Mitsubishi Heavy Industries (7011) FY2026 Q3 Earnings Report

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Executive Summary

For the cumulative Q3 period of FY2025, revenue increased, while business profit and net income grew at even faster rates, resulting in higher revenue and earnings accompanied by improved profitability. Revenue was ¥3,3269.8B (up +9.2% YoY, +2,799.4B), business profit (operating income) was ¥3012.7B (up +25.5% YoY, +611.4B), profit before tax was ¥3292.6B (up +29.5% YoY), and net income attributable to owners of the parent was ¥2,109.96B (up +22.6% YoY, +388.9B). The principal factors behind the substantially faster earnings growth than revenue growth were improvements in gross and operating profit margins, together with restrained growth in SG&A expenses. Orders received amounted to ¥5,029.1B (up +13% YoY), while the order backlog reached ¥12,247.4B, expanding the foundation supporting future revenue generation.

Factors Affecting Results

【Revenue】Revenue increased +9.2% YoY to ¥3,3269.8B. Expanded orders in Energy, progress on defense projects and increased deliveries of commercial aircraft (787/777) in Aircraft, Defense & Space, and strong performance in engineering and steelmaking machinery in Plants & Infrastructure drove revenue growth. Conversely, Logistics, Thermal & Drive Systems reported lower revenue due to reduced unit sales of turbochargers and thermal equipment, partially offsetting overall growth.

【Profit and Loss】Business profit increased +25.5% YoY to ¥3012.7B, exceeding the increase in revenue. The cost-of-sales ratio declined to 78.3% from 79.3% in the previous year, improving the gross profit margin to 21.7% from 20.7%. SG&A expenses rose +7.4% YoY to ¥452.15B, below the revenue growth rate, and the SG&A ratio declined to 13.6% from 13.8%, indicating a positive operating leverage effect. However, temporary construction losses of approximately ¥30B, including the South African project, were incurred in the Steam Power business; excluding these losses, the underlying improvement in business profit would have been greater. The difference between profit before tax (¥3292.6B) and net income attributable to owners of the parent (¥2,109.96B) resulted from income taxes (¥99.53B, effective tax rate of 30.2%) and the portion attributable to non-controlling interests (approximately ¥7B), and was based on ordinary tax and minority shareholder allocations rather than temporary factors. In conclusion, the company achieved higher revenue and earnings.

Segment Analysis

Energy, the largest segment by revenue contribution (approximately 40.7%), generated revenue of ¥1,354.7B (+6%), business profit of ¥146.7B, and the highest profit contribution, with a margin of 10.8%. Growth in GTCC (gas turbine combined-cycle) orders for North America and Asia and improved profitability were the primary drivers, while certain construction losses in Steam Power were a factor reducing earnings. Aircraft, Defense & Space had the highest profitability, with business profit of ¥105.3B and a margin of 11.8%, achieving higher revenue and earnings through progress on defense projects and increased commercial aircraft deliveries. Plants & Infrastructure remained solid, with business profit of ¥64.9B and a margin of 10.2%. Logistics, Thermal & Drive Systems had business profit of ¥18.4B and a margin of 4.2%, lower than those of the other segments, with lower unit sales contributing to the decline in earnings. Other and Corporate reported business profit of -¥34.2B; excluding the reversal of the previous year's ¥28.5B gain on the sale of land at Honmoku, results improved by ¥6.8B YoY due to greater efficiency in corporate expenses.

Key Financial Indicators

Profitability: ROE (annualized) was 10.4% (improving from the previous-year period), while the operating profit margin was 9.1% (up +1.2pt from 7.9% in the previous year).
Cash flow quality: Operating CF/net income attributable to owners of the parent was approximately 1.22x, indicating sound cash support for earnings. FCF (operating CF + investing CF) was ¥167.67B.
Investment efficiency: Against capital expenditures of ¥148.32B, the decrease in property, plant and equipment (-¥150.875B) suggests asset restructuring and transfers to assets held for sale.
Financial soundness: The equity ratio was 35.9% (up +0.7pt from 35.2% in the previous year).

Cash Flow Analysis

Operating CF was ¥256.74B, a substantial improvement from -¥15.79B in the previous-year period. The ratio to net income was approximately 1.2x, indicating sound cash support for earnings.
Investing CF was -¥89.08B, primarily due to capital expenditures of ¥148.32B.
Financing CF was -¥188.43B, with dividend payments of ¥79.35B, bond redemptions of ¥35B, and a net decrease in short-term borrowings of ¥11.98B accounting for the principal cash outflows.
FCF (operating CF + investing CF) was ¥167.67B, a significant improvement of +¥311.4B YoY.
Cash generation assessment: Strong. Although the increase in contract assets and decrease in trade payables weighed on working capital, the increase in contract liabilities and improved profitability in the core business lifted operating CF.

