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Volex plcAnnual Report
2015
Creating two
companies with
a bright future
Contents
IFRS basis of presentation
The financial information included in this document is based on IFRS, as
explained in note 1, Significant accounting policies, of this report, unless
otherwise indicated.
1 Performance highlights
2 Message from the CEO
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).
Significant developments
In September 2014, Philips announced its plan to sharpen its strategic focus
by establishing two stand-alone companies focused on the HealthTech and
Lighting opportunities respectively. We have established a stand-alone
structure for Philips Lighting within the Philips Group effective February 1,
2016. We expect to be able to announce the separation of the Lighting
business in the first half of 2016, subject to market conditions and other
relevant circumstances. As previously stated, we are reviewing all strategic
options for Philips Lighting, including an initial public offering and a private
sale.
It should however be noted that the completion of the separation could
take more time than originally planned or anticipated and that there is no
certainty as to the method or timing of the separation of the Lighting
business, which may expose Philips to risks of additional cost and other
adverse consequences. For further information on specific risks involved in
the separation please refer to chapter 7, Risk management, of this Annual
Report.
The separation impacts all businesses and markets as well as all supporting
functions and all assets and liabilities of the Group. With effect from Q1
2016 onwards Philips plans to report and discuss its financial performance
on the basis of different reportable segments than the sectors currently
presented and discussed in this Annual Report. For more details on the
new segment reporting in 2016 and onwards, please refer to the
introduction of chapter 6, Sector performance, of this Annual Report.
As announced on January 22, 2016, the agreement pursuant to which the
consortium led by GO Scale Capital would acquire an 80.1% interest in the
combined businesses of Lumileds and Automotive, has been terminated.
Philips is now actively engaging with other parties that have expressed an
interest in the businesses and will continue to report the Lumileds and
Automotive businesses as discontinued operations (see note 3,
Discontinued operations and other assets classified as held for sale).
Further updates will be provided in the course of 2016.
Philips ArenaVision LED is the world’s first LED pitch
lighting to meet the stringent requirements of
international television broadcasters and sports
federations, ensuring a fantastic match experience, both
for the fans in the stadium and those watching at home.
Increasingly, Philips is teaming up with hospital and
health systems to understand their needs, provide
integrated solutions, and engage in multi-year
cooperation to drive improvements in terms of patient
outcomes, quality of care delivery and cost productivity.
3 Philips in 2015 at a glance
4 Our strategic focus
4.1 Addressing global challenges
4.2 How we create value
4.3 Accelerate! journey continues
4.4 Lives improved
4.5 Global presence
4.6 Our strategy in action
5 Group performance
5.1 Financial performance
5.2 Social performance
5.3 Environmental performance
5.4 Proposed distribution to shareholders
5.5 Outlook
6 Sector performance
6.1 Healthcare
6.2 Consumer Lifestyle
6.3 Lighting
6.4 Innovation, Group & Services
7 Risk management
7.1 Our approach to risk management and business
control
7.2 Risk categories and factors
7.3 Strategic risks
7.4 Operational risks
7.5 Compliance risks
7.6 Financial risks
7.7 Separation risk
8 Management
9 Supervisory Board
10 Supervisory Board report
10.1 Report of the Corporate Governance and
Nomination & Selection Committee
10.2 Report of the Remuneration Committee
10.3 Report of the Audit Committee
11 Corporate governance
11.1 Board of Management
11.2 Supervisory Board
11.3 General Meeting of Shareholders
11.4 Meeting logistics and other information
11.5 Investor Relations
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Annual Report 2015
12 Group financial statements
12.1 Management’s report on internal control
12.2 Report of the independent auditor
12.3 Independent auditors’ report on internal control
over financial reporting
12.4 Consolidated statements of income
12.5 Consolidated statements of comprehensive
income
12.6 Consolidated balance sheets
12.7 Consolidated statements of cash flows
12.8 Consolidated statements of changes in equity
12.9 Notes
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112
General, sector and main countries information
1 Significant accounting policies
2
Information by sector and main country
3 Discontinued operations and other assets
classified as held for sale
4 Acquisitions and divestments
5
Interests in entities
Notes related to the income statement
Income from operations
6
7 Financial income and expenses
8
Income taxes
9 Earnings per share
Notes related to the balance sheet
10 Property, plant and equipment
11 Goodwill
12
Intangible assets excluding goodwill
15
13 Other financial assets
14 Other assets
Inventories
16 Receivables
17 Equity
18 Debt
19 Provisions
20 Post-employment benefits
21 Accrued liabilities
22 Other liabilities
Notes related to the cash flow statement
23 Cash used for derivatives and current financial
assets
24 Purchase and proceeds from non-current
financial assets
Other notes
25 Contractual obligations
26 Contingent assets and liabilities
27 Related-party transactions
28 Share-based compensation
29 Information on remuneration
30 Fair value of financial assets and liabilities
31 Details of treasury / other financial risks
32 Subsequent events
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13 Company financial statements
13.1 Balance sheets before appropriation of results
13.2 Statements of income
13.3 Statement of changes in equity
13.4 Notes
A Net income
B Audit fees
C
Intangible assets
D Financial fixed assets
E Other financial assets
F Receivables
G Shareholders’ equity
H Debt
I Other current liabilities
J Employees
K Contractual obligations and contingent
liabilities not appearing in the balance sheet
L Subsequent events
13.5 Independent auditor’s report
14 Sustainability statements
14.1 Economic indicators
14.2 Social statements
14.3 Environmental statements
14.4 Independent Auditor’s Assurance Report
14.5 Global Reporting Initiative (GRI) table 4.0
15 Reconciliation of non-GAAP information
16 Five-year overview
17 Investor Relations
17.1 Key financials and dividend
17.2 Share information
17.3 Philips’ rating
17.4 Performance in relation to market indices
17.5 Financial calendar
17.6 Investor contact
18 Definitions and abbreviations
19 Forward-looking statements and other
information
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Annual Report 2015
3
Performance highlights 1
1 Performance highlights
Philips Group
Key data in millions of EUR unless otherwise stated
2014 - 2015
Philips Group
Lives improved in billions
Sales
Comparable sales growth
EBITA
as a % of sales
EBIT
as a % of sales
Net income
Net income attributable to shareholders
per common share in EUR:
basic
diluted
Net operating capital
Free cash flow
Shareholders’ equity
Employees at December 31
continuing operations
discontinued operations
2014
2015
21,391
24,244
(1)%
821
3.8%
486
2.3%
411
0.45
0.45
2%
1,372
5.7%
992
4.1%
659
0.70
0.70
8,838
11,096
497
325
10,867
11,662
113,678
112,959
105,365
104,204
0.3
by Philips
well-being
products
0.88
by Philips
care products
1.7
by Philips
Green Products
Total: 2.0 billion (double counts eliminated)
Double counts
8,313
8,755
Conceptual drawing, areas do not reflect actual proportions
Performance in millions of EUR unless otherwise stated
2014 - 2015
Group
Healthcare
Consumer Lifestyle
Lighting
Sales
21,391
24,244
13%
9,186
10,912
19%
2014
2015
2014
2015
2014
4,731
2015
5,347
13%
2014
6,869
2015
7,411
8%
Green Product
sales
Sales in mature
geographies1)
Sales in growth
geographies1)
EBITA
Net operating
capital
11,065
13,014
18%
3,508
4,580
31%
2,605
3,091
19%
4,952
5,343
8%
14,004
15,836
13%
6,890
8,207
19%
2,508
2,784
11%
4,182
4,425
6%
7,387
8,408
14%
2,296
2,705
18%
2,223
2,563
821
1,372
67%
616
1,024
66%
573
673
15%
17%
2,687
2,986
11%
293
594
103%
8,838
11,096
26%
7,565
9,212
22%
1,353
1,453
7%
3,638
3,813
5%
1) For a definition of mature and growth geographies see chapter 18, Definitions and abbreviations, of this Annual Report
Philips Group
Free cash flow in millions of EUR
2011 - 2015
1,645
1,886
(241)
(53)
610
(663)
497
325
Free cash flow
1,303
1,167
Operating cash flows
82
912
(830)
(806)
(842)
Net capital expenditures
Philips Group
Comparable sales growth by geographic cluster1) in %
2013 - 2015
8.9
3.5
2.7
2.2
1.5
0
(0.3)
(1.3)
(0.9)
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mature geographies
growth geographies
Philips Group
1) For a reconciliation to the most directly comparable GAAP measures,
see chapter 15, Reconciliation of non-GAAP information, of this Annual
Report
4
Annual Report 2015
Performance highlights 1
Philips Group
EBIT and EBITA1) in millions of EUR
2011 - 2015
Philips Group
Research and development expenses in millions of EUR
2011 - 2015
6.7%
4.5%
3.8%
5.7%
EBITA as a % of sales
10.4%
2,276
1,855
1,334
1,876
(542)
1,003
592
411
421
821
486
335
1,372
EBITA in value
992
EBIT in value
380
Amortization and impairment
in value
7.7%
7.8%
7.5%
7.6%
1,724
453
1,659
405
1,635
463
1,543
363
7.9%
As a % of sales
1,927
Research and development
expenses
495
Green Innovation
1,180
1,271
1,254
1,172
1,432
Other Innovation
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1) For a reconciliation to the most directly comparable GAAP measures,
see chapter 15, Reconciliation of non-GAAP information, of this Annual
Report
Philips Group
Green Product sales per sector in millions of EUR
2011 - 2015
Philips Group
Operational carbon footprint in kilotonnes CO2-equivalent
2011 - 2015
46.3%
50.0%
51.7%
53.7%
As a % of sales
13,014
5,343
Lighting
3,091
Consumer Lifestyle
10,997
11,065
5,037
4,952
10,285
5,056
1,619
2,270
2,605
3,610
3,690
3,508
4,580
Healthcare
38.8%
7,719
3,955
1,101
2,663
2,022
130
627
119
243
903
1,807
167
573
117
205
1,898
220
558
116
218
1,697
176
475
122
204
1,600
183
Discontinued operations
394
103
202
Manufacturing
Non-industrial operations
Business travel
745
786
720
718
Logistics
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Philips Group
Brand value1) in billions of USD
2011 - 2015
10.9
10.3
9.8
8.7
9.0
Philips Group
New patents filed in number of patents
2011 - 2015
1,750
1,680
1,450
1,500
1,550
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1) As measured by Interbrand
Annual Report 2015
5
Message from the CEO 2
2 Message from the CEO
“ After separating, Philips will focus on driving higher growth
and higher value from its core activities in the field of health
technology, and Lighting will have a great future as a stand-
alone company.” Frans van Houten, CEO Royal Philips
Dear stakeholder,
2015 was a crucial year for Philips as we restored growth
and improved productivity. We also took the decisive
next step in our Accelerate! transformation – separating
out our Lighting business and moving away from a
diversified holding structure to create two stand-alone
companies, each with their own clearly defined
strategic direction and focus. We believe this is the best
way to create lasting value for our customers and
shareholders and a bright future for our employees.
Given the major challenges the world faces, for instance
in terms of population health management, energy
resource constraints and climate change, we see
significant opportunities for the two companies – both
leveraging the trusted Philips brand – to apply their
innovative competencies and capture higher growth in
attractive end-markets, which are very much in a state
of transition.
Two companies with a bright future
Philips will focus on the exciting opportunities in the
area of health technology, delivering meaningful
innovation to improve people’s lives across the health
continuum – through new, more integrated forms of
care delivery.
With an expanding and aging population, the rise of
chronic diseases, and global resource constraints,
health systems all over the world are under tremendous
pressure. At the same time, more and more people are
keen to take an active role in managing their own health.
And digital technology, whilst bringing vast new
opportunities, is shifting value from devices to software
and services. All of this is driving the convergence of
professional healthcare and consumer end-markets.
By leveraging our advanced technology, deep clinical
and consumer insights, long-standing customer
relationships, our new HealthSuite digital cloud
platform, and integrated solutions portfolio, we can
improve people’s health and enable better outcomes at
lower cost across the health continuum.
6
Annual Report 2015
In the field of lighting, the industry is undergoing a
radical transformation. Population growth and
urbanization are increasing demand for light,
specifically energy-efficient light. At the same time, the
rapid rise of LED and the mass adoption of digital
technology are driving a shift towards connected
lighting. With connected lighting, the lighting fixtures
not only provide high-quality illumination, but are also
fitted with sensors and connected to the building’s IT
network infrastructure, forming an ‘information
pathway’. This is opening up new applications where
we can deliver extraordinary value beyond illumination,
also via new service-based business models.
As a more agile, stand-alone company with direct
access to capital markets, we believe that our Lighting
business will be better able to strengthen its position as
the world leader in lighting solutions, boost scale and
capture growth.
2015 a year of solid progress
Amidst all this transformation, it was vital that we
improved our performance in 2015, giving our
customers the product and service innovation they
expect.
Overall, 2015 was a solid year for Philips, in which we
recorded consistent performance improvements in the
face of challenging economic conditions. Sales were up
2% on a comparable basis, driven by 4.5% growth in our
HealthTech portfolio. Profitability also increased thanks
to the improved operational performance, overhead
cost savings, a reduction in cost of goods sold and
process optimization, partly offset by the significant
impact of currency headwinds, higher investments in
R&D, settlement costs for pension de-risking, and
ongoing investments to improve our quality
management systems.
We reinvigorated our Healthcare business in North
America and gained momentum in winning large-scale
multi-year healthcare enterprise deals, e.g. with
Westchester Medical Center (USA) and Mackenzie
Health (Canada). And at our Imaging Systems facility in
Cleveland we saw a gradual ramp-up of production in
the course of the year. In February 2015 we completed
the acquisition of Volcano, improving our position in the
growing image-guided therapy market and
strengthening our ability to deliver the benefits of
minimally invasive therapies, such as faster recovery
and shorter hospital stays. Post-merger integration is
making good progress.
We also continued to deliver impressive growth and
strong earnings across the majority of our Consumer
Lifestyle portfolio. Our Health & Wellness and Personal
Care businesses performed very well, delivering
another year of high growth and margin expansion.
Expanding our offering to help consumers make
healthier choices, we launched the first in a series of
personal health apps at the IFA trade fair in Berlin. Built
on our Philips HealthSuite digital platform, these
Message from the CEO 2
personal health programs represent a new era in
connected care, as healthcare continues to move
outside the hospital and into our homes and everyday
lives.
Lighting had another year of excellent operational
improvements, recording double-digit growth and
margin expansion in LED, the key segment in the
industry, while continuing to actively manage the
decline of the conventional lighting market. Further
improvement in profitability was mainly driven by cost
productivity and procurement savings.
The power of our connected lighting propositions,
based on IoT (Internet of Things) technology, was
underscored by the opening of the world’s most
sustainable office building, The Edge in Amsterdam,
which features Philips’ smart connected lighting
solution, with Power over Ethernet. In the US, Los
Angeles remotely manages more than 100,000 street
lights with our CityTouch lighting management system
to create a more livable and safe city. And in the home,
our Hue connected lighting platform continues to be a
resounding success. Towards the end of the year, we
teamed up with Cisco and SAP to address the
opportunities in the office and street lighting markets
respectively.
The termination of the planned sale of Lumileds to a
consortium led by GO Scale Capital was of course a
disappointing outcome, but we are actively engaging
with other parties that have expressed an interest in the
Lumileds business.
Accelerate! driving performance improvement
In 2015, our multi-year Accelerate! program again
helped us to step up growth and increase margins,
despite deteriorating macro-economic conditions in a
number of markets. Through Accelerate! and the
implementation of the Philips Business System (PBS)
we continue to drive improvements across the
organization. The PBS is helping us to further tighten
our focus on quality and excellence and enhance
productivity through continuous improvement
methodologies, while embedding new capabilities and
making us more agile, entrepreneurial and customer-
centric, with a culture of higher performance. This is
evidenced by the many large-scale multi-year hospital
deals we won in 2015 and our improving growth and
margins despite the difficult economic times.
The PBS is also helping to reduce time-to-market for
our innovations through Lean transformations of our
customer value chains. And it is supporting our drive to
become a digital company, both in how we work and in
what we offer to the market, e.g. our Philips HealthSuite
digital platform and connected LED lighting. Last but
not least, it is driving overhead cost and productivity
savings, offsetting headwinds and enabling us to
improve our operating results over the year,
notwithstanding an increase in our Research &
Development expenses to 7.9% of sales.
Annual Report 2015
7
Message from the CEO 2
Innovating for a healthier, more sustainable world
In 2015, our innovative solutions and services improved
the lives of 2 billion people around the world.
Underlining our strength in the creation and protection
of intellectual property we filed 1,750 new patents
during the year and were named the world’s second-
largest patent applicant for patents filed at the
European Patent Office.
We also entered into a five-year research alliance with
Massachusetts Institute of Technology (MIT) to develop
breakthrough innovations in health technology and
connected lighting. And our North American research
organization moved to the Cambridge, Mass. area to
facilitate collaboration with MIT, academic hospitals,
and business partners.
In 2015, we again delivered on our sustainability
commitments, with Green Products accounting for 54%
of total sales. Philips was recognized as a world leader
for corporate action on climate change, achieving a
perfect score (100A) in the Carbon Disclosure Project
(CDP) Climate Change survey for the 3rd year in a row,
and being named Leader in the Industrial
Conglomerates category in the Dow Jones
Sustainability Index. Keeping up the momentum, we
committed to making Philips’ operations carbon-
neutral by 2020 at the 2015 Paris climate conference.
Underlining the importance we attach to ‘doing good
while doing well’, the Philips Foundation entered into
global innovation partnerships with the Red Cross and
UNICEF, as well as supporting a host of innovation
projects designed to make a difference in the
communities and lives of those most in need.
Strategic priorities for 2016
In light of the global trends and opportunities outlined
above and the innovative competencies we can bring
to bear, both our health technology and lighting
businesses are well placed to thrive as markets drive
greater demand for our solutions and services.
Both companies are deeply committed to delivering on
their strategic opportunities. For Philips, serving the
health technology markets, this means building strong
consultative customer relationships, selling value-
added solutions and winning more large-scale, multi-
year projects with healthcare providers. It also means
delivering growth from innovation investments,
establishing the Philips HealthSuite digital platform as
a leading cloud-based enabling solution, and boosting
scale in its existing businesses.
For Lighting, as a stand-alone company, it means:
optimizing returns from conventional products to fund
innovation in LED, to outpace the market; leading the
shift to LED systems, building the largest IoT connected
installed base; capturing adjacent value through new
Services business models; and being its customers’ best
business partner locally, leveraging its global scale.
8
Annual Report 2015
Both companies will remain strongly committed to
improve performance and capture higher growth,
focusing ever more closely on customers’ needs, driving
new ways to innovate and leveraging partnerships,
embracing digital technology in their ways of working,
and relentlessly driving a mindset of continuous
improvement and operational excellence.
It is my deepest conviction that both Philips and
Lighting stand to benefit from the separation, as it will
enable greater focus on their respective attractive
markets and allow them to capture higher growth and
deliver higher profitability.
In conclusion
For 2016, we continue to expect modest comparable
sales growth and we will build on our 2015 operational
performance improvement. Taking into account
ongoing macro-economic headwinds and the phasing
of costs and sales, we expect improvements in the year
to be back-end loaded.
We are proposing to the upcoming Annual General
Meeting of Shareholders to maintain this year’s
distribution at EUR 0.80 per share, in cash or shares.
Philips Group
Dividend per common share in EUR
2010-2016
0.75
0.75
0.75
0.70
0.80
0.80
0.80
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‘161)
1) Subject to approval by the 2016 Annual General Meeting of
Shareholders
I would like to thank our customers, shareholders and
other stakeholders for their continued support. I also
want to thank all our employees for their dedication and
effort this past year.
In 2016, Philips celebrates 125 years in business. That’s
a tremendous feat for an innovation company,
especially in such a fast-changing world. And I’m
convinced that there is much more to come, as we
continue to improve people’s lives through meaningful
innovation.
Frans van Houten
Chief Executive Officer
3 Philips in 2015 at a glance
Philips in 2015 at a glance 3
January 21
Philips Foundation announces
global innovation partnerships
with the Red Cross and UNICEF
February 17
Philips completes acquisition of
Volcano
February 26
Philips becomes second-largest
patent applicant at the
European Patent Office
March 2
A record-breaking number of 52
winners at the iF DESIGN
AWARD 2015
April 8
Los Angeles to control its street
lighting through mobile and
cloud-based technologies from
Philips
April 16
Philips provides Light as a
Service to Schiphol Airport
May 7
AGM approves separation of
Lighting business from Royal
Philips
May 19
Philips signs five-year research
alliance with Massachusetts
Institute of Technology
June 16
Multi-year partnership with
Westchester Medical Center
Health Network to transform
patient care
June 25
Philips connected lighting a key
feature of sustainable office
building The Edge in Amsterdam
July 6
Philips opens GrowWise City
Farming research center in
Eindhoven to develop light
growth recipes
September 3
Philips introduces personal
health programs at IFA in Berlin
September 8
Leading global health
institutions digitize pathology
workflows with Philips to
enhance diagnoses
September 10
Philips industry leader in 2015
Dow Jones Sustainability Index
September 14
Technology agreement with
Catharina Hospital for largest
cardiovascular center in the
Netherlands
October 9
Philips celebrates 90 years of
design
November 10
Philips and Canada’s Mackenzie
Health announce 18-year
strategic partnership
December 7
Philips commits to making its
operations carbon-neutral by
2020 at COP21 Paris climate
conference
December 9
Philips and Cisco form global
strategic alliance to address EUR
1 billion office lighting market
December 14
Philips wins a Thomson Reuters
2015 Top 100 Global Innovator
Award
Annual Report 2015
9
Our strategic focus 4
4 Our strategic focus
4.1 Addressing global challenges
Guided by our passion to improve people’s lives, Philips has been a leader in building
and shaping markets with meaningful innovations for 125 years. With the world facing
the challenge of tackling climate change and energy constraints, as well as providing
effective and affordable healthcare to a growing global population, we see compelling
opportunities in the health technology and lighting markets.
