Koninklijke Philips N.V. Annual Report 2013

Plain-text annual report

Annual Report 2013 Delivering innovation that matters to you Annual Report 20139 9.1 9.2 9.3 Supervisory Board report Report of the Corporate Governance and Nomination & Selection Committee Report of the Remuneration Committee Report of the Audit Committee 10 Corporate governance 10.1 Board of Management 10.2 Supervisory Board 10.3 General Meeting of Shareholders 10.4 Logistics of the General Meeting of Shareholders and provision of information 10.5 Investor Relations 107 110 111 116 118 118 120 122 123 125 IFRS basis of presentation The ﬁnancial information included in this document is based on IFRS, unless otherwise indicated. Forward-looking statements and other information Please refer to chapter 18, Forward-looking statements and other information, of this Annual Report for more information about forward-looking statements, third-party market share data, fair value information, IFRS basis of preparation, use of non-GAAP information, statutory ﬁnancial statements and management report, and reclassiﬁcations. Dutch Financial Markets Supervision Act This document comprises regulated information within the meaning of the Dutch Financial Markets Supervision Act (Wet op het Financieel Toezicht). Statutory ﬁnancial statements and management report The chapters Group ﬁnancial statements and Company ﬁnancial statements contain the statutory ﬁnancial statements of the Company. The introduction to the chapter Group ﬁnancial statements sets out which parts of this Annual Report form the Management report within the meaning of Section 2:391 of the Dutch Civil Code (and related Decrees). Contents Performance highlights Message from the CEO Accelerate! Our transformation Business impact Fast facts Next phase Building a great company Our rich heritage Our vision 1 1.1 1.2 1.3 1.4 2 2.1 2.2 2.3 Market opportunities 2.4 2.5 2.6 3 3.1 3.2 3.3 3.4 4 4.1 4.2 4.3 4.4 4.5 5 5.1 5.2 5.3 5.4 6 6.1 6.2 6.3 Our business system Our people Global presence Delivering innovation that matters to you Knowing our customers Understanding people’s needs Behind the scenes Lives improved Group performance Financial performance Social performance Environmental performance Proposed distribution to shareholders Outlook Sector performance Healthcare Consumer Lifestyle Lighting Innovation, Group & Services Risk management Our approach to risk management and business control Risk categories and factors Strategic risks 6.4 Operational risks 6.5 6.6 Compliance risks Financial risks 7 8 Management Supervisory Board 2 Annual Report 2013 4 6 9 10 11 19 20 21 22 22 23 25 25 26 27 28 29 35 37 38 39 52 62 67 68 69 71 77 82 88 92 92 95 96 97 99 101 103 105 11 Group ﬁnancial statements 11.1 Management’s report on internal control 11.2 11.3 11.4 11.5 11.6 11.7 11.8 Report of the independent auditor Auditor’s report on internal control over ﬁnancial reporting Consolidated statements of income Consolidated statements of comprehensive income Consolidated balance sheets Consolidated statements of cash ﬂows Consolidated statements of changes in equity 11.9 Notes 1 2 3 4 5 6 7 8 9 Signiﬁcant accounting policies Information by sector and main country Income from operations Financial income and expenses Income taxes Interests in entities Discontinued operations and other assets classiﬁed as held for sale Earnings per share Acquisitions and divestments 10 Property, plant and equipment 11 Goodwill 12 Intangible assets excluding goodwill 13 Non-current receivables 14 Other non-current ﬁnancial assets 15 Other non-current assets 16 Inventories 17 Other current assets 18 Current receivables 19 Equity 20 Long-term debt and short-term debt 21 Provisions 22 Other non-current liabilities 23 Accrued liabilities 24 Other current liabilities 25 Contractual obligations 26 Contingent assets and liabilities 27 Cash from (used for) derivatives and current ﬁnancial assets 28 Purchase and proceeds from non-current ﬁnancial assets 29 Assets in lieu of cash from sale of businesses 30 Post-employment beneﬁts 31 Share-based compensation 32 Related-party transactions 33 34 Information on remuneration Fair value of ﬁnancial assets and liabilities 35 Details of treasury / other ﬁnancial risks 36 Subsequent events 11.10 Independent auditor’s report - Group 128 128 128 129 130 131 132 134 136 137 137 145 148 149 150 153 154 156 156 158 159 160 161 162 162 162 162 162 163 165 166 168 168 168 168 169 171 171 171 171 174 178 178 182 184 187 189 12 12.1 12.2 12.3 Company ﬁnancial statements Balance sheets before appropriation of results Statements of income Statement of changes in equity 12.4 Notes A B Intangible assets Financial ﬁxed assets C Other non-current ﬁnancial assets D E F Receivables Shareholders’ equity Long-term debt and short-term debt G Other current liabilities H Net income I J K L Employees Contractual obligations and contingent liabilities not appearing in the balance sheet Audit fees Subsequent events 12.5 Independent auditor’s report - Company 13 Sustainability statements 13.1 Economic indicators 13.2 Social statements 13.3 Environmental statements 13.4 Independent assurance report 13.5 Global Reporting Initiative (GRI) table 4.0 14 Reconciliation of non-GAAP information 15 Five-year overview 16 Investor Relations 16.1 Key ﬁnancials and dividend policy 16.2 Share information 16.3 Philips’ rating 16.4 Performance in relation to market indices 16.5 Philips’ acquisitions 16.6 Financial calendar 16.7 Investor contact 17 Deﬁnitions and abbreviations 190 191 192 192 193 193 193 193 194 194 195 195 195 195 195 195 195 196 197 201 201 208 212 213 225 230 233 233 235 237 238 241 242 242 246 18 Forward-looking statements and other information 249 Annual Report 2013 3 Performance highlights Performance highlights Prior-period ﬁnancial statements and related information have been restated for the treatment of Audio, Video, Multimedia and Accessories as discontinued operations (see note 7, Discontinued operations and other assets classiﬁed as held for sale) and the adoption of IAS 19R, which mainly relates to accounting for pensions (see note 30, Post-employment beneﬁts). For a reconciliation to the most directly comparable GAAP measures, see chapter 14, Reconciliation of non-GAAP information, of this Annual Report. Financial table all amounts in millions of euros unless otherwise stated Sales EBITA as a % of sales EBIT as a % of sales 2011 2012 2013 20,992 23,457 23,329 1,435 1,106 2,451 6.8 4.7 10.5 (479) (2.3) 648 1,991 2.8 8.5 Net income (loss) (1,456) (30) 1,172 Net income attributable to shareholders per common share in euro: Equity and Net income per common share in euros ■-shareholders’ equity per common share - basic --Net income attributable to shareholders per common share in euro - diluted 0.26 15.72 1.36 15.87 (1.53) 13.31 (0.04) 12.19 1.27 12.28 20 15 10 5 0 (5) 2009 2010 2011 2012 2013 Operating cash ﬂows in millions of euros ■-net capital expenditures_■■-free cash ﬂows ■-operating cash ﬂows_--free cash ﬂows as a % of sales 6.0 1,235 1,931 (696) 2.3 411 985 (574) 3,000 2,000 1,000 0 (1,000) (2,000) 760 (857) (97) (0.5) 6.9 1,627 2,082 (455) 0.7 172 1,138 (966) 2009 2010 2011 2012 2013 - basic - diluted (1.53) (0.04) (1.53) (0.04) 1.28 1.27 Net debt (cash) to group equity in billions of euros ■-net debt (cash)--■-group equity Net operating capital 10,382 9,316 10,238 Free cash ﬂows (97) 1,627 172 Shareholders’ equity 12,328 11,151 11,214 Employees at December 31 125,240 118,087 116,681 of which discontinued operations 5,645 2,005 1,992 1) Mid-term ﬁnancial targets 2) Including restructuring and acquisitions 3) Excluding Mergers & Acquisitions impact 4) Based on the results of 60 “pulse surveys” as there was no full-scope Employee Engagement Survey in 2012 5) For a deﬁnition of of mature and growth geographies, see chapter 17, Deﬁnitions and abbreviations, of this Annual Report 6) As measured by Interbrand Financial performance 2013 CAGR 2012 - 2013 % EBITA as % of sales2) ROIC %3) Target1) 4-6% 10-12% 12-14% Actual 4.5% 10.5% 15.3% 20 15 10 5 0 (5) 14.6 15.1 12.4 11.2 11.2 0.7 0.7 1.4 (0.1) (1.2) 2009 2010 ratio: (1) : 101 (8) : 108 2011 5 : 95 2012 6 : 94 2013 11 : 89 Research and development expenses in millions of euros ■-Green Innovation_■■-R&D_--as a % of sales 7.8 1,831 569 7.4 1,733 509 1,262 1,224 8.4 1,526 340 1,186 7.3 1,486 392 1,094 7.6 1,605 479 1,126 2,000 1,500 1,000 500 0 4 Annual Report 2013 2009 2010 2011 2012 2013 Employee Engagement Index in % ■-favorable--■-neutral--■-unfavorable 14 15 71 11 12 77 10 14 76 6 15 79 9 16 75 100 75 50 25 0 Performance highlights Operational carbon footprint in kilotonnes CO2-equivalent ■-logistics_■-business travel ■-non-industrial operations_■-manufacturing 2,500 2,000 1,500 1,000 500 0 1,930 909 174 220 627 1,845 767 159 247 672 1,771 703 155 256 657 1,614 709 142 217 546 1,654 738 114 227 575 2009 2010 2011 20124) 2013 2009 2010 2011 2012 2013 Performance in millions of euros Group Healthcare Consumer Lifestyle Lighting 2012 2013 2012 2013 2012 2013 2012 2013 Sales 23,457 23,329 1% 9,983 9,575 4% 4,139 4,605 7% 8,442 8,413 0% Green product sales 10,981 11,815 8% 3,610 3,690 2% 1,619 2,270 40% 5,572 5,855 2% Sales in mature geographies5) 15,407 14,825 4% 7,615 7,154 Sales in growth geographies5) 8,050 8,504 6% 2,368 2,421 6% 2% 2,365 2,418 2% 5,010 4,758 5% 1,954 2,187 12% 3,432 3,655 6% EBITA 1,106 2,451 122% 1,226 1,512 23% 456 483 Net operating capital 9,316 10,238 10% 7,976 7,437 7% 1,205 1,261 6% 5% 128 695 443% 4,635 4,462 4% Total sales by business 2013: Healthcare as a % Total sales by business 2013: Consumer Lifestyle as a % Imaging Systems 38 Customer Services 26 Domestic Appliances 47 Home Healthcare Solutions 14 Patient Care & Clinical Informatics 22 Total sales by business 2013: Lighting as a % Brand value6) in billions of US dollars Health & Wellness 20 Personal Care 33 Lumileds 5 Automotive 10 Professional Lighting Solutions 28 Consumer Luminaires 5 10 5 0 Light Sources & Electronics 52 8.7 8.7 9.0 8.1 9.8 2009 2010 2011 2012 2013 Annual Report 2013 5 Message from the CEO Message from the CEO “ Our Accelerate! initiatives helped us to achieve our mid-term 2013 targets. We are implementing the Philips Business System across the company to improve customer focus and operational excellence, and drive our businesses systematically to global leadership performance. With our mission to deliver meaningful innovation to make the world healthier and more sustainable, we are well positioned to improve our growth rate.” Frans van Houten, CEO Dear stakeholder, In 2013 we passed a major milestone on our Accelerate! Accelerate! is helping us get closer to our customers, as illustrated by our landmark alliance with Georgia transformation journey to unlock Philips’ full potential. Regents Medical Center. And the transformation of our Despite economic headwinds, especially in Europe and value chains is speeding up the introduction of locally the United States, our Accelerate! initiatives helped us relevant innovations in key markets around the world. to achieve our mid-term 2013 targets. I am delighted Innovations like our EPIQ ultrasound imaging system, with this result, as it underlines yet again that Philips is, our Smart Air Puriﬁer and Airfryer home appliances, and above all, a case of self-help. our energy-efﬁcient CityTouch lighting management system. 6 Annual Report 2013 Message from the CEO We are also seeing the steady development of a growth In 2014 we celebrate 100 years of Philips Research, and and performance culture characterized by strong over the past year we underlined our commitment to employee engagement, teamwork, the drive for innovation by investing EUR 1.7 billion in research and operational excellence and accountability for results. development. We ﬁled over 1,500 patent applications This is making us more agile, entrepreneurial and in 2013. Other innovation highlights included the innovative. increasing adoption of our Digital Pathology solution and the development of the 200 lm/W TLED prototype Financial performance to replace ﬂuorescent tube lighting. The economic environment in 2013 was challenging. Full-year sales declined by 1% in nominal terms, but We also continued to deliver on our EcoVision increased by 3% on a comparable basis. Closing the sustainability commitments in 2013, improving the lives year with strong 7% top-line growth in the fourth of 1.8 billion people around the globe and hitting our quarter, we delivered a compound annual growth rate Green Product sales target of 50% of total sales two for comparable sales over the period 2012-2013 of years ahead of schedule. In Buenos Aires we were 4.5%, compared to our target of 4-6%. In regional terms, awarded the order to renovate most of the city’s our growth geographies delivered 11% comparable 125,000 street lights with our CityTouch system, and in sales growth in 2013 and now make up 36% of total Dubai we were selected to transform over 260 sales. Municipality buildings with intelligent LED solutions – both projects reducing energy consumption by some Proﬁtability improved signiﬁcantly on the back of 50%. Our efforts to create a healthier and more increased gross margins and productivity gains from sustainable world received recognition in the form of a our Accelerate! program. This resulted in a reported rise to 23rd place in Interbrand’s ranking of the top 50 EBITA of 10.5%, within the target bandwidth of 10-12%. Best Global Green Brands, as well as a top rating from And our return on invested capital was 15.3%, above the the Carbon Disclosure Project. targeted range of 12-14%. Our Healthcare business increased operational and in 2013 we had to contend with the termination of earnings despite a virtually ﬂat top line. With the issues the deal with Funai for our Audio, Video, Multimedia surrounding health care reform in the US and budget and Accessories business. We also faced compliance constraints in key markets, we are increasingly focusing issues relating to our General Business Principles, which on becoming the technology solutions partner of we are reﬁning and strengthening. Of course, no year is entirely free of disappointment, choice to major hospitals as a way to unlock new growth. Reﬂecting the success of its innovative propositions for personal health and well-being, Looking ahead – our Path to Value by 2016 Philips is a diversiﬁed technology company with a Consumer Lifestyle posted strong growth and good portfolio of some 40 businesses across various earnings, while Lighting recorded higher sales, driven strategic domains. Over half of these businesses hold by a 38% increase in LED-based sales, and improved global leadership positions. Our portfolio is operational earnings. underpinned by strong assets: deep market insights; world-class innovation capabilities – technology, In 2013 we also completed the execution of our EUR 2 know-how and strong IP positions; our global footprint; billion share buy-back program, thereby improving the our talented, engaged people; and the Philips brand. efﬁciency of our balance sheet, and announced a new EUR 1.5 billion program to be concluded over the next The signiﬁcant changes we have made to our portfolio 2-3 years. By the end of 2013 we had completed 7% of in recent years have created a better growth platform this new program. Other 2013 highlights with higher proﬁt potential. And with the transformation of our business model architecture, we are increasingly becoming a technology solutions partner, with In 2013 we rose to # 40 on Interbrand’s annual ranking recurring revenue streams accounting for over 25% of of the top-100 global brands, with our brand value sales. increasing by 8% to close to USD 10 billion. And in November we unveiled our new brand positioning and Meeting the needs of a changing world brand line – “innovation and you” – and our redesigned In light of the mega-trends and challenges the world is shield, which enjoyed an enthusiastic reception from facing, we are conﬁdent in our chosen strategic customers, employees and other stakeholders. direction. With its focus on health and sustainability, our Annual Report 2013 7 Message from the CEO vision to improve the lives of 3 billion people a year by world-class integration and consulting services. At 2025 helps to differentiate us from the competition, Consumer Lifestyle we have a new business initiative have a closer relationship with our customers, create IP on Personal Health. And in our Innovation, Group & and ultimately create more value. Services sector we have several highly promising start- We see the shift from a linear to a circular economy as a margin-accretive because of the necessary further opportunity to create value. In a linear economy, investments. Examples of these exciting new business products are used brieﬂy and then discarded as waste. areas include point-of-care diagnostics as well as In a circular economy, products are designed so they horticultural and city farming technology. ups, although it will be a few years before they are become part of a value network where re-use and refurbishment ensure continuous re-exploitation of Conﬁdent in the future resources. While remaining cautious about the short-term macro- economic outlook, we are committed to delivering on We are redesigning our products in order to capture our 2016 ﬁnancial performance targets. As a sign of our their residual value. And we are shifting from conﬁdence in Philips’ future, we are proposing to the transactions to relationships via service and solution upcoming General Meeting of Shareholders to increase business models. A good example is the 10-year this year’s dividend to EUR 0.80 per common share, in performance contract we were awarded to install, cash or stock. monitor and maintain 13,000 connected lighting ﬁxtures and energy management controls for parking garages in Washington, DC. Because we are ensuring light levels and delivering the solutions as a service that is paid for by the energy savings, Washington gets brighter, safer LED lighting for its garages with none of the up-front cost, thereby removing one of the main barriers to the adoption of energy-efﬁcient technology. Driving productivity improvement Over the coming years we will continue to drive operational excellence and invest in innovation and sales development. We will also continue to focus on Dividend per common share in euros 0.75 0.75 0.75 0.70 0.80 0.80 0.60 0.40 0.20 0 improving proﬁtability, e.g. by further reducing 2010 2011 2012 2013 20141) overhead costs and driving value engineering through 1) Subject to approval by the 2014 Annual General Meeting of Shareholders our Design for Excellence (DfX) program. Altogether we see signiﬁcant potential to improve productivity over the next few years. We also have scope for value- creating bolt-on acquisitions, but will remain prudent with our capital allocation. Most of our growth opportunities are organic. In 2014 we will roll out a new IT landscape to make Philips a truly real-time company, and we will further embed the Philips Business System (PBS). The PBS is the way we run our company to ensure business success is repeatable. This year will also see our new brand positioning being activated across the globe. New growth initiatives I am pleased to say that Philips has multiple new growth On behalf of my colleagues on the Executive Committee, I wish to thank all our employees for embracing Accelerate!, helping to build a great company ﬁt for the demands of the 21st century, and delivering innovations that matter to people the world over. And I would like to thank our customers, shareholders and other stakeholders, for their continued trust and support. opportunities in the making. Within our Healthcare Frans van Houten, sector we have established the Healthcare Informatics Solutions & Services business group, which is focusing Chief Executive Ofﬁcer on a digital connected healthcare delivery platform, advanced informatics and big data analytics, and 8 Annual Report 2013 Accelerate! In 2011 we embarked upon our Accelerate! journey of change and performance improvement. Ultimately, Accelerate! is all about delivering meaningful innovation to our customers in local markets – and doing so faster and better than the competition. 1. Our transformation Driving change and improvement Now in its third year, Accelerate! is making Philips a more agile and entrepreneurial innovator. The program, which is set to run through 2017, is made up of ﬁve streams designed to: make us more customer focused resource our business/market create lean end-to-end customer combinations to win value chains implement a simpler, standardized drive a growth and performance operating model culture 10 Annual Report 2013 2. Business impact Accelerate! in action Customer alliance shaping the future of health care In 2013 we entered into a 15-year partnership with Georgia Regents Medical Center to facilitate the delivery of innovative and affordable solutions across the continuum of care. Read more on page 13 Faster, more efﬁcient innovation We are transforming our end-to-end value chain to just four Lean-based business models. This is helping us to deliver our innovations to market faster and more efﬁciently. Read more on page 14 Annual Report 2013 11 Culture change driving improvement The renewal of our company culture continued to pay further dividends in 2013, with our engaged employees driving performance improvement across the organization. Read more on page 16 Increasing our cost productivity As we move toward a single value-added layer above our business and market organizations, we are on track to deliver gross overhead and indirect cost savings of € 1.5 billion by 2015. Read more on page 18 12 Annual Report 2013 Partners in care: new approaches, new models With the help of patient advisors like Alice Reece, Philips and Georgia Regents Medical Center are working to redeﬁne patient and family care. “When I think about the future of healthcare we have to “Providing care requires us to be innovative, requires us re-think everything: every square foot, every person, to think differently. The partnership that we now have every dollar, every resource. And that forces real with Philips really stresses a better outcome for our dynamic change in a way that this industry hasn’t seen patients.” in years.” David Hefner Executive Vice President Georgia Regents Medical Center Dr Ricardo Azziz CEO Georgia Regents Health System Annual Report 2013 13 End-to-end – building a winning value chain Around the world, we are working together with our partners and customers to optimize every step in the value chain. This end-to-end approach is enabling us to innovate and execute faster and more efﬁciently. Driving growth in oral healthcare In Germany, we are building on our professional To present current manual toothbrush users with more alternatives from Philips Sonicare, driving growth in the recommendation strategy and driving conversion of mid-segment, we created a more accessibly priced manual toothbrush users to electric tooth brushing proposition, the Philips Sonicare PowerUp. This through innovation leadership, portfolio expansion and product features similar brushing movements to distribution via new channels. This end-to-end manual and is gentle and effective. Research showed approach resulted in a market share improvement of that over 90% of consumers surveyed preferred the over 7%. Sonicare PowerUp over their manual toothbrush. With only a third of German households owning a The majority of electric toothbrushes and replacement rechargeable toothbrush, there is a signiﬁcant brush heads are sold in drugstores and hypermarkets. opportunity to expand our leadership in the sonic To leverage this opportunity, Sonicare PowerUp toothbrush segment. Taking an end-to-end launched in DM and Budni drugstores, as well as perspective, we identiﬁed three key drivers for Kauﬂand and Marktkauf hypermarkets, adding 2,000 expansion: driving and communicating innovation stores to our distribution. We optimized our supply leadership with superior propositions; creating a Philips chain to work with these partners, designing bespoke Sonicare proposition at a price-point accessible for a packaging, signiﬁcantly reducing time-to-market and broader audience; and making that proposition improving transparency. available to consumers in channels like drugstores and hypermarkets. In less than a year our end-to-end strategy resulted in strong market share gains and double-digit growth in Philips Sonicare is already leading in the German brush head sales. Consumer satisfaction increased, market, with consumers responding to superior with patients advised by their dentist to switch to propositions like Flexcare Platinum and electric brushing conveniently able to purchase a DiamondClean. In 2013, our leadership position was Philips Sonicare and replacement brush heads at their further supported through celebrity endorsement, local drugstore. which is driving awareness and conversion. 14 Annual Report 2013 LED façade lighting faster to market Through our end-to-end transformation program, we organization was assembled to address all opportunities along the value chain. The team took have identiﬁed and driven improvements along the ownership of the common goal to achieve ambitious entire LED value chain in China. This has resulted in a cost targets. It invested in market research and started broad range of competitively priced façade lighting with market sizing and customer segmentation, before solutions for the mid-tier market segment in China, with developing imaginative strategies for product a 40% reduction in time-to-market for new product positioning, go-to-market and time-to-market. From introductions and a signiﬁcant increase in on-time the outset, everyone knew that the new product line delivery. had to be conceived, developed and ﬁne-tuned extremely quickly. In 2012, market intelligence showed that we were missing out on the LED façade lighting segment in The result was a new range of competitive LED façade China – a segment predicted to reach € 520 million by lighting solutions specially designed for the mid-range 2015, 70% of which will be taken by mid-range market in China. And all in just under 28 weeks – a solutions. The problem was that in China we only massive reduction compared to the 12 months it offered top-range LED façade solutions. Clearly, previously took to bring a new product line to market. something had to be done. Another beneﬁt of this end-to-end collaboration is that achievement of the delivery time target of 25 days has An end-to-end transformation program was increased from 43% to 66%, with a further rise to 95% immediately initiated, and a cross-functional team expected by 2015. representing both the business and our market Annual Report 2013 15 Our people, our culture In 2013 we continued to drive structural change through our multi-year transformation program Accelerate! We are seeing the steady emergence of a growth and performance culture that is making us more agile, entrepreneurial and innovative. With our Accelerate! behaviors – Eager to win, Take organization outwards. They are providing invaluable ownership and Team up to excel – ﬁrmly embedded in insights and helping to drive changes in day-to-day the organization, we are rolling out a wide range of activities and behaviors. initiatives designed to harness the talents, viewpoints and experience of our employees and so build a winning culture. A culture anchored by our General Business Principles. Capability building ALP and ATP are also an integral part of our capability- building efforts. In 2013 we took the next steps in becoming a learning organization by completing the Transformation and change To date, over 1,350 of our leading executives have taken organizational design of Philips University. This involved a fundamental shift to align our learning part in our Accelerate! Leadership Program (ALP). This activities with the organizational development immersive program is designed to strengthen our priorities we have set to enable us to deliver on our leaders’ transformational capabilities so they can drive business strategy. New ﬂagship learning programs will change in the organization. Complementing the ALP, be introduced early in 2014, and a move to one single the Accelerate! Team Performance (ATP) is a learning management system is scheduled for the transformational session designed to reinforce second half of the year. behaviors that enhance team effectiveness. By year- end, more than 200 teams and 3,650 participants had been through the program, which also touched more Employee engagement In October 2013 we launched our renewed bi-annual than 2,000 employees via viral events. Employee Engagement Survey (EES), emphasizing the The transformation drive is being embraced across the performance, including change agility, alignment, and organization. In Healthcare, to name just one example, engagement. The overall engagement index shows a a group of over 160 employee advocates or “Culture positive score of 75% – 3 percentage points above the Champions” is now in place, role-modeling and chosen global external high-performance benchmark. instilling the new culture from the middle of the dimensions of employee behavior that affect 16 Annual Report 2013 Bringing our brand to life Reﬂecting this culture of engagement, our employees of the unveiling at our head ofﬁce in Amsterdam. In this way, a highly engaged workforce was brought together also play a crucial role as ambassadors of our brand. In to celebrate a landmark event in the history of the May 2013 our Employee Brand Jam focused on company. engaging employees around our new brand promise. They were asked to share, via a dedicated dashboard, their stories about how Philips delivers innovation to Diversity and inclusion Having an inclusive culture where differences are them. This campaign won a European Excellence honored, respected and encouraged and a diverse Award in the Internal Communications category. workforce that mirrors the markets we’re active in, In the lead-up to brand launch day, 13 November, we customers and consumers and thus to create value for invited the world to uncover our redesigned shield Philips and its stakeholders. Our new Diversity & through a mosaic launched via social media. Over Inclusion Policy deﬁnes our global standards and the 14,000 individuals took part in the 48 hours ahead of role all employees need to play to create a diverse and enables us to deliver innovation that matters to our the reveal. On the day itself, over 60 sites around the inclusive workplace. world hosted simultaneous events linked to a live feed Annual Report 2013 17 Fewer layers, faster and better services In 2011, Philips embarked on a comprehensive program to signiﬁcantly increase the efﬁciency of its overhead structure: those activities which take place mainly above the level of operational businesses and market organizations. Since then, real progress has been made – with more work to be done over the coming years. The Accelerate! productivity program looked ﬁrst to Finance is a good example. Traditionally, ﬁnance benchmarks – to what was currently industry best-in- professionals were spread widely across Philips, each class – and subsequently leveraged this insight to re- supporting business management in everything from engineer the company’s overhead activities such as IT, basic bookkeeping to analysis of upcoming Asian Finance, Human Resources and Real Estate. The competition. As of 2013, we have re-engineered the objective was to deliver improved service levels to operating model of our Finance activity, pooling internal customers in a faster, simpler, easier-to- knowledge into efﬁcient, dedicated Centers of experience way – at lower cost. Expertise – one focused on fundamental bookkeeping and internal control, another on ﬁnancial planning and The focus of the program was on the operating model – analysis of business performance, yet another on how the function was set up to deliver its services. expert company-wide advice on speciﬁc topics ranging These ‘smarter functions’ looked to pool services into from foreign exchange to pensions. This has led to a Centers of Expertise which then provide high-quality, simpler, leaner, more effective operating model which, 24/7 support to a wide range of businesses and critically, is able to deliver faster, better services to its geographies from a single hub. Equally impactful was internal customers. Similar transformations in the other the increased use of ‘output-based delivery’, swapping functions – and indeed more broadly in business contract workers brought into Philips to support management – have, collectively, allowed us to initiatives for clear output-based contracts with the 3rd- substantially improve the efﬁciency and effectiveness party suppliers. Last, but by no means least, was the of our overhead structure and – in the process – report reduction in managerial layers and subsequent a gross cost reduction of over EUR 1 billion through the increase in span of control of individual managers; this end of 2013. has led to less bureaucracy and faster decision making across the company. 18 Annual Report 2013 3. Fast facts Our 2013 results Comparable sales growth EBITA Return on invested capital 4.5% CAGR 2012-2013 10.5% group margin 15.3% Comparable sales growth Net income R&D expenditure 3.3% 2013 € 1,172 million € 1,733 million 7.4% of sales Green Product sales Patent families Brand value 51% of total sales 13,200 1,550 patent applications in 2013 $ 9.8 billion No. 40 on Interbrand list of most valuable brands Annual Report 2013 19 4. Next phase The journey continues First milestone passed Accelerate! is working and driving our transformation. We are pleased to have achieved the ﬁrst major milestone on our Accelerate! journey – our mid-term Our targets for 2016 Comparable sales growth CAGR 2014-2016 2013 ﬁnancial targets. However, we still Group reported EBITA have a way to go before we have delivered Philips’ full potential. New targets on Path to Value That’s why we have set ourselves challenging new targets, to be realized by the end of 2016. These indicate the value we create, as measured by sales growth, proﬁtability and our use of capital: Healthcare Consumer Lifestyle Lighting Return on invested capital 4-6% 11-12% 16-17% 11-13% 9-11% >14% 20 Annual Report 2013 Building a great company We have what it takes to be a great company, ﬁt for the demands of the 21st century – a compelling mission and vision, a clearly deﬁned strategic direction, and, increasingly, a culture of high performance. 1. Our rich heritage A born innovator Philips was founded in Eindhoven, Netherlands, in 1891 by Frederik and Gerard Philips – later joined by Gerard’s brother Anton – to “manufacture incandescent lamps and other electrical products”. For the 120-plus years since then, we have been improving people’s lives with a steady ﬂow of ground- breaking innovations. Today, we are building upon this rich heritage as we touch billions of lives each year with our innovative healthcare and lighting solutions and our personal health and well-being products. 2. Our vision What we aspire to At Philips, we strive to make the world healthier and more sustainable through innovation. Our goal is to improve the lives of 3 billion people a year by 2025. We will be the best place to work for people who share our passion. Together we will deliver superior value for our customers and shareholders. 22 Annual Report 2013 3. Market opportunities Responding to global challenges With our understanding of many of the longer- term challenges our world faces, we see major opportunities to apply our innovative competencies and create value for our stakeholders. We see a growing need for health care The world’s population aged 60 years and older 11% 22% 2000 2050 Annual Report 2013 23 We see increased focus on personal well-being Well-being of people around the world 62% Only 62% of people around the globe rate their current state of health and well-being as “good” or “very good”. We see rising demand for energy-efﬁcient solutions The world’s electricity consumption Average saving we can make by switching to energy-efﬁcient lighting solutions 40% 19% Lighting Through some 40 businesses we apply our deep knowledge of customers, outstanding innovation capabilities, strong brand, global footprint and talented and engaged people – often in value-adding partnerships – to provide solutions that address these needs and challenges and make the world healthier and more sustainable. 24 Annual Report 2013 4. Our business system Ensuring success is repeatable The Philips Business System is the way we run our company to deliver on our mission and vision. It is designed to ensure that success is repeatable, i.e. that we create value for our stakeholders time after time. Philips Group Strategy Where we invest Philips CAPs Our unique strengths Mission Vision Guiding statement Philips Path to Value What we deliver Philips Excellence How we operate Group Strategy: We manage our portfolio with clearly deﬁned strategies and allocate resources to maximize value creation. CAPs: We strengthen and leverage our core Capabilities, Assets and Positions as they create differential value: deep customer insight, technology innovation, our brand, global footprint, and our people. Excellence: We are a learning organization that applies common operating principles to deliver Philips Excellence. Path to Value: We deﬁne and execute business plans that deliver sustainable results along a credible Path to Value. 5. Our people Engaged employees crucial for success We need all our people collaborating effectively – in a diverse and inclusive environment, where they can grow and fulﬁll their ambitions. Engagement supports our culture of growth and performance improvement, reinforcing our goal of being the best place to work for people who share our passion. Annual Report 2013 25 2013 Employee Engagement Survey% positive75201372High-performancebenchmark8070075 Global presence Find out more about the scale and location of our activities throughout the world. 26 Annual Report 2013 124 North America Sales* 7,041 Number of employees 29,233 Employees female 35 % Employees male 65% R&D centers 22 Manufacturing sites 40 Assets* 10,5201 Asia & Paciﬁc Sales* 7,439 Number of employees 40,438 Employees female 37 % Employees male 63 % R&D centers 13 Manufacturing sites 25 Assets* 5,3572 EMEA Sales* 7,410 Number of employees 41,829 Employees female 32 % Employees male 68 % R&D centers 21 Manufacturing sites 40 Assets* 9,7353 Latin America Sales* 1,439 Number of employees 3,189 Employees female 37 % Employees male 63 % R&D centers 3 Manufacturing sites 6 Assets* 94743* In millions of euros 2013 R&D centers includes group and sector centersDelivering innovation that matters to you At Philips, our mission is to improve people’s lives through meaningful innovation. In 2013 we reafﬁrmed our long-standing commitment to this goal with the launch of our new brand promise. 1. Knowing our customers Who do we mean by ‘you’? Philips delivers innovation that matters to you. But just who is ‘you’? And what matters to you? To get ever closer to our customers, these are questions we ask every day. With our global presence – we have customer- facing staff in over 100 countries – and our trusted brand, we are uniquely placed to capture local customer insights. By understanding the challenges local people face – whether they be a hospital director, a city planner, a doctor or a consumer – we ensure that their actual needs and aspirations drive our innovation efforts. So we can deliver what really matters to them. 28 Annual Report 2013 2. Understanding people’s needs What matters to you? “Without communication, Ralph and I could have never survived the 64 years.” Discover how an innovative telemedicine program is enabling seniors to continue living at home. Read more on page 32 Annual Report 2013 29 Helen McCurdyPhoenix, USA“My husband loves fried food. Back then I would tell him, No, it’s not good for your health.” Find out how Philips Airfryer is helping people to eat more healthily. Read more on page 33 30 Annual Report 2013 Dable Kwan Hong Kong“I no longer have to struggle working at the factory.” See how LED lighting is helping to bring prosperity to the port of Da Nang. Read more on page 34 Annual Report 2013 31 Le Thi VinhDa Nang, VietnamThe comfort of home: a new model for care delivery Ralph and Helen McCurdy, a loving husband and wife who can live together at home and receive high-quality health care, thanks to an innovative and efﬁcient telemedicine program from Philips and Banner Health. “Without communication, Ralph and I could have never survived the 64 years. To be able to talk to a doctor on a video and we don’t have to wait two or three days for a doctor appointment, it’s fabulous.” Helen McCurdy “This is the future. It’s really an amazing model of care that doesn’t exist anywhere else… yet. When I have a team of people, augmented by a lot of Philips technology, I can catch things earlier, treat things earlier, and intervene in a way that allows me to accomplish what I set out to do as a geriatrician, and ultimately to do some good in these patient’s lives.” Edward Perrin, MD Geriatric Care Specialist & Medical Director Banner Hospice 32 Annual Report 2013 Frying with air: inspiring healthy meals The Philips Airfryer lets Dable Kwan prepare spring rolls and other delicious fried foods with much less oil. Who knew innovation could be so good for you, and taste so good too? “My name is Dable and I live in Hong Kong. I’m a housewife and I love to cook. I really started to cook seriously about 10 years ago. My husband loves fried food. Back then I would tell him, ‘No, there’s too much oil and grease, and it’s not good for your health.’ But since getting the Philips Airfryer, ah, what a happy man.” “It really makes cooking much easier, much healthier, and much more fun. Now, I’m using less oil, less salt, less everything else. We just had our check-ups and our cholesterol, blood sugar and everything else are at very healthy levels.” Annual Report 2013 33 Lighting a dragon: a bridge to prosperity The port of Da Nang has grown in prosperity since Philips LEDs began lighting up the Dragon Bridge. See how the lives of ﬁsherman Le Van Khe and his daughter Le Thi Vinh are improving. “The lights make the structure more vibrant and “I have my own sugarcane juice cart near the Dragon interesting for people who come to marvel at it… The Bridge. When the bridge opened I saw a lot of tourists bridge has been central to our overall growth. This year arrive and ﬁgured that selling sugarcane to them would we’re hoping to receive around 3 million tourists.” be better than working at the factory. My father is very Tran Chi Cuong Deputy Director Danang Department of Culture, Sports and Tourism happy that I no longer have to struggle working at the factory. On a Saturday and Sunday it’s so much fun to see the show. The bridge is very important to my family and me. My life lit up because the bridge lit up. It has changed our lives for the better.” Le Thi Vinh 34 Annual Report 2013 3. Behind the scenes How we innovate for you Armed with deep insights into local customer needs, we then bring together our R&D and design expertise and our local business-creation capabilities to address these needs. The locally relevant solutions we develop – often in collaboration with our customers – do not always involve ‘new technology’. Instead, they may mean a new application or a unique customer proposition brought about by an innovative partnership. Discover overleaf how we applied our innovation and design capability to help women breastfeed for longer. Annual Report 2013 35 Inside innovation Almost 25% of mothers stop breastfeeding within the ﬁrst three months because it becomes too painful. A further 40% stop because of a decreased milk supply. Discover how the Philips AVENT Natural range addresses these problems. Using a breast pump to express milk can make it easier for mothers to continue breastfeeding. People Philips AVENT Natural bottle We used the same insights to create a new baby bottle, researchers at Philips discovered that moms thought designed to tackle two things: teat acceptance (also pumps were too cold and mechanical, and forced them known as ‘latch on’) and colic. When babies suckle at to lean forward to make sure the milk ﬂows down into the breast, they cause the nipple to elongate in a the bottle. rhythmic way, so we created a teat to stretch in the same way. To create a more natural breast-like shape, Around the same time, a clinical study by Philips the designers made the teat much wider at the base. conﬁrmed that comfort is physiologically essential to And to prevent babies swallowing too much air when helping mothers produce lots of milk. Pain, stress or they are feeding, we added an ‘anti-colic’ twin-valve discomfort hampers the release of oxytocin, the system that allows air to vent into the bottle rather than hormone responsible for triggering milk production. the baby’s stomach. Both the bottle and the breast pump have received several awards for outstanding design. Philips AVENT Comfort breast pump Therefore we took comfort as the starting point of the design and reshaped the pump to make it possible for moms to sit back in a more relaxing position to express milk. Using ultrasound and MRI scanners, we studied how babies actually suckle. To mimic that, we added ﬁve oval petals that gently massage the areas around the nipple to stimulate more milk. We changed the texture of the cushioned silicone funnel that cups the breast, giving it a silky feel that is warm and gentle against the skin. 36 Annual Report 2013 Lives improved We take a two-dimensional approach – The contribution to the ecological social and ecological – to improving dimension is determined by means of people’s lives. Products and solutions our Green product portfolio, such as our that directly support the curative (care) energy-efﬁcient lighting. For additional or preventive (well-being) side of information, please visit people’s health, determine the www.philips.com/sustainability. contribution to the social dimension. Annual Report 2013 37 1161089121516254311317147Markets1. Africa2. ASEAN3. Benelux4. Central & East Europe5. DACH6. France7. Greater China8. Iberia9. Indian Subcontinent10. Italy, Israel and Greece11. Japan12. Latin America13. Middle East & Turkey14. Nordics15. North America16. Russia and Central Asia17. UK & IrelandLives improved* (millions) 32 201 28 77 89 56 330 43 167 48 49 132 74 25 342 73 49Population** (millions) 1,095 938 28 133 98 64 1,392 57 1,449 81 127 492 338 26 470 264 69 GDP*** (USD billions) 2,095 5,687 1,368 1,501 4,662 2,744 9,737 1,581 1,987 2,596 5,007 4,655 3,426 1,679 19,881 2,699 2,722 * Source: Philips** Source: IMF, CIA Factbook & Wikipedia*** Source: IMF, CIA Factbook & Wikipedia4 Group performance 4 - 4 4 Group performance “ 2013 was a signiﬁcant step forward on our Path to Value. Despite stronger headwinds than initially anticipated, we succeeded in achieving our mid-term 2013 ﬁnancial targets. We delivered a compound annual growth rate for comparable sales over the period 2012-2013 of 4.5%, compared to our target of 4-6%. We achieved a reported EBITA of 10.5% of sales, within our target bandwidth of 10-12%. And our return on invested capital reached 15.3% at year-end, above the targeted range of 12-14%.” Ron Wirahadiraksa, CFO 38 Annual Report 2013 4.1 Financial performance 4 Group performance 4.1 - 4.1.1 year amounted to EUR 1,172 million, mainly driven by strong operational performance, including signiﬁcant gross margin improvement and productivity gains coming from the Accelerate! program. • Sales amounted to EUR 23.3 billion, a 1% nominal decline for the year. Excluding unfavorable currency effects, comparable sales were 3% above 2012, Prior-period ﬁnancial statements have been restated driven by all three operating sectors. Healthcare for the treatment of Audio, Video, Multimedia and sales grew 1%, mainly driven by Customer Services. Accessories as discontinued operations (see note 7, Lighting sales were 3% above 2012, driven by Discontinued operations and other assets classiﬁed as Lumileds and Automotive, partly tempered by a sales held for sale) and the adoption of IAS 19R, which mainly decline at Consumer Luminaires. Sales at Consumer relates to accounting for pensions (see note 30, Post- Lifestyle were 10% above 2012, with double-digit (1,046) (77) 1,170 lower than in 2012. The decrease is mainly a result of employment beneﬁts). Management summary Key data in millions of euros unless otherwise stated Sales EBITA1) as a % of sales EBIT as a % of sales 2011 2012 2013 20,992 23,457 23,329 1,435 1,106 2,451 6.8 4.7 10.5 (479) 648 1,991 (2.3) 2.8 8.5 Financial income and expenses (331) (329) (330) Income tax expense (251) (185) (466) Results of investments in associates 15 (211) (25) Income (loss) from continuing operations Income (loss) from discontinued operations - net of income tax Net income (loss) Net income attributable to shareholders per common share in euros: (410) 47 2 (1,456) (30) 1,172 - basic - diluted (1.53) (0.04) (1.53) (0.04) 1.28 1.27 Net operating capital (NOC)1) 10,382 9,316 10,238 Cash ﬂows before ﬁnancing activities1) (515) 1,157 141 Employees (FTEs) 125,240 118,087 116,681 of which discontinued operations 5,645 2,005 1,992 1) For a reconciliation to the most directly comparable GAAP measures, see chapter 14, Reconciliation of non-GAAP information, of this Annual Report The year 2013 • In 2013 we continued to make good progress in a challenging economic environment, particularly in the United States and Western Europe. We recorded 3% comparable sales growth (1% nominal decline), with a strong contribution from growth geographies. The proﬁtability improved substantially, with all sectors delivering solid earnings. Net income for the growth at Domestic Appliances and high-single-digit growth at Personal Care and Health & Wellness. • Our growth geographies achieved 11% comparable growth, while mature geographies declined by 1%, as a result of the overall macroeconomic developments, including the continued weakness of the Western European markets and the continued economic uncertainty in North America. In 2013, growth geographies accounted for 36% of total sales, compared to 34% in 2012. • EBIT amounted to EUR 1,991 million, or 8.5% of sales, compared to EUR 648 million, or 2.8% of sales, in 2012. EBIT improvement was seen at all sectors, but was mainly driven by Lighting and Healthcare. • In 2013 we generated EUR 1,138 million of cash ﬂow from operating activities, which was EUR 944 million the payment of the European Commission ﬁne in Q1 2013, increased working capital requirements and the payout of restructuring provisions in 2013. Our cash ﬂows before ﬁnancing activities were EUR 1,016 million lower than in 2012, due to a decrease in cash ﬂows from operating activities and proceeds from divestments, partly offset by lower outﬂows related to acquisitions of new businesses. • In 2013 we completed the execution of our EUR 2 billion share buy-back program, thereby improving the efﬁciency of our balance sheet, and announced a new EUR 1.5 billion program to be concluded over the next 2-3 years. By the end of the year we had completed 7% of this program. 4.1.1 Sales The composition of sales growth in percentage terms in 2013, compared to 2012, is presented in the table below. Annual Report 2013 39 4 Group performance 4.1.2 - 4.1.2 Sales growth composition 2013 versus 2012 in % compara- ble growth currency effects consolida- tion changes nominal growth 4.1.2 Earnings In 2013, Philips’ gross margin was EUR 9,688 million, or 41.5% of sales, compared to EUR 8,991 million, or 38.3% of sales, in 2012. Gross margin in 2013 included EUR 52 million of restructuring and acquisition-related charges, 0.8 (4.6) (0.3) (4.1) whereas 2012 included EUR 289 million of restructuring and acquisition-related charges. Higher gross margin percentages were seen in all sectors. Selling expenses decreased from EUR 5,334 million in 2012 to EUR 5,075 million in 2013. 2013 included EUR 45 million of restructuring and acquisition-related charges, compared to EUR 184 million of restructuring charges in 2012. The year-on-year decrease was mainly attributable to lower restructuring activities and overhead reductions in our commercial organizations. In relation to sales, selling expenses decreased from 22.7% to 21.8%. Selling expenses as a percentage of sales were lower in all sectors. General and administrative expenses amounted to EUR 949 million in 2013, compared to EUR 845 million in 2012. As a percentage of sales, costs increased from 3.6% in 2012 to 4.1%. 2013 included EUR 5 million of restructuring and acquisition related-charges, compared to EUR 31 million in 2012. The 2012 ﬁgure included a EUR 25 million past-service pension cost gain from a change in a medical retiree plan, while 2013 included a pension settlement loss of EUR 31 million. Research and development costs decreased from EUR 1,831 million in 2012 to EUR 1,733 million in 2013. Research and development costs in 2013 included EUR 15 million of restructuring and acquisition-related charges, compared to EUR 57 million in 2012. The year- on-year decrease was largely attributable to lower restructuring charges and currency effects. As a percentage of sales, research and development costs decreased from 7.8% in 2012 to 7.4% in 2013. The overview below shows sales, EBIT and EBITA according to the 2013 sector classiﬁcations. Healthcare Consumer Lifestyle Lighting IG&S1) Philips Group 10.0 3.2 (2.0) 3.3 (3.4) (3.5) (0.5) (3.9) 0.0 0.0 5.7 0.1 6.6 (0.3) 3.2 (0.5) 1) Innovation, Group & Services Group sales amounted to EUR 23,329 million in 2013, which represents a 1% nominal decline compared to 2012. Adjusting for a 4% negative currency effect comparable sales were 3% above 2012. Comparable sales were up 10% at Consumer Lifestyle, while Lighting was 3% higher and Healthcare 1% higher than the previous year. Healthcare sales amounted to EUR 9,575 million, which was EUR 408 million lower than in 2012, but 1% higher on a comparable basis. Higher comparable sales were driven by mid-single-digit growth at Customer Services, while Home Healthcare Solutions and Patient Care & Clinical Informatics recorded low-single-digit growth. This was partly offset by a mid-single-digit decline at Imaging Systems. Increases in growth geographies were tempered by a decline in North America and Western Europe. Consumer Lifestyle reported sales of EUR 4,605 million, which was EUR 286 million higher than in 2012, or 10% higher on a comparable basis. We achieved double- digit growth at Domestic Appliances and high-single- digit growth at Health & Wellness and Personal Care. Lighting sales amounted to EUR 8,413 million, which was EUR 29 million lower than in 2012, but 3% higher on a comparable basis. Growth was largely driven by double-digit growth at Automotive and Lumileds and low-single-digit growth at Light Sources & Electronics. This was tempered by a low-single-digit decline at Consumer Luminaires. while Professional Lighting Solutions was ﬂat year-on-year. IG&S reported sales of EUR 736 million, which was EUR 23 million higher than in 2012, due to higher royalty income. 40 Annual Report 2013 Sales, EBIT and EBITA in millions of euros unless otherwise stated sales EBIT % EBITA1) % 2013 Healthcare 9,575 1,315 13.7 1,512 15.8 Consumer Lifestyle 4,605 429 8,413 489 9.3 5.8 483 10.5 695 8.3 736 (242) − (239) − Lighting IG&S Philips Group 23,329 1,991 8.5 2,451 10.5 2012 Healthcare 9,983 1,026 10.3 1,226 12.3 Consumer Lifestyle 4,319 400 9.3 456 10.6 Lighting IG&S 8,442 (66) (0.8) 128 713 (712) − (704) Philips Group 23,457 648 2.8 1,106 1.5 − 4.7 1) For a reconciliation to the most directly comparable GAAP measures, see chapter 14, Reconciliation of non-GAAP information, of this Annual Report In 2013, EBIT increased by EUR 1,343 million year-on- year to EUR 1,991 million, or 8.5% of sales. 2013 included EUR 117 million of restructuring and acquisition-related 4 Group performance 4.1.2 - 4.1.2 Healthcare EBITA improved from EUR 1,226 million, or 12.3% of sales, in 2012 to EUR 1,512 million, or 15.8% of sales, in 2013. EBITA improvements were realized across all businesses, due to higher sales and reduced expenses resulting from cost-saving programs. Restructuring and acquisition-related charges in 2013 were close to zero, compared to EUR 134 million in 2012. 2013 included a past-service pension cost gain of EUR 61 million and a gain on the sale of a business of EUR 21 million. Consumer Lifestyle EBITA improved from EUR 456 million, or 10.6% of sales, in 2012 to EUR 483 million, or 10.5% of sales, in 2013. Restructuring and acquisition-related charges amounted to EUR 14 million in 2013, compared to EUR 56 million in 2012. 2012 EBITA included a EUR 160 million gain on the Senseo transaction, while 2013 EBITA included a past-service pension cost gain of EUR 1 million. Lighting EBITA improved from EUR 128 million, or 1.5% of sales, charges, compared to EUR 561 million in 2012. 2013 EBIT in 2012 to EUR 695 million, or 8.3% of sales, in 2013. was also impacted by a net gain of EUR 47 million from a Restructuring and acquisition-related charges past-service pension cost gain and related settlement amounted to EUR 100 million in 2013, compared to EUR loss in the US, as well as a EUR 21 million gain on the sale 315 million in 2012. 2012 EBITA included EUR 81 million of a business in Healthcare. 2012 EBIT included a EUR of losses related to the sale of industrial assets, while 313 million impact of the European Commission ﬁne 2013 EBITA included a past-service pension cost gain of related to the alleged violation of competition rules in EUR 10 million. Excluding these impacts, the increase in the Cathode-Ray Tube (CRT) industry, EUR 132 million EBITA was mainly attributable to higher operational of provisions related to various legal matters, a net gain performance. on EUR 197 million on the sale of assets, mainly for the Senseo and High Tech Campus transactions, and a EUR 81 million loss on the sale of industrial assets at Lighting. Innovation, Group & Services EBITA improved from a loss of EUR 704 million in 2012 In addition, 2012 EBIT also included a past-service cost to a loss of EUR 239 million in 2013. Restructuring and gain of EUR 25 million related to a retiree medical plan. acquisition-related charges amounted to EUR 3 million in 2013, compared to EUR 56 million in 2012. 2013 EBITA Amortization and impairment of intangibles, excluding included a net EUR 25 million loss from a past-service software and capitalized product development costs, pension cost gain and related settlement loss. 2012 amounted to EUR 432 million in 2013, compared to EUR EBITA included a EUR 313 million impact of the 458 million in 2012. Additionally, goodwill impairment European Commission ﬁne, EUR 132 million of charges of EUR 26 million were taken in the fourth provisions related to various legal matters, a EUR 37 quarter of 2013 mainly as a result of reduced growth million gain on the sale of the High Tech Campus, and a expectations at Consumer Luminaires. EUR 25 million past-service cost gain related to a medical retiree plan. EBITA improved from EUR 1,106 million, or 4.7% of sales, in 2012 to EUR 2,451 million, or 10.5% of sales, in 2013. For further information regarding the performance of EBITA showed a year-on-year increase at all Sectors. the sectors, see chapter 5, Sector performance, of this Annual Report. Annual Report 2013 41 4 Group performance 4.1.3 - 4.1.5 4.1.3 Advertising & Promotion Philips’ total advertising and promotion expenses were EUR 882 million in 2013, an increase of 5% compared to 2,200 2012. The increase was mainly due to the launch of our new brand positioning as well as higher investments in growth geographies, such as China. As in 2012, the Company allocated a higher proportion of its total advertising and promotion spend to growth geographies and strategic markets. Accordingly, the advertising and promotion spend in key growth geographies increased by 4% compared to 2012. The total advertising and promotion investment as a 1,100 0 Research and development expenses in millions of euros ■-in value----as a % of sales 8.4 1,526 7.3 1,486 7.6 1,605 7.8 1,831 7.4 1,733 percentage of sales was 3.8% in 2013, compared to 3.6% 2009 2010 2011 2012 2013 in 2012. Advertising & Promotion expenses in millions of euros ■-in value----as a % of sales 4.1 865 3.6 841 3.8 882 3.8 769 3.7 666 1,000 750 500 250 0 2009 2010 2011 2012 2013 Philips increased its brand value by 8% in 2013 to over USD 9.8 billion in the ranking of the world’s 100 most valuable brands, as measured by Interbrand. In the 2013 listing, Philips moved up one position to the 40th most valuable brand in the world. 4.1.4 Research and development Research and development costs decreased from EUR 1,831 million in 2012 to EUR 1,733 million in 2013. 2013 included EUR 15 million of restructuring and acquisition-related charges, compared to EUR 57 million in 2012. As a percentage of sales, research and development costs decreased from 7.8% in 2012 to 7.4%. The year-on-year decrease was largely attributable to currency effects and lower restructuring charges. Research and development costs within Healthcare decreased by EUR 43 million, mainly due to lower restructuring activities at Imaging Systems and Patient Care and Clinical Informatics. At Lighting, research and development costs decreased by EUR 21 million, primarily in the conventional businesses within Light Sources & Electronics. At Consumer Lifestyle, research and development spending was EUR 10 million higher than in 2012, mainly in Health & Wellness. In Innovation, Group & Services, research and development expenses decreased by EUR 44 million, due to lower restructuring, productivity savings as well as lower costs at Intellectual Property & Standards. Research and development expenses per sector in millions of euros Healthcare Consumer Lifestyle Lighting Innovation, Group & Services 2011 2012 2013 754 249 416 186 823 251 462 295 780 261 441 251 Philips Group 1,605 1,831 1,733 4.1.5 Pensions In 2013, the total costs of post-employment beneﬁts amounted to EUR 294 million for deﬁned-beneﬁt plans and EUR 139 million for deﬁned-contribution plans, compared to EUR 289 million and EUR 139 million respectively in 2012. The above costs are reported in operating expenses except for the included net interest cost component which is reported in ﬁnancial income and expense. The net interest cost for deﬁned-beneﬁt plans was EUR 71 million in 2013 (2012: EUR 85 million). 42 Annual Report 2013 4 Group performance 4.1.6 - 4.1.6 2013 included past-service cost gains of EUR 81 million, which included EUR 78 million related to the announced freeze of accrual after December 31, 2015 for salaried workers in the Company’s US deﬁned- beneﬁt pension plan. In the same US plan a settlement Restructuring and related charges in millions of euros Restructuring and related charges per sector: loss of EUR 31 million was recognized in 2013 following Healthcare a lump-sum offering to terminated vested employees. Consumer Lifestyle This offering resulted in settling the pension obligations Lighting towards these employees. The past-service cost gain is Innovation, Group & Services allocated to the respective sectors of the US employees Continuing operations involved whereas the settlement loss is allocated fully Discontinued operations to Pensions in IG&S as it related to inactive employees. In 2012, past-service cost gains of EUR 31 million were recognized of which EUR 25 million in the Dutch pension plan due to a restructuring. In one of the Company’s deﬁned-beneﬁt retiree medical plans, a past-service cost gain of EUR 25 million was recognized due to a beneﬁt change. Cost breakdown of restructuring and related charges: Personnel lay-off costs Release of provision Restructuring-related asset impairment Other restructuring-related costs Continuing operations Discontinued operations 2011 2012 2013 3 5 54 23 85 18 116 38 301 56 511 29 (6) 10 94 3 101 16 105 423 103 (44) (35) (64) 10 14 85 18 66 57 511 29 36 26 101 16 The overall funded status of our deﬁned-beneﬁt In 2013, the most signiﬁcant restructuring projects pension plans in 2013 was comparable to that of 2012. related to Lighting and were driven by the industrial The deﬁcits recognized on our balance sheet decreased footprint rationalization. Restructuring projects at by approximately EUR 400 million due to a higher Lighting centered on Luminaires businesses and Light discount rate in the US, cash contributions and the US Sources & Electronics, the largest of which took place in events described above. The surpluses of the plans in the United States, France and Belgium. Innovation, the Netherlands and UK decreased, but as Philips does Group & Services restructuring projects mainly focused not recognize a surplus in these countries, the net on the Financial Operations Service Unit, primarily in balance sheet position was not impacted. Italy, France and the United States. Consumer Lifestyle In 2013, major progress was made in managing the (primarily in the Netherlands and Austria) and Coffee restructuring charges mainly related to Personal Care ﬁnancial exposure to deﬁned-beneﬁt plans, such as the (mainly Italy). changes in the funding of the Dutch pension plan, the changes in the US plan as described above, and a buy- In 2012, the most signiﬁcant restructuring projects in in the UK plan. related to Lighting and Healthcare and were driven by Accelerate! transformation program. Restructuring For further information, refer to note 30, Post- projects at Lighting centered on Luminaires businesses employment beneﬁts. and Light Sources & Electronics, the largest of which took place in the Netherlands, Germany and various 4.1.6 Restructuring and impairment charges locations in the United States. In Healthcare, the largest In 2013, EBIT included net charges totaling EUR 101 projects were undertaken at Imaging Systems and million for restructuring. In addition to the annual Patient Care & Clinical Informatics, in various locations goodwill-impairment tests for Philips, trigger-based in the United States, to reduce operating costs and impairment tests were performed during the year, simplify the organization. Innovation, Group & Services resulting in a goodwill impairment of EUR 26 million at restructuring projects focused on the IT and Financial Consumer Luminaires, mainly as a consequence of Operations Service Units (primarily in the Netherlands), reduced growth rates resulting from a slower-than- Group & Regional Overheads (mainly in the anticipated recovery of certain markets, as well as Netherlands and Italy) and Philips Innovation Services delays in the introduction of new product ranges. (in the Netherlands and Belgium). Consumer Lifestyle 2012 included EUR 511 million of restructuring charges. Italy) and Health & Wellness (in the United States). restructuring charges mainly related to Coffee (mainly For further information on sensitivity analysis, please refer to note 11, Goodwill. Annual Report 2013 43 4 Group performance 4.1.7 - 4.1.9 For further information on restructuring, refer to note 21, Impairment charges in 2013 amounted to EUR 10 Provisions. 4.1.7 Financial income and expenses million, mainly from shareholdings in Lighting Science Group and Gilde III. In 2012, impairment charges amounted to EUR 8 million, mainly from shareholdings A breakdown of Financial income and expenses is in Tendris. presented in the table below. Financial income and expenses in millions of euros For further information, refer to note 4, Financial income and expenses. 2011 2012 2013 4.1.8 Income taxes Income taxes amounted to EUR 466 million, compared Interest expense (net) (302) (325) (268) Sale of securities Impairments Other 51 (34) (46) 1 (8) 3 − (10) (52) (331) (329) (330) The net interest expense in 2013 was EUR 57 million lower than in 2012, mainly as a result of lower average outstanding debt and interest related to pensions in 2013. Other ﬁnancial income was a EUR 52 million loss in 2013, primarily consisting of a EUR 25 million accretion expense (mainly associated with discounted provisions) and EUR 24 million of other ﬁnancing charges. Other ﬁnancial income was a EUR 3 million gain in 2012, primarily consisting of a EUR 46 million gain related to a change in estimate on the valuation of long-term derivative contracts and remaining other ﬁnancial income of EUR 20 million. This was offset by a EUR 22 million accretion expense (mainly associated with discounted provisions) and EUR 41 million other ﬁnancing charges. Impairments in millions of euros TPV Chi-Mei Innolux BG Medicine Prime Technology Tendris Gilde III Lighting Science Group Other 2011 2012 2013 (25) (4) (2) (1) − − − (2) (34) − (1) (1) − (5) (1) − − (8) − (1) (1) − (1) (2) (3) (2) (10) to EUR 185 million in 2012. The effective income tax rate was 28.1%, compared to 58.0% in 2012. Excluding the non-tax-deductible European Commission ﬁne and charges related to various legal matters in 2012, the effective tax rate in 2012 was 25.5%. The 2.6 percentage points increase in 2013 was mainly related to a higher weighted average statutory income tax rate in 2013 due to a change in the country mix of proﬁt and loss, which was partly offset by lower valuation allowances. For 2014, the effective tax rate excluding incidental non-taxable items is expected to be between 30% and 32%. For further information, refer to note 5, Income taxes. 4.1.9 Results of investments in associates The results related to investments in associates improved from a loss of EUR 211 million in 2012 to a loss of EUR 25 million in 2013, largely attributable to a charge of EUR 196 million related to the former LG.Philips Displays joint venture in 2012. The European Commission imposed ﬁnes in relation to alleged violations of competition rules in the Cathode- Ray Tube industry. Philips recorded a total charge of EUR 509 million, of which EUR 313 million was directly related to Philips and therefore recorded in Income from operations, while EUR 196 million related to LG.Philips Displays and was therefore recorded in Results of investments in associates. Results of investments in associates in millions of euros Company’s participation in income Investment impairment and other charges 2011 2012 2013 18 (3) 15 (5) 5 (206) (211) (30) (25) 44 Annual Report 2013 4 Group performance 4.1.10 - 4.1.13 The Company’s participation in income increased from For further information, refer to note 7, Discontinued a loss of EUR 5 million in 2012 to a gain of EUR 5 million operations and other assets classiﬁed as held for sale. in 2013. The gain in 2013 was mainly attributable to the results of Philips Medical Capital, while the loss in 2012 4.1.12 Net income was mainly due to the results of EMGO. Net income increased from a net loss of EUR 30 million For further information, refer to note 6, Interests in increase was largely due to EUR 1,343 million higher in 2012 to a net proﬁt of EUR 1,172 million in 2013. The entities. EBIT and better results relating to investments in associates of EUR 186 million, offset by higher income 4.1.10 Non-controlling interests tax charges of EUR 281 million. Net income attributable to non-controlling interests amounted to EUR 3 million in 2013, compared to EUR 5 Basic earnings per common share from net income million in 2012. attributable to shareholders increased from negative EUR 0.04 per common share in 2012 to EUR 1.28 per 4.1.11 Discontinued operations common share in 2013. Discontinued operations consist of the Audio, Video, Multimedia and Accessories (AVM&A) business, the 4.1.13 Acquisitions and divestments Television business and certain divestments formerly reported as discontinued operations. The results related to these businesses are reported under Acquisitions In 2013, there were four minor acquisitions. Acquisitions Discontinued operations in the Consolidated in 2013 and previous years led to post-merger statements of income and Consolidated statements of integration charges totaling EUR 16 million in 2013: cash ﬂows. Healthcare EUR 6 million, Consumer Lifestyle EUR 4 million, and Lighting EUR 6 million. Philips had reached an agreement to transfer the AVM&A business to Funai Electric Co. Ltd in Q1 2013. In 2012, Philips completed the acquisition of Indal This agreement was terminated on October 25, 2013. within Lighting. Acquisitions in 2012 and previous years Since then, Philips has received expressions of interest led to post-merger integration charges totaling EUR 50 in the business from various parties and has been million in 2012: Healthcare EUR 18 million, Consumer actively discussing the sale of the business with Lifestyle EUR 18 million, and Lighting EUR 14 million. potential buyers. In the meantime, the AVM&A business operates as a standalone entity named WOOX In 2011, we completed six acquisitions. Healthcare Innovations. acquisitions included Sectra, AllParts Medical and Dameca. Within Consumer Lifestyle, Philips completed The Television business was divested as part of a the acquisition of Preethi and Povos. Within Lighting, strategic partnership agreement with TPV Technology Philips acquired Optimum Lighting. Acquisitions in 2011 Ltd (TPV) that was signed on April 1, 2012. Philips and previous years led to post-merger integration retained a 30% interest in TP Vision Holdings BV (TP charges totaling EUR 74 million in 2011: Healthcare EUR Vision venture). On January 20, 2014, Philips 17 million, Consumer Lifestyle EUR 45 million, and announced that it has signed a term sheet to transfer Lighting EUR 12 million. the remaining 30% stake in TP Vision to TPV. After completion, TPV will fully own TP Vision, which Divestments During 2013, Philips completed several divestments of will enable further integration with TPV’s TV business. business activities, mainly related to certain Healthcare Income from discontinued operations decreased by activities. EUR 45 million to EUR 2 million in 2013. The decrease During 2012, Philips completed several divestments of was mainly attributable to lower operational results business activities, namely the Television business (for and higher disentanglement costs in the AVM&A further information see note 7, Discontinued operations business. In 2012, income from discontinued operations and other assets classiﬁed as held for sale), certain of EUR 47 million was composed of EUR 78 million of Lighting manufacturing activities, Speech Processing net income related to AVM&A, partly offset by a EUR 31 activities and certain Healthcare service activities. The million net loss related to the Television business. Speech Processing activities were sold to Invest AG, in line with our strategy. Annual Report 2013 45 4 Group performance 4.1.13 - 4.1.15 In 2012, Philips agreed to extend its partnership with strong performance at Consumer Lifestyle and showed mid-single-digit growth, mainly driven by Sara Lee Corp (Sara Lee) to drive growth in the global Healthcare. coffee market. Under a new exclusive partnership framework, which will run through to 2020, Philips will In growth geographies, sales grew by EUR 454 million, be the exclusive Senseo consumer appliance or 11% on a comparable basis, driven by double-digit manufacturer and distributor for the duration of the growth at Consumer Lifestyle and Lighting. In China and agreement. As part of the agreement, Philips divested Latin America, we achieved solid double-digit nominal its 50% ownership right in the Senseo trademark to Sara and comparable growth. Sales per geographic cluster in millions of euros ■-Western Europe_■-North America_■-other mature_■-growth 30,000 20,000 10,000 0 1,708 20,992 6,820 6,748 5,716 2011 23,457 8,050 7,470 5,872 2012 23,329 8,504 2,065 1,913 7,041 5,871 2013 4.1.15 Cash ﬂows provided by continuing operations Cash ﬂows from operating activities Net cash ﬂow from operating activities amounted to EUR 1,138 million in 2013, which is EUR 944 million lower 10.7 than in 2012. The decrease is mainly a result of the payment of the European Commission ﬁne, increased working capital usage and the payout of restructuring charges in 2013. (0.5) Cash ﬂows from operating activities and net capital expenditures in millions of euros 2,500 2,000 1,500 1,000 500 0 (500) (1,000) (1,500) ■-cash ﬂows from operating activities--■-net capital expenditures 1,931 2,082 985 760 1,138 (574) (696) (857) (455) (966) 2009 2010 2011 2012 2013 Lee. In 2011, Philips completed several divestments, of which Assembléon was the most signiﬁcant. Philips sold 80% of the shares in Assembléon to H2 Equity Partners, an Amsterdam-based private equity ﬁrm, for a consideration of EUR 14 million. For details, please refer to note 9, Acquisitions and divestments. 4.1.14 Performance by geographic cluster In 2013, sales grew 3% on a comparable basis (-1% nominally), driven by growth at Consumer Lifestyle, notably in growth geographies. Comparable sales growth by geographic cluster1) in % ■-Philips Group--■-growth geographies--■-mature geographies 12.4 12.5 5.8 5.7 2.9 3.3 2.4 15 10 5 0 (5) 2011 2012 2013 1) For a reconciliation to the most directly comparable GAAP measures, see chapter 14, Reconciliation of non-GAAP information, of this Annual Report Sales in mature geographies were EUR 582 million lower than in 2012, or 1% lower on a comparable basis. Sales in Western Europe were impacted by macroeconomic developments and were ﬂat on a comparable basis. Growth at Lighting and Consumer Lifestyle was offset by a decline at Healthcare. Sales in North America declined by EUR 429 million or 2% lower on a comparable basis, mainly due to declines at Healthcare and Lighting. Both nominal and comparable sales in other mature geographies showed strong growth. Comparable sales in other mature geographies 46 Annual Report 2013 Condensed consolidated statements of cash ﬂows for the years ended December 31, 2011, 2012 and 2013 are Net capital expenditures Net capital expenditures totaled EUR 966 million, 4 Group performance 4.1.15 - 4.1.15 presented below: Condensed consolidated cash ﬂow statements1) in millions of euros 2011 2012 2013 Cash ﬂows from operating activities: Net income (loss) (1,456) (30) 1,172 Adjustments to reconcile net income to net cash provided by operating activities Net cash provided by operating activities Net cash (used for) provided by investing activities 2,216 2,112 (34) 760 2,082 1,138 (1,275) (925) (997) Cash ﬂows before ﬁnancing activities2) (515) 1,157 141 Net cash used for ﬁnancing activities (1,790) (293) (1,241) Cash (used for) provided by continuing operations (2,305) 864 (1,100) Net cash (used for) discontinued operations (374) (126) (206) Effect of changes in exchange rates on cash and cash equivalents (7) (51) (63) Total change in cash and cash equivalents Cash and cash equivalents at the beginning of year 5,833 3,147 3,834 Cash and cash equivalents at the end of year 3,147 3,834 2,465 1) Please refer to section 11.7, Consolidated statements of cash ﬂows, of this Annual Report 2) Please refer to chapter 14, Reconciliation of non-GAAP information, of this Annual Report which was EUR 511 million higher than in 2012, mainly reﬂecting the impact of proceeds received in 2012 from the sale of the High Tech Campus of EUR 425 million and the 2012 divestment of Philips’ 50% ownership right in the Senseo trademark to Sara Lee for EUR 170 million. Excluding these impacts in 2012, net capital expenditures were EUR 84 million lower than in 2012, mainly due to lower investments at Lighting. Cash ﬂows from acquisitions and ﬁnancial assets, divestments and derivatives in millions of euros ■-divestments and derivatives--■-acquisitions and ﬁnancial assets 462 763 (301) 119 360 (241) 1,000 500 0 (500) (1,000) 132 (42) (7) (550) (418) (428) (470) (31) (24) Acquisitions and ﬁnancial assets The net cash impact of acquisitions of businesses and ﬁnancial assets in 2013 was a total of EUR 24 million. There was a EUR 11 million outﬂow for acquisitions of businesses and a EUR 13 million outﬂow for ﬁnancial assets. (2,686) 687 (1,369) 2009 2010 2011 2012 2013 Cash ﬂows from investing activities In 2013, cash ﬂows from investing activities resulted in a The net cash impact of acquisitions of businesses and ﬁnancial assets in 2012 was a total of EUR 428 million, net outﬂow of EUR 997 million. This was attributable to mainly related to the acquisition of Indal. The EUR 167 EUR 966 million cash used for net capital expenditures, million outﬂow for ﬁnancial assets mainly related to EUR 101 million cash used for derivatives and current loans provided to TPV and the TP Vision venture in ﬁnancial assets, as well as EUR 24 million used for connection with the divestment of the Television acquisitions of businesses and non-current ﬁnancial business (EUR 151 million in aggregate). assets, partly offset by EUR 94 million of net proceeds from divestments. Divestments and derivatives Cash proceeds of EUR 94 million were received from In 2012, cash ﬂows from investing activities resulted in a divestments, mainly of non-strategic businesses within net outﬂow of EUR 925 million. This was attributable to Healthcare. Cash ﬂows from derivatives and current EUR 455 million cash used for net capital expenditures, ﬁnancial assets led to a net cash outﬂow of EUR 101 EUR 261 million used for acquisitions, as well as a EUR million. 167 million outﬂow for ﬁnancial assets, mainly due to loans provided to TPV and the TP Vision venture in In 2012, cash proceeds of EUR 4 million were received connection with the divestment of the Television from divestments. Cash ﬂows from derivatives and business (EUR 151 million in aggregate). securities led to a net cash outﬂow of EUR 46 million. Annual Report 2013 47 4 Group performance 4.1.16 - 4.1.18 Cash ﬂows from ﬁnancing activities Net cash used for ﬁnancing activities in 2013 was EUR 4.1.17 Financing Condensed consolidated balance sheets for the years 1,241 million. Philips’ shareholders were given EUR 678 2011, 2012 and 2013 are presented below: million in the form of a dividend, of which the cash portion of the dividend amounted to EUR 272 million. The net impact of changes in debt was a decrease of EUR 407 million, including the redemption of a USD 143 million bond. Additionally, net cash outﬂows for share buyback and share delivery totaled EUR 562 million. Net cash used for ﬁnancing activities in 2012 was EUR 293 million. Philips’ shareholders were given EUR 687 million in the form of a dividend, of which the cash portion of the dividend amounted to EUR 255 million. The net impact of changes in debt was an increase of EUR 730 million, including the issuance of USD 1.5 billion in bonds, partially offset by the early redemption of a USD 500 million bond. Additionally, net cash outﬂows for share buy-back and share delivery totaled EUR 768 million. 4.1.16 Cash ﬂows from discontinued operations In 2013, EUR 206 million cash was used by discontinued operations. The Television business used net cash of EUR 138, attributable to cash outﬂows of EUR 91 million for operating activities and EUR 47 million for investing activities. The Audio, Video Multimedia and Accessories business used net cash of EUR 68 million attributable to Condensed consolidated balance sheet information1) in millions of euros 2011 2012 2013 Intangible assets 11,012 10,679 9,766 Property, plant and equipment 3,014 2,959 2,780 Inventories Receivables 3,625 3,495 3,240 5,117 4,858 4,892 Assets held for sale 551 43 507 Other assets Payables Provisions Liabilities directly associated with assets held for sale Other liabilities 2,931 3,213 2,909 (6,563) (6,210) (5,435) (2,680) (2,956) (2,554) (61) (27) (348) (3,871) (4,169) (3,094) 13,075 11,885 12,663 Cash and cash equivalents 3,147 3,834 2,465 Debt Net cash (debt) (3,860) (4,534) (3,901) (713) (700) (1,436) Non-controlling interests (34) (34) (13) Shareholders’ equity (12,328) (11,151) (11,214) (13,075) (11,885) (12,663) 1) Please refer to section 11.6, Consolidated balance sheets, of this Annual operating activities. Report In 2012, EUR 126 million cash was used by discontinued operations. The Television business used net cash of EUR 256 million, attributable to operating cash outﬂows of EUR 296 million partly offset by cash inﬂows from investing activities of EUR 40 million. The Audio, Video Multimedia and Accessories business generated a cash inﬂow of EUR 130 million attributable to operating activities. 4.1.18 Cash and cash equivalents In 2013, cash and cash equivalents decreased by EUR 1,369 million to EUR 2,465 million at year-end. The decrease was mainly attributable to an outﬂow on net capital expenditures of EUR 966 million, cash outﬂows for treasury share transactions of EUR 562 million, cash dividend payout of EUR 272 million, EUR 407 million from decreases in debt and a EUR 206 million outﬂow related to discontinued operations. This was partly offset by a EUR 1,138 million inﬂow from operations. In 2012, cash and cash equivalents increased by EUR 687 million to EUR 3,834 million at year-end. The increase was mainly attributable to cash inﬂows from operations amounting to EUR 2,082 million and EUR 730 million from increases in debt. This was partly offset by a EUR 768 million outﬂow for treasury share transactions, an outﬂow on net capital expenditures of EUR 455 million, a EUR 428 million outﬂow for acquisitions of businesses and ﬁnancial assets, a EUR 255 million outﬂow for the cash dividend payout, and a EUR 126 million outﬂow related to discontinued operations. 48 Annual Report 2013 4 Group performance 4.1.19 - 4.1.21 Cash balance movements in millions of euros 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 3,834 94 172 (164) (407) (24) (562) (272) (206) 2,465 2012 Divestments1) Free cash ﬂow2) Other3) Debt Acquisitions Treasury share transaction Dividend Discontinued operations 2013 1) Includes proceeds from divestment of Proﬁle Pharma and Raytel Cardiac 2) Please refer to chapter 14, Reconciliation of non-GAAP information, of this Annual Report 3) Includes cash ﬂow for derivatives and currency effect 4.1.19 Debt position 4.1.20 Net debt to group equity Total debt outstanding at the end of 2013 was EUR Philips ended 2013 in a net debt position (cash and cash 3,901 million, compared with EUR 4,534 million at the equivalents, net of debt) of EUR 1,436 million, end of 2012. Changes in debt in millions of euros New borrowings Repayments Consolidation and currency effects Total changes in debt 2011 2012 2013 (454) (1,361) 1,314 (62) 798 631 56 (674) (64) 471 226 633 In 2013, total debt decreased by EUR 633 million. New borrowings of EUR 64 million consisted mainly of replacements to lease contracts. Repayment of EUR 471 million included a USD 143 million redemption on USD bonds as well as payments on short-term debt. Other changes resulting from consolidation and currency effects led to a decrease of EUR 226 million. In 2012, total debt increased by EUR 674 million. New borrowings of EUR 1,361 million included the issuance of USD 1.5 billion in bonds. Repayment of EUR 631 million included early redemption of a USD 500 million bond. Other changes resulting from consolidation and currency effects led to a decrease of EUR 56 million. Long-term debt as a proportion of the total debt stood at 85% at the end of 2013 with an average remaining term of 12.8 years, compared to 82% and 12.7 years at the end of 2012. For further information, please refer to note 20, Long- term debt and short-term debt. compared to a net debt position of EUR 700 million at the end of 2012. Net debt (cash) to group equity1) in billions of euros ■-net debt (cash)--■-group equity2) 20 15 10 5 0 (5) 14.6 15.1 12.4 11.2 11.2 0.7 0.7 1.4 (0.1) (1.2) 2009 2010 ratio: (1) : 101 (8) : 108 2011 5 : 95 2012 6 : 94 2013 11 : 89 1) For a reconciliation to the most directly comparable GAAP measures, see chapter 14, Reconciliation of non-GAAP information, of this Annual Report 2) Shareholders’ equity and non-controlling interests 4.1.21 Shareholders’ equity Shareholders’ equity increased by EUR 63 million in 2013 to EUR 11,214 million at December 31, 2013. The increase was mainly a result of EUR 1,169 million net income, partially offset by EUR 476 million of currency translation losses and EUR 669 million related to the purchase of treasury shares. The dividend payment to shareholders in 2013 reduced equity by EUR 272 million, while the delivery of treasury shares increased equity by EUR 118 million and the share premium due to share-based compensation plans increased equity by EUR 105 million. Shareholders’ equity decreased by EUR 1,177 million in 2012 to EUR 11,151 million at December 31, 2012. The decrease was mainly as a result of EUR 816 million Annual Report 2013 49 4 Group performance 4.1.22 - 4.1.23 related to the purchase of treasury shares, EUR 100 Philips can issue commercial paper up to 364 days in million of currency translation losses and a EUR 35 tenor, both in the US and in Europe, in any major freely million net loss. The dividend payment to shareholders convertible currency. There is a panel of banks, in in 2012 reduced equity by EUR 259 million. The Europe and in the US, which service the program. The decrease was partially offset by a EUR 50 million interest is at market rates prevailing at the time of increase related to the delivery of treasury shares and a issuance of the commercial paper. There is no collateral EUR 84 million increase in share premium due to share- requirement in the commercial paper program. Also, based compensation plans. there are no limitations on Philips’ use of funds from the program. As at December 31, 2013, Philips did not have The number of outstanding common shares of Royal any loans outstanding under these facilities. Philips at December 31, 2013 was 913 million (2012: 915 million). Philips’ existing long-term debt is rated A3 (with stable outlook) by Moody’s and A- (with stable outlook) by At the end of 2013, the Company held 20.7 million Standard & Poor’s. It is Philips’ objective to manage its shares in treasury to cover the future delivery of shares ﬁnancial ratios to be in line with an A3/A- rating. There is (2012: 28.7 million shares). This was in connection with no assurance that Philips will be able to achieve this the 44.3 million rights outstanding at the end of 2013 goal. Ratings are subject to change at any time. (2012: 52.3 million rights) under the Company’s long- Outstanding long-term bonds and credit facilities do term incentive plans. At the end of 2013, the Company not have a repetitive material adverse change clause, held 3.9 million shares for cancellation (2012: 13.8 ﬁnancial covenants or credit-rating-related million shares). acceleration possibilities. 4.1.22 Liquidity position As at December 31, 2013, Philips had total cash and cash Including the Company’s net debt (cash) position (cash equivalents of EUR 2,465 million. Philips pools cash and cash equivalents, net of debt), listed available-for- from subsidiaries to the extent legally and sale ﬁnancial assets, as well as its EUR 1.8 billion economically feasible. Cash not pooled remains committed revolving credit facility, the Company had available for local operational or investment needs. access to net available liquid resources of EUR 429 Philips had a total gross debt position of EUR 3,901 million as of December 31, 2013, compared to EUR 1,220 million at year-end 2013. million one year earlier. Liquidity position in millions of euros Philips believes its current working capital is sufﬁcient to meet its present working capital requirements. 2011 2012 2013 4.1.23 Cash obligations Contractual cash obligations Presented below is a summary of the Group’s contractual cash obligations and commitments at December 31, 2013. Cash and cash equivalents 3,147 3,834 2,465 Committed revolving credit facility/ CP program/Bilateral loan Liquidity Available-for-sale ﬁnancial assets at fair value Short-term debt Long-term debt 3,200 1,800 1,800 6,347 5,634 4,265 110 120 65 (582) (809) (592) (3,278) (3,725) (3,309) Net available liquidity resources 2,597 1,220 429 The fair value of the Company’s available-for-sale ﬁnancial assets amounted to EUR 65 million. Philips has a EUR 1.8 billion committed revolving credit facility that can be used for general corporate purposes and as a backstop of its commercial paper program. In January 2013, the EUR 1.8 billion facility was extended by 2 years until February 2018. The commercial paper program amounts to USD 2.5 billion, under which 50 Annual Report 2013 Contractual cash obligations at December 31, 2013 in millions of euros 1) payments due by period less than 1 year total 1-3 years 3-5 years after 5 years Long-term debt2) 3,472 308 2 900 2,262 Finance lease obligations Short-term debt 241 230 Operating leases 1,017 Derivative liabilities 337 Interest on debt3) 2,421 61 230 237 112 185 78 − 316 93 346 34 − 182 92 68 − 282 40 315 1,575 Purchase obligations4) Trade and other payables 184 81 76 26 2,462 2,462 − − 1 − 10,364 3,676 911 1,549 4,228 1) Data in this table are undiscounted 2) Long-term debt includes short-term portion of long-term debt and excludes ﬁnance lease obligations 3) Approximately 20% of the debt bears interest at a ﬂoating rate. The majority of the interest payments on variable interest rate loans in the table above reﬂect market forward interest rates at the period end and these amounts may change as the market interest rate changes 4) Philips has commitments related to the ordinary course of business which in general relate to contracts and purchase order commitments for less than 12 months. In the table, only the commitments for multiple years are presented, including their short-term portion 4 Group performance 4.1.23 - 4.1.23 The Company had EUR 203 million restructuring- related provisions by the end of 2013, of which EUR 128 million is expected to result in cash outﬂows in 2014. Refer to note 21, Provisions for details of restructuring provisions and potential cash ﬂow impact for 2014 and further. A proposal will be submitted to the General Meeting of Shareholders to declare a distribution of EUR 0.80 per common share (up to EUR 740 million), in cash or shares at the option of the shareholder, against the net income for 2013. Further details will be given in the agenda for the General Meeting of Shareholders, to be held on May 1, 2014. Guarantees Philips’ policy is to provide guarantees and other letters of support only in writing. Philips does not provide other forms of support. At the end of 2013, the total fair value of guarantees recognized by Philips in other non- current liabilities amounted to less than EUR 1 million. The following table outlines the total outstanding off- balance sheet credit-related guarantees and business- related guarantees provided by Philips for the beneﬁt of unconsolidated companies and third parties as at December 31, 2012 and 2013. Philips has no material commitments for capital expenditures. Expiration per period in millions of euros Additionally, Philips has a number of commercial agreements, such as supply agreements, which provide that certain penalties may be charged to the Company if it does not fulﬁll its commitments. Certain Philips suppliers factor their trade receivables from Philips with third parties through supplier ﬁnance arrangements. At December 31, 2013 approximately EUR 343 million of the Philips accounts payables were known to have been sold onward under such arrangements whereby Philips conﬁrms invoices. Philips continues to recognize these liabilities as trade payables and will settle the liabilities in line with the original payment terms of the related invoices. Other cash commitments The Company and its subsidiaries sponsor post- employment beneﬁt plans in many countries in accordance with legal requirements, customs and the local situation in the countries involved. For a discussion of the plans and expected cash outﬂows, please refer to note 30, Post-employment beneﬁts. total amounts committed less than 1 year 1-5 years after 5 years 2013 Business- related guarantees Credit- related guarantees 2012 Business- related guarantees Credit- related guarantees 292 107 117 68 41 333 19 126 7 124 15 83 295 113 114 68 27 322 11 124 − 114 16 84 Annual Report 2013 51 4 Group performance 4.2 - 4.2.2 4.2 Social performance Our businesses provide innovative solutions that address major trends affecting the world – the demand for affordable healthcare, the need for greater energy efﬁciency and the desire for personal well-being. In 2013, Philips further strengthened its focus on sustainability. This is rooted in our long-standing belief that sustainability is a key enabler of value creation and offers opportunities to innovate our way out of the challenging economic circumstances. Therefore, sustainability is an integral part of Philips’ vision and strategy. 4.2.1 Improving people’s lives At Philips, we strive to make the world healthier and more sustainable through innovation. Our goal is to 4.2.2 Employee engagement Employee engagement is key to our competitive performance. Engaged employees help us meet our improve the lives of 3 billion people a year by 2025. To business goals and help make Philips a great place to guide our efforts and measure our progress, we take a two-dimensional approach – social and ecological – to work. We have used employee engagement surveys for over a decade to gather feedback and focus areas and improving people’s lives. Products and solutions from have seen tangible results along our journey. our portfolio that directly support the curative (care) or preventive (well-being) side of people’s health, determine the contribution to the social dimension. As Employee Engagement Index in % ■-favorable--■-neutral--■-unfavorable healthy ecosystems are also needed for people to live a 100 healthy life, the contribution to the ecological dimension is determined by means of our Green Product portfolio, such as our energy-efﬁcient lighting. Through Philips products and solutions that directly support the curative or preventive side of people’s health, we improved the lives of 630 million people in 2013, driven by our Healthcare sector. Additionally, our well-being products that help people live a healthy life, and our Green Products that contribute to a healthy 75 50 25 0 14 15 71 11 12 77 10 14 76 6 15 79 9 16 75 2009 2010 2011 20121) 2013 ecosystem, improved the lives of 290 million and 1.49 1) Based on 60 pulse surveys conducted in 2012 billion people respectively. After the elimination of double counts - people touched multiple times - we arrived at 1.8 billion lives. This is an increase of 100 million compared to our total baseline of 1.7 billion people a year, established in 2012. More information on this metric can be found in chapter 13, Sustainability statements, of this Annual Report. In 2012, we announced our intention to move from an annual measurement of Employee Engagement Survey data to a bi-annual basis in order to allow more time for teams to analyze results and implement improvement actions. We also used this as an opportunity to review the way we approach engagement, with the aim of improving the link between the high levels of employee engagement that we achieve and improved business results. In 2013 we applied a more contemporary model relevant for the next steps in our journey. While our employee survey using the refreshed methodology is not directly comparable to our historical metric, we see 52 Annual Report 2013 Double countsNumbers in billionsConceptual drawing, areas do not reﬂect actual proportionsLives improved by Philips in 20131.490.631.8 (double counts eliminated)By Philips green products0.29By Philips well-being productsBy Philips care products4 Group performance 4.2.2 - 4.2.3 that 75% of our employees provided a favorable diversity and inclusion as priorities and to engage all response to our new engagement index, 3 points above employees and leaders in contributing to an inclusive the external high-performing benchmark. This is a very work environment. This policy prescribes: encouraging result; especially given the speed and scale of our current transformation. • Championing workforce diversity. We embrace The survey results indicate the following areas as gender, gender identity or expression, sexual unique individuals regardless of race, color, age, strengths: orientation, language, religion, political or other opinion, disability, national or social origin or birth. • Clarity of strategic direction provided by senior • Valuing diverse perspectives. We leverage the leadership diverse thinking, skills, experience and working styles • Adopting good ideas from all over the company of everyone in our company. • Making good use of skills and abilities • Building a ﬂexible organization. We provide • Providing opportunities for employees to grow and opportunities for work arrangements that develop accommodate the diverse needs of people at • Senior leaders’ belief in the future of Philips different career and life stages. There are also improvement areas: • Respecting stakeholder diversity. We develop strong and sustainable relationships with diverse stakeholders including customers, communities, • Making the changes necessary to compete governments, suppliers and shareholders. effectively and applying these changes in a consistent manner • Ability as an organization to ﬁx problems so they don’t happen again • Senior leaders have to do more to ensure we drive collaboration, execution and improvement across organizational boundaries • Focus on customers must continue to strengthen • Need to create a diverse workforce and inclusive culture where people of all backgrounds can succeed in Philips Gender diversity in % ■-male1)-■-female1) 100 43 43 42 28 29 29 18 18 19 13 14 15 82 82 81 87 86 85 72 71 71 50 57 57 58 Engagement is now an integral part of how we build our 0 culture and is an ingredient in a broader portfolio of Staff Professionals Management Executives initiatives and measurement tools. For example, in our 1) Left to right: 2011, 2012 and 2013 end-to-end transformations, we use surveys to ensure forward progress while creating opportunities for team dialogues. We will use shorter, targeted surveys and dialogue platforms to maintain focus on key areas until the next full-census employee survey in 2015. 4.2.3 Diversity and inclusion We set measurable objectives for achieving diversity and inclusion within Philips. Measuring performance against deﬁned metrics twice annually, Executive Committee members hold their organizations accountable for progress and review actions and outcomes as part of business reviews. With the roll-out of a revised Diversity and Inclusion (D&I) strategy and the launch of a new global D&I policy in 2013, Philips has taken major steps to clearly anchor Progress has been made in ensuring a better representation of women in leadership roles: women now constitute 15% of Philips’ executive population, an increase of 1 percentage point year-on-year. Also, we have been appointing more local leaders: at year-end 2013, over 75% of senior leaders in countries were of local origin. Going forward, driving D&I remains a priority for Philips. While female representation has also increased at professional and management level, Philips has made this an attention point for the coming year as well, recognizing that this is necessary in order to strengthen the leadership pipeline and create a strong basis for sustainable change. Therefore, a commitment has been made to increase the share of women in corporate grades 70 – 90 (refer to professionals and management category in the graphs) by 5 percentage points (per Annual Report 2013 53 100 50 0 70 35 0 4 Group performance 4.2.3 - 4.2.4 grade) by 2016 compared to the 2012 baseline. Over the same period, the share of female executives is to increase to 20% of the total executive population. Employee turnover in % Philips has two women on its Executive Committee and two female members of the Supervisory Board. Philips executives come from more than 30 countries. Female Male Philips Group 2011 2012 2013 13 10 11 14 13 14 18 15 16 New hire diversity in % ■-male1)-■-female1) Employee turnover: manufacturing vs non-manufacturing sites in % 38 45 42 32 33 34 24 24 29 29 12 27 88 76 76 71 71 73 68 67 66 62 58 55 Staff Professionals Management Executives 1) Left to right: 2011, 2012 and 2013 In 2013, Philips employed 35% females, a decrease of 1 percentage point compared to 2012. Employees per age category in % ■-male1)-■-female1) 2012 2013 17 12 14 20 15 16 ■-male1)-■-female1) 18 82 21 79 9 91 24 76 Manufacturing staff Non-manufacturing staff Group Exit diversity in % 43 46 30 30 70 70 57 54 100 80 60 40 20 0 33 33 32 31 32 31 28 28 27 30 31 31 20 20 21 24 24 25 9 9 13 13 8 12 8 6 7 4 6 4 Staff Professionals Management Executives 1) Left to right: 2012 and 2013 4.2.4 Employment The total number of Philips Group employees (Continued operations) was 114,689 at the end of 2013, compared to 116,082 at the end of 2012. Approximately 41% were employed in the Lighting sector, due to the continued vertical integration in this business. Some under 25 25-35 35-45 45-55 over 55 32% were employed in the Healthcare sector and 1) Left to right: 2011, 2012 and 2013 approximately 16% in the Consumer Lifestyle sector. In 2013, employee turnover amounted to 16% (15% in non-manufacturing sites; 20% in manufacturing locations), an increase compared to 2012 caused by the changing industrial footprint, divestments at Healthcare, the company’s overhead reduction program and high turnover of manufacturing staff in our factories, mainly in the growth markets. Employees per sector 2013 in FTEs at year-end Innovation, Group & Services 12,937 Lighting 46,890 Healthcare 37,008 Consumer Lifestyle 17,854 54 Annual Report 2013 4 Group performance 4.2.5 - 4.2.5 Compared to 2012, the number of employees in continuing operations decreased by 1,393. This decrease reﬂects a reduction of 688 employees, mainly related to the industrial footprint rationalization at Lighting. It also reﬂects the departure of 705 employees due to divestments in Healthcare. Approximately 52% of the Philips workforce was located in mature geographies, and about 48% in growth geographies. In 2013, the number of employees in mature geographies decreased by 1,614, mainly attributable to reductions relating to the company’s overhead reduction program and the industrial footprint reduction in Lighting. Growth geographies headcount increased by 221, primarily in the growth businesses in Consumer Lifestyle. Employees per sector in FTEs at year-end 2011 2012 2013 Healthcare 37,955 37,460 37,008 Consumer Lifestyle 15,471 16,542 17,854 Lighting 53,168 50,224 46,890 Innovation, Group & Services 13,001 11,856 12,937 Continuing operations 119,595 116,082 114,689 Discontinued operations 5,645 2,005 1,992 Employment in FTEs 2011 2012 2013 Position at beginning of year 119,775 125,240 118,087 Consolidation changes: acquisitions divestments comparable changes Divestment and other changes in discontinued operations 4,759 909 (479) (850) (1,024) (3,398) − (705) (688) 2,035 (3,640) (13) Position at year-end 125,240 118,087 116,681 of which: continuing operations 119,595 116,082 114,689 discontinued operations 5,645 2,005 1,992 4.2.5 Developing our people Philips’ vision statement includes the following afﬁrmation: “We will be the best place to work for people who share our passion. Together we will deliver superior value for our customers and shareholders.” As part of our drive to build a learning organization, learners at Philips are supported by a personalized University Portal accessible through all media, which facilitates individual learning journeys according to the 70 (on-the-job experience): 20 (coaching): 10 125,240 118,087 116,681 (classroom) model. Employees per geographic cluster in FTEs at year-end Our key 2013 objective in terms of leadership development was the creation of a Leadership Academy, based on a strategic framework that 2011 2012 2013 differentiates the learning needs of leaders at every level in the organization: Transformation, Transition Western Europe North America 32,901 31,126 30,514 and Accelerate. 