Philips Suffers Huge Slide In Profits
By Jof Enriquez,
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Philips recently reported that it has fallen behind financial targets following a significant plunge in profits. The Dutch manufacturer of medical scanners and lighting products attributed the drop to operational difficulties, weakening markets, and restructuring costs.
According to its most recent financial report covering the fourth quarter of 2014, net income fell to €134 million compared to €412 million in the same period of 2013. The difference of €278 million represents a 67 percent drop in profits quarter-to-quarter.
The loss was “mostly due to the costs of closing a medical equipment manufacturing plant in Cleveland, Ohio,” according to Reuters. Philips said that operational problems in the Cleveland plant where scanners are made cost €225 million in 2014. The company said issues there had been resolved, but it would take much of 2015 to restore full capacity.
“Our Cleveland factory resumed shipments to customers in January, marking an important milestone,” the company said in its press release. “The updated quality management system at our Cleveland facility recently passed the third-party audit and we have now resumed shipments of our Brilliance iCT systems.”
The rest of the financial report reflected poor performance in other areas. Comparable sales decreased 2 percent during the fourth quarter and declined 1 percent for the full year. Meanwhile, return on invested capital (ROIC) was 4.5 percent, compared to 13.9 percent in 2013. Earnings before interest, taxes, and amortization (EBITA) for 2014 amounted to €821 million, or 3.8 percent of sales, compared to €2.3 billion, or 10.4 percent of sales, in 2013, according to the statement.
The company said it is now behind 1 percentage point on its 2016 targets. Its top executive also said in the statement that “ongoing softness in end-markets like China and Russia” compounded performance issues that led to poor financial results in consecutive quarters. He did say, however, that the company is still on the right track.
“It feels bad to be behind on our targets,” said Frans van Houten, CEO of Philips, according to the Wall Street Journal. “But I’m convinced we’ll get back on the path of improvement. Transforming Philips is a marathon, not a sprint.”
Van Houten is steering Philips toward a restructuring plan first unveiled in September of last year. Under the plan, which is anticipated to be completed in 12 to 18 months, Philips will split into two companies: HealthTech and Lighting. The move involves spinning off the lighting business and allows the company to focus on higher-profit healthcare solutions. As part of the shift in strategy, Philips recently acquired catheter-based imaging company Volcano Corporation for $1.2 billion
According to its financial report, restructuring costs are estimated to be between 300 to €400 million in 2015. However, van Houten later told analysts that the overhaul could “lead to up to €650 million in restructuring and separation costs in 2015, much more than analysts had forecast,” according to the WSJ.