Annual Report 2013
Delivering
innovation that
matters to you
Annual Report 2013 9
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
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110
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116
118
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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
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Annual Report 2013
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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
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129
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134
136
137
137
145
148
149
150
153
154
156
156
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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
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193
193
194
194
195
195
195
195
195
195
195
196
197
201
201
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225
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235
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238
241
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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 centers Delivering
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, Vietnam The 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 & Wikipedia 4 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 products 4 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 systemLabor 4 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 chart 5 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
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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.
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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.
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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
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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.
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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.
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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 Principles 6 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
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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.
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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.
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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
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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
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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
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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)
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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.
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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
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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
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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
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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.
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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.
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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
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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.
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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 Audits 13 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
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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 yet 13 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).
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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.
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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.
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