Koninklijke Philips N.V PHG reported second-quarter 2016 earnings of €0.46 (52 cents), an increase of 53.3% from the year-ago tally of €0.30.
The Dutch electronics giant reported second-quarter net income of €431 million ($486.7 million), an increase of 57.3% compared with the prior-year quarter’s figure of €274 million. The impressive net income performance was largely driven by the improvement in the HealthTech portfolio and rebound in the Lighting business.
Inside the Headlines
Total revenue in the quarter declined 1.9% year over year to €5,861 million ($6,618.3 million). Waning sales in HealthTech Other, Diagnosis & Treatment and Lighting businesses offset the revenue growth at the Personal Health and Connected Care & Health Informatics segments, weighing down on sales to a large extent. However, sales grew 3% year over year on a comparable basis, buoyed by growth in Healthtech.
However, Philips’ adjusted earnings before interest, taxes and amortization (EBITA), the company’s preferred measure of operational performance, rose 8.6% year over year to €544 million ($614.3 million) on the back of higher volumes and cost productivity.
On the other hand, net cash flow generated from operating activities came in at €318 million ($359.1 million) compared with net cash flow of €196 million in the year-ago quarter.
In the first quarter, Personal Health sales rose 3.6% year over year to €1,661 million ($1,875.6 million). The segment reported a 9% year-over-year increase in comparable sales as well. The upside was driven by growth in Health & Wellness, Personal Care, Sleep & Respiratory Care and Domestic Appliances. Geographically, Middle East & Turkey, Central & Eastern Europe outperformed with double-digit growth. Also, mature geographies like Western Europe and North America witnessed strong sales growth, supplementing the sales performance at this segment.
Diagnosis & Treatment revenues declined 3% in the quarter to €1,600 million ($1,806.7 million). On a comparable basis, revenues climbed 1% year over year. Low-single-digit growth in Image-Guided Therapy and Ultrasound thwarted the growth momentum to some extent. On a geographic basis, double-digit growth in Latin America, Middle East & Turkey and India was offset by low-single-digit decline in mature markets, with North America being hurt the most.
Connected Care & Health Informatics revenues grew 2.4% in the quarter to €767 million ($866.1 million). On a comparable basis, segmental revenues climbed 6% year over year, backed by growth in Patient Care & Monitoring Solutions as well as Healthcare Informatics, Solutions & Services. On a geographic basis, both growth geographies and matured geographies experienced single-digit sales growth. While Latin America emerged as the winner in the growth markets, North America recorded the maximum sales growth among the mature geographies.
Revenues in the HealthTech Other segment showed weakness, dropping 10.3% to €105 million ($118.6 million). The decline in this segment was mainly attributable to lower revenues from royalties due to the expiration of licenses, which more than offset the strength in emerging businesses.
Lighting revenues dropped 6.1% year over year to €1,728 million ($1,951.3 million) as a decline in Lamps more than offset growth in the LED and Professional business. On a comparable basis also, revenues fell 1% year over year.
Sales in the mature geographies inched up 1% year over year on a comparable basis, mainly driven by mid-single-digit growth in Western Europe. Comparable sales in growth geographies also increased 6% on a year-over-year basis, owing to improved sales in Central and Eastern Europe (up in double digit) and Latin America (up in mid-single digit).
Exiting the quarter on Jun 30, 2016, Philips’ cash and cash equivalents rose to €1,926 million ($2,138.6 million) from €1,135 million a year back.
The company’s long-term debt rose to €5,269 million ($5,850.6 million) compared with €4048 million a year ago.
Management believes that Philips’ Accelerate program will act as a catalyst for long-term growth by enabling expansion into adjacent and new growth markets. During the quarter, the Accelerate Program helped boost revenues and leverage on digital capabilities.
Moreover, through the program, the company has achieved gross savings of €19 million of overhead costs during the reported quarter. Also, the Design for Excellence program garnered €86 million of incremental procurement savings during the quarter. Furthermore, the End2End improvement program raked in €45 million.
Notable Developments During the Quarter
During the quarter, Philip’s HealthTech segment acquired PathXL to strengthen its hold in the Digital Pathology business, singed a €36 multi-year strategic partnership with Medical University of South Carolina Health and a €9 million agreement with Heart Hospital in Tampere. Also, the company launched the OneBlade hybrid styler in its personal care business line.
Update on Lighting Deal
On May 27, 2016, Philips declared that it sold 25% or 37.5 million of Philips Lighting shares in the float, after failing to find a buyer for the same. Shares in Philips Lighting commenced trading under the ticker “LIGHT” on Euronext Amsterdam. The IPO is one of the largest listings in Europe year to date. The company sold its stake in its lighting division at the rate of €20 per share. This price implies a market capitalization of about €3 billion for the 125-year old lighting division.
Philips first announced its plans to offload the lighting unit in Sep 2014. The IPO brings to an end Philips’ 18-month long search for a buyer for its lighting division. The sale marks the final step in a multi-year restructuring initiative spearheaded by CEO Frans van Houten. The IPO also ends Philips’ era as a conglomerate that made everything from light bulbs and television sets to medical scanners and coffee machines.
Based on the present market scenario and accounting for the macroeconomic headwinds, management expects modest sales growth in full-year 2016. The company has also committed itself toward pursuing growth opportunities and improving EBITA. Also, the company expects separation costs in the range of €65–€85 million for the second half of 2016.
We believe Philips’ dedicated efforts to gain traction in the healthcare space will propel growth. Additionally, rapid uptake of innovative health and well-being solutions are adding to the company’s strength. Also, separation of the Lighting business will free up the company’s resources to invest in core growth areas, thereby bolstering growth.
Despite these positives, escalating restructuring charges and adverse currency movements are expected to weigh on the company’s financials in the short run. Also, sluggishness in China might hurt the company’s major product line, compounding the problems for this Zacks Rank #4 (Sell) company.
1 EUR = $ 1.12921 (period average from Apr 1, 2016 to Jun 30, 2016)
1 EUR = $ 1.11038 (as of Jun 30, 2016)
One Philips ADR corresponds to one ordinary share.
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