Brighter 2Q for Phillips

Koninklijke Phillips Electronics N.V. (PHG - Analyst Report) reported results for the second quarter of 2012, with net income of €167 million ($215 million) compared to a net loss of €1.3 billion in the prior-year period. Goodwill and intangible asset impairment charges of €1.4 million that occurred in second quarter of 2011 led to a net loss.

Excluding the impairment charges benefit, net income for the quarter was €127 million, driven by higher operating earnings.

Quarterly Details

For the second quarter of fiscal 2012, the company reported revenue growth of 5.0% to €5.8 billion ($7.6 billion) compared to €5.2 billion in the prior-year quarter. The revenue increase was primarily driven by 13% growth in group nominal sales, which included a 7% positive effect from currency.

Earnings before Interest, Tax and Amortization (EBITA) increased €79 million ($101.5 million) year-over-year. The increase was primarily attributable to higher earnings at Healthcare and Consumer Lifestyle, which was partially offset by higher cost at Innovation, Group & Services and lower EBITDA at Lighting.

Segment Details

Healthcare sales for the quarter grew 7% year over year driven by increases across its businesses, especially double-digit growth at the Patient Care & Clinical Informatics and Customer services, high-single-digit growth at Imaging systems and mid-single digit growth at Home Healthcare Solutions.

Geographically, revenue growth in mature markets was 4% year over year with North America growing 7% year over. Sales from Western Europe declined 1% during the reported quarter. Emerging markets reported strong revenue growth of 22% year over year. This was, however, partially offset by higher acquisition related charges compared to the prior-year quarter.

The Consumer Lifestyle segment posted revenue growth of 9% during the quarter. On a comparable basis, sales grew 3% driven by high single-digit growth in the combined growth businesses such as Personal Care, Heath& Wellness and Domestic Appliances.

This was partially offset by a decline at Lifestyle Entertainment. Excluding Licenses and Lifestyle Entertainment, comparable sales grew 8% year over year. Asia reported a double-digit growth while North America posted mid single digit growth. This was partially offset by a decline in Western Europe.

During the reported quarter, the Lightning segment reported sales growth of 6% year over year driven by double-digit growth at Light Sources & Electronics and high single-digit sales growth at Automotive. On a geographic basis, growth markets reported sales growth of 13% while high single-digit growth was witnessed in North America. However, Europe reported a year over year decline in revenues.

Sales in the Innovation, Group & Services segment declined to €97 million from €112 million primarily due to lower license income.

Geographical Growth

On a geographical basis, comparable sales in the growth geographies increased 11% in the fourth quarter.

The company’s growth markets include all markets excluding the U.S, Canada, Western Europe, Australia, New Zealand, South Korea and Japan.

The above mentioned geographies are classified as mature markets; revenue growth in the mature markets was 2% year over year.

Cash and Balance Sheet

Cash flow from operating activities declined significantly to €52 million ($66.8 million) compared to €63 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 to €263 million ($338 million) from €243 million attributable to higher investments in the Lighting and Consumer Lifestyle segments.

At the end of the second quarter, the company had a debt position of €1.8 billion ($2.3 billion) compared to €156 million in the prior-year quarter. Increase in debt was primarily attributable to treasury stock transactions, payment of annual dividend and negative free cash flow in the second quarter.

Phillips currently has a Zacks Rank of #1 which implies a Strong Buy for short term (1-3 months).