Koninklijke Philips N.V. PHG reported modest third-quarter 2017 results, driven by robust sales growth particularly in China and in its Connected Care & Health Informatics businesses. The company also reiterated its full-year 2017 guidance.
The company posted third-quarter net income of €423 million ($497 million), an increase of 10.4% compared with the prior-year quarter’s figure of €383 million. Increase of income from continuing operations drove the year-over-year improvement in operating income.
Inside the Headlines
Total sales in the quarter came in at €4,148 million ($4,875 million), relatively flat (inching down 0.2%) from the year-ago tally. The year-over-year decline can primarily be attributed to fall in sales of Personal Health businesses and HealthTech Other segment, partially mitigated by impressive performances from Connected Care & Health Informatics businesses and Diagnosis & Treatment businesses.
Philips’ adjusted earnings before interest, taxes and amortization (EBITA) – the company’s preferred measure of operational performance – rose 12.2% year over year to €532 million ($625.1 million), benefiting from higher volumes, procurement savings as well as cost productivity.
Koninklijke Philips N.V. Price, Consensus and EPS Surprise
Koninklijke Philips N.V. Price, Consensus and EPS Surprise | Koninklijke Philips N.V. Quote
Meanwhile, net cash provided by operating activities came in at €295 million ($346.6 million) compared with year-ago quarter figure €259 million. The company’s comparable order intake rose 5% year over year, driven by strong growth in Connected Care & Health Informatics businesses.
During the reported quarter, Personal Health sales fell 0.8% year over year to €1,650 million ($1,938.8 million). This segment reported a 1% decline in nominal sales and a 5% hike in comparable sales. The upside in comparable sales came on the back of high-single digit growth in Health & Wellness as well as Sleep & Respiratory Care, while Domestic Appliances recorded growth in mid-single-digit. On a geographic basis, double-digit growth in Middle East & Turkey and India, high-single digit growth in China, bolstered revenues in the quarter.
Diagnosis & Treatment revenues rose 0.2% in the quarter to €1,638 million ($1,924.7 million). While nominal sales were flat, comparable sales grew 2% for the quarter. Mid-single-digit growth in Image-Guided Therapy and low-single-digit growth in Ultrasound and Diagnostic Imaging drove this segment’s sales. On a geographic basis, double-digit growth in China, Latin America and India acted as catalysts.
Connected Care & Health Informatics revenues inched up 1.2% in the quarter to €751 million ($882.5 million). On a nominal basis, segmental revenues climbed 1% year over year and comparable sales grew 8% for the quarter. Sales improvement was primarily driven by double-digit growth in Patient Care & Monitoring Solutions as well as mid-single digit growth in Healthcare Informatics.
On a geographic basis, while growth geographies witnessed mid-single-digit growth, mature geographies posted a low-single-digit decline. Double-digit growth in China, Middle East & Turkey and Latin acted as catalysts.
Revenues in the HealthTech & Other segment continued to show weakness, shrinking 7.7% to €108 million ($127 million). The decline in this segment can mainly be attributed to higher restructuring charges incurred during the quarter.
With effect from this quarter, Philips is reporting results of Philips Lighting under discontinued operations.
Liquidity & Share Repurchase
Exiting the quarter on Sep 30, 2017, Philips’ cash and cash equivalents rose to €999 million ($1,180.2 million) from €1,859 million a year back. The company’s long-term debt fell to €4,441 million ($5,246.2 million) compared with €4,860 million a year ago.
Diligent Cost-Savings Programs
Philips has been gaining significantly from its DfX program, along with other productivity and savings programs. These programs have been designed to maximize the value potential of the company, while accelerating growth by leveraging on innovation and operational execution.
Thanks to these initiatives, in the reported quarter, the company achieved procurement savings of €77 million, powered by the DfX program, while other productivity programs also resulted in a savings of €69 million. The company now is well on track to generate an impressive annual savings of €400 million.
Notable Developments During the Quarter
The quarter was marked by a string of acquisitions which the company had identified over the past two years. Philips announced the acquisition of Health & Parenting to strengthen its offerings in pregnancy and parenting. Health & Parenting is a London-based developer of healthcare and family-related mobile applications for expectant and new parents.
The company also inked an agreement to buy image-analysis software provider, TomTec Imaging Systems GmbH. This acquisition is likely to enhance the former’s image-guided therapy portfolio.
Further, earlier this month, the company obtained the 510(k) clearance from the U.S. Food and Drug Administration (FDA) for marketing its new eL18-4 transducer for ‘small parts’ assessment. The company is anticipated to launch the newest solution at the 16th World Federation for Ultrasound in Medicine and Biology (“WFUMB”) Congress in Taipei.
Update on Lighting Deal
At the end of the third-quarter 2017, Philips holds 41.27% of the issued and outstanding share capital of Philips Lighting shares. Philips aims to sale the business completely over the next few years.
Based on the present market scenario and accounting for the macroeconomic headwinds, Philips continues to project full-year sales growth of 4-6%. The company also anticipates its Adjusted EBITA margin to improve around 100 basis points this year.
In the past couple of years, Philips has successfully evolved from a lighting company into a healthcare technology provider. Moreover, the company's transformation from a hardware-oriented to a software-driven business, with a higher-margin and recurring-revenue model, bodes well for investors. The company also believes that increased spending on healthcare and fitness will drive future growth.
Further, the company is highly optimistic about the prospects of its Diagnosis & Treatment vertical on account of positive industry trends, with the Image-Guided Therapy and Ultrasound equipment segments acting as major profit churners. This apart, the company’s Connected Care & Health Informatics vertical is progressing well, and is experiencing strength in Patient Care & Monitoring Solutions.
Though, healthcare markets hold solid prospects in the long run, lackluster performance in key end markets, including the Western Europe and North America are thwarting the growth momentum of the Dutch multinational. Also, higher restructuring and acquisition-related charges are proving to be a drag on the company’s financials.
Philips currently carries a Zacks Rank #3 (Hold).
Stocks to Consider
Some stocks worth considering in the same space include Applied Materials, Inc. AMAT, Analog Devices, Inc. ADI and Amphenol Corporation APH. While Applied Materials sports a Zacks Rank #1 (Strong Buy), Analog Devices and Amphenol Corporation carry a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
Applied Materials has an excellent earnings surprise history, surpassing estimates in each of the trailing four quarters with an average beat of 2.7%.
Analog Devices has an excellent earnings surprise history, exceeding estimates in each of the trailing four quarters with an average beat of 19.1%.
Amphenol Corporation has posted earning beats every time in the trailing four quarters. It boasts an average beat of 7.9%.
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