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Bright 4Q for Phillips Electronics

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Koninklijke Phillips Electronics N.V. (PHG) reported a net income of €355 million ($460 million) for the fourth quarter of 2012, down 35.4% year over year. The year-over-year decline was primarily due to the European Commission fine of €509 million ($660 million) related to the violations of competition rules by Phillips while divesting its Cathode-Ray Tubes business in 2001.

However, excluding the impact of this fine, net income amounted to €154 million ($199.7 million) compared with a net loss of €32 million in the prior-year quarter.

Quarterly Details

For the fourth quarter of 2012, the company reported revenue growth of 3% to €7.2 billion ($9.3 billion) from €6.7 billion in the prior-year quarter. The revenue increase was primarily driven by 7% growth in group nominal sales, which included a 4% positive impact from currency. 

Earnings before Interest, Tax and Amortization (:EBITA), excluding one-time items, stood at €875 million ($113.4 million). However, including adjustments related to restructuring and acquisition related charges of €358 million ($464 million), €313 million ($405 million) related to European Commission fine and €154 million ($199 million) associated with legal matters and loss on sale of industrial assets, EBITA came in at €50 million ($34 million), down 90% year over year from €503 million.

Segment Details

Healthcare sales for the quarter grew 4% year over year to €2.9 billion ($3.76 billion) driven by increases across its businesses, especially high single-digit growth at the Home Healthcare Solutions and mid-single-digit growth at Customer Services. Imaging systems and Patient Care and Clinical Informatics both reported low single-digit growth.

Geographically, revenue growth in North America declined 4% year over. However, sales from Europe and emerging markets grew 11% and 7%, respectively, in the reported quarter.

Orders in the Healthcare segment grew 4% year over year in the reported quarter with mid-single-digit growth in Imaging systems and low single-digit growth at Patient care and Clinical Informatics.

The Consumer Lifestyle segment posted revenue growth of 4% to €1.9 billion ($2.5 billion) during the quarter. On a comparable basis, sales grew 2% on 10% increase in the combined growth businesses such as Personal Care, Heath& Wellness and Domestic Appliances. This was partially offset by a double-digit decline at Lifestyle Entertainment.

On a geographic basis, the segment reported double-digit growth from the emerging markets while the company witnessed mid single-digit growth in North America. However, growth in Western Europe remained flat year over year.

During the fourth quarter, Audio/Video Entertainment business was transferred to Funai Electric Co. for €150 million ($194 million). In addition, Funai will be paying a brand license fee associated with a licensing agreement for an initial period of five and half years, with an option to renew for another five years.

The deal related to the Audio, Multimedia and Accessories businesses is expected to close in the second half of 2013. However, the video business will be transferred in 2017, related to the existing intellectual property licensing arrangements.  

During the reported quarter, the Lightning segment reported sales growth of 9% year over year. The comparable sales grew 4%, driven by double-digit growth at Lumileds and mid single-digit growth at Consumer Luminaires and Automotive. LED sales grew 43% year over year and now represent 25% of the total lighting sales.

On a geographic basis, mature markets reported flat year-over-year sales growth as 4% rise in Western Europe was fully offset by a 4% decline in North America.  However, revenue grew 8% year over year in the growth markets (emerging markets).

During the quarter, under the LED portfolio, Phillips introduced Hue, which is supposed to be a revolutionary LED lightning system. This can be controlled through a wirelessly through a smart device.

Sales in the Innovation, Group & Services segment declined to 5% to €123 million ($159 million) from €129 million in the prior-year period.   

Geographical Growth

On a geographical basis, comparable sales in the growth geographies increased 10% in the fourth quarter. Growth geographies represented 35% of the total sales in 2012 versus 33% in 2011.

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

The above mentioned geographies are classified as mature markets; revenue growth in the mature markets was 1% year over year. The marginal growth in the mature markets was due to the lack of macro-economic developments and the continued weakness in the Western European markets. 

Cash and Balance Sheet

Cash flow from operating activities grew significantly to €1.2 billion ($1.5 billion) compared to €1.1 billion in the comparable prior-year quarter. The increase was attributable to higher net earnings and increase in provisions, which was partially offset by decrease in working capital.

Capital expenditures for the quarter were €310 ($402 million) versus €223 million, due to higher investments in the Lighting and Consumer Lifestyle segments.

At the end of the fourth quarter, the company had a debt of €700 million ($908 million) compared to €713 million in the prior-year quarter. The decline in debt was attributable to a free cash inflow of €764 million, which was partially offset by treasury share transactions and cash outflow for discontinued operations.

Phillips currently has a Zacks Rank #2 (Buy). Its rival Siemens AG (SI) recently reported modest results for the first quarter of fiscal 2013 with a net income of $1.57 billion (€1.21 billion) or $1.84 per share (€1.42) compared to $1.79 billion (€1.38 billion) or $2.02 per share (€1.56) in the year-earlier quarter. Siemens carries a Zacks Rank #1 (Strong Buy).

The company’s competitors who are yet to report their financial results include Daktronics Inc. (DAKT) and Esco Technologies Inc. (ESE), which carry Zacks Rank # 1 and Zacks Rank #2, respectively. 

1€= $1.29708 (October 1, 2012 to December 31, 2012)

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