KYB (7242) FY2027 Q1 Earnings Report

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Executive Summary

Although the Company recorded higher revenue but lower profit in Q1, the primary cause of the decline was the disappearance of the one-time gain on bargain purchase (¥6.15B) recognized in the same period of the previous year; underlying business profitability has improved. Revenue was ¥126.16B (+10.7% YoY), Operating Income was ¥10.81B (-19.1%), and Net Income was ¥8.80B (-29.6%). The gross margin improved by +1.6pt YoY to 21.1%. While revenue and profit growth in the core AC Business and HC Business provided support, the disappearance of non-recurring income recorded in the previous year made a significant contribution to the decline in profit shown on the income statement.

Factors Affecting Performance

【Revenue】Revenue was ¥126.16B, an increase of +10.7% YoY. By segment, the AC Business generated ¥88.82B (+11.5%), accounting for 70.4% of total revenue and driving overall growth. The HC Business generated ¥33.85B (+9.0%), while the Aircraft Equipment Business generated ¥2.00B (+9.2%). All reportable segments recorded higher revenue, indicating broad-based expansion of the demand base.

【Profitability】Operating Income was ¥10.81B (-19.1% YoY), and the Operating Income margin declined to 8.6% from 11.7% in the same period of the previous year. Although the gross margin improved to 21.1% (+1.6pt) due to an improvement in the cost of sales ratio, SG&A expenses increased by +12.5% YoY, exceeding the rate of revenue growth. In addition, the ¥6.15B gain on bargain purchase recorded in the same period of the previous year disappeared, resulting in a decline in net other income and expenses from ¥6.49B to ¥1.41B and putting downward pressure on Operating Income. Segment profit increased in all segments: AC (+46.9%), HC (+36.8%), and Aircraft Equipment (+17.0%), indicating improved business profitability excluding the one-time gain in the comparative period. Net Income was ¥8.80B (-29.6%), also affected by the increase in the effective tax rate to 19.0% from 7.9% in the previous year. In conclusion, the underlying business recorded higher revenue and profit by segment, but consolidated results showed higher revenue and lower profit due to the reversal of one-time factors.

Segment Analysis

The AC Business generated revenue of ¥88.82B (+11.5%) and segment profit of ¥6.26B (+46.9%), with a profit margin of 7.1%, making it the core business and accounting for 70.4% of consolidated revenue. The HC Business generated revenue of ¥33.85B (+9.0%) and segment profit of ¥1.60B (+36.8%), with a profit margin of 4.7%, lower than that of the AC Business and therefore offering relatively greater scope for profitability improvement. The Aircraft Equipment Business is small in scale, with revenue of ¥2.00B (+9.2%), but secured high profitability, with segment profit of ¥0.56B (+17.0%) and a profit margin of 27.8%. All three reportable segments recorded higher revenue and profit, indicating expansion of the Company-wide business base.

Key Financial Indicators

【Profitability】The Operating Income margin of 8.6% declined from 11.7% in the same period of the previous year, but the gross margin improved by +1.6pt YoY to 21.1%, indicating progress in cost efficiency. The SG&A ratio rose by +0.2pt YoY to 14.4%, with expenses increasing slightly ahead of revenue.

【Cash Flow Quality】Operating Cash Flow (OCF) was ¥15.25B, approximately 1.7 times Net Income of ¥8.80B, confirming cash-generation capacity in excess of accounting profit.

【Investment Efficiency】Annualized ROE was 14.5%, a level reflecting the Profit Before Tax margin and asset efficiency.

【Financial Soundness】The Equity Ratio was 46.2%, down 4.4pt from 50.6% in the same period of the previous year. Total equity declined from the beginning of the period due to large-scale share repurchases and dividend payments; the trend in the capital buffer will be an area to monitor going forward.

Cash Flow Analysis

Operating Cash Flow was ¥15.25B, an increase of +73.3% YoY, demonstrating cash generation in excess of Net Income of ¥8.80B. An increase in inventories (-¥2.19B) and a decrease in trade payables (-¥0.53B) placed pressure on funds from a working capital perspective, but cash inflows from a decrease in accounts receivable and improvements in other items offset these effects. Investing Cash Flow was -¥3.86B, primarily reflecting capital expenditures of ¥4.92B, resulting in Free Cash Flow of ¥11.39B. Financing Cash Flow was -¥7.60B. Large shareholder returns, consisting of dividend payments of ¥4.20B and share repurchases of ¥24.66B, were broadly offset by a net increase in short- and long-term borrowings totaling ¥24.42B. Cash and cash equivalents increased to ¥54.80B, securing funding capacity for the time being; however, the fact that part of the source of shareholder returns was financed through borrowings should be noted as a change in the funding structure.

