SUMIDA (6817) FY2026 Q2 Earnings Report

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Executive Summary

Despite higher revenue, profit margins deteriorated substantially, making the decline in the earnings conversion of revenue growth the most important issue in the current results. Revenue was ¥798.6B (+12.2% YoY), Operating Income was ¥19.1B (-43.2%), Profit Before Tax, equivalent to Ordinary Income, was ¥5.7B (-73.7%), and Net Income was ¥2.6B (-83.7%). The primary factors were the low gross margin of 12.7%, as well as financial expenses of ¥13.6B, which accounted for approximately 71% of Operating Income and significantly compressed Profit Before Tax. The effective tax rate was also high at 53.6%, resulting in weak conversion from Profit Before Tax to Net Income.

Factors Affecting Results

【Revenue】Revenue was ¥798.6B, representing a 12.2% YoY increase. By segment, AsiaPacific generated ¥483.1B in revenue (60.5% composition ratio, +8.7% YoY), while EU generated ¥315.5B (39.5% composition ratio, +18.0% YoY), with growth in EU driving overall growth.

【Profit and Loss】Operating Income was ¥19.1B (-43.2% YoY). By segment, AsiaPacific Operating Income declined substantially to ¥13.0B (-43.2% YoY, 2.7% margin), while EU secured higher earnings of ¥17.8B (+42.9% YoY, 5.7% margin). The Company-wide Operating Income margin was 2.4%, down significantly from approximately 4.7% in the previous year, and the Company was unable to fully absorb SG&A expenses (¥72.0B, 9.0% of revenue) at a gross margin of 12.7%. In addition, financial expenses of ¥13.6B compressed Profit Before Tax to ¥5.7B, while the effective tax rate of 53.6% further reduced Net Income to ¥2.6B. Revenue increased while earnings declined.

Segment Analysis

The Company comprises two segments. AsiaPacific recorded revenue of ¥483.1B (60.5% composition ratio) and Operating Income of ¥13.0B (2.7% margin); despite higher revenue (+8.7% YoY), profit declined substantially by -43.2%. EU recorded revenue of ¥315.5B (39.5% composition ratio) and Operating Income of ¥17.8B (5.7% margin), achieving both higher revenue (+18.0%) and higher earnings (+42.9%). The decline in Company-wide earnings was primarily attributable to deteriorating profitability in AsiaPacific alone, in contrast to the improving profitability of EU.

Key Financial Indicators

【Profitability】Operating Income margin was 2.4%, Net Income margin was 0.3%, ROE was 0.4%, and ROIC was 2.9%, all at low levels, with the Operating Income margin declining significantly from approximately 4.7% in the previous year. At a gross margin of 12.7%, the burden of SG&A expenses equivalent to 9.0% of revenue was substantial, resulting in weak earnings conversion from the operating level onward. 【Cash Flow Quality】Operating Cash Flow (OCF) was ¥51.8B, significantly exceeding Net Income of ¥2.6B, indicating solid cash-generating capacity relative to accounting earnings. Cash outflows from increases in inventories and trade receivables were partially offset by an increase in trade payables. 【Investment Efficiency】Despite capital expenditures of ¥28.2B, Free Cash Flow remained positive at ¥19.5B. ROIC of 2.9% indicates low business profitability relative to invested capital. 【Financial Soundness】The Equity Ratio was 37.6%. Of total interest-bearing debt of ¥544.0B, short-term debt accounted for more than half at ¥322.9B, indicating a high degree of refinancing dependence compared with cash and deposits of ¥60.3B. Financial expenses of ¥13.6B accounted for approximately 71% of Operating Income, indicating limited resilience to interest burdens.

