Koninklijke Philips Electronics NV (PHG) reported earnings per share of €0.55 (70 cents per ADR) for the third quarter of 2010, compared with €0.19 in the prior-year quarter. The company delivered strong performance in all its operating sectors, especially Lighting and Healthcare.

Revenue

Total sales in the quarter were €6,159 million, an increase of 10% year over year, led by increased sales in all its sectors. Currency movements had an 8% favorable impact on sales.

Healthcare sales increased by 14%, led by growth in most of its businesses. Consumer Lifestyle sales grew by 1%, driven by solid performance in Health & Wellness, Personal Care and Domestic Appliances businesses, which was offset by declines in other businesses. Lighting sales increased by 16%, driven by strong sales in all its businesses, especially Lighting Electronics and Lumileds.

Sales grew by 5% in mature markets while it grew by 19% in the emerging markets. The healthcare market was particularly strong in the Western Europe. The emerging markets benefited from growth in China, India, Russia and the ASEAN countries, again mainly in the Lighting and Healthcare sectors.

Income and Expenses

Earnings before Interest, Tax and Amortization (EBITA) increased by €304 million compared with €648 million in the third quarter of 2009. This was due to profitability improvements in all sectors and lower restructuring and acquisition related charges. Operating Profit increased by €280 million to €517 million.

Balance Sheet & Cash Flow

There was a net operating cash inflow of €8 million, down from inflow of €470 million in the third quarter of 2009 due to higher working capital requirements, mainly inventories. This decline was partially offset by higher cash earnings. The cash balance at the end of the quarter was €4.4 billion, a decline of €108 million, primarily due to free cash outflow of €200 million, partially offset by €165 million proceeds from redemption of the TVP convertible bond. Increased investment in equipment at Lighting raised the capital expenditure by €51 million during the quarter.

At the end of the quarter, Philips had a net debt of €80 million (U.S. $108.8 million), which is a substantial improvement from €621 million in the year-ago period.

The number of employees increased sequentially by 1,034 in 3Q10 due to increases at Consumer Lifestyle and Healthcare.

Outlook

Though the company recorded a strong profitability during the third quarter of 2010, it prefers to maintain a cautious outlook for the fourth quarter due to the prevailing uncertain economic environment and weak consumer confidence. Fourth quarter is, however, expected to be a seasonally strong period, boosted by the company’s growing businesses and geographical expansion and offset by a weak construction market.

Philips is actively restructuring its portfolio to better focus on healthcare, lighting and lifestyle markets with several recently focused acquisitions and divestments, which bodes well for the company going forward. In the second half of 2009, Philips acquired the assets of InnerCool Therapies Inc., a pioneer in the field of therapeutic hypothermia, a medical treatment that lowers a patient’s body temperature.

The company’s continued ability to increase cash flow by higher earnings, partially offset by lower inflow from working capital, has helped to sustain investments in growth initiatives while maintaining a strong balance sheet.

However, Philips’ global presence exposes the company to regional and local regulatory rules, which may interfere with the realization of business opportunities and investments in the countries in which it operates. Philips’ overall performance in the coming years depends on realizing its growth ambitions in the emerging markets. Major competitors of Philips are General Electric Co. (GE), Panasonic Corporation (PC) and Sony Corporation (SNE).

Headquartered in Amsterdam, The Netherlands, Koninklijke Philips Electronics NV is one of the world’s largest electronics companies and the biggest in Europe, with sales of €26.4 billion in 2008 and €23.2 billion in the full year of 2009. The company is divided into five distinct business sectors after the sale of the semiconductor division: Healthcare, Consumer Lifestyle, Lighting, Innovative & Emerging Businesses (I&EB) and Philips Group Management & Services (GMS). Philips employs above 117,000 employees in more than 60 countries worldwide.

We currently maintain our Neutral rating for the long term on Philips, with a Zacks #1 Rank (short-term Strong Buy recommendation) over the next one-to-three months.

 
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