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Nikon (NINOY) Q2 Earnings Decline Y/Y on Top Line Weakness

Nikon Corporation’s NINOY second-quarter fiscal 2018 earnings declined significantly over the comparable quarter last fiscal, as the company generated a net profit of ¥5.1 billion ($45.9 million) compared with profit of ¥7.5 billion last year.

Operating income for the fiscal second quarter increased 16.5% year over year to ¥10.6 billion ($95.5 million).

For the first half of the year, net profit attributable to owners declined 37.1% over the comparable period last year, to ¥13.9 billion ($125.2 million). This was due to decline in revenues. Earnings per share for the first half of the fiscal year came in at ¥35.09, slumping 37% year over year.

Inside the Headlines

In the quarter, Nikon’s net sales declined 9.4% year over year to ¥158.1 billion ($1.42 billion). The top line was negatively impacted by decline of sales volume of FPD lithography systems, which was somewhat offset by lower deficit in the Semiconductor lithography business.

For the first half of the fiscal, net sales fell 4.5% to ¥328.4 billion ($2.96 billion), dragged by negative growth in Imaging Products Business as well as in Precision Equipment Business, year over year.

For the first half of the fiscal, sales for the Precision Equipment Business recorded a decline of 15% year over year to ¥98 billion ($882.9 million). The segment’s operating profit came to ¥20.1 billion, down from ¥25.1 billion in the prior-year period. Both revenues and operating profit were dragged by decline in sales volume of FPD lithography systems.

The Imaging Products Business witnessed a decline in sales as the top line shrunk 1.7% year over year to ¥175.2 billion ($1.6 billion). However, operating profit recorded an increase of 4.1% to ¥15.4 billion compared with ¥14.8 billion in the prior-year period. The unit’s operating profit improved on account of shifting to and focusing on high value-add products in spite of market shrinkage.

The Healthcare Business remained relatively steady, with the top line coming in at ¥25.2 billion ($227 million), up from sales of ¥24 billion recorded in the comparable quarter last year. The units’ revenues were driven by impressive sales of Retina diagnostic imaging equipment outside of the United States. The segment recorded an operating loss of ¥2.1 billion, wider than the loss of ¥0.6 billion in the prior-year period. The figure was dragged by upfront investments in Bioscience and ophthalmological diagnosis fields.

The Industrial Metrology and Others posted sales of ¥29.8 billion ($268.5 million) in the first half of the fiscal, up from sales of ¥26 billion recorded in the year-ago period. Increase in revenues was primarily attributable to strong performance of image measuring system and X-ray inspection system for Industrial Metrology. This segment also recorded an operating profit of ¥1.5 billion, higher than the profit of ¥1.2 billion in the prior-year period.

Nikon Corp. Price, Consensus and EPS Surprise

Nikon Corp. Price, Consensus and EPS Surprise | Nikon Corp. Quote

Liquidity & Cash Flow

As of Sep 30, 2017, Nikon’s cash and cash equivalents were ¥327.6 billion ($3 billion), up from ¥271.6 billion recorded a year ago.

Total liabilities came out to be ¥498.9 billion ($4.5 billion), up from ¥455.9 billion a year ago.

Guidance

Concurrent with present market scenario, Nikon raised forecast for fiscal 2018. The company currently expects net sales to come at around ¥710 billion up from its previous forecast of ¥700 billion. The company anticipates sales in the Imaging Products Business to be stronger than previously expected. However, it reiterated the guidance for operating profits, which remains at about ¥45 billion.

Restructuring Plan & Business Segments

Earlier, Nikon unveiled a plan to undertake company-wide structural reform, as it seeks to enhance 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. The company’s Semiconductor Lithography Business Imaging Product business is still not profitable, while the Imaging Product Business has been grappling with foreign exchange headwinds.

In light of the above, Nikon 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. Additionally, Nikon intends to optimize manufacturing, sales and R&D on a global basis along with streamlining and optimizing its workforce. As part of the initiative, Nikon stated it will be declaring a voluntary retirement program for about 1,000 employees.

Further, this quarter, Nikon announced some restructuring with respect to its business segments.

The company integrated two of its business units, Microscope Solutions BU and Medical Business Development Division into Healthcare BU, which will fall under a separate, new segment named the Healthcare Business. Further, the Industrial Metrology BU was reclassified under the new Industrial Metrology and Others segment, along with Customized Products BU, Glass BU, and Encoder BU.

The business structure was reorganized to facilitate collaboration and streamline operations. The Precision Equipment and Imaging Products segments remained unchanged.

Current Business Scenario

For its Semiconductor Lithography Business, the company plans to cut back its investment in ArF immersion scanners and channelize these resources to other lithography systems and businesses in growth field. We believe that the company’s R&D initiatives make way for some breakthrough discoveries for the medical business, consequently aiding it to reap benefits in the long run.

However, 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. The company is presently facing some risks in the Imaging Business unit, with slowdown in digital cameras–interchangeable lens type, interchangeable lenses and compact digital cameras sales. Further, a rapidly shrinking market share of digital camera market is adding to the company’s woes.

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

Stocks to Consider

Better-ranked stocks worth considering in the same space include Axcelis Technologies, Inc. ACLS, MKS Instruments, Inc. MKSI and Ultra Clean Holdings, Inc. UCTT. While Axcelis Technologies and MKS Instruments sport a Zacks Rank #1 (Strong Buy), Ultra Clean Holdings International carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Axcelis Technologies has a decent earnings surprise history, surpassing estimates thrice in the trailing four quarters with an average beat of 25.2%.

MKS Instruments has delivered earning beats thrice in the trailing four quarters. It boasts an average beat of 7.4%.

Ultra Clean Holdings has a modest earnings surprise history in the trailing four quarters, having beaten estimates thrice. It has delivered an average beat of 16.5%.

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