NIHON KOHDEN (6849) FY2026 Q3 Earnings Report

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Executive Summary

For the cumulative Q3 period of the fiscal year ending March 2026, revenue increased while earnings declined, as weak domestic demand and higher selling, general and administrative expenses pressured profitability. Revenue was ¥164.01B (¥158.48B in the same period last year, +3.5%), Operating Income was ¥9.13B (¥10.93B, -16.5%), Ordinary Income was ¥11.88B (¥13.51B, -12.0%), and Net Income was ¥6.47B (¥8.14B, -20.5%). The primary factors behind the decline in Operating Income were lower domestic revenue resulting from restrained investment in medical equipment and inventory adjustments by AED distributors, as well as higher SG&A expenses due to wage increases, higher R&D expenses, and increased amortization of goodwill. Net Income was further reduced by the recognition of a ¥2.43B extraordinary loss for early retirement premiums. The full-year forecast has also been revised to Revenue of ¥235B (downward revision of ¥5B) and Operating Income of ¥20B (downward revision of ¥4B).

Factors Affecting Business Performance

【Revenue】Revenue increased +3.5% year on year to ¥164.01B. Domestic revenue declined due to restrained and postponed capital investment by hospitals and clinics and inventory adjustments by AED distributors. Overseas revenue, however, posted double-digit growth in North America, Europe, Asia, and other regions, offsetting the decline with real growth of +7%. The Physiological Measurement Equipment segment (+17.0%) led growth, supported by the consolidation of ADTECH Co., Ltd. and the expansion of home sleep recording devices, while the Patient Monitoring segment (-5.0%) was a drag on performance.

【Profit and Loss】Operating Income was ¥9.13B (-16.5%). Although the gross profit margin was maintained at 51.9%, SG&A expenses amounted to ¥75.95B, representing 89.3% of gross profit and weighing on profitability. The primary factors were increases in salaries and allowances, amortization of goodwill, depreciation and amortization, and R&D expenses. In non-operating items, foreign exchange gains of ¥2.47B contributed to Ordinary Income of ¥11.88B (-12.0%). However, Net Income declined to ¥6.47B (-20.5%) due to the recognition of an extraordinary loss of ¥2.43B (early retirement premiums, a temporary factor). In conclusion, the Company recorded higher revenue but lower earnings.

Segment Analysis

By segment, Patient Monitoring has the largest revenue mix and is positioned as the core business; however, revenue declined -5.0% year on year, weighing on overall performance. Physiological Measurement Equipment recorded substantial revenue growth of +17.0%, driven by the consolidation effect of ADTECH Co., Ltd. and the expansion of home sleep recording devices, and is considered the segment that made the largest contribution to Operating Income. Therapeutic Equipment revenue increased +6.6%, led by ventilators and AEDs overseas, while domestic revenue declined for ablation catheters and AEDs. By region, domestic Revenue declined to ¥100.19B (-0.9%), whereas overseas Revenue grew to ¥63.82B (+11.3%), with the overseas business supporting overall revenue growth.

Key Financial Metrics

Profitability: ROE 3.7%, Operating Income margin 5.6% (down from the equivalent 6.9% in the same period last year)
Cash flow quality: Operating Cash Flow / Net Income 1.95x, FCF ¥6.00B
Investment efficiency: Capital expenditures / depreciation and amortization 1.38x
Financial soundness: Equity Ratio 69.9%, Current Ratio 364.2%

Cash Flow Analysis

Operating Cash Flow was ¥12.48B, or 1.95x Net Income of ¥6.47B, indicating sound cash backing for earnings. A ¥15.44B decrease in trade receivables was a positive contributor, while a ¥4.65B increase in inventories and a ¥1.33B decrease in trade payables exerted downward pressure. Investing Cash Flow was -¥6.47B, primarily reflecting capital expenditures of ¥4.69B. Financing Cash Flow was -¥7.04B and included share repurchases of ¥2.72B, dividend payments, and repayments of short-term borrowings. FCF was positive at ¥6.00B. Cash generation is assessed as somewhat stronger than average, although inventory trends require monitoring.