Cash Flow Analysis

Operating Cash Flow was ¥51.8B, down -13.0% YoY, but remained substantially above Net Income of ¥2.6B. In terms of working capital, the ¥15.7B increase in inventories and ¥4.9B increase in trade receivables represented cash outflows, while the ¥14.7B increase in trade payables provided a partial offset. Investing Cash Flow was an outflow of -¥32.3B, primarily due to capital expenditures of ¥28.2B, while Free Cash Flow, calculated as the sum of Operating Cash Flow and Investing Cash Flow, remained positive at ¥19.5B. Financing Cash Flow was -¥21.8B, primarily due to dividend payments of ¥8.9B, and cash and cash equivalents stood at ¥60.3B. Cash-generating capacity is relatively stable compared with the weakness of accounting earnings; however, if the increases in inventories and trade receivables continue, the working capital burden will determine future FCF levels.

Earnings Quality

Financial expenses of ¥13.6B were incurred against Operating Income of ¥19.1B, compressing Profit Before Tax to ¥5.7B. Financial income was limited to just ¥0.1B, and financial expenses effectively represent a recurring cost factor that continuously weighs on earnings. In addition, income taxes of ¥3.1B resulted in a high effective tax rate of 53.6%, and conversion from Profit Before Tax to Net Income of ¥2.6B was also weak. Meanwhile, Operating Cash Flow of ¥51.8B substantially exceeded Net Income, indicating that cash-based earnings quality was relatively sound compared with the weakness of accounting earnings. However, it should be noted that this divergence was primarily attributable to non-cash items and an increase in trade payables, and does not indicate an improvement in recurring earnings power.

Earnings Forecast and Guidance

Against the Full-Year plan, the Revenue progress rate was 51.2%, broadly in line with a standard trajectory, while the Operating Income progress rate was 25.5% and the Net Income progress rate was 6.6%, both substantially behind schedule. To achieve the Full-Year plan, the Company will need Operating Income of ¥55.9B in the second half (approximately 2.9 times the first-half result) and Net Income of ¥34.1B (approximately 14 times the first-half result). The Company has not revised its earnings forecast, and achievement of the plan will depend on profitability improvement, control of financial expenses, and normalization of the effective tax rate in the second half.

Shareholder Returns

The interim dividend was ¥26.00 per share, and total dividend payments were ¥8.9B. The Payout Ratio against first-half Net Income of ¥2.6B was high at 359.1%; however, Free Cash Flow of ¥19.5B was approximately 2.26 times the dividend payment amount, indicating that dividends were covered on a cash basis. The Full-Year dividend forecast is ¥53.00, with the interim dividend equivalent to approximately 49.1% of the forecast. If the Full-Year Net Income plan of ¥36.5B is achieved, the Payout Ratio is expected to be approximately 48%, and dividend sustainability will depend on earnings recovery in the second half.

Risk Factors

1. Low Profitability and Price Pass-Through Risk: With a gross margin of 12.7% and an Operating Income margin of 2.4%, Operating Income declined -43.2% despite revenue growth of +12.2%, indicating that fluctuations in raw material prices and capacity utilization have a significant impact on earnings.

2. High Interest Burden Risk: Financial expenses of ¥13.6B were equivalent to approximately 71% of Operating Income of ¥19.1B, and the interest coverage ratio remained at approximately 1.4x. Short-term interest-bearing debt of ¥322.9B substantially exceeded cash and deposits of ¥60.3B, indicating a high degree of refinancing dependence.

3. Risk of Prolonged Working Capital Cycle: Increases in inventories of ¥326.8B and accounts receivable of ¥337.6B are weighing on Operating Cash Flow, making improvements in inventory and receivables turnover an important challenge for stabilizing future cash flow.

Industry Benchmark (For Reference; Prepared by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

The Company's profitability is substantially below the industry median.

Growth and Capital Efficiency

The Revenue growth rate is slightly above the industry median, indicating that top-line expansion itself is relatively favorable within the industry.

※Source: Prepared by the Company

Key Points from the Results

1. Despite revenue growth of +12.2%, the Operating Income margin declined substantially from the previous year, making the failure of revenue growth to translate into earnings expansion the central characteristic of the results.