Earnings Quality

The difference between profit before tax (¥3292.6B) and net income (consolidated: ¥2179.6B; attributable to owners of the parent: ¥2,109.96B) was primarily due to income taxes of ¥99.53B (effective tax rate of 30.2%) and was not attributable to any special temporary factors.
Non-operating financial income of ¥40.31B, equivalent to approximately 1.2% of revenue, exceeded financial expenses of ¥12.32B, meaning that net financial income made a positive contribution to earnings. Equity-method income of ¥19.81B also supplemented profit before tax.
From an accrual perspective, operating CF exceeded net income, and there are few concerns regarding earnings quality. However, certain construction losses in Steam Power (approximately ¥30B) were non-recurring in nature and had a negative impact on business profit for the period.

Earnings Forecast and Guidance

The cumulative Q3 progress rate against the full-year revenue forecast of ¥4,800B was 69.3%, below the standard progress rate of 75%. Conversely, progress toward the full-year net income forecast attributable to owners of the parent of ¥260B was 81.2%, above the standard level, indicating greater room for achievement of the earnings plan than of the revenue plan.
The company raised its outlook for orders received by +¥600B versus the previous forecast and increased its business profit outlook by +¥20B. The order backlog reached ¥1,2247.4B, up +¥2,011.1B from the end of the previous fiscal year. The order backlog/revenue ratio was approximately 2.55x against the annual revenue forecast of ¥4,800B, providing high visibility into future revenue.

Shareholder Returns

The company plans annual dividends of ¥24, consisting of an interim dividend of ¥12 and a planned year-end dividend of ¥12. The forecast payout ratio (dividends only, based on forecast total dividends of approximately ¥80.6B against full-year net income of ¥260B) is approximately 31.0%. Share repurchases were limited to ¥0.18B, resulting in a total return ratio of approximately 31.1% including share repurchases. Shareholder returns for the period were effectively centered on dividends. Post-capex FCF (operating CF - capital expenditures) was ¥108.43B, covering approximately 1.4x cumulative dividend payments of ¥79.35B and securing sufficient capacity for dividend funding.

Catalysts

【Short term】The pace of revenue recognition in Q4 (recovery from the 69.3% progress rate) and whether additional construction losses arise in the Steam Power business. 【Long term】Progress in converting the ¥1,2247.4B order backlog into revenue, optimization of the asset portfolio accompanying the separation of non-core businesses in the ML business (Mitsubishi Logisnext), and progress in passing through costs in response to U.S. tariff measures.

Industry Benchmark (Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

Growth and Capital Efficiency

※Source: Compiled by the Company

Risk Factors

1. Deterioration in working capital efficiency: Contract assets increased +39.7% YoY to ¥1,106.59B, and the lengthening collection period, including trade receivables and contract assets, is contributing to volatility in operating cash flow.

2. Construction losses in the Steam Power business: Losses of approximately ¥30B have been recognized on certain projects, including the South African project, and cost fluctuation risks specific to large-scale, long-term projects could affect profit margins.

3. Delayed full-year revenue progress and external environment: The full-year revenue progress rate was 69.3%, below the standard progress rate, resulting in a high degree of dependence on revenue recognition in Q4. In addition, U.S. tariff measures and deviations from the assumed exchange rate (USD/JPY ¥150) could affect cost pass-through and profitability.

Key Points from the Earnings Results

1. The business profit margin improved to 9.1% from 7.9% in the previous year, confirming the positive operating leverage effect from the expansion of the gross profit margin and decline in the SG&A ratio. Whether this improvement represents a structural enhancement in earnings power or a temporary improvement in project profitability will require verification through subsequent trends in profit margins and is therefore a point of interest.

2. The order backlog of ¥1,2247.4B (up +¥2,011.1B from the end of the previous fiscal year) and contract liabilities of ¥184.349B (up +27.6% YoY) demonstrate high visibility into future revenue and are consistent with the upward revision to the full-year outlook (orders +¥600B, business profit +¥20B).

3. Operating CF improved significantly from negative operating CF in the previous-year period to ¥256.74B, while FCF increased to ¥167.67B, up +¥311.4B YoY. The improvement in cash generation is clear from the earnings data, although the high levels of contract assets and inventories remain factors that could influence the pace of future cash conversion.

Theoretical Share Price (Reference Value)

Sensitivity: ¥820–¥869 at ±1% for the cost of equity, and ¥843–¥846 at ±0.1 for ω.

Notes:

• Net assets as of the quarter-end were used (there is a timing gap 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 values based solely on published data; these are not forecasts of market prices or recommendations of specific investment actions and do not predict or guarantee future share prices.)

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This report is an earnings analysis document automatically generated by AI through an 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 available earnings data. Investment decisions should be made at your own responsibility, after consulting professionals as necessary.

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