IHI (7013) FY2027 Q1 Earnings Report

Quick View

Executive Summary

The first quarter saw increases in both revenue and earnings; however, the primary driver of the earnings growth was gains on the sale of fixed assets and other assets, and these results need to be evaluated separately from recurring improvements in business profitability. Revenue was ¥3745.5B (+10.9% YoY), Operating Income was ¥732.2B (+250.5%), and Net Income was ¥544.4B (+336.0%). The Operating Income margin rose significantly to 19.5%; however, gains on the sale of fixed assets, investment property, and other assets accounted for ¥401.0B of ¥429.6B in other income, representing the primary factor behind the increase in reported Operating Income. Even on a gross profit less SG&A basis excluding the gains on disposal (¥317.0B, with an 8.5% margin), profitability improved from the same period of the previous year, confirming a certain degree of improvement in underlying profitability.

Factors Affecting Performance

【Revenue】Revenue increased 10.9% YoY to ¥3745.5B. The Aerospace, Space & Defense segment led growth as the largest segment, with revenue of ¥1541.6B (+21.3%), while Resources, Energy & Environment also grew to ¥882.1B (+25.6%). By contrast, Social Infrastructure declined to ¥203.8B (▲28.2%), and Industrial Systems & General-Purpose Machinery declined to ¥996.9B (▲2.0%).

【Profit and Loss】Operating Income increased significantly to ¥732.2B (+250.5%), and the Operating Income margin improved to 19.5% from 6.2% in the previous year; however, most of this improvement was attributable to gains on the sale of fixed assets and other assets of ¥401.0B. On a basis excluding the gains on disposal, the equivalent Operating Income was ¥317.0B, with an 8.5% margin, improving from ¥196.0B and 5.8% in the same period of the previous year. Operating leverage was evident through an improved gross profit margin (23.9% versus 22.2% in the previous year) and restrained growth in SG&A expenses (+4.2%, below the rate of revenue growth). Against Profit Before Tax of ¥819.6B, Net Income was ¥544.4B, implying an effective tax rate of 33.6%. Net Income expanded sharply by 336.0% YoY, supporting the conclusion that both revenue and earnings increased. However, the quality of reported earnings was significantly affected by temporary factors.

Segment Analysis

Aerospace, Space & Defense recorded revenue of ¥1541.6B (+21.3%) and segment profit of ¥292.0B (+4.4%), making it the core business with the largest contribution to consolidated earnings. Resources, Energy & Environment recorded revenue of ¥882.1B (+25.6%) and segment profit of ¥28.3B, turning profitable from a loss of ¥33.7B in the same period of the previous year. Industrial Systems & General-Purpose Machinery recorded revenue of ¥996.9B (▲2.0%), while segment profit increased significantly to ¥55.8B (+1729.3%). Social Infrastructure recorded revenue of ¥203.8B (▲28.2%) and a segment loss of ¥18.1B, essentially unchanged from the loss of ¥17.9B in the same period of the previous year. The Other segment recorded revenue of ¥121.2B (+17.1%) and a sharp increase in segment profit to ¥421.7B (+8105.1%); however, this is highly consistent with the consolidated gains on the sale of fixed assets and other assets of ¥401.0B and is difficult to regard as recurring earnings power.

Key Financial Indicators

【Profitability】The Operating Income margin of 19.5% and Net Income margin of 14.5% both increased significantly from the same period of the previous year; however, they were heavily affected by gains on the sale of fixed assets and other assets of ¥401.0B included in other income, and therefore need to be evaluated separately from recurring improvements in profitability. The margin excluding the gains on disposal improved to 8.5% from 5.8% in the same period of the previous year.【Cash Flow Quality】Operating Cash Flow (OCF) was ▲¥432.5B, substantially diverging from Net Income of ¥544.4B, indicating that the conversion of earnings into cash has not progressed. Free Cash Flow (FCF) was also negative at ▲¥196.1B.【Investment Efficiency】Annualized ROE was high at 30.1%, but this includes the effects of financial leverage (total assets/net assets) and the boost to Net Income from temporary gains on disposal.【Financial Soundness】The Equity Ratio was 28.3%, while the current ratio was 126.4%, based on current assets of ¥14859.5B and current liabilities of ¥11759.7B. Bonds and borrowings totaled ¥3578.1B, comprising current liabilities of ¥1196.0B and non-current liabilities of ¥2382.1B, indicating that the Company has current interest-bearing debt at nearly the same level as cash of ¥1170.1B.

Cash Flow Analysis

Operating Cash Flow (OCF) was ▲¥432.5B, deteriorating significantly from ▲¥53.5B in the same period of the previous year. The primary factors were simultaneous working capital outflows, including an increase of ¥621.9B in inventories, an increase of ¥167.7B in operating receivables, and a decrease of ¥169.7B in operating payables, in addition to income taxes paid of ¥201.6B. Investing Cash Flow was positive at ¥236.4B; however, as this included proceeds from the sale of fixed assets and other assets of ¥484.7B, ongoing investment activity would have resulted in net cash outflows excluding this item. Financing Cash Flow was ▲¥205.6B, with repayment of long-term borrowings of ¥267.98B, together with dividend payments of ¥103.5B, contributing to the outflows. Consequently, FCF (OCF + Investing Cash Flow) was ▲¥196.1B, meaning that dividend payments could not be fully covered by internally generated funds. Cash and cash equivalents declined to ¥1170.1B, and the fact that earnings growth did not translate into cash generation is an important point of caution for the current period.

