Philips, the Dutch conglomerate, is a good example. Former chief executive
Gerard Kleisterlee left earlier this year on a high. However, in Monday’s
first-half results, new boss Frans van Houten reported a loss of €1.26 per
share and warned of an “uncertain” outlook. Having signposted the news last
month, Philips’ share price was stable.
Mr van Houten is certainly making his mark on the balance sheet. The main
reason for the loss was a €1.3bn goodwill write-off. Two changes contributed
to this: first, the rate at which Philips discounts the future cash flows it
expects increased 60 basis points to a high-sounding 8.7 per cent – lowering
the value of future income. Second, management’s predictions of those future
cash flows were lowered.
The rest of the balance sheet has also been squeezed in the past six months.
Liabilities are 18 per cent lower, while assets have fallen by 16 per cent
(the goodwill write-off comprised only one-quarter of this shrinkage). The
weak US dollar is a factor, but it has depreciated less than 8 per cent
against the euro since December. A new €2bn share buy-back programme will
make the balance sheet shrink further. The reduction in invested capital
will help Mr van Houten boost Philips’ return on it, from the annualised
11.2 per cent in the first half towards a promised 12-14 per cent by 2013.
Mr van Houten may have merely tempered the over-optimism of his predecessor,
but his manoeuvrings will make future comparisons more flattering. The
episode makes clear that when a company changes its top management,
investors need to pay much closer attention to the numbers than usual.
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