David RichardsPhilips, Europe’s largest maker of consumer electronics, has lived up to its reputation by delivering yet another decline in revenue and profits. This is the biggest fall in four years for a company that is desperate for success in the consumer electronics market.
Only last month the company rolled out a flat panel LCD TV that pumps coloured light out from both the front and back in an attempt to differentiate itself from other TV vendors.
Philips shares lost as much as 6.3 percent, the most since May 2003. Third-quarter net income declined to $469 million from 4.24 billion euro’s a year earlier, missing analysts’ estimates. A contributor to the fall was the company’s medical division, however the company’s consumer electronics division has reported a rare lift in sales.
Chief Executive Officer Gerard Kleisterlee recently sold most of the company’s semiconductor assets and reduced the stake in a flat- panel display venture to focus on medical scanners, appliances and lighting. Philips said the medical division, the world’s largest maker of patient monitoring systems, is suffering because of reduced government spending on health in markets like the USA.
“If this has to be your growth engine, it’s some sort of a problem that it’s not doing well,” said Corne van Zeijl, who oversees about $1.48 billion including Philips shares at SNS Asset Management in the Dutch town of Den Bosch. “Investors could be somewhat disappointed in the medical division.”
Philips shares fell 1.82 euro’s, or 5.7 percent, to 30.33 euro’s in Amsterdam. They are up 6.2 percent this year, compared with a 12 percent increase of the Amsterdam Exchanges Index.
Profit fell to 30 cents a share from 3.57 euro’s a year earlier. Profit in the quarter was seen at 387 million euro’s, the median estimate in a Bloomberg survey of 11 analysts via phone and e-mail. Sales in the period rose 3.3 percent to 6.52 billion euro’s, topping the 6.36 billion-euro median estimate.
Revenue at the consumer electronics division, which makes televisions and DVD players and is Philips’ largest unit, rose 4.7 percent to 2.52 billion euro’s in the period.
Domestic appliances sales gained 24 percent to 718 million euros, with Ebita jumping 41 percent to 135 million euros. That gave the division an Ebita margin of 18.8 percent.
Chip Gain
Philips had a 4.19 billion-euro gain from the sale of a majority stake in its chip division last year.
Total income from continuing operations, which excludes gains and losses from disposals, rose to 333 million euros in the third quarter from 1 million euro’s a year earlier, Philips said.
Ebita rose to 438 million euro’s from 71 million euros. The year-earlier number included a 265 million-euro one-time cost to reflect a change in accounting for asbestos-related product liabilities. Ebita as a percentage of sales reached 6.7 percent in the quarter from 1.1 percent a year earlier.
On Sept. 10, Philips raised its profit forecast because of lower costs linked to the planned merger of its health-care units and of the consumer divisions. Earnings before interest, tax and amortization will top 10 percent of sales by 2010, up from more than 7.5 percent this year, and operating earnings per share will more than double.
“Nothing in the results changes my neutral view,” said Scott Geels, an analyst at Sanford C. Bernstein who has a “market perform” rating on the stock. “At this point domestic appliances is doing well, and medical is clearly not. The different growth profiles of the various divisions will get them there,” he said, referring to the 2010 targets.
CFO Sivignon declined to say what the company’s sales growth will be this year, adding it targets annual average sales growth of as much as 6 percent. The company will exceed an operating profit margin of 7.5 percent this year, he said.
Chip Exit
Kleisterlee sold control of the semiconductor unit and most of its shares in Hsinchu, Taiwan-based Taiwan Semiconductor Manufacturing Co., the world’s largest customized-chip maker. The Dutch company still owns 19.9 percent of NXP BV, Europe’s third- largest semiconductor maker, after it sold control of the unit to a group of buyout firms last year.
Philips, also Europe’s largest maker of televisions, cut its stake in LG.Philips LCD Co. to 19.9 percent from 32.9 percent on Oct. 10. Philips has a “long-term plan to go down to zero or something close to that,” Sivignon said, adding the company may “keep a few percentage points.”
LG.Philips, the world’s second-largest maker of liquid crystal displays, reported its biggest profit in more than three years on Oct. 9. The venture contributed 127 million euro’s to Philips’s net income in the third quarter, compared with a shortfall of 85 million euro’s a year earlier.
Kleisterlee, 61, has said asset sales and a plan to increase debt will leave as much as 20 billion euro’s of cash for medical and lighting takeovers, dividends and share buybacks over the next three years. Philips has this year unveiled or completed at least eight acquisitions.
New Structure
As of Jan. 1, the company will have three main businesses, consumer lifestyle, health care and lighting, all the result of combinations of smaller units. The revamp will save Philips as much as 200 million euro’s annually.
Philips has already started repurchasing 4 billion euro’s of shares. It had about 800 million euro’s left for buybacks on July 26, based on documents on its Web site. The company said today it will unveil “the next step” in its program “to return capital to shareholders” when it reports fourth-quarter earnings.