28,129 26,134 25,080 Other mature geographies 3,232 3,359 3,478 The Academy ﬂagship leadership development Total mature geographies 64,262 60,619 59,072 programs (including the market program Shaping Growth geographies 55,333 55,463 55,617 Markets and the ﬁrst-time manager program Leading Continuing operations 119,595 116,082 114,689 People@Philips) are being co-created in collaboration Discontinued operations 5,645 2,005 1,992 with leading suppliers and business schools, with a 125,240 118,087 116,681 strong emphasis on helping people to develop on the job and through external coaching and mentoring. In 2013 we also started building a stronger, more focused and cost-effective approach to assessment for development. We introduced two new assessment tools – Manager Ready, a powerful virtual manager readiness assessment solution which was piloted in key markets (China, India, ASEAN, Central Europe, Benelux, Middle East & Turkey, and the US) and the renewed 360 program based on the new Leadership Competencies and Philips behaviors. Annual Report 2013 55 4 Group performance 4.2.5 - 4.2.6 Enrollment in functional curricula programs, including 4.2.6 Health and Safety Marketing, Finance, IT, Sales, HR, Procurement and Philips strives for an injury-free and illness-free work Innovation, decreased to 19,000 from 24,000 in 2012. environment, with a sharp focus on decreasing the One of the reasons for this reduction is that many number of injuries and process improvements. This is functional curricula were reviewed and content deﬁned as a KPI, on which we set yearly targets for the rationalized in 2013, allowing us to redeploy the company and our individual sectors. investment into development of new content. number of enrollments We regret to report three fatalities in 2013, all involving contractors. In Pakistan and Colombia, two contractors 2009 2010 2011 2012 2013 died while working on a Lighting project. In Poland a contractor died while working on a reconstruction at Core Curriculum programs 5,500 20,000 39,500 43,000 32,500 one of our factories. The Legal curriculum hit the record of 63,000 enrollments, largely driven by the global roll-out of mandatory Compliance programs. In 2013, we also introduced local market programs with speciﬁc training modules for our staff in various geographies, including China, India and Africa. In 2013, we recorded 307 Lost Workday Injuries cases, i.e. occupational injury cases where the injured person is unable to work one or more days after the injury, a signiﬁcant decrease compared with 345 in 2012. The number of Lost Workdays caused by these injuries amounted to 9,603 days down from 12,630 days in 2012. The rate of Lost Workday Injuries decreased to 0.28 per 100 FTEs compared with 0.31 in 2012. We recorded 1,000 enrollments for the new Philips Excellence curriculum and around 2,500 registrations for the End2End curriculum programs. Lost Workday Injuries per 100 FTEs Other programs Philips has played a pioneering role in the Netherlands Healthcare 0.20 0.25 0.20 0.22 0.19 with its national Vocational Qualiﬁcation Program (CV) Consumer Lifestyle 0.26 0.26 0.23 0.25 0.24 and the Philips Employment Scheme (WGP). The CV Lighting 0.76 0.80 0.64 0.45 0.41 2009 2010 2011 2012 2013 project has been running since 2004 and targets employees who know their trade well, but do not have a diploma to prove it. CV provides a solution by awarding these people a recognized qualiﬁcation. To date, some 1,800 participants have obtained a qualiﬁcation that will help them in their future careers. Via WGP, we offer vulnerable groups of external jobseekers a work experience placement, usually combined with some kind of training. The program started in 1983 and over 12,500 people have participated since. After participating in the program, about 70% ﬁnd a job. In 2013, Philips employed some 150 persons via the WGP program, including young people with autism who are training to become a test engineer. Of the previous group of 10 autistic persons, eight found a job, one proceeded with a course of study, and the other is applying for jobs. Training spend Our external training spend in 2013 amounted to EUR 47.3 million, in line with EUR 46.9 million in 2012. Innovation, Group & Services 0.07 0.13 0.04 0.05 0.04 Philips Group 0.44 0.50 0.38 0.31 0.28 All sectors showed a decrease in the Lost Workday Injury rate. At Lighting, a dedicated action program, “Safety First”, was launched ﬁve years ago to drive down injury levels. In 2012, various regional Health & Safety improvement programs and peer audit programs were started and further expanded in 2013. Since 2010, Lighting achieved a strong decline in reported accident rates mainly attributed to active management involvement, launch of a new policy on machine safety improvements and further strengthening of management systems at major sites implementing the “Safety First” program. Lighting initiated a work stream to address Health & Safety management in Turnkey projects, headed by the Lighting market leaders. In efforts to further reduce injury rates, Lighting will also roll-out a Behavior Based Safety program in 2014. 56 Annual Report 2013 4 Group performance 4.2.6 - 4.2.7 The Health & Safety performance of Healthcare suspected violations of applicable laws or regulations improved signiﬁcantly in 2013. The Lost Workday Cases employees are urged to always report these to either (LWC) decreased from 80 to 70 while the LWC Rate their GBP Compliance Ofﬁcer or the Philips Ethics Line. decreased from 0.22 to 0.19 compared to 2012 ﬁgures. The global implementation of the Philips Ethics hotline Healthcare targeted Health & Safety performance seeks to ensure that alleged violations are registered improvement actions within their Field Service and dealt with consistently within one company-wide Organization (FSO) to include organizational system. ownership and program management among other items. The FSO overall impact on the Sector Health & To drive the practical deployment of the GBP, a set of Safety performance decreased in 2013 compared to directives has been published, which are applicable to 2012. FSO Lost Workday Cases decreased from 46% to all employees. There are also separate directives which 38% of the Sector total while the number of Lost apply to speciﬁc categories of employees, e.g. the Workdays decreased from 49% to 38% of the Sector Supply Management Code of Ethics and Financial total compared to 2012. While the total number of Lost Code of Ethics. Details can be found at Workday Cases decreased in 2013, the number of Lost www.philips.com/gbp. Workdays increased primarily due to isolated incidents with extended healing times. In 2013, we introduced a mandatory sign-off on GBP for Consumer Lifestyle continued to have low injury case levels. A new governance structure was launched in the Business Integrity Survey all executives. Consumer Lifestyle organization to embed Health & In June 2013, a business integrity survey has been rolled Safety performance review and ownership in the out to all employees in eight most relevant languages to businesses. The acquisitions Preethi and Povos started get their input on the effectiveness of our GBP program. reporting their performance in 2013. The survey provides input on a number of aspects that 4.2.7 General Business Principles are recognized to inﬂuence responsible business conduct. The insights that were derived from this survey The Philips General Business Principles (GBP) govern were used to further enhance the effectiveness of the Philips’ business decisions and actions throughout the current compliance activities as well as the compliance world, applying equally to corporate actions and the road map. behavior of individual employees. They incorporate the fundamental principles within Philips for doing The overall conclusion that could be drawn from the business. survey is that the Philips culture provides a sound basis to build upon, and that leaders are well positioned to The GBP are available in most of the local languages manage integrity even more actively so as to support an and are an integral part of the labor contracts in virtually environment in which employees feel comfortable to all countries where Philips has business activities. discuss or report potential issues and dilemmas. Responsibility for compliance with the principles rests primarily with the management of each business. Every Ongoing training country organization and each main production site has The business integrity survey provided the kickoff of a a compliance ofﬁcer. Conﬁrmation of compliance with global GBP communications campaign, culminating in a the GBP is an integral part of the annual Statement on global event called the ‘GBP dialogue week’ held in Business Controls that has to be issued by the October 2013, in which managers were invited to hold management of each business unit. The GBP sessions with their teams to discuss GBP in relation to incorporate a whistleblower policy, standardized their function or business. In their feedback, complaint reporting and a formal escalation procedure. participating managers indicated they experienced this The whistleblower policy is intended to supplement week as very meaningful and worth repeating. more speciﬁc local grievance or complaint procedures. If employees wish to raise an issue for which there is a The mandatory web-based GBP training, which is more speciﬁc procedure or grievance channel designed to reinforce awareness of the need for available, they are free to use this, e.g. use the compliance with the GBP, is available in 23 languages. applicable human resources procedures for Every quarter, all new hires get an invitation to take this employment issues. However, in case of concerns of training in their local language. In addition, targeted Annual Report 2013 57 4 Group performance 4.2.7 - 4.2.8 audiences have been invited to take a web-based for aging well. As of 2014, the activities of the Center will training on speciﬁc topics, including anti-bribery, be merged with our other stakeholder engagement antitrust, privacy and export controls. platforms and initiatives across the businesses and More information on the Philips GBP can be found in markets. chapter 6, Risk management, of this Annual Report. Partnering to improve healthcare in Africa Results of the monitoring in place are provided in the In November 2013, Philips and AMREF Flying Doctors chapter 13, Sustainability statements, of this Annual announced that they will work together in a partnership Report. 4.2.8 Stakeholder engagement to structurally improve healthcare infrastructure and provision in Africa. Both parties will leverage their respective strengths to help tackle inadequately In organizing ourselves around customers and markets, equipped medical facilities and inadequately trained we create dialogues with our stakeholders in order to staff as a way to better address the growing incidence of explore common grounds in addressing societal non-communicable diseases across the continent. challenges, build partnerships and jointly develop AMREF and Philips will also work with local supporting ecosystems for our innovations. Working stakeholders to develop and implement large-scale with partners is crucial in delivering on our vision to projects to make healthcare more accessible to the make the world healthier and more sustainable through local population. innovation. An overview of stakeholders is provided in chapter 13, Sustainability statements, of this Annual We sought similar partnerships in our ‘Fabric of Africa’ Report. campaign launched in 2013. The campaign’s primary intent is to enter into public/private partnerships with Strategic Partner of the World Economic Forum local and international stakeholders to improve In 2013, Philips entered into a strategic partnership with healthcare delivery in the areas of non-communicable the World Economic Forum. The Forum’s mission of diseases, maternal and child health, healthcare ‘Improving the state of the world’ closely matches our infrastructure, technology and clinical training. Philips own and the Forum engages business, political, has developed innovative, low-resource setting health academic and other leaders of society to shape global, technologies and e-Health solutions to address the regional and industry agendas in an informal, action challenges in the African market. More information on focused way. this campaign can be found at www.philips.com/FabricofAfrica. During the ﬁrst year of our partnership, Philips contributed signiﬁcantly to the Forum’s agenda, with Working on global issues active participation in three industry groups, numerous In 2013, Philips participated in a number of international speaking roles at the various meetings and a co- conferences and events focused on sustainable chairmanship of Frans van Houten at the World development and climate change. These included the Economic Forum on Africa summit in Cape Town. Climate Week in New York City (organized by The Furthermore, Deborah DiSanzo, CEO Healthcare, has Climate Group), co-launching the ‘Cities & Aging’ policy accepted to chair a thought leadership initiative that snapshot with the Global Cities Indicator Facility in will explore Health Systems Leapfrogging in Emerging Toronto, as well as the United Nations Climate Change Markets. Conference in Warsaw, Poland. Most notably we were invited as the only private sector company to join the The Philips Center for Health and Well-being UN Secretary General’s Chief Executives Board, with Over the last 5 years, Philips has run The Philips Center Ban Ki Moon and part of his UN leadership team. Here for Health and Well-being as a knowledge-sharing we highlighted that energy efﬁcient and intelligent LED forum that raised the level of dialogue on key societal solutions will result in a 30% reduction of electricity questions that matter most to citizens and consumption by the global lighting market in 2020 communities. In 2013, the Aging Well think tank, one of compared to 2006. This equates to a reduction of 515 megaton CO2 emissions, while also signiﬁcantly reducing energy bills by around EUR 100 billion in 2020. the initiatives of the Center, actively participated in a number of events, such as the Aging in America conference of the American Society on Aging, the International Congress on Telehealth and Telecare of the King’s Fund in the UK, and a well-attended expert roundtable to explore next-generation technologies 58 Annual Report 2013 4 Group performance 4.2.8 - 4.2.10 Innovation event At the end of 2012 we signed a three year partnership In November, Philips Research organized an Innovation agreement with the Royal Dutch Football Association Event at the High Tech Campus with external guest (KNVB) to support their WorldCoaches program by speakers, to share best practices, share Philips installing more than 100 solar lighting ‘Light Centers’ in corporate ambition for more sustainable product rural communities throughout Africa and South solutions; initiate new innovative concepts to radically America. Working together with local communities and improve access to healthcare; new products that the KNVB, the Light Centers will provide safe and decrease food waste and help meet world food security functional space for sports and other community goals; and to identify new approaches to the circular activities after dark. economy, focusing on concepts such as “design for reuse” and improved recycling efﬁciency. We believe Throughout 2014, Philips will roll out a new three pillar these global challenges can only be addressed through social investment strategy, comprising of a disaster Open Innovation and regional partnerships with all relief program, a local community investment program stakeholders involved. We collaborate with academics, and a signature social innovation program. The main universities through direct partnerships, Open focus will be on access to healthcare, access to light and Innovation initiatives and government driven initiatives, healthy futures. like FP7 and Horizon 2020, two European Union research programs. 4.2.10 Supplier sustainability 4.2.9 Social Investment Programs Many of our products are being created and manufactured in close cooperation with a wide range of In 2013, we continued to develop and localize our business partners, both in the electronics industry and global social investment program, other industries. Philips needs suppliers to share our SimplyHealthy@Schools. In Brazil, 230 employees commitment to sustainability, and not just in the from Philips ofﬁces and factories registered to development and manufacturing of products but also in volunteer in Fal@ndo em Bem-Estar, the local the way they conduct their business. We require adaptation of SimplyHealthy@Schools. The program suppliers to provide a safe working environment for aims to empower kids from 8 to 12 to change their their workers, to treat workers with respect, and to work habits, health and environment and educates in an environmentally sound way. Our programs are teenagers about safe sex and sexual transferable designed to engage and support our suppliers on a diseases prevention, a critical national issue. shared journey towards continuous improvement in supply chain sustainability. Philips Brazil also rolled-out a new initiative in 2013 with an important Healthcare partner, Fleury. Based on As a leading company in sustainability, Philips will act the same topics and questions explored in our Fal@ndo as a catalyst and support our suppliers in their pursuit of em Bem-Estar, the project consists of a giant interactive continuous improvement of social and environmental board game, developed to be used in schools performance. We recognize that this is a huge challenge throughout the entire country by Fleury and Philips requiring an industry-wide effort in collaboration with employees. other societal stakeholders. Therefore, we remain active, together with peers in the industry, in the In North America, the Philips Cares program provides Electronic Industry Citizenship Coalition (EICC) and ways for employees to work together to improve encourage our strategic suppliers to join the EICC too. people’s lives by creating healthy, sustainable We will also continue to seek active cooperation and communities that contribute to the success and well- dialogue with other societal stakeholders including being of future generations. This can take many forms: governments and civil society organizations, either from helping a child to excel in math, to providing safety directly or through institutions like the EICC, the multi- and energy efﬁcient home improvements to the stakeholder programs of the Sustainable Trade disadvantaged, to raising awareness about the Initiative IDH, and the OECD. importance of cardiac health. In 2013 alone, more than 5,000 employees participated in volunteer Supplier Sustainability Involvement Program opportunities that suited their needs, schedules, and The Philips Supplier Sustainability Involvement passions in partnerships with organizations such as Program is our overarching program to help improve American heart Association, March of Dimes, and the sustainability performance of our suppliers. We Rebuilding Together. create commitment from our suppliers by requiring them to comply with our Regulated Substances List and Annual Report 2013 59 4 Group performance 4.2.10 - 4.2.10 the Philips Supplier Sustainability Declaration, which As in previous years, the majority of the audits in 2013 we include in all purchasing contracts. The Declaration were done in China. The total number of full-scope is based on the EICC code of conduct and we added audits carried out since we started the program in 2005 requirements on Freedom of Association and Collective is 2,162. This number includes repeated audits (131 in Bargaining. The topics covered in the Declaration are 2013), since we execute a full-scope audit at our risk listed below. We monitor supplier compliance with the suppliers every three years. The audit program covers Declaration through a system of regular audits. 90% of our spend with risk suppliers. Accumulative number of initial and continual conformance audits 200 2,162 159 212 273 360 2,500 2,000 1,500 1,000 500 0 277 166 365 150 2005 2006 2007 2008 2009 2010 2011 2012 2013 total Distribution of supplier audits by country Other 10 Brazil 10 Mexico 14 India 27 China 139 Audit ﬁndings We believe it is important to be transparent about the issues we observe during the audits. Therefore we have published a detailed list of identiﬁed major non- compliances in our annual report since 2010. To track improvements Philips measures the ‘compliance rate’ for the identiﬁed risk suppliers, being the percentage of risk suppliers that was audited within the last 3 years, and do not have any - or have resolved all major non compliances. During 2013 we achieved a compliance rate of 77% (2012: 75%). Please refer to sub-section 13.2.2, Supplier indicators, of this Annual Report for the detailed ﬁndings of 2013. 2013 supplier audits in risk countries In 2013, Philips conducted 200 full-scope audits, including four joint audits conducted on behalf of Philips and other EICC member companies. Additionally, 59 audits of potential suppliers were performed. Potential suppliers are audited as part of the supplier approval process, and they need to close any zero-tolerance issues before they can start delivering to Philips. In our new audit approach, we place more focus on capacity building programs to realize structural improvements leading to better audit results. 60 Annual Report 2013 • Freely Chosen Employment• Child Labor Prohibition• Working Hours• Wages and Beneﬁts• Humane Treatment• Non-Discrimination• Freedom of Association• Occupational Safety• Emergency Preparedness• Occupational Injury and Illness• Industrial Hygiene• Physically Demanding Work• Machine Safeguarding• Sanitation, Food and HousingHealth and SafetyEnvironmentalEthics• Environmental Permits and Reporting• Pollution Prevention and Resource Reduction• Hazardous Substances• Wastewater and Solid Waste• Air Emissions• Product Content Restrictions• Business Integrity• No Improper Advantage• Disclosure of Information• Intellectual Property• Fair Business, Advertising and Competition• Protection of Identity• Responsible Sourcing of Minerals• Privacy• Non-Retaliation• Company Commitment• Risk Assessment and Risk Management• Management Accountability and Responsibility• Improvement Objectives• Legal and Customer Requirements • Training• Communication• Corrective Action Process• Worker Feedback and Participation• Documentation and Records• Audits and Assessments• Supplier ResponsibilityManagement systemLabor4 Group performance 4.2.10 - 4.2.11 Supplier development and capacity building region outside the control of the rebels, we launched Based on many years of experience with the audit the Conﬂict-Free Tin Initiative. This initiative introduces program, we know that a combination of audits, a tightly controlled conﬂict-free supply chain of tin from capacity building, consequence management and a mine in the DRC all the way down to an end-product. structural attention from management is crucial to Philips is one of the industry partners brought together realize structural and lasting changes at supplier by the Dutch government that initiated the program in production sites. In 2013 we continued our focus on 2012. To underline our commitment to conﬂict-free capacity building initiatives which are offered to help sourcing, we joined a delegation in February 2013 to suppliers improve their practices. Our supplier visit the mine and engage with different local sustainability experts in China, India and Brazil stakeholders in the DRC. At the end of 2013 we reached organized trainings, visited suppliers for on-site an important milestone when the ﬁrst end-user consultancy, conducted pre-audit checks and helped products containing this conﬂict-free tin were made in suppliers to train their own employees on topics like our Philips Lighting factory. occupational health and safety, emergency preparedness and chemicals management. During 2013 we continued our work with 349 priority suppliers to raise awareness and conduct supply chain We also teamed up with peers in the industry and civil investigations to determine the origin of the metals in society organizations to work on capacity building at our products. This resulted in the identiﬁcation of 191 Chinese factories via the IDH Electronics Program, an smelters in our supply chain involved to process these innovative multi-stakeholder initiative sponsored by metals. We publish this smelter list on our website, the Sustainable Trade Initiative (Initiatief Duurzame creating transparency at deeper levels in our supply Handel). The goal is to improve working conditions for chain of those actors that we believe hold the key more than 500,000 employees in the electronics towards effectively addressing the concerns around sector. Two years ago the program was kicked-off in conﬂict minerals. Philips encourages all smelters in our China’s Pearl River Delta, and now expanded to also supply chain to join the Conﬂict Free Smelter program cover supplier factories in the Yangtze River Delta area. and demonstrate their conﬂict-free status via A total of 15 Philips suppliers are now participating in independent third party assessments. 29% of the the program. smelters identiﬁed by our suppliers have now successfully passed the Conﬂict Free Smelter 4.2.11 Conﬂict minerals: issues further down the chain In line with Philips’ commitment to supply chain assessment. As sufﬁcient conﬂict-free smelters for all four metals (Tin, Tantalum, Tungsten and Gold) will sustainability, we feel obliged to implement measures become available, Philips plans to direct its supply in our chain to ensure that our products are not directly chain towards these smelters. or indirectly funding human atrocities in the Democratic Republic of the Congo (DRC). We are concerned about We believe that industry collaboration and stakeholder the situation in eastern DRC where proceeds from the dialogue are important to create impact at these deeper extractives sector are used to ﬁnance rebel conﬂicts in levels of our supply chain. Therefore Philips continued the region. Philips is committed to address this issue its active contribution to the Conﬂict Free Sourcing through the means and inﬂuencing mechanisms Initiative, a joint effort of the EICC and GeSI and others available to us, even though Philips does not directly to positively inﬂuence the social and environmental source minerals from the DRC and mines are typically conditions in the metals extractives supply chain. To seven or more tiers removed from our direct suppliers. assist in developing a due diligence standard for conﬂict minerals, we continued our participation in the Although this region has a rich supply of minerals, its multi-stakeholder OECD-hosted program for the economy has collapsed due to decades of ongoing implementation of the “OECD Due Diligence Guidance conﬂict. In an effort to prevent minerals from ﬁnancing for Responsible Supply Chains of Minerals from war, many companies worldwide have shied away from Conﬂict-Affected and High-Risk Areas”. We also purchasing minerals from the DRC, creating a de facto continued our engagement with relevant stakeholders embargo in a region where mining is often the only including the European Parliament, other industry source of income for local communities. We decided organizations and local as well as international NGOs in that this was not the right approach and instead of Europe and the U.S. to see how we can resolve the avoiding the DRC, we took the more difﬁcult road, issue. supporting conﬂict-free sourcing from the DRC. To promote cooperation and economic growth in the Annual Report 2013 61 4 Group performance 4.2.11 - 4.3.1 In line with the US Dodd-Frank Act, we started preparations for publishing a Philips Conﬂict Minerals Report, including an audit of the Conﬂict Minerals Report as required by the Act. For more details and result of our supplier sustainability program, please refer to sub-section 13.2.2, Supplier indicators, of this Annual Report. 4.3 Environmental performance EcoVision Philips has a long sustainability history stretching all the way back to our founding fathers. In 1994 we launched our ﬁrst program and set sustainability targets for our own operations. Next we launched our ﬁrst EcoVision program in 1998 which focused on operations and products. We also started to focus on sustainability in our supply chain in 2003. We extended our scope further in 2010 by including the social dimension of products and solutions, which is now reﬂected in our renewed company vision stating that we strive to make the world healthier and more sustainable through innovation. Our goal is to improve the lives of 3 billion people a year by 2025. The main elements of the EcoVision program are: • Improving people’s lives • Green Product sales • Green Innovation, including Circular Economy • Green Operations • Health & Safety • Supplier Sustainability In this environmental performance section an overview is given of the most important environmental parameters of the program. Improving people’s lives, Health & Safety, and Supplier Sustainability are addressed in the Social performance section. Details of the EcoVision parameters can be found in the chapter 13, Sustainability statements, of this Annual Report. 4.3.1 Green Innovation Green Innovation is the Research & Development spend related to the development of new generations of Green Products and Green Technologies. We announced in 2010 our plan to invest a cumulative EUR 2 billion in Green Innovation during the coming 5 years. In 2013 Philips invested some EUR 509 million in Green Innovation, with the strongest contribution from Lighting mainly stemming from investments in LED. 62 Annual Report 2013 4 Group performance 4.3.1 - 4.3.1 Green Innovation per sector in millions of euros 600 400 200 0 340 185 50 44 61 392 230 46 56 60 ■-Healthcare_■-Consumer Lifestyle ■-Lighting_■-Group Innovation 569 325 38 509 327 27 70 136 75 80 479 291 36 67 85 Lighting At Lighting, we strive to make the world healthier and more sustainable through energy-efﬁcient lighting solutions. In 2013 Lighting invested EUR 327 million in line with EUR 325 million in 2012 to develop products and solutions that address environmental and social challenges. Investments are made to advance the LED revolution, which can substantially reduce carbon dioxide emissions (by switching from inefﬁcient to energy-efﬁcient lighting). Recent examples include the TLED and the Philips LUXEON Altilon product family in the Mercedes S-class Intelligent Lighting System, 2009 2010 2011 2012 2013 making this the ﬁrst car in which all lighting functions are Healthcare LED. Furthermore, Lighting has developed solutions for water puriﬁcation, solar LEDs for rural and urban Philips Healthcare develops innovative solutions locations, and LED solutions for agricultural across the continuum of care in collaborating with applications supporting biodiversity. clinicians and customers to improve patient outcomes, provide better value, and expand access to care. While Philips Group Innovation doing so, we take into account all Green Focal Areas Philips Group Innovation invested EUR 27 million in and aim to reduce environmental impact over the total Green Innovations, spread over projects focused on lifecycle, with a focus on energy efﬁciency and dose global challenges related to water, air, waste, energy, reduction. Healthcare investments in Green Innovation food and access to affordable healthcare. Group in 2013 amounted to EUR 80 million, a signiﬁcant Innovation deployed the Sustainable Innovations decrease compared with 2012. This can be attributed to Assessment tool in which innovation projects are a number of signiﬁcant Healthcare projects which were mapped, categorized and scored along the completed in 2012. Other areas covered include environmental and social dimension to identify those increased levels of recycled content in our products, innovation projects that drive sustainable innovation. remote servicing and closing the materials loop, e.g. One example of a Group Innovation project is related to through upgrading strategies, parts harvesting and low cost solar-powered LED lighting. refurbishing programs as well as reducing environmentally relevant substances from our When the sun sets in Africa, over 600 million people on products. Philips Healthcare actively supports a the continent rely on kerosene and candles to see in the voluntary industry initiative (COCIR) for improving the dark. For most of the population who are at the Base of energy efﬁciency of imaging equipment. Moreover, we the Pyramid (BoP) these lighting solutions remain are actively partnering with care providers to look costly, give only low illumination and are highly non- together for innovative ways to reduce the sustainable. The BoP comprises four billion people environmental impact of healthcare, for example by living in our world today, and in the poorest socio- optimizing energy efﬁcient use of medical equipment. economic group. We engaged directly with BoP Consumer Lifestyle consumers in some of the poorest areas of Africa to understand their needs for lighting and energy and how Green Innovation at Consumer Lifestyle amounted to they wish to use that light. The insights derived from EUR 75 million compared to EUR 70 million in 2012 and these studies have resulted in a re-design of our entire resulted in an increase in Green Product sales in all portfolio of solar lighting for the consumer. At the same Business Groups. The sector continued its work on time the new products take advantage of the very latest improving the energy efﬁciency of its products, closing developments in LED, solar panels and battery the materials loop (e.g. by using recycled materials in technology, resulting in a portfolio that is ﬂexible in products and packaging) and the voluntary phase-out use-case, has a high performance, is robust and long of polyvinyl chloride (PVC), brominated ﬂame lasting. All this is provided at price-points that match retardants (BFR) and Bisphenol A (BPA) from food the spending power of the target consumers with a contact products. In particular, more than 80% of the payback time within 3-6 months. shaving and grooming products are completely PVC/ BFR-free. Annual Report 2013 63 4 Group performance 4.3.1 - 4.3.2 Energy efﬁciency of products current value chains e.g. upstream-downstream Energy efﬁciency is a key Green Focal Area for our integration and co-creation) and logistics, innovations Green Products. About 97% of the energy consumed for material-, component-, and product reuse, products during the use phase of our products is attributable to designed for disassembly and serviceability. In 2013, Lighting products, according to our analysis. The Philips became a global partner of the Ellen McArthur remaining 3% is split over Consumer Lifestyle and Foundation, the leading organization on the concept of Healthcare. Therefore, we focus on the energy circular economy. efﬁciency of our Lighting products in the calculation. The annual energy consumption per product category Closing the material loop is calculated by multiplying the power consumption of In 2013 we restated the 2009 baseline for global a product by the average annual operating hours and collection and recycling amounts at around 22,500 the annual pieces sold and then dividing the light tonnes (excluding TV and AVM&A), based on the data output (lumens) by the energy consumed (watts). The retrieved from the WEEE collection schemes and from average energy efﬁciency of our total product portfolio our own recycling and refurbishment services (mainly improved some 2% in 2013 (19% compared to 2009). Healthcare). The amount of collection and recycling for 2012 (reported in 2013) was calculated at 31,000 In 2013 LED sales continued to advance well, but tonnes, excluding AVM&A (which was calculated at demand for conventional lighting remained fairly stable 9,000 tonnes). A small improvement compared to the due to the challenging economic environment. Since amount for 2011 due to an increase in recycled products the number of traditional lamps sold is signiﬁcantly in Healthcare. higher than LEDs, the energy efﬁciency improvement of the total Lighting portfolio in 2013 was limited. As the Recycled materials traditional incandescent lamp will be banned in more We calculated the amount of recycled materials in our countries, we expect the energy efﬁciency products in 2013 at some 14,000 tonnes (2012: 15,000 improvement to advance in the coming years. Our tonnes), by focusing on the material streams plastics, target for 2015 is a 50% improvement compared to the aluminum, refurbished products, and spare parts 2009 baseline. In this target setting, assumptions were harvesting depending on the relevance in each sector. made on the speed of the regulatory developments in this area, which stayed behind expectations. Therefore, Our target is to double the global collection and in 2015 the target of 50% improvement will probably recycling and the amount of recycled materials in our not yet be achieved. Further details on this parameter products by 2015 compared to 2009. Further details on and the methodology can be found in the document this parameter and the methodology can be found in ‘Energy efﬁciency of Philips products’ at the document ‘Closing the material loop’ at www.philips.com/sustainability. www.philips.com/sustainability. Circular economy 4.3.2 Green Product sales For a sustainable world, the transition from a linear to a Green Products offer a signiﬁcant environmental circular economy is a necessary boundary condition. A improvement in one or more Green Focal Areas: Energy circular economy aims to decouple economic growth efﬁciency, Packaging, Hazardous substances, Weight, from the use of natural resources and ecosystems by Recycling and disposal and Lifetime reliability. Sales using those resources more effectively. It is a driver for from Green Products increased from EUR 11.0 billion in innovation in the areas of material-, component- and 2012 to EUR 11.8 billion in 2013, or 51% of sales, thereby product reuse, as well as new business models such as reaching the target of 50% we set ourselves for 2015. solutions and services. In a circular economy, the more effective (re)use of materials enables to create more All sectors contributed to the growth in Green Product value, both by cost savings and by developing new sales, but Consumer Lifestyle achieved the highest markets or growing existing ones. Green Product nominal sales growth, followed by In 2013, Philips started its circular economy approach. 10% positive impact in 2013 on the Green Product sales Key characteristics are customer access over percentage of Consumer Lifestyle (2013: 49%). Healthcare and Lighting. The exclusion of AVM&A had a ownership (pay for performance e.g. pay per lux or pay per scan), business model innovations (from transactions to relationships via service and solution models), reverse cycles (including partners outside 64 Annual Report 2013 4 Group performance 4.3.2 - 4.3.3 Green Product sales per sector in millions of euros ■-Healthcare_■-Consumer Lifestyle_■-Lighting --as a % of sales 14,000 7,000 0 39.7 8,335 4,571 37.1 7,579 4,376 1,067 32.5 5,895 3,393 711 1,791 2,136 2,663 1,101 46.8 10,981 5,752 1,619 3,610 50.6 11,815 5,855 2,270 3,690 controls and presence detection, it can save up to 80% in running costs whilst typically delivering back the return on investment in under 3 years. As the solution is wireless, it is an easy retroﬁt solution that will match the lumen output of traditional ﬂuorescents. We aim to create products that have signiﬁcantly less impact on the environment during their whole lifecycle through our EcoDesign process. Overall, the most signiﬁcant improvements have been realized in our energy efﬁciency Green Focal Area, an important objective of our EcoVision program, although there was 2009 2010 2011 2012 2013 also growing attention for hazardous substances and recyclability in all sectors in 2013, the latter driven by New Green Products from each sector include the our Circular Economy initiatives. following examples. Healthcare 4.3.3 Green Operations The Green Operations program focuses on the main During 2013, Healthcare expanded the Green Product contributors to climate change, recycling of waste, portfolio with 13 new products to improve patient reduction of water consumption and reduction of outcomes, provide better value, and expand access to emissions of restricted and hazardous substances. care, while reducing environmental impact. Philips’ new EPIQ platform for example, delivers high-quality Full details, can be found in chapter 13, Sustainability ultrasound imaging to every setting where statements, of this Annual Report. echocardiography is used and at the same time reduces both energy use and product weight by almost 30% Carbon footprint and energy efﬁciency compared to the predecessor model. The energy After achieving our EcoVision4 carbon emissions consumption for each of Philips MRI models is lower than the market average according to COCIR. Other reduction target in 2012 (25% operational CO2 emissions reduction compared to 2007, the baseline year) we examples are new X-ray systems such as DuraDiagnost continued our energy efﬁciency improvement systems and a new Certeray X-ray generator, with programs across different disciplines in 2013. Examples signiﬁcantly lower energy use and product weight are Work Place Innovation, partnering in the KLM versus predecessor models. Green Products from BioFuel program and Green Logistics. However, in 2013 Patient Care & Clinical Informatics include MX400/450 our Carbon Footprint increased by 2% to 1,654 and MX 500 patient monitors, for which product weight is signiﬁcantly reduced (up to 27%) as well as energy consumption (up to 23%) when compared to their predecessor models. Consumer Lifestyle kilotonnes CO2 as a result of increased carbon emissions from air transport (to mitigate supply shortages), the increased use of SF6 (a substance with high Global Warming Potential impact) and increased business travel due to our increasing focus on emerging markets. These were, however, partly offset by Consumer Lifestyle is focusing on the avoidance of decreasing emissions resulting from reduced ofﬁce substances of concern, the application of recycled space (Work Place Innovation), consolidation of materials and the energy efﬁciency of the products. In warehouses, the changing industrial footprint, and the 2013, in China, Consumer Lifestyle introduced energy increase in purchased electricity from renewable efﬁcient living room Air puriﬁers. The products have an sources. energy efﬁcient motor, and score the highest grade (A) on the China energy label for Air puriﬁers. Lighting In 2013, CO2 emissions from non-industrial sites decreased 20%, in large part attributable to our Work Place Innovation program which enables ﬂex-working An example of a new Green Product introduced in 2013 and thus reduces the ﬂoor space in our portfolio. But is the Paciﬁc LED Green Parking system covered also our continuing focus on buildings’ energy parking solution. It ensures safety, whilst offering efﬁciency and the increased share of purchased outstanding energy savings, low maintenance and long electricity from renewable sources have helped lifetimes. Through a mix of LED luminaires, wireless achieve this. Annual Report 2013 65 4 Group performance 4.3.3 - 4.3.3 After a decrease in 2012, total emissions from business Water travel increased 5% in 2013 as reduced emissions from Total water intake in 2013 was 5.0 million m3, about 4% our lease car ﬂeet were off-set by increased air travel. higher than in 2012. This increase was mainly due to a We continue to promote video conferencing as an new acquisition in China that started to report in 2013, alternative to travel. In 2013, logistics CO2 emissions increased 5% in comparison with 2012. These were which accounted for 6% of group water consumption in 2013 as well as increased water use at two Lighting mainly caused by increased air shipments to mitigate Lumileds sites, mitigated by water conservation supply shortages in our Lighting sector. activities across all sectors. Our operational energy efﬁciency decreased 5% from Lighting represents around 79% of total water usage. In 1.15 terajoules per million euro sales in 2012 to 1.21 this sector, water is used in manufacturing as well as for terajoules per million euro sales in 2013 as a result of domestic purpose. The other sectors use water mainly intensiﬁed industrial activities, increased business for domestic purposes. travel and increased logistics activities. Operational carbon footprint in kilotonnes CO2-equivalent ■-logistics_■-business travel ■-non-industrial operations_■-manufacturing 2,500 2,000 1,500 1,000 500 0 1,930 909 174 220 627 1,845 767 159 247 672 1,771 703 155 256 657 1,614 709 142 217 546 1,654 738 114 227 575 Water intake in thousands m3 2009 2010 2011 2012 2013 Healthcare 363 256 308 421 Consumer Lifestyle 315 351 338 303 454 586 Lighting 3,531 3,604 3,682 4,133 4,004 Innovation, Group & Services 7 7 − − − Philips Group 4,216 4,218 4,328 4,857 5,044 In 2013, 82% of water was purchased and 18% was extracted from groundwater wells. 2009 2010 2011 2012 2013 Waste Ratios relating to carbon emissions and energy use 2009 2010 2011 2012 2013 Total waste increased 5% to 92 kilotonnes in 2013 from 88 kilotonnes in 2012. Lighting (77%) and Consumer Lifestyle (12%) account for 89% of our total waste. The increase was mainly due to one-time demolition scrap at a Lighting site in the Netherlands (10 kilotonnes) and Operational CO2 emissions in kilotonnes CO2-equivalent Operational CO2 efﬁciency in tonnes CO2- equivalent per million euro sales Operational energy use in terajoules Operational energy efﬁciency in terajoules per million euro sales 1,930 1,845 1,771 1,614 1,654 a new acquisition in China, mitigated by the exclusion of the AVM&A business in CL and waste reduction programs in all sectors. 83 73 70 65 71 31,145 32,766 31,402 28,405 28,162 Total waste in kilotonnes 1.34 1.29 1.24 1.15 1.21 Operational carbon footprint by Greenhouse Gas Protocol scopes in kilotonnes CO2-equivalent 2009 2010 2011 2012 2013 Healthcare 8.2 11.2 9.3 10.4 Consumer Lifestyle 20.1 23.2 19.6 12.7 9.6 11.4 Lighting 69.3 70.1 65.1 64.5 71.0 Innovation, Group & Services 0.1 0.1 0.0 0.0 0.0 2009 2010 2011 2012 2013 Philips Group 97.7 104.6 94.0 87.6 92.0 Scope 1 Scope 2 Scope 3 447 441 431 443 465 Total waste consists of waste that is delivered for 636 485 427 409 387 landﬁll, incineration or recycling. Materials delivered for 847 919 913 762 802 recycling via an external contractor comprised 74 Philips Group 1,930 1,845 1,771 1,614 1,654 kilotonnes, which equated to 81%, an improvement compared to 77% in 2012, as our manufacturing sites 66 Annual Report 2013 4 Group performance 4.3.3 - 4.4 implemented recycling programs. Of the remaining waste, 14% comprised non-hazardous waste and 5% hazardous waste. 4.4 Proposed Industrial waste delivered for recycling in % Other 15 Paper 21 Waste chemicals 2 Demolition scrap 14 Plastic 4 Wood 9 Emissions Glass 19 Metal 16 distribution to shareholders Pursuant to article 34 of the articles of association of Royal Philips, a dividend will ﬁrst be declared on preference shares out of net income. The remainder of the net income, after reservations made with the approval of the Supervisory Board, shall be available for distribution to holders of common shares subject to shareholder approval after year-end. As of December 31, 2013, the issued share capital consists only of common shares; no preference shares have been Emissions of restricted substances totaled 9 kilos in issued. Article 33 of the articles of association of Royal 2013, a signiﬁcant decrease compared to 55 kilos in Philips gives the Board of Management the power to 2012, due to a continued reduction in mercury determine what portion of the net income shall be emissions at Lighting and more accurate retained by way of reserve, subject to the approval of measurements. The level of emissions of hazardous the Supervisory Board. substances decreased by some 40% from 70,093 to 40,451 kilos, mainly as a result of a decrease in total A proposal will be submitted to the 2014 Annual styrene emissions at Lighting and more accurate General Meeting of Shareholders to declare a dividend measurements mitigated by an increase in xylene of EUR 0.80 per common share (up to EUR 740 million), emissions in CL. All sectors have reduction programs for in cash or in shares at the option of the shareholder, the restricted and hazardous substances. against the net income for 2013. Restricted and hazardous substances in kilos 2009 2010 2011 2012 2013 272 188 111 55 9 Restricted substances Hazardous substances Shareholders will be given the opportunity to make their choice between cash and shares between May 8, 2014 and May 30, 2014. If no choice is made during this election period the dividend will be paid in shares. On May 30, 2014 after close of trading, the number of share dividend rights entitled to one new common share will be determined based on the volume weighted average 32,869 61,795 65,477 70,093 40,451 price of all traded common shares Koninklijke Philips N.V. at NYSE Euronext Amsterdam on 28, 29 and 30 For more details on restricted and hazardous May 2014. The Company will calculate the number of substances, please refer to sub-section 13.3.3, Green share dividend rights entitled to one new common Operations, of this Annual Report. share (the ‘ratio’), such that the gross dividend in shares will be approximately equal to the gross dividend in cash. On June 3, 2014 the ratio and the number of shares to be issued will be announced. Payment of the dividend and delivery of new common shares, with settlement of fractions in cash, if required, will take place from June 4, 2014. The distribution of dividend in cash to holders of New York registry shares will be made in USD at the USD/EUR rate ﬁxed by the European Central Bank on June 2, 2014. Annual Report 2013 67 4 Group performance 4.4 - 4.5 Dividend in cash is in principle subject to 15% Dutch dividend withholding tax, which will be deducted from the dividend in cash paid to the shareholders. Dividend in shares paid out of net income is subject to 15% dividend withholding tax, but only in respect of the par value of the shares (EUR 0.20 per share). In 2013, a dividend of EUR 0.75 per common share was paid in cash or shares, at the option of the shareholder. Approximately 59.8% elected for a share dividend resulting in the issue of 18,491,337 new common shares, leading to a 2.1% percent dilution. EUR 271,991,204 was paid in cash. For additional information, see chapter 16, Investor Relations, of this Annual Report. The balance sheet presented in this report, as part of the Company ﬁnancial statements for the period ended December 31, 2013, is before appropriation of the result for the ﬁnancial year 2013. 4.5 Outlook Achieving the 2013 ﬁnancial targets was an important milestone and we have now set our sights on reaching our 2016 targets. We are conﬁdent in our ability to further improve our performance by continuing the strong focus on our Accelerate! transformation program. Looking at 2014, we remain cautious because of the ongoing macro-economic uncertainties, currency headwinds and softer order intake in Q4 2013. Therefore, we expect that 2014 will be a modest step towards our 2016 targets, also taking into account restructuring to drive the new productivity targets and investments in additional growth initiatives. 68 Annual Report 2013 5 Sector performance 5 Sector performance 5 - 5 Our structure Koninklijke Philips N.V. (the ‘Company’) is the parent Philips with key stakeholders, especially our employees, customers, government and society. company of the Philips Group (‘Philips’ or the ‘Group’). Additionally, the global shared business services for The Company is managed by the members of the Board procurement, ﬁnance, human resources, IT and real of Management and Executive Committee under the estate are reported in this sector, as well as certain supervision of the Supervisory Board. The Executive pension costs. Committee operates under the chairmanship of the Chief Executive Ofﬁcer and shares responsibility for the deployment of Philips’ strategy and policies, and the achievement of its objectives and results. Philips’ activities in the ﬁeld of health and well-being are organized on a sector basis, with each operating sector – Healthcare, Consumer Lifestyle and Lighting – being responsible for the management of its businesses worldwide. The Innovation, Group & Services sector includes the activities of Group Innovation, through which Philips invests in projects that are currently not part of the operating sectors, but which could lead to additional At the end of 2013, Philips had 111 production sites in 28 organic growth or create value through future spin-offs. countries, sales and service outlets in approximately Furthermore, Group and regional management 100 countries, and 114,689 employees. organizations support the creation of value, connecting Annual Report 2013 69 Innovation, Group & ServicesHealthcareConsumer LifestyleLighting• Imaging Systems • Home Healthcare Solutions• Patient Care & Clinical Informatics• Customer Services• Personal Care• Domestic Appliances• Health & Wellness• Light Sources & Electronics• Consumer Luminaires• Professional Lighting Solutions• Automotive Lighting• LumiledsGroup Innovation • Design • New Venture Integration • Group and Regional Overheads • Pensions and Global Service UnitsMembers of the Board of Management and certain key officers together form the Executive CommitteeExecutive CommitteeHealthcareConsumerLifestyleLightingInnovationGroup &ServicesOrganizational chart5 Sector performance 5 - 5 Sales, EBIT and EBITA 2013 in millions of euros unless otherwise stated Healthcare Consumer Lifestyle Lighting Innovation, Group & Services Philips Group sales EBIT % EBITA1) 9,575 4,605 8,413 736 23,329 1,315 429 489 (242) 1,991 13.7 9.3 5.8 − 8.5 1,512 483 695 (239) 2,451 % 15.8 10.5 8.3 − 10.5 1) For a reconciliation to the most directly comparable GAAP measures, see chapter 14, Reconciliation of non-GAAP information, of this Annual Report Sales per operating sector 2013 in millions of euros Employees per operating sector 2013 in FTEs at year-end Lighting 8,413 Healthcare 9,575 Lighting 46,890 Healthcare 37,008 Consumer Lifestyle 17,854 Consumer Lifestyle 4,605 EBITA per operating sector 20131) in millions of euros Lighting 695 Consumer Lifestyle 483 Healthcare 1,512 1) For a reconciliation to the most directly comparable GAAP measures, see chapter 14, Reconciliation of non-GAAP information, of this Annual Report 70 Annual Report 2013 5.1 Healthcare 5 Sector performance 5.1 - 5.1 “ As health systems around the world address the complexities of care delivery at their core, Philips Healthcare is responding to the global call for transformation through meaningful and intelligent innovation. Across our businesses, we are collaborating with customers to consistently provide better care at lower cost to more patients. Through our Accelerate! program, we are delivering on this commitment to our customers faster and more effectively than ever before.” Deborah DiSanzo, CEO Philips Healthcare • By focusing on innovations in key areas across the • The ongoing implementation of Accelerate! has been continuum of care and aligning our resources with enhancing our ability to move quickly and efﬁciently customers and clinicians, we continue to provide in delivering the innovation that matters most to our solutions that offer more value while helping lower customers. the cost of care. • We continue to drive proﬁtable growth and deliver on our commitments, despite challenging economic headwinds, for instance in North America and Europe. Annual Report 2013 71 5 Sector performance 5.1.1 - 5.1.2 5.1.1 Health care landscape (CT), magnetic resonance imaging (MRI) and Health systems in mature, developing and underserved molecular imaging (MI); diagnostic X-ray, including markets around the world continue to press for new digital X-ray and mammography; interventional X- solutions that can help them provide accessible, ray, encompassing cardiology, radiology, surgery affordable, quality care to diverse patient populations. and other areas; and ultrasound, a modality with diverse customers and broad clinical presence. Increasingly, they are abandoning the notion that • Patient Care & Clinical Informatics: Enterprise-wide incremental improvements can resolve the patient monitoring solutions, from value solutions to overwhelming economic, demographic and logistic sophisticated connected solutions, for real-time issues standing in the way of the care that is needed. clinical information at the patient’s bedside; Instead, they are pursuing new opportunities to cardiology informatics and enterprise imaging approach the delivery of care differently. informatics, including picture archiving and communication systems and other clinical This broader, deeper and bolder way of thinking is information systems; patient monitoring and clinical opening the door to a world of transformational informatics; mother and child care, including solutions with far-reaching implications, ranging from products and solutions for pregnancy, labor and cutting-edge technology platforms and protocols to delivery, newborn and neonatal intensive care and innovative new business models and initiatives that are the transition home; and therapeutic care, including redeﬁning the clinical experience across the continuum cardiac resuscitation, emergency care solutions, of care. therapeutic temperature management, anesthesia care, hospital respiratory systems and ventilation. The demand for more effective care delivery is • Home Healthcare Solutions: Sleep management, intensifying and unrelenting, as people live longer, respiratory care and non-invasive ventilation; suffer increasingly from chronic disease, and become medical alert and medication dispensing services for bigger consumers of constrained healthcare resources. independent living; and remote patient monitoring. The burden that this places on health systems is • Customer Services: Equipment services and support, unsustainable – and driving the need for industry- including service contracts, installation, equipment deﬁning solutions. 5.1.2 About Philips Healthcare maintenance, remote proactive monitoring and multi-vendor services; managed services, including equipment ﬁnancing and asset management; and At Philips, we are dedicated to delivering innovation professional services, including consulting, site that matters to our customers and the patients they planning and project management, education and serve. We do this by developing innovative solutions design. across the continuum of care in partnership with clinicians and our customers to improve patient *In January 2014 the Healthcare Informatics Solutions & outcomes, provide more and better value, and expand Services business group was established. This business access to care. group is focusing on a common digital healthcare platform, advanced informatics and big data analytics, Philips is one of the world’s leading healthcare and world-class integration and consulting services. companies (based on sales) along with General Electric and Siemens. The United States, our largest market, represented 40% of Healthcare’s global sales in 2013, followed by China, Japan and Germany. Growth geographies accounted for 25% of Healthcare sales. Philips Healthcare has approximately 37,000 employees worldwide. In 2013 our Healthcare business was organized around four strategic business groups*: • Imaging Systems: Integrated clinical solutions that include radiation oncology, clinical applications and platforms, and portfolio management; advanced diagnostic imaging, including computed tomography Total sales by business 2013 as a % Imaging Systems 38 Customer Services 26 Home Healthcare Solutions 14 Patient Care & Clinical Informatics 22 72 Annual Report 2013 5 Sector performance 5.1.2 - 5.1.3 Sales at Healthcare are generally higher in the second patient data for more conﬁdent diagnosis and half of the year largely due to the timing of new product treatment. Our solutions also helped optimize availability and customer spending patterns. workﬂows in an increasingly connected care environment. Regulatory requirements • The delivery of continuous, quality care to patients Philips Healthcare is subject to extensive regulation. living with chronic conditions requires a thoughtful, We are committed to compliance with regulatory coordinated approach. New solutions combining product approval and quality system requirements in advanced functionality and patient-centric design, every market we serve by addressing speciﬁc terms and including the Wisp minimal contact nasal mask for conditions of local and national regulatory authorities, sleep and respiratory therapy, were introduced to including the US FDA, the SFDA in China, and other help patients adhere to a health regimen for more comparable foreign agencies. Obtaining regulatory independent living. approval is costly and time-consuming, but a • The complexities of healthcare delivery call for prerequisite for market introduction. comprehensive solutions to address staggering costs, clinician shortages and demanding patient In our Healthcare facility in Cleveland, Ohio, certain populations. Through customized models and issues in the general area of manufacturing process programs, as demonstrated by our multi-year controls were identiﬁed during an ongoing US Food and alliance with Georgia Regents Medical Center to Drug Administration (FDA) inspection. To address these facilitate innovative and affordable patient-centered issues, on January 10, 2014, we started a voluntary, care, we continued to help visionary health systems temporary suspension of new production at the facility, address these challenges today while moving toward primarily to strengthen manufacturing process controls. a sustainable future. Currently, there is no indication of product safety • Optimizing resources to cost-effectively meet the issues. Please refer to note 36, Subsequent events for needs of resource-intensive patient populations further details. requires integrated solutions. By leveraging our leadership in telehealth technology and care With regard to sourcing, please refer to sub-section coordination, we implemented new Hospital to 13.2.2, Supplier indicators, of this Annual Report. Home programs with Banner Health in the US and opened eICUs with Guy’s and St Thomas’ Hospitals in 5.1.3 2013 highlights the UK. In 2013, as healthcare systems continued to move forward with fundamental changes, we remained 2013 also marked the third year of our Accelerate! focused on delivering innovative solutions and journey of change and performance improvement. We investing in strategic alliances that help enable this made signiﬁcant progress driving customer centricity transformation: deep into our organization, embracing operational excellence through programs like Design for X (where X • Addressing the world’s most prevalent diseases can be cost, quality, manufacturing, refurbishment, etc.) starts with the clinician’s ability to visualize clearly and fostering a growth and performance culture across and accurately within the human body. By integrating our businesses. One of the key outcomes has been imaging and information in meaningful ways – and faster alignment across Philips Healthcare in delivering drawing on our expertise in cardiology, oncology and locally relevant innovations and making these solutions other critical areas – we expanded our solutions more cost-effective through efﬁciencies in product offering with the launch of the EPIQ ultrasound development. system, advancements in image-guided interventional therapy and other innovations to improve diagnosis, treatment and management of disease. • Achieving the best possible patient outcomes depends on the clinician’s ability to access relevant information, anywhere and anytime. Through innovative devices and strategic collaboration, such as our work with Mayo Clinic on developing cloud- based solutions for the intensive care unit (ICU), we helped providers manage massive amounts of Annual Report 2013 73 5 Sector performance 5.1.4 - 5.1.4 5.1.4 2013 ﬁnancial performance Key data in millions of euros unless otherwise stated Sales Sales growth % increase, nominal % increase, comparable1) EBITA 1) as a % of sales EBIT as a % of sales 2011 2012 2013 8,852 9,983 9,575 3 5 13 6 1,080 1,226 12.3 (4) 1 1,512 15.8 12.2 27 0.3 1,026 1,315 10.3 13.7 Net operating capital (NOC)1) 8,418 7,976 7,437 Cash ﬂows before ﬁnancing activities1) 707 1,298 1,292 Employees (FTEs) 37,955 37,460 37,008 1) For a reconciliation to the most directly comparable GAAP measures, see chapter 14, Reconciliation of non-GAAP information, of this Annual Report In 2013, sales amounted to EUR 9,575 million, 4% lower than in 2012 on a nominal basis. Excluding a 5% negative currency effect, comparable sales increased by 1%. Customer Services achieved solid mid-single- digit growth. Home Healthcare Solutions and Patient Care & Clinical Informatics both posted low-single-digit growth, while Imaging Systems recorded a mid-single- digit decline. Green Product sales amounted to EUR 3,690 million, or 39% of sector sales. Geographically, comparable sales in growth geographies showed high-single digit growth, largely driven by strong double-digit growth in China and Latin America, partly offset by a decline in Russia & Central Asia. In mature geographies, comparable sales declined by 1%. The year-on-year sales decrease was largely attributable to North America and Western Europe, as sales in other mature geographies showed a high-single-digit increase, led mainly by Japan. EBITA increased from EUR 1,226 million, or 12.3% of sales, in 2012 to EUR 1,512 million, or 15.8% of sales, in 2013. All businesses delivered improved EBITA, largely as a result of cost-saving programs related to overhead reduction. Restructuring and acquisition-related charges were close to zero, compared with EUR 134 million in 2012. EBITA in 2013 also included EUR 61 million from a past-service pension gain and a EUR 21 million gain on the sale of a business. EBIT amounted to EUR 1,315 million, or 13.7% of sales, and included EUR 197 million of charges related to intangible assets. 74 Annual Report 2013 Net operating capital decreased by EUR 539 million to EUR 7.4 billion, mainly due to currency effects and lower ﬁxed assets. Cash ﬂows before ﬁnancing activities decreased slightly from EUR 1,298 million in 2012 to EUR 1,292 million, as higher earnings were more than offset by higher outﬂows from working capital and provisions. Sales per geographic cluster in millions of euros ■-Western Europe_■-North America_■-other mature_■-growth 12,000 8,000 4,000 0 7,839 1,450 763 3,685 8,601 1,701 968 3,901 8,852 1,905 1,046 3,953 9,983 2,368 1,252 4,393 9,575 2,421 1,133 4,089 1,941 2,031 1,948 1,970 1,932 2009 2010 2011 2012 2013 ■-Sales----NOC 8.0 10.0 7.4 9.6 Sales and net operating capital in billions of euros 8.9 8.6 8.4 8.9 8.4 7.8 12 8 4 0 2009 2010 2011 2012 2013 EBIT and EBITA1) in millions of euros ■-Amortization and impairment in value_■-EBIT in value ■■-EBITA in value_--EBITA as a % of sales 1,800 1,200 600 0 15.8 1,512 197 1,315 10.0 786 255 531 12.2 1,080 1,053 12.3 1,226 200 1,026 13.1 1,129 263 866 27 2009 2010 2011 2012 2013 1) For a reconciliation to the most directly comparable GAAP measures, see chapter 14, Reconciliation of non-GAAP information, of this Annual Report 5 Sector performance 5.1.5 - 5.1.6 5.1.5 Delivering on EcoVision sustainability commitments The increasing population and rising levels of human development worldwide pose a number of challenges, such as scarcity of natural resources, pollution, and stressed health care systems. Philips Healthcare continues to help increase the number of lives improved annually around the globe by developing solutions that improve access to care, while at the same time respecting the boundaries of natural resources. In 2013 we introduced 13 new Green Products to support energy efﬁciency, materials reduction and other sustainability goals. We are also actively collaborating with care providers to look for innovative ways to reduce the environmental impact of health care, for example by improving the energy efﬁciency of medical equipment. 5.1.6 Delivering innovation that matters to you Annual Report 2013 75 5 Sector performance 5.1.6 - 5.1.6 Guiding cancer care: a new approach to therapy With image-guided High Intensity Focused Ultrasound from Philips, doctors at the University Hospital in Utrecht are researching ways of providing cancer therapy with fewer side effects and reducing the need for surgery.1) “Up to 70% of patients with cancer will be facing bone “If we have patients with cancer that don’t need to be metastases…The patients we see are in a lot of pain. The treated anymore with the surgical scalpel and leave a problems they have are in their daily activities such as day after treatment in a good clinical condition, that sleeping, walking. This pain can be really debilitating.” would be a really major shift in health care and cancer treatment.” Dr Maurice van den Bosch Interventional Radiologist UMC Utrecht “No instruments whatsoever will go into the patient’s body. Without touching the patient we can treat the patient… By managing their pain we restore patients’ quality of life.” Dr Merel Huisman Department of Radiology UMC Utrecht 76 Annual Report 2013 1) This device is not available for sale in the USA: its use is limited to approved investigations only. 5.2 Consumer Lifestyle 5 Sector performance 5.2 - 5.2 “ Across the world people are increasingly motivated to look and feel their best, seeking solutions that are truly meaningful, solutions that ﬁt their daily lives. At Philips Consumer Lifestyle we are driving proﬁtable growth, by taking global innovations and bringing them to market in a way that is highly locally relevant. We are empowering millions of consumers to make healthier choices every day, in areas such as oral healthcare, nutrition and healthy air.” Pieter Nota, CEO Philips Consumer Lifestyle • We are executing our strategy with rigor, delivering • Accelerate! has transformed the sector into a market- strong growth and improving proﬁtability through driven organization, by changing our operating locally relevant innovation. model, performance culture and end-to-end • Future growth drivers are clearly set: grow the core approach. businesses through local and global innovation, and geographical expansion of proven propositions; further expand in the domain of personal health and well-being by exploring new business adjacencies and new business areas. Annual Report 2013 77 5 Sector performance 5.2.1 - 5.2.2 5.2.1 Lifestyle retail landscape In 2013 the Consumer Lifestyle sector consisted of the Across the world, consumers are looking for solutions following areas of business*: that help them to be healthy, live well and enjoy life. They want to be in control of their own health and well- • Health & Wellness: mother and childcare, oral being and to care for their family and friends. They want healthcare, pain management to look and feel good. • Personal Care: male grooming, beauty • Domestic Appliances: kitchen appliances, coffee, In a connected, digital world, consumers are looking for garment care, ﬂoor care, air puriﬁcation smart, personalized solutions. Purchase decisions are increasingly made or inﬂuenced online; this is as true of *Philips had reached an agreement to transfer the consumers in growth geographies such as China, as it is Audio, Video, Multimedia and Accessories (AVM&A) in developed markets such as Western Europe. business to Funai Electric Co. Ltd in Q1 2013. This The rise of the middle class in growth geographies is then, Philips has received expressions of interest in the another trend impacting the retail landscape. This business from various parties and has been actively rapidly expanding group is experiencing greater discussing the sale of the business with potential agreement has been terminated as of October 25. Since spending power. buyers. In the meantime, the AVM&A business operates as a stand-alone entity named WOOX Innovations. In 2013, economic headwinds caused continued Consequently, the AVM&A business is reported as pressure on consumer spending in some markets. discontinued operations throughout 2013. However, living a healthy life remained a high priority for consumers. Total sales by business 2013 as a % 5.2.2 About Philips Consumer Lifestyle At Consumer Lifestyle we aim to make a difference to people’s lives by making it easier for them to achieve a healthier and better lifestyle. The sector is focused on value creation through category leadership and operational excellence. We are increasing the quality and local relevance of product innovation, the speed with which we innovate, and expanding our distribution to capture increasing spending power in growth geographies. Accelerate! is fully embedded in Consumer Lifestyle Domestic Appliances 47 Health & Wellness 20 Personal Care 33 and delivering strong results. Having moved from a We offer a broad range of products from high to low functional, centrally-led organization to an price/value quartiles, necessitating a diverse organization built around businesses and markets, we distribution model. We continue to expand our portfolio are now able to direct investments to where the growth to increase its accessibility, particularly for lower-tier is, addressing locally relevant consumer needs. This cities in growth geographies. We have implemented approach enables us to take locally developed innovative approaches in online and social media to platforms and adapt them for other markets or on a build our brand and drive sales. global scale. Under normal economic conditions, the Consumer Our end-to-end approach is accelerating our specialist Lifestyle sector experiences seasonality, with higher capability development in mature markets, to enable sales in the fourth quarter. effective partnerships with customers and consumers, and in growth geographies, to enable development of Consumer Lifestyle employs approximately 17,900 go-to-market strategies. Additionally, an extensive people worldwide. Our global sales and service change program has instilled an organizational organization covers more than 50 developed and performance culture with a strong focus on growth geographies. In addition, we operate accountability. 78 Annual Report 2013 manufacturing and business creation organizations in Austria, Brazil, China, India, Indonesia, Italy, the Netherlands, Romania, the UK and the US. 5 Sector performance 5.2.2 - 5.2.4 A new innovation site in Shanghai is fully equipped to Russia, the MultiCooker was launched in several target speciﬁc market needs. Innovating directly in the European markets, with initial market response market allows us to increase the annual number of exceeding expectations. locally relevant introductions and to implement • Innovative, precision tools are driving market share product and packaging updates faster. Regulatory requirements and brand preference in male grooming. Following the successful launch of the Click & Style range, we further expanded our portfolio with the introduction Consumer Lifestyle is subject to signiﬁcant regulatory of the world’s ﬁrst laser-guided beard trimmer: the requirements in the markets where it operates. This Philips Beard Trimmer 9000. includes the European Union’s Waste from Electrical • Demonstrating our ability to respond quickly to local and Electronic Equipment (WEEE), Restriction of market opportunities, we recorded strong sales Hazardous Substances (RoHS), Registration, growth in our air puriﬁer business in China on the back Evaluation, Authorization and Restriction of Chemicals of heightened awareness of outdoor air quality in the (REACH), Energy-use of Products (EuP) requirements country. and Product Safety Regulations. Consumer Lifestyle has a growing portfolio of medically regulated products 5.2.4 2013 ﬁnancial performance in its Health & Wellness and Personal Care businesses. For these products we are subject to the applicable requirements of the US FDA, the European Medical Device Directive, the SFDA in China, the regulations stipulated by Health Authorities in India and comparable regulations in other countries. Through our growing beauty, oral healthcare and mother and childcare product portfolio the range of applicable regulations has been extended to include requirements relating to cosmetics and, on a very small scale, pharmaceuticals. With regard to sourcing, please refer to sub-section 13.2.2, Supplier indicators, of this Annual Report. 5.2.3 2013 highlights • Building our leadership in digital innovation, we unveiled a range of connected consumer propositions at this year’s IFA trade show in Berlin. Key data in millions of euros unless otherwise stated Sales Sales growth % increase (decrease), nominal % increase (decrease), comparable1) EBITA 1) as a % of sales EBIT as a % of sales 2011 2012 2013 3,771 4,319 4,605 14 11 153 4.1 109 2.9 15 9 456 10.6 400 9.3 7 10 483 10.5 429 9.3 Net operating capital (NOC)1) 874 1,205 1,261 Cash ﬂows before ﬁnancing activities1) (271) 422 472 Employees (FTEs) 15,471 16,542 17,854 1) For a reconciliation to the most directly comparable GAAP measures, see chapter 14, Reconciliation of non-GAAP information, of this Annual Report Highlights included a smart air puriﬁer, baby monitor Sales amounted to EUR 4,605 million, a nominal and a digital grooming guide. increase of 7% compared to 2012. Excluding a 3% • The extended Philips AVENT Natural infant feeding negative currency impact, comparable sales were 10% range was showcased at the Kind + Jugend fair in higher year-on-year. Domestic Appliances achieved Germany. The Natural baby bottle is proven to be strong double-digit growth, while Health & Wellness more easily accepted by babies, thanks to its unique and Personal Care recorded high-single-digit growth. teat design. • Further strengthening our global leadership, the From a geographical perspective, comparable sales latest introductions in Oral Healthcare, including the showed a 17% increase in growth geographies and 4% Philips Sonicare PowerUp and Sonicare FlexCare growth in mature geographies. In growth geographies, Platinum, have been well received by consumers and the year-on-year sales increase was driven by Russia are driving strong growth in North America and China. and China, primarily in our Domestic Appliances and • Continuing the geographical expansion and Personal Care businesses. Growth geographies’ share localization of proven product innovations, we of sector sales increased from 45% in 2012 to 47% in introduced the Airfryer in Japan and the SoupMaker 2013. in markets across Europe, the Middle East and Latin America. Additionally, following major success in EBITA increased from EUR 456 million, or 10.6% of sales, in 2012 to EUR 483 million, or 10.5% of sales, in 2013. Restructuring and acquisition-related charges Annual Report 2013 79 EBIT and EBITA1) in millions of euros ■-Amortization and impairment in value_■-EBIT in value ■■-EBITA in value_--EBITA as a % of sales 10.6 456 56 400 10.5 483 54 429 600 400 200 0 6.4 211 188 4.1 153 44 109 1.0 14 30 23 16 2009 2010 2011 2012 2013 1) For a reconciliation to the most directly comparable GAAP measures, see chapter 14, Reconciliation of non-GAAP information, of this Annual Report 5.2.5 Delivering on EcoVision sustainability commitments Sustainability plays an important role at Consumer Lifestyle, with the main focus on optimizing the sustainability performance of our products and operations. Green products, which meet or exceed our minimum requirements in the areas of energy consumption, packaging and substances of concern, accounted for 49% of total sales in 2013. And more than 80% of our shaving and grooming products are completely PVC/BFR-free. In 2013 we continued to increase the use of recycled materials in our products. Over 330 tons of recycled plastics were used in vacuum cleaners and almost 250 tons in irons. In our operations we continue to use more energy from renewable sources, with the ultimate aim of having CO2-neutral production sites. In 2013 we improved the recycling percentage of our industrial waste to almost 80%. 5 Sector performance 5.2.4 - 5.2.6 amounted to EUR 14 million in 2013, compared to EUR 56 million in 2012. EBITA in 2012 included a EUR 160 million one-time gain from the extension of our partnership with Sara Lee, including the transfer of our 50% ownership right to the Senseo trademark. Excluding this one-time gain, the year-on-year EBITA increase was driven by improved earnings in all businesses. EBIT amounted to EUR 429 million, or 9.3% of sales, which included EUR 54 million of amortization charges, mainly related to intangible assets at Health & Wellness and Domestic Appliances. Net operating capital increased from EUR 1,205 million in 2012 to EUR 1,261 million in 2013, due to higher working capital and lower provisions. Cash ﬂows before ﬁnancing activities increased from EUR 422 million in 2012 to EUR 472 million in 2013. Excluding the cash proceeds of EUR 170 million received in 2012 from the Senseo transaction, cash ﬂows before ﬁnancing activities increased by EUR 120 million mainly attributable to higher cash earnings. Sales per geographic cluster in millions of euros ■-Western Europe_■-North America_■-other mature_■-growth 4,605 2,187 4,319 1,954 3,771 1,532 3,316 1,290 193 228 272 299 560 1,273 688 1,323 768 1,325 769 1,350 2,925 1,067 142 516 1,200 5,000 2,500 0 ■-Sales----NOC 1.2 4.3 1.3 4.6 Sales and net operating capital in billions of euros 0.9 3.8 0.9 3.3 0.7 2.9 6 3 0 2009 2010 2011 2012 2013 80 Annual Report 2013 2009 2010 2011 2012 2013 5.2.6 Delivering innovation that matters to you 5 Sector performance 5.2.6 - 5.2.6 A conﬁdent man: smooth shaving with Philips SensoTouch Jialing Jin’s family means the world to him. And he wants them to know it. When he shaves with a Philips SensoTouch 3D, he feels more conﬁdent and his family feels the difference. “I think having a clean-cut and neat appearance can boost a man’s conﬁdence. In the past I used a standard razor, but it irritated my skin.” “Since I began using the new Philips SensoTouch 3D razor, my shaving experience has noticeably improved. My skin is even smoother and my daughter loves to touch my face. She tells me my skin is so smooth! Having a clean-cut and tidy appearance increases my conﬁdence, and with that I am able to enjoy a full life.” Annual Report 2013 81 5 Sector performance 5.3 - 5.3.1 5.3 Lighting “ In 2013 our industry experienced a huge transformation as the shift to LED lighting gathered pace. We delivered value by improving our proﬁtability and achieved a leading position in LED lighting solutions. Going forward, we will accelerate the drive to LED and help our customers to realize the beneﬁts of intelligent connected lighting, serving both consumers and the growing professional market for integrated systems and services.” Eric Rondolat, CEO Philips Lighting • The lighting industry is undergoing a radical 5.3.1 Lighting business landscape transformation. We are witnessing a number of trends and transitions • The lighting market is being driven by the transition to that are affecting the lighting industry and changing the LED and digital applications. way people use and experience light. • Our four-pillar strategy will enable us to improve performance, maximize growth and strengthen our We serve a large and attractive market that is driven by position as a global leader in the lighting market. the need for more light, energy-efﬁcient lighting, and digital lighting. Over half the world’s population currently lives in urban areas: a ﬁgure that is expected to rise to over 70% by 2050. That means 3 billion extra city 82 Annual Report 2013 5 Sector performance 5.3.1 - 5.3.2 dwellers. These people will all need light. In addition, We aim to further strengthen our position in the digital the world needs energy-efﬁcient light in the face of market through added investment in LED leadership rising energy prices and climate change. At the same while at the same time capitalizing on our broad time, the lighting industry is moving from conventional portfolio, distribution and brand in conventional to LED lighting, which is changing the way people use, lighting - seizing the signiﬁcant opportunity to grow experience and interact with light. LED technology, market share and optimize proﬁts in conventional when combined with controls and software and linked lamps and drivers by ﬂexibly anticipating the slower or into a network, is allowing light points to achieve a faster phase-out of conventional products. degree of intelligence. This is opening up the possibility of new functionalities and services based on the We address people’s lighting needs across a full range transmission and analysis of data. of market segments. Indoors, we offer lighting solutions for homes, shops, ofﬁces, schools, hotels, factories and The lighting market is expected to grow by 4-6% on a hospitals. Outdoors, we offer solutions for roads (street compound annual basis between 2013 and 2016.The lighting and car lights) and for public spaces, residential majority of this growth will be driven by LED-based areas and sports arenas, as well as solar-powered LED solutions and applications – heading towards a 45% off-grid lighting. In addition, we address the desire for share by 2015 – and growth geographies. light-inspired experiences through architectural 5.3.2 About Philips Lighting projects. Finally, we offer speciﬁc applications of lighting in specialized areas, such as horticulture and Philips Lighting is a global market leader with water puriﬁcation. recognized expertise in the development, manufacture and application of innovative, energy-efﬁcient lighting Philips Lighting spans the entire lighting value chain – products, systems and services that improve people’s from light sources, luminaires, electronics and controls lives. We have pioneered many of the key to application-speciﬁc systems and services – through breakthroughs in lighting over the past 122 years, laying the following businesses: the basis for our current strength and ensuring we are well-placed to be a leader in the digital transformation. • Light Sources & Electronics: LED, eco-halogen, (compact) ﬂuorescent, high-intensity discharge and We have a ﬁrm strategy in place to deliver even greater incandescent light sources, plus electronic and value for our customers. This strategy is based upon electromagnetic gear, modules and drivers four pillars: • Consumer Luminaires: functional, decorative, lifestyle, scene-setting luminaires • Lead the technological revolution – strengthen our • Professional Lighting Solutions: controls and leadership position through continued innovation in luminaires for city beautiﬁcation, road lighting, sports high-quality, efﬁcient and connected LED systems. lighting, ofﬁce lighting, shop/hospitality lighting, • Win in the consumer market – build on our strengths industry lighting in lamps by meeting consumers’ needs and • Automotive Lighting: car headlights and signaling delivering innovative products, such as the Hue • Lumileds: packaged LEDs personal wireless lighting system that can be controlled by a smart phone or tablet. At the same The Light Sources & Electronics business conducts its time we are addressing costs so that consumers can sales and marketing activities through the professional, quickly enjoy the advantages of new LED OEM and consumer channels, the latter also being used innovations in lamps, luminaires and systems. In by our Consumer Luminaires business. Professional addition, we are developing new channels to market. Lighting Solutions is organized in a trade business • Drive innovation in professional lighting systems and (commodity products) and a project solutions business services – providing integrated offerings for this (project luminaires, systems and services). Automotive market, which is an early adopter of energy-efﬁcient Lighting is organized in two businesses: OEM and LED and now intelligent connected lighting Aftermarket. technologies. • Accelerate! – strengthen our capabilities and The conventional lamps industry is highly consolidated, improve the way we work so that we reduce our with GE and Osram as key competitors. The LED lighting costs, are more productive, and fully satisfy our market, on the other hand, is very dynamic. We face customers’ expectations. new competition from Asia and new players from the Annual Report 2013 83 5 Sector performance 5.3.2 - 5.3.4 semiconductor and building management sectors. The Our smart and connected CityTouch lighting system luminaires industry is fragmented, with our competition was installed in a number of cities around the world. varying per region and per market segment. This intelligent lighting system enables cities to control light points in a dynamic and ﬂexible way to deliver light Under normal economic conditions, Lighting’s sales are where and when needed, saving energy and generally not materially affected by seasonality. maintenance costs. Philips Lighting has manufacturing facilities in some 25 Our innovations in architectural lighting were used to countries in all regions of the world, and sales rejuvenate some of the best-known landmarks in the organizations in more than 60 countries. Commercial world, such as the Bay Bridge in San Francisco, and to activities in other countries are handled via distributors create new city icons such as the ﬁre and water- working with our International Sales organization. breathing Dragon Bridge in Da Nang, Vietnam. Lighting has approximately 46,900 employees Underlining our expertise in integrated solutions, we worldwide. Regulatory requirements collaborated with the Rijksmuseum, Amsterdam to develop a customized LED lighting solution for the museum’s entire exhibition area, bringing the color and Lighting is subject to signiﬁcant regulatory detail of masterpieces such as Rembrandt’s Night requirements in the markets where it operates. These Watch to life as never before. include the European Union’s Waste from Electrical and Electronic Equipment (WEEE), Restriction of The latest innovation in Philips Hue, our Hazardous Substances (RoHS), Registration, groundbreaking connected lighting system for the Evaluation, Authorization and Restriction of Chemicals home, connects to internet services, making the system (REACH), Energy-using Products (EuP) and Energy even more intelligent, with new functionality to enjoy. Performance of Buildings (EPBD) directives. We also launched ‘Friends of Hue’ – lamp ﬁttings and Total sales by business 2013 as a % Lumileds 5 Automotive 10 Professional Lighting Solutions 28 Consumer Luminaires 5 Light Sources & Electronics 52 5.3.3 2013 highlights In 2013, our lighting innovations underlined our four- pillar strategy aimed at delivering even greater value for our customers and shareholders. Leading the technological revolution in lighting, we delivered a number of groundbreaking innovations. Lumileds set the standard in high and mid-power LEDs, improving efﬁcacy and light quality. In our drive to continuously reduce energy consumption, Philips was the ﬁrst to show a prototype TLED providing 200 lumens per watt, which is twice as efﬁcient as current LED-based solutions. We also continued to pioneer innovations in connected lighting, in segments such as home and city lighting. 84 Annual Report 2013 luminaires such as LivingColors Bloom and LightStrips which enable consumers to create even richer lighting experiences. Resulting from our partnership with Disney, StoryLight Mickey is another addition to the Friends of Hue portfolio. It transforms bedtime stories into a unique experience. The Philips-Disney partnership combines Philips’ innovation in lighting with the magic of Disney characters and storytelling to transform a child’s bedroom into a more imaginative place for them to read, play and fall asleep. 5.3.4 2013 ﬁnancial performance Key data in millions of euros unless otherwise stated Sales Sales growth % increase, nominal % increase, comparable1) EBITA 1) as a % of sales EBIT as a % of sales 2011 2012 2013 7,638 8,442 8,413 1 6 399 5.2 (408) (5.3) 11 4 128 1.5 (66) (0.8) 0 3 695 8.3 489 5.8 Net operating capital (NOC)1) 4,965 4,635 4,462 Cash ﬂows before ﬁnancing activities1) 208 279 478 Employees (FTEs) 53,168 50,224 46,890 1) For a reconciliation to the most directly comparable GAAP measures, see chapter 14, Reconciliation of non-GAAP information, of this Annual Report 5 Sector performance 5.3.4 - 5.3.4 In 2013, sales amounted to EUR 8,413 million, in line Cash ﬂows before ﬁnancing activities increased from with 2012 on a nominal basis. Excluding a 3% negative EUR 279 million in 2012 to EUR 478 million, mainly due currency effect, comparable sales increased by 3%. to higher cash earnings and lower net capital Double-digit comparable sales growth was achieved expenditures, partly offset by higher outﬂows for by Lumileds and Automotive. Light Sources & working capital. Electronics recorded low-single-digit growth, while comparable sales at Professional Lighting Solutions were in line with 2012. Consumer Luminaires showed a low-single-digit decline. The year-on-year comparable sales increase was substantially driven by growth geographies, which grew 12% on a comparable basis. As a proportion of total sales, sales in growth geographies increased to 43% of total Lighting sales, driven by double-digit growth in China and Indonesia, compared to 41% in 2012. In mature geographies, sales showed a low-single-digit decline, largely due to lower demand in North America and Western Europe, particularly at Professional Lighting Solutions and Consumer Luminaires. Sales of LED-based products grew to 29% of total sales, up from 22% in 2012, driven by Light Sources & Electronics and Professional Lighting Solutions. Sales of energy-efﬁcient Green Products exceeded EUR 5,855 million, or 70% of sector sales. EBITA amounted to EUR 695 million, or 8.3% of sales, compared to EUR 128 million, or 1.5% of sales, in 2012. Restructuring and acquisition-related charges amounted to EUR 100 million in 2013, compared to EUR 315 million in 2012. The increase in EBITA was mainly Sales per geographic cluster in millions of euros ■-Western Europe_■-North America_■-other mature_■-growth 10,000 8,000 6,000 4,000 2,000 0 7,552 2,899 7,638 3,073 8,442 3,432 8,413 3,655 367 391 478 367 1,989 1,926 2,121 1,985 6,546 2,211 253 1,811 2,271 2,297 2,248 2,411 2,406 2009 2010 2011 2012 2013 ■-Sales----NOC 4.6 8.4 4.5 8.4 Sales and net operating capital in billions of euros 5.5 7.6 5.0 7.6 5.1 6.5 10 8 6 4 2 0 attributable to higher operational earnings, as well as 2009 2010 2011 2012 2013 lower restructuring and acquisition-related charges. Additionally, 2012 included losses on the sale of industrial assets amounting to EUR 81 million. EBIT amounted to EUR 489 million, or 5.8% of sales, which included EUR 180 million of amortization charges, mainly related to intangible assets at Professional Lighting Solutions, and an impairment of EUR 32 million related to customer relationships at Consumer Luminaires. Additionally, a goodwill impairment charge of EUR 26 million was taken in the fourth quarter of 2013 due to reduced growth expectations. Net operating capital decreased by EUR 173 million to EUR 4.5 billion, primarily due to currency effects, partly offset by a reduction in restructuring provisions. EBIT and EBITA1) in millions of euros 10.8 818 173 645 1.6 103 161 (58) 1,000 500 0 (500) ■-Amortization and impairment in value_■-EBIT in value ■■-EBITA in value_--EBITA as a % of sales 5.2 399 807 (408) 8.3 695 206 489 1.5 128 194 (66) 2009 2010 2011 2012 2013 1) For a reconciliation to the most directly comparable GAAP measures, see chapter 14, Reconciliation of non-GAAP information, of this Annual Report Annual Report 2013 85 5 Sector performance 5.3.5 - 5.3.6 5.3.5 Delivering on EcoVision sustainability commitments In 2013, Philips Lighting invested EUR 327 million in Green Innovation, compared to EUR 325 million in 2012. Investments continue to be made in energy-saving technologies such as LED, OLED and lighting controls and in the reduction of regulated substances in our product portfolio. In April, Philips announced that it had created the ﬁrst LED lamp prototype delivering 200 lumens per watt of high-quality light, halving energy use compared to current LED lamps. The energy efﬁciency of our total product portfolio improved from 37.9 to 38.5 lumens per watt in 2013. Within the Green Operations 2015 program, we are on track to meet our commitments to reduce Lighting’s environmental footprint. By using energy from renewable sources and implementing energy-saving programs in our major operational sites, we have reduced our carbon footprint from energy by approximately 15% since the baseline year of 2009. In 2013, 83% of our total waste was re- used as a result of recycling. 5.3.6 Delivering innovation that matters to you 86 Annual Report 2013 5 Sector performance 5.3.6 - 5.3.6 An inspired home: lighting up a little girl’s day Meet a London couple who use Philips Hue lighting to create a happy and inspiring environment for their daughter, Elena. “Being a parent is not easy, I think anyone can understand that. And I think it’s about trying to ﬁnd the small things that just help you through the day a bit better.” “We also ﬁnd during play especially, it’s a great way to interact with her. Painting itself is great fun, but when you can kind of paint the colors with the light bulb, that’s even better. Or dancing is great fun, but when you can dance and the lights change, it just brings a whole new element to the experience. It makes for a much more engaging and fun day for us and for her.” Annual Report 2013 87 5 Sector performance 5.4 - 5.4.1 5.4 Innovation, Group & Services “ In 2013, we continued to better align our innovation strategies with our business strategies. We are making real progress improving our ability to innovate end-to-end, all the way from gaining a deep understanding of local customer needs to actual impact in the marketplace. Our innovation process is becoming more effective, efﬁcient and faster, allowing us to better deliver solutions that really matter to people.” Jim Andrew, Chief Innovation & Strategy Ofﬁcer Introduction Innovation, Group & Services comprises the activities of Group Innovation, Group headquarters, including country and regional management, and certain costs of 5.4.1 About Innovation, Group & Services Philips Group Innovation Philips Group Innovation (PGI) feeds the innovation pension and other post-retirement beneﬁt plans. pipeline, enabling its business partners – the Philips Additionally, the global shared business services operating businesses – to create new business options for procurement, ﬁnance, human resources, IT and real through new technologies, new business creation, and estate are reported in this sector. intellectual property development. Focused research and development improvement activities drive time- to-market efﬁciency and increased innovation 88 Annual Report 2013 5 Sector performance 5.4.1 - 5.4.1 effectiveness. In addition, PGI opens up new value aligned with our vision and strategy and inspired by spaces beyond current business scope or focus unmet customer needs as well as major societal (Emerging Business Areas), manages the Emerging- challenges. Business-Areas-related R&D portfolio, and creates synergy for cross-sector initiatives. In 2013, Philips Research created the world’s most energy-efﬁcient warm-white LED lamp. The new TLED PGI encompasses Philips Research, Philips Innovation prototype, designed to replace ﬂuorescent tube Services, the Philips Innovation Campus in Bangalore, lighting, delivers 200 lumens per watt of high-quality the Philips Innovation Center Shanghai, Philips Design, light, halving energy use compared to current LED the Philips Healthcare Incubator as well as Emerging lamps. Business Areas. In total, PGI employs some 4,900 professionals around the globe. In the area of Healthcare, Philips Research co-created innovative imaging solutions with improved ultrasound, PGI actively participates in ‘Open Innovation’ through MRI and X-ray results. In the case of X-ray, the Philips relationships with academic and industrial partners, as AlluraClarity system provides industry-leading visibility well as via European and regional projects, in order to for live image guidance at low X-ray dose levels. improve innovation efﬁciency and effectiveness, generate new ideas, enhance technology partnering The new EPIQ premium ultrasound platform received capabilities, and share the related ﬁnancial exposure. outstanding feedback from key opinion leaders about The High Tech Campus in Eindhoven (Netherlands), the the exceptional image quality delivered by multiline Philips Innovation Campus in Bangalore (India), and the beam forming (nSight Imaging) and Anatomical Philips Innovation Center in Shanghai (China) are prime Intelligence. examples of environments enabling Open Innovation. Philips Innovation Services Through Open Innovation, Philips also seeks to ensure Philips Innovation Services offers a range of advanced proximity of innovation activities to growth innovation services, expertise and high-tech facilities geographies. For example, in 2013, Philips and Dubai across the entire innovation activity chain. Services Economic Council signed a memorandum of extend from concept creation, product development, understanding to develop a series of strategic initiatives prototyping and small series production, to encourage the adoption of Open Innovation industrialization, quality and reliability, to sustainability strategies between businesses and government in the and industrial consulting. Innovation Services’ skills are United Arab Emirates. leveraged by the Philips businesses and Philips Group Innovation across all regions, on a wide range of A joint initiative between PGI, IT and multiple Philips innovation projects. businesses aims at speeding up digital innovation to create personalized solutions that matter to people. Examples of recent innovations supported by One of the results in 2013 was that Philips, together with Innovation Services include the Hue personal wireless Accenture, simulated the ﬁrst proof-of-concept for the lighting, intelligent catheters such as the EchoNavigator seamless transfer of patient vital signs into Google live image-guidance tool, OLED lighting, Green Glass. At the IFA in Berlin, Philips also demonstrated Hospital energy-saving services for medical apps that add smart personalized functionalities to institutions, and the Smart Air Puriﬁer. consumer products, such as a facial hair style app, an air puriﬁcation app, and a coffee experience app. Innovation Services also supports Philips’ drive to Philips Research deliver innovations that are locally relevant. This year the organization opened a new Service Center at the Philips Research is the main partner of Philips’ Philips innovation site in Shanghai. Staffed by experts in operating businesses for technology-enabled electronics design, electromagnetic compatibility, innovation. It creates new technologies and the related reliability and mechatronics, the Service Center intellectual property (IP), which enables Philips to grow provides locally relevant services meeting Philips’ in businesses and markets. Together with the innovation needs in China. businesses and the markets, Philips Research co- creates innovations to strengthen the core businesses as well as to open up new opportunities in adjacent business areas. Research’s innovation pipeline is Annual Report 2013 89 5 Sector performance 5.4.1 - 5.4.1 Philips Innovation Campus Bangalore Philips Design is widely recognized as a world leader in Philips Innovation Campus Bangalore (PIC) hosts people-centric design. In 2013, it won over 100 key activities from most of our operating businesses, Philips design awards, including an unprecedented 39 iF Research, Design, IP&S, and IT. Healthcare is the largest design awards in the areas of product, communication R&D organization at PIC, with activities in Imaging and innovation design, 22 red dot design awards, eight Systems and Patient Care & Clinical Informatics. While Successful Design Awards China, seven Dutch Good PIC originally started as a software center, it has since Industrial Design Recognition prizes, and four developed into a broad product development center Australian International Design Awards. (including mechanical, electronics, and supply chain capabilities). Several Healthcare businesses have also Philips Healthcare Incubator located business organizations focusing on growth The Philips Healthcare Incubator is a corporate geographies at PIC. organization within Philips Group Innovation dedicated to new business creation. Its mission is to identify novel Philips Innovation Center Shanghai business opportunities addressing unmet needs of Philips Research China is Philips’ second-largest patients, payors and care providers through ground- research lab globally. The organization currently has breaking innovation, and to transform these into over 170 staff, working in the Healthcare, Consumer successful businesses. The ultimate goal is to create Lifestyle and Lighting programs, and cooperates new, sizeable business categories for Philips in health extensively with Philips labs across the world. Research care. China anchors our broader commitment to our Shanghai R&D campus as an innovation hub. Philips Design Philips Intellectual Property & Standards Philips IP&S proactively pursues the creation of new intellectual property in close co-operation with Philips’ Philips Design partners with the Philips businesses, operating businesses and Philips Group Innovation. Group Innovation, and functions to ensure that our IP&S is a leading industrial IP organization providing innovations are people-focused, meaningful and world-class IP solutions to Philips’ businesses to locally relevant, and that the Philips brand experience support their growth, competitiveness and proﬁtability. is differentiating, consistent and drives customer preference across all its touch-points. Philips’ IP portfolio currently consists of approximately 13,200 patent families, 2,680 trademark families, 3,930 Philips Design is a global function within the company, design families, and 2,150 domain name families. comprised of a Group Design team that leads the Philips ﬁled approximately 1,550 patent applications in function and develops new competencies, and fully 2013, with a strong focus on the growth areas in health integrated sector Design teams ensuring close and well-being. alignment with the Philips businesses. The organization is made up of designers across various disciplines, as IP&S participates in the setting of standards to create well as psychologists, ergonomists, sociologists and new business opportunities for the Healthcare, anthropologists – all working together to understand Consumer Lifestyle and Lighting sectors. A substantial people’s needs and desires and to translate these into portion of revenue and costs is allocated to the relevant solutions and experiences that create value for operating sectors. Philips believes its business as a people and business. Design’s forward-looking whole is not materially dependent on any particular exploration projects deliver vital insights for new patent or license, or any particular group of patents and business development. licenses. In the area of emergency care, for example, the Design team has been instrumental in developing a new user Group and Regional Costs Group and Regional organizations support the creation interaction concept for the next generation of of value, connecting Philips with key stakeholders, automatic external deﬁbrillation (AED). Based on new especially our employees, customers, government and and deeper insights from onsite research into society. These organizations include the Executive stakeholder requirements, protocols, routines and Committee, Brand Management, Sustainability, New behavior in emergency settings in ﬁrehouses and police Venture Integration, the Group functions related to stations, it improves the ease of use for ﬁrst responders, strategy, human resources, legal and ﬁnance, as well as resulting in faster deployment. The Philips HeartStart country and regional management. FR3 AED won a red dot design award in 2013. 90 Annual Report 2013 5 Sector performance 5.4.1 - 5.4.2 Accelerate! Investments Innovation, Group & Services plays an important role in pension cost gain of EUR 6 million, which was recorded across Group Innovation, IP Royalties, Group and the Accelerate! program, notably by helping to improve Regional Overheads and Service Units and Others. the end-to-end value chain. The End-to-End approach consists of three core processes: Idea-to-Market, EBITA at Group Innovation was a EUR 15 million lower Market-to-Order, and Order-to-Cash. Innovation, net cost than in 2012, mainly due to lower restructuring Group & Services supports a more efﬁcient and effective charges. Idea-to-Market process in ﬁve focal areas: speeding up time-to-market, portfolio optimization, driving Group & Regional Overhead costs were EUR 14 million breakthrough innovation, improving innovation higher than in 2012, mainly due to increased costs competencies, and strengthening the position of related to our new brand positioning. Philips as an innovation leader. Based on deeper customer insights, and enhanced capability and Accelerate! investments amounted to EUR 137 million in competency building, we are driving value more 2013, and include investments in IT infrastructure, effectively. 