DENSO CORPORATION FY2027 Q1 Earnings Report

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Executive Summary

The quarter resulted in higher revenue but lower profit, as rising costs and the European segment’s shift into the red weighed on operating income. Revenue was ¥19,138.7B (+9.1% YoY), operating income was ¥841.8B (-21.5%), and profit before tax was ¥1,126.3B (-19.7%). Quarterly net income attributable to owners of the parent was ¥678.8B (-14.4%), while consolidated quarterly net income including non-controlling interests was ¥758.5B (-14.7%). The increase in cost of sales, selling, general and administrative expenses exceeded the pace of revenue growth, causing the operating margin to decline to 4.4%, down 1.7pt from 6.1% in the prior year.

Factors Affecting Performance

【Revenue】Revenue was ¥19,138.7B, representing a 9.1% increase YoY. By region, revenue increased across all regions: North America +13.6%, Other +23.0%, Japan +8.8%, Europe +7.1%, and Asia +3.9%.

【Profit and Loss】Operating income was ¥841.8B, representing a 21.5% decline YoY. The gross profit margin declined to 12.9% from 14.0% in the prior year, a decrease of 1.1pt, while the SG&A ratio increased to 8.6% from 7.9%, an increase of 0.7pt. These were the primary factors that lowered the operating margin from 6.1% to 4.4%, a decline of 1.7pt. By segment, Europe fell into the red at -¥86.2B (prior year: +¥52.2B), while Japan also declined to ¥75.7B (-43.3%), with its margin falling to 1.0%. Meanwhile, North America secured higher profit at ¥253.0B (+12.1%), and Asia remained the largest profit-contributing segment despite operating income of ¥418.3B (-12.2%). Financial income of ¥317.3B and share of profit or loss of investments accounted for using the equity method of ¥53.6B supported profit before tax, but did not fully offset the decline in operating income. Consequently, profit before tax was ¥1,126.3B (-19.7%), and net income attributable to owners of the parent was ¥678.8B (-14.4%). The results were characterized by higher revenue but lower profit.

Segment Analysis

Of the five segments, only North America and Other achieved higher profit. Asia posted revenue of ¥3,931.3B (+3.9%) and operating income of ¥418.3B (-12.2%), with a margin of 10.6%. Although it remained the Company’s largest profit contributor, performance declined from the prior year. North America recorded revenue of ¥5,345.4B (+13.6%) and operating income of ¥253.0B (+12.1%), with a margin of 4.7%, maintaining broadly flat performance while achieving higher revenue and profit. Japan had the largest scale, with revenue of ¥7,687.7B (+8.8%), but profitability deteriorated substantially, with operating income of ¥75.7B (prior year: ¥133.4B, -43.3%) and a margin of 1.0% (prior year: 1.9%). Europe fell into the red, with revenue of ¥1,804.4B (+7.1%) and operating income of -¥86.2B (prior year: +¥52.2B), resulting in a margin of -4.8%. Other secured the highest profitability among all segments, with revenue of ¥369.8B (+23.0%), operating income of ¥72.5B (+31.6%), and a margin of 19.6%. The disparity in margins among segments has widened from the prior year, with the decline in Japan’s margins and Europe’s structural deficit weighing on the Company-wide operating margin.

Key Financial Metrics

【Profitability】The operating margin was 4.4%, down 1.7pt from 6.1% in the prior year, while the net margin based on net income attributable to owners of the parent was 3.5%, down 1.0pt from 4.5% in the prior year. ROE was 1.4%. 【Cash Flow Quality】Operating cash flow (OCF) was ¥2,389.6B, approximately 3.5 times net income attributable to owners of the parent of ¥678.8B, indicating sound cash backing for earnings. 【Investment Efficiency】Capital expenditures of ¥887.5B amounted to 92.5% of depreciation and amortization of ¥959.2B, representing a level primarily centered on replacement investment. Quarterly revenue turnover against total assets of ¥87,960.5B was 0.22x. 【Financial Soundness】The equity ratio was 58.1%, down 4.8pt from 62.9% at the end of the previous fiscal year. Current assets of ¥43,191.5B compared with current liabilities of ¥20,325.4B, maintaining a current ratio of approximately 2.1x.

Cash Flow Analysis

Operating cash flow increased 45.4% YoY to ¥2,389.6B. A cash inflow impact of ¥1,748.1B from progress in collecting trade receivables contributed to the increase, while an increase in inventories (-¥471.9B) and a decrease in trade payables (-¥551.9B) had negative effects. Investing cash flow was -¥1,067.7B, primarily due to capital expenditures of ¥887.5B and other items, resulting in free cash flow of ¥1,321.9B. Financing cash flow was +¥926.7B due to procurement through long-term borrowings and bonds. However, after share repurchases of ¥3,135.9B and dividend payments of ¥942.2B, cash and cash equivalents increased by ¥2,400.0B from ¥11,891.3B at the beginning of the period to ¥14,291.2B at the end of the period.