Quality of Earnings

Operating Income of ¥10.81B includes ¥0.83B in equity-method investment income, but its contribution was approximately 7.7% of Operating Income and was not large enough to drive earnings. Financial income of ¥0.76B and financial expenses of ¥0.72B were broadly balanced, resulting in a net financial income surplus of only ¥0.05B. The difference between Profit Before Tax of ¥10.86B and Net Income of ¥8.80B was attributable to income taxes of ¥2.06B, resulting in an effective tax rate of 19.0%, normalized from 7.9% in the same period of the previous year. In the same period of the previous year, other income of ¥6.55B, including a ¥6.15B gain on bargain purchase, significantly boosted profit. As there were no similar one-time items in the current period, the difference in the quality of the comparative periods was the primary cause of the decline in profit. The impact of one-time items, such as impairment losses of ¥0.02B and gains on the sale of fixed assets of ¥0.03B, was limited, and current-period profit consisted more closely of recurring operating earnings.

Earnings Forecast and Guidance

Q1 progress against the full-year forecast was 25.8% for Revenue (forecast: ¥489.00B), 45.1% for Operating Income (forecast: ¥24.00B), and 51.9% for Net Income (forecast: ¥17.00B). Revenue was broadly in line with the standard progress benchmark of 25%, while Operating Income and Net Income were well above the standard progress level. This reflects the conservative incorporation into the full-year forecast of the disappearance of the prior-year one-time gain. While the full-year forecast calls for declines of -31.3% in Operating Income and -44.9% in Net Income, the year-on-year declines in Q1 were relatively smaller. No revisions have been made to the earnings forecast or dividend forecast.

Shareholder Returns

Dividend payments during Q1 were ¥4.20B, resulting in a Payout Ratio of 50.6% relative to Net Income of ¥8.80B. Including share repurchases of ¥24.66B, total shareholder returns reached ¥28.86B. The Total Return Ratio was 328.0% of Net Income and 253.4% of Free Cash Flow of ¥11.39B, substantially exceeding internally generated funds. This source of shareholder returns was effectively supplemented by a net increase in short- and long-term borrowings of ¥24.42B. The sustainability of shareholder returns going forward will depend on borrowing capacity and capital levels. In addition, a 1-for-3 stock split, with October 1, 2026 as the effective date, is scheduled. Based on the pre-split basis, the forecast annual dividend for the fiscal year ending March 2027 is ¥162.00, and no revision has been made to the dividend forecast.

Risk Factors

1. Sustainability of capital returns: The Total Return Ratio, including share repurchases, reached 328.0%, while the ratio to Free Cash Flow also reached 253.4%, meaning that returns could not be covered solely by internally generated funds during the period. Part of the source of shareholder returns was financed through an increase in borrowings (¥24.42B), and continued returns will require sustained growth in Operating Cash Flow and the preservation of borrowing capacity.

2. Working capital efficiency: Accounts receivable of ¥131.01B accounted for 25.9% of total assets, while inventories of ¥77.78B accounted for 15.4%; both increased year on year. The increase in inventories resulted in a cash outflow of ¥2.19B through current-period Operating Cash Flow. The effectiveness of collections and inventory management during a period of revenue growth may affect future cash-generation capacity.

3. Business concentration risk: The AC Business accounts for 70.4% of consolidated revenue, making consolidated performance highly sensitive to fluctuations in demand for automobiles and motorcycles. In addition, the Equity Ratio declined by 4.4pt YoY to 46.2%; the balance between the scale of capital returns and the trend in the capital buffer will be an area to monitor going forward.

Industry Benchmark (For Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

Profitability indicators were broadly in line with the industry median, with no notable relative outperformance or underperformance.

Growth and Capital Efficiency

The revenue growth rate exceeded the industry median by +4.5pt and was at a high level close to the upper bound of the IQR.

※Source: Compiled by the Company

Key Takeaways from the Earnings Results

1. The +1.6pt improvement in the gross margin and higher revenue and profit across all reportable segments indicate an improvement in underlying business profitability. The declines in consolidated Operating Income and Net Income were primarily due to the disappearance of the non-recurring gain on bargain purchase recorded in the same period of the previous year; the difference in the quality of the comparative periods should be noted.

2. Operating Cash Flow was ¥15.25B, exceeding Net Income and confirming solid cash-generation capacity. At the same time, the Total Return Ratio, including share repurchases, was 328.0%, substantially exceeding internally generated funds; part of the returns was financed through an increase in borrowings of ¥24.42B.

3. Q1 progress against the full-year forecast was 45.1% for Operating Income and 51.9% for Net Income, above the standard progress benchmark. This was attributable to the comparison with a conservative full-year plan that reflects the disappearance of the prior-year one-time gain.

Theoretical Share Price (Reference Value)

Sensitivity: ¥4,532–¥4,794 at ±1% for the Cost of Equity, and ¥4,624–¥4,684 at ±0.1 for ω.

Notes:

• Because forecast ROE is below the Cost of Equity, the theoretical value is below Book Value Per Share.
• Net assets as of the end of the quarter are used (there is a time-period mismatch with the full-year forecast).

(Calculation model: Residual Income Model (Ohlson-type, explicit 5-year fade) / Interest rate reference month: 2026-07 / Mechanically calculated solely from publicly disclosed data; this does not constitute a forecast of the market share price or a recommendation of any specific investment action, and does not predict or guarantee future share prices.)

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This report is an earnings analysis document automatically generated by AI through analysis of 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 discretion and responsibility, after consulting professionals as necessary.

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