Royal Philips Electronics (PHG) posted a net loss of €1.3 billion ($1.9 billion) in the second quarter of fiscal 2011. The loss was primarily the result of a goodwill impairment charge of €1.4 billion ($2.0 billion). The impairment charge was the result of the annual review of business projections and discount rates.
Quarterly Details
For the second quarter of fiscal 2011, the company posted a revenue decline of 3.4% to €1.29 billion ($1.9 billion) compared to €1.33 billion in the prior-year quarter. Double-digit sales growth at the company’s Health & Wellness and Personal Care segments and a high single-digit growth at the Domestic Appliances segment were fully offset by lower license revenue and declines at Lifestyle and Entertainment. However, comparable sales excluding licenses grew 1%.
Earnings before Interest, Tax and Amortization (EBITA) declined €136 million ($195 million) year over year to €370 million ($532 million). The decline was primarily attributable to sharp declines in Consumer Lifestyle and Lighting, which were partially offset by higher earnings in Healthcare.
Segment Details
The Healthcare segment was the biggest contributor in terms of sales. The segment posted a revenue growth of 8%. In the U.S. there is a strong drive from hospitals to reduce operating expenses and become more efficient, as a result of which they are investing in newer technologies. Further, hospital construction in the U.S. is expected to rise by 5% in 2011 and 9% in 2012.
Consumer Lifestyle segment sales declined 2% year over year due to a drop in performance of the Lifestyle Entertainment division. However, excluding the Lifestyle division, the Consumer division posted a double-digit aggregate growth.
The Lighting segment posted a revenue growth of 2% during the quarter, driven by a 21% LED-based sales growth, while the traditional lighting division declined year over year due to the shift in product mix, raw material price increases and weaker consumer demand.
Geographical Growth
On a geographical basis, comparable sales in the growth geographies increased 9% in the second quarter. However, excluding the effect of a decline of packaged LED sales to these markets, the comparable growth was 12% year-over-year.
The company’s growth markets include all markets excluding the U.S, Canada, Western Europe, Australia, New Zealand, South Korea, and Japan. Sales from the growth geographies increased to 33% during the reported quarter.
The countries named above are classified as mature markets, which posted comparable sales growth of 12% in the quarter. This was driven by a 22% growth in the healthcare business in Japan, while sales in North America grew 4%. However, Western Europe witnessed a decline of 4% in the quarter due to market-related weakness.
Cash and Balance Sheet
Net cash flow from operating activities declined significantly to €39 million ($56 million) compared to €497 million in the comparable prior-year quarter. The decline was attributable to higher working capital outflow, primarily related to higher vendor payments.
Capital expenditures for the quarter increased €26 million ($37 million) to €184 million ($264 million) driven by higher investments in the Lighting and Consumer Lifestyle segments.
At the end of the second quarter, the company had a debt position of €156 million ($224 million) compared to €306 million in the prior-year quarter.
During the quarter, the company announced a share repurchase program of up to €2 billion to be executed over the year.
During the quarter, Phillips implemented a comprehensive performance improvement and change program called Accelerate to realize the value potential and speed up growth. In addition, the company has launched key initiatives to implement the Phillips Business System, which includes a €500 million cost reduction program that is expected to be accretive to margins from 2013.
Outlook
The company also announced its outlook for fiscal 2013. Management has announced mid-term performance goals, which include a sales growth of 4-6%. The company expected reported EBITA margins of 10% to 12% as a whole, and segment wise 15% to 17% for healthcare, 8% to 10% for Consumer Lifestyle and 8% to 10% for Lighting. Phillips expects a return on invested capital of 12% to 14%.
Phillips primarily competes with Siemens AG (SI) and currently holds a Zacks #5 Rank, which implies a short-term 'Strong Sell’ recommendation.
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