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  • Philips reports net loss of EUR 770 million in the second quarter of 2001

Philips reports net loss of EUR 770 million in the second quarter of 2001

Jul 17, 2001

Net Income of Royal Philips Electronics in the second quarter amounted

to a loss of EUR 770 million (a loss of EUR 0.60 per share) compared

to a profit of EUR 3,604 million (EUR 2.71 per share) in the

corresponding period of 2000.

Net income was negatively impacted by special items after tax of EUR

422 million (a loss of EUR 0.33 per share). The second quarter of 2000

included one-time gains of EUR 2,905 million (EUR 2.19 per share).

Year to date net income amounted to a loss of EUR 664 million (a loss

of EUR 0.52 per share) versus a profit of EUR 4,744 million (EUR 3.57

per share) in 2000.

The first six months of the year were negatively impacted by special

items after tax of EUR 449 million (a loss of EUR 0.35 per share)

compared with a profit of EUR 3,301 million last year (EUR 2.48 per

share)rard Kleisterlee, President and CEO of Royal Philips Electronics

commented: "The economic slowdown that started in the USA last year

has spread to other parts of the world now. Markets for

Telecommunications and PC and PC Peripherals continue to show

weakness. Our Semiconductors, Components and Consumer Electronics

businesses have been significantly impacted by this trend. At the same

time, we see continued good performance from our Lighting, Domestic

Appliances and Personal Care and Medical Systems divisions. We expect

that our earnings will bottom out in the third quarter.

"We have taken firm measures in the first half of the year to reduce

cost, hold inventories tight and cut capital spending. In the second

half of the year we expect to take additional pre-tax charges of

between EUR 250 million and EUR 300 million to further reduce cost. We

will maintain a healthy balance sheet while doing so.

Sales in the second quarter came to EUR 7,682 million, a 16% decrease

on the year before. Changes arising from (de)consolidations had a

negative effect of 1%. Currency fluctuations had a positive effect of

2%. Price erosion in the second quarter, at 8% compared with 6% in the

corresponding quarter of last year. Sales volume declined by 9% in the

second quarter of 2001.

Income from operations in the second quarter was a loss of EUR 745

million (9.7% of sales) compared with a profit of EUR 724 million last

year. Income included a loss of EUR 714 million for special items,

made up as follows: restructuring charges of EUR 448 million, charges

for inventory adjustments and obsolescence of EUR 143 million and

charges totaling EUR 123 million for litigation settlement,

receivables write-downs, disentanglement and moving expenses. These

charges were off-set by one-time gains of EUR 197 million from the

partial sale of Philips' ownership in two companies. Last year's

second quarter included charges of approximately EUR 80 million as a

result of the sale of Philips Projects, and restructuring charges at

the Research Center.

Goodwill related charges came to EUR 77 million compared to EUR 55

million in 2000. The increase in goodwill amortization charges was for

companies newly acquired in 2000 (MedQuist, ADAC and Optiva.

Financial income and expenses in the second quarter were EUR -74

million, compared to EUR -43 million last year. The difference mainly

related to higher interest expenses due to higher net debt.

Income tax charges in the second quarter have been determined at a

tentative rate of 25%. This compares to 20% in last year's

corresponding quarter.

Philips' income from operational results relating to unconsolidated

companies amounted to a loss of EUR 92 million in the second quarter,

versus a profit of EUR 3,095 million last year. Negative contributions

were reported from TSMC, Systems on Silicon Manufacturing Company

(SSMC) and LG.Philips LCD Co. Results were positively impacted by a

gain of EUR 20 million from the sale of Philips' ownership in battery

facilities.

Results of TSMC included a one-time charge for impairment at a TSMC

subsidiary of EUR 82 million due to changes to US accounting

principles, off-set by a gain of EUR 42 million related to a reduction

in the provision for withholding tax. Income of the second quarter

2000 included a gain of EUR 2,905 million from one-off events (the

sale of a portion of shares in ASM Lithography, an increase in equity

value of TSMC, a gain resulting from the swap of Philips' equity in

Beltone Electronics Inc. into shares of GN Great Nordic A/S). On a

comparable basis income from operational results relating to

unconsolidated companies amounted to a loss of EUR 58 million in the

second quarter of 2001 versus a profit of EUR 190 million last

year.