5.4.2 2013 ﬁnancial performance Key data in millions of euros unless otherwise stated Sales Sales growth 2011 2012 2013 731 713 736 internal departments and external consultancy dedicated to the Accelerate! program. Pensions amounted to a net cost of EUR 41 million, and represent costs related to deferred pensioners covered by company plans. In 2013, EBITA was impacted by a EUR 31 million settlement loss arising from a lump-sum offering to terminated vested employees in our US pension plan. In 2012, EBITA was positively impacted by a EUR 25 million gain from a change in a medical % increase (decrease), nominal % increase (decrease), comparable1) (23) (13) (2) − 3 (2) retiree plan. EBITA of: Group Innovation IP Royalties Group and Regional costs Accelerate! investment Pensions (78) (149) (134) 262 (140) (28) 22 253 (161) (128) 24 312 (175) (137) (41) (64) Service Units and other (235) (543) EBITA 1) EBIT (197) (704) (239) (207) (712) (242) Net operating capital (NOC)1) (3,875) (4,500) (2,922) Cash ﬂows before ﬁnancing activities1) (1,159) (842) (2,101) Employees (FTEs) 13,001 11,856 12,937 1) For a reconciliation to the most directly comparable GAAP measures, see chapter 14, Reconciliation of non-GAAP information, of this Annual Report EBITA at Service Units and Other increased from a loss of EUR 543 million in 2012 to a loss of EUR 64 million. In 2012, EBITA included the EUR 313 million impact of the European Commission ﬁne and provisions related to various legal matters totaling EUR 132 million, as well as a gain on the sale of the High Tech Campus of EUR 37 million. Excluding these impacts, the increase in EBITA in 2013 was mainly due to lower restructuring costs as well as releases of environmental provisions. Net operating capital decreased to negative EUR 2.9 billion, primarily related to the payment of the European Commission ﬁne, a decrease in pension liabilities, an increase in the value of currency hedges as well as a reclassiﬁcation of real estate assets from the In 2013, sales amounted to EUR 736 million, EUR 23 sectors to the Service Units. million higher than in 2012, due to higher royalty income. Cash ﬂows before ﬁnancing activities decreased from an outﬂow of EUR 842 million in 2012 to an outﬂow of EBITA in 2013 amounted to a loss of EUR 239 million, EUR 2,101 million, mainly due to the payment of the compared to a loss of EUR 704 million in 2012. In 2012, European Commission ﬁne and lower cash inﬂows from EBITA included the EUR 313 million impact of the the sale of ﬁxed assets. European Commission ﬁne and provisions related to various legal matters totaling EUR 132 million. Restructuring and acquisition-related charges amounted to EUR 3 million in 2013, compared to EUR 56 million in 2012. 2013 EBITA also included a past-service Annual Report 2013 91 6 Risk management 6 - 6.1 6 Risk management 6.1 Our approach to risk management and business control approach is embedded in the areas of corporate governance, Philips Business Control Framework and Philips General Business Principles. Corporate governance Corporate governance is the system by which a company is directed and controlled. Philips believes that good corporate governance is a critical factor in achieving business success. Good corporate governance derives from, amongst other things, solid The following section presents an overview of Philips’ internal controls and high ethical standards. approach to risk management and business controls and a description of the nature and the extent of its The quality of Philips’ systems of business controls and exposure to risks. Philips’ risk management focuses on the ﬁndings of internal and external audits are reported the following risk categories: Strategic, Operational, to and discussed by the Audit Committee of the Compliance and Financial risks. These categories are Supervisory Board. Internal auditors monitor the quality further described in section 6.2, Risk categories and of the business controls through risk-based operational factors, of this Annual Report. The risk overview audits, inspections of ﬁnancial reporting controls and highlights the main risks known to Philips, which could compliance audits. Audit committees at group level hinder it in achieving its strategic and ﬁnancial business (Group, Finance, Innovation and IT), at Global Market objectives. The risk overview may, however, not include level and at Sector level (Healthcare, Lighting, all the risks that may ultimately affect Philips. Some Consumer Lifestyle) meet quarterly to address risks not yet known to Philips, or currently believed not weaknesses in the business controls infrastructure as to be material, could ultimately have a major impact on reported by internal and external auditors or revealed Philips’ businesses, objectives, revenues, income, by self-assessment of management, and to take assets, liquidity or capital resources. corrective action where necessary. These audit committees are also involved in determining the All oral and written forward-looking statements made desired company-wide internal audit planning as on or after the date of this Annual Report and approved by the Audit Committee of the Supervisory attributable to Philips are expressly qualiﬁed in their Board. An in-depth description of Philips’ corporate entirety by the factors described in the cautionary governance structure can be found in chapter 10, statement included in chapter 18, Forward-looking Corporate governance, of this Annual Report. statements and other information, of this Annual Report and the overview of risk factors described in section 6.2, Risk categories and factors, of this Annual Report. Philips Business Control Framework The Philips Business Control Framework (BCF) sets the standard for risk management and business control in Philips. The objectives of the BCF are to maintain Risk management forms an integral part of the business integrated management control of the company’s planning and review cycle. The company’s risk and operations, in order to ensure the integrity of the control policy is designed to provide reasonable ﬁnancial reporting, as well as compliance with laws and assurance that objectives are met by integrating regulations. Philips is using the Committee of management control into the daily operations, by Sponsoring Organizations of the Treadway ensuring compliance with legal requirements and by Commission (COSO) framework on internal control safeguarding the integrity of the company’s ﬁnancial (1992) as a basis for the BCF. reporting and its related disclosures. It makes management responsible for identifying the critical As part of the BCF, Philips has implemented a global business risks and for the implementation of ﬁt-for- standard for internal control over ﬁnancial reporting purpose risk responses. Philips’ risk management (ICS). The ICS, together with Philips’ established accounting procedures, is designed to provide 92 Annual Report 2013 6 Risk management 6.1 - 6.1 reasonable assurance that assets are safeguarded, that unit. The GBP incorporate a whistleblower policy, the books and records properly reﬂect transactions standardized complaint reporting and a formal necessary to permit preparation of ﬁnancial escalation procedure. statements, that policies and procedures are carried out by qualiﬁed personnel and that published ﬁnancial The Philips Ethics hotline seeks to ensure that alleged statements are properly prepared and do not contain violations are registered and dealt with consistently any material misstatements. ICS has been deployed in within a company-wide system. To drive the practical all main reporting units, where business process owners deployment of the GBP, a set of directives has been perform an extensive number of controls, document published, which are applicable to all employees. There the results each quarter, and take corrective action are also separate directives which apply to speciﬁc where necessary. ICS supports sector and functional categories of employees (e.g. the Supply Management management in a quarterly cycle of assessment and Code of Ethics and Financial Code of Ethics, refer to monitoring of its control environment. The ﬁndings of www.philips.com/gbp). management’s evaluation are reported to the Executive Committee and the Supervisory Board To seek to ensure compliance with the highest quarterly. standards of transparency and accountability by all employees performing important ﬁnancial functions, As part of the Annual Report process, management’s the Financial Code of Ethics contains, amongst other accountability for business controls is enforced through things, standards to promote honest and ethical the formal issuance of a Statement on Business conduct, as well as full, accurate and timely disclosure Controls and a Letter of Representation by sector and procedures in order to avoid conﬂicts of interest. functional management to the Executive Committee. Any deﬁciencies noted in the design and operating Both the Finance and Supply Management Code of effectiveness of controls over ﬁnancial reporting which Ethics are signed off on an annual basis by the relevant were not completely remediated are evaluated at year- employees, to conﬁrm their awareness of and end by the Executive Committee. The Executive compliance with, the respective codes. Committee’s report, including its conclusions regarding the effectiveness of internal control over ﬁnancial The GBP self-assessment process is fully embedded in reporting, can be found in section 11.1, Management’s an automated workﬂow application (ICS) supporting report on internal control, of this Annual Report. Sector, Market and functional management in Philips General Business Principles The Philips General Business Principles (GBP) govern monitoring internal controls, as described under the Philips Business Control Framework. Embedding GBP self-assessments in ICS seeks to ensure that GBP Philips’ business decisions and actions throughout the compliance is now part of Sector, Market and functional world, applying to corporate actions and the behavior management’s quarterly ICS/SOx (Sarbanes-Oxley) of individual employees. They incorporate the monitoring process, and that GBP non-compliance fundamental principles within Philips for doing issues, if signiﬁcant, are reported to the Board of business. The intention of the GBP is to ensure Management/Executive Committee via the Quarterly compliance with laws and regulations, as well as with Certiﬁcation Statement process. Philips’ norms and values. In June 2013, as part of the global GBP communications The GBP are available in most of the local languages campaign, a business integrity survey was rolled out to and are an integral part of the labor contracts in virtually all employees to obtain their input on the effectiveness all countries where Philips has business activities. of our GBP program. The insights that were derived Responsibility for compliance with the principles rests from this survey were used to further enhance the primarily with the management of each business. Every effectiveness of the current compliance activities as country organization and each main production site has well as the compliance road map. The business integrity a compliance ofﬁcer. All compliance ofﬁcers operate survey also provided the kickoff for a global GBP under the supervision of the GBP Review Committee. communications campaign, culminating in a global Conﬁrmation of compliance with the GBP is an integral event called the ‘GBP dialogue week’ held in October part of the annual Statement on Business Controls that 2013, in which managers were invited to hold sessions has to be issued by the management of each business with their teams to discuss GBP in relation to their function or business. Annual Report 2013 93 6 Risk management 6.1 - 6.1 Mandatory web-based GBP training, which is designed to reinforce awareness of the need for compliance with the GBP, is available in 23 languages. Every quarter, all new employees are invited to take this training in their local language. In 2013, targeted audiences participated in a web-based training focusing on speciﬁc topics, including anti-bribery, antitrust, privacy and export controls. In 2013, we introduced a mandatory sign-off on GBP for all executives. For further details, please refer to the General Business Principles paragraph in chapter 13, Sustainability statements, of this Annual Report. Financial Code of Ethics The Company recognizes that its businesses have responsibilities within the communities in which they operate. The Company has a Financial Code of Ethics which applies to the CEO (the principal executive ofﬁcer) and CFO (the principal ﬁnancial and principal accounting ofﬁcer), and to the heads of the Group Control, Group Treasury, Group Fiscal and Group Internal Audit departments of the Company. The Company has published its Financial Code of Ethics within the investor section of its website located at www.philips.com. No changes have been made to the Code of Ethics since its adoption and no waivers have been granted therefrom to the ofﬁcers mentioned above in 2013. 94 Annual Report 2013 6.2 Risk categories and factors 6 Risk management 6.2 - 6.2 Taking risks is an inherent part of entrepreneurial Strategic risks and opportunities may affect Philips’ behavior. A structured risk management process allows strategic ambitions. Operational risks include adverse management to take risks in a controlled manner. In unexpected developments resulting from internal order to provide a comprehensive view of Philips’ processes, people and systems, or from external events business activities, risks and opportunities are identiﬁed that are linked to the actual running of each business in a structured way combining elements of a top-down (examples are solution and product creation, and and bottom-up approach. Risks are reported on a supply chain management). Compliance risks cover regular basis as part of the ‘Business Performance unanticipated failures to implement, or comply with, Management’ process. All relevant risks and appropriate laws, regulations, policies and procedures. opportunities are prioritized in terms of impact and Within the area of Financial risks, Philips identiﬁes risks likelihood, considering quantitative and/or qualitative related to Treasury, Accounting and reporting, aspects. The bottom-up identiﬁcation and prioritization Pensions and Tax. Philips does not classify these risk process is supported by workshops with the respective categories in order of importance. management at Sector, Market and Group Function level. The top-down element allows potential new risks Philips describes the risk factors within each risk and opportunities to be discussed at management level category in order of Philips’ current view of expected and included in the subsequent reporting process, if signiﬁcance, to give stakeholders an insight into which found to be applicable. Reported risks and risks and opportunities it considers more prominent opportunities are analyzed for potential cumulative than others at present. The risk overview highlights the effects and are aggregated at Sector, Market and Group main risks and opportunities known to Philips, which level. Philips has a structured risk management process could hinder it in achieving its strategic and ﬁnancial to address different risk categories: Strategic, business objectives. The risk overview may, however, Operational, Compliance and Financial risks. not include all the risks that may ultimately affect Philips. Describing risk factors in their order of expected signiﬁcance within each risk category does not mean that a lower listed risk factor may not have a material and adverse impact on Philips’ business, strategic objectives, revenues, income, assets, liquidity, capital resources or achievement of Philips’ 2016 goals. Furthermore, a risk factor described after other risk factors may ultimately prove to have more signiﬁcant adverse consequences than those other risk factors. Over time Philips may change its view as to the relative signiﬁcance of each risk factor. Annual Report 2013 95 Operational • Transformation program• Innovation process• Supply chain• IT• People• Product quality and liability• ReputationCompliance • Legal• Market practices• Regulatory• General business principles• Internal controls• Data privacy/Product securityFinancial • Treasury• Tax• Pensions• Accounting and reporting• Macroeconomic changes• Changes in industry/market• Growth emerging markets• Joint ventures• Acquisitions• Intellectual property rightsStrategicRisksCorporate GovernancePhilips Business Control FrameworkPhilips General Business Principles6 Risk management 6.3 - 6.3 6.3 Strategic risks Philips may be unable to adapt swiftly to changes in industry or market circumstances, which could have a material adverse impact on its ﬁnancial condition and results. As Philips’ business is global, its operations are exposed Fundamental shifts in the industry, like the transition to economic and political developments in countries from traditional lighting to LED lighting, may drastically across the world that could adversely impact its change the business environment. If Philips is unable to revenues and income. recognize these changes in good time, is late in Philips’ business environment is inﬂuenced by adjusting its business models, or if circumstances arise conditions in the domestic and global economies. such as pricing actions by competitors, then this could Continued concerns about the macroeconomic have a material adverse effect on Philips’ growth environment has shown its impact on global markets ambitions, ﬁnancial condition and operating result. during 2013. Towards the end of 2013 the macroeconomic environment seemed to tilt towards a Philips’ overall performance in the coming years is more positive outlook, however with substantial dependent on realizing its growth ambitions in growth differences between geographical areas. Anticipated geographies. changes in US monetary policy during 2013 have Growth geographies are becoming increasingly resulted in a signiﬁcant negative impact on foreign important in the global market. In addition, Asia is an currency rates in a number of emerging markets, important production, sourcing and design center for highlighting ﬁscal problems and other economic Philips. Philips faces strong competition to attract the vulnerabilities in these countries. The disparate best talent in tight labor markets and intense macroeconomic outlook for the main geographies and competition from local companies as well as other the potential impact of further changes in ﬁscal and global players for market share in growth geographies. monetary policy continues to provide uncertainty on Philips needs to maintain and grow its position in the levels of capital expenditures in general, growth geographies, invest in local talents, understand unemployment levels and consumer and business developments in end-user preferences and localize the conﬁdence, which could adversely affect demand for portfolio in order to stay competitive. If Philips fails to products and services offered by Philips. Political achieve this, then this could have a material adverse developments, such as healthcare reforms in various effect on growth ambitions, ﬁnancial condition and countries may impose additional uncertainties by operating result. redistributing sector spending, changing reimbursement models and ﬁscal changes. The growth ambitions of Philips may be adversely affected by economic volatility inherent in growth Numerous other factors, such as the ﬂuctuation of geographies and the impact of changes in energy and raw material prices, as well as global macroeconomic circumstances on growth economies. political conﬂicts in North Africa, the Middle East and other regions, could continue to impact Philips may not control joint ventures or associated macroeconomic factors and the international capital companies in which it invests, which could limit the and credit markets. Economic and political uncertainty ability of Philips to identify and manage risks. may have a material adverse impact on Philips’ Philips has invested or will invest in joint ventures or ﬁnancial condition or results of operations and can also associated companies in which Philips will have a non- make it more difﬁcult for Philips to budget and forecast controlling interest. In these cases , Philips has limited accurately. Philips may encounter difﬁculty in planning inﬂuence over, and limited or no control of, the and managing operations due to the lack of adequate governance, performance and cost of operations of infrastructure and unfavorable political factors, joint ventures or associated companies. Some of these including unexpected legal or regulatory changes such joint ventures or associated companies may represent as foreign exchange import or export controls, signiﬁcant investments. The joint ventures and increased healthcare regulation, nationalization of associated companies that Philips does not control assets or restrictions on the repatriation of returns from may make business, ﬁnancial or investment decisions foreign investments. Given that growth geographies are contrary to Philips’ interests or decisions different from becoming increasingly important in Philips’ operations, those, which Philips itself may have made. the above-mentioned risks are also expected to grow Additionally, Philips partners or members of a joint and could have a material adverse effect on Philips’ venture or associated company may not be able to ﬁnancial condition and operating results. meet their ﬁnancial or other obligations, which could 96 Annual Report 2013 6 Risk management 6.3 - 6.4 expose Philips to additional ﬁnancial or other obligations, as well as have a material adverse effect on the value of its investments in those entities or potentially subject Philips to additional claims. 6.4 Operational risks Failure to deliver on the objectives of the Acquisitions could expose Philips to integration risks transformation programs. and challenge management in continuing to reduce the In 2011 Philips started a very extensive transformation complexity of the company. program (Accelerate!) to unlock Philips’ full potential. Philips’ acquisitions may continue to expose Philips in Accelerate! spans a time period of several years. Failure the future to integration risks in areas such as sales and to achieve the objectives of the transformation service force integration, logistics, regulatory programs may have a material adverse effect on the compliance, information technology and ﬁnance. mid and long term ﬁnancial targets. Integration difﬁculties and complexity may adversely impact the realization of an increased contribution from In addition the transformation program of the Finance acquisitions. Philips may incur signiﬁcant acquisition, function may expose Philips to adverse changes in the administrative and other costs in connection with these quality of its systems of internal control. transactions, including costs related to the integration of acquired businesses. Failure to achieve improvements in Philips’ solution and product creation process and/or increased speed Furthermore, organizational simpliﬁcation and in innovation-to-market could hamper Philips’ resulting cost savings may be difﬁcult to achieve. proﬁtable growth ambitions. Acquisitions may also lead to a substantial increase in Further improvements in Philips’ solution and product long-lived assets, including goodwill. Write-downs of creation process, ensuring timely delivery of new these assets due to unforeseen business developments solutions and products at lower cost and upgrading of may have a material adverse effect on Philips’ earnings, customer service levels to create sustainable particularly in Healthcare and Lighting, which have competitive advantage, are important in realizing signiﬁcant amounts of goodwill (see also note 11, Philips’ proﬁtable growth ambitions. The emergence of Goodwill). new low-cost competitors, particularly in Asia, further underlines the importance of improvements in the Philips’ inability to secure and retain intellectual product creation process. The success of new solution property rights for products, whilst maintaining overall and product creation, however, depends on a number competitiveness, could have a material adverse effect of factors, including timely and successful completion on its results. of development efforts, market acceptance, Philips’ Philips is dependent on its ability to obtain and retain ability to manage the risks associated with new licenses and other intellectual property (IP) rights products and production ramp-up issues, the ability of covering its products and its design and manufacturing Philips to attract and retain employees with the processes. The IP portfolio is the result of an extensive appropriate skills, the availability of products in the patenting process that could be inﬂuenced by a right quantities and at appropriate costs to meet number of factors, including innovation. The value of anticipated demand and the risk that new products and the IP portfolio is dependent on the successful services may have quality or other defects in the early promotion and market acceptance of standards stages of introduction. Accordingly, Philips cannot developed or co-developed by Philips. This is determine in advance the ultimate effect that new particularly applicable to Consumer Lifestyle where solutions and product creations will have on its ﬁnancial third-party licenses are important and a loss or condition and operating results. If Philips fails to impairment could have a material adverse impact on accelerate its innovation-to-market processes and fails Philips’ ﬁnancial condition and operating results. to ensure that end-user insights are fully captured and translated into solution and product creations that improve product mix and consequently contribution, it may face an erosion of its market share and competitiveness, which could have a material adverse effect on its ﬁnancial condition and operating results. Annual Report 2013 97 6 Risk management 6.4 - 6.4 If Philips is unable to ensure effective supply chain Diversity in information technology (IT) could result in management, e.g. facing an interruption of its supply ineffective or inefﬁcient business management. IT chain, including the inability of third parties to deliver outsourcing and off-shoring strategies could result in parts, components and services on time, and if it is complexities in service delivery and contract subject to rising raw material prices, it may be unable to management. sustain its competitiveness in its markets. Philips is engaged in a continuous drive to create a Philips is continuing the process of creating a leaner more open, standardized and consequently, more supply base with fewer suppliers, while maintaining cost-effective IT landscape. This is leading to an dual sourcing strategies where possible. This strategy approach involving further outsourcing, off-shoring, very much requires close cooperation with suppliers to commoditization and ongoing reduction in the number enhance, amongst other things, time to market and of IT systems. This could introduce additional risk with quality. In addition, Philips is continuing its initiatives to regard to the delivery of IT services, the availability of IT reduce assets through outsourcing. These processes systems and the scope and nature of the functionality may result in increased dependency on external offered by IT systems. suppliers and providers. Although Philips works closely with its suppliers to avoid supply-related problems, Philips observes a global increase in IT security threats there can be no assurance that it will not encounter and higher levels of sophistication in computer crime, supply problems in the future or that it will be able to posing a risk to the conﬁdentiality, availability and replace a supplier that is not able to meet its demand. integrity of data and information. Shortages or delays could materially harm its business. The global increase in security threats and higher levels of professionalism in computer crime have increased Most of Philips’ activities are conducted outside of the the importance of effective IT security measures, Netherlands, and international operations bring including proper identity management processes to challenges. For example, production and procurement protect against unauthorized systems access. of products and parts in Asian countries are increasing, Nevertheless, Philips’ systems, networks, products, and this creates a risk that production and shipping of solutions and services remain potentially vulnerable to products and parts could be interrupted by a natural attacks, which could potentially lead to the leakage of disaster, such as occurred in Japan in 2011. A general conﬁdential information, improper use of its systems shortage of materials, components or subcomponents and networks or defective products, which could in turn as a result of natural disasters also bears the risk of materially adversely affect Philips’ ﬁnancial condition unforeseeable ﬂuctuations in prices and demand, and operating results. In recent years, the risks that we which could have a material adverse effect on its and other companies face from cyber-attacks have ﬁnancial condition and operating results. increased signiﬁcantly. The objectives of these cyber- attacks vary widely and may include, among things, Sectors purchase raw materials including so-called rare disruptions of operations including provision of services earth metals, copper, steel, aluminum and oil, which to customers or theft of intellectual property or other exposes them to ﬂuctuations in energy and raw sensitive information belonging to us or other business material prices. In recent times, commodities have been partners. Successful cyber-attacks may result in subject to volatile markets, and such volatility is substantial costs and other negative consequences, expected to continue. If we are not able to compensate which may include, but are not limited to, lost revenues, for our increased costs or pass them on to customers, reputational damage, remediation costs, and other price increases could have a material adverse impact on liabilities to customers and partners. Furthermore, Philips’ results. In contrast, in times of falling enhanced protection measures can involve signiﬁcant commodity prices, Philips may not fully proﬁt from such costs. Although we have experienced cyber-attacks but price decreases as Philips attempts to reduce the risk of to date have not incurred any signiﬁcant damage as a rising commodity prices by several means, such as result, there can be no assurance that in the future long-term contracting or physical and ﬁnancial Philips will be as successful in avoiding damages from hedging. In addition to the price pressure that Philips cyber-attacks. Additionally, the integration of new may face from our customers expecting to beneﬁt from companies and successful outsourcing of business falling commodity prices or adverse market conditions, processes are highly dependent on secure and well this could also adversely affect its ﬁnancial condition controlled IT systems. and operating results. 98 Annual Report 2013 6 Risk management 6.4 - 6.5 Due to the fact that Philips is dependent on its personnel for leadership and specialized skills, the loss of its ability to attract and retain such personnel would have an adverse effect on its business. 6.5 Compliance risks The attraction and retention of talented employees in Legal proceedings covering a range of matters are sales and marketing, research and development, pending in various jurisdictions against Philips and its ﬁnance and general management, as well as of highly current and former group companies. Due to the specialized technical personnel, especially in uncertainty inherent in legal proceedings, it is difﬁcult to transferring technologies to low-cost countries, is predict the ﬁnal outcome. critical to Philips’ success. This is particularly valid in Philips, including a certain number of its current and times of economic recovery. The loss of specialized former group companies, is involved in legal skills could also result in business interruptions. There proceedings relating to such matters as competition can be no assurance that Philips will continue to be issues, commercial transactions, product liability, successful in attracting and retaining all the highly participations and environmental pollution. Since the qualiﬁed employees and key personnel needed in the ultimate outcome of asserted claims and proceedings, future. or the impact of any claims that may be asserted in the future, cannot be predicted with certainty, Philips’ Warranty and product liability claims against Philips ﬁnancial position and results of operations could be could cause Philips to incur signiﬁcant costs and affect affected materially by adverse outcomes. Philips’ results as well as its reputation and relationships with key customers. Please refer to note 26, Contingent assets and Philips is from time to time subject to warranty and liabilities, for additional disclosure relating to speciﬁc product liability claims with regard to product legal proceedings. performance and effects. Philips could incur product liability losses as a result of repair and replacement Philips is exposed to governmental investigations and costs in response to customer complaints or in legal proceedings with regard to possible anti- connection with the resolution of contemplated or competitive market practices. actual legal proceedings relating to such claims. In Philips is facing increased scrutiny by national and addition to potential losses arising from claims and European authorities of possible anti-competitive related legal proceedings, product liability claims could market practices. For example, Philips is one of the affect Philips’ reputation and its relationships with key companies that were inspected by ofﬁcials of the customers (both customers for end products and European Commission in December 2013. The customers that use Philips’ products in their production European Commission is looking into potential process). As a result, product liability claims could restrictions on online sales of consumer electronic materially impact Philips’ ﬁnancial condition and products and small domestic appliances. Philips is fully operating results. cooperating with the European Commission. Philips’ ﬁnancial position and results could be materially Any damage to Philips’ reputation could have an affected by an adverse ﬁnal outcome of governmental adverse effect on its businesses. investigations and litigation, as well as any potential Philips is exposed to developments which could affect related claims. its reputation. Such developments could be of an environmental or social nature, or connected to the Philips’ global presence exposes the company to behavior of individual employees or suppliers and regional and local regulatory rules, changes to which could relate to adherence to regulations related to may affect the realization of business opportunities and labor, health and safety, environmental and chemical investments in the countries in which Philips operates. management. Reputational damage could materially Philips has established subsidiaries in over 80 impact Philips’ ﬁnancial condition and operating countries. These subsidiaries are exposed to changes in results. governmental regulations and unfavorable political developments, which may affect the realization of business opportunities or impair Philips’ local investments. Philips’ increased focus on the healthcare sector increases its exposure to highly regulated markets, where obtaining clearances or approvals for new products is of great importance, and where there is Annual Report 2013 99 6 Risk management 6.5 - 6.5 a dependency on the available funding for healthcare laws. In Philips Healthcare, privacy and product safety systems. In addition, changes in reimbursement and security issues may arise, especially with respect to policies may affect spending on healthcare. remote access or monitoring of patient data or loss of data on our customers’ systems. Philips is exposed to non-compliance with General Business Principles. Philips operates in a highly regulated product safety Philips’ attempts to realize its growth ambitions could and quality environment. Philips’ products are subject expose it to the risk of non-compliance with the Philips to regulation by various government agencies, General Business Principles, such as anti-bribery including the FDA (US) and comparable foreign provisions. This risk is heightened in growth agencies. Obtaining their approval is costly and time geographies as the legal and regulatory environment is consuming, but a prerequisite for market introduction. A less developed in growth geographies compared to delay or inability to obtain the necessary regulatory mature geographies. Examples include commission approvals for new products could have a material payments to third parties, remuneration payments to adverse effect on business. The risk exists that product agents, distributors, consultants and the like, and the safety incidents or user concerns could trigger FDA acceptance of gifts, which may be considered in some business reviews which, if failed, could lead to business markets to be normal local business practice. (See also interruption which in turn could adversely affect Philips’ note 26, Contingent assets and liabilities.) ﬁnancial condition and operating results. E.g. the voluntary, temporary suspension of new production at Defective internal controls would adversely affect our our Healthcare facility in Cleveland, Ohio targets to ﬁnancial reporting and management process. further strengthen manufacturing process controls after The reliability of reporting is important in ensuring that certain issues in this area were identiﬁed during an management decisions for steering the businesses and ongoing FDA inspection. managing both top-line and bottom-line growth are based on top-quality data. Flaws in internal control systems could adversely affect the ﬁnancial position and results and hamper expected growth. The correctness of disclosures provides investors and other market professionals with signiﬁcant information for a better understanding of Philips’ businesses. Imperfections or lack of clarity in the disclosures could create market uncertainty regarding the reliability of the data presented and could have a negative impact on the Philips share price. The reliability of revenue and expenditure data is key for steering the business and for managing top-line and bottom-line growth. The long lifecycle of healthcare sales, from order acceptance to accepted installation, together with the complexity of the accounting rules for when revenue can be recognized in the accounts, presents a challenge in terms of ensuring there is consistency of application of the accounting rules throughout Philips Healthcare’s global business. Philips is exposed to non-compliance with data privacy and product safety laws. Philips’ brand image and reputation would be adversely impacted by non-compliance with various data protection and product security laws. In light of Philips digital strategy, data privacy laws are increasingly important. Also, Philips Healthcare is subject to various (patient) data protection and safety 100 Annual Report 2013 6.6 Financial risks 6 Risk management 6.6 - 6.6 For further analysis, please refer to note 35, Details of treasury / other ﬁnancial risks. Philips is exposed to a number of different ﬁscal Philips is exposed to a variety of treasury risks and other uncertainties which could have a signiﬁcant impact on ﬁnancial risks including liquidity risk, currency risk, local tax results. interest rate risk, commodity price risk, credit risk, Philips is exposed to a number of different tax country risk and other insurable risk. uncertainties which could result in double taxation, Negative developments impacting the global liquidity penalties and interest payments. These include transfer markets could affect the ability of Philips to raise or re- pricing uncertainties on internal cross-border deliveries ﬁnance debt in the capital markets or could lead to of goods and services, tax uncertainties related to signiﬁcant increases in the cost of such borrowing in the acquisitions and divestments, tax uncertainties related future. If the markets expect a downgrade or to the use of tax credits and permanent establishments, downgrades by the rating agencies or if such a tax uncertainties due to losses carried forward and tax downgrade has actually taken place, it could increase credits carried forward and potential changes in tax law the cost of borrowing, reduce our potential investor that could result in higher tax expense and payments. base and adversely affect our business. Those uncertainties may have a signiﬁcant impact on local tax, results which in turn could adversely affect Philips is exposed to ﬂuctuations in exchange rates, Philips’ ﬁnancial condition and operating results. especially between the US dollar and the euro. A high percentage of its business volume is conducted in the The value of the losses carried forward is subject to US but based on exports from Europe, whilst, a having sufﬁcient taxable income available within the considerable amount of US dollar - denominated loss-carried-forward period, but also to having imports is also sold in Europe. A weakening of the US sufﬁcient taxable income within the foreseeable future dollar versus the euro would have an adverse effect on in the case of losses carried forward with an indeﬁnite reported earnings of the company. In addition, Philips is carry-forward period. The ultimate realization of the exposed to the ﬂuctuation in exchange rates of other Company’s deferred tax assets, including tax losses currencies such as the Japanese yen and currencies of and credits carried forward, is dependent upon the growth geographies such as China, India and Brazil. generation of future taxable income in the countries where the temporary differences, unused tax losses The credit risk of ﬁnancial and non-ﬁnancial and unused tax credits were incurred and during the counterparties with outstanding payment obligations periods in which the deferred tax assets become creates exposures for Philips, particularly in relation to deductible. Additionally, in certain instances, accounts receivable with customers and liquid assets realization of such deferred tax assets is dependent and fair values of derivatives and insurance receivables upon the successful execution of tax planning contracts with ﬁnancial counterparties. A default by strategies. Accordingly, there can be no absolute counterparties in such transactions can have a material assurance that all (net) tax losses and credits carried adverse effect on Philips’ ﬁnancial condition and forward will be realized. operating results. For further details, please refer to the ﬁscal risks Philips’ supply chain is exposed to ﬂuctuations in paragraph in note 5, Income taxes. energy and raw material prices. Commodities such as oil are subject to volatile markets and signiﬁcant price Philips has deﬁned-beneﬁt pension plans in a number increases from time to time. If Philips is not able to of countries. The funded status and the cost of compensate for, or pass on, its increased costs to maintaining these plans are inﬂuenced by movements customers, such price increases could have an adverse in ﬁnancial market and demographic developments, impact on its ﬁnancial condition and operating results. creating volatility in Philips’ ﬁnancials. Philips is exposed to interest rate risk, particularly in North America is covered by deﬁned-beneﬁt pension relation to its long-term debt position; this risk can take plans. The accounting for deﬁned-beneﬁt pension the form of either fair value or cash ﬂow risk. Failure to plans requires management to make estimates on effectively hedge this risk can impact Philips’ ﬁnancial discount rates, inﬂation, longevity and expected rates condition and operating results. of compensation. Movements (e.g. due to the A signiﬁcant proportion of employees in Europe and movements of ﬁnancial markets) in these assumptions Annual Report 2013 101 6 Risk management 6.6 - 6.6 can have a signiﬁcant impact on the Deﬁned Beneﬁt Obligation and pension cost. A negative performance of the ﬁnancial markets could have a material impact on cash funding requirements and pension costs and also affect the value of certain ﬁnancial assets and liabilities of the company. For further details, please see note 30, Post- employment beneﬁts and note 36, Subsequent events. Philips is exposed to a number of reporting risks. A risk rating is assigned for each risk identiﬁed, based on the likelihood of occurrence and the potential impact of the risk on the ﬁnancial statements and related disclosures. In determining the probability that a risk will result in a misstatement of a more than inconsequential amount or material nature, the following factors are considered to be critical: complexity of the associated accounting activity or transaction process, history of accounting and reporting errors, likelihood of signiﬁcant (contingent) liabilities arising from activities, exposure to losses, existence of a related party transaction, volume of activity and homogeneity of the individual transactions processed and changes to the prior period in accounting characteristics compared to the previous period. Important critical reporting risk areas identiﬁed within Philips following the risk assessment are: • complex accounting for sales-related accruals, warranty provisions, tax assets and liabilities, pension beneﬁts, and business combinations • complex sales transactions relating to multi-element deliveries (combination of goods and services) • valuation procedures with respect to assets (including goodwill and inventories) • signiﬁcant (contingent) liabilities such as environmental claims and other litigation • outsourcing of high volume/homogeneous transactional ﬁnance and IT operations to third-party service providers • employee post-retirement beneﬁts (as described separately) 102 Annual Report 2013 7 Management 7 Management 7 - 7 Koninklijke Philips N.V. is managed by an Executive Koninklijke Philips N.V. and is answerable to Committee which comprises the members of the Board shareholders at the Annual General Meeting of of Management and certain key ofﬁcers from functions, Shareholders. Pursuant to the two-tier corporate businesses and markets. structure, the Board of Management is accountable for its performance to a separate and independent The Executive Committee operates under the Supervisory Board. chairmanship of the Chief Executive Ofﬁcer and shares responsibility for the deployment of Philips’ strategy The Rules of Procedure of the Board of Management and policies, and the achievement of its objectives and and Executive Committee are published on the results. Company’s website (www.philips.com/investor). Under Dutch Law, the Board of Management is accountable for the actions and decisions of the Corporate governance A full description of the Company’s corporate Executive Committee and has ultimate responsibility governance structure is published in chapter 10, for the management and external reporting of Corporate governance, of this Annual Report. Frans van Houten President/Chief Executive Ofﬁcer (CEO) Jim Andrew Executive Vice President & Chief Strategy and Innovation Ofﬁcer Chairman of the Board of Management since April 2011 Corporate responsibilities: Strategy, Innovation, Design, Sustainability Corporate responsibilities: Chairman of the Executive Committee, Internal Born 1962, American Audit, Information Technology, Supply Management, Marketing & Communication, Accelerate! - Overall transformation, End2End Born 1960, Dutch Eric Coutinho Executive Vice President, General Secretary & Chief Legal Ofﬁcer Deborah DiSanzo Executive Vice President & Chief Executive Ofﬁcer of Philips Healthcare Corporate responsibilities: Legal, General Business Principles Corporate responsibilities: Sector Healthcare Born 1951, Dutch Born 1960, American Ronald de Jong Executive Vice President & Chief Market Leader Patrick Kung Executive Vice President & Chief Executive Ofﬁcer Philips Greater China Corporate responsibilities: Markets, Areas & Countries (except Greater Corporate responsibilities: Philips Greater China China), Accelerate! - Customer Centricity Born 1967, Dutch Born 1951, American Pieter Nota Executive Vice President & Chief Executive Ofﬁcer of Philips Consumer Eric Rondolat Executive Vice President & Chief Executive Ofﬁcer Philips Lighting Lifestyle Corporate responsibilities: Sector Lighting Member of the Board of Management since April 2011 Born 1966, Italian/French Corporate responsibilities: Sector Consumer Lifestyle, Accelerate! - Resource to Win Born 1964, Dutch Carole Wainaina Executive Vice President & Chief Human Resources Ofﬁcer Ron Wirahadiraksa Executive Vice President & Chief Financial Ofﬁcer (CFO) Corporate responsibilities: Human Resource Management, Accelerate! - Member of the Board of Management since April 2011 Culture and change management Born 1966, Kenyan Corporate responsibilities: Finance, Mergers & Acquisitions, Accelerate! - Operating Model Born 1960, Dutch Annual Report 2013 103 7 Management 7 - 7 From top to bottom, from left to right: Frans van Houten, Ron Wirahadiraksa, Deborah DiSanzo, Ronald de Jong, Jim Andrew, Pieter Nota, Eric Coutinho, Eric Rondolat, Carole Wainaina, Patrick Kung 104 Annual Report 2013 8 Supervisory Board 8 - 8 8 Supervisory Board The Supervisory Board supervises the policies of the executive management and the general course of affairs of Koninklijke Philips N.V. and advises the executive management thereon. The Supervisory Board, in the two-tier corporate structure under Dutch law, is a separate and independent corporate body. The Rules of Procedure of the Supervisory Board are published on the Company’s website. For details on the activities of the Supervisory Board, see chapter 9, Supervisory Board report, of this Annual Report and section 10.2, Supervisory Board, of this Annual Report. Jeroen van der Veer Chairman James Schiro Vice-Chairman and Secretary; Chairman of the Remuneration Committee Chairman of Corporate Governance and Nomination & Selection Member of the Supervisory Board since 2005; third term expires in 2017 Committee Former CEO of Zurich Financial Services and Chairman of the Group Member of the Supervisory Board since 2009; second term expires in 2017 Management Board. Also serves on various boards of private and listed Former Chief Executive of Royal Dutch Shell and Chairman of the companies including Goldman Sachs as Lead Director and member of the Supervisory Board of ING Group. Member of the Supervisory Board of audit committee, PepsiCo as member of the Supervisory Board and Reva Concertgebouw N.V. Born 1947, Dutch** *** Medical as member of the Supervisory Board. Senior Advisor CVC Capital Partners Ltd. Born 1946, American** *** Kees van Lede Member of the Supervisory Board since 2003; third term expires in 2015 Ewald Kist Member of the Supervisory Board since 2004; third term expires in 2016 Former Chairman of the Board of Management of Akzo Nobel and currently Former Chairman of the Executive Board of ING Group and currently member Chairman of the Supervisory Board of Royal Imtech N.V. Member of the of the Supervisory Boards of DSM, Moody’s Investor Service and Stage Supervisory Boards of AirFrance/KLM, Air Liquide and Senior Advisor JP Morgan Plc. Born 1942, Dutch* Entertainment Born 1944, Dutch** Heino von Prondzynski Member of the Supervisory Board since 2007; second term expires in 2015 Christine Poon Member of the Supervisory Board since 2009; second term expires in 2017 Former member of the Corporate Executive Committee of the F. Hofmann- Former Vice-Chairman of Johnson & Johnson’s Board of Directors and La Roche Group and former CEO of Roche Diagnostics, currently Chairman Worldwide Chairman of the Pharmaceuticals Group. Currently dean of Ohio of the Supervisory Board of HTL Strefa and Epigenomics AG. Member of the State University’s Fisher College of Business and member of the Board of Supervisory Board of Hospira Born 1949, German* Jackson Tai Chairman of Audit Committee Directors of Prudential and Regeneron Born 1952, American** *** Neelam Dhawan Member of the Supervisory Board since 2012; ﬁrst term expires in 2016 Member of the Supervisory Board since 2011; ﬁrst term expires in 2015 Currently Managing Director of Hewlett-Packard India Former Vice-Chairman and CEO of DBS Group and DBS Bank Ltd and former Born 1959, Indian* Managing Director at J.P. Morgan &Co. Incorporated. Currently a member of the Supervisory Boards of The Bank of China Limited, Singapore Airlines, MasterCard Incorporated and Eli Lilly and Company. Also Non-Executive Director of privately-held Russell Reynolds Associates and of Vapor Stream Born 1950, American* * member of the Audit Committee ** member of the Remuneration Committee *** member of the Corporate Governance and Nomination & Selection Committee Annual Report 2013 105 8 Supervisory Board 8 - 8 From top to bottom, from left to right: Neelam Dhawan, Jackson Tai, Ewald Kist, Heino von Prondzynski, Christine Poon, James Schiro, Kees van Lede, Jeroen van der Veer 106 Annual Report 2013 9 Supervisory Board report 9 Supervisory Board report 9 - 9 Introduction We as members of the Supervisory Board are fully • The divestment of the Audio, Video, Multimedia and Accessories business (including the termination of committed to our role and responsibility in respect of the Funai agreement). the proper functioning of the corporate governance of Philips. The Supervisory Board supervises and advises The Supervisory Board conducted so-called “deep the Board of Management and Executive Committee in dives” on a range of topics, such as: the strategy of performing their management tasks and setting the Consumer Lifestyle; the operations of the Lighting direction of the business of the Philips group. The Sector in North America and reviews of the company’s Supervisory Board acts, and we as individual members activities in Latin America. of the Board act in the interests of Koninklijke Philips N.V., its business and all its stakeholders. This report The Supervisory Board also conducted a number of includes a more speciﬁc description of the Supervisory reviews of the company’s operations in markets, Board’s activities during the ﬁnancial year 2013 and including in China, Middle-East and Turkey, and Africa. other relevant information on its functioning. Moreover, the North American Market (including the Activities of the Supervisory Board The full scope and details of the discussions within the activities of the Sectors and key functions in that geography) was discussed by the Supervisory Board and we provided feedback on the new brand identity, Supervisory Board are conﬁdential, (inter alia) given the which was launched in November 2013. Additionally, business sensitive nature of the matters discussed. we received updates on sustainability and the share Nevertheless, the overview below indicates a number buy-back program and the impact of currency of matters that we discussed during meetings headwinds. throughout 2013: • Philips’ performance and ﬁnancial headroom aspects of the Accelerate! program, This included the • Philips’ strategy and the new mid-term targets that transformation of the Finance and IT functions and also were announced during the Capital Markets Day in the progress made in transforming the culture within September 2013. In particular, the Supervisory Board Philips and simplifying its operating model. On multiple occasions, we were briefed on the various focused on the nature of the Group, the portfolio of approximately 40 businesses across various strategic The Supervisory Board also reviewed Philips’ annual domains, the company’s geographic footprint and and interim ﬁnancial statements, including non- the roadmap to unlock the company’s full potential ﬁnancial information, prior to publication thereof. over the coming years with emphasis on the Philips Business System • Philips’ annual management commitment for 2013 Supervisory Board meetings and attendance In 2013, the Supervisory Board convened for seven • The review of the integration of large acquisitions regular meetings. Moreover, we collectively and • The change in (the funding of) the pension individually interacted with members of the Executive obligations in the Netherlands Committee and with senior management outside the • Philips’ progression towards becoming a more digital formal Supervisory Board meetings. The Chairman of company the Supervisory Board and the CEO met regularly for • The enterprise risk management (which included the bilateral discussions about the progress of the annual risk assessment and discussion of the company on a variety of matters. changing nature of the risks faced by Philips and the possible impact of such risks). For instance, the The Supervisory Board meetings were well attended in Supervisory Board discussed the impact of changing 2013. The attendance percentage of the meetings - macro-economic conditions and the risks posed by including the committee meetings- was high (in excess information security of 95%). The Supervisory Board committees also • Quality and regulatory matters, and convened regularly (see the separate reports of the committees below) and all of the committees regularly reported back on their activities to the full Supervisory Annual Report 2013 107 9 Supervisory Board report 9 - 9 Board. We as members of the Board devoted sufﬁcient no other vacancies to fulﬁl in 2013. In addition, we note time to engage (proactively if the circumstances so that there may be various other pragmatic reasons – required) in our supervisory responsibilities. such as the other relevant selection criteria and the Composition, diversity and self-evaluation by the Supervisory Board The Supervisory Board is a separate corporate body availability of suitable candidates within Philips – that could play a complicating role in fully achieving the gender targets in the short term. that is independent of the Board of Management (and In 2013, the members of the Supervisory Board the Executive Committee). Its independence is also completed a questionnaire to verify compliance in 2013 reﬂected in the requirement that members of the with applicable corporate governance rules and its Supervisory Board can neither be a member of the Rules of Procedure. The outcome of this survey was Board of Management, member of the Executive satisfactory. Committee nor an employee of Philips. The Supervisory Board furthermore considers all its members to be In addition, we each submitted to the Chairman independent pursuant to the Dutch Corporate responses to a questionnaire designed to self-evaluate Governance Code. We will continue to pay close the functioning of the Supervisory Board. The attention to applicable independence criteria. questionnaire covered topics such as the composition and competence of the Supervisory Board (for The Supervisory Board currently consists of eight example, the Board’s size and the education and members. The agenda for the upcoming 2014 Annual training requirements of its members), access to General Meeting of Shareholders includes the proposal information, the frequency and quality of the meetings, to appoint Ms. Orit Gadiesh as an additional member to quality and timeliness of the meeting materials, the the Supervisory Board, bringing the total to nine nature of the topics discussed during members. The proﬁle of the Supervisory Board aims for an meetings and the functioning of the Supervisory Board’s committees. appropriate combination of knowledge and experience The responses to the questionnaire were aggregated among its members encompassing marketing, into a report, which was discussed by the Supervisory manufacturing, technology, ﬁnancial, economic, social Board in a private meeting. Certain areas were and legal aspects of international business, identiﬁed that could be improved and it was decided government and public administration in relation to the that the Chairman would follow-up with individual global and multi-product character of Philips’ members to address speciﬁc issues. Summarizing, the businesses. The Supervisory Board pays great value to responses provided by the Supervisory Board members diversity in its composition. More particular it aims for indicated that the Board is a well-functioning team and having members with an European and a non- we believe a diversity of experience and skills is European background (nationality, working experience presented on the Board. The functioning of the or otherwise) and one or more members with an Supervisory Board committees was considered to be executive or similar position in business or society no commendable (or better) and speciﬁc feedback will be longer than ﬁve years ago. addressed by the chairman of each committee with its members. The evaluation lead to certain practical steps In addition, we support the Philips’ policy to appoint a to improve the accessibility of the large quantity of well-balanced mix of women and men to its Board of materials provided to Supervisory Board members. Management, Executive Committee and Supervisory Board. New Dutch legislation, effective per January 1, In 2013, the use of an external evaluator to measure the 2013, requires companies to pursue a policy of having at functioning of the Supervisory Board was considered; least 30% of the seats on the Board of Management and however, it was decided to continue self-evaluation for the Supervisory Board held by women and at least 30% the time being. We will reconsider the use of an external of the seats held by men. evaluator as circumstances require. We believe we are making good progress in implementing this policy. The appointment of Orit Supervisory Board committees The Supervisory Board has assigned certain of its tasks Gadiesh, as currently proposed to the General Meeting to three permanent committees: the Corporate of Shareholders, will bring the Supervisory Board’s Governance and Nomination & Selection Committee, gender diversity within the statutory criteria. There were the Remuneration Committee and the Audit 108 Annual Report 2013 9 Supervisory Board report 9 - 9 Committee. The function of the committees is to prepare the decision-making of the full Supervisory Further information For a better understanding of the responsibilities of the Board, and the committees currently have no Supervisory Board and for internal regulations and independent or assigned powers. The full Board retains procedures for its functioning and that of its overall responsibility for the activities of its committees. committees, please refer to chapter 10, Corporate The separate reports of the committees are part of this governance, of this Annual Report and to the following Supervisory Board report and are published below. documents published on the company’s website: Financial Statements 2013 The ﬁnancial statements of the company for 2013, as • Articles of Association • Rules of Procedure Supervisory Board, including the presented by the Board of Management, have been Charters of the Board committees audited by KPMG Accountants N.V. as independent • Rules of Conduct with respect to Inside Information external auditor appointed by the General Meeting of • (Re)appointment scheme Shareholders. Its reports have been included in the section Group ﬁnancial statements; section 11.10, Independent auditor’s report - Group, of this Annual Report and the section Company ﬁnancial statement; section 12.5, Independent auditor’s report - Company, of this Annual Report. We have approved these ﬁnancial statements, and all individual members of the Supervisory Board (together with the members of the Board of Management) have signed these documents. We recommend to shareholders that they adopt the 2013 ﬁnancial statements. We likewise recommend to shareholders that they adopt the proposal of the Board Changes Supervisory Board and committees 2013 • Christine Poon, James Schiro and Jeroen van der Veer have been reappointed as a member of the Supervisory Board. Changes and reappointments Supervisory Board 2014 of Management to make a distribution of EUR 0.80 per • It is proposed to appoint Orit Gadiesh as a member of common share (up to EUR 740 million), in cash or in the Supervisory Board.* shares at the option of the shareholder, against the net income for 2013. Finally, we would like to express our thanks to the members of the Executive Committee and all other employees for their continued contribution during the year. In particular, we would like to express our sincere appreciation to Eric Coutinho, our Chief Legal Ofﬁcer and General Secretary, who will retire in 2014. We wish him all the best for the future. * Subject to approval of appointment by the General Meeting of Shareholders. Changes Management 2014 • Eric Coutinho, Chief Legal Officer and General Secretary will retire on April 30, 2014. He will be succeeded by Marnix van Ginneken (currently Philips' Head of Group Legal). February 25, 2014 The Supervisory Board Jeroen van der Veer Kees van Lede Heino von Prondzynski Jackson Tai James Schiro Ewald Kist Christine Poon Neelam Dhawan Annual Report 2013 109 9 Supervisory Board report 9.1 - 9.1 9.1 Report of the Corporate Governance and Nomination & Selection Committee appointments of suitable candidates to the Board of Management, Executive Committee and Supervisory Board. Under its responsibility for the selection criteria and appointment procedures for Philips’ senior management, the Committee reviewed the succession plans for top 70 positions and emergency candidates for key roles in the company. With respect to corporate governance matters, the Committee discussed relevant developments and legislative changes. The Committee notes a number of important legislative changes to Dutch corporate law came into effect in 2013 and 2014. In addition there were changes to Dutch accountancy law, new rules on inquiry proceedings and an amendment to the European Transparency Directive. These legislative developments and other developments were The Corporate Governance and Nomination & Selection discussed by the Committee, as well as their potential Committee is chaired by Jeroen van der Veer and its impact on the company’s governance. Finally, the other members are James Schiro and Christine Poon. Committee discussed possible agenda items for the upcoming 2014 Annual General Meeting of The Committee is responsible for the review of Shareholders. selection criteria and appointment procedures for the Board of Management, the Executive Committee, as well as the Supervisory Board. In 2013, the Committee consulted with the CEO and other members of the Board of Management on the appointment or reappointment of candidates to ﬁll current and future vacancies on the Board of Management, Executive Committee and Supervisory Board. Following which it prepared decisions and advised the Supervisory Board on the candidates for appointment. The Committee devoted speciﬁc attention to identifying a suitable candidate matching the proﬁle of the Supervisory Board. Subsequently, the Nomination & Selection Committee reviewed and approved the nomination of Orit Gadiesh as member of the Supervisory Board, who was selected from a shortlist of suitable candidates. The Committee also devoted speciﬁc attention to succession planning for Executive Committee members. As indicated in its report above, the Supervisory Board believes it is making good progress in implementing a policy of gender diversity. The Committee strives to continue this trend and give appropriate weight to the diversity policy in the nomination and appointment process on future vacancies, while taking into account the overall proﬁle and selection criteria for 110 Annual Report 2013 9.2 Report of the Remuneration Committee Introduction The Remuneration Committee is chaired by James 9 Supervisory Board report 9.2 - 9.2.2 The performance targets for the members of the Board of Management are determined annually at the beginning of the year. The Supervisory Board determines whether performance conditions have been met and can adjust the pay-out of the annual cash incentive and the long-term incentive grant upward or downward if the predetermined performance criteria were to produce an inappropriate result in extraordinary circumstances. The authority for such adjustments exists on the basis of contractual ultimum remedium- and claw back clauses. In addition, pursuant to new Dutch legislation effective January 1, Schiro and its other members are Jeroen van der Veer, 2014, incentives may under circumstances be amended Ewald Kist and Christine Poon. The Committee is or clawed back pursuant to statutory powers. For more responsible for preparing decisions of the Supervisory information please refer to chapter 10, Corporate Board on the remuneration of individual members of governance, of this Annual Report. Further information the Board of Management and the Executive on the performance targets is given in the chapters on Committee. In performing its duties and responsibilities the Annual Incentive and the Long-Term Incentive Plan the Remuneration Committee is assisted by an external respectively. consultant and in-house remuneration expert acting on the basis of a protocol which ensures that he acts on the 9.2.2 Contracts instructions of the Remuneration Committee. Currently, The main elements of the contracts of the members of no member of the Remuneration Committee is a the Board of Management are made public no later member of the management board of another listed than the date of the notice convening the General company. In line with applicable statutory and other Meeting of Shareholders at which the appointment of regulations this report focuses on the employment and the member of the Board of Management will be remuneration of the members of the Board of proposed. Management. 9.2.1 Remuneration policy Term of appointment The members of the Board of Management are The objective of the remuneration policy for members appointed for a period of 4 years. of the Board of Management, as adopted by the General Meeting of Shareholders, is in line with that for Contract terms for current members executives throughout the Philips Group: to attract, motivate and retain qualiﬁed senior executives of the highest caliber, with an international mindset and background essential for the successful leadership and F.A. van Houten R.H. Wirahadiraksa effective management of a large global company. The P.A.J. Nota end of term March 31, 2015 March 31, 2015 March 31, 2015 Board of Management remuneration policy is benchmarked regularly against companies in the general industry and aims at the median market position. Notice period Termination of the contract by a member of the Board of Management is subject to three months’ notice. A notice period of six months will be applicable in the One of the goals behind the policy is to focus on case of termination by the Company. improving the performance of the company and enhancing the value of the Philips Group. Consequently, the remuneration package includes a Severance payment The severance payment is set at a maximum of one variable part in the form of an annual cash incentive and year’s salary. a long-term incentive consisting of performance shares. The policy does not encourage inappropriate risk-taking. Share ownership Simultaneously with the introduction of the new LTI Plan in 2013, the guideline for members of the Board of Management to hold a certain number of shares in the company has been increased to the level of at least Annual Report 2013 111 9 Supervisory Board report 9.2.2 - 9.2.6 200% of base pay (the CEO 300%). Until this level has 9.2.4 Remuneration costs been reached the members of the Board of The table below gives an overview of the costs incurred Management are required to retain all after-tax shares by the Company in the ﬁnancial year in relation to the derived from any long-term incentive plan. remuneration of the Board of Management. Costs 9.2.3 Scenario analysis related to performance shares, stock option and restricted share right grants are taken by the Company The Remuneration Committee annually conducts over a number of years. As a consequence, the costs scenario analysis. This includes the calculation of mentioned below in the columns stock options and remuneration under different scenarios, whereby restricted share rights are the accounting cost of multi- different Philips performance assumptions and year grants given to members of the Board of corporate actions are looked at. The Supervisory Board Management during their board membership. concluded that the current policy has proven to function well in terms of a relationship between the strategic objectives and the chosen performance criteria and believe that new Long-Term Incentive Plan has further improved this relationship. Remuneration Board of Management 20131) in euros annual base salary3) base salary realized annual incentive F.A. van Houten 1,100,000 1,100,000 1,081,520 R.H. Wirahadiraksa 675,000 656,250 P.A.J. Nota 625,000 618,750 497,745 561,713 Costs in the year2) perfor- mance shares 402,275 205,713 190,473 stock options restricted share rights pension costs other compen- sation 218,682 190,441 468,407 75,906 137,926 128,856 263,451 35,732 182,835 146,626 253,605 68,206 1) Reference date for board membership is December 31, 2013 2) A crisis tax levy of 16% as imposed by the Dutch government amounts to EUR 681,596 in total . This crisis tax levy is payable by the employer and is charged over income of employees exceeding a EUR 150,000 threshold in 2013. These expenses do not form part of the remuneration costs mentioned. The costs for the once-only Accelerate! Grant are not included in the table above. See the table below 3) Salary as of April 1, 2013 Accelerate! Grant The members of the Board of Management received a van Houten has not been increased per April 1, 2013 and remained at EUR 1,100,000. The salary of Pieter Nota special once-only performance grant related to the has been increased from EUR 600,000 to EUR 625,000 realization of the Accelerate! program and the mid- and the salary of the CFO, Ron Wirahadiraksa, has been term targets of the company (CSG CAGR, EBITA and increased from EUR 600,000 to EUR 675,000 to bring it ROIC). This grant consists of performance shares and closer to market level. performance options. The costs related to the Accelerate! Grant to the members of the Board of 9.2.6 Annual Incentive Management have been fully taken in the ﬁnancial year Each year, a variable cash incentive (Annual Incentive) 2013. Around 450 other key employees received a can be earned, based on the achievement of speciﬁc similar performance grant. Accelerate! Grant number of performance shares number of performance stock options Costs in euros F.A. van Houten 55,000 55,000 1,434,933 R.H. Wirahadiraksa P.A.J. Nota 38,500 38,500 38,500 1,004,453 38,500 1,004,453 9.2.5 Base salary The base salaries of the members of the Board of Management have been reviewed in April 2013 as part of the regular remuneration review. The salary of Frans and challenging targets. The Annual Incentive criteria are for 80% the ﬁnancial indicators of the Company and for 20% the team targets comprising, among others, sustainability targets as part of our EcoVision program. The on-target Annual Incentive percentage is set at 60% of the base salary for members of the Board of Management and 80% of the base salary for the CEO, and the maximum Annual Incentive achievable is 120% of the annual base salary for members of the Board of Management and for the CEO it is 160% of the annual base salary. 112 Annual Report 2013 9 Supervisory Board report 9.2.6 - 9.2.7 To support the performance culture, the Annual The following performance incentive-zone applies for Incentive plan is based on (ﬁnancial) targets at ‘own EPS: level’ and ‘group’ level results (line-of-sight). The 2013 realization is a reﬂection of above target performance Performance incentive-zone for EPS on EBITA, ROIC and Team Targets and a below target realization on CSG, resulting in the pay-out as presented in the table below. Below threshold Threshold Target Maximum Pay-out in % 0 40 100 200 Annual Incentive realization 2013 (pay-out in 2014) in euros realized annual incentive as a % of base salary (2013) F.A. van Houten R.H. Wirahadiraksa P.A.J. Nota 1,081,520 497,745 561,713 98.3% 73.7% 89.9% The EPS targets are annually set by the Supervisory Board. Given the fact that these targets are considered to be company sensitive disclosure will take place retrospectively at the end of the performance period. EPS targets and the achieved performance are published in the annual report after the relevant performance period. 9.2.7 Long-Term Incentive Plan In 2013 a new LTI Plan has been introduced. The new TSR The TSR peer group for the new plan consists of the plan consists of performance shares only. following 21 companies: Grant size The annual grant size is set by reference to a multiple of base salary. For the CEO the annual grant size is set at 120% of base salary and for the other members of the ABB Covidien Danaher Eaton Hitachi Panasonic Honeywell Int. Procter & Gamble Johnson Controls Schneider Electric Johnson & Johnson Siemens Board of Management at 100% of base salary. This is at Electrolux Legrand Toshiba a mid-market level against leading European listed Emerson Electric LG Electronics Smiths Group companies. The actual number of performance shares General Electric Medtronic 3M to be awarded is determined by reference to the average of the closing price of the Philips share on the A ranking approach to TSR applies with Philips itself day of publication of the quarterly results and the four excluded from the peer group to permit interpolation. subsequent dealing days. The performance incentive-zone is outlined in the table Vesting schedule Dependent upon the achievement of the performance below: conditions cliff-vesting applies three years after the Performance incentive-zone for TSR date of grant. During the vesting period, the value of dividends will be added to the performance shares in the form of shares. These dividend equivalent shares will only be delivered to the extent that the award actually vests. Performance conditions Vesting of the performance shares is based on two equally weighted performance conditions: • 50% Adjusted Earnings per Share growth (“EPS”) and • 50% Relative Total Shareholder Return (“TSR”) EPS EPS growth is calculated applying the simple point-to- point method at year end. Earnings are the income from continued operations attributable to shareholders as reported in the Annual Report. Position Pay-out in % ≥14 -21 ≥13 ≥12 ≥11 ≥10 ≥9 ≥8 ≥7 ≥6 -1 0 60 60 100 120 140 160 180 200 Under the new LTI Plan members of the Board of Management were granted 124,171 performance shares in 2013. The following tables provide an overview of granted but not yet vested (locked up) stock option grants, an overview of performance shares granted but not yet vested and an overview of restricted share rights granted but not yet released. The reference date for board membership is December 31, 2013. The Accelerate! Grant is reported separately under sub- section 9.2.4, Remuneration costs, of this Annual Report. Annual Report 2013 113 9 Supervisory Board report 9.2.7 - 9.2.8 Performance shares 1) in euros F.A. van Houten R.H. Wirahadiraksa P.A.J. Nota originally granted number of performance shares grant date 2013 2013 2013 62,559 31,991 29,621 value at grant date 1,320,000 675,000 625,000 end of vesting period number of performance shares vested in 2013 value at vesting date in 2013 2016 2016 2016 n.a. n.a. n.a. n.a. n.a. n.a. 1) Accelerate! Grant reported separately. Dividend performance shares resulting from the new LTI Plan not included Stock options2) in euros F.A. van Houten R.H. Wirahadiraksa P.A.J. Nota grant date number of stock options value at grant date end of lock up period value at end of lock up period3) 2010 2011 2012 2010 2011 2012 2010 2011 2012 20,4001) 75,000 75,000 16,5001) 51,000 51,000 40,8001) 51,000 51,000 103,428 366,000 212,550 81,675 248,880 144,534 206,856 248,880 144,534 2013 2014 2015 2013 2014 2015 2013 2014 2015 86,429 n.a. n.a. 36,290 n.a. n.a. 172,857 n.a. n.a. 1) Awarded before date of appointment as a member of the Board of Management 2) Accelerate! Grant reported separately 3) Value at end of lock up period based on Black & Scholes value Restricted share rights in euros F.A. van Houten R.H. Wirahadiraksa P.A.J. Nota originally granted number of restricted share rights grant date value at grant date number of restricted share rights released in 2013 value at release date in 2013 2010 2011 2012 2010 2011 2012 2010 2011 2012 5,1001) 20,001 20,001 4,1251) 13,602 13,602 10,2001) 13,602 13,602 116,688 418,021 296,415 102,713 284,282 201,582 233,376 284,282 201,582 1,700 6,667 6,667 1,375 4,534 4,534 3,400 4,534 4,534 41,497 145,607 136,807 30,113 99,023 93,038 82,994 99,023 93,038 1) Awarded before date of appointment as a member of the Board of Management For more details of the LTI Plan, see note 31, Share- 9.2.8 Pensions based compensation. 114 Annual Report 2013 Members of the Board of Management participate in the Executives Pension Plan in the Netherlands consisting of a combination of a deﬁned-beneﬁt (career average) and deﬁned-contribution plan. The target 9 Supervisory Board report 9.2.8 - 9.2.11 retirement age under the plan is 62.5. The plan does not 9.2.11 Year 2014 require employee contributions. For more details, see note 33, Information on remuneration. 9.2.9 Additional arrangements Accelerate! Grant Based on the 2013 ﬁnancial performance on CSG CAGR, EBITA and ROIC, the Supervisory Board concluded in In addition to the main conditions of employment, a her January 2014 meeting that all the performance number of additional arrangements apply to members conditions exceed the mid-term targets as announced of the Board of Management. These additional in 2011. As a consequence the total number of shares arrangements, such as expense and relocation and options under the Accelerate! Grant, as these were allowances, medical insurance, accident insurance and originally granted in January 2013, became company car arrangements, are in line with those for unconditional. On January 28, 2014 the shares (after Philips executives in the Netherlands. In the event of tax) have been delivered to the members of the Board disablement, members of the Board of Management of Management. With respect to these shares a holding are entitled to beneﬁts in line with those for other period until January 29, 2018 applies. The options can Philips executives in the Netherlands. be exercised during the period January 29, 2016 - Unless the law provides otherwise, the members of the Board of Management and of the Supervisory Board shall be reimbursed by the Company for various costs Pensions In view of upcoming legislation in the Netherlands, the and expenses, like reasonable costs of defending pension arrangements will be reviewed in the course of claims, as formalized in the articles of association. 2014. January 29, 2023. Under certain circumstances, described in the articles of association, such as an act or failure to act by a member of the Board of Management or a member of the Supervisory Board that can be characterized as intentional (“opzettelijk”), intentionally reckless (“bewust roekeloos”) or seriously culpable (“ernstig verwijtbaar”), there will be no entitlement to this reimbursement. The Company has also taken out liability insurance (D&O - Directors & Ofﬁcers) for the persons concerned. 9.2.10 Remuneration Supervisory Board The table below gives an overview of the remuneration structure, which has remained unchanged since 2008. Remuneration 20131) in euros per year Supervisory Board Audit Committee Remuneration Committee Corporate Governance and Nomination & Selection Committee Fee for intercontinental traveling per trip Entitlement Philips product arrangement Chairman Member 110,000 15,000 12,500 65,000 10,000 8,000 12,500 6,000 3,000 3,000 2,000 2,000 1) For more details, see note 33, Information on remuneration Annual Report 2013 115 9 Supervisory Board report 9.3 - 9.3 9.3 Report of the Audit Committee share repurchase program and payment of dividends, The Committee also reviewed the goodwill impairment test performed in the second quarter, risk management, tax issues, IT strategy and transformation (including information security) and remediation of IT related internal control ﬁndings, the company’s ﬁnance transformation, developments in The Audit Committee is chaired by Jackson Tai, and its regulatory investigations as well as legal proceedings other members are Neelam Dhawan, Kees van Lede including antitrust investigations and related and Heino von Prondzynski. The Committee assists the provisions, environmental exposures and ﬁnancing Supervisory Board in fulﬁlling its supervisory and performance of ﬁnancial holdings and recent responsibilities for (inter alia) the integrity of the acquisitions and new Dutch legislation on mandatory company’s ﬁnancial statements. auditor rotation and prohibition on non-audit The Audit Committee met for four quarterly meetings services. and two education and training sessions during 2013 • With regard to the internal audit, the Committee and reported its ﬁndings to the plenary Supervisory reviewed, and if required approved, the internal audit Board. The CEO, the CFO, the Head of Internal Audit, charter, audit plan, audit scope and its coverage in the Group Controller and the external auditor (KPMG relation to the scope of the external audit, as well as Accountants N.V.) attended all regular meetings. the stafﬁng, independence and organizational Furthermore, the Committee met each quarter structure of the internal audit function. The separately with each of the CEO, the CFO, the Head of Committee also reviewed and approved the Internal Audit and the external auditor as well as on an appointment of a new Head of Internal Audit ad hoc basis with other company employees, such as following the rotational reassignment of the previous the Group Treasurer, the Group Controller and Head of incumbent. Financial Risk and Pensions Management. The overview below indicates certain of the matters reviewed the proposed audit scope, approach and that were discussed during meetings throughout 2013: fees, the independence of the external auditor, non- • With regard to the external audit, the Committee audit services provided by the external auditor in • The company’s 2013 annual and interim ﬁnancial conformity with the Philips Auditor Policy, as well as statements, including non-ﬁnancial information, any changes to this policy. The Committee also prior to publication thereof. It also assessed in its reviewed the External Auditor’s independence as quarterly meetings the adequacy and well as its professional ﬁtness and good standing. For appropriateness of internal control policies and information on the fees of KPMG Accountants N.V., internal audit programs and their ﬁndings. please refer to the table ‘Fees KPMG’ in note 3, • Matters relating to accounting policies, ﬁnancial risks Income from operations. and compliance with accounting standards. • The company’s policy on business controls, the Compliance with statutory and legal requirements General Business Principles including the and regulations, particularly in the ﬁnancial domain, deployment thereof and amendments thereto. The was also reviewed. Important ﬁndings, Philips’ major Committee was informed on, discussed and areas of risk (including the internal auditor’s reporting monitored closely the company’s internal control thereon, and the General Counsel’s review of certiﬁcation processes, in particular compliance with litigation and other claims) and follow-up action and section 404 of the US Sarbanes-Oxley Act and its appropriate measures were examined thoroughly. requirements regarding assessment, review and monitoring of internal controls. Speciﬁcally, the Committee reviewed the company’s pension liabilities and its program to de-risk future On January 1, 2016, the new legislation on mandatory pension liabilities and related economic, accounting auditor rotation will become effective, which has also and legal implications. The Committee reviewed the been reﬂected in the Auditor Policy amended as per company’s cash ﬂow generation, liquidity and January 1, 2013 (please refer to chapter 10, Corporate headroom throughout the year to undertake its governance, of this Annual Report for more ﬁnancial commitments, including the company’s information). Under the new rotation rules, Philips must 116 Annual Report 2013 9 Supervisory Board report 9.3 - 9.3 engage a new audit ﬁrm for its statutory audit for the ﬁnancial year starting January 1, 2016. The Committee has been involved in the process of selecting a new auditor and will continue to be involved in the ﬁnal selection in 2014 of such future auditor, subject to appointment by the 2015 Annual General Meeting of Shareholders. During each Audit Committee meeting, the Committee reviewed the report from the external auditor in which the auditor set forth its ﬁndings and attention points during the relevant period. The Committee also assesses the overall performance of the external auditor, as required by the Auditor Policy. Please refer to the agenda and explanatory notes thereto for the upcoming 2014 Annual General Meeting of Shareholders for more information on the proposed re- appointment, for one additional year, of the external auditor. Finally, the Audit Committee also participated in a number of education sessions during 2013, including education on pensions and proposed changes to the IFRS accounting standards. Annual Report 2013 117 10 Corporate governance 10 - 10.1 10 Corporate governance Corporate governance of the Philips group - Introduction Koninklijke Philips N.V., a company organized under Dutch law (the ‘Company’), is the parent company of the Philips Group (‘Philips’ or the ‘Group’). The Company, which started as a limited partnership with the name Philips & Co in Eindhoven, the Netherlands, in 1891, was converted into the company with limited liability N.V. Philips’ Gloeilampenfabrieken on September 11, 1912. The Company’s name was changed to Philips Electronics N.V. on May 6, 1994, to Koninklijke Philips Electronics N.V. on April 1, 1998, and to Koninklijke Philips N.V. on May 3, 2013. Its shares have been listed on the Amsterdam Stock Exchange, Euronext Amsterdam, since 1912. The shares have been traded in the United States since 1962 and have been listed on the New York Stock Exchange since 1987. Over the last decades the Company has pursued a consistent policy to improve its corporate governance in line with Dutch, US and international (codes of) best practices. The Company has incorporated a fair disclosure practice in its investor relations policy, has strengthened the accountability of its executive management and its independent supervisory directors, and has increased the rights and powers of shareholders and the communication with investors. The Company is required to comply with, inter alia, Dutch Corporate Governance rules, the US Sarbanes-Oxley Act, other US securities laws and related regulations (including applicable stock exchange rules), insofar as applicable to the Company. A summary of signiﬁcant differences between the Company’s corporate governance practice and the New York Stock Exchange corporate governance standards is published on the Company’s website (www.philips.com/investor). In this report, the Company addresses its overall corporate governance structure and states to what extent and how it applies the principles and best practice provisions of the Dutch Corporate Governance Code (as revised on December 10, 2008; the ‘Dutch Corporate Governance Code’). This report also includes the information which the Company is required to disclose pursuant to the Dutch governmental decree on Article 10 Takeover Directive and the governmental decree on Corporate Governance. Deviations from aspects of the corporate governance structure of the Company, when deemed necessary in the interests of the Company, will be disclosed in the Annual Report. Substantial changes in the Company’s corporate governance structure and in the Company’s compliance with the Dutch Corporate Governance Code, if any, will be submitted to the General Meeting of Shareholders for discussion under a separate agenda item. The Supervisory Board and the Board of Management, which are responsible for the corporate governance structure of the Company, are of the opinion that the principles and best practice provisions of the Dutch Corporate Governance Code that are addressed to the Board of Management and the Supervisory Board, interpreted and implemented in line with the best practices followed by the Company, are being applied. 10.1 Board of Management Introduction The Board of Management is entrusted with the management of the Company. Certain key ofﬁcers have been appointed to manage the Company together with the Board of Management. The members of the Board of Management and these key ofﬁcers together constitute the Executive Committee (the ‘Executive Committee’). Under the chairmanship of the President/Chief Executive Ofﬁcer (‘CEO’) the members of the Executive Committee share responsibility for the deployment of its strategy and policies, and the achievement of its objectives and results. The Executive Committee has, for practical purposes, adopted a division of responsibilities indicating the functional and business areas monitored and reviewed by the individual members. For the purpose of this document, where the Executive Committee is mentioned this also includes the Board of Management unless the context requires otherwise. The Board of Management remains accountable for the actions and decisions of the Executive Committee and has ultimate responsibility for the Company’s management and the external reporting and is answerable to shareholders of the Company at the Annual General Meeting of Shareholders. 