Earnings Quality

The gap between Ordinary Income of ¥11.88B and Net Income of ¥6.47B (¥6.41B attributable to owners of the parent) was attributable to an extraordinary loss of ¥2.43B (early retirement premiums, a temporary factor) and income taxes of ¥3.42B. Non-operating income of ¥3.24B represented 2.0% of Revenue, with foreign exchange gains of ¥2.47B accounting for the majority. This amount was equivalent to 27.0% of Operating Income of ¥9.13B, indicating that non-recurring foreign exchange gains made a substantial contribution to the increase in Ordinary Income. As Operating Cash Flow exceeded Net Income, there are no significant concerns regarding earnings quality from an accruals perspective.

Earnings Forecast and Guidance

Progress against the full-year forecast was 69.8% for Revenue, 45.7% for Operating Income, and 54.0% for Ordinary Income, all below the standard progress benchmark of 75%. The shortfall in progress was particularly significant for Operating Income, and achieving the full-year forecast will require profitability recovery in Q4 to exceed the same period last year. The full-year forecast was revised downward in February to Revenue of ¥235B (-¥5B) and Operating Income of ¥20B (-¥4B). Year-end deliveries in the domestic consumables and services business and IT system projects, as well as overseas shipment and installation progress, are expected to determine Q4 performance.

Shareholder Returns

The Q2 dividend was ¥16.00 per share, and the full-year forecast dividend is ¥32.00 per share. Based on forecast full-year Net Income of ¥12.50B, the Payout Ratio is approximately 41.7%, broadly consistent with the Q3 cumulative Payout Ratio of 42.7%. Share repurchases of ¥2.72B represent capital returns separate from dividends, and the Total Return Ratio, including dividends and share repurchases, indicates a larger scale of shareholder returns. The medium-term management plan sets a policy of a consolidated Total Return Ratio of at least 35%.

Catalysts

【Short Term】Progress of year-end deliveries for the domestic consumables and services business and IT system projects in the Q4 accounts, achievement of a gross profit margin in the 52% range, and the degree to which SG&A expenses can be restrained.

【Long Term】Progress toward expanding the North American business and reforming profitability across the Company to achieve a 5% Revenue CAGR, a 15% Operating Income margin, and ROE of 12% under the medium-term management plan BEACON 2030 Phase II.

Industry Benchmark (For Reference; Company Analysis)

Profitability and Returns

Both the Operating Income margin and Net Income margin are below the industry median, indicating that profitability is relatively low within the industry.

Growth and Capital Efficiency

The Revenue growth rate was slightly above the industry median, indicating that top-line growth was broadly in line with the industry average.

※Source: Company analysis

Risk Factors

1. Downside risk to domestic medical equipment demand: Investment in equipment by hospitals and clinics was restrained and postponed more extensively than expected, resulting in domestic Revenue declining -0.9% year on year. AED unit sales also declined from 63,800 units to 58,100 units due to inventory adjustments by distributors.

2. Profitability pressure from higher SG&A expenses: SG&A expenses of ¥75.95B accounted for 89.3% of gross profit of ¥85.09B, and increases in salaries and allowances, amortization of goodwill, and R&D expenses reduced Operating Income by 16.5% year on year. Significant improvement in profitability in Q4 will be necessary to achieve the full-year Operating Income forecast.

3. Impact of foreign exchange fluctuations: Foreign exchange gains of ¥2.47B were equivalent to 27.0% of Operating Income and supported Ordinary Income. The assumed Q4 exchange rate is ¥154/US dollar, and appreciation of the yen could reverse non-operating income and expenses and weigh on Ordinary Income.

Key Points from the Earnings Report

1. The revenue growth trend has been maintained through double-digit growth in the overseas business, but the Operating Income margin declined to 5.6% due to restrained domestic capital investment and higher SG&A expenses, indicating a persistent deterioration in profitability.