Earnings Quality

Against operating income of ¥841.8B, the Company recorded financial income of ¥317.3B, financial expenses of ¥82.8B, and share of profit or loss of investments accounted for using the equity method of ¥53.6B. Non-operating income and expenses were limited relative to revenue, and no temporary items corresponding to extraordinary income or losses were identified. The effective tax rate was 32.7% (income taxes of ¥367.9B / profit before tax of ¥1,126.3B), down 3.9pt from 36.6% in the prior year, with the lower tax burden supporting net income. OCF before changes in working capital was ¥2,810.8B, substantially exceeding net income, indicating low accruals and sound cash backing for earnings. Meanwhile, comprehensive income attributable to owners of the parent was limited to ¥270.9B, resulting in a ¥407.9B gap from net income of ¥678.8B. The primary factor was a valuation loss of ¥821.5B on equity instruments designated as FVTOCI, reflecting changes in the market value of cross-held shares and other instruments; this item is not recognized in the income statement.

Earnings Forecast and Guidance

Progress against the full-year plan was 24.7% for revenue (¥19,138.7B / ¥77,500.0B), 16.8% for operating income (¥841.8B / ¥5,000.0B), and 17.8% for net income attributable to owners of the parent (¥678.8B / ¥3,820.0B). Progress in operating income and net income was below that of revenue, and also lagged the simple quarterly linear progression of 25%. Although the earnings forecast was revised during the quarter, the dividend forecast of ¥74.00 for the full year was unchanged. Achieving the full-year plan will structurally require a recovery in the second half, including improvement in the profitability of the European segment and recovery in domestic margins.

Shareholder Returns

The full-year dividend forecast is ¥74.00, implying a payout ratio of 49.3% based on projected full-year EPS of ¥150.08. Dividend payments during the quarter totaled ¥942.2B. Compared with quarterly net income attributable to owners of the parent of ¥678.8B, the payout ratio appears high at the equivalent of 139%, partly due to timing differences; this reflects the timing of the full-year dividend determination and payment. Share repurchases amounted to ¥3,135.9B, a substantial increase from ¥1,185.9B in the same period of the prior year. Total shareholder returns during the quarter, combining dividends and share repurchases, amounted to ¥4,078.1B, exceeding free cash flow of ¥1,321.9B. The difference was primarily financed through an increase in interest-bearing debt.

Risk Factors

1. Deterioration in the profitability of the European segment: Operating profit or loss in Europe was -¥86.2B (prior year: +¥52.2B), resulting in a shift into the red. The margin was -4.8% against revenue of ¥180.4B.

2. Accumulation of working capital: Inventories increased by ¥583.9B from ¥13,368.4B at the end of the previous fiscal year to ¥13,952.3B in the current period, and represented a cash outflow factor of ¥471.9B in the statement of cash flows.

3. Increase in interest-bearing debt: Long-term bonds and borrowings increased by ¥4,512.1B (+78.6%) from ¥5,738.8B at the end of the previous fiscal year to ¥10,250.9B in the current period, while the equity ratio declined to 58.1% from 62.9% at the end of the previous fiscal year.

Industry Benchmark (Reference; Compiled by the Company)

Profitability and Returns

The Company’s operating margin and net margin (4.0% on a consolidated basis) are both below the industry median and are positioned near the lower bound of the IQR.

Growth and Capital Efficiency

The revenue growth rate exceeded the industry median, indicating that the trend of revenue growth is relatively strong among peers.

※Source: Compiled by the Company

Key Takeaways from the Results

1. Operating profit declined despite higher revenue: While revenue increased by +9.1%, the gross margin deteriorated by 1.1pt and the SG&A ratio deteriorated by 0.7pt, causing the operating margin to decline by 1.7pt to 4.4%. Pressure was evident in both gross profit and fixed costs within the earnings structure.

2. Cash flow support was relatively strong: OCF was approximately 3.5 times net income attributable to owners of the parent, indicating that earnings quality remained sound from the perspective of cash conversion.

3. Delayed full-year progress and disparities among segments: Progress in operating income and net income was below revenue progress. The shift of Europe into the red and the decline in domestic margins weighed on overall performance, while Asia and North America remained relatively stable.

Theoretical Share Price (Reference Value)

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

Sensitivity: ¥1,953–¥2,067 at ±1% for the cost of equity, and ¥2,007–¥2,009 at ±0.1 for 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 end of the quarter are used; there is a timing difference from the full-year forecast.

(Calculation model: Residual income model / Interest rate reference month: 2026-06 / This value does not forecast 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 available earnings data. Investment decisions should be made at your own responsibility, after consulting professionals as necessary.

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