Determined to win in both, we are separating out our Lighting activities as a stand-alone company. This will create more
focus, giving Lighting the opportunity to grow and capture the vast opportunities in energy-efficient, digital lighting
products, systems and services, and Philips the enhanced focus to expand its core business to address the opportunities
in the health technology market.
We see a growing need for better health and better care at lower cost
Global resource constraints on health systems are driving a shift to value-based healthcare to reduce cost, increase
access and improve outcomes. At the same time, aging populations across the globe and the rise of chronic conditions
are driving a shift of care to lower-cost settings and the home.
In parallel, more and more people are looking for new ways to proactively monitor and manage their health. And the
digitalization of healthcare is shifting value from devices to software and services.
These challenges can only be met through new, more integrated forms of care delivery across the health continuum,
with a shift away from today’s focus on acute care and late-stage interventions.
In an increasingly connected world, the convergence of Philips’ consumer technologies that facilitate healthy living,
medical technologies that help clinicians to deliver better diagnosis and treatment, and cloud-based technologies that
enable data sharing and analysis, will be a key enabler of more effective, lower-cost integrated health solutions. This
fits very well with our core strengths in professional healthcare and in consumer health and well-being.
Healthy living
Prevention
Diagnosis
Treatment
Home care
Help people to live
a healthy life in a
healthy home
environment
Enable people to
manage their own
health
Provide first time right
diagnosis with
personalized and
adaptive care pathways
Enable more
effective therapies,
faster recovery and
better outcomes
Support recovery
and chronic care at
home
Connected care and health informatics
Improve population health outcomes and efficiency through optimized care coordination,
real-time analytics and value-added services
10
Annual Report 2015
Our strategic focus 4.1
In a total addressable market estimated at over EUR 140 billion, we are well positioned to leverage advanced technology
and our deep clinical and consumer insights to deliver integrated solutions that improve people’s health and enable
better outcomes across the health continuum.
Healthy living and Prevention
Diagnosis and Treatment
Home care
We have defined five priority areas: personal health, definitive diagnosis, minimally invasive guided therapy, population
health management, and connected care delivery. And our focus on cardiology, oncology, respiratory care, and fertility,
pregnancy and parenting already gives us a broad-based opportunity to expand our integrated solutions capabilities.
More and more, we are teaming up with hospital and health systems to understand their needs, provide integrated
solutions, and engage in multi-year cooperation to drive improvements in terms of patient outcomes, quality of care
delivery and cost productivity.
Going forward, we will further drive the benefits of scale in our current businesses while delivering additional growth
from continuing investments in innovation. And establishing the Philips HealthSuite digital platform as a leading cloud
solution to connect consumers, patients and providers will allow us to introduce value propositions with recurring
revenue streams.
We see increasing demand for energy-efficient and connected digital lighting
The lighting industry is undergoing a radical transformation, driven by the market’s transition to LED and digital
technology. Three mega-trends present a huge opportunity.
More light
More energy-efficient light
Digital light
The rapid rise in the world’s population and in new lighting applications is driving up global demand for light. At the
same time, with lighting accounting for 19% of global electricity consumption, the world needs that light to be energy-
efficient. And with the integration of LED technology, lighting controls and software opening up new functionality and
services, the world will benefit from the compelling new applications that connected digital lighting can offer, delivering
value beyond illumination.
As a stand-alone company, our Lighting business is well positioned to capture the value that is shifting from individual
products to connected LED lighting systems and services, more than offsetting the decline of conventional lighting. Its
total addressable market is estimated at over EUR 65 billion.
Annual Report 2015
11
Our strategic focus 4.1
Home
Government
Cities
Offices
Industry
Stadiums
Retail
Reducing
electricity
bills and
redefining
the space we
live in
Empowering a
sustainable
environment
Creating brighter
safer streets,
reducing costs
and carbon
footprint
Helping
business to
reduce energy,
work differently
and provide
new
experiences
Improving
efficiency and
safety and
reducing
maintenance
costs
Enhancing the
experience for
fans with
flexible
lighting
Helping
retailers drive
sales and
build
customer
loyalty
Optimizing returns from its conventional products to fund growth, Philips Lighting is committed to innovate in LED to
outpace the market. It will continue to lead the shift to Systems, building the industry’s largest connected installed base
and capturing value through new Services business models with recurring revenue streams, e.g. Light as a Service. And,
leveraging its global scale, it will continue to strive to be its customers’ best business partner locally.
4.2 How we create value
Understanding and meeting people’s needs
Building upon our long history of innovation, we take a systematic approach to value creation. Our starting point is
always to understand the specific challenges local people face – whether they be a doctor, a real estate developer, a
hospital director, a city planner, a consumer, etc.
Having gained these deep insights, we then apply our innovative competencies, strong brand, global footprint and
talented, engaged people – often in value-adding partnerships – to deliver solutions that meet these needs. Making
the world healthier and more sustainable.
To measure the impact our solutions are having around the world, we have developed our independently verified Lives
Improved model. We take a two-dimensional approach – social and ecological – to improving people’s lives. Products
and solutions that directly support the curative (care) or preventive (well-being) side of people’s health, determine the
contribution to the social dimension. The contribution to the ecological dimension is determined by means of our Green
Product portfolio, such as our energy-efficient lighting.
Our business system
With its four interlocking elements, the Philips Business System (PBS) is designed to help us deliver on our mission and
vision – and to ensure that success is repeatable. As we execute our strategy and invest in the best opportunities,
leverage our unique strengths and become operationally excellent, we will be able to consistently deliver value to our
customers, consumers and other stakeholders.
• Group strategy: We manage our portfolio with clearly
• Excellence: We are a learning organization that
defined strategies and allocate resources to
maximize value creation.
• CAPs: We strengthen and leverage our core
Capabilities, Assets and Positions – our deep
customer insights, technological innovation, global
footprint, our people, and the trusted Philips brand –
as they create differential value.
applies common operating principles and practices
to deliver to our customers with excellence.
• Path to Value: We define and execute business plans
that deliver sustainable results along a credible Path
to Value.
The ‘Creating value for our stakeholders’ diagram, based on the International Integrated Reporting Council framework,
shows how – with the Philips Business System at the heart of our endeavors – we use six different forms of capital to
drive value in the short, medium and long term.
12
Annual Report 2015
Our strategic focus 4.2
Capital input
Creating value for our stakeholders
Value outcomes
Human
Intellectual
Financial
Manufacturing
Natural
Social
We employ diverse
and talented people
and give them the
skills and training
they need to ensure
their effectiveness
and their personal
development and
employability.
We apply our
innovation and
design expertise to
create new products
and solutions that
meet local customer
needs.
We raise the funds we
need from
shareholders and
other capital
providers. We allocate
this capital to the
businesses and
markets we think offer
the best prospects for
growth and returns.
We apply Lean
techniques to our
manufacturing
processes to
produce high-
quality products. We
manage our supply
chain in a
responsible way.
We are a responsible
company and aim to
minimize the
environmental
impact of our supply
chain, our
operations, and also
our products and
solutions.
Human
• Employees 104,204, 35% female
• Training spend EUR 50 million on
450,000 courses, over 1 million
hours through Philips University
• 48,092 employees in growth
geographies
Intellectual
• Invested in R&D EUR 1.9 billion
(Green Innovation
EUR 495 million)
• Employees in R&D 11,462 in 60
R&D centers across the globe
including growth markets
Financial
• Debt EUR 5.8 billion
• Equity EUR 11.8 billion
• Market capitalization
EUR 21.6 billion
Manufacturing
• Manufacturing sites 95, cost of
materials used EUR 8,446 million
• Total assets EUR 31.0 billion
• Capital expenditure
EUR 522 million
Natural
• Energy used in manufacturing
9,702 terajoules
• Water used 2.7 million m3
• Recycled content in
our products 13.5 kilotonnes
Social
• Philips Foundation
• Stakeholder engagement
Capabilities, Assets
and Positions
Our unique strengths
Strategy
Where
we invest
Excellence
How we
operate
Path to Value
What we deliver
We contribute to our
customers and
society through our
products and
solutions, our tax
payments, the
products and
services we buy, and
our investments in
local communities.
Human
• Employee Engagement Index
71% positive
• Sales per employee EUR 232,659
• Employee benefit expenses
EUR 7,107 million
Intellectual
• New patent filings 1,750 and IP
Royalties EBITA EUR 284 million
• 54% Green Product sales
Financial
• Comparable sales growth 2.2%
• EBITA as % of sales 5.7%
• Free cash flow EUR 325 million
• Dividend EUR 730 million
• Corporate taxes paid
EUR 280 million
Manufacturing
• EUR 24 billion products and
solutions sold, corresponding to
2.0 billion lives improved
Natural
• CO2 emissions 1,417 kilotonnes
• 13,800 kilotonnes (estimated)
products put on market
• 68.5 kilotonnes waste, of which
83% recycled
Social
• Brand value USD 10.9 billion
• Partnerships with UNICEF and
Red Cross
Annual Report 2015
13
Our strategic focus 4.2
4.3 Accelerate! journey continues
In 2011 we set out on our Accelerate! journey of change and performance improvement. Designed to transform Philips
into an agile and entrepreneurial company, Accelerate! is all about delivering meaningful innovation to our customers
in local markets – and doing so in a fast and efficient way.
The program has three main thrusts:
• transform to address underperformance
• expand global leadership positions
• initiate new growth engines
We are now in the fifth year of this transformation process, and our Path to Value is clearly mapped out:
Accelerate! roadmap
Initiate new growth engines
• Invest in adjacencies
• Seed emerging business areas
Expand global leadership positions
• Invest to strengthen our core businesses
• Resource allocation to right businesses and geographies
Accelerate!
Transform to address underperformance
• Turnaround or exit underperforming businesses
• Productivity and margin improvements
• Rebuild culture, processes, systems and capabilities
• Implement the Philips Business System
2011
2016
For 2016, we continue to expect modest comparable sales growth and we will build on our 2015 operational performance
improvement. Taking into account ongoing macro-economic headwinds and the phasing of costs and sales, we expect
improvements in the year to be back-end loaded.
14
Annual Report 2015
4.4 Lives improved
Our strategic focus 4.4
Markets
1. Africa
2. ASEAN
3. Benelux
4. Central & East Europe
5. Germany, Austria & Switzerland
6. France
7. Greater China
8.
9.
Iberia
Indian Subcontinent
10.
Italy, Israel and Greece
11. Japan
12. Latin America
13. Middle East & Turkey
14. Nordics
15. North America
16. Russia and Central Asia
17. UK & Ireland
Lives improved (million)1)
Population (million)2)
GDP (USD billion)3)
56
227
28
87
92
59
375
45
203
52
34
172
108
26
345
86
50
1,152
935
29
125
99
65
1,406
57
1,503
82
127
626
338
27
357
287
70
1,959
5,634
1,267
1,376
4,424
2,454
12,263
1,424
2,488
2,341
4,116
5,185
2,824
1,425
19,541
1,810
3,108
1) Source: Philips, double counts eliminated
2) Source: IMF, The World Bank, CIA Factbook & Wikipedia
3) Source: IMF, CIA Factbook & Wikipedia
4.5 Global presence
Regions
Asia & Pacific
EMEA
Latin America
North America
Sales in millions of
EUR
Number of
employees
Employees
female
Employees
male
R&D centers
Manufacturing
sites
Tangible and intangible
assets in millions of EUR
6,990
7,948
1,211
8,095
32,533
39,903
8,154
23,614
32%
34%
46%
36%
68%
66%
54%
64%
9
28
3
20
20
35
11
29
2,023
2,959
136
9,420
Annual Report 2015
15
Our strategic focus 4.6
4.6 Our strategy in action
Training tomorrow’s lifesavers
At Philips, we build relationships to ensure that our products and
solutions are addressing people’s needs in the right way. And that means
supplying help as well as hardware.
In a technologically advanced world, it’s no good simply
investing in pioneering products such as high-tech
radiology devices, MRI scanners and other medical
imaging tools: doctors need to know how to use them
to improve patient care. Which is where Philips comes
in, not only providing the technology, but expert
developmental medical training too, by partnering with
key stakeholders.
At the American University of Beirut, students and
professionals from all over the Middle East join
colleagues from Lebanon – along with private
companies such as Philips – to develop essential life-
saving skills that they can take back to their home
countries, and to learn how they can make a difference
through digital innovations. The medical training is a
collaboration that not only teaches new skills, but is
spreading the finest medical care through some of the
world’s most vulnerable populations.
.
16
Annual Report 2015
Our strategic focus 4.6
Addressing the community’s
primary health needs
In Africa, we are partnering with local governments to develop
Community Life Centers with the aim of not only improving primary
healthcare but also promoting community development.
In most countries in Sub-Saharan Africa, healthcare
systems are having to contend with serious challenges.
Primary health facilities in particular are facing
difficulties in offering quality basic services to local
communities and playing the role of gatekeeper to the
rest of the healthcare system.
At Philips we believe that the strengthening of health
systems has to start at the primary level. That’s why, in
partnership with local government, we have installed a
Community Life Center at Langata in Kiambu County,
Kenya. Community Life Centers are a total solution for
primary healthcare facilities, combining an integrated
set of appropriate technologies with design,
implementation and support services.
Since the opening of the Langata Community Life
Center the number of children treated has doubled and
Ante Natal Care visits have increased 12-fold,
supporting our commitment to the UN’s ‘Every Woman,
Every Child’ initiative.
Annual Report 2015
17
Our strategic focus 4.6
Change your health for life
In 2015, Philips announced the first in a series of personal health
programs – including connected health measurement devices, app-
based personalized programs and cloud-based data analysis – to help
consumers take greater control of their health.
Philips personal health programs represent a new era
in connected care for consumers, patients and health
providers, as healthcare continues to move outside the
hospital, and into our homes and everyday lives. They
are built on the Philips HealthSuite digital platform, an
open and secure, cloud-based platform that collects
and analyzes health and other data from multiple
devices and sources.
“ Consumers are increasingly engaged in their personal
health and they want solutions that empower them to
stay healthy and prevent illness,” says Pieter Nota (CEO
Philips Consumer Lifestyle in 2015). “Philips personal
health programs will help consumers develop healthier
habits for life.”
Leveraging Philips’ deep healthcare and consumer
expertise, the personal health programs enable
individuals to measure vital signs to understand how
lifestyle choices affect their body, to set goals and
monitor their progress, and to stay motivated with
intelligent programs, developed with leading doctors
and psychologists, that respond to individual progress
and make personalized recommendations.
The Philips personal health programs and health measurement devices are
not currently available for sale in the USA.
18
Annual Report 2015
Our strategic focus 4.6
Offering new parents peace of
mind
We believe that every baby deserves the best possible start in life. With
the Philips Avent uGrow digital platform, parents can track progress,
relish milestones and learn about their baby’s development and needs.
Philips Avent uGrow is an innovative digital parenting
platform in the form of a mobile application, plus
connected digital products, which provides new
parents with personalized advice and insights to help
them understand and support each stage of their
baby’s development.
Based on professional guidance and pertinent
localized content, and with a timeline that incorporates
data ranging from how much baby has eaten to sleep
patterns, uGrow gives new parents peace of mind in
their baby’s development. Interactive photos and
virtual stickers can be used to mark occasions and
celebrate milestones on baby’s timeline. And the app
remembers key dates in order to provide bespoke
guidance, e.g. on baby’s developing weight, or on
weaning as baby grows.
“ Being a parent is a life-changing experience, during
which we often rely on our intuition,” says Aliette van
der Wal, Business Leader Mother & Childcare, Health &
Wellness. “At Philips Avent we’re harnessing the power
of connected technology to empower parents with
additional information, tailored to individual needs,
which will help them make the best decisions for their
baby.”
Annual Report 2015
19
Our strategic focus 4.6
Connected lighting delivering
value beyond illumination
With Philips CityTouch, Los Angeles remotely manages more than
100,000 street lights to create a more livable city.
In 2015, Los Angeles became the first city in the world
to control its street lighting through an advanced Philips
management system that uses mobile and cloud-
based technologies.
With Philips CityTouch, the LA Bureau of Street Lighting
can remotely control street lighting fixtures, as well as
monitor energy use and the status of each light. Using
mobile chip technology embedded into each fixture,
the street lights are able to identify themselves and
network instantly.
This smart plug-and-play approach not only reduces
the cost of programming each fixture, it also reduces the
time required for commissioning from days to minutes
and eliminates on-site commissioning completely.
Furthermore, CityTouch offers system managers a real-
time, map-based view of all connected light points via
any standard web browser.
20
Annual Report 2015
“ I call it priceless,” says Ed Ebrahimian, Director of the LA
Bureau of Street Lighting, “because if we can save one
life by finding out if a light is out and fixing it right away,
we’ve done our job.”
Our strategic focus 4.6
Creating a sustainable office
environment
Opened in 2015, innovative office building The Edge in Amsterdam
received the highest-ever BREEAM score – the leading assessment
method for sustainable buildings. A key aspect of the design is a
connected lighting system from Philips.
Supporting workplace productivity, employees at The
Edge are also able to set the lighting and temperature
to suit their personal preferences via an app on their
smartphone.
The Edge’s connected lighting system uses nearly
6,500 LED luminaires over the building’s 15 stories.
These fixtures are connected to the building’s IT
network by Power over Ethernet (PoE) technology. With
PoE, Ethernet cables transmit both power and data,
eliminating the need for separate power cabling and
creating a sort of ‘information pathway’.
With integrated sensors in 3,000 of these luminaires,
the connected lighting system captures anonymous
data on room occupancy. The LED fixtures interface
with other building systems such as heating and
ventilation to provide facility managers with an
integrated view of a building’s occupancy patterns and
energy usage. This enables more informed decision
making, with unprecedented levels of energy and
operational efficiency.
Annual Report 2015
21
Our strategic focus 4.6
Lighting the steel heart
Innovative lighting can help improve health and safety at work. Nowhere
is this more apparent than in Ostrava, where Philips has helped to
transform ArcelorMittal’s steel plant with a new lighting system.
ArcelorMittal, Ostrava. “This gave kind of an explosive
or meteoric effect to the employees. And I think it was
thanks to Philips.”
A steel plant can be a hazardous workplace. When
employees work with molten steel, with loads
exceeding 350 tons in weight and temperatures
exceeding 1,500 degrees, it is important to have good
lighting. At its steel plant in Ostrava, the steel heart of
the Czech Republic, ArcelorMittal needed a lighting
partner who understood their needs, could offer a
suitable solution, and, of course, deliver that solution
with a minimum of disruption.
With the steel plant in full operation, Philips
implemented a complete modernization of the lighting.
It was a complex project but ArcelorMittal and Philips
worked closely together for the duration of the
renovation. “There has been a substantial improvement
in health, safety, as well as productivity and energy
benefits,” says Anoop Nair, Chief Operating Officer,
22
Annual Report 2015
5 Group performance
Group performance 5
“ 2015 saw Philips returning to growth and improving
profitability in challenging macro-economic conditions as
our Accelerate! program continued to deliver results.”
Abhijit Bhattacharya, CFO Royal Philips
5.1 Financial performance
Management summary
The year 2015
• Comparable sales rose 4.5% in our HealthTech
portfolio, which combines our Healthcare and
Consumer Lifestyle businesses. This illustrates the
progress we are making in capturing opportunities in
this large and growing market. Overall, comparable
sales for the Group increased by 2% to EUR 24.2
billion.
• Our Healthcare business recorded 4% growth. More
significantly, our order intake was up 5% for the year.
This performance was supported by strong growth in
North America and Western Europe – and a
substantial rebound in China in Q4.
• Our Consumer Lifestyle business achieved a
comparable sales increase of 6% year-on-year,
driven by double-digit growth at Health & Wellness
and high-single-digit growth at Personal Care.
• Lighting recorded another year of operational
improvements, resulting in a substantial increase in
profitability. We strongly improved the performance
of our LED business, which grew by 25% on a
comparable basis and significantly improved
profitability. On a full-year basis LED now accounts
for 43% of total Lighting sales. In the conventional
lamps business we continued to gain market share in
a declining market and improved profitability
combined with a solid cash flow. The expected
decline in conventional lighting led to a comparable
sales decrease of 3% for our Lighting business overall.
• In line with our mission to improve people’s lives, we
have embedded sustainability at the heart of our
business processes, and Green Product sales
increased to 54% of total revenues in 2015. In
recognition of our sustainability achievements,
Philips was named industry leader in the Industrial
Conglomerates category in the 2015 Dow Jones
Sustainability Index.
Annual Report 2015
23
Group performance 5.1
• EBITA totaled EUR 1.4 billion, compared to EUR 821
5.1.1 Sales
million a year earlier. Our three cost savings programs
all delivered ahead of plan in 2015. We achieved EUR
290 million of gross savings in overhead costs, EUR
379 million of gross savings in procurement, and our
End2End process improvement program delivered
productivity savings of EUR 187 million.
• Net income amounted to EUR 659 million, a 60%
increase from EUR 411 million in 2014.
• Free cash flow amounted to EUR 325 million in 2015,
which was EUR 172 million lower than in 2014, mainly
due to CRT litigation claims, higher outflows related
to pension de-risking settlements, and net capital
expenditures, partly offset by higher earnings.
The composition of sales growth in percentage terms in
2015, compared to 2014, is presented in the table below.
Philips Group
Sales growth composition in %
2015 versus 2014
com-
parable
growth
currency
effects
consoli-
dation
changes
nominal
growth
Healthcare
Consumer
Lifestyle
Lighting
Innovation, Group
& Services
Philips Group
3.8
5.8
(2.8)
5.4
2.2
11.7
7.2
8.5
1.7
9.4
3.3
18.8
0.0
2.2
(12.2)
1.7
13.0
7.9
(5.1)
13.3
• By the end of the year we had also completed 74% of
the EUR 1.5 billion- share buy-back program.
Group sales amounted to EUR 24,244 million in 2015,
which represents 13% nominal growth compared to 2014.