2. Financial expenses accounted for approximately 71% of Operating Income, amplifying fluctuations in Profit Before Tax and Net Income. The level of financial burden creates a structure in which future earnings volatility will be affected by financing costs.

3. Operating Cash Flow of ¥51.8B and Free Cash Flow of ¥19.5B remained positive, and cash-generating capacity was relatively stable compared with the weakness of accounting earnings. However, the achievement of the Full-Year plan incorporates substantial earnings improvement in the second half.

Theoretical Share Price (Reference Value)

Sensitivity: ¥1,688–¥1,784 at ±1% in the cost of equity, and ¥1,729–¥1,739 at ±0.1 in ω.

Notes:

• Net Income is substantially compressed relative to Operating Income due to tax expenses, acquisition-related expenses, minority interests, and other factors (Net Income ÷ Operating Income 49%). This value reflects that compression at face value; if the factors are temporary, underlying earnings power may be higher.
• 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 are used (there is a time-period discrepancy relative to the Full-Year forecast).

(Calculation model: Residual Income Model (Ohlson-type, explicit 5-year fade) / Interest rate reference month: 2026-07 / Mechanically calculated value based solely on publicly disclosed data; this is not a forecast of the market share price or a recommendation of any specific investment action, and does 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 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 discretion and responsibility, after consulting professionals as necessary.

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AI Financial Analysis

Executive Summary

FY2026 Q2 performance was weak: revenue expanded 12.2% year on year, but margin compression and a heavy financing/tax burden drove profit attributable to owners down 85.6% to ¥2.4bn. First-half revenue reached ¥79.86bn, exceeding half of the ¥156.0bn full-year sales forecast with a 51.2% progress rate. Gross profit rose to ¥10.14bn from ¥9.64bn, but the gross margin fell 80bp year on year to 12.7%. Cost of sales increased 13.3%, faster than revenue growth, indicating that higher sales did not translate into proportional gross-profit expansion. SG&A expenses rose 16.0% to ¥7.20bn, also outpacing revenue growth. Consequently, operating income fell 43.2% to ¥1.91bn and the operating margin compressed 230bp to 2.4%. Profit before tax declined 73.7% to ¥0.57bn, reflecting finance costs of ¥1.36bn against operating income of ¥1.91bn. The interest burden was only 0.299, meaning roughly 70% of EBIT was absorbed by net financing costs. The effective tax rate was elevated at 53.6%, reducing net income to ¥2.65bn and profit attributable to owners to ¥2.4bn. Net profit margin was only 0.3%, and reported annualized ROE was 0.7%, far below a level consistent with attractive capital efficiency. Cash generation was substantially stronger than accounting earnings, with operating cash flow of ¥5.18bn and free cash flow of ¥1.95bn. However, operating cash flow was lower year on year and included a net working-capital cash outflow, led by inventory and receivable increases. The interim dividend of ¥26 per share is fully consistent with the unchanged ¥53 full-year dividend forecast, but it represents a 359.1% payout ratio against first-half earnings. Management maintained its full-year forecast, yet first-half operating-income progress was only 25.5% and attributable-profit progress only 6.6%, requiring a substantial second-half earnings recovery. The key issue for the second half is whether gross-margin restoration, SG&A discipline, and lower financing/tax drag can convert sales growth into forecast-level earnings.

