Philips ($PHG) shed as much as 4% in early trading as continued manufacturing problems and intellectual property litigation as well as weakness in Russia and China weighed on investor confidence after it reported third-quarter results. The conglomerate had a net loss of €103 million ($132 million) on sales of €5.5 billion in the third quarter, down from net income of €281 million ($359 million) on sales of €5.6 billion in the third quarter of 2013.
It tried to be upbeat about the upcoming restructuring, which will spin off the lighting business and combine its consumer and healthcare business under the umbrella of "HealthTech." That process is expected to take another 12 to 18 months to complete.
Philips CEO Frans van Houten highlighted recent multiyear healthcare contracts and noted that it would use acquisitions to further fill in HealthTech offerings. Healthcare sales gained 1% over the same quarter last year.
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| Philips CEO Frans van Houten |
"In HealthTech, we can identify several areas where we can strengthen our portfolio, going forward. We have a great starting position in HealthTech. Customers ask us to become a solutions provider. We've talked about the four new contracts that we won in the third quarter, 15-year contracts. Obviously, the more we can put into those contracts the better it is," he said on the conference call.
"So, potential fill-in acquisitions would leverage the Philips brand, would leverage the global access in the markets, and would benefit from the, let's say, the overall solutions selling approach," van Houten concluded.
These long-term contracts include one with Reinier de Graaf Hospital in the Netherlands for imaging and to improve clinical and operational performance as well as patient experience; another with the Karolinska University Hospital and the Stockholm County Council for image-guided therapy and improvement of stroke care work flow; and a deal with World Citi Medical Center in the Philippines to modernize its orthopedic center.
van Houten attributed the quarterly loss to a number of factors including a one-time charge related to a $466 million jury verdict for competitor Masimo, which he said the company will appeal. He said the outcome was "unexpected" and that they are confident in an appeal. It would take two or three years to get to an actual payout, should one actually be required, van Houten said.
He also cited lower operational earnings as a factor in the loss, including a manufacturing facility that is still hampered by a closure and a slowdown in Russia and China sales.
Philips started to ship products again during the third quarter from a manufacturing plant in Cleveland, OH, that it had voluntarily closed.
"We began to ship the first products in the third quarter, and we now have also resumed production of iCT and Ingenuity scanners," said van Houten. "We will further ramp up production in Q4 and the first quarter of 2015, which will, of course, contribute to an improved performance in Q4 and in 2015."
van Houten chalked up the Russian weakness to macroeconomic declines that hampered consumer sales and that in China to recent governmental anticorruption crackdowns in healthcare. He expects China to improve next year, as administrative burdens on this front are satisfied.
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