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.