Profitability Analysis

Annualized DuPont ROE is 0.7%, comprising a 0.3% net profit margin, 0.945x asset turnover, and 2.61x financial leverage. The principal weakness is profitability rather than asset utilization: a 0.3% net margin leaves little earnings return despite reasonable annualized turnover and meaningful leverage. The five-factor decomposition shows an EBIT margin of 2.4%, an interest burden of 0.299, and a tax burden of 0.420. Thus, the earnings decline began at the operating level and was then amplified below EBIT by finance costs and taxation. Gross margin declined from 13.5% in the prior-year period to 12.7%, an 80bp contraction, because cost of sales grew 13.3% versus revenue growth of 12.2%. Operating margin declined from 4.7% to 2.4%, a 230bp contraction, as SG&A increased 16.0%, faster than revenue. This indicates negative operating leverage in the first half, despite top-line expansion. Finance costs of ¥1.36bn were equivalent to 70.9% of operating income, producing a low EBIT-to-finance-cost coverage ratio of 1.41x. The 53.6% effective tax rate further reduced the conversion of pre-tax profit into net profit. The annualized ROIC of 2.9% is also below 5%, indicating that operating returns are not currently sufficient relative to the capital employed. The recovery required for the full-year plan depends on improved manufacturing cost absorption and SG&A leverage rather than additional sales growth alone.

Growth Assessment

Revenue growth of 12.2% demonstrates continued demand momentum, but first-half profit performance shows that current growth has low incremental profitability. The ¥7.12bn increase in revenue generated only a ¥0.51bn increase in gross profit, while SG&A rose by ¥0.99bn. This conversion profile is unsatisfactory for a manufacturing business with a sizeable fixed asset base of ¥55.90bn, equal to 33.1% of total assets. Inventory increased ¥2.39bn year on year to ¥32.68bn and trade receivables increased ¥1.26bn to ¥33.76bn, broadly tracking expanded activity but also increasing working-capital intensity. Annualized DSO of 77 days is above the 60-day warning threshold, while annualized inventory days of 86 are above the 60-day benchmark. These metrics make collection discipline, production planning, and inventory normalization central to the quality of future sales growth. The full-year sales target requires only a further ¥76.14bn of second-half revenue, broadly consistent with the first-half run rate. In contrast, achieving the ¥7.50bn operating-income target requires ¥5.59bn in second-half operating income, implying a sharp improvement from ¥1.91bn in the first half. Achieving the ¥3.65bn attributable-profit target requires ¥3.41bn in the second half, compared with ¥0.24bn in the first half. The unchanged guidance therefore embeds a back-end-loaded profit recovery, with the operating margin needing to recover materially from the first-half 2.4% level. Other comprehensive income of ¥2.35bn, principally translation differences, lifted total comprehensive income to ¥2.61bn but does not substitute for operating earnings recovery.

Financial Health

Liquidity is adequate but not abundant. Current assets of ¥79.75bn exceeded derived current liabilities of ¥66.79bn, producing a current ratio of approximately 1.19x; this is above 1.0x but below the 1.5x healthy benchmark. Cash and cash equivalents were ¥6.03bn, while inventories and receivables together represented ¥66.44bn, making liquidity materially dependent on working-capital realization. Interest-bearing debt totaled ¥54.40bn, comprising ¥32.29bn current debt and ¥22.11bn non-current debt. Current debt is substantial relative to cash, although current assets exceed current liabilities and provide balance-sheet coverage. Debt-to-equity was 1.61x, below the 2.0x explicit aggressive-leverage threshold but still indicative of a leveraged capital structure. Financial leverage in the DuPont analysis was 2.61x, which magnifies the effect of weak operating profitability on shareholder returns. The maturity profile improved modestly, with current interest-bearing debt declining ¥5.88bn year on year and non-current debt increasing ¥6.69bn; total interest-bearing debt nevertheless increased by ¥0.81bn. The key solvency concern is not an excessive D/E ratio alone but weak debt-servicing capacity: EBIT covered finance costs by only 1.41x. Lease liabilities totaled ¥7.94bn, and right-of-use assets were ¥7.82bn, adding fixed payment commitments alongside interest-bearing borrowings. Goodwill of ¥8.31bn equaled 12.8% of equity and 4.9% of assets, while intangible assets represented 7.3% of assets; these are moderate levels and do not create an elevated M&A-related balance-sheet concentration. Equity declined ¥0.52bn year on year to ¥64.84bn, although positive translation-related OCI increased accumulated other comprehensive income.

