KYB (7242) FY2026 Q3 Earnings Report

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Executive Summary

Revenue, Operating Income, and Net Income all increased substantially, resulting in earnings growth driven not only by higher revenue but also by improved gross margin and operating leverage from the containment of SG&A expenses. Revenue was ¥3,539.9B (+9.7% YoY), Operating Income was ¥312.4B (+104.3%), Profit Before Tax, equivalent to Ordinary Income, was ¥313.3B (+113.7%), and Net Income attributable to owners of the parent was ¥246.3B (+168.1%). Gross margin improved to 20.1% from 18.6% in the previous year, while the SG&A expense growth rate of 7.6% remained below the revenue growth rate, contributing to the expansion of the Operating Income margin to 8.8% from 4.7% in the previous year. Other income of ¥97.0B accounted for a certain proportion of Operating Income; therefore, the continuity of its components needs to be confirmed when assessing earnings quality.

Factors Affecting Earnings

【Revenue】Revenue increased 9.7% YoY to ¥3,539.9B. Although the segment breakdown is not included in the disclosed data, the Company-wide revenue growth trend has continued.

【Profit and Loss】Gross profit expanded at a pace exceeding revenue growth, increasing 18.3% YoY to ¥713.2B, while gross margin improved to 20.1% from 18.6% in the previous year. SG&A expenses amounted to ¥502.5B, increasing only 7.6% YoY and remaining below the pace of revenue growth; consequently, Operating Income doubled to ¥312.4B (+104.3%). Against Profit Before Tax of ¥313.3B, the effective tax rate remained low at 17.6%, and Net Income attributable to owners of the parent was ¥246.3B (+168.1%). Operating Income includes Other Income of ¥97.0B, equivalent to approximately 31.0% of Operating Income. In addition to improvements in core-business gross profit and cost efficiency, income factors with a potentially temporary nature may have contributed to earnings growth. In conclusion, the Company achieved higher revenue and higher earnings.

Key Financial Indicators

【Profitability】The Operating Income margin was 8.8%, improving by +4.1pt from 4.7% in the previous year. The Net Income margin, based on income attributable to owners of the parent, was 7.0%, up +4.1pt from 2.8% in the previous year.【Cash Flow Quality】Operating Cash Flow (OCF) was ¥226.1B, only 0.92 times Net Income attributable to owners of the parent of ¥246.3B. OCF decreased -3.9% from ¥235.4B in the same period of the previous year, indicating that the increase in earnings has not been sufficiently converted into cash.【Investment Efficiency】Annualized ROE was 13.7%, a level reflecting a balanced combination of total asset turnover and the Equity Ratio.【Financial Soundness】The Equity Ratio was 48.4%, nearly unchanged from 48.7% in the previous year. Interest-bearing debt totaled ¥1,093.6B on a combined current and non-current basis; together with cash and cash equivalents on hand of ¥504.5B, the financial foundation remains stable.

Cash Flow Analysis

OCF was ¥226.1B, down -3.9% from ¥235.4B in the same period of the previous year, indicating that cash generation has not kept pace with the growth in Net Income. Against OCF subtotal of ¥266.4B, increases in accounts receivable and notes receivable placed pressure on working capital. Together with an increase in inventories of ¥16.6B and an increase in accounts payable of ¥13.2B, these items absorbed funds. Investing Cash Flow was -¥59.4B, including capital expenditures of ¥167.3B, indicating that the Company continues to make proactive investments. Free Cash Flow (OCF + Investing Cash Flow) remained positive at ¥166.7B. Financing Cash Flow was -¥168.1B. Total shareholder returns of ¥195.7B, comprising dividend payments of ¥70.6B and share repurchases of ¥125.1B, exceeded Free Cash Flow. Although cash and cash equivalents accumulated to ¥504.5B, part of the funds used for shareholder returns was supplemented by cash on hand and borrowings.

Earnings Quality

Of Profit Before Tax of ¥313.3B, Other Income of ¥97.0B was equivalent to approximately 31.0% of Operating Income of ¥312.4B, suggesting that recurring operating profit and income elements with a potentially temporary nature may be mixed. Financial income of ¥16.9B and financial expenses of ¥16.0B were nearly balanced, resulting in a limited impact on profit and loss. Equity-method investment gains contributed positively by ¥20.6B, accounting for 8.4% of Net Income attributable to owners of the parent; therefore, fluctuations in the performance of equity-method affiliates may also affect consolidated earnings. The effective tax rate remained low at 17.6%, increasing the conversion rate from Profit Before Tax to Net Income. The fact that OCF remained at 0.92 times Net Income reflects an expansion in accruals due to increases in trade receivables and inventories. Continued monitoring of working capital trends is necessary when assessing earnings quality.

