Apr 17, 2001 - Sales declined 1%
- Income from operations: EUR 332 million (4.0% of sales)
- Unconsolidated companies: a loss of EUR 73 million, as a result of
lower operational income and higher goodwill and merger integration
costs
- One-time charge in the second quarter of approximately EUR 350
million; headcount reduction of more than 6,000
The rapid downturn in the telecommunications and PC industries that
has affected the businesses of Royal Philips Electronics since
December 2000, continued throughout the first quarter of 2001. Results
at Components, Consumer Electronics and to a lesser extent,
Semiconductors were especially impacted by this decline, the speed of
which has been remarkable. Performance at Lighting, Domestic
Appliances and Personal Care (DAP), and Medical Systems was solid, as
expected.
Net Income in the first quarter amounted to EUR 106 million (EUR 0.08
per share) compared to EUR 1,140 million (EUR 0.86 per share) in the
corresponding period of 2000. Included in income is an after tax gain
of EUR 53 million from the sale of the Philips Broadcast Group to
Thomson Multimedia. The first quarter of 2000 included a gain of EUR
526 million (EUR 0.40 per share) from the sale of a portion of the JDS
Uniphase shares.
Sales in the first quarter came to EUR 8,208 million, a 1% decrease on
the year before. Changes arising from (de)consolidations had a neutral
effect on balance. Currency fluctuations had a positive effect of 3%.
Price erosion in the first quarter, at 6%, compares with 5% in the
corresponding quarter in the year earlier. Volume growth in the first
quarter of 2001 was 2%.
Income from operations excluding amortization goodwill and other
intangibles in the first quarter was EUR 412 million (5% of sales).
Income included an incidental gain of EUR 70 million related to the
sale of Philips Broadcast activities to Thomson Multimedia, and EUR 25
million collected insurance payments at Semiconductors. Also included
were charges for the write-off of components and inventory
obsolescence at Consumer Communications of EUR 74 million, one-time
acquisition related charges for ADAC at Medical Systems of EUR 20
million, and charges of EUR 37 million for various activities in
Miscellaneous. Last year's first quarter included charges of EUR 82
million for various restructuring projects, and other incidental
charges.
Income from Operations amounted to EUR 332 million compared to EUR 663
million in the first quarter of 2000. The goodwill related charges
came to EUR 80 million compared to EUR 53 million in 2000. The
increase related to charges for newly acquired companies in 2000
(MedQuist, ADAC and Optiva).
Financial income and expenses in the first quarter were EUR -84
million, compared to income of EUR 480 million last year. The first
quarter of 2000 included an incidental gain on the sale of a portion
of JDS Uniphase shares of EUR 526 million. Excluding this item, the
financial income and expense amounted to EUR -46 million. The
difference mainly relates to higher interest expenses.
Income tax charges in the first quarter have been determined at a
tentative rate of 25%. This compares to 20% (excluding non taxable
gain on the sale of JDS Uniphase shares) in last year's corresponding
quarter.
Philips' income from operational results relating to unconsolidated
companies amounted to a loss of EUR 10 million in the first quarter,
versus a profit of EUR 153 million last year. Market weakness resulted
in lower contributions from TSMC, and negative contributions from SSMC
and LG.Philips LCD Co. Philips' share in the results of Atos Origin
was included under income from operational results on a three month
delay basis (i.e. relating to Atos Origin's 4th quarter 2000
performance), and included Philips' share of non-recurring merger
integration costs of EUR 20 million.
Goodwill charges relating to unconsolidated companies amounted to EUR
63 million compared to EUR 18 million in the first quarter of 2000.
The increase related to Philips' shareholdings in TSMC and Atos
Origin.
The share of third-party minority interests in the income of Group
companies amounted to EUR 7 million, compared to EUR 14 million in the
first quarter of 2000.
Net income for the first quarter amounted to EUR 106 million (EUR 0.08
per share) versus EUR 1,140 million (EUR 0.86 per share) in 2000.
Accounting policies
Accounting policies applied are unchanged compared to the year
2000.
Segment reporting
On February 8, 2001 it was announced that the activities listed under
Consumer Electronics Specialty Products would be reallocated within
the Group. In the first quarter of 2001, the respective businesses
have been moved as follows:
- Institutional TV and Accessories to Mainstream CE
- Broadband Networks to Digital Networks
- Speaker Systems, Remote Control Systems, Creative Display Solutions,
and Imaging to Components
- All remaining businesses to Miscellaneous
Prior year financials for the year 2000 in the sectors have been
restated accordingly.