Notable B/S Changes

Inventories: +¥2.39bn (+7.9%) to ¥32.68bn - supports higher activity but contributed ¥1.57bn to operating cash outflow and coincides with elevated annualized inventory days of 86. Interest-bearing debt, non-current: +¥6.69bn (+43.4%) to ¥22.11bn - debt maturities appear to have been extended, but total debt still increased and finance-cost coverage remains weak. Interest-bearing debt, current: -¥5.88bn (-15.4%) to ¥32.29bn - reduced short-term debt moderates near-term maturity pressure, although current debt remains substantial. Accounts receivable: +¥1.26bn (+3.9%) to ¥33.76bn - sales growth has increased receivables, while annualized DSO of 77 days requires attention. Accumulated other comprehensive income: +¥2.30bn (+15.4%) to ¥17.26bn - primarily translation-related OCI strengthened reported equity value, but does not improve operating profitability.

Cash Flow Quality

Cash conversion was strong in the first half, with operating cash flow of ¥5.18bn versus net income of ¥2.40bn attributable to owners, producing an OCF-to-net-income ratio of 21.57x. This ratio is exceptionally high because accounting earnings were depressed by finance costs and tax expense, rather than because operating cash flow was weak. The accruals ratio of negative 2.9% is consistent with cash generation exceeding reported earnings. Operating cash flow nevertheless declined from ¥5.95bn in the prior-year period to ¥5.18bn. Working capital was a net use of cash: inventory growth consumed ¥1.57bn and receivable growth consumed ¥0.49bn, partially offset by a ¥1.47bn increase in payables and ¥0.39bn of other working-capital inflows. The combined inventory and receivable cash absorption is consistent with the elevated annualized DSO and inventory days. Cash interest paid was ¥1.20bn and lease payments were ¥0.77bn, highlighting the recurring cash cost of the capital structure. Capital expenditures were ¥2.82bn and intangible asset purchases were ¥0.59bn. After capital expenditures, free cash flow was positive at ¥1.95bn, equivalent to 2.26x cash coverage of dividends paid of ¥0.89bn. Positive free cash flow supports near-term distributions and investment, but its sustainability depends on preventing further working-capital build and restoring operating margins. Net cash decreased only ¥0.10bn as operating cash flow funded investment, debt repayment, and dividends, while borrowings of ¥8.27bn supported financing needs.

Dividend Sustainability

The company paid an interim dividend of ¥26 per share and maintained the full-year dividend forecast of ¥53 per share. The interim DPS is therefore consistent with a roughly balanced interim/fiscal-year-end distribution profile. The calculated first-half payout ratio was 359.1%, which is well above the 100% warning threshold because first-half earnings were severely depressed. This payout ratio is not sustainable on the current first-half earnings run rate. Cash coverage is more favorable: free cash flow of ¥1.95bn covered dividends paid of ¥0.89bn by 2.26x. However, free cash flow coverage alone is not sufficient to establish long-run dividend capacity when EBIT interest coverage is only 1.41x and the business requires ongoing capital expenditure. The full-year forecast of ¥110.4 EPS and ¥53 DPS implies a prospective dividend payout ratio of approximately 48%, which would be within a sustainable range if achieved. Dividend sustainability is therefore conditional on the forecasted second-half recovery in operating profit and attributable earnings. No share repurchases were identified in the period, so the relevant distribution metric is the dividend payout ratio rather than a total return ratio.

