IHI Corporation FY2027 Q1 Earnings Report

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Executive Summary

During the quarter, Revenue and Net Income increased significantly, primarily due to the recognition of gains on the sale of investment property and other assets, resulting in higher Revenue and earnings. Revenue was 3,745.5B (+10.9% YoY), Operating Income was 732.2B (+250.5%), Profit Before Tax was 819.6B (+305.3%), and Net Income attributable to owners of the parent was 535.2B (+361.3%). The main drivers of earnings growth were the recognition of other income of 429.6B (including approximately 401.0B in gains on sales), arising from the sale of property, plant and equipment, investment property, and other assets, as well as higher Revenue and improved profitability in the Aerospace, Space & Defense segment. Meanwhile, Operating Cash Flow (OCF) was -432.5B, substantially below Net Income, as increases in inventories and trade receivables and a decrease in trade payables weighed on cash generation.

Factors Affecting Performance

【Revenue】Revenue was 3,745.5B, representing a 10.9% YoY increase. By segment, Aerospace, Space & Defense was the largest and fastest-growing segment, with Revenue of 1,541.6B (41.2% of total, +21.3%), while Resources, Energy & Environment also recorded significant growth, with Revenue of 882.1B (23.6% of total, +25.7%). Conversely, Social Infrastructure reported Revenue of 203.8B (5.4% of total, -28.2%), and Industrial Systems & General-Purpose Machinery recorded Revenue of 996.9B (26.6% of total, -2.0%), both declining.

【Profit and Loss】Operating Income was 732.2B, representing a substantial 250.5% YoY increase. The gross profit margin improved to 23.9% from 22.2% in the previous year, while the SG&A expense ratio declined to 15.4% from 16.4%, resulting in operating leverage. In addition, the recognition of other income of 429.6B (including approximately 401.0B in gains on sales of property, plant and equipment, investment property, and other assets) significantly boosted Operating Income; this was a temporary factor. Profit Before Tax was 819.6B (+305.3%), and Net Income attributable to owners of the parent was 535.2B (+361.3%). Revenue and earnings both increased.

Segment Analysis

Among the four reportable segments, Aerospace, Space & Defense was the largest contributor to earnings, with Revenue of 1,541.6B (+21.3%) and Operating Income of 292.0B (+4.4%); its operating margin of 18.9% was the highest among all segments. Resources, Energy & Environment reported Revenue of 882.1B (+25.7%), while Operating Income turned profitable at 28.3B, compared with -33.7B in the previous year. Industrial Systems & General-Purpose Machinery reported nearly flat Revenue of 996.9B (-2.0%), while Operating Income improved to 55.8B from 3.1B in the previous year, resulting in a margin of 5.6%. Social Infrastructure recorded a substantial decline in Revenue to 203.8B (-28.2%), and Operating Income remained negative at -18.1B, compared with -18.0B in the previous year. Operating Income in the “Other” category, which is not included in the reportable segments, was exceptionally high at 421.7B, compared with 5.1B in the previous year. This was likely primarily due to the recognition of gains on sales of assets related to urban development (real estate) and other businesses and is strongly temporary in nature.

Key Financial Indicators

【Profitability】The Operating Income margin improved by +13.3pt to 19.5%, from 6.2% in the same period of the previous year, while the Net Income margin, based on income attributable to owners of the parent, improved by +10.9pt to 14.3%, from 3.4%. However, a considerable portion of the improvement was attributable to other income, including approximately 401.0B in gains on asset sales, and the underlying improvement in profitability excluding this factor is considered limited.【Cash Flow Quality】OCF was -432.5B, substantially below Net Income attributable to owners of the parent of 535.2B, indicating a significant divergence between OCF and Net Income. The increase in inventories (+502.5B, +10.0%) and decrease in trade payables (-169.7B) weighed on cash generation.【Investment Efficiency】ROE was 7.5%. Reflecting the characteristics of its made-to-order businesses, the Company has a substantial asset burden from inventories and trade receivables, and total asset turnover remained low.【Financial Soundness】The Equity Ratio improved to 28.3%, from 26.9% in the same period of the previous year. Interest-bearing debt, comprising bonds and borrowings, totaled 3,578.1B, while cash and cash equivalents were 1,170.1B. Total liabilities were equivalent to 2.4 times total net assets of 7,238.3B.

Cash Flow Analysis

Cash flow from operating activities was -432.5B, deteriorating from -53.5B in the same period of the previous year. The main factors reducing cash flow were increases in inventories and prepaid expenses (-621.9B), a decrease in trade payables (-169.7B), and an increase in trade receivables (-167.7B), in addition to income tax payments (-201.6B). Cash flow from investing activities was +236.4B, primarily due to proceeds of 484.7B from the sale of property, plant and equipment, investment property, and other assets. Cash flow from financing activities was -205.6B, with repayments of long-term borrowings (-268.0B) and dividend payments (-103.5B) serving as sources of cash outflow, partly offset by proceeds from long-term borrowings (+200.0B). Free cash flow, calculated as the sum of OCF and investing cash flow, was -196.1B, and cash and cash equivalents declined from 1,550.8B at the beginning of the period to 1,170.1B at period-end.

