Philips Reports Solid Q3 Earnings on Operational Strength
Koninklijke Phillips N.V.PHG reported third-quarter 2015 net income of €0.34 per share (38 cents), marking a remarkable turnaround from a loss of €0.11 reported in the year-ago comparable quarter. Despite the surge in earnings, the company's shares remained relatively flat (down a marginal 0.5%) in yesterday's trading.
The company's bottom-line results largely benefited from solid revenue growth and improved operational performance during the quarter. Moreover, Philips' Accelerate program, continuing to act as a growth driver across all of its segments, supported the improvement in earnings.
Inside the Headlines
Total revenue increased 12% year over year to €5,836 million ($6,490.8 million). Improvement in top line was largely driven by solid sales in Consumer Lifestyle and Healthcare segments. In addition, on a comparable basis, sales increased 2% year over year, fueled by growth in North America, Asia Pacific and Central & Eastern Europe.
Phillips reported adjusted earnings before Interest, Tax and Amortization ("EBITA") of €429 million ($477.1 million) compared with a loss of €62 million recorded a year ago. Impressive performance across all four operating segments drove EBITA margin growth.
On the other hand, cash flow from operating activities came in at €281 million ($312.5 million), down from the prior-year tally of €325 million.
In the third quarter, Healthcare segment's sales rose 18% year over year to €2,627 million ($2,921.7 million). The segment reported a 3% year-over-year increase in comparable sales, mainly aided by mid-single digit growth in Imaging Systems, Healthcare Informatics, Solutions & Services and Customer Services.
Consumer Lifestyle revenues increased 12% in the quarter to €1,246 million ($1,385.8 million), backed by double-digit growth in Health & Wellness as well as Personal Care business lines. On a comparable basis, segmental revenues climbed 6% year over year, primarily driven by mid-single digit growth in "growth geographies" and "mature geographies".
Lighting revenues increased 7% year over year to €1,830 million ($2,035.3 million), mainly fueled by strong sales in LED and Professional lighting business lines. However, on a comparable basis, revenues dipped 3% owing to a sales decline in Consumer Luminaires and Light Sources & Electronics.
Revenues in the Innovation, Group & Services segment fell 6% to €133 million ($147.9 million). Nevertheless, on a comparable basis, the same grew 15% year over year. Growth in this segment was mainly attributable to robust IP Royalties and outstanding improvement in the company's emerging businesses including Digital Pathology and Photonics.
Sales in the growth geographies were in line on a comparable basis, as growth from Consumer Lifestyle segment was offset by decline in Healthcare and Lighting segments. Notably, strong sales in Central & Eastern Europe and Asia Pacific contributed to the top-line growth; while weak sales in China, the Middle East and Turkey proved to be a drag.
On the other hand, comparable sales in mature geographies increased 3% on a year-over-year basis, owing to improved sales in Germany, Switzerland, Austria, North America, Australia and New Zealand.
Exiting the quarter on Sep 30, 2015, Phillips' cash and cash equivalents declined to €1,025 million ($ 1,152.4 million) from €1,135 million at the end of Jun 30, 2015.
The company's long-term debt totaled €3,973 million ($4,482.7 million) compared with €4,048 as of Jun 30, 2015.
Management believes that Phillips' Accelerate program will act as a catalyst for long-term growth. During the quarter, the Accelerate Program helped in reduction of manufacturing-cycle time in Healthcare segment, simplification of order fulfillment process in Consumer Lifestyle segment, and creation of a "go-to-market model" in the Lighting segment.
Moreover, it has led to €33 million of overhead cost-savings during the quarter. Additionally, Design for Excellence (DfX) program and End2End improvement program resulted in incremental procurement savings and productivity gains of €107 million.
Based on the present market scenario and Philips' leadership position in it, management expects modest comparable sales growth for full-year 2015. The company has also committed itself toward pursuing growth opportunities and improving EBITA in 2016.
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.
Similarly, the company remains well on track to complete its transition of the Lighting Business, having sold 80% of its stake in Automotive Lighting and Lumileds to GO Scale Capital during the second quarter. 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 currency headwinds, stiff competition and softness in key markets, Phillips currently carries a Zacks Rank #4 (Sell). Better-ranked stocks in the sector include GigOptix, Inc. GIG , Mistras Group, Inc. MG and Casio Computer Co., Ltd. CSIOY . While GigOptix and Mistras Group sport a Zacks Rank #1 (Strong Buy), Casio Computer holds a Zacks rank #2 (Buy).
Note: 1 EUR = $ 1.1122 (period average from Jul 1, 2015 to Sep 30, 2015
1 EUR = $ 1.1243 (as of Sep 30, 2015)
One Koninklijke Phillips ADR corresponds to one ordinary share.