Philips sets aside €575M ahead of US class-action suit over CPAP recall

In a first-quarter earnings report released Monday, Philips clocked a net loss of 665 million euros ($733.7 million), thanks in large part to ongoing restructuring efforts and the still-rippling effects of the June 2021 recall of 5.5 million of the company’s respiratory devices.

The period’s net loss is more than quadruple that of the same quarter last year when Philips reported a loss of 151 million euros.

A major chunk of the company’s expenses came from the 575 million euros that it set aside as it braces for a resolution in at least one tranche of the class-action lawsuits it’s currently facing in the U.S. over the 2021 recall.

Thousands of plaintiffs have filed suit against the company, spanning hundreds of personal injury claims, requests for medical monitoring for people who used the recalled devices and reimbursement for the economic losses that some users say they experienced due to the recall. The litigation provision set aside during the first quarter would cover only the last of these.

“Resolving the Philips Respironics recall for patients remains our highest priority,” Philips CEO Roy Jakobs said in the earnings report, noting that the provision “is an important step in addressing the litigation related to the recall.”

Along with the litigation provision, Philips took another 54-million-euro recall-related hit to its bottom line as it continues its repair-and-replace program for all affected CPAP and BiPAP machines, ventilators and other breathing support devices. To date, according to the report, more than 95% of all needed repair kits and replacement devices have been produced; most of the remaining 5% of devices are ventilators, “for which Philips Respironics is fully focused on working towards a solution,” the company said.

Taking another bite out of Philips’ earnings for the quarter were expenses tied to company-wide restructuring efforts.

Those efforts began last fall, just a few days into Jakobs’ tenure at the helm, when he announced alongside lower-than-expected third-quarter earnings that about 4,000 workers would be laid off. The affected employees would come from all across the company, he said at the time, with Philips’ biggest employee bases—in the U.S., the Netherlands, India and China, in descending order—taking the proportionally biggest hits.

Just a few months later, alongside a full-year earnings report released in January, Jakobs said another 6,000 jobs had been added to the chopping block. Together, those 10,000 cuts add up to about 13% of the company’s workforce, which had counted 78,000 workers as of the end of 2021.

The layoffs will be staggered through 2025, but have already begun: In Monday’s earnings report, Jakobs said that about 5,400 cuts have already been made, adding, “I realize that we are asking a lot from our employees to work through the necessary changes and deeply appreciate their tremendous efforts and ongoing commitment to deliver on our company purpose.”

In total, the workforce reduction cost Philips 150 million euros in the first quarter, according to the report.

Outside of those losses, Philips saw its sales jump about 6% year over year, reaching nearly 4.2 billion euros ($4.6 billion) for the quarter. That increase came even as the company’s order intake stayed flat compared to the same period last year—as a double-digit increase in orders in its diagnosis and treatment division was balanced out by a decline in the connected care business, where growth in sales of hospital patient monitoring devices are still being offset by the effects of the respiratory recall.

With that sales growth and a sharp uptick in Philips’ operating cash flow—which grew from an outflow of 227 million euros last year to an inflow of 202 million euros for the first quarter of this year—Jakobs deemed the quarter “a solid start to the year,” even as he noted that “uncertainties remain” for the months ahead.

Investors seemed to agree: As the earnings report went live Monday morning, Philips’ stock price shot upwards to $21.70, growing 14% over its closing price of $19.03 Friday afternoon and marking its first time above the $20 mark since August.