Philips Group
Key data in millions of EUR unless otherwise stated
2013 - 2015
2013
2014
2015
21,990
21,391
24,244
2,276
10.4%
1,855
8.4%
(330)
(466)
821
3.8%
486
2.3%
(301)
(26)
1,372
5.7%
992
4.1%
(369)
(239)
(25)
62
30
1,034
221
414
138
1,172
190
411
245
659
Condensed statement of
income
Sales
EBITA 1)
as a % of sales
EBIT
as a % of sales
Financial income and expenses
Income tax expense
Results of investments in
associates
Income from continuing
operations
Income from discontinued
operations - net of income tax
Net income
Other indicators
Net income attributable to
shareholders per common share
in EUR:
basic
diluted
1.28
1.27
0.45
0.45
0.70
0.70
Net operating capital (NOC)1)
10,238
8,838
11,096
Free cash flow1)
Employees (FTEs)
82
497
325
116,082
113,678
112,959
continuing operations
105,637
105,365
104,204
discontinued operations
10,445
8,313
8,755
1) For a reconciliation to the most directly comparable GAAP measures,
see chapter 15, Reconciliation of non-GAAP information, of this Annual
Report
Adjusted for a 9% positive currency effect and 2%
consolidation impact, comparable sales were 2% above
2014.
Healthcare sales amounted to EUR 10,912 million,
which was EUR 1,726 million higher than in 2014 or 4%
higher on a comparable basis. Imaging Systems
achieved high-single-digit growth, Healthcare
Informatics, Solutions & Services posted mid-single-
digit growth, Customer Services reported low-single-
digit growth, while Patient Care & Monitoring Solutions
was in line with 2014. From a geographical perspective,
comparable sales in growth geographies showed high-
single-digit growth, and mature geographies recorded
low-single-digit growth.
Consumer Lifestyle reported sales of EUR 5,347 million,
which was EUR 616 million higher than in 2014, or 6%
higher on a comparable basis. Health & Wellness
achieved double-digit growth, Personal Care reported
high-single-digit growth, while Domestic Appliances
was in line with 2014. From a geographical perspective,
growth geographies achieved high-single-digit growth
and mature geographies registered low-single-digit
growth.
Lighting sales amounted to EUR 7,411 million, which was
EUR 542 million higher than in 2014 and 3% lower on a
comparable basis. Both Light Sources & Electronics and
Consumer Luminaires recorded a mid-single-digit
decline, while Professional Lighting Solutions remained
flat year-on-year. From a geographical perspective,
comparable sales showed a mid-single-digit decline in
growth geographies and a low-single-digit decline in
mature geographies.
IG&S reported sales of EUR 574 million, which was EUR
31 million lower than in 2014. A decline in revenues as a
result of the OEM remote controls divestment, was
partly offset by higher sales from emerging business
areas.
24
Annual Report 2015
5.1.2 Earnings
In 2015, Philips’ gross margin was EUR 9,856 million, or
40.7% of sales, compared to EUR 8,206 million, or
38.4% of sales, in 2014. Gross margin in 2015 included
EUR 176 million of restructuring and acquisition-related
charges, whereas 2014 included EUR 249 million of
restructuring and acquisition-related charges. 2015 also
included charges of EUR 35 million related to the
devaluation of the Argentine peso, a EUR 28 million
currency revaluation of the provision for the Masimo
litigation and EUR 3 million related to the separation of
the Lighting business. Gross margin in 2014 included
charges of EUR 366 million related to the provision for
the Masimo litigation, EUR 68 million of impairment and
other charges related to industrial assets at Lighting,
EUR 46 million of mainly inventory write-downs related
to the voluntary suspension of production at the
Cleveland facility, and a past-service pension cost gain
of EUR 17 million. Excluding these items, gross margin
as a % of sales was broadly in line with 2014.
Selling expenses increased from EUR 5,124 million in
2014 to EUR 5,815 million in 2015. Selling expenses as a
% of total sales remained in line with 2014 at 24.0%. 2015
included EUR 62 million of restructuring and
acquisition-related charges, compared to EUR 128
million of restructuring charges in 2014. Selling
expenses in 2015 included charges of EUR 31 million
related to a legal provision and EUR 69 million related
to the separation of the Lighting business, while 2014
included a past-service pension cost gain of EUR 20
million. Excluding these items, selling expenses as a %
of sales were in line with 2014.
Research and development costs increased from EUR
1,635 million in 2014 to EUR 1,927 million in 2015.
Research and development costs in 2015 included EUR
16 million of restructuring and acquisition-related
charges, compared to EUR 34 million in 2014. Research
and development costs 2014 also included a past-
service pension gain of EUR 22 million and charges of
EUR 3 million of mainly write-downs related to the
voluntary suspension of production at the Cleveland
facility. The year-on-year increase was mainly due to
currency impact and higher spend at Healthcare and
IG&S. As a percentage of sales, research and
development costs increased from 7.6% in 2014 to 7.9%
in 2015.
General and administrative expenses amounted to EUR
1,209 million, or 5.0% of sales, in 2015, compared to EUR
747 million, or 3.5% of sales, in 2014. 2015 included EUR
30 million of restructuring and acquisition related-
charges, compared to EUR 23 million in 2014. 2015 also
included charges of EUR 345 million mainly related to
settlements for pension de-risking and EUR 111 million
related to the separation of the Lighting business, while
2014 included a past-service pension cost gain of EUR
8 million. Excluding these items, the year-on-year
decrease was driven by reductions in all operating
sectors.
Group performance 5.1.2
The overview below shows sales, EBIT and EBITA
according to the 2015 sector classifications.
Philips Group
Sales, EBIT and EBITA
in millions of EUR unless otherwise stated
2014 - 2015
Sales
EBIT
%
EBITA1)
%
2015
Healthcare
10,912
819
7.5%
1,024
9.4%
Consumer
Lifestyle
Lighting
Innovation, Group
& Services
5,347
7,411
621
11.6%
673
12.6%
486
6.6%
594
8.0%
574
(934)
-
(919)
-
Philips Group
24,244
992
4.1%
1,372
5.7%
2014
Healthcare
Consumer
Lifestyle
Lighting
9,186
456
5.0%
616
6.7%
4,731
6,869
520
11.0%
573
12.1%
185
2.7%
293
4.3%
Innovation, Group
& Services
605
(675)
-
(661)
-
Philips Group
21,391
486
2.3%
821
3.8%
1) For a reconciliation to the most directly comparable GAAP measures, see
chapter 15, Reconciliation of non-GAAP information, of this Annual
Report
In 2015, EBIT increased by EUR 506 million year-on-
year to EUR 992 million, or 4.1% of sales. Restructuring
and acquisition-related charges amounted to EUR 283
million, which included the Volcano acquisition,
compared to EUR 434 million in 2014. 2015 EBIT also
included charges of EUR 345 million mainly related to
settlements for pension de-risking, EUR 183 million
relating to the separation of the Lighting business, EUR
35 million related to the devaluation of the Argentine
peso, EUR 31 million relating to legal provisions, EUR 28
million related to the currency revaluation of the
provision for the Masimo litigation, and a EUR 37 million
gain related to the sale of real estate assets. EBIT in
2014 included charges of EUR 366 million related to the
provision for the Masimo litigation, EUR 244 million
related to the CRT antitrust litigation, EUR 68 million of
impairment and other charges related to industrial
assets at Lighting, EUR 49 million of mainly inventory
write-downs related to the Cleveland facility, and a EUR
67 million past-service pension cost gain.
Amortization and impairment of intangibles, excluding
software and capitalized product development costs,
amounted to EUR 380 million in 2015, compared to EUR
332 million in 2014. In 2015, goodwill impairment
charges amounted to nil, while 2014 included charges
of EUR 3 million consisting of impairments on divested
businesses in Healthcare and Lighting, see note 11,
Goodwill.
EBITA increased from EUR 821 million, or 3.8% of sales,
in 2014 to EUR 1,372 million, or 5.7% of sales, in
2015. EBITA showed a year-on-year increase at all
sectors except IG&S.
Annual Report 2015
25
and Quality & Regulatory spend, investments in
emerging business areas, and lower licensing revenue
in IP Royalties.
5.1.3 Advertising and promotion
Philips’ total advertising and promotion expenses were
EUR 1,000 million in 2015, an increase of 10% compared
to 2014. The increase was mainly due to investments in
key growth geographies, such as China and India, and
mature geographies such as the United States and
Japan. The total advertising and promotion investment
as a percentage of sales was 4.1% in 2015, compared to
4.3% in 2014.
Philips brand value increased by 6% to over USD 10.9
billion as measured by Interbrand. In the 2015 listing,
Philips is ranked the 47th most valuable brand in the
world.
Philips Group
Advertising and promotion expenses in millions of EUR
2011 - 2015
4.3%
3.7%
4.0%
4.3%
4.1%
As a % of sales
852
829
913
869
1,000
Advertising and promotion
expenses
‘11
‘12
‘13
‘14
‘15
5.1.4 Research and development
Research and development costs increased from EUR
1,635 million in 2014 to EUR 1,927 million in 2015. 2015
included EUR 16 million of restructuring and
acquisition-related charges, compared to EUR 34
million in 2014. 2014 also included a past-service
pension gain of EUR 22 million and charges of EUR 3
million of mainly inventory write-downs related to
Cleveland. The year-on-year increase was mainly due
to currency impact and higher spend at Healthcare and
IG&S. As a percentage of sales, research and
development costs increased from 7.6% in 2014 to 7.9%.
Group performance 5.1.3
Healthcare
EBITA amounted to EUR 1,024 million, or 9.4% of sales,
compared to EUR 616 million, or 6.7% of sales, in 2014.
EBITA in 2015 included restructuring and acquisition-
related charges of EUR 168 million, which included the
Volcano acquisition, compared to EUR 70 million in
2014. 2015 EBITA also included charges of EUR 28
million related to the currency revaluation of the
provision for the Masimo litigation, EUR 8 million
related to the devaluation of the Argentine peso, and a
EUR 31 million legal provision. EBITA in 2014 included
charges of EUR 366 million related to the provision for
the Masimo litigation, charges of EUR 49 million of
mainly inventory write-downs related to Cleveland,
and a EUR 16 million past-service pension cost gain.
Excluding these items, the increase was largely driven
by higher volumes, partly offset by an increase in
Quality & Regulatory spend and higher planned
expenditure for growth initiatives.
Consumer Lifestyle
EBITA amounted to EUR 673 million, or 12.6% of sales,
a year-on-year increase of EUR 100 million. 2015 EBITA
included restructuring and acquisition-related charges
of EUR 36 million and charges related to the
devaluation of the Argentine peso of EUR 13 million.
2014 EBITA included restructuring and acquisition-
related charges of EUR 9 million and a EUR 11 million
past-service pension cost gain. The year-on-year
increase was largely driven by cost productivity, higher
volumes, and product mix, partly offset by higher
restructuring and acquisition-related charges.
Lighting
EBITA amounted to EUR 594 million, or 8.0% of sales, a
year-on-year increase of EUR 301 million. 2015 EBITA
included EUR 99 million of restructuring and
acquisition-related charges and EUR 14 million of
charges related to the devaluation of the Argentine
peso. 2014 EBITA included EUR 245 million of
restructuring and acquisition-related charges, EUR 68
million of impairment and other charges related to
industrial assets, and a EUR 13 million past-service
pension cost gain. The increase in EBITA was largely
driven by cost productivity, improved LED margins and
lower restructuring and acquisition-related charges.
Innovation, Group & Services
EBITA amounted to a net cost of EUR 919 million,
compared to EUR 661 million in 2014. EBITA in 2015
included a EUR 20 million net release of restructuring
charges, compared to EUR 113 million restructuring
charges in 2014. EBITA in 2015 also included charges of
EUR 183 million related to the separation of the Lighting
business, EUR 345 million mainly related to settlements
for pension de-risking, and a EUR 37 million gain related
to the sale of real estate assets. EBITA in Q4 2014 also
included EUR 244 million of charges related to the CRT
antitrust litigation and a EUR 27 million past-service
pension cost gain. Excluding these items, the decrease
in EBITA was largely driven by higher Group and
Regional Costs, mainly related to information security
26
Annual Report 2015
Philips Group
Research and development expenses in millions of EUR
2011 - 2015
7.7%
7.8%
7.5%
7.6%
1,724
1,659
1,635
1,543
7.9%
As a % of sales
1,927
Research and development
expenses
‘11
‘12
‘13
‘14
‘15
Philips Group
Research and development expenses in millions of EUR
2013 - 2015
Healthcare
Consumer Lifestyle
Lighting
Innovation, Group & Services
2013
2014
810
268
313
268
822
263
330
220
2015
1,073
301
315
238
Philips Group
1,659
1,635
1,927
5.1.5 Pensions
In 2015, the total costs of post-employment benefits
amounted to EUR 559 million for defined benefit plans
and EUR 293 million for defined contribution plans,
compared to EUR 241 million and EUR 144 million
respectively in 2014. Excluding 2015 pension de-risking
cost and the 2014 past service cost gain, defined benefit
costs decreased by EUR 92 million compared to 2014.
The above costs are reported in Operating expenses
except for the net interest cost component which is
reported in Financial income and expense. The net
interest cost for defined benefit plans was EUR 72
million in 2015 (2014: EUR 59 million).
2015 included settlement costs of EUR 329 million
mainly related to the settlement of the UK plan, results
of other de-risking actions in the UK prior to the
settlement and the settlement of parts of the US
pension plan. Past-service costs of EUR 14 million were
recognized related to de-risking actions taken in the UK
prior to the settlement of the plan, including a past-
service cost for GMP Equalization in the same UK plan.
Some smaller plan changes in other countries resulted
in a small past service cost gain. Due to the above, and
the change to defined contribution accounting for the
Dutch pension plan, which is explained in the pension
note, the Company’s Defined Benefit Obligation in 2015
decreased from EUR 27 billion to EUR 4.5 billion at the
end of 2015.
Group performance 5.1.5
2014 included past-service cost gains in the
Netherlands of EUR 67 million, which were mainly
related to the mandatory plan change in the
Netherlands, where a salary cap of EUR 100,000 must
be applied to the pension salary with effect from
January 1, 2015. This change lowers the Company’s
Defined Benefit Obligation, which is recognized as a
past-service cost gain. Compensatory measures are
given in wages for employees impacted.
The overall funded status in 2015 decreased as the
surpluses of the Netherlands and the UK plan are no
longer included due to their settlements in 2015. The
pension deficits recognized in our balance sheet
decreased mainly due to the above mentioned de-
risking actions in the US. The surpluses of the
Netherlands and the UK plan were not recognized in the
balance sheet due to the asset ceiling test and therefore
their settlement does not impact the pension balances
as per the Company’s accounting policy.
For further information, refer to note 20, Post-
employment benefits.
5.1.6 Restructuring and impairment charges
In 2015, EBIT included net charges totaling EUR 171
million for restructuring. In addition to the annual
goodwill-impairment tests for Philips, trigger-based
impairment tests were performed during the year,
resulting in a goodwill impairment of nil.
2014 included EUR 414 million of restructuring charges
and a goodwill impairment of EUR 2 million at Lighting
and EUR 1 million at Healthcare.
For further information on sensitivity analysis, please
refer to note 11, Goodwill.
In 2015, the most significant restructuring projects
related to Lighting and Healthcare and were driven by
industrial footprint rationalization and the overhead
cost reduction program. Restructuring projects at
Lighting centered on the declining conventional lamps
industry and Professional Lighting Solutions, the largest
of which took place in France and Indonesia.
Restructuring projects at Healthcare mainly took place
in the US and France. Consumer Lifestyle restructuring
projects were mainly related to Italy.
In 2014, the most significant restructuring projects
related to Lighting and IG&S and were driven by
industrial footprint rationalization and the Accelerate!
transformation program. Restructuring projects at
Lighting centered on Light Sources & Electronics and
Professional Lighting Solutions, the largest of which
took place in Belgium, the Netherlands and France.
Innovation, Group & Services restructuring projects
were mainly related to IT and group and country
overheads and centered primarily on the Netherlands,
the US and Belgium. Restructuring projects at
Annual Report 2015
27
Group performance 5.1.7
Healthcare mainly took place in the US and the
Netherlands. Consumer Lifestyle restructuring projects
were mainly in the Netherlands.
For further information on restructuring, refer to note 19,
Provisions.
Philips Group
Restructuring and related charges in millions of EUR
2013 - 2015
Restructuring and related charges per
sector:
Healthcare
Consumer Lifestyle
Lighting
Innovation, Group & Services
Continuing operations
Discontinued operations
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
2013
2014
2015
(6)
10
77
3
84
33
95
(62)
25
26
84
33
68
8
225
113
414
18
354
(36)
57
39
414
18
61
37
93
(20)
171
5
194
(88)
46
19
171
5
5.1.7 Financial income and expenses
A breakdown of Financial income and expenses is
presented in the table below.
Philips Group
Financial income and expenses in millions of EUR
2013 - 2015
Interest expense (net)
Sale of securities
Impairments
Other
2013
(269)
-
(10)
(51)
2014
(251)
60
(17)
(93)
2015
(302)
20
(46)
(41)
Financial income and expenses
(330)
(301)
(369)
Net interest expense in 2015 was EUR 51 million higher
than in 2014, mainly due to a weaker euro against the
US dollar in relation to interest expenses on USD bonds.
The gain from the sale of stakes in 2015 amounted to
EUR 20 million, mainly from Assembléon Technologies
B.V., Silicon & Software Systems and other equity
interest.
Impairments amounted to EUR 46 million mainly due
to valuation allowances.
Other financial expense amounted to EUR 41 million in
2015, primarily consisting of interest expense related to
the jury verdict in the Masimo litigation, and accretion
expense associated with other discounted provisions.
For further information, refer to note 7, Financial income
and expenses.
28
Annual Report 2015
5.1.8 Income taxes
Income taxes amounted to EUR 239 million, compared
to EUR 26 million in 2014. The effective income tax rate
in 2015 was 38.4%, compared to 14.1% in 2014. The
increase was mainly due to a significant change in the
geographical mix of actual profits and the absence of
various items that reduced the charge in the prior year,
in particular favorable tax regulations relating to R&D
investments in 2014.
For 2016, we expect our effective tax rate to be in the
30% to 35% range. However, the actual rate will depend
on the geographical mix of actual profits.
For further information, refer to note 8, Income taxes.
5.1.9 Results of investments in associates
Philips Group
Results of investments in associates in millions of EUR
2013 - 2015
Company’s participation in income
Investment impairment and other items
Dilution gain
Results of Investments in associates
2013
2014
2015
5
(30)
-
(25)
30
-
32
62
10
19
1
30
Results related to investments in associates decreased
from a gain of EUR 62 million in 2014 to a gain of EUR
30 million in 2015. 2015 included proceeds from the sale
of Assembléon Technologies B.V., while 2014 included
a EUR 32 million dilution gain related to Philips’ stake
in Corindus Vascular Robotics.
The Company’s participation in income decreased from
EUR 30 million in 2014 to EUR 10 million in 2015. The
gain in 2015 was mainly attributable to the results of
Philips Medical Capital.
For further information, refer to note 5, Interests in
entities.
5.1.10 Non-controlling interests
Net income attributable to non-controlling interests
amounted to a gain of EUR 14 million in 2015, compared
to a loss of EUR 4 million in 2014.
5.1.11 Discontinued operations
Discontinued operations consist primarily of the
combined businesses of Lumileds and Automotive, the
Audio, Video, Multimedia & Accessories business, and
the Television business. The results related to these
businesses are reported under Discontinued
operations in the Consolidated statements of income
and Consolidated statements of cash flows.
In 2014, Philips announced the start of the process to
combine the Lumileds and Automotive Lighting
businesses into a stand-alone company and explore
strategic options to attract capital from third-party
investors for this combined business.
As announced on January 22, 2016, Philips and GO
Scale Capital have withdrawn their filing with the
Committee of Foreign Investment in the United States
(CFIUS) and terminated the agreement pursuant to
which the consortium led by GO Scale Capital would
acquire an 80.1% interest in the combined businesses
of Lumileds and Automotive. Despite the parties’
extensive efforts to mitigate CFIUS’ concern, regulatory
clearance has not been granted for this particular
transaction. Philips is actively discussing the sale of the
business with potential buyers and expects a
transaction to be completed in the year 2016.
Income from discontinued operations increased by
EUR 55 million to EUR 245 million in 2015. The year-on-
year increase was mainly due to the positive impact
from the treatment of depreciation and amortization of
assets held for sale. Income from discontinued
operations mainly consisted of net income of EUR 246
million related to the combined businesses of Lumileds
and Automotive and a net loss of EUR 1 million, mainly
related to the Audio, Video, Multimedia & Accessories
and Television business.
Group performance 5.1.12
Philips also purchased some minor magnetic
resonance imaging (MRI) activities from Hologic, a US
healthcare company. Acquisitions in 2014 and prior
years led to post-merger integration charges of EUR 1
million in Healthcare, EUR 1 million in Consumer
Lifestyle and EUR 19 million in Lighting.
In 2013, there were four minor acquisitions. Acquisitions
in 2013 and prior years led to post-merger integration
charges of EUR 6 million in Healthcare, EUR 4 million in
Consumer Lifestyle EUR, and 6 million in Lighting.
Divestments
In 2015, Philips completed seven divestments, which
include, the sale of Assembléon Holding B.V., OEM
Remote Controls, Axsun Technologies LLC, and several
small businesses within Healthcare and Lighting.
In 2014, Philips completed the divestment of its
Lifestyle Entertainment activities to Gibson Brands Inc.
Philips also completed two other divestments of
business activities which related to Healthcare and
Lighting activities.
In 2013, Philips completed several divestments of
business activities, mainly related to certain Healthcare
activities.
For details, please refer to note 4, Acquisitions and
divestments.
For further information, refer to note 3, Discontinued
operations and other assets classified as held for sale.
5.1.14 Performance by geographic cluster
5.1.12 Net income
Net income increased from EUR 411 million in 2014 to
EUR 659 million in 2015. The increase was largely due
to higher EBIT of EUR 506 million and net income from
discontinued operations of EUR 55 million, partly offset
by higher income tax charges of EUR 213 million and
lower results from investments in associates of EUR 32
million.
Basic earnings per common share from net income
attributable to shareholders increased from EUR 0.45
per common share in 2014 to EUR 0.70 per common
share in 2015.
