EIKEN INDUSTRIES (7265) FY2026 Q1 Earnings Report

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Executive Summary

Q1 FY2026 resulted in lower revenue and lower profit, with the particularly steep decline in Operating Income indicating that deteriorating profitability was the primary driver of performance. Revenue was ¥19.5B (¥20.1B in the same period last year, YoY -2.7%), while Operating Income was ¥0.5B (¥1.2B in the same period last year, YoY -53.7%). Ordinary Income was ¥0.6B (YoY -52.9%) and Net Income was ¥0.5B (YoY -47.1%), representing substantial profit declines in both cases. The primary factors were a decline in gross margin (13.2% versus 15.7% in the same period last year) and negative operating leverage caused by an increase in SG&A expenses (YoY +3.2%) despite lower revenue.

Factors Affecting Performance

【Revenue】Revenue was ¥19.5B, down 2.7% year on year. By segment, the core Filter Business generated ¥18.7B (approximately 96% of the total), down 3.4%, while BurningAppliances generated ¥0.8B, up 17.9%. Overall, however, the decline in revenue from the Filter Business weighed on total Revenue.

【Profit and Loss】Cost of sales remained nearly level with the same period last year at ¥16.9B, resulting in a gross profit decline (down ¥0.56B) that exceeded the decline in Revenue, while the gross margin fell by approximately 2.5pt to 13.2%. In addition, SG&A expenses increased 3.2% year on year to ¥2.0B despite the decline in Revenue, causing the SG&A ratio to rise to 10.5%. As a result, Operating Income contracted substantially to ¥0.5B (Operating Income margin of 2.7%). Including ¥0.1B in non-operating income (including dividends received, etc.), Ordinary Income was ¥0.6B. Extraordinary gains and losses were immaterial, resulting in Net Income of ¥0.5B. The contraction in profit substantially exceeded the decline in Revenue, placing the results in the category of lower revenue and lower profit.

Segment Analysis

The Filter Business is the Company’s core business, with Revenue of ¥18.7B (approximately 96% of the total) and Operating Income of ¥1.4B (profit margin of 7.3%), but both Revenue and profit declined year on year (Revenue YoY -3.4%, profit YoY -31.9%). The BurningAppliances Business is small in scale, with Revenue of ¥0.8B, but Revenue increased 17.9% year on year and profit also rose substantially (YoY +321.9%); however, its profit margin remained low at 2.7%. Other businesses are very small, and on a company-wide basis, deterioration in the profitability of the Filter Business was the primary driver of the contraction in total Operating Income.

Key Financial Metrics

【Profitability】The Operating Income margin was 2.7%, down approximately 3.1pt from 5.8% in the same period last year, while the Net Income margin also contracted to 2.5% (4.5% in the same period last year). The gross margin was 13.2% (15.7% in the same period last year), indicating a decline in the ability to absorb costs.【Cash Quality】Non-operating income was approximately 0.5% of Revenue and included dividends received, but remained limited in scale. Extraordinary gains and losses were also minor, and Net Income broadly reflects recurring operating business results.【Investment Efficiency】Annualized ROE was 3.2% and annualized ROIC was 3.6%, both remaining at levels reflecting the decline in core business profitability. Total asset turnover was approximately 1.0x, representing a slight decline from the same period last year.【Financial Soundness】The Equity Ratio was 77.6% and the current ratio was 335.1%, both high levels. Cash and deposits of ¥17.9B were approximately 3.9x short-term borrowings of ¥4.6B. All interest-bearing debt consisted of short-term borrowings, indicating that refinancing trends warrant continued monitoring from a funding-structure perspective.

Cash Flow Analysis

As individual data from the statement of cash flows have not been provided, funding trends are assessed based on changes in the balance sheet. Cash and deposits were ¥17.85B, down ¥0.89B from ¥18.74B in the same period last year, while the Equity Ratio remained broadly unchanged at 77.6% versus 77.8% in the same period last year. Inventories increased to ¥8.13B from ¥7.98B in the same period last year, with work in process increasing particularly by ¥0.22B, suggesting a buildup of funds in the production process. With a current ratio of 335.1% and a quick ratio of 278.5%, short-term funding capacity is substantial, and cash was maintained at approximately 3.9x short-term borrowings of ¥4.6B. Overall, although the contraction in Operating Income and increase in inventories have had a modest impact on cash on hand, the high Equity Ratio and ample cash and deposits continue to support the funding base.

Earnings Quality

Current-period profit was largely unaffected by extraordinary gains and losses and had a high-quality composition reflecting recurring operating business results. Extraordinary gains and extraordinary losses were both immaterial at the 0.0B level, and the difference between Ordinary Income of ¥0.6B and Net Income of ¥0.5B was primarily attributable to income taxes, etc. (¥0.1B, effective tax rate of approximately 20.8%). Non-operating income of ¥0.1B included ¥0.05B in dividends received, but represented only approximately 0.5% of Revenue, indicating a low degree of dependence on non-operating income. On the other hand, accrual-related factors, such as increases in work in process and the provision for bonuses, were observed, and inventory buildup and increased future personnel costs could affect earnings going forward. Overall, current-period Net Income directly reflects the decline in core business profitability, with no significant distortion of underlying performance by temporary factors.