118 Annual Report 2013 All resolutions of the Executive Committee are adopted by majority vote comprising the majority of the members of the Board of Management present or represented, such majority comprising the vote of the CEO. The Board of Management retains the authority to, at all times and in all circumstances, adopt resolutions without the participation of the other members of the Executive Committee. In discharging its duties, the Executive Committee shall be guided by the interests of the Company and its afﬁliated enterprise, taking into consideration the interests of the Company’s stakeholders. The Executive Committee is supervised by the Supervisory Board and provides the latter with all information the Supervisory Board needs to fulﬁll its own responsibilities. Major decisions of the Board of Management and Executive Committee require the approval of the Supervisory Board; these include decisions concerning (a) the operational and ﬁnancial objectives of the Company, (b) the strategy designed to achieve the objectives, (c) if necessary, the parameters to be applied in relation to the strategy and (d) corporate social responsibility issues that are relevant to the Company. The Executive Committee follows the Rules of Procedure of the Board of Management and Executive Committee, which set forth procedures for meetings, resolutions and minutes. These Rules of Procedure are published on the Company’s website. (Term of) Appointment and conﬂicts of interests Members of the Board of Management as well as the CEO are appointed by the General Meeting of Shareholders upon a binding recommendation drawn up by the Supervisory Board after consultation with the CEO. This binding recommendation may be overruled by a resolution of the General Meeting of Shareholders adopted by a simple majority of the votes cast and representing at least one-third of the issued share capital. If a simple majority of the votes cast is in favor of the resolution to overrule the binding recommendation, but such majority does not represent at least one-third of the issued share capital, a new meeting may be convened at which the resolution may be passed by a simple majority of the votes cast, regardless of the portion of the issued share capital represented by such majority. In the event a binding recommendation has been overruled, a new binding recommendation shall be submitted to the General Meeting of Shareholders. If such second binding recommendation has been overruled, the General Meeting of Shareholders shall be free to appoint a board member. Members of the Board of Management and the CEO are appointed for a term of four years, it being understood that this term expires at the end of the General Meeting of Shareholders to be held in the fourth year after the year of their appointment. Reappointment is possible for consecutive terms of four years or, if applicable, until a later retirement date or other contractual termination date in the fourth year, unless the General Meeting of Shareholders resolves otherwise. Members may be suspended by the Supervisory Board and the General Meeting of Shareholders and dismissed by the latter. Individual data on the members of the Board of Management and Executive Committee are published in chapter 7, Management, of this Annual Report. The other members of the Executive Committee are appointed, suspended and dismissed by the CEO, subject to approval by the Supervisory Board. The acceptance by a member of the Board of Management of a position as a member of a supervisory board or a position of non-executive director in a one-tier board (a ‘Non-Executive Directorship’) at another company requires the approval of the Supervisory Board. The Supervisory Board is required to be notiﬁed of other important positions (to be) held by a member of the Board of Management. Under the Dutch Corporate Governance Code, no member of the Board of Management shall hold more than two Non-Executive Directorships at listed companies, or is a chairman of a supervisory board or one-tier board, other than of a Group company or participating interest of the Company. New Dutch legislation, effective January 1, 2013, provides for further limitations on the Non- Executive Directorships. No member of the Board of Management shall hold more than two Non-Executive Directorships at ‘large’ companies (naamloze vennootschappen or besloten vennootschappen) or ‘large’ foundations (stichtingen) as deﬁned under Dutch law and no member of the Board of Management shall hold the position of chairman of another one-tier board or the position of chairman of another supervisory board. In order for a company or foundation to be regarded as large, it must meet at least two of the following criteria: (i) the value of the assets according to the balance sheet with explanatory notes, considering the acquisition or manufacturing price, exceeds EUR 17.5 million; (ii) the net turnover exceeds EUR 35 million; or (iii) the average number of employees equals or exceeds 250. During the ﬁnancial year 2013 all members of the Board of Management complied with the limitations on Non-Executive Directorships described above. Pursuant to new Dutch legislation on board diversity, effective January 1, 2013, the Company must pursue a policy of having at least 30% of the seats on the Board of Management held by men and at least 30% of the seats held by women. The rule will cease to have effect on January 1, 2016. For more details on board diversity please be referred to the Report of Corporate Governance and Nomination & Selection Committee in this Annual Report. New Dutch legislation on conﬂicts of interests, effective January 1, 2013, provides that a member of the Board of Management may not participate in the adoption of resolutions if he or she has a direct or indirect personal conﬂict of interest with the Company or related enterprise. If all members of the Board of Management have a conﬂict, the resolution concerned will be adopted by the Supervisory Board. The Company’s corporate governance includes rules to specify situations in which a (potential) conﬂict may exist, to avoid (potential) conﬂicts of interests as much as possible, and to deal with such conﬂicts should they arise. The rules on conﬂicts of interests apply to the other members of the Executive Committee correspondingly. Relevant matters relating to conﬂicts of interests, if any, shall be mentioned in the Annual Report for the ﬁnancial year in question. No such matters have occurred during the ﬁnancial year 2013. Amount and composition of the remuneration of the Board of Management The remuneration of the individual members of the Board of Management is determined by the Supervisory Board on the proposal of the Remuneration Committee of the Supervisory Board, and must be consistent with the policy thereon as adopted by the General Meeting of Shareholders. The current remuneration policy applicable to the Board of Management was adopted by the 2013 General Meeting of Shareholders, and is published on the Company’s website. A full and detailed description of the composition of the remuneration of the individual members of the Board of Management is included in chapter 9, Supervisory Board report, of this Annual Report. Pursuant to new Dutch legislation, effective January 1, 2014, the remuneration of the members of the Board of Management and the Supervisory Board must be included as a separate agenda item in the convening notice for a general meeting of shareholders and must be dealt with before the meeting can proceed to consider and adopt the Annual Accounts. The remuneration structure of the Company, including severance pay, is such that it promotes the interests of the Company in the medium and long-term, does not encourage members of the Board of Management to act in their own interests and neglect the interests of the Company, and does not reward failing members of the Board of Management upon termination of their employment. The level and structure of remuneration shall be determined in the light of factors such as the results, the share price performance and other developments relevant to the Company. Deviations on elements of the remuneration policy in extraordinary circumstances, when deemed necessary in the interests of the Company, will be disclosed in the Annual Report or, in case of an appointment, in good time prior to the appointment of the person concerned. The main elements of the contract of employment of a new member of the Board of Management - including the amount of the ﬁxed base salary, the structure and amount of the variable remuneration component, any severance plan, pension arrangements and the general performance criteria - shall be made public no later than at the time of issuance of the notice convening the General Meeting of Shareholders in which a proposal for appointment of that member of the Board of Management has been placed on the agenda. In compliance with the Dutch Corporate Governance Code, the term of contract of the members of the Board of Management is set at four years, and in case of termination, severance payment is limited to a maximum of one year’s base salary; if the maximum of one-year’s salary would be manifestly unreasonable for a 10 Corporate governance 10.1 - 10.1 member of the Board of Management who is dismissed during his ﬁrst term of ofﬁce, the member of the Board of Management shall be eligible for a severance payment not exceeding twice the annual salary. All current members of the Board of Management are employed by means of a contract of employment. Pursuant to new Dutch legislation, effective January 1, 2013, new members of the Board of Management will be employed by means of a services agreement (overeenkomst van opdracht). From 2003 until 2013, Philips maintained a Long-Term Incentive Plan (‘LTI Plan’) consisting of a mix of restricted shares rights and stock options for members of the Board of Management, Philips executives and other key employees. A fully revised LTI Plan applicable to members of the Board of Management was approved by the 2013 General Meeting of Shareholders. The revised plan consists of performance shares only, with a three year post-grant performance measurement. For more details please be referred to the section 9.2, Report of the Remuneration Committee, of this Annual Report. The so-called ultimum remedium clause and claw-back clause of best practice provisions II.2.10 and II.2.11 of the Dutch Corporate Governance Code are applicable to Annual Incentive payments and LTI grants for the year 2009 onwards to all members of the Board of Management. In respect of the LTI grants, the ultimum remedium clause can be applied to the performance-related actual number of stock options, restricted share rights and/or performance shares that is granted. In addition, pursuant to newly adopted Dutch legislation, effective January 1, 2014, the Supervisory Board will be authorized to change unpaid bonuses awarded to members of the Board of Management if payment or delivery of the bonus would be unacceptable according to the principles of reasonableness and fairness. The Company, which in this respect may also be represented by the Supervisory Board or a special representative appointed for this purpose by the General Meeting of Shareholders, may also claim repayment of bonuses paid or delivered (after December, 31, 2013) insofar as these have been granted on the basis of incorrect information on the fulﬁllment of the relevant performance criteria or other conditions. Bonuses are broadly deﬁned as ‘non-ﬁxed’ remuneration, either in cash or in the form of share-based compensation, that is conditional in whole or in part on the achievement of certain targets or the occurrence of certain circumstances. The explanatory notes to the balance sheet shall report on any moderation and/or claim for repayment of board remuneration. The newly adopted legislation also introduces an obligation for the Company to reduce the remuneration of a member of the Board of Management, if and to the extent the value of such member’s share-based remuneration would have increased as a result of the announcement of a large transaction (requiring shareholder approval) or a public offer for the Company. Members of the Board of Management hold shares in the Company for the purpose of long-term investment and are required to refrain from short- term transactions in Philips securities. According to the Philips Rules of Conduct on Inside Information, members of the Board of Management are only allowed to trade in Philips securities (including the exercise of stock options) during ‘windows’ of twenty business days following the publication of annual and quarterly results (provided the person involved has no ‘inside information’ regarding Philips at that time unless an exemption is available). Furthermore, the Rules of Procedure of the Board of Management and Executive Committee contain provisions concerning ownership of and transactions in non-Philips securities by members of the Board of Management. Members of the Board of Management are prohibited from trading, directly or indirectly, in securities of any of the companies belonging to the peer group, during one week preceding the disclosure of Philips’ annual or quarterly results. These rules referred to above in this paragraph apply to members of the Executive Committee correspondingly. Transactions in shares in the Company carried out by members of the Board of Management or members of the Supervisory Board and other Insiders (if applicable) are notiﬁed to the Netherlands Authority for the Financial Markets (AFM) in accordance with Dutch law and, if necessary, to other relevant authorities. Indemniﬁcation of members of the Board of Management and Supervisory Board Unless the law provides otherwise, the members of the Board of Management and of the Supervisory Board shall be reimbursed by the Company for various costs and expenses, such as the reasonable costs of defending claims, as formalized in the Articles of Association. Under certain circumstances, described in the Articles of Association, such as an act or failure to act by a member of the Board of Management or a member of the Supervisory Board that can be characterized as intentional (‘opzettelijk’), intentionally reckless (‘bewust roekeloos’) or seriously Annual Report 2013 119 10 Corporate governance 10.1 - 10.2 culpable (‘ernstig verwijtbaar’), there will be no entitlement to this reimbursement unless the law or the principles of reasonableness and fairness require otherwise. The Company has also taken out liability insurance (D&O - Directors & Ofﬁcers) for the persons concerned. In line with regulatory requirements, the Company’s policy forbids personal loans to and guarantees on behalf of members of the Board of Management or the Supervisory Board, and no loans and guarantees have been granted and issued, respectively, to such members in 2013, nor are any loans or guarantees outstanding as of December 31, 2013. The aggregate share ownership of the members of the Board of Management and the Supervisory Board represents less than 1% of the outstanding ordinary shares in the Company. Risk management approach Within Philips, risk management forms an integral part of business management. The Company has implemented a risk management and internal control system that is designed to provide reasonable assurance that strategic objectives are met by creating focus, by integrating management control over the Company’s operations, by ensuring compliance with applicable laws and regulations and by safeguarding the reliability of the ﬁnancial reporting and its disclosures. The Executive Committee reports on and accounts for internal risk management and control systems to the Supervisory Board and its Audit Committee. The Company has designed its internal control system in accordance with the recommendations of the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s risk management approach is embedded in the periodic business planning and review cycle and forms an integral part of business management. On the basis of risk assessments, management determines the risks and appropriate risk responses related to the achievement of business objectives and critical business processes. Risk factors and the risk management approach, as well as the sensitivity of the Company’s results to external factors and variables, are described in more detail in [Risk management]. Signiﬁcant changes and improvements in the Company’s risk management and internal control system have been discussed with the Supervisory Board’s Audit Committee and the external auditor and are disclosed in that section as well. With respect to ﬁnancial reporting a structured self-assessment and monitoring process is used company-wide to assess, document, review and monitor compliance with internal control over ﬁnancial reporting. Internal representations received from management, regular management reviews, reviews of the design and effectiveness of internal controls and reviews in corporate and divisional audit committees are integral parts of the Company’s risk management approach. On the basis thereof, the Board of Management conﬁrms that internal controls over ﬁnancial reporting provide a reasonable level of assurance that the ﬁnancial reporting does not contain any material inaccuracies, and conﬁrms that these controls have properly functioned in 2013. The ﬁnancial statements fairly represent the ﬁnancial condition and result of operations of the Company and provide the required disclosures. It should be noted that the above does not imply that these systems and procedures provide certainty as to the realization of operational and ﬁnancial business objectives, nor can they prevent all misstatements, inaccuracies, errors, fraud and non-compliances with rules and regulations. In view of the above the Board of Management believes that it is in compliance with the requirements of recommendation II.1.4. of the Dutch Corporate Governance Code. The above statement on internal controls should not be construed as a statement in response to the requirements of section 404 of the US Sarbanes-Oxley Act. The statement as to compliance with section 404 is set forth in the section Management’s report on internal control over ﬁnancial reporting of this Annual Report. Philips has a ﬁnancial code of ethics which applies to certain senior ofﬁcers, including the CEO and CFO, and to employees performing an accounting or ﬁnancial function (the ﬁnancial code of ethics has been published on the Company’s website). The Company, through the Supervisory Board’s Audit Committee, also has appropriate procedures in place for the receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls or auditing matters and the conﬁdential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters. Internal ‘whistleblowers’ have the opportunity, without jeopardizing their position, to report on irregularities of a general, operational or ﬁnancial nature and to report complaints about members of the Executive Committee to the Chairman of the Supervisory Board. In view of the requirements under the US Securities Exchange Act, procedures are in place to enable the CEO and the CFO to provide certiﬁcations with respect to the Annual Report on Form 20-F. A Disclosure Committee is in place, which advises the various ofﬁcers and departments involved, including the CEO and the CFO, on the timely review, publication and ﬁling of periodic and current (ﬁnancial) reports. In addition to the certiﬁcation by the CEO and CFO under US law, each individual member of the Supervisory Board and the Board of Management must under Dutch law, sign the Group and Company ﬁnancial statements being disclosed and submitted to the General Meeting of Shareholders for adoption. If one or more of their signatures is missing, this shall be stated, and the reasons given for this. The members of the Board of Management issue the responsibility statement with regard to chapter 11, Group ﬁnancial statements, of this Annual Report, as required by applicable Dutch company law and securities law. 10.2 Supervisory Board Introduction The Supervisory Board supervises the policies of the Board of Management and Executive Committee and the general course of affairs of Philips and advises the executive management thereon. The Supervisory Board, in the two-tier corporate structure under Dutch law, is a separate body that is independent of the Board of Management. Its independent character is also reﬂected in the requirement that members of the Supervisory Board can be neither a member of the Board of Management nor an employee of the Company. The Supervisory Board considers all its members to be independent pursuant to the Dutch Corporate Governance Code and under the applicable US Securities and Exchange Commission standards. The Supervisory Board, acting in the interests of the Company and the Group and taking into account the relevant interest of the Company’s stakeholders, supervises and advises the Board of Management and Executive Committee in performing its management tasks and setting the direction of the Group’s business, including (a) the Philips group’s performance, (b) the Philips group’s general strategy and the risks connected to its business activities, (c) the operational and ﬁnancial objectives, (d) the parameters to be approved in relation to the strategy, (e) corporate social responsibility issues (f) the structure and management of the systems of internal business controls, (g) the ﬁnancial reporting process, (h) the compliance with applicable laws and regulations, (i) the company-shareholders relationship, and (j) the corporate governance structure of the Company. The Group’s strategy and major management decisions are discussed with and approved by the Supervisory Board. For a description of further responsibilities and tasks of the Supervisory Board please refer to the Supervisory Board’s Rules of Procedure which is published on the Company’s website. In its report, the Supervisory Board describes the composition and functioning of the Supervisory Board and its committees, the activities of the board and its committees in the ﬁnancial year, the number of committee meetings and the main items discussed. Rules of Procedure of the Supervisory Board The Supervisory Board’s Rules of Procedure set forth its own governance rules (including meetings, items to be discussed, resolutions, appointment and re-election, committees, conﬂicts of interests, trading in securities, proﬁle of the Supervisory Board). Its composition follows the proﬁle, which aims for an appropriate combination of knowledge and experience among its members encompassing marketing, technological, manufacturing, ﬁnancial, economic, social and legal aspects of international business and government and public administration in relation to the global and multi- product character of the Group’s businesses. The Supervisory Board attaches great importance to diversity in its composition. More particularly, it aims at having members with a European and a non- European background (nationality, working experience or otherwise) and one or more members with an executive or similar position in business or society no longer than 5 years ago. Pursuant to new Dutch legislation on board diversity, effective January 1, 2013, the Company shall pursue a policy of having at least 30% of the seats on the Supervisory Board held by men and at least 30% of the seats held by women. The rule will cease to have effect on January 1, 2016. For more 120 Annual Report 2013 details on board diversity please be referred to section 9.1, Report of the Corporate Governance and Nomination & Selection Committee, of this Annual Report. The Rules of Procedure of the Supervisory Board are published on the Company’s website. They include the charters of its committees, to which the plenary Supervisory Board, while retaining overall responsibility, has assigned certain tasks: the Corporate Governance and Nomination & Selection Committee, the Audit Committee and the Remuneration Committee. Each committee reports, and submits its minutes for information, to the Supervisory Board. In line with US and Dutch best practices, the Chairman of the Supervisory Board must be independent pursuant to the Dutch Corporate Governance Code and under the applicable US standards. Furthermore, the Dutch Corporate Governance Code allows a maximum of one member of each Supervisory Board committee not to be independent (as deﬁned by the Code). As mentioned in the introduction of this section 10.2 above, the Supervisory Board considers all its members to be independent. The Supervisory Board is assisted by the General Secretary of the Company. The General Secretary sees to it that correct procedures are followed and that the Supervisory Board acts in accordance with its statutory obligations and its obligations under the Articles of Association. Furthermore the General Secretary assists the Chairman of the Supervisory Board in the actual organization of the affairs of the Supervisory Board (information, agenda, evaluation, introductory program) and is the contact person for interested parties who want to make concerns known to the Supervisory Board. The General Secretary shall, either on the recommendation of the Supervisory Board or otherwise, be appointed and may be dismissed by the Board of Management, after the approval of the Supervisory Board has been obtained. (Term of) Appointment, individual data and conﬂicts of interests The Supervisory Board consists of at least ﬁve members (currently eight), including a Chairman, Vice-Chairman and Secretary. The Dutch ‘structure regime’ does not apply to the Company itself. Members are currently elected by the General Meeting of Shareholders for ﬁxed terms of four years, upon a binding recommendation from the Supervisory Board. According to the Company’s Articles of Association, this binding recommendation may be overruled by a resolution of the General Meeting of Shareholders adopted by a simple majority of the votes cast and representing at least one-third of the issued share capital. If a simple majority of the votes cast is in favor of the resolution to overrule the binding recommendation, but such majority does not represent at least one-third of the issued share capital, a new meeting may be convened at which the resolution may be passed by a simple majority of the votes cast, regardless of the portion of the issued share capital represented by such majority. In the event a binding recommendation has been overruled, a new binding recommendation shall be submitted to the General Meeting of Shareholders. If such second binding recommendation has been overruled, the General Meeting of Shareholders shall be free to appoint a board member. There is no age limit applicable, and members may be re-elected twice. The date of expiration of the terms of Supervisory Board members is published on the Company’s website. Individual data on the members of the Supervisory Board are published in the Annual Report, and updated on the Company’s website. Members may be suspended and dismissed by the General Meeting of Shareholders. In the event of inadequate performance, structural incompatibility of interests, and in other instances in which resignation is deemed necessary in the opinion of the Supervisory Board, the Supervisory Board shall submit to the General Meeting of Shareholders a proposal to dismiss the respective member of the Supervisory Board. After their appointment, all members of the Supervisory Board shall follow an introductory program, which covers general ﬁnancial and legal affairs, ﬁnancial reporting by the Company, any speciﬁc aspects that are unique to the Company and its business activities, and the responsibilities of a Supervisory Board member. Any need for further training or education of members will be reviewed annually, also on the basis of an annual evaluation survey. Under the Dutch Corporate Governance Code, no member of the Supervisory Board shall hold more than ﬁve supervisory board memberships of Dutch listed companies, the chairmanship of a supervisory board counting as two regular memberships. In addition, new Dutch legislation, effective January 1, 2013, provides that no member of the Supervisory Board shall hold more than ﬁve Non-Executive 10 Corporate governance 10.2 - 10.2 Directorships at ‘large’ companies or foundations as deﬁned under Dutch law (see section 10.1, Board of Management, of this Annual Report), with a position as chairman counting for two. During the ﬁnancial year 2013 all members of the Supervisory Board complied with the limitations on Non- Executive Directorships described above. New Dutch legislation on conﬂicts of interests, effective January 1, 2013, provides that a member of the Supervisory Board may not participate in the adoption of resolutions if he or she has a direct or indirect personal conﬂict of interest with the Company or related enterprise. If all members of the Supervisory Board have a conﬂict, the resolution concerned will be adopted by the General Meeting of Shareholders. The Company’s corporate governance includes rules to specify situations in which a (potential) conﬂict may exist, to avoid (potential) conﬂicts of interests as much as possible, and to deal with such conﬂicts should they arise. Relevant matters relating to conﬂicts of interests, if any, shall be mentioned in the Annual Report for the ﬁnancial year in question. No decisions to enter into material transactions in which there are conﬂicts of interest with members of the Supervisory Board were taken during the ﬁnancial year 2013. Meetings of the Supervisory Board The Supervisory Board meets at least six times per year, including a meeting on strategy. The Supervisory Board, on the advice of its Audit Committee, also discusses, in any event at least once a year, the main risks of the business, and the result of the assessment of the structure and operation of the internal risk management and control systems, as well as any signiﬁcant changes thereto. The members of the Executive Committee attend meetings of the Supervisory Board except in matters such as the desired proﬁle, composition and competence of the Supervisory Board and the Executive Committee, as well as the remuneration and performance of individual members of the Executive Committee and the conclusions that must be drawn on the basis thereof. In addition to these items, the Supervisory Board, being responsible for the quality of its own performance, discusses, at least once a year on its own, without the members of the Executive Committee being present, (i) both its own functioning and that of the individual members, and the conclusions that must be drawn on the basis thereof, as well as (ii) both the functioning of the Board of Management and that of the individual members, and the conclusions that must be drawn on the basis thereof. The President/CEO and other members of the Executive Committee have regular contacts with the Chairman and other members of the Supervisory Board. The Executive Committee is required to keep the Supervisory Board informed of all facts and developments concerning Philips that the Supervisory Board may need in order to function as required and to properly carry out its duties, to consult it on important matters and to submit certain important decisions to it for its prior approval. The Supervisory Board and its individual members each have their own responsibility to request from the Executive Committee and the external auditor all information that the Supervisory Board needs in order to be able to carry out its duties properly as a supervisory body. If the Supervisory Board considers it necessary, it may obtain information from ofﬁcers and external advisers of the Company. The Company provides the necessary means for this purpose. The Supervisory Board may also require that certain ofﬁcers and external advisers attend its meetings. The Chairman of the Supervisory Board The Supervisory Board’s Chairman will see to it that: (a) the members of the Supervisory Board follow their introductory program, (b) the members of the Supervisory Board receive in good time all information which is necessary for the proper performance of their duties, (c) there is sufﬁcient time for consultation and decision-making by the Supervisory Board, (d) the committees of the Supervisory Board function properly, (e) the performance of the Executive Committee members and Supervisory Board members is assessed at least once a year, and (f) the Supervisory Board elects a Vice-Chairman. The Vice-Chairman of the Supervisory Board shall deputize for the Chairman when the occasion arises. The Vice- Chairman shall act as contact of individual members of the Supervisory Board or the Board of Management concerning the functioning of the Chairman of the Supervisory Board. Remuneration of the Supervisory Board and share ownership The remuneration of the individual members of the Supervisory Board, as well as the additional remuneration for its Chairman and the members of its committees is determined by the General Meeting of Shareholders. The remuneration of a Supervisory Board member is not dependent on the results of the Company. Further details are published in the Supervisory Board report. Annual Report 2013 121 10 Corporate governance 10.2 - 10.3 Shares or rights to shares shall not be granted to a Supervisory Board member. In accordance with the Rules of Procedure of the Supervisory Board, any shares in the Company held by a Supervisory Board member are long-term investments. The Supervisory Board has adopted a policy on ownership of and transactions in non-Philips securities by members of the Supervisory Board. This policy is included in the Rules of Procedure of the Supervisory Board. The Corporate Governance and Nomination & Selection Committee The Corporate Governance and Nomination & Selection Committee consists of at least the Chairman and Vice-Chairman of the Supervisory Board. The Committee reviews the corporate governance principles applicable to the Company at least once a year, and advises the Supervisory Board on any changes to these principles as it deems appropriate. It also (a) draws up selection criteria and appointment procedures for members of the Supervisory Board, the Board of Management and the Executive Committee; (b) periodically assesses the size and composition of the Supervisory Board, the Board of Management and the Executive Committee, and makes the proposals for a composition proﬁle of the Supervisory Board, if appropriate; (c) periodically assesses the functioning of individual members of the Supervisory Board, the Board of Management and the Executive Committee, and reports on this to the Supervisory Board. The Committee also consults with the President/CEO and the Executive Committee on candidates to ﬁll vacancies on the Supervisory Board, the Executive Committee, and advises the Supervisory Board on the candidates for appointment. It further supervises the policy of the Executive Committee on the selection criteria and appointment procedures for Philips Executives. The Remuneration Committee The Remuneration Committee meets at least twice a year and is responsible for preparing decisions of the Supervisory Board on the remuneration of individual members of the Board of Management and the Executive Committee. The Remuneration Committee prepares an annual remuneration report. The remuneration report contains an account of the manner in which the remuneration policy has been implemented in the past ﬁnancial year, as well as an overview of the implementation of the remuneration policy planned by the Supervisory Board for the next year(s). The Supervisory Board aims to have appropriate experience available within the Remuneration Committee. No more than one member of the Remuneration Committee shall be an executive board member of another Dutch listed company. In performing its duties and responsibilities the Remuneration Committee is assisted by an in-house remuneration expert acting on the basis of a protocol ensuring that the expert acts on the instructions of the Remuneration Committee and on an independent basis in which conﬂicts of interests are avoided. The Audit Committee The Audit Committee meets at least four times a year, before the publication of the annual, semi-annual and quarterly results. All of the members of the Audit Committee are considered to be independent under the applicable US Securities and Exchange Commission rules and at least one of the members of the Audit Committee, which currently consists of four members of the Supervisory Board, is a ﬁnancial expert as set out in the Dutch Corporate Governance Code and each member is ﬁnancially literate. In accordance with this code, a ﬁnancial expert has relevant knowledge and experience of ﬁnancial administration and accounting at the company in question. The Supervisory Board considers the fact of being compliant with the Dutch Corporate Governance Code, in combination with the knowledge and experience available in the Audit Committee as well as the possibility to take advice from internal and external experts and advisors, to be sufﬁcient for the fulﬁllment of the tasks and responsibilities of the Audit Committee. None of the members of the Audit Committee is an Audit Committee ﬁnancial expert as deﬁned under the regulations of the US Securities and Exchange Commission. The Audit Committee may not be chaired by the Chairman of the Supervisory Board or by a (former) member of the Board of Management. All members of the Audit Committee are independent The tasks and functions of the Audit Committee, as described in its charter, which is published on the Company’s website as part of the Rules of Procedure of the Supervisory Board, include the duties recommended in the Dutch Corporate Governance Code. More speciﬁcally, the Audit Committee assists the Supervisory Board in fulﬁlling its oversight responsibilities for the integrity of the Company’s ﬁnancial statements, the ﬁnancial reporting process, the system of internal business controls and risk management, the internal and external audit process, the internal and external auditor’s qualiﬁcations, its independence and its performance, as well as the Company’s process for monitoring compliance with laws and regulations and the General Business Principles (GBP). It reviews the Company’s annual and interim ﬁnancial statements, including non- ﬁnancial information, prior to publication and advises the Supervisory Board on the adequacy and appropriateness of internal control policies and internal audit programs and their ﬁndings. In reviewing the Company’s annual and interim statements, including non-ﬁnancial information, and advising the Supervisory Board on internal control policies and internal audit programs, the Audit Committee reviews matters relating to accounting policies and compliance with accounting standards, compliance with statutory and legal requirements and regulations, particularly in the ﬁnancial domain. Important ﬁndings and identiﬁed risks are examined thoroughly by the Audit Committee in order to allow appropriate measures to be taken. With regard to the internal audit, the Audit Committee, in cooperation with the external auditor, reviews the internal audit charter, audit plan, audit scope and its coverage in relation to the scope of the external audit, stafﬁng, independence and organizational structure of the internal audit function. With regard to the external audit, the Audit Committee reviews the proposed audit scope, approach and fees, the independence of the external auditor, its performance and its (re-)appointment, audit and permitted non-audit services provided by the external auditor in conformity with the Philips Policy on Auditor Independence, as well as any changes to this policy. The Audit Committee also considers the report of the external auditor and its report with respect to the annual ﬁnancial statements. According to the procedures, the Audit Committee acts as the principal contact for the external auditor if the auditor discovers irregularities in the content of the ﬁnancial reports. It also advises on the Supervisory Board’s statement to shareholders in the annual accounts. The Audit Committee periodically discusses the Company’s policy on business controls, the GBP including the deployment thereof, overviews on tax, IT, litigation and legal proceedings, environmental exposures, ﬁnancial exposures in the area of treasury, real estate, pensions, and the Group’s major areas of risk. The Company’s external auditor, in general, attends all Audit Committee meetings and the Audit Committee meets separately at least on a quarterly basis with each of the President/CEO, the CFO, the internal auditor and the external auditor. 10.3 General Meeting of Shareholders Introduction A General Meeting of Shareholders is held at least once a year to discuss the Annual Report, including the report of the Board of Management, the annual ﬁnancial statements with explanatory notes thereto and additional information required by law, and the Supervisory Board report, any proposal concerning dividends or other distributions, the appointment of members of the Board of Management and Supervisory Board (if any), important management decisions as required by Dutch law, and any other matters proposed by the Supervisory Board, the Board of Management or shareholders in accordance with the provisions of the Company’s Articles of Association. The Annual Report, the ﬁnancial statements and other regulated information such as deﬁned in the Dutch Act on Financial Supervision (Wet op het Financieel Toezicht), will solely be published in English. As a separate agenda item and in application of Dutch law, the General Meeting of Shareholders discusses the discharge of the members of the Board of Management and the Supervisory Board from responsibility for the performance of their respective duties in the preceding ﬁnancial year. However, this discharge only covers matters that are known to the Company and the General Meeting of Shareholders when the resolution is adopted. The General Meeting of Shareholders is held in Eindhoven, Amsterdam, Rotterdam, The Hague, Utrecht or Haarlemmermeer (Schiphol Airport) no later than six months after the end of the ﬁnancial year. Meetings are convened by public notice, via the Company’s website or other electronic means of communication and to registered shareholders by letter or by the use of electronic means of communication, at least 42 days prior to the (Extraordinary) General Meeting of Shareholders. Extraordinary General Meetings of Shareholders may be convened by the Supervisory Board or the Board of Management if deemed necessary and must be held if shareholders jointly representing at least 10% of the outstanding share capital make a written request to that effect to the Supervisory Board and the Board of Management, specifying in detail the business to be dealt with. The agenda of a General Meeting of Shareholders shall contain such business as may be placed thereon by the Board of Management or the Supervisory Board, and agenda items will be explained where necessary in writing. The agenda shall list which items are for discussion and which items are to be voted upon. Material 122 Annual Report 2013 amendments to the Articles of Association and resolutions for the appointment of members of the Board of Management and Supervisory Board shall be submitted separately to the General Meeting of Shareholders, it being understood that amendments and other proposals that are connected in the context of a proposed (part of the) governance structure may be submitted as one proposal. In accordance with the Articles of Association and Dutch law, requests from shareholders for items to be included on the agenda will generally be honored, subject to the Company’s rights to refuse to include the requested agenda item under Dutch law and the Dutch Corporate Governance Code, provided that such requests are made in writing at least 60 days before a General Meeting of Shareholders to the Board of Management and the Supervisory Board by shareholders representing at least 1% of the Company’s outstanding capital or, according to the ofﬁcial price list of NYSE Euronext Amsterdam, representing a value of at least EUR 50 million. Written requests may be submitted electronically and shall comply with the procedure stipulated by the Board of Management, which procedure is posted on the Company’s website. Pursuant to new legislation, effective July 1, 2013, shareholders requesting an item to be included on the agenda, have an obligation to disclose their full economic interest (i.e. long position and short position) to the Company. The Company has the obligation to publish such disclosures on its website. Main powers of the General Meeting of Shareholders All outstanding shares carry voting rights. The main powers of the General Meeting of Shareholders are to appoint, suspend and dismiss members of the Board of Management and of the Supervisory Board, to adopt the annual accounts, declare dividends and to discharge the Board of Management and the Supervisory Board from responsibility for the performance of their respective duties for the previous ﬁnancial year, to appoint the external auditor as required by Dutch law, to adopt amendments to the Articles of Association and proposals to dissolve or liquidate the Company, to issue shares or rights to shares, to restrict or exclude pre-emptive rights of shareholders and to repurchase or cancel outstanding shares. Following common corporate practice in the Netherlands, the Company each year requests limited authorization to issue (rights to) shares, to restrict or exclude pre-emptive rights and to repurchase shares. In compliance with Dutch law, decisions of the Board of Management that are so far-reaching that they would greatly change the identity or nature of the Company or the business require the approval of the General Meeting of Shareholders. This includes resolutions to (a) transfer the business of the Company, or almost the entire business of the Company, to a third party (b) enter into or discontinue long-term cooperation by the Company or a subsidiary with another legal entity or company or as a fully liable partner in a limited partnership or ordinary partnership, if this cooperation or its discontinuation is of material signiﬁcance to the Company or (c) acquire or dispose of a participating interest in the capital of a company to the value of at least one-third of the amount of the assets according to the balance sheet and notes thereto or, if the Company prepares a consolidated balance sheet, according to the consolidated balance sheet and notes thereto as published in the last adopted annual accounts of the Company, by the Company or one of its subsidiaries. Thus the Company applies principle IV.1 of the Dutch Corporate Governance Code within the framework of the Articles of Association and Dutch law and in the manner as described in this corporate governance report. The Board of Management and Supervisory Board are also accountable, at the Annual General Meeting of Shareholders, for the policy on the additions to reserves and dividends (the level and purpose of the additions to reserves, the amount of the dividend and the type of dividend). This subject is dealt with and explained as a separate agenda item at the General Meeting of Shareholders. Philips aims for a sustainable and stable dividend distribution to shareholders in the long term. A resolution to pay a dividend is dealt with as a separate agenda item at the General Meeting of Shareholders. The Board of Management and the Supervisory Board are required to provide the General Meeting of Shareholders with all requested information, unless this would be prejudicial to an overriding interest of the Company. If the Board of Management and the Supervisory Board invoke an overriding interest in refusing to provide information, reasons must be given. If a serious private bid is made for a business unit or a participating interest and the value of the bid exceeds a certain threshold (currently one-third of the amount of the assets according to the balance sheet and notes thereto or, if the Company prepares a consolidated balance sheet, according to the consolidated balance sheet and notes thereto as published in the last adopted annual accounts of the Company), and such bid is made public, the Board of Management shall, at its earliest convenience, make public its position on the bid and the reasons for this position. 10 Corporate governance 10.3 - 10.4 A resolution to dissolve the Company or change its Articles of Association can be adopted at the General Meeting of Shareholders by at least three- fourths of the votes cast, at which meeting more than half of the issued share capital is represented. If the requisite share capital is not represented, a further meeting shall be convened, to be held within eight weeks of the ﬁrst meeting, to which no quorum requirement applies. Furthermore, the resolution requires the approval of the Supervisory Board. If the resolution is proposed by the Board of Management, the adoption needs an absolute majority of votes and no quorum requirement applies to the meeting. Repurchase and issue of (rights to) own shares The 2013 General Meeting of Shareholders has resolved to authorize the Board of Management, subject to the approval of the Supervisory Board, to acquire shares in the Company within the limits of the Articles of Association and within a certain price range up to and including November 2, 2014. The maximum number of shares the company may hold, will not exceed 10% of the issued share capital as of May 3, 2013, which number may be increased by 10% of the issued capital as of that same date in connection with the execution of share repurchase programs for capital reduction programs. In addition, the 2013 General Meeting of Shareholders resolved to authorize the Board of Management, subject to the approval of the Supervisory Board, to issue shares or grant rights to acquire shares in the Company as well as to restrict or exclude the pre-emption right accruing to shareholders up to and including November 2, 2014. This authorization is limited to a maximum of 10% of the number of shares issued as of May 3, 2013 plus 10% of the issued capital in connection with or on the occasion of mergers and acquisitions. 10.4 Logistics of the General Meeting of Shareholders and provision of information Introduction Pursuant to Dutch law, the record date for the exercise of the voting rights and the rights relating to General Meetings of Shareholders is set at the 28th day prior to the day of the meeting. Shareholders registered at such date are entitled to attend the meeting and to exercise the other shareholder rights (in the meeting in question) notwithstanding subsequent sale of their shares thereafter. This date will be published in advance of every General Meeting of Shareholders. Information which is required to be published or deposited pursuant to the provisions of company law and securities law applicable to the Company and which is relevant to the shareholders, is placed and updated on the Company’s website, or hyperlinks are established. The Board of Management and Supervisory Board shall ensure that the General Meeting of Shareholders is informed of facts and circumstances relevant to proposed resolutions in explanatory notes to the agenda and, if deemed appropriate, by means of a ‘shareholders circular’ published on the Company’s website. Resolutions adopted at a General Meeting of Shareholders shall be recorded by a civil law notary and co-signed by the chairman of the meeting; such resolutions shall also be published on the Company’s website within 15 days after the meeting. A draft summary of the discussions during the General Meeting of Shareholders, in the language of the meeting, is made available to shareholders, on request, no later than three months after the meeting. Shareholders shall have the opportunity to respond to this summary for three months, after which a ﬁnal summary is adopted by the chairman of the meeting in question. Such ﬁnal summary shall be made available on the Company’s website. Registration, attending meetings and proxy voting Holders of common shares who wish to exercise the rights attached to their shares in respect of a General Meeting of Shareholders, are required to register for such meeting. Shareholders may attend a General Meeting of Shareholders in person, or may grant a power of attorney to a third party to attend the meeting and to vote on their behalf. The Company will also distribute a voting instruction form for a General Meeting of Shareholders (assuming the agenda for such meeting includes voting items). By returning this form, shareholders grant power to an independent proxy holder who will vote according to the instructions expressly given on the voting instruction form. Also other persons entitled to vote shall be given the possibility to give voting proxies or instructions to an independent third party prior to the meeting. Details on the registration for meetings, attending and proxy voting will be included in the notice convening a General Meeting of Shareholders. The Dutch Shareholders Communication Channel decided to terminate its activities as per the end Annual Report 2013 123 10 Corporate governance 10.4 - 10.4 of 2013. Their decision follows the entry into force of new legislation on July 1, 2013 which provides a legal basis in Dutch law for shareholder communication. Preference shares and the Stichting Preferente Aandelen Philips As a means to protect the Company and its stakeholders against an unsolicited attempt to obtain (de facto) control of the Company, the General Meeting of Shareholders in 1989 adopted amendments to the Company’s Articles of Association that allow the Board of Management and the Supervisory Board to issue (rights to) preference shares to a third party. As a result, the Stichting Preferente Aandelen Philips (the ‘Foundation’) was created, which was granted the right to acquire preference shares in the Company. The mere notiﬁcation that the Foundation wishes to exercise its rights, should a third party ever seem likely in the judgment of the Foundation to obtain (de facto) control of the Company, will result in the preference shares being effectively issued. The Foundation may exercise this right for as many preference shares as there are ordinary shares in the Company outstanding at that time. No preference shares have been issued as of December 31, 2013. In addition, the Foundation has the right to ﬁle a petition with the Enterprise Chamber of the Amsterdam Court of Appeal to commence an inquiry procedure within the meaning of section 2:344 Dutch Civil Code. The object of the Foundation is to represent the interests of the Company, the enterprises maintained by the Company and its afﬁliated companies within the Group, in such a way that the interests of Philips, those enterprises and all parties involved with them are safeguarded as effectively as possible, and that they are afforded maximum protection against inﬂuences which, in conﬂict with those interests, may undermine the autonomy and identity of Philips and those enterprises, and also to do anything related to the above ends or conducive to them. In the event of (an attempt at) a hostile takeover or other attempt to obtain (de facto) control of the Company this arrangement will allow the Company and its Board of Management and Supervisory Board to determine its position in relation to the third party and its plans, seek alternatives and defend Philips’ interests and those of its stakeholders from a position of strength. The members of the self-electing Board of the Foundation are Messrs S.D. de Bree, F.J.G.M. Cremers and M.W. den Boogert. No Philips board members or ofﬁcers are represented on the board of the Foundation. The Company does not have any other anti-takeover measures in the sense of other measures which exclusively or almost exclusively have the purpose of frustrating future public bids for the shares in the capital of the Company in case no agreement is reached with the Board of Management on such public bid. Furthermore, the Company does not have measures which speciﬁcally have the purpose of preventing a bidder who has acquired 75% of the shares in the capital of the Company from appointing or dismissing members of the Board of Management and subsequently amending the Articles of Association of the Company. It should be noted that also in the event of (an attempt at) a hostile takeover or other attempt to obtain (de facto) control of the Company, the Board of Management and the Supervisory Board are authorized to exercise in the interests of Philips all powers vested in them. Audit of the ﬁnancial reporting and the position of the external auditor The annual ﬁnancial statements are prepared by the Board of Management and reviewed by the Supervisory Board upon the advice of its Audit Committee and taking into account the report of the external auditor. Upon approval by the Supervisory Board, the accounts are signed by all members of both the Board of Management and the Supervisory Board and are published together with the ﬁnal opinion of the external auditor. The Board of Management is responsible, under the supervision of the Supervisory Board, for the quality and completeness of such publicly disclosed ﬁnancial reports. The annual ﬁnancial statements are presented for discussion and adoption to the Annual General Meeting of Shareholders, to be convened subsequently. The Company, under US securities regulations, separately ﬁles its Annual Report on Form 20-F, incorporating major parts of the Annual Report as prepared under the requirements of Dutch law. Internal controls and disclosure policies Comprehensive internal procedures, compliance with which is supervised by the Supervisory Board, are in place for the preparation and publication of the Annual Report, the annual accounts, the quarterly ﬁgures and ad hoc ﬁnancial information. As from 2003, the internal assurance process for business risk assessment has been strengthened and the review frequency has been upgraded to a quarterly review cycle, in line with best practices in this area. 124 Annual Report 2013 As part of these procedures, a Disclosure Committee has been appointed by the Board of Management to oversee the Company’s disclosure activities and to assist the Executive Committee in fulﬁlling its responsibilities in this respect. The Committee’s purpose is to ensure that the Company implements and maintains internal procedures for the timely collection, evaluation and disclosure, as appropriate, of information potentially subject to public disclosure under the legal, regulatory and stock exchange requirements to which the Company is subject. Such procedures are designed to capture information that is relevant to an assessment of the need to disclose developments and risks that pertain to the Company’s various businesses, and their effectiveness for this purpose will be reviewed periodically. Auditor information In accordance with the procedures laid down in the Philips Auditor Policy and as mandatorily required by Dutch law, the external auditor of the Company is appointed by the General Meeting of Shareholders on the proposal of the Supervisory Board, after the latter has been advised by the Audit Committee and the Board of Management. Under this Auditor Policy, as updated in 2013, the Supervisory Board and the Audit Committee assesses the functioning of the external auditor. The main conclusions of this assessment shall be communicated to the General Meeting of Shareholders for the purposes of assessing the nomination for the appointment of the external auditor. The current auditor of the Company, KPMG Accountants N.V., was appointed by the 1995 General Meeting of Shareholders. In 2002, when the Auditor Policy was adopted, the appointment of KPMG Accountants N.V. was conﬁrmed by the Supervisory Board for an additional three years. The 2008 and 2011 General Meeting of Shareholders resolved to re-appoint KPMG Accountants N.V. as auditor. Mr J.F.C. van Everdingen is the current partner of KPMG Accountants N.V. in charge of the audit duties for Philips. The external auditor shall attend the Annual General Meeting of Shareholders. Questions may be put to him at the meeting about his report. The Board of Management and the Audit Committee of the Supervisory Board shall report on their dealings with the external auditor to the Supervisory Board on an annual basis, particularly with regard to the auditor’s independence. The Supervisory Board shall take this into account when deciding upon its nomination for the appointment of an external auditor. New Dutch legislation on mandatory auditor rotation will become effective January 1, 2016, meaning the Company must engage a new audit ﬁrm for its statutory audit starting per January 1, 2016. The external auditor attends, in principle, all meetings of the Audit Committee. The ﬁndings of the external auditor, the audit approach and the risk analysis are also discussed at these meetings. The external auditor attends the meeting of the Supervisory Board at which the report of the external auditor with respect to the audit of the annual accounts is discussed, and at which the annual accounts are approved. In its audit report on the annual accounts to the Board of Management and the Supervisory Board, the external auditor refers to the ﬁnancial reporting risks and issues that were identiﬁed during the audit, internal control matters, and any other matters, as appropriate, requiring communication under the auditing and other standards generally accepted in the Netherlands and the US. Auditor policy New Dutch legislation, effective January 1, 2013, has been adopted on the separation of audit and non-audit services, meaning the Company’s external auditor is no longer allowed to provide non-audit services, with an exception for non-audit service arrangements already in place on December 31, 2012. In light of this new Dutch legislation, the Auditor Policy was updated in 2013. The policy is published on the Company’s website. The policy is also in line with US Securities and Exchange Commission rules under which the appointed external auditor must be independent of the Company both in fact and appearance. The Auditor Policy includes rules for the pre-approval by the Audit Committee of all services to be provided by the external auditor. Proposed services may be pre-approved at the beginning of the year by the Audit Committee (annual pre-approval) or may be pre-approved during the year by the Audit Committee in respect of a particular engagement (speciﬁc pre-approval). The annual pre-approval is based on a detailed, itemized list of services to be provided, designed to ensure that there is no management discretion in determining whether a service has been approved and to ensure the Audit Committee is informed of each services it is pre-approving. Unless pre-approval with respect to a speciﬁc service has been given at the beginning of the year, each proposed service requires speciﬁc pre-approval during the year. Any annually pre- approved services where the fee for the engagement is expected to exceed pre-approved cost levels or budgeted amounts will also require speciﬁc pre-approval. The term of any annual pre-approval is 12 months from the date of the pre-approval unless the Audit Committee states otherwise. During 2013, there were no services provided to the Company by the external auditor which were not pre-approved by the Audit Committee. 10.5 Investor Relations Introduction The Company is continually striving to improve relations with its shareholders. In addition to communication with its shareholders at the Annual General Meeting of Shareholders, Philips elaborates its ﬁnancial results during (public) conference calls, which are broadly accessible. It publishes informative annual, semi-annual and quarterly reports and press releases, and informs investors via its extensive website. The Company is strict in its compliance with applicable rules and regulations on fair and non-selective disclosure and equal treatment of shareholders. Each year the Company organizes Philips Capital Market Days and participates in several broker conferences, announced in advance on the Company’s website and by means of press releases. Shareholders can follow in real time, by means of webcasting or telephone lines, the meetings and presentations organized by the Company. Thus the Company applies recommendation IV.3.1 of the Dutch Corporate Governance Code, which in its perception and in view of market practice does not extend to less important analyst meetings and presentations. It is Philips’ policy to post presentations to analysts and shareholders on the Company’s website. These meetings and presentations will not take place shortly before the publication of annual, semi-annual and quarterly ﬁnancial information. Furthermore, the Company engages in bilateral communications with investors. These communications either take place at the initiative of the Company or at the initiative of individual investors. During these communications the Company is generally represented by its Investor Relations department. However, on a limited number of occasions the Investor Relations department is accompanied by one or more members of the Board of Management. The subject matter of the bilateral communications ranges from single queries from investors to more elaborate discussions on the back of disclosures that the Company has made such as its annual and quarterly reports. Also here, the Company is strict in its compliance with applicable rules and regulations on fair and non-selective disclosure and equal treatment of shareholders. The Company shall not, in advance, assess, comment upon or correct, other than factually, any analyst’s reports and valuations. No fee(s) will be paid by the Company to parties for the carrying-out of research for analysts’ reports or for the production or publication of analysts’ reports, with the exception of credit-rating agencies. Major shareholders and other information for shareholders The Dutch Act on Financial Supervision imposes an obligation to disclose (inter alia) percentage holdings in the capital and/or voting rights in the Company when such holdings reach, exceed or fall below 3, 5, 10, 15, 20, 25, 30, 40, 50, 60, 75 and 95 percent (as a result of an acquisition or disposal by a person, or as a result of a change in the company’s total number of voting rights or capital issued). Certain cash settled derivatives are also taken into account when calculating the capital interest. Pursuant to new legislation, effective July 1, 2013, the obligation to disclose capital interest does not only relate to gross long positions, but also to gross short positions. Required disclosures must be made to the Netherlands Authority for the Financial Markets (AFM) without delay. The AFM then notiﬁes such disclosures to the Company and includes them in a register which is published on the AFM’s website. Furthermore, an obligation to disclose (net) short positions is set out in the EU Regulation on Short Selling. On July 1, 2013 the Company received notiﬁcation from the AFM that it had received disclosures under the Dutch Act on Financial Supervision of a substantial holding of 4.3% by Dodge & Cox International Stock Fund. On August 14, 2013 the Company received notiﬁcation from the AFM that it had received disclosures under the Dutch Act on Financial Supervision of a total shareholding of 3.01% and 3.45% of the voting rights by BlackRock Inc. On January 3, 2014 the Company received notiﬁcation from the AFM that it had received disclosures under the Dutch Act on Financial Supervision of a substantial holding of 3.08% by Norges Bank. As per December 31, 2013, approximately 91% of the common shares were held in bearer form and approximately 9% of the common shares were represented by registered shares of New York Registry issued in the name of approximately 1,218 holders of record, including Cede & Co. Cede & Co acts as nominee for the Depository Trust Company holding the shares 10 Corporate governance 10.4 - 10.5 (indirectly) for individual investors as beneﬁciaries. Citibank, N.A., 388 Greenwich Street, New York, New York 10013 is the transfer agent and registrar. Only bearer shares are traded on the stock market of Euronext Amsterdam. Only shares of New York Registry are traded on the New York Stock Exchange. Bearer shares and registered shares may be exchanged for each other. Since certain shares are held by brokers and other nominees, these numbers may not be representative of the actual number of United States beneﬁcial holders or the number of Shares of New York Registry beneﬁcially held by US residents. The provisions applicable to all corporate bonds that have been issued by the Company in March 2008 and 2012 contain a ‘Change of Control Triggering Event’. This means that if the Company experienced such an event with respect to a series of corporate bonds the Company might be required to offer to purchase the bonds of that series at a purchase price equal to 101% of their principal amount, plus accrued and unpaid interest, if any. Corporate seat and head ofﬁce The statutory seat of the Company is Eindhoven, the Netherlands, and the statutory list of all subsidiaries and afﬁliated companies, prepared in accordance with the relevant legal requirements (Dutch Civil Code, Book 2, Sections 379 and 414), forms part of the notes to the consolidated ﬁnancial statements and is deposited at the ofﬁce of the Commercial Register in Eindhoven, the Netherlands (ﬁle no. 17001910). The executive ofﬁces of the Company are located at the Breitner Center, Amstelplein 2, 1096 BC Amsterdam, the Netherlands, telephone 0031 (0)20 59 77 777. Compliance with the Dutch Corporate Governance Code In accordance with the governmental decree of December 10, 2009, the Company fully complies with the Dutch Corporate Governance Code and applies all its principles and best practice provisions that are addressed to the Board of Management or the Supervisory Board. The full text of the Dutch Corporate Governance Code can be found at the website of the Monitoring Commission Corporate Governance Code (www.commissiecorporategovernance.nl). February 25, 2014 Annual Report 2013 125 Performance Statements 11 Group ﬁnancial statements 11.1 Management’s report on internal control 11.2 11.3 11.4 11.5 11.6 11.7 11.8 Report of the independent auditor Auditor’s report on internal control over ﬁnancial reporting Consolidated statements of income Consolidated statements of comprehensive income Consolidated balance sheets Consolidated statements of cash ﬂows Consolidated statements of changes in equity 11.9 Notes 11.10 Independent auditor’s report - Group 12 12.1 12.2 12.3 Company ﬁnancial statements Balance sheets before appropriation of results Statements of income Statement of changes in equity 12.4 Notes 12.5 Independent auditor’s report - Company 13 Sustainability statements 13.1 Economic indicators 13.2 Social statements 13.3 Environmental statements 13.4 Independent assurance report 13.5 Global Reporting Initiative (GRI) table 4.0 128 128 128 129 130 131 132 134 136 137 189 190 191 192 192 193 196 197 201 201 208 212 213 126 Annual Report 2013 Notes overview Group ﬁnancial statements Company ﬁnancial statements A B Intangible assets Financial ﬁxed assets C Other non-current ﬁnancial assets D E F Receivables Shareholders’ equity Long-term debt and short-term debt G Other current liabilities H Net income I J K L Employees Contractual obligations and contingent liabilities not appearing in the balance sheet Audit fees Subsequent events 193 193 193 194 194 195 195 195 195 195 195 195 1 2 3 4 5 6 7 8 9 Signiﬁcant accounting policies Information by sector and main country Income from operations Financial income and expenses Income taxes Interests in entities Discontinued operations and other assets classiﬁed as held for sale Earnings per share Acquisitions and divestments 10 Property, plant and equipment 11 Goodwill 12 Intangible assets excluding goodwill 13 Non-current receivables 14 Other non-current ﬁnancial assets 15 Other non-current assets 16 Inventories 17 Other current assets 18 Current receivables 19 Equity 20 Long-term debt and short-term debt 21 Provisions 22 Other non-current liabilities 23 Accrued liabilities 24 Other current liabilities 25 Contractual obligations 26 Contingent assets and liabilities 27 Cash from (used for) derivatives and current ﬁnancial assets 28 Purchase and proceeds from non-current ﬁnancial assets 29 Assets in lieu of cash from sale of businesses 30 Post-employment beneﬁts 31 Share-based compensation 32 Related-party transactions 33 34 Information on remuneration Fair value of ﬁnancial assets and liabilities 35 Details of treasury / other ﬁnancial risks 36 Subsequent events 137 145 148 149 150 153 154 156 156 158 159 160 161 162 162 162 162 162 163 165 166 168 168 168 168 169 171 171 171 171 174 178 178 182 184 187 Annual Report 2013 127 11 Group ﬁnancial statements 11 - 11.2 11 Group ﬁnancial statements Introduction This section of the Annual Report contains the audited consolidated ﬁnancial statements including the notes thereon that have been prepared in accordance with International Financial Reporting Standards (IFRS) as endorsed by the European Union (EU) and with the statutory provisions of Part 9, Book 2 of the Dutch Civil Code. All standards and interpretations issued by the International Accounting Standards Board (IASB) and the IFRS Interpretations Committee effective year-end 2013 have been endorsed by the EU, except that the EU did not adopt some paragraphs of IAS 39 applicable to certain hedge transactions. Philips has no hedge transactions to which these paragraphs are applicable. Consequently, the accounting policies applied by Philips also comply fully with IFRS as issued by the IASB. Together with the section Company ﬁnancial statements, this section contains the statutory ﬁnancial statements of the Company. The following sections and chapters: • chapter 1, Accelerate!, of this Annual Report • chapter 2, Building a great company, of this Annual Report • chapter 3, Delivering innovation that matters to you, of this Annual Report • chapter 4, Group performance, of this Annual Report • chapter 5, Sector performance, of this Annual Report • chapter 6, Risk management, of this Annual Report • section 9.1, Report of the Corporate Governance and Nomination & Selection Committee, of this Annual Report section 9.2, Report of the Remuneration Committee, of this Annual Report • • chapter 10, Corporate governance, of this Annual Report • chapter 18, Forward-looking statements and other information, of this Annual Report form the Management report within the meaning of section 2:391 of the Dutch Civil Code (and related Decrees). The sections Group performance and Sector performance provide an extensive analysis of the developments during the ﬁnancial year 2013 and the results. The term EBIT has the same meaning as Income from operations (IFO), and is used to evaluate the performance of the business. These sections also provide information on the business outlook, investments, ﬁnancing, personnel and research and development activities. The Statement of income included in the section Company ﬁnancial statements has been prepared in accordance with section 2:402 of the Dutch Civil Code, which allows a simpliﬁed Statement of income in the Company ﬁnancial statements in the event that a comprehensive Statement of income is included in the consolidated Group ﬁnancial statements. For ‘Additional information’ within the meaning of section 2:392 of the Dutch Civil Code, please refer to section 11.10, Independent auditor’s report - Group, of this Annual Report on the Group ﬁnancial statements, section 12.5, Independent auditor’s report - Company, of this Annual Report on the Company ﬁnancial statements, section 4.4, Proposed distribution to shareholders, of this Annual Report, and note 36, Subsequent events. Please refer to chapter 18, Forward-looking statements and other information, of this Annual Report for more information about forward- looking statements, third-party market share data, fair value information, and revisions and reclassiﬁcations. The Board of Management of the Company hereby declares that, to the best of our knowledge, the Group ﬁnancial statements and Company ﬁnancial statements give a true and fair view of the assets, liabilities, ﬁnancial position and proﬁt or loss of the Company and the undertakings included in the consolidation taken as a whole and that the management report referred to above gives a true and fair view concerning the position as per the balance sheet date, the development and performance of the 128 Annual Report 2013 business during the ﬁnancial year of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks that they face. Board of Management Frans van Houten Ron Wirahadiraksa Pieter Nota February 25, 2014 11.1 Management’s report on internal control Management’s report on internal control over ﬁnancial reporting pursuant to section 404 of the US Sarbanes-Oxley Act The Board of Management of Koninklijke Philips N.V. (the Company) is responsible for establishing and maintaining an adequate system of internal control over ﬁnancial reporting (as such term is deﬁned in Rule 13a-15(f) under the US Securities Exchange Act). Internal control over ﬁnancial reporting is a process to provide reasonable assurance regarding the reliability of our ﬁnancial reporting for external purposes in accordance with IFRS as issued by the IASB. Internal control over ﬁnancial reporting includes maintaining records that, in reasonable detail, accurately and fairly reﬂect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of our ﬁnancial statements; providing reasonable assurance that receipts and expenditures of company assets are made in accordance with management authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of company assets that could have a material effect on our ﬁnancial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over ﬁnancial reporting is not intended to provide absolute assurance that a misstatement of our ﬁnancial statements would be prevented or detected. Also, projections of any evaluation of the effectiveness of internal control over ﬁnancial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. The Board of Management conducted an assessment of the Company’s internal control over ﬁnancial reporting based on the “Internal Control- Integrated Framework (1992)” established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that assessment, the Board of Management concluded that, as of December 31, 2013, the Company’s internal control over Group ﬁnancial reporting is considered effective. The effectiveness of the Company’s internal control over ﬁnancial reporting as of December 31, 2013, as included in this section Group ﬁnancial statements, has been audited by KPMG Accountants N.V., an independent registered public accounting ﬁrm, as stated in their report which follows hereafter. Board of Management Frans van Houten Ron Wirahadiraksa Pieter Nota February 25, 2014 11.1.1 Changes in internal control over ﬁnancial reporting During the year ended December 31, 2013, there have been no changes in our internal control over ﬁnancial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over ﬁnancial reporting. 11.2 Report of the independent auditor The report set out below is provided in compliance with the standards of the Public Company Accounting Oversight Board in the US and includes an opinion on the effectiveness of internal control over ﬁnancial reporting as at December 31, 2013. Management’s report on internal control over ﬁnancial reporting is set out in section 11.1, Management’s report on internal control, of this Annual Report. KPMG Accountants N.V. has also issued reports on the consolidated ﬁnancial statements in accordance with Dutch law, including the Dutch standards on auditing, which is set out in section 11.10, Independent auditor’s report - Group, of this Annual Report, and in accordance with auditing standards of the Public Company Accounting Oversight Board in the US, which will be included in the Annual Report on Form 20-F expected to be ﬁled with the US Securities and Exchange Commission on February 25, 2014. KPMG Accountants N.V. has also reported separately on the Company Financial Statements of Koninklijke Philips N.V. This audit report is set out in section 12.5, Independent auditor’s report - Company, of this Annual Report. 11 Group ﬁnancial statements 11.2 - 11.3 11.3 Auditor’s report on internal control over ﬁnancial reporting Report of Independent Registered Public Accounting Firm To the Supervisory Board and Shareholders of Koninklijke Philips N.V.: We have audited Koninklijke Philips N.V. and subsidiaries’ internal control over ﬁnancial reporting as of December 31, 2013, based on criteria established in Internal Control — Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Koninklijke Philips N.V.’s Board of Management is responsible for maintaining effective internal control over ﬁnancial reporting and for its assessment of the effectiveness of internal control over ﬁnancial reporting, included in the accompanying section 11.1, “Management’s report on internal control”, of this Annual Report. Our responsibility is to express an opinion on the Company’s internal control over ﬁnancial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over ﬁnancial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over ﬁnancial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over ﬁnancial reporting is a process designed to provide reasonable assurance regarding the reliability of ﬁnancial reporting and the preparation of ﬁnancial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over ﬁnancial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reﬂect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of ﬁnancial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the ﬁnancial statements. Because of its inherent limitations, internal control over ﬁnancial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, Koninklijke Philips N.V. and subsidiaries maintained, in all material respects, effective internal control over ﬁnancial reporting as of December 31, 2013, based on criteria established in Internal Control — Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Koninklijke Philips N.V. and subsidiaries as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income, cash ﬂows, and changes in equity for each of the years in the three-year period ended December 31, 2013, and our report dated February 25, 2014, expressed an unqualiﬁed opinion on those consolidated ﬁnancial statements. KPMG Accountants N.V. Amsterdam, The Netherlands February 25, 2014 Annual Report 2013 129 11 Group ﬁnancial statements 11.4 - 11.4 11.4 Consolidated statements of income in millions of euros unless otherwise stated Consolidated statements of income of the Philips Group for the years ended December 31 2011 2012 2013 Sales Cost of sales Gross margin Selling expenses General and administrative expenses Research and development expenses 11 Impairment of goodwill Other business income Other business expenses 3 4 4 Income from operations Financial income Financial expenses Income before taxes 5 Income tax expense Income (loss) after taxes 6 Results relating to investments in associates: - Company’s participation in income - Other results Income (loss) from continuing operations 7 Discontinued operations - net of income tax Net income (loss) Attribution of net income (loss) Net income (loss) attributable to shareholders Net income (loss) attributable to non-controlling interests Earnings per common share attributable to shareholders Basic earnings per common share in euros Income (loss) from continuing operations attributable to shareholders Net income (loss) attributable to shareholders Diluted earnings per common share in euros1) Income (loss) from continuing operations attributable to shareholders Net income (loss) attributable to shareholders 8 8 8 8 20,992 (12,732) 8,260 (5,025) (802) (1,605) (1,355) 124 (76) (479) 113 (444) (810) (251) (1,061) 18 (3) (1,046) (410) (1,456) (1,460) 4 23,457 (14,466) 8,991 (5,334) (845) (1,831) − 275 (608) 648 106 (435) 319 (185) 134 (5) (206) (77) 47 (30) (35) 5 23,329 (13,641) 9,688 (5,075) (949) (1,733) (28) 123 (35) 1,991 70 (400) 1,661 (466) 1,195 5 (30) 1,170 2 1,172 1,169 3 2011 2012 2013 (1.10) (1.53) (1.10) (1.53) (0.09) (0.04) (0.09) (0.04) 1.28 1.28 1.27 1.27 Prior-period ﬁnancial statements have been restated for the treatment of Audio, Video, Multimedia and Accessories as discontinued operations (see note 7, Discontinued operations and other assets classiﬁed as held for sale) and the adoption of IAS 19R, which mainly relates to accounting for pensions (see note 30, Post-employment beneﬁts). The accompanying notes are an integral part of these consolidated ﬁnancial statements. 1) The Dilutive potential common shares are not taken into account in the periods for which there is a loss, as the effect would be antidilutive 130 Annual Report 2013 11.5 Consolidated statements of comprehensive income in millions of euros unless otherwise stated Consolidated statements of comprehensive income of the Philips Group for the years ended December 31 11 Group ﬁnancial statements 11.5 - 11.5 Net income (loss) for the period Other comprehensive income items that will not be reclassiﬁed to proﬁt or loss: Pensions and other post-employment plans: Remeasurements Income tax effect on remeasurements Revaluation reserve: Release revaluation reserve Reclassiﬁcation directly into retained earnings Total of items that will not be reclassiﬁed to proﬁt or loss Other comprehensive income items that are or may be reclassiﬁed to proﬁt or loss: Currency translation differences: Net current period change, before tax Income tax effect Reclassiﬁcation adjustment for gain (loss) realized Available-for-sale ﬁnancial assets: Net current period change, before tax Income tax effect Reclassiﬁcation adjustment for (loss) gain realized Cash ﬂow hedges: Net current period change, before tax Income tax effect Reclassiﬁcation adjustment for (loss) gain realized Total of items that are or may be reclassiﬁed to proﬁt or loss Other comprehensive (loss) income for period Total comprehensive income (loss) for the period Total comprehensive income (loss) attributable to: Shareholders Non-controlling interests 2011 (1,456) (404) 120 (16) 16 (284) 71 (2) 3 (87) 19 (26) (31) − 27 (26) (310) (1,766) (1,770) 4 2012 (30) (206) 60 (16) 16 (146) (99) − (1) 8 (2) 3 23 (8) 14 (62) (208) (238) (243) 5 2013 1,172 139 (77) (31) 31 62 (427) (35) (14) (5) − 6 68 (2) (62) (471) (409) 763 760 3 The Consolidated statements of comprehensive income have been restated for the adoption of IAS 19R, which mainly relates to pension reporting (see note 30, Post- employment beneﬁts). The accompanying notes are an integral part of these consolidated ﬁnancial statements. Annual Report 2013 131 11 Group ﬁnancial statements 11.6 - 11.6 11.6 Consolidated balance sheets in millions of euros unless otherwise stated Consolidated balance sheets of the Philips Group as of December 31 Assets Non-current assets 10 25 Property, plant and equipment: - At cost - Less accumulated depreciation 11 Goodwill 12 Intangible assets excluding goodwill: - At cost - Less accumulated amortization 13 6 14 5 15 Non-current receivables Investments in associates Other non-current ﬁnancial assets Deferred tax assets Other non-current assets Total non-current assets Current assets 16 Inventories - net Current ﬁnancial assets 17 Other current assets 34 Derivative ﬁnancial assets 5 Income tax receivable 18 32 Receivables: - Accounts receivable - net - Accounts receivable from related parties - Other current receivables 7 Assets classiﬁed as held for sale 35 Cash and cash equivalents Total current assets 26 Contingent assets Total assets 132 Annual Report 2013 7,880 (4,921) 7,821 (4,090) 4,334 13 238 2012 2013 7,692 (4,912) 7,638 (4,376) 2,959 6,948 3,731 176 177 549 1,919 94 2,780 6,504 3,262 144 161 496 1,675 63 16,553 15,085 3,495 3,240 − 337 137 97 4,585 43 3,834 12,528 10 354 150 70 4,678 507 2,465 11,474 4,420 39 219 29,081 26,559 Equity and liabilities Equity 19 Shareholders’ equity: Preference shares, par value EUR 0.20 per share: - Authorized: 2,000,000,000 shares (2012: 2,000,000,000 shares), issued none Common shares, par value EUR 0.20 per share: - Authorized: 2,000,000,000 shares (2012: 2,000,000,000 shares) - Issued and fully paid: 937,845,789 shares (2012: 957,132,962 shares) Capital in excess of par value Retained earnings Revaluation reserve Currency translation differences Available-for-sale ﬁnancial assets Cash ﬂow hedges Treasury shares, at cost 24,508,022 shares (2012: 42,541,687 shares) 19 Non-controlling interests Group equity Non-current liabilities 20 25 Long-term debt 21 26 30 Long-term provisions 5 22 Deferred tax liabilities Other non-current liabilities Total non-current liabilities Current liabilities 20 25 Short-term debt 34 5 Derivative ﬁnancial liabilities Income tax payable 25 32 Accounts and notes payable: - Trade creditors - Accounts payable to related parties 23 Accrued liabilities 21 26 30 Short-term provisions 7 Liabilities directly associated with assets held for sale 24 Other current liabilities Total current liabilities 25 26 Contractual obligations and contingent liabilities 11 Group ﬁnancial statements 11.6 - 11.6 2012 2013 191 1,304 10,724 54 (93) 54 20 (1,103) 2,835 4 188 1,796 10,415 23 (569) 55 24 (718) 2,458 4 11,151 34 11,185 3,725 2,119 92 2,005 7,941 809 517 200 2,839 3,171 837 27 1,555 9,955 11,214 13 11,227 3,309 1,903 76 1,568 6,856 592 368 143 2,462 2,830 651 348 1,082 8,476 Total liabilities and group equity 29,081 26,559 Prior-period ﬁnancial statements have been restated for the treatment of Audio, Video, Multimedia and Accessories as discontinued operations (see note 7, Discontinued operations and other assets classiﬁed as held for sale) and the adoption of IAS 19R, which mainly relates to accounting for pensions (see note 30, Post-employment beneﬁts). The accompanying notes are an integral part of these consolidated ﬁnancial statements. Annual Report 2013 133 11 Group ﬁnancial statements 11.7 - 11.7 11.7 Consolidated statements of cash ﬂows in millions of euros Consolidated statements of cash ﬂows of the Philips Group for the years ended December 31 2011 2012 2013 Cash ﬂows from operating activities Net income (loss) Result of discontinued operations - net of income tax Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation, amortization, and impairments of ﬁxed assets Impairment of goodwill and other non-current ﬁnancial assets Net gain on sale of assets Loss (income) from investments in associates Dividends received from investments in associates Dividends paid to non-controlling interests (Increase) decrease in working capital Increase in receivables and other current assets Increase in inventories (Decrease) increase in accounts payable, accrued and other current liabilities Increase in non-current receivables, other assets and other liabilities (Decrease) increase in provisions Other items Net cash provided by operating activities Cash ﬂows from investing activities Purchase of intangible assets Proceeds from sale of intangible assets Expenditures on development assets Capital expenditures on property, plant and equipment Proceeds from sales of property, plant and equipment Cash from (used for) derivatives and current ﬁnancial assets Purchase of other non-current ﬁnancial assets Proceeds from other non-current ﬁnancial assets Purchase of businesses, net of cash acquired 27 28 Proceeds from sale of interests in businesses, net of cash disposed of Net cash used for investing activities Cash ﬂows from ﬁnancing activities Proceeds from issuance (payments) of short-term debt Principal payments of long-term debt Proceeds from issuance of long-term debt Treasury shares transactions Dividends paid Net cash used for ﬁnancing activities (1,456) 410 1,400 1,387 (88) (14) 44 (4) (622) (363) (216) (43) (425) 15 113 760 (69) − (276) (640) 128 26 (43) 87 (507) 19 (1,275) (217) (1,097) 454 (671) (259) (1,790) (30) (47) 1,172 (2) 1,398 1,349 14 (141) 5 15 (4) 546 (191) (32) 769 (327) 429 224 2,082 (34) 160 (345) (661) 425 (46) (167) 3 (261) 1 (925) 133 (631) 1,228 (768) (255) (293) 38 (54) 25 6 (7) (1,417) (530) (165) (722) (76) (194) 298 1,138 (49) − (357) (587) 27 (101) (13) 15 (11) 79 (997) (285) (186) 64 (562) (272) (1,241) Net cash (used for) provided by continuing operations (2,305) 864 (1,100) 134 Annual Report 2013 Cash ﬂows from discontinued operations Net cash (used for) provided by operating activities Net cash (used for) provided by investing activities Net cash used for discontinued operations Net cash (used for) provided by continuing and discontinued operations Effect of changes in exchange rates on cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year Supplemental disclosures to the Consolidated statements of cash ﬂows Cash ﬂows from: Interest paid Interest received Pensions Income taxes Net gain on sale of assets: Cash proceeds from the sale of assets Book value of these assets Deferred results on sale and leaseback transactions Non-cash proceeds Non-cash investing and ﬁnancing information 29 Assets in lieu of cash from the sale of businesses: Shares/share options/convertible bonds (continuing operations) Shares/share options/convertible bonds (discontinued operations) Conversion of convertible personnel debentures Treasury shares transactions: Shares acquired Exercise of stock options 11 Group ﬁnancial statements 11.7 - 11.7 2011 (280) (94) (374) (2,679) (7) 5,833 3,147 2012 (166) 40 (126) 738 (51) 3,147 3,834 2013 (159) (47) (206) (1,306) (63) 3,834 2,465 2011 2012 2013 (269) 38 (639) (582) 234 (164) − 18 88 18 − − (751) 80 (273) 34 (610) (359) 589 (473) 25 − 141 − 17 4 (816) 48 (267) 52 (679) (454) 121 (63) (4) − 54 − − 7 (669) 107 Prior-period ﬁnancial statements have been restated for the treatment of Audio, Video, Multimedia and Accessories as discontinued operations (see note 7, Discontinued operations and other assets classiﬁed as held for sale) and the adoption of IAS 19R, which mainly relates to accounting for pensions (see note 30, Post-employment beneﬁts). The accompanying notes are an integral part of these consolidated ﬁnancial statements. For a number of reasons, principally the effects of translation differences and consolidation changes, certain items in the statements of cash ﬂows do not correspond to the differences between the balance sheet amounts for the respective items. Annual Report 2013 135 11 Group ﬁnancial statements 11.8 - 11.8 11.8 Consolidated statements of changes in equity in millions of euros unless otherwise stated Consolidated statements of changes in equity of the Philips Group common share capital in excess of par value retained earnings revalua- tion re- serve currency transla- tion dif- ferences avail- able-for- sale ﬁnancial assets cash ﬂow hedges treasury shares at cost total share- holders’ equity non-con- trolling interests total equity Balance as of Jan. 1, 2011 197 354 15,391 86 (65) 139 (5) (1,076) 15,021 46 15,067 Total comprehensive income (loss) (1,728) (16) 72 (94) (4) − (1,770) 4 (1,766) Dividend distributed 5 443 (711) (263) (263) Movement in non- controlling interests Cancellation of treasury shares Purchase of treasury shares Re-issuance of treasury shares Share-based compensation plans Income tax share-based compensation plans − − − (5) − (51) (34) (6) 56 (6) − − (5) − − (700) (751) 86 46 56 (6) (16) (21) − (751) 46 56 (6) Balance as of Dec. 31, 2011 202 813 12,890 70 7 45 (9) (1,690) 12,328 34 12,362 Total comprehensive income (loss) Dividend distributed 6 422 Movement in non- controlling interests Cancellation of treasury shares (17) Purchase of treasury shares Re-issuance of treasury shares Share-based compensation plans Income tax share-based compensation plans (16) (100) 9 29 − (165) (687) − − − (1,221) (47) (22) (46) 84 7 − − 1,238 (769) 118 (243) (259) − − (816) 50 84 7 5 (5) (238) (259) (5) − (816) 50 84 7 Balance as of Dec. 31, 2012 191 1,304 10,724 54 (93) 54 20 (1,103) 11,151 34 11,185 Total comprehensive income (loss) Dividend distributed 4 402 Movement in non- controlling interests Cancellation of treasury shares (7) 1,262 (678) − (780) (38) (31) (476) 1 4 − 787 (631) 760 (272) − − (669) Purchase of treasury shares Re-issuance of treasury shares Share-based compensation plans Income tax share-based compensation plans (36) (75) 229 118 105 21 105 21 3 763 (272) (24) (24) − (669) 118 105 21 Balance as of Dec. 31, 2013 188 1,796 10,415 23 (569) 55 24 (718) 11,214 13 11,227 The Consolidated statements of changes in equity have been restated for the adoption of IAS 19R, which mainly relates to pension reporting (see note 30, Post-employment beneﬁts). The accompanying notes are an integral part of these consolidated ﬁnancial statements. 136 Annual Report 2013 11.9 Notes all amounts in millions of euros unless otherwise stated Prior-period ﬁnancial statements have been restated for the treatment of Audio, Video, Multimedia and Accessories as discontinued operations (see note 7, Discontinued operations and other assets classiﬁed as held for sale) and the adoption of IAS 19R, which mainly relates to accounting for pensions (see note 30, Post-employment beneﬁts). Notes to the Consolidated ﬁnancial statements of the Philips Group 1 Signiﬁcant accounting policies The Consolidated ﬁnancial statements in this section have been prepared in accordance with International Financial Reporting Standards (IFRS) as endorsed by the European Union (EU) and with the statutory provisions of Part 9, Book 2 of the Dutch Civil Code. All standards and interpretations issued by the International Accounting Standards Board (IASB) and the IFRS Interpretations Committee effective year-end 2013 have been endorsed by the EU, except that the EU did not adopt some of the paragraphs of IAS 39 applicable to certain hedge transactions. Philips has no hedge transactions to which these paragraphs are applicable. Consequently, the accounting policies applied by Philips also comply fully with IFRS as issued by the IASB. These accounting policies have been applied by group entities. The Consolidated ﬁnancial statements have been prepared under the historical cost convention, unless otherwise indicated. The Consolidated ﬁnancial statements are presented in euros, which is the Company’s presentation currency. On February 25, 2014, the Board of Management authorized the Consolidated ﬁnancial statements for issue. The Consolidated ﬁnancial statements as presented in this report are subject to the adoption by the Annual General Meeting of Shareholders, to be held on May 1, 2014. Use of estimates The preparation of the Consolidated ﬁnancial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. These estimates inherently contain certain degree of uncertainty. Actual results may differ from these estimates under different assumptions or conditions. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the date of the Consolidated ﬁnancial statements, and the reported amounts of revenues and expenses during the reporting period. We evaluate these estimates and judgments on an ongoing basis and base our estimates on historical experience, current and expected future outcomes, third-party evaluations and various other assumptions that we believe are reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities as well as identifying and assessing the accounting treatment with respect to commitments and contingencies. We revise material estimates if changes occur in the circumstances or there is new information or experience on which an estimate was or can be based. Estimates signiﬁcantly impact goodwill and other intangibles acquired, tax on activities disposed, impairments, ﬁnancial instruments, the accounting for an arrangement containing a lease, revenue recognition (multiple element arrangements), assets and liabilities from employee beneﬁt plans, other provisions and tax and other contingencies, classiﬁcation of assets and liabilities held for sale and the presentation of items of proﬁt and loss and cash ﬂows as continued or discontinued. The fair values of acquired identiﬁable intangible assets are based on an assessment of future cash ﬂows. Impairment analyses of goodwill, intangible assets not yet ready for use and indeﬁnite-lived intangible assets are performed annually and whenever a triggering event has occurred to determine whether the carrying value exceeds the recoverable amount. These analyses generally are based on estimates of future cash ﬂows. The fair value of ﬁnancial instruments that are not traded in an active market is determined by using valuation techniques. The Company uses its judgment to select from a variety of common valuation methods including the discounted cash ﬂow method and option valuation models and to make assumptions that are mainly based on market conditions existing at each balance sheet date. 11 Group ﬁnancial statements 11.8 - 11.9 1 Actuarial assumptions are established to anticipate future events and are used in calculating post-employment beneﬁt expenses and liabilities. These factors include assumptions with respect to interest rates, rates of increase in health care costs, rates of future compensation increases, turnover rates and life expectancy. Prior-year information The presentation of certain prior-year information has been reclassiﬁed to conform to the current year presentation, including the 2011 presentation of adjustments to the results of prior year’s divestments reported as discontinued operations as a consequence of the resolution of uncertainties that arose from the relevant sales agreements. As a result, an income tax beneﬁt of EUR 30 million was retrospectively reclassiﬁed in the 2011 comparative ﬁgures from income tax expense of continuing operations to income tax from discontinued operations. Basis of consolidation The Consolidated ﬁnancial statements include the accounts of Koninklijke Philips N.V. (‘the Company’) and all subsidiaries that the Company controls, i.e. when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. The existence and effect of potential voting rights are considered when assessing whether the Company controls another entity. Subsidiaries are fully consolidated from the date that control commences until the date that control ceases. All intercompany balances and transactions have been eliminated in the Consolidated ﬁnancial statements. Unrealized losses are eliminated in the same way as unrealized gains, but only to the extent that there is no evidence of impairment. Business combinations Business combinations are accounted for using the acquisition method. Under the acquisition method, the identiﬁable assets acquired, liabilities assumed and any non-controlling interest in the acquiree are recognized at the acquisition date, which is the date on which control is transferred to the Company. For acquisitions on or after January 1, 2010, the Company measures goodwill at the acquisition date as: • • • • the fair value of the consideration transferred; plus the recognized amount of any non-controlling interest in the acquiree; plus if the business combination is achieved in stages, the fair value of the existing equity interest in the acquiree; less the net recognized amount (generally fair value) of the identiﬁable assets acquired and liabilities assumed. When the excess is negative, a bargain purchase gain is recognized immediately in proﬁt or loss (hereafter referred to as the Statement of income). The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts are generally recognized in the Statement of income. Costs related to the acquisition, other than those associated with the issue of debt or equity securities, that the Company incurs in connection with a business combination are expensed as incurred. Any contingent consideration payable is recognized at fair value at the acquisition date and initially is presented as Long-term provisions. When timing and amount of the consideration become more certain, it is reclassiﬁed to Accrued liabilities. If the contingent consideration is classiﬁed as equity, it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent changes to the fair value of the contingent consideration are recognized in the Statement of income. Acquisitions between January 1, 2004 and January 1, 2010 For acquisitions between January 1, 2004 and January 1, 2010, goodwill represents the excess of the cost of the acquisition over the Company’s interest in the recognized amount (generally fair value) of the identiﬁable assets, liabilities and contingent liabilities of the acquiree. Transaction costs, other than those associated with the issue of debt or equity securities, that the Company incurred in connection with business combinations were capitalized as part of the cost of the acquisition. Annual Report 2013 137 11 Group ﬁnancial statements 11.9 - 11.9 Acquisitions of and adjustments to non-controlling interests Acquisitions of non-controlling interests are accounted for as transactions with owners in their capacity as owners and therefore no goodwill is recognized. Adjustments to non-controlling interests arising from transactions that do not involve the loss of control are based on a proportionate amount of the net assets of the subsidiary. For changes to non-controlling interest without the loss of control, the difference between such change and any consideration paid or received is recognized directly in equity. Loss of control Upon the loss of control, the Company derecognizes the assets and liabilities of the subsidiary, any non-controlling interests and the other components of equity related to the subsidiary. Any surplus or deﬁcit arising on the loss of control is recognized in the Statement of income. If the Company retains any interest in the previous subsidiary, then such interest is measured at fair value at the date the control is lost. Subsequently it is accounted for as an equity-accounted investee or as an available-for-sale ﬁnancial asset depending on the level of inﬂuence retained. Investments in associates (equity-accounted investees) Associates are all entities over which the Company has signiﬁcant inﬂuence, but not control. Signiﬁcant inﬂuence is presumed with a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method of accounting and are initially recognized at cost. The group’s investment in associates includes goodwill identiﬁed on acquisition, net of any accumulated impairment loss. The Company’s share of the net income of these companies is included in results relating to associates in the Statement of income, after adjustments to align the accounting policies with those of the Company, from the date that signiﬁcant inﬂuence commences until the date that signiﬁcant inﬂuence ceases. When the Company’s share of losses exceeds its interest in an associate, the carrying amount of that interest (including any long- term loans) is reduced to zero and recognition of further losses is discontinued except to the extent that the Company has incurred legal or constructive obligations or made payments on behalf of the associate. Unrealized gains on transactions between the Company and its associates are eliminated to the extent of the Company’s interest in the associates. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Remeasurement differences of equity stake resulting from gaining control over the investee previously recorded as associate are recorded under Results related to investments in associates. Investments in associates include loans from the Company to these investees. Accounting for capital transactions of a consolidated subsidiary or an associate The Company recognizes dilution gains or losses arising from the sale or issuance of stock by a consolidated subsidiary or an associate in the Statement of income, unless the Company or the subsidiary either has reacquired or plans to reacquire such shares. In such instances, the result of the transaction is recorded directly in equity. Dilution gains and losses arising in investments in associates are recognized in the Consolidated statements of income under Results relating to investments in associates. Foreign currencies Foreign currency transactions The ﬁnancial statements of all group entities are measured using the currency of the primary economic environment in which the entity operates (functional currency). The euro (EUR) is the functional and presentation currency of the Company. Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or valuation where items are remeasured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the Statement of income, except when deferred in Other comprehensive income as qualifying cash ﬂow hedges and qualifying net investment hedges. 138 Annual Report 2013 Foreign currency differences arising from translation are recognized in proﬁt or loss, except for available-for-sale equity investments (except on impairment in which case foreign currency differences that have been recognized in Other comprehensive income are reclassiﬁed to proﬁt and loss), which are recognized in Other comprehensive income. All exchange difference items are presented as part of Cost of sales, with the exception of tax items and ﬁnancial income and expense, which are recognized in the same line item as they relate in the Statement of income. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency using the exchange rate at the date the fair value was determined. Non- monetary items in a foreign currency that are measured based on historical cost are translated using the exchange rate at the date of transaction. Foreign operations The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated to euro at exchange rates at the reporting date. The income and expenses of foreign operations are translated to euro at exchange rates at the dates of the transactions. Foreign currency differences arising on translation of foreign operations into the Group’s presentation currency are recognized in Other comprehensive income, and presented as part of Currency translation differences in equity. However, if the operation is a non-wholly owned subsidiary, then the relevant proportionate share of the translation difference is allocated to the non-controlling interests. When a foreign operation is disposed of such that control, signiﬁcant inﬂuence or joint control is lost, the cumulative amount in the translation reserve related to the foreign operation is reclassiﬁed to the Statement of income as part of the gain or loss on disposal. When the Company disposes of only part of its interest in a subsidiary that includes a foreign operation while retaining control, the relevant proportion of the cumulative amount is reattributed to Non-controlling interests. When the Company disposes of only part of its investment in an associate or joint venture that includes a foreign operation while retaining signiﬁcant inﬂuence or joint control, the relevant proportion of the cumulative amount is reclassiﬁed to the Statement of income. Financial instruments Non-derivative ﬁnancial instruments Non-derivative ﬁnancial instruments are recognized initially at fair value when the Company becomes a party to the contractual provisions of the instrument. Regular way purchases and sales of ﬁnancial instruments are accounted for at the trade date. Dividend and interest income are recognized when earned. Gains or losses, if any, are recorded in Financial income and expense. Non-derivative ﬁnancial instruments comprise cash and cash equivalents, receivables, other non-current ﬁnancial assets and debt and other ﬁnancial liabilities that are not designated as hedges. Cash and cash equivalents Cash and cash equivalents include all cash balances and short-term highly liquid investments with an original maturity of three months or less that are readily convertible into known amounts of cash. Receivables Receivables are carried at the lower of amortized cost or the present value of estimated future cash ﬂows, taking into account discounts given or agreed. The present value of estimated future cash ﬂows is determined through the use of value adjustments for uncollectible amounts. As soon as individual trade accounts receivable can no longer be collected in the normal way and are expected to result in a loss, they are designated as doubtful trade accounts receivable and valued at the expected collectible amounts. They are written off when they are deemed to be uncollectible because of bankruptcy or other forms of receivership of the debtors. The allowance for the risk of non-collection of trade accounts receivable takes into account credit-risk concentration, collective debt risk based on average historical losses, and speciﬁc circumstances such as serious adverse economic conditions in a speciﬁc country or region. In the event of sale of receivables and factoring, the Company derecognizes receivables when the Company has given up control or continuing involvement, which is deemed to have occurred when: • the Company has transferred its rights to receive cash ﬂows from the receivables or has assumed an obligation to pay the received cash ﬂows in full without any material delay to a third party under a ‘pass- through’ arrangement; and • either (a) the Company has transferred substantially all of the risks and rewards of the ownership of the receivables, or (b) the Company has neither transferred nor retained substantially all of the risks and rewards, but has transferred control of the assets. However, in case the Company neither transfers nor retains substantially all the risks and rewards of ownership of the receivables nor transfers control of the receivables, the receivable is recognized to the extent of the Company’s continuing involvement in the assets. In this case, the Company also recognizes an associated liability. The transferred receivable and associated liability are measured on a basis that reﬂects the rights and obligations that the Company has retained. Other non-current ﬁnancial assets Other non-current ﬁnancial assets include held-to-maturity investments, loans and available-for-sale ﬁnancial assets and ﬁnancial assets at fair value through proﬁt or loss. Held-to-maturity investments are those debt securities which the Company has the ability and intent to hold until maturity. Held-to- maturity debt investments are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts using the effective interest method. Loans receivable are stated at amortized cost, less impairment. Available-for-sale ﬁnancial assets are non-derivative ﬁnancial assets that are designated as available-for-sale and that are not classiﬁed in any of the other categories of ﬁnancial assets. Subsequent to initial recognition, they are measured at fair value and changes therein, other than impairment losses and foreign currency differences on available for sale- debt instruments are recognized in Other comprehensive income and presented in the fair value reserve in equity. When an investment is derecognized, the gain or loss accumulated in equity is reclassiﬁed to the Statement of income. Available-for-sale ﬁnancial assets including investments in privately-held companies that are not associates, and do not have a quoted market price in an active market and whose fair value could not be reliably determined, are carried at cost. A ﬁnancial asset is classiﬁed as fair value through proﬁt or loss if it is classiﬁed as held for trading or is designated as such upon initial recognition. Financial assets are designated as fair value through proﬁt or loss if the Company manages such investments and makes purchase and sale decisions based on their fair value in accordance with the Company- documented risk management or investment strategy. Attributable transaction costs are recognized in the Statement of income as incurred. Financial assets at fair value through proﬁt or loss are measured at fair value, and changes therein are recognized in proﬁt or loss. Equity Common shares are classiﬁed as equity. Incremental costs directly attributable to the issuance of shares are recognized as a deduction from equity. Where the Company purchases the Company’s equity share capital (treasury shares), the consideration paid, including any directly attributable incremental costs (net of income taxes) is deducted from equity attributable to the Company’s equity holders until the shares are cancelled or reissued. Where such ordinary shares are subsequently reissued, any consideration received, net of any directly attributable incremental transaction costs and the related income tax effects, is included in equity attributable to the Company’s equity holders. Dividends are recognized as a liability in the period in which they are declared. The income tax consequences of dividends are recognized when a liability to pay the dividend is recognized. Debt and other liabilities Debt and liabilities other than provisions are stated at amortized cost. However, loans that are hedged under a fair value hedge are remeasured for the changes in the fair value that are attributable to the risk that is being hedged. 11 Group ﬁnancial statements 11.9 - 11.9 Derivative ﬁnancial instruments, including hedge accounting The Company uses derivative ﬁnancial instruments principally to manage its foreign currency risks and, to a more limited extent, for managing interest rate and commodity price risks. All derivative ﬁnancial instruments are classiﬁed as current assets or liabilities and are accounted for at the trade date. Embedded derivatives are separated from the host contract and accounted for separately if the economic characteristics and risks of the host contract and the embedded derivative are not closely related. The Company measures all derivative ﬁnancial instruments at fair value derived from market prices of the instruments, or calculated as the present value of the estimated future cash ﬂows based on observable interest yield curves, basis spread, credit spreads and foreign exchange rates, or from option pricing models, as appropriate. Gains or losses arising from changes in fair value of derivatives are recognized in the Statement of income, except for derivatives that are highly effective and qualify for cash ﬂow or net investment hedge accounting. Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the Statement of income, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. For interest rate swaps designated as a fair value hedge of an interest bearing asset or liability that are unwound, the amount of the fair value adjustment to the asset or liability for the risk being hedged is released to the Statement of income over the remaining life of the asset or liability based on the recalculated effective yield. Changes in the fair value of a derivative that is highly effective and that is designated and qualiﬁes as a cash ﬂow hedge, are recorded in Other comprehensive income, until the Statement of income is affected by the variability in cash ﬂows of the designated hedged item. To the extent that the hedge is ineffective, changes in the fair value are recognized in the Statement of income. The Company formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash ﬂows of hedged items. When it is established that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, the Company discontinues hedge accounting prospectively. When hedge accounting is discontinued because it is expected that a forecasted transaction will not occur, the Company continues to carry the derivative on the Balance sheet at its fair value, and gains and losses that were accumulated in equity are recognized immediately in the Statement of income. If there is a delay and it is expected that the transaction will still occur, the amount in equity remains there until the forecasted transaction affects income. In all other situations in which hedge accounting is discontinued, the Company continues to carry the derivative at its fair value on the Balance sheet, and recognizes any changes in its fair value in the Statement of income. Foreign currency differences arising on the retranslation of ﬁnancial instruments designated as a hedge of a net investment in a foreign operation are recognized directly as a separate component of equity through Other comprehensive income, to the extent that the hedge is effective. To the extent that the hedge is ineffective, such differences are recognized in the Statement of income. Offsetting and master netting agreements The Company presents ﬁnancial assets and ﬁnancial liabilities on a gross basis as separate line items in the Consolidated balance sheet. Master netting agreements may be entered into when the Company undertakes a number of ﬁnancial instrument transactions with a single counterparty. Such an agreement provides for a net settlement of all ﬁnancial instruments covered by the agreement in the event of default or certain termination events on any of the transactions. A master netting agreement may create a right of offset that becomes enforceable and affects the realization or settlement of individual ﬁnancial assets and ﬁnancial liabilities only following a speciﬁed termination event. However, if this contractual right is subject to certain limitations then it does not necessarily provide a basis for offsetting unless both of the offsetting criteria are met, i.e. there is a legally enforceable right and an intention to settle net or simultaneously. Property, plant and equipment Items of property, plant and equipment are measured at cost less accumulated depreciation and accumulated impairment losses. The useful lives and residual values are evaluated annually. Annual Report 2013 139 11 Group ﬁnancial statements 11.9 - 11.9 Assets manufactured by the Company include direct manufacturing costs, production overheads and interest charges incurred for qualifying assets during the construction period. Government grants are deducted from the cost of the related asset. Depreciation is calculated using the straight-line method over the useful life of the asset. Depreciation of special tooling is generally also based on the straight-line method. Gains and losses on the sale of property, plant and equipment are included in Other business income. Costs related to repair and maintenance activities are expensed in the period in which they are incurred unless leading to an extension of the original lifetime or capacity. Plant and equipment under ﬁnance leases and leasehold improvements are amortized using the straight-line method over the shorter of the lease term or the estimated useful life of the asset. The gain realized on sale and operating leaseback transactions that are concluded based upon market conditions is recognized at the time of the sale. The Company capitalizes interest as part of the cost of assets that take a substantial period of time to become ready for use, which is deﬁned by the Company as a period of more than 6 months. Goodwill Measurement of goodwill at initial recognition is described under ‘Basis of consolidation’. Goodwill is subsequently measured at cost less accumulated impairment losses. In respect of investment in associates, the carrying amount of goodwill is included in the carrying amount of investment, and an impairment loss on such investment is not allocated to any asset, including goodwill, that forms part of the carrying amount of investment in associates. Intangible assets other than goodwill Acquired ﬁnite-lived intangible assets are amortized using the straight- line method over their estimated useful life. The useful lives are evaluated annually. Patents and trademarks with a ﬁnite useful life acquired from third parties either separately or as part of the business combination are capitalized at cost and amortized over their remaining useful lives. Intangible assets acquired as part of a business combination are capitalized at their acquisition-date fair value. The Company expenses all research costs as incurred. Expenditure on development activities, whereby research ﬁndings are applied to a plan or design for the production of new or substantially improved products and processes, is capitalized as an intangible asset if the product or process is technically and commercially feasible and the Company has sufﬁcient resources and the intention to complete development. The development expenditure capitalized comprises of all directly attributable costs (including the cost of materials and direct labor). Other development expenditures and expenditures on research activities are recognized in the Statement of income. Capitalized development expenditure is stated at cost less accumulated amortization and impairment losses. Amortization of capitalized development expenditure is charged to the Statement of income on a straight-line basis over the estimated useful lives of the intangible assets. Costs relating to the development and purchase of software for both internal use and software intended to be sold are capitalized and subsequently amortized over the estimated useful life. Leased assets Leases in which the Company is the lessee and has substantially all the risks and rewards of ownership are classiﬁed as ﬁnance leases. Finance leases are capitalized at the commencement of the lease at the lower of the fair value of the leased assets and the present value of the minimum lease payments. Each lease payment is allocated between the liability and ﬁnance charges. The interest element of the ﬁnance cost is charged to the Statement of income over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The corresponding rental obligations, net of ﬁnance charges, are included in other short-term and other non-current liabilities. The property, plant and equipment acquired under ﬁnance leases is depreciated over the shorter of the useful life of the assets and the lease term. Leases in which substantially all risks and rewards of ownership are retained by the lessor are classiﬁed as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are recognized in the Statement of income on a straight-line basis over the term of the lease. 