HIROSE ELECTRIC CO.,LTD. FY2026 Q3 Earnings Report

Financial Highlights

• Net Sales: ¥156.55B
• Operating Income: ¥32.50B
• Net Income: ¥24.81B
• EPS: ¥738.35

Income Statement

Balance Sheet

Cash Flow Statement

Profitability Ratios

Year-over-Year Comparison

Share Information

Dividend Information

Full Year Forecast

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AI Financial Analysis

Executive Summary

FY2026 Q3 was a mixed quarter for Hirose Electric: top-line growth resumed, but profitability compressed and net profit declined YoY. Revenue rose 8.4% YoY to 1565.5, driven by volume recovery and pricing resilience, lifting gross profit to 663.5. Gross margin contracted to 42.4% from 45.6% (-320 bps), as cost inflation and product mix outweighed price/mix tailwinds. Operating income declined 5.0% YoY to 325.0, with operating margin at 20.8% versus 23.7% a year ago (-290 bps). Net income fell 10.0% YoY to 248.1, with net margin at 15.8% versus 19.1% (-330 bps), pressured by a higher effective tax rate of 29.7%. SG&A increased 6.2% to 336.0, rising more slowly than revenue, indicating some operating cost discipline. Finance income softened to 29.5 from 34.3, and other expenses rose to 7.3, modestly weighing on pretax profit. Cash generation remained robust: operating cash flow was 332.7 (OCF/NI 1.34x), and free cash flow was 303.6, supported by disciplined working capital actions despite elevated DSO and DIO. The balance sheet is exceptionally strong with an equity ratio of 88.3% and low leverage (D/E 0.13x). Management accelerated shareholder returns: dividends of 164.9 and buybacks of 150.2 drove a total return ratio of ~127% of net income, slightly above FCF in the period. Capital expenditure was 162.0 (capex intensity ~10%), consistent with ongoing capacity/automation investments and product roadmap execution. Accounts receivable increased to 501.6 and inventories to 278.9 amid lead-time normalization and delivery phasing; accounts payable rose to 154.5, keeping DPO around the upper end of the healthy range. Comprehensive income improved materially to 388.2, aided by favorable OCI (notably FX translation and equity FV gains). Overall earnings quality is high, but the working capital cycle lengthened, elevating execution risk into year-end. For the full year, the company guides to sales of 2050 and net income of 305.0 with DPS of 490 yen, implying continued margin normalization versus last year. Near term, monitoring margin recovery, working capital turns, and the pace of shareholder returns relative to FCF will be crucial.

Profitability Analysis

ROE (6.6%) = Net Profit Margin (15.8%) × Asset Turnover (0.366) × Financial Leverage (1.13x). The largest YoY change came from net profit margin, down ~330 bps, while asset turnover improved modestly (0.346 → 0.366) and leverage remained stable (~1.13x). Margin compression reflects a ~320 bps gross margin decline (45.6% → 42.4%) due to cost headwinds and product/mix, partially offset by SG&A discipline (+6.2% vs revenue +8.4%). Operating margin fell ~290 bps (23.7% → 20.8%), and the higher tax rate (29.7% vs prior period’s lower level) further reduced net margin. Sustainability: gross margin pressure should ease if input costs stabilize and pricing holds, but near-term recovery likely gradual; SG&A containment appears sustainable. Watch for any divergence where SG&A growth outpaces revenue—currently not the case. Operating leverage weakened relative to last year due to lower gross spread; restoring mix (high-value connectors) is key for ROE improvement.

Growth Assessment

Revenue grew 8.4% YoY to 1565.5, indicating demand stabilization in core connector end-markets. Operating income declined 5.0% to 325.0, with profitability affected by lower gross margin despite higher volumes. Net income decreased 10.0% to 248.1, reflecting margin compression and a higher tax burden. Finance income was positive at 29.5, aiding pretax profit alongside other income of 4.8. The full-year outlook targets sales of 2050 and net income of 305.0 with EPS of 911.47 yen, implying modest sequential improvement but continued YoY normalization. Growth sustainability hinges on improving product mix toward high-speed/high-reliability connectors, continued penetration in automotive/industrial/communications, and maintaining pricing power. Elevated working capital days suggest some order-to-cash lag; conversion improvement would support growth without balance sheet strain. Capex intensity (~10%) supports capacity, automation, and new product introductions, aligning with medium-term growth plans.