Sales and income from operations per sector
Sales in the Lighting sector totaled EUR 1,295 million, 6%
ahead of the year before. Currency movements had a positive impact of
3% on sales. Volume growth was 7%, while prices were 4% lower, on
average. The strongest sales growth was achieved by the business units
Automotive & Special Lighting and Luminaires.
Income from operations came to EUR 202 million, approximately the same
level as last year. Margins remained strong at 15.5%, below the record
16.6% in the year earlier quarter.
Sales in Consumer Electronics totaled EUR 2,685 million, a
decrease of 5% over the same quarter in 2000. Currency movements had a
positive effect of 2% on nominal sales. Sales volume increased by 4%,
while prices decreased on average by 10%; price erosion rose
particularly in mobile phones. Sales of Mainstream CE products
increased marginally, hampered by the slowdown in the U.S. market.
Sales edged up in Branded Monitors, DVD Video and Audio Systems.
Digital Networks recorded sharply lower sales of set-top boxes, in
particular to U.S. cable operators. Sales in mobile handsets were
impacted by the weakness in the telecommunications industry,
particularly in Europe, caused by slowing consumer demand and
adjustment of the excess inventories throughout the supply chain.
Income from operations in Consumer Electronics turned from a profit of
EUR 83 million in 2000 to a loss of EUR 99 million. The decrease was
mainly attributable to Consumer Communications, which reported a loss
of EUR 118 million, compared to a profit of EUR 24 million last year.
Adjusted sales plans in Consumer Communications resulted in a write
down of components and an obsolescence charge of EUR 74 million. Sales
of handsets in Western Europe were significantly lower. By contrast,
performance in Asia was positive, mainly driven by the Xenium product
which has been well received in the region. Due to the sales
shortfall, income from operations at Digital Networks ended the
quarter at a loss of EUR 40 million, EUR 24 million lower than the
loss of EUR 16 million of last year. Income in 2001 included a charge
of EUR 3 million for write-off of inventories.
In the first quarter, Mainstream CE reported a loss of EUR 39 million,
compared to a loss of EUR 8 million in 2000. The performance was
negatively impacted by the slowdown of the U.S. economy, which left
both manufacturers and retailers with high inventory levels in the
first few months of this year.
License income in the first quarter increased with EUR 15 million to
EUR 98 million.
Sales in the DAP sector totaled EUR 440 million, representing
15% growth. The consolidated sales of Optiva Corporation was the main
driver for the uplift (12%). Price erosion was stable at 2%, while
volume growth was 3%. Strong growth was posted in Eastern Europe,
Brazil and China. This was partly countered by lower sales in North
America, reflecting the weaker economy and slowing demand. Sales in
Europe were stimulated by the launch, together with Douwe Egberts, of
the Senseo Crema, a revolutionary new coffee-making system.
Income from operations increased by approximately 18% to EUR 53
million, mainly driven by improvements in Body Beauty and Health, and
the Oral Care business.
Sales in the Components sector totaled EUR 934 million, a
decrease of 22% over the first quarter of 2000. Changes in
consolidations had a negative effect of 7%, while currency movements
positively impacted nominal sales by 3%. Average prices decreased by
7%, while sales volume decreased by 11%. Sales in the sector were
strongly affected by the slowdown in the worldwide PC industry and
telecommunications markets, affecting sales in monitor displays,
optical storage modules and mobile display systems.
In the first quarter income of Components came to a loss of EUR 77
million, compared to a profit of EUR 100 million last year. All
businesses showed a deterioration on last year. Within Display
Components, this was caused by lower sales and high cost levels in
relation to reduced activity levels. Generally weak conditions for the
mobile market, resulting in price erosion and lower capacity
utilization, caused lower results within Mobile Display Systems.
Optical Storage was strongly influenced by the continued slowdown of
the PC market. Income also deteriorated compared to last year, due to
higher investments in New Business Creation and investment for
e-business projects.
Sales in the Semiconductors sector came to EUR 1,420 million,
an increase of 16% over the same quarter in the year earlier. The
consolidation of MiCRUS and SMP (Malaysia) had a positive effect of 8%
on nominal sales, in addition to a 4% positive currency effect. Price
erosion was 6%, up from 3% last year, while volume growth came to 10%.
Income from operations amounted to EUR 231 million, which is 4% lower
than the EUR 241 million of last year. Income in the first quarter
2001 included collected insurance payments of EUR 25 million.
Operating margin on revenues declined from 16.8% in the first quarter
of last year, to 14.5% this year.
Sales in the Medical Systems sector totaled EUR 824 million,
44% up from the year earlier. The larger part of the increase relates
to the consolidation of MedQuist and ADAC (33%). Additionally, sales
were positively influenced by currency movements (5%). On a comparable
basis, sales increased 6%, mainly caused by Europe and North America.
