HARADA INDUSTRY (6904) FY2026 Q3 Earnings Report

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Executive Summary

The cumulative results for Q3 reflected an increase in profit despite a decline in revenue, rather than a decline in profit, with cost improvements and normalization of the tax burden being the primary drivers of profit growth. Revenue was ¥310.2B (-8.3% YoY), Operating Income was ¥26.2B (+25.5%), Ordinary Income was ¥26.2B (+36.0%), and Net Income was ¥20.0B (+106.5%). Despite the decline in revenue, the gross margin increased to 25.1%, while SG&A expenses also decreased by 6.0%, securing an increase in Operating Income. In addition, the decline in the effective tax rate led to a sharp increase in Net Income.

Factors Affecting Performance

【Revenue】Revenue was ¥310.2B, down 8.3% YoY. By region, Japan was almost flat at ¥146.2B (+0.6% of external revenue), while North and Central America declined to ¥93.7B (-18.4%), Asia to ¥50.5B (-6.7%), and Europe to ¥32.6B (-12.0%). The decline in North and Central America was the primary cause of the company-wide revenue decrease.

【Profit and Loss】Operating Income was ¥26.2B (+25.5%), supported by a 269bp improvement in the gross margin from 22.4% to 25.1% and a 6.0% reduction in SG&A expenses. Ordinary Income was ¥26.2B (+36.0%), further supported by a 41.2% decline in interest expense. Net Income was ¥20.0B (+106.5%), substantially exceeding the growth in Ordinary Income as the effective tax rate declined from 49.8% to 23.8%. Although Revenue declined, profit expanded significantly, resulting in an increase in profit despite a decrease in revenue.

Segment Analysis

Segment profit in Asia expanded significantly to ¥15.1B (+284.0% YoY; profit margin of 8.3%), becoming the core business and accounting for more than half of the total company-wide segment profit of ¥26.9B. Japan recorded ¥7.4B in segment profit (profit margin of 5.1%), representing a decline in profit, while North and Central America fell substantially to ¥2.1B (profit margin of 2.2%), affected by an 18.4% decline in external revenue. Europe was relatively stable at ¥2.3B (profit margin of 5.9%). While improved profitability in Asia drove the company-wide increase in profit, deteriorating demand and profitability in North and Central America remain structural challenges.

Key Financial Indicators

【Profitability】The Operating Income margin was 8.4%, improving by 228bp from 6.2% in the same period of the prior year, while the Net Income margin increased by 358bp from 2.9% to 6.4%. ROE (annualized) was 18.9%, with the improvement in the Net Income margin being the largest contributing factor.【Cash Quality】Comprehensive Income was ¥9.1B, below Net Income of ¥20.0B, with the difference mainly attributable to a ¥11.5B deterioration in foreign currency translation adjustments.【Investment Efficiency】DSO was 63 days, DIO was 137 days, and CCC was 174 days. All exceeded generally recognized warning thresholds, indicating that funds tied up in inventories and receivables are an issue.【Financial Soundness】The Equity Ratio improved to 38.6% from 34.4% in the prior year, but Interest-Bearing Debt of ¥153.5B consisted entirely of short-term borrowings. Its ratio to cash of ¥65.3B was 0.43x, warranting attention from the perspective of refinancing risk. Interest coverage remained high, ensuring sufficient capacity to pay interest.

Cash Flow Analysis

As cash flow statement data has not been disclosed, funding trends are analyzed based on changes in the balance sheet. Cash and deposits were ¥65.3B, nearly flat from ¥64.5B in the same period of the prior year, while Accounts Payable declined 35.2% from ¥33.9B to ¥22.0B, reducing the scope for financing through trade payables. Although inventories declined from ¥61.1B to ¥55.4B, the high levels of DIO at 137 days and CCC at 174 days persisted, indicating that cash generation from working capital is likely to remain limited. Interest-Bearing Debt remained high at ¥153.5B, with dependence on short-term borrowings being a defining feature of the funding structure. Retained Earnings increased from ¥65.7B to ¥84.1B, indicating continued accumulation of internal reserves.

Earnings Quality

The improvement in profit for the current period consisted of two factors: a recovery in core operating profitability and normalization of the tax burden. Operating Income expanded due to recurring factors, namely gross margin improvement and SG&A expense reductions. Extraordinary items were minor, consisting of extraordinary income of ¥0.03B and extraordinary losses of ¥0.02B, and the impact of temporary factors was limited. Meanwhile, the fact that Net Income growth substantially exceeded Ordinary Income growth was attributable to the decline in the effective tax rate from 49.8% to 23.8%; this reduction in the tax burden cannot necessarily be regarded as permanent. Among non-operating income, foreign exchange gains of ¥1.5B were equivalent to 5.9% of Operating Income, meaning that a certain portion of Ordinary Income depended on foreign exchange movements, a non-operating factor. Comprehensive Income of ¥9.1B was below Net Income of ¥20.0B, and the ¥11.5B deterioration in foreign currency translation adjustments warrants attention from an accrual perspective.

