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Ventilator recall and profit warning double whammy slam Philips

Philips Q4 earnings hit by part shortages and ventilator recall
Philips Q4 earnings hit by part shortages and ventilator recall   -   Copyright  Thomson Reuters 2022
By Reuters

By Bart H. Meijer

AMSTERDAM – Shares in Philips plunged 15% on Wednesday, their worst intra-day drop in over 20 years, after the Dutch health technology group warned supply chain woes would hit profits and a ventilator recall needed to be expanded.

Philips recalled upto 4 million of its breathing-aid machines last year amid concerns that a type of foam used in the devices could degrade and become toxic. It has now raised that estimate by 1 million and hiked its provision for the recall by 45% to 725 million euros.

“The extended recall is a major negative as this also extends the litigation risk”, ING analyst Marc Hesselink said.

The current provision does not cover the possible costs of litigation, with Philips facing more than a hundred class action suits. Fears of a large claims bill had already lopped around 15 billion euros off Philips’ market value in the past nine months.

In addition to the expanded recall, Philips also cut its estimate for adjusted earnings before interest, tax and amortisation (EBITA) by almost 40% in the fourth quarter to about 650 million euros ($739 million), as it continued to scramble for memory chips and other parts.

The double whammy of bad news saw it lose over 4.5 billion euros ($5.1 billion) of its market value, its worst day on the stock market since 1998, when it was still a sprawling conglomerate selling lightbulbs, televisions and CD-players.

Now specializing in medical equipment and other health products, Philips initially benefited from a jump in demand during the COVID-19 pandemic but a global shortage of semiconductors and other electronic components has left it exposed.

Chief Executive Frans van Houten said those shortages had put a serious brake on sales in recent months.

“We had shortages of several components and saw port congestion, sometimes up to 2 or 3 weeks. All of this meant our manufactured goods couldn’t reach customers in time”, he said.

Comparable sales fell 10% on a yearly basis to 4.9 billion euros, Philips said, as hospitals had to postpone the installation of equipment due to a lack of parts.

($1 = 0.8765 euros)