Shares of Koninklijke Phillips Electronics N.V. (PHG) have declined about 2.3% since Oct 20, when the company released its third-quarter results. The company reported net loss of €103 million ($130.66 million) or €0.11 (14 cents) per share for the third quarter of 2014 as against net income of €281 million or €0.35 per share in the prior-year quarter.

The year-over-year decline was primarily due to adverse currency impact and the ongoing sluggishness in the key markets like Russia and China among others. Moreover, the unfavorable case verdict related to Masimo litigation remains a headwind going forward.

Quarterly Details

Revenues declined marginally to €5,547 million ($7,036.37million) from €5,595 million. On a nominal basis, group sales declined 1%, whereas revenues remained flat year over year on a comparable basis.

The company reported adjusted earnings before Interest, Tax and Amortization (:EBITA) of €536 million ($679.92 million) or 9.7% of sales, compared with 11.4% in the prior-year quarter. However, the IP litigation charges and voluntary suspension at its Cleveland healthcare production facility led to EBITA loss of €7 million ($8.88 million) in the quarter.

Segment Details

Healthcare sales for the quarter dropped 1% year over year to €2,234 million ($2833.83 million). Nonetheless, the segment showed a comparable sales improvement of 1% with Home Healthcare solutions and Customer services growing in mid-single digits and Patient Care & Clinical Informatics in low-single digits, while there was a mid-single digit decline in the Imaging systems.

The Consumer Lifestyle segment revenues climbed 2% in the quarter to €1,114 million ($1,413.11 million). On a comparable basis, segment revenues increased 5% year over year aided by mid-single digit growth in Health & Wellness and Domestic Appliances and low-single digit growth in Personal Care business.

During the quarter, the Lighting segment’s sales decreased 1% year over year to €2,056 million ($2,608.04 million). On a comparable basis too, segment revenues dipped 1% owing to mid-single digit decline in Light Sources & Electronics and Consumer Luminaires, which completely offset the double-digit growth in Lumileds, mid-single digit growth in Automotives and low-single digit growth in Professional Lightning Solutions.

Revenues in the Innovation, Group & Services segment dropped 12% to €143 million ($181.40 million). On a comparable basis, revenues declined 15% year over year.

Geographical Growth

Sales in the growth geographies increased 2% on a comparable basis. The increase was driven by strong growth in Consumer Lifestyle and Healthcare businesses, especially in regions like Central & Eastern Europe, India and Africa. Comparable sales in China remained flat year over year.

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

The abovementioned geographies are classified as mature markets for which the comparable sales decreased 1% year over year. The decline was primarily owing to the sluggish performance of the Healthcare and Lightning sales.

Cash and Balance Sheet

Cash flow from operating activities came in at €365 million ($463 million), an increase from the prior-year’s figure of €342 million ($433.83 million). Growth was primarily driven by an increase in cash flow from the working capital, which was, however, partially offset by reduced cash earnings.

The company’s cash balance decreased to €1,716 million ($2176.75 million) as against €2,304 million in the prior year.

Gross capital expenditures for the quarter were €116 million ($147.15 million) versus €138 million in the year-ago period, primarily due to lower investment in the Lighting and Consumer Lifestyle businesses.

Philips’s net debt stood at €2.6 billion ($3.3 billion), compared to €2 billion at the end of the prior-year quarter.

Business Update

In September, Phillips announced its decision to split into two companies. According to Philips, its healthcare and consumer lifestyle segments will be fused to form a new company – HealthTech – while its lighting business will operate as a stand-alone enterprise. The restructuring is expected to generate about €100 million ($128.5 million) in savings by 2015 and around another €300 million ($385 million) by 2016. However, Philips expects to incur additional restructuring charges of €50 million.

Earlier in June, the company had announced its plan to initiate the process for integration of the Lumileds (LED components) and Automotive lighting businesses into a stand-alone company within the Philips Group.

The restructuring, by focusing on its core business, is expected to aid the sinking company with a new lease of life..

Looking Ahead

Though headwinds are expected to persist for the rest of 2014, the company expects an improvement in adjusted EBITA. Further, Philips remains optimistic about achieving its 2016 targets as per its Accelerate! transformation program, which was introduced to improve its overall performance and reduce costs. The project comprises five streams to enhance customer relevance, change company culture, reduce overhead costs, streamline the End2End customer value chains and reallocate resources to profitable growth opportunities. It is expected to be operational till 2017.

Zacks Rank

Phillips currently has a Zacks Rank #4 (Sell). Better-ranked stocks in the sector that look promising at the moment include Control4 Corporation (CTRL), OmniVision Technologies, Inc. (OVTI) and Diodes Incorporated (DIOD). All three stocks hold a Zacks Rank #2 (Buy).

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