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Nikon (NINOY) Q2 Earnings Fall Y/Y, Sales Guidance Down

Nikon Corporation’s NINOY net income declined almost 15% year over year in its second-quarter fiscal 2017 results, as the company generated earnings of ¥6.3 billion ($61.8 million) per share.

Shares fell about 3.3% in the trading session following the results, as the camera maker announced a major restructuring plan, which included reassigning over 1,500 employees and focusing on “high-value” cameras.   

For the first half of the year, net income soared 54% over the comparable period last year, to ¥17.7 billion ($173.5 million), driven by recovering consumer spending in Japan and the U.S. Strong performance in the Precision Equipment and Medical businesses contributed to the growth.

Inside the Headlines

In the reported quarter, Nikon’s net sales were down 18.1% year over year to ¥174.4 billion ($1.7 billion), hurt by the impact of adverse foreign exchange rates. Sluggish performance of three out of the four business segments dragged overall top-line growth. The aftermath of Kumamoto earthquakes also proved to be a major drag on revenues.

For the first half of the fiscal, net sales fell 13.8%, dragged by negative growth in Imaging Products and Instruments businesses.

Operating income for the quarter came in at ¥8.4 million ($82.4 million), down 14.3% from the prior-year tally of ¥9.8 billion.

For the first half of the fiscal, sales for the Precision Equipment Business surged a whopping 35.6% year over year to ¥115.3 billion ($1.1 billion).The unit enjoyed remarkable growth in the FPD Lithography System field, which benefited from the extension of capital investments. Operating income at the segment also rose to ¥24.4 billion, compared to ¥4.4 billion in the prior-year period.

However, the Imaging Products Business witnessed a decline in both sales and profits, as the top line shrunk 31.1% year over year to ¥178.3 billion ($1.7 billion). The unit’s performance was hurt due to the shrinking digital camera market and negative impact of foreign exchange translation. In addition, the 2016 Kumamoto earthquake disrupted the suppliers, which affected this unit’s operations as well. Operating income at the segment also fell to ¥15.2 billion, down from ¥24.2 billion in the prior-year period.

The Instruments Business remained relatively steady, with the top line coming in at ¥30.6 billion ($300 million), down somewhat from sales of ¥33.2 billion recorded in the comparable quarter last year. The microscope field’s performance remained stable, however adverse foreign currency translation impact hurt revenues. Further, in the industrial metrology field, the company recorded weak sales due to sluggish recovery in capital investments, both in the U.S. and Asia. The segment recorded an operating loss of ¥1.4 billion, wider than the loss of ¥0.5 billion in the prior-year period.

The new Medical Business posted sales of ¥9 billion ($88.2 million) in the first half of the fiscal, as Optos Plc's retinal diagnostic imaging equipment showed solid growth globally. This segment also recorded an operating loss of ¥2.4 billion, slightly lower than the ¥2.5 billion loss in the prior-year period.

Lastly, the Other Businesses segment net sales fell 9.4% year over year to ¥10.4 billion ($102 million), as sales in both Customized Products Business and the Glass Business (products like photomask substrates for FPD) declined. Operating income for the unit increased by 27.6% year on year to ¥1.8 billion yen.

Liquidity & Cash Flow

As of Sep 30, 2016, Nikon’s cash and cash equivalents were ¥271.7 billion($2.7 billion), up from ¥209.9 billion recorded a year ago.

Long-term liabilities (which include Bonds and Long-term loans) totaled ¥145.2 billion ($1.4 billion), up from ¥110.4 billion a year ago.

NIKON CORP ADR Price, Consensus and EPS Surprise



Based on the present market scenario, Nikon has revised its forecast for fiscal 2017. The company now expects sales in the Imaging Products Business to be weaker than previously expected. Also, the company took into consideration the continuing appreciation of yen and the impact on the supply chain from the Kumamoto earthquakes.

Once again, the company reduced the forecast for net sales from ¥820 billion to ¥800 billion. However, the guidance for operating profits was raised from ¥46 billion to ¥49 billion, reflecting the company’s cost streamlining efforts.

Restructuring Plan

Nikon Corporation unveiled a plan to undertake company-wide structural reform, as it seeks to enhance its operational profitability and create value.

The restructuring was prompted by the fact that Nikon has not been able to derive value from its existing businesses. Its Semiconductor Lithography Business Imaging Product business is still not profitable, while the Imaging Product Business has been grappling with a shrinking market and foreign exchange headwinds.

In light of the above, Nikon has planned to discontinue the current "Medium-Term Management Plan Update." Instead, it has initiated a company-wide restructuring to help shift to a strategy which pursues profit growth instead of revenue growth.

The plan includes reassessment of the strategy of the Semiconductor Lithography and Imaging Product Businesses. Further, Nikon intends to optimize manufacturing, sales and R&D on a global basis and streamline & optimize its workforce. As a part of the initiative, Nikon stated it will be announcing a voluntary retirement program for about 1,000 employees.

Extraordinary losses due to the restructuring are estimated to be about ¥48 billion and will be booked during the fiscal year ending Mar 31, 2017.

Our Take

Nikon has been suffering in recent times as its chip-making equipment business has been underperforming, as it struggles with slowing demand and stiff competition with overseas rivals. Further, adverse foreign exchange impact and supply disruptions caused by the Kumamoto earthquakes in April further dented operations for this company.

The Japanese precision instrument maker aims to downsize low-profitable operations and instead focus resources on medical equipment and other promising businesses.

Nikon currently carries a Zacks Rank #3 (Hold).

Stocks to Consider

Some better-ranked stocks in the same space includeMKS Instruments, Inc. MKSI, Tessera Technologies Inc. TSRA and Ultra Clean Holdings Inc. UCTT.

MKS Instruments sports a Zacks Rank #1 (Strong Buy). The company has a robust earnings beat history, having surpassed estimates strongly each time in the trailing four quarters, for an average positive earnings surprise of 26.8%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Ultra Clean Holdings, also boasting a Zacks Rank #1, has beaten estimates thrice in the trailing four quarters. It had surpassed estimates by a whopping 41.7% in the last reported quarter.

Tessera Technologies, having a Zacks Rank #2 (Buy), has achieved an average positive earnings surprise of 12.1% over the trailing four quarters, beating estimates all through.

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