were substantially behind at 7.3% and 14.7%, respectively. The need for a recovery in profitability in the second half as a prerequisite for achieving the plan is noteworthy.

Theoretical Share Price (Reference Value)

This is a mechanically calculated reference range based solely on publicly disclosed data using a residual income model (Ohlson-type, explicit 5-year fade). It is not a forecast of the market share price or a recommendation to undertake any specific investment action.

Sensitivity: 2,774円〜2,932円 for a ±1% change in the cost of equity, and 2,847円〜2,855円 for a ±0.1 change in ω.

Notes:

• Because forecast ROE is below the cost of equity, the theoretical value is below book value per share.
• Net assets as of the quarter-end were used (there is a timing difference relative to the full-year forecast).

（Calculation model: Residual Income Model / Interest Rate Reference Month: 2026-07 / This value is not intended to predict or guarantee the future share price）

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This report is an earnings analysis document automatically generated by AI based on 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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