5.1.13 Acquisitions and divestments
Acquisitions
In 2015, Philips completed four acquisitions, the largest
were Volcano Corporation, an image-guided therapy
company based in the United States, and Blue Jay
Consulting, a leading provider of hospital emergency
room consulting services. Acquisitions in 2015 and prior
years led to post-merger integration charges of EUR 107
million in Healthcare and EUR 5 million in Lighting.
In 2014, Philips acquired Unisensor, a Danish healthcare
company, and a 51% interest in General Lighting
Company (GLC) based in the Kingdom of Saudi Arabia.
In 2015, sales increased 13% nominally, largely due to
favorable foreign exchange impacts, and 2% on a
comparable basis, driven by Healthcare and Consumer
Lifestyle.
Sales in mature geographies were EUR 1,832 million
higher than in 2014, or 1% higher on a comparable basis.
Sales in Western Europe were 1% higher than in 2014,
with growth at Healthcare and Consumer Lifestyle
partly offset by a decline at Lighting. Sales in North
America increased by EUR 1,417 million, or 1% on a
comparable basis. Comparable sales in other mature
geographies showed a 3% increase, with growth at
Healthcare and Consumer Lifestyle, while Lighting was
in line with 2014.
In growth geographies, sales increased by EUR 1,021
million, or 4% on a comparable basis, with high-single-
digit growth at Consumer Lifestyle and Healthcare,
partly offset by a mid-single digit decline at Lighting.
Double-digit growth in Central & Eastern Europe and
high-single-digit growth in Asia Pacific and India were
partly offset by flat growth year-on-year in China.
Annual Report 2015
29
Group performance 5.1.15
Philips Group
Comparable sales growth by geographic cluster1) in %
2013 - 2015
8.9
Condensed consolidated statements of cash flows for
the years ended December 31, 2013, 2014 and 2015 are
presented below:
Philips Group
Condensed consolidated cash flow statements1)
in millions of EUR
2013 - 2015
1.5
0
(0.3)
(1.3)
(0.9)
3.5
2.7
2.2
Net income
Adjustments to reconcile net income
to net cash provided by operating
activities
Net cash provided by operating
activities
2013
1,172
2014
2015
411
659
(260)
892
508
912
1,303
1,167
‘13
‘14
‘15
‘13
‘14
‘15
‘13
‘14
‘15
Net cash used for investing activities
(862)
(984)
(1,941)
Cash flows before financing
activities2)
50
319
Net cash used for financing activities
(1,241)
(1,189)
(774)
508
Cash used for continuing
operations
Net cash (used for) provided by
discontinued operations
Effect of changes in exchange rates
on cash and cash equivalents
Total change in cash and cash
equivalents
Cash and cash equivalents at the
beginning of year
Cash and cash equivalents at the
end of year
(1,191)
(870)
(266)
(115)
193
(63)
85
79
80
(1,369)
(592)
(107)
3,834
2,465
1,873
2,465
1,873
1,766
1) Please refer to section 12.7, Consolidated statements of cash flows, of
this Annual Report
2) Please refer to chapter 15, Reconciliation of non-GAAP information, of
this Annual Report
Cash flows from investing activities
In 2015, cash flows from investing activities resulted in
a net outflow of EUR 1,941 million. This was attributable
to EUR 1,137 million used for acquisitions of businesses
and non-current financial assets, EUR 842 million cash
used for net capital expenditures, and EUR 72 million
used for derivatives and current financial assets, partly
offset by EUR 110 million of net proceeds from non-
current financial assets and divestments.
In 2014, cash flows from investing activities resulted in
a net outflow of EUR 984 million. This was attributable
to EUR 806 million cash used for net capital
expenditures, EUR 258 million used for acquisitions of
businesses and non-current financial assets, and EUR
7 million used for derivatives and current financial
assets, partly offset by EUR 87 million of net proceeds
from non-current financial assets and divestments.
Net capital expenditures
Net capital expenditures amounted to a cash outflow
of EUR 842 million, compared to an outflow of EUR 806
million in 2014. The year-on-year increase was mainly
due to higher investments at Healthcare and Lighting.
mature geographies
growth geographies
Philips Group
1) For a reconciliation to the most directly comparable GAAP measures,
see chapter 15, Reconciliation of non-GAAP information, of this Annual
Report
Philips Group
Sales by geographic cluster in millions of EUR
2013 - 2015
21,990
7,668
1,759
6,883
21,391
7,387
1,661
6,678
24,244
8,408
Growth
1,855
Other mature
8,095
North America
5,680
5,665
5,886
Western Europe
‘13
‘14
‘15
5.1.15 Cash flows provided by continuing
operations
Cash flows from operating activities
Net cash flows from operating activities amounted to
EUR 1,167 million in 2015, which was EUR 136 million
lower than in 2014, mainly due to pension settlement
costs and CRT litigation claims, partly offset by higher
earnings.
Philips Group
Cash flows from operating activities and net capital
expenditures in millions of EUR
2011 - 2015
1,886
912
610
1,303
1,167
Cash flows from operating
activities
(241)
(663)
(830)
(806)
(842) Net capital expenditures
‘11
‘12
‘13
‘14
‘15
30
Annual Report 2015
Group performance 5.1.16
Philips Group
Cash flows from acquisitions and financial assets,
divestments and derivatives in millions of EUR
2011 - 2015
(1,099)
38
(32)
(8)
(24)
(178)
80
(258)
Divestments, derivatives and
current financial assets
(418)
132
(471)
(43)
(428)
(550)
Net cash used for financing activities in 2014 was EUR
1,189 million. Philips’ shareholders were given EUR 729
million in the form of a dividend, of which the cash
portion of the dividend amounted to EUR 292 million.
The net impact of changes in debt was a decrease of
EUR 301 million. Additionally, net cash outflows for
share buy-back and share delivery totaled EUR 596
million.
5.1.16 Cash flows from discontinued operations
‘11
‘12
‘13
‘14
‘15
(1,137)
Acquisitions and non-current
financial assets
Acquisitions and non-current financial assets
The net cash impact of acquisitions of businesses and
non-current financial assets in 2015 was a total of EUR
1,137 million. There was a EUR 1,116 million outflow for
acquisitions of businesses, mainly related to the
acquisition of Volcano and a EUR 21 million outflow for
non-current financial assets.
The net cash impact of acquisitions of businesses and
non-current financial assets in 2014, was a total of EUR
258 million. There was a EUR 177 million outflow for
acquisitions of businesses mainly related to the
acquisition of a 51% interest in the General Lighting
Company (GLC) in the Kingdom of Saudi Arabia, and a
EUR 81 million outflow for non-current financial assets,
mainly in the form of a EUR 60 million loan to TPV
Technology Limited.
Divestments, derivatives and current financial
assets
Cash proceeds of EUR 110 million were received, mainly
from the divestment of the Assembléon Holding B.V.,
the OEM remote control business and Axsun
Technologies LLC. Cash flows from derivatives and
current financial assets led to a net cash outflow of EUR
72 million.
In 2014, cash proceeds of EUR 87 million were received,
mainly from the divestment of the Shakespeare
business and the sale of shares in Neusoft. Cash flows
from derivatives and current financial assets led to a net
cash outflow of EUR 7 million.
Cash flows from financing activities
Net cash provided by financing activities in 2015 was
EUR 508 million. Philips’ shareholders were given EUR
730 million in the form of a dividend, of which the cash
portion of the dividend amounted to EUR 298 million.
The net impact of changes in debt was an increase of
EUR 1,231 million. Additionally, net cash outflows for
share buy-back and share delivery totaled EUR 425
million.
In 2015, cash inflow from discontinued operations as
reported within operating activities amounted to EUR
79 million, mainly attributable to a cash inflow of EUR
115 million from the Automotive and Lumileds
businesses, offset by a cash outflow from the Audio,
Video, Multimedia & Accessories business of EUR 37
million.
In 2014, cash inflow from discontinued operations
amounted to EUR 193 million. Cash flows from the
businesses reported in operating activities amounted to
a EUR 105 million cash inflow, mainly attributable to a
cash inflow from the Automotive and Lumileds
businesses of EUR 240 million, offset by cash outflow
from the Audio, Video, Multimedia & Accessories
business of EUR 107 million. The cash consideration
received for the sale of Audio, Video, Multimedia &
Accessories business amounted to EUR 88 million and
was reported as cash flow from investing activities.
5.1.17 Financing
Condensed consolidated balance sheets for the years
2013, 2014 and 2015 are presented below:
Philips Group
Condensed consolidated balance sheet1) in millions of EUR
2013 - 2015
Intangible assets
9,766
10,526
12,216
Property, plant and equipment
2,780
2,095
2,322
2013
2014
2015
Inventories
Receivables
Assets held for sale
Other assets
Payables
Provisions
3,240
3,314
3,463
4,892
5,040
507
2,909
1,613
3,891
5,287
1,809
4,113
(5,435)
(5,293)
(5,652)
(2,554)
(3,445)
(3,225)
Liabilities directly associated with
assets held for sale
(348)
(349)
(407)
Other liabilities
(3,094)
(4,193)
(4,152)
Net asset employed
12,663
13,199
15,774
Cash and cash equivalents
2,465
1,873
1,766
Debt
Net debt
(3,901)
(4,104)
(5,760)
(1,436)
(2,231)
(3,994)
Non-controlling interests
(13)
(101)
(118)
Shareholders’ equity
(11,214)
(10,867)
(11,662)
Financing
(12,663)
(13,199)
(15,774)
1) Please refer to section 12.6, Consolidated balance sheets, of this Annual
Report
Philips expects the financing in 2016 to be broadly in
line with 2015.
Annual Report 2015
31
Group performance 5.1.18
5.1.18 Cash and cash equivalents
In 2015, cash and cash equivalents decreased by EUR
107 million to EUR 1,766 million at year-end. The
decrease was mainly attributable to an outflow of EUR
1,137 on acquisitions mainly related to Volcano, cash
outflows for treasury share transactions of EUR 425
million, and a cash dividend payout of EUR 298 million.
This was partly offset by EUR 1,231 million from
increases in debt, EUR 325 million free cash flow and
EUR 110 million related to divestments.
Philips Group
Cash balance movements in millions of EUR
2015
2014
Divestments
Free cash flow
Other
Debt
1,873
+110
+3251)
+82)
+1,231
Acquisitions
-1,137
Treasury share transaction
Dividend
Discontinued operations
2015
-425
-298
+79
1,766
-107
1) Please refer to chapter 15, Reconciliation of non-GAAP information, of
this Annual Report
Includes cash flow for derivatives and currency effect
2)
5.1.19 Debt position
Total debt outstanding at the end of 2015 was EUR
5,760 million, compared with EUR 4,104 million at
the end of 2014.
Philips Group
Changes in debt in millions of EUR
2013 - 2015
New borrowings
Repayments
Currency effects and consolidation
changes
Changes in debt
2013
2014
2015
(64)
471
226
633
(69)
370
(1,335)
104
(504)
(425)
(203)
(1,656)
In 2015, total debt increased by EUR 1,656 million. New
borrowings of EUR 1,335 million were mainly due to a
short-term bridging loan with low interest rate used for
the Volcano acquisition, while repayments amounted
to EUR 104 million. Other changes resulting from
consolidation and currency effects led to an increase of
EUR 425 million.
In 2014, total debt increased by EUR 203 million. New
borrowings of EUR 69 million consisted mainly of
replacements to lease contracts. Repayment of EUR
370 million included a EUR 250 million repayment of a
five-year loan. Other changes resulting from
consolidation and currency effects led to an increase of
EUR 504 million.
32
Annual Report 2015
At the end of 2015, long-term debt as a proportion of
the total debt stood at 71% with an average remaining
term of 10.7 years, compared to 90% and 11.6 years at
the end of 2014.
For further information, please refer to note 18, Debt.
5.1.20 Shareholders’ equity
Shareholders’ equity increased by EUR 795 million in
2015 to EUR 11,662 million at December 31, 2015. The
increase was mainly a result of EUR 645 million net
income and EUR 791 million of other comprehensive
income, partially offset by EUR 507 million related to
the purchase of shares for the share buy-back program.
The dividend payment to shareholders in 2015 reduced
equity by EUR 298 million including tax and service
charges, while the delivery of treasury shares increased
equity by EUR 82 million and net share-based
compensation plans increased equity by EUR 82
million.
The number of outstanding common shares of Royal
Philips at December 31, 2015 was 917 million (2014: 914
million). At the end of 2015, the Company held 11.8
million shares in treasury to cover the future delivery of
shares (2014: 17.1 million shares). This was in connection
with the 39.1 million rights outstanding at the end of
2015 (2014: 40.8 million rights) under the Company’s
long-term incentive plans. At the end of 2015, the
Company held 2.2 million shares for cancellation (2014:
3.3 million shares).
5.1.21 Net debt to group equity
Philips ended 2015 in a net debt position (total debt less
cash and cash equivalents) of EUR 3,994 million,
compared to a net debt position of EUR 2,231 million at
the end of 2014.
Philips Group
Net debt to group equity1) in billions of EUR
2011 - 2015
12.4
11.2
11.2
11.0
11.8 Group equity2)
4.0
Net debt (cash)
0.7
0.7
2.2
1.4
‘11
‘12
‘13
‘14
‘15
5 : 95
6 : 94
11 : 89
17 : 83
25 : 75
ratio
1) For a reconciliation to the most directly comparable GAAP measures,
see chapter 15, Reconciliation of non-GAAP information, of this Annual
Report
2) Shareholders’ equity and non-controlling interests
5.1.22 Liquidity position
Including the Company’s cash position (cash and cash
equivalents), as well as its EUR 1.8 billion committed
revolving credit facility, the Company had access to
available liquidity of EUR 3,566 million vs. Gross Debt
(including short and long-term) of EUR 5,760 million as
of December 31, 2015.
Including the Company’s cash position (cash and cash
equivalents), as well as its EUR 1.8 billion committed
revolving credit facility, the Company had access to
available liquidity of EUR 3,673 million vs. Gross Debt
(including short and long-term) of EUR 4,104 million as
of December 31, 2014.
Philips Group
Liquidity position in millions of EUR
2013 - 2015
Cash and cash equivalents
Committed revolving credit
facility/CP program/Bilateral loan
Liquidity
Available-for-sale financial assets
at fair value
Short-term debt
Long-term debt
2013
2,465
2014
1,873
2015
1,766
1,800
1,800
1,800
4,265
3,673
3,566
65
75
75
(592)
(392)
(1,665)
(3,309)
(3,712)
(4,095)
Net available liquidity resources
429
(356)
(2,119)
Philips has a EUR 1.8 billion committed revolving credit
facility that can be used for general group purposes and
as a backstop of its commercial paper program and will
mature in February 2018. The commercial paper
program amounts to USD 2.5 billion, under which
Philips can issue commercial paper up to 364 days in
tenor, both in the US and in Europe, in any major freely
convertible currency. There is a panel of banks, in
Europe and in the US, which service the program. The
interest is at market rates prevailing at the time of
issuance of the commercial paper. There is no collateral
requirement in the commercial paper program. Also,
there are no limitations on Philips’ use of funds from the
program. As at December 31, 2015, Philips did not have
any loans outstanding under these facilities.
Philips’ existing long-term debt is rated Baa1 (with
stable outlook) by Moody’s and BBB+ (with stable
outlook) by Standard & Poor’s. Our net debt position is
managed in such a way that we expect to retain a strong
investment grade credit rating. Furthermore, the
Group’s aim when managing the net debt position is
dividend stability and a pay-out ratio of 40% to 50% of
continuing net income. Following the intended
separation of the Lighting business, the dividend pay-
out ratio with respect to future years could be subject
to change. The Company’s outstanding long-term debt
and credit facilities do not contain financial covenants
or cross-acceleration provisions that are based on
adverse changes in ratings or on material adverse
change.
Group performance 5.1.22
As at December 31, 2015, Philips had total cash and cash
equivalents of EUR 1,766 million. Philips pools cash
from subsidiaries to the extent legally and
economically feasible. Cash not pooled remains
available for local operational or investment needs.
Philips believes its current liquidity and direct access to
capital markets is sufficient to meet its present working
capital requirements.
5.1.23 Cash obligations
Contractual cash obligations
Presented below is a summary of the Group’s
contractual cash obligations and commitments at
December 31, 2015.
Philips Group
Contractual cash obligations1) in millions of EUR
2015
Payments due by period
less
than 1
year
total
1-3
years
3-5
years
after 5
years
4,034
84
1,152
1
2,797
242
72
92
36
1,515
1,515
-
-
42
-
952
243
280
162
267
995
253
383
156
203
2,767
221
438
334
1,774
175
68
69
30
2,673
2,673
-
-
8
-
13,353
5,129
2,414
719
5,091
Long-term
debt2)
Finance lease
obligations
Short-term
debt
Operating
leases
Derivative
liabilities
Interest on
debt3)
Purchase
obligations4)
Trade and other
payables
Contractual
cash
obligations
1) Obligations in this table are undiscounted
2) Long-term debt includes short-term portion of long-term debt and
excludes finance lease obligations
3) Approximately 32% 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
Philips has no material commitments for capital
expenditures.
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, 2015 approximately
EUR 395 million of the Philips accounts payable were
known to have been sold onward under such
arrangements whereby Philips confirms invoices.
Annual Report 2015
33
Group performance 5.1.23
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 20, Post-employment benefits.
The Company had EUR 297 million restructuring-
related provisions by the end of 2015, of which EUR 228
million is expected to result in cash outflows in 2016.
Refer to note 19, Provisions for details of restructuring
provisions.
A proposal will be submitted to the upcoming Annual
General Meeting of Shareholders to declare a dividend
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 2015 and retained earnings.
Further details will be given in the agenda for the
Annual General Meeting of Shareholders, to be held on
May 12, 2016.
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 2015, the total fair value
of guarantees recognized on the balance sheet
amounted to EUR nil million (December 31, 2014: EUR
nil million). Remaining off-balance-sheet business and
credit-related guarantees provided on behalf of third
parties and associates increased by EUR 16 million
during 2015 to EUR 37 million (December 31, 2014: EUR
21 million).
5.1.24 Analysis of 2014 compared to 2013
The analysis of the 2014 financial results compared to
2013, 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 2015, which will be filed electronically
with the US Securities and Exchange Commission.
5.2.1
5.2 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, resource scarcity, and the desire for personal
well-being.
Philips further strengthened its focus on sustainability
in 2015 through a number of initiatives described in the
Social and Environmental performance sections,
including the introduction of new products and
solutions and partnerships with the Red Cross and
UNICEF through the Philips Foundation.
34
Annual Report 2015
Our people
At Philips, a key element of our vision is to offer the best
place to work for people who share our passion. Our
people are one of our unique strengths, and each one
of our employees is instrumental to Philips’ success.
Our strategy is based on the belief that every employee
at Philips has talent and can grow and contribute with
increasing impact, so we support all individuals in
driving their development. We believe that the best
place to work is an inclusive place to work, and we
celebrate and foster an inclusive culture where
everyone feels valued, respected, and where all of our
people can thrive.
Our company people strategy is directly linked to our
business strategy. In 2015, we continued on our path to
creating two winning stand-alone companies, including
ensuring the timely allocation of our employees to
either Royal Philips or to Philips Lighting. We also
continued to drive our Accelerate! transformation
through our growth and performance culture, where we
take ownership, we are eager to win, we team up to
excel, and we always act with integrity. Alongside these
behaviors, we focus on nurturing six competences
which accelerate our transformation, and we offer
related learning and development opportunities to all
employees through our Philips University.
“Philips people share a passion for improving
people’s lives through meaningful innovation, and
this passion has kept us all working together
towards our common mission and vision during the
past year. Throughout 2015, our people have
demonstrated that we are one Philips family, even if
we know that we will ultimately be part of Royal
Philips or of Philips Lighting. As CHRO, I am proud to
belong to Philips, and proud to be one of our Philips
people.”
Denise Haylor
Chief Human Resources Officer
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. To
guide our efforts and measure our progress, we take a
two-dimensional approach – social and ecological – to
improving people’s lives. Products and solutions from
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
healthy ecosystems are also needed for people to live
a healthy life, the contribution to the ecological
dimension is determined by means of our steadily
growing 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 881 million people in
2015, driven by our Healthcare sector. Additionally, our
Group performance 5.2.1
well-being products that help people live a healthy life
improved the lives of 304 million, and our Green
Products that contribute to a healthy ecosystem 1.7
billion people. After the elimination of double counts –
people touched multiple times – we arrived at 2.0
billion lives. This is an increase of around 140 million
compared to 2014, mainly driven by Healthcare in
Greater China and North America, Consumer Lifestyle
in Greater China, ASEAN and North America, and
Lighting in North America and the Indian subcontinent.
Philips Group
Lives improved in billions
In 2015, MAS had an average employee response rate
of 50% across all four quarters, and we recorded an
overall engagement score of 71% favorable across the
Philips population. This was in line with 2014 results,
and we were pleased to see a significant downward
trend in the unfavorable score (decreasing from 17% in
2014 to 7% in 2015).
Philips Group
Employee Engagement Index in %
2011 - 2015
10
14
6
15
9
16
7
Unfavorable
22
Neutral
17
11
0.3
by Philips
well-being
products
0.88
by Philips
care products
1.7
by Philips
Green Products
Total: 2.0 billion (double counts eliminated)
Double counts
Conceptual drawing, areas do not reflect actual proportions
More information on this metric can be found in
Methodology for calculating Lives Improved.
5.2.2 Employee engagement
Employee engagement is key to our competitive
performance and at the heart of our vision, promoting
the best place to work for people who share our
passion. Engaged employees are emotionally
committed to and proud of our company, they help us
meet our business goals, and they contribute to making
our workplace the best it can be. We can only truly offer
an environment in which all our people can thrive when
we maintain a dialogue with our people to understand
their needs. Our employees take the time for this
dialogue, directly shaping the work environment and
our inclusive culture. As a result, high engagement
levels not only help Philips to grow, but also help us to
understand our employees’ needs in depth and
respond to these in turn.
