Royal Philips Electronics NV, the world's largest lighting company, reported a euro1.35 billion ($1.9 billion) loss for the second quarter on Monday, mostly due to a writedown on the value of its goodwill _ the amount paid in excess of the fair value of companies that it has acquired in the past.
In the same period a year ago, Philips had a net profit of euro262 million. The company said second quarter revenues fell 2.6 percent to euro5.21 billion from a year ago, due mostly to a stronger euro. However, operating earnings even before the euro1.39 billion goodwill charges at the company's lighting and consumer appliances arms both declined sharply. Operating profits at its medical imaging equipment arm grew.
"Our second quarter results were impacted by near-term operational challenges, weaker markets and a significant impairment charge," said new CEO Frans van Houten.
The goodwill writedowns were based mostly on lower estimates of the fair value of likely future cash flows from the company's health care and lighting businesses. Such estimates many years into the future are by their nature somewhat speculative, though they are reviewed annually and approved by the company's auditors. Philips cited "growing economic uncertainty" as a reason the value of these future cash flows has been impaired.
For Philips' key lighting division, the company said margins were hurt by raw materials price increases, greater research and development costs, and greater advertising costs.
At consumer appliances, Philips attributed the worse operating performance to lower licensing revenues and increased advertising spending.
Monday's weak report follows a March profit warning about the company's television business and another warning in June that said business conditions were weak at the company's lighting and consumer appliance arms. Philips makes a range of products from electric shavers to coffee machines.
The company said it will seek to reduce operating costs by euro500 million, without specifying how much of those savings will come from job cuts. It is targeting sales growth at least equaling global GDP growth by 2013.
"The outlook for lighting and consumer margins is substantially cut and suggests pressures in these two businesses are structural and will not be easily fixed, even including the new cost savings program," said analyst Victor Bareno of SNS Securities. "However, the new targets look realistic," he added, raising his recommendation on shares to Hold from Reduce.
Shares rose 2.2 percent to euro17.715 in Amsterdam, but are still down nearly 20 percent over the past three months.
The fall in share price may not be all that bad for Van Houten and new CFO Ron Wirahadiraksa, both appointed for four-year terms that began on March 31. The more stock awards and options they receive at comparatively low levels, the more they stand to gain if the company's share price rises toward the end of their tenures.
The large goodwill writedown should improve the company's return on equity in coming years. Separately Monday Philips announced a new euro2 billion share buyback program.