Profit stumble pushes Philips to focus on healthcare

Healthcare, the largest unit by revenue, was also the worst performing for Dutch electronics conglomerate Philips ($PHG) during the second quarter. The company said it is making moves to turn that around, including a management shake-up a few weeks ago for the group and the reopening of a medical imaging production facility in Cleveland, OH, during the third quarter.

Net profit for the second quarter was down 23% from €242 million ($328 million), compared with €317 million a year earlier.

The company attributed the decrease to unfavorable exchange rates and the voluntary closure of the Cleveland medical imaging plant in April. FDA sent a warning letter to Philips regarding the facility in 2011, but the following year the agency said the issues had been addressed. That FDA letter from 2012 said the agency would revisit its concerns during future inspections. Philips makes computed tomography scanners and molecular imaging machines at this facility.

"In the second quarter we continued to face headwinds, including ongoing softness in certain markets, unfavorable currency exchange rates and the voluntary suspension of production at our healthcare facility in Cleveland," said Philips CEO Frans van Houten in a statement.

He said Philips remains on track to meet targets it first laid out in 2011 for 2016, which include compound annual sales growth of 4% to 6%, EBITA margins of 11% to 12% of sales, and healthcare group EBITA margins of sales of 16% to 17%.

But in the second quarter, sales were flat compared to the same quarter in 2013 at €5.3 billion. In healthcare, comparable sales were down 4% to €2.4 billion.

The company noted healthcare sales strength in China and Europe, which van Houten said would drive better results in the second half along with the reopening of the Cleveland plant.

"While the voluntary temporary suspension of production at our Cleveland facility continued to impact our performance this quarter, our corrective actions are progressing according to plan and shipments are expected to resume gradually in the course of Q3 2014," he said in a statement. "In light of this and the recent strong equipment order intake in China and Europe, we expect the performance improvement in the second half of the year to be back-end loaded."

Last quarter, Philips also signed a couple of deals aimed at long-term healthcare performance: a strategic alliance with Salesforce.com to create a cloud-based healthcare IT platform and a partnership with New Karolinska Hospital in Sweden to work toward improved patient care at lower cost.

Investors were unconvinced of a turnaround, sending Philips down more than 1% in early NYSE trading after the earnings announcement. For the year, Philips has declined almost 14%.

- here are the slides and press release on second quarter earnings
- and here is coverage from Bloomberg and The Wall Street Journal (sub. req.)

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