Given that employee feedback and input is so critical,
we actively track it via quarterly surveys with a set of
targeted questions. In 2014, we implemented a
complementary, team-focused survey called My
Accelerate! Survey (MAS) with accompanying
promotion of Team Performance Dialogues with
People Managers and their teams. This proved to be a
positive driver of employee action to increase team
effectiveness, and, as a result, we ran MAS in each
quarter of 2015 as our way of monitoring engagement.
76
79
75
72
71
Favorable
‘11
‘121)
‘13
‘142)
‘152)
1) Based on 60 pulse surveys conducted in 2012
2) Based on My Accelerate! Surveys
For more information on MAS, please refer to sub-
section 14.2.1, Engaging our employees, of this Annual
Report.
5.2.3 Inclusion
At Philips, we believe that the best place to work is an
inclusive place to work. This means celebrating and
fostering a work environment in which all of our
people’s ideas, knowledge, perspectives, experiences
and styles are valued. It also means that all individuals
are treated fairly and respectfully, have equal access to
opportunities and resources, and can contribute fully to
Philips’ success. In this report we publish data on
international, gender and age diversity, as proxies for
the wider inclusion we promote.
Philips is a global company, and our executives
originate from more than 35 countries. We embrace a
global mindset and actively promote and build
capability in this area. The composition of our Executive
Committee and Supervisory Board likewise reflects our
global focus.
In terms of gender diversity, we recorded an increase in
the share of female executives to 19% at year-end 2015
– up from 18% in 2014. We are well on track to achieve
our aspiration of 20% female executives by year-end
2016. This is driven both by our active engagement of
senior female leaders globally, and also by the fact that
our inclusion culture is embedded in our people
practices, policies and processes. Overall, 35% of
Philips employees in 2015 were female. Philips has 7
persons in the Executive Committee (1 female) and 9 in
the Supervisory Board (3 females), which means that 4
out of 16 positions (or 25%) are held by women.
Annual Report 2015
35
Group performance 5.2.3
Philips Group
Gender diversity in %
2013 - 2015
42
42
42
29
29
30
19
20
21
15
18
19 Female
Philips Group
Exit diversity in %
2014 - 2015
33
30
46
48
22
19
13
17
Female
58
58
58
71
71
70
81
80
79
85
82
81 Male
67
70
54
52
78
81
87
83 Male
‘13
‘14
‘15
‘13
‘14
‘15
‘13
‘14
‘15
‘13
‘14
‘15
‘14
‘15
‘14
‘15
‘14
‘15
‘14
‘15
Staff
Professionals
Management
Executives
Staff
Professionals
Management
Executives
Our comprehensive approach to succession planning
for all executives and other key positions ensures we
remain on track in terms of our gender targets, and also
in terms of our broader inclusion aspirations. This
approach drives development and career planning for
all individuals, and ensures we build an inclusive work
environment not only for today but also for the future.
In terms of promotions in 2015, 10% of new Executives
promoted internally were women, and women
represented 24% of all external Executive hires. The
decrease in female Management and Executive new
hires compared with 2014 did not impact our overall
gender diversity in these categories, as this was mainly
offset by the relatively smaller proportion of female
Management and Executive exits. Indeed, compared to
the percentage of women employed by Philips in 2014,
we see a relatively higher outflow of women in the staff
categories and a lower outflow of female managers and
executives. Overall, gender diversity either increased or
was stable across all categories, and we will continue
to drive gender-inclusive practices in terms of talent
attraction, engagement, development and retention in
2016.
Philips Group
New hire diversity in %
2013 - 2015
42
47
47
34
36
35
29
29
26
27
31
24 Female
58
53
53
66
64
65
71
71
74
73
69
76 Male
‘13
‘14
‘15
‘13
‘14
‘15
‘13
‘14
‘15
‘13
‘14
‘15
In 2015, our age diversity was similar to that of 2014, with
relatively larger shifts taking place in the categories of
women under 25, between 45 and 55, and over 55. We
will continue to monitor age diversity as part of our
inclusive culture in 2016.
Philips Group
Employees per age category in %
2013 - 2015
32
32
32
32
31
30
21
21
23
27
26
26
31
31
31
25
25
25
11 Female
9
9
13
14
15 Male
‘13
‘14
‘15
‘13
‘14
‘15
‘13
‘14
‘15
‘13
‘14
‘15
6
4
‘13
7
4
‘14
4
3
‘15
under 25
25-35
35-45
45-55
over 55
5.2.4 Employment
The total number of Philips Group employees
(continuing operations) was 104,204 at the end of 2015,
compared to 105,365 at the end of 2014. Approximately
38% were employed in the Healthcare sector, 32% in the
Lighting sector and 16% in the Consumer Lifestyle
sector.
Philips Group
Employees per sector in FTEs at year-end
2013 - 2015
Healthcare
Consumer Lifestyle
Lighting
2013
2014
2015
37,008
37,065
40,099
17,255
16,639
38,671
37,808
16,254
33,618
14,233
Staff
Professionals
Management
Executives
Innovation, Group & Services
12,703
13,853
Continuing operations
105,637
105,365
104,204
Discontinued operations
10,445
8,313
8,755
Philips Group
116,082
113,678
112,959
36
Annual Report 2015
Group performance 5.2.5
Compared to 2014, the number of employees in
continuing operations decreased by 1,161. The decrease
reflects industrial footprint rationalization at Lighting
and a reduction in third-party workers at Consumer
Lifestyle, partly offset by the consolidation of the
Volcano acquisition at Healthcare.
Approximately 54% of the Philips workforce was
located in mature geographies, and about 46% in
growth geographies. In 2015, the number of employees
in mature geographies increased by 1,081, mainly due
to the Volcano acquisition at Healthcare. The number
of employees in growth geographies decreased by
2,242 largely driven by footprint rationalization at
Lighting.
Philips Group
Employees per geographic cluster in FTEs at year-end
2013 - 2015
Western Europe
North America
2013
2014
2015
28,944
29,105
28,590
24,401
22,283
23,614
Other mature geographies
3,419
3,643
Mature geographies
56,764
55,031
3,908
56,112
Growth geographies
48,873
50,334
48,092
Continuing operations
105,637
105,365
104,204
Discontinued operations
10,445
8,313
8,755
Philips Group
116,082
113,678
112,959
Philips Group
Employment in FTEs at year-end
2013 - 2015
Balance as of January 1
118,087
116,082
113,678
2013
2014
2015
Consolidation changes:
Acquisitions
Divestments
Changes in discontinued
operations
Other changes
-
(705)
(186)
(1,114)
1,506
(247)
(2,132)
(1,531)
1,865
(300)
442
(2,726)
Philips Group
Voluntary turnover in %
2015
Female
Male
Staff
11.4
13.9
Philips Group
12.9
Profes-
sionals
Manage-
ment
Execu-
tives
7.7
6.8
7.1
5.8
5.1
5.3
8.3
5.9
6.4
Total
9.7
9.7
9.7
5.2.5 Developing our people
Philips University was launched in Q4 2014, and our
focus on leader-led learning and building a learning
organization as part of our growth and performance
culture continued in 2015. We believe that continuous
learning maximizes the potential of all employees –
and consequently Philips’ potential to deliver for
customers and consumers. Philips University embraces
a philosophy of learning that balances learning carried
out on the job, coaching and mentoring, and formal
learning methods such as classroom teaching and e-
learnings. Presently, we are exploring new learning
channels to improve capability building and focus on
business-critical topics and key roles that will increase
the impact of the University.
More than one million hours in total were spent on
training through Philips University in 2015.
Training spend
Our external training spend in 2015 amounted to EUR
50.4 million, up from EUR 44.7 million in 2014. This
reflects an increase in the number of courses offered
through the Philips University, supporting the
transformation process at Philips, as well as a strong
increase in courses attended.
For more information on our people’s development,
please refer to sub-section 14.2.2, People development,
of this Annual Report.
Balance as of December 31
116,082
113,678
112,959
5.2.6 Health and Safety
In 2016, the number of employees is expected to be
below the levels of 2015.
In 2015, employee turnover amounted to 16.6% (of
which 9.7% was voluntary) compared to 14.9% (6.4%
voluntary) in 2014. 2015 turnover was mainly due to the
changing industrial footprint and our overhead
reduction program.
Philips Group
Employee turnover in %
2015
Female
Male
Staff
20.0
24.0
Philips Group
22.3
Profes-
sionals
Manage-
ment
Execu-
tives
12.4
11.3
11.6
11.3
10.2
10.4
13.9
15.2
14.9
Total
16.6
16.6
16.6
Philips strives for an injury-free and illness-free work
environment, with a sharp focus on reducing the
number of injuries and improving processes. The Lost
Workday Injury Cases (LWIC) rate is defined as a KPI, on
which we set yearly targets for the company, our
individual sectors and Business Groups.
In 2015, we recorded 213 LWIC, i.e. occupational injury
cases where the injured person is unable to work one
or more days after the injury. This represents a
significant decrease compared with 227 in 2014, and
continues the downward trend since 2010. The LWIC
rate decreased to 0.21 per 100 FTEs, compared with
0.23 in 2014. The number of Lost Workdays caused by
injuries decreased by 1,087 days (some 12%) to 7,981
days in 2015.
For more information on Health and Safety, please refer
to sub-section 14.2.4, Health and Safety performance,
of this Annual Report.
Annual Report 2015
37
Group performance 5.2.7
5.2.7 General Business Principles
The Philips General Business Principles (GBP)
incorporate the fundamental principles for all Philips
business. They set the standard for business conduct
for both individual employees and for the company
itself. They also provide a reference for the business
conduct we expect from our business partners and
suppliers. Translations are available in 32 languages,
allowing almost every employee to read the GBP in
their native language. The GBP form an integral part of
labor contracts in virtually every country in which
Philips operates. In addition, there are separate Codes
of Ethics that apply to employees working in specific
areas of our business, i.e. the Procurement Code of
Ethics and the Financial Code of Ethics. Details can be
found at www.philips.com/gbp.
Employees are actively encouraged to engage in
dialogue with their colleagues about what constitutes
‘acting with integrity’ in a given business situation and
to speak up if they have any concerns. They can turn to
either their manager or a GBP Compliance Officer for
advice and support.
The Philips Ethics Line operates globally, allowing
employees to dial a toll-free hotline number to report
a concern in their local language or to raise a concern
online via a web intake form. Since May 2015, third
parties have access to the Philips Ethics Line so they
can raise any concerns they might have in relation to
Philips business. In 2015, 39 parties, among which
former employees and contractors, used this option.
The types of concerns filed by external parties follow
the overall trends, with most concerns relating to
‘Treatment of employees’ followed by ‘Business
integrity’. A standard for investigation is in place to
promote consistency and due care in the way concerns
are investigated.
For a description of GBP processes and policies, please
refer to section 7.1, Our approach to risk management
and business control, of this Annual Report.
Business Integrity Survey
In 2013 the first survey was held among our employees
to measure the effectiveness of GBP deployment. In
June 2015 a follow-up survey was rolled out to all
employees in the ten most relevant languages to check
status. The overall conclusion that could be drawn from
the survey is that the Philips culture continues to
provide a sound basis for any GBP- or compliance-
related program.
Role of management
The Philips Executive Committee constantly reinforces
the message that acting in line with the GBP is not
something that is optional, but something that is vital to
our business success. Managers at all levels are
specifically given the responsibility to engage in
dialogue with their teams on what responsible business
conduct means for their daily practice. Management is
38
Annual Report 2015
supported in this by a network of GBP Compliance
Officers who operate on different levels in the
organization.
Training and awareness
In October of this year all employees with an email
account were invited to take the updated GBP e-
learning. This training course will be made available in
the 22 most relevant languages. At the end of the course
employees are asked to confirm that they are
committed to acting in line with the GBP. The series of
face-to-face training courses for GBP Compliance
Officers that was started in 2014 was continued.
More information on the Philips GBP can be found in
chapter 7, Risk management, of this Annual Report. The
results of the monitoring measures in place are given in
sub-section 14.2.5, General Business Principles, of this
Annual Report.
5.2.8 Working with stakeholders
In organizing ourselves around customers and markets,
we create dialogues with our stakeholders in order to
explore common ground for addressing societal
challenges, building partnerships and jointly
developing supporting ecosystems for our innovations
around the world. Working with partners is crucial in
delivering on our vision to make the world healthier and
more sustainable through innovation. An overview of
stakeholders and topics discussed is provided in
chapter 14, Sustainability statements, of this Annual
Report.
For more information on our stakeholder engagement
activities in 2015, please refer to sub-section 14.2.7,
Stakeholder Engagement, of this Annual Report.
5.2.9 Supplier sustainability
Philips has a direct business relationship with
approximately 10,000 product and component
suppliers and 30,000 service providers. In many cases
the sustainability issues deeper in our supply chain
require us to intervene beyond tier 1 of the chain.
Supplier sustainability programs
We have developed a number of strategic programs to
help our suppliers improve their sustainability
performance. These programs cover the assessment of
supplier sustainability performance (audits),
management of regulated substances, conflict minerals
and other responsible sourcing initiatives. More
detailed information about our programs is available
www.philips.com/suppliers.
Supplier sustainability policies
The Philips Supplier Sustainability policy consists of
two core documents: Supplier Sustainability
Declaration (SSD) and Regulated Substances List (RSL).
Both these documents are an integral part of our
supplier contracts.
The list of other applicable policies can be found
www.philips.com/suppliers.
Regulated Substances List
All suppliers and brand licensees must ensure that all
products or parts and product packaging delivered to
Philips, as well as some manufacturing processes used
to make Philips parts and brand license products,
comply with the applicable requirements in this list.
Supplier Sustainability Declaration
The Declaration is derived from the Electronic Industry
Citizenship Coalition (EICC) Code of Conduct and sets
out the standards and behaviors we require from our
suppliers and their suppliers. We monitor supplier
compliance with the Declaration through a system of
regular audits.
Supplier Sustainability Audit Program in 2015
In 2015, we audited 195 of our current risk suppliers,
including 120 continued conformance audits with
suppliers that we had already audited in 2012. This
represented some one third of the number of risk
suppliers. On top of the audits with current risk
suppliers, we also audited 26 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.
As in previous years, the majority of the audits were
done in China. Additionally, audits were performed in
Brazil, India and Mexico. A smaller number of audits
took place also in Belarus, Dominican Republic,
Indonesia, Philippines, Russia and Ukraine. These
audits directly or indirectly relate to the working
conditions of almost 116,000 workers at the production
sites that were audited.
Philips Group
Distribution of supplier audits by country
2015
China
India
19
Mexico
12
Brazil
Other
6
15
143
Audit findings
To track improvements, Philips measures the
‘compliance rate’ for the identified risk suppliers, i.e. the
percentage of risk suppliers that were audited within
the last three years and do not have any – or have
resolved all – major non-compliances. During 2015 we
achieved a compliance rate of 86% (2014: 86%).
Please refer to sub-section 14.2.8, Supplier indicators,
of this Annual Report for the detailed findings of 2015.
Group performance 5.2.9
Supplier development and capacity building
In 2015, we continued our focus on capacity-building
initiatives which are offered to help suppliers improve
their practices. Our supplier sustainability experts in
China organized training, visited suppliers for on-site
consultancy, conducted pre-audit checks and helped
suppliers to train their own employees.
5.2.10 Addressing issues deeper in the supply
chain
Philips’ shares the concern about issues in the mining
of minerals that are used in electronics industry
products. Areas of concern include the situation in
eastern DRC (Democratic Republic of the Congo),
where proceeds from the mining sector are used to
finance rebel conflicts in the region, environmental and
safety concerns in tin mining in Indonesia, the wide
array of issues related to gold mining, and child labor in
mining in general.
Philips does not source the minerals directly and the
mines are typically seven or more tiers away from our
direct suppliers.
We were one of the first companies to survey our
suppliers to identify smelters used in the supply chain
that produce the metals of concern, and one of the few
companies to have our SEC Conflict Minerals Report
audited in 2014 and 2015.
For more details and results of our supplier
sustainability program, please refer to sub-section
14.2.8, Supplier indicators, of this Annual Report.
5.3 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 second
program in 1998, which focused on the environmental
dimension of our 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 company vision:
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.
Philips publishes every year a full Integrated Annual
Report with the highest (reasonable) assurance level on
the financial, social and environmental performance.
With that overall reasonable assurance level Philips is
a frontrunner in this field. KPMG has provided
reasonable assurance on whether the information in
chapter 14, Sustainability statements, of this Annual
Report, section 5.2, Social performance, of this Annual
Report and section 5.3, Environmental performance, of
this Annual Report presents fairly, in all material
Annual Report 2015
39
Group performance 5.3
respects, the sustainability performance in accordance
with the reporting criteria. Please refer to section 14.4,
Independent Auditor’s Assurance Report, of this Annual
Report.
The main elements of the EcoVision program are:
• Improving people’s lives
• Green Product sales
• Green Innovation, including Circular Economy
• Green Operations
• Health and Safety
• Supplier Sustainability
In 2015, our fifth EcoVision program ended. In this
Environmental performance section an overview is
given of the most important environmental parameters
of the program. Improving people’s lives, Health and
Safety, and Supplier Sustainability are addressed in the
Social performance section. Details of the EcoVision
parameters can be found in the chapter 14,
Sustainability statements, of this Annual Report. We
plan to launch the next 5-year program in the second
quarter of 2016.
5.3.1 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 next 5 years. In
2014, Philips already achieved this EUR 2 billion target
a year ahead of schedule. In 2015, we invested some
EUR 495 million in Green Innovation, excluding
Lumileds and Automotive. Lighting continued to be the
largest contributor, mainly as a result of investments in
LED. The impact of Lumileds and Automotive on Green
Innovation is significant at EUR 93 million in 2015 and
EUR 105 million in 2014.
Philips Group
Green Innovation per sector in millions of EUR
2011 - 2015
453
38
209
70
136
‘12
405
27
223
75
80
‘13
463
21
255
97
90
‘14
363
36
175
67
85
‘11
495
21
Group Innovation
254
Lighting
99
Consumer Lifestyle
121
Healthcare
‘15
Healthcare
Healthcare develops innovative solutions across the
continuum of care in close collaboration with clinicians
and customers, to improve patient outcomes, provide
better value, and help secure access to high-quality
40
Annual Report 2015
care. Healthcare investments in Green Innovation in
2015 amounted to EUR 121 million, a EUR 31 million
increase compared to 2014. All Philips Green Focal
Areas are taken into account while we aim to reduce
environmental impact over the total lifecycle. Energy
efficiency is an area of focus, especially for our large
imaging systems such as MRI. In 2015, we started to add
an energy-efficient CryoCompressor to our MRI
systems. Closing the materials loop is another area,
where our focus on developing upgrading pathways
has enabled extended product life and therefore
reduced materials use and lower cost. Healthcare
actively supports a voluntary industry initiative to
improve the energy efficiency of medical imaging
equipment. Moreover, we are actively partnering with
multiple leading care providers to look together for
innovative ways to reduce the environmental impact of
healthcare, for example by maximizing energy-efficient
use of medical equipment and optimizing lifecycle
value.
Consumer Lifestyle
Continuous high R&D investments at Consumer
Lifestyle are also reflected in Green Innovation spend,
which amounted to EUR 99 million in 2015, comparable
to EUR 97 million in 2014. The continued green
investments resulted in high Green Product sales in all
Business Groups. The sector continued its work on
improving the energy efficiency of its products, closing
the materials loop (e.g. by using recycled materials in
products and packaging) and the voluntary phase-out
of polyvinyl chloride (PVC), brominated flame
retardants (BFR), Bisphenol A (BPA) and phthalates
from, among others, food contact products. In
particular, more than 80% of the shaving, grooming and
oral healthcare products are completely PVC/BFR-
free. Green investments during the course of 2015 in
Personal Health Solutions are expected to result in the
launch of the first Green Products in this product
segment in early 2016.
Lighting
At Lighting, we strive to make the world healthier and
more sustainable through energy-efficient lighting
systems. With a 2015 investment of EUR 254 million in
Green Innovation (excluding Lumileds and
Automotive), Lighting invested a similar amount as in
2014. Increasing investments in digital lighting solutions
and cloud computing have led to further improvements
in the area of energy efficiency. In 2015, Los Angeles
became the first city in the world to control its street
lighting through an advanced Philips management
system that uses mobile and cloud-based
technologies. Beyond significant energy efficiency
benefits, this new Philips CityTouch gives citizens safer
lit streets and reports faults and reduces commissioning
time to minutes. This system also supports the
transition to a more circular economy as the wireless
plug-and-play connector nodes protect a city’s existing
investment by networking streetlights from any vendor.
Philips Group Innovation
Philips Group Innovation invested EUR 21 million in
Green Innovations, spread over projects focused on
global challenges related to water, air, energy, food,
Circular Economy, and access to affordable healthcare.
The Research organization within Group Innovation
used the Sustainable Innovations Assessment tool, in
which innovation projects are evaluated and scored
along the environmental and social dimensions, in
order to identify those projects that most strongly drive
sustainable innovation. As of 2015, transfers of
innovation projects include a Lives Improved
calculation to assess what the project’s contribution will
be to Philips’ vision to improve the lives of 3 billion
people a year by 2025.
Philips Green Patent portfolio
At the end of 2015, Philips’ IP portfolio consisted of 6.7%
green patent families. All families are labeled with at
least one Green Focal Area. In 2015, 6% of our total new
patent filings were flagged as green patent family.
Energy efficiency is still the most frequently occurring
Green Focal Area throughout the portfolio. As IP is an
extension of Philips’ innovation efforts, the portfolio
percentage related to green patents is multiplied by our
annual patent portfolio costs to determine Philips’
yearly investment in Green IP.
While a product can be classified as green by
incorporating an environmentally friendly technology,
such technology cannot always be protected in a
patent because of a lack of patentability over the state-
of-the-art technology. Therefore, there is not
necessarily a correlation between green patents and
Green Technologies in Green Products.
Energy efficiency of products
Energy efficiency is a key Green Focal Area for our
Green Products. According to our analysis, about 97%
of the energy consumed during the use phase of our
products is attributable to Lighting products. The
remaining 3% is split over Consumer Lifestyle and
Healthcare. Therefore, we focus on the energy
efficiency of our Lighting products in the calculation.