Goodwill charges relating to unconsolidated companies amounted to EUR

63 million compared to EUR 22 million in the second 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 1 million, compared to EUR 14 million in the

second quarter of 2000.

Net income for the second quarter amounted to a loss of EUR 770

million (a loss of EUR 0.60 per share) versus a profit of EUR 3,604

million (EUR 2.71 per share) in 2000.

Special items impacted net income negatively to an amount of EUR 422

million, specified as follows:

Restructuring programs and the related one-time pre-tax charges

resulted in an amount of EUR 714 million for the following

activities:

PCC's mobile handset business: EUR 269 million

Semiconductors: EUR 107 million

Digital Networks: EUR 125 million

Components : EUR 153 million

Other sectors: EUR 60 million

Total EUR 714 million

Included further were gains on the sale of participations resulting in

a pre-tax profit of EUR 197 million. The positive impact on income tax

of the abovementioned special items amounted to EUR 129 million.

Unconsolidated companies had one-time net charges of EUR 34 million in

their results.

For the second half of the year it is now expected that another charge

of between EUR 250 million and EUR 300 million for restructuring and

related one-time pre-tax charges will be taken, mainly at

Semiconductors, Components and Consumer Electronics; this will bring

the total special pre-tax charges to approximately EUR 1.0 billion for

the full year.

Sales and income from operations per sector

Sales in the Lighting sector totaled EUR 1,268 million, 5%

ahead of the year before. Volume growth was 7%, while prices were on

average 3% lower. The business units Lamps and Automotive recorded the

strongest growth, while sales increased strongly in Asia and Latin

America. Income from operations came to EUR 135 million, compared to

EUR 162 million last year. The quarterly results included EUR 19

million for restructuring charges, of which EUR 10 million is related

to the sale of battery manufacturing activities. The gain on the sale

of Philips' ownership in the battery manufacturing facility has been

reported under unconsolidated companies. Income as a percentage of

segment revenues slipped from 13.3% to 10.5%, due to the restructuring

charges and an increase in material-related costs, in particular in

Lamps.

Sales in Consumer Electronics totaled EUR 2,527 million, a

decrease of 18% over the same quarter in 2000. Currency movements had

a positive effect of 1% on nominal sales. Sales volume decreased by

9%, while prices decreased on average by 10%. Declining sales were

posted in all regions, most strongly in North and Latin America. The

business units VCR and Monitors experienced the most severe

reductions. DVD sales continued to show strong growth of over 50%.

Income from operations in Consumer Electronics turned from a profit of

EUR 126 million in 2000 to a loss of EUR 498 million. The decrease was

mainly attributable to special items of EUR 269 million at Consumer

Communications, mostly related to the decision to refocus the mobile

handset business, and special items of EUR 125 million at Digital

Networks. Sales at Mainstream CE were 10% lower than in the same

quarter of the year before. Price erosion increased from 7% in the

first quarter to 9% in this quarter. Consequently, Mainstream CE

reported a loss of EUR 71 million, compared to a profit of EUR 29

million last year. Special items at Mainstream CE amounted to EUR 11

million, mostly relating to restructuring charges. Sales in Consumer

Communications ended 32% lower than in the second quarter of 2000. The

decline occurred in Europe, partly off-set by steep growth in Asia

Pacific, notably in China, where sales nearly doubled. Income at

Consumer Communications came to a loss of EUR 311 million, compared to

a profit of EUR 10 million last year. Special charges at Consumer

Communications came to EUR 269 million and included an amount of EUR

241 million for restructuring charges. Sales of Digital Networks

decreased due to a lower activity level of set-top boxes, mainly in

the USA. Income from operations at Digital Networks ended the quarter

at a loss of EUR 184 million, compared to a loss of EUR 21 million

last year. Special items at Digital Networks were EUR 125 million,

mainly write-off of inventories and a settlement for litigation in

respect of a contract. License income in the second quarter amounted

to EUR 68 million, and was EUR 40 million lower than last year mainly

due to delayed receipts of CD-R licenses.

Sales in the DAP sector totaled EUR 521 million, representing

13% growth, which was mainly attributable to the consolidated sales of

Optiva. Price erosion was stable at 2%, while volume growth was 5%.

Sales developed favorably in Europe and North America, especially for

the business unit Male Shaving & Grooming.