Order intake, excluding the effect of the new consolidations,
increased 21%, and was most significant in Magnetic Resonance.
Income from operations in Medical Systems came to a small profit of
EUR 1 million, compared to EUR 20 million last year. Higher goodwill
charges of EUR 36 million, and one-time charges related to the
acquisition of ADAC of EUR 20 million, mainly caused the deviation.
Sales in the Miscellaneous sector totaled EUR 610 million, a
decrease of 8% over the year before. In the first quarter Philips'
stake in NavTech has been increased from 50% to 80%, and the company
has been consolidated as per January 1, 2001. The income of
Miscellaneous came to EUR 21 million and included special charges of
EUR 37 million for a number of items and the gain of EUR 70 million on
the sale of parts of Philips Professional Broadcast group to Thomson
Multimedia. Last year's income was a loss of EUR 23 million.
Income from operations in Unallocated was breakeven, compared
to a loss of EUR 9 million last year.
Geographic developments
Geographically, sales growth was strong in North America (11% up),
driven by sales of new consolidations (MedQuist, MiCRUS, ADAC and
Optiva) and the appreciation of the U.S. dollar. On a comparable
basis, sales were lower by 11%, affected by the slowdown of the U.S.
economy. Sales in Asia Pacific ended 3% lower, particularly caused by
lower supplies of Components to the depressed PC industry. European
sales decreased 8%, mainly caused by the deconsolidation of Origin; on
a comparable basis, sales were virtually flat. Latin America saw 5%
growth.
Income from operations in the first quarter weakened in all regions
except Asia Pacific. The weaker economic conditions in the U.S.
affected the performance in North America, in particular at
Components, Mainstream CE and Digital Networks. This resulted in a
loss of EUR 115 million for this region, compared to a loss of EUR 10
million last year. Income in Europe amounted to EUR 253 million and
was approximately half the amount of last year. The lower performance
in Europe was almost entirely due to the losses recorded in Consumer
Communications and Components, and the impact of the financial crisis
in Turkey. Income in Latin America was at the same level as last year.
With an increase in income of EUR 51 million, Asia Pacific came to a
profit of EUR 185 million. All sectors, except Components contributed
to the improvement; increases were particularly noticeable at
Mainstream CE and at Semiconductors.
Cash flows and financing
The cash flow from operating activities in the first quarter amounted
to a negative of EUR 349 million which was EUR 754 million lower than
in the first quarter of last year. The variance was mostly related to
the lower income, higher investment in working capital and the
decrease in provisions.
Expressed as a percentage of sales, inventories at the end of the
first quarter came to 15.6%, compared to 14.5% a year earlier. The
biggest increases occurred at Digital Networks, Components,
Semiconductors and Lighting.
Cash flow from investing activities in the first quarter totaled EUR
835 million, compared to a positive inflow of EUR 130 million in 2000.
The deviation is mainly caused by the absence of proceeds from the
sales of securities, while securities worth EUR 550 million were sold
last year. An additional impact came from net capital expenditures
(mainly in Components and Semiconductors), which were EUR 757 million,
EUR 301 million higher than last year, though considerably lower than
the EUR 1,248 million of the last quarter of 2000.
In the first quarter of 2001, the cash flow from financing activities
amounted to an inflow of EUR 946 million, due to the impact of a EUR
1,108 million increase in short term debt levels, mostly resulting
from the USD 2.5 billion Global Commercial Paper program, launched
earlier in the year.
The net debt to group equity ratio amounted to 17:83 at the end March
2001, compared to a ratio of 4:96 at the end of the first quarter of
last year.
Employees
The number of employees at the end of March 2001 totaled 219,399,
unchanged from January 1, 2001, but approximately 10,000 less than
March 31, 2000.
Outlook
We see no signs that the slowdown in economic activity in certain
parts of the world, particularly the USA, is near its end. This will
continue to cause low growth and high price erosion for some of the
markets in which Philips is active. As a result, net income in the
second quarter before special charges is likely to be negative.
Capital expenditures have been cut back to EUR 2.5 billion and will be
reduced further if needed.
Measures are being taken to bring costs in line with revenue levels,
including a headcount reduction of between 6,000 and 7,000 people.
During the course of the second quarter, detailed plans will be
communicated, in particular with respect to structurally
underperforming activities in Components and Consumer Electronics. For
the moment, we expect to take one-time pre-tax charges of
approximately EUR 350 million in the second quarter. This will include
a charge of approximately EUR 60 million for the disentanglement of
the Display Components business in preparation for the joint venture
with LG.
Amsterdam, April 17, 2001
Board of Management
Media inquiries: Ben Geerts, Philips Corporate Communications, tel:
+31 20 5977215
