Koninklijke Philips N.V. PHG reported second-quarter 2020 adjusted earnings of €0.35 per share, down 16.7% year over year. COVID-19 impacted sales as well as adjusted EBITDA by 10 percentage points and 3 percentage points, respectively.

Sales declined 5.9% on a year-over-year basis at €4.40 billion. Comparable sales (includes adjustments for consolidation charges & currency effects) dropped 6% year over year primarily due to COVID-19.

Notably, double-digit comparable sales growth in the Connected Care businesses were fully offset by a double-digit decline in the Personal Health businesses and high-single-digit decline in the Diagnosis & Treatment businesses.

The company’s comparable order intake grew 27% with more than double-digit growth in the Connected Care businesses while the Diagnosis & Treatment businesses double-digit year over year.

Growth in comparable order intake was driven by solid demand for CT imaging systems, hospital ventilators and patient monitors.
 

Sales declined 6% on a comparable basis in growth geographies with mid-single-digit decline in China and a double-digit decline in India. Comparable order intake grew double digits, driven by Russia, Central Asia and Latin America.

Sales in mature geographies fell 6% year over year on a comparable basis. Low-single-digit growth in Western Europe was fully offset by double-digit decline in North America and a mid-single-digit decline in other mature geographies.

Comparable order intake in mature geographies grew in double digits, driven by Western Europe and North America.

Segmental Update

Diagnosis & Treatment revenues decreased 7% from the year-ago quarter to €1.92 billion. Comparable sales fell 9% year over year. While Diagnostic Imaging sales were flat, Ultrasound declined mid-single-digit and Image-Guided Therapy reported double-digit decline.

Comparable sales in growth geographies showed mid-single-digit growth. China witnessed double-digit growth.

Mature geographies grew at a double-digit rate, reflecting double-digit decline in both North America and Western Europe.

Connected Care business revenues improved 14% to €1.32 billion. Comparable sales increased 14%, primarily driven by COVID-19-generated demand with double-digit growth in Sleep & Respiratory Care and mid-single-digit growth in Monitoring & Analytics.

Mature geographies grew in double digits, primarily on double-digit growth in Western Europe, a mid-single digit rise in other mature geographies and a low-single-digit growth in North America.

Growth geographies showed double-digit growth, driven by double-digit growth in Latin America and Middle East & Turkey.

Personal Health sales declined 21% year over year to €1.07 billion. Comparable sales fell 19% due to the COVID-19 outbreak. Each of Personal Care, Domestic Appliances and Oral Healthcare businesses witnessed a double-digit decline.

Growth geographies declined in double-digits. Mature geographies posted a double-digit fall due to a low-single-digit decline in Western Europe and a double-digit decrease in both North America and other mature geographies.

Other segment sales dropped 12.5% to €84 million, primarily due to lower royalty income.

Operating Details

Gross margin contracted 380 basis points (bps) on a year-over-year basis to 41.7% in the reported quarter.

General & administrative and research & development expenses increased 30 bps and 90 bps, respectively. However, selling expenses decreased 60 bps.

In the reported quarter, procurement cost savings totaled €57 million. Savings from overhead and other productivity programs were €51 million.

Philips’ adjusted earnings before interest, taxes and amortization (“EBITA”) — the company’s preferred measure of operational performance — were €418 million, down 24% from the year-ago quarter.

Adjusted EBITA margin shrank 220 bps on a year-over-year basis to 9.5%.

Diagnosis & Treatment EBITA margins contracted 370 bps on a year-over-year basis. Personal Health adjusted EBITA margin was 5.6% compared with 13.4% in the year-ago quarter.

However, Connected Care adjusted EBITA margins expanded 570 bps.

Balance Sheet & Other Details

As of Jun 30, 2020, Philips’ cash and cash equivalents were €2.29 billion and total debt was €7.30 billion. This compares with cash and cash equivalents of €2.14 billion and total debt of €6.87 billion as of Mar 31, 2020.

Meanwhile, net cash flow generated from operating activities came in at €558 million. Free cash outflow was €311 million.

Regulatory Update- External Defibrillators

Philips’ Emergency Care and Resuscitation business resumed manufacturing and shipping of external defibrillators for the United States, after the FDA lifted its injunction during the reported quarter.

Moreover, Philips received FDA pre-market approval for the HeartStart FR3 and HeartStart FRx automated external defibrillators, and their supporting accessories, including batteries and pads.

Additionally, Philips has obtained authorizations through the FDA’s Emergency Use Authorization (EUA) process for the expanded use of its IntelliVue Patient Monitors MX750/MX850 and IntelliVue Active Displays AD75/AD85.

Further, Philips has received FDA 510(k) clearances to market its Biosensor BX100 for early patient deterioration detection in the general ward and to market a wide range of its ultrasound solutions for the management of COVID-19-related lung and cardiac complications.

Guidance

Philips anticipates return to growth and improved profitability in the second half of 2020 depending on its ability to convert existing order book for the Diagnosis & Treatment and Connected Care businesses, elective procedures normalize, and gradual improvement in consumer demand..

For 2020, Philips aims to achieve modest comparable sales growth and adjusted EBITA margin improvement.

Zacks Rank and Other Stocks to Consider

Phillips currently sports a Zacks Rank #4 (Sell).

Advanced Micro Devices AMD, A10Networks ATEN and Impinj PI are stocks worth considering from the broader computer and technology sector. All the three stocks flaunt a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

While both AMD and A10 Networks are set to report quarterly results on Jul 28, Impinj is scheduled to report on Jul 29.

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