Income from operations increased by 29% to EUR 71 million, helped by

an incidental gain from the sale of a property.

Sales in the Components sector totaled EUR 807 million, a

decrease of 40% over the second quarter of 2000. Changes in

consolidations had a negative effect of 5%, while currency movements

positively impacted nominal sales by 1%. Prices decreased on average

by 11%, while sales volume decreased by 25%. 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 second quarter income from operations of Components came to a

loss of EUR 332 million, which included an amount of EUR 86 million

for restructuring charges and EUR 67 million for other special items,

compared to a profit of EUR 144 million last year. The restructuring

charges are related to Optical Storage (EUR 51 million), Mobile

Display Systems (EUR 20 million) and the Global Commercial

Organization (EUR 15 million). The other special items included an

amount of EUR 25 million for disentanglement costs at Display

Components, which merged its cathode ray tube (CRT) operations with LG

Electronics, inventories write-off of EUR 28 million and impairment of

fixed assets to an amount of EUR 10 million. Income before special

items ended at a loss of EUR 179 million and was strongly influenced

by increased price erosion across almost all businesses, lower factory

loads and delayed introduction of new products.

Sales in the Semiconductors sector came to EUR 1,131 million, a

decrease of 19% over the same quarter in the year earlier. The

consolidation effect was 6% positive on nominal sales, in addition to

a 2% positive currency effect. Price erosion was 9%, up from 2% last

year, while volume decreased by 18%.

Income from operations amounted to a loss of EUR 255 million compared

to a profit of EUR 324 million last year. Income included EUR 90

million for restructuring charges, mainly for re-alignment of the fab

production capacity in Albuquerque, USA, and charges of EUR 17 million

for inventory obsolescence. Income before special items came to a loss

of EUR 148 million and was affected by increased price erosion which

rose from 6% in the first quarter to 9% in the second quarter. Sales in the Medical Systems sector totaled EUR 948 million,

38% up from the year earlier. The larger part of the increase related

to the consolidation of MedQuist and ADAC (31%). Additionally, sales

were positively influenced by currency movements (3%). On a comparable

basis, sales increased 4%, mainly related to ongoing strong growth in

North America. Order intake in the first half year rose by 33%, half

of it attributable to the acquisition of ADAC. The business unit

Magnetic Resonance (MR) posted an order intake increase of over 50%.

Income from operations in Medical Systems came to a profit of EUR 42

million compared to EUR 44 million last year. Income included special

charges of EUR 16 million, mostly for the relocation of the U.S.

Headquarters to Bothell, near Seattle. Goodwill charges related to

earlier acquisitions amounted to EUR 40 million and were EUR 29

million higher than last year.

Sales in the Miscellaneous sector totaled EUR 480 million, a

decrease of 35% over the year before.

Income of Miscellaneous came to EUR 123 million and included a gain of

EUR 197 million for the sale of the participation of Philips in FEI

and the sale of the brand and the commercial organization of Marantz.

The performance was unfavorably impacted by lower sales, in particular

in the business of Philips Enabling Technologies Group (ETG) and

Assembleon, which were affected by the downturn in the market place. A

charge of EUR 5 million is included in income of the second quarter

for restructuring at ETG. Last year's income was a loss of EUR 91

million.

Income from operations in Unallocated was a loss of EUR 31

million, compared to a loss of EUR 36 million last year. In both years

pension credits in the Netherlands impacted income of Unallocated

equally favorably.

Geographic developments

Sales growth was negative in nearly all regions. Europe posted 21%

lower sales nominally, part of which (5%) is caused by the

deconsolidation of Origin. The sectors Consumer Electronics, notably

Consumer Communications and Digital Networks, Components and

Semiconductors posted the strongest decline. Sales growth in North

America was 5% negative, including an upward effect of 10% related to

new consolidations and a 6% uplift from the stronger US dollar. The

most significant decrease occurred in Consumer Electronics,

Semiconductors and Components. The Asia Pacific region suffered a 24%

decline in sales, attributable to depressed sales in Components,

Semiconductors and Mainstream CE. By contrast, sharply higher sales

were realized in GSM mobile phones and Lighting. Sales in Latin

America were 1% lower nominally, but 4% higher on a comparable basis.

