Philips to Cut 4,500 Jobs as Profit Sinks to Two-Year Low

By Maaike Noordhuis - Oct 17, 2011 5:55 PM GMT+0700

Royal Philips Electronics NV, the world’s biggest maker of light bulbs, plans to cut 4,500 jobs to revive earnings after quarterly profit fell to the lowest in almost two years and the company predicted no near-term rebound.

The job cuts are part of a plan to save 800 million euros ($1.1 billion), Amsterdam-based Philips said in a statement today. Earnings before interest, taxes and amortization dropped to 368 million euros ($510 million) in the third quarter, from 647 million euros a year earlier. That beat the 341 million-euro average estimate in a Bloomberg survey of analysts. Revenue fell 1.3 percent to 5.39 billion euros, in line with estimates.

“Taking into account that cost-cutting measures will kick in in the fourth quarter and next year, maybe Philips has hit the bottom this quarter,” said Jos Versteeg, an analyst at Theodoor Gilissen Bankiers. Versteeg, who advises that investors buy the stock, said earnings were better than he had expected.

Chief Executive Officer Frans van Houten said the biggest round of job cuts since 2009 are an “inevitable step” to revive Philips and respond to economic challenges. Van Houten spent the quarter traveling to Philips global sites, gathering together workers in meetings to push his bid to accelerate an efficiency drive. The manufacturer aims to pull out of television production by the end of the year, a move it said today is taking longer than anticipated.

Stock Rebound

Philips rose as much as 4.6 percent to 15.49 euros in Amsterdam and was up 1.1 percent as of 12:54 p.m. Before today, the stock had declined 35 percent this year, reducing the market value of the company to 14.9 billion euros. German rival Siemens AG (SIE), which also makes light bulbs and medical equipment, has dropped about 18 percent in 2011.

Philips had “better than expected results, albeit relative to low expectations,” Peter Olofsen, an analyst at Kepler Capital Markets, said in a note to clients. The stock’s price reflects that investors are “discounting overly cautious future margins.”

Philips employed about 120,500 people at the end of the third quarter, excluding the discontinued television operations. Some 1,400 jobs will be eliminated in the Netherlands, Philips said. The focus on administration and services jobs in making cuts is the reason why the Netherlands is bearing the brunt of the reductions, Van Houten said.

Cost cuts will take place at the headquarters, in infrastructure, information technology and real estate, and will have “quite a big impact in 2012 and 2013,” Van Houten said in an interview with Bloomberg Television.

Cost of Changes

Restructuring costs will amount to 400 million euros through 2014, the company said, with 200 million euros of the total to be incurred in 2012.

Net income dropped to 74 million euros in the quarter from 524 million euros a year earlier, Philips said.

Philips is a remnant of a consumer-electronics industry once led by Europe and now dominated by Asia. Munich-based Siemens exited production of phones and bundled its appliances operation into a joint venture. The company is also working on an initial public offering of its Osram lighting subsidiary.

The planned cuts should help improve efficiency at a time when Philips is battling slowing economic growth and competition from lower-cost manufacturers in Asia. Some 60 percent of the savings are tied to the job cuts, while the remainder will come from “other structural costs,” Philips said.

Margin Improvement

Investors may increasingly favor the stock “in the course of next year as margins start to improve,” Kepler’s Olofsen said.

Van Houten is seeking to drive innovation and new products that can be moved quickly to market and made a commercial success. He is stepping up market penetration and innovation by making additional investments of 200 million euros a year.

The executive, who took over in April, has set a target of increasing earnings before interest, taxes and amortization to 10 percent to 12 percent of revenue by 2013, on sales growth of 4 percent to 6 percent. He reiterated those goals today.

In lighting, where Philips is global market leader, the goal is to lift the margin to 8 to 10 percent. In the third quarter, the measure stood at 5.8 percent, compared with 11.3 percent a year earlier. That marked the third consecutive quarterly drop for the division.

In health care, Philips wants to boost margins to 15 percent to 17 percent by 2013, while in consumer lifestyle subsidiary, it aims for an Ebita margin of 8 to 10 percent. Both divisions were short of those goals in the third quarter.

To contact the reporter on this story: Maaike Noordhuis in Amsterdam at mnoordhuis@bloomberg.net

To contact the editor responsible for this story: Benedikt Kammel at bkammel@bloomberg.net