IHI Corporation FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥713.65B
• Operating Income: ¥69.45B
• Net Income: ¥57.05B
• EPS: ¥52.76

Income Statement

Balance Sheet

Cash Flow Statement

Profitability Ratios

Year-over-Year Comparison

Share Information

Dividend Information

Full Year Forecast

Disclaimer

This data was automatically extracted from XBRL files. Please refer to the original disclosure documents for accuracy.

AI Financial Analysis

Executive Summary

Verdict: A mixed quarter for IHI with top-line contraction and operating margin compression, offset by stronger below-OP items and a materially higher net profit. Revenue fell 5.8% YoY to 7,136.51, while operating income declined 10.1% YoY to 694.49, indicating negative operating leverage. Gross profit reached 1,688.23, implying a gross margin of 23.7%, but SG&A of 1,142.31 constrained operating leverage. Operating margin is 9.7% this quarter versus roughly 10.2% a year ago, a compression of about 47 bps by our estimate. Despite weaker operations, profit before tax rose to 747.09 and net income surged 42.2% YoY to 559.12, supported by favorable below-OP factors (including equity method income of 88.99 and other non-operating items). The effective tax rate was 23.6%, consistent with a normalized rate and supportive of net earnings. ROE printed 9.9% via Net Margin 7.8% × Asset Turnover 0.305 × Leverage 4.13x, aligning with the reported 9.9%. ROIC stands at 9.4%, above the typical 7–8% management target range, suggesting solid investment efficiency at mid-year. However, cash flow quality is weak: operating cash flow was -571.30, yielding an OCF/Net Income ratio of -1.02x, and free cash flow was deeply negative at -801.11. Financing cash inflow of 400.26 and dividends paid of 106.05 imply reliance on external funding while shareholder returns continue. Leverage is high with D/E at 3.13x and equity ratio at 23.1%, limiting balance sheet flexibility. Working capital intensity remains substantial with receivables of 5,284.62 and inventories of 5,245.89, typical for large project-driven businesses but a key driver of OCF volatility. Equity method income contributed 11.9% of profits—supportive but not dominant—indicating a moderate reliance on affiliates. Overall, the quarter shows resilient bottom-line performance aided by non-operating items, but the deterioration in operating margin and negative cash conversion raise sustainability questions. Near-term focus should be on order execution, milestone billings, and working capital release to normalize cash flows. Management’s ability to sustain ROIC near 9% while reducing financial leverage will be critical for equity value compounding.

Profitability Analysis

ROE decomposition: ROE 9.9% = Net Profit Margin 7.8% × Asset Turnover 0.305 × Financial Leverage 4.13x. The most notable change versus last year appears to be the net margin, which improved at the bottom line despite operating margin compression, due to stronger below-OP contributions and a normalized tax rate. Operating margin compressed by ~47 bps (current ~9.73% vs prior ~10.20%), driven by revenue decline (-5.8% YoY) and SG&A rigidity, indicating negative operating leverage. Business drivers include project mix, cost pass-through timing, and likely weaker contribution in certain heavy-industry segments that pressure gross-to-operating spread. The net margin uplift is likely partly one-time or timing-related (non-operating income ratio 15.9%, equity method income 88.99), and thus less repeatable than core operations. SG&A rose in absolute terms against lower revenue (or did not fall proportionally), a concerning operating expense trend that reduces flexibility if demand softens.

Growth Assessment

Top-line contracted 5.8% YoY to 7,136.51, with operating income down 10.1% YoY to 694.49, indicating negative operating leverage. Gross margin is 23.7%, but SG&A of 1,142.31 compressed operating margin to ~9.7%. Net income increased 42.2% YoY to 559.12, supported by stronger non-operating items and equity method income (88.99). The quality of profit growth is mixed; bottom-line strength relies on below-OP contributions, while core operations softened. ROIC at 9.4% exceeds the 7–8% benchmark, implying efficient deployment of capital despite near-term margin pressures. Outlook hinges on execution of long-cycle projects, conversion of order backlog to revenue, timing of milestone recognition, and stabilization of supply chain costs. If working capital normalizes in H2, cash conversion could improve; absent that, growth remains cash-inefficient. Equity method contributions are helpful but may be volatile given affiliate performance. Near-term, expect operating margin recovery to depend on price/mix, cost pass-through, and progress payments. Currency and commodity dynamics remain key swing factors for revenue and margins.