Compared to the first quarter, income from operations in the second

quarter weakened in all regions except in Latin America. The weaker

economic conditions affected in particular the performance in Europe

and North America. Income in Europe turned into a loss of EUR 522

million compared to a profit of EUR 458 million last year.

Restructuring projects, mainly in France (Consumer Communications) and

Hungary (Components), in addition to deteriorated market conditions at

Semiconductors and Components impacted income negatively. The region

North America reported a loss of EUR 234 million, double the loss of

the first quarter. The gain on the sale of the participation in FEI

was more than off-set by the restructuring charge for Albuquerque at

Semiconductors and charges for special items related to set-top boxes

at Digital Networks. The shortfall in income was attributable to lower

operational income at Semiconductors, Components and Consumer

Electronics. The loss of EUR 28 million in Asia Pacific was mainly

caused by underutilization of factories at Components and

Semiconductors, and by restructuring charges at Components (China).

Income of EUR 38 million in Latin America was slightly above last

year's level.

Cash flows and financing

Cash flow from operating activities in the second quarter amounted to

a negative of EUR 250 million which was EUR 558 million lower than in

the second quarter of last year. The variance was mostly related to

the lower income.

Expressed as a percentage of sales, inventories at the end of the

second quarter came to 16.0%, compared to 15.6% three months ago.

Cash flow from investing activities in the second quarter totaled a

negative EUR 118 million, compared to a positive inflow of EUR 1,868

million in 2000. Last year included proceeds from the sale of

businesses, worth EUR 2,725 million, while in the second quarter of

2001 proceeds from the sale of business interests in mainly FEI,

Marantz and batteries amounted to EUR 271 million. LG Electronics

redeemed outstanding preference shares of EUR 500 million. Gross

capital expenditure amounted to EUR 714 million compared with EUR 629

million last year.

In the second quarter of 2001, net cash flow from financing activities

amounted to an inflow of EUR 362 million. During the second quarter a

Eurobond of EUR 2.25 billion was issued. The proceeds of this bond

were used in part to repay existing long and short-term debt for a

total of EUR 1.3 billion. The net impact of the increasing debt

position on cashflow was EUR 952 million in the second quarter.

The net debt to group equity ratio amounted to 20:80 at the end of

June 2001, compared to 17:83 at the end of March 2001.

Employees

The number of employees at the end of June 2001 totaled 212,390,

approximately 7,000 less than March 31, 2001. A decrease of 2,400

reflects the deconsolidation of FEI and Marantz. The remaining

reductions occurred mainly at Components.

The first six months

Sales in the first six months amounted to EUR 15,890 million, a

decrease of 9% nominally, with stronger currencies lifting sales by

2%. On a comparable basis, sales were 11% lower.

Income from operations amounted to a loss of EUR 413 million (-2.6% of

sales) compared to a profit of EUR 1,387 million (7.9% of sales) in

2000. The downturn in the semiconductors, telecommunications and PC

industries heavily affected the company's income. This year's result

included a loss of EUR 714 million for special items and EUR 197

million one-time gains, as reported in the second quarter. Also

included were EUR 95 million one-time gains (the sale of a number of

Philips Broadcast Group's activities to Thomson Multimedia of EUR 70

million and collected insurance payments at Semiconductors of EUR 25

million) as well as EUR 131 million one-time charges (inventory

write-offs at PCC of EUR 74 million, acquisition-related charges for

ADAC at Medical Systems of EUR 20 million and various activities in

Miscellaneous of EUR 37 million), already reported in the first

quarter. Last year's result included charges of EUR 162 million as a

result of the sale of Philips Projects, and various one-time charges.

RONA amounted to -6.5% compared to 25.3% in the year-earlier period.

Goodwill amortization and related charges for intangibles came to EUR

157 million compared to EUR 108 million. The increase is related to

charges for newly acquired companies in 2000 (MedQuist, ADAC and

Optiva.

Financial income and expenses came to an expense of EUR 158 million,

compared to a positive EUR 437 million in the first half of 2000. Last

year included a EUR 526 million gain from the sale of a portion of

shares of JDS Uniphase. Excluding this item, the unfavorable variance

is mainly due to higher net interest expenses as a result of higher

outstanding debt.

The tax burden has been determined at a tentative rate of 25% compared

to 20% (excluding a non taxable gain on the sale of JDS Uniphase

shares) in the same period of last year.