Earnings Forecast and Guidance

Against the full-year company forecasts (Revenue of ¥400.0B, Operating Income of ¥16.0B, Ordinary Income of ¥13.0B, and Net Income of ¥2.0B), cumulative Q3 progress rates were 77.5% for Revenue, 163.8% for Operating Income, 201.5% for Ordinary Income, and 999.2% for Net Income, with profit-related metrics substantially exceeding forecasts. Using the standard progress rate of 75% as a benchmark, Revenue is generally progressing as expected, while the profit forecasts are substantially inconsistent with actual results. Key areas of focus going forward are whether the full-year forecasts will be revised and the Q4 profitability, tax burden, and foreign exchange trends underlying those forecasts.

Shareholder Returns

The Q2 dividend was ¥0 per share, while the full-year company forecast calls for an annual dividend of ¥7.5 per share. Based on the average number of shares outstanding during the period of 21,151,932 shares, the total annual dividend is approximately ¥1.59B, and the forecast Payout Ratio relative to the company’s forecast Net Income of ¥2.0B is approximately 793%, a level at which the dividend cannot be funded solely by forecast profit. On the other hand, based on cumulative Q3 Net Income of ¥1.998B, the allocation rate of total dividends would be approximately 79.3%. Assessment of dividend sustainability depends substantially on whether the full-year profit forecast is revised in line with actual results. Retained Earnings have accumulated to ¥84.1B, providing sufficient funding capacity assuming the level of cumulative profit; however, a comprehensive assessment that also considers the degree of dependence on short-term borrowings is necessary.

Risk Factors

1. Refinancing Risk: Interest-Bearing Debt of ¥153.5B consists entirely of short-term borrowings, and the short-term liabilities ratio has reached 100.0%. The ratio to cash of ¥65.3B is only 0.43x, resulting in a financial structure highly sensitive to refinancing terms and short-term interest rate trends.

2. Inventory and Working Capital Accumulation: DIO of 137 days, DSO of 63 days, and CCC of 174 days all exceed generally recognized warning levels. Continued inventory accumulation amid a declining-revenue environment could lead to risks of inventory write-downs and discounted sales when demand fluctuates.

3. Variations in Regional Profitability: While external revenue in North and Central America declined 18.4% and segment profit deteriorated significantly by 68.4%, segment profit in Asia expanded sharply by 284.0%. The reproducibility of Asia’s high profitability and the recovery of demand and profitability in North and Central America will determine the sustainability of the company-wide profit margin.

Industry Benchmark (Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Return

Both the Operating Income margin and Net Income margin were approximately in line with the industry median, placing profitability at an average level within the industry.

Growth and Capital Efficiency

The Revenue growth rate was 11.6pt below the industry median, placing the company behind its industry peers in terms of growth.

Source: Compiled by the Company

Key Points from the Earnings Results

1. Although Revenue declined by 8.3%, Operating Income increased by 25.5% due to a 269bp improvement in the gross margin and a 6.0% reduction in SG&A expenses. Whether the improvement in profitability during a period of declining revenue reflects structural efficiency improvements in the core business will be an important point to monitor going forward.

2. Segment profit in Asia expanded sharply by 284.0% YoY, resulting in a structure in which it accounted for more than half of total company-wide segment profit. The reproducibility of this profitability improvement is a key point in determining the sustainability of the company-wide profit margin.

3. Against the full-year company forecasts (Operating Income of ¥16.0B and Net Income of ¥2.0B), cumulative actual results substantially exceeded forecasts, resulting in a large divergence between forecasts and actual results. Whether the full-year forecasts will be revised will be a key focus in future earnings disclosures.

Theoretical Share Price (Reference Value)

Sensitivity: ¥498–¥525 at ±1% for the Cost of Equity, and ¥506–¥514 at ±0.1 for ω.

Notes:

• As the progress of Net Income against the full-year forecast (999%) exceeds the standard level (75%), forecast EPS has been adjusted upward within a maximum range of +10% (because companies ahead of schedule tend to exceed their forecasts; adjustments may be excessive for businesses with strong seasonality).
• Net Income is substantially compressed relative to Operating Income (Net Income ÷ Operating Income 12%) due to the tax burden, acquisition-related expenses, and non-controlling interests, among other factors. This value reflects that compression at face value, and underlying earning power may be higher if these factors are temporary.
• As forecast ROE is below the Cost of Equity, the theoretical value is below Book Value per Share.
• Net assets as of the quarter-end have been used (there is a timing mismatch with the full-year forecast).

(Calculation model: Residual Income Model (Ohlson-type; explicit 5-year fade) / Interest rate reference month: 2026-07 / Mechanically calculated solely from 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 based on XBRL earnings summary 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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