Brighter 4Q Earnings for Phillips

Zacks Equity Research
January 29, 2014

Koninklijke Phillips Electronics N.V. (PHG) reported net income of €412 million ($560.8 million) in the fourth quarter of 2013, compared to a net loss of €420 million in the prior-year quarter. The year-over-year growth was primarily due to overall improvement in operating results and lower restructuring and acquisition related charges. In addition, project Accelerate has also been a driving factor for the robust increase in income.                              

Phillips reported third-quarter earnings of €0.44 (60 cents) compared to loss of €0.46 on earnings in the prior year quarter.

Quarterly Details

Fourth-quarter sales on a comparable basis grew 7% year over year to €6.8 billion ($9.3 billion). However, group nominal sales increased marginally by 1% year over year due to 6% impact from unfavorable currency translations.

Earnings before Interest, Tax and Amortization (:EBITA), excluding restructuring and acquisition-related charges, pension settlement loss, and loss on the sale of industrial assets at Lighting, were €884 million ($1.2 billion) or 13.0% of sales versus 11.3% in the prior-year quarter. Increase in adjusted EBITA was also driven by lower acquisition and restructuring-related charges.  

Segment Details

Healthcare sales on comparable basisfor the quarter were up 4% year over year driven by growth across all of its businesses. Customer services grew in high-single digits, while Home Healthcare solutions increased mid single-digit and Patient Care & Clinical Informatics reported low-single digit growth. In addition, Imaging systems also reported a low-single digit decline.

Comparable sales in growth geographies increased in double digits year-on-year, with strong growth in China and Latin America. This was partly offset by a decline in Russia & Central Asia. In addition, Western Europe recorded low single-digit growth; while other mature geographies achieved mid single-digit growth but North America reported a 1% decline.

Orders in the Healthcare equipment on a comparable basis declined 1% year over year in the reported quarter. However, excluding multi-year deals in the prior-year quarter, equipment order intake increased by 1%. Orders in the Patient Care & Clinical Informatics grew low single digits, while Imaging Systems showed a low single digit decline as orders grew in low single digits, fully offset by 7% decline in both Patient care and Clinical Informatics orders.

The Consumer Lifestyle segment posted strong revenue growth of 8% to €1.4 billion ($1.9 billion) in the quarter on a comparable basis. During the quarter, the segment reported double-digit growth in Domestic Appliances while Health & Wellness reported high single-digit growth. The Personal Care division also grew in mid single-digits during the quarter.

On geographical basis, Consumer Lifestyle reported a double-digit comparable sales increase in growth geographies while reporting low single-digit growth in mature geographies. Western Europe and North America also showed low single-digit growth.

During the reported quarter, the Lightning segment reported sales increase of 8.0% year over year on comparable basis. Segment revenues were driven by double-digit growth at Lumileds and Automotive. In addition, Light sources, Electronics and Professional Lightning Solutions achieved mid single-digit growth, partially offset by Consumer Luminaires which reported low single-digit decline. LED sales grew 48% year over year and now represent 34% of the total lighting sales.

Revenues in the Innovation, Group & Services segment surged 22.2% to €237 million ($322.6 million), primarily due to due to higher IP royalties related to one-time patent settlements in our Blu-ray and TV licensing programs.

Geographical Growth

On a geographical basis, comparable sales in the growth geographies increased 15% in the fourth quarter. The increase was driven by strong growth in China, Latin America, Africa, the Middle East and Turkey.

The company’s growth markets exclude the U.S., Canada, Western Europe, Australia, New Zealand, South Korea and Japan.

The above mentioned geographies are classified as mature markets and revenues increased 2% year over year. The marginal decline in the mature markets was primarily attributable to strong performance of the healthcare and Consumer Lifestyle sectors, offset by flat Lightning sales.   

Project Accelerate

Phillips introduced project Accelerate to improve its overall performance and reduce costs for the company. The project is expected to be operational till 2017 and has five streams to enhance customer relevance, change company culture, reduce overhead costs, streamline the End2End customer value chains, and reallocate resources to profitable growth opportunities.

In addition, the company has also introduced a €1.1 billion cost reduction program. In fiscal 2013, the company has achieved €641 million ($851 million) in gross savings and has been able to reduce about 74% of the targeted employees in fiscal 2013. This program is expected to be complete by 2014.

Cash, Balance Sheet and Share Repurchase

Net cash flow from operating activities declined to €905 million ($1.2 billion) compared with €1.1 billion in the comparable prior-year quarter. The decrease was attributable to debt redemption and expenses related to discontinued operations.

Capital expenditures for the quarter were €297 million ($404.3 million) versus €303 million in the year-ago period, due to lower investments in the Lighting and Consumer Lifestyle segments.

At the end of fourth-quarter 2013, Philips had a net debt position of €1.4 billion ($1.9 billion), compared to €0.7 billion at the end of the fourth quarter of 2012. During the quarter, the net debt decreased by €596 million ($811.2 million), largely due to a free cash inflow of €608 million ($828 million).

Phillips currently holds a Zacks Rank #5 (Strong Sell). Other stocks that are worth considering in the electronics products and general industry sector are Mistras group Inc. (MG) , GigOptix Inc. (GIG) and Altra Industrial Motion Corp. (AIMC). Mistras carries a Zacks Rank #1 (Strong Buy) while GigOptix and Altra carry a Zacks Rank #2 (Buy). 

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