Philips (PHG) Reports Earnings in Q4, Revenues Increase

Koninklijke Philips N.V. PHG reported earnings in fourth-quarter 2016 of €0.67 (72 cents) per share, as against the loss of €0.05 in the year-ago quarter.

Post the earnings release, shares of the company inched up 1.3% at the end of regular trading session on Jan 25.

The Dutch electronics giant reported fourth-quarter net income of €640 million ($690.6 million), a remarkable turnaround compared to the prior-year quarter's loss of €39 million. Improved operational performance and an increase of income from continuing operations drove the year-over-year improvement in operating income.

Koninklijke Philips N.V. Price, Consensus and EPS Surprise

Koninklijke Philips N.V. Price, Consensus and EPS Surprise | Koninklijke Philips N.V. Quote

For full-year 2016, the company's earnings per share came in at $1.56, registering a whopping growth of 122.6% on a year-over-year basis.

Inside the Headlines

Total revenue in the quarter came in at €7,240 million ($7,812.1 million), up 2.0% from the year-ago tally. Top-line improvement came on the back of impressive HealthTech portfolio sales. However, part of this improvement was largely offset by decline in Lighting business.

For full-year 2016, the company recorded sales of €24,516 million ($26,453.3 million), advanced 1.1% from the year-ago tally.

Philips' adjusted earnings before interest, taxes and amortization (EBITA) - the company's preferred measure of operational performance - jumped 18.9% year over year to €1001 million ($1080.1 million) benefiting from cost-productivity programs and higher volumes.

On the other hand, net cash flow generated from operating activities came in at €1,076 million ($1161.0 million) compared with net cash flow of €956 million in the prior-year quarter. This improvement is attributable to robust growth income from operations.

Segmental Revenues

In the fourth quarter, Personal Health sales rose 6.1% year over year to €2,165 million ($2,336.1 million). This segment recorded 7% hike in comparable sales. Double-digit growth in Health & Wellness, high-single-digit growth in Domestic Appliances and mid-single-digit growth in Sleep & Respiratory Care and Personal Care drove this segment's top-line growth.

Diagnosis & Treatment revenues increased 2.9% in the quarter to €2,032 million ($2,192.6 million). Comparable sales grew 3% for the quarter. While double-digit growth in Image-Guided Therapy proved conducive to growth, this was offset by low-single-digit decline in Ultrasound segment's sales.

Connected Care & Health Informatics revenues were up 4.3% in the quarter to €955 million ($1030.5 million). On a comparable basis, sales grew 4%. Sales improvement mainly came on the back mid-single-digit growth in Patient Care & Monitoring Solutions and Population Health Management. However, sales decline in Healthcare Informatics, Solutions & Services proved to be a drag for the segment.

Revenues in the HealthTech & Other segment jumped 21.4% to €153 million ($165.1 million). Higher royalty income due to one-time patent license deals drove the sales of this segment.

Lighting revenues dipped 5.1% year over year to €1,934 million ($2,086.8 million) as a decline in Lamps more than offset growth in LED sales. During the reported quarter, total LED lighting sales grew 16% year on year, and currently represent 59% of total Lighting sales.

Liquidity & Share Repurchase

Exiting the quarter on Dec 31, 2016, Philips' cash and cash equivalents rose to €2,334 million ($2,454.3 million) from €1,766 million a year back. The company's long-term debt fell to €4,021 million ($4,228.3 million) compared with €4,095 million a year ago.

During the quarter under review, the company completed its three-year EUR 1.5 billion share buyback program.

Diligent Cost-Savings Programs

Philips has been strongly benefiting from three of its comprehensive performance improvement and change-initiative programs - namely Accelerate, End2End productivity, and Design for Excellence - implemented earlier. These programs have been designed to maximize the value potential of the company and accelerate growth by leveraging on innovation and operational execution.

During fourth-quarter 2016, the Design for Excellence program garnered €163 million of incremental procurement savings and the End2End improvement program raked in €52 million in productivity gains. Overall, in 2016, the company achieved €269 million of gross savings in overhead costs, €418 million of gross savings in procurement, and €204 million of productivity savings from the End2End program.

Update on Lighting Deal

Philips was finally successful in offloading a major stake in its lighting business - Lumileds - after a failed attempt for the same in Jan 2016.

Philips inked an agreement to sell an 80.1% stake in Lumileds to NY-based private-equity firm, Apollo Global Management LLC. In Jan 2016, the Dutch conglomerate had been forced to abandon a more lucrative deal to sell Lumileds to a Chinese consortium - GO Scale - after the influential Committee on Foreign Investment in the U.S. (CFIUS) blocked the same.

CFIUS's rejection of the deal cost Philips about $1.3 billion, as the latter was about to receive around $2.8 billion from the stake sale to the Chinese group, which valued the lighting business at $3.3 billion. In the new deal, Philips will get cash proceeds of about $1.5 billion for the stake, roughly 46% less than what was expected in the Chinese deal. This fresh deal, which values the whole unit at $2 billion, is slated to close in the first half of 2017 and is subject to regulatory approval.

Our Take

Philips' fourth-quarter results were largely impressive, with growth in both top- and bottom-line performance. The company's cost-saving programs have been producing tangible results, thus supplementing its strength. It further believes that increased spending on healthcare and fitness will act as a long-term growth driver.

Philips is presently focusing on key opportunities in population health management; while improving its enterprise wide solutions for health systems and collaborating with health care organizations, to fortify its foothold in the healthcare industry. Moreover, offloading of the healthcare business is a major positive and will likely help this Zacks Rank #3 (Hold) company allocate its resources in core business areas to stoke growth, moving ahead.

Key Picks

Some better-ranked stocks in the same space include Exa Corp. EXA , Harris Corporation HRS and Barracuda Networks, Inc. CUDA . While Exa Corp. flaunts a Zacks Rank #1 (Strong Buy), both Harris Corporation and Barracuda Networks carry a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank stocks here.

Exa Corp. beat estimates each time in the trailing four quarters and has an average positive surprise of 68.1%.

Harris Corporation has an impressive earnings surprise history for the trailing four quarters, beating estimates all through, with an average positive surprise of 4.2%.

Barracuda Networks company has a striking earnings surprise history. It surpassed estimates in each of the trailing four quarters, with a remarkable average positive surprise of 475%.

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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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