140 Annual Report 2013 Inventories Inventories are stated at the lower of cost or net realizable value. The cost of inventories comprises all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. The costs of conversion of inventories include direct labor and ﬁxed and variable production overheads, taking into account the stage of completion and the normal capacity of production facilities. Costs of idle facility and abnormal waste are expensed. The cost of inventories is determined using the ﬁrst-in, ﬁrst-out (FIFO) method. Inventory is reduced for the estimated losses due to obsolescence. This reduction is determined for groups of products based on purchases in the recent past and/or expected future demand. Provisions Provisions are recognized if, as a result of a past event, the Company has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outﬂow of economic beneﬁts will be required to settle the obligation. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre- tax discount rate that reﬂects current market assessments of the time value of money and the risks speciﬁc to the obligation. The increase in the provision due to passage of time is recognized as interest expense. A provision for warranties is recognized when the underlying products or services are sold. The provision is based on historical warranty data and a weighing of possible outcomes against their associated probabilities. The Company accrues for losses associated with environmental obligations when such losses are probable and can be estimated reliably. Measurement of liabilities is based on current legal and constructive requirements. Liabilities and expected insurance recoveries, if any, are recorded separately. The carrying amount of liabilities is regularly reviewed and adjusted for new facts and changes in law. The provision for restructuring relates to the estimated costs of initiated reorganizations, the most signiﬁcant of which have been approved by the Board of Management, and which generally involve the realignment of certain parts of the industrial and commercial organization. When such reorganizations require discontinuance and/or closure of lines of activities, the anticipated costs of closure or discontinuance are included in restructuring provisions. A liability is recognized for those costs only when the Company has a detailed formal plan for the restructuring and has raised a valid expectation with those affected that it will carry out the restructuring by starting to implement that plan or announcing its main features to those affected by it. Before a provision is established, the Company recognizes any impairment loss on the assets associated with the restructuring. The Company provides for onerous contracts, based on the lower of the expected cost of fulﬁlling the contract and the expected net cost of terminating the contract. Before a provision is established, the Company recognizes any impairment loss on the assets associated with that contract. The Company records a provision for decommissioning costs of certain facilities. Decommissioning costs are provided at the present value of expected costs to settle the obligation using estimated cash ﬂows and are recognized as part of the cost of the particular asset. The cash ﬂows are discounted at a current pre-tax rate that reﬂects the risks speciﬁc to the decommissioning liability. The unwinding of the discount is expensed as incurred and recognized in the Statement of income as a Financial expense. The estimated future costs of decommissioning are reviewed annually and adjusted as appropriate. Changes in the estimated future costs or in the discount rate applied are added to or deducted from the cost of the asset. The Company is a provider of electrical equipment that falls under the EU Directive on Waste Electrical and Electronic Equipment (WEEE). The directive distinguishes between waste management of equipment sold to private households prior to a date as determined by each EU Member State (historical waste) and waste management of equipment sold to private households after that date (new waste). A provision for the expected costs of management of historical waste is recognized when the Company participates in the market during the measurement period as determined by each Member State, and the costs can be reliably measured. These costs are recognized as Other business expenses in the Statement of income. With respect to new waste, a provision for the expected costs is recognized when products that fall within the directive are sold and the disposal costs can be reliably measured. Derecognition takes place when the obligation expires, is settled or is transferred. These costs are recognized as part of Costs of sales. With respect to equipment sold to entities other than private households, a provision is recognized when the Company becomes responsible for the costs of this waste management, with the costs recognized as Other business expenses or Cost of sales as appropriate. Impairment Value in use is measured as the present value of future cash ﬂows expected to be generated by the asset. If the carrying amount of an asset is deemed not recoverable, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the recoverable amount. Impairment of goodwill, intangible assets not yet ready for use and indeﬁnite-lived intangible assets Goodwill, intangible assets not yet ready for use and indeﬁnite-lived intangible assets are not amortized but tested for impairment annually and whenever impairment indicators require. In most cases the Company identiﬁed its cash generating units as one level below that of an operating segment. Cash ﬂows at this level are substantially independent from other cash ﬂows and this is the lowest level at which goodwill is monitored by the Executive Committee. The Company performed and completed annual impairment tests in the same quarter of all years presented in the Consolidated Statements of income. An impairment loss is recognized in the Statement of income whenever and to the extent that the carrying amount of a cash-generating unit exceeds the unit’s recoverable amount, which is the greater of its value in use and fair value less cost to sell. An impairment loss on an investment in associates is not allocated to any asset, including goodwill, that forms part of the carrying amount of the investment in associates. Impairment of non-ﬁnancial assets other than goodwill, intangible assets not yet ready for use, indeﬁnite-lived intangible assets, inventories and deferred tax assets Non-ﬁnancial assets other than goodwill, intangible assets not yet ready for use, indeﬁnite-lived intangible assets, inventories and deferred tax assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is recognized and measured by a comparison of the carrying amount of an asset with the greater of its value in use and fair value less cost to sell. Value in use is measured as the present value of future cash ﬂows expected to be generated by the asset. If the carrying amount of an asset is deemed not recoverable, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the recoverable amount. The review for impairment is carried out at the level where discrete cash ﬂows occur that are independent of other cash ﬂows. Impairment losses recognized in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if and to the extent there has been a change in the estimates used to determine the recoverable amount. The loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized. Reversals of impairment are recognized in the Statement of income. Impairment of ﬁnancial assets A ﬁnancial asset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash ﬂows of that asset. In case of available-for-sale ﬁnancial assets, a signiﬁcant or prolonged decline in the fair value of the ﬁnancial assets below its cost is considered an indicator that the ﬁnancial assets are impaired. If any such evidence exists for available-for-sale ﬁnancial assets, the cumulative loss - measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that ﬁnancial asset previously recognized in the Statement of income - is reclassiﬁed from the fair value reserve in equity (through Other comprehensive income) to the Statement of income. If objective evidence indicates that ﬁnancial assets that are carried at cost need to be tested for impairment, calculations are based on information derived from business plans and other information available for estimating their fair value. Any impairment loss is charged to the Statement of income. An impairment loss related to ﬁnancial assets is reversed if in a subsequent period, the fair value increases and the increase can be related objectively to an event occurring after the impairment loss was recognized. The loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined if no impairment loss had been recognized. Reversals of impairment are 11 Group ﬁnancial statements 11.9 - 11.9 recognized in the Statement of income except for reversals of impairment of available-for-sale equity securities, which are recognized in Other comprehensive income. Employee beneﬁt accounting A deﬁned contribution plan is a post-employment beneﬁt plan under which an entity pays ﬁxed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to deﬁned contribution pension plans are recognized as an employee beneﬁt expense in the Statement of income in the periods during which services are rendered by employees. A deﬁned beneﬁt plan is a post-employment beneﬁt plan other than a deﬁned contribution plan. The net pension asset or liability recognized in the Consolidated balance sheet in respect of deﬁned beneﬁt post- employment plans is the fair value of plan assets less the present value of the projected deﬁned beneﬁt obligation (DBO) at the balance sheet date. The projected deﬁned beneﬁt obligation is calculated annually by qualiﬁed actuaries using the projected unit credit method. Recognized assets are limited to the present value of any reductions in future contributions or any future refunds. For the Company’s major plans, a full discount rate curve of high-quality corporate bonds (based on Towers Watson RATE:Link data) is used to determine the deﬁned beneﬁt obligation, whereas for the other plans a single-point discount rate is used based on the plan’s maturity. Plans in countries without a deep corporate bond market use a discount rate based on the local sovereign curve and the plan’s maturity. Pension costs in respect of deﬁned beneﬁt post-employment plans primarily represent the increase of the actuarial present value of the obligation for post-employment beneﬁts based on employee service during the year and the interest on the net recognized asset or liability in respect of employee service in previous years. The Company presents service costs in Income from operations and net interest expenses related to deﬁned beneﬁt plans in Financial expense. Remeasurements of the net deﬁned beneﬁt liability comprise actuarial gains and losses, the return on plan assets (excluding interest) and the effect of the asset ceiling (excluding interest). The Company immediately recognizes all remeasurements in Other comprehensive income. The Company recognizes gains and losses on the settlement of a deﬁned beneﬁt plan when the settlement occurs. The gain or loss on settlement comprises any resulting change in the fair value of plan assets and change in the present value of deﬁned beneﬁt obligation. Past service costs following from the introduction of a change to the beneﬁt payable under a plan or a signiﬁcant reduction of the number of employees covered by a plan, are recognized in full in the Statement of income. Short-term employee beneﬁt obligations are measured on an undiscounted basis and are expensed as the related service is provided. The Company recognizes a liability and an expense for bonuses and proﬁt-sharing, based on a formula that takes into consideration the proﬁt attributable to the Company’s shareholders after certain adjustments. The Company recognizes a provision where contractually obliged or where there is a past practice that has created a constructive obligation and the obligation can be measured reliably. The Company’s net obligation in respect of long-term employee beneﬁts is the amount of future beneﬁt that employees have earned in return for their service in the current and prior periods, such as jubilee entitlements. That beneﬁt is discounted to determine its present value. Remeasurements are recognized in the income statement in the period in which they arise. Share-based payment The grant-date fair value of equity-settled share-based payment awards granted to employees is recognized as personnel expense, with a corresponding increase in equity, over the vesting period of the award. The Company uses the Black-Scholes option-pricing model and Monte Carlo sampling to determine the fair value of the awards, depending on the type of instruments granted and certain vesting conditions. Revenue recognition Revenue from the sale of goods in the course of the ordinary activities is measured at the fair value of the consideration received or receivable, net of returns, trade discounts and volume rebates. Revenue for sale of goods is recognized when the signiﬁcant risks and rewards of ownership have been transferred to the buyer, recovery of the consideration is probable, the associated costs and possible return of the goods can be estimated Annual Report 2013 141 11 Group ﬁnancial statements 11.9 - 11.9 reliably, there is no continuing involvement with goods, and the amount of revenue can be measured reliably. If it is probable that discounts will be granted and the amount can be measured reliably, then the discount is recognized as a reduction of revenue as the sales are recognized. Transfer of risks and rewards varies depending on the individual terms of the contract of sale. For consumer-type products in the sectors Lighting and Consumer Lifestyle, these criteria are met at the time the product is shipped and delivered to the customer and, depending on the delivery conditions, title and risk have passed to the customer and acceptance of the product, when contractually required, has been obtained, or, in cases where such acceptance is not contractually required, when management has established that all aforementioned conditions for revenue recognition have been met. Examples of the above-mentioned delivery conditions are ‘Free on Board point of delivery’ and ‘Costs, Insurance Paid point of delivery’, where the point of delivery may be the shipping warehouse or any other point of destination as agreed in the contract with the customer and where title and risk for the goods pass to the customer. Revenues of transactions that have separately identiﬁable components are recognized based on their relative fair values. These transactions mainly occur in the Healthcare sector and include arrangements that require subsequent installation and training activities in order to become operable for the customer. However, since payment for the equipment is contingent upon the completion of the installation process, revenue recognition is generally deferred until the installation has been completed and the product is ready to be used by the customer in the way contractually agreed. Revenues are recorded net of sales taxes, customer discounts, rebates and similar charges. For products for which a right of return exists during a deﬁned period, revenue recognition is determined based on the historical pattern of actual returns, or in cases where such information is not available, revenue recognition is postponed until the return period has lapsed. Return policies are typically based on customary return arrangements in local markets. For products for which a residual value guarantee has been granted or a buy-back arrangement has been concluded, revenue recognition takes place when signiﬁcant risks and rewards of ownership are transferred to the customer. The following are the principal factors that the Company considers in determining that the Company has transferred signiﬁcant risks and rewards: • • • • the period from the sale to the repurchase represents the major (normally at least 75%) part of the economic life of the asset; the proceeds received on the initial transfer and the amount of any residual value or repurchase price, measured on a present value basis, is equal to substantially all (normally at least 90%) of the fair value of the asset at the sale date; insurance risk is borne by the customer; however, if the customer bears the insurance risk but the Company bears the remaining risks, then risks and rewards have not been transferred to the customer; and the repurchase price is equal to the market value at the time of the buy- back. In case of loss under a sales agreement, the loss is recognized immediately. Shipping and handling billed to customers is recognized as revenues. Expenses incurred for shipping and handling of internal movements of goods are recorded as cost of sales. Shipping and handling related to sales to third parties are recorded as selling expenses. When shipping and handling is part of a project and billed to the customer, then the related expenses are recorded as cost or sales. Service revenue related to repair and maintenance activities for goods sold is recognized ratably over the service period or as services are rendered. A provision for product warranty is made at the time of revenue recognition and reﬂects the estimated costs of replacement and free-of- charge services that will be incurred by the Company with respect to the products. For certain products, the customer has the option to purchase an extension of the warranty, which is subsequently billed to the customer. Revenue recognition occurs on a straight-line basis over the contract period. Revenue from services is recognized when the Company can reliably measure the amount of revenue and the associated cost related to the stage of completion of a contract or transaction, and the recovery of the consideration is considered probable. 142 Annual Report 2013 Royalty income, which is generally earned based upon a percentage of sales or a ﬁxed amount per product sold, is recognized on an accrual basis. Grants from the government are recognized at their fair value where there is a reasonable assurance that the grant will be received and the Company will comply with all attached conditions. Government grants relating to costs are deferred and recognized in the Statement of income over the period necessary to match them with the costs that they are intended to compensate. Financial income and expenses Financial income comprises interest income on funds invested (including available-for-sale ﬁnancial assets) and recognized surpluses for post- employment beneﬁt plans, dividend income, net gains on the disposal of available-for-sale ﬁnancial assets, net fair value gains on ﬁnancial assets at fair value through proﬁt or loss, net gains on the remeasurement to fair value of any pre-existing available-for-sale interest in an acquiree, and net gains on hedging instruments that are recognized in the Statement of income. Interest income is recognized on accrual basis in the Statement of income, using the effective interest method. Dividend income is recognized in the Statement of income on the date that the Company’s right to receive payment is established, which in the case of quoted securities is normally the ex-dividend date. Financial expenses comprise interest expense on borrowings and recognized deﬁcits for post-employment beneﬁt plans, unwinding of the discount on provisions and contingent consideration, losses on disposal of available-for-sale ﬁnancial assets, net fair value losses on ﬁnancial assets at fair value through proﬁt or loss, impairment losses recognized on ﬁnancial assets (other than trade receivables), net interest expenses related to deﬁned beneﬁt plans and net losses on hedging instruments that are recognized in the Statement of income. Borrowing costs that are not directly attributable to the acquisition, construction or production of a qualifying asset are recognized in the Statement of income using the effective interest method. Foreign currency gains and losses are reported on a net basis as either ﬁnancial income or ﬁnancial cost depending on whether foreign currency movements are in a net gain or net loss position. Income tax Income tax comprises current and deferred tax. Income tax is recognized in the Statement of income except to the extent that it relates to items recognized directly within equity or in other comprehensive income. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially-enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Deferred tax assets and liabilities are recognized, using the balance sheet method, for the expected tax consequences of temporary differences between the carrying amounts of assets and liabilities and the amounts used for taxation purposes. Deferred tax is not recognized for the following temporary differences: the initial recognition of goodwill, the initial recognition of assets and liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable proﬁt, and differences relating to investments in subsidiaries to the extent that they probably will not reverse in the foreseeable future. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantially-enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally-enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously. A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future taxable proﬁts will be available against which they can be utilized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in the countries where the deferred tax assets originated and during the periods when the deferred tax assets become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Deferred tax liabilities for withholding taxes are recognized for subsidiaries in situations where the income is to be paid out as dividend in the foreseeable future, and for undistributed earnings of unconsolidated companies to the extent that these withholding taxes are not expected to be refundable or deductible. Changes in tax rates are reﬂected in the period when the change has been enacted or substantially-enacted by the reporting date. Discontinued operations and non-current assets held for sale Non-current assets (disposal groups comprising assets and liabilities) that are expected to be recovered primarily through sale rather than through continuing use are classiﬁed as held for sale. A discontinued operation is a component of an entity that either has been disposed of, or that is classiﬁed as held for sale, and (a) represents a separate major line of business or geographical area of operations; and (b) is a part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations; or (c) is a subsidiary acquired exclusively with a view to sell. A component that previously was held for use will have one or more cash-generating units. Generally, the disposal of a business that previously was part of a single cash-generating unit does not qualify as a component of an entity and therefore shall not be classiﬁed as a discontinued operation if disposed of. Non-current assets held for sale and discontinued operations are carried at the lower of carrying amount or fair value less costs to sell. Any gain or loss from disposal of a business, together with the results of these operations until the date of disposal, is reported separately as discontinued operations. The ﬁnancial information of discontinued operations is excluded from the respective captions in the Consolidated ﬁnancial statements and related notes for all periods presented. Comparatives in the balance sheet are not re-presented when a non- current asset or disposal group is classiﬁed as held for sale. Comparatives are restated for presentation of discontinued operations in the Statement of cash ﬂow and Statement of income. Upon classiﬁcation of a disposal group as held for sale the Company may agree with the buyer to retain certain assets and liabilities, in which case such items are not presented as part of assets/liabilities held for sale, even though the associated item in the Statement of income would be presented as part of discontinued operations. The presentation of cash ﬂows relating to such items in that case mirrors the classiﬁcation in the Statement of income, i.e. as cash ﬂows from discontinued operations. Adjustments in the current period to amounts previously presented in discontinued operations that are directly related to the disposal of a discontinued operation in a prior period are classiﬁed separately in discontinued operations. Circumstances to which these adjustments may relate include resolution of uncertainties that arise from the terms of the disposal transaction, such as the resolution of a purchase price adjustments and indemniﬁcations, resolution of uncertainties that arise from and are directly related to the operations of the component before its disposal, such as environmental and product warranty obligations retained by the Company, or the settlement of employee beneﬁt plan obligations provided that the settlement is directly related to the disposal transaction. Segments Operating segments are components of the Company’s business activities about which separate ﬁnancial information is available that is evaluated regularly by the chief operating decision maker (the Board of Management of the Company). The Board of Management decides how to allocate resources and assesses performance. Reportable segments comprise the operating sectors Healthcare, Consumer Lifestyle and Lighting. Innovation, Group & Services (IG&S) is a sector but not a separate reportable segment and holds, amongst others, headquarters, overhead and regional/country organization expenses. Segment accounting policies are the same as the accounting policies as applied to the Group. Cash ﬂow statements Cash ﬂow statements are prepared using the indirect method. Cash ﬂows in foreign currencies have been translated into euros using the weighted average rates of exchange for the periods involved. Cash ﬂows from derivative instruments that are accounted for as fair value hedges or cash ﬂow hedges are classiﬁed in the same category as the cash ﬂows from the hedged items. Cash ﬂows from other derivative instruments are classiﬁed consistent with the nature of the instrument. Earnings per share The Company presents basic and diluted earnings per share (EPS) data for its common shares. Basic EPS is calculated by dividing the net income attributable to shareholders of the Company by the weighted average number of common shares outstanding during the period, adjusted for own shares held. Diluted EPS is determined by adjusting the Statement of income attributable to shareholders and the weighted average number of 11 Group ﬁnancial statements 11.9 - 11.9 common shares outstanding, adjusted for own shares held, for the effects of all dilutive potential common shares, which comprise convertible personnel debentures, restricted shares, performance shares and share options granted to employees. Financial guarantees The Company recognizes a liability at the fair value of the obligation at the inception of a ﬁnancial guarantee contract. The guarantee is subsequently measured at the higher of the best estimate of the obligation or the amount initially recognized. IFRS accounting standards adopted as from 2013 The accounting policies set out above have been applied consistently to all periods presented in these Consolidated ﬁnancial statements except as explained below which addresses changes in accounting policies. In case of the absence of explicit transition requirements for new accounting pronouncements, the Company accounts for any change in accounting principle retrospectively. The Company has adopted the following new and amended IFRSs as of January 1, 2013. Disclosures - Offsetting Financial Assets and Liabilities (Amendments to IFRS 7) As a result of the amendments to IFRS 7, the Company has expanded its disclosures about the offsetting of ﬁnancial assets and liabilities. See note 34, Fair value of ﬁnancial assets and liabilities. IFRS 10 Consolidated Financial Statements IFRS 10 introduces a single control model to determine whether an investee should be consolidated. The new standard includes guidance on control with less than half of the voting rights (‘de facto’ control), participating and protective voting rights and agent/principal relationships. Based on a reassessment of the control conclusion for the investees at January 1, 2013, the adoption of IFRS 10 did not have a material impact on the Company’s Consolidated ﬁnancial statements. IFRS 11 Joint Arrangements Under IFRS 11, the structure of the joint arrangement, although still an important consideration, is no longer the main factor in determining the type of joint arrangement and therefore the subsequent accounting. Instead: • The Company’s interest in a joint operation, which is an arrangement in which the parties have rights to the assets and obligations for the liabilities, will be accounted for on the basis of the Company’s interest in those assets and liabilities. • The Company’s interest in a joint venture, which is an arrangement in which the parties have rights to the net assets, are equity-accounted. Prior to 2012 the Company accounted for jointly controlled entities using the equity method. The adoption therefore does not have a material impact on the Company’s Consolidated ﬁnancial statements. IFRS 12 Disclosure of Interests in Other Entities This standard contains the disclosure requirements for interests in subsidiaries, joint ventures, associates and other unconsolidated interests. As a result of IFRS 12, the Company has expanded its disclosures on interests in other entities. See note 6, Interests in entities. IFRS 13 Fair Value Measurement IFRS 13 establishes a single framework for measuring fair value and making disclosures about fair value measurements, when such measurements are required or permitted by other IFRSs. More speciﬁcally, the deﬁnition of fair value was clariﬁed to be the price at which an orderly transaction to sell an asset or to transfer a liability would take place between market participants at the measurement date. The standard also replaces and expands disclosure requirements about fair value measurements in other IFRSs, of which some of these are required in interim ﬁnancial statements related to ﬁnancial instruments. The Company therefore has included additional disclosures in note 34, Fair value of ﬁnancial assets and liabilities. IFRS 13 has no material impact on the measurements of the Company’s assets and liabilities. Presentation of Items of Other Comprehensive Income (Amendments to IAS 1) The new amendment requires separation of items presented in Other comprehensive income into two groups, based on whether or not they can be recycled into the Statement of income in the future. Items that will not be recycled in the future are presented separately from items that may be Annual Report 2013 143 Recoverable Amount Disclosures for Non-Financial Assets (Amendments to IAS 36) (2013) The amendment to IAS 36 Impairment of Assets was introduced following the introduction of IFRS 13 Fair Value Measurement, to reduce the circumstances in which the recoverable amount of assets or cash- generating units is required to be disclosed, clarify the disclosures required, and to introduce an explicit requirement to disclose the discount rate used in determining impairment (or reversals) where recoverable amount (based on fair value less costs of disposal) is determined using a present value technique. As the amendment is basically to avoid unintended disclosure requirements from the introduction of IFRS 13, it was early adopted by the Company. The amendment has no material impact. Deﬁned Beneﬁt Plans: Employee Contributions (Amendments to IAS 19) Initially the abovementioned IAS 19 (2011) adjustments required that employee contributions basically would have to be incorporated in the measurement of the deﬁned beneﬁt obligation. This amendment allows a practical expedient to continue to recognize employee contributions in the Statement of income when certain conditions are met. The Company early adopted this amendment and as a result there is no change in the way how employee contributions are currently treated compared to the treatment prior to the IAS 19 (2011) adoption. Up to 2013 the Company has very limited employee contributions in their pension plans. IFRS accounting standards adopted as from 2014 and onwards A number of new standards and amendments to existing standards have been published and are mandatory for the Company beginning on or after January 1, 2014 or later periods, and the Company has not yet early adopted them. Those which may be the most relevant to the Company are set out below. IFRIC 21 Levies IFRIC 21 provides guidance on the accounting for certain outﬂows imposed on entities by governments in accordance with laws and/or regulations (levies). The Interpretation identiﬁes the obligating event for the recognition of a liability as the activity that triggers the payment of the levy in accordance with the relevant legislation. This Interpretation does not have a material impact on the ﬁnancial statements. Changes to other standards, following from Amendments and the Annual Improvement Cycles, do not have a material impact on the Company’s ﬁnancial statements. 11 Group ﬁnancial statements 11.9 - 11.9 recycled in the future. The application of this amendment impacts presentation and disclosures only. Comparative information has been re- presented. IAS 19 Employee Beneﬁts (2011) As a result of the introduction of IAS 19 (2011) - or IAS 19R/Revised - the Company has changed its accounting policy with regard to the accounting of deﬁned beneﬁt pension plans. The main change impacts the basis of determining the income or expense for the period related to these pension plans. Under the new standard the Company determines a net interest expense (income) by applying the discount rate used to measure the deﬁned beneﬁt obligation (DBO) at the beginning of the annual period to the net deﬁned beneﬁt liability (asset) at the beginning of the annual period, taking into account any changes in the net deﬁned beneﬁt liability (asset) during the period as a result of contributions and beneﬁt payments. As a result, this net interest now comprises: • • • interest cost on the DBO; interest income on plan assets; and interest on the effect of the asset ceiling. Previously, the Company determined interest income on plan assets based on their long-term rate of expected return. Furthermore, as from January 1, 2013 the Company presents net interest expenses related to deﬁned beneﬁts in Financial income and expense rather than Income from operations. The new standard no longer allows for accrual of future pension administration costs as part of the DBO. Such costs should be expensed as incurred. Previously, for the Dutch pension plan the Company accrued a surcharge for pension administration costs as part of the service costs into the DBO. With the adoption of the new standard this accrual was eliminated, resulting in an exclusion of EUR 216 million from the DBO per January 1, 2013, thereby improving the funded status. This funded status improvement is offset by the impact of the asset ceiling test regarding the Dutch pension plan’s surplus, and hence there is no further impact on the Company’s balance sheet ﬁgures other than the direct recognition of previously unrecognized past service cost. The impact on Equity from the IAS 19 (2011) accounting policy change is as follows: Decrease in the net deﬁned beneﬁt obligation (non-current, after asset ceiling restriction) Increase in deferred tax assets (non-current) Net increase on equity Split to: Equity holders of the parent Non-controlling interest December 31, 2012 13 (2) 11 11 – The limited impact on the balance sheet mainly relates to some unrecognized past service cost gains and losses which must be recognized immediately under IAS 19 (2011). The limited impact is explained by the fact that the Company already applied immediate recognition of actuarial gains and losses in Other comprehensive income. The negative impact of IAS 19 (2011) for post-employment deﬁned beneﬁt plans on Income from operations, Income before taxes and Basic and Diluted earnings per share is as follows: Income from operations Financial income and expenses Income before taxes Basic earnings per share Diluted earnings per share 2011 2012 (124) (92) (216) (0.17) (0.17) (260) (85) (345) (0.28) (0.28) 144 Annual Report 2013 11 Group ﬁnancial statements 11.9 - 11.9 2 2 Information by sector and main country in millions of euros Information by sector and main country Sectors sales sales including intercompany research and development expenses income from operations income from operations as a % of sales cash ﬂow before ﬁnancing activities 2013 Healthcare Consumer Lifestyle Lighting Innovation, Group & Services Inter-sector eliminations 2012 Healthcare Consumer Lifestyle Lighting Innovation, Group & Services Inter-sector eliminations 2011 Healthcare Consumer Lifestyle Lighting Innovation, Group & Services Inter-sector eliminations 9,575 4,605 8,413 736 23,329 9,983 4,319 8,442 713 23,457 8,852 3,771 7,638 731 9,600 4,622 8,433 1,049 (375) 23,329 10,005 4,329 8,465 984 (326) 23,457 8,866 3,777 7,652 984 (287) (780) (261) (441) (251) 1,315 429 489 (242) (1,733) 1,991 (823) (251) (462) (295) 1,026 400 (66) (712) (1,831) 648 (754) (249) (416) (186) 27 109 (408) (207) 20,992 20,992 (1,605) (479) 13.7 9.3 5.8 − 8.5 10.3 9.3 (0.8) − 2.8 0.3 2.9 (5.3) − (2.3) 1,292 472 478 (2,101) 141 1,298 422 279 (842) 1,157 707 (271) 208 (1,159) (515) Our sectors are organized based on the nature of the products and services. The four sectors comprise Healthcare, Consumer Lifestyle, Lighting and Innovation, Group & Services as shown in the table above. A short description of these sectors is as follows: Healthcare: Consists of the following businesses - Imaging Systems, Home Healthcare Solutions, Patient Care & Clinical Informatics, and Customer Services. Consumer Lifestyle: Consists of the following businesses - Personal Care, Domestic Appliances, and Health & Wellness. Lighting: Consists of the following businesses - Light Sources & Electronics, Professional Lighting Solutions, Consumer Luminaires, Automotive Lighting, and Lumileds. Innovation, Group & Services: Consists of group headquarters, as well as the overhead expenses of regional and country organizations. Also included are the net results of group innovation, intellectual property & services, the global service units and Philips’ pension and other postretirement beneﬁt costs not directly allocated to the other sectors. Transactions between the sectors mainly relate to services provided by the sector Innovation, Group & Services to the other sectors. The pricing of such transactions is determined on an arm’s length basis. Annual Report 2013 145 11 Group ﬁnancial statements 11.9 - 11.9 Sectors total assets net operating capital total liabilities excl. debt current accounts receivable, net tangible and intangible assets depreciation and amortization1) capital expenditures 2013 Healthcare Consumer Lifestyle Lighting Innovation, Group & Services Assets classiﬁed as held for sale 2012 Healthcare Consumer Lifestyle Lighting Innovation, Group & Services Assets classiﬁed as held for sale 2011 Healthcare Consumer Lifestyle Lighting Innovation, Group & Services Assets classiﬁed as held for sale 7,437 1,261 4,462 (2,922) 10,238 7,976 1,205 4,635 (4,500) 9,316 8,418 874 4,965 (3,875) 10,382 10,465 2,832 6,711 6,044 26,052 507 26,559 11,248 3,280 6,970 7,540 29,038 43 29,081 11,591 3,794 6,915 6,546 28,846 551 29,397 2,943 1,571 2,229 4,340 11,083 348 11,431 3,186 2,075 2,313 5,761 13,335 27 13,362 3,087 2,917 1,927 5,183 13,114 61 13,175 1,978 743 1,567 132 4,420 1,967 865 1,364 138 4,334 1,882 1,309 1,261 132 4,584 6,467 1,574 3,857 648 (517) (199) (504) (129) 12,546 (1,349) 7,130 1,694 4,293 521 (543) (198) (543) (114) 13,638 (1,398) 7,479 1,752 4,320 475 (538) (167) (570) (125) 14,026 (1,400) 132 135 223 97 587 135 128 290 108 661 153 130 279 78 640 1) Includes impairments of tangible and intangible assets excluding goodwill Goodwill assigned to sectors carrying value at January 1 reclassiﬁ- cation acquisitions purchase price allocation adjustment impairments divestments and transfers to assets classiﬁed as held for sale translation differences carrying value at December 31 2013 Healthcare Consumer Lifestyle Lighting Innovation, Group & Services 2012 Healthcare Consumer Lifestyle Lighting Innovation, Group & Services 4,573 668 1,707 − 6,948 4,703 674 1,639 − 7,016 − − (8) 8 − − − − − 3 − 1 − 4 − − 100 − 100 11 − (15) − (4) (1) (1) − − (2) − − (26) − (26) − − − − − (40) (18) − 3 (55) − (6) − − (6) (272) (18) (73) − 4,275 632 1,586 11 (363) 6,504 (129) 1 (32) − 4,573 668 1,707 − (160) 6,948 146 Annual Report 2013 Main countries 2013 Netherlands United States China Germany Japan France United Kingdom Other countries Assets classiﬁed as held for sale 20122) Netherlands United States China Germany Japan France United Kingdom Other countries Assets classiﬁed as held for sale 20112) Netherlands United States China Germany Japan France United Kingdom Other countries Assets classiﬁed as held for sale 11 Group ﬁnancial statements 11.9 - 11.9 sales1) tangible and intangible assets 656 6,442 2,942 1,355 1,006 915 692 9,321 23,329 627 6,824 2,585 1,323 1,204 941 676 9,277 23,457 636 6,159 1,978 1,272 908 892 579 8,568 20,992 915 7,384 1,057 288 401 80 573 1,848 12,546 62 12,608 886 8,007 1,114 271 537 90 628 2,105 13,638 6 13,644 908 8,473 1,126 252 618 97 615 1,937 14,026 287 14,313 1) The sales are reported based on country of destination 2) Previous years reﬂect the sales and tangible and intangible assets of those respective years of the main countries of 2013 Annual Report 2013 147 Employees The average number of employees by category is summarized as follows (in FTEs): 2011 2012 2013 Production 57,011 58,031 58,116 Research and development 12,539 12,974 12,072 Other Employees 31,789 32,730 32,006 101,339 103,735 102,194 3rd party workers 16,092 15,498 13,171 Continuing operations 117,431 119,233 115,365 Discontinued operations 6,100 2,901 1,997 Employees consist of those persons working on the payroll of Philips and whose costs are reﬂected in the Employee beneﬁt expenses table. 3rd party workers consist of personnel hired on a per period basis, via extenal companies. Depreciation and amortization Depreciation of property, plant and equipment and amortization of intangibles are as follows: Sales composition Goods Services Royalties Depreciation of property, plant and equipment Amortization of internal-use software 2011 2012 2013 Amortization of other intangible assets Amortization of development costs 17,636 19,918 19,716 2,926 3,130 3,139 430 409 474 20,992 23,457 23,329 2011 2012 2013 617 55 559 169 678 45 458 217 632 39 432 246 1,400 1,398 1,349 Depreciation of property, plant and equipment is primarily included in cost of sales. Amortization of the categories of other intangible assets are reported in selling expenses for brand names and customer relationships and are reported in cost of sales for technology based and other intangible assets. Amortization (including impairment) of development cost is included in research and development expenses. Shipping and handling Shipping and handling costs are included in cost of sales and selling expenses. Advertising and promotion Advertising and promotion costs are included in selling expenses. 3 11 Group ﬁnancial statements 11.9 - 11.9 3 Income from operations For information related to Sales and tangible and intangible assets on a geographical and sector basis, see note 2, Information by sector and main country. Sales and costs by nature 2011 2012 2013 Sales 20,992 23,457 23,329 Costs of materials used (7,119) (8,177) (7,895) Employee beneﬁt expenses (5,697) (6,694) (6,129) Depreciation and amortization (1,400) (1,398) (1,349) Shipping and handling (776) (788) (809) Advertising and promotion (865) (841) (882) Lease expense (314) (364) (347)1) Other operational costs (3,993) (4,214) (3,987) Impairment of goodwill (1,355) − Other business income and expenses 48 (333) (28) 88 Income from operations (479) 648 1,991 1) Lease expense includes EUR 42 million of other costs, such as fuel and electricity, and taxes to be paid and reimbursed to the lessor Philips has no single external customer that represents 10% or more of revenues. Costs of materials used Cost of materials used represents the inventory recognized in cost of sales. Employee beneﬁt expenses 2011 2012 2013 Salaries and wages 4,668 5,499 4,983 Post-employment beneﬁts costs 272 344 362 Other social security and similar charges: - Required by law - Voluntary 595 162 678 173 658 126 5,697 6,694 6,129 The employee beneﬁt expenses relate to employees who are on the Philips payroll, both with permanent and temporary contracts. For further information on pension costs, see note 30, Post-employment beneﬁts. Details on the remuneration of the members of the Board of Management and the Supervisory Board, see note 33, Information on remuneration. 148 Annual Report 2013 11 Group ﬁnancial statements 11.9 - 11.9 4 In 2013, result on disposal of ﬁxed assets was mainly due to sale of real estate assets. 2011 2012 2013 In 2013, result on other remaining businesses were mainly due to release of earn out provisions. For further information, see note 21, Provisions. Audit fees Fees KPMG Audit fees - consolidated ﬁnancial statements - statutory ﬁnancial statements Audit-related fees 1) - acquisitions and divestments - sustainability assurance - other Tax fees 2) -tax compliance services Other fees 3) - royalty investigation - other Total 15.6 10.1 5.5 2.4 0.1 0.5 1.8 0.9 0.9 0.5 0.4 0.1 14.7 9.7 5.0 5.6 2.9 0.8 1.9 1.3 1.3 0.7 0.1 0.6 15.6 10.1 5.5 2.2 0.4 0.7 1.1 0.8 0.8 1.3 0.0 1.3 19.4 22.3 19.9 1) The percentage of services provided in 2013 is 11.1% of the total fees 2) The percentage of services provided in 2013 is 4.0% of the total fees 3) The percentage of services provided in 2013 is 6.5% of the total fees This table ’Fees KPMG’ forms an integral part of the Company Financial Statements, please refer to note K, Audit fees. Impairment of goodwill In 2013, goodwill impairment charges amounts to EUR 28 million, including EUR 26 million as result of reduced growth expectations in Consumer Luminaires. In 2011, goodwill was impaired in the Healthcare sector for an amount of EUR 824 million and in the Lighting sector for an amount of EUR 531 million. For further information on impairment of goodwill, see note 11, Goodwill. Other business income (expenses) Other business income (expenses) consists of the following: 4 Financial income and expenses 2011 2012 2013 Interest income 39 37 Interest income from loans and receivables Interest income from cash and cash equivalents Dividend income from available for sale ﬁnancial assets Net gains from disposal of ﬁnancial assets Net change in fair value of ﬁnancial assets at fair value through proﬁt or loss Net change in fair value of ﬁnancial liabilities at fair value through proﬁt or loss Net foreign exchange gains Other ﬁnancial income 5 20 34 17 11 51 6 − − 6 4 1 − 44 − 20 Financial income 113 106 Interest expense (340) (363) Interest on debt and borrowings (245) (271) Finance charges under ﬁnance lease contract Interest expenses - pensions Unwind of discount of provisions Net foreign exchange losses Impairment loss of ﬁnancial assets Net change in fair value of ﬁnancial assets at fair value through proﬁt or loss Net change in fair value of ﬁnancial liabilities at fair value through proﬁt or loss (3) (92) (33) (2) (34) (7) (85) (22) − (8) (2) Other ﬁnancial expenses (35) (40) 55 33 22 5 − − − − 10 70 (323) (245) (7) (71) (25) (6) (10) (9) (3) (24) 2011 2012 2013 Financial expense (444) (435) (400) Result on disposal of businesses: - income - expense Result on disposal of ﬁxed assets: - income - expense Result on other remaining businesses: - income - expense Total other business income Total other business expense 27 (26) 47 (11) 50 (39) 48 124 (76) 9 (84) 224 (9) 42 (515) (333) 275 (608) 50 (1) 19 (13) 54 (21) 88 123 (35) In 2013, result on disposal of businesses was mainly due to divestment of non-strategic businesses within Healthcare. For further information, see note 9, Acquisitions and divestments Financial income and expenses (331) (329) (330) Net ﬁnancial income and expense showed a EUR 330 million expenses in 2013, which was 1 million higher than in 2012. Total ﬁnance income of EUR 70 million included EUR 55 million interest income. Remaining ﬁnancial income included dividend income of EUR 5 million and other ﬁnance income of EUR 10 million. Total ﬁnancial expense of EUR 400 million included EUR 10 million impairment charges and EUR 323 million interest expenses. Remaining ﬁnancial expense consisted mainly of EUR 25 million of accretion expenses associated with discounted provisions and uncertain tax positions and EUR 24 million other ﬁnancing charges. Net ﬁnancial income and expense showed a EUR 329 million expense in 2012, which was EUR 2 million lower than in 2011. Total ﬁnancial income of EUR 106 million included a EUR 46 million gain related to a change in estimate on the valuation of long term derivative contracts. Remaining ﬁnancial expense consisted mainly of EUR 22 million of accretion expenses associated with discounted provisions and uncertain tax positions and EUR 40 million other ﬁnancing charges. Net ﬁnancial income and expense showed a EUR 331 million expense in 2011. Total ﬁnance income of EUR 113 million included EUR 51 million gain on the disposal of ﬁnancial assets, of which EUR 44 million resulted from Annual Report 2013 149 Current tax income (expense) (360) (280) (280) Tax expenses due to other liabilities Philips’ operations are subject to income taxes in various foreign jurisdictions. The statutory income tax rates vary from 10.0% to 39.4%, which results in a difference between the weighted average statutory income tax rate and the Netherlands’ statutory income tax rate of 25% (2012: 25.0%; 2011: 25.0%). A reconciliation of the weighted average statutory income tax rate to the effective income tax rate of continuing operations is as follows: in % 2011 2012 2013 Weighted average statutory income tax rate 41.6 21.9 27.6 Tax rate effect of: Changes related to: - utilization of previously reserved loss carryforwards 2.4 (0.2) (1.2) - new loss carryforwards not expected to be realized - addition (releases) Non-tax-deductible impairment charges Non-taxable income Non-tax-deductible expenses Withholding and other taxes Tax rate changes Prior year tax results Tax incentives and other (7.7) 1.8 (61.9) 7.1 (14.1) (2.9) (0.1) 2.8 (2.5) 2.5 15.7 (0.6) 0.6 (18.7) 68.7 6.9 1.1 1.7 0.2 0.6 (8.1) 7.5 0.8 0.0 (3.0) (0.2) 3.1 (37.5) 0.5 (1.3) Effective tax rate (31.0) 58.0 28.1 The weighted average statutory income tax rate increased in 2013 compared to 2012, as a consequence of a change in the country mix of income tax rates, as well as a signiﬁcant change in the mix of proﬁts and losses in the various countries. The effective income tax rate is higher than the weighted average statutory income tax rate in 2013, mainly due to withholding and other taxes which are partly offset by the net impact of non-taxable/non-deductible income and other tax expenses. 5 11 Group ﬁnancial statements 11.9 - 11.9 the sale of shares in TCL and EUR 6 million resulted from the sale of Digimarc. Remaining ﬁnancial income included dividend income of EUR 11 million and a total net EUR 6 million gain from fair value changes, mainly the revaluation of the NXP option. Total ﬁnance expense of EUR 444 million included EUR 34 million impairment charges, mainly related to the shareholding in TPV Technology. Remaining ﬁnancial expense consisted mainly of EUR 33 million of accretion expenses associated with discounted provisions and uncertain tax positions and EUR 35 million other ﬁnancing charges. 5 Income taxes The tax expense on income before tax of continuing operations amounted to EUR 466 million (2012: EUR 185 million, 2011: EUR 251 million). The components of income before taxes and income tax expense are as follows: Netherlands Foreign 2011 2012 2013 148 (177) 314 (958) 496 1,347 Income before taxes of continuing operations (810) 319 1,661 Netherlands: Current tax income (expense) Deferred tax income (expense) Foreign: (40) 82 42 (78) 13 (65) − (107) (107) Deferred tax income (expense) 163 (197) 143 (137) (89) (369) Income tax expense of continuing operations Income tax expense of discontinued operations (251) (185) (466) 96 (17) (10) Income tax expense (155) (202) (476) The components of income tax expense are as follows: 2011 2012 2013 Current tax expense (390) (370) (268) Prior year results (10) 12 (12) Current tax income (expense) (400) (358) (280) 2011 2012 2013 Recognition of previously unrecognized tax losses Current year tax loss carried forwards not recognized Temporary differences (not recognized) recognized Prior year results Tax rate changes 20 1 20 (89) (50) (29) 15 31 (1) 2 (2) (4) (3) 15 − Origination and reversal of temporary differences Deferred tax income (expense) 269 245 209 156 (199) (196) 150 Annual Report 2013 11 Group ﬁnancial statements 11.9 - 11.9 Deferred tax assets and liabilities Net deferred tax assets relate to the following balance sheet captions and tax loss carryforwards (including tax credit carryforwards), of which the movements during the years 2013 and 2012 respectively are as follows: December 31, 2012 recognized in income recognized in OCI acquisitions/ divestments other1) December 31, 2013 Intangible assets Property, plant and equipment Inventories Prepaid pension assets Other receivables Other assets Provisions: - pensions - guarantees - termination beneﬁts - other postretirement beneﬁts - other provisions Other liabilities Tax loss carryforwards (including tax credit carryforwards) Net deferred tax assets (928) 68 258 − 55 42 598 26 118 72 605 171 742 1,827 13 − 9 (24) (3) (4) (70) 4 (28) (5) (32) 27 (83) (196) − − − 23 1 (2) (82) − 8 (7) 16 − (11) (54) − − − − − (1) − − − − − − − (1) 44 (10) (3) − (3) (3) (20) (1) (1) (3) (22) (6) 51 23 (871) 58 264 (1) 50 32 426 29 97 57 567 192 699 1,599 December 31, 2011 recognized in income recognized in OCI acquisitions/ divestments other1) December 31, 2012 Intangible assets (1,074) Property, plant and equipment Inventories Prepaid pension costs Other receivables Other assets Provisions: - pensions - guarantees - termination beneﬁts - other postretirement beneﬁts - other provisions Other liabilities Tax loss carryforwards (including tax credit carryforwards) Net deferred tax assets 77 221 2 44 19 617 34 42 71 636 231 732 1,652 165 (2) 41 (4) 13 17 (62) (10) 67 3 (33) (63) 24 156 1) Primarily includes foreign currency translation differences which were recognized in OCI − − − 6 − (7) 64 − 5 (3) 10 (4) (7) 64 (35) − − − − − − − − − − − 6 (29) 16 (7) (4) (4) (2) 13 (21) 2 4 1 (8) 7 (13) (16) (928) 68 258 − 55 42 598 26 118 72 605 171 742 1,827 Annual Report 2013 151 11 Group ﬁnancial statements 11.9 - 11.9 Deferred tax assets and liabilities relate to the balance sheet captions, as follows: assets liabilities net 2013 Intangible assets Property, plant and equipment Inventories Prepaid pension costs Other receivables Other assets Provisions: - pensions - guarantees - termination beneﬁts - other postretirement - other Other liabilities 116 107 271 1 60 48 426 29 97 57 581 213 (987) (49) (7) (2) (10) (16) − − − − (14) (21) (871) 58 264 (1) 50 32 426 29 97 57 567 192 deferred tax liability position. Of the total deferred tax assets of EUR 1,675 million at December 31, 2013, (2012: EUR 1,919 million), EUR 543 million (2012: EUR 507 million) is recognized in respect of ﬁscal entities in various countries where there have been ﬁscal losses in the current or preceding period. Management’s projections support the assumption that it is probable that the results of future operations will generate sufﬁcient taxable income to utilize these deferred tax assets. At December 31, 2013 and 2012, there were no recognized deferred tax liabilities for taxes that would be payable on the unremitted earnings of certain foreign subsidiaries of Philips Holding USA since it has been determined that undistributed proﬁts of such subsidiaries will not be distributed in the foreseeable future. The temporary differences associated with the investments in subsidiaries of Philips Holding USA, for which a deferred tax liability has not been recognized, aggregate to EUR 32 million (2012: EUR 35 million). At December 31, 2013, operating loss carryforwards expire as follows: Total 2014 2015 2016 2017 2018 2019/ 2023 unlimi- ted later 4,330 28 1 3 6 6 44 841 3,401 The Company also has tax credit carryforwards of EUR 138 million, which are available to offset future tax, if any, and which expire as follows: Tax loss carryforwards (including tax credit carryforwards) 699 − 699 Total 2014 2015 2016 2017 2018 2019/ 2023 unlimi- ted later 2,705 (1,106) 1,599 138 3 − 1 − 4 19 95 16 Set-off of deferred tax positions (1,030) 1,030 − Net deferred tax assets 1,675 (76) 1,599 2012 Intangible assets Property, plant and equipment Inventories Prepaid pension costs Other receivables Other assets Provisions: - pensions - guarantees - termination beneﬁts - other postretirement - other Other liabilities assets liabilities net 151 115 263 2 58 54 599 26 117 72 624 198 (1,079) (928) (47) (5) (2) (3) (12) − (1) − 1 − (19) (27) 68 258 − 55 42 598 26 118 72 605 171 Tax loss carryforwards (including tax credit carryforwards) 742 − 742 3,021 (1,194) 1,827 Set-off of deferred tax positions (1,102) 1,102 − Net deferred tax assets 1,919 (92) 1,827 Deferred tax assets are recognized for temporary differences, unused tax losses, and unused tax credits to the extent that realization of the related tax beneﬁts is probable. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in the countries where the deferred tax assets originated and during the periods when the deferred tax assets become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. The net deferred tax assets of EUR 1,599 million (2012: EUR 1,827 million) consist of deferred tax assets of EUR 1,675 million (2012: EUR 1,919 million) in countries with a net deferred tax asset position and deferred tax liabilities of EUR 76 million (2012: EUR 92 million) in countries with a net 152 Annual Report 2013 At December 31, 2013 , operating loss and tax credit carryforwards for which no deferred tax assets have been recognized in the balance sheet, expire as follows: Total 2014 2015 2016 2017 2018 2019/ 2023 unlimi- ted later 1,928 25 1 3 2 − 39 9 1,849 At December 31, 2013, the amount of deductible temporary differences for which no deferred tax asset has been recognized in the balance sheet is EUR 151 million (2012: EUR 157 million). Classiﬁcation of the income tax payable and receivable is as follows: 2012 2013 Income tax receivable 97 70 Income tax receivable - under non-current receivables Income tax payable − − (200) (143) Income tax payable - under non-current liabilities − (1) Tax risks Philips is exposed to tax uncertainties. These uncertainties include amongst others the following: Transfer pricing uncertainties Philips has issued transfer pricing directives, which are in accordance with international guidelines such as those of the Organization of Economic Co-operation and Development. As transfer pricing has a cross-border effect, the focus of local tax authorities on implemented transfer pricing procedures in a country may have an impact on results in another country. In order to reduce the transfer pricing uncertainties, monitoring procedures are carried out by Group Tax and Internal Audit to safeguard the correct implementation of the transfer pricing directives. Tax uncertainties on general service agreements and speciﬁc allocation contracts Due to the centralization of certain activities in a limited number of countries (such as research and development, centralized IT, group functions and head ofﬁce), costs are also centralized. As a consequence, these costs and/or revenues must be allocated to the beneﬁciaries, i.e. the various Philips entities. For that purpose, apart from speciﬁc allocation contracts for costs and revenues, general service agreements are signed with a large number of group entities. Tax authorities review the implementation of GSAs, apply beneﬁt tests for particular countries or audit the use of tax credits attached to GSAs and royalty payments, and may reject the implemented procedures. Furthermore, buy in/out situations in the case of (de)mergers could affect the tax allocation of GSAs between countries. The same applies to the speciﬁc allocation contracts. Tax uncertainties due to disentanglements and acquisitions When a subsidiary of Philips is disentangled, or a new company is acquired, related tax uncertainties arise. Philips creates merger and acquisition (M&A) teams for these disentanglements or acquisitions. In addition to representatives from the involved sector, these teams consist of specialists from various group functions and are formed, amongst other things, to identify hidden tax uncertainties that could subsequently surface when companies are acquired and to reduce tax claims related to disentangled entities. These tax uncertainties are investigated and assessed to mitigate tax uncertainties in the future of the extent possible. Several tax uncertainties may surface from M&A activities. Examples of uncertainties are: applicability of the participation exemption, allocation issues, and non-deductibility of parts of the purchase price. Tax uncertainties due to permanent establishments In countries where Philips starts new operations or alters business models, the issue of permanent establishment may arise. This is because when operations in a country involves a Philips organization in another country, there is a risk that tax claims will arise in the former country as well as in the latter country. 6 Interests in entities In this section we discuss the nature of, and risks associated with, the Company’s interests in its consolidated entities and associates, and the effects of those interests on the Company’s ﬁnancial position and ﬁnancial performance. Interests in entities could in principle relate to: Interests in subsidiaries • • Joint arrangements • Unconsolidated structured entities • Investments in associates Interests in subsidiaries Wholly owned subsidiaries The Group ﬁnancial statements comprise the assets and liabilities of approximately 400 legal entities. Set out below is a list of material subsidiaries representing greater than 5% of either the consolidated group sales, income from operations or net income (before any intra-group eliminations). All of the entities are 100% owned and have been for the last 3 years. Interests in subsidiaries in order of EBIT (decreasing) Legal entity name Principal country of business Philips Electronics North America Corporation United States Philips Medizin Systeme Böblingen GmbH Philips Consumer Lifestyle B.V. Philips Ultrasound, Inc. Philips (China) Investment Company, Ltd. Philips Lighting Poland S.A. Philips Innovative Applications Philips Medical Systems Nederland B.V. RIC Investments, LLC Philips Lighting B.V. Philips Oral Healthcare, Inc. Philips Medical Systems DMC GmbH Philips GmbH Germany Netherlands United States China Poland Belgium Netherlands United States Netherlands United States Germany Germany 11 Group ﬁnancial statements 11.9 - 11.9 6 Not wholly owned subsidiaries Among the consolidated legal entities is one entity where the Company owns 44% of the voting power. We have determined that the Company controls this entity on a de facto power basis. The sales, income from operations and net income of this entity is less than 1% of the consolidated ﬁnancial data of the company and therefore not considered material. In total eleven consolidated subsidiaries are not wholly owned by the Company. The sales, income from operations and net income of these entities (before any intra-group eliminations) are less than 3% of the consolidated ﬁnancial data of the company and therefore not considered material. Joint arrangements and unconsolidated structured entities The Company did not have joint arrangements or unconsolidated structured entities that require separate disclosure under IFRS 12. Investments in associates Philips has investments in a number of associates, none of them are regarded as individually material. The changes during 2013 are as follows: Investments in associates Total investments Balance as of January 1, 2013 Changes: Sales/Redemption Reclassiﬁcations Share in income Dividends declared Translation and exchange rate differences Balance as of December 31, 2013 177 (2) (7) 5 (6) (6) 161 Philips has agreed that it will transfer the remaining 30% stake in the TP Vision venture, which has a book value of nil as at December 31, 2013, to TPV. The net impact of a transaction-related payment has been accrued in Other current liabilities at December 31, 2013 due to conditions that existed at the balance sheet date. The Company owns four equity interests which represent more than 20% in the capital of the underlying companies. With respect to these equity interests, the Company cannot exercise signiﬁcant inﬂuence based on governance agreements concluded among shareholders. These equity interests are accounted for as Other non-current ﬁnancial assets. In 2013, the Company’s share in net income of these entities was insigniﬁcant. The Company has one investment where it owns 51% of the shares of an entity, however is not able to control it and therefore it is not consolidated but accounted for as an investment in associate. During 2013 the Company’s shareholding in two of its investments in associates was diluted and subsequently treated as available-for-sale ﬁnancial assets. The dilution gains of EUR 16 million are recognized under results related to investments in associates. The Company has not recognized a proportional share of losses, totaling EUR 37 million (2012: EUR 9 million) in relation to its investments in associates because the Company has no obligation in respect of these losses. Summarized information of investments in associates Unaudited summarized ﬁnancial information on the Company’s most signiﬁcant investments in associates, on a combined basis, is presented below. It is based on the most recent available ﬁnancial information. Included from April 2012 is the 30%-interest in TP Vision Holding which includes the former Philips TV business. Annual Report 2013 153 7 11 Group ﬁnancial statements 11.9 - 11.9 Net sales Income before taxes Income taxes Net income 2011 2012 2013 408 2,534 2,180 86 (27) 59 (7) 2 (5) (243) 12 (231) At the moment of divestment the related balance sheet positions will be transferred, the associated currency translation differences, part of Shareholders’ equity, will be recognized in the Consolidated statement of income. At December 31, 2013, the estimated release amounts to a EUR 3 million loss. The following table presents the assets and liabilities of the AVM&A business, classiﬁed as Assets held for sale and Liabilities directly associated with the assets held for sale in the Consolidated balance sheets. Total share in net income of associates recognized in the Consolidated statements of income 18 (5) 5 Current assets Non-current assets Current liabilities Non-current liabilities Net asset value 2012 2013 1,635 1,368 485 412 2,120 1,780 (1,544) (1,327) (186) 390 (278) 175 Property, plant and equipment Intangible assets including goodwill Inventories Accounts receivable Other assets Assets classiﬁed as held for sale Accounts payable Provisions Other liabilities Investments in associates included in the Consolidated balance sheet 177 161 Liabilities directly associated with assets held for sale 2013 17 32 130 212 9 400 217 33 98 348 7 Discontinued operations and other assets classiﬁed as held for sale Discontinued operations included in the Consolidated statements of income and the Consolidated statements of cash ﬂows consists of the Audio, Video, Multimedia and Accessories (AVM&A) business, the Television business and certain divestments formerly reported as discontinued operations. Discontinued operations: Audio, Video, Multimedia and Accessories business Following the agreement with Funai Electric Co. Ltd which was announced in Q1 2013, the results of the Audio, Video, Multimedia and Accessories (AVM&A) business are reported as discontinued operations in the Consolidated statements of income and Consolidated statements of cash ﬂows. Assets classiﬁed as held for sale and Liabilities directly associated with assets held for sale are reported in the Consolidated balance sheet as of the moment of the announcement. This agreement was terminated on October 25, 2013. Since then, Philips has been actively discussing the sale of the business with various parties. Therefore the AVM&A business continues to be reported as discontinued operations in the Consolidated statements of income and Consolidated statements of cash ﬂows with the related assets and liabilities included as Assets classiﬁed as held for sale and Liabilities directly associated with assets held for sale in the Consolidated balance sheet. The following table summarizes the results of the AVM&A business included in the Consolidated statements of income as discontinued operations. 2011 2012 2013 Sales 1,587 1,331 1,117 Costs and expenses (1,499) (1,210) (1,067) Disentanglement costs Income before taxes Income taxes Investments in associates Results from discontinued operations − 88 (10) − 78 − 121 (40) (3) 78 (44) 6 (3) − 3 154 Annual Report 2013 Non-transferrable balance sheet positions, such as certain accounts receivable, accounts payable, accrued liabilities and provisions are reported on the respective balance sheet captions. Discontinued operations: Television business As announced in Q1 2012, the Television business’s strategic partnership agreement with TPV Technology Limited was signed on April 1, 2012. In 2013, the discontinued Television business reported a net loss of EUR 6 million (2012: a net loss of EUR 31 million; 2011: a net loss of EUR 515 million). The following table summarizes the results of the Television business included in the Consolidated statements of income as discontinued operations. 2011 2012 2013 Sales Costs and expenses 2,702 563 (2,913) (622) loss on sale of discontinued operations (380) 5 Income (loss) before taxes (591) (54) Income taxes Operational income tax Income tax on loss on sale of discontinued operations Results from discontinued operations 76 49 27 (515) 23 28 (5) (31) (3) (3) 4 (2) (4) (2) (2) (6) In 2011, the loss on the sale of the Television business amounted to approximately EUR 380 million, which mainly comprised of present value of initial contributions made to the TV venture (EUR 183 million), total disentanglement costs (EUR 81 million), contributed assets which were not fully recovered (EUR 66 million) and various smaller other items, offset by the revenue associated with the sale, including the fair value of a contingent consideration and a retained 30% interest in the TV venture. In addition to the contributions that were agreed and recognized as loss on onerous contract, Philips made commitments to provide further ﬁnancing to the TV venture for more details see note 25, Contractual obligations and note 36, Subsequent events. The following table presents the in 2012 divested assets and liabilities of the Television business. 11 Group ﬁnancial statements 11.9 - 11.9 April 1, 2012 In 2013, the Company divested two Healthcare businesses formerly reported under Assets classiﬁed as held for sale. For more details see note 9, Acquisitions and divestments. Property, plant and equipment Intangible assets including goodwill Write down to fair value less costs to sell Inventories Other assets Assets classiﬁed as held for sale Provisions Liabilities classiﬁed as held for sale 91 − − 124 25 240 (6) (6) Discontinued operations: Other Certain results of other divestments formerly reported as discontinued operations are included with a net gain of EUR 5 million in 2013 (2012: a result of EUR nil million; 2011: a net gain of EUR 27 million). Other assets classiﬁed as held for sale On July 1, 2013, Philips announced to transfer certain assets and cash proceeds from the sale of certain assets to the Dutch pension plan. In total EUR 94 million of related assets are qualiﬁed as held for sale as of December 31, 2013. EUR 92 million relates to other non-current ﬁnancial assets. For more details see note 30, Post-employment beneﬁts. Assets and liabilities directly associated with assets held for sale relate to property, plant and equipment for an amount of EUR 13 million (December 31, 2012 EUR 1 million) and business divestments of EUR nil million at December 31, 2013 (December 31, 2012 EUR 15 million). On March 29, 2012, Philips announced the completion of the High Tech Campus transaction with proceeds of EUR 425 million, consisting of a EUR 373 million cash transaction and an amount of EUR 52 million to be received after the deal. The gain from the transaction, after deducting expenses related to other real estate efﬁciency measures which are part of the EUR 800 million cost reduction program announced in 2011, of EUR 65 million, of which EUR 37 million was recognized in the ﬁrst quarter of 2012 in income from operations while EUR 28 million was deferred to future periods and is recognized periodically starting as of April 2012. The deferral of the gain relates to the ﬁnance lease element in the sale and lease-back arrangement part of the deal. In 2012, Philips divested several industrial sites in sector Lighting, the Speech Processing business in sector Consumer Lifestyle and a minor service activity in sector Healthcare. The transactions of the industrial sites resulted in a loss of EUR 95 million, consisting of contributed assets, which were not fully recovered leading to a EUR 14 million impairment on property, plant and equipment and EUR 81 million loss reported in other business expense as result on disposal of businesses. As part of these divestments onerous supply agreements were signed, which amounted to EUR 60 million at December 31, 2012. The speech Processing business resulted in a gain of EUR 21 million gain reported in other business income as result on disposal of business. Annual Report 2013 155 8 9 11 Group ﬁnancial statements 11.9 - 11.9 8 Earnings per share Earnings per share Income (loss) from continuing operations Income attributable to non-controlling interest Income (loss) from continuing operations attributable to shareholders Income (loss) from discontinued operations Net income (loss) attributable to shareholders Weighted average number of common shares outstanding (after deduction of treasury shares) during the year Plus incremental shares from assumed conversions of: Options and restricted share rights Convertible debentures Dilutive potential common shares Adjusted weighted average number of shares (after deduction of treasury shares) during the year Basic earnings per common share in euro2) Income (loss) from continuing operations Income (loss) from discontinued operations Income (loss) from continuing operations attributable to shareholders Net income (loss) attributable to shareholders Diluted earnings per common share in euro2,3,4) Income (loss) from continuing operations Income (loss) from discontinued operations Income (loss) from continuing operations attributable to shareholders Net income (loss) attributable to shareholders Dividend distributed per common share in euros 2011 (1,046) 4 (1,050) (410) (1,460) 2012 (77) 5 (82) 47 (35) 2013 1,170 3 1,167 2 1,169 952,808,9651) 922,101,0051) 911,071,970 4,309,777 173,890 5,014,991 106,204 10,896,583 103,899 4,483,667 5,121,195 11,000,482 957,292,6321) 927,222,2001) 922,072,452 (1.10) (0.43) (1.10) (1.53) (1.10) (0.43) (1.10) (1.53) 0.75 (0.08) 0.05 (0.09) (0.04) (0.08) 0.05 (0.09) (0.04) 0.75 1.28 − 1.28 1.28 1.27 − 1.27 1.27 0.75 1) Adjusted to make previous years comparable for the bonus shares (273 thousand) issued in May 2013 2) The effect on income of convertible debentures affecting earnings per share is considered immaterial 3) In 2013, 2012 and 2011, respectively 14 million, 36 million and 37 million securities that could potentially dilute basic EPS were not included in the computation of dilutive EPS because the effect would have been antidilutive for the periods presented 4) The Dilutive potential common shares are not taken into account in the periods for which there is a loss, as the effect would be antidilutive 9 Acquisitions and divestments 2013 There were four acquisitions in 2013. These acquisitions involved an aggregated purchase price of EUR 10 million. Measured on a yearly basis, the aggregated impact of these acquisitions on Group Sales, Income from operations, Net income and Net income per common share (on a fully diluted basis) are not material in respect of IFRS 3 disclosure requirements. Philips completed ﬁve divestments of business activities during 2013, mainly related to certain Healthcare service activities. The transactions involved an aggregate consideration of EUR 99 million and are therefore deemed immaterial in respect of IFRS 3 disclosure requirements. 2012 During 2012, Philips entered into one acquisition. On January 9, 2012 Philips acquired (in)directly 99.93% of the outstanding shares of Industrias Derivadas del Aluminio, S.L. (Indal). This acquisition involved a cash consideration of EUR 210 million and was accounted for using the acquisition method. By the end of July 2012, Indal was fully owned by Philips. Philips completed in the ﬁrst quarter of 2012 the divestment of the Television business. Furthermore there were several divestments of business activities during 2012, which comprised the divestment of certain Lighting manufacturing activities, Speech Processing activities and certain Healthcare service activities. These transactions involved an aggregated consideration of EUR 49 million and are therefore deemed immaterial in respect of IFRS 3 disclosure requirements. On January 26, 2012, Philips agreed to extend its partnership with Sara Lee Corp (Sara Lee) to drive growth in the global coffee market. Under a new exclusive partnership framework, which will run through to 2020, Philips will be the exclusive Senseo consumer appliance manufacturer and distributor for the duration of the agreement. As part of the agreement, Philips transferred its 50% ownership right in the Senseo trademark to Sara Lee. Under the terms of the agreement, Sara Lee paid Philips a total consideration of EUR 170 million. The consideration was recognized in 156 Annual Report 2013 11 Group ﬁnancial statements 11.9 - 11.9 Other business income for an amount of EUR 160 million. The remainder was included in various line items of the Consolidated statements of income (EUR 8 million) or deducted from the book value of Property, plant and equipment (EUR 2 million). 2011 During 2011, Philips entered into six acquisitions. These acquisitions involved an aggregated purchase price of EUR 498 million and have been accounted for using the acquisition method. Measured on an annualized basis, the aggregated impact of the six acquisitions on group Sales, Income from operations, Net income and Net income per common share (on a fully diluted basis) is not material in respect of IFRS 3 disclosure requirements. The divestments in 2011 involved an aggregated consideration of EUR 57 million and were therefore deemed immaterial in respect of IFRS 3 disclosure requirements. Annual Report 2013 157 10 11 Group ﬁnancial statements 11.9 - 11.9 10 Property, plant and equipment land and buildings machinery and installations other equipment prepayments and construction in progress 1,924 (835) 1,089 8 79 − (1) (87) (15) (17) (29) (62) 1,899 (872) 1,027 4,004 (2,851) 1,153 88 244 − (14) (321) (26) (4) (57) (90) 3,948 (2,885) 1,063 1,658 (1,235) 423 61 160 − (7) (163) (22) (4) (17) 8 1,586 (1,155) 431 294 − 294 461 (483) − (4) − − − (9) (35) 259 − 259 land and buildings machinery and installations other equipment prepayments and construction in progress 1,981 (895) 1,086 95 125 1 (64) (77) (13) (23) (29) (12) 3 1,924 (835) 1,089 3,914 (2,762) 1,152 114 312 4 (8) (358) (33) (2) − (28) 1 4,004 (2,851) 1,153 1,552 (1,141) 411 98 116 12 (10) (188) (12) (1) − (3) 12 1,658 (1,235) 423 365 − 365 497 (553) − (10) − (1) 1 − (5) (71) 294 − 294 Balance as of January 1, 2013: Cost Accumulated depreciation Book value Change in book value: Capital expenditures Assets available for use Acquisitions Disposals and sales Depreciation Impairments Transfer to assets classiﬁed as held for sale Translation differences Total changes Balance as of December 31, 2013: Cost Accumulated depreciation Book value Balance as of January 1, 2012: Cost Accumulated depreciation Book value Change in book value: Capital expenditures Assets available for use Acquisitions Disposals and sales Depreciation Impairments Transfer to assets classiﬁed as held for sale Reclassiﬁcations Translation differences Total changes Balance as of December 31, 2012: Cost Accumulated depreciation Book value total 7,880 (4,921) 2,959 618 − − (26) (571) (63) (25) (112) (179) 7,692 (4,912) 2,780 total 7,812 (4,798) 3,014 804 − 17 (92) (623) (59) (25) (29) (48) (55) 7,880 (4,921) 2,959 Land with a book value of EUR 133 million at December 31, 2013 (2012: EUR 152 million) is not depreciated. Property, plant and equipment includes lease assets with a book value of EUR 187 million at December 31, 2013 (2012: EUR 248 million). The expected useful lives of property, plant and equipment are as follows: Buildings Machinery and installations Other equipment from 5 to 50 years from 3 to 20 years from 1 to 10 years 158 Annual Report 2013 11 Group ﬁnancial statements 11.9 - 11.9 11 11 Goodwill The changes in 2012 and 2013 were as follows: Cash ﬂow projections of Respiratory Care & Sleep Management, Imaging Systems, Patient Care & Clinical Informatics and Professional Lighting Solutions for 2013 were based on the following key assumptions (based on the annual impairment test performed in the second quarter): 2012 2013 in % Balance as of January 1: Cost Amortization and impairments Book value Changes in book value: Acquisitions Purchase price allocation adjustment Impairments Divestments and transfers to assets classiﬁed as held for sale Translation differences Balance as of December 31: Cost Amortization and impairments Book value 9,224 9,119 (2,208) (2,171) 7,016 6,948 100 (2) − 4 (4) (26) (6) (55) (160) (363) 9,119 8,596 (2,171) (2,092) 6,948 6,504 The movement of EUR 55 million in Divestments and transfers to assets classiﬁed as held for sale mainly relate to divestments in the Healthcare sector. Acquisitions in 2012 include goodwill related to the acquisition of Indal for EUR 100 million. In addition, goodwill changed due to the ﬁnalization of purchase price accounting related to acquisitions in the prior year. For impairment testing, goodwill is allocated to (groups of) cash- generating units (typically one level below operating sector level), which represents the lowest level at which the goodwill is monitored internally for management purposes. Goodwill allocated to the cash-generating units Respiratory Care & Sleep Management, Imaging Systems, Patient Care & Clinical Informatics and Professional Lighting Solutions is considered to be signiﬁcant in comparison to the total book value of goodwill for the Group at December 31, 2013. The amounts allocated are presented below: Respiratory Care & Sleep Management Imaging Systems Patient Care & Clinical Informatics Professional Lighting Solutions 2012 2013 1,706 1,482 1,331 1,337 1,544 1,414 1,271 1,266 The basis of the recoverable amount used in the annual (performed in the second quarter) and trigger-based impairment tests for the units disclosed in this note is the value in use. Key assumptions used in the impairment tests for the units were sales growth rates, income from operations and the rates used for discounting the projected cash ﬂows. These cash ﬂow projections were determined using management’s internal forecasts that cover an initial period from 2013 to 2017 that matches the period used for our strategic process. Projections were extrapolated with stable or declining growth rates for a period of 5 years, after which a terminal value was calculated. For terminal value calculation, growth rates were capped at a historical long-term average growth rate. The sales growth rates and margins used to estimate cash ﬂows are based on past performance, external market growth assumptions and industry long-term growth averages. Income from operations in all units is expected to increase over the projection period as a result of volume growth and cost efﬁciencies. compound sales growth rate1) initial forecast period extra- polation period2) used to calculate terminal value pre-tax discount rates Respiratory Care & Sleep Management Imaging Systems Patient Care & Clinical Informatics Professional Lighting Solutions 4.9 3.9 3.7 3.4 2.7 2.7 11.3 12.4 4.1 3.5 2.7 13.2 7.4 5.4 2.7 12.8 1) Compound sales growth rate is the annualized steady growth rate over the forecast period 2) Also referred to later in the text as compound long-term sales growth rate The assumptions used for the 2012 cash ﬂow projections were as follows: in % compound sales growth rate1) initial forecast period extra- polation period2) used to calculate terminal value pre-tax discount rates Respiratory Care & Sleep Management Imaging Systems Patient Care & Clinical Informatics Professional Lighting Solutions 8.0 3.4 5.8 2.9 2.7 2.7 11.2 12.8 6.5 4.1 2.7 13.2 6.6 5.3 2.7 13.0 1) Compound sales growth rate is the annualized steady growth rate over the forecast period 2) Also referred to later in the text as compound long-term sales growth rate Among the mentioned units, Respiratory Care & Sleep Management and Professional Lighting Solutions have the highest amount of goodwill and the lowest excess of the recoverable amount over the carrying amount. The headroom of Respiratory Care & Sleep Management was estimated at EUR 660 million, the headroom of Professional Lighting Solutions at EUR 670 million. The increase in the headroom of Professional Lighting Solutions compared to the annual impairment test 2012, in which the headroom approximated the carrying value, is mainly explained by increased forecasted proﬁtability assumptions driven by gross margin improvements. The following changes could, individually, cause the value in use to fall to the level of the carrying value: increase in pre-tax discount rate, basis points decrease in long-term growth rate, basis points decrease in terminal value amount, % Respiratory Care & Sleep Management Professional Lighting Solutions 290 550 290 520 39 39 Annual Report 2013 159 12 11 Group ﬁnancial statements 11.9 - 11.9 The results of the annual impairment test of Imaging Systems and Patient Care & Clinical Informatics have indicated that a reasonably possible change in key assumptions would not cause the value in use to fall to the level of the carrying value. Impairment charge 2013 In the fourth quarter, the updated impairment test for Consumer Luminaires resulted in EUR 26 million impairment. This was mainly a consequence of reduced growth rate due to slower anticipated recovery of certain markets and introduction delays of new product ranges. The pre-tax discount rate applied to the most recent cash ﬂow projection is 13.5%. The pre-tax discount rate applied in the previous projection was 13.4%. Compared to the previous impairment test there has been no change in the organization structure which impacts how goodwill is allocated to this cash-generating unit. After the impairment charge mentioned above the estimated recoverable amount for this cash-generating unit approximates the carrying value. Consequently, any adverse change in key assumptions would, individually, cause a further impairment to be recognized. Remaining goodwill allocated to Consumer Luminaires at December 31, 2013 amounts to EUR 106 million. Additional information 2013 In addition, other units, are sensitive to ﬂuctuations in the assumptions as set out above. Based on the annual impairment test, it was noted that the headroom for the cash-generating unit Home Monitoring was EUR 76 million. An increase of 280 points in the pre-tax discounting rate, a 560 basis points decline in the compound long-term sales growth rate or a 38% decrease in terminal value would cause its value in use to fall to the level of its carrying value. The goodwill allocated to Home Monitoring at December 31, 2013 amounts to EUR 35 million. Based on the annual impairment test, it was noted that with regard to the headroom for the cash-generating unit Lumileds, the estimated recoverable amount approximates the carrying value of the cash- generating unit. Consequently, any adverse change in key assumptions would, individually, cause an impairment to be recognized. The goodwill allocated to Lumileds at December 31, 2013 amounts to EUR 127 million . Please refer to note 2, Information by sector and main country for a speciﬁcation of goodwill by sector. 12 Intangible assets excluding goodwill The changes were as follows: other intangible assets product development software total Balance as of January 1, 2013: Cost 5,868 1,584 369 7,821 (2,972) 2,896 (817) 767 (301) (4,090) 68 3,731 19 15 (387) (50) 5 (28) (118) 8 (536) 357 − (213) (33) 30 − (37) (2) 406 15 (637) (85) − − 5 (9) (25) 1 78 (1) (1) − (38) (144) 9 (11) (469) Amortization/ impairments Book value Changes in book value: Additions Acquisitions Amortization Impairments Reversal of impairment Divestments and transfers to assets classiﬁed as held for sale Translation differences Other Total changes Balance as of December 31, 2013: Cost 5,533 1,761 344 7,638 Amortization/ impairments Book Value (3,173) 2,360 (916) 845 (287) (4,376) 57 3,262 160 Annual Report 2013 11 Group ﬁnancial statements 11.9 - 11.9 13 other intangible assets product Other intangible assets consist of: development software total Balance as of January 1, 2012: Cost 5,857 1,437 369 7,663 (2,593) 3,264 (793) 644 (281) (3,667) 88 3,996 11 347 29 387 137 (455) (17) (42) (2) (368) − (190) (30) (10) 6 123 − 137 (44) (689) (2) − (3) (49) (52) 1 (20) (265) Amortization/ impairments Book value Changes in book value: Additions Acquisitions and purchase price allocation adjustments Amortization Impairments Translation differences Other Total changes Balance as of December 31, 2012: Cost 5,868 1,584 369 7,821 Amortization/ impairments Book value (2,972) 2,896 (817) 767 (301) (4,090) 68 3,731 The additions for 2013 contain internally generated assets of EUR 357 million and EUR 30 million for product development and software respectively (2012: EUR 347 million, EUR 29 million). The impairment charges in 2013 include an impairment charge of EUR 24 million in Imaging Systems, which relate to capitalized product development for EUR 7 million and other intangibles for EUR 17 million. The impairment charge is based on a trigger-based test on a speciﬁc business unit in Imaging Systems. A change in the business outlook coming from a slower than expected sales ramp up resulted in the mentioned impairment charge. The basis of the recoverable amount used in this test is the value in use and a pre-tax discount rate of 9,6% is applied. After the impairment charge the carrying value of the related intangible assets is zero. The impairment charges in 2013 includes an impairment charge of EUR 32 million for customer relationships in Consumer Luminaires. The charge is based on a trigger-based test on speciﬁc mature markets following the initiated turnaround plan, reconsidering product ranges and growth rates. The basis of the recoverable amount used in this test is the value in use and a pre-tax discount rate of 11.4% is applied. After the impairment charge the carrying value of the related intangible assets is zero. The acquisitions through business combinations in 2012 mainly consist of the acquired intangible assets of Indal for EUR 134 million. The amortization of intangible assets is speciﬁed in note 3, Income from operations. The impairment charges in 2012 for other intangibles mainly relates to brand names in Professional Lighting Solutions. As part of the rationalization of the go-to-market model in Professional Lighting Solutions, the Company decided to discontinue the use of several brands which resulted in the mentioned impairment charge. The impairment of product development of EUR 30 million relates to various projects in all three operating sectors. December 31, 2012 December 31, 2013 amortization/ impairments gross amortization/ impairments gross Brand names 966 (374) 909 (424) Customer relationships Technology Other 3,045 1,759 98 5,868 (1,318) 2,856 (1,202) 1,678 (78) 90 (2,972) 5,533 (1,447) (1,226) (76) (3,173) The estimated amortization expense for other intangible assets for each of the next ﬁve years is: 2014 2015 2016 2017 2018 310 283 253 225 217 The expected useful lives of the intangible assets excluding goodwill are as follows: Brand names Customer relationships Technology Other Software Product development 2-20 years 2-25 years 3-20 years 1-8 years 1-3 years 3-5 years The expected weighted average remaining life of other intangible assets is 10.3 years as of December 31, 2013 (2012: 11.2 years). The capitalized product development costs for which amortization has not yet commenced amounted to EUR 356 million (2012: EUR 361 million). At December 31, 2013 the carrying amount of customer relationships of Respiratory Care & Sleep Management was EUR 459 million with a remaining amortization period of 10.2 years. 13 Non-current receivables Non-current receivables include receivables with a remaining term of more than one year. Annual Report 2013 161 14 15 16 17 18 11 Group ﬁnancial statements 11.9 - 11.9 14 Other non-current ﬁnancial assets The changes during 2013 were as follows: availa- ble-for- sale ﬁnancial assets loans and re- ceivables held-to- maturity invest- ments ﬁnancial assets at fair value through proﬁt or loss total Balance as of January 1, 2013 Changes: Reclassiﬁcations Acquisitions/ additions Sales/ redemptions/ reductions Impairment Transfer to assets classiﬁed as held for sale Value adjustments Translation and exchange differences Balance as of December 31, 2013 232 267 6 17 (11) (8) 37 13 (6) (2) (62) (30) 17 1 3 − 1 − − − − 47 549 − − (8) − 43 31 (25) (10) − (92) (9) 9 1 (8) (1) (1) (9) 192 272 3 29 496 Available-for-sale ﬁnancial assets The Company’s investments in available-for-sale ﬁnancial assets mainly consist of investments in common stock of companies in various industries. An amount of EUR 62 million has been reclassiﬁed as assets held for sale in relation to the agreed contribution to the Dutch Pension Fund (please refer to note 30, Post-employment beneﬁts and note 36, Subsequent events). Loans and receivables During 2013 loans with face value EUR 30 million were transferred to assets held for sale in relation to the agreed contribution to the Dutch Pension Fund (please refer to note 30, Post-employment beneﬁts and note 36, Subsequent events). Financial assets at fair value through proﬁt or loss The reduction of ﬁnancial assets at fair value through proﬁt and loss includes certain ﬁnancial instruments that Philips received in exchange for the transfer of its television activities. The initial value of EUR 17 million was adjusted by EUR 11 million during 2012 and EUR 6 million in 2013 reported under Value adjustments. As of December 31, 2013 the fair value reported was nil. On January 20, 2014, Philips has signed a term sheet to transfer its remaining 30% stake in TP Vision, which will also impact the above commitments. For further information, please refer to note 36, Subsequent events. In 2010 Philips sold its entire holding of common shares in NXP Semiconductors B.V. (NXP) to Philips Pension Trustees Limited (herein referred to as “UK Pension Fund”). As a result of this transaction the UK Pension Fund obtained the full legal title and ownership of the NXP shares, including the entitlement to any future dividends and the proceeds from any sale of shares. From the date of the transaction, the NXP shares became an integral part of the plan assets of the UK Pension Fund. The purchase agreement with the UK Pension Fund includes an arrangement that may entitle Philips to a cash payment from the UK Pension Fund on or after September 7, 2014, if the total value yielded by the NXP shares has increased by this date to a level in excess of a predetermined threshold, which at the time of the transaction was substantially above the transaction price, and the UK Pension Fund is in a surplus (on a swaps basis) on September 7, 2014. The arrangement qualiﬁes as a ﬁnancial instrument and is reported under Other non-current ﬁnancial assets. The Trustees of the UK Pension Fund have been selling the NXP shares in a number of transactions since 2010. The remaining number of NXP shares 162 Annual Report 2013 were sold in the course of 2013 and the total sale proceeds of the NXP shares exceeded the predetermined threshold. However as of December 31, 2013 the UK Pension Fund was not in surplus (on the agreed swaps basis). The fair value of the arrangement was estimated to be EUR 14 million as of December 31, 2012. As of December 31, 2013 management’s best estimate of the fair value of the arrangement is EUR 7 million, based on the current funded status as of December 31, 2013 (swaps basis) and the economic and demographic risks of the UK Pension Fund. The change in fair value in 2013 is reported under Value adjustments in the table above and also recognized in Financial income and expense. 15 Other non-current assets Other non-current assets in 2013 are comprised of prepaid pension costs of EUR 5 million (2012: EUR 7 million) and prepaid expenses of EUR 58 million (2012: EUR 87 million). For further details see note 30, Post-employment beneﬁts. 16 Inventories Inventories are summarized as follows: Raw materials and supplies Work in process Finished goods 2012 2013 1,039 1,029 513 375 1,943 1,836 3,495 3,240 During 2013, inventories associated with the Audio, Video, Multimedia and Accessories (AVM&A) business have been reclassiﬁed to Assets held for sale. For more details, please refer note 7, Discontinued operations and other assets classiﬁed as held for sale. The write-down of inventories to net realizable value amounted in 2013 to EUR 199 million (2012: EUR 273 million). The write-down is included in cost of sales. 17 Other current assets Other current assets include prepaid expenses of EUR 354 million (2012: EUR 337 million). 18 Current receivables The accounts receivable, net, per sector are as follows: Healthcare Consumer Lifestyle Lighting Innovation, Group & Services 2012 2013 1,967 1,978 865 743 1,364 1,567 138 132 4,334 4,420 The aging analysis of accounts receivable, net, is set out below: current overdue 1-30 days overdue 31-180 days overdue > 180 days 2012 2013 3,624 3,671 272 298 140 287 305 157 4,334 4,420 A large part of overdue trade accounts receivable relates to public sector customers with slow payment approval processes. The allowance for doubtful accounts receivable has been primarily established for receivables that are past due. 11 Group ﬁnancial statements 11.9 - 11.9 19 The changes in the allowance for doubtful accounts receivable are as follows: The following transactions took place resulting from employee option and share plans: 2011 2012 2013 2012 2013 Balance as of January 1 Additions charged to income Deductions from allowance1) Other movements Balance as of December 31 264 20 (31) (20) 233 233 11 (43) 1 202 202 24 (23) (21) 182 1) Write-offs for which an allowance was previously provided 19 Equity Common shares As of December 31, 2013, the issued and fully paid share capital consists of 937,845,789 common shares, each share having a par value of EUR 0.20. In June 2013, Philips settled a dividend of EUR 0.75 per common share, representing a total value of EUR 678 million. Shareholders could elect for a cash dividend or a share dividend. Approximately 59.8% of the shareholders elected for a share dividend, resulting in the issuance of 18,491,337 new common shares. The settlement of the cash dividend resulted in a payment of EUR 272 million. The following table shows the movements in the outstanding number of shares; Share movement schedule Shares acquired 5,147 3,984 Average market price EUR 17.86 EUR 22.51 Amount paid EUR 0 million EUR 0 million Shares delivered Average market price 4,844,898 EUR 24.39 8,066,511 EUR 28.35 Amount received EUR 118 million EUR 229 million Total shares in treasury at year-end 28,712,954 20,650,427 Total cost EUR 847 million EUR 618 million In order to reduce share capital, the following transactions took place: 2012 2013 Shares acquired 46,865,485 27,807,372 Average market price EUR 16.41 EUR 22.69 Amount paid EUR 769 million EUR 631 million Reduction of capital stock Total shares in treasury at year-end 82,364,590 37,778,510 13,828,733 3,857,595 2012 2013 Total cost EUR 256 million EUR 100 million Balance as of January 1 926,094,902 914,591,275 Dividend distributed 30,522,107 18,491,337 Purchase of treasury shares (46,870,632) (27,811,356) Re-issuance of treasury shares 4,844,898 8,066,511 Balance as of December 31 914,591,275 913,337,767 Preference shares The ‘Stichting Preferente Aandelen Philips’ has been granted the right to acquire preference shares in the Company. Such right has not been exercised. As a means to protect the Company and its stakeholders against an unsolicited attempt to acquire (de facto) control of the Company, the General Meeting of Shareholders in 1989 adopted amendments to the Company’s articles of association that allow the Board of Management and the Supervisory Board to issue (rights to acquire) preference shares to a third party. As of December 31, 2013, no preference shares have been issued. Option rights/restricted shares The Company has granted stock options on its common shares and rights to receive common shares in the future (see note 31, Share-based compensation). Treasury shares In connection with the Company’s share repurchase programs, shares which have been repurchased and are held in treasury for (i) delivery upon exercise of options, performance and restricted share programs and employee share purchase programs, and (ii) capital reduction purposes, are accounted for as a reduction of shareholders’ equity. Treasury shares are recorded at cost, representing the market price on the acquisition date. When issued, shares are removed from treasury shares on a ﬁrst-in, ﬁrst- out (FIFO) basis. Any difference between the cost and the cash received at the time treasury shares are issued, is recorded in retained earnings. Dividend withholding tax in connection with the Company’s purchase of treasury shares is recorded in retained earnings. Dividend distribution A proposal will be submitted to the General Meeting of Shareholders to pay a dividend of EUR 0.80 per common share, in cash or shares at the option of the shareholder from the 2013 net income. Limitations in the distribution of shareholders’ equity Pursuant to Dutch law, limitations exist relating to the distribution of shareholders’ equity of EUR 1,609 million (2012: EUR 1,480 million). Such limitations relate to common shares of EUR 188 million (2012: EUR 191 million) as well as to legal reserves required by Dutch law included under retained earnings of EUR 1,319 million (2012: EUR 1,161 million), revaluation reserves of EUR 23 million (2012: EUR 54 million), available-for-sale ﬁnancial assets EUR 55 million (2012: EUR 54 million) and cash ﬂow hedges EUR 24 million (2012: EUR 20 million). The unrealized losses related to currency translation differences of EUR 569 million (2012: EUR 93 million), although qualifying as a legal reserve, reduce the distributable amount by their nature. The legal reserve required by Dutch law of EUR 1,319 million included under retained earnings relates to any legal or economic restrictions on the ability of afﬁliated companies to transfer funds to the parent company in the form of dividends. Non-controlling interests Non-controlling interests represent the claims that third parties have on equity of consolidated group companies that are not wholly-owned by the Company. The Company has no material non-controlling interests. The Net income attributable to non-controlling interests amounted to EUR 3 million in 2013 (2012: EUR 5 million). In 2013 Philips reduced its non-controlling interest by EUR 19 million due to the sale of one of its Healthcare subsidiaries in China in which a local shareholder held an ownership percentage of 49%. Objectives, policies and processes for managing capital Philips manages capital based upon the measures net operating capital (NOC), net debt and cash ﬂows before ﬁnancing activities. The Company believes that an understanding of the Philips Group’s ﬁnancial condition is enhanced by the disclosure of net operating capital (NOC), as this ﬁgure is used by Philips’ management to evaluate the capital efﬁciency of the Philips Group and its operating sectors. NOC is deﬁned as: total assets excluding assets from discontinued operations less: (a) cash Annual Report 2013 163 11 Group ﬁnancial statements 11.9 - 11.9 and cash equivalents, (b) deferred tax assets, (c) other (non-)current ﬁnancial assets, (d) investments in associates, and after deduction of: (e) provisions excluding deferred tax liabilities, (f) accounts and notes payable, (g) accrued liabilities, (h) current/non-current liabilities, and (i) trading securities. Net debt is deﬁned as the sum of long- and short-term debt minus cash and cash equivalents. The net debt position as a percentage of the sum of group equity (shareholders’ equity and non-controlling interests) and net debt is presented to express the ﬁnancial strength of the Company. This measure is widely used by management and investment analysts and is NOC composition therefore included in the disclosure. Our net debt position is managed in such a way that we expect to continuously meet our objective to retain our target at A3 rating (Moody’s) and A- rating (Standard and Poor’s). Furthermore, the Group’s objective when managing the net debt position is to fulﬁll our commitment to a stable dividend policy with a 40% to 50% target pay-out from continuing net income. Cash ﬂows before ﬁnancing activities, being the sum of net cash from operating activities and net cash from investing activities, are presented separately to facilitate the reader’s understanding of the Company’s funding requirements. 