ZACROS (7917) FY2026 Q3 Earnings Report

Quick View

Executive Summary

The Company achieved higher revenue and earnings, with Ordinary Income and Net Income showing growth exceeding that of Operating Income. Revenue was ¥1,197.0B (+5.6% YoY), Operating Income was ¥89.2B (+6.6%), Ordinary Income was ¥100.0B (+16.4%), and Net Income was ¥72.8B (¥60.4B in the previous year). The main drivers of earnings growth were strong performance in the Information Electronics Business and Industrial Infrastructure Business, as well as an increase in non-operating income, including foreign exchange gains. Meanwhile, the Wellness Business posted a substantial decline in earnings due to higher depreciation expenses related to the new building at the Mie site and upfront investments.

Factors Affecting Business Performance

【Revenue】Revenue was ¥1,197.0B, up +5.6% YoY. The Information Electronics Business (+5.2%) was driven by higher sales of information recording materials amid the expansion of the semiconductor market for AI applications, while the Industrial Infrastructure Business (+10.7%) benefited from strong performance in construction materials and chemicals. The Wellness Business (+4.8%) returned to revenue growth in Q3, led by bio-related operations, while the Environmental Solutions Business (+0.9%) remained sluggish due to deteriorating profitability at its U.S. liquid-container subsidiary.

【Profit and Loss】Operating Income was ¥89.2B (+6.6%), with earnings growth in the Industrial Infrastructure and Information Electronics Businesses offsetting the substantial decline in the Wellness Business, which resulted from higher depreciation expenses related to the new building at the Mie site and upfront investments. Ordinary Income was ¥100.0B (+16.4%), substantially exceeding the growth in Operating Income, partly due to a temporary factor involving ¥13.2B in non-operating income, including a foreign exchange gain of ¥2.6B. Extraordinary income and losses resulted in a modest net loss of ¥0.5B, mainly reflecting a ¥0.6B loss on the disposal of fixed assets, and were not at a level that materially impaired the quality of Net Income. In conclusion, the Company achieved higher revenue and earnings.

Segment Analysis

By composition, Electronic Materials was the largest segment, with revenue of ¥433.9B (36.2% of total revenue), positioning it as a core business. In terms of Operating Income, the Industrial Infrastructure Business made the greatest contribution to profitability, at ¥39.3B (12.2% margin), followed by Electronic Materials at ¥37.3B (8.6% margin). The two segments accounted for more than 86% of total Operating Income and led the improvement in business performance. Meanwhile, the Wellness Business generated Operating Income of only ¥1.8B, with a margin of 0.8%, as higher depreciation expenses related to the new building at the Mie site and upfront investments weighed on profitability. The gap in profit margins between segments reached approximately 11.4pt at its widest, indicating a structure with high earnings dependence on the core Industrial Infrastructure and Electronic Materials businesses.

Key Financial Indicators

Profitability: ROE was 7.1%, and the Operating Income margin was 7.5% (gross margin: 23.4%; SG&A ratio: 15.9%). Cash flow quality: Although Operating Cash Flow (OCF) is difficult to calculate from the disclosed information, Comprehensive Income of ¥66.0B was slightly below Net Income of ¥72.8B. Financial soundness: The Equity Ratio was 65.1%. Current assets of ¥846.9B versus current liabilities of ¥436.1B resulted in a current ratio of approximately 194%. Interest-bearing debt was limited to short-term borrowings of ¥47.2B and long-term borrowings of ¥42.3B, indicating a strong financial base.

Cash Flow Analysis

Detailed disclosure of the cash flow statement is limited, but cash and deposits increased to ¥169.2B from ¥149.9B in the previous year. In terms of capital expenditures, construction in progress of ¥144.9B accounted for 21.8% of property, plant and equipment, indicating that ongoing investments in the new building at the Mie site and other facilities are progressing. Depreciation expenses increased by ¥4B YoY to ¥14B, indicating that the Company is in an investment phase. From a financing perspective, short-term borrowings increased substantially YoY, suggesting that a portion of capital expenditures may have been financed through borrowings. Cash generation is assessed as being in a phase where investment burdens are preceding earnings growth, and is considered standard.

