Philips reports heavy Q2 loss as demand sags

Reporting a larger than expected net loss of 770 million euros (US$658 million) for its second quarter, Koninklijke Philips Electronics NV Tuesday said it hasn't hit rock bottom yet. The company expects the loss to be heavier in the third quarter.

Philips said that its semiconductor, components and consumer electronics divisions were significantly impacted by the economic slowdown, while other divisions less tied to cyclical IT demand did well.

The 770 million euro second-quarter loss is in sharp contrast with last year's second-quarter net profit of 3.6 billion euros. This year's figure was negatively impacted by special items after tax of 422 million euros, while last year's figure included one-time gains of 2.9 billion euros.

Sales in the second quarter came in at 7.68 billion euros, down 16 percent from 9.15 billion euros in the year ago period.

"Let there be no misunderstanding, we are in heavy weather," said Philips President and Chief Executive Officer (CEO) Gerard Kleisterlee at a press conference. "We enjoy a healthy balance sheet that provides a buffer in these difficult times," he said.

"The downturn in the cyclical part of the business has accelerated in the second quarter. We also see that the economic downturn has affected all regions. Europe has been lagging the U.S. and now South America is also slowing," Kleisterlee said.

Looking into the near term future Philips said it expects its earnings to bottom out in the third quarter. For the full year 2001 Philips expects net income before special charges to break even or post a small loss.

In the second half of the year the Dutch electronics giant expects to take additional pre-tax charges of between 250 million and 300 million euros to further reduce cost and adjust production to demand, Kleisterlee said. For the year total job cuts will be "well over 10,000," he said.

Sales at the semiconductor division dropped 19 percent compared to the year ago quarter. Plans are in place to reduce headcount in the unit with about 3,000 to 4,000 people in the second half of the year. The Dutch electronics giant doesn't expect the semiconductor industry to recover before 2002.

"The drivers to get the growth engine going are simply not there," Kleisterlee said.

In addition, Philips said it has cut back on capital expenditure for the entire company from 3.5 billion euros to 2.1 billion euros for 2001 and has taken measures to reduce other costs and hold inventories.

Specifically for Philips Semiconductors capital expenditure for next year will be around 600 million euros for investments in specific technologies unique to some of Philips' products, Philips Chief Financial Officer (CFO) Jan Hommen said during the press conference.

Philips Components and parts of Philips Consumer Electronics have been transformed recently. Philips has merged its display units, part of Philips Components, into joint ventures with South Korea's LG Electronics Inc. Also, last month Philips moved its loss making mobile handset business, part of Philips Consumer Electronics, into a joint venture that is majority owned by China Electronic Corp. [See "Philips calls on Chinese for cell phones," June 26.] "Components is focusing now on mobile display systems, optical storage and wireless connectivity," Kleisterlee said.

Hit by the financial downturn in the telecommunication industry, Philips Components was restructured with the reduction of over 4,000 employees during the first quarter this year. For the second half of the year Philips foresees another 1,500 job cuts at the division. Compared to the same period last year, sales at Philips Components dropped 40 percent in the second quarter.

At Philips Consumer Electronics sales fell 18 percent in the second quarter compared to the year ago period.

"The current situation asks for commitment and discipline from all in Philips. Because we are sticking to this discipline all in all it is fair to say that under the circumstances we are holding out reasonably well and are doing better than most others in the technology sector," he said.

Shares in Philips (PHI.AMS) were down 4 percent at 28.02 euros in midday trading on the Amsterdam stock exchange.

Koninklijke Philips Electronics NV, in Amsterdam, can be reached at +31-20-597-7777 or on the Web at http://www.philips.com/.

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