2011 2012 2013 11,012 3,014 9,393 (2,680) (10,357) 10,382 10,679 2,959 8,921 (2,956) (10,287) 9,316 9,766 2,780 8,699 (2,554) (8,453) 10,238 2011 2012 2013 3,278 582 3,860 3,147 713 12,328 34 12,362 13,075 5 95 2011 760 (1,275) (515) 3,725 809 4,534 3,834 700 11,151 34 11,185 11,885 6 94 2012 2,082 (925) 1,157 3,309 592 3,901 2,465 1,436 11,214 13 11,227 12,663 11 89 2013 1,138 (997) 141 Intangible assets Property, plant and equipment Remaining assets Provisions Other liabilities Net operating capital Composition of net debt to group equity Long-term debt Short-term debt Total debt Cash and cash equivalents Net debt (cash)1) Shareholders’ equity Non-controlling interests Group equity Net debt and group equity Net debt divided by net debt and group equity (in %) Group equity divided by net debt and group equity (in %) 1) Total debt less cash and cash equivalents Composition of cash ﬂows Cash ﬂows from operating activities Cash ﬂows from investing activities Cash ﬂows before ﬁnancing activities 164 Annual Report 2013 11 Group ﬁnancial statements 11.9 - 11.9 20 20 Long-term debt and short-term debt Long-term debt (range of) interest rates average rate of interest amount outstanding 2013 due in 1 year due after 1 year due after 5 years average remaining term (in years) amount outstanding 2012 2,958 2,059 13.7 3,198 USD bonds Convertible debentures Private ﬁnancing 3.8 - 7.8% 5.6% 2,958 0 - 0% 0 - 0% − − − − Bank borrowings 0 - 7.8% 2.0% 466 Other long-term debt 0 - 19.0% 4.4% Finance leases 0.7 - 15.1% 3.8% 5.0% 48 3,472 199 3,671 − − − 260 48 308 54 362 − − 206 − 3,164 145 3,309 − − 203 − 2,262 53 2,315 − − 3.6 1.0 6.3 Corresponding data of previous year 5.2% 3,976 251 3,725 3,357 The following amounts of long-term debt as of December 31, 2013, are due in the next ﬁve years: Short-term debt 12 2 469 52 3,733 243 3,976 3,417 2012 2013 533 25 251 809 207 23 362 592 2014 2015 2016 2017 2018 Total Corresponding amount of previous year 362 42 26 16 910 1,356 619 effective rate 2012 2013 Unsecured USD Bonds Due 5/15/25; 7 3/4% Due 6/01/26; 7 1/5% Due 8/15/13; 7 1/4% Due 5/15/25; 7 1/8% 7.429% 6.885% 6.382% 6.794% 75 126 108 78 Due 3/11/18; 5 3/4%1) 6.066% 948 Due 3/11/38; 6 7/8%1) Due 3/15/22; 3.750%1) Due 3/15/42; 5.000%1) Adjustments2) 7.210% 3.906% 5.273% 758 758 379 (32) 72 120 − 74 907 726 726 363 (30) 3,198 2,958 1) The provisions applicable to these bonds, issued in March 2008 and in March 2012, contain a ‘Change of Control Triggering Event’. If the Company would experience such an event with respect to a series of corporate bonds, the Company may be required to offer to purchase the bonds of the series at a purchase price equal to 101% of the principal amount, plus accrued and unpaid interest, if any. 2) Adjustments relate to issued bond discounts, transaction costs and fair value adjustments for interest rate derivatives Secured liabilities In 2013, none of the long-term and short-term debt was secured by collateral (2012: EUR nil million). Short-term bank borrowings Other short-term loans Current portion of long-term debt During 2013, the weighted average interest rate on the bank borrowings was 6.4% (2012: 7.8%). In the Netherlands, the Company issued personnel debentures with a 5- year right of conversion into common shares of Koninklijke Philips NV. Convertible personnel debentures may not be converted within a period of 3 years after the date of issue. These convertible personnel debentures were available to most employees in the Netherlands and were purchased by them with their own funds and were redeemable on demand. The convertible personnel debentures become non-convertible debentures at the end of the conversion period. Although convertible debentures have the character of long-term ﬁnancing, the total outstanding amounts have been classiﬁed as current portion of long-term debt. At December 31, 2013 the conversion period ended, so none were outstanding (2012: EUR 12 million). The conversion price varied between EUR 14.2 and EUR 24.6 with various conversion periods ending between January 1, 2013 and December 31, 2013. As of January 1, 2009, Philips no longer issues these debentures. Furthermore, Philips has a USD 2.5 billion Commercial Paper Program and a EUR 1.8 billion revolving credit facility that can be used for general corporate purposes and as a backstop of its commercial paper program. In January 2013, the EUR 1.8 billion facility was extended by 2 years until February 18, 2018. As of December 31, 2013 Philips did not have any loans outstanding under either facility. Annual Report 2013 165 21 11 Group ﬁnancial statements 11.9 - 11.9 21 Provisions 2012 2013 long- term short- term long- term short- term Provisions for deﬁned-beneﬁt plans (see note 30) 808 52 754 Other postretirement beneﬁts (see note 30) Postemployment beneﬁts and obligatory severance payments Product warranty 233 17 200 56 90 26 229 41 59 Environmental provisions 330 45 249 Restructuring-related provisions Onerous contract provisions Other provisions 108 67 427 277 61 130 75 40 485 51 14 25 207 62 128 53 111 Environmental provisions The environmental provisions include accrued losses recorded with respect to environmental remediation. Approximately half of this provision is expected to be utilized within the next ﬁve years. The remaining portion relates to longer-term remediation activities. The changes in this provision are as follows: 2011 2012 2013 Balance as of January 1 250 305 375 Changes: Additions Utilizations Releases Changes in discount rate Accretion Translation differences Purchase price allocation adjustment Changes in consolidation 48 (15) (15) 25 6 6 − − 48 (22) (1) 18 6 (4) − 25 375 30 (21) (16) (40) 6 (8) (15) − 311 2,119 837 1,903 651 Balance as of December 31 305 Post-employment beneﬁts and obligatory severance payments The provision for post-employment beneﬁts covers beneﬁts provided to former or inactive employees after employment but before retirement, including salary continuation, supplemental unemployment beneﬁts and disability-related beneﬁts. The decrease of provision due to changes in discount rate in 2013 relates to an overall increase of the market rates used in discounting. For more details on the main assumptions underlying environmental provisions reference is made to note 26, Contingent assets and liabilities. 2011 2012 2013 Restructuring-related provisions Balance as of January 1 116 104 82 Changes: Additions Utilizations Translation differences Changes in consolidation Balance as of December 31 29 (41) − − 104 12 (37) 1 2 82 15 (29) (1) (1) 66 The provision for obligatory severance payments covers the Company commitment to pay employees a lump sum upon the employee’s dismissal or resignation. In the event that a former employee has passed away, the Company may have a commitment to pay a lump sum to the deceased employee’s relatives. The Company expects the provision will be utilized mostly within the next three years. Product warranty The provision for product warranty reﬂects the estimated costs of replacement and free-of-charge services that will be incurred by the Company with respect to products sold. The Company expects the provision will be utilized mainly within the next year. The changes in the provision for product warranty are as follows: The most signiﬁcant projects in 2013 In 2013, the most signiﬁcant restructuring projects related to Lighting and were driven by the industrial footprint rationalization. • In Healthcare, the largest projects were undertaken in Customer Services, Home Healthcare Solutions and Imaging Systems in the United States, Italy and the Netherlands to reduce the operating costs and simplify the organization. • Consumer Lifestyle restructuring charges were mainly related to Personal Care (primarily in the Netherlands and Austria) and Coffee (mainly Italy). • Restructuring projects at Lighting centered on Luminaires businesses and Light Sources & Electronics, the largest of which took place in the United States, France and Belgium. Innovation, Group & Services restructuring projects mainly focused on the Financial Operations Service Unit, primarily in Italy, France and the United States. • The Company expects the provision will be utilized mainly within the next year. The movements in the provisions and liabilities for restructuring in 2013 are presented by sector as follows: Dec. 31, 2012 addi- tions utilized re- leased other changes1) Dec. 31, 2013 2011 2012 2013 Healthcare 77 14 (50) (23) Consumer Lifestyle Lighting IG&S 48 198 62 11 64 16 385 105 (27) (110) (30) (217) (10) (19) (15) (67) (1) (1) (3) 2 (3) 17 21 130 35 203 1) Other changes primarily relate to translation differences and transfers between sectors The most signiﬁcant projects in 2012 In 2012, the most signiﬁcant restructuring projects related to Lighting and Healthcare and were driven by our change program Accelerate!. Balance as of January 1 404 378 319 Changes: Additions Utilizations Transfer to assets classiﬁed as held for sale Translation differences Changes in consolidation 444 370 350 (470) (427) (363) − 1 (1) − (4) 2 (24) (16) − Balance as of December 31 378 319 266 166 Annual Report 2013 • In Healthcare, the largest projects were undertaken in Imaging Systems and Patient Care & Clinical Informatics in various locations in the United States, the Netherlands and Germany to reduce the operating costs and simplify the organization. • Consumer Lifestyle restructuring charges were mainly related to Lifestyle Entertainment (primarily in Hong Kong and the United States) and Coffee (mainly Italy). • Restructuring projects at Lighting centered on Luminaires businesses and Light Sources & Electronics, the largest of which took place in the Netherlands, Belgium and in various locations in the US. Innovation, Group & Services restructuring projects focused on the IT and Financial Operations Service Units (primarily in the Netherlands), Group & Regional Overheads (mainly in the Netherlands and Italy) and Philips Innovation Services (in the Netherlands and Belgium). • The movements in the provisions and liabilities for restructuring in 2012 are presented by sector as follows: Dec. 31, 2011 addi- tions utilized re- leased other changes1) Dec. 31, 2012 Healthcare 18 100 (29) (7) (5) 77 Consumer Lifestyle Lighting IG&S 39 52 60 58 225 67 (41) (61) (47) 169 450 (178) (8) (16) (10) (41) − (2) (8) 48 198 62 (15) 385 1) Other changes primarily relate to translation differences and transfers between sectors The most signiﬁcant projects in 2011 In 2011, the most signiﬁcant restructuring projects related to Lighting and Innovation, Group & Services were driven by our change program Accelerate!. • In Healthcare, the largest projects were undertaken in Home Healthcare Solutions, Imaging Systems and Patient Care & Clinical Informatics in various locations in the United States to reduce the operating costs and simplify the organization. • Consumer Lifestyle restructuring charges mainly relate to our remaining Television operations in Europe. • Restructuring projects at Lighting are driven by our change program • Accelerate!. In addition projects centered on the Luminaires business and Light Sources & Electronics, the largest of which took place in Brazil, the Netherlands and in various locations in the US. Innovation, Group & Services restructuring projects focused on the Global Service Units (primarily in the Netherlands), Group & Regional Overheads (mainly the Netherlands, Brazil and Italy) and Philips Design (Netherlands). The movements in the provisions and liabilities for restructuring in 2011 are presented by sector as follows: Dec. 31, 2010 addi- tions utilized re- leased other changes1) Dec. 31, 2011 Healthcare 33 16 (17) (14) − 18 Consumer Lifestyle Lighting IG&S 75 70 48 25 44 37 (56) (47) (15) 226 122 (135) (6) (13) (14) (47) 1 (2) 4 3 39 52 60 169 1) Other changes primarily relate to translation differences and transfers between sectors Onerous contract provisions The onerous contract provisions include provisions for the loss recognized upon signing the agreement with TPV Technology Limited for the Television business of EUR 7 million (2012: EUR 24 million), provisions for unfavorable supply contracts as part of divestment transactions of EUR 38 11 Group ﬁnancial statements 11.9 - 11.9 million (2012: EUR 60 million), onerous (sub)lease contracts of EUR 38 million (2012: EUR 35 million) and expected losses on existing projects/ orders of EUR 10 million (2012: EUR 9 million). The Company expects the provision will be utilized mostly within the next three years. The changes in the provision for onerous contract are as follows: 2011 2012 2013 Balance as of January 1 − 248 128 Changes: Additions Utilizations Releases Reclassiﬁcation 270 (22) − − 142 (277) (6) 21 Balance as of December 31 248 128 34 (64) (4) (1) 93 Other provisions The main elements of other provisions are: provision for employee jubilee funds totaling EUR 76 million (2012: EUR 76 million), self-insurance liabilities of EUR 56 million (2012: EUR 61 million), liabilities related to business combinations totaling EUR 9 million (2012: EUR 36 million), provisions for rights of return of EUR 45 million (2012: EUR 45 million), provisions in respect of outstanding litigation totaling EUR 236 million (2012: EUR 238 million), provision for possible taxes/social security of EUR 65 million (2012: EUR 28 million) and provision for decommissioning costs of EUR 33 million (2012: EUR nil million). In 2013, EUR 20 million of releases related to provision for business combinations. The reclassiﬁcation in 2013 includes mainly liabilities related to decommissioning costs reclassiﬁed to provisions from other (non)current liabilities and possible taxes transferred to provisions from other non- current ﬁnancial assets. The reclassiﬁcation in 2012 includes mainly liabilities for rights of return which were recognized in previous years in accrued liabilities. There are provisions in respect of certain outstanding litigation within various operations, of which management expects the outcomes of these disputes to be resolved within the forthcoming ﬁve years. The actual outcome of these disputes and the timing of the resolution cannot be estimated by the Company at this time. The further information ordinarily required by IAS 37, ‘Provisions, contingent liabilities and contingent assets’ has not been disclosed on the grounds that it can be expected to seriously prejudice the outcome of the disputes. Less than a half of provision for employee jubilee funds and provision for possible taxes/social security is expected to be utilized within next ﬁve years. Provision for self-insurance liabilities and provision for decommissioning costs are expected to be used mainly within the next ﬁve years. All other provisions are expected to be utilized within the next three years, except for provision for rights of return, which the Company expects to use within the next year. 2011 2012 2013 Balance as of January 1 310 389 557 Changes: Additions Utilizations Releases Reclassiﬁcation Liabilities directly associated with assets held for sale Translation differences Changes in consolidation 201 396 (138) (260) (9) − (6) (4) 35 (27) 67 − (9) 1 190 (148) (55) 84 (3) (29) − Balance as of December 31 389 557 596 Annual Report 2013 167 22 23 24 25 11 Group ﬁnancial statements 11.9 - 11.9 22 Other non-current liabilities Other non-current liabilities are summarized as follows: Accrued pension costs Income tax payable Decommissioning cost Deferred income Other tax liability Other liabilities 2012 2013 1,166 813 − 23 194 488 134 1 − 214 443 97 2,005 1,568 The decrease in the accrued pension costs is mainly attributable to the US deﬁned beneﬁt plan. See also note 30, Post-employment beneﬁts. In 2013, liabilities related to decommissioning cost were reclassiﬁed from (non)current liabilities to other provisions. For further details on tax related liabilities refer to note 5, Income taxes. 23 Accrued liabilities Accrued liabilities are summarized as follows: 2012 2013 (CRT) industry. In addition, the European Commission has ordered Philips and LG Electronics to be jointly and severally liable to pay a ﬁne of EUR 392 million for an alleged violation of competition rules by LG.Philips Displays (LPD), a 50/50 joint venture between the Company and LG Electronics. In 2006, LPD went bankrupt. The aggregate of the amount of EUR 313 million and EUR 196 million (being 50% of the ﬁne related to LPD) has been recorded under Other liabilities in December 2012 and paid in Q1 2013. 25 Contractual obligations Contractual cash obligations at December 31, 20131) payments due by period less than 1 year total 1-3 years 3-5 years after 5 years Long-term debt2) 3,472 308 2 900 2,262 Finance lease obligations Short-term debt Operating leases Derivative liabilities Interest on debt3) Purchase obligations4) Trade and other payables 241 230 1,017 337 2,421 61 230 237 112 185 78 − 316 93 346 34 − 182 92 315 184 81 76 26 2,462 2,462 − − 68 − 282 40 1,575 1 − Personnel-related costs: - Salaries and wages - Accrued holiday entitlements - Other personnel-related costs Fixed-asset-related costs: - Gas, water, electricity, rent and other Distribution costs Sales-related costs: - Commission payable - Advertising and marketing-related costs - Other sales-related costs Material-related costs Interest-related accruals Deferred income Other accrued liabilities 590 560 10,364 3,676 911 1,549 4,228 192 148 69 114 52 149 118 186 75 824 654 184 130 61 104 24 159 98 175 57 812 466 1) Data in this table is undiscounted 2) Long-term debt includes short-term portion of long-term debt and excludes ﬁnance lease obligations 3) Approximately 20% of the debt bears interest at a ﬂoating rate. Majority of the interest payments on variable interest rate loans in the table above reﬂect market forward interest rates at the period end and these amounts may change as market interest rate changes 4) Philips has commitments related to the ordinary course of business which in general relate to contracts and purchase order commitments for less than 12 months. In the table, only the commitments for multiple years are presented, including their short-term portion The long-term operating lease commitments are mainly related to the rental of buildings. A number of these leases originate from sale-and- leaseback arrangements. Operating lease payments under sale-and- leaseback arrangements for 2013 totaled EUR 42 million (2012: EUR 35 million). 3,171 2,830 The remaining minimum payments from operating leases originating from sale-and-leaseback arrangements are as follows: 2014 2015 2016 2017 2018 Thereafter 42 37 36 35 34 171 24 Other current liabilities Other current liabilities are summarized as follows: Advances received from customers on orders not covered by work in process Other taxes including social security premiums Other liabilities 2012 2013 308 176 1,071 240 193 649 1,555 1,082 Other liabilities include EUR 530 million (2012: EUR 442 million) accrued customer rebates that cannot be offset with accounts receivables for those customers. On December 5, 2012 the Company announced that it received a ﬁne of EUR 313 million from the European Commission following an investigation into alleged violation of competition rules in the Cathode-Ray Tubes 168 Annual Report 2013 11 Group ﬁnancial statements 11.9 - 11.9 26 Finance lease liabilities Expiration per period in millions of euros 2012 present value of mini- mum lease pay- ments future mini- mum lease pay- ments future mini- mum lease pay- ments interest 2013 present value of mini- mum lease pay- ments interest 2013 Total amounts committed Less than one year Between one and ﬁve years 73 7 65 61 7 54 After ﬁve years 137 25 113 112 20 92 88 298 23 55 65 243 68 241 15 42 53 199 2012 Total amounts committed Less than one year Between one and ﬁve years After ﬁve years business- related guarantees credit- related guarantees 292 107 117 68 295 113 114 68 41 19 7 15 27 11 − 16 total 333 126 124 83 322 124 114 84 Less than one year Between one and ﬁve years More than ﬁve years Philips entered into contracts with several venture capitalists where it committed itself to make, under certain conditions, capital contributions to investment funds to an aggregated amount of EUR 40 million (2012: EUR 48 million) until June 30, 2021. As at December 31, 2013 capital contributions already made to these investment funds are recorded as available-for-sale ﬁnancial assets within Other non-current ﬁnancial assets. Based on its 30% share in the TP Vision venture, Philips had various commitments to provide further funding to the TP Vision venture at December 31, 2013 (see note 32, Related-party transactions). On 20 January 2014, Philips has signed a term sheet to transfer its remaining 30% stake in the TP Vision venture, which will also impact the above commitments (see note 36, Subsequent events). See also note 7, Discontinued operations and other assets classiﬁed as held for sale for further details on the Television business divestment. 26 Contingent assets and liabilities Contingent assets In 1996, CIEM (Labor Union of Manaus) representing, among other companies Philips Brazil, ﬁled a ﬁscal claim against Manaus Free Trade Zone Superintendence (SUFRAMA), in order to obtain a judicial declaration of the illegality and unconstitutionality of the Public Price tax, charged by SUFRAMA. The Lower Court ruled favorable for Philips. In September 2007, Philips requested the Settlement of Declaratory Judgment, in order to refund the amounts unduly paid to SUFRAMA during 1992 to 1999. In August 2011, a ruling was issued to approve Philips credit for the amount of EUR 36 million (BRL 118 million). The estimated amount as of year-end 2013 is EUR 40 million (BRL 130 million), the increase explained by interest. In December 2008, SUFRAMA ﬁled the appeal against the decision issued in the records of the Settlement of Declaratory Judgment. The Regional Court unanimously upheld the Lower Court decision to reject SUFRAMA’s appeal. SUFRAMA ﬁled two appeals against the Regional Court decision. One to the Superior Court of Justice (STJ) and the other to Supreme Court. Both appeals were denied. SUFRAMA ﬁled a Bill of Review against the decision that denied both appeals. The appeal was admitted in STJ. The judgment is pending since October 2013. Final decision is expected in two years. Contingent liabilities Guarantees Philips’ policy is to provide guarantees and other letters of support only in writing. Philips does not stand by other forms of support. At the end of 2013, the total fair value of guarantees recognized by Philips in other non- current liabilities amounted to less than EUR 1 million. The following table outlines the total outstanding off-balance sheet credit-related guarantees and business-related guarantees provided by Philips for the beneﬁt of unconsolidated companies and third parties as at December 31, 2013. Environmental remediation The Company and its subsidiaries are subject to environmental laws and regulations. Under these laws, the Company and/or its subsidiaries may be required to remediate the effects of certain chemicals on the environment. The Company accrues for losses associated with environmental obligations when such losses are probable and reliably estimable. Such amounts are recognized on a discounted basis since they reﬂect the present value of estimated future cash ﬂows. Provisions for environmental remediation can change signiﬁcantly due to the emergence of additional information regarding the extent or nature of the contamination, the need to utilize alternative technologies, actions by regulatory authorities and changes in judgments, assumptions, and discount rates. The Company and/or its subsidiaries have recognized environmental remediation provisions for sites in various countries. In the United States, subsidiaries of the Company have been named as potentially responsible parties in state and federal proceedings for the clean-up of certain sites. Legal proceedings The Company and certain of its group companies and former group companies are involved as a party in legal proceedings, including regulatory and other governmental proceedings, including discussions on potential remedial actions, relating to such matters as competition issues, commercial transactions, product liability, participations and environmental pollution. In respect of antitrust laws, the Company and certain of its (former) group companies are involved in investigations by competition law authorities in several jurisdictions and are engaged in litigation in this respect. Philips is one of the companies that were inspected by ofﬁcials of the European Commission in December 2013. The European Commission is looking into potential restrictions on online sales of consumer electronic products and small domestic appliances. Philips is fully cooperating with the European Commission. Since the ultimate disposition of asserted claims and proceedings and investigations cannot be predicted with certainty, an adverse outcome could have a material adverse effect on the Company’s consolidated ﬁnancial position, results of operations and cash ﬂows. Provided below are disclosures of the more signiﬁcant cases: Cathode-Ray Tubes (CRT) On November 21, 2007, the Company announced that competition law authorities in several jurisdictions had commenced investigations into possible anticompetitive activities in the Cathode-Ray Tubes, or CRT industry. On December 5, 2012, the European Commission issued a decision imposing ﬁnes on (former) CRT manufacturers including the Company. The European Commission imposed a ﬁne of EUR 313 million on the Company and a ﬁne of EUR 392 million jointly and severally on the Company and LG Electronics, Inc. In total a payable of EUR 509 million was recognized and the ﬁne was paid in the ﬁrst quarter of 2013. The Company has appealed the decision of the European Commission. The Annual Report 2013 169 11 Group ﬁnancial statements 11.9 - 11.9 authorities in Brazil and Hungary are continuing to pursue the matter against Philips and other defendants. Philips will respond to these allegations in 2014. Department of Justice and have continued to cooperate with the authorities in these investigations. On this basis, the Company expects to be immune from governmental ﬁnes. Subsequent to the public announcement of these investigations in 2007, certain Philips group companies were named as defendants in over 50 class action antitrust complaints ﬁled in various federal district courts in the United States. These actions allege anticompetitive conduct by manufacturers of CRTs and seek treble damages on behalf of direct and indirect purchasers of CRTs and products incorporating CRTs. These complaints assert claims under federal antitrust law, as well as various state antitrust and unfair competition laws and may involve joint and several liability among the named defendants. These actions have been consolidated by the Judicial Panel for Multidistrict Litigation for pretrial proceedings in the United States District Court for the Northern District of California. In 2012 a settlement agreement was approved between the Company and counsel for direct purchaser plaintiffs fully resolving all claims of the direct purchaser class and obtaining a complete release by class members. Sixteen individual plaintiffs, principally large retailers of CRT products who sought exclusion from the direct purchaser class settlement, ﬁled separate “opt-out” actions against Philips and other defendants based on the same substantive allegations as the putative class plaintiff complaints. These cases are consolidated for pre-trial purposes with the putative class actions in the Northern District of California and discovery is being coordinated. Philips’ motions to dismiss the complaints of the individual plaintiffs have been denied. Trials on the individual claims have not yet been scheduled. On September 24, 2013 a class of indirect purchasers was certiﬁed pursuant to F.R.C.P. 23. Discovery is proceeding in the indirect purchaser action and a trial on these claims is currently scheduled for 2015. Philips intends to continue to vigorously defend these indirect purchaser and individual lawsuits. In addition, the state attorneys general of California, Florida, Illinois, Oregon and Washington ﬁled actions against Philips and other defendants seeking to recover damages on behalf of the states and, in parens patriae capacity, their consumers. In 2012 the Florida complaint was withdrawn. In 2013 a settlement agreement with the state attorney general of California has been approved. The actions brought by the state attorneys general of Illinois, Oregon and Washington are pending in the respective state courts of the plaintiffs. The Courts have not set trial dates and there is no timetable for the resolution of these cases. Philips intends to continue to vigorously defend these remaining lawsuits. Certain Philips group companies have also been named as defendants, in proposed class proceedings in Ontario, Quebec and British Columbia, Canada, along with numerous other participants in the industry. At this time, no statement of defense has been ﬁled, no certiﬁcation motion has been scheduled and no class proceeding has been certiﬁed as against the Philips defendants. Philips intends to vigorously oppose these claims. Due to the considerable uncertainty associated with certain of these matters, on the basis of current knowledge, the Company has concluded that potential losses cannot be reliably estimated with respect to these matters. These investigations and litigation could have a materially adverse effect on the Company’s consolidated ﬁnancial position, results of operations and cash ﬂows. In addition to the above cases, in 2006 Italian investor Mr. Carlo Vichi ﬁled a claim against Philips for the repayment of a 2002 EUR 200 million loan (plus interest and damages) that was given to an afﬁliate of the CRT joint venture LG.Philips Displays (“LPD”) that went bankrupt in January of 2006. One of the issues in the case was whether LPD’s alleged participation in the CRT cartel as determined by the European Commission was a matter that should have been disclosed to Mr. Vichi. The trial in the case took place in December 2012 and after a period of post-trial brieﬁng, the Delaware Chancery Court ruled in favor of Philips on February 18, 2014. The decision is subject to appeal to the Delaware Supreme Court. Optical Disc Drive (ODD) On October 27, 2009, the Antitrust Division of the United States Department of Justice conﬁrmed that it had initiated an investigation into possible anticompetitive practices in the Optical Disc Drive (ODD) industry. Philips Lite-On Digital Solutions Corp. (PLDS), a joint venture owned by the Company and Lite-On IT Corporation, as an ODD market participant, is included in this investigation. PLDS and the Company have been accepted under the Corporate Leniency program of the US 170 Annual Report 2013 In July 2012, the European Commission issued a Statement of Objections addressed to (former) ODD suppliers including the Company. The European Commission granted the Company immunity from ﬁnes, conditional upon the Company’s continued cooperation. The Company responded to the Statement of Objections both in writing and at an oral hearing. PLDS is also subject to similar investigations outside the US and Europe relating to the ODD market. Where relevant, the Company is cooperating with the authorities. Subsequent to the public announcement of these investigations in 2009, the Company, PLDS and Philips & Lite-On Digital Solutions USA, Inc. (PLDS USA), among other industry participants, were named as defendants in numerous class action antitrust complaints ﬁled in various federal district courts in the United States. These actions allege anticompetitive conduct by manufacturers of ODDs and seek treble damages on behalf of direct and indirect purchasers of ODDs and products incorporating ODDs. These complaints assert claims under federal antitrust law, as well as various state antitrust and unfair competition laws and may involve joint and several liability among the named defendants. These actions have been consolidated for pre-trial proceedings in the United States District Court for the Northern District of California. Consolidated Amended Complaints were ﬁled by direct and indirect purchasers. The defendants’ motions to dismiss these Complaints were denied and Philips has ﬁled Answers to the Complaints. Discovery is proceeding. Plaintiffs ﬁled motions seeking to certify the putative classes of direct and indirect purchasers under F.R.C.P. Rule 23 in May 2013, and Defendants have ﬁled responses opposing class certiﬁcation. Plaintiffs are scheduled to ﬁle reply briefs in February 2014, and oral argument will be scheduled after brieﬁng is complete. In addition, ﬁve individual entities have ﬁled separate actions against the Company, PLDS, PLDS USA and other defendants. The allegations contained in these individual complaints are substantially identical to the allegations in the direct purchaser class complaints. The Company is in the process of submitting answers to these various individual complaints. All of these matters have been consolidated into the action in the Northern District of California for pre-trial purposes and discovery is being coordinated. The Company intends to vigorously defend all of the civil actions in the US courts. Also, in June 2013, the State of Florida ﬁled a separate complaint in the Northern District of California against the Company, PLDS, PLDS USA and other defendants containing largely the same allegations as the class and individual complaints. Florida seeks to recover damages sustained in its capacity as a buyer of ODDs and, in its parens patriae capacity, on behalf of its citizens. This case has been joined with the ODD class action cases in the Northern District of California for pre-trial purposes. The Company intends to seek dismissal of the Florida complaint. The Company and certain Philips group companies have also been named as defendants, in proposed class proceedings in Ontario, Quebec, British Columbia, and Manitoba, Canada along with numerous other participants in the industry. These complaints assert claims against various ODD manufacturers under federal competition laws as well as tort laws and may involve joint and several liability among the named defendants. Philips intends to vigorously defend these lawsuits. Due to the considerable uncertainty associated with these matters, on the basis of current knowledge, the Company has concluded that potential losses cannot be reliably estimated with respect to these matters. These investigations and litigation could have a materially adverse effect on the Company’s consolidated ﬁnancial position, results of operations and cash ﬂows. Smart card chips Philips is part of an investigation by the European Commission into alleged anti-competitive conduct in the period September 2003 to September 2004 relating to the former Philips smart card chips business. This business was part of Philips’ former Product Division Semiconductors, which was divested in 2006. The European Commission issued its Statement of Objections on April 22, 2013. The Company responded to the Statement of Objections both in writing and at a hearing. Based on our current knowledge, the Company does not believe that this investigation will have a materially adverse effect on the Company’s consolidated ﬁnancial position. 27 Cash from (used for) derivatives and current ﬁnancial assets A total of EUR 93 million cash was paid with respect to foreign exchange derivative contracts related to ﬁnancing activities (2012: EUR 47 million outﬂow; 2011: EUR 25 million inﬂow). A total of EUR 8 million was paid with respect to current ﬁnancial assets (2012: EUR 1 million inﬂow; 2011: EUR 1 million inﬂow). 28 Purchase and proceeds from non-current ﬁnancial assets In 2013, there were no signiﬁcant cash ﬂows resulting from investing activities. In 2012, the cash outﬂow was mainly due to loans provided to TPV Technology Limited and TP Vision venture in connection with the divestment of the Television business (EUR 151 million in aggregate). In 2011, the sale of Philips’ interest in TCL Corporation (TCL) and Digimarc generated cash totaling EUR 79 million. 29 Assets in lieu of cash from sale of businesses In 2013, there were no transactions related to the sale of businesses that involved assets in lieu of cash. In 2012, Philips received certain ﬁnancial instruments in exchange for the transfer of its television business. At the date of this transaction the fair value of these ﬁnancial instruments involved an amount of EUR 17 million. In 2011, the Company entered into four transactions with different venture capital partners where certain incubator activities were transferred in exchange for shares in separately established investment entities. The investment entities represented a value of EUR 18 million at the date that these transactions were closed. 30 Post-employment beneﬁts 11 Group ﬁnancial statements 11.9 - 11.9 27 28 29 30 Following the new Collective Labour Agreement with the respective trade unions in 2013 a new funding agreement has been agreed with the Trustees of the Company Pension Fund. Under the new funding agreement, which becomes effective January 1, 2014, the Company has no further ﬁnancial obligation to the Pension Fund other than to pay an agreed ﬁxed contribution for the annual accrual of active members. Although the new funding agreement will de-risk the plan, the annual premium can be subject to variability after ﬁve years due to potential discounts and as a result, the plan continues to be accounted for as a deﬁned beneﬁt plan. The other changes in the plan are a new pensionable age of 67 (was 65) and the introduction of an employee contribution. These changes had practically no impact on the existing deﬁned beneﬁt obligation. For further details we refer to note 36, Subsequent events. United Kingdom The UK plan is executed by a Company Pension Fund. In the UK plan the accrual of new beneﬁts ceased in 2011. A legally mandatory indexation for accrued beneﬁts still applies. The Company does not pay regular contributions, other than an agreed portion of the administration costs. The UK plan assets until September 2013 contained a high concentration of NXP shares. The NXP shares were transferred to the Fund by the Company in 2010 as part of a recovery plan and have by now all been sold by the UK Fund. In 2013 the Trustee of the UK Fund entered into a bulk insurance contract - a buy-in - which provides for payment in respect of a part of the Fund’s pensioners. The asset value related to this buy-in included in the UK plan assets equals the deﬁned-beneﬁt obligation of the related pensioners and is EUR 508 million per December 31, 2013. United States The US deﬁned-beneﬁt plan covers certain hourly workers and salaried workers hired before January 1, 2005. The accrual for salaried workers in the US plan will end per December 31, 2015. The announcement in 2013 of this delayed freeze in the US plan triggered a past service cost gain of EUR 78 million. In the same US plan in 2013 a large group of terminated vested employees accepted a lump-sum offering thus lowering the plan assets and liabilities. The related settlement result was a loss of EUR 31 million. Employee post-employment plans have been established in many countries in accordance with the legal requirements, customs and the local practice in the countries involved. Indexation of beneﬁts is not mandatory. The Company pays contributions for the annual service costs as well as additional contributions to cover a deﬁcit. The assets of the US plan are in a Trust governed by Trustees. The Company sponsors a number of deﬁned-beneﬁt pension plans. The beneﬁts provided by these plans are based on employees’ years of service and compensation levels. The Company also sponsors a limited number of deﬁned-beneﬁt retiree medical plans. The beneﬁts provided by these plans are typically covering a part of the healthcare insurance costs after retirement. Most employees that take part in a Company pension plan however are covered by deﬁned-contribution (DC) pension plans. The largest deﬁned-beneﬁt pension plans are in; • The Netherlands, • The United Kingdom (UK) and • The United States (US). Together these plans account for more than 90% of the total deﬁned- beneﬁt obligation and plan assets. The Netherlands The pension plan in the Netherlands is of a deﬁned-beneﬁt nature. The annual accrual rate in this career average pay plan that covers all employees covered under the Collective Labour Agreement is 1.85% of the pension salary. Executives are in a ‘hybrid plan’ with an accrual rate of 1.25% per service year next to a DC contribution, the level of which depends on the executive grade. Both plans are executed by the Company Pension Fund. Indexation of beneﬁts is conditional and depends among others on the statutory and regulatory funding ratio of the Fund. The Company is required to fund the annual service cost plus surcharges for solvency requirements, costs and a contribution for indexation. The Company is required to pay additional surcharges in case the funded status of the Company Pension Fund drops below an agreed level. The Company is entitled to discounts and refunds if the funded status of the Company Pension Fund exceeds an agreed surplus level. Risks related to deﬁned-beneﬁt plans These deﬁned-beneﬁt plans expose the Company to various demographic and economic risks such as longevity risk, investment risks, currency and interest rate risk and in some cases inﬂation risk. The latter plays a role in the assumed wage increase and in the UK plan where indexation is mandatory. Pension fund Trustees are responsible for and have full discretion over the investment strategy of the plan assets. In general Trustees manage pension fund risks by diversifying the investments of plan assets and by (partially) matching interest rate risk of liabilities. The Company has an active derisking strategy in which it constantly looks for opportunities to reduce the risks associated with its deﬁned beneﬁt plans. Liability driven investment strategies, lump sum cash-out options, buy-ins, buy-outs and the above mentioned change in the funding of the Dutch plan are examples of that strategy. The larger plans are either governed by independent Boards or by Trustees who have a legal obligation to evenly balance the interests of all stakeholders and operate under the local regulatory framework. Balance sheet positions The net balance sheet position presented in this note can be explained as follows: • The surpluses in our plans in The Netherlands, UK as well some other countries are not recognized as a net deﬁned beneﬁt asset because in The Netherlands the current surplus will not bring sufﬁcient future economic beneﬁts to the Company (asset ceiling restrictions) whereas the regulatory framework in the other countries involved explicitly prohibits refunds to the employer. • The deﬁcit of the US deﬁned-beneﬁt plan presented under other liabilities and the provisions of the unfunded plans therefore count for the largest part of the net balance sheet position. The measurement date for all deﬁned-beneﬁt plans is December 31. Annual Report 2013 171 11 Group ﬁnancial statements 11.9 - 11.9 Summary of pre-tax costs for post-employment beneﬁts The below table contains the total of current- and past service costs, admin costs and settlement results as included in operating cost and the interest cost as included in ﬁnancial income and expense. Deﬁned-beneﬁt plans: Pensions Deﬁned-beneﬁt plans included in operating cost included in ﬁnancial expense included in discontinued operations Deﬁned-contribution plans including multi-employer plans included in operating cost included in discontinued operations 2011 2012 2013 253 155 93 5 123 117 6 290 205 85 − 144 139 5 297 223 71 3 142 139 3 Movements in the net liabilities and - assets for deﬁned beneﬁt pension plans: Deﬁned-beneﬁt obligation at the beginning of year 13,294 8,920 22,214 14,433 9,021 23,454 Netherlands other total Netherlands other 2012 2013 total Service cost Interest cost Employee contributions Actuarial (gains) / losses – demographic assumptions – ﬁnancial assumptions – experience adjustment (Negative) past service cost Divestments Settlements Beneﬁts paid Exchange rate differences Miscellaneous 170 502 − 133 1,151 (76) (25) − − (716) − − 81 388 4 64 358 8 (6) (13) (294) (465) (36) 12 251 890 4 197 1,509 (68) (31) (13) (294) (1,181) (36) 12 183 467 − 205 (214) (75) (1) − − (704) − − Deﬁned-beneﬁt obligation at end of year 14,433 9,021 23,454 14,294 Present value of funded obligations at end of year Present value of unfunded obligations at end of year 14,426 7 8,168 853 22,594 14,288 860 6 77 351 4 17 (385) (32) (80) (3) (279) (462) (318) − 7,911 7,112 799 Netherlands other total Netherlands other 2012 260 818 4 222 (599) (107) (81) (3) (279) (1,166) (318) − 22,205 21,400 805 2013 total Fair value of plan assets at beginning of year 13,946 7,303 21,249 15,203 7,588 22,791 Interest income on plan assets Admin expenses paid Return on plan assets excluding interest income Employee contributions Employer contributions Divestments Settlements Beneﬁts paid Exchange rate differences 531 (4) 1,237 − 209 − − (716) − 337 (5) 460 4 216 (1) (294) (407) (25) 868 (9) 1,697 4 425 (1) (294) (1,123) (25) 496 (9) (426) − 283 − − (704) − Fair value of plan assets at end of year 15,203 7,588 22,791 14,843 Funded status Unrecognized net assets Net balance sheet position 770 (777) (7) (1,433) (586) (2,019) (663) (1,363) (2,026) 549 (555) (6) 317 (5) (338) 4 187 (1) (311) (407) (306) 6,728 (1,183) (428) (1,611) 813 (14) (764) 4 470 (1) (311) (1,111) (306) 21,571 (634) (983) (1,617) 172 Annual Report 2013 11 Group ﬁnancial statements 11.9 - 11.9 The classiﬁcation of the net balance is as follows: Netherlands other total Netherlands other 2012 Prepaid pension costs under other non-current assets Accrued pension costs under other liabilities Provision for pensions under provisions − − (7) (7) 7 (1,173) (853) 7 (1,173) (860) (2,019) (2,026) − − (6) (6) 5 (817) (799) (1,611) Changes in the effect of the asset ceiling Netherlands other Unrecognized assets at the beginning of year Interest on unrecognized assets Remeasurements Exchange rate differences Unrecognized assets at the end of year 660 26 91 − 777 399 25 173 (11) 586 2012 total 1,059 51 264 (11) 1,363 Netherlands other 777 25 (247) − 555 586 31 (155) (34) 428 2013 total 5 (817) (805) (1,617) 2013 total 1,363 56 (402) (34) 983 Plan assets allocation The asset allocation in the Company’s pension plans at December 31 was as follows: average age of 45 is 1.75% (2012 0.75% for CLA A). The indexation assumption used to calculate the deﬁned beneﬁt obligations for the Netherlands is 1.0% (2012: 1.0%). 2012 2013 Netherlands other Netherlands other The (average) duration of the DBO of the pension plans is 15 years for the Netherlands (2012: 14 years) and 11 years for other countries (2012: 11 years). Matching portfolio: - Debt securities 11,734 6,106 11,238 4,282 Deﬁned-beneﬁt plans: retiree medical plans Movements in the net liability for retiree medical plans: Return portfolio: - Equity securities 2,366 1,083 2,524 910 - Real estate - Other 683 420 19 380 790 291 9 1,527 15,203 7,588 14,843 6,728 The assets in 2013 contain 14% (2012: 11%) unquoted assets, the increase compared to 2012 mainly related to the buy-in value in the UK plan. Plan assets in 2013 do not include property occupied by or ﬁnancial instruments issued by the Company Assumptions The mortality tables used for the Company’s major schemes are: • Netherlands: Prognosis table 2012-2062 including experience rating TW2012. • United Kingdom retirees: SAPS 2002- Core CMI 2011 projection • United States: RP2000 CH Fully Generational Deﬁned-beneﬁt obligation at the beginning of year 269 250 2012 2013 Service cost Interest cost Actuarial (gains) or losses arising from: – ﬁnancial assumptions Past service cost Beneﬁts paid Exchange rate differences Miscellaneous 1 12 1 (25) (17) (6) 15 1 10 (17) − (15) (16) − Deﬁned-beneﬁt obligation at end of year 250 213 Present value of funded obligations at end of year − − The weighted averages of the assumptions used to calculate the deﬁned- beneﬁt obligations as of December 31 were as follows: Present value of unfunded obligations at end of year 250 213 2012 2013 Netherlands other Netherlands other Discount rate 3.3% 4.1% 3.4% 4.5% Rate of compensation increase * 3.3% * 3.2% * The rate of compensation increase for the Netherlands consists of a general compensation increase and an individual salary increase based on merit, seniority and promotion. In 2013 the Company determined new turnover- and disability rates and individual salary rates for all active participants based on the period 2010-2012. The individual increase at the Funded status Net balances (250) (250) (213) (213) Classiﬁcation of the net balance is as follows: Provision for other postretirement beneﬁts (250) (213) Annual Report 2013 173 31 11 Group ﬁnancial statements 11.9 - 11.9 The weighted average assumptions used to calculate the deﬁned beneﬁt obligations for retiree medical plans as of December 31 were as follows: 2012 2013 Discount rate 4.5% 4.8% Compensation increase (where applicable) − − Assumed healthcare cost trend rates at December 31: Healthcare cost trend rate assumed for next year Rate that the cost trend rate will gradually reach 2012 2013 7.5% 5.2% 7.5% 5.2% Year of reaching the rate at which it is assumed to remain 2019 2019 The average duration of the DBO of the retiree medical plans is 9 years (2012: 8 years). Investment policy in our largest pension plans It must be acknowledged that trustees of the Philips pension plans are responsible for and have full discretion over the investment strategy of the plan assets. The objective of the liability hedging portfolio of the Philips pension plan in the Netherlands is to match part of the interest rate sensitivity of the plan’s inﬂation-linked pension liabilities (based on a 2% inﬂation assumption). The liability hedging portfolio is mainly invested in euro- denominated government bonds, investment grade debt securities and long-duration interest rate swaps. The size of the liability hedging portfolio is targeted to be at least 64% of the fair value of the plan’s inﬂation-linked pension liabilities. The objective of the return portfolio is to maximize investment returns within well-speciﬁed risk constraints. The Philips pension plan in the United Kingdom operates a ﬁxed income portfolio that aims to fully hedge the interest rate and inﬂation rate sensitivities of the fair value of the plan’s pension liabilities. Part of the portfolio is invested in a buy-in policy, in which an insurance company guarantees all future beneﬁt payments to the plan, thereby matching the investment and longevity risks of the pension liabilities covered in the buy-in policy. The plan assets of the Philips pension plan in the United States are invested in a well diversiﬁed portfolio. The interest rate sensitivity of the ﬁxed income portfolio is closely aligned to that of the plan’s pension liabilities. Any contributions from the sponsoring company are used to further increase the ﬁxed income part of the assets. As part of the investment strategy, any additional investment returns of the return portfolio are used to further decrease the interest rate mismatch between the plan assets and the pension liabilities. Cash ﬂows and costs in 2014 Philips expects considerable cash outﬂows in relation to employee beneﬁts which are estimated to amount to EUR 626 million in 2014, consisting of EUR 417 million employer contributions to deﬁned beneﬁt pension plans, EUR 140 million employer contributions to deﬁned contribution pension plans, EUR 52 million expected cash outﬂows in relation to unfunded pension plans and EUR 17 million in relation to unfunded retiree medical plans. The employer contributions to deﬁned beneﬁt pension plans are expected to amount to EUR 223 million for the Netherlands and EUR 194 million for other countries. The Company continues to fund a part of the existing deﬁcit in the US pension plan in 2014, which amount is included in the amounts aforementioned. For the funding of the deﬁcit in the US plan the Group adheres to the minimum funding requirements of the US Pension Protection Act. The UK plan is currently in a surplus on a regulatory basis and does not require any funding in 2014 other than the agreed administration cost. The funding of the pension fund in the Netherlands for 2014 consists of a ﬁxed percentage of payroll which applies for a period of 5 years. The additional contribution to the pension fund for the Netherlands is not included in the above ﬁgures. For further details we refer to note 36, Subsequent events. It is noted that the (majority of the) contribution will need to be written off through Other comprehensive income due to the asset ceiling restrictions in the pension plan in the Netherlands. 174 Annual Report 2013 The service and administration cost for 2014 is expected to amount to EUR 256 million, consisting of EUR 255 million for deﬁned-beneﬁt pension plans and EUR 1 million for deﬁned-beneﬁt retiree medical plans. The net interest expense for 2014 is expected to amount to EUR 54 million, consisting of EUR 43 million for deﬁned-beneﬁt pension plans and EUR 11 million for deﬁned-beneﬁt retiree medical plans. The cost for deﬁned- contribution pension plans in 2014 is expected to amount to EUR 140 million. Sensitivity analysis The table below illustrates the approximate impact on the deﬁned-beneﬁt obligation if the Company were to change key assumptions. The DBO was recalculated using a change in the assumptions of 1% which overall is considered a reasonably possible change. The impact on the DBO because of changes in discount rate is normally accompanied by offsetting movements in plan assets, especially when using matching strategies. Deﬁned beneﬁt obligation Pension Netherlands Pension other 2013 Retiree medical (1,708) (822) (12) 165 979 355 28 461 232 − − 2,158 962 (147) (876) (26) (418) − − 7 12 16 − − Increase Discount rate (1% movement) Wage increase (1% movement) Inﬂation (1% movement) Longevity (see explanation) Medical beneﬁt level (1% price increase) Decrease Discount rate (1% movement) Wage increase (1% movement) Inﬂation (1% movement) Longevity also impacts post-employment beneﬁt liabilities. The above sensitivity table illustrates the impact on the deﬁned-beneﬁt obligation of a further 10% decrease in the assumed rates of mortality for the Company’s major schemes. A 10% decrease in assumed mortality rates equals improvement of life expectancy by 0.5 - 1 year. Changes in assumed health care cost trend rates can have a signiﬁcant effect on the amounts reported for the retiree medical plans. A one percentage-point increase in medical beneﬁt level is therefore included in above table as a likely scenario. Philips Pension Fund in the Netherlands In relation to the fraud in the Dutch real estate sector uncovered in 2007, Philips and the Philips Pension Fund in the Netherlands have jointly and amicably assessed any residual damages in 2013. In view of the new pension agreement, which includes a new funding structure, effective as of January 1, 2014, Philips decided to make a special cash contribution in 2013 to ensure that any potential ﬁnancial issues from the past, including this real estate fraud, were cleared. As a result of this special contribution the real estate case has been closed. 31 Share-based compensation The purpose of the share-based compensation plans is to align the interests of management with those of shareholders by providing incentives to improve the Company’s performance on a long-term basis, thereby increasing shareholder value. The Company has the following plans: • options on its common shares; • rights to receive common shares in the future based on a service condition (restricted shares); rights to receive common shares in the future based on performance and service conditions (performance shares). • Restricted shares and options were granted to members of the Board of Management and other members of the Executive Committee, executives and certain selected employees. Options were last granted in January 2013. Restricted shares are still granted to new employees or certain selected employees. Furthermore, in January 2012 and 2013, as part of the Accelerate! program, the Company has granted the following: • options on its common shares (Accelerate! options); • rights to receive common shares in the future (Accelerate! shares). These Accelerate! options and shares were granted to a group of approximately 500 key employees below the level of Board of Management in January 2012 and to the Board of Management in January 2013. In May 2013 a new long-term incentive plan was approved at the Annual General Meeting of Shareholders granting performance shares to members of the Board of Management and other members of the Executive Committee, executives and certain selected employees. USD-denominated options, restricted and performance shares are granted to employees in the United States only. Share-based compensation costs were EUR 109 million (EUR 91 million, net of tax), EUR 86 million (EUR 75 million, net of tax) and EUR 55 million (EUR 57 million, net of tax) in 2013, 2012 and 2011, respectively. Option plans Under the Company’s plans, options are granted at fair market value on the date of grant. The Company granted options that expire after 10 years. Generally, these options vest after 3 years, provided the grantee is still employed with the Company. A limited number of options granted to certain employees of acquired businesses may contain accelerated vesting. As of December 31, 2013 there are no non-vested options which contain non-market performance conditions. The fair values of the Company’s 2013, 2012 and 2011 option grants were estimated using a Black-Scholes option valuation model and the following weighted average assumptions: 2011 2012 2013 EUR-denominated Risk-free interest rate Expected dividend yield 2.89% 3.3% 1.87% 4.7% 1.20% 4.5% 11 Group ﬁnancial statements 11.9 - 11.9 The fair value of the Company’s 2013 and 2012 Accelerate! option grants were estimated using a Black-Scholes option valuation model and the following assumptions: 2012 2013 EUR-denominated Risk-free interest rate Expected dividend yield Expected option life Expected share price volatility USD-denominated Risk-free interest rate Expected dividend yield Expected option life Expected share price volatility 1.52% 4.3% 6.5 yrs 32% 1.19% 4.0% 6.5 yrs 38% 0.89% 3.9% 6.5 yrs 32% − − − − The assumptions were used for these calculations only and do not necessarily represent an indication of Management’s expectations of future developments. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of subjective assumptions, including the expected price volatility. The Company has based its volatility assumptions on historical experience for a period equal to the expected life of the options. The expected life of the options is also based upon historical experience. The Company’s employee stock options have characteristics signiﬁcantly different from those of traded options, and changes in the assumptions can materially affect the fair value estimate. The following tables summarize information about the Company’s options as of December 31, 2013 and changes during the year: Option plans (excluding Accelerate! options) EUR-denominated options weighted average exercise price Expected option life 6.5 yrs 6.5 yrs 6.5 yrs Outstanding at January 1, 2013 23,109,265 Expected share price volatility USD-denominated Risk-free interest rate Expected dividend yield 30% 32% 33% 2.78% 3.6% 1.23% 4.5% 1.32% 4.6% Expected option life 6.5 yrs 6.5 yrs 6.5 yrs Expected share price volatility 34% 38% 39% Granted Exercised Forfeited Expired 35,193 2,664,550 1,807,077 15,003 Outstanding at December 31, 2013 18,657,828 21.43 22.28 18.45 23.74 22.12 21.63 Exercisable at December 31, 2013 11,657,060 23.99 The exercise prices range from EUR 12.63 to EUR 32.04. The weighted average remaining contractual term for options outstanding and options exercisable at December 31, 2013, was 5.3 years and 3.8 years, respectively. The aggregate intrinsic value of the options outstanding and options exercisable at December 31, 2013, was EUR 104 million and EUR 41 million, respectively. The weighted average grant-date fair value of options granted during 2013, 2012, and 2011 was EUR 4.21, EUR 2.84 and EUR 4.82, respectively. The total intrinsic value of options exercised during 2013, 2012, and 2011 was approximately EUR 15 million, EUR 3 million and EUR 1 million, respectively. Annual Report 2013 175 11 Group ﬁnancial statements 11.9 - 11.9 Option plans (excluding Accelerate! options) USD-denominated options weighted average exercise price Outstanding at January 1, 2013 16,606,652 Granted Exercised Forfeited Expired 22,275 1,969,901 1,209,456 − Outstanding at December 31, 2013 13,449,570 29.04 28.69 23.27 30.66 − 29.74 The aggregate intrinsic value in the tables and text above represents the total pre-tax intrinsic value (the difference between the Company’s closing share price on the last trading day of 2013 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders if the options had been exercised on December 31, 2013. The following table summarizes information about the Company’s Accelerate! options as of December 31, 2013 and changes during the year: Accelerate! options EUR-denominated options weighted average exercise price Exercisable at December 31, 2013 8,313,489 33.26 Outstanding at January 1, 2013 2,927,000 Granted Forfeited 152,000 225,000 Outstanding at December 31, 2013 2,854,000 15.24 22.43 15.24 15.62 Exercisable at December 31, 2013 2,722,000 15.29 USD-denominated Outstanding at January 1, 2013 860,000 Granted Forfeited Outstanding at December 31, 2013 − 65,000 795,000 20.02 − 20.02 20.02 Exercisable at December 31, 2013 795,000 20.02 The exercise price of the Accelerate! options granted in 2012 are EUR 15.24 and USD 20.02 and in 2013 EUR 22.43. The weighted average remaining contractual term for EUR and USD Accelerate! options outstanding and exercisable at December 31, 2013 was 8.1 years. The aggregate intrinsic value of the Accelerate! options outstanding at December 31, 2013, was EUR 31 million and USD 13 million, respectively. The grant-date fair value of Accelerate! options granted during 2013 was EUR 4.41 per option. At December 31, 2013 there are no unrecognized compensation costs related to both EUR and USD Accelerate! options. At December 31, 2013 all performance targets under the Accelerate! program, which were based on the 2013 mid-term ﬁnancial targets, have been met. Restricted and Accelerate! shares The fair value of restricted and Accelerate! shares is equal to the fair value of the share at grant date less the present value, using the risk-free interest rate, of dividends which will not be received up to the vesting date. The Company issues restricted shares that, in general, vest in equal annual installments over a three-year period, starting one year after the date of grant. For grants up to and including January 2013 the Company granted 20% additional (premium) shares, provided the grantee still holds the shares after three years from the delivery date and the grantee is still with the Company on the respective delivery dates. The exercise prices range from USD 16.76 to USD 44.15. The weighted average remaining contractual term for options outstanding and options exercisable at December 31, 2013, was 5.4 years and 3.9 years, respectively. The aggregate intrinsic value of the options outstanding and options exercisable at December 31, 2013, was USD 106 million and USD 40 million, respectively. The weighted average grant-date fair value of options granted during 2013, 2012 and 2011 was USD 6.70, USD 4.56 and USD 7.47, respectively. The total intrinsic value of options exercised during 2013, 2012 and 2011 was USD 17 million, USD 4 million and USD 4 million. At December 31, 2013, a total of EUR 9 million of unrecognized compensation costs relate to non-vested EUR and USD denominated options. These costs are expected to be recognized over a weighted- average period of 1.0 years. Cash received from exercises under the Company’s option plans amounted to EUR 84 million, EUR 19 million and EUR 20 million in 2013, 2012, and 2011, respectively. The actual tax deductions realized as a result of option exercises totaled approximately EUR 5 million, EUR 1 million and EUR 1 million, in 2013, 2012, and 2011, respectively. The outstanding options are categorized in exercise price ranges as follows: Option plans (excluding Accelerate! options) exercise price options intrinsic value in millions weighted average remaining contractual term EUR- denominated 10-15 15-20 20-25 25-30 30-35 USD- denominated 15-20 20-25 25-30 30-35 35-40 40-55 4,967,645 1,104,222 8,547,886 1,693,773 2,344,302 61 9 33 1 − 18,657,828 104 3,406,981 335,769 3,220,919 2,943,429 1,813,212 1,729,260 62 5 26 12 1 − 13,449,570 106 7.4 yrs 2.5 yrs 5.6 yrs 2.3 yrs 3.3 yrs 5.3 yrs 7.6 yrs 7.8 yrs 5.3 yrs 4.7 yrs 4.2 yrs 3.3 yrs 5.4 yrs 176 Annual Report 2013 A summary of the status of the Company’s restricted shares as of December 31, 2013 and changes during the year are presented below: Restricted shares (excluding Accelerate! shares)1) weighted average grant-date fair value shares EUR-denominated Outstanding at January 1, 2013 1,954,985 Granted Vested/Issued Forfeited 85,296 885,733 89,379 Outstanding at December 31, 2013 1,065,169 USD-denominated Outstanding at January 1, 2013 1,924,156 Granted Vested/Issued Forfeited 114,127 795,668 102,369 Outstanding at December 31, 2013 1,140,246 16.45 21.90 18.07 16.01 15.31 20.99 31.48 23.14 20.18 20.33 11 Group ﬁnancial statements 11.9 - 11.9 Performance shares The performance is measured over a three-year performance period. The performance shares have two performance conditions, relative Total Shareholders’ Return compared to a peer group of 21 companies and adjusted Earnings Per Share growth. The performance shares vest three years after the grant date. The number of performance shares that will vest is dependent on achieving the two performance conditions, which are equally weighted, and provided that the grantee is still employed with the Company. The fair value of the performance shares is measured based on Monte- Carlo simulation and the following weighted average assumptions: EUR-denominated Risk-free interest rate Expected dividend yield Expected share price volatility USD-denominated Risk-free interest rate Expected dividend yield Expected share price volatility 2013 0.55% 3.7% 27% 0.55% 3.7% 30% 1) Excludes 20% additional (premium) shares that may be received if shares delivered under the restricted share rights plan are not sold for a three- year period The Company has based its volatility assumptions on historical experience measured over a ten-year period. At December 31, 2013, a total of EUR 16 million of unrecognized compensation costs relate to non-vested restricted shares. These costs are expected to be recognized over a weighted-average period of 1.8 years. A summary of the status of the Company’s Accelerate! shares as of December 31, 2013 and changes during the year are presented below: Accelerate! shares weighted average grant-date fair value shares EUR-denominated Outstanding at January 1, 2013 2,927,000 Granted Forfeited Vested 152,000 225,000 2,854,000 Outstanding at December 31, 2013 − USD-denominated Outstanding at January 1, 2013 860,000 Granted Forfeited Vested Outstanding at December 31, 2013 − 65,000 795,000 − 13.75 21.68 13.75 14.17 − 18.05 − 18.05 18.05 − On January 28, 2014 the Supervisory Board resolved that all performance targets under the Accelerate! program, which were based on the 2013 mid- term ﬁnancial targets, have been met. This means that in accordance with IFRS accounting requirements the Accelerate! shares vested and that at December 31, 2013 there are no unrecognized compensation costs to both EUR and USD Accelerate! shares. After delivery an additional two-year holding period applies, except for Accelerate! shares granted to the Board of Management of which after delivery an additional four-year holding period applies. A summary of the status of the Company’s performance share plans as of December 31, 2013 and changes during the year are presented below: weighted average grant- date fair value shares EUR-denominated Granted Forfeited 3,509,518 66,595 Outstanding at December 31, 2013 3,442,923 USD-denominated Granted Forfeited 2,419,445 121,219 Outstanding at December 31, 2013 2,298,226 23.53 23.45 23.53 30.77 30.70 30.77 At December 31, 2013, a total of EUR 116 million of unrecognized compensation costs relate to non-vested performance shares. These costs are expected to be recognized over a weighted-average period of 2.3 years. Other plans Employee share purchase plan Under the terms of employee stock purchase plans established by the Company in various countries, substantially all employees in those countries are eligible to purchase a limited number of Philips shares at discounted prices through payroll withholdings, of which the maximum ranges from 10% to 20% of total salary. Generally, the discount provided to the employees is in the range of 10% to 20%. A total of 1,425,048 shares were bought by employees in 2013 under the plan at an average price of EUR 21.92 (2012: 1,906,183 shares at EUR 15.69; 2011: 1,851,718 shares at EUR 17.93). Convertible personnel debentures In the Netherlands, the Company issued personnel debentures with a 2- year right of conversion into its common shares starting three years after the date of issuance, with a conversion price equal to the share price on that date. The last issuance of this particular plan was in December 2008. From 2009 onwards, employees in the Netherlands are able to join an employee share purchase plan as described in the previous paragraph. In Annual Report 2013 177 32 33 11 Group ﬁnancial statements 11.9 - 11.9 2013, 509,195 shares were issued in conjunction with conversions at an average price of EUR 14.21 (2012: 270,827 shares at an average price of EUR 14.22; 2011: 1,079 shares at an average price of EUR 24.66). 32 Related-party transactions In the normal course of business, Philips purchases and sells goods and services from/to various related parties in which Philips typically holds a 50% or less equity interest and has signiﬁcant inﬂuence. These transactions are generally conducted with terms comparable to transactions with third parties. Sales of goods and services Purchases of goods and services Receivables from related parties Payables to related parties 2011 2012 2013 278 117 19 6 288 130 13 4 305 143 39 4 Based on its 30% share in the TP Vision venture, Philips had various commitments to provide further funding to the TP Vision venture at December 31, 2013: • A subordinated shareholder loan of EUR 51 million (fully drawn) can be extended depending on the venture’s funding needs. EUR 21 million of this loan is due in April 2015 and EUR 30 million due in April 2017, • A senior 12-month EUR 30 million bridge loan facility (undrawn) to the venture can be extended up to April 2017 depending on the venture’s funding needs, • A committed EUR 60 million loan facility (undrawn) that can be extended up to April 2018, depending on the venture’s funding needs. On 20 January 2014, Philips has signed a term sheet to transfer its remaining 30% stake in the TP Vision venture, which will also impact the above commitments (note 36, Subsequent events). See also, note 7, Discontinued operations and other assets classiﬁed as held for sale for further details on the Television business divestment. In light of the composition of the Executive Committee during 2012 and 2013, the Company considered the members of the Executive Committee and the Supervisory board to be the key management personnel as deﬁned in IAS 24 ‘Related parties’. In 2011, the Company considered the members of the Board of Management and the Supervisory Board to be the key management personnel. For remuneration details of the Executive Committee, the Board of Management and the Supervisory Board see note 33, Information on remuneration. For employee beneﬁt plans see note 30, Post-employment beneﬁts. 33 Information on remuneration Remuneration of the Executive Committee In 2013, the total remuneration costs relating to the members of the Executive Committee (including the members of the Board of Management) amounted to EUR 24,773,537 (2012: EUR 18,585,112) consisting of the elements in the table below. Remuneration costs of the Executive Committee in euros Salary Annual incentive1) Performance shares2) Stock options2) 2012 2013 5,640,090 6,011,557 4,839,949 4,422,732 1,049,205 6,478,554 1,194,444 2,020,040 Restricted share rights2) 1,566,448 1,115,504 Pension costs 2,054,516 2,277,705 Other compensation3) 2,240,460 2,447,445 1) The annual incentives are related to the performance in the year reported which are paid out in the subsequent year 2) Costs of performance shares, stock options and restricted share rights are based on accounting standards (IFRS) and do not reﬂect the value of stock options at the end of the lock up period and the value of performance shares and restricted share rights at the vesting/release date. Costs for the Accelerate! Grant are included 3) The stated amount concern (share of) allowances to members of the Executive Committee that can be considered as remuneration. In a situation where such a share of an allowance can be considered as (indirect) remuneration (for example, private use of the company car), then the share is both valued and accounted for here. The method employed by the ﬁscal authorities in the Netherlands is the starting point for the value stated. The crisis tax levy of 16% as imposed by the Dutch government amounts to EUR 1,245,944 (2012: EUR 702,940). This crisis tax is payable by the employer and is charged over income of employees exceeding a EUR 150,000 threshold in 2012 and 2013. These amounts are included in the amounts stated under Other compensation At December 31, 2013, the members of the Executive Committee (including the members of the Board of Management) held 1,479,498 (2012: 1,376,913) stock options at a weighted average exercise price of EUR 18.69 (2012: EUR 18.23). Remuneration of the Board of Management In 2013, the total remuneration costs relating to the members of the Board of Management amounted to EUR 10,928,951 (2012: EUR 7,301,334; 2011: EUR 10,844,833). At December 31, 2013, the members of the Board of Management held 586,500 stock options (2012: 454,500; 2011: 1,072,431) at a weighted average exercise price of EUR 19.60. (2012: EUR 18.78; 2011: EUR 23.01). 178 Annual Report 2013 20134) F.A. van Houten R.H. Wirahadiraksa P.A.J. Nota 20124) F.A. van Houten R.H. Wirahadiraksa P.A.J. Nota Remuneration costs of individual members of the Board of Management in euros 11 Group ﬁnancial statements 11.9 - 11.9 salary annual incentive1) performance shares2) stock options2) restricted share rights2) pension costs 1,100,000 1,081,520 1,594,675 461,215 190,441 468,407 656,250 497,745 1,040,393 307,699 128,856 263,451 618,750 561,713 1,025,153 352,608 146,626 253,605 other compen- sation3) 75,906 35,732 68,206 2,375,000 2,140,978 3,660,221 1,121,522 465,923 985,463 179,844 1,100,000 1,279,520 600,000 523,440 600,000 556,200 S.H. Rusckowski (Jan.-Apr.) 233,333 178,500 2,533,333 2,537,660 2011 F.A. van Houten (Apr. - Dec.) 825,000 363,000 R.H. Wirahadiraksa (Apr. - Dec.) 450,000 148,500 G.H.A. Dutiné 650,000 214,500 P.A.J. Nota (Apr. - Dec.) 450,000 148,500 S.H. Rusckowski G.J. Kleisterlee (Jan. - March) P-J. Sivignon (Jan. - March) 687,500 231,000 275,000 178,750 92,400 45,045 R.S. Provoost (Jan. - Sept.) 512,500 132,300 4,028,750 1,375,245 − − − − − − − − − − − − − − 209,589 315,760 422,845 149,067 217,020 243,438 188,029 253,836 247,883 (200,400) (209,638) 90,211 346,285 576,978 1,004,377 125,957 253,926 297,179 105,477 180,686 170,299 462,263 334,186 245,018 47,154 34,961 60,754 159,833 302,701 39,709 72,125 143,774 67,067 131,159 211,915 375,736 213,435 213,434 255,159 168,532 341,856 254,975 336,773 29,973 7,041 69,545 (48,117)5) 105,679 68,830 175,301 9,340 22,606 1,839,376 1,472,372 1,332,017 797,073 1) The annual incentives are related to the performance in the year reported which are paid out in the subsequent year. For more details on the annual incentives, see sub-section 9.2.6, Annual Incentive, of this Annual Report 2) Costs of performance shares, stock options and restricted share rights (including the once-only Accelerate! Grant) are based on accounting standards (IFRS) and do not reﬂect the value of stock options at the end of the lock up period and the value of performance shares and restricted share rights at the vesting/release date 3) The stated amounts concern (share of) allowances to members of the Board of Management that can be considered as remuneration. In a situation where such a share of an allowance can be considered as (indirect) remuneration (for example, private use of the company car), then the share is both valued and accounted for here. The method employed by the ﬁscal authorities in the Netherlands is the starting point for the value stated. In 2011 the other compensation for Mr Rusckowski includes an amount of USD 445,976 (= EUR 325,352) related to tax equalization in connection with pension obligations 4) A crisis levy of 16% as imposed by the Dutch government amounts to EUR 681,596 in 2013 (2012: EUR 413,405) in total. This crisis tax levy is payable by the employer and is charged over income of employees exceeding a EUR 150,000 threshold in 2012 and 2013. These expenses do not form part of the remuneration costs mentioned 5) As Mr Kleisterlee was born before January 1, 1950, he continued to be a member of the ﬁnal pay plan with a pensionable age of 60. No further accrual took place For further information on remuneration costs, see sub-section 9.2.4, Remuneration costs, of this Annual Report. Annual Report 2013 179 11 Group ﬁnancial statements 11.9 - 11.9 The tables below give an overview of the holding of the members of the Board of Management under the performance share plans, restricted share rights plan and the stock option plans of the Company: Number of performance shares (holdings) January 1, 2013 awarded 2013 awarded dividend shares 2013 December 31, 2013 F.A. van Houten R.H. Wirahadiraksa P.A.J. Nota 1) Once-only Accelerate! Grant Number of restricted share rights (holdings) − − − − − − − 62,559 55,0001) 31,991 38,5001) 29,621 38,5001) 256,171 2,112 − 1,080 − 1,000 − 4,192 64,671 55,000 33,071 38,500 30,621 38,500 260,363 January 1, 2013 awarded 2013 released 2013 December 31, 2013 potential premium shares F.A. van Houten R.H. Wirahadiraksa P.A.J. Nota 35,0351) 24,0451) 26,0701) 85,150 − − − − 15,034 10,443 12,468 20,001 13,602 13,602 9,024 6,935 7,482 37,945 47,205 23,441 1) (Partly) awarded before date of appointment as a member of the Board of Management Stock options (holdings) F.A. van Houten R.H. Wirahadiraksa P.A.J. Nota granted exercised expired December 31, 2013 grant price (in euros) share (closing) price on exercise date January 1, 2013 20,4001) 75,000 75,000 − – − − 55,0002) 10,8001) 12,0001) 16,5001) 51,000 51,000 − − − – − − 38,5002) 40,8001) 51,000 51,000 − – − − 38,5002) 454,500 132,000 − − − − − − − − – − − − − − − − − − − − − − − – − − − − − − 20,400 75,000 75,000 55,000 10,800 12,000 16,500 51,000 51,000 38,500 40,800 51,000 51,000 38,500 586,500 22.88 20.90 14.82 22.43 23.11 12.63 24.90 20.90 14.82 22.43 22.88 20.90 14.82 22.43 − − − − − − − − – − − − − − expiry date 10.18.2020 04.18.2021 04.23.2022 01.29.2023 04.14.2018 04.14.2019 04.19.2020 04.18.2021 04.23.2022 01.29.2023 10.18.2020 04.18.2021 04.23.2022 01.29.2023 1) Awarded before date of appointment as a member of the Board of Management 2) Performance Accelerate! Grant options as of January 29, 2013 180 Annual Report 2013 11 Group ﬁnancial statements 11.9 - 11.9 When pension rights are granted to members of the Board of Management, necessary payments (if insured) and all necessary provisions are made in accordance with the applicable accounting principles. In 2013, no (additional) pension beneﬁts were granted to former members of the Board of Management. Remuneration of the Supervisory Board The remuneration of the members of the Supervisory Board amounted to EUR 747,000 (2012: EUR 799,500; 2011: EUR 803,250); former members received no remuneration. At December 31, 2013, the members of the Supervisory Board held no stock options. See note 31, Share-based compensation for further information on performance shares, stock options and restricted share rights as well sub- section 9.2.7, Long-Term Incentive Plan, of this Annual Report. The accumulated annual pension entitlements and the pension costs of individual members of the Board of Management are as follows (in euros): accumulated annual pension as of December 31, 20131) age at December 31, 2013 pension costs2,3) F.A. van Houten R.H. Wirahadiraksa P.A.J. Nota 53 53 49 60,203 468,407 33,208 263,451 24,785 253,605 985,463 1) Under average pay plan, including - if applicable - transferred pension 2) entitlements under pension scheme(s) of previous employer(s) Including costs related to employer contribution in deﬁned-contribution pension plan 3) Cost are related to the period of board membership Annual Report 2013 181 34 11 Group ﬁnancial statements 11.9 - 11.9 The individual members of the Supervisory Board received, by virtue of the positions they held, the following remuneration (in euros): membership committees other compensation1) total 20132) J. van der Veer J.J. Schiro C.J.A. van Lede E. Kist H. von Prondzynski C. Poon J.P. Tai N. Dhawan 2012 J. van der Veer J.M. Thompson (Jan. - Apr.) C.J.A. van Lede E. Kist J.J. Schiro H. von Prondzynski C. Poon J.P. Tai N. Dhawan (Apr. - Dec.) 2011 J. van der Veer J-M. Hessels (Jan. - March) J.M. Thompson C.J.A. van Lede E. Kist J.J. Schiro H. von Prondzynski C. Poon J.P. Tai (Apr, - Dec.) 110,000 65,000 65,000 65,000 65,000 65,000 65,000 65,000 565,000 110,000 32,500 65,000 65,000 65,000 65,000 65,000 65,000 65,000 597,500 98,750 55,000 65,000 65,000 65,000 65,000 65,000 65,000 65,000 20,500 18,500 10,000 8,000 10,000 14,000 15,000 10,000 106,000 20,500 4,667 10,834 10,333 17,000 10,000 12,666 13,333 6,667 106,000 19,375 5,125 14,000 12,500 15,000 14,000 10,000 10,000 7,500 608,750 107,500 5,000 8,000 5,000 5,000 5,000 11,000 20,000 17,000 76,000 5,000 11,000 5,000 5,000 17,000 5,000 14,000 17,000 17,000 96,000 2,000 2,000 20,000 2,000 2,000 17,000 2,000 20,000 20,000 87,000 135,500 91,500 80,000 78,000 80,000 90,000 100,000 92,000 747,000 135,500 48,167 80,834 80,333 99,000 80,000 91,666 95,333 88,667 799,500 120,125 62,125 99,000 79,500 82,000 96,000 77,000 95,000 92,500 803,250 1) The amounts mentioned under other compensation relate to the fee for intercontinental travel and the entitlement of EUR 2,000 under the Philips product arrangement 2) As of 2013, part of the renumeration of members of the Supervisory Board living in the Netherlands is subject to VAT. The amounts mentioned in this table are excluding VAT. Supervisory Board members’ and Board of Management members’ interests in Philips shares Members of the Supervisory Board and of the Board of Management are not allowed to hold any interests in derivative Philips securities. Number of shares1) J. van der Veer H. von Prondzynski J.P. Tai F.A. van Houten R.H. Wirahadiraksa P.A.J. Nota December 31, 2012 December 31, 2013 16,624 3,290 1,053 21,048 16,060 11,757 17,192 3,402 2,175 37,258 27,879 24,937 1) Reference date for board membership is December 31, 2013 34 Fair value of ﬁnancial assets and liabilities The estimated fair value of ﬁnancial instruments has been determined by the Company using available market information and appropriate valuation methods. The estimates presented are not necessarily indicative of the amounts that will ultimately be realized by the Company upon maturity or disposal. The use of different market assumptions and/or estimation methods may have a material effect on the estimated fair value amounts. For cash and cash equivalents, current receivables, accounts payable, interest accrual and short-term debts, the carrying amounts approximate fair value, because of the short maturity of these instruments, and therefore fair value information is not included in the table below. The fair value of Philips’ debt is estimated on the basis of the quoted market prices for certain issues, or on the basis of discounted cash ﬂow analysis based upon market rates plus Philips’ spread for the particular tenors of the borrowing arrangement. Accrued interest is not included within the carrying amount or estimated fair value of debt. 182 Annual Report 2013 11 Group ﬁnancial statements 11.9 - 11.9 December 31, 2012 December 31, 2013 Fair value hierarchy carrying amount estimated fair value carrying amount estimated fair value level 1 level 2 level 3 total Financial assets Carried at fair value: Available-for-sale ﬁnancial assets - non- current Available-for-sale ﬁnancial assets - current Securities classiﬁed as assets held for sale Fair value through proﬁt and loss - non-current Derivative ﬁnancial instruments 153 153 96 96 − − − − 10 62 47 47 29 137 337 137 337 150 347 10 62 29 150 347 Carried at (amortized) cost: Cash and cash equivalents 3,834 2,465 December 31, 2013 Available-for-sale ﬁnancial assets - non-current Available-for-sale ﬁnancial assets - current Securities classiﬁed as assets held for sale Financial assets designated at fair value through proﬁt and loss - non-current Derivative ﬁnancial instruments - assets Non-current loans and receivables including guarantee deposits Receivables - non-current Total ﬁnancial assets 42 6 62 22 − 4 − − − 150 − − 132 143 144 441 54 96 − − 7 − − − 61 10 62 29 150 143 144 634 Loans and receivables: Non-current loans and receivables Other non-current loans and receivables Loans classiﬁed as assets held for sale 127 − 140 140 143 143 129 30 4,678 Financial liabilities designated at fair value through proﬁt and loss - non-current Derivative ﬁnancial instruments - liabilities − − Debt (3,345) (200) − (13) (13) (368) − − (368) (3,545) Receivables - current 4,585 Total ﬁnancial liabilities (3,345) (568) (13) (3,926) Receivables - non- current Held-to-maturity investments Available-for-sale ﬁnancial assets Financial liabilities Carried at fair value: Fair value through proﬁt and loss - non-current Derivative ﬁnancial instruments Carried at (amortized) cost: 176 176 144 144 3 79 3 96 8,944 316 7,688 287 (11) (11) (13) (13) December 31, 2012 Available-for-sale ﬁnancial assets - non-current Financial assets designated at fair value through proﬁt and loss - non-current Derivative ﬁnancial instruments - assets Non-current loans and receivables including guarantee deposits Receivables - non-current (517) (517) (368) (368) Total ﬁnancial assets 110 28 − − 138 − − 137 140 176 453 43 153 19 47 − − − 62 137 140 176 653 Accounts payable Interest accrual (2,839) (75) (2,462) (57) Debt (Corporate bond and ﬁnance lease) Debt (Bank loans, overdrafts etc.) (3,412) (4,162) (3,157) (3,545) (1,122) (744) (7,448) (4,162) (6,420) (3,545) The table below represents categorization of measurement of the estimated fair values of ﬁnancial assets and liabilities. Financial liabilities designated at fair value through proﬁt and loss - non-current Derivative ﬁnancial instruments - liabilities Debt Total ﬁnancial liabilities − − (3,948) (3,948) − (11) (11) (517) (214) (731) − − (517) (4,162) (11) (4,690) Speciﬁc valuation techniques used to value ﬁnancial instruments include: Level 1 Instruments included in level 1 are comprised primarily of listed equity investments classiﬁed as available-for-sale ﬁnancial assets, investees and ﬁnancial assets designated at fair value through proﬁt and loss. The fair value of ﬁnancial instruments traded in active markets is based on quoted market prices at the balance sheet date. A market is regarded as active if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service, or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis. Annual Report 2013 183 35 11 Group ﬁnancial statements 11.9 - 11.9 Level 2 The fair value of ﬁnancial instruments that are not traded in an active market (for example, over-the-counter derivatives or convertible bond instruments) are determined by using valuation techniques. These valuation techniques maximize the use of observable market data where it is available and rely as little as possible on entity-speciﬁc estimates. If all signiﬁcant inputs required to fair value an instrument are based on observable market data, the instrument is included in level 2. The fair value of derivatives is calculated as the present value of the estimated future cash ﬂows based on observable interest yield curves, basis spread and foreign exchange rates. The valuation of convertible bond instruments uses observable market quoted data for the options and present value calculations using observable yield curves for the fair value of the bonds. Financial assets subject to offsetting, enforceable master netting arrangements or similar agreements 2012 2013 Derivatives Gross amounts of recognized ﬁnancial assets 137 150 Gross amounts of recognized ﬁnancial liabilities offset in the statement of ﬁnancial position Net amounts of ﬁnancial assets presented in the statement of ﬁnancial position − − 137 150 Related amounts not offset in the statement of ﬁnancial position Level 3 If one or more of the signiﬁcant inputs are not based on observable market data, the instrument is included in level 3. Financial instruments Cash collateral received (67) − (85) − The arrangement with the UK Pension Fund in conjunction with the sale of NXP is a ﬁnancial instrument carried at fair value classiﬁed as level 3. At the end of 2013, the fair value of this instrument is estimated to be EUR 7 million with the changes of fair value recorded to ﬁnancial income and expense. Please refer to note 14, Other non-current ﬁnancial assets for more details. Furthermore, deferred consideration and loan extension options to TP Vision are also included in level 3. On January 20, 2014, Philips has signed a term sheet to transfer its remaining 30% stake in TP Vision, which will also impact the above commitments. For further information, please refer to note 36, Subsequent events. The table below shows the reconciliation from the beginning balance to the end balance for fair value measured in Level 3 of the fair value hierarchy. ﬁnancial assets ﬁnancial liabilities Balance at January 1, 2013 Total gains and losses recognized in: - proﬁt or loss - other comprehensive income Balance at December 31, 2013 62 (12) 11 61 (11) (2) − (13) Philips has the following balances related to its derivative activities. These transactions are subject to master netting and set-off agreements. In case of certain termination events, under the terms of the Master Agreement, Philips can terminate the outstanding transactions and aggregate their positive and negative values to arrive at a single net termination sum (or close-out amount). This contractual right is subject to the following: • The right may be limited by local law if the counterparty is subject to bankruptcy proceedings; • The right applies on a bilateral basis. Net amount 70 65 Financial liabilities subject to offsetting, enforceable master netting arrangements or similar agreements 2012 2013 Derivatives Gross amounts of recognized ﬁnancial liabilities (517) (368) Gross amounts of recognised ﬁnancial assets offset in the statement of ﬁnancial position − − Net amounts of ﬁnancial liabilities presented in the statement of ﬁnancial position (517) (368) Related amounts not offset in the statement of ﬁnancial position Financial instruments Cash collateral received 67 − 85 − Net amount (450) (283) 35 Details of treasury / other ﬁnancial risks Philips is exposed to several types of ﬁnancial risk. This note further analyzes ﬁnancial risks. Philips does not purchase or hold derivative ﬁnancial instruments for speculative purposes. Information regarding ﬁnancial instruments is included in note 34, Fair value of ﬁnancial assets and liabilities. Liquidity risk Liquidity risk is the risk that an entity will encounter difﬁculty in meeting obligations associated with ﬁnancial liabilities. Liquidity risk for the group is monitored through the Treasury liquidity committee which tracks the development of the actual cash ﬂow position for the group and uses input from a number of sources in order to forecast the overall liquidity position both on a short and long term basis. Group Treasury invests surplus cash in money market deposits with appropriate maturities to ensure sufﬁcient liquidity is available to meet liabilities when due. The rating of the Company’s debt by major rating services may improve or deteriorate. As a result, Philips’ future borrowing capacity may be inﬂuenced and its ﬁnancing costs may ﬂuctuate. Philips has various sources to mitigate the liquidity risk for the group. At December 31, 2013, Philips had EUR 2,465 million in cash and cash equivalents (2012: EUR 3,834 million), within which short-term deposits of EUR 1,714 million (2012: EUR 3,177 million) and other liquid assets of EUR 18 million (2012: EUR 120 million). Philips pools cash from subsidiaries to the extent legally and economically feasible; cash not pooled remains available for operational or investment needs by the Company. 184 Annual Report 2013 Furthermore, Philips has a USD 2.5 billion Commercial Paper Program and a EUR 1.8 billion revolving credit facility that can be used for general group purpose and as a backstop for its commercial paper program. In January 2013 the EUR 1.8 billion facility was extended by 2 years until February 18, 2018. The facility has no ﬁnancial covenants and repetitive material adverse change clauses and can be used for general group purposes. As of December 31, 2013, Philips did not have any amounts outstanding under any of these facilities. Additionally Philips also held EUR 65 million of equity investments in available-for-sale ﬁnancial assets (fair value at December 31, 2013). Currency risk Currency risk is the risk that the fair value or future cash ﬂows of a ﬁnancial instrument will ﬂuctuate because of changes in foreign exchange rates. Currency ﬂuctuations may impact Philips’ ﬁnancial results. Philips is exposed to currency risk in the following areas: • Transaction exposures, related to forecasted sales and purchases and on-balance-sheet receivables/payables resulting from such transactions • Translation exposure of net income in foreign entities • Translation exposure of foreign-currency intercompany and external debt and deposits • Translation exposure of foreign-currency-denominated equity invested in consolidated companies • Translation exposure to equity interests in non-functional-currency investments in associates and available-for-sale ﬁnancial assets. It is Philips’ policy that signiﬁcant transaction exposures are hedged by the businesses. Accordingly, all businesses are required to identify and measure their exposures resulting from material transactions denominated in currencies other than their own functional currency. Philips’ policy generally requires committed foreign currency exposures to be fully hedged using forwards. Anticipated transactions may be hedged using forwards or options or a combination thereof. The amount hedged as a proportion of the total anticipated exposure identiﬁed varies per business and is a function of the ability to project cash ﬂows, the time horizon for the cash ﬂows and the way in which the businesses can adapt to changing levels of foreign-currency exchange rates. As a result, hedging activities cannot and will not eliminate all currency risks for these anticipated transaction exposures. Generally, the maximum tenor of these hedges is 18 months. 11 Group ﬁnancial statements 11.9 - 11.9 The following table outlines the estimated nominal value in millions of euros for transaction exposure and related hedges for Philips’ most signiﬁcant currency exposures consolidated as of December 31, 2013: Estimated transaction exposure and related hedges in millions of euros maturity 0-60 days maturity over 60 days exposure hedges exposure hedges December 31, 2013 Receivables Functional vs. exposure currency EUR vs. USD USD vs. EUR EUR vs. GBP USD vs. JPY EUR vs. JPY EUR vs. CNY USD vs. AUD EUR vs. CHF USD vs. CAD GBP vs. USD Others Total 2013 Total 2012 Payables 387 191 83 46 39 18 16 21 10 12 148 971 1,098 Functional vs. exposure currency EUR vs. USD USD vs. CNY EUR vs. PLN EUR vs. GBP USD vs. SGD INR vs. USD IDR vs. USD EUR vs. RON BRL vs. USD USD vs. EUR Others Total 2013 Total 2012 (171) (70) (30) (23) (14) (21) (24) (3) (14) (5) (82) (457) (622) (364) (166) (71) (42) (39) (18) (12) (18) (8) (12) (124) (874) (998) 253 70 24 18 12 21 14 3 11 4 72 502 560 1,718 (1,169) 695 284 217 166 73 65 57 63 57 296 3,691 4,037 (831) (162) (102) (81) (26) (16) (12) (28) (15) (18) (106) (1,397) (1,875) (354) (158) (113) (116) (41) (33) (33) (33) (33) (156) (2,239) (2,453) 518 92 36 46 19 16 7 15 8 9 65 831 1,050 The derivatives related to transactions are, for hedge accounting purposes, split into hedges of on-balance-sheet accounts receivable/ payable and forecasted sales and purchases. Changes in the value of on- balance-sheet foreign-currency accounts receivable/payable, as well as the changes in the fair value of the hedges related to these exposures, are reported in the income statement under costs of sales. Hedges related to forecasted transactions, where hedge accounting is applied, are accounted for as cash ﬂow hedges. The results from such hedges are deferred in other comprehensive income within equity to the extent that the hedge is effective. As of December 31, 2013, a gain of EUR 24 million was deferred in equity as a result of these hedges. The result deferred in equity will be released to earnings mostly during 2014 at the time when the related hedged transactions affect the income statement. During 2013, a net gain of EUR 5 million was recorded in the consolidated statement of income as a result of ineffectiveness on certain anticipated cash ﬂow hedges. Annual Report 2013 185 11 Group ﬁnancial statements 11.9 - 11.9 The total net fair value of hedges related to transaction exposure as of December 31, 2013 was an unrealized asset of EUR 44 million. An instantaneous 10% increase in the value of the euro against all currencies would lead to a decrease of EUR 68 million in the value of the derivatives; including a EUR 58 million decrease related to foreign exchange transactions of the US dollar against the euro, a EUR 15 million decrease related to foreign exchange transactions of the Japanese yen against euro, a EUR 15 million decrease related to foreign exchange transactions of the Pound sterling, partially offset by a EUR 46 million increase related to foreign exchange transactions of the euro against the US dollar. The EUR 68 million decrease includes a loss of EUR 19 million that would impact the income statement, which would largely offset the opposite revaluation effect on the underlying accounts receivable and payable, and the remaining loss of EUR 49 million would be recognized in equity to the extent that the cash ﬂow hedges were effective. The total net fair value of hedges related to transaction exposure as of December 31, 2012 was an unrealized asset of EUR 25 million. An instantaneous 10% increase in the value of the euro against all currencies would lead to a decrease of EUR 69 million in the value of the derivatives; including a EUR 96 million decrease related to foreign exchange transactions of the US dollar against the euro, a EUR 17 million decrease related to foreign exchange transactions of the Japanese yen against euro, a EUR 8 million decrease related to foreign exchange transactions of the Pound sterling, partially offset by a EUR 69 million increase related to foreign exchange transactions of the euro against the US dollar. Foreign exchange exposure also arises as a result of inter-company loans and deposits. Where the Company enters into such arrangements the ﬁnancing is generally provided in the functional currency of the subsidiary entity. The currency of the Company’s external funding and liquid assets is matched with the required ﬁnancing of subsidiaries either directly through external foreign currency loans and deposits, or synthetically by using foreign exchange derivatives, including cross currency interest rate swaps and foreign exchange forward contracts. In certain cases where group companies may also have external foreign currency debt or liquid assets, these exposures are also hedged through the use of foreign exchange derivatives. Changes in the fair value of hedges related to this exposure are either recognized within ﬁnancial income and expenses in the statements of income, accounted for as cash ﬂow hedges or where such loans would be considered part of the net investment in the subsidiary then net investment hedging would be applied. Translation exposure of foreign-currency equity invested in consolidated entities may be hedged. If a hedge is entered into, it is accounted for as a net investment hedge. As of December 31, 2013 cross currency interest rate swaps and foreign exchange forward contracts with a fair value liability of EUR 261 million and external bond funding for a nominal value of USD 4,059 million were designated as net investment hedges of our ﬁnancing investments in foreign operations. During 2013 a total gain of EUR 2 million was recognized in the income statement as ineffectiveness on net investment hedges. The total net fair value of these ﬁnancing derivatives as of December 31, 2013, was a liability of EUR 260 million. An instantaneous 10% increase in the value of the euro against all currencies would lead to an increase of EUR 245 million in the value of the derivatives, including a EUR 272 million increase related to the US dollar. Philips does not currently hedge the foreign exchange exposure arising from equity interests in non-functional-currency investments in associates and available-for-sale ﬁnancial assets. Interest rate risk Interest rate risk is the risk that the fair value or future cash ﬂows of a ﬁnancial instrument will ﬂuctuate because of changes in market interest rates. Philips had outstanding debt of EUR 3,901 million, which created an inherent interest rate risk. Failure to effectively hedge this risk could negatively impact ﬁnancial results. At year-end, Philips held EUR 2,465 million in cash and cash equivalents, total long-term debt of EUR 3,309 million and total short-term debt of EUR 592 million. At December 31, 2013, Philips had a ratio of ﬁxed-rate long-term debt to total outstanding debt of approximately 80%, compared to 72% one year earlier. A sensitivity analysis conducted as of January 2014 shows that if long- term interest rates were to decrease instantaneously by 1% from their level of December 31, 2013, with all other variables (including foreign exchange rates) held constant, the fair value of the long-term debt would increase by approximately EUR 317 million. If there was an increase of 1% in long- term interest rates, this would reduce the market value of the long-term debt by approximately EUR 251 million. 186 Annual Report 2013 If interest rates were to increase instantaneously by 1% from their level of December 31, 2013, with all other variables held constant, the annualized net interest expense would decrease by approximately EUR 18 million. This impact was based on the outstanding net cash position at December 31, 2013. A sensitivity analysis conducted as of January 2013 shows that if long- term interest rates were to decrease instantaneously by 1% from their level of December 31, 2012, with all other variables (including foreign exchange rates) held constant, the fair value of the long-term debt would increase by approximately EUR 422 million. If there was an increase of 1% in long- term interest rates, this would reduce the market value of the long-term debt by approximately EUR 339 million. If interest rates were to increase instantaneously by 1% from their level of December 31, 2012, with all other variables held constant, the annualized net interest expense would decrease by approximately EUR 25 million. This impact was based on the outstanding net cash position at December 31, 2012. Equity price risk Equity price risk is the risk that the fair value or future cash ﬂows of a ﬁnancial instrument will ﬂuctuate because of changes in equity prices. Philips is a shareholder in several publicly listed companies, including Chimei Innolux, Shenyang Neusoft Corporation Ltd, and TPV Technology Ltd. As a result, Philips is exposed to potential ﬁnancial loss through movements in their share prices. The aggregate equity price exposure in its main available-for-sale ﬁnancial assets amounted to approximately EUR 65 million at year-end 2013 (2012: EUR 120 million including investments in associates shares that were sold during 2012) and a further EUR 62 million that has been reclassiﬁed as assets held for sale in relation to the agreed contribution to the Dutch Pension Fund (please refer to note 36, Subsequent events). Philips does not hold derivatives in its own stock or in the above-mentioned listed companies. Philips is also a shareholder in several privately-owned companies amounting to EUR 50 million. As a result, Philips is exposed to potential value adjustments. As part of the sale of shares in NXP to Philips Pension Trustees Limited there was an arrangement that may entitle Philips to a cash payment from the UK Pension Fund on or after September 7, 2014 if the value of the NXP shares has increased by this date to a level in excess of a predetermined threshold, which at the time of the transaction was substantially above the transaction price, and the UK Pension Fund is in surplus (on the regulatory funding basis) on September 7, 2014. Commodity price risk Commodity price risk is the risk that the fair value or future cash ﬂows of a ﬁnancial instrument will ﬂuctuate because of changes in commodity prices. Philips is a purchaser of certain base metals, precious metals and energy. Philips hedges certain commodity price risks using derivative instruments to minimize signiﬁcant, unanticipated earnings ﬂuctuations caused by commodity price volatility. The commodity price derivatives that Philips enters into are accounted for as cash ﬂow hedges to offset forecasted purchases. As of December 2013, a loss of EUR 2.2 million was deferred in equity as a result of these hedges. A 10% increase in the market price of all commodities as of December 31, 2013 would increase the fair value of the derivatives by EUR 1.4 million. As of December 2012, a loss of EUR 0.3 million was deferred in equity as a result of these hedges. A 10% increase in the market price of all commodities as of December 31, 2012 would increase the fair value of the derivatives by EUR 2 million. Credit risk Credit risk represents the loss that would be recognized at the reporting date, if counterparties failed completely to perform their payment obligations as contracted. Credit risk is present within Philips trade receivables. To have better insights into the credit exposures, Philips performs ongoing evaluations of the ﬁnancial and non-ﬁnancial condition of its customers and adjusts credit limits when appropriate. In instances where the creditworthiness of a customer is determined not to be sufﬁcient to grant the credit limit required, there are a number of mitigation tools that can be utilized to close the gap including reducing payment terms, cash on delivery, pre-payments and pledges on assets. Philips invests available cash and cash equivalents with various ﬁnancial institutions and is exposed to credit risk with these counterparties. Philips is also exposed to credit risks in the event of non-performance by ﬁnancial institutions with respect to ﬁnancial derivative instruments. Philips actively manages concentration risk and on a daily basis measures the potential loss under certain stress scenarios, should a ﬁnancial institution default. These worst-case scenario losses are monitored and limited by the Company. The Company does not enter into any ﬁnancial derivative instruments to protect against default by ﬁnancial institutions. However, where possible the Company requires all ﬁnancial institutions with whom it deals in derivative transactions to complete legally enforceable netting agreements under an International Swap Dealers Association master agreement or otherwise prior to trading, and whenever possible, to have a strong credit rating from Standard & Poor’s and Moody’s Investor Services. Philips also regularly monitors the development of the credit risk of its ﬁnancial counterparties. Wherever possible, cash is invested and ﬁnancial transactions are concluded with ﬁnancial institutions with strong credit ratings or with governments or government-backed institutions. Below table shows the credit ratings of the ﬁnancial institutions with which Philips had short-term deposits above EUR 25 million as of December 31, 2013: Credit risk with number of counterparties for deposits above EUR 25 million AA-rated governments AA-rated government banks AAA-rated bank counterparties AA-rated bank counterparties A-rated bank counterparties 25-100 million 100-500 million 500-2,000 million − − − 1 1 2 2 1 − 2 3 8 − − − − − − For an overview of the overall maximum credit exposure of the group’s ﬁnancial assets, please refer to note 34, Fair value of ﬁnancial assets and liabilities for details of carrying amounts and fair value. Country risk Country risk is the risk that political, legal, or economic developments in a single country could adversely impact our performance. The country risk per country is deﬁned as the sum of the equity of all subsidiaries and associated companies in country cross-border transactions, such as intercompany loans, accounts receivable from third parties and intercompany accounts receivable. The country risk is monitored on a regular basis. As of December 31, 2013, the Company had country risk exposure of EUR 7.8 billion in the United States, EUR 2.5 billion in Belgium and EUR 1.5 billion in China (including Hong Kong). Other countries higher than EUR 500 million are United Kingdom (EUR 673 million), Japan (EUR 608 million) and the Netherlands (EUR 517 million). Countries where the risk exceeded EUR 300 million but was less than EUR 500 million are Poland, Germany and Malaysia. The degree of risk of a country is taken into account when new investments are considered. The Company does not, however, use ﬁnancial derivative instruments to hedge country risk. Other insurable risks Philips is covered for a broad range of losses by global insurance policies in the areas of property damage/business interruption, general and product liability, transport, directors’ and ofﬁcers’ liability, employment practice liability, crime, and aviation product liability. The counterparty risk related to the insurance companies participating in the above mentioned global insurance policies are actively managed. As a rule Philips only selects insurance companies with a S&P credit rating of at least A-. Throughout the year the counterparty risk is monitored on a regular basis. To lower exposures and to avoid potential losses, Philips has a global Risk Engineering program in place. The main focus of this program is on property damage and business interruption risks including company interdependencies. Regular on-site assessments take place at Philips locations and business critical suppliers by risk engineers of the insurer in order to provide an accurate assessment of the potential loss and its impact. The results of these assessments are shared across the Company’s stakeholders. On-site assessments are carried out against the predeﬁned Risk Engineering standards which are agreed between Philips and the insurers. Recommendations are made in a Risk Improvement report and 11 Group ﬁnancial statements 11.9 - 11.9 36 are monitored centrally. This is the basis for decision-making by the local management of the business as to which recommendations will be implemented. For all policies, deductibles are in place, which vary from EUR 250,000 to EUR 2,500,000 per occurrence and this variance is designed to differentiate between the existing risk categories within Philips. Above this ﬁrst layer of working deductibles, Philips operates its own re-insurance captive, which during 2013 retained EUR 2.5 million per occurrence for property damage and business interruption losses and EUR 5 million in the aggregate per year. For general and product liability claims, the captive retained EUR 1.5 million per claim and EUR 6 million in the aggregate. New contracts were signed on December 31, 2013, for the coming year, whereby the re-insurance captive retentions remained unchanged. 