Quality of Earnings

Ordinary Income of ¥100.0B exceeded Net Income of ¥72.8B by ¥27.2B; this difference reflects deductions for income taxes and other taxes of ¥26.6B and the portion attributable to non-controlling interests of ¥7.7B, rather than special factors. Non-operating income of ¥13.2B was only 1.1% of revenue but equivalent to 14.8% of Operating Income of ¥89.2B. The inclusion of a ¥2.6B foreign exchange gain warrants attention as a temporary source of volatility. Extraordinary income and losses resulted in a small net loss of ¥0.5B, with no significant distortion in earnings quality. Comprehensive Income of ¥66.0B fell below Net Income of ¥72.8B, mainly due to foreign currency translation adjustments of △¥10.3B.

Earnings Forecast and Guidance

Progress against the full-year forecast was 75.8% for revenue (¥1,197.0B/¥1,580.0B), 82.6% for Operating Income (¥89.2B/¥108.0B), and 82.6% for Ordinary Income (¥100.0B/¥121.0B). Compared with the standard progress rate of 75% after three quarters, revenue was approximately in line with the standard pace, while Operating Income and Ordinary Income were each 7.6pt ahead, indicating that profit progress is leading. Contract liabilities (advances received) were small at ¥5.0B, and no quantitative disclosure was available regarding the order backlog; therefore, no ratio was calculated.

Shareholder Returns

The interim dividend was ¥72 per share. (Based on the Company’s disclosure, there is also a statement indicating an annual dividend plan of ¥36, consisting of an interim dividend of ¥18 and a year-end dividend of ¥18; the impact of a stock split or similar event is assumed.) In addition to the annual dividend, the Company plans to conduct share repurchases, with a maximum of 1.82 million shares or ¥2B, as resolved on November 6, 2025. The Total Return Ratio is expected to be 74.7%. This should be viewed as the Total Return Ratio, including share repurchases, rather than the payout ratio based solely on dividends.

Catalysts

【Short term】Progress of the share repurchase plan, with a maximum of ¥2B, and trends in non-operating income and expenses, including foreign exchange gains, in Q4. 【Long term】Expansion of production capacity and earnings contributions from the Wellness Business following the full-scale operation of the new building at the Mie site, and medium-term expansion of the Information Electronics Business against the backdrop of growth in the semiconductor market for AI applications.

Industry Benchmark (For Reference; Compiled by the Company)

Profitability and Returns

Both the Operating Income margin and Net Income margin are slightly below the industry median.

Growth and Capital Efficiency

The revenue growth rate exceeds the industry median, indicating a relatively faster pace of revenue growth.

※Source: Compiled by the Company

Risk Factors

1. Prolonged collection of accounts receivable: Accounts receivable and notes receivable of ¥384.1B account for 24.5% of total assets, and the amount would be even larger including electronically recorded monetary claims. Working capital constraints and collection risk need to be monitored.

2. Investment recovery risk related to construction in progress: Construction in progress of ¥144.9B accounts for 21.8% of property, plant and equipment, with large-scale investments in the new building at the Mie site and other facilities underway. If demand falls short or utilization remains low after operations commence, this could lead to lower investment efficiency and future impairment risk.

3. Deteriorating profitability in specific segments: In the Environmental Solutions Business, deteriorating profitability at the U.S. liquid-container subsidiary, and in the Information Electronics Business, sluggish performance at the Taiwan display-related subsidiary, are weighing on earnings. The Company’s overall earnings structure is therefore exposed to the performance of its overseas subsidiaries.

Key Points in the Earnings Results

1. The growth rates of Ordinary Income and Net Income substantially exceeded that of Operating Income. The fact that part of the earnings growth was supported by non-operating income, including foreign exchange gains, is noteworthy when evaluating earnings quality.

2. By segment, Operating Income in the Wellness Business declined substantially from the previous year. The structural factors of higher depreciation expenses related to the new building at the Mie site and upfront investments are depressing short-term profitability. The emergence of the effects of increased production capacity over the medium term will be a key focus going forward.

3. The Company plans to conduct share repurchases in addition to paying dividends, targeting a Total Return Ratio of 74.7%. This can be cited as evidence of an enhanced shareholder return policy.

Theoretical Share Price (Reference Value)

Sensitivity: ¥1,225–¥1,296 at ±1% for the cost of equity, and ¥1,258–¥1,260 at ±0.1 for ω.

Notes:

• Since progress of Net Income against the full-year forecast (87%) exceeds the standard rate (75%), forecast EPS has been adjusted upward within a maximum range of +10% (because companies with leading progress tend to outperform forecasts; the adjustment may be excessive for businesses with strong seasonality).
• 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 gap 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.)