Earnings Forecast and Guidance

The Company’s full-year forecast is Revenue of ¥83.5B (YoY +3.1%), Operating Income of ¥4.1B (YoY -0.7%), Ordinary Income of ¥4.3B (YoY -4.7%), and Net Income of ¥3.0B (YoY -7.7%). Q1 progress rates were 23.4% for Revenue, 13.0% for Operating Income, 14.2% for Ordinary Income, and 15.9% for Net Income, all approximately 10 points below the standard progress level of 25%. The delay in progress toward the Operating Income target is particularly significant: the Q1 actual Operating Income margin was 2.7%, approximately 2.2pt below the full-year forecast Operating Income margin of 4.9%. While the Company expects full-year Revenue growth, it plans for profit to be slightly below the previous year. Achievement of the plan will depend on a recovery in Revenue and improvements in the cost ratio and SG&A ratio over the remaining three quarters. No revision to the earnings forecast was made during the quarter.

Shareholder Returns

The full-year dividend forecast is ¥110.0 per share, and the annual total dividend based on the weighted-average number of shares outstanding during the period of 1,024,478 shares is approximately ¥1.13B. The forecast payout ratio against the full-year Net Income forecast of ¥3.01B is approximately 37.5%, which is not excessive based solely on dividends as the numerator. However, annualized Q1 Net Income was only approximately ¥1.9B, and achievement of the full-year forecast of ¥3.0B will depend on profit improvement in the second half. If the full-year profit plan is not achieved, the payout ratio could rise, and the recovery trajectory of the Operating Income margin will determine dividend sustainability. No disclosure regarding share repurchases has been made.

Risk Factors

1. Profitability deterioration risk: The gross margin declined to 13.2% from 15.7% in the same period last year, while the Operating Income margin contracted to 2.7% (5.8% in the same period last year). If the decline in cost absorption capacity caused by lower Revenue while cost of sales remains broadly flat continues, it could affect achievement of the full-year Operating Income forecast of ¥4.1B.

2. Demand fluctuation risk: The core Filter Business (approximately 96% of Revenue) recorded Revenue YoY -3.4% and profit YoY -31.9%. The automotive parts and filter-related businesses are susceptible to production trends and demand fluctuations, making the pace of recovery toward the full-year Revenue growth plan of ¥83.5B a key issue.

3. Fixed-cost absorption risk and short-term funding structure: SG&A expenses increased YoY +3.2% amid lower Revenue, causing the SG&A ratio to rise. In addition, all interest-bearing debt of ¥4.6B consisted of short-term borrowings, resulting in a short-term debt ratio of 100%. However, cash and deposits of ¥17.9B (approximately 3.9x short-term borrowings) and a current ratio of 335.1% provide mitigating factors from a liquidity perspective.

Industry Benchmark (For Reference; Prepared by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

Both the Operating Income margin and Net Income margin are below the industry median, placing profitability in the lower tier of the industry.

Growth and Capital Efficiency

While the industry median is trending toward Revenue growth, the Company recorded a decline in Revenue, placing its growth profile in the lower tier of the industry.

※Source: Prepared by the Company

Key Takeaways from the Earnings Results

1. In Q1, the decline in Operating Income (-53.7%) was significantly larger than the decline in Revenue (-2.7%), confirming high earnings sensitivity to Revenue. Trends in the gross margin and SG&A ratio will be the central points of observation determining whether the full-year Operating Income forecast can be achieved.

2. The strong financial foundation, including an Equity Ratio of 77.6%, a current ratio of 335.1%, and cash and deposits of ¥17.9B, supports funding stability even during a period of declining profitability.

3. Based on the full-year dividend forecast of ¥110.0, the forecast payout ratio is approximately 37.5%. Assuming the full-year profit plan is achieved, the dividend burden is not excessive; however, Q1 profit progress of 15.9% was below the standard level, making achievement of full-year profit an item for continued monitoring.

Theoretical Share Price (Reference Value)

Sensitivity: ¥4,924–¥5,204 at ±1% for the cost of equity, and ¥5,035–¥5,078 at ω±0.1.

Notes:

• As forecast ROE is below the cost of equity, the theoretical value will be below book value per share.
• Net assets as of the quarter-end are used (there is a timing gap relative to the full-year forecast).
• As net assets include non-controlling interests, the theoretical value may be calculated somewhat higher.

(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 predict or guarantee the future share price.)

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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 discretion and responsibility, after consulting professionals as necessary.

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