Earnings Forecast and Guidance

Progress rates against the Full-Year forecast were 74.5% for Revenue, 86.8% for Operating Income, and 89.5% for Net Income. Profit items are substantially exceeding the standard progress rate of 75%. The Company expects Full-Year Revenue to increase +8.4%, Operating Income to increase +58.8%, and Net Income to increase +84.6%; however, the growth rates as of the Q3 cumulative period—Operating Income +104.3% and Net Income +168.1%—are tracking ahead of these forecasts. The required Q4 levels are approximately ¥121.0B in Revenue and approximately ¥4.76B in Operating Income. On a simple calculation, the required Operating Income margin is 3.9%, below the Q3 cumulative margin of 8.8%. This suggests that the Full-Year forecast may incorporate a degree of conservatism; however, the Q4 profit margin could fluctuate depending on the continuity of Other Income.

Shareholder Returns

The Q2 dividend was ¥75.00 per share, while the Full-Year forecast dividend is ¥150.00 per share. The Payout Ratio against forecast EPS of ¥597.44 is approximately 25.1%. Dividend payments of ¥70.6B were covered approximately 2.4 times by Free Cash Flow of ¥166.7B, indicating a high level of sustainability for dividends alone. Meanwhile, Total Shareholder Returns of ¥195.7B, including share repurchases of ¥125.1B, resulted in a Total Return Ratio of approximately 79.5% relative to Net Income attributable to owners of the parent of ¥246.3B, exceeding Free Cash Flow. The Payout Ratio and Total Return Ratio are clearly at different levels, and the sustainability of the scale of shareholder returns, including share repurchases, needs to be monitored in conjunction with on-hand liquidity and capital expenditure plans.

Risk Factors

1. Delays in the collection of trade receivables: Accounts receivable and notes receivable amounted to ¥1,285.7B, increasing +17.0% YoY and accumulating at a pace exceeding the +9.7% growth in Revenue. The conversion of higher revenue into cash has been delayed, serving as a factor depressing OCF.

2. Inventory accumulation: Inventories amounted to ¥755.7B, increasing +11.8% YoY. Inventory levels need to be monitored from the perspective of the risk of inventory valuation losses during demand fluctuations and the tie-up of funds.

3. Weight of temporary factors in the earnings composition: Other Income of ¥97.0B represents approximately 31.0% of Operating Income. Depending on the continuity of its components, this may affect the reproducibility of future profit margins.

Industry Benchmark (Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

The Company's profitability is positioned slightly above the industry median.

Growth and Capital Efficiency

The Revenue growth rate is substantially above both the industry median and the upper quartile.

※Source: Compiled by the Company

Key Takeaways from the Earnings Results

1. Operating Income increased +104.3% and Net Income increased +168.1%, substantially exceeding the +9.7% increase in Revenue. The primary drivers were operating leverage from gross margin improvement (+approximately 1.5pt) and containment of the SG&A expense growth rate (+7.6%).

2. Progress rates for earnings against the Full-Year forecast were high at 86.8% for Operating Income and 89.5% for Net Income, substantially exceeding the standard progress rate of 75%. Meanwhile, OCF remained at 0.92 times Net Income, highlighting that the increase in earnings has not been fully converted into cash.

3. Total Shareholder Returns of ¥195.7B, including share repurchases, exceeded Free Cash Flow of ¥166.7B, resulting in a significant gap between the Payout Ratio (approximately 25.1%) and the Total Return Ratio (approximately 79.5%). The sustainability of the scale of future shareholder returns should be assessed together with improvements in working capital.

Theoretical Share Price (Reference Value)

Sensitivity: ¥5,550–¥5,880 at Cost of Equity ±1%, and ¥5,701–¥5,726 at ω±0.1.

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 (Ohlson-type, explicit 5-year fade) / Interest rate reference month: 2026-07 / Mechanically calculated values based solely on publicly disclosed data; these are not forecasts of market share 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 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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