Financial Health

Leverage is elevated: D/E at 3.13x triggers a high-leverage warning; equity ratio at 23.1% is low for comfort. Liquidity assessment is constrained by missing current liability data; current ratio cannot be computed, so no explicit warning is issued. Maturity mismatch risk cannot be fully assessed; however, sizable current assets (13,962.14) versus large receivables (5,284.62) and inventories (5,245.89) indicate liquidity tied up in working capital, increasing dependence on short-term financing in downcycles. Financing cash inflow of 400.26 suggests active use of debt/financing to support operations and returns. Interest-bearing debt breakdown and interest coverage are unreported, limiting solvency precision. No off-balance sheet obligations were disclosed in the data provided; typical industry exposures (e.g., guarantees on long-term projects) may exist but are not visible here.

Cash Flow Quality

OCF was -571.30 against net income of 559.12, yielding OCF/NI of -1.02x, a material earnings quality concern. Free cash flow of -801.11 underscores cash strain after investments. The negative OCF likely reflects working capital build tied to project timing (receivables and inventories are large), which is common in large engineering/manufacturing businesses; without detail on period-over-period changes, we cannot attribute to deliberate working capital management. Dividend payments of 106.05 were not covered by FCF, implying external funding reliance this quarter. Sustained negative OCF would pressure leverage and constrain capital allocation. Watch for H2 reversal as milestones are invoiced and inventories convert; absent that, cash earnings quality remains weak.

Dividend Sustainability

The calculated payout ratio is 232.4%, which appears elevated versus typical sustainability thresholds (<60%), though quarter/TTM alignment may distort the metric. FCF coverage is -0.62x, indicating dividends were not funded by free cash flow this period. With D/E at 3.13x and OCF negative, maintaining or increasing dividends without cash flow normalization would depend on additional financing or asset monetizations. Policy outlook likely emphasizes stable dividends, but prudence suggests aligning payouts with cash generation as H2 progresses. We lack disclosed annual DPS guidance; monitor year-end Board decisions and FCF trajectory.

Risk Assessment

Business Risks:

• Project execution risk and cost overruns in long-cycle engineering programs
• Supply chain and inflationary cost pressure impacting gross margins
• Demand volatility in aero engines, energy, and industrial segments
• FX risk (USD/JPY and EUR/JPY) affecting revenue and costs
• Commodity and materials price fluctuations (steel, specialty alloys)

Financial Risks:

• High leverage (D/E 3.13x) and low equity ratio (23.1%)
• Negative operating cash flow and FCF, reliance on financing cash inflows
• Potential interest rate sensitivity with rising funding costs
• Working capital concentration in receivables and inventories increasing liquidity risk

Key Concerns:

• Operating margin compression (~47 bps YoY) amid revenue decline
• OCF/NI at -1.02x signaling weak cash earnings quality
• Dividend not covered by FCF this quarter
• Profit mix skewed toward non-operating items (non-operating income ratio 15.9%; equity method income 11.9%) which may be volatile
• Data gaps (no current liabilities or interest expense) limit full stress assessment

Investment Implications

Key Takeaways:

• Core operations softened with revenue -5.8% and OP -10.1%, compressing operating margin to ~9.7%
• Net income +42.2% YoY aided by below-OP items; sustainability depends on operational recovery
• ROE 9.9% and ROIC 9.4% are respectable, but achieved alongside high leverage (D/E 3.13x)
• Cash conversion is the weak link: OCF -571.30 and FCF -801.11
• Dividend coverage from cash is inadequate this quarter; funding relies on financing inflows

Metrics to Watch:

• Order intake/backlog conversion and milestone billings
• Operating cash flow and working capital turns (receivables, inventories, advances received)
• Operating margin trajectory and SG&A discipline
• Equity method income volatility and non-operating contribution
• Equity ratio and net debt trend; interest coverage once disclosed
• ROIC sustainability relative to WACC

Relative Positioning: Within Japanese heavy industry peers, IHI delivers above-target ROIC and mid-to-high single digit operating margins but lags on cash conversion and balance sheet conservatism; the quarter’s strong net profit is offset by negative OCF and elevated leverage, positioning the company as execution- and funding-sensitive into H2.

Disclaimer

This analysis was auto-generated by AI. Please note the following:

• No Guarantee of Accuracy: The accuracy and completeness of this analysis are not guaranteed. For accurate financial data, please refer to the original disclosure documents published on TDnet or other official sources
• Not Investment Advice: This analysis is for general informational purposes only and does not constitute investment advice under applicable securities laws. It is not a recommendation to buy or sell any specific securities
• At Your Own Risk: Investment decisions should be made at your own discretion and risk. We assume no liability for any losses incurred based on this analysis