Philips' (PHG) Q2 Earnings Down on Supply Chain Constraints

Koninklijke Philips N.V. PHG reported second-quarter 2022 adjusted earnings of €0.14 per share, down 65% year over year.

Sales increased 1.3% on a year-over-year basis to €4.18 billion. Comparable sales (includes adjustments for consolidation charges & currency effects) decreased 7% year over year, primarily due to headwinds caused by global supply chain challenges and COVID lockdowns in China.

Comparable sales in the Diagnosis & Treatment and Personal Health businesses witnessed mid-single-digit increases on a year-over-year basis. The Connected Care business witnessed a double-digit decline.

Philips’ comparable order intake grew 1% year over year in the reported quarter. Diagnosis & Treatment businesses witnessed low-single-digit growth, while the Connected Care business witnessed a low-single-digit decline.

Sales decreased 18% on a comparable basis in growth geographies. Sales in mature geographies were down 2% year over year on a comparable basis.

Koninklijke Philips N.V. Price, Consensus and EPS Surprise

Koninklijke Philips N.V. Price, Consensus and EPS Surprise

Koninklijke Philips N.V. price-consensus-eps-surprise-chart | Koninklijke Philips N.V. Quote

Philips’ shares were down more than 7% following second-quarter 2022 results. Markedly, Philips’ shares have dropped 44.2% year to date compared with the Zacks Medical-Products industry’s decline of 25.5%.

Segmental Update

Diagnosis & Treatment revenues increased 2% from the year-ago quarter to €2.16 billion. Comparable sales declined 4% year over year.

Enterprise Diagnostic Informatics revenues grew in the high-single-digit range. Image-Guided Therapy witnessed mid-single-digit growth in the reported quarter. However, Ultrasound and Diagnostic Imaging revenues declined due to specific electronic component shortages.

Connected Care business revenues declined 13% year over year to €1.06 billion. Comparable sales decreased 13%, primarily due to the consequences of the Respironics field action and the impact of supply chain headwinds.

Personal Health’s comparable sales were down 5%, with a low-single-digit decline in Oral Healthcare and Personal Care witnessing a high-single-digit decline.

Other segment sales amounted to €128 million, up €24 million on a year-over-year basis.

Operating Details

Gross margin contracted 90 basis points (bps) on a year-over-year basis to 41.4% in the reported quarter.

General & administrative expenses, as a percentage of sales, increased 20 bps on a year-over-year basis to 3.5%. Moreover, selling expenses increased 160 bps to 26.6%. Research & development expenses also increased 60 bps to 11.7%.

Restructuring, acquisition-related and other charges amounted to €125 million compared with €359 million in the year-ago quarter.

Philips’ adjusted earnings before interest, taxes and amortization (“EBITA”) — the company’s preferred measure of operational performance — declined 59.4% year over year to €216 million.

Diagnosis & Treatment’s EBITA margins contracted 700 bps on a year-over-year basis to 6.2%. Connected Care’s adjusted EBITA margin was 1.1% compared with 11.4% in the year-ago quarter.

Personal Health’s adjusted EBITA margins expanded 420 bps on a year-over-year basis to 12.4%.

Balance Sheet

As of Jun 30, 2022, Philips’ cash and cash equivalents were €1.26 billion and total debt was €8 billion. This compares with cash and cash equivalents of €1.44 billion and total debt of €7 billion as of Mar 31, 2022.

Guidance

Philips expects 2022 comparable sales growth between 1% and 3% (down from previous guidance between 3% and 5%). Adjusted EBITA margin is expected to be 10%, driven by 6-9% comparable sales growth in the second half of 2022.

For the 2023-2025 period, Philips expects 4-6% average annual comparable sales growth and an adjusted EBITA margin of 14-15%. Free cash flow is now expected to be roughly €2 billion by 2025.

Zacks Rank and Stocks to Consider

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

Acadia Healthcare ACHC, Alkermes ALKS and Molina Healthcare MOH are some better-ranked stocks worth considering in the same industry. While Alkermes sports Zacks Rank #1 (Strong Buy), both Acadia and Molina have Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Acadia, Alkermes and Molina are expected to report their quarterly results on Jul 27.

On a year-to-date basis, Acadia and Alkermes have returned 29.6% and 24.9%, respectively. However, shares of Molina are down 3.2% over the same timeframe.

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