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Philips (PHG) Q2 Earnings Increase Y/Y, Order Intake Strong

Koninklijke Philips N.V. PHG reported optimistic second-quarter 2017 results, driven by robust sales growth and higher income from continued operations, and also reiterated its full-year 2017 guidance.

The Dutch electronics giant reported second-quarter net income from continuing operations of €161 million ($177 million), up 36.4% from the prior-year quarter’s figure of €118 million. Earnings were driven by strong sales growth, lower financial expenses and improved operational performance. The year-earlier figure had been hurt by taxes linked to the company’s efforts to divest the lighting business.

The company posted second-quarter 2017 net income of €0.27 (29.7 cents) per share, as against earnings of €0.46 recorded in the year-ago quarter. Earnings were hurt due to lower income from discontinued operations, higher restructuring and acquisition-related costs.

Investors cheered the solid results, with shares of the company rising 3.8% at one point in pre-market trading following the release.

Koninklijke Philips N.V. Price and Consensus

 

Inside the Headlines

Total revenue in the quarter came in at €4,294 million ($4721.8 million), up 3.9% from the year-ago tally. Top-line improvement came on the back of impressive HealthTech portfolio sales.

Philips’ adjusted earnings before interest, taxes and amortization (EBITA) – the company’s preferred measure of operational performance – jumped 14.6% year over year to €439 million ($482.7 million), benefiting from cost-productivity programs and higher volumes.

On the other hand, net cash flow generated from operating activities came in at €73 million ($80.3 million) compared with net cash flow of €177 million witnessed in the prior-year quarter.

The company’s comparable order intake rose 8% year over year, driven by strong growth in Diagnosis & Treatment and Connected Care & Health Informatics businesses.

Segmental Revenues

In the reported quarter, Personal Health sales rose 6% year over year to €1,761 million ($1,936.4 million). This segment recorded a 6% hike in comparable sales. Double-digit growth in Health & Wellness, high-single-digit growth in Personal Care and mid-single-digit growth in Sleep & Respiratory Care drove this segment’s top line.

Diagnosis & Treatment revenues increased 4.4% in the quarter to €1,671 million ($1,837.5 million). Comparable sales grew 3% for the quarter. Mid-single-digit growth in Ultrasound and Image-Guided Therapy proved conducive to growth.

Connected Care & Health Informatics revenues were almost flat year over year at €768 million ($844.5 million). On a comparable basis, sales inched up 1%. Sales improvement came mainly on the back of low-single-digit growth in Patient Care & Monitoring Solutions.However, sales decline in Healthcare Informatics, Solutions & Services proved to be a drag for the segment.

Revenues in the HealthTech & Other segment continued to be weak and fell 8.6% year over year to €92 million ($101.2 million). Lower royalty income due to foreseen expiration of licenses marred the sales of this segment.

With effect from this quarter, Philips is reporting results of Philips Lighting under discontinued operations.

Liquidity & Share Repurchase

Exiting the quarter on Mar 31, 2017, Philips’ cash and cash equivalents rose to €2,220 million ($2,535.8 million) from €1,926 million a year back. The company’s long-term debt fell to €2,599 million ($2,968.8 million) compared with €5,269 million a year ago.

During fourth-quarter 2016, the company completed its three-year EUR 1.5 billion share buyback program. Philips will launch a share buyback program for €15 billion in third-quarter 2017, to be executed over a span of two years.

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.

Thanks to these initiatives, 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. In second-quarter 2017, cost savings on overhead and procurement led to a remarkable increase in margins, saving about €109 million.

The company now aims to enhance its performance further and targets to deliver 4–6% comparable sales growth, and adjusted EBITA margin expansion of around 100 basis points per year.

Acquisitions

The quarter was marked by a string of acquisitions which the company had identified over the past two years. Philips signed an agreement to acquire Spectranetics to strengthen its Diagnosis & Treatment businesses. Spectranetics is a provider of vascular intervention and lead management solutions. Philips also acquired CardioProlific, a US-based company that develops catheter-based thrombectomy technology for the treatment of peripheral vascular disease. Both these acquisitions will complement Philips’ portfolio of image-guided therapy devices.

Philips also inked an agreement to buy U.S.-based medical device company, Electrical Geodesics, Inc. This acquisition will likely enhance the former’s imaging technologies and advanced informatics portfolio, used in neurological applications.

The company penned an agreement to buy Respiratory Technologies, which provides an innovative airway clearance solution for patients with chronic respiratory conditions.

Furthermore, subsequent to the quarter, Philips acquired image-analysis software provider TomTec Imaging Systems. TomTec specializes in diagnostic ultrasound that helps healthcare personnel to increase efficiency and diagnostic quality. Along with CardioProlific and Spectranetics, TomTec will likely be conducive to Philips’ image-guided therapy portfolio as well.

Earlier this month, Philips also acquired the UK-based Health & Parenting, a London-based developer of healthcare and family-related mobile applications for expectant and new parents, in order to strengthen its Personal Health businesses.

Update on Lighting Deal

Philips had successfully offloaded a major stake in its lighting business – Lumileds – as it inked an agreement to sell an 80.1% stake in Lumileds to NY-based private-equity firm, Apollo Global Management LLC in early February this year. This fresh deal, which values the whole unit at $2 billion, closed in second-quarter 2017. Also, Philips sold 22.25 million shares of Philips Lighting.

As a result of these transactions, its shareholding in Philips Lighting has decreased to 41.2%. Hence, the company is reporting Philips Lighting as part of Discontinued Operations.

Outlook

Philips continues to project full-year sales growth of 4–6% and anticipates gaining momentum in the second half of the year, boosted by a strong order book.

While the company expects an uncertain climate in the U.S. and continued volatility in its markets, Philips is enjoying robust orders in China and India, as well as Europe.

Our Take

Philips’ second-quarter results were quite consistent, 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, even in the face of continued volatility in the markets in which the company operates.

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 the company’s foothold in the healthcare industry. Its numerous acquisitions should also prove accretive to its top line in the quarters ahead, and help strengthen its foothold in the end markets.

Moreover, offloading of the lighting business is a major positive and will likely help this company allocate its resources in core business areas to stoke growth, moving ahead.

Zacks Rank & Stocks to Consider

Philips presently holds a Zacks Rank #4 (Sell). Some better-ranked stocks in the same space include Lam Research Corporation LRCX, Applied Materials, Inc. AMAT and KLA-Tencor Corporation KLAC. While Lam Research sports a Zacks Rank #1 (Strong Buy), Applied Materials and KLA-Tencor carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Lam Research has an impressive earnings surprise history for the trailing four quarters, beating estimates all through, with an average positive surprise of 6.1%.

With four back-to-back earnings beats, Applied Materials has an average positive surprise of 3.4%.

KLA-Tencor has a striking earnings surprise history as well. The company surpassed estimates in each of the trailing four quarters, with an average positive surprise of 11.6%.

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€1 = $1.09963 (Period average from Apr 1, 2017 to Jun 30, 2017)

€1 = $1.14227(As on Jun 30, 2017)


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