2. Both the Revenue and Operating Income full-year forecasts were revised downward, and the Q3 cumulative progress rate for Operating Income was 45.7%, significantly below the standard level. The extent of improvement in the gross profit margin and SG&A expenses in Q4 will determine the full-year outcome.

3. The extraordinary loss of ¥2.43B was a temporary factor resulting from early retirement premiums and is positioned as part of an initiative aimed at structural reform. The medium-term management plan targets an Operating Income margin of 15%, and the gap from the current period’s level indicates room for future improvement.

Theoretical Share Price (Reference Value)

Sensitivity: ¥1,009–¥1,067 at ±1% for the cost of equity, and ¥1,036–¥1,038 at ±0.1 for ω.

Notes:

• Goodwill amortization of ¥6.5 per share is added back to earnings (to account for non-cash expenses and comparability with IFRS companies).
• 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 timing difference from 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 predict or guarantee future share prices.)

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This report is an earnings analysis document automatically generated by AI through integrated analysis of XBRL earnings summary data and PDF earnings presentation materials. 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 adviser as necessary.

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AI Financial Analysis

Executive Summary

FY2026 Q3 performance was mixed: revenue continued to grow, but profitability weakened materially and full-year operating-profit delivery now requires a pronounced Q4 recovery. Revenue increased 3.5% year on year to ¥164.0bn. Gross profit rose to ¥85.1bn, but the gross margin edged down by approximately 14bp to 51.9%. SG&A expense increased 6.2% to ¥76.0bn, outpacing revenue growth and reducing operating income by 16.5% to ¥9.1bn. Consequently, the operating margin compressed by approximately 133bp to 5.6%, below the company's prior-year level and below the 8% threshold generally associated with solid profitability. Ordinary income declined 12.0% to ¥11.9bn, partly supported by ¥2.5bn of foreign-exchange gains. Net income attributable to owners fell 21.2% to ¥6.4bn, with the net margin contracting by approximately 122bp to 3.9%. Net income was additionally affected by a net extraordinary loss of ¥2.0bn, comprising ¥2.4bn of extraordinary losses and ¥0.4bn of extraordinary gains. Cash earnings were substantially stronger than accounting earnings: operating cash flow was ¥12.5bn, equal to 1.95x net income. Free cash flow was positive at ¥6.0bn after ¥4.7bn of capital expenditure. The balance sheet remains conservatively positioned, with a 364.2% current ratio, 0.43x reported debt-to-equity ratio, and 39.9x EBIT interest coverage. The company materially reduced short-term borrowings while increasing cash, although long-term borrowings of ¥23.0bn remain the principal interest-bearing funding source. Working-capital efficiency is the central operating concern, as quality alerts indicate elevated receivable days, inventory days and a long cash conversion cycle. Finished-goods inventory increased 13.2% year on year to ¥37.2bn, which raises the importance of monitoring sales conversion, product mix and potential inventory obsolescence. Foreign-exchange gains equivalent to 27.0% of operating profit also indicate meaningful exposure of reported ordinary earnings to currency movements. The FY2026 operating-income forecast implies that the Q4 operating margin must recover substantially from the current 5.6% level. The full-year dividend plan of ¥32 per share appears financially covered by expected earnings and current free-cash-flow generation, but maintaining shareholder returns while funding above-depreciation capital expenditure depends on restoring operating-profit conversion.