Earnings Quality

The expansion in earnings during the current period was supported by both recurring improvements in business profitability and temporary gains on asset disposals. Of ¥429.6B in other income, gains on the sale of fixed assets, intangible assets, and investment property accounted for ¥401.0B, representing the primary factor behind the increase in reported Operating Income of ¥732.2B. Excluding this item, the equivalent Operating Income (gross profit less SG&A expenses) was ¥317.0B, with an 8.5% margin, improving from ¥196.0B and 5.8% in the same period of the previous year; therefore, an underlying improvement in profitability can be confirmed. Meanwhile, OCF was ▲¥432.5B, substantially diverging from Net Income of ¥544.4B, as working capital movements—increases in inventories and accounts receivable and a decrease in accounts payable—hindered the conversion of earnings into cash. Total comprehensive income was ¥563.5B, broadly close to Net Income of ¥544.4B, with no significant divergence attributable to other comprehensive income, including foreign currency translation adjustments of ¥26.6B. Accordingly, the current period’s earnings remain highly dependent on temporary factors, and qualitative concerns remain from the perspective of consistency with cash flow.

Earnings Forecast and Guidance

The full-year Company forecast is revenue of ¥18400B, Operating Income of ¥2500B (+51.0% YoY), EPS of ¥161.67, and a dividend of ¥23.00. The Q1 progress rates were 20.4% for revenue and 29.3% for Operating Income, with Operating Income exceeding the standard one-quarter progress benchmark of 25%. However, since Q1 Operating Income includes gains on the sale of fixed assets and other assets of ¥401.0B, it is difficult to regard this progress rate on its own as a basis for an upside to the full-year forecast. Underlying earnings progress excluding the gains on disposal is likely to be more gradual, and the extent to which business profitability and working capital improve in the second half will be the focus in assessing achievement of the full-year plan.

Shareholder Returns

The full-year forecast dividend is ¥23.00 (after the stock split), and the Payout Ratio based on forecast EPS of ¥161.67 is approximately 14.2%, a conservative level significantly below the generally used sustainability benchmark of approximately 60%. Dividend payments during Q1 were ¥103.5B, while share repurchases were negligible (¥0.0B), making dividends the primary form of shareholder returns. However, OCF for the current period was ▲¥432.5B and FCF was also ▲¥196.1B, meaning that dividends could not be funded by internally generated cash during the quarter. Dividend sustainability is supported by the low Payout Ratio and retained earnings of ¥4849.0B, but normalization of working capital and recovery in OCF will be key points to monitor going forward.

Risk Factors

1. Dependence on temporary gains on asset disposals: Gains on the sale of fixed assets and other assets accounted for ¥401.0B of ¥429.6B in other income and were a primary factor behind reported Operating Income of ¥732.2B. The reversal of these gains could prevent the high full-year earnings progress rate from being sustained.

2. Deterioration in working capital and cash flow quality: OCF was ▲¥432.5B, with a simultaneous increase of ¥621.9B in inventories, an increase of ¥167.7B in operating receivables, and a decrease of ¥169.7B in operating payables. If the delayed conversion of earnings into cash continues, the impact on liquidity and funding could increase.

3. Financial leverage and fixed funding burdens: With an Equity Ratio of 28.3%, the Company has fixed liabilities and obligations including bonds and borrowings of ¥3578.1B, lease liabilities of ¥1293.6B, and retirement benefit obligations of ¥1306.1B. Financial flexibility in response to the interest-rate environment and business fluctuations therefore needs to be monitored.

Industry Benchmark (For Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

The Company’s profitability metrics are above the industry median and the upper bound of the IQR; however, it should be noted that the current period includes temporary gains on asset disposals.

Growth and Capital Efficiency

The revenue growth rate also exceeded the industry median, showing growth close to the upper bound of the IQR.

※Source: Compiled by the Company

Key Takeaways from the Earnings Results

1. The significant earnings growth in Q1 was primarily attributable to gains on the sale of fixed assets and other assets of ¥401.0B; excluding these gains, the Operating Income margin was only 8.5% (5.8% in the previous year). Reported figures need to be distinguished from recurring improvements in profitability.

2. Aerospace, Space & Defense recorded revenue of ¥1541.6B (+21.3%) and segment profit of ¥292.0B, making the largest contribution to consolidated earnings and clearly establishing its position as the core segment in the business portfolio.

3. The current period’s cash flow trends, consisting of OCF of ▲¥432.5B and FCF of ▲¥196.1B, were significantly affected by working capital movements—increases in inventories and accounts receivable and a decrease in accounts payable. The evolution of funding and cash flow throughout the full year will be a key focus in evaluating the quality of the earnings data.

Theoretical Share Price (Reference Value)

Sensitivity: ¥1,066–¥1,134 for Cost of Equity ±1%; ¥1,086–¥1,119 for ω ±0.1.

Notes:

• 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 (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 forecast or guarantee future share prices.)

---

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 disclosed earnings data. Investment decisions should be made at your own responsibility, after consulting with a professional as necessary.

---End of Report---