Markets

Philips (PHG) Reports Strong Q4 Earnings, Shares Rally

Shares of Koninklijke Philips N.VPHG rallied almost 7% yesterday after the Dutch electronics giant reported strong fourth-quarter earnings, placating investors somewhat prior to the planned sale of its lighting business.

Philips reported fourth-quarter net loss of €39 million ($42.7 million), compared with the prior-year quarter's net profit of €134 million. The loss was due to pension charges, financial expenses and higher income tax charges.

However, Philips' adjusted earnings before interest, taxes and amortization (EBITA), the company's preferred measure of operational performance, rose 13% year over year on the back of impressive cost productivity and top-line growth. Moreover, Philips' Accelerate program, continuing to act as a growth driver across its segments, supported the improvement in earnings.

For full year 2015, Philips reported net income of €659 million ($721.7 million), up over 60% compared with 2014, driven by healthy performance across almost all operating sectors of the company.

Inside the Headlines

Total revenue for the quarter increased almost 9% year over year to €7,095 million ($7,770 million). Improvement in the top line was largely driven by solid sales in Consumer Lifestyle and Healthcare segments, as well as positive currency movements and portfolio changes. In addition, on a comparable basis, sales increased 2% year over year, fueled by growth in North America and Asia Pacific.

For 2015, total revenue came in at €24.2 billion ($26.5 billion), up 13% over the previous year. Through the year, Healthcare, Consumer Lifestyle and Lighting segments stood out as growth drivers, while Innovation, Group & Services remained subdued throughout the year. On a comparable basis, 2015 sales increased 2% year over year.

Phillips reported adjusted EBITA of €842 million ($922 million), up over 13% from €743 million recorded a year ago. Impressive top line performance across three of the company's four operating segments, combined with cost efficiencies, drove EBITA growth.

On the other hand, net cash flow from operating activities came in at €956 million ($1,047 million), up from the prior-year tally of €841 million.

Segmental Revenues

In the fourth quarter, Healthcare 's sales rose 15% year over year to €3,270 million ($3,581 million). The segment reported a 3% year-over-year increase in comparable sales. The segment's growth was driven by growth in Imaging Systems and Healthcare Informatics, Solutions & Services. Geographically, China outperformed with double digit growth, while North America and Western Europe were also strong.

Consumer Lifestyle revenues increased 9% in the quarter to €1,663 million ($1,821 million), backed by double-digit growth in Health & Wellness as well as Personal Care and Domestic Appliances business lines. On a comparable basis, segmental revenues climbed 6% year over year, primarily driven by double digit growth in "growth geographies" and mid-single digit growth in "mature geographies" like North America and Western Europe.

Lighting revenues increased 3% year over year to €2,026 million ($2,219 million). However, on a comparable basis, revenues dipped 2% owing to a sales decline in Professional Lighting Solutions and Light Sources & Electronics.

Revenues in the Innovation, Group & Services segment continued to show weakness, dropping 26% to €136 million ($149 million). On a comparable basis, sales fell 11% year over year. The decline in this segment was mainly attributable to lower revenues from IP Royalties and impact of the divestment of the OEM remote controls business in 2014, which more than offset the strength in emerging businesses like Photonics.

Sales in the mature geographies were in line on a comparable basis, as growth in North America and other areas was offset by a decline in Western Europe. On the other hand, comparable sales in mature geographies increased 6% on a year-over-year basis, owing to improved sales in China, India and Middle East and Turkey.

Liquidity

Exiting the quarter on Dec 31, 2015, Phillips' cash and cash equivalents declined to €1,766 million ($1,926 million) from €1,873 million a year back.

The company's long-term debt stood at €4,095 million ($4,466 million) compared with €3,712 million a year ago.

Accelerate Program

Management believes that Phillips' Accelerate program will act as a catalyst for long-term growth. During the quarter, the Accelerate Program helped in increasing sales of ClarityIQ upgrades in the Healthcare segment, leveraging digital capabilities and boosting sales in Consumer Lifestyle segment, and driving revenue growth in the Lighting segment.

Moreover, through the program, the company has achieved gross savings of €290 million in overhead costs during the year.

Based on the present market scenario and accounting for macroeconomic headwinds, management expects modest comparable sales growth for full-year 2016. The company has also committed itself toward pursuing growth opportunities and improving EBITA in 2016.

Update on Lumileds Deal

Last week, Philips scrapped its proposed $2.8 billion plan to divest its LED business, Lumileds, to GO Scale Capital after failing to receive regulatory approval for the same.

Philips had inked an agreement with GO Scale Capital to sell 80.1% interest in the Lumileds business as part of its strategy to gradually exit the lighting business. Philips is presently preparing to divest its residual lighting business through a listing or sale.

However, it is likely that Philips may now have to sell Lumileds for a markedly lower price as the unit's earnings have recently come under pressure. Selling the unit is a critical step for Philips in its plan to exit its lighting activities. The company has been attempting to get out of its relatively low-margin lighting business and focus its resources on the more profitable health and consumer products businesses.

To Conclude

We believe Philips' strategic initiatives, undertaken in targeted growth areas, primarily led to a relatively strong quarter. The company continues to pursue growth opportunities in the Healthcare segment which has also emerged as its strongest performer. Additionally, rapid market traction of innovative health and well-being solutions are adding to the Consumer Lifestyle segment's strength.

However, due to factors like macroeconomic headwinds, stiff competition and softness in certain key markets, Phillips currently carries a Zacks Rank #5 (Strong Sell). Some better-ranked stocks in the broader sector include GigOptix, Inc. GIG , Logitech International SA LOGI and Mistras Group, Inc. MG . All of these stocks sport a Zacks Rank #1 (Strong Buy).

Note: One Koninklijke Phillips ADR corresponds to one ordinary share.

1 EUR = $ 1.0952 (period average from Oct 1, 2015 to Dec 31, 2015)

1 EUR = $ 1.0906 (as of Dec 31, 2015)

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days . Click to get this free report >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

LOGITECH INTL (LOGI): Free Stock Analysis Report

KONINKLIJKE PHL (PHG): Free Stock Analysis Report

MISTRAS GROUP (MG): Free Stock Analysis Report

GIGOPTIX INC (GIG): Free Stock Analysis Report

To read this article on Zacks.com click here.

Zacks Investment Research

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.

In This Story

MG PHG LOGI

Other Topics

Earnings Stocks

Latest Markets Videos

Zacks

Zacks is the leading investment research firm focusing on stock research, analysis and recommendations. In 1978, our founder discovered the power of earnings estimate revisions to enable profitable investment decisions. Today, that discovery is still the heart of the Zacks Rank. A wealth of resources for individual investors is available at www.zacks.com.

Learn More