NETHERLANDS —Philips, the Dutch health technology company, has reported a significant drop in first-quarter core profit.
The company’s earnings before interest, taxes, and amortization fell by about a third, from 365 million euros (US$402.1 million) to 243 million euros (US$267.7 million), compared to the same period last year.
This decline was attributed to two factors: an ongoing global shortage of parts and a massive recall of ventilators.
As a result of these challenges, comparable sales for the quarter decreased by 4% to 3.9 billion euros (US$4.3 billion).
The company has been grappling with supply chain issues, and has had to expand its global recall of respiratory devices once again.
Despite these challenges, the company had a better-than-expected performance in the quarter, with adjusted core profit coming in above analysts’ estimates of 236 million euros (US$260 million). However, sales dropped by almost 8%, which is a cause for concern.
Despite the challenges, Philips remains optimistic about its prospects for the rest of the year. The company has said it expects sales and profitability to recover in the second half of the year, provided current problems do not worsen.
However, Chief Executive Frans van Houten has acknowledged the risks that lie ahead.
He said that “risks related to the COVID-19 situation in China, the Russia-Ukraine war, supply chain challenges and inflationary pressures” could impact the company’s ability to convert its strong order book to sales and achieve its margin target if conditions deteriorate further.
Philips’ sleep and respiratory care unit has been a significant drag on the company’s growth, as it continues to address the massive recall of its ventilators that was launched last year.
The recall was initiated due to concerns that a type of foam used in the devices could deteriorate and become toxic, posing a serious health risk to patients.
In the first quarter, Philips increased its provision for the global repair or replacement of over 5 million devices by a staggering 165 million euros (US$181.8 million).
This brought the total costs incurred by the company so far to almost 900 million euros (US$ 991.5 million).
These costs do not include potential litigation expenses, as the company is facing over a hundred class action lawsuits.
The possibility of a large claims bill has wiped out approximately 15 billion euros (US$16.5 billion) from Philips’ market value since June of last year.
The fallout from the ventilator recall has been a significant challenge for Philips, impacting both its financial performance and its reputation.
The company has been working diligently to address the issue, but it is clear that there is still a long road ahead.
In addition to the financial costs, the recall has also had a significant impact on the company’s employees, who have had to work hard to manage the fallout.
In the connected care division, Philips reported a 3% year-over-year increase in first-quarter sales, reaching 1 billion euros (US$1.1 billion).
This growth was largely driven by double-digit increases in hospital patient monitoring, which more than offset a decline in sleep and respiratory care.
Notably, the segment saw robust double-digit growth in China, while sales remained flat in North America and declined in Western Europe.
In the diagnosis and treatment division, quarterly revenues surged 15% to 2.2 billion euros (US$2.4 billion).
Philips attributed this strong performance to continued supply chain improvements, which led to mid-single-digit gains in diagnostic imaging, as well as double-digit growth in ultrasound and image-guided therapy.
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