Nikon Corporation’s (OTC:NINOY) first-quarter fiscal 2018 earnings declined significantly over the comparable quarter last fiscal, as the company generated a net profit of ¥8.9 billion ($80.7 million) compared with profit of¥14.7 billion last year. Earnings per share came in at¥22.37, down 39.7% year over year.
Operating income too decreased 31.1% year over year to ¥12.4 billion ($65.1 million).
Inside the Headlines
In the quarter, Nikon’s net sales inched up 0.6% year over year to ¥170.3 billion ($1.5 billion). The top line was positively impacted by increase in unit sales from FPD and Semiconductor lithography, which was somewhat offset by soft digital camera sales, change in product mix of new DSLRs and delayed budget execution by governments.
Sales for the Precision Equipment Business climbed 6.6% year over year to ¥55.2 billion ($500.7 million).The unit enjoyed remarkable growth in the FPD Lithography System field, which benefited from the broad-based strength in capital investments. However, operating income at the segment fell to ¥13.1 billion compared to ¥14.8 billion in the prior-year quarter due to lower unit sales in the FPD Lithography System field.
However, the Imaging Products Business witnessed a steady decline in both sales and profits, as the top line edged down 0.8% over first-quarter fiscal 2017 to ¥90.9 billion ($824.6 million). The unit saw a turnaround in the shrinking digital camera market, as the compact digital camera market improved year over year. Operating income at the segment also fell to ¥7.6 billion, down 24.8% from ¥10.1 billion in the year-ago period, due to adverse product mix.
The Instruments Business displayed nearly flat growth, with the top line coming in at ¥13.5 billion ($122.5 million), up from sales of ¥13.4 billion recorded last quarter. The microscope-related field’s performance was weak due to delayed budget execution by the U.S. and China governments and other factors, and adverse foreign currency translation impact further hampered revenues. However, in the industrial metrology field, the company recorded improved sales in the U.S. and Asia. The segment recorded an operating loss of ¥2.4 billion compared with a loss of ¥1.2 billion in the prior fiscal quarter, due to higher upfront investments and expenses related to sales expansion initiatives.
The new Medical Business posted sales of ¥4.7 billion ($42.6 million) in the quarter, up from ¥4.2 billion recorded in the year-ago period. Optos Plc's retinal diagnostic imaging equipment exhibited solid performance in North America, which drove revenues.This segment also recorded an operating loss of ¥1.1 billion, slightly wider than the ¥0.6-billion loss in the prior-year quarter, hurt by upfront investments.
Lastly, the Other Businesses segment net sales grew 9.4% year over year at ¥5.8 billion ($52.6 million).
Liquidity & Cash Flow
As of Jun 30, 2017, Nikon’s cash and cash equivalents were ¥309.2 billion ($2.8 billion), down from ¥319.1 billion recorded on Mar 31, 2017.
Long-term liabilities (which include Bonds and Long-term loans) totaled ¥137.7 billion ($1.2 billion), marginally down from ¥138.3 billion a year ago.
Nikon Corp. Price, Consensus and EPS Surprise
Restructuring Plan
In third-quarter fiscal 2017, Nikon unveiled a plan to undertake company-wide structural reform, as it seeks to enhance its operational profitability and create value.The restructuring will help Nikon shift from a strategy pursuing revenue growth to one pursuing profit improvement.
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 a shrinking market and 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 and streamline & optimize its workforce. As part of the initiative, Nikon stated it will be declaring a voluntary retirement program for about 1,000 employees.
Extraordinary losses due to the restructuring came to about ¥49.8 billion and were booked in the fiscal year ending Mar 31, 2017.
Guidance
The company sees a gradual recovery trend in its end markets as both the U.S. and Europe enjoy steady personal consumption, after much turmoil in the aftermath of the UK’s decision to exit from the EU, as well as the U.S. presidential election. Japan’s capital investment and personal consumption also seem to be on the road to recovery.
Incorporating the present market scenario, Nikon reiterated its forecast for fiscal 2018. The company expects net sales to come at around ¥700 billion. Also, the guidance for operating profits is about ¥45 billion.
Nikon anticipates strong capital investments in the semiconductor-related field, which will drive growth in the Precision Equipment Business. Sales in the Imaging Products Business are likely to be better than the earlier projections, led by an increase in unit sales of digital cameras and interchangeable lenses. The instruments businessis also contending with deferred government budget spending and restrained investments, which might mar sales.
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 Apr 2016 further dented operations for this company.
In order to drive growth, the Japanese precision instrument maker aims to downsize low-profitable operations and instead focus resources on medical equipment and other promising businesses.Nikon’s growth blueprint is based on four initiatives — a merger & acquisition program, research & development program, human resource program and cost-reduction program.
Nikon is focusing on expansion in two new segments, namely Medical and Instruments business. Also, the company is undertaking a number of initiatives to stabilize the key financials of its core business areas – including Precision Equipment and Imaging Products. In addition, Nikon’s strategic acquisitions and investments to build its medical business is anticipated to help it reap significant benefits over the long run.
Nikon currently flaunts a Zacks Rank #1 (Strong Buy).
Other Stocks to Consider
Other top-ranked stocks include Lam Research Corporation (NASDAQ:LRCX) , Applied Materials, Inc. (NASDAQ:AMAT) and Advanced Energy Industries, Inc. (NASDAQ:AEIS) . While Lam Research sports a Zacks Rank #1, Applied Materials and KLA-Tencor (NASDAQ:KLAC) carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Lam Research has an impressive earnings surprise history for the trailing four quarters, beating estimates all through, with an average positive surprise of 4.4%.
With four back-to-back earnings beats, Applied Materials has an average positive surprise of 3.4%.
Advanced Energy Industries has a decent earnings surprise history as well. The company surpassed estimates thrice over the trailing four quarters, with an average positive surprise of 11.3%.
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