---

This report is an earnings analysis document automatically generated by AI through integrated analysis of XBRL earnings summary data and PDF earnings presentation materials. 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, and you should consult a professional as necessary.

---End of Report---

---

AI Financial Analysis

Executive Summary

ZACROS delivered a solid FY2026 Q3 result, with revenue growth translating into slightly stronger operating profitability and materially faster growth in profit attributable to owners. Cumulative Q3 revenue increased 5.6% year on year to ¥119.70bn. Operating income rose 6.6% to ¥8.92bn, marginally outpacing sales growth. Gross profit increased to ¥27.97bn and the gross margin expanded by approximately 6bp to 23.4%. SG&A expenses increased 5.5% to ¥19.05bn, broadly in line with revenue growth, indicating controlled overhead absorption. The operating margin improved by approximately 7bp to 7.5%. Ordinary income grew 16.4% to ¥10.00bn, substantially faster than operating income. This reflected a ¥1.32bn non-operating income contribution, including ¥0.26bn of foreign-exchange gains, ¥0.17bn of interest income, and ¥0.15bn of subsidy income. Profit attributable to owners rose 22.9% to ¥6.51bn, with the net margin expanding about 77bp to 5.4%. The earnings uplift was also aided by a much smaller extraordinary net loss of ¥0.53bn, versus a larger loss in the prior-year period. The effective tax rate was 26.7%, producing a tax burden of 0.655. The annualized DuPont ROE was 8.5%, supported principally by 1.017x annualized asset turnover and 1.54x financial leverage rather than an exceptional margin level. Liquidity remains strong, with a 194.2% current ratio, a 174.4% quick ratio, and cash equal to 3.58x short-term debt. The main balance-sheet operating issue is collection efficiency, as reported annualized DSO of 88 days is above the 60-day warning threshold. Construction in progress represents 21.8% of PPE, pointing to an elevated execution burden as capital projects move toward commissioning. Against full-year guidance, Q3 progress is 75.8% for sales, 82.6% for operating income, 82.6% for ordinary income, and 86.8% for profit attributable to owners. The above-normal profit progress indicates a favorable earnings position entering Q4, while the conversion of receivables into cash and timely completion of construction projects remain central to assessing the durability of this performance.

Profitability Analysis

Annualized ROE of 8.5% decomposes into a 5.4% net profit margin, 1.017x annualized asset turnover, and 1.54x financial leverage. The net margin improved from approximately 4.7% in the prior-year Q3 period to 5.4%, and was the principal positive component in the year-on-year earnings improvement. Gross margin expanded modestly to 23.4% from roughly 23.3%, while operating margin rose to 7.5% from roughly 7.4%, demonstrating limited but positive operating leverage. Revenue grew 5.6% and SG&A grew 5.5%, so expense discipline was sufficient to preserve the incremental gross-profit benefit. The larger improvement below operating income came from non-operating items: ordinary-income margin reached 8.4%, about 78bp above the prior-year level, compared with only about 7bp of operating-margin expansion. Interest coverage of 58.70x and an interest burden of 1.114 indicate that interest income and other non-operating income more than offset the interest-cost effect in the five-factor bridge. The tax burden of 0.655 is moderately below the 0.70 normal benchmark but remains consistent with the reported 26.7% effective tax rate. Annualized ROA is approximately 5.5%, based on the annualized earnings flow and asset turnover, placing returns in a moderate range. The operational margin improvement appears sustainable if sales growth and SG&A discipline continue, whereas the comparatively large ordinary-income uplift is less purely operating in nature because it includes foreign-exchange gains and subsidy income.

Growth Assessment

Sales growth of 5.6% to ¥119.70bn is broadly consistent with the 4.8% full-year sales-growth assumption embedded in company guidance. Gross profit increased 5.8% to ¥27.97bn, slightly ahead of sales, supporting the modest gross-margin expansion. Operating income growth of 6.6% to ¥8.92bn also aligns closely with the full-year operating-income growth assumption of 6.8%. Q3 operating-income progress of 82.6% is 7.6 percentage points above the standard 75% seasonal run-rate. Revenue progress of 75.8% is near the standard 75% level, indicating that the earnings outperformance versus the annual plan has been driven more by profitability than by unusually early revenue recognition. Ordinary-income progress is likewise 82.6%, while profit attributable to owners has reached 86.8% of the full-year target, 11.8 percentage points above the standard pace. The stronger bottom-line progress reflects the combination of improved operating profit, non-operating income, and a reduced extraordinary-loss burden. The ¥1.45bn increase in construction in progress to ¥14.49bn provides evidence of a meaningful investment pipeline, but realization depends on project completion, ramp-up, and returns on invested capital. Finished goods were ¥8.62bn, raw materials ¥6.38bn, and work in process ¥1.98bn, with finished goods representing the largest identified production-inventory category. Manufacturing-sector growth remains exposed to customer order conditions, raw-material and energy-cost movements, foreign-exchange conditions, and execution of production-capacity investments.

