By Geoffrey Smith
July 21, 2014

Philips NV, the Dutch electronics and healthcare group, said Monday its second-quarter profit fell 24% and sales fell 6%, overshadowed by the “voluntary suspension of production” at a healthcare facility in Cleveland after a warning letter from the Food and Drug Administration.

Sales were down 6% from a year earlier at €5.29 billion. Both figures were below consensus forecasts compiled by Bloomberg.

Philips (PHG) said soft markets, the strong euro and the Cleveland suspension would make 2014 a “challenging” year overall but said that second-half basic operating earnings to be up from a year earlier.

It said it expected the closure of the Cleveland facility to knock between €60 and €70 billion off earnings before interest, taxes and amortisation this year at healthcare, the division which makes over two-thirds of Philips’ profits. The company is spinning off lower-margin businesses such as LEDs and automotive lighting. something that will make it an even more concentrated healthcare play in future.

The company had suspended production at Cleveland voluntarily in April, after the FDA protested it hadn’t been properly informed about a product recall in January 2012. The FDA had been dissatisfied with Philips’ original response to its complaints.

Philips said Monday it’s taking “comprehensive measures to raise the efficacy of the quality management system” and that it expected to resume production gradually in the third quarter. The company has already stripped out a layer of management at the division, which now reports directly to chief executive Frans van Houten.

In an echo of the dispute over corporate taxation raging in the U.S. at the moment, Philips said its profits had been bolstered by an €81 million drop in taxes, due to its exploitation of the Netherlands’ “Innovation Box” tax rule, under which profits earned on patents researched and developed in the Netherlands are only taxed at 5%. Philips said it has applied the rule retroactively since 2013, and expects it to cut its effective tax rate by two percentage points in the future.

 

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