The annual energy consumption per product category
is calculated by multiplying the power consumption of
a product by the average annual operating hours and
the annual pieces sold and then dividing the light
output (lumens) by the energy consumed (watts). The
average energy efficiency of our total product portfolio
increased significantly in 2015 to 44.5 lumen per watt,
or 10% compared to 2014. The exclusion of Lumileds
and Automotive had a limited upward effect on the
energy efficiency of the portfolio.
Group performance 5.3.1
Philips Group
Energy efficiency of total product portfolio in lumen/watt
2011 - 2015
39.3
40.1
40.5
37.6
44.5
‘11
‘12
‘13
‘14
‘15
In 2015, LED sales advanced well, as demand for
conventional lighting declined. Compared to 2009, the
baseline year of our measurement, the average energy
efficiency of our portfolio increased by 33%. We expect
the energy efficiency to improve further in the coming
years as the traditional incandescent lamp is banned in
more countries. Our target for 2015 was a 50%
improvement compared to the 2009 baseline. In this
target setting, assumptions were made about the speed
of the regulatory developments in this area, which fell
short of expectations.
Further details on this parameter and the methodology
can be found here:
Improving energy efficiency of Philips products.
Circular Economy
The transition from a linear to a circular economy is
essential to create a sustainable world. A circular
economy aims to decouple economic growth from the
use of natural resources and ecosystems by using these
resources more effectively. It is a driver of innovation in
the areas of material, component and product re-use,
as well as new business models such as system
solutions and services. In a circular economy, more
effective (re)use of materials enables the creation of
more value, both by means of cost savings and by
developing new markets or growing existing ones.
For more information on our Circular Economy
activities, please refer to sub-section 14.3.1, EcoVision,
of this Annual Report.
Closing the materials loop
The amount of collection and recycling for 2014
(reported in 2015) was calculated at 28,500 tonnes, a
10% decrease compared to 31,500 tonnes reported in
2014, driven by lower weight of products and
components in all sectors. Our target was to double
global collection and recycling by 2015 compared to
2009, when the baseline was set around 22,500
tonnes, based on the data retrieved from the Waste
Electrical and Electronic Equipment (WEEE) collection
schemes and from our own recycling and refurbishment
services (mainly Healthcare).
Annual Report 2015
41
Group performance 5.3.1
Recycled materials
We calculated the amount of recycled materials used in
our products in 2015 at some 13,500 tonnes (2014:
13,000 tonnes) by focusing on the material streams
plastics (Consumer Lifestyle), aluminum (Lighting),
refurbished products, and spare parts harvesting
(Healthcare) depending on their relevance in each
sector.
Our target was to double the amount of recycled
materials in our products by 2015 compared to 2009,
when the baseline was set at 7,500 tonnes.
Further details on this parameter and the methodology
can be found here: Closing the materials loop.
5.3.2 Green Product sales
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. Sales
from Green Products, excluding the Lumileds and
Automotive business, increased to EUR 13.0 billion in
2015, or 54% of sales (52% in 2014), thereby reaching a
record level for Philips.
The exclusion of Lumileds and Automotive had a 1%
negative impact on the total Green Product sales
percentage.
Philips Group
Green Product sales per sector in millions of EUR
2011 - 2015
50.0%
51.7%
53.7%
As a % of sales
13,014
5,343
Lighting
10,997
11,065
5,037
4,952
46.3%
10,285
5,056
1,619
2,270
2,605
3,091
Consumer Lifestyle
3,610
3,690
3,508
4,580
Healthcare
38.8%
7,719
3,955
1,101
2,663
‘11
‘12
‘13
‘14
‘15
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
also growing attention for hazardous substances and
recyclability in all sectors in 2015, the latter driven by
our Circular Economy initiatives.
New Green Products from each sector include the
following examples.
42
Annual Report 2015
Healthcare
In 2015, Healthcare expanded the Green Product
portfolio with 11 new products and redesigned various
current Green Products with environmental
improvements. These products improve patient
outcomes, provide better value, and help secure access
to high-quality care, while reducing environmental
impact. Examples include a new packaging system for
our PCMS medical supplies business, which has
enabled a 90% reduction in air space in packaging and
a 24% reduction in packaging material weight to
support our customers in reducing their waste streams.
Another example is our Home Monitoring business
which operates by a performance-based service
business model that enables 76% re-use of products
and parts while maintaining the embedded labor and
energy. The Efficia is a new Green Product in our value
range of patient monitoring, which is an example of
how we aim to support expanded access to care in
under-resourced regions while lowering environmental
impact as well. We started to add an energy-efficient
CryoCompressor to our MRI systems, with energy
savings in the various non-scanning modes of 30-40%.
Both material (30%) and energy (20%) savings are
achieved in our new Access CT system, a compact-
designed CT for the value segment market. Sleep and
Respiratory Care (SRC) launched the V680 ventilator
which includes, besides better performance in
uninterrupted invasive or noninvasive ventilation, a
product and packaging material weight reduction of
60% and 75% respectively and a reduction in energy
usage of 80%. Other new Green Products came from
SRC (lightweight masks and sleep therapy devices),
MCS group (lightweight battery chargers) and X-Ray
systems for the Brazilian market without lead counter
ballasts.
Consumer Lifestyle
Consumer Lifestyle focuses on Green Products which
meet or exceed our minimum requirements in the areas
of energy consumption, packaging, and substances of
concern. The sales of Green Products in 2015 surpassed
58% of total sales. All our Green Products with
rechargeable batteries (like toothbrushes, shavers, and
grooming products) exceed the stringent California
energy efficiency norm by at least 10%. We are making
steady progress in developing PVC/BFR-free products.
More than 65% of sales consist of PVC/BFR-free
products, with the exception of the power cords, for
which there are not yet economical viable alternatives
available. In the remaining 35% of product sales,
PVC/BFR has already been phased out to a significant
extent, but the products are not yet completely free of
these substances.
In 2015, more kitchen appliances, vacuum cleaners,
coffee machines and irons were launched with parts
made of recycled plastics. In total we have applied
some 900 tons of recycled plastics in our products. An
example is the new Perfect Care Eco Aqua Steam
Generator, with more than 50% recycled plastics.
Lighting
Green Product sales within Philips Lighting increased to
72% in 2015. Connected lighting systems contributed to
Green Product sales with solutions in more applications
and market segments. In August 2015 the new
installation of the connected Philips LED lighting
system in the Allianz Arena made it Germany’s first and
Europe’s largest stadium to feature a dynamic and
colorful light display on its entire façade. This new
energy-efficient lighting system also saves
approximately 60% on electricity and 362 tons of CO2
per year. The maintenance and operating costs are also
lower due to the cloud-based Philips ActiveSite
platform. The LEDs have an average lifetime of 80,000
operating hours and the system is extremely robust,
even under extreme weather conditions.
5.3.3 Green Operations
The Green Operations program focuses on the main
contributors to climate change, recycling of waste,
reduction of water consumption, and reduction of
emissions of restricted and hazardous substances. Full
details can be found in chapter 14, Sustainability
statements, of this Annual Report.
Carbon footprint and energy efficiency
After achieving our EcoVision4 carbon emissions
reduction target in 2012, we continued our energy
efficiency improvement programs across different
disciplines. This year we have achieved our 2015
emission reduction target that was set at a 40%
decrease in CO2 reductions compared to our 2007 base
year. Our carbon footprint decreased by 7% compared
to 2014, resulting in a total of 1,417 kilotonnes CO2, a 41%
decrease compared to 2007. This was mainly achieved
by emissions reductions of 17% compared to 2014 in our
manufacturing facilities, resulting from operational
changes and decreased energy usage due to lower load
at energy intensive Lighting factories. Additionally the
energy intensity for our non-industrial operations
decreased resulting in emission reductions of 16%.
Business travel emissions showed a slight reduction of
1% compared to 2014. In order to further decrease our
business travel emissions we will continue to promote
video conferencing as an alternative to travel in 2016.
These reductions were, however, offset by a 23%
increase in emissions from air transport over the course
of 2015, mainly at Healthcare to meet demand.
Our operational energy efficiency improved by 18%,
from 1.29 terajoules per million euro sales in 2014 to 1.06
terajoules per million euro sales in 2015 as a result of
energy efficiency programs in our industrial sites.
During 2015, the applied emission factors used to
calculate our operational carbon footprint have been
updated from the previously used DEFRA (UK
Department for Environment, Food & Rural Affairs)
2007 and bespoke emission factors to the applicable
DEFRA 2015 emission factors for each year respectively.
This update affected all historical data and resulted in
an overall average increase of our carbon emissions by
Group performance 5.3.2
11% for all years. We implemented these new emission
factors to ensure improved carbon disclosure. The
emission factor update did not affect our performance
against the base year.
From this year onward our scope 2 emissions reporting
will include both the market based method as well as
the location based method. Both methods are adopted
according to the new Corporate Standard of the
Greenhouse Gas (GHG) Protocol as further described in
chapter 14, Sustainability statements, of this Annual
Report. The market based method will serve as
reference for calculating our total operational carbon
footprint. As explained in chapter 14, the market based
method includes reduction of our emissions resulting
from purchasing renewable energy. In 2015, we
procured 54% of our electricity from renewable sources.
Approximately 60% of our renewable energy is
standardly contracted via our energy providers. The
remaining 40% was mainly sourced in the United States
through procurement of renewable energy certificates.
The impact of the exclusion of Lumileds and
Automotive is displayed as discontinued operations in
the next graph; the size of which varies over the years,
but averages around 10% over the past 5 years.
Emissions from discontinued operations in our
industrial activities have been identified exactly.
Emissions from our non-industrial facilities and
business travel have been estimated based on FTE
data. For our logistics emissions the part of
discontinued operations has been estimated using
revenue share as a proxy where applicable.
Philips Group
Operational carbon footprint in kilotonnes CO2-equivalent
2011 - 2015
2,022
130
627
119
243
903
1,807
167
573
117
205
1,898
220
558
116
218
1,697
176
475
122
204
1,600
183
Discontinued operations
394
103
202
Manufacturing
Non-industrial operations
Business travel
745
786
720
718
Logistics
‘11
‘12
‘13
‘14
‘15
Philips Group
Operational carbon footprint by Greenhouse Gas Protocol
scopes in kilotonnes CO2-equivalent
2011 - 2015
Scope 1
381
355
361
320
261
2011
2012
2013
2014
2015
Scope 2 (market
based)
Scope 3
365
1,146
335
313
950
1,004
277
924
236
920
Philips Group
1,892
1,640
1,678
1,521
1,417
Scope 2 (location
based)
579
584
583
546
496
Annual Report 2015
43
Group performance 5.3.3
Water
Total water intake in 2015 was 2.7 million m3, about 12%
lower than in 2014. This decrease was mainly due to
lower production volumes at multiple Lighting sites
where water is used for cooling purposes, operational
changes and water-saving actions at various sites.
Lighting represents around 64% of total water usage. In
this sector, water is used in manufacturing as well as for
domestic purposes. The other sectors use water mainly
for domestic purposes. The exclusion of Lumileds and
Automotive has a significant downward impact on the
water consumption of Philips. In 2015, Lumileds and
Automotive accounted for 1.7 million m3 of water.
Philips Group
Water intake in thousands of m3
2011 - 2015
Healthcare
Consumer
Lifestyle
Lighting
Innovation,
Group & Services
Continuing
operations
Discontinued
operations
2011
308
2012
2013
2014
2015
421
454
514
439
338
303
586
537
2,249
2,413
2,249
2,052
537
1,751
-
-
-
-
-
2,895
3,137
3,289
3,103
2,727
1,433
1,720
1,755
1,700
1,684
Philips Group
4,328
4,857
5,044
4,803
4,411
In 2015, 72% of water was purchased and 28% was
extracted from groundwater wells.
Waste
In 2015, total waste decreased by some 9% compared
to 2014 to 68.5 kilotonnes, mainly due to operational
changes, lower production volumes and less packing
waste at Lighting sites. Lighting contributed 66% of
total waste, Consumer Lifestyle 17% and Healthcare
17%. The exclusion of Lumileds and Automotive had a
9% downward impact on total waste.
Philips Group
Ratios relating to carbon emissions and energy use
2011 - 2015
Operational CO2 emissions
in kilotonnes CO2-equivalent
Operational CO2 efficiency
in tonnes CO2-equivalent per million EUR sales
Operational energy use
in terajoules
Operational energy efficiency
in terajoules per million EUR sales
44
Annual Report 2015
Philips Group
Total waste in kilotonnes
2011 - 2015
Healthcare
Consumer
Lifestyle
Lighting
Innovation,
Group & Services
Continuing
operations
Discontinued
operations
2011
2012
2013
2014
2015
9.3
10.4
9.6
9.8
11.6
19.6
58.1
12.7
57.5
11.4
54.9
11.3
53.9
11.6
45.3
-
-
-
-
-
87.0
80.6
75.9
75.0
68.5
Philips Group
94.0
87.6
92.0
80.4
7.0
7.0
16.1
5.4
6.4
74.9
Total waste consists of waste that is delivered for
landfill, incineration or recycling. Materials delivered for
recycling via an external contractor comprised 57
kilotonnes, which equals 83% of total waste, an
improvement compared to 80% in 2014, as our
manufacturing sites continued their recycling programs.
Of the 17% remaining waste, 72% comprised non-
hazardous waste and 28% hazardous waste; 8.2
kilotonnes of waste was sent to landfill.
Philips Group
Industrial waste delivered for recycling in %
2015
23
22
18
Paper
Glass
Metal
Wood
Plastic
Demolition scrap
Waste chemicals
Other
10
8
6
6
7
Emissions
Emissions of restricted substances totaled 26 kilos in
2015, mainly caused by one site in China reporting a
thinner containing benzene. For the third year in a row,
mercury emissions at Lighting were as low as
reasonably achievable, according to our assessment.
The level of emissions of hazardous substances
decreased from 28,310 kilos to 25,101 kilos (-11%), driven
by a reduction in xylene emissions at Consumer
Lifestyle, due to lower production of products where
these specific lacquers and thinners are used as well as
2011
2012
2013
2014
1,892
1,640
1,678
1,521
95
74
76
71
2015
1,417
58
31,682
28,886
29,586
27,579
25,614
1.59
1.30
1.35
1.29
1.06
a decrease in styrene emissions at two Lighting sites.
Lighting and Consumer Lifestyle have reduction
programs for restricted and hazardous substances.
Philips Group
Restricted and hazardous substances in kilos
2011 - 2015
Restricted
substances
Hazardous
substances
2011
2012
2013
2014
2015
111
671)
371)
291)
26
63,604 67,530
35,118
28,310
25,101
1) Numbers have been restated
For more details on restricted and hazardous
substances, please refer to sub-section 14.3.3, Green
Operations, of this Annual Report.
5.4 Proposed 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, 2015, the issued share capital consists only of
common shares; no preference shares have been
issued. Article 33 of the articles of association of Royal
Philips gives the Board of Management the power to
determine what portion of the net income shall be
retained by way of reserve, subject to the approval of
the Supervisory Board.
A proposal will be submitted to the upcoming Annual
General Meeting of Shareholders to declare a dividend
of EUR 0.80 per common share (up to EUR 740 million),
in cash or in shares at the option of the shareholder,
against the net income for 2015 and retained earnings.
Shareholders will be given the opportunity to make
their choice between cash and shares between May 18,
2016 and June 10, 2016. If no choice is made during this
election period the dividend will be paid in shares. On
June 10, 2016 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 Koninklijke Philips
N.V. at Euronext Amsterdam on June 8, 9 and 10, 2016.
The Company will calculate the number of share
dividend rights entitled to one new common share (the
‘ratio’), such that the gross dividend in shares will be
approximately equal to the gross dividend in cash. On
June 14, 2016 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
15, 2016. 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 13, 2016.
Group performance 5.3.3
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 and retained earnings
is subject to 15% dividend withholding tax, but only in
respect of the par value of the shares (EUR 0.20 per
share).
In 2015, a dividend of EUR 0.80 per common share was
paid in cash or shares, at the option of the shareholder.
For 59.2% of the shares, the shareholders elected for a
share dividend resulting in the issue of 17,671,990 new
common shares, leading to a 1.9% dilution. EUR 298
million was paid in cash. For additional information, see
chapter 17, 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, 2015, is before appropriation of the result
for the financial year 2015.
5.5 Outlook
For 2016, we continue to expect modest comparable
sales growth and we will build on our 2015 operational
performance improvement. Taking into account
ongoing macro-economic headwinds and the phasing
of costs and sales, we expect improvements in the year
to be back-end loaded.
Annual Report 2015
45
Sector performance 6
6 Sector performance
Our structure in 2015
Koninklijke Philips N.V. (Royal Philips or the ‘Company’)
is the parent company of the Philips Group (‘Philips’ or
the ‘Group’). The Company is managed by the members
of the Board of Management and Executive Committee
under the supervision of the Supervisory Board. The
Executive 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.
In 2015, Philips’ activities in the field of health and well-
being were 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 and Group and regional
management organizations. Additionally, the global
shared business services for procurement, finance,
human resources, IT and real estate are reported in this
sector, as well as certain pension costs.
At the end of 2015, Philips had 95 production sites in 25
countries, sales and service outlets in approximately
100 countries, and 112,959 employees.
2016 and beyond
In September 2014, Philips announced its plan to
sharpen its strategic focus by establishing two stand-
alone companies focused on the HealthTech and
Lighting opportunities respectively. We have
established a stand-alone structure for Philips Lighting
within the Philips Group, effective February 1, 2016. We
expect to be able to announce the separation of the
Lighting business in the first half of 2016, subject to
market conditions and other relevant circumstances.
Accordingly, Innovation, Group & Services will be split
and allocated to Philips and Philips Lighting.
In light of its focus on health technology, Philips has
eliminated the Healthcare and Consumer Lifestyle
sector layers in order to drive the convergence of
consumer health and professional healthcare as well as
to reduce overhead costs. We plan to change the
reporting of Philips’ health technology activities to
three segments (Personal Health, Diagnosis &
Treatment, Connected Care & Health Informatics) with
effect from Q1 2016.
Further updates will be provided in the course of 2016.
Our structure in 2015
Koninklijke Philips N.V.
Healthcare
Consumer
Lifestyle
Imaging Systems
Personal Care
Lighting
Light Sources &
Electronics
Customer Services
Domestic Appliances
Consumer Luminaires
Innovation,
Group & Services
Group Innovation
Intellectual Property &
Royalties
Healthcare Informatics,
Solutions & Services
Patient Care &
Monitoring Solutions
46
Annual Report 2015
Health & Wellness
Professional Lighting
Solutions
Group and regional
costs
Accelerate!
investments
Pensions
Service units and other
6.1 Healthcare
Sector performance 6.1
“ By leveraging our world-class innovation capability, deep
clinical and consumer insights, long-standing customer
relationships with healthcare providers, and our integrated
solutions portfolio, we provide greater value while helping
lower the cost of care across the health continuum.”
Frans van Houten, CEO Royal Philips
• We are gaining momentum in delivering large-scale
6.1.1 Healthcare landscape
end-to-end healthcare solutions globally with
clients like Westchester Medical Center (USA),
Mackenzie Health (Canada) and the Kenyan Ministry
of Health.
• Our Accelerate! program continues to drive
improvements in healthcare, resulting in enhanced
customer centricity and service levels, faster time-to-
market for our innovations, strengthened quality and
compliance systems, and better cost productivity. We
increased our investments in, among others,
healthcare informatics, personal health solutions and
our quality systems. We also strengthened our ability
to offer integrated solutions in the growing image-
guided therapy market through the acquisition of
Volcano.
• We continue to expand the capabilities of Philips’
HealthSuite digital platform, which enables
connected health propositions to improve the
delivery of care at lower cost, which allow us to build
recurring revenue streams.
Healthcare systems around the world are under
increasing economic pressure. More people are living
longer, and more are living with chronic conditions –
driving healthcare spending to unsustainable levels.
Shortages of healthcare professionals are also adding
to the relentless challenge of delivering better care at
lower cost to growing patient populations.
Fundamental transformative changes are already taking
place in the healthcare industry to enable the provision
of affordable, quality care to those who need it. A shift is
under way towards value-based healthcare, which places
greater emphasis on results, driving the reduction of waste
and inefficiency, increasing access and improving
outcomes, while at the same time reducing costs.
Consumers are becoming increasingly engaged in
managing their own health, with greater attention being
focused on the benefits of healthy living and home care.
Mobile and digital technologies are significant enablers
of this trend, leading to new care delivery models –
Annual Report 2015
47
Sector performance 6.1.1
founded upon integrated care, real-time analytics and
value-added solutions and services – that give patients
greater control over and responsibility for their health.
6.1.2 About Healthcare in 2015
At Philips, we deliver innovative, integral technology
solutions designed to create value by improving the
quality and delivery of care while lowering cost. Our
broad and deep clinical expertise and technology
leadership across the health continuum and
commitment to customer collaboration are core to our
business and truly differentiate us.
Philips is one of the world’s leading healthcare
companies (based on sales) along with General Electric
and Siemens. The competitive landscape in the
healthcare industry is evolving with the emergence of a
considerable number of new market players. The
United States, our largest market, represented 43% of
Healthcare’s global sales in 2015, followed by China,
Japan and Germany. Growth geographies accounted
for 25% of Healthcare sales. In 2015, Philips Healthcare
had approximately 40,000 employees worldwide.
In 2015, our Healthcare business (which was organized
in six business groups) reported on four segments:
• Imaging (comprising the business groups Diagnostic
Imaging, Image-Guided Therapy, Ultrasound):
Diagnostic imaging solutions, including computed
tomography (CT), magnetic resonance imaging (MRI),
advanced molecular imaging (AMI) and diagnostic X-ray,
which includes digital X-ray and mammography;
integrated clinical solutions, which include radiation
oncology planning, disease specific oncology solutions
and X-Ray dose management; image-guided therapy
solutions including interventional X-ray systems,
encompassing cardiology, radiology and surgery, and
interventional imaging and therapy devices that include
Intravascular Ultrasound (IVUS), Fractional Flow Reserve
(FFR) and atherectomy; and ultrasound, a modality with
diverse customers and broad clinical presence.