Financial Health

The balance sheet is conservatively funded overall, with total equity of ¥102.13bn representing 65.1% of total assets and debt/capital of only 8.1%. Current assets of ¥84.69bn exceed current liabilities of ¥43.61bn by ¥41.08bn, producing a 194.2% current ratio and leaving no broad current-asset/current-liability maturity mismatch. The quick ratio of 174.4% confirms that liquidity remains ample even without reliance on inventories. Cash and deposits of ¥16.92bn cover short-term loans of ¥4.72bn by 3.58x. Interest-bearing debt totals ¥8.95bn, comprising ¥4.72bn of short-term loans and ¥4.23bn of long-term loans. The reported debt-to-equity ratio is 0.54x, below the 1.0x conservative benchmark, while the low debt/capital ratio and strong interest coverage reinforce modest solvency risk. The refinancing-risk alert nevertheless warrants attention: 52.7% of interest-bearing debt is short term, above the 40% alert threshold. The root cause is the sharp increase in short-term loans to ¥4.72bn from ¥0.60bn a year earlier, a ¥4.13bn increase or 693.4%. Although this short-term funding profile is readily supported by cash and working capital at present, a sustained reliance on short-tenor borrowing could increase refinancing sensitivity if rates rise or operating cash conversion weakens. Net defined-benefit liability of ¥4.32bn and directors' retirement provision of ¥0.63bn are additional long-duration obligations to monitor. Goodwill is immaterial at ¥0.05bn, equal to effectively 0% of equity and assets, so the balance sheet is not dependent on acquired goodwill values.

Notable B/S Changes

Short-term loans: +¥4.13bn (+693.4%) to ¥4.72bn — the debt-tenor mix has shifted toward short-term financing; cash coverage remains strong but refinancing exposure has increased. Treasury stock: -¥2.13bn (-82.7% in carrying-value magnitude) to -¥4.71bn — indicates a larger treasury-share balance and potential additional capital-return or share-management effect. Goodwill: -¥0.06bn (-53.9%) to ¥0.05bn — goodwill is immaterial, reducing M&A-related impairment sensitivity. Accounts payable, other: -¥6.85bn (-51.4%) to ¥6.49bn — a material reduction in this liability category changes the composition of supplier and other short-term financing. Electronically recorded monetary claims: +¥1.69bn (+30.5%) to ¥7.23bn — adds to the elevated customer-receivables position and reinforces the need to monitor collection efficiency.

Cash Flow Quality

Working-capital quality is the key cash-conversion consideration. Trade receivables were ¥38.42bn and electronically recorded monetary claims were ¥7.23bn, making customer-credit exposure substantial relative to cumulative Q3 revenue. The reported annualized DSO is 88 days, materially above the 60-day warning level. The root cause of the high-DSO alert is the large receivables balance, with trade receivables increasing ¥2.69bn year on year and electronically recorded monetary claims increasing ¥1.69bn. In a manufacturing business, elevated DSO can reflect customer mix or contractual billing cycles, but it also raises the risk that accounting earnings are not promptly converted into cash. The impact is a potential drag on internally funded capital investment and shareholder distributions if collections do not normalize. Trade payables increased ¥2.53bn to ¥23.01bn and electronically recorded obligations were ¥2.57bn, providing some supplier-financing support to working capital. Construction in progress increased to ¥14.49bn and represents 21.8% of PPE, triggering the high-CIP alert. The root cause is an elevated concentration of capital assets that have not yet been placed into service. This may be consistent with a capacity-expansion or modernization program, but the impact is project-delay, cost-overrun, and delayed-return risk until assets are commissioned and generate earnings. The company retains substantial cash liquidity of ¥16.92bn, which provides a cushion while receivables are collected and projects are completed.

