Philips slips on missed Q4 earnings, warns on AED recall repercussions

(Reuters) — Royal Philips (NYSE:PHG) missed forecasts for 4th-quarter earnings today and said a dispute with the U.S. Justice Dept. over defibrillators it sold through 2015 would significantly impact that business.

The Dutch company stuck by its medium-term financial targets of 4% to 6% average comparable sales growth and a 1% improvement in adjusted earnings before interest, tax & amortization margin despite the dispute over its HeartStart defibrillators, used to deliver an electrical shock to restore the heart’s normal rhythm in a cardiac emergency.

“We are currently in discussions on a civil matter with the Dept. of Justice representing the U.S. Food & Drug Administration, arising from past inspections in and before 2015, primarily on our external defibrillator business,” CEO Frans van Houten said in a statement. “While the discussions have not yet concluded, we anticipate a meaningful impact on the operations of this business.”

Van Houten said the company’s global defibrillator business has sales of around €300 million annually, compared with 2016 group sales of €24.5 billion for the full year.

“What I’m trying to flag … is that this will not have a major visual impact on our overall results for 2017,” van Houten told reporters on a conference call.

Shares were down -1.9% in Amsterdam, trading at €27.33 apiece as of about noon GMT.

Barclays analysts said in a note that the earnings looked reasonably good apart from the defibrillator issue, and repeated a “neutral” rating on shares.

“Any possibly impact of uncertainty related to the future of Obamacare did clearly not materialize in Q4,” they wrote.

Problems with the Philips HeartStart automated external defibrillators date back at least to 2009, when the company recalled about 5,400 of its HeartStart FR2+ AEDs after discovering a microchip failure. By September 2012 due an issue with an internal electrical component that could cause them to fail to deliver a shock. That recall affected around 700,000 devices.

Philips was forced to close a plant in Cleveland in 2014 that made high-end medical scanners due to U.S. government concerns over adherence to quality control rules. The company is still recovering from that incident, which badly dented earnings, with production in Cleveland ramping to full capacity over the course of 2015 and margins at its diagnosis division continuing to recover.

Van Houten said today that Philips is committed to quality and had “over the last years made investments to enable significant progress in this area.”

Spokesman Steve Klink said that, as was the case with the scanners sold from the Cleveland factory, none of which were ever found to have been flawed, the defibrillators sold by the company were “absolutely safe” and there had never been a defect reported with any of more than 1.5 million in the field.

“These are medical devices, and if there were ever a problem or a defect, there would be a report about it,” Klink said.

The company reported 4th-quarter adjusted EBITA of €1 billion ($1.08 billion) compared with €842 million in the same period a year earlier. Sales rose 3% to €7.24 billion.

Analysts polled for Reuters forecast EBITA at €1.04 billion and sales at €7.28 billion.

Over 2016, Philips sold or floated its traditional lighting business in several steps, largely completing its shift to become a health technology company. It intends to sell its remaining 71% stake in Philips Lighting, which reported an increase in earnings yesterday.

($1 = €0.9301)

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