36 Subsequent events Dutch pension plan contribution On July 1, 2013, Philips announced that it had reached an agreement with the Dutch trade unions on a new collective labor agreement that covers the period January 1, 2013 till December 31, 2014. The new agreement includes changes in the plan rules and the funding agreement with the Dutch pension plan, which is the company’s largest Deﬁned Beneﬁt pension plan. The plan changes have become effective as of January 1, 2014 and the new funding agreement has been signed by the Trustees of the Dutch pension plan. As part of these changes, Philips agreed to make a EUR 600 million contribution to the Dutch pension plan, of which EUR 240 million has been settled in cash on February 19, 2014. During 2014 and 2015, the remainder of the consideration will be settled through the transfer of assets and cash proceeds from the sale of assets which are currently owned by Philips. The (majority of the) contribution will need to be written off through other comprehensive income due to the asset ceiling restrictions in the plan. Healthcare facility in Cleveland, Ohio In our healthcare facility in Cleveland, Ohio, certain issues in the general area of manufacturing process controls were identiﬁed during an ongoing US Food and Drug Administration (FDA) inspection. To address these issues, on January 10, 2014 we started a voluntary, temporary suspension of new production at the facility, primarily to strengthen manufacturing process controls. Currently, there is no indication of product safety issues. This action is estimated to have a negative impact on the sector’s operational results of approximately EUR 60 to 70 million in the ﬁrst half of 2014, of which we expect to recover a substantial part in the second half of 2014. Transfer of the remaining 30%-stake in TP Vision Holding to TPV Technology Limited (TPV) On January 20, 2014 Philips announced that it has signed a term sheet to transfer the remaining 30% stake in the TP Vision venture to TPV Technology Limited. The signing of deﬁnitive agreements is expected to take place in the ﬁrst quarter of 2014, with completion expected in the second half of 2014, subject to certain regulatory and TPV shareholder approvals. After completion, TPV will fully own TP Vision, which will enable further integration with TPV’s TV business. The remaining 30% stake in the TP Vision venture will be transferred for a deferred purchase price and all outstanding loans and stand-by facilities between Philips and the TP Vision venture will be transferred to TPV. The brand license agreement between Philips and the TP Vision venture will remain in place, with an annual royalty of 2.2% of sales payable by the TP Vision venture to Philips. The minimum annual royalty has been reduced from EUR 50 million to EUR 40 million. The agreement includes a EUR 50 million transaction-related payment, which Philips has accounted for in the fourth quarter of 2013 under Results relating to investments in associates (see note 6, Interests in entities). LTI coverage program To cover Philips’ outstanding obligations resulting from past and present long-term incentive and employee stock purchase programs dating back to 2004, Philips will repurchase up to 12 million additional Philips shares on NYSE Euronext Amsterdam, to be executed during 2014. The shares repurchased will be held by Philips as treasury shares until they are distributed to participants. Philips started this program as of January 28, 2014 and will enter into subsequent discretionary management agreements with one or more banks to repurchase Philips shares within the limits of relevant laws and regulations (in particular EC Regulation 2273/2003) and Philips’ articles of association. All transactions are published on Philips’ website (www.philips.com/investor) on a weekly basis. Annual Report 2013 187 11 Group ﬁnancial statements 11.9 - 11.9 The LTI coverage program is over and above the existing EUR 1.5 billion share repurchase program for cancellation purposes which started on October 21, 2013. 188 Annual Report 2013 11.10 Independent auditor’s report - Group Independent auditor’s report To the Supervisory Board and Shareholders of Koninklijke Philips N.V.: Report on the consolidated ﬁnancial statements We have audited the accompanying consolidated ﬁnancial statements 2013 which are part of the ﬁnancial statements of Koninklijke Philips N.V., Eindhoven, the Netherlands, and comprise the consolidated balance sheet as at December 31, 2013, the consolidated statements of income, comprehensive income, cash ﬂows and changes in equity for the year then ended and notes, comprising a summary of the signiﬁcant accounting policies and other explanatory information. Management’s responsibility The Board of Management is responsible for the preparation and fair presentation of the consolidated ﬁnancial statements in accordance with International Financial Reporting Standards as adopted by the European Union and with Part 9 of Book 2 of the Dutch Civil Code and for the preparation of the Management report in accordance with Part 9 of Book 2 of the Dutch Civil Code. Furthermore, management is responsible for such internal control as it determines is necessary to enable the preparation of the consolidated ﬁnancial statements that are free from material misstatement, whether due to fraud or error. Auditor’s responsibility Our responsibility is to express an opinion on these consolidated ﬁnancial statements based on our audit. We conducted our audit in accordance with Dutch law, including the Dutch Standards on Auditing. This requires that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated ﬁnancial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated ﬁnancial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated ﬁnancial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated ﬁnancial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated ﬁnancial statements. We believe that the audit evidence we have obtained is sufﬁcient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated ﬁnancial statements give a true and fair view of the ﬁnancial position of Koninklijke Philips N.V. as at December 31, 2013 and of its result and its cash ﬂows for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union and with Part 9 of Book 2 of the Dutch Civil Code. Report on other legal and regulatory requirements Pursuant to the legal requirements under Section 2:393 sub 5 at e and f of the Dutch Civil Code, we have no deﬁciencies to report as a result of our examination whether the Management report, to the extent we can assess, as deﬁned in the introduction paragraph of section 11 Group ﬁnancial statements, has been prepared in accordance with Part 9 of Book 2 of this Code, and whether the information as required under Section 2:392 sub 1 at b - h has been annexed. Further, we report that the Management report to the extent we can assess, is consistent with the consolidated ﬁnancial statements as required by Section 2:391 sub 4 of the Dutch Civil Code. Amsterdam, The Netherlands February 25, 2014 KPMG Accountants N.V. J.F.C. van Everdingen RA 11 Group ﬁnancial statements 11.10 - 11.10 Annual Report 2013 189 12 Company ﬁnancial statements 12 - 12 12 Company ﬁnancial statements The Company balance sheet has been prepared before the appropriation of result. The Company statement of income has been prepared in accordance with Section 2:402 of the Dutch Civil Code, which allows a simpliﬁed Statement of income in the Company ﬁnancial statements in the event that a comprehensive Statement of income is included in the consolidated Group ﬁnancial statements. Additional information For ‘Additional information’ within the meaning of Section 2:392 of the Dutch Civil Code, please refer to section 11.10, Independent auditor’s report - Group, of this Annual Report, section 12.5, Independent auditor’s report - Company, of this Annual Report, and section 4.4, Proposed distribution to shareholders, of this Annual Report. Adjustments Prior-period ﬁnancial statements have been restated following the adoption of IAS 19R, which mainly relates to accounting for pensions. Introduction Statutory ﬁnancial statements The sections Group ﬁnancial statements and Company ﬁnancial statements contain the statutory ﬁnancial statements of Koninklijke Philips N.V. (the Company). A description of the Company’s activities and group structure is included in the Consolidated Financial Statements. Accounting policies applied The ﬁnancial statements of the Company included in this section are prepared in accordance with Part 9 of Book 2 of the Dutch Civil Code. Section 362 (8), Book 2, Dutch Civil Code, allows companies that apply IFRS as adopted by the European Union in their consolidated ﬁnancial statements to use the same measurement principles in their company ﬁnancial statements. The Company has prepared these Company ﬁnancial statements using this provision. The accounting policies are described in note 1, Signiﬁcant accounting policies. Investments in group companies are accounted for using the equity method in these Company ﬁnancial statements. Presentation of Company ﬁnancial statements The structure of the Company balance sheets is aligned with the Consolidated balance sheets in order to achieve optimal transparency between the Group ﬁnancial statements and the Company ﬁnancial statements. Consequently, the presentation of the Company balance sheets deviates from Dutch regulations. 190 Annual Report 2013 12.1 Balance sheets before appropriation of results Balance sheets of Koninklijke Philips N.V. as of December 31 in millions of euros Assets Non-current assets: Property, plant and equipment Intangible assets Financial ﬁxed assets Non-current receivables Deferred tax assets Other non-current ﬁnancial assets A B C Current assets: D Receivables Assets classiﬁed as held for sale Cash and cash equivalents Liabilities and shareholders’ equity E Shareholders’ equity: Preference shares, par value EUR 0.20 per share: - Authorized: 2,000,000,000 shares (2012: 2,000,000,000 shares) - Issued: none Common shares, par value EUR 0.20 per share: - Authorized: 2,000,000,000 shares (2012: 2,000,000,000 shares) - Issued and fully paid: 937,845,789 shares (2012: 957,132,962 shares) Capital in excess of par value Legal reserve: revaluation Legal reserve: available-for-sale ﬁnancial assets Legal reserve: cash ﬂow hedges Legal reserve: afﬁliated companies Legal reserve: currency translation differences Retained earnings H Net income 1) Treasury shares, at cost: 24,508,022 shares (2012: 42,541,687 shares) Non-current liabilities: F Long-term debt Long-term provisions Deferred tax liabilities Other non-current liabilities F G J Current liabilities: Short-term debt Other current liabilities Contractual obligations and contingent liabilities not appearing in the balance sheet 1) Prepared before appropriation of results 12 Company ﬁnancial statements 12.1 - 12.1 2 9 16,597 49 212 325 7,988 − 2,879 191 1,304 54 54 20 1,161 (93) 9,598 (35) (1,103) 3,539 10 19 139 11,742 1,461 2012 2013 18 55 19,535 32 161 283 17,194 20,084 7,500 45 1,282 10,867 28,061 8,827 28,911 188 1,796 23 55 24 1,319 (569) 7,927 1,169 (718) 11,151 11,214 3,158 16 15 161 3,707 3,350 13,645 702 13,203 14,347 28,061 28,911 Annual Report 2013 191 12 Company ﬁnancial statements 12.2 - 12.3 12.2 Statements of income Statements of income of Koninklijke Philips N.V. for the years ended December 31 in millions of euros Net income from afﬁliated companies Other net income H Net income 12.3 Statement of changes in equity Statement of changes in equity of Koninklijke Philips N.V. in millions of euros unless otherwise stated 2012 375 (410) (35) 2013 1,276 (107) 1,169 legal reserves com- mon shares capital in excess of par value revalua- tion available- for-sale ﬁnancial assets cash ﬂow hedges afﬁliated compa- nies currency translation differences retained earnings net income treasury shares at cost share- holders’ equity 191 1,304 54 54 20 1,161 (93) 9,598 (35) (1,103) 11,151 (35) 35 1,169 1,169 (31) 31 (5) 68 158 (427) (96) (2) (62) 6 (35) (14) (678) (780) (38) (75) 402 4 (7) (36) 105 21 − (302) (37) (70) (272) − 787 (631) (669) 229 118 105 21 188 1,796 23 55 24 1,319 (569) 7,927 1,169 (718) 11,214 Balance as of January 1, 2013 Appropriation of prior year result Net income Release revaluation reserve Net current period change Income tax on net current period change Reclassiﬁcation into income Dividend distributed Cancellation of treasury shares Purchase of treasury shares Re-issuance of treasury shares Share-based compensation plans Income tax on share-based compensation plans Balance as of December 31, 2013 192 Annual Report 2013 12 Company ﬁnancial statements 12.4 - 12.4 A B C 12.4 Notes All amounts in millions of euros unless otherwise stated Notes to the Company ﬁnancial statements A Intangible assets Intangible assets includes mainly licenses and patents. The changes during 2013 are as follows; In December 2013, investments in group companies increased by EUR 2,111 million due to the purchase of 25% of a group company which was previously owned by another group company. This transaction was executed in view of our continued effort to restructure and optimize our foreign based intra-group ﬁnance activities. In addition, investments in group companies also increased by EUR 517 million as a result of capital injections. These transactions reﬂect most of the increase in the line Acquisitions/additions. intangible assets C Other non-current ﬁnancial assets Balance as of January 1, 2013: Cost Amortization/ impairments Book value Changes in book value: Reclassiﬁcations Additions Amortization Total changes Balance as of December 31, 2013: Cost Amortization/ impairments Book value 55 (46) 9 7 41 (2) 46 67 (12) 55 B Financial ﬁxed assets The investments in group companies and associates are presented as ﬁnancial ﬁxed assets in the balance sheet using the equity method. Goodwill paid upon acquisition of investments in group companies or associates is included in the net equity value of the investment and is not shown separately on the face of the balance sheet. Loans are provided to group companies and associates and are stated at amortized cost, less impairment. investments in group companies investments in associates loans total Balance as of January 1, 2013 Changes: 10,407 87 6,103 16,597 Reclassiﬁcation − Acquisitions/ additions Sales/redemptions Net income from afﬁliated companies Dividends received Translation differences Other Balance as of December 31, 2013 2,632 (131) 1,309 (340) (458) 172 (3) − (2) (8) − (3) − − (3) 529 (524) − − 3,161 (657) 1,301 (340) (235) (696) − 172 13,591 71 5,873 19,535 A list of investments in group companies, prepared in accordance with the relevant legal requirements (Dutch Civil Code, Book 2, Sections 379 and 414), is deposited at the Chamber of Commerce in Eindhoven, The Netherlands. available- for-sale ﬁnancial assets loans and receivables ﬁnancial assets at fair value through proﬁt and loss total Balance as of January 1, 2013 Changes: Reclassiﬁcations Acquisitions/ additions Sales/redemptions/ reductions Impairments Transfer to assets classiﬁed as held for sale Value adjustments Balance as of December 31, 2013 84 221 20 325 3 9 − (7) (15) 12 86 − − (1) (1) (30) 1 190 − − − − 3 9 (1) (8) − (13) (45) − 7 283 Available-for-sale ﬁnancial assets The Company’s investments in available-for-sale ﬁnancial assets mainly consist of investments in common stock of companies in various industries. An amount of EUR 15 million has been reclassiﬁed to assets held for sale in relation to the agreed contribution to the Philips Pension Fund (please refer to note 30, Post-employment beneﬁts and note 36, Subsequent events). Loans and receivables During 2013 loans with face value EUR 30 million were transferred to assets held for sale in relation to the agreed contribution to the Philips Pension Fund (please refer to note 30, Post-employment beneﬁts and note 36, Subsequent events). Financial assets at fair value through proﬁt and loss Included in this category are certain ﬁnancial instruments that Philips received in exchange for the transfer of its television activities. The initial value of EUR 17 million was adjusted by EUR 11 million during 2012 and EUR 6 million in 2013 reported under Value adjustments. As of December 31, 2013 the fair value reported was nil. For more information please refer to note 36, Subsequent events. In 2010, Philips sold its entire holding of common shares in NXP Semiconductors B.V. (NXP) to Philips Pension Trustees Limited (herein referred to as “UK Pension Fund”). As a result of this transaction the UK Pension Fund obtained the full legal title and ownership of the NXP shares, including the entitlement to any future dividends and the proceeds from any sale of shares. From the date of the transaction the NXP shares became an integral part of the plan assets of the UK Pension Fund. The purchase agreement with the UK Pension Fund includes an arrangement that may entitle Philips to a cash payment from the UK Pension Fund on or after September 7, 2014, if the total value yielded by the NXP shares has increased by this date to a level in excess of a predetermined threshold, which at the time of the transaction was substantially above the transaction price, and the UK Pension Fund is in a surplus (on a swaps basis) on September 7, 2014. The arrangement qualiﬁes as a ﬁnancial instrument and is reported under Other non-current ﬁnancial assets. The Trustees of the UK Pension Fund have been selling the NXP shares in a number of transactions since 2010. The remaining number of NXP shares were sold in the course of 2013 and the total sale proceeds of the NXP shares exceeded the predetermined threshold. However, as of December Annual Report 2013 193 D E 12 Company ﬁnancial statements 12.4 - 12.4 31, 2013 the UK Pension Fund was not in surplus (on the agreed swaps basis). The fair value of the arrangement was estimated to be EUR 14 million as of December 31, 2012. As of December 31, 2013 management’s best estimate of the fair value of the arrangement is EUR 7 million, based on the current funded status as of December 31, 2013 (swaps basis) and the economic and demographic risks of the UK Pension Fund. The change in fair value in 2013 is reported under Value adjustments in the table above. D Receivables Trade accounts receivable Afﬁliated companies Other receivables Advances and prepaid expenses Derivative instruments - assets E Shareholders’ equity 2012 2013 83 80 7,690 7,177 23 16 176 5 28 210 7,988 7,500 Common shares As of December 31, 2013, the issued and fully paid share capital consists of 937,845,789 common shares, each share having a par value of EUR 0.20. In June 2013, Philips settled a dividend of EUR 0.75 per common share, representing a total value of EUR 678 million. Shareholders could elect for a cash dividend or a share dividend. Approximately 59.8% of the shareholders elected for a share dividend, resulting in the issuance of 18,491,337 new common shares. The settlement of the cash dividend resulted in a payment of EUR 272 million. The following table shows the movements in the outstanding number of shares; Share movement schedule 2012 2013 Balance as of January 1 926,094,902 914,591,275 Dividend distributed 30,522,107 18,491,337 Purchase of treasury shares (46,870,632) (27,811,356) Re-issuance of treasury shares 4,844,898 8,066,511 Balance as of December 31 914,591,275 913,337,767 Preference shares The ‘Stichting Preferente Aandelen Philips’ has been granted the right to acquire preference shares in the Company. Such right has not been exercised. As a means to protect the Company and its stakeholders against an unsolicited attempt to (de facto) take over control of the Company, the General Meeting of Shareholders in 1989 adopted amendments to the Company’s articles of association that allow the Board of Management and the Supervisory Board to issue (rights to acquire) preference shares to a third party. As of December 31, 2013, no preference shares have been issued. Option rights/restricted shares The Company has granted stock options on its common shares and rights to receive common shares in the future. Please refer to note 31, Share- based compensation, which is deemed incorporated and repeated herein by reference. Treasury shares In connection with the Company’s share repurchase programs, shares which have been repurchased and are held in treasury for (i) delivery upon exercise of options, performance and restricted share programs and employee share purchase programs, and (ii) capital reduction purposes, 194 Annual Report 2013 are accounted for as a reduction of shareholders’ equity. Treasury shares are recorded at cost, representing the market price on the acquisition date. When issued, shares are removed from treasury shares on a FIFO basis. Any difference between the cost and the cash received at the time treasury shares are issued, is recorded in retained earnings. Dividend withholding tax in connection with the Company’s purchase of treasury shares is recorded in retained earnings. The following transactions took place resulting from employee option and share plans: 2012 2013 Shares acquired 5,147 3,984 Average market price EUR 17.86 EUR 22.51 Amount paid EUR 0 million EUR 0 million Shares delivered Average market price 4,844,898 EUR 24.39 8,066,511 EUR 28.35 Amount received EUR 118 million EUR 229 million Total shares in treasury at year-end 28,712,954 20,650,427 Total cost EUR 847 million EUR 618 million In order to reduce share capital, the following transactions took place: 2012 2013 Shares acquired 46,865,485 27,807,372 Average market price EUR 16.41 EUR 22.69 Amount paid EUR 769 million EUR 631 million Reduction of capital stock Total shares in treasury at year-end 82,364,590 37,778,510 13,828,733 3,857,595 Total cost EUR 256 million EUR 100 million Dividend distribution A proposal will be submitted to the 2014 General Meeting of Shareholders to pay a dividend of EUR 0.80 per common share, in cash or shares at the option of the shareholder, from the 2013 net income. Legal reserves As of December 31, 2013, legal reserves relate to the revaluation of assets and liabilities of acquired companies in the context of multi-stage acquisitions of EUR 23 million (2012: EUR 54 million), unrealized gains on available-for-sale ﬁnancial assets of EUR 55 million (2012: EUR 54 million), unrealized gains on cash ﬂow hedges of EUR 24 million (2012: EUR 20 million), ‘afﬁliated companies’ of EUR 1,319 million (2012: EUR 1,161 million) and unrealized currency translation losses of EUR 569 million (2012: EUR 93 million). The item ‘afﬁliated companies’ relates to the ‘wettelijke reserve deelnemingen’, which is required by Dutch law. This reserve relates to any legal or economic restrictions on the ability of afﬁliated companies to transfer funds to the parent company in the form of dividends. Limitations in the distribution of shareholders’ equity Pursuant to Dutch law, limitations exist relating to the distribution of shareholders’ equity of EUR 1,609 million (2012: EUR 1,480 million). As at December 31, 2013, such limitations relate to common shares of EUR 188 million (2012: EUR 191 million) as well as to legal reserves included under ‘revaluation’ of EUR 23 million (2012: EUR 54 million), available-for-sale ﬁnancial assets of EUR 55 million (2012: EUR 54 million), unrealized gains on cash ﬂow hedges of EUR 24 million (2012: EUR 20 million) and ‘afﬁliated companies’ of EUR 1,319 million (2012: EUR 1,161 million). The unrealized losses related to currency translation differences of EUR 569 million (2012: EUR 93 million), although qualifying as a legal reserve, reduce the distributable amount by their nature. 12 Company ﬁnancial statements 12.4 - 12.4 F G H I J K L F Long-term debt and short-term debt Long-term debt (range of) interest rates average interest rate amount outstanding due in 1 year due after 1 year due after 5 years average remaining term (in years) amount outstanding 2012 USD bonds 3.8 - 7.8% 5.6% 2,958 − 2,958 2,059 13.7 3,198 Convertible debentures Private ﬁnancing Intercompany ﬁnancing 0.0 - 2.3% Bank borrowings Other long-term debt 1.5 - 2.2% 1.8 - 19.0% 0.7% 1.9% 4.5% 2,296 2,296 250 47 − 200 − − 200 − 0.6 3.6 1.0 2,593 3,158 2,259 450 47 5,751 12 2 442 450 49 4,153 Corresponding data previous year 4,153 614 3,539 3,289 4,030 The following amounts of the long-term debt as of December 31, 2013, are due in the next ﬁve years: 2014 2015 2016 2017 2018 Corresponding amount previous year 2,593 − − − 899 3,492 864 Short-term debt Short-term debt includes the current portion of outstanding external and intercompany long-term debt of EUR 2,593 million (2012: EUR 614 million), other debt to group companies totaling EUR 10,976 million (2012: EUR 11,015 million) and short-term bank borrowings of EUR 76 million (2012: EUR 113 million). G Other current liabilities Income tax payable Other short-term liabilities Accrued expenses Derivative instruments - liabilities 2012 2013 78 538 253 592 4 53 174 471 For the remuneration of past and present members of both the Board of Management and the Supervisory Board, please refer to note 33, Information on remuneration, which is deemed incorporated and repeated herein by reference. J Contractual obligations and contingent liabilities not appearing in the balance sheet Philips entered into contracts with several venture capitalists where it committed itself to make, under certain conditions, capital contributions to investment funds to an aggregated amount of EUR 40 million (2012: EUR 48 million) until June 30, 2021. As at December 31, 2013 capital contributions already made to these investment funds are recorded as available-for-sale ﬁnancial assets within Other non-current ﬁnancial assets. Furthermore, Philips made commitments to third parties in 2013 of EUR 16 million (2012: EUR 25 million) with respect to sponsoring activities. The amounts are due before 2016. General guarantees as referred to in Section 403, Book 2, of the Dutch Civil Code, have been given by the Company on behalf of several group companies in the Netherlands. The liabilities of these companies to third parties and investments in associates totaled EUR 1,255 million as of year- end 2013 (2012: EUR 1,416 million). Guarantees totaling EUR 255 million (2012: EUR 284 million) have also been given on behalf of other group companies and credit guarantees totaling EUR 15 million (2012: EUR 4 million) on behalf of unconsolidated companies and third parties. The Company is the head of a ﬁscal unity that contains the most signiﬁcant Dutch wholly-owned group companies. The Company is therefore jointly and severally liable for the tax liabilities of the tax entity as a whole. For additional information, please refer to note 26, Contingent assets and liabilities , which is deemed incorporated and repeated herein by reference. 1,461 702 K Audit fees In 2012, Other short-term liabilities included a payable amount of EUR 509 million related to a ﬁne from the European Commission following an investigation into alleged violation of competition rules in the Cathode- Ray Tubes (CRT) industry. The payable amount represented the aggregate of EUR 313 million paid by the Company and EUR 196 million, being 50% of the ﬁne related to LPD. This amount was paid in 2013 and is therefore reﬂected in the reduction of other short-term liabilities compared with 2012. H Net income Net income in 2013 amounted to a proﬁt of EUR 1,169 million (2012: a loss of EUR 35 million). The increase of net results in 2013 compared to 2012 is especially due to the ﬁnancial performance of afﬁliated companies. I Employees The number of persons employed by the Company at year-end 2013 was 10 (2012: 10) and included the members of the Board of Management and certain leaders from functions, businesses and markets, together referred to as the Executive Committee. For a summary of the audit fees, please refer to the Group Financial statements, note 3, Income from operations, which is deemed incorporated and repeated herein by reference. L Subsequent events Dutch pension plan contribution On July 1 2013, Philips announced that it had reached an agreement with the Dutch trade unions on a new collective labor agreement that covers the period January 1, 2013 till December 31, 2014. The new agreement includes changes in the plan rules and the funding agreement with the Dutch pension plan, which is the company’s largest Deﬁned Beneﬁt pension plan. The plan changes have become effective as of January 1, 2014 and the new funding agreement has been signed by the Trustees of the Dutch pension plan. As part of these changes, Philips agreed to make a EUR 600 million contribution to the Dutch pension plan, of which EUR 240 million has been settled in cash on February 19, 2014. During 2014 and 2015, the remainder of the consideration will be settled through the transfer of assets and cash proceeds from the sale of assets which are currently owned by Philips. The (majority of the) contribution will need to be written off through other comprehensive income due to the asset ceiling restrictions in the plan. Annual Report 2013 195 Auditor’s responsibility Our responsibility is to express an opinion on these Company ﬁnancial statements based on our audit. We conducted our audit in accordance with Dutch law, including the Dutch Standards on Auditing. This requires that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the Company ﬁnancial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the Company ﬁnancial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the Company ﬁnancial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the Company ﬁnancial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the Company ﬁnancial statements. We believe that the audit evidence we have obtained is sufﬁcient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the Company ﬁnancial statements give a true and fair view of the ﬁnancial position of Koninklijke Philips N.V. as at December 31, 2013 and of its result for the year then ended in accordance with Part 9 of Book 2 of the Dutch Civil Code. Report on other legal and regulatory requirements Pursuant to the legal requirements under Section 2:393 sub 5 at e and f of the Dutch Civil Code, we have no deﬁciencies to report as a result of our examination whether the Management report as deﬁned in the introduction paragraph of section 11 Group ﬁnancial statements, to the extent we can assess, has been prepared in accordance with Part 9 of Book 2 of this Code, and whether the information as required under Section 2:392 sub 1 at b - h has been annexed. Further, we report that the Management report, to the extent we can assess, is consistent with the Company ﬁnancial statements as required by Section 2:391 sub 4 of the Dutch Civil Code. Amsterdam, The Netherlands February 25, 2014 KPMG Accountants N.V. J.F.C. van Everdingen RA 12 Company ﬁnancial statements 12.5 - 12.5 Healthcare facility in Cleveland, Ohio In our healthcare facility in Cleveland, Ohio, certain issues in the general area of manufacturing process controls were identiﬁed during an ongoing US Food and Drug Administration (FDA) inspection. To address these issues, on January 10 we started a voluntary, temporary suspension of new production at the facility, primarily to strengthen manufacturing process controls. Currently, there is no indication of product safety issues. This action is estimated to have a negative impact on the sector’s EBITA of approximately EUR 60 to 70 million in the ﬁrst half of 2014, of which we expect to recover a substantial part in the second half of 2014. Transfer of the remaining 30%-stake in TP Vision Holding to TPV Technology On January 20, 2014 Philips announced that it has signed a term sheet to transfer the remaining 30% stake in the TP Vision venture to TPV Technology Limited. The signing of deﬁnitive agreements is expected to take place in the ﬁrst quarter of 2014, with completion expected in the second half of 2014, subject to certain regulatory and TPV shareholder approvals. After completion, TPV will fully own TP Vision, which will enable further integration with TPV’s TV business. The remaining 30% stake in the TP Vision venture will be transferred for a deferred purchase price and all outstanding loans and stand-by facilities between Philips and the TP Vision venture will be transferred to TPV. The brand license agreement between Philips and the TP Vision venture will remain in place, with an annual royalty of 2.2% of sales payable by the TP Vision venture to Philips. The minimum annual royalty has been reduced from EUR 50 million to EUR 40 million. The agreement includes a EUR 50 million transaction-related payment, which Philips has accounted for in the fourth quarter of 2013 under Results relating to investments in associates (see note 6, Interests in entities). LTI coverage program To cover Philips’ outstanding obligations resulting from past and present long-term incentive and employee stock purchase programs dating back to 2004, Philips will repurchase up to 12 million additional Philips shares on NYSE Euronext Amsterdam, to be executed during 2014. The shares repurchased will be held by Philips as treasury shares until they are distributed to participants. Philips started this program as of January 28, 2014 and will enter into subsequent discretionary management agreements with one or more banks to repurchase Philips shares within the limits of relevant laws and regulations (in particular EC Regulation 2273/2003) and Philips’ articles of association. All transactions are published on Philips’ website (www.philips.com/investor) on a weekly basis. The LTI coverage program is over and above the existing EUR 1.5 billion share repurchase program for cancellation purposes which started on October 21, 2013. February 25, 2014 The Supervisory Board The Board of Management 12.5 Independent auditor’s report - Company Independent auditor’s report To the Supervisory Board and Shareholders of Koninklijke Philips N.V.: Report on the Company ﬁnancial statements We have audited the accompanying Company ﬁnancial statements 2013 which are part of the ﬁnancial statements of Koninklijke Philips N.V., Eindhoven, the Netherlands, and comprise the Company balance sheets as at December 31, 2013, the Company statements of income, and changes in equity for the year then ended and notes, comprising a summary of the accounting policies and other explanatory information in section 12 and 12.4. Management’s responsibility The Board of Management is responsible for the preparation and fair presentation of these Company ﬁnancial statements and the preparation of the Management report, both in accordance with Part 9 of Book 2 of the Dutch Civil Code. Furthermore, management is responsible for such internal control as it determines is necessary to enable the preparation of the Company ﬁnancial statements that are free from material misstatement, whether due to fraud or error. 196 Annual Report 2013 13 Sustainability statements 13 Sustainability statements 13 - 13 Approach to sustainability reporting Philips has a long tradition of sustainability reporting, beginning in 1999 when we published our ﬁrst environmental annual report. This was expanded in 2003, with the launch of our ﬁrst sustainability annual report, which provided details of our social and economic performance in addition to our environmental results. In 2008, we decided to publish an integrated ﬁnancial, social and environmental report, reﬂecting the progress we have made embedding sustainability in our way of doing business. This is also supported by the inclusion of sustainability in the Philips Mission, Vision and the company strategy. This is our sixth annual integrated ﬁnancial, social and environmental report. Tracking trends We continuously follow external trends to determine the issues most relevant for our company and those where we can make a positive contribution to society at large. In addition to our own research, we make use of a variety of sources, including the United Nations Environmental Programme (UNEP), World Bank, World Business Council for Sustainable Development (WBCSD), World Economic Forum and World Health Organization. Our work also involves tracking topics of concern to governments, regulatory bodies, academia, and non-governmental organizations, and following the resulting media coverage. Stakeholders We seek to engage stakeholders across all our activities to gain their feedback on speciﬁc areas of our business. Working in partnerships is crucial in delivering on our vision to make the world healthier and more sustainable through innovation. In addition to engagement with our customers, our suppliers, employees, local communities and governments, we participate in meetings and task forces as a member of organizations including the WBCSD, World Economic Forum, Electronic Industry Citizenship Coalition (EICC), Carbon Disclosure Project Supply Chain, European Committee of Domestic Equipment Manufacturers (CECED), Federation of National Manufacturers Associations for Luminaires and Electrotechnical Components for Luminaires in the European Union (CELMA), European Coordination Committee of the Radiological, Electromedical and Healthcare IT Industry (COCIR), Digital Europe, European Lamp Companies Federation (ELC), European Roundtable of Industrialists (ERT), National Electrical Manufacturers Association (NEMA), Environmental Leadership Council of the Information Technology Industry Council (ELC ITIC), Consumer Electronics Association (CEA), Association of Home Appliance Manufacturers (AHAM), Healthcare Plastics Recycling Council (HPRC) and the Ellen MacArthur Foundation. A multi-stakeholder project with the Sustainable Trade Initiative (IDH), a number of NGOs, and electronic companies was started in 2011 and continued in 2013. The program focuses on improving working circumstances in the electronics industry in China. Furthermore, we engaged with the leading Dutch labor union (FNV) and a number of NGOs, including Enough, GoodElectronics, MakeITfair, the Chinese Institute of Public and Environmental Affairs, SOMO, Amnesty International, Greenpeace and Friends of the Earth. Reporting standards In this report, we have followed relevant best practice standards and international guidelines while reporting on our sustainability performance. Most important are the Global Reporting Initiative’s (GRI) new G4 Sustainability Reporting Guidelines as well as the International Integrated Reporting Council (IIRC) Integrated Reporting framework. A detailed overview of the G4 Comprehensive Indicators is provided at the end of this section. Sustainability is integrated in our company strategy and embedded in the organization. We have tried to reﬂect this “integrated thinking” while writing this report, in line with the framework. We signed on to the United Nations Global Compact in March 2007, joining thousands of companies from all regions of the world as well as international labor and civil society organizations to advance 10 universal principles in the areas of human rights, labor, the environment and anti- corruption. Our General Business Principles, Sustainability and Environmental Policies, and our Supplier Sustainability Declaration are the cornerstones that enable us to live up to the standards set by the Global Compact. This is closely monitored and reported, as illustrated throughout this report, which is also our annual Communication on Progress (COP) submitted to the UN Global Compact Ofﬁce. Material aspects and our focus Based on ongoing trend analysis, stakeholder input and media analysis, we identify the key material aspects for our company from a sustainability perspective. We have mapped the aspects in the table below, taking into account the: • • level of concern to society at large and stakeholders, versus signiﬁcance of the environmental and social impact on and by Philips through our operations and products/solutions. This is a dynamic process, as we continuously monitor the world around us. We develop our policies and programs based on our ﬁndings. The results have been reviewed and approved by the Sustainability Board. Annual Report 2013 197 13 Sustainability statements 13 - 13 Key material aspects Environmental - Climate change - Energy efﬁciency - Clean technologies - Circular Economy (incl. resource efﬁciency and collection & recycling) Reference1) section 2.3, Market opportunities, of this Annual Report section 4.3, Environmental performance, of this Annual Report chapter 13, Sustainability statements, of this Annual Report section 2.3, Market opportunities, of this Annual Report section 4.3, Environmental performance, of this Annual Report chapter 13, Sustainability statements, of this Annual Report sub-section 5.4.1, About Innovation, Group & Services, of this Annual Report Message from the CEO, of this Annual Report sub-section 4.3.1, Green Innovation, of this Annual Report section 4.3, Environmental performance, of this Annual Report sub-section 13.2.2, Supplier indicators, of this Annual Report - Biodiversity (increased focus on natural resources) section 4.3, Environmental performance, of this - Water scarcity - Pollution (incl. air and acidiﬁcation) Societal - Aging population - Rising healthcare costs - Chronic and lifestyle related diseases - Healthy Living - Expanding middle class in growth geographies - Responsible Supply Chains (inc. human rights) - Demographic shift and urbanization - Conﬂict minerals - Employee health and safety Annual Report chapter 13, Sustainability statements, of this Annual Report chapter 13, Sustainability statements, of this Annual Report sub-section 5.4.1, About Innovation, Group & Services, of this Annual Report Reference1) Message from the CEO, of this Annual Report section 2.3, Market opportunities, of this Annual Report section 5.1, Healthcare, of this Annual Report Message from the CEO, of this Annual Report section 2.3, Market opportunities, of this Annual Report section 5.1, Healthcare, of this Annual Report Message from the CEO, of this Annual Report section 2.3, Market opportunities, of this Annual Report section 5.1, Healthcare, of this Annual Report Message from the CEO, of this Annual Report section 2.3, Market opportunities, of this Annual Report section 5.2, Consumer Lifestyle, of this Annual Report Message from the CEO, of this Annual Report section 5.2, Consumer Lifestyle, of this Annual Report section 4.2, Social performance, of this Annual Report chapter 13, Sustainability statements, of this Annual Report section 2.3, Market opportunities, of this Annual Report sub-section 5.3.1, Lighting business landscape, of this Annual Report sub-section 4.2.10, Supplier sustainability, of this Annual Report sub-section 13.2.2, Supplier indicators, of this Annual Report section 4.2, Social performance, of this Annual Report 198 Annual Report 2013 Boundaries Supply chain, operations, use phase Supply chain, operations, use phase Use phase Supply chain, operations, use phase Operations, use phase Operations Operations, use phase Boundaries Use phase Use phase Use phase Use phase Use phase Supply chain Use phase Supply chain Supply chain, operations 13 Sustainability statements 13 - 13 - Economic downturn Message from the CEO, of this Annual Report Supply chain, operations, use phase Reference1) Governance - Privacy and on-line sales - Business ethics and General Business Principles - Partnerships and co-creation - Impact of social media - Stakeholder activism and transparency - Metrics beyond ﬁnancials - Product regulation (inc. transparency on chemicals) - Diversity Reference1) Boundaries section 6.5, Compliance risks, of this Annual Report section 6.5, Compliance risks, of this Annual Report sub-section 5.4.1, About Innovation, Group & Services, of this Annual Report chapter 13, Sustainability statements, of this Annual Report sub-section 4.2.8, Stakeholder engagement, of this Annual Report section 6.4, Operational risks, of this Annual Report sub-section 4.2.8, Stakeholder engagement, of this Annual Report sub-section 4.2.10, Supplier sustainability, of this Annual Report section 6.4, Operational risks, of this Annual Report section 4.2, Social performance, of this Annual Report section 4.3, Environmental performance, of this Annual Report chapter 13, Sustainability statements, of this Annual Report section 6.5, Compliance risks, of this Annual Report sub-section 5.1.2, About Philips Healthcare, of this Annual Report sub-section 5.2.2, About Philips Consumer Lifestyle, of this Annual Report sub-section 5.3.2, About Philips Lighting, of this Annual Report section 2.5, Our people, of this Annual Report sub-section 4.2.3, Diversity and inclusion, of this Annual Report Operations, use phase Supply chain, operations, use phase Supply chain, use phase Supply chain, operations, use phase Supply chain, operations, use phase Supply chain, operations, use phase Supply chain, operations, use phase Operations 1) With the exception of section 4.2, Social performance, of this Annual Report, section 4.3, Environmental performance, of this Annual Report, and chapter 13, Sustainability statements, of this Annual Report, the sections and chapters referred to are not included in the scope of the assurance engagement Programs and targets Our sustainability commitments are grouped under the label EcoVision, comprising the following elements: target 2015 baseline year Green Product Sales 50% of total sales Lives Improved Green Innovation 2 billion - Investments EUR 2 billion (cumulative) - Energy Efﬁciency 49 Lumen/Watt (up 50%) - Materials - Collection & Recycling 45,000 tonnes (up 100%) - Recycled content 15,000 tonnes (up 100%) 2010 2009 2009 2009 Green Operations - CO2 reduction - Health & Safety 40% 2007 0.26 Lost Workday Injury Cases per 100 FTE Supplier Sustainability 1) 72% compliant 1) For more information see sub-section 13.2.2, Supplier indicators, of this Annual Report All of our programs are guided by the Philips General Business Principles, which provide the framework for all of our business decisions and actions. Boundaries of sustainability reporting Our sustainability performance reporting encompasses the consolidated Philips Group activities, following the consolidation criteria detailed in this section. As a result of impact assessments of our value chain we have identiﬁed the material topics, determined their relative impact in the value chain (supply chain, our own operations, and use phase of our products) and report for each topic on the relevant parts of the value chain. More details on our impact are provided in the relevant sections. The consolidated selected ﬁnancial information in this sustainability statements section has been derived from the Group Financial Statements, which are based on IFRS. Comparability and completeness We used expert opinions and estimates for some parts of the Key Performance Indicator calculations. There is therefore an inherent uncertainty in our calculations. The ﬁgures reported are Philips’ best estimate. As our insight increases, we may enhance the methodology in the future. The Green Product deﬁnition has changed in 2013 for Lighting; with the phase-out of incandescent lamps, the Eco Halogen lamp became the reference product for many lamps and was not included in our Green Product sales any longer. This had a downward impact on the Green Product sales of Lighting of some 4%. At the same time it was decided to include sustainable services provided by the business group Professional Lighting Solutions (PLS) in the Green Product deﬁnition Lighting. This had an upward impact of 1,5% on the Green Product sales of this sector. Annual Report 2013 199 13 Sustainability statements 13 - 13 The emissions of substances data is based on measurements and estimates at manufacturing site level. There is therefore an inherent uncertainty in our calculations. The ﬁgures reported are Philips’ best estimate. As our insight increases, we may enhance the methodology in the future. Integration of newly acquired activities is scheduled according to a deﬁned integration timetable (in principle, ﬁrst full reporting year after the year of acquisition) and subject to the integration agenda. Data for activities that are divested during the reporting year are not included in full-year reporting. Environmental data are reported for manufacturing sites with more than 50 industrial employees. Social data cover all employees, including temporary employees, but exclude contract workers. Due to the implementation of new HRM systems, we are able to provide exit diversity information on Philips employees as from 2012. Historical comparisons may not be available, however. Health and safety data is reported for units with over 50 FTEs (full-time equivalents) and is voluntary for smaller units. New acquisitions must report, in principle, the ﬁrst year after acquisition and subject to the integration agenda. Data for activities that are divested during the reporting year are not included in full-year reporting. In line with the discontinued operations presentation in the Group ﬁnancial statements regarding the Audio, Video, Multimedia and Accessories (AVM&A) business, we have excluded the AVM&A data from the consolidated Sustainability data. Where the impact of the exclusion was material, we clearly disclosed the impact. Prior-period ﬁnancial statements have been restated for the treatment of Audio, Video, Multimedia and Accessories as discontinued operations and the adoption of IAS 19R, which mainly relates to accounting for pensions. Data deﬁnitions and scope Lives improved, energy efﬁciency and materials The key performance indicators on ‘lives improved’, ‘energy efﬁciency’ and ‘materials’ and the scope are deﬁned in the respective methodology documents that can be found at www.philips.com/sustainability. Green Products Green Products offer a signiﬁcant environmental improvement in one or more Green Focal Areas: Energy efﬁciency, Packaging, Hazardous substances, Weight, Recycling and disposal and Lifetime reliability. The life cycle approach is used to determine a product’s overall environmental improvement. It calculates the environmental impact of a product over its total life cycle (raw materials, manufacturing, product use and disposal). Green Products need to prove leadership in at least one Green Focal Area compared to industry standards, which is deﬁned by a sector speciﬁc peer group. This is done either by outperforming reference products (which can be a competitor or predecessor product in the particular product family) by at least 10%, outperforming product-speciﬁc eco-requirements or by being awarded with a recognized eco-performance label. Because of different product portfolios, sectors have speciﬁed additional criteria for Green Products, including product-speciﬁc minimum requirements where relevant. Green Innovation Green Innovation comprise all R&D activities directly contributing to the development of Green Products or Green Technologies. A wide set of additional criteria and boundaries have been deﬁned as the basis for internal and external validation. Environmental data All environmental data from manufacturing operations are reported on a half-year basis in our sustainability reporting and validation tool, according to deﬁned company guidelines that include deﬁnitions, procedures and calculation methods. Operational carbon footprint The Philips operational carbon footprint (Scope 1, 2 and 3) is calculated on a half-yearly basis and includes: Industrial sites – manufacturing and assembly sites • • Non-industrial sites – ofﬁces, warehouses, IT centers and R&D facilities • Business travel – lease and rental cars and airplane travel • Logistics – air, sea and road transport All emission factors used to transform input data (for example, amount of tonne-kilometers transported) into CO2 emissions are from the Greenhouse Gas Protocol (GHGP), except for business travel, where the service providers supplied CO2 data based on their own veriﬁed methodology. The GHGP distinguishes three scopes. It is mandatory to report on the ﬁrst two to comply with the GHGP reporting standards. • Scope 1 – direct CO2 emissions – is reported on with direct emissions from our industrial and non-industrial sites in full. Emissions from industrial sites, which consist of direct emissions resulting from processes and fossil fuel combustion on site, are reported in the sustainability reporting system. Energy use and CO2 emissions from non-industrial sites are based on actual data where available. If this is not the case, they are estimated based on square meters, taking the geographical location and building type of the site into account. • Scope 2 – CO2 emissions resulting from the generation of purchased electricity for our premises – is reported on with electricity use from industrial and non-industrial sites in full. Indirect CO2 emissions resulting from purchased electricity, steam and heat are reported in the sustainability reporting system. Those emissions of industrial sites not yet reporting are calculated on the same basis as described in Scope 1. Indirect emissions of non-industrial sites are calculated in the same manner as described in Scope 1. • Scope 3 – other CO2 emissions related to activities not owned or controlled by the Group is reported on for our business travel and distribution activities. Commuting by our employees, upstream distribution (before suppliers ship to us), outsourced activities and emissions resulting from product use by our customers are not included in our operational carbon footprint. The calculations for business travel by lease cars are based on actual fuel usage and for rental cars on distance traveled. Emissions from business travel by airplane are calculated by the supplier based on mileage ﬂown and emission factors from DEFRA (UK Department of Environment, Food and Rural Affairs), distinguishing between short, medium and long ﬂights. Further, emissions from air freight for distribution are calculated based on the amount of tonne-kilometers transported between airports (distinguishing between short, medium and long hauls), including an estimate (based on actual data of the lanes with the largest volumes) for trucking from sites and distribution centers to airports and vice versa. Express shipments are generally a mix of road and air transport, depending on the distance. Therefore the assumption is applied that shipments over less than 600 km are transported by road and the rest of the shipments by air (those emissions by air are calculated in the same way as air freight). For sea transport, only data on transported volume were available so an estimate had to be made about the average weight of a container. Transportation to and from ports is not registered. This fore and aft part of sea transport was estimated to be around 3% of the total distance (based on actual data of the lanes with the largest volumes), consisting of a mix of modalities, and was added to the total emissions accordingly. CO2 emissions from road transport were also calculated based on tonne-kilometers. If data were incomplete, the emissions were estimated based on sales volumes. Return travel of vehicles is not included in the data for sea and road distribution. Health and safety Health and safety data are reported and validated monthly. The focus is on reporting work-related injuries, which predominantly occur in manufacturing operations. The annual number of cases leading to at least one lost workday is reported per 100 FTEs (full-time equivalents). Fatalities are reported for staff, contractors and visitors and include commuting accidents. Internal validation processes are followed and peer audits performed to ensure consistent data quality and to assess the robustness of data reporting systems. General Business Principles Alleged GBP violations are registered in our intranet-based reporting and validation tool. These environmental data from manufacturing are tracked and reported to measure progress against our Green operations program targets. Reporting on ISO 14001 certiﬁcation is based on manufacturing units reporting in the sustainability reporting system. Supplier audits Supplier audits are primarily focused on identiﬁed risk suppliers, based on identiﬁed risk countries and on spend of more than EUR 1 million (new suppliers EUR 100,000 and no threshold for high risk suppliers). 200 Annual Report 2013 • Based on the Maplecroft Human Rights Risk Indexes, risk countries for Supply Management in 2013 were: Brazil, China, India, Indonesia, Mexico, Ukraine, and Vietnam. • Suppliers of new ventures are included to the extent that the integration process of these ventures has been ﬁnalized. Normative integration period is two years after closure of the new venture. Sustainability governance Sustainability is strongly embedded in our core business processes, like innovation (EcoDesign), sourcing (Supplier Sustainability Involvement Program), manufacturing (Green Manufacturing 2015) and Logistics (Green Logistics) and projects like the Circular Economy initiative. The Sustainability Board is the highest governing sustainability body in Philips, chaired by Jim Andrew, member of the Executive Committee. Three other Executive Committee members sit in the Sustainability Board jointly with sector and functional executives. The Sustainability Board convenes four times per year, deﬁnes Philips’ sustainability strategy and programs, monitors progress and takes corrective action where needed. Progress on Sustainability is communicated internally on a quarterly basis to Philips staff and at least annually in the Executive Committee and Supervisory Board. External assurance KPMG has provided reasonable assurance on whether the information in chapter 13, Sustainability statements, of this Annual Report and section 4.2, Social performance, of this Annual Report and section 4.3, Environmental performance, of this Annual Report presents fairly, in all material respects, the sustainability performance in accordance with the reporting criteria. We refer to section 13.4, Independent assurance report, of this Annual Report. 13.1 Economic indicators 13 Sustainability statements 13 - 13.2.1 13.2 Social statements This section provides additional information on (some of) the social performance parameters reported in section 4.2, Social performance, of this Annual Report 13.2.1 General Business Principles The analysis is based upon 335 concerns reported via the formal GBP procedure in 2013 relating to alleged violations of the General Business Principles (GBP), compared to 374 in 2012. The decrease in the overall number of concerns reported can mainly be attributed to a decrease in the Americas. We see a slight decrease in percentage of reported concerns in North America, which accounted for 43% of all concerns (2012: 47%), and a continued decrease in concerns reported in Latin America (2013: 17%; 2012: 21%, 2011: 32%). Europe and the Middle East show a stable 15% of the total number of reported concerns (2012: 15%). Only the Asia Paciﬁc region, which accounted for 25% of all concerns, shows a notable and continuing increase in reports (2012: 18%). The continuing dominance in North America we believe is due to a corporate culture in which employees are very much aware of compliance issues, their rights and the opportunities for reporting potential violations. The continuing increase in the Asia Paciﬁc region we believe is the consequence of our efforts in that region to strengthen our corporate culture in the area of ethics and compliance. Most common types of reported concerns Treatment of employees The most common reported concern remains related to the Treatment of employees category, which represented 61% of all reports (2012: 55%). As in 2012, the vast majority of the Treatment of employees concerns (81%) remains related to two issues – Equal and fair treatment and Respectful treatment. This section provides summarized information on contributions on an accruals basis to the most important economic stakeholders as a basis to drive economic growth. For a full understanding of each of these indicators, see the speciﬁc ﬁnancial statements and notes in this report. Concerns regarding Equal and fair treatment – primarily favoritism, discrimination and unfair treatment - originated principally in the US. Of the concerns reported in the US, 39% related to equal and fair treatment, whereas that ﬁgure was 24% for Philips. Distribution of direct economic beneﬁts in millions of euros 2011 2012 2013 Suppliers: goods and services 12,732 14,466 13,641 Employees: salaries and wages 4,668 5,499 4,983 Shareholders: distribution from retained earnings Government: corporate income taxes Capital providers: net interest 711 251 302 687 185 325 678 466 268 Total purchased goods and services amounted to EUR 13.6 billion, representing 58% of total revenues of the Philips Group. Of this amount, 70% was spent with global suppliers, the remainder with local suppliers. Compared to 2012, spending decreased signiﬁcantly mainly as a result of Bill of Material savings. In 2013, the salaries and wages totaled EUR 4.98 billion. This amount is some EUR 500 million lower than in 2012, caused by a reduction in headcount and lower restructuring costs. See note 3, Income from operations for more information. Dividend distributed to shareholders amounted to EUR 678 million, comparable to 2012. Income taxes amounted to EUR 466 million, compared to EUR 185 million in 2012. The effective income tax rate was 28.1%, compared to 58.0% in 2012. Excluding the non-tax-deductible European Commission ﬁne and charges related to various legal matters in 2012, the effective tax rate in 2012 was 25.5%. The 2.6 percentage points increase in 2013 was mainly related to a higher weighted average statutory income tax rate in 2013 due to a change in the country mix of proﬁt and loss, which was partly offset by lower valuation allowances. For a further understanding, see note 5, Income taxes. Most concerns regarding lack of Respectful treatment – primarily verbal abuse, (sexual) harassment and hostile work environment– again come from the US. Of the concerns reported in the US, 33% related to respectful treatment; compared to 25% for Philips as a whole. Business integrity In second place, with 33% of the total number of reports, are concerns reported in the Business integrity category (2012: 32%). Most concerns (60%) in this category originate in the Asia Paciﬁc region. Followed by the regions North America and Europe and Middle East (both 17%) and Latin America (7%). More information on these categories can be found in the GBP Directives on www.philips.com/gbp. Annual Report 2013 201 13 Sustainability statements 13.2.1 - 13.2.2 Breakdown of reported GBP concerns 2009 2010 2011 2012 2013 Health & Safety 6 3 2 11 3 Treatment of employees 162 184 132 205 203 - Collective bargaining − 1 − 1 5 - Equal and fair treatment - Employee development - Employee privacy - Employee relations - Respectful treatment - Remuneration - Right to organize - Working hours - HR other Legal Business Integrity Supply management IT Other Total 63 64 41 72 80 3 2 15 53 22 − 4 − 4 88 4 − 54 318 1 2 4 96 12 − 4 − 13 112 4 − 22 − 1 1 71 6 − 2 10 10 − 1 2 102 15 1 − 11 19 4 1 5 84 15 − 3 6 9 107 119 109 3 − 15 3 − 17 5 6 − 338 269 374 335 Classiﬁcation of the concerns investigated Substantiated versus unsubstantiated concerns Although 89 of the 335 GBP concerns reported in 2013 are still pending (especially those lodged during the last three months of the year), the table of investigated concerns provides an initial indication of the number of substantiated concerns compared to the number of concerns which, upon investigation, could not be substantiated. Out of the 246 concerns investigated, it was found that roughly one quarter (28%) were justiﬁed, comparable with 2012 (26%). With regard to concerns regarding Treatment of employees, there was a notable increase in the number of justiﬁed concerns to 20% of the total number of concerns in this category, back to the level of 2011 (2012: 13%, 2011: 21%). In the other major category, i.e. the investigated concerns in the Business integrity category, the percentage of concerns that was justiﬁed increased considerably to 50% (2012: 42%). A range of disciplinary and corrective measures have been implemented as a result of established violations of the General Business Principles, ranging from dismissal and written warnings to awareness training sessions and organizational measures. category substantiated unsubstantiated substantiated unsubstantiated substantiated unsubstantiated 2011 2012 2013 Health & Safety Treatment of employees Legal Business Integrity Supply Management IT Other Total − 18 − 33 2 − 3 56 2 68 5 43 1 − 5 124 2 22 5 37 1 − 11 78 7 150 8 51 − − 4 220 − 33 2 32 − 3 − 70 2 136 2 32 3 1 − 176 13.2.2 Supplier indicators In addition to our own sustainability activities, we also engage our suppliers and their suppliers toward better sustainability practices. To that end, we are active in various supply chain initiatives around the world. updated Declaration includes 4 entirely new provisions, and 14 updates to existing provisions. The new provisions are related to responsible sourcing of minerals, protection of privacy, non-retaliation, and supplier responsibility to monitor code compliance at next tier suppliers. Philips has a direct business relationship with approximately 10,000 product and component suppliers and 30,000 service providers. Given the size and complexity of our supply chain we need to focus our efforts. Therefore, we developed an approach based on the supplier’s sustainability risk proﬁle related to spend, country of production, business risk and type of supplier relationship. The risk proﬁle is used to select suppliers for inclusion in our sustainability audit program, conﬂict minerals, hazardous substance management and IDH Electronics program. Philips Supplier Sustainability Declaration The Philips Supplier Sustainability Declaration is based on the EICC Code of Conduct and in line with our General Business Principles, we added requirements on Freedom of Association and Collective Bargaining. The topics covered include labor and human rights, worker health and safety, environmental impact, ethics, and management systems. We monitor supplier compliance to the Declaration through a system of regular audits. In 2012 we updated the Philips Supplier Sustainability Declaration, in line with the new version of the EICC Code of Conduct. In 2013, we rolled-out the updated Declaration via the new purchasing contracts signed with suppliers, and via all trainings and audits done per January 1, 2013. The The Declaration requires suppliers to cascade the EICC Code down to their next tier suppliers. Suppliers must regard the Code as a total supply chain initiative and at a minimum, also require its next tier suppliers to acknowledge and implement the Code. This roll-out to deeper levels in the supply chain is reviewed during the on-site audits, where it is assessed how requirements have been communicated to the next tier suppliers and whether there is an effective process in place to ensure that the next tier suppliers implement the Code. Risk suppliers with who we have a direct business relationship are included in the supplier sustainability audit program, and most of these are tier 1 suppliers. However, sometimes Philips also selects and prescribes the tier 2 suppliers, in which case these tier 2 suppliers will also be included in the audit program. Supplier Sustainability Audit Program We monitor supplier compliance with the Declaration through a system of regular audits. During these audits, an independent external party visits the supplier’s site for several man-days to hold interviews with workers and management, do a factory tour, and review documentation. Based on their risk proﬁle, 572 risk suppliers are included in the supplier audit and development program; the majority of these are in China. During the 202 Annual Report 2013 audits, compliance with all sections of the Declaration is reviewed. In the event of non-compliance (NC) we require suppliers to make a corrective action plan, and we monitor its implementation until all major NCs are resolved. Full-scope audits are conducted in a 3-year cycle; to date we have audited 90% of all identiﬁed risk suppliers. 2013 Audits In 2013 we audited 200 of our current risk suppliers, including 131 continued conformance audits with suppliers that we already audited in 2010. Risk suppliers from recently acquired companies are also included, and this year we audited 27 suppliers from the acquisitions of Povos and Preethi. As in previous years, the majority of the audits were done in China. Also in Brazil, India and Mexico audits were done, as well as a small number of audits in Indonesia, Ukraine and Vietnam. With these audits we directly or indirectly impacted over 110,000 workers employed at the production sites that were audited. On top of the audits with current risk suppliers, we also audited 59 potential suppliers during the supplier selection process. These potential suppliers need to close any zero-tolerance issues before they can start delivering to Philips. Below we report on the ﬁndings at existing suppliers only; ﬁndings at potential suppliers are not included in this report since these suppliers are not (yet) part of Philips’ supply base. To track improvements Philips measures the ‘compliance rate’ for the identiﬁed risk suppliers, being the percentage of risk suppliers was audited within the last 3 years and don’t have - or have resolved all - major NCs. During 2013 we achieved a compliance rate of 77% (2012: 75%). Number of initial and continued conformance audits ■-initial--■-continued conformance 150 100 50 0 95 44 7 3 Brazil 14 13 China India 7 3 Others 8 Mexico 6 13 Sustainability statements 13.2.2 - 13.2.2 Per January 2013 we rolled out an updated version of the Philips Supplier Sustainability Declaration and audit checklist. Philips follows the EICC classiﬁcation for distinguishing major and minor NCs, and in the new audit checklist the classiﬁcation of what is a major and what is a minor NC changed for several topics. This explains some of the differences in audit ﬁndings 2013 compared to 2012. Audit ﬁndings Below table shows the results of the full scope audits done during 2013. When the audit reveals areas of non-compliance we request suppliers to implement corrective actions and our sustainability experts and independent third party auditors monitor the implementation during resolution audits. The results of the resolution audits are not included in the table below. Positive trends compared to last year • Occupational safety (NCs down 29%) • Working hours (on average 22% less NCs in 2013) • Emergency preparedness (NCs down 8%) • Wages and beneﬁts (NCs down 8%) Above topics belong to the most frequently observed areas of non- compliance and therefore, during our supplier development activities and visits we have paid more attention to these topics in 2013. Negative trends compared to last year • Business integrity (NCs up 28% - no training provided for employees) • Freely chosen employment (NCs up 11% - workers paying deposits) • Child labor prohibition/young worker management (NCs up 10% - young employees working overtime) Above increases we believe are mostly the result of more stringent criteria in the new EICC audit checklist. Management systems There may be areas where our audits reveal compliance in actual practice, but the related underlying management systems to safeguard continued compliance may not be sufﬁcient. Therefore, also management systems are reviewed during the audits. Although the 2013 audits show improvements compared to previous years, we see this as a continued weak area at suppliers where further capacity building is necessary. Related to management systems the most frequently observed NCs are a lack of third-party certiﬁed management systems, supplier responsibility (EICC Code requirements have not been communicated to the next tier suppliers), insufﬁcient management accountability and responsibility, and absence of improvement objectives. Annual Report 2013 203 Initial audit(full scope)3 yearcycleCorrective action implementationSupplier training&capabilitybuildingContinued conformance audit(full scope)Resolution Audit(limited scope)Supplier Sustainability Audits13 Sustainability statements 13.2.2 - 13.2.2 Summary of 2013 initial and continued conformance audit ﬁndings per region suppliers with one or more major non-compliances per category (in % of suppliers audited in 2013) “<10%” means that <10% of the supplier audits done in 2013 showed areas of non-compliance for a certain topic No. of audits Initial audits Continued conformance audits Average number of non-compliances per audit China Asia excl. China LATAM EMEA 139 44 95 11 35 15 20 18 24 9 15 9 2 1 1 11 Total 200 69 131 12 Workers employed at sites audited 88,775 13,008 8,067 516 110,336 Labor Freely Chosen Employment1) 10-25% 50-75% 10-25% Child labor prohibition /young worker management2) Working hours Wages and Beneﬁts Humane Treatment Non-discrimination Freedom of association Health & Safety Occupational Safety Emergency Preparedness Occupational Injury and Illness Industrial Hygiene Physically demanding work Machine safeguarding Food Sanitation and Housing Environment Environmental Permits and Reporting Pollution prevention and resource reduction Hazardous substances Waste water and solid waste Air emissions Product content restrictions Management systems Certiﬁed management system (SA8000, etc.) Company commitment Management accountability and responsibility Legal and customer requirements Risk assessment and risk management Improvement objectives Training Communication Worker feedback and participation Audits and assessments Corrective action process Documentation and records Supplier responsibility Ethics Business Integrity No improper advantage Disclosure of information Protection of Intellectual Property Fair business, advertising and competition Protection of identity Responsible sourcing of minerals 204 Annual Report 2013 10-25% 50-75% 50-75% <10% <10% - 25-50% 25-50% 25-50% 25-50% <10% 10-25% 10-25% 10-25% <10% 25-50% <10% 10-25% - 50-75% 10-25% 25-50% 10-25% 25-50% 25-50% 10-25% 10-25% 10-25% 25-50% 25-50% 10-25% 25-50% <10% 50-75% 25-50% <10% - 10-25% 25-50% 50-75% 25-50% 25-50% <10% <10% <10% <10% - <10% - <10% <10% 25-50% 10-25% <10% 10-25% - 10-25% 10-25% 25-50% 25-50% 25-50% <10% <10% - >75% 25-50% 50-75% 25-50% 50-75% 50-75% 50-75% 25-50% 25-50% 50-75% 25-50% 25-50% 50-75% 10-25% 10-25% - 10-25% 10-25% - 50-75% 10-25% 25-50% 25-50% 10-25% 25-50% 25-50% 10-25% 10-25% 25-50% 25-50% <10% 25-50% 25-50% 25-50% - <10% 10-25% 10-25% - 25-50% 25-50% <10% <10% <10% 10-25% <10% <10% <10% <10% 25-50% <10% 25-50% <10% - - - 50-75% - - - 50-75% >75% 50-75% >75% - 50-75% 50-75% >75% - 50-75% 50-75% - - >75% - 50-75% - >75% - - - - - - - - - - - - - - - 10-25% 10-25% 50-75% 25-50% <10% <10% <10% 25-50% 25-50% 25-50% 25-50% <10% 10-25% 10-25% 10-25% <10% 25-50% <10% 10-25% - 50-75% 10-25% 25-50% 10-25% 25-50% 25-50% 25-50% 25-50% 10-25% 25-50% 25-50% 10-25% 25-50% 25-50% <10% <10% <10% <10% <10% <10% 13 Sustainability statements 13.2.2 - 13.2.2 Privacy Non-retaliation General EICC Code China Asia excl. China - <10% - <10% LATAM - <10% EMEA - - Total - <10% <10% 25-50% 10-25% 50-75% 10-25% 1) Freely Chosen Employment: these cases are related to workers having to pay a deposit to their employer, which is not acceptable under the EICC Code of Conduct. We requested suppliers to take corrective action and veriﬁed that the deposits were returned to the workers and supplier policies were changed. 2) Child labor avoidance /young worker management: this is related to A) 20 cases of young workers (16 – 18 years) working overtime hours, which is not allowed by local laws. We requested suppliers to stop this and veriﬁed implementation of corrective action during resolving audits. B) two cases of historic child labor, where a labor agency and a supplier hired 2 workers a couple of months prior to reaching the legal age. We requested suppliers to strengthen its management system and age veriﬁcation procedure, and ensured that the workers were enrolled in the young worker management program. If we ﬁnd any cases of child labor, we require suppliers to take immediate action according to the ILO guidelines for employers of child labor, see also our child labor policy Implementing corrective actions On average we see 12 major NCs per supplier audit, and work with each supplier to resolve these NCs within 90 days where possible. Goal is to improve the conditions in the supplier factories. Therefore, we focus on training, supplier development and implementation of corrective action plans with those suppliers. In exceptional cases where the supplier is unwilling to improve, we will decide to end the business relationship, which we did for 15 suppliers in 2013. If Philips notices that there is a delay in the realization of the corrective action plan by the supplier, Philips uses a stratiﬁed approach for consequence management. Depending on the root cause why the supplier is not taking sufﬁcient corrective actions, Philips can decide to: send a formal warning to the supplier; allocate no new projects; allocate no new orders; or stop doing business. Audit progress and targets 2013 Goals Compliance rate: 67% 2014 Goals 75% of corrective actions implemented within 90 days (for major NCs found in 2014 audits) Progress Reached 77% compliance rate More information on the Supplier Sustainability Involvement Program, the Philips Supplier Sustainability Declaration and audit approach can be found at www.philips.com/suppliers. Supplier training and capacity building Based on many years of experience with the audit program, we know that a combination of audits, capacity building, consequence management and structural attention from management is crucial to realize structural and lasting changes at supplier production sites. Developing risk suppliers Since 2012 we are extending our capacity building initiatives which are offered to help suppliers improve their practices. We organize classroom training sessions, Philips sustainability experts regularly visit suppliers to provide on-site consultancy and training, and we invite suppliers to participate in trainings provided by the EICC. This is what we did different in 2013 training sessions, to improve the impact of the supplier trainings and audit results: • Smaller groups (less than 40 attendees per training, more training sessions, 22 full days of training were given), to enable more interaction and dialogue with and between suppliers • Suppliers performed self-assessments prior to the training • Suppliers learned how to do a self-audit after the training, Philips experts helped suppliers in this process and with the follow-up actions In China we invited suppliers for classroom training sessions which were attended by over 190 active and potential suppliers, representing a workforce of more than 120,000 factory workers in total. Next to basic training on the EICC Code of Conduct, dedicated trainings were provided for areas where we often see weak performance during the audits, e.g. ﬁre safety, working hours, and management systems. We continued our training programs for Philips buyers and quality managers, supporting them to further integrate sustainability in their daily work with suppliers. Supplier training and capacity building 2013 Goals Progress 35% of active risk suppliers in China involved in supplier sustainability development program Supplier sustainability development program was initiated in China. 44% suppliers are involved in sustainability development program Worked together with Philips customers to improve sustainability performance over multiple tiers of the supply chain, harmonizing sustainability expectations and requirements towards suppliers. 2014 Roll-out best practices and learnings from IDH electronics program to Chinese suppliers included in audit program Start dedicated 3-year program to improve Health & Safety conditions in supplier factories. Start roll-out to 20% of the Chinese suppliers in 2014 Sustainable Trade Initiative IDH Since 2011 Philips has been an active initiator and participant in the IDH Electronics Program, a multi-stakeholder initiative sponsored by the Dutch government to accelerate sustainable trade by building partnerships between leading multinationals, civil society organizations, governments, and other stakeholders. The IDH Electronics Program aims to support the development of sustainable and innovative workforce management practices for over 75 suppliers. Unlike other CSR programs that have been implemented previously in the industry, this program steers away from traditional auditing methods and seeks to make a signiﬁcant impact by building and up-scaling the skills of both workers and management. By promoting worker-management dialogue and helping to develop employees’ skills and careers, the program strives to reduce employee turnover and wastage, improve energy efﬁciency and improve the overall performance of supplier factories. The goal is to improve working conditions for more than 500,000 employees in the electronics sector. Participating suppliers are given an ‘Entry Point Assessment’ to identify issues that affect both factory management and employees, such as worker-management communication, occupational health and safety, Annual Report 2013 205 13 Sustainability statements 13.2.2 - 13.2.2 production, performance management and environmental issues. This is then used to develop a tailor-made action plan with each supplier, based on improved dialogue between management and employees. Suppliers receive support over a period of up to 24 months, and the cost of the program is shared between the supplier, Philips, and the IDH. In 2013, IDH was extended from the Pearl River Delta Area to include the Yangtze River Delta area. As of year-end 2013, the program covers 52 suppliers to Philips, Apple, Nokia, Dell and Hewlett-Packard. A total of 15 Philips suppliers are now involved in the program, seven in the Yangtze River Delta area and eight in the Pearl River Delta Area, covering around 17,000 employees. Together with other branded goods manufacturers, we are going beyond a supplier audit. In order to ensure a worthwhile output we are also working together with suppliers and the IDH program team to identify the top three improvement actions, and we are monitoring progress closely. Suppliers such as ‘company B’ are starting to see the beneﬁts of this program. IDH 2013 Goals Increase number of participating Philips suppliers from 7 to 15 suppliers Each IDH supplier identiﬁes its top 3 improvement actions 2014 Goals Increase number of participating suppliers to 20 All participating suppliers identify their top 3 improvement actions and develop their work plans 70% of all identiﬁed top 3 improvement actions implemented by end 2014 Progress 15 suppliers are now participating. Another 5 were invited and are in the process of enrolling All 15 suppliers completed their Entry Point Assessments and identiﬁed improvement areas and 11 suppliers deﬁned their top 3 improvement actions and completed development of their work plans IDH case study B is a company based in Hong Kong, which has an electronics factory located in Dongguan, China. As a Philips supplier, B has been involved in the IDH Electronics Program since January 2013. Philips has committed not to purchase raw materials, subassemblies, or supplies which we know contain conﬂict minerals that directly or indirectly ﬁnance or beneﬁt armed groups in the DRC or an adjoining country. Philips works towards the following goals: B has implemented a series of improvement plans in different areas, including worker-management communication, workers’ welfare and pay, health and safety, factory facilities and production. These improvement actions have resulted in increased productivity and greater employee satisfaction. • Minimize trade in conﬂict minerals that beneﬁt armed groups in the DRC or an adjoining country • Enable legitimate minerals from the region to enter global supply chains, thereby supporting the Congolese economy and the local communities that depend on these exports. To improve worker-management communication, for example, B has set up a factory improvement team made up of front-line production workers, departmental representatives and managerial staff. B’s management believes that talking directly to front-line workers gives a more accurate picture of what is going on in the company than hear-say reports that are passed up through the organizational hierarchy. The team structure helps to facilitate B’s cultural values of mutual respect and open communication. In the coming years B’s management will continue their active cooperation and dialogue with employees. Challenges will be identiﬁed jointly through constructive dialogue facilitated by the IDH Program. Issues further down the chain Conﬂict minerals In line with Philips’ commitment to supply chain sustainability, we feel obliged to implement measures in our chain to ensure that our products are not directly or indirectly funding human atrocities in the Democratic Republic of the Congo (DRC). We are concerned about the situation in eastern DRC where proceeds from the extractives sector are used to ﬁnance rebel conﬂicts in the region. Philips is committed to address this issue, even though it does not directly source minerals from the DRC. The supply chain for the metals of concern consists of many tiers, including mines, traders, exporters, smelters, reﬁners, alloy producers and component manufacturers, before reaching Philips’ direct suppliers. What are conﬂict minerals? Conﬂict minerals are deﬁned in the US Dodd-Frank Act as tin, tantalum, tungsten and gold. They can come from many sources around the world, including mines in the DRC which are estimated to provide approximately 18% of global tantalum production, 4% of tin, 3% of tungsten, and 2% of gold. These minerals may end up in many different products such as cars, planes, chemicals, jewelry, packaging, and electronics equipment. Collaboration with different stakeholders We believe that industry collaboration and stakeholder dialogue are key to creating impact at these deeper levels of our supply chain. Since 2008 Philips is actively contributing to the Conﬂict Free Sourcing Initiative, a joint effort founded by a coalition of leading electronics companies from the industry organizations EICC and GeSI (formerly called the “EICC-GeSI Extractives Work Group”). Over 120 companies participate in this initiative today, and we have formed partnerships with other leadership groups from across industries, government and civil society. The Conﬂict Free Sourcing Initiative provides information on conﬂict-free smelters and reﬁners, common tools and standards to collect supply chain information, and forums for exchanging best practices. It is a multi-sector, multi- stakeholder network, and reduces the need for duplication of efforts across the many sectors that are using these minerals. See also www.conﬂictfreesmelter.org As we have been doing for years, we continued in 2013 our engagement with relevant stakeholders including the European Parliament, other industry organizations and local as well as international NGOs in Europe and the U.S. to see how we can resolve the issue. To assist in developing a due diligence standard for conﬂict minerals, we participated in the multi- stakeholder OECD-hosted program for the implementation of the “OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conﬂict-Affected and High-Risk Areas”. Supply chain due diligence In 2013 we continued our work with 349 priority suppliers to raise awareness and conduct supply chain investigations into the country of origin for the metals. These suppliers cover more than 80% of the relevant purchasing spend. Using the standard Conﬂict Minerals Reporting 206 Annual Report 2013 Template we requested our suppliers to report back their progress and to disclose which smelters are used in their supply chains to produce the metals. armed groups in the DRC, and our suppliers reported back that they provide us with conﬂict-free products. Nevertheless, we continue to urge smelters to conﬁrm their status via independent third party assessments. 13 Sustainability statements 13.2.2 - 13.2.2 Philips was the ﬁrst company to publish its smelter list on internet in 2012. In doing so we created transparency at deeper levels in our supply chain of those actors that we believe hold the key towards effectively addressing the concerns around conﬂict minerals. In 2013 we updated the smelter list with new information received from our suppliers, and we will continue to do so as more information becomes available over time. Conﬂict-free smelter program Smelters mix minerals from many sources and reﬁne it into metal used in our industry. The smelter is at a key point in the supply chain to enforce responsible sourcing by implementing due diligence in selecting their mineral sources. The EICC-GeSI CFS program makes it possible to identify smelters that can demonstrate through an independent third party assessment that the minerals they procure did not originate from sources that contribute to conﬂict in the DRC. After having identiﬁed smelters in our supply chain, Philips started to invite these smelters to participate in the CFS program. A list of CFS compliant smelters for tin, tantalum and gold has been published, and assessments for tungsten smelters are under way. As sufﬁcient conﬂict-free smelters for all four metals become available, Philips plans to direct its supply chain towards these smelters. See www.conﬂictfreesmelter.org for more details. Conﬂict Free Tin Initiative In September 2012, the Conﬂict Free Tin Initiative was launched, introducing a tightly controlled conﬂict-free supply chain for tin, from a mine in the Democratic Republic of Congo (DRC) all the way to an end- product. Philips is one of the industry partners brought together by the Dutch government that initiated this conﬂict-free sourcing program in eastern DRC. In an effort to prevent minerals from ﬁnancing war, many companies worldwide have refrained from purchasing minerals from the DRC, leading to a de facto embargo and a collapse of the local economy. The easiest route would have been to simply abandon sources from the DRC and nearby countries (forbidding suppliers from sourcing there) and to rely instead on supplies from conﬂict-free regions. However, we decided against that approach. Instead of avoiding the DRC, we took the more difﬁcult road, supporting conﬂict-free sources within the region. Progress Conﬂict minerals is now a standard part of the Philips procurement core curriculum Organized webinars for buyers and suppliers, attended by about 120 participants and installed a helpdesk (English and Chinese) to support suppliers in collecting the requested information Progress on smelter identiﬁcation Philips suppliers have provided the names of several hundred possible smelters and we are working to conﬁrm which of these actually are smelters. For all four metals together we now identiﬁed 191 conﬁrmed smelters in our supply chain, of which the majority is located in Asia. 29% of these successfully passed their Conﬂict Free Smelter (CFS) assessment, thereby conﬁrming their conﬂict-free status. None of the smelters identiﬁed in our supply chain is known to source minerals that beneﬁt Conﬂict minerals 2013 Goals Awareness raising and capability building with buyers and suppliers Priority suppliers to adopt a conﬂict-free sourcing policy 71% of the priority suppliers did Priority suppliers to investigate supply chain and report back on progress and results 94% of the priority suppliers completed the standard Conﬂict Minerals Reporting Template. 69% disclosed smelters identiﬁed in their supply chain Conﬂict Free Tin Initiative: include DRC tin in end-user product In Q4 the ﬁrst products were made using this DRC conﬂict-free tin 2014 Goals Publish a Philips Conﬂict Minerals Report validated by external auditors Collect Conﬂict Minerals Reporting Templates from at least 80% of priority suppliers, applying stricter criteria on data quality and completeness Conﬂict Free Tin Initiative: include DRC tin in mainstream solder supply (move from pilot to normal business) For more details, see www.philips.com/suppliers and the published Philips position paper on Conﬂict Minerals. Annual Report 2013 207 Philips conﬂict minerals policy and strategyAwareness raising and training suppliersSuppliers adopt conﬂict-free policySuppliers investigate supply chainReport back to Philips on progress and disclose smelter namesCompile and publish Philips smelter listAssess and mitigate sourcing risksReport publicly about process and resultsStep 1:Step 2:Step 3:Step 4:Step 5:Step 6:Step 7:Step 8: 13 Sustainability statements 13.2.2 - 13.3.1 Number of identiﬁed smelters per region Russian Federation 11 Others 10 the market are compliant with the Philips Regulated Substances List and all relevant legislation. During 2013 we collected and validated substance declarations for nearly 95% of all relevant components and products. 13.3 Environmental statements Asia excl. China 74 This section provides additional information on (some of) the environmental performance parameters reported section 4.3, Environmental performance, of this Annual Report. 13.3.1 EcoVision North America 19 South America 11 Europe 24 China 42 Number of identiﬁed smelters per metal ■-Not CFS compliant--■-CFS compliant 100 0 29 58 8 55 19 2 20 Our latest EcoVision program, includes key performance indicators in relation to Green Product sales, Improving people’s lives, Green Innovation, Green Operations, Health & Safety, Employee Engagement and Supplier Sustainability. Improving people’s lives At Philips, we strive to make the world healthier and more sustainable through innovation. Our goal is to improve the lives of 3 billion people a year by 2025. Through Philips products and solutions that directly support the curative or preventive side of people’s health, we improved the lives of 630 million people in 2013, driven by our Healthcare sector. Additionally, our well- being products that help people live a healthy life, and our Green Products that contribute to a healthy ecosystem, improved the lives of 290 million and 1.49 billion people respectively. After the elimination of double counts - people touched multiple times - we arrived at 1.8 billion lives. This is an increase of 100 million compared to our total baseline of 1.7 billion people a year, established in 2012. Examples of products in the ‘well-being’ category that help people live a healthier life are juicers, blenders, air fryers, but also mother and childcare products. Examples of Green Products, products offering a signiﬁcant environmental improvement in one or more Green Focal Areas, can be found in sub-section 4.3.2, Green Product sales, of this Annual Report. Further details on this parameter and the methodology can be found in the document ‘Improving people’s lives’. Gold Tantalum Tin Tungsten 0 Operational carbon footprint and energy efﬁciency Operational energy efﬁciency and carbon footprint: 2013 details The 2013 results can be attributed to several factors: • Accounting for 45% of the total footprint, total CO2 emissions from manufacturing increased due the higher use of SF6 (a substance with high Global Warming Potential impact) in our Lighting manufacturing operations. This was, however, partly offset by our continued focus on energy efﬁciency improvement programs, our changing industrial footprint, the further increase of the share of purchased electricity from renewable sources to 50% of total purchased electricity. • CO2 emissions from non-industrial operations (ofﬁces, warehouses, etc.) represent 7% of the total. The overall ﬂoor space decreased signiﬁcantly in 2013 as a result of our Work Place Innovation program, which promotes ﬂex-working and thus reduces the ﬂoor space in our real estate portfolio. As a result, emissions reduced 20% compared to 2012 as we also continued to focus on the most efﬁcient use of facility space and increased the share of purchased electricity from renewable sources. • The total CO2 emissions related to business travel, accounting for 14% of our carbon footprint, increased 5%. This is mainly attributable to Philips’ increasing presence in emerging markets. Our stringent in- house travel policy remains in place, as does our Green Lease Car policy. • Overall CO2 emissions from logistics, representing approximately one third of the total, increased 5% compared to 2012. We recorded an increase in sea freight, conﬁrming the effect of our gatekeeping process to move freight from air to sea. However, increased air shipments to address supply shortages in our Lighting sector mitigated the reduction realized by this policy. Tin mining in Indonesia The islands of Bangka and Belitung, Indonesia, are one of the world’s principal tin-producing regions. Recently concerns have been raised about environmental devastation and unsafe working conditions related to the illegal mining of tin in this region. To evaluate possibilities for addressing these concerns, Philips teamed up with other frontrunner companies, the tin industry and civil society in the new IDH Indonesian Tin Working Group, coordinated by the Dutch Sustainable Trade Initiative IDH. We co-funded a situational analysis and sustainability assessment commissioned by this working group to better understand the situation and the potential ways for downstream companies to take constructive action. Other initiatives in our supply chain Carbon footprint of our supply chain Society has a pressing need to manage and reduce CO2 emissions over the whole value chain, including at supplier level. Therefore 80 of the largest suppliers to Philips have been invited to report their carbon footprint as part of the Carbon Disclosure Project (CDP) Supply Chain program. 69 suppliers completed the full questionnaire, showing increased performance with respect to climate change. This year, Philips became a founding member of the CDP Action Exchange program, connecting our suppliers to globally recognized solutions providers in the ﬁeld of energy- efﬁcient technology, helping them in their search for innovative solutions to reduce their future emissions, for instance by applying LED lighting technology. Substance management with suppliers We work with suppliers to eliminate and minimize the use of hazardous substances in our products and production processes. Since regulatory requirements affecting electronics frequently change, we structurally collect information from suppliers in an online tool (BOMcheck) since 2010, in particular for those suppliers that provide materials which could represent a risk in terms of compliance, e.g. soft plastics, complex materials, and ROHS-relevant materials. Philips validates the substance declarations received from suppliers to ensure that the products we put on 208 Annual Report 2013 Operational carbon footprint for logistics in kilotonnes CO2-equivalent 2009 2010 2011 2012 2013 Air transport Road transport Sea transport Philips Group 308 345 328 309 326 174 160 145 167 176 153 105 108 132 141 627 672 657 546 575 13.3.2 Biodiversity Philips recognizes the importance of healthy ecosystems and rich biodiversity for our company, our employees, and society as a whole. We aim to minimize any negative impacts and actively promote ecosystem restoration activities including biodiversity restoration projects with social components, sustainable development, poverty relief, and carbon offsetting. In 2013 Philips made signiﬁcant steps forward in biodiversity management, both on sites, on natural capital valuation and on the management level. The steps were led by the Philips Leaders for Nature (LFN) team, site management, local sustainability organizations worldwide, sustainability managers, and Group Sustainability in Eindhoven, the Netherlands. We made intensive use of the internal company-wide social network platform to create and share activities and achievements including training programs. We continued our global partnership with the International Union for the Conservation of Nature (IUCN) Netherlands Committee and our participation in the IUCN LFN program which brings companies, NGOs and government together to work on the topic of business and biodiversity. Our projects in 2013 included improving our understanding of biodiversity by organizing together with the IUCN a very well-attended Business & Ecosystems Training (BET) on the topics of Natural Capital, Ecosystem Services and Biodiversity and the link to business. We worked on actively preserving biodiversity in and around our industrial sites with local communities and environmental organizations. In the Netherlands, the Drachten Consumer Lifestyle and Best Healthcare plants restructured their sites for optimal restoration of biodiversity and employee well-being. Other examples are a large-scale employee-led biodiversity initiative in Reedsville, Pennsylvania; and conservation efforts in the Miribel (France), Ketrzyn Farel and Pila (Poland), San Jose (USA), Varginha (Brazil), and Pune (India) sites for example. In addition Philips employees established a community garden at the High-Tech Campus in Eindhoven (the Netherlands). A diverse team organized several internal and external events for the Netherlands sustainability day in October 2013 – including an introduction to the Circular Economy program and a product disassembly workshop. Finally, Philips co-hosted the “Mind Your Business” event with PwC and the Netherlands Ministry of Economic Affairs on ‘The transition to a bio-based economy – the role of government, the impact of/for companies, and partnerships/networks – the necessity of joint projects and knowledge sharing’. We also conducted a biodiversity survey and water risk investigation of our industrial sites. The biodiversity survey results have enabled us to build a knowledge base of endangered and resident species, nature reserves and wildlife corridors, biodiversity initiatives and partnerships at Philips industrial sites. This will enable us to prepare biodiversity guidelines for sites. Philips commissioned Trucost, in 2013, to perform an Environmental Proﬁt and Loss (EP&L) analysis using 2012 data to help identify natural capital dependency “hot spots” and place a ﬁnancial value on Philips environmental impacts. The preliminary results show that between 2007 and 2012 Philips was able to decrease its exposure to natural capital risks and hence be better positioned to succeed in a natural capital constrained economy. Together with the WBCSD we will further develop the EP&L concept and methodology, including the environmental beneﬁts. To build and expand the Philips biodiversity strategy Philips has developed a biodiversity policy. 13.3.3 Green Operations In 2010, we decided to group all activities related to improving the environmental performance of our manufacturing facilities (including chemicals management) under the Green Manufacturing 2015 program, 13 Sustainability statements 13.3.1 - 13.3.3 which we renamed to Green Operations. The program focuses on most contributors to climate change, but also addresses water, recycling of waste and chemical substances. In the course of 2013 we implemented an improved process to report chemicals used in processes in more detail. Based on the new insights gained, we included a few additional substances to our reporting scope in 2013. These substances do not have a material impact on our reported data. New chemicals on which we will focus our reduction efforts and new reduction targets will be incorporated in the next Green Operations program. Green Operations in % unless otherwise stated 2007 baseline year 2013 actual1) 2015 target1) Total CO2 from manufacturing 865 kilotonnes CO2 - equivalent (19) (25) Water 4.2 million m3 20 (10) Materials provided for recycling via external contractor per total waste Restricted substances: Benzene emission Mercury emission CFCs, HCFCs Hazardous substances Lead emission PFCs Toluene emission Xylene emission Styrene Antimony, Arsenic and their compounds 1) Against the base year 2007 79 81 80 52 kg (100) achieved 185 kg (96) (100) 156 kg (100) achieved 1,838 kg (100) achieved 1,534 kg 2,210 kg 4,506 kg 248 (46) 525 (35) (90) (90) 80,526 kg (93) achieved 18 kg (100) achieved Energy use in manufacturing Total energy usage in manufacturing amounted to 14,160 terajoules in 2013, of which Lighting consumes about 79%. Compared to 2012, energy consumption at Philips went down by 2%. This was driven by new acquisitions reporting for the ﬁrst time, organizational changes and energy efﬁciency improvements. Total energy consumption in manufacturing in terajoules 2009 2010 2011 2012 2013 Healthcare 1,670 1,545 1,541 1,798 1,794 Consumer Lifestyle 1,188 1,274 1,252 1,104 1,142 Lighting 11,535 11,580 11,189 11,519 11,224 Innovation, Group & Services 28 27 − − − Philips Group 14,421 14,426 13,982 14,421 14,160 Carbon emissions in manufacturing The greenhouse gas emissions of our manufacturing operations totaled 705 kilotonnes CO2-equivalent in 2013, 2% higher than in 2012. This is the result of new acquisitions reporting for the ﬁrst time and increased usage of speciﬁc process chemicals. Indirect CO2 emissions overall decreased, mainly as a result of increased usage of electricity generated by renewable sources. Annual Report 2013 209 13 Sustainability statements 13.3.3 - 13.3.3 Total carbon emissions in manufacturing in kilotonnes CO2-equivalent CFCs/HCFCs In 2013 total emissions from CFCs/HCFCs remained at 1 kg. 2009 2010 2011 2012 2013 Hazardous substances Targets have been set on a selected number of hazardous substances. Direct CO2 1) Indirect CO2 Other greenhouse gases From glass production 295 443 54 24 299 294 294 317 273 310 34 25 40 28 60 27 281 293 104 27 Philips Group2) 816 675 635 691 705 1) From energy 2) Excluding new acquisitions therefore different from Operational carbon footprint CO2 emissions decreased at Healthcare due to energy efﬁciency improvements and increased use of electricity generated by renewable sources, this was however partly mitigated by new acquisitions reporting for the ﬁrst time. Lighting increased its CO2 emissions due to the increased use of speciﬁc process chemicals, mitigated by electricity generated by renewable sources. Total carbon emissions in manufacturing per sector in kilotonnes CO2-equivalent 2009 2010 2011 2012 2013 Healthcare Consumer Lifestyle 118 53 57 42 54 39 70 38 58 38 Lighting 644 575 542 583 609 Innovation, Group & Services 1 1 − − − Philips Group 816 675 635 691 705 Restricted substances Emissions of restricted substances totaled 9 kilos in 2013, a signiﬁcant decrease compared to 2012 mainly as a result of the continued reduction in mercury emissions in Lighting, and more accurate measurements. With the Green Operations program we continue to focus on a selection of the most important substances in our processes. Hazardous substances in kilos 2009 2010 2011 2012 2013 Lead and lead compounds PFCs (Per Fluorinated Compounds) Toluene Xylene Styrene 1,958 108 44 73 1 2,535 1,507 1,842 2,560 5,331 2,160 6,745 5,745 6,184 1,190 4,619 30,491 37,889 18,947 28,176 21,567 22,920 19,920 42,329 5,753 Antimony, Arsenic and their compounds 30 24 37 − − Total 32,869 61,795 65,477 70,093 40,451 Lead and lead compounds The strong decrease in 2013 was mainly due to more accurate calculations based on the improved reporting process. PFCs The increase in 2013 to 5,331 kg was caused by Lumileds sites where PFCs are used as process chemicals. Toluene The emission of toluene, mainly used in wet lacquers, decreased by 81% in 2013 largely as a result of phase-out programs in Consumer Lifestyle. Xylene The use of xylene increased by 49% due to increased production at Consumer Lifestyle sites. Styrene Styrene is mainly used in Lighting. In 2013, the emission of styrene decreased signiﬁcantly due to more accurate calculations based on the improved reporting process. Restricted substances in kilos Antimony, Arsenic and their compounds Lighting was successful in phasing-out these substances. 2009 2010 2011 2012 2013 Benzene and Benzene compounds Mercury and Mercury Compounds CFCs/HCFCs1) Total 1) Excluding cooling systems 136 101 55 − 122 14 272 83 4 188 51 5 111 54 1 55 − 8 1 9 Benzene Lighting was the only sector that used benzene in manufacturing, but has been successful in 2012 in the phase-out of benzene. Mercury Mercury is used exclusively by Lighting. Emissions decreased from 54 kg in 2012 to 8 kg in 2013, due to continued emissions reductions activities and improved measurements. Sustainability world map ISO 14001 certiﬁcation In 2013, 80% of reporting manufacturing sites were certiﬁed. This increase compared to the previous year is attributable to new acquisitions being certiﬁed for the ﬁrst time. The sectors have programs in place to address certiﬁcation at new sites. ISO 14001 certiﬁcation as a % of all reporting organizations 2009 2010 2011 2012 2013 Philips Group 92 95 89 71 80 Environmental Incidents In 2013, 3 incidents were reported by Healthcare related to waste water and a leakage. Consumer Lifestyle reported 1 incident related to emissions to air and Lighting reported 3 incidents reported to waste water and a leakage. There were no ﬁnes reported in our sustainability reporting tool in connection with any of the incidents. 