Nikon (NINOY) Q3 Earnings Fall Y/Y, Sales Guidance Down

Nikon Corporation 's NINOY earnings declined significantly year over year in its third-quarter fiscal 2017 results, as the company generated a net loss of ¥18.5 billion ($169.7 million).

The camera maker had announced a major restructuring plan last quarter, which included reassigning over 1,500 employees and focusing on "high-value" cameras. Nikon recorded losses from inventory write-downs/write-offs in the Semiconductor Lithography business as restructuring expenses, which resulted in the net loss. An increase in tax expenses arising from tax effects also hurt the bottom line.

Shares fell about 5.5% in the trading session following the results, as investors were likely disappointed with the dismal results. Further, despite progress in restructuring, Nikon cut its fiscal 2017 guidance for the second straight quarter, on the back of weaker expectations for the imaging and instrument segments.

For the first nine months of the fiscal, net loss came in at ¥831 million ($7.6 million), sharply down from the net income of ¥18.7 billion in the comparable period last year. However, operating income increased 67.1% year over year to ¥42.2 billion, supported by strong performance in the Precision Equipment and Medical businesses.

Inside the Headlines

In the reported quarter, Nikon's net sales climbed 2.1% year over year to ¥222.1 billion ($2 billion). The top line was driven by increase in unit sales from FPD and Semiconductor lithography, which was offset by the impact of adverse foreign exchange rates and decline in digital cameras unit sales.

For the first nine months of the fiscal, net sales dipped 8.2% year over year to ¥565.8 billion ($5.2 billion), dragged by adverse foreign exchange translation effect as well as decline in camera unit sales, offset by an increase in unit sales from FPD lithography.

Operating income for the quarter came in at ¥42.1 million ($0.3 million), up 67.5% from the prior-year tally of ¥25.2 billion.

For the quarter, sales for the Precision Equipment Business surged a whopping 154% year over year to ¥72.1 billion ($661.5 million).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 ¥17.6 billion, compared to an operating loss of ¥0.9 billion in the prior-year period.

However, the Imaging Products Business witnessed a decline in both sales and profits, as the top line shrunk 23% year over year to ¥122.5 billion ($1.1 billion). The unit's performance was affected 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 ¥9 billion, down from ¥18.4 billion in the year-ago period.

The Instruments Business also displayed negative growth, with the top line coming in at ¥17.2 billion ($157.8 million), down from sales of ¥19.3 billion recorded in the comparable quarter last year. The microscope field's performance was weak and adverse foreign currency translation impact further hampered revenues. Further, in the industrial metrology field, the company recorded poor sales due to sluggish recovery in capital investments. The segment recorded an operating loss of ¥0.8 billion, compared with operating income of ¥0.4 billion in the year-earlier period.

The new Medical Business posted sales of ¥4.9 billion ($88.2 million) in the quarter, down from ¥5.1 billion in the year-ago quarter. Optos Plc's retinal diagnostic imaging equipment exhibited solid performance in Japan and Europe; however its performance remained quite dreary in the U.S., which hit revenues. This segment also recorded an operating loss of ¥1.5 billion, slightly wider than the ¥1.4-billion loss in the prior-year period.

Lastly, the Other Businesses segment net sales fell 4% year over year to ¥5.4 billion ($49.5 million).

Liquidity & Cash Flow

As of Sep 30, 2016, Nikon's cash and cash equivalents were ¥316.7 billion ($2.9 billion), up from ¥233.5 billion recorded a year ago.

Long-term liabilities (which include Bonds and Long-term loans) totaled ¥160 billion ($1.5 billion), up from ¥110.4 billion a year ago.

Nikon Corp. Price, Consensus and EPS Surprise

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


Based on the present market scenario, Nikon has revised its forecast for fiscal 2017 downward. The company expects substantial decrease in fourth-quarter fiscal 2017 net sales and operating income.

Once again, the company reduced the forecast for net sales from ¥800 billion to ¥750 billion. Also, the guidance for operating profits has been slashed from ¥49 billion to ¥44 billion.

The company estimates sales in the Imaging Products Business to be even weaker than previously projected, as market slowdown is worse than expected and action camera sales will likely remain weak. Additionally, the company took into consideration the continuing appreciation of the yen and the impact on the supply chain from the Kumamoto earthquakes.

The industrial metrology businessis also contending with global market slowdown and restrained investments in the U.S. automotive market, which will hurt sales in the current quarter.

Restructuring Plan

In the fiscal third quarter, 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. 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 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 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 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 Apr 2016 have 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 include MKS Instruments, Inc. MKSI , Ultratech, Inc. UTEK and Ultra Clean Holdings Inc. UCTT , each boasting a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here.

MKS Instruments has achieved an average positive earnings surprise of 21.5% in the trailing four quarters, beating estimates all through.

Ultra Clean Holdings has beaten estimates thrice in the trailing four quarters. It had surpassed estimates by a whopping 41.7% in the last reported quarter.

Ultratech has a robust earnings beat history, having surpassed estimates strongly each time in the trailing four quarters, for an average positive earnings surprise of 62.9%.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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