Consent decree wipes $24M off Philips’ first-quarter earnings

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Philips is worried that the trade row between the U.S. and China will affect its business. (pasja1000)

A consent decree triggered by the production of adulterated automated external defibrillators (AEDs) has wiped $24 million off Philips’ first-quarter earnings. The charge is tied to the suspension of AED production and other actions related to the consent decree.

Philips entered into the decree late last year to resolve an FDA complaint arising from activities at its facilities in Massachusetts and Washington. The FDA accused Philips of manufacturing and shipping AEDs under conditions that fell short of good manufacturing practices. Specifically, the complaint said Philips’ corrective and preventive action procedures, design verification and validation controls and product specifications were subpar.

Philips predicted the consent decree would cost it close to $100 million. So far, the total is nearing $50 million. Philips recorded charges of $24 million in the fourth quarter and $24 million in the first quarter and is predicting the same for the second quarter. The company chalked up a further $21 million in first-quarter charges related to quality and regulatory activities.

The first quarter covered a period in which Philips’ attempt to recover from the consent decree made some progress. Independent auditors inspected the affected operations. And Philips built on the earlier resumption of FRx and FR3 AED shipments to a key market by expanding distribution to other ex-U.S. countries. 

Despite those efforts, sales at the therapeutic care unit that houses the AED business slipped in the first quarter. The decline was covered by improvements elsewhere, which enabled Philips to beat analyst expectations. But with some of the growth coming from China, Philips is worried that the trade row with the U.S. will affect its business. 

“So far the effects are modest, but we are worried about the trade tensions,” Philips CEO Frans van Houten told Reuters. “We don’t expect any tariffs to be imposed on medical equipment, but we see indirect effects through the rising cost of commodities such as aluminum and steel. We can’t isolate ourselves from that, nor from the effects on economic confidence overall.”