Philips' income from operational results relating to unconsolidated

companies decreased to a loss of EUR 228 million, compared to a profit

of EUR 3,208 million last year which was primarily related to EUR

2,905 million one-time gains, as reported in the second quarter. This

year's result included one-time gains of EUR 62 million, a one-time

charge of EUR 82 million for impairment of a TSMC subsidiary company,

as reported in the second quarter, and Philips' share of non-recurring

merger integration costs of EUR 20 million related to Atos Origin.

Market weakness, in particular in the PC industry resulted in negative

contributions from LG.Philips LCD Co, TSMC and SSMC.

Goodwill charges relating to unconsolidated companies amounted to EUR

126 million compared to EUR 40 million in the first half of 2000. The

increase is 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 8 million, compared to EUR 28 million in the

first half of 2000.

Net income for this year amounted to a loss of EUR 664 million (a loss

of EUR 0.52 per share) versus a profit of EUR 4,744 million (EUR 3.57

per share) in 2000.

Subsequent Events

LG Electronics of South Korea and Royal Philips Electronics finalized

a joint venture deal to merge the cathode ray tube (CRT) operations,

which became effective on July 2,2001. The Joint Venture LG.Philips

Display launched its operation in Hong Kong on July 6, 2001.

Consequently the Display Components business will be deconsolidated

from the third quarter onwards. The share in the income of LG.Philips

Display will be reported in Results relating to unconsolidated

companies. Philips' operations that were merged into the joint venture

had annual sales of approximately EUR 2 billion and 23,000

employees.

Philips Medical Systems announced the acquisition of Marconi's Medical

Systems business for $1.1 billion. This acquisition will enable

Philips Medical Systems to become a leading player in the

high-technology computed tomography scanner business and to further

strengthen its magnetic resonance imaging and nuclear medicine systems

businesses. This acquisition, combined with that of Agilent's

Healthcare Solutions Group for $ 1.7 billion, the latter expected to

close in the third quarter of 2001, will make Philips the world's

second largest manufacturer of medical diagnostic imaging equipment.

Outlook

The downturn in the semiconductors, telecommunications and PC

industries as well as in the consumer electronics markets has

accelerated in the second quarter, and has spread to all geographic

areas. We remain very cautious about the economic development for the

rest of the year, as visibility remains low. For Semiconductors our

current expectation is that the industry will not see a recovery

before 2002. Capital expenditures have been cut back to EUR 2.1

billion. Cost levels will be adjusted further to bring them in line

with reduced revenue levels.

With expected additional charges of between EUR 250 million and EUR

300 million in the second half of this year, net income for the full

year before special charges is now expected to come in at break-even

to a small loss.

Amsterdam, July 17, 2001

Board of Management

Media inquiries: Ben Geerts, Philips Corporate Communications, tel.

+31 20 59 77 215.

Royal Philips Electronics of the Netherlands is one of the world's

biggest electronics companies and Europe's largest, with sales of EUR

37.9 billion in 2000. It is a global leader in color television sets,

lighting, electric shavers, color picture tubes for televisions and

monitors, and one-chip TV products. Its 212,390 employees in more than

60 countries are active in the areas of lighting, consumer

electronics, domestic appliances, components, semiconductors, and

medical systems. Philips is quoted on the NYSE (symbol: PHG), London,

Frankfurt, Amsterdam and other stock exchanges. News from Philips is

located at http://www.news.philips.com

'Safe Harbor' Statement under the Private Securities Litigation Reform

Act of 1995

This document contains certain forward-looking statements with respect

to the financial condition, results of operations and business of

Philips and certain of the plans and objectives of Philips with

respect to these items.

By their nature, forward-looking statements involve risk and

uncertainty because they relate to events and depend on circumstances

that will occur in the future. There are a number of factors that

could cause actual results and developments to differ materially from

those expressed or implied by these forward-looking statements. These

factors include, but are not limited to, levels of consumer and

business spending in major economies, changes in consumer tastes and

preferences, the levels of marketing and promotional expenditures by

Philips and its competitors, raw materials and employee costs, changes

in future exchange and interest rates (in particular, changes in tax

rates and future business combinations, acquisitions or dispositions

and the rate of technical changes. Market share estimates contained in

this report are based on outside sources such as specialized research

institutes, industry and dealer panels, etc. in combination with

management estimates.

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