• Patient Care & Monitoring Solutions: Enterprise-wide
patient monitoring solutions, from value solutions to
sophisticated connected solutions, for real-time clinical
information at the patient’s bedside; patient analytics,
patient monitoring and clinical decision support systems;
therapeutic care, including cardiac resuscitation,
emergency care solutions, invasive and non-invasive
ventilators for acute and sub-acute hospital environments,
and respiratory monitoring devices; consumables across
the patient monitoring and therapeutic care businesses;
and customer service, including clinical, IT, technical, and
remote customer propositions.
• Customer Services: Product and solution services and
support, including clinical support and performance
services; education and value-added services;
installation; remote proactive monitoring; and customer
service agreements.
48
Annual Report 2015
• Healthcare Informatics, Solutions & Services:
Advanced Healthcare IT, clinical and imaging
informatics for radiology and cardiology departments,
Picture Archiving and Communication systems (PACS)
and fully integrated Electronic Medical Record (EMR)
systems; technology-enabled services including
telehealth, remote patient monitoring, care
coordination to make aging and chronic condition
experiences better; a professional services business
(Healthcare Transformation Services) spanning
consulting, education, clinical and business
performance improvement, program management,
system integration services. All solutions and software
businesses will be supported by the Philips HealthSuite
digital platform to enable interoperability, Big Data
analytics, optimized workflows and care pathways,
rapid application development, enhanced patient
centricity and engagement.
Philips Healthcare
Total sales by business as a %
2015
Imaging Systems
Patient Care & Monitoring Solutions
37
31
Healthcare Informatics,
Solutions & Services
6
Customer Services
26
Sales at Philips’ health systems businesses are generally
higher in the second half of the year, largely due to the timing
of new product availability and customer spending patterns.
Commitment to quality
The implementation of the Philips Business System is
embedding a fundamental commitment to quality across all
our processes, products, systems and services. This
commitment is of vital importance in the extensively
regulated health equipment and system business. We are
committed to compliance with regulatory product approval
and quality system requirements in every market we serve,
by addressing specific terms and conditions of local and
national regulatory authorities including the US FDA, the
CFDA in China and comparable agencies in other countries.
Obtaining regulatory approval is costly and time-consuming,
but a prerequisite for market introduction.
Further progress was made in 2015 in the remediation of the
quality management systems at our Healthcare facility in
Cleveland, Ohio, with the ramp-up of production and
shipments continuing through the year.
With regard to sourcing, please refer to sub-section
14.2.8, Supplier indicators, of this Annual Report.
6.1.3 2015 business highlights
6.1.4 2015 financial performance
Sector performance 6.1.3
Leveraging our portfolio, insights and capabilities across
the health continuum, Philips Healthcare continued to
create value for healthcare providers and consumers
around the world in 2015, with a strong focus on
collaborative innovation, including large-scale
partnerships, co-created solutions, and strategic alliances.
We strengthened our leadership position in the fast-
growing image-guided therapy market by completing
the acquisition of Volcano Corporation, a global leader
in catheter-based imaging and measurement solutions
for cardiovascular applications. Volcano’s
complementary portfolio and expertise will create
opportunities to accelerate revenue growth for our
image-guided therapy business.
Philips and Westchester Medical Center entered into a
multi-year, USD 500 million managed services
partnership to transform and improve healthcare for 3
million patients. The agreement includes consulting
services, medical technologies and clinical informatics
solutions, and aims to improve all care areas, including
radiology, cardiology, neurology, oncology and
pediatrics.
We introduced our Lumify app-based ultrasound solution
in the US. Combining a dedicated Philips ultrasound
transducer, a compatible smart device and app, and secure
cloud-enabled services, Lumify has been designed to
enable faster diagnosis, improve patient satisfaction and
reduce costs, while generating recurring revenues.
With more than 800,000 patient monitors installed and
275 million patients tracked every year, we are leveraging
our installed base for expansion of our services and
efficient roll-out of our innovations. For example,
CareEvent, an enterprise event management solution,
which includes a mobile application to send informative
alerts directly to a caregiver’s smartphone for informed
decision making and timely interventions when required.
Philips acquired Blue Jay Consulting, a leading provider
of consulting services to hospital emergency
departments in the US. Blue Jay’s offering complements
Philips’ enterprise-wide consulting services to help
improve clinical care and operational effectiveness
across the health continuum.
We expanded the capabilities of our HealthSuite digital
platform, a secure cloud infrastructure for health data and
devices, and strengthened the associated ecosystem
through our collaborations with Amazon Web Services,
Radboud University Medical Center and Salesforce.
In 2015, we entered the fifth year of our Accelerate!
journey, which continued to drive improvements in
operational performance, as we focused on
strengthening our innovation pipeline while making
progress on cost savings.
Philips Healthcare
Key data in millions of EUR unless otherwise stated
2013 - 2015
Sales
Sales growth
% increase (decrease),
nominal
% increase (decrease),
comparable1)
EBITA 1)
as a % of sales
EBIT
as a % of sales
Net operating capital
(NOC)1)
Cash flows before
financing activities1)
2013
9,575
2014
9,186
2015
10,912
(4)%
(4)%
19%
1%
1,512
15.8%
1,315
13.7%
(2)%
616
6.7%
456
5.0%
4%
1,024
9.4%
819
7.5%
7,437
7,565
9,212
1,292
910
81
Employees (in FTEs)
37,008
37,065
40,099
1) For a reconciliation to the most directly comparable GAAP measures,
see chapter 15, Reconciliation of non-GAAP information, of this Annual
Report
In 2015, sales amounted to EUR 10,912 million, 19%
higher than in 2014 on a nominal basis. Excluding a 12%
positive currency effect and a 3% positive effect from
portfolio changes, mainly related to Volcano,
comparable sales increased by 4%. Healthcare
Informatics, Solutions & Services achieved mid-single-
digit growth, Imaging Systems posted high-single-digit
growth, Customer Services reported low-single-digit
growth, while Patient Care & Monitoring Solutions was
in line with 2014. Green Product sales amounted to EUR
4,580 million, or 42% of sector sales.
From a geographical perspective, comparable sales in
growth geographies showed high-single-digit growth, and
mature geographies recorded low-single-digit growth.
EBITA amounted to EUR 1,024 million, or 9.4% of sales,
compared to EUR 616 million, or 6.7% of sales, in 2014.
EBITA in 2015 included restructuring and acquisition-
related charges of EUR 168 million, which included the
Volcano acquisition, compared to EUR 70 million in
2014. 2015 EBITA also included charges of EUR 28
million related to the currency revaluation of the
provision for the Masimo litigation, EUR 8 million
related to the devaluation of the Argentine peso, and a
EUR 31 million legal provision.
EBITA in 2014 included charges of EUR 366 million
related to the provision for the Masimo litigation,
charges of EUR 49 million of mainly inventory write-
downs related to Cleveland and a EUR 16 million past-
service pension cost gain.
EBIT amounted to EUR 819 million, or 7.5% of sales, and
included EUR 205 million of charges related to acquired
intangible assets.
Annual Report 2015
49
6.1.5 Delivering on EcoVision sustainability
commitments
A growing and aging population, the rise of chronic and
lifestyle-related diseases and global resource constraints
pose a number of challenges, including pollution and
stressed healthcare systems. Philips continues to improve
lives around the globe by developing solutions that help
secure access to care, while at the same time respecting
the boundaries of natural resources.
In 2015, Green Product sales in Healthcare amounted
to EUR 4,580 million and we introduced 11 new Green
Products to support energy efficiency, materials
reduction and other sustainability goals. We also
actively collaborate with care providers around the
globe to look for ways to minimize the environmental
impact of healthcare, for example by reducing the
energy use of medical equipment. Supporting the
transition to a circular economy, we have continued to
focus on expanding the Diamond Select refurbishment
program and also the SmartPath upgrading program.
Philips was presented with the ‘Champion for Change’
Award by Practice Greenhealth for the second
consecutive year. This award honors businesses that go
beyond taking steps to improve their own green
practices, but also help their clients and associates to
expand their sustainable practices.
In September 2014, Philips announced its plan to sharpen
its strategic focus by establishing two stand-alone
companies focused on the HealthTech and Lighting
opportunities respectively. Philips has transferred its
Lighting business into a stand-alone structure effective
February 1, 2016 and has moved from a holding company
model to an operating company model.
In light of its focus on health technology, Philips has
eliminated the Healthcare and Consumer Lifestyle
sector layers in order to drive the convergence of
consumer health and professional healthcare as well as
to reduce overhead costs. We plan to change the
reporting of Philips’ health technology activities to
three segments (Personal Health, Diagnosis &
Treatment, Connected Care & Health Informatics) with
effect from Q1 2016. For more details on the new
segment reporting in 2016 and onwards, please refer to
the introduction of Sector performance.
Further updates will be provided in the course of 2016.
Sector performance 6.1.4
Net operating capital increased by EUR 1,647 million to
EUR 9,212 million, mainly driven by the Volcano
acquisition and currency impacts.
Cash flows before financing activities decreased from EUR
910 million in 2014 to EUR 81 million in 2015, largely due to
higher cash outflows for investments at Imaging Systems.
Philips Healthcare
Sales per geographic cluster in millions of EUR
2011 - 2015
9,983
2,368
1,252
9,575
2,421
1,133
8,852
1,905
1,046
10,912
9,186
2,705
Growth
2,296
1,080
1,231
Other mature
3,953
4,393
4,089
3,896
4,887
North America
1,948
1,970
1,932
1,914
2,089 Western Europe
‘11
‘12
‘13
‘14
‘15
Philips Healthcare
Sales and net operating capital1) in billions of EUR
2011 - 2015
9.2
Net operating capital
8.4
8.9
8.0
10.0
7.4
9.6
7.6
9.2
‘11
‘12
‘13
‘14
‘15
1) For a reconciliation to the most directly comparable GAAP measures,
see chapter 15, Reconciliation of non-GAAP information, of this Annual
Report
Philips Healthcare
EBIT and EBITA 1) in millions of EUR
2011 - 2015
15.8%
1,512
1,315
12.2%
12.3%
1,226
1,026
1,080
27
1,053
200
‘12
197
‘13
‘11
6.7%
9.4%
EBITA as a % of sales
1,024
EBITA in value
819
EBIT in value
205
‘15
Amortization and impairment
in value
616
456
160
‘14
1) For a reconciliation to the most directly comparable GAAP measures,
see chapter 15, Reconciliation of non-GAAP information, of this Annual
Report
50
Annual Report 2015
10.9
Sales
6.1.6 2016 and beyond
6.2 Consumer Lifestyle
Sector performance 6.2
“ Across the world people are increasingly engaged in their
personal health and are looking for solutions to stay healthy
and prevent illness. We are leveraging our deep consumer
expertise and extensive healthcare know-how to drive the
consumerization of health. We’re supporting people to live a
healthy life in a healthy home environment; enabling them
to proactively manage their own health.”
Pieter Nota, CEO Philips Consumer Lifestyle
• We are executing our strategy, with locally relevant
innovation delivering strong growth and driving
profitability.
• Future growth drivers are clearly set: grow the core
businesses through local and global innovation
platforms, and geographical expansion of proven
propositions; further expand in the domain of
personal health by exploring new business
adjacencies and new business areas; leverage
connectivity as a further growth driver.
• In 2015, Consumer Lifestyle made further strong
progress to reposition towards healthy living and
prevention across the health continuum in more
attractive markets, with better margins.
• Our multi-year Accelerate! program has transformed
the sector into a market-driven organization, by
changing our operating model and instilling a strong
performance culture and end-to-end approach.
6.2.1 Consumer landscape
Across the world, consumers are looking for solutions
that help them to be healthy, live well and enjoy life.
They are increasingly tracking their personal health
through a combination of hardware and software
devices and services, which they expect will deliver
insights that are real-time, highly personal and direct
them towards better health.
In a connected, digital world, consumers are looking for
smart, personalized solutions. Purchase decisions are
increasingly made or influenced online. In 2015,
economic headwinds, especially in growth markets,
created pressure on consumer spending. However,
living a healthy life remained a high priority for
consumers.
Annual Report 2015
51
Sector performance 6.2.2
6.2.2 About Consumer Lifestyle in 2015
Through our various businesses, we aim to make a
difference to people’s lives by enabling them to make
healthy choices every day based on locally relevant
innovation. In recent years we have been responding to
the need and desire of consumers to take charge of
their personal health journey. We service our customers
across the health continuum, delivering innovation in
healthy living and disease prevention. In doing so, we
target more attractive markets with better margins.
We are leveraging connectivity to engage consumers in
new and impactful ways through social media and digital
innovation. For example, in 2015 we launched Philips
Avent uGrow, a new digital parenting platform which
supports the healthy development of babies, and also the
latest Philips Sonicare for Kids Connected toothbrush.
Under normal economic conditions, Philips’ personal
health businesses experience seasonality, with higher
sales in the fourth quarter.
We are focused on value creation through category
leadership and operational excellence, driving global
leadership positions. 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.
In 2015, Consumer Lifestyle employed approximately
16,000 people worldwide. The global sales and service
organization covered more than 50 developed and
growth geographies. In addition, we operated
manufacturing and business creation organizations in
Argentina, Austria, Brazil, China, India, Indonesia, Italy,
the Netherlands, Romania, the UK and the US.
Through 2015, Consumer Lifestyle has been built
around businesses and markets, enabling us to direct
investments to where the growth is, addressing locally
relevant consumer needs. We create global platforms
that can be adapted for local relevance.
Our end-to-end approach is accelerating specialist
capability development in mature markets, to enable
effective partnerships with customers and consumers,
and in growth geographies, to enable development of
go-to-market strategies.
In 2015, the Consumer Lifestyle sector consisted of the
following areas of business:
• Health & Wellness: mother and child care, oral
healthcare, pain management
• Personal Care: male grooming, beauty
• Domestic Appliances: kitchen appliances, coffee, air
purification, garment care, floor care
Philips Consumer Lifestyle
Total sales by business as a %
2015
Health & Wellness
Personal Care
Domestic Appliances
24
33
43
Through our personal health businesses, we offer a
broad range of products from high to low price/value
quartiles, necessitating a diverse distribution model. We
continue to expand our portfolio and increase its
accessibility, particularly in lower-tier cities in growth
geographies. We are well positioned to increasingly
capture growth in online sales and are building our
digital and e-commerce capabilities across the
company. We are adapting our web functionality to offer
consumers a better user experience via smaller screens,
driving improvements from conversion to sales.
Commitment to quality
The implementation of the Philips Business System is
embedding a fundamental commitment to quality
across all our processes, products, systems and
services. Philips’ personal health businesses are subject
to regulatory requirements in the markets where it
operates. This includes the European Union’s Waste
from Electrical and Electronic Equipment (WEEE),
Restriction of Hazardous Substances (RoHS),
Registration, Evaluation, Authorization and Restriction
of Chemicals (REACH), Energy-use of Products (EuP)
requirements and Product Safety Regulations. We have
a growing portfolio of medically regulated products in
our 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 CFDA in China and comparable
regulations in other countries. Through our growing
beauty, oral healthcare and mother and child care
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
14.2.8, Supplier indicators, of this Annual Report.
6.2.3 2015 business highlights
• The success of established propositions like the
Philips Sonicare DiamondClean and the Philips
Sonicare AirFloss Ultra, along with new innovations
like Philips Sonicare for Kids Connected, drove
continued growth across the world, in particular in
China, Japan, Germany and North America.
• Continuing the geographical expansion of Philips
product innovations, we reached the milestone of 5
million Philips Airfryers sold. Philips is the market
leader in the world’s low-fat fryer market.
• Delivering on its male grooming growth strategy to
drive loyalty and create more value among existing
users, Philips launched the Philips Smart Shaver
Series 7000.
52
Annual Report 2015
Sector performance 6.2.3
• The new Philips Smart Air Purifier 8000i series is a
high-performing air purifier that helps to quickly
improve indoor air quality – even in larger rooms.
• At Kind + Jugend, the leading international baby and
toddler trade fair in Germany, Philips reinforced its
industry leadership, showcasing the Philips Avent
uGrow Platform, a new digital parenting platform
which supports the healthy development of babies.
• Empowering consumers to take greater control of
their health, Philips personal health programs were
announced at IFA Berlin, one of the world’s leading
trade shows for home appliances. Built upon the
Philips HealthSuite digital platform, each program
compromises connected health measurement
devices, an app-based personalized program with
coaching, and secure, cloud-based data analysis.
6.2.4 2015 financial performance
13 million. EBITA in 2014 also included a EUR 11 million
past-service pension cost gain. The year-on-
year EBITA increase was mainly driven by improved
earnings at Health & Wellness and Personal Care.
EBIT amounted to EUR 621 million, or 11.6% of sales,
which included EUR 52 million of amortization charges,
mainly related to acquired intangible assets at Health
& Wellness and Domestic Appliances.
Net operating capital increased from EUR 1,353 million
in 2014 to EUR 1,453 million in 2015, due to higher
working capital, partly offset by a reduction in
intangible fixed assets.
Cash flows before financing activities increased from
EUR 553 million in 2014 to EUR 589 million in 2015,
mainly due to higher earnings.
Philips Consumer Lifestyle
Key data in millions of EUR unless otherwise stated
2013 - 2015
Philips Consumer Lifestyle
Sales per geographic cluster in millions of EUR
2011 - 2015
Sales
Sales growth
% increase, nominal
% increase, comparable1)
EBITA 1)
2013
4,605
2014
4,731
2015
5,347
7%
10%
483
3%
6%
573
13%
6%
673
as a % of sales
10.5%
12.1%
12.6%
EBIT
as a % of sales
Net operating capital (NOC)1)
Cash flows before financing
activities1)
429
9.3%
1,261
520
11.0%
1,353
621
11.6%
1,453
480
553
589
4,319
1,954
272
768
3,771
1,532
228
688
4,605
4,731
2,187
2,223
299
769
324
781
5,347
2,563
Growth
354
Other mature
966
North America
1,323
1,325
1,350
1,403
1,464
Western Europe
Employees (in FTEs)
17,255
16,639
16,254
‘11
‘12
‘13
‘14
‘15
1) For a reconciliation to the most directly comparable GAAP measures,
see chapter 15, Reconciliation of non-GAAP information, of this Annual
Report
Sales amounted to EUR 5,347 million, a nominal
increase of 13% compared to 2014. Excluding a 7%
positive currency impact, comparable sales were 6%
higher year-on-year. Health & Wellness achieved
double-digit growth, Personal Care reported high-
single-digit growth, while Domestic Appliances was in
line with 2014. Green Product sales amounted to EUR
3,091 million, or 58% of total sector sales.
From a geographical perspective, growth geographies
achieved high-single-digit growth and mature
geographies registered low-single-digit growth. In
growth geographies, the increase was mainly driven by
Central & Eastern Europe, Asia Pacific and India,
primarily in the Health & Wellness and Personal Care
businesses. Growth geographies’ share of sector sales
was 48%, compared to 47% in 2014.
EBITA increased from EUR 573 million, or 12.1% of sales,
in 2014 to EUR 673 million, or 12.6% of sales, in 2015.
Restructuring and acquisition-related charges
amounted to EUR 36 million in 2015, compared to EUR
9 million in 2014. EBITA in 2015 also included charges
related to the devaluation of the Argentine peso of EUR
Philips Consumer Lifestyle
Sales and net operating capital1) in billions of EUR
2011 - 2015
1.3
4.6
1.4
4.7
1.2
4.3
0.9
3.8
1.5
5.3
Net operating capital
Sales
‘11
‘12
‘13
‘14
‘15
1) For a reconciliation to the most directly comparable GAAP measures,
see chapter 15, Reconciliation of non-GAAP information, of this Annual
Report
Annual Report 2015
53
In light of its focus on health technology, Philips has
eliminated the Healthcare and Consumer Lifestyle
sector layers in order to drive the convergence of
consumer health and professional healthcare as well as
to reduce overhead costs. We plan to change the
reporting of Philips’ health technology activities to
three segments (Personal Health, Diagnosis &
Treatment, Connected Care & Health Informatics) with
effect from Q1 2016. For more details on the new
segment reporting in 2016 and onwards, please refer to
the introduction of Sector performance.
Further updates will be provided in the course of 2016.
Sector performance 6.2.4
Philips Consumer Lifestyle
EBIT and EBITA 1) in millions of EUR
2011 - 2015
10.6%
10.5%
12.1%
12.6%
EBITA as a % of sales
673
EBITA in value
4.1%
153
109
44
‘11
573
520
483
456
400
429
621
EBIT in value
56
‘12
54
‘13
53
‘14
52
‘15
Amortization and
impairment in value
1) For a reconciliation to the most directly comparable GAAP measures,
see chapter 15, Reconciliation of non-GAAP information, of this Annual
Report
6.2.5 Delivering on EcoVision sustainability
commitments
Sustainability continued to play an important role at
Consumer Lifestyle in 2015, 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 area of
energy consumption, packaging and/or substances of
concern, accounted for 58% of total sales in 2015. All
Green Products with rechargeable batteries exceed the
stringent California energy efficiency standard by at
least 10%. And over 65% of total sales are PVC- and/or
BFR-free products (excluding power cords). In 2015, we
continued to increase the use of recycled materials in
our products. Over 900 tons of recycled plastics were
used in kitchen appliances, vacuum cleaners, irons and
coffee machines, compared to 625 tons in 2014.
As concrete examples of our commitment to sustainability
we launched the new Perfect Care Eco Aqua Steam
Generator, of which the plastic parts consist of 50%
recycled material, and the Performer Expert vacuum
cleaner, which is free of PVC/BFR, has an A-class energy
label and contains 50% recycled plastics.
In our operations we continue to use most of our
electricity from renewable sources, with the ultimate
aim of having CO2-neutral production sites by 2020. In
2015, 65% of the electricity used in manufacturing sites
came from renewable sources and 82% of the industrial
waste was recycled.
6.2.6 2016 and beyond
In September 2014, Philips announced its plan to
sharpen its strategic focus by establishing two stand-
alone companies focused on the HealthTech and
Lighting opportunities respectively. Philips has
transferred its Lighting business into a stand-alone
structure effective February 1, 2016 and has moved from
a holding company model to an operating company
model.
