EXEDY (7278) FY2026 Q3 Earnings Report

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Executive Summary

Despite the decline in revenue, Exedy secured higher profit through cost improvements, resulting in earnings that indicate a qualitative improvement in its profitability structure. Revenue was ¥226.45B (-3.0% YoY), Operating Income was ¥16.73B (+3.4%), and Net Income was ¥12.51B (+13.2%; of which ¥11.09B was attributable to owners of the parent, +9.0% YoY). As cost of sales declined 4.6% YoY, the gross margin improved to 19.9% (18.5% in the same period last year), which was the primary factor that absorbed the revenue decline and generated higher profit.

Factors Affecting Business Performance

【Revenue】Revenue was ¥226.45B, down 3.0% YoY, indicating an ongoing decline in revenue. Although segment disclosures are not available, the decline is considered to have been primarily driven by downward pressure on demand and volume, while improvements were observed in pricing and product mix.

【Profit and Loss】Cost of sales declined 4.6% YoY to ¥18.134B, contracting at a faster pace than the revenue decline. Consequently, gross profit increased 4.3% YoY to ¥45.11B, and the gross margin improved by approximately 1.4pt to 19.9%. SG&A expenses were ¥28.60B, increasing 6.6% YoY at a pace exceeding the decline in revenue; this warrants attention with respect to future operating leverage. Operating Income was ¥16.73B (+3.4% YoY), while Profit Before Tax was ¥17.77B, supported by positive net financial income (financial income of ¥1.77B minus financial expenses of ¥0.84B). Net Income was ¥12.51B (+13.2% YoY), exceeding the growth rate of Operating Income. In conclusion, the company achieved higher profit despite lower revenue.

Key Financial Indicators

【Profitability】The 7.4% operating margin improved from 6.9% in the same period last year but remains below the industry median of 8.6%. The 19.9% gross margin also continues to improve YoY, although it remains below 20%. 【Cash Flow Quality】Operating Cash Flow (OCF) was ¥26.64B, substantially exceeding Net Income of ¥12.51B, indicating strong cash support for earnings. 【Investment Efficiency】Annualized ROE was 8.2%, leaving further room to improve capital efficiency. Total asset turnover was generally below 1x, making efficiency as an asset-intensive business a key issue. 【Financial Soundness】The Equity Ratio improved to 60.2% from 59.4% in the previous year, indicating a strong financial base. Interest-bearing debt totaled ¥54.74B, comprising current debt of ¥23.15B and non-current debt of ¥31.59B, indicating conservative leverage.

Cash Flow Analysis

OCF increased substantially by 57.3% YoY to ¥26.64B, reaching 2.4x Net Income attributable to owners of the parent of ¥11.09B. Investing Cash Flow was -¥10.47B, of which capital expenditures accounted for ¥5.65B. Financing Cash Flow was -¥16.69B, with dividend payments of ¥10.98B and share repurchases of ¥0.93B serving as the primary outflows. Free cash flow, calculated as OCF less Investing Cash Flow, was positive at ¥16.17B and comfortably exceeded shareholder return expenditures totaling ¥11.91B, comprising dividends and share repurchases. Cash and cash equivalents accumulated to ¥70.31B, indicating ample liquidity.

Earnings Quality

The growth in Operating Income and Net Income was primarily based on the recurring factor of improved gross profit resulting from cost-of-sales reductions, with limited dependence on temporary gains or losses from extraordinary items. Financial income of ¥1.77B exceeded financial expenses of ¥0.84B and lifted Profit Before Tax, but the difference was limited to ¥0.93B; the core of earnings was therefore improved profitability in the underlying business. OCF substantially exceeded Net Income, indicating negative accruals, or a strong cash collection component in the earnings structure. Comprehensive Income was ¥20.73B, including ¥17.91B attributable to owners of the parent, exceeding Net Income of ¥11.09B. This was attributable primarily to an increase in other comprehensive income, centered on foreign currency translation adjustments, and should therefore be distinguished from recurring earnings power.

Earnings Forecasts and Guidance

The full-year company forecast is Revenue of ¥300.00B, Operating Income of ¥22.00B (+0.7% YoY), and EPS of ¥369.36. The Q3 cumulative progress rates were 75.5% for Revenue and 76.1% for Operating Income, slightly exceeding the standard 75% progress level. Achieving the full-year forecast will require approximately ¥5.27B of Operating Income in Q4, equivalent to a required operating margin of approximately 7.2%. This is below the cumulative actual operating margin of 7.4%; therefore, if current profitability can be maintained, the company may achieve its plan.

Shareholder Returns

The Q2 dividend was ¥150.00 per share, while the full-year forecast dividend is ¥300.00. The forecast payout ratio against forecast full-year EPS of ¥369.36 is approximately 81.2%. Dividend payments of ¥10.98B were more than adequately covered by ¥20.99B, calculated as OCF less capital expenditures, confirming the financial capacity to sustain dividends. Share repurchases of ¥0.93B were conducted, bringing total shareholder return expenditures, including dividends, to ¥11.91B. As the forecast payout ratio is high at over 80%, attention should be paid to the company’s capacity for shareholder returns if future earnings fall below plan.

Risk Factors

1. Continued Revenue Decline: Revenue is in a declining phase, down 3.0% YoY. As a manufacturer of drivetrain components for the automotive industry, changes in customers’ production plans and vehicle mix may affect sales volume and product mix.

2. Working Capital Collection and Inventory Efficiency: Both the accounts receivable turnover period of 64 days and the inventory turnover period of 65 days exceed 60 days. If collection periods lengthen or inventory becomes stagnant, these could become sources of OCF volatility.

3. Rising SG&A Expenses: SG&A expenses increased 6.6% YoY, exceeding the rate of revenue decline. If fixed-cost growth continues, it could offset the improvement in the operating margin during periods of declining demand.

Industry Benchmark (For Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

The company’s profitability is slightly below the industry median.

Growth and Capital Efficiency

The revenue growth rate is substantially below the industry median, placing the company notably among businesses experiencing a revenue decline within the industry.

※Source: Compiled by the Company

Key Points from the Earnings Results

1. Despite the revenue decline, an improvement in the gross margin resulting from cost-of-sales reductions (19.9%, +1.4pt YoY) drove higher Operating Income and a 13.2% increase in Net Income. OCF reached 2.4x Net Income, indicating strong cash support for earnings.

2. Financial resilience is high, with an Equity Ratio of 60.2%, a current ratio of 261.8%, and interest coverage of approximately 19.9x. Progress toward the full-year forecast is also generally on track, at 76.1% for Operating Income and 75.5% for Revenue.

3. Accounts receivable turnover days of 64 days and inventory turnover days of 65 days both exceed 60 days, making them key points to monitor when assessing the sustainability of earnings and cash flow.

Theoretical Share Price (Reference Value)

Sensitivity: ¥4,779–¥5,041 at ±1% for the cost of equity, and ¥4,899–¥4,912 at ±0.1 for ω.

Notes:

• As forecast ROE is below the cost of equity, the theoretical value is below book value per share.
• Net assets as of the quarter-end are used; there is a timing difference relative to 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 is not 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 responsibility, after consulting with a professional as necessary.

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