Philips (PHG) Reports Q4 Earnings, Order Intake Strong

Koninklijke Philips N.V. PHG reported decent fourth-quarter 2017 results, driven by robust sales growth, particularly in Personal Health and Diagnosis & Treatment businesses.

The Dutch electronics giant posted fourth-quarter net income of €899 million ($1,058.8 million), an increase of 40.5% compared with the prior-year quarter’s figure of €640 million. The bottom line benefited from lower financial expenses, despite negligible sales growth.

The company’s net income in the fourth quarter included net income related to Philips Lighting’s business, all of which is reported in discontinued operations.

Inside the Headlines

Total revenues in the quarter came in at €5,303 million ($6,245.9 million), relatively flat (down 0.1%) from the year-ago tally. The year-over-year decline can primarily be attributed to fall in sales of Connected Care & Health Informatics businesses and HealthTech Other segment. This was partially mitigated by impressive performances from Personal Health and Diagnosis & Treatment businesses. The company, however, registered a 5% comparable year-over-year sales growth.

For full-year 2017, the company recorded sales of €17,780 million ($20,941.3 million), advanced 2.1% from the year-ago tally.

Koninklijke Philips N.V. Price, Consensus and EPS Surprise

Koninklijke Philips N.V. Price, Consensus and EPS Surprise | Koninklijke Philips N.V. Quote

Philips’ adjusted earnings before interest, taxes and amortization (EBITA) — the company’s preferred measure of operational performance — increased 9% year over year to €884 million ($1,041.2 million) benefiting from higher volumes, procurement savings and other cost productivity.

Meanwhile, net cash flow generated from operating activities came in at €1,202 million ($1,415.7 million) compared with net cash flow of €758 million in the prior-year quarter. The company’s comparable order intake rose 7% year over year, driven by strong growth in Diagnosis & Treatment businesses.

Segmental Revenues

In the fourth quarter, Personal Health sales increased 0.7% year over year to €2,181 million ($2,568.7 million). This segment reported growth of 1% in nominal sales and hike of 6% in comparable sales. The upside in comparable sales was driven by high-single digit growth in Health & Wellness as well as Sleep & Respiratory Care, while Domestic Appliances and Personal Care recorded growth in mid-single digit. On a geographic basis, double-digit growth in Asia Pacific and India, high-single digit growth in Central & Eastern Europe and China, bolstered revenues in the quarter.

Diagnosis & Treatmentrevenues rose 3% in the quarter to €2,092 million ($2,463.9 million). While nominal sales reported growth of 3%, comparable sales grew 6% for the quarter. High-single digit growth in Ultrasound and mid-single digit growth in Image-Guided Therapy and Diagnostic Imaging drove this segment’s sales. On a geographic basis, double-digit growth in China, Middle East and Turkey as well as high-single digit growth in North America acted as catalysts.

Connected Care & Health Informaticsrevenues were down 4.5% in the quarter to €912 million ($1,074.2 million). On a nominal basis, segmental revenues declined 5% year over year, while comparable sales grew 2% for the quarter. Comparable sales growth was primarily driven by high-single digit growth in Healthcare Informatics as well as low-single-digit growth in Patient Care & Monitoring Solutions.

On a geographic basis, while mid-single digit growth was posted mature geographies, mid-single-digit decline was witnessed in growth geographies. Double-digit growth in India and high-single digit growth in North America proved conducive to sales, which was somewhat offset by double-digit decline in Middle East & Turkey and Africa.

Revenues in the HealthTech & Other segment continued to show weakness, shrinking 22.2% to €119 million ($140.1 million). The decline in this segment can mainly be attributed to lower royalty income during the quarter.

Since the third quarter of 2017, Philips has been reporting results of Philips Lighting under discontinued operations.

Liquidity & Share Repurchase

Exiting the quarter on Dec 31, 2017, Philips’ cash and cash equivalents declined to €1,939 million ($2,322.7 million) from €2,334 million a year back. The company’s long-term debt rose to €4,044 million ($4,844.3 million) compared with €4,021 million a year ago.

Diligent Cost-Savings Programs

Philips has been gaining significantly from its DfX program, along with other productivity and savings programs. These programs have been designed to maximize the value potential of the company, while accelerating growth by leveraging on innovation and operational execution.

During the reported quarter, the company achieved procurement savings of €81 million, driven by the DfX program, while other productivity programs also resulted in a savings of €52 million. Overall, the company generated an impressive annual savings of €483 million, higher than the targeted savings of €400 million.

Notable Developments During the Quarter

During the reported quarter, Philips announced the acquisition of VitalHealth that would complement Philips Wellcentive’s solution including health informatics and patient engagement programs. VitalHealth is a leading supplier of cloud-based population health management solutions for the delivery of personalized care outside the hospitals.

Moreover, the company obtained the 510(k) clearance from the U.S. Food and Drug Administration for marketing its new eL18-4 transducer for ‘small parts’ assessment. The company is anticipated to launch the newest solution at the 16th World Federation for Ultrasound in Medicine and Biology Congress in Taipei.

Update on Lighting Deal

At the end of fourth-quarter 2017, Philips held 29.01% of the issued share capital of Philips Lighting shares. Philips aims to sell the business completely over the next few years.

Guidance

Based on the present market scenario and combining with the company’s strong order book, Philips projects full-year sales growth of 4-6%. The company also anticipates its Adjusted EBITA margin to improve around 100 basis points this year.

Our Take

In the past couple of years, Philips has successfully morphed from a lighting company into a healthcare technology provider. Further, the company's transformation from a hardware-oriented to a software-driven business, with a higher-margin and recurring-revenue model is impressive. The company also believes that increased spending on healthcare and fitness will act as a long-term growth driver, going forward.

Moreover, the company remains optimistic about the prospects of its Diagnosis & Treatment vertical on account of positive industry trends as Image-Guided Therapy and Ultrasound equipment sales are acting as major profit churners. Further, the company’s ardent lookout for strategic acquisitions has enabled it to strengthen core business. This apart, the company is strongly benefiting from three of its comprehensive performance improvement and change-initiative programs — namely Accelerate, End2End productivity, and Design for Excellence — implemented earlier, consequently acting as a key driver of growth.

Philips currently carries a Zacks Rank #2 (Buy).

Other Stocks to Consider

Some other stocks worth considering in the same space include Aspen Technology, Inc. AZPN, Applied Materials, Inc. AMAT and AMTEK, Inc. AME. While Aspen Technology sports a Zacks Rank #1 (Strong Buy), Applied Materials and AMTEK carry a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Aspen Technology has an excellent earnings surprise history, surpassing estimates in each of the trailing four quarters with an average beat of 33.7%.

Applied Materials has an excellent earnings surprise history, exceeding estimates in each of the trailing four quarters with an average beat of 2.8%.

AMTEK has posted earning beats thrice in the trailing four quarters. It boasts an average beat of 4.1%.

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