210 Annual Report 2013 13 Sustainability statements 13.3.3 - 13.3.3 Annual Report 2013 211 1161089121516254311317147SustainabilityMarkets1. Africa2. ASEAN3. Benelux4. Central & East Europe5. DACH6. France7. Greater China8. Iberia**9. Indian Subcontinent10. Italy, Israel and Greece11. Japan12. Latin America13. Middle East & Turkey14. Nordics15. North America16. Russia and Central Asia17. UK & IrelandManufacturingsites 0 7 13 8 4 4 13 2 5 4 0 6 0 2 40 0 3Waste (Tonnes) – 7,827 20,057 18,628 2,926 747 7,625 – 7,316 1,614 – 1,282 – 57 21,937 – 1,918 Recycled (%) – 57% 89% 85% 90% 76% 86% – 100% 66% – 93% – 99% 70% – 85%Hazardous substances – 5,520 177 22,045 3 36 1,724 – 24 4,738 – 780 – 0 5,366 – 38Restricted substances – 4 1 0 1 0 1 – 0 0 – 0 – 0 2 – 0CO2 emitted(Tonnes CO2) – 251,450 32,176 72,092 5,515 3,119 119,750 – 69,491 5,461 – 188 – 15 141,559 – 3,808 Water(m3) – 1,276,133 590,061 491,337 191,435 19,179 988,721 – 267,278 26,622 – 27,126 – 1,249 1,140,441 – 24,780Total wasteEmissions (kg)Lost Workday Injury rate* 0.33 0.09 0.31 0.32 0.46 1.15 0.16 1.22 0.11 0.76 0.00 0.14 0.14 0.28 0.28 0.00 0.37*Includes manufacturing and non-manufacturing sites**Acquired manufacturing sites did not start reporting environmental data yet13 Sustainability statements 13.4 - 13.4 13.4 Independent assurance report To the Supervisory Board and Shareholders of Koninklijke Philips N.V.: We were engaged by the Supervisory Board of Koninklijke Philips N.V. (further ‘Philips’) to provide assurance on the information in the chapter Sustainability statements and the sections Social performance and Environmental performance in the Annual Report 2013 (further ‘The Sustainability Information’). The Board of Management is responsible for the preparation of The Sustainability Information, including the identiﬁcation of material issues. Our responsibility is to issue an assurance report based on the engagement outlined below. Scope Our assurance engagement was designed to provide reasonable assurance on whether The Sustainability Information is presented fairly, in all material respects, in accordance with the reporting criteria. We do not provide any assurance on the achievability of the objectives, targets and expectations of Philips. Reporting criteria and assurance standard Philips applies the Sustainability Reporting Guidelines G4 of the Global Reporting Initiative supported by internally developed guidelines as described in Approach to sustainability reporting in the chapter Sustainability statements, of this Annual Report. It is important to view the performance data in the context of these criteria. We conducted our engagement in accordance with the Dutch Standard 3410N: Assurance engagements relating to sustainability reports and which is a speciﬁc part of the International Standard for Assurance Engagement (ISAE 3000): Assurance Engagement other than Audits or Reviews of Historical Financial Information, issued by the International Auditing and Assurance Standards Board. This standard requires, among others, that the assurance team possesses the speciﬁc knowledge, skills and professional competencies needed to provide assurance on sustainability information, and that they comply with the requirements of the Code of Ethics for Professional Accountants of the International Federation of Accountants to ensure their independence. Work undertaken Our procedures included performing a risk assessment (part of which was a media search), assessing the appropriateness of the accounting policies used, evaluating the design and implementation, and testing the operating effectiveness of the systems and processes for collecting and processing the qualitative and quantitative information in The Sustainability Information (including the implementation of these at a number of sites), and evaluating the overall presentation of sustainability information within our scope. Also we held interviews with relevant management and tested documentation on a sample basis to determine whether the information is supported by sufﬁcient evidence. Additionally we determined, to the extent we can assess, whether the information concerning sustainability in the other sections of the Annual Report 2013 is consistent with the information in The Sustainability Information. Opinion In our opinion, The Sustainability Information presents fairly, in all material respects, the sustainability performance of Philips in accordance with the reporting criteria. We also report, to the extent we can assess, that the information on sustainability in the rest of the Annual Report 2013 is consistent with information in The Sustainability Information. Amsterdam, The Netherlands February 25, 2014 KPMG Accountants N.V. J.F.C. van Everdingen RA 212 Annual Report 2013 13 Sustainability statements 13.5 - 13.5 13.5 Global Reporting Initiative (GRI) table 4.0 KPMG has audited Chapter 11 Group ﬁnancial statements and Chapter 12 Company ﬁnancial statements, as well as sections 4.2 Social performance, 4.3 Environmental performance and Chapter 13 Sustainability statements. Where in the table cross- reference is made to these parts, the information is included in the scope of one of these audits. For the other information in the report, KPMG has assessed whether this information is consistent with the information in the aforementioned parts. Where there is no cross-reference to a section in the Report, assurance is not applicable. Please refer to sections 11.10, 12.5 and 13.4 for the independent auditor’s reports. Annual Report 2013 213 13 Sustainability statements 13.5 - 13.5 General Standard Disclosures proﬁle disclosure description Strategy and analysis G4-1 Statement from the most senior decision- maker of the organization (incl. strategy relates to sustainability, impacts of the activities in relation to the stakeholders) cross-reference Message from the CEO G4-2 Description of key impacts, risks, and Message from the CEO opportunities section 2.3, Market opportunities section 6.2, Risk categories and factors section 6.3, Strategic risks section 6.4, Operational risks section 6.5, Compliance risks section 6.6, Financial risks chapter 13, Sustainability statements proﬁle disclosure description Organizational proﬁle cross-reference G4-3 G4-4 G4-5 G4-6 G4-7 G4-8 Name of the organization chapter 10, Corporate governance Primary brands, products, and/or services section 1.4, Next phase section 2.1, Our rich heritage section 2.3, Market opportunities section 2.4, Our business system section 2.6, Global presence Location of organization’s headquarters section 10.5, Investor Relations Number of countries where the organization operates, and names of countries with either major operations or that are speciﬁcally relevant to the sustainability issues covered in the report section 2.6, Global presence chapter 5, Sector performance section 13.2, Social statements Nature of ownership and legal form chapter 10, Corporate governance Markets served (including geographic Performance highlights breakdown, sectors served and types of customers/beneﬁciaries) chapter 3, Delivering innovation that matters to you G4-9 Scale of the reporting organization Performance highlights G4-10 Total workforce by employment type, gender, employment contract and region G4-11 Percentage of employees covered by collective bargaining agreements G4-12 Describe the organization’s supply chain (incl. product or service providers, engaged suppliers in total number, type, and location, payments made to suppliers) G4-13 Signiﬁcant changes during the reporting period relating to size, structure, or ownership or its supply chain (incl. changes in location, operations, facilities, capital information and supplier information) sub-section 5.1.4, 2013 ﬁnancial performance sub-section 5.2.4, 2013 ﬁnancial performance sub-section 5.3.4, 2013 ﬁnancial performance sub-section 5.4.2, 2013 ﬁnancial performance sub-section 4.2.3, Diversity and inclusion sub-section 4.2.4, Employment note 3, Income from operations For all Philips businesses, guidance is applicable regarding collective bargaining agreements. See www.philips.com/gbp The actual percentage of employees covered by collective bargaining agreements is managed and monitored at local level. Philips considers this percentage on consolidated level not relevant. chapter 13, Sustainability statements section 13.1, Economic indicators sub-section 13.2.2, Supplier indicators Related content: Supplier Sustainability Involvement Program section 16.2, Share information section 16.5, Philips’ acquisitions note 7, Discontinued operations and other assets classiﬁed as held for sale note 9, Acquisitions and divestments chapter 13, Sustainability statements sub-section 13.2.2, Supplier indicators G4-14 Explanation of whether and how the precautionary approach or principle is addressed by the organization section 6.1, Our approach to risk management and business control chapter 10, Corporate governance G4-15 Externally developed economic, chapter 13, Sustainability statements environmental, and social charters, 214 Annual Report 2013 13 Sustainability statements 13.5 - 13.5 proﬁle disclosure description cross-reference principles, or other initiatives to which the organization subscribes or endorses G4-16 Memberships in associations (such as chapter 13, Sustainability statements - “Stakeholders” industry associations) proﬁle disclosure description Identiﬁed material aspects and boundaries cross-reference G4-17 Operational structure of the organization, including main divisions, operating companies, subsidiaries, and joint ventures (List all entities in the consolidated ﬁnancial statements) Performance highlights Message from the CEO chapter 5, Sector performance chapter 9, Supervisory Board report note 2, Information by sector and main country G4-18 G4-19 G4-20 Process for deﬁning report content and the Aspect Boundaries and explain how the Reporting Principles has been implemented chapter 13, Sustainability statements List all the material Aspects identiﬁed chapter 13, Sustainability statements The Aspect Boundary within the chapter 13, Sustainability statements organization: Whether the Aspect is material within the organization; The list of entities included in G4-17 for which the Aspect is or is not material; Speciﬁc limitation regarding the Aspect Boundary within the organization G4-21 The Aspect Boundary outside the chapter 13, Sustainability statements organization: Whether the Aspect is material outside the organization; The list of entities for which the Aspect is material, relate to geographical location; Speciﬁc limitation regarding the Aspect Boundary outside the organization G4-22 Explanation of the effect of any re- statements chapter 13, Sustainability statements - “Comparability and completeness” note 7, Discontinued operations and other assets classiﬁed as held for sale G4-23 Signiﬁcant changes from previous reporting periods in the Scope and Aspect Boundaries chapter 13, Sustainability statements proﬁle disclosure description Stakeholder engagement cross-reference G4-24 List of stakeholder groups engaged by the organization sub-section 4.2.8, Stakeholder engagement chapter 13, Sustainability statements - “Stakeholders” G4-25 Basis for identiﬁcation and selection of stakeholders with whom to engage sub-section 4.2.8, Stakeholder engagement chapter 13, Sustainability statements - “Stakeholders” G4-26 Approaches to stakeholder engagement, G4-27 including frequency of engagement by type and by stakeholder group Key topics and concerns that have been raised through stakeholder engagement, and how the organization has responded to those key topics and concerns, including through its reporting; Report the stakeholder groups that raised each of the key topics and concerns sub-section 4.2.8, Stakeholder engagement chapter 13, Sustainability statements - “Stakeholders” sub-section 4.2.8, Stakeholder engagement chapter 13, Sustainability statements - “Stakeholders” proﬁle disclosure description cross-reference Report proﬁle G4-28 Reporting period section 11.1, Management’s report on internal control Annual Report 2013 215 13 Sustainability statements 13.5 - 13.5 proﬁle disclosure description cross-reference chapter 13, Sustainability statements G4-29 G4-30 G4-31 G4-32 G4-33 Date of most recent previous report chapter 15, Five-year overview Reporting cycle chapter 15, Five-year overview Contact point for questions regarding the section 16.7, Investor contact report or its contents Table identifying the location of the Standard Disclosures in the report chapter 13, Sustainability statements section 13.5, Global Reporting Initiative (GRI) table 4.0 Policy and current practice with regard to seeking external assurance for the report section 9.3, Report of the Audit Committee section 10.4, Logistics of the General Meeting of Shareholders and provision of information section 11.1, Management’s report on internal control section 11.2, Report of the independent auditor section 11.3, Auditor’s report on internal control over ﬁnancial reporting section 11.10, Independent auditor’s report - Group note K, Audit fees section 12.5, Independent auditor’s report - Company chapter 13, Sustainability statements section 13.4, Independent assurance report proﬁle disclosure description cross-reference Governance G4-34 Governance structure of the organization (incl. report the committees responsible for decision-making on economic, environmental and social impacts) G4-35 Process for delegating authority for economic, environmental and social topics G4-36 Whether the organization has appointed an executive-level position or positions with responsibility for economic, environmental and social topics, and whether post holders report directly to the highest governance body G4-37 Processes for consultation between stakeholders and the highest governance body on economic, environmental and social topics (to whom, any feedback) G4-38 The composition of the highest governance body and its committees G4-39 Indicate whether the Chair of the highest governance body is also an executive ofﬁcer G4-40 Process for determining the qualiﬁcations and expertise of the members of the highest governance body chapter 10, Corporate governance section 10.1, Board of Management section 10.2, Supervisory Board section 10.3, General Meeting of Shareholders section 10.4, Logistics of the General Meeting of Shareholders and provision of information chapter 13, Sustainability statements section 10.1, Board of Management section 10.2, Supervisory Board chapter 13, Sustainability statements chapter 7, Management section 10.1, Board of Management section 10.2, Supervisory Board chapter 13, Sustainability statements sub-section 4.2.2, Employee engagement sub-section 4.2.8, Stakeholder engagement section 10.5, Investor Relations chapter 13, Sustainability statements section 16.7, Investor contact chapter 7, Management chapter 8, Supervisory Board section 10.1, Board of Management section 10.2, Supervisory Board chapter 13, Sustainability statements section 10.1, Board of Management chapter 9, Supervisory Board report section 9.1, Report of the Corporate Governance and Nomination & Selection Committee section 10.2, Supervisory Board G4-41 Processes in place for the highest governance body to ensure, that conﬂicts of interest are avoided section 10.1, Board of Management section 10.2, Supervisory Board G4-42 Roles in the development, approval, and updating of the organization’s purpose, value or mission statements, strategies, policies, and goals chapter 9, Supervisory Board report section 10.1, Board of Management section 10.2, Supervisory Board section 10.3, General Meeting of Shareholders section 10.4, Logistics of the General Meeting of Shareholders and provision of information chapter 13, Sustainability statements 216 Annual Report 2013 13 Sustainability statements 13.5 - 13.5 proﬁle disclosure description G4-43 The measures taken to develop and enhance the highest governance body’s collective knowledge G4-44 Processes for evaluating the highest governance body’s own performance G4-45 Procedures of the highest governance body for overseeing the organization’s identiﬁcation and management of performance, including relevant risks and opportunities, and adherence or compliance with internationally agreed standards, codes of conduct and principles cross-reference chapter 9, Supervisory Board report section 10.1, Board of Management section 10.2, Supervisory Board section 6.1, Our approach to risk management and business control chapter 9, Supervisory Board report section 10.1, Board of Management section 10.2, Supervisory Board chapter 13, Sustainability statements section 6.1, Our approach to risk management and business control chapter 9, Supervisory Board report chapter 10, Corporate governance section 10.1, Board of Management section 10.2, Supervisory Board G4-46 The highest governance body’s role in reviewing the effectiveness of the organization’s risk management processes for economic, environmental and social topics section 6.1, Our approach to risk management and business control section 9.3, Report of the Audit Committee section 10.1, Board of Management chapter 13, Sustainability statements G4-47 The frequency of the highest governance body’s review of economic, environmental and social impacts, risks, and opportunities G4-48 The highest committee or position that formally reviews and approves the organization’s sustainability report and ensures that all material Aspects are covered G4-49 The process for communicating critical concerns to the highest governance body section 6.1, Our approach to risk management and business control section 9.3, Report of the Audit Committee section 10.1, Board of Management chapter 13, Sustainability statements section 10.2, Supervisory Board chapter 13, Sustainability statements sub-section 4.2.7, General Business Principles section 6.1, Our approach to risk management and business control G4-50 The nature and total number of critical sub-section 13.2.1, General Business Principles concerns that were communicated to the highest governance body and the mechanism(s) used to address and resolve them G4-51 Linkage between compensation for section 9.2, Report of the Remuneration Committee members of the highest governance body, senior managers, and executives, and the organization’s performance G4-52 The process for determining remuneration; Whether remuneration consultants are involved section 9.2, Report of the Remuneration Committee section 10.1, Board of Management section 10.2, Supervisory Board G4-53 Mechanisms for shareholders and employees to provide recommendations or direction to the highest governance body section 10.3, General Meeting of Shareholders section 10.4, Logistics of the General Meeting of Shareholders and provision of information section 10.5, Investor Relations G4-54 The ratio of the annual total compensation G4-55 for the organization’s highest-paid individual in each country of signiﬁcant operations to the median annual total compensation for all employees (excluding the highest-paid individual) in the same country The ratio of percentage increase in annual total compensation for the organization’s highest-paid individual in each country of signiﬁcant operations to the median percentage increase in annual total compensation for all employees (excluding the highest-paid individual) in the same country Philips does not consider this indicator relevant, Philips makes an impact on local communities by the salaries it pays its employees. Salaries are based on industry norms as described in www.philips.com/gbp (GBP - 4.4 Wages and payment) Philips does not consider this indicator relevant, Philips makes an impact on local communities by the salaries it pays its employees. Salaries are based on industry norms as described in www.philips.com/gbp proﬁle disclosure description cross-reference Ethics and integrity Annual Report 2013 217 13 Sustainability statements 13.5 - 13.5 proﬁle disclosure G4-56 description cross-reference Internally developed statements of mission or values, codes of conduct, and principles relevant to economic, environmental, and social performance and the status of their implementation sub-section 4.2.7, General Business Principles section 6.1, Our approach to risk management and business control See www.philips.com/gbp G4-57 The internal and external mechanisms for G4-58 seeking advice on ethical and lawful behavior, and matters related to organizational integrity, such as helplines or advice lines The internal and external mechanisms for reporting concerns about unethical or unlawful behavior, and matters related to organizational integrity, such as escalation through line management, whistleblowing mechanisms or hotlines sub-section 4.2.7, General Business Principles section 6.1, Our approach to risk management and business control sub-section 13.2.1, General Business Principles Speciﬁc Standard Disclosures proﬁle disclosure description Economic Economic performance cross-reference G4-EC1 Direct economic value generated and Performance highlights distributed, including revenues, operating costs, employee wages and beneﬁts, payments to providers of capital, payments to government (by country) and community investments; EVG&D separately at country, regional or market level sub-section 4.2.9, Social Investment Programs note 2, Information by sector and main country section 13.1, Economic indicators G4-EC2 Financial implications and other risks and opportunities for the organization’s activities due to climate change sub-section 4.3.1, Green Innovation sub-section 4.3.2, Green Product sales section 6.4, Operational risks sub-section 13.3.2, Biodiversity G4-EC3 Coverage of the organization’s deﬁned- note 30, Post-employment beneﬁts beneﬁt plan obligations G4-EC4 Signiﬁcant ﬁnancial assistance received Philips does not receive signiﬁcant ﬁnancial assisstance from government from governments. Market presence G4-EC5 Ratios of standard entry level wage by For all Philips businesses, guidance is applicable regarding gender compared to local minimum wage at signiﬁcant locations of operation G4-EC6 Procedures for local hiring and proportion of senior management hired from the local community at signiﬁcant locations of operation Indirect economic impacts G4-EC7 Development and impact of infrastructure investments and services supported G4-EC8 Signiﬁcant indirect economic impacts, including the extent of impacts equal and fair treatment and wages and payment. See www.philips.com/gbp (GBP - 4.3 Equal and fair treatment and 4.4 Wages and payment) Actual ratios are managed and monitored at local level. Philips considers this ratio on consolidated level not relevant. sub-section 4.2.3, Diversity and inclusion sub-section 4.2.4, Employment sub-section 4.2.8, Stakeholder engagement sub-section 4.2.9, Social Investment Programs sub-section 5.1.3, 2013 highlights sub-section 5.3.3, 2013 highlights sub-section 4.2.8, Stakeholder engagement sub-section 4.2.9, Social Investment Programs sub-section 5.1.3, 2013 highlights sub-section 5.3.3, 2013 highlights Procurement practices G4-EC9 Proportion of spending on local suppliers at signiﬁcant locations of operation section 13.1, Economic indicators Related content: Supplier sustainability Related content: Involvement program 218 Annual Report 2013 13 Sustainability statements 13.5 - 13.5 proﬁle disclosure description cross-reference G4-EN1 Materials used by weight or volume G4-EN2 Percentage of materials used that are recycled input materials sub-section 4.3.3, Green Operations sub-section 13.3.3, Green Operations sub-section 4.3.1, Green Innovation sub-section 4.3.3, Green Operations chapter 13, Sustainability statements sub-section 13.3.3, Green Operations G4-EN3 Energy consumption within the organization sub-section 4.3.3, Green Operations sub-section 13.3.3, Green Operations G4-EN4 Energy consumption outside of the organization sub-section 13.2.2, Supplier indicators Philips does not report this indicator in the Annual Report, but in the Carbon Disclosure Project (CDP) reporting. G4-EN5 Energy intensity G4-EN6 Reduction of energy consumption G4-EN7 Reductions in energy requirements of products and services sub-section 4.3.3, Green Operations sub-section 13.3.1, EcoVision sub-section 4.3.3, Green Operations sub-section 13.3.3, Green Operations sub-section 4.3.1, Green Innovation sub-section 4.3.2, Green Product sales chapter 13, Sustainability statements G4-EN8 Total water withdrawal by source sub-section 4.3.3, Green Operations sub-section 13.3.3, Green Operations G4-EN9 Water sources signiﬁcantly affected by Philips is not a water-intensive company, so this indicator is withdrawal of water not applicable for Philips. G4-EN10 Percentage and total volume of water Philips is not a water-intensive company, so this indicator is recycled and reused not applicable for Philips. G4-EN11 Location and size of land owned, leased, G4-EN12 managed in or adjacent to protected areas and areas of high biodiversity value outside protected areas Description of signiﬁcant impacts of activities, products and services on biodiversity in protected areas and areas of high biodiversity value outside protected areas G4-EN13 Habitats protected or restored G4-EN14 Total number of IUCN Red List species and national conservation list species with habitats in areas affected by operations, by level of extinction risk sub-section 13.3.2, Biodiversity This data is currently not available for all sites. Philips plans to report on this indicator in 2014. sub-section 13.3.2, Biodiversity This data is currently not available for all sites. Philips plans to report on this indicator in 2014. sub-section 13.3.2, Biodiversity This data is currently not available for all sites. Philips plans to report on this indicator in 2014. sub-section 13.3.2, Biodiversity This data is currently not available for all sites. Philips plans to report on this indicator in 2014. Environment Materials Energy Water Biodiversity Emissions G4-EN15 Direct greenhouse gas (GHG) emissions (Scope 1) sub-section 4.3.3, Green Operations sub-section 13.3.3, Green Operations G4-EN16 Indirect greenhouse gas (GHG) emissions (Scope 2) sub-section 4.3.3, Green Operations sub-section 13.3.3, Green Operations G4-EN17 Other indirect greenhouse gas (GHG) emissions (Scope 3) sub-section 4.3.3, Green Operations sub-section 13.2.2, Supplier indicators G4-EN18 Greenhouse gas (GHG) emissions intensity sub-section 4.3.3, Green Operations G4-EN19 Emissions of ozone-depleting substances sub-section 13.3.3, Green Operations (ODS) G4-EN20 Emissions of ozone-depleting substances sub-section 13.3.3, Green Operations by weight G4-EN21 NOx, SOx, and other signiﬁcant air emissions Philips does not report this indicator in the Annual Report, but in the Carbon Disclosure Project (CDP) reporting. Efﬂuents and Waste G4-EN22 Total water discharge by quality and Philips is not a water-intensive company, so this indicator is destination not applicable for Philips. Annual Report 2013 219 13 Sustainability statements 13.5 - 13.5 proﬁle disclosure description G4-EN23 Total weight of waste by type and disposal method cross-reference sub-section 4.3.3, Green Operations sub-section 13.3.3, Green Operations G4-EN24 Total number and volume of signiﬁcant sub-section 13.3.3, Green Operations G4-EN25 G4-EN26 spills Weight of transported, imported, exported, or treated waste deemed hazardous under the terms of the Basel Convention2 Annex I, II, III, and VIII, and percentage of transported waste shipped internationally Identity, size, protected status, and biodiversity value of water bodies and related habitats signiﬁcantly affected by the organization’s discharges of water and runoff sub-section 13.3.3, Green Operations sub-section 13.3.2, Biodiversity This data is currently not available for all sites. Philips plans to report on this indicator in 2014. Products and Services G4-EN27 Extent of impact mitigation of sub-section 4.3.1, Green Innovation environmental impacts of products and services G4-EN28 Percentage of products sold and their sub-section 4.3.1, Green Innovation packaging materials that are reclaimed by category Compliance G4-EN29 Monetary value of signiﬁcant ﬁnes and total number of non-monetary sanctions for non-compliance with environmental laws and regulations note 26, Contingent assets and liabilities Transport Overall G4-EN30 Signiﬁcant environmental impacts of sub-section 4.3.3, Green Operations transporting products and other goods and materials for the organization’s operations, and transporting members of the workforce G4-EN31 Total environmental protection expenditures and investments by type chapter 13, Sustainability statements sub-section 13.3.2, Biodiversity Philips does not monitor such expenditures at Group level Supplier environmental assessment G4-EN32 Percentage of new suppliers that were screened using environmental criteria sub-section 4.2.10, Supplier sustainability chapter 13, Sustainability statements G4-EN33 Signiﬁcant actual and potential negative sub-section 13.2.2, Supplier indicators environmental impacts in the supply chain and actions taken Environmental grievance mechanisms G4-EN34 Number of grievances about environmental impacts ﬁled, addressed, and resolved through formal grievance mechanisms sub-section 13.3.3, Green Operations - environmental incidents proﬁle disclosure description cross-reference Labor practices and decent work Employment G4-LA1 Total workforce by employment type, employment contract and region sub-section 4.2.3, Diversity and inclusion sub-section 4.2.4, Employment note 3, Income from operations G4-LA2 Beneﬁts provided to full-time employees Beneﬁts provided are fully compliant with all applicable that are not provided to temporary or part- time employees, by signiﬁcant locations of operation national laws. See www.philips.com/gbp (GBP Directives - 9.10 Employment conditions) G4-LA3 Return to work and retention rates after For all Philips businesses, guidance is applicable regarding parental leave, by gender equal and fair treatment. See www.philips.com/gbp (GBP Directives - 9.7 Equal and fair treatment) 220 Annual Report 2013 13 Sustainability statements 13.5 - 13.5 proﬁle disclosure description Labor/Management relations cross-reference Actual rates are managed and monitored at local level. Philips considers this rate on consolidated level not relevant. G4-LA4 Minimum notice periods regarding For all Philips businesses, guidance is applicable regarding operational changes, including whether these are speciﬁed in collective agreements Employment conditions. See www.philips.com/gbp (GBP Directives - 9.10 Employment conditions) Notice periods are managed and monitored at local level. Philips considers this data on consolidated level not relevant. Occupational health and safety G4-LA5 Percentage of total workforce represented in formal joint management–worker health and safety committees that help monitor and advise on occupational health and safety programs G4-LA6 Type of injury and rates of injury, occupational diseases, lost days, and absenteeism, and total number of work- related fatalities, by region and by gender On sector level, different initiatives exist to help decrease the number and severeness of Lost Workday Injuries cases. See sub-section 4.2.6, Health and Safety The percentage of total workforce represented is managed and monitored at local level. Philips considers this data on consolidated level not relevant. sub-section 4.2.6, Health and Safety Sustainability world map On site level, insights exist in gender speciﬁc information. Philips considers this data on consolidated level not relevant. G4-LA7 Workers with high incidence or high risk of sub-section 4.2.6, Health and Safety diseases related to their occupation G4-LA8 Health and safety topics covered in formal See www.philips.com/gbp agreements with trade unions Training and education G4-LA9 Average hours of training per year per employee by gender, and by employee category (GBP - 4.1 Right to organize and 4.2 Health and safety) The content of formal agreements with trade unions varies per country. The inclusion of Health and Safety topics in these agreements is monitored locally and not considered relevant to be reported at Group level. sub-section 4.2.5, Developing our people The number of enrollments and the training spend are managed and monitored on consolidated level. The hours of training per year per employee are managed and monitored on local level. Philips considers these data on consolidated level not relevant. G4-LA10 Programs for skills management and Our people, our culture lifelong learning that support the continued employability of employees and assist them in managing career endings sub-section 4.2.5, Developing our people G4-LA11 Percentage of employees receiving regular performance and career development reviews, by gender and by employee category sub-section 4.2.5, Developing our people Philips implemented a semi-annual performance review, but does not track the percentage of employees beneﬁtting from this centrally. Diversity and equal opportunity G4-LA12 Composition of governance bodies and breakdown of employees per category according to gender, age group, minority group membership and other indicators of diversity sub-section 4.2.3, Diversity and inclusion section 10.1, Board of Management section 10.2, Supervisory Board Equal remuneration for women and men G4-LA13 Ratio of basic salary and remuneration of women to men by employee category, by signiﬁcant locations of operation For all Philips businesses, guidance is applicable regarding equal and fair treatment and wages and payment. See www.philips.com/gbp (GBP - 4.3 Equal and fair treatment and 4.4 Wages and payment). Actual ratios are managed and monitored at local level. Philips considers this ratio on consolidated level not relevant. Supplier assessment for labor practices G4-LA14 G4-LA15 Percentage of new suppliers that were screened using labor practices criteria sub-section 4.2.10, Supplier sustainability chapter 13, Sustainability statements Signiﬁcant actual and potential negative impacts for labor practices in the supply chain and actions taken sub-section 13.2.2, Supplier indicators Annual Report 2013 221 13 Sustainability statements 13.5 - 13.5 proﬁle disclosure description cross-reference Labor practices grievance mechanisms G4-LA16 Number of grievances about labor practices ﬁled, addressed, and resolved through formal grievance mechanisms sub-section 4.2.10, Supplier sustainability sub-section 13.2.1, General Business Principles sub-section 13.2.2, Supplier indicators See www.philips.com/gbp proﬁle disclosure description cross-reference Human rights Investment G4-HR1 G4-HR2 Non-discrimination Total number and percentage of signiﬁcant investment agreements and contracts that include human rights clauses or that underwent human rights screening sub-section 4.2.10, Supplier sustainability chapter 13, Sustainability statements See www.philips.com/gbp Philips does not monitor the percentage centrally. Total hours of employee training on human rights policies or procedures concerning aspects of human rights that are relevant to operations, including the percentage of employees trained sub-section 4.2.7, General Business Principles sub-section 13.2.1, General Business Principles sub-section 13.2.2, Supplier indicators For all Philips businesses, guidance is applicable regarding employee training on human rights policies as part of the GBP. Total hours of employee training are managed and monitored at local level. Philips considers these data on consolidated level not relevant. G4-HR3 Total number of incidents of discrimination and actions taken sub-section 13.2.1, General Business Principles sub-section 13.2.2, Supplier indicators Freedom of association and collective bargaining G4-HR4 Child Labor Operations and suppliers identiﬁed in which the right to exercise freedom of association and collective bargaining may be violated or at signiﬁcant risk, and measures taken to support these rights sub-section 13.2.1, General Business Principles sub-section 13.2.2, Supplier indicators G4-HR5 Operations and suppliers identiﬁed as having signiﬁcant risk for incidents of child labor, and measures taken to contribute to the effective abolition of child labor sub-section 13.2.1, General Business Principles sub-section 13.2.2, Supplier indicators Forced or compulsory labor G4-HR6 Operations and suppliers identiﬁed as having signiﬁcant risk for incidents of forced or compulsory labor, and measures to contribute to the elimination of all forms of forced or compulsory labor sub-section 13.2.1, General Business Principles sub-section 13.2.2, Supplier indicators Security practices G4-HR7 Percentage of security personnel trained in the organization’s human rights policies or procedures that are relevant to operations The actual percentage of security personnel trained in the organization’s human rights policies or procedures that are relevant to operations is managed and monitored at local level. Philips considers this data on consolidated level not relevant. Indigenous rights G4-HR8 Total number of incidents of violations Philips is not operational in areas with indigenous people. involving rights of indigenous people and actions taken Therefore this indicator is not relevant. Assessment G4-HR9 Supplier human rights assessment Total number and percentage of operations that have been subject to human rights reviews or impact assessments The total number and percentage of operations that have been subject to human rights reviews or impact assessments are managed and monitored at local level. Philips considers this data on consolidated level not relevant. G4-HR10 Percentage of new suppliers that were screened using human rights criteria sub-section 4.2.10, Supplier sustainability 222 Annual Report 2013 13 Sustainability statements 13.5 - 13.5 proﬁle disclosure description G4-HR11 Signiﬁcant actual and potential negative human rights impacts in the supply chain and actions taken Human rights grievance mechanisms cross-reference sub-section 4.2.11, Conﬂict minerals: issues further down the chain chapter 13, Sustainability statements sub-section 13.2.2, Supplier indicators G4-HR12 Number of grievances about human rights impacts ﬁled, addressed, and resolved through formal grievance mechanisms sub-section 4.2.10, Supplier sustainability sub-section 13.2.1, General Business Principles sub-section 13.2.2, Supplier indicators See www.philips.com/gbp proﬁle disclosure description cross-reference Society Local Communities G4-SO1 Percentage of operations with implemented local community engagement, impact assessments, and development programs sub-section 4.2.8, Stakeholder engagement sub-section 4.2.9, Social Investment Programs sub-section 5.1.3, 2013 highlights sub-section 5.3.3, 2013 highlights Philips has groupwide community involvement programs and policies that its sites implement and evaluate at local level. Philips does not consider the calculation of an overall percentage as relevant in this context. G4-SO2 Operations with signiﬁcant actual or potential negative impacts on local communities Sustainability world map Anti- corruption G4-SO3 Total number and percentage of operations assessed for risks related to corruption and the signiﬁcant risks identiﬁed section 6.1, Our approach to risk management and business control sub-section 13.2.1, General Business Principles G4-SO4 Communication and training on anti- corruption policies and procedures sub-section 4.2.7, General Business Principles G4-SO5 Conﬁrmed incidents of corruption and sub-section 13.2.1, General Business Principles Public Policy actions taken G4-SO6 Total value of political contributions by Philips does not make political contributions as deﬁned in country and recipient/beneﬁciary www.philips.com/gbp (GBP Directives - chapter 7 Dealing with governments, political parties and politicians) Anti-competitive Behavior G4-SO7 Total number of legal actions for anti- competitive behavior, anti-trust, and monopoly practices and their outcomes section 6.5, Compliance risks Compliance G4-SO8 Supplier assessment for impacts on society Monetary value of signiﬁcant ﬁnes and total number of non-monetary sanctions for non-compliance with laws and regulations note 26, Contingent assets and liabilities G4-SO9 Percentage of new suppliers that were screened using criteria for impacts on society sub-section 4.2.10, Supplier sustainability sub-section 4.2.11, Conﬂict minerals: issues further down the chain chapter 13, Sustainability statements G4-SO10 Signiﬁcant actual and potential negative sub-section 13.2.2, Supplier indicators impacts on society in the supply chain and actions taken Grievance mechanisms for impacts on society Annual Report 2013 223 13 Sustainability statements 13.5 - 13.5 proﬁle disclosure G4-SO11 description cross-reference Number of grievances about impacts on society ﬁled, addressed, and resolved through formal grievance mechanisms sub-section 4.2.10, Supplier sustainability sub-section 13.2.1, General Business Principles sub-section 13.2.2, Supplier indicators sub-section 13.3.3, Green Operations - “Environmental incidents” See www.philips.com/gbp proﬁle disclosure description cross-reference Product responsibility Customer health and safety G4-PR1 Life cycle stages in which health and safety impacts of products and services are assessed for improvement, and percentage of signiﬁcant products and services categories subject to such procedures sub-section 5.1.2, About Philips Healthcare sub-section 5.2.2, About Philips Consumer Lifestyle sub-section 5.3.2, About Philips Lighting G4-PR2 Total number of incidents of non- Philips plans to report on this indicator in 2014. Information compliance with regulations and voluntary codes concerning the health and safety impacts of products and services during their life cycle, by type of outcomes on current consumer product recalls can be found at www.recall.philips.com. Product and service labeling G4-PR3 Type of product and service information required by procedures, and percentage of signiﬁcant products and services subject to such information requirements sub-section 5.1.2, About Philips Healthcare sub-section 5.2.2, About Philips Consumer Lifestyle sub-section 5.3.2, About Philips Lighting G4-PR4 Total number of incidents of non- Philips plans to report on this indicator in 2014. compliance with regulations and voluntary codes concerning product and service information and labeling, by type of outcomes G4-PR5 Results of surveys measuring customer Philips measures the Net Promoter Scores, but does not satisfaction disclose these for conﬁdentiality reason. Marketing communications G4-PR6 Sale of banned or disputed products Philips plans to report on this indicator in 2014. Refer also to www.philips.com/gbp G4-PR7 Total number of incidents of non- Philips plans to report on this indicator in 2014. Refer also to compliance with regulations and voluntary codes concerning marketing communications, including advertising, promotion, and sponsorship, by type of outcomes www.philips.com/gbp Customer privacy G4-PR8 Total number of substantiated complaints section 6.5, Compliance risks regarding breaches of customer privacy and losses of customer data Compliance G4-PR9 Monetary value of signiﬁcant ﬁnes for non- note 26, Contingent assets and liabilities compliance with laws and regulations concerning the provision and use of products and services Disclosure of management approach Material aspects DMA and Indicators Omissions chapter 13, Sustainability statements - “Key material aspects” chapter 13, Sustainability statements - “Key material aspects” section 13.5, Global Reporting Initiative (GRI) table 4.0 - “Speciﬁc Standard Disclosures” section 13.5, Global Reporting Initiative (GRI) table 4.0 - “Cross- reference” chapter 13, Sustainability statements - “Key material aspects” (Footnote 1) 224 Annual Report 2013 14 Reconciliation of non-GAAP information 14 - 14 14 Reconciliation of non-GAAP information Explanation of Non-GAAP measures Koninklijke Philips N.V. (the ‘Company’) believes that an understanding of sales performance is enhanced when the effects of currency movements and acquisitions and divestments (changes in consolidation) are excluded. Accordingly, in addition to presenting ‘nominal growth’, ‘comparable growth’ is provided. Comparable sales exclude the effects of currency movements and changes in consolidation. As indicated in the Signiﬁcant accounting policies, sales and income are translated from foreign currencies into the Company’s reporting currency, the euro, at the exchange rate on transaction dates during the respective years. As a result of signiﬁcant currency movements during the years presented, the effects of translating foreign currency sales amounts into euros could have a material impact. Therefore, these impacts have been excluded in arriving at the comparable sales in euros. Currency effects have been calculated by translating previous years’ foreign currency sales amounts into euros at the following year’s exchange rates in comparison with the sales in euros as historically reported. Years under review were characterized by a number of acquisitions and divestments, as a result of which activities were consolidated or deconsolidated. The effect of consolidation changes has also been excluded in arriving at the comparable sales. For the purpose of calculating comparable sales growth, when a previously consolidated entity is sold or contributed to a venture that is not consolidated by the Company, relevant sales are excluded from impacted prior-year periods. Similarly, when an entity is acquired, relevant sales are excluded from impacted periods. The Company uses the term EBIT and EBITA to evaluate the performance of the Philips Group and its operating sectors. The term EBIT has the same meaning as Income from operations (IFO). Referencing EBITA will make the underlying performance of our businesses more transparent by factoring out the amortization of acquired intangible assets. EBITA represents income from operations before amortization and impairment of intangible assets generated in acquisitions (excluding software and capitalized development expenses). The Company believes that an understanding of the Philips Group’s ﬁnancial condition is enhanced by the disclosure of net operating capital (NOC), as this ﬁgure is used by Philips’ management to evaluate the capital efﬁciency of the Philips Group and its operating sectors. NOC is deﬁned as: total assets excluding assets classiﬁed as held for sale less: (a) cash and cash equivalents, (b) deferred tax assets, (c) other non-current ﬁnancial assets and current ﬁnancial assets, (d) investments in associates, and after deduction of: (e) provisions, (f) accounts and notes payable, (g) accrued liabilities, (h) other non-current liabilities and other current liabilities. Net debt is deﬁned as the sum of long- and short-term debt minus cash and cash equivalents. The net debt position as a percentage of the sum of group equity (shareholders’ equity and non-controlling interests) and net debt is presented to express the ﬁnancial strength of the Company. This measure is widely used by management and investment analysts and is therefore included in the disclosure. Our net debt position is managed in such a way that we expect to continiously meet our objective to retain our target at A3 rating (Moody’s) and A- rating (Standard and Poor’s). Furthermore, the Group’s objective when managing the net debt position is to fulﬁll our commitment to a stable dividend policy with a 40% to 50% pay-out of continuing net income. Cash ﬂows before ﬁnancing activities, being the sum total of net cash from operating activities and net cash from investing activities, and free cash ﬂow, being net cash from operating activities minus net capital expenditures, are presented separately to facilitate the reader’s understanding of the Company’s funding requirements. Net capital expenditures comprise of purchase of intangible assets, proceeds from sale of intangible assets, expenditures on development assets, capital expenditures on property, plant and equipment and proceeds from disposals of property, plant and equipment. This measure is widely used by management to calculate free cash ﬂow. Adjustments Prior-period ﬁnancial statements have been restated for the treatment of Audio, Video, Multimedia and Accessories as discontinued operations (see note 7, Discontinued operations and other assets classiﬁed as held for sale) and the adoption of IAS 19R, which mainly relates to pension reporting (see note 30, Post-employment beneﬁts). Annual Report 2013 225 14 Reconciliation of non-GAAP information 14 - 14 Sales growth composition per sector in % 2013 versus 2012 Healthcare Consumer Lifestyle Lighting Innovation, Group & Services Philips Group 2012 versus 2011 Healthcare Consumer Lifestyle Lighting Innovation, Group & Services Philips Group 2011 versus 2010 Healthcare Consumer Lifestyle Lighting Innovation, Group & Services Philips Group comparable growth currency effects consolidation changes nominal growth 0.8 10.0 3.2 (2.0) 3.3 6.4 8.7 3.8 0.3 5.7 5.3 11.0 6.2 (12.9) 5.8 (4.6) (3.4) (3.5) (0.5) (3.9) 6.4 4.4 4.6 1.7 5.2 (2.5) (1.8) (2.4) (0.9) (2.3) (0.3) 0.0 0.0 5.7 0.1 0.0 1.4 2.1 (4.4) 0.8 0.1 4.5 (2.7) (9.0) (0.7) (4.1) 6.6 (0.3) 3.2 (0.5) 12.8 14.5 10.5 (2.5) 11.7 2.9 13.7 1.1 (22.8) 2.8 Sales growth composition per geographic cluster in % comparable growth currency effects consolidation changes nominal growth 2013 versus 2012 Western Europe North America Other mature geographies Total mature geographies Growth geographies Philips Group 2012 versus 2011 Western Europe North America Other mature geographies Total mature geographies Growth geographies Philips Group 2011 versus 2010 Western Europe North America Other mature geographies Total mature geographies Growth geographies Philips Group 226 Annual Report 2013 0.1 (2.4) 5.0 (0.5) 10.7 3.3 (0.9) 2.7 11.8 2.4 12.5 5.7 (0.7) 5.2 6.9 2.9 12.4 5.8 (0.6) (3.1) (12.3) (3.4) (5.1) (3.9) 1.1 8.7 9.2 5.6 4.3 5.2 0.3 (4.9) 2.7 (1.8) (3.3) (2.3) 0.5 (0.2) 0.0 0.1 0.0 0.1 2.5 (0.7) (0.1) 0.7 1.2 0.8 (1.9) 0.3 (2.0) (0.9) (0.3) (0.7) 0.0 (5.7) (7.3) (3.8) 5.6 (0.5) 2.7 10.7 20.9 8.7 18.0 11.7 (2.3) 0.6 7.6 0.2 8.8 2.8 14 Reconciliation of non-GAAP information 14 - 14 Composition of net debt to group equity 2011 2012 2013 Long-term debt Short-term debt Total debt Cash and cash equivalents Net debt (cash)1) Shareholders’ equity Non-controlling interests Group equity Net debt and group equity Net debt divided by net debt and group equity (in %) Group equity divided by net debt and group equity (in %) 1) Total debt less cash and cash equivalents. Composition of cash ﬂows Cash ﬂows from operating activities Cash ﬂows from investing activities Cash ﬂows before ﬁnancing activities Cash ﬂows from operating activities Net capital expenditures: Purchase of intangible assets Proceeds from sale of intangible assets Expenditures on development assets Capital expenditures on property, plant and equipment Proceeds from disposals of property, plant and equipment Free cash ﬂows 3,278 582 3,860 3,147 713 12,328 34 12,362 13,075 5 95 2011 760 (1,275) (515) 760 (857) (69) − (276) (640) 128 (97) 3,725 809 4,534 3,834 700 11,151 34 11,185 11,885 6 94 2012 2,082 (925) 1,157 2,082 (455) (34) 160 (345) (661) 425 1,627 3,309 592 3,901 2,465 1,436 11,214 13 11,227 12,663 11 89 2013 1,138 (997) 141 1,138 (966) (49) − (357) (587) 27 172 Annual Report 2013 227 14 Reconciliation of non-GAAP information 14 - 14 EBITA to Income from operations (or EBIT) 2013 EBITA Amortization of intangible assets1) Impairment of goodwill Income from operations (or EBIT) 2012 EBITA Amortization of intangible assets1) Income from operations (or EBIT) 2011 EBITA Amortization of intangible assets1) Impairment of goodwill Income from operations (or EBIT) Philips Group Healthcare Consumer Lifestyle Lighting Innovation, Group & Services 2,451 (432) (28) 1,991 1,106 (458) 648 1,435 (559) (1,355) (479) 1,512 (195) (2) 1,315 1,226 (200) 1,026 1,080 (229) (824) 27 483 (54) − 429 456 (56) 400 153 (44) − 109 695 (180) (26) 489 128 (194) (66) 399 (276) (531) (408) (239) (3) − (242) (704) (8) (712) (197) (10) − (207) 1) Excluding amortization of software and product development. 228 Annual Report 2013 14 Reconciliation of non-GAAP information 14 - 14 Net operating capital to total assets 2013 Philips Group Healthcare Consumer Lifestyle Lighting Innovation, Group & Services Net operating capital (NOC) 10,238 7,437 1,261 4,462 (2,922) Exlcude liabilities comprised in NOC: - payables/liabilities - intercompany accounts - provisions Include assets not comprised in NOC: - investments in associates - current ﬁnancial assets - other non-current ﬁnancial assets - deferred tax assets - liquid assets Assets classiﬁed as held for sale Total assets 2012 2,541 124 278 85 − − − − 1,275 75 221 − − − − − 1,672 105 452 20 − − − − 10,465 2,832 6,711 2,965 (304) 1,603 56 10 496 1,675 2,465 6,044 8,453 − 2,554 161 10 496 1,675 2,465 26,052 507 26,559 Net operating capital (NOC) 9,316 7,976 1,205 4,635 (4,500) Exclude liabilities comprised in NOC: - payables/liabilities - intercompany accounts - provisions Include assets not comprised in NOC: - investments in associates - other non-current ﬁnancial assets - deferred tax assets - liquid assets Assets classiﬁed as held for sale Total assets 2011 2,760 71 355 86 − − − 1,718 42 315 − − − − 1,695 37 581 22 − − − 11,248 3,280 6,970 4,114 (150) 1,705 69 549 1,919 3,834 7,540 10,287 − 2,956 177 549 1,919 3,834 29,038 43 29,081 Net operating capital (NOC) 10,382 8,418 874 4,965 (3,875) Exclude liabilities comprised in NOC: - payables/ liabilities - intercompany accounts - provisions Include assets not comprised in NOC: - investments in associates - other non-current ﬁnancial assets - deferred tax assets - liquid assets Assets classiﬁed as held for sale Total assets 2,697 103 287 86 − − − 2,292 74 551 3 − − − 1,593 51 283 23 − − − 11,591 3,794 6,915 3,775 (228) 1,559 91 346 1,731 3,147 6,546 10,357 − 2,680 203 346 1,731 3,147 28,846 551 29,397 Annual Report 2013 229 15 Five-year overview 15 - 15 15 Five-year overview all amounts in millions of euros unless otherwise stated Prior-period ﬁnancial statements have been restated for the treatment of Audio, Video, Multimedia and Accessories as discontinued operations (see note 7, Discontinued operations and other assets classiﬁed as held for sale) and the adoption of IAS 19R, which mainly relates to pension reporting (see note 30, Post-employment beneﬁts). Due to factors such as acquisitions and divestments, the amounts, percentages and ratios are not directly comparable. General data 2009 2010 2011 2012 2013 Sales 18,149 20,415 20,992 23,457 23,329 % increase over previous year (6) 12 3 12 (1) Income from operations (EBIT) (loss) Financial income and expenses - net Income (loss) from continuing operations Income (loss) from continuing operations attributable to shareholders Income (loss) from discontinued operations Net income (loss) Net income (loss) attributable to shareholders Free cash ﬂow Net assets Turnover rate of net operating capital1) Total employees at year-end 377 (280) 173 159 86 259 245 1,721 (175) 1,157 1,151 144 1,301 1,295 (479) (331) (1,046) (1,050) (410) (1,456) (1,460) 648 (329) (77) (82) 47 (30) (35) 1,991 (330) 1,170 1,167 2 1,172 1,169 411 1,235 (97) 1,627 172 14,631 15,067 12,362 1.39 1.50 1.75 11,185 2.12 11,227 2.27 116,153 119,775 125,240 118,087 116,681 1) Calculated based on balance sheet positions related to continued operations 2) In euros unless otherwise stated In thousands of shares 3) 4) Adjusted to make previous years comparable for the bonus shares (273 thousand) issued in May 2013 5) In manufacturing excluding new acquisitions Income EBIT as a % of sales EBITA as a % of sales Income taxes as a % of income before taxes Income (loss) from continuing operations as a % of shareholders’ equity (ROE) 2009 2010 2011 2012 2013 377 2.1 807 4.4 0.0 0.0 173 1.2 1,721 8.4 2,188 10.7 (407) (26.3) 1,157 7.6 (479) (2.3) 1,435 6.8 (251) 31.0 (1,046) (7.8) 648 2.8 1,106 4.7 (185) (58.0) (77) (0.6) 1,991 8.5 2,451 10.5 (466) (28.1) 1,170 10.6 Net income (loss) 259 1,301 (1,456) (30) 1,172 230 Annual Report 2013 Capital employed Cash and cash equivalents Receivables and other current assets Assets classiﬁed as held for sale Inventories Non-current ﬁnancial assets/investments in associates Non-current receivables/assets Property, plant and equipment Intangible assets Total assets Property, plant and equipment: Capital expenditures for the year Depreciation for the year Capital expenditures : depreciation Inventories as a % of sales1) Outstanding trade receivables, in days sales1) Financial structure 15 Five-year overview 15 - 15 2009 2010 2011 2012 2013 4,386 4,966 − 2,913 972 2,885 3,252 11,523 30,897 444 686 0.6 14.5 50 5,833 5,324 120 3,865 660 1,532 3,145 12,233 32,712 555 612 0.9 16.0 56 3,147 5,570 551 3,625 549 1,929 3,014 11,012 29,397 640 617 1.0 16.5 54 3,834 5,156 43 3,495 726 2,189 2,959 10,679 29,081 661 678 1.0 14.3 50 2,465 5,262 507 3,240 657 1,882 2,780 9,766 26,559 587 632 0.9 13.9 52 2009 2010 2011 2012 2013 Other liabilities 9,523 10,610 10,434 10,379 Liabilities directly associated with assets held for sale Debt Provisions Total provisions and liabilities Shareholders’ equity Non-controlling interests − 4,267 2,476 16,266 − 4,658 2,377 17,645 61 3,860 2,680 17,035 27 4,534 2,956 17,896 15,332 8,529 348 3,901 2,554 14,582 15,021 12,328 49 46 34 11,151 34 11,214 13 Group equity and liabilities 30,897 32,712 29,397 29,081 26,559 Net debt : group equity ratio (1):101 (8):108 5:95 6:94 11:89 Market capitalization at year-end 19,180 21,694 15,077 18,200 24,340 Annual Report 2013 231 15 Five-year overview 15 - 15 Key ﬁgures per share2) Sales per common share EBITA per common share - diluted 19.56 0.87 21.68 2.30 22.03 1.50 25.44 1.19 25.61 2.66 2009 2010 2011 2012 2013 Weighted average amount of shares outstanding: - basic3,4) - diluted3,4) Basic earnings per common share: Income (loss) from continuing operations attributable to shareholders per share Net income (loss) attributable to shareholders Diluted earnings per common share: Income (loss) from continuing operations attributable to shareholders per share Net income (loss) attributable to shareholders Dividend distributed per common share Total shareholder return per common share Shareholders’ equity per common share Price/earnings ratio Share price at year-end Highest closing share price during the year Lowest closing share price during the year Average share price 927,709 941,691 952,809 922,101 911,072 931,264 949,554 957,293 927,222 922,072 0.17 0.26 0.17 0.26 0.70 7.55 15.72 121.65 20.68 21.03 10.95 15.26 1.22 1.38 1.21 1.36 0.70 2.94 15.87 18.79 22.92 26.94 20.34 23.35 (1.10) (1.53) (0.09) (0.04) (1.10) (1.53) 0.75 (5.89) 13.31 (0.09) (0.04) 0.75 4.37 12.19 (14.80) (221.11) 16.28 25.34 12.23 18.11 19.90 20.33 13.76 16.92 1.28 1.28 1.27 1.27 0.75 7.50 12.28 20.82 26.65 26.78 20.26 23.33 Amount of common shares outstanding at year-end3) 927,457 946,506 926,095 914,591 913,338 Energy efﬁciency of products, in lumen/watt 32.5 34.7 35.5 Sustainability Lives improved, in billions Collection and recycling amount, in tonnes Recycled material in products, in tonnes Green Product sales, as a % of total sales Green Innovation, in millions of euros Operational carbon footprint, in kilotonnes CO2-equivalent Operational energy efﬁciency, in terajoules per million euro sales Total energy consumption in manufacturing, in terajoules5) Total carbon emissions in manufacturing, in kilotonnes CO2-equivalent 5) Water intake, in thousands m3 5) Total waste, in kilotonnes5) Materials provided for recycling via external contractor per total waste, in % Restricted substances, in kilos Hazardous substances, in kilos ISO 14001 certiﬁcation, as a % of all reporting organizations5) Employee Engagement Index, % favorable Female executives, in % of total Lost Workday Injuries, per 100 FTEs Fatalities Initial and continual conformance audits, number of audits Suppliers audits, compliance rate, in % 232 Annual Report 2013 2009 2010 2011 2012 2013 1.7 37.9 22,500 27,500 30,500 7,500 10,000 15,000 33 340 1,930 1.34 14,421 816 4,216 97.7 77 272 37 392 1,845 1.29 40 479 1,771 1.24 14,426 13,982 675 4,218 104.6 78 188 635 4,328 94.0 77 111 47 569 1,614 1.15 14,421 691 4,857 87.6 77 55 1.8 38.5 31,000 14,000 51 509 1,654 1.21 14,160 705 5,044 92.0 81 9 32,869 61,795 65,477 70,093 40,451 92 71 10 0.44 − 360 − 95 77 11 89 76 13 0.50 0.38 − 273 − 2 212 72 71 79 14 0.31 7 159 75 80 75 15 0.28 3 200 77 16 Investor Relations 16 - 16.1 16 Investor Relations 16.1 Key ﬁnancials and EBIT and EBITA1) in millions of euros ■-EBIT--■-Amortization and impairment--■■-EBITA dividend policy Prior-period ﬁnancial statements have been restated for the treatment of Audio, Video, Multimedia and Accessories as discontinued operations (see note 7, Discontinued operations and other assets classiﬁed as held for sale) and the adoption of IAS 19R, which mainly 3,000 2,500 2,000 1,500 1,000 500 0 (500) 2,188 467 1,721 807 430 377 relates to pension reporting (see note 30, Post- 2009 2010 2,451 460 1,991 1,106 458 648 2012 2013 1,435 1,914 (479) 2011 employment beneﬁts). Key ﬁnancials Net income attributable to shareholders of the Philips Group in 2013 showed a gain of EUR 1,169 million, or EUR 1.27 per common share (diluted; basic EUR 1.28 per common share). This compares to a loss of EUR 35 million, or EUR 0.04 per common share (diluted; basic EUR 0.04 per common share), in 2012. Net income attributable to shareholders in millions of euros ■-net income attributable to shareholders --per common share in euros - diluted 1.27 1,169 1.36 1,295 0.26 245 (35) (0.04) 2009 2010 (1,460) (1.53) 2011 2012 2013 2,000 1,000 0 (1,000) (2,000) 1) For a reconciliation to the most directly comparable GAAP measures, see chapter 14, Reconciliation of non-GAAP information, of this Annual Report Operating cash ﬂows in millions of euros ■-net capital expenditure_■■-free cash ﬂows1) ■-operating cash ﬂows_--free cash ﬂow as a % of sales 6.0 1,235 1,931 (696) 2.3 411 985 (574) 3,000 2,000 1,000 0 (1,000) (2,000) 760 (857) (97) (0.5) 6.9 1,627 2,082 (455) 0.7 172 1,138 (966) 2009 2010 2011 2012 2013 1) For a reconciliation to the most directly comparable GAAP measures, see chapter 14, Reconciliation of non-GAAP information, of this Annual Report Dividend policy We are committed to a stable dividend policy with a 40% to 50% target pay-out of continuing net income. Continuing net income is the base ﬁgure used to calculate the dividend payout for the year. For 2013, the key exclusions from net income to arrive at continuing net income are the following: the results related to the Television and Audio, Video, Multimedia and Accessories businesses of Consumer Lifestyle that are shown as discontinued operations, the gains related to past-service pension costs in the US and the settlement loss arising from a lump sum offering to terminated vested employees in the US pension plan, as well as the impairment of goodwill in Lighting and of other intangible assets in Healthcare and Lighting. Annual Report 2013 233 16 Investor Relations 16.1 - 16.1 Restructuring and acquisition-related charges and the result of the sale of the 30% stake in investment in associate TP Vision are also excluded. Proposed distribution A proposal will be submitted to the 2014 Annual General Meeting of Shareholders to declare a dividend ex-dividend date record date payment date Amsterdam shares New York shares May 5, 2014 May 7, 2014 June 4, 2014 May 5, 2014 May 7, 2014 June 4, 2014 of EUR 0.80 per common share (up to EUR 740 million), Dividend and dividend yield per common share in cash or in shares at the option of the shareholder, against the net income for 2013. Shareholders will be given the opportunity to make their choice between cash and shares between May 8, 2014, and May 30, 2014. If no choice is made during this election period, the dividend will be paid in shares. On May 30, 2014 after close of trading, the number of share dividend rights entitled to one new common share will be determined based on the volume weighted average price of all traded common shares of Koninklijke Philips 1.00 0.80 0.60 0.40 0.20 0 1.7 0.44 2.1 0.40 1.6 0.36 ■-dividend per share in euros----yield in %1) 3.3 0.75 4.6 0.75 3.8 0.75 3.0 0.80 2.4 0.70 5.1 0.70 3.4 0.70 2.1 0.60 N.V. at NYSE Euronext Amsterdam on 28, 29 and 30 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 20142) 1) Dividend yield % is as of December 31 of previous year 2) Subject to approval by the 2014 Annual General Meeting of Shareholders Information for investors in New York Registry shares program Dividends and distributions per common share The following table sets forth in euros the gross dividends on the common shares in the ﬁscal years indicated (from prior-year proﬁt distribution) and such amounts as converted into US dollars and paid to holders of shares of the New York registry: 2009 2010 2011 2012 2013 in EUR in USD 0.70 0.94 0.70 0.93 0.75 0.75 0.75 1.11 0.94 0.98 Exchange rates USD : EUR The following two tables set forth, for the periods and dates indicated, certain information concerning the exchange rate for US dollars into euros based on the Noon Buying Rate in New York City for cable transfers in foreign currencies as certiﬁed for customs purposes by the Federal Reserve Bank of New York (the “Noon Buying Rate”). The Noon Buying Rate on February 14, 2014 was EUR 0.7305 per USD 1. May, 2014. The Company will calculate the number of share dividend rights entitled to one new common share, such that the gross dividend in shares will be approximately equal to the gross dividend in cash. On June 3, 2014 the ratio and the number of shares to be issued will be announced. Payment of the dividend and delivery of new common shares, with settlement of fractions in cash, if required, will take place from June 4, 2014. The distribution of dividend in cash to holders of New York registry shares will be made in USD at the USD/EUR rate ﬁxed by the European Central Bank on June 2, 2014. Dividend in cash is in principle subject to 15% Dutch dividend withholding tax, which will be deducted from the dividend in cash paid to the shareholders. Dividend in shares paid out of net income is subject to 15% dividend withholding tax, but only in respect of the par value of the shares (EUR 0.20 per share). Shareholders are advised to consult their own tax advisor on the applicable situation with respect to taxes on the dividend received. In 2013, a dividend of EUR 0.75 per common share was paid in cash or shares, at the option of the shareholder. For 59.8% of the shares an election was made for a share dividend resulting the issuance of 18,491,337 new common shares, leading to a 2.1% percent dilution. EUR 271,991,204 was paid in cash. For additional information, see section 4.4, Proposed distribution to shareholders, of this Annual Report. 234 Annual Report 2013 16 Investor Relations 16.1 - 16.2 period end average high low EUR per USD 16.2 Share information 2008 2009 2010 2011 2012 2013 0.7184 0.6844 0.8035 0.6246 0.6977 0.7187 0.7970 0.6623 0.7536 0.7579 0.8362 0.6879 Market capitalization Philips’ market capitalization was EUR 24.3 billion at 0.7708 0.7186 0.7736 0.6723 year-end 2013. The highest closing price for Philips’ 0.7584 0.7782 0.8290 0.7428 shares during 2013 in Amsterdam was EUR 26.78 on 0.7257 0.7532 0.7828 0.7238 December 27, 2013 and the lowest was EUR 20.26 on highest rate lowest rate December 31, 2013 and the lowest was USD 26.60 on January 4, 2013. The highest closing price for Philips’ shares during 2013 in New York was USD 36.97 on August, 2013 September, 2013 October, 2013 November, 2013 December, 2013 January, 2014 0.7578 0.7448 0.7622 0.7387 0.7413 0.7241 0.7487 0.7350 0.7379 0.7238 0.7407 0.7309 Philips publishes its ﬁnancial statements in euros while a substantial portion of its net assets, earnings and sales are denominated in other currencies. Philips conducts its business in more than 50 different currencies. January 4, 2013. Market capitalization in billions of euros ■-market capitalization of Philips 25 20 15 10 5 0 Unless otherwise stated, for the convenience of the 2009 2010 2011 2012 2013 reader the translations of euros into US dollars appearing in this report have been made based on the closing rate on December 31, 2013 (USD 1 = EUR 0.7255). Share capital structure During 2013, Philips’ issued share capital decreased by This rate is not materially different from the Noon approximately 19 million common shares to a level of Buying Rate on such date (USD 1 = EUR 0.7257). 938 million common shares. The main reasons for this are the cancellation of 37,778,510 Philips shares The following table sets out the exchange rate for US acquired pursuant to the EUR 2 billion share repurchase dollars into euros applicable for translation of Philips’ program and the issuance of 18,491,337 shares related ﬁnancial statements for the periods speciﬁed. to the elective dividend. The basic shares outstanding EUR per USD 2012 to 913 million at the end of 2013. As of December decreased from 915 million at the end of December period end average high low 31, 2013, the shares held in treasury amounted to 25 million shares, of which 21 million are held by Philips to 0.7096 0.6832 0.7740 0.6355 cover long-term incentive and employee stock 0.6945 0.7170 0.7853 0.6634 purchase plans. 0.7485 0.7540 0.8188 0.7036 0.7728 0.7192 0.7728 0.6721 The Dutch Act on Financial Supervision imposes an 0.7582 0.7776 0.8166 0.7500 obligation to disclose (inter alia) percentage holdings in 0.7255 0.7527 0.7805 0.7255 the capital and/or voting rights in the Company when 2008 2009 2010 2011 2012 2013 such holdings reach, exceed or fall below 3, 5, 10, 15, 20, 25, 30, 40, 50, 60, 75 and 95 percent (as a result of an acquisition or disposal by a person, or as a result of a change in the company’s total number of voting rights or capital issued). Certain cash settled derivatives are also taken into account when calculating the capital interest. Pursuant to new legislation, effective July 1, 2013, the obligation to disclose capital interest does not Annual Report 2013 235 16 Investor Relations 16.2 - 16.2 only relate to gross long positions, but also to gross short positions. Required disclosures must be made to Shareholders by style (estimated)1) in % the Netherlands Authority for the Financial Markets (AFM) without delay. The AFM then notiﬁes such disclosures to the Company and includes them in a register which is published on the AFM’s website. Furthermore, an obligation to disclose (net) short positions is set out in the EU Regulation on Short Selling. On July 1, 2013 the Company received notiﬁcation from the AFM that it had received disclosures under the Dutch Act on Financial Supervision of a substantial holding of 4.3% by Dodge & Cox International Stock Fund. On August 14, 2013 the Company received notiﬁcation from the AFM that it had received disclosures under the Dutch Act on Financial Supervision of a total shareholding of 3.01% and 3.45% Other 8 SWF2) 8 Retail 6 Yield 5 Index 11 GARP3) 10 Growth 23 Value 29 1) Split based on identiﬁed shares in shareholder identiﬁcation 2) SWF: Sovereign Wealth Fund 3) GARP: growth at reasonable price Share repurchase programs of the voting rights by BlackRock Inc. On January 3, Share repurchases for capital reduction purposes 2014 the Company received notiﬁcation from the AFM By the end of Q2 2013, Philips completed the EUR 2 that it had received disclosures under the Dutch Act on billion share repurchase program that started in July Financial Supervision of a substantial holding of 3.08% 2011. On September 17, 2013, Philips announced a new by Norges Bank. EUR 1.5 billion share repurchase program. This program started on October 21, 2013 and is to be completed over Based on a survey in December 2013 and information the next two to three years. By the end of 2013, Philips provided by several large custodians, the following had completed 7% of the EUR 1.5 billion share shareholder portfolio information is included in the repurchase program. graphs Shareholders by region and Shareholders by style. Shareholders by region (estimated)1) in % Other 6 North America 44 Western Europe 50 1) Split based on identiﬁed shares in shareholder identiﬁcation Share repurchases related to Long-Term Incentive (LTI) and employee stock purchase programs To cover Philips’ outstanding obligations resulting from past and present long-term incentive and employee stock purchase programs dating back to 2004, Philips will repurchase up to 12 million additional Philips shares on NYSE Euronext Amsterdam, to be executed during 2014. The shares repurchased will be held by Philips as treasury shares until they are distributed to participants. Philips started this program on January 28, 2014 and will enter into subsequent discretionary management agreements with one or more banks to repurchase Philips shares within the limits of relevant laws and regulations (in particular EC Regulation 2273/2003) and Philips’ articles of association. Further details on the share repurchase programs can be found on the Investor Relations website. For more information see chapter 10, Corporate governance, of this Annual Report. 236 Annual Report 2013 16 Investor Relations 16.2 - 16.3 Impact of share repurchases on share count in thousands of shares Shares issued Shares in treasury Shares outstanding Shares repurchased Shares cancelled 2009 2010 2011 2012 2013 972,412 44,955 927,457 2 − 986,079 1,008,975 39,573 946,506 82,880 926,095 15 − 47,508 − 957,133 42,542 914,591 46,871 82,365 937,846 24,508 913,338 27,811 37,779 A total of 24,508,022 shares were held in treasury by the Company at December 31, 2013 (2012: 42,541,687 shares). As of that date, a total of 44 million rights to acquire shares (under long-term incentive plans) were outstanding (2012: 52 million). Period January, 2013 February, 2013 March, 2013 April, 2013 May, 2013 June, 2013 July, 2013 August, 2013 September, 2013 October, 2013 November, 2013 December, 2013 total number of shares purchased average price paid per share in EUR total number of shares purchased as part of publicly announced programs maximum EUR amount of shares that may yet be purchased under the programs 2,806,796 6,340,305 2,368,862 4,552,000 5,119,261 2,766,495 − 35 − 766,047 1,434,010 1,657,545 21.38 22.55 23.12 22.10 22.12 21.58 − 21.05 − 25.85 26.10 25.70 2,806,796 6,339,803 2,367,018 4,552,000 5,117,783 2,766,377 − − − 766,040 1,434,010 1,657,545 471,195,448 328,260,385 273,523,670 172,938,033 59,707,937 − − − − 1,480,195,100 1,442,763,231 1,400,158,416 16.3 Philips’ rating Philips’ existing long-term debt is rated A3 (with stable outlook)2) by Moody’s and A- (with stable outlook)1) by Standard & Poor’s. It is Philips’ objective to manage its ﬁnancial ratios to be in line with an A3/A- rating. There is Credit rating summary long-term short-term outlook Standard and Poor’s Moody’s A- A3 A-2 P-2 Stable1) Stable2) 1) On July 24, 2013, Standard and Poor’s changed the outlook from negative no assurance that Philips will be able to achieve this to stable goal. Ratings are subject to change at any time. Outstanding long-term bonds and credit facilities do not have a repetitive material adverse change clause, ﬁnancial covenants or credit rating-related acceleration possibilities. 2) On February 6, 2014, Moody’s changed the outlook from negative to stable Annual Report 2013 237 16 Investor Relations 16.4 - 16.4 16.4 Performance in relation to market indices The common shares of the Company are listed on the common shares is NYSE Euronext Amsterdam. For the stock market of NYSE Euronext Amsterdam. The New New York Registry Shares it is the New York Stock York Registry Shares of the Company, representing Exchange. common shares of the Company, are listed on the New York Stock Exchange. The principal market for the The following table shows the high and low closing sales prices of the common shares on the stock market of NYSE Euronext Amsterdam as reported in the Ofﬁcial Price List and the high and low closing sales prices of the New York Registry Shares on the New York Stock Exchange: Euronext Amsterdam (EUR) New York stock exchange (USD) 1st quarter 2nd quarter 3rd quarter 4th quarter 1st quarter 2nd quarter 3rd quarter 4th quarter 1st quarter 2nd quarter 3rd quarter 4th quarter 1st quarter 2nd quarter 3rd quarter 4th quarter 2009 2010 2011 2012 2013 August, 2013 September, 2013 October, 2013 November, 2013 December, 2013 January, 2014 high 21.03 25.28 26.94 26.23 24.19 25.34 22.84 17.84 16.28 16.56 15.57 19.49 20.33 23.67 23.48 25.32 26.78 24.58 25.32 26.08 26.50 26.78 28.10 low 10.95 20.34 22.83 21.32 20.79 21.73 16.33 12.23 12.77 14.48 13.76 15.51 18.27 20.26 20.36 20.89 23.17 22.90 23.83 23.17 25.70 24.64 25.52 high 30.19 33.48 35.90 33.32 33.90 33.81 32.44 25.74 22.54 21.51 20.26 24.89 26.81 31.72 30.65 33.60 36.97 32.45 33.60 35.69 35.76 36.97 38.36 low 13.98 28.26 28.09 26.84 27.10 29.81 23.36 16.87 17.22 18.34 17.32 19.11 23.52 26.60 26.75 27.28 31.36 30.62 31.57 31.36 34.81 33.92 34.61 238 Annual Report 2013 16 Investor Relations 16.4 - 16.4 Euronext Amsterdam Share price development in Amsterdam in euros PHIA 2013 High Low Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 23.13 23.31 23.67 23.48 22.90 21.81 24.41 24.58 25.32 26.08 26.50 26.78 20.26 21.23 21.56 20.54 20.45 20.36 20.89 22.90 23.83 23.17 25.70 24.64 Average 21.34 22.26 22.93 22.15 21.97 21.29 22.81 24.00 24.54 24.68 26.14 25.81 Average daily volume1) 5.50 6.11 6.09 6.57 6.17 5.90 5.33 3.81 6.32 5.41 3.90 4.99 2012 High Low 16.56 16.42 16.26 15.32 15.26 15.57 17.90 18.86 19.49 20.11 20.21 20.33 14.48 15.45 14.95 13.76 14.00 13.87 15.51 18.09 18.16 18.27 19.47 19.83 Average 15.31 15.80 15.55 14.51 14.49 14.67 16.47 18.46 18.80 18.95 19.95 20.05 Average daily volume1) 6.77 5.53 5.54 8.05 6.91 6.10 6.15 4.68 5.60 4.97 4.89 3.88 New York Stock Exchange Share price development in New York in US dollars PHG 2013 High Low Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 31.16 31.72 30.72 30.65 29.21 29.19 32.47 32.45 33.60 35.69 35.76 36.97 26.60 27.82 28.23 26.88 26.75 26.94 27.28 30.62 31.57 31.36 34.81 33.92 Average 28.41 29.68 29.71 28.84 28.37 28.12 29.91 31.92 32.86 33.63 35.22 35.48 Average daily volume1) 0.85 0.77 0.82 0.77 0.80 0.93 0.86 0.44 0.66 0.66 0.39 0.39 2012 High Low 21.47 21.36 21.51 20.26 20.00 19.67 22.11 23.30 24.89 26.23 26.01 26.81 18.34 20.24 19.58 17.98 17.68 17.32 19.11 22.00 22.99 23.52 24.80 25.91 Average 19.73 20.85 20.57 19.10 18.57 18.41 20.26 22.84 24.20 24.48 25.51 26.27 Average daily volume1) 1.64 0.93 1.32 1.80 1.03 0.83 0.63 0.54 0.82 0.64 0.77 0.62 1) In millions of shares Annual Report 2013 239 Share listings Ticker code No. of shares issued at Dec. 31, 2013 No. of shares outstanding issued at Dec. 31, 2013 Amsterdam, New York PHIA, PHG 938 million 913 million Market capitalization at year-end 2013 EUR 24.3 billion Industry classiﬁcation MSCI: Capital Goods ICB: Diversiﬁed Industrials Members of indices AEX, NYSE, DJSI, and others 20105010 2727 16 Investor Relations 16.4 - 16.4 240 Annual Report 2013 5-year relative performance: Philips and AEXbase 100 = Dec 31, 2008monthly traded volume in Philips on Euronext Amsterdam, in millionsJan ‘09Dec ‘13350020050116,7100233.3150Philips Amsterdam closing share priceAEXRelative performance: Philips and unweighted peer group index1) base 100 = Dec 31, 2012Philips Amsterdam closing share pricePhilips peer group1)Jan ‘13Dec ‘13150100125751) The peer group has been extended from 11 to 21 companies, in line with the TSR peer group as defined in the new Long-Term Incentive Plan, implemented in 2013. The peer group consists of: 3M, ABB, Covidien, Danaher, Eaton, Electrolux, Emerson, General Electric, Hitachi, Honeywell, Johnson Control, Johnson & Johnson, Legrand, LG Electronics, Medtronic, Panasonic, Procter & Gamble, Schneider, Siemens, Smiths Group, Toshiba. The index shows the unweighted average closing share prices of the peer group. This graph is not linked to the TSR performance calculation as part of the Long-Term Incentive Plan.5-year relative performance: Philips and Dow Jonesbase 100 = Dec 31, 2008Philips NY closing share priceDow Jones Industrial Averagemonthly traded volume in Philips on New York Stock Exchange, in millionsJan ‘09Dec ‘135002005016.710033.3150 16 Investor Relations 16.5 - 16.5 16.5 Philips’ acquisitions Philips made no announcements of acquisitions in 2013 and 2012. Acquisitions 2011 / Announcement dates January 5, 2011 Optimum Lighting, LLC Professional Luminaires January 20, 2011 Preethi1) Domestic Appliances Expand portfolio with customized energy-efﬁcient lighting solutions Become a leading kitchen appliances company in India March 9, 2011 Dameca A/S Patient Care & Expand portfolio with integrated, advanced anesthesia care solutions Clinical Informatics June 20, 2011 AllParts Medical Customer Services Expand capabilities in imaging equipment services, strengthening Philips’ Multi- Vendor Services business June 27, 2011 Sectra Mamea AB2) Imaging Systems Expand Women’s Healthcare portfolio with a unique digital mammography June 29, 2011 Indal Group July 11, 2011 Povos Electric Appliance (Shanghai) Co., Ltd.2) Professional Luminaires Domestic Appliances 1) Asset transaction 2) Combined asset transaction / share transaction Acquisitions 2010 / Announcement dates February 11, 2010 Luceplan Consumer Luminaires solution in terms of radiation dose Strengthen leading position in professional lighting within Europe Expand product portfolio in China and continue to build business creation capabilities in growth geographies Iconic brand in the premium design segment for residential applications February 24, 2010 Somnolyzer1) Home Healthcare Somnolyzer 24x7 automated-scoring solution that can improve the productivity of sleep centers March 26, 2010 Tecso Patient Care & Strengthen clinical informatics portfolio with leading Brazilian provider of Clinical Informatics Radiology Information Systems (RIS) July 13, 2010 Street Light Control Portfolio1) Lighting Electronics Strengthen outdoor lighting portfolio with acquisition control portfolio. Street Lighting controls activities of Amplex A/S July 28, 2010 Apex Imaging Systems Strengthen portfolio of high-quality transducers aimed at the value segment in August 2, 2010 CDP Medical1) August 20, 2010 Burton Patient Care & Clinical Informatics Professional Luminaires emerging markets Expand clinical informatics portfolio in high-growth markets in the area of PACS Expand portfolio with leading provider of specialized lighting solutions for healthcare facilities September 13, 2010 Wheb Sistemas Patient Care & Strengthen clinical informatics portfolio with a leading Brazilian provider of clinical Clinical Informatics information systems October 11, 2010 Discus Health & Wellness Expand oral healthcare portfolio with leading manufacturer of professional tooth whitening products December 6, 2010 NCW Professional Luminaires Expand global leadership position of professional lighting entertainment solutions January 6, 2011 medSage Technologies1) Home Healthcare Strengthen portfolio by becoming a leading provider of patient interaction and management applications 1) Asset transaction Annual Report 2013 241 16 Investor Relations 16.6 - 16.7 16.6Financial calendar 16.7 Investor contact Financial calendar Shareholder services Annual General Meeting of Shareholders Record date Annual General Meeting of Shareholders Annual General Meeting of Shareholders Quarterly reports 2014 First quarter results 2014 Second quarter results 2014 Third quarter results 2014 Fourth quarter results 2014 Capital Markets Days 2014 April 3, 2014 May 1, 2014 April 22, 2014 July 21, 2014 October 20, 2014 January 27, 20151) Holders of shares listed on Euronext Philips offers a dynamic print manager that facilitates the creation of a customized PDF. Non-US shareholders and other non-US interested parties can make inquiries about the Annual Report 2013 to: Royal Philips Annual Report Ofﬁce Philips Center, HBT 12 P.O. Box 77900 Capital Markets Days (Healthcare, Consumer Lifestyle and Lighting) September 23-24, 2014 1070 MX Amsterdam, The Netherlands E-mail: annual.report@philips.com 1) Subject to ﬁnal conﬁrmation Communications concerning share transfers, lost certiﬁcates, dividends and change of address should be directed to: ABN AMRO Bank N.V. Department Equity Capital Markets/Corporate Broking HQ7050 Gustav Mahlerlaan 10, 1082 PP Amsterdam, The Netherlands Telephone: +31-20-34 42000 Fax: +31-20-62 88481 Holders of New York Registry shares Philips offers a dynamic print manager that facilitates the creation of a customized PDF. Holders of New York Registry shares and other interested parties in the US can make inquiries about the Annual Report 2013 to: Citibank Shareholder Service P.O. Box 43077 Providence, Rhode Island 02940-3077 Telephone: 1-877-CITI-ADR (toll-free) Telephone: 1-781-575-4555 (outside of US) Fax: 1-201-324-3284 Website: www.citi.com/dr E-mail: citibank@shareholders-online.com Communications concerning share transfers, lost certiﬁcates, dividends and change of address should be directed to Citibank. The Annual Report on Form 20-F is ﬁled electronically with the US Securities and Exchange Commission. 242 Annual Report 2013 16 Investor Relations 16.7 - 16.7 International direct investment program Philips offers a dividend reinvestment and direct stock communications the Company is generally represented by its Investor Relations department. However, on a purchase plan designed for the US market. This limited number of occasions the Investor Relations program provides existing shareholders and interested department is accompanied by one or more members investors with an economical and convenient way to of the Board of Management. The subject matter of the purchase and sell Philips New York Registry shares and bilateral communications ranges from individual to reinvest cash dividends. Philips does not administer queries from investors to more elaborate discussions or sponsor the program and assumes no obligation or following disclosures that the Company has made such liability for the operation of the plan. For further as its annual and quarterly reports. The Company is information on this program and for enrollment forms, strict in its compliance with applicable rules and contact: Citibank Shareholder Service regulations on fair and non-selective disclosure and equal treatment of shareholders. Telephone: 1-877-248-4237 (1-877-CITI-ADR) More information on the activities of Investor Relations Monday through Friday 8:30 AM EST can be found in chapter 10, Corporate governance, of through 6:00 PM EST Website www.citi.com/dr or by writing to: Citibank Shareholder Service International Direct Investment Program P.O. Box 2502, Jersey City, NJ 07303-2502 2014 Annual General Meeting of Shareholders The Agenda and the explanatory notes of the Agenda for the 2014 Annual General Meeting of Shareholders are published on the Company’s website. For the Annual General Meeting of Shareholders on May 1, 2014, a record date of April 3, 2014 will apply. Those persons who on April 3, 2014 hold shares in the Company and are registered as such in one of the registers designated by the Board of Management for the Annual General Meeting of Shareholders will be entitled to participate in and vote at the meeting. The Dutch Shareholders Communication Channel decided to terminate its activities as per the end of 2013. Their decision follows the entry into force of new legislation on July 1, 2013 which provides a legal basis in Dutch law for shareholder communication. Investor relations activities From time to time the Company engages in communications with investors via road shows, one- on-one meetings, group meetings, broker conferences and capital markets days. The purpose of these meetings is to inform the market on the results, strategy and decisions made, as well as to receive feedback from shareholders. Also, the Company engages in bilateral communications with investors. These communications take place either at the initiative of the Company or at the initiative of investors. During these this Annual Report. Analysts’ coverage Philips is covered by approximately 35 analysts who frequently issue reports on the company. Annual Report 2013 243 16 Investor Relations 16.7 - 16.7 How to reach us Investor Relations contact Royal Philips Philips Center, HBT 14 P.O. Box 77900 1070 MX Amsterdam, The Netherlands Telephone: +31-20-59 77222 Website: www.philips.com/investor E-mail: investor.relations@philips.com Robin Jansen Head of Investor Relations Telephone: +31-20-59 77222 Vanessa Bruinsma-Kleijkers Investor Relations Manager Telephone: +31-20-59 77447 Leandro Mazzoni Investor Relations Manager Telephone: +31-20-59 77055 The registered ofﬁce of Royal Philips is High Tech Campus 5 5656 AE Eindhoven, The Netherlands Switch board, telephone: +31-40-27 91111 Sustainability contact Philips Group Sustainability High Tech Campus 5 (room 2.56) 5656 AE Eindhoven, The Netherlands Telephone: +31-40-27 83651 Fax: +31-40-27 86161 Website: www.philips.com/sustainability E-mail: philips.sustainability@philips.com Corporate Communications contact Royal Philips Philips Center, HBT 19 P.O. Box 77900 1070 MX Amsterdam, The Netherlands E-mail: corporate.communications@philips.com For media contacts please refer to: www.newscenter.philips.com/main/standard/news/ contacts 244 Annual Report 2013 17 Deﬁnitions and abbreviations 17 - 17 17 Deﬁnitions and abbreviations Base of the Pyramid The base of the pyramid is the largest, but poorest socio-economic group. In global terms, this is the 4 billion people who live on less than USD 2.50 per day. BMC Business Market Combination - As a diversiﬁed technology group, Philips has a wide portfolio of categories/business innovation units which are grouped in business groups based primarily on technology or customer needs. Philips has physical market presence in over 100 countries, which are grouped into 17 market clusters. Our primary operating modus is the Business Market matrix comprising Business Groups and Markets. These Business Market Combinations (BMCs) drive business performance on a granular level at which plans are agreed between global businesses and local market teams. Brominated ﬂame retardants (BFR) Brominated ﬂame retardants are a group of chemicals that have an inhibitory effect on the ignition of combustible organic materials. Of the commercialized chemical ﬂame retardants, the brominated variety are most widely used. Compound annual growth rate (CAGR) The CAGR is the average Comparable Sales calculated over a period of more than one year. Compound comparable sales exclude the effect of currency movements and acquisitions and divestments (changes in consolidation) over the total period. Philips believes that CAGR information enhances understanding of sales performance over a period longer than a year. CO2-equivalent CO2-equivalent or carbon dioxide equivalent is a quantity that describes, for a given mixture and amount of greenhouse gas, the amount of CO2 that would have the same global warming potential (GWP), when measured over a speciﬁed timescale (generally 100 years). Cash ﬂow before ﬁnancing activities The cash ﬂow before ﬁnancing activities is the sum of net cash ﬂow from operating activities and net cash ﬂow from investing activities. Chloroﬂuorocarbon (CFC) A chloroﬂuorocarbon is an organic compound that contains carbon, chlorine and ﬂuorine, produced as a volatile derivative of methane and ethane. CFCs were originally developed as refrigerants during the 1930s. Comparable sales Comparable sales exclude the effect of currency movements and acquisitions and divestments (changes in consolidation). Philips believes that comparable sales information enhances understanding of sales performance. Continuing net income This equals recurring net income from continuing operations, or net income excluding discontinued operations and excluding material non- recurring items. Dividend yield The dividend yield is the annual dividend payment divided by Philips’ market capitalization. All references to dividend yield are as of December 31 of the previous year. EBITA Earnings before interest, tax and amortization (EBITA) represents income from continuing operations excluding results attributable to non- controlling interest holders, results relating to investments in associates, income taxes, ﬁnancial income and expenses, amortization and impairment on intangible assets (excluding software and capitalized development expenses). Philips believes that EBITA information makes the underlying performance of its businesses more transparent by factoring out the amortization of these intangible assets, which arises when acquisitions are consolidated. In our Annual Report on form 20-F this deﬁnition is referred to as Adjusted IFO. EBITA per common share EBITA divided by the weighted average number of shares outstanding (basic). The same principle is used for the deﬁnition of net income per common share, replacing EBITA. Electronic Industry Citizenship Coalition (EICC) The Electronic Industry Citizenship Coalition was established in 2004 to promote a common code of conduct for the electronics and information and communications technology (ICT) industry. EICC now includes more than 40 global companies and their suppliers. Employee Engagement Index (EEI) The Employee Engagement Index (EEI) is the single measure of the overall level of employee engagement at Philips. It is a combination of perceptions and attitudes related to employee satisfaction, commitment and advocacy. Energy-using Products (EuP) An energy-using product is a product that uses, generates, transfers or measures energy (electricity, gas, fossil fuel). Examples are boilers, computers, televisions, transformers, industrial fans, industrial furnaces etc. Free cash ﬂow Free cash ﬂow is the net cash ﬂow from operating activities minus net capital expenditures. Full-time equivalent employee (FTE) Full-time equivalent is a way to measure a worker’s involvement in a project. An FTE of 1.0 means that the person is equivalent to a full-time worker, while an FTE of 0.5 signals that the worker is only half-time. Global Reporting Initiative (GRI) The Global Reporting Initiative (GRI) is a network-based organization that pioneered the world’s most widely used sustainability reporting framework. GRI is committed to the framework’s continuous improvement and application worldwide. GRI’s core goals include the mainstreaming of disclosure on environmental, social and governance performance. Green Innovation Green Innovation comprise all R&D activities directly contributing to the development of Green Products or Green Technologies. 246 Annual Report 2013 Green Products Green Products offer a signiﬁcant environmental improvement in one or more Green Focal Areas: Energy efﬁciency, Packaging, Hazardous substances, Weight, Recycling and disposal and Lifetime reliability. The life cycle approach is used to determine a product’s overall environmental improvement. It calculates the environmental impact of a product over its total life cycle (raw materials, manufacturing, product use and disposal). Green Products need to prove leadership in at least one Green Focal Area compared to industry standards, which is deﬁned by a sector speciﬁc peer group. This is done either by outperforming reference products (which can be a competitor or predecessor product in the particular product family) by at least 10%, outperforming product speciﬁc eco-requirements or by being awarded with a recognized eco-performance label. Because of different product portfolios, sectors have speciﬁed additional criteria for Green Products, including product speciﬁc minimum requirements where relevant. Growth geographies Growth geographies are the developing geographies comprising of Asia Paciﬁc (excluding Japan, South Korea, Australia and New Zealand), Latin America, Central & Eastern Europe, the Middle East (excluding Israel) and Africa. Hydrochloroﬂuorocarbon (HCFC) Hydrochloroﬂuorocarbon is a ﬂuorocarbon that is replacing chloroﬂuorocarbon as a refrigerant and propellant in aerosol cans. Income as % of shareholders’ equity (ROE) This ratio measures income from continuing operations as a percentage of average shareholders’ equity. ROE rates Philips’ overall proﬁtability by evaluating how much proﬁt the company generates with the money shareholders have invested. Income from continuing operations Net income from continuing operations, or net income excluding discontinued operations. Initiatief Duurzame Handel (IDH) IDH is the Dutch Sustainable Trade Initiative. It brings together government, frontrunner companies, civil society organizations and labor unions to accelerate and up-scale sustainable trade in mainstream commodity markets from the emerging countries to Western Europe. International Standardization Organization (ISO) The International Standardization Organization (ISO)is the world’s largest developer and publisher of International Standards. ISO is a network of the national standards institutes of more than 160 countries, one member per country, with a Central Secretariat in Geneva, Switzerland, that coordinates the system. ISO is a non-governmental organization that forms a bridge between the public and private sectors. Light-Emitting Diode (LED) Light-Emitting Diode (LED), in electronics, is a semiconductor device that emits infrared or visible light when charged with an electric current. Visible LEDs are used in many electronic devices as indicator lamps, in automobiles as rear-window and brake lights, and on billboards and signs as alphanumeric displays or even full-color posters. Infrared LEDs are employed in autofocus cameras and television remote controls and also as light sources in ﬁber-optic telecommunication systems. Lives improved by Philips To calculate how many lives we are improving, market intelligence and statistical data on the number of people touched by the products contributing to the social or ecological dimension over the lifetime of a product are multiplied by the number of those products delivered in a year. After elimination of double counts – multiple different product touches per individual are only counted once – the number of lives improved by our innovative solutions is calculated. In 2012 we established our baseline at 1.7 billion a year. Mature geographies Mature geographies are the highly developed markets comprising of Western Europe, North America, Japan, South Korea, Israel, Australia and New Zealand. 17 Deﬁnitions and abbreviations 17 - 17 Millennium Development Goals (MDG) Adopted by world leaders in the year 2000 and set to be achieved by 2015, the Millennium Development Goals (MDGs) provide concrete, numerical benchmarks for tackling extreme poverty in its many dimensions. The MDGs also provide a framework for the entire international community to work together towards a common end – making sure that human development reaches everyone, everywhere. Goals include for example eradicating extreme poverty and hunger, achieving universal primary education and ensuring environmental sustainability. Net debt : group equity ratio The % distribution of net debt over group equity plus net debt. Non-Governmental Organization (NGO) A non-governmental organization (NGO) is any non-proﬁt, voluntary citizens’ group which is organized at a local, national or international level. OEM Original Equipment Manufacturer. Operational carbon footprint A carbon footprint is the total set of greenhouse gas emissions caused by an organization, event, product or person; usually expressed in kilotonnes CO2-equivalent. The Philips operational carbon footprint is calculated on a half-year basis and includes industrial sites (manufacturing and assembly sites), non-industrial sites (ofﬁces, warehouses, IT centers and R&D facilities), business travel (lease and rental cars and airplane travel) and logistics (air, sea and road transport). Perﬂuorinated compounds (PFC) A perﬂuorinated compound (PFC) is an organoﬂuorine compound with all hydrogens replaced by ﬂuorine on a carbon chain—but the molecule also contains at least one different atom or functional group. PFCs have unique properties to make materials stain, oil, and water resistant, and are widely used in diverse applications. PFCs persist in the environment as persistent organic pollutants, but unlike PCBs, they are not known to degrade by any natural processes due to the strength of the carbon–ﬂuorine bond. Polyvinyl chloride (PVC) Polyvinyl chloride, better known as PVC or vinyl, is an inexpensive plastic so versatile it has become completely pervasive in modern society. The list of products made from polyvinyl chloride is exhaustive, ranging from phonograph records to drainage and potable piping, water bottles, cling ﬁlm, credit cards and toys. More uses include window frames, rain gutters, wall paneling, doors, wallpapers, ﬂooring, garden furniture, binders and even pens. Productivity Philips uses Productivity internally and as mentioned in this annual report as a non-ﬁnancial indicator of efﬁciency that relates the added value, being income from operations adjusted for certain items such as restructuring and acquisition-related charges etc. plus salaries and wages (including pension costs and other social security and similar charges), depreciation of property, plant and equipment, and amortization of intangibles, to the average number of employees over the past 12 months. Regulation on Hazardous Substances (RoHS) The RoHS Directive prohibits all new electrical and electronic equipment placed on the market in the European Economic Area from containing lead, mercury, cadmium, hexavalent chromium, poly-brominated biphenyls (PBB) or polybrominated diphenyl ethers (PBDE), except in certain speciﬁc applications, in concentrations greater than the values decided by the European Commission. These values have been established as 0.01% by weight per homogeneous material for cadmium and 0.1% for the other ﬁve substances. Return on equity (ROE) Income from continuing operations as a % of average shareholders’ equity (calculated on the quarterly balance sheet positions). Annual Report 2013 247 17 Deﬁnitions and abbreviations 17 - 17 Return on invested capital (ROIC) Return on Invested Capital consists of income from continuing operations excluding results attributable to non-controlling interest holders, results relating to investments in associates and ﬁnancial income and expenses, divided by the average net operating capital at year end and the preceding four quarter ends. Philips believes that ROIC information makes the underlying performance of its businesses more transparent as it relates returns to the operating capital in use. SF6 SF6 (Sulfur hexaﬂuoride) is used in the electrical industry as a gaseous dielectric medium. Turnover rate of net operating capital Sales divided by average net operating capital (calculated on the quarterly balance sheet positions). Waste Electrical and Electronic Equipment (WEEE) The Waste Electrical and Electronic Equipment Directive (WEEE Directive) is the European Community directive on waste electrical and electronic equipment which became European Law in February 2003, setting collection, recycling and recovery targets for all types of electrical goods. The directive imposes the responsibility for the disposal of waste electrical and electronic equipment on the manufacturers of such equipment. Weighted Average Statutory Tax Rate (WASTR) The reconciliation of the effective tax rate is based on the applicable statutory tax rate, which is a weighted average of all applicable jurisdictions. This weighted average statutory tax rate (WASTR) is the aggregation of the result before tax multiplied by the applicable statutory tax rate without adjustment for losses, divided by the group result before tax. 248 Annual Report 2013 18 Forward-looking statements and other information 18 - 18 18 Forward-looking statements and other information Forward-looking statements This document contains certain forward-looking statements with respect to the ﬁnancial condition, results of operations and business of Philips and certain of the plans and objectives of Philips with respect to these items, in particular section 4.5, Outlook, of this Annual Report, of this Annual Report. Examples of forward-looking statements include statements made about our strategy, estimates of sales growth, future EBITA and future developments in our organic business. Forward-looking statements can be identiﬁed generally as those containing words such as “anticipates”, “assumes”, “believes”, “estimates”, “expects”, “should”, “will”, “will likely result”, “forecast”, “outlook”, “projects”, “may” or similar expressions. By their nature, forward-looking statements involve risk and uncertainty because they relate to future events and circumstances and there are many factors that could cause actual results and developments to differ materially from those expressed or implied by these forward- looking statements. These factors include, but are not limited to, domestic and global economic and business conditions, the successful implementation of our strategy and our ability to realize the beneﬁts of this strategy, our ability to develop and market new products, changes in legislation, legal claims, changes in exchange and interest rates, changes in tax rates, pension costs and actuarial assumptions, raw materials and employee costs, our ability to identify and complete successful acquisitions and to integrate those acquisitions into our business, our ability to successfully exit certain businesses or restructure our operations, the rate of technological changes, political, economic and other developments in countries where Philips operates, industry consolidation and competition. As a result, Philips’ actual future results may differ materially from the plans, goals and expectations set forth in such forward-looking statements. For a discussion of factors that could cause future results to differ from such forward-looking statements, see also chapter 6, Risk management, of this Annual Report, of this Annual Report. Third-party market share data Statements regarding market share, contained in this document, including those regarding Philips’ competitive position, are based on outside sources such as specialized research institutes, industry and dealer panels in combination with management estimates. Where full-year information regarding 2013 is not yet available to Philips, those statements may also be based on estimates and projections prepared by outside sources or management. Rankings are based on sales unless otherwise stated. Fair value information In presenting the Philips Group’s ﬁnancial position, fair values are used for the measurement of various items in accordance with the applicable accounting standards. These fair values are based on market prices, where available, and are obtained from sources that are deemed to be reliable. Readers are cautioned that these values are subject to changes over time and are only valid at the balance sheet date. When quoted prices or observable market values do not exist, fair values are estimated using valuation models, which we believe are appropriate for their purpose. They require management to make signiﬁcant assumptions with respect to future developments which are inherently uncertain and may therefore deviate from actual developments. Critical assumptions used are disclosed in the ﬁnancial statements. In certain cases, independent valuations are obtained to support management’s determination of fair values. IFRS basis of presentation The ﬁnancial information included in this document is based on IFRS, unless otherwise indicated. As used in this document, the term EBIT has the same meaning as Income from operations (IFO). Use of non-GAAP information In presenting and discussing the Philips Group’s ﬁnancial position, operating results and cash ﬂows, management uses certain non-GAAP ﬁnancial measures like: comparable growth; EBITA; NOC; net debt (cash); free cash ﬂow; and cash ﬂow before ﬁnancing activities. These non-GAAP ﬁnancial measures should not be viewed in isolation as alternatives to the equivalent GAAP measures. Further information on non-GAAP information and a reconciliation of such measures to the most directly comparable GAAP measures can be found in chapter 14, Reconciliation of non-GAAP information, of this Annual Report, of this Annual Report. Statutory ﬁnancial statements and management report The chapters Group ﬁnancial statements and Company ﬁnancial statements contain the statutory ﬁnancial statements of the Company. The introduction to the chapter Group ﬁnancial statements sets out which parts of this Annual Report form the management report within the meaning of Section 2:391 of the Dutch Civil Code (and related Decrees). Analysis of 2012 compared to 2011 The analysis of the 2012 ﬁnancial results compared to 2011, and the discussion of the critical accounting policies, have not been included in this Annual Report. These sections are included in Philips’ Form 20-F for the ﬁnancial year 2013, which will be ﬁled electronically with the US Securities and Exchange Commission. Annual Report 2013 249

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