Profitability Analysis

Annualized DuPont ROE is 5.0%, decomposed into a 3.9% net profit margin, 0.886x asset turnover and 1.43x financial leverage. The weakest component is the net margin, which fell from approximately 5.1% in the prior-year nine-month period to 3.9%, while leverage remains moderate and is not the driver of the return profile. The primary operational deterioration was margin-related: revenue rose 3.5%, gross profit margin slipped to 51.9%, and SG&A grew 6.2%, resulting in a 16.5% decline in operating income. Operating leverage was therefore adverse, as the incremental revenue base did not absorb the growth in selling, administrative and development-related cost sufficiently. The operating margin of 5.6% was down approximately 133bp year on year from 6.9%. EBITDA was ¥12.5bn and the EBITDA margin was 7.6%, confirming that the earnings pressure extends beyond non-cash charges. Under JGAAP, goodwill amortization of ¥0.8bn reduced operating profit and net income; EBITDA before goodwill amortization was ¥13.3bn. Goodwill amortization represented approximately 6.3% of EBITDA, a moderate rather than severe accounting drag, so it does not explain the majority of the operating-income decline. The tax burden was 0.648, equivalent to a 34.6% effective tax rate, and therefore also restrained conversion from pre-tax profit to net profit. The interest burden exceeded 1.0x because non-operating income, particularly foreign-exchange gains, more than offset financing costs; this is supportive of ordinary income but is less recurring than operating profit. Asset turnover of 0.886x is annualized and remains modest for the asset base, making margin restoration more important than balance-sheet leverage as a route to improving ROE. Financial leverage of 1.43x is conservative, limiting financial risk but also indicating that future ROE improvement should be generated through operating execution rather than increased borrowing.

Growth Assessment

Revenue growth of 3.5% demonstrates continued top-line expansion, but profit growth quality weakened because SG&A increased faster than sales and gross margin was slightly lower. The gap between revenue growth and operating-income growth indicates insufficient cost absorption and/or an unfavorable sales and product-cost mix during the nine-month period. Finished goods increased to ¥37.2bn from ¥32.9bn, while work in process increased to ¥6.2bn from ¥4.5bn; this inventory build should be assessed against demand realization in the final quarter. Raw materials were broadly stable at ¥18.6bn, suggesting that the inventory movement is concentrated further downstream in the production and distribution cycle. Capital expenditure of ¥4.7bn exceeded depreciation and amortization of ¥3.4bn, producing a 1.38x CapEx/depreciation ratio and indicating continued investment above maintenance levels. This investment posture can support future capacity, product development and operating resilience, but it raises the required return hurdle while operating margins are under pressure. Full-year revenue guidance is ¥235.0bn, and nine-month revenue progress is 69.8%, 5.2 percentage points below the standard 75% Q3 progression. Full-year operating-income guidance is ¥20.0bn, with Q3 progress only 45.7%, 29.3 percentage points below the standard pace. This requires approximately ¥10.9bn of Q4 operating income, exceeding the ¥9.1bn generated cumulatively over the first nine months. Ordinary-income progress is 54.0% against the ¥22.0bn forecast, while net-income progress is 51.3% against the ¥12.5bn forecast. The forecast therefore embeds a substantial final-quarter improvement in operating profitability, rather than merely a normal seasonal completion of revenue. The company forecasts full-year sales growth of 4.2% and operating-income decline of 3.4%, implying that management expects a meaningful improvement from the current 16.5% year-on-year operating-income decline.

Financial Health

Liquidity is strong, with current assets of ¥170.1bn against current liabilities of ¥46.7bn, producing a 364.2% current ratio. The 284.5% quick ratio also indicates that short-term obligations can be covered without relying on inventory liquidation. Working capital was ¥123.4bn, providing a substantial liquidity buffer. Cash and deposits increased 33.7% year on year to ¥38.0bn. Short-term loans declined from ¥26.0bn to ¥0.5bn, materially reducing refinancing and maturity-mismatch risk in current liabilities. The short-term debt ratio is only 0.2%, and cash is 759.96x short-term debt. Long-term loans of ¥23.0bn now account for nearly all ¥23.0bn of interest-bearing debt, lengthening the debt maturity profile. Debt/EBITDA is 1.84x, debt/capital is 11.8%, and reported debt-to-equity is 0.43x; each is consistent with a manageable solvency profile. EBIT interest coverage of 39.9x and EBITDA interest coverage of 54.7x show ample capacity to service interest expense. Total equity of ¥172.5bn funds 69.9% of assets, supporting resilience against earnings volatility. Goodwill equals 6.6% of equity and 4.6% of assets, while total intangible assets equal 10.3% of assets; neither indicates a balance sheet excessively dependent on acquisition-related values. The major balance-sheet watchpoint is not debt capacity but operational working capital, given receivables of ¥57.5bn and inventories of ¥37.2bn.