Financial Health

Balance sheet strength is high: equity ratio 88.3% with D/E at 0.13x indicates very conservative leverage. Cash and cash equivalents were 863.4, complemented by sizable current and noncurrent financial assets (674.3 and 762.5), providing ample liquidity. Lease liabilities remain modest (current 11.2; noncurrent 49.5) relative to cash and equity. Accounts receivable at 501.6 and inventories at 278.9 are well covered by current assets of 2406.4. Maturity mismatch risk appears low given liquid asset coverage and minimal interest-bearing obligations. Notable treasury stock expansion reflects buybacks and cancellations, but equity remains robust at 3776.3.

Notable B/S Changes

Treasury Stock: -149.8 (−54.6%) - Significant buybacks and cancellation; boosts per-share metrics but raises total return intensity. Accounts Receivable: +97.6 (+24.2%) - Stronger shipments and extended collection cycle; monitor credit risk and cash conversion. Other Financial Assets (Current): -201.6 (−23.0%) - Redeployment of liquid financial assets toward buybacks/investments; reduces liquidity buffer marginally. Other Financial Assets (Noncurrent): +124.6 (+19.5%) - Increased longer-term financial holdings; shifts asset mix toward noncurrent. Noncurrent Assets: +191.0 (+11.4%) - Growth in PP&E and financial assets reflects ongoing investment pipeline. Total Equity: +74.9 (+2.0%) - Retained earnings and OCI gains offset shareholder returns.

Cash Flow Quality

OCF of 332.7 exceeded net income of 248.1 (OCF/NI 1.34x), indicating strong cash conversion. Free cash flow was 303.6 after capex of 162.0, sufficient to fund dividends of 164.9 (FCF coverage ~1.8x). The total return (dividends + buybacks) of 315.1 approximated FCF, implying returns were largely cash-funded this period. Working capital movements included an increase in receivables (-76.1 on OCF), higher inventories (-11.5), and higher payables (+22.1); the net effect lengthened the cash conversion cycle. Accruals ratio of -2.0% corroborates high earnings quality. No signs of aggressive working capital manipulation; however, sustained elevated DSO/DIO would pressure future cash conversion if not normalized.

Dividend Sustainability

Interim and year-end DPS are 245 yen each (total 490 yen). The calculated payout ratio is 70.5% of net income, above the <60% benchmark but supported by strong OCF and FCF in the period (FCF coverage ~1.7x for dividends). Total return ratio was ~127% of net income due to buybacks, leaning on the balance sheet and cash reserves; this is acceptable given the company’s high equity ratio and liquidity, but not indefinitely if margins remain compressed. With capex at 162.0 and FCF of 303.6, the dividend appears sustainable; continuation of elevated buybacks should be paced against FCF and investment needs.

Risk Assessment

Business risks include Margin pressure from input cost inflation and product/mix shifts reducing gross margin., Demand variability in electronics end-markets (industrial, communications, automotive) affecting volume and pricing., Execution risk in improving working capital turns given elevated DSO and DIO..

Financial risks include Lengthened cash conversion cycle (167 days) increasing cash tied in operations., High total payout versus net income (~127%) increasing reliance on cash reserves if earnings soften., FX translation sensitivity reflected in OCI swings..

Key concerns include Receivable days at 117 and inventory days at 113 indicate slow conversion; persistent elevation could compress OCF., Net margin compression (-330 bps YoY) and higher tax burden weigh on ROE (6.6%, below the 8% threshold)., Capex intensity (~10%) raises execution bar for returns; delays in ramp or mix improvement could dampen ROIC..

Investment Implications

Key takeaways include Top-line recovery (+8.4% YoY) but profitability contracted across gross, operating, and net levels., Cash generation remains solid (OCF/NI 1.34x; FCF 303.6), underpinning dividends., Working capital cycle is long (CCC 167 days), requiring active management to sustain cash conversion., Balance sheet capacity is ample (equity ratio 88.3%; D/E 0.13x) to support investment and returns., Total shareholder return was aggressive (~127% of NI); sustainability hinges on FCF consistency..

Metrics to watch include Gross margin trajectory and product mix toward higher-value connectors., DSO, DIO, and CCC for working capital normalization., Capex-to-sales and realized returns (OP uplift, ROE/ROCE)., Tax rate normalization and finance income trends., Total return ratio versus FCF..

Regarding relative positioning, Within Japan’s connector/electronic component peers, Hirose exhibits stronger balance sheet conservatism and healthy operating margins, but current ROE is below peer leaders; improving working capital turns and restoring gross margin are key to closing the gap.