Bright Q3 Earnings for Phillips Electronics - Analyst Blog

Koninklijke Phillips Electronics N.V.(PHG) reported net income of €281 million ($372.2 million) in the third quarter of 2013, up 167.6% year over year. The year-over-year growth was primarily due to overall improvement in operating results and lower restructuring and acquisition related charges. In addition, project Accelerate has also been a driving factor for the robust increase in income.                                                                      

Phillips reported third quarter earnings of €0.31 (41 cents), a strong 181.8% year-over-year increase.   

Following the earnings release on Oct 21, the stock grew 1.4% to $35.65 on Oct 22.                                                          

Quarterly Details

Third quarter sales on a comparable basis grew 3% year over year to €5.6 billion ($7.4 billion). However, group nominal sales declined 3% year over year due to 6% impact from unfavorable currency translations.

Earnings before Interest, Tax and Amortization (EBITA), excluding restructuring and acquisition related charges, the pension settlement loss, and the loss on the sale of industrial assets at Lighting, stood at €634 million ($840 million) or 11.3% of sales versus 8.2% in the prior-year quarter. Increase in adjusted EBITA was also driven by improved gross margin and cost improvements across all sectors.

Segment Details

Healthcaresales for the quarter were flat year over year on comparable basis at €2.36 billion ($3.13 billion) owing to weakness in some of its businesses. Customer services grew in mid-single digits, while Patient Care & Clinical Informatics and Home Healthcare Solutions increased in low-single digits. In addition, Imaging systems also reported a mid-single digit decline.

Geographically, revenues on comparable basis in growth geographies grew 3% year over year with particularly strong growth in China, Central & Eastern Europe and Latin America. This was partially offset by weakness in Russia, Central Asia, the Middle East and Turkey. However, Western Europe was flat year over year, while North America witnessed a 2% decline and other mature geographies reported low single digit growth.  

Orders in the Healthcare equipment on a comparable basis declined 2% year over year in the reported quarter as orders in the Imaging systems grew in low single digit, which was fully offset by 7% decline in both Patient care and Clinical Informatics orders.

The Consumer Lifestyle segment posted strong revenue growth of 9% to €1.1 billion ($1.4 billion) in the quarter on a comparable basis. During the quarter, the segment reported high double-digit growth in Health & Wellness and domestic appliances reported high single-digit growth. Personal Care division also grew in mid single-digits during the quarter.

On geographical basis, Phillips has been strengthening its Consumer Lifestyle division's presence by introducing innovative products. During the quarter, the segment reported strong double-digit growth in growth geographies and mid single-digit growth in mature geographies. While North America reported high single-digit growth, Western Europe remained flat year over year.  

During the reported quarter, the Lightning segment reported sales increase of 3.0% year over year on comparable basis. Segment revenues were driven by double-digit growth at Lumileds and Automotive. In addition, Light sources and Electronics achieved low single-digit growth, partially offset by Professional Lightning Solutions and Consumer Luminaires reported low single-digit decline. LED sales grew 33% year over year and now represent 30% of the total lighting sales.

Revenues in the Innovation, Group & Services segment declined 1.6% to €185 million ($245 million), primarily due to lower license income.

Geographical Growth

On a geographical basis, comparable sales in the growth geographies increased 10% in the third quarter. The increase was driven by strong growth in China, the Middle East and Turkey. Growth geographies represented 37% of total sales in the quarter versus 35% in the third quarter of 2012.

The company's growth markets exclude the U.S, Canada, Western Europe, Australia, New Zealand, South Korea and Japan.

The above mentioned geographies are classified as mature markets and revenues declined 1% year over year in these markets. The marginal decline in the mature markets was primarily attributable to weak sales in the Lightning and healthcare segment, which was partially offset by growth at Consumer Lifestyle.   

Project Accelerate

Phillips introduced project Accelerate to improve its overall performance and reduce costs for the company. The project is expected to be operational till 2017 and has five streams to enhance customer relevance, change company culture, reduce overhead costs, streamline the End2End customer value chains, and re-allocate resources to profitable growth opportunities.

In addition, the company has also introduced a €1.1 billion cost reduction program. To date, the company has achieved a €856 million ($1.1 million) in gross savings and has been able to reduce about 66% of the targeted employees during the third quarter. This program is expected to be complete by 2014.

Cash, Balance Sheet and Share Repurchase

Cash flow from operating activities declined to €337 million ($446 million) compared with €648 million in the comparable prior-year quarter. The decrease was attributable to debt redemption and expenses related to discontinued operations.

Capital expenditures for the quarter were €220 ($291 million) versus €238 million in the year-ago period, due to lower investments in the Lighting and Consumer Lifestyle segments.

At the end of the third quarter, the company had a debt of €2.0 billion ($2.6 billion) compared to €1.5 billion in the prior-year quarter. The decline in debt was attributable to payment of €72 million ($95 million) of debt during the quarter.

During the third quarter, Phillips initiated a share buyback program worth €1.5 billion ($1.99 billion), beginning Oct 21.

Phillips currently has a Zacks Rank #3 (Hold). Other stocks that are worth considering at the moment are Bel Fuse Inc. (BELFB), Cubic Corporation (CUB) and Mistras Group, Inc. (MG). All three carry a Zacks Rank #2 (Buy).  

1€ = $1.32470 (3 months average, ending Sep 30)