Philips (PHG) Posts Modest Q3 Results, Guidance Intact

Koninklijke Philips N.V (NYSE:PHG) reported third-quarter 2016 earnings of €0.40 (45 cents), an increase of 17.7% from the year-ago tally of €0.34.

The Dutch electronics giant reported third-quarter net income of €383 million ($427.3 million), an increase of 18.2% compared with the prior-year quarter’s figure of €324 million. Improved operational performance and an increase of income from continuing operations drove the year-over-year improvement in operating income.

Inside the Headlines

Total revenue in the quarter came in at €5,898 million ($6,580.1 million), relatively flat (inching up 1.1%) from the year-ago tally.

Top-line improvement came on the back of impressive HealthTech portfolio sales. However, most of this improvement was largely offset by decline in Lighting business.

However, Philips’ adjusted earnings before interest, taxes and amortization (EBITA) – the company’s preferred measure of operational performance – rose 13.9% year over year to €649 million ($724.1 million) benefiting from cost-productivity programs and positive developments at the Cleveland healthcare production facility, which had battled with considerable headwinds two years back.

On the other hand, net cash flow generated from operating activities came in at €500 million ($557.8 million) compared with net cash flow of €281 million in the year-ago quarter.

Segmental Revenues

In the third quarter, Personal Health sales rose 4.9% year over year to €1,663 million ($1,855.3 million). This segment reported a 5% rise in nominal sales and a 7% hike in comparable sales. The upside in comparable sales was driven by double-digit growth in Health & Wellness, high-single-digit growth in Sleep & Respiratory Care and mid-single-digit growth in Personal Care and Domestic Appliances. On a geographic basis, double-digit growth in Central & Eastern Europe, high-single-digit growth in China, high single-digit growth in Western Europe and mid-single-digit growth in North America bolstered revenues in the quarter.

Diagnosis & Treatment revenues rose 5.1% in the quarter to €1,635 million ($1,824.1 million). While nominal sales were up 5%, comparable sales grew 6% for the quarter. Double-digit growth in Image-Guided Therapy and low-single-digit growth in Diagnostic Imaging drove this segment’s sales. On a geographic basis, double-digit growth in China and Latin America and low-single-digit growth in North America, acted as catalysts.

Connected Care & Health Informatics revenues inched up 1.4% in the quarter to €742 million ($827.8 million). On a nominal basis, segmental revenues climbed 1% year over year, but remained flat on a comparable basis. Sales improvement mainly came on the back of mid-single-digit growth of the Informatics, Solutions & Services business.

On a geographic basis, while growth geographies witnessed mid-single-digit growth, mature geographies posted a low-single-digit decline. While India and Africa emerged as the winner in the growth markets, Western Europe proved to be a major drag on the performance of matured geographies.

Revenues in the HealthTech & Other segment showed weakness, shrinking 6.4% to €117 million ($130.5 million). The decline in this segment was mainly attributable to lower revenues from royalties due to the expiration of licenses, which more than offset the strength in emerging businesses.

Lighting revenues went down 5.3% year over year to €1,741 million ($1,942.3 million) as a decline in Lamps and Professional business more than offset growth in the LED sales. During the reported quarter, total LED lighting sales grew 16% year on year and currently represent 56% of total Lighting sales, compared to 46% a year ago.

Sales in the mature geographies remained relatively flat, inching up 0.8%, on a year-over-year basis. Low-single-digit growth in North America proved conducive to the comparable top-line growth of the company. Sales in growth geographies also increased 1.5% on a year-over-year basis, mainly attributable to high-single-digit growth in China and Latin America.

Liquidity & Share Repurchase

Exiting the quarter on Sep 30, 2016, Philips’ cash and cash equivalents rose to €1,859 million ($2,084.0 million) from €1,025 million a year back. The company’s long-term debt rose to €4,860 million ($5,448.3 million) compared with €3,973 million a year ago.

As of Sep 30, 2016, the company completed 98% of the three-year EUR 1.5 billion share buyback program. Subsequent to the end of the quarter, on Oct 20, 2016, the buyback was finally completed.

Diligent Cost-Savings Programs

Philips has been strongly benefitting 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 third-quarter 2016, Accelerate Program contributed largely to operational improvements across all business segments. Going forward, Philips intends to invest significantly in quality and innovation, including health, informatics, wearable patient monitoring solutions and digital pathology, under this program.

Also, the Design for Excellence program garnered €102 million of incremental procurement savings during the quarter and the End2End improvement program raked in €66 million. Moreover, the company has achieved gross savings of €12 million of overhead costs during the reported quarter.

Notable Developments during the Quarter

During third-quarter 2016, Philips acquired population health management software solutions provider, Wellcentive. This strategic buyout will help the company to leverage on cloud-based IT solutions to import, aggregate and analyze clinical, claims and financial data. This apart, the company signed two major deals to boost its healthcare portfolio. It inked a three-year patient monitoring solutions agreement with Chicago-based Rush University Medical Center and a five-year interventional cardiology solutions agreement with DeltaHealth in China.

Further, Philips proceeded with its product launch drive and launched a range of personalized health programs under its cloud-enabled connected health ecosystem, HealthSuite. These include the Philips Sonicare FlexCare Platinum Connected toothbrush and the uGrow medical-grade baby app.

Update on Lighting Deal

Philips announced its plans to offload its lighting unit in Sep 2014. During second-quarter 2016, the company sold 25% or 37.5 million of Philips Lighting shares in the float, after failing to find a buyer for the same. Later, Philips Lighting commenced trading in the Amsterdam stock exchange. Currently, Philips holds a 71.2% stake with the aim of selling the business completely over the next several years.

Outlook Reiterated

Based on the present market scenario and accounting for the macroeconomic headwinds, management expects modest sales growth in 2016. The company has also committed itself toward tapping growth opportunities and improving its EBITA. However, Philips remains wary about the volatility in its key end markets and believes this can pose as a major threat to the company’s profitability.

To Conclude

Over the past couple of quarters, Philips has successfully repositioned itself as a healthcare company, fortifying its presence in the domain. Though, healthcare markets hold solid prospects in the long run, lackluster performance in key end markets, including the U.S., Europe and China in the short-run are thwarting the growth momentum of the Dutch multinational.

Also, higher restructuring expenses and escalating taxes are posing as headwinds for the Zacks Rank #4 (Sell) company. Further, stiff competition from biggies like General Electric Company (NYSE:GE) and Siemens Aktiengesellschaft (OTC:SIEGY) also add to the company’s woes.

A better-ranked stock in the industry includes VOXX International Corporation (NASDAQ:VOXX) . The Zacks Rank #1 (Strong Buy) company has a decent earnings surprise history, beating estimates thrice in the trailing four quarters and boasts of a whopping average positive surprise of 251.7%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Confidential from Zacks

Beyond this Analyst Blog, would you like to see Zacks' best recommendations that are not available to the public? Our Executive VP, Steve Reitmeister, knows when key trades are about to be triggered and which of our experts has the hottest hand. Click to see them now>>