Notable B/S Changes

Short-term loans: -¥25.98bn (-99.8%) to ¥0.05bn - materially reduced short-term refinancing exposure; funding is now predominantly long-term. Cash and deposits: +¥9.57bn (+33.7%) to ¥38.00bn - strengthened immediate liquidity despite capital expenditure, dividends and share repurchases. Finished goods: +¥4.35bn (+13.2%) to ¥37.23bn - inventory accumulation heightens sell-through, obsolescence and cash-conversion monitoring. Work in process: +¥1.68bn (+37.6%) to ¥6.16bn - indicates a higher production pipeline and requires monitoring for production bottlenecks or delayed shipment conversion. Accounts receivable: -¥13.70bn (-19.3%) to ¥57.48bn - supported operating cash flow, although the supplied 96-day DSO alert indicates collection efficiency remains a concern.

Cash Flow Quality

Cash-flow quality was strong in the reported nine-month period, with operating cash flow of ¥12.5bn versus net income attributable to owners of ¥6.4bn. The 1.95x OCF/net-income ratio is well above the 0.8x warning threshold and does not indicate an accrual-driven earnings-quality issue. The accruals ratio of -2.5% is also consistent with favorable cash conversion. OCF/EBITDA was 1.00x, indicating that EBITDA translated fully into operating cash flow during the period. Free cash flow was ¥6.0bn after capital expenditure of ¥4.7bn, and therefore supported both internal investment and shareholder distributions. Cash generation benefited from a ¥15.4bn decrease in trade receivables, which was partly offset by a ¥4.6bn inventory increase and a ¥1.3bn decrease in trade payables. The receivables cash release is positive for current-period OCF but should not be assumed to recur at the same magnitude. Inventory investment is a countervailing signal and is consistent with the high-inventory-days alerts. The annualized DSO alert of 96 days is above the 60-day warning level, indicating slow cash collection relative to manufacturing benchmarks; this can raise funding needs and credit risk if collections deteriorate. The annualized DIO alert of 215 days is well above the 90-day warning threshold, and the additional 129-day inventory alert is also above the 60-day benchmark; both indicate elevated inventory intensity even though the reported alert calculations differ. The annualized cash conversion cycle alert of 244 days, above the 120-day warning threshold, indicates that cash remains tied up in the operating cycle for an extended period. For a medical-equipment manufacturer, slower order conversion, distributor inventories, product mix changes and risk of technological obsolescence are relevant implications of this inventory profile. The increase in finished goods, rather than raw materials, makes end-demand conversion and inventory aging particularly important to monitor. Financing cash flow was negative ¥7.0bn, reflecting shareholder distributions and the net repayment of short-term debt, while investing cash flow was negative ¥6.5bn, mainly for tangible and intangible investment.

Dividend Sustainability

The planned full-year dividend is ¥32 per share, including the ¥16 interim dividend. Based on forecast EPS of ¥76.98, the implied full-year dividend payout ratio is approximately 41.6%, within the stated sustainable range below 60%. The reported interim payout ratio is 42.7%, also indicating a moderate dividend commitment relative to earnings. Free cash flow of ¥6.0bn covered the interim dividend requirement by 2.20x. Operating cash flow of ¥12.5bn also exceeded the ¥5.2bn of cash dividends paid during the nine-month period. Capital expenditure was above depreciation, demonstrating that the company is funding growth or replacement investment while remaining free-cash-flow positive. Share repurchases totaled ¥2.7bn; including the ¥5.2bn of cash dividends paid, the estimated cumulative total return ratio was approximately 124% of net income attributable to owners. Accordingly, dividends alone appear sustainable, but the combination of dividends and buybacks exceeded current-period accounting earnings and should be evaluated against normalized free cash flow and the need to manage elevated working capital. The strong liquidity position and low debt burden provide near-term flexibility. Sustained support for the full shareholder-return program will nevertheless depend on delivering the forecast Q4 operating-profit recovery and avoiding further inventory-related cash absorption.