Dividend Sustainability

The disclosed interim dividend is ¥72.00 per share. The provided calculated payout ratio is 85.2%, which is above the 60% sustainability benchmark but remains below the 100% warning threshold. Relative to Q3 basic EPS of ¥89.34, the ¥72.00 interim dividend represents a high proportion of cumulative attributable earnings per share. Retained earnings of ¥787.06bn provide a substantial accounting capital base, and the company has strong liquidity with ¥16.92bn of cash and deposits. However, the high payout level reduces the margin for funding the elevated ¥14.49bn construction-in-progress program through retained cash generation. Treasury stock increased in absolute value by ¥2.13bn year on year to ¥4.71bn, indicating that shareholder-return activity should be assessed using a total return ratio when repurchase amounts are identified. Dividend capacity therefore depends particularly on collection of the sizeable receivables balance, execution of capital projects, and preservation of the current operating margin.

Risk Assessment

Business risks include Manufacturing demand risk: sales growth is positive at 5.6%, but customer order conditions can affect utilization, pricing, and absorption of fixed production costs., Receivable-collection risk: reported annualized DSO of 88 days exceeds the 60-day warning threshold; the high receivables balance can delay cash conversion and increase customer-credit exposure., Capital-project execution risk: construction in progress of ¥14.49bn, equal to 21.8% of PPE, creates risk of commissioning delays, cost overruns, and a lag before returns are realized., Input-cost and supply-chain risk: raw-material, energy, and logistics-cost volatility can pressure the 23.4% gross margin in a manufacturing operation., Foreign-exchange risk: foreign-exchange gains of ¥0.26bn contributed to non-operating income, so currency movements can affect ordinary income even where operating performance is stable..

Financial risks include Refinancing risk: 52.7% of interest-bearing debt is short term, above the 40% alert threshold, following a 693.4% year-on-year increase in short-term loans to ¥4.72bn., Cash-conversion risk: a longer collection cycle could constrain internally generated funding for capital projects and dividends despite currently strong liquidity., Return dilution risk: annualized ROE of 8.5% is moderate rather than high, and expanded capital assets must produce adequate earnings to improve returns., Non-operating-income reliance risk: ordinary income rose faster than operating income, partly reflecting foreign-exchange gains, interest income, and subsidy income..

Key concerns include Priority 1 — collection efficiency: the 88-day annualized DSO is the clearest near-term operating-finance risk because it directly affects liquidity conversion., Priority 2 — capital-project delivery: the 21.8% CIP/PPE ratio is above the 20% alert threshold and should be monitored for completion timing and subsequent asset utilization., Priority 3 — debt tenor: liquidity currently mitigates the high short-term-debt ratio, but the funding mix should normalize or remain well covered by cash and operating inflows., Priority 4 — earnings composition: monitor whether operating-margin expansion continues, since below-the-line income made a meaningful contribution to the stronger ordinary-income growth..

Investment Implications

Key takeaways include Revenue, gross profit, operating income, ordinary income, and profit attributable to owners all increased year on year, with attributable profit growing fastest at 22.9%., Operating profitability improved modestly, with gross margin at 23.4% and operating margin at 7.5%., FY2026 Q3 progress exceeds the standard seasonal pace for operating income and profit attributable to owners, while sales progress is broadly normal., The company has strong liquidity and low debt/capital, but a higher proportion of short-term borrowings requires monitoring., The key test of earnings quality is conversion of the elevated receivables balance into cash, alongside timely monetization of the large construction-in-progress balance..

Metrics to watch include Reported annualized DSO and the balances of trade receivables and electronically recorded monetary claims, Short-term loans, the short-term debt ratio, and cash/short-term debt coverage, Construction in progress, CIP/PPE, commissioning schedules, and returns from newly deployed assets, Gross margin, operating margin, and SG&A growth relative to sales growth, Foreign-exchange gains or losses and the share of ordinary-income growth derived from non-operating items, Dividend payout ratio and any disclosed share-repurchase amounts for total return ratio assessment.

Regarding relative positioning, ZACROS exhibits a sound balance-sheet profile for a capital-intensive manufacturer, with strong liquidity, low debt/capital, immaterial goodwill, and very strong interest coverage. Profitability is improving but remains moderate versus the stated benchmarks: the 7.5% operating margin is below the 8% threshold for a good rating and annualized ROE of 8.5% is below the 10% good threshold. Its relative strengths are financial resilience and Q3 profit progress versus guidance; its relative constraints are slow receivable conversion, elevated construction in progress, and a short-term-heavy debt mix.