Earnings Quality

The increase in Operating Income to 732.2B was significantly supported by other income of 429.6B (including approximately 401.0B in gains on sales of property, plant and equipment, investment property, and other assets), indicating that recurring operating results and temporary factors coexisted. Financial income of 41.7B and financial expenses of 20.7B provided a net positive contribution of +20.9B, improving from a net negative contribution of -72.1B in the same period of the previous year. Equity in earnings of affiliates accounted for under the equity method was 66.5B, nearly unchanged from 65.5B in the previous year, indicating stable earnings contributions from affiliated companies. Comprehensive income was 563.5B, exceeding consolidated quarterly profit of 544.4B by +19.1B. The difference was attributable to increases in other comprehensive income, including +26.6B in foreign currency translation adjustments of overseas subsidiaries. The divergence from Net Income was limited and did not materially impair earnings quality.

Earnings Forecast and Guidance

The Q1 progress rates against the full-year forecasts (Revenue of 1,840.0B, Operating Income of 250.0B, and Net Income attributable to owners of the parent of 172.0B) were 20.4% for Revenue, 29.3% for Operating Income, and 31.1% for Net Income. Compared with the 25% benchmark for evenly distributed quarterly progress, Revenue was below the benchmark, while Operating Income and Net Income exceeded it. This was likely primarily due to the early contribution from asset-sale gains recognized in Q1. Although the Company revised its earnings forecasts during the quarter, it did not revise its dividend forecast.

Shareholder Returns

The dividend forecast is ¥23.00 per share, based on the stock split conducted in October 2025. Dividend payments during Q1 totaled 103.5B, corresponding to the payment of the year-end dividend for the previous fiscal year (FY ending March 2026). Based on forecast Net Income attributable to owners of the parent of 1,720.0B for the full year and the weighted-average number of shares outstanding during the period, the expected dividend payout ratio is approximately 14.2%, based on total forecast dividends of approximately 244B, representing a conservative level. Share repurchases were virtually nonexistent during the quarter (-0.0B), and shareholder returns were centered on dividends. Note that the stock split conducted in October 2025, at a ratio of 7 shares for 1 share, requires caution when making simple comparisons with historical dividend results.

Risk Factors

1. Accumulation of working capital and delayed cash conversion: Inventories increased to 5,544.7B, up +10.0% YoY (+502.5B), while OCF of -432.5B was substantially below Net Income. Improvements in inventory and trade receivables turnover will determine the Company’s future cash-generation capacity.

2. Variability in segment earnings and reliance on temporary gains: While the Social Infrastructure segment remained loss-making, with Operating Income of -18.1B, much of the increase in Operating Income for the current period depended on asset-sale gains of approximately 401.0B in the “Other” category. Underlying improvements in profitability were limited to certain segments, including Aerospace, Space & Defense.

3. Financial leverage: Total liabilities of 1兆7,374.2B were equivalent to 2.4 times total net assets of 7,238.3B. Interest-bearing debt totaled 3,578.1B in bonds and borrowings, and reached 4,871.7B including lease liabilities. Although the Equity Ratio improved to 28.3% from the previous year, it remains at a level requiring continued monitoring.

Industry Benchmark (For Reference; Compiled by the Company)

Profitability and Returns

Both the Operating Income margin and Net Income margin substantially exceeded the industry median, although it should be noted that the current period includes temporary factors such as gains on asset sales.

Growth and Capital Efficiency

The Revenue growth rate exceeded the industry median and was close to the upper end of the IQR.

※Source: Compiled by the Company

Key Points from the Earnings Results

1. The substantial earnings increase during the quarter was primarily due to the recognition of approximately 401.0B in gains on sales of investment property and other assets. Accordingly, the improvement in the Operating Income margin to 19.5% and the Net Income margin to 14.3% includes this temporary factor. Underlying profitability improvements were supported by Revenue growth of +21.3% and an improved margin of 18.9% in the Aerospace, Space & Defense segment.

2. The full-year progress rates for Operating Income and Net Income, at 29.3% and 31.1%, respectively, were ahead of the Revenue progress rate of 20.4%. The fact that earnings progress was boosted by the early recognition of temporary gains should be considered when evaluating full-year results.

3. OCF was -432.5B, as increases in inventories and trade receivables and a decrease in trade payables weighed on cash generation. There was a divergence between earnings growth reported on the income statement and cash flow trends, making future improvements in working capital turnover a key area of focus.

Theoretical Share Price (Reference Value)

This is a mechanically calculated reference range based solely on 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: ¥1,066–¥1,134 for a ±1% change in the cost of equity, and ¥1,086–¥1,119 for a ±0.1 change in ω.

Note:

• 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: 2026-07 / This value does not forecast 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, and you should consult a professional adviser as necessary.

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