Risk Assessment

Business risks include Margin execution risk: SG&A grew 6.2% while revenue grew 3.5%, contributing to a 133bp operating-margin decline to 5.6%. Failure to restore cost absorption would pressure the full-year operating-income target., Inventory and demand-conversion risk: finished goods rose 13.2% year on year to ¥37.2bn, while the DIO alerts of 215 days and 129 days both exceed relevant warning benchmarks. For a medical-equipment manufacturer, slow-moving products, technology transitions, tender timing and distributor demand can create obsolescence or discounting risk., Collection-cycle risk: the DSO alert of 96 days exceeds the 60-day warning threshold. Slower customer collection can increase working-capital funding requirements and reduce the repeatability of operating-cash-flow strength., Currency risk: foreign-exchange gains were ¥2.5bn, equivalent to 27.0% of operating profit. This exceeds the 20% alert threshold, meaning ordinary earnings retain material sensitivity to exchange-rate movements and hedging effectiveness., Guidance execution risk: operating-income progress is 45.7% against a normal 75% Q3 pace, requiring a very strong Q4 contribution to achieve ¥20.0bn full-year operating income..

Financial risks include Long-term borrowings of ¥23.0bn are manageable under current leverage and coverage metrics, but should operating profit remain weak, debt/EBITDA would rise from the current 1.84x., Total shareholder distributions, including buybacks, exceeded current-period net income, increasing dependence on sustained free cash flow for continued capital returns., The long cash conversion cycle of 244 days can create cash-flow volatility if receivables cease to release cash or if inventory continues to build..

Key concerns include The high-receivable-days alert reflects a 96-day annualized DSO. Its root cause is a large receivables balance relative to the annualized sales base; the impact is slower cash conversion and potentially higher credit exposure., The high-inventory-days alerts of 215 days and 129 days reflect elevated inventory relative to annualized cost of sales. The increase in finished goods suggests that the issue is most relevant to shipment and end-demand conversion rather than raw-material procurement alone; the impact is greater obsolescence, markdown and future cash-absorption risk., The long-CCC alert of 244 days is the combined consequence of slow collection and high inventory intensity. This is unfavorable for a manufacturing business because it extends the time required to recycle production investment into cash., The FX-exposure alert is driven by ¥2.5bn of foreign-exchange gains, or 27.0% of operating profit. Such support is not equivalent to recurring operating-margin improvement and can reverse as exchange rates move..

Investment Implications

Key takeaways include Revenue growth remained positive at 3.5%, but operating income declined 16.5% as SG&A growth exceeded sales growth and the operating margin fell to 5.6%., Operating cash conversion was strong, with OCF/net income of 1.95x and ¥6.0bn of positive free cash flow., Liquidity and debt-service capacity are strong, supported by a 364.2% current ratio, 1.84x debt/EBITDA and 39.9x EBIT interest coverage., Working-capital efficiency and inventory conversion are the principal operational issues, given the elevated DSO, DIO and cash conversion cycle alerts., The operating-income forecast requires a significant Q4 recovery, making evidence of margin normalization and inventory sell-through central to the next results assessment., JGAAP goodwill amortization is a moderate drag, but goodwill exposure itself is low at 6.6% of equity and does not represent a material balance-sheet impairment concern..

Metrics to watch include Quarterly operating margin and SG&A growth relative to revenue growth, Progress toward the ¥20.0bn full-year operating-income forecast, Finished-goods inventory and inventory days, Trade receivables, DSO and the cash conversion cycle, Foreign-exchange gains or losses relative to operating profit, Free cash flow after capital expenditure and total return ratio, Long-term debt, debt/EBITDA and interest coverage.

Regarding relative positioning, The company combines a strong liquidity and solvency profile with currently modest annualized profitability. Its 5.0% annualized ROE and 5.6% operating margin are below stronger profitability benchmarks, while cash conversion is favorable. Relative positioning therefore depends primarily on whether operating-margin recovery and working-capital normalization can accompany continued revenue growth.