Risk Assessment

Business risks include Margin risk: gross margin declined 80bp to 12.7% and operating margin declined 230bp to 2.4%; cost inflation, unfavorable product/customer mix, or inadequate manufacturing cost absorption could prevent the required second-half recovery., Working-capital risk: annualized DSO of 77 days and inventory days of 86 days indicate slower cash conversion than manufacturing benchmarks; further inventory accumulation or delayed customer collections would pressure cash flow., Execution risk against unchanged guidance: operating-income progress is only 25.5% versus a typical 50% first-half pace, requiring ¥5.59bn of second-half operating income., Manufacturing cycle risk: the company is exposed to demand volatility, customer order changes, component and raw-material cost movements, production utilization changes, supply-chain disruption, and foreign-exchange effects typical of global electronic-component manufacturing..

Financial risks include Interest burden risk: finance costs of ¥1.36bn consumed about 71% of EBIT, leaving EBIT-to-finance-cost coverage at only 1.41x., Leverage and refinancing risk: interest-bearing debt totaled ¥54.40bn, including ¥32.29bn classified as current, while D/E was 1.61x., Tax-rate risk: the 53.6% effective tax rate reduced already-low pre-tax earnings materially, with a tax burden of 0.420., Dividend coverage risk: the ¥26 interim dividend represented a 359.1% payout ratio against first-half earnings, making distributions reliant on second-half earnings normalization and continued cash generation..

Key concerns include HIGH_TAX_BURDEN: the effective tax rate of 53.6% is above 40%, leaving only 42.0% of pre-tax profit as net income. This materially weakens earnings conversion and makes the full-year attributable-profit target more demanding., HIGH_INTEREST_BURDEN: the interest burden of 0.299 indicates approximately 70% of EBIT was consumed by finance costs. Given the 1.41x EBIT-to-finance-cost coverage, earnings are sensitive to further rate increases, refinancing costs, or any additional operating-profit weakness., LOW_OPERATING_EFFICIENCY: EBIT margin of 2.4% is below the 5% concern threshold and fell 230bp year on year. Revenue growth is currently insufficient to offset cost-of-sales and SG&A growth., CAPITAL_EFFICIENCY: annualized ROIC of 2.9% is below 5%, indicating low returns on the sizeable operating asset and capital base. Margin recovery is essential before leverage can become value-accretive., HIGH_RECEIVABLE_DAYS: annualized DSO of 77 days exceeds the 60-day warning threshold. This increases collection and customer-credit exposure and ties up liquidity in receivables., HIGH_INVENTORY_DAYS: annualized inventory days of 86 exceed the 60-day benchmark. The inventory build consumed ¥1.57bn of operating cash flow and raises the risk of slower turns if demand softens., LOW_GROSS_MARGIN: gross margin of 12.7% is below 20% and declined year on year. This leaves limited capacity to absorb SG&A, interest expense, and tax volatility..

Investment Implications

Key takeaways include Top-line momentum remains positive, but first-half earnings show severe operating deleverage and weak earnings conversion., The unchanged full-year forecast is heavily dependent on a second-half margin and profit rebound rather than sales growth alone., Operating cash flow and positive free cash flow provide near-term support, but cash conversion is exposed to elevated receivable and inventory days., The balance sheet is not at the D/E warning threshold, but weak interest coverage makes financing costs a central earnings risk., Goodwill and intangible-asset concentrations are moderate, limiting M&A-related impairment risk relative to equity..

Metrics to watch include Gross margin and operating margin, particularly progress toward a level capable of supporting the ¥7.50bn full-year operating-income target, SG&A growth relative to revenue growth, Finance costs and EBIT-to-finance-cost coverage, Annualized DSO, inventory days, inventory balance, and receivable collections, Second-half operating-income and attributable-profit delivery versus the unchanged full-year forecast, Free cash flow after capital expenditures, interest, lease payments, and dividends.

Regarding relative positioning, The company currently screens as a low-margin, leveraged manufacturer with adequate current liquidity and strong first-half operating cash flow relative to depressed net income. Its moderate goodwill exposure is a balance-sheet positive, but annualized ROE of 0.7%, annualized ROIC of 2.9%, weak 1.41x interest coverage, and above-benchmark working-capital days leave it financially and operationally dependent on a credible second-half margin recovery.