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Annual Report 2015
6.3 Lighting
Sector performance 6.3
“ We are successfully leading the industry transformation
from conventional lighting to innovative LED and connected
lighting systems that unlock new value and experiences for
our customers and partners. Embedding lighting into the
Internet of Things, we will capture growth opportunities and
adjacent value from new services-based business models.
Our leadership positions, innovations and strong brand
present a catalyst for value creation, growth and a solid
foundation on which to become a stand-alone lighting
company.” Eric Rondolat, CEO Philips Lighting
• The lighting industry is undergoing a radical
6.3.1 Lighting landscape
transformation.
• The lighting market is being driven by the transition
to LED and connected lighting applications.
• Recognizing that the growth and profit pool will shift
to digitally connected lighting products, systems and
services, our goal is to become a lighting solutions
company capturing superior growth and profitability.
• We continue on our Accelerate! journey to achieve
operational excellence across our businesses.
• The separation process is fully under way and is
expected to be completed in the first half of 2016.
We are witnessing a number of trends and transitions
that are affecting the lighting industry and changing the
way people use and experience light.
We serve a large and attractive market that is driven by
the need for more light, the need for energy-efficient
lighting, and the need for digital and connected lighting.
The world’s population is forecast to grow from 7 billion
today to over 9 billion by 2050. At the same time, we
are witnessing rapid urbanization, with over 70% of the
world’s population expected to live in urban areas by
2050. These trends will increase demand for light. In
addition, in the face of resource constraints and climate
change, the world needs that light to be energy-
Annual Report 2015
55
Sector performance 6.3.1
efficient. At the same time, the lighting industry is
moving from conventional to LED lighting, which is
changing the way people use, experience and interact
with light. Digital technologies enable connectivity and
seamless integration in software architectures, systems
and services. Connected lighting allows light points to
be used as information pathways opening up new
functionalities and services based on the transmission
and analysis of data.
The lighting market is expected to grow by 2-4% per
annum between 2015 and 2019 (source: BCG). The majority
of this growth will be driven by LED-based solutions and
applications – heading towards a 60-65% share by 2018.
6.3.2 About Lighting in 2015
Philips Lighting is a global market leader with
recognized expertise in the development, manufacture
and application of innovative, energy-efficient lighting
products, systems and services that improve people’s
lives. We have pioneered many of the key
breakthroughs in lighting over the past 125 years, laying
the basis for our current strength and leading position
in the digital transformation.
We have a firm strategy which is based upon six
priorities:
• Optimize value from conventional products to
support growth
• Innovate in LED products commercially and
technologically to outgrow the market
• Lead the shift to systems, building the largest
connected installed base
• Capture adjacent value through new services
business models
• Be our customers’ best business partner locally,
leveraging our global scale
• Use our Accelerate! program to improve our
operational excellence
We aim to further invest to support our leadership in
LED and connected lighting systems and services while
at the same time capitalizing on our broad portfolio,
distribution and brand in conventional lighting by
flexibly anticipating and managing the phase-out and
declining sales of conventional products.
We address people’s lighting needs across a full range
of market segments. Indoors, we offer lighting products,
systems and services for homes, shops, offices, schools,
hotels, factories and hospitals. Outdoors, we offer
products, systems and services for roads, streets, public
spaces, residential areas and sports arenas, as well as
solar-powered LED off-grid lighting. In addition, we
address the desire for light-inspired experiences
through architectural projects. Finally, we offer specific
applications of lighting in specialized areas, such as
entertainment, horticulture, and water purification.
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Annual Report 2015
In 2015, Philips Lighting spanned a full-service lighting
value chain – from lamps, luminaires, electronics and
controls to connected and application-specific systems
and services – through the following businesses:
• Light Sources & Electronics: LED, eco-halogen,
(compact) fluorescent, high-intensity discharge and
incandescent light sources, plus electronic and
electromagnetic gear, modules and drivers
• Consumer Luminaires: functional, decorative,
lifestyle, scene-setting luminaires
• Professional Lighting Solutions: controls and
luminaires for city beautification, road lighting, sports
lighting, office lighting, shop/hospitality lighting,
industry lighting
Philips Lighting
Total sales by business as a %
2015
Light Sources & Electronics
56
Consumer Luminaires
7
Professional Lighting Solutions
37
In 2015, the Light Sources & Electronics business
conducted its sales and marketing activities through the
professional, OEM and consumer channels, the latter
also being used by our Consumer Luminaires business.
Professional Lighting Solutions was organized in a
project solutions business (project luminaires, systems
and services).
The conventional lamps industry has been highly
consolidated, with GE and Osram as main key
competitors. The LED lighting market, on the other
hand, is very dynamic. We face new competition from
Asia and new players from the semiconductor and
building management sectors. The luminaires industry
is fragmented, with our competition varying per region
and per market segment.
Under normal economic conditions, Lighting’s sales are
generally not materially affected by seasonality.
Philips Lighting has manufacturing facilities in some 25
countries in all major regions of the world, and sales
organizations in more than 60 countries. Commercial
activities in other countries are handled via distributors
working with our International Sales organization.
Lighting has approximately 34,000 employees
worldwide.
Commitment to quality
The implementation of the Philips Business System is
embedding a fundamental commitment to quality
across all our processes, products, systems and
services. Lighting is subject to significant regulatory
requirements in the markets where it operates. These
include the European Union’s Waste from Electrical and
Electronic Equipment (WEEE), Restriction of
Sector performance 6.3.2
Hazardous Substances (RoHS), Registration,
Evaluation, Authorization and Restriction of Chemicals
(REACH), Energy-using Products (EuP) and Energy
Performance of Buildings (EPBD) directives.
With regard to sourcing, please refer to sub-section
14.2.8, Supplier indicators, of this Annual Report.
Philips continues to light up iconic buildings around the
world with colorful and dynamic connected LED
lighting. New illuminations in 2015 include Europe’s
largest mosque located in Moscow, Le Meurice hotel in
Paris, the Cairo Opera House, the Accra Theater in
Ghana, the Big Four Bridge in Louisville, US, the Nanjing
Tower in China, and the Edirne Bridge and Butterfly
Valley in Turkey.
6.3.3 2015 business highlights
In 2015, our lighting innovations supported our six
strategic priorities aimed at delivering even greater
value for our customers and other stakeholders. These
highlights showcase our leading innovations in
connected lighting, systems and services, our
aspiration to be the lighting company for the Internet of
Things for both professional and consumer markets.
Philips launched LifeLight, a solar-powered LED
lighting range for homes in Kenya and other African
countries. The range eliminates the need to use
kerosene lamps, with their harmful fumes, in homes in
off-grid areas, and also increases productivity and
community life by enabling activities to continue after
dark.
Philips expanded its portfolio of connected lighting
products for the home by introducing Philips Hue
Phoenix, a luminaire providing tunable white light,
Philips Hue Go, a portable wireless luminaire, Philips
Lightstrip Plus, a flexible LED light strip, and a new
bridge enabling Philips Hue to interact with other Apple
HomeKit devices and become voice-controlled.
Philips and Cisco formed a global strategic alliance that
will help enable facilities managers, building owners
and office workers to reap the benefits of the Internet
of Things in offices. The alliance combines Philips’
connected office lighting system with Cisco’s highly
secure network technology, to increase energy
efficiency, provide data to optimize user comfort and
improve the office environment.
Philips made further inroads with its Philips CityTouch
lighting system, with Los Angeles adopting an
advanced Philips management system that uses
wireless and cloud-based technologies to control its
street lighting. Philips’ CityTouch connected lighting
management system is now used in more than 262
projects in over 30 countries across the world.
In Lille, France, Carrefour installed 2.5 kilometers of
Philips LED lighting that uses light to transmit a location
signal to a shopper’s smartphone, triggering an app to
provide location-based services. This enables
Carrefour to provide new services to its shoppers, such
as helping them to navigate and find promotions across
the 7,800 m2 shop floor. It is the world’s largest
connected lighting indoor positioning system for retail
and has reduced the total lighting-based electricity
consumption of the hypermarket by 50%.
Philips provided a connected LED lighting system for
the New NY Bridge in New York. It will combine roadway
and architectural lighting, an industry first, on what will
be the most technologically advanced bridge in North
America. The system will feature remotely programmed
lights that produce dynamic colorful effects and use
Philips ActiveSite and Philips CityTouch cloud-based
monitoring and management systems.
6.3.4 2015 financial performance
Philips Lighting
Key data in millions of EUR unless otherwise stated
2013 - 2015
Sales
Sales growth
% increase (decrease),
nominal
% increase (decrease),
comparable1)
EBITA 1)
as a % of sales
EBIT
as a % of sales
Net operating capital (NOC)1)
Cash flows before financing
activities1)
2013
7,145
2014
6,869
2015
7,411
(2)%
(4)%
8%
1%
580
8.1%
413
5.8%
4,462
(3)%
293
4.3%
185
2.7%
3,638
(3)%
594
8.0%
486
6.6%
3,813
418
442
642
Employees (in FTEs)
38,671
37,808
33,618
1) For a reconciliation to the most directly comparable GAAP measures,
see chapter 15, Reconciliation of non-GAAP information, of this Annual
Report
In 2015, sales amounted to EUR 7,411 million, 8% higher on a
nominal basis. Excluding a 9% positive currency effect and a
2% positive effect from portfolio changes, comparable sales
decreased by 3%. Both Light Sources & Electronics and
Consumer Luminaires recorded a mid-single-digit decline,
partly due to the anticipated decline in conventional lighting,
while Professional Lighting Solutions remained flat year-on-
year.
From a geographical perspective, comparable sales in
growth geographies showed a mid-single-digit decrease,
largely driven by declines across all businesses in China and
at Light Sources & Electronics and Professional Lighting in
Middle East & Turkey. Sales in growth geographies increased
from 39% of total sales in 2014 to 40% in 2015. Comparable
sales in mature geographies showed a low-single-digit
decline, with Western Europe and North America recording
a low-single-digit decline and other mature geographies
remaining flat year-on-year.
Annual Report 2015
57
Sector performance 6.3.4
Sales of LED-based products grew to 43% of total sales, up
from 34% in 2014, driven by Light Sources & Electronics and
Professional Lighting Solutions. Sales of energy-efficient
Green Products exceeded EUR 5,343 million, or 72% of sector
sales.
EBITA increased from EUR 293 million, or 4.3% of sales, in
2014 to EUR 594 million, or 8.0% of sales in 2015.
Restructuring and acquisition-related charges amounted to
EUR 99 million in 2015, compared to EUR 245 million in 2014.
EBITA in 2015 also included EUR 14 million of charges related
to the devaluation of the Argentine peso, while 2014 included
a EUR 13 million past-service pension cost gain and EUR 68
million of impairment and other charges related to industrial
assets. The increase in EBITA was mainly attributable to
lower restructuring and acquisition-related charges, cost
productivity and improved LED gross margins.
EBIT amounted to EUR 486 million, or 6.6% of sales, which
included EUR 108 million of amortization charges, mainly
related to acquired intangible assets at Professional Lighting
Solutions.
Net operating capital increased by EUR 175 million to EUR 3.8
billion. The current-year increase was mainly due to currency
translation effects.
Cash flows before financing activities increased from EUR
442 million in 2014 to EUR 642 million due to higher earnings
and a decrease in working capital.
Philips Lighting
Sales per geographic cluster in millions of EUR
2011 - 2015
Philips Lighting
Sales and net operating capital1) in billions of EUR
2011 - 2015
5.0
6.6
4.6
7.3
4.5
7.1
3.6
6.9
3.8
7.4
Net operating capital
Sales
‘11
‘12
‘13
‘14
‘15
1) For a reconciliation to the most directly comparable GAAP measures,
see chapter 15, Reconciliation of non-GAAP information, of this Annual
Report
Philips Lighting
EBIT and EBITA1) in millions of EUR
2011 - 2015
8.1%
8.0%
EBITA as a % of sales
0.9%
4.3%
580
413
167
69
147
(78)
594
EBITA in value
293
185
108
486
108
EBIT in value
Amortization and
impairment in value
5.0%
330
769
(439)
7,303
7,145
7,411
6,869
‘11
‘12
‘13
‘14
‘15
2,853
234
2,891
2,687
2,986
Growth
1) For a reconciliation to the most directly comparable GAAP measures,
see chapter 15, Reconciliation of non-GAAP information, of this Annual
Report
213
198
207
Other mature
6.3.5 Delivering on EcoVision sustainability
6,608
2,492
224
1,832
commitments
Early in 2015, Philips Lighting engaged in a ‘Light as a
Service’ business arrangement with Amsterdam Airport
Schiphol. Under the terms of this agreement Philips will
retain ownership of the lighting equipment and
Schiphol will pay for the light used. The project will
utilize LED-based products that will deliver 50% energy
savings relative to legacy lighting. Light as a Service is
starting to gain traction in the market as a new business
model, because it offers state-of-the-art lighting
hassle-free, does not require any customer investment,
provides energy efficiency (lower CO2 emissions), and
supports the circular economy (less waste to landfill).
1,991
1,827
1,779
2,030
North America
2,060
2,225
2,214
2,205
2,188
Western Europe
‘11
‘12
‘13
‘14
‘15
58
Annual Report 2015
Within the framework of the Green Operations 2015
program, Philips Lighting has reduced its carbon
footprint in manufacturing (scope 1 and 2 emissions) by
approximately 58% since the baseline year of 2007. In
2015, 85% of our total industrial waste was re-used as
a result of recycling. In December 2015, while speaking
at COP 21 in Paris, Eric Rondolat announced Philips’
commitment to making its operations carbon-neutral
by 2020, both for Royal Philips and for Philips Lighting.
6.3.6 2016 and beyond
In September 2014, Philips announced its plan to
sharpen its strategic focus by establishing two stand-
alone companies focused on the HealthTech and
Lighting opportunities respectively. We have
established a stand-alone structure for Philips Lighting
within the Philips Group, effective February 1, 2016. We
expect to be able to announce the separation of the
Lighting business in the first half of 2016, subject to
market conditions and other relevant circumstances. As
previously stated, we are reviewing all strategic options
for Philips Lighting, including an initial public offering
and a private sale.
From an external financial reporting perspective, it
should be noted that Royal Philips will introduce new
segment reporting, from Q1 2016 onwards. The Lighting
segment will represent the Philips Lighting businesses
and include the relevant allocation of the current
Innovation, Group & Services. For more details on the
new segment reporting in 2016 and onwards, please
refer to the introduction of Sector performance.
Further updates will be provided in the course of 2016.
Sector performance 6.3.5
Annual Report 2015
59
Sector performance 6.4
6.4 Innovation, Group & Services
• Philips moved its North American Research
organization to the Cambridge, Mass. area to benefit
from the vibrant innovation ecosystem and to
facilitate collaboration with Massachusetts Institute
of Technology (MIT), academic hospitals, and
business partners. Also the new site will be truly
interdisciplinary, co-locating various functions like
upstream marketing, strategy, design, digital
accelerator, and early-stage ventures.
• Philips became the second-largest patent applicant
in the world for patents filed at the European Patent
Office (EPO).
• Philips Design celebrated 90 years of design legacy
with a record-breaking 156 design awards.
Introduction
In 2015, Innovation, Group & Services comprised the
activities of Philips Group Innovation, Group
headquarters, including country and regional
management, and certain costs of pension and other
post-retirement benefit plans. Additionally, the global
shared business services for procurement, finance,
human resources, IT and real estate are reported in this
sector.
6.4.1 About Innovation, Group & Services in 2015
Philips Group Innovation
At Philips, our innovation efforts are closely aligned
with our business strategy. Philips Group Innovation
(PGI) feeds the innovation pipeline, enabling its
business partners – the Philips operating businesses –
to create new business options through new
technologies, new business creation, and intellectual
property management and development. Focused
research and development improvement activities
drive time-to-market efficiency and increased
innovation effectiveness.
PGI boosts innovation from idea to product as co-
creator and strategic partner for the Philips businesses
and complementary Open Innovation ecosystem
partners. It does so through cooperation between
research, design, marketing, strategy and businesses in
interdisciplinary teams along the innovation chain, from
front-end to first-of-a-kind product development. In
addition, PGI opens up new value spaces beyond the
direct scope of current businesses (Emerging Business
Areas), manages the Company-funded R&D portfolio,
and creates synergies for cross-sector initiatives.
PGI encompasses Philips Research, Philips Innovation
Services, the Philips Innovation Campus in Bangalore,
the Philips Innovation Center Shanghai, the Philips
Innovation Labs in Cambridge (USA), the Philips Africa
Innovation Hub, Philips Design, the Philips HealthTech
Incubator, and the Emerging Business Areas. In total,
PGI employs some 5,000 professionals around the
globe.
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Annual Report 2015
PGI actively participates in Open Innovation through
relationships with academic and industrial partners, as
well as via European and regional projects, in order to
improve innovation effectiveness and efficiency,
capture and generate new ideas, enhance technology
partnering capabilities, and share the related financial
exposure. The High Tech Campus in Eindhoven
(Netherlands), the Philips Innovation Campus in
Bangalore (India), the Philips Innovation Center in
Shanghai (China) and the Philips Cambridge Innovation
Labs (USA) are prime examples of environments
enabling Open Innovation.
Through Open Innovation, Philips seeks to apply new
thinking to solving major societal issues. A great
example is the five-year alliance between Philips
Research and Massachusetts Institute of Technology
(MIT) aimed at speeding up advancements in health
technology solutions to help address society’s most
pressing challenges in healthcare, as well as digital
connected lighting systems to address the need to
make cities more livable and sustainable. With a total
budget of USD 25 million for the five-year term, this is
the largest research alliance undertaken by the
company in the region. Philips researchers will be
collaborating intensely with MIT faculty and PhD
students on jointly defined research programs and
Open Innovation projects.
Philips Research
Philips Research is the main partner of Philips’
operating businesses for technology-enabled
innovation. It creates new technologies and the related
intellectual property, which enables Philips to grow in
businesses and markets. Together with the 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 aligned with
Philips’ vision and strategy and inspired by unmet
customer needs as well as major societal challenges.
In the area of Healthcare, we continue to engage with
customers in novel ways to discover unmet needs and
co-create solutions with our partners. The Digital
Accelerator and the recently opened HealthSuite Lab
at the High Tech Campus in Eindhoven, for example,
enable us to fast-track the development and execution
of new care models and solutions, together with
partners and customers such as hospital networks,
supported by the latest digital technologies and rapid
prototyping. Through research partnerships, such as
our agreements with Stockholm County Council and
Karolinska University Hospital, researchers from
different industries, hospitals and academia are
brought together to facilitate closer links between the
delivery of care and clinical research.
In the area of Lighting, we remain highly focused on
offering solutions across the lighting value chain,
including software, controls, luminaires, light sources
and modules. We are shifting our lighting portfolio from
individual products towards connected LED lighting
systems and services, LED luminaires and LED lamps
for the professional and consumer markets. In close
collaboration with the US Department of Defense/US
Army Base Fort Sill (Oklahoma) in North America,
Philips Research demonstrated how the use of
advanced LED light sources and smart lighting controls
can result in substantial energy and cost savings while
improving the quality of light in terms of color rendering
and brightness. The initiative was honored with the
ESTCP (Environmental Security Technology
Certification Program) 2015 ‘Project of the Year Award’
for Energy and Water.
Philips Innovation Services
Philips Innovation Services offers a wide range of expert
services in development, realization & consulting.
Innovation Services’ skills are leveraged by Philips
Businesses, Markets and Philips Group Innovation in all
regions.
Together with Research and a new dedicated
Connected Digital Proposition team, Innovation
Services has helped realize various connected products
as part of personal health programs launched at IFA in
Berlin – the health watch, blood pressure monitor, body
analysis scale and ear thermometer – as well as the
recently announced cooperation with Charité –
Universitätsmedizin Berlin on preventing delirium in
critical care with lighting and acoustics concepts.
Philips Innovation Services also supported projects
such as Philips LifeLight, the new zero-energy, solar-
powered LED lighting range designed for homes in off-
grid rural and semi-urban communities, as part of
Philips’ drive to deliver innovations that are locally
relevant.
Philips Innovation Campus Bangalore
Philips Innovation Campus Bangalore (PIC) hosts
activities from most of our operating businesses, Philips
Research, Design, IP&S, and IT. Healthcare is the largest
R&D organization at PIC, with activities in Imaging
Systems, Patient Care & Monitoring Solutions, and
Healthcare Informatics, Solutions & Services. While PIC
originally started as a software center, it has since
developed into a broad product development center
(including mechanical, electronics, and supply chain
capabilities). Several Healthcare businesses have also
located business organizations focusing on growth
geographies at PIC.
Philips Innovation Center Shanghai
Philips Research China is Philips’ second-largest
research lab globally. The organization has staff
working in the Healthcare, Consumer Lifestyle and
Lighting programs and cooperates extensively with
Sector performance 6.4.1
Philips labs across the world. Research China anchors
our broader commitment to our Shanghai R&D campus
as an innovation hub.
Philips Cambridge Innovation Labs (USA)
The new Philips Cambridge Innovation Labs that
opened in October 2015 are situated in the hub of the
Cambridge/Boston ecosystem. The labs are the new
home to approximately 100 Philips Research North
America employees and another 150 Philips employees
from other innovation functions and ventures. Being
within close proximity to the MIT campus allows
researchers to collaborate easily with MIT faculties and
PhD students on jointly defined research programs, as
well as to participate in Open Innovation projects. The
joint teams are working on advancements in healthcare
and connected lighting systems
Philips Africa Innovation Hub
The Philips Africa Innovation Hub in Nairobi, Kenya,
creates locally relevant innovations ‘in Africa, for Africa’,
with particular focus on improving access to lighting
and affordable healthcare. The Africa Innovation Hub is
a collaboration between Philips Group Innovation and
Philips’ Africa market organization.
Philips Design
Celebrating its 90th anniversary in 2015, Philips Design
is the global design function for the company, ensuring
that innovations are meaningful, people-focused and
locally relevant. The Design group is also tasked with
ensuring that the Philips brand experience is
differentiating, consistently expressed and drives
customer preference.
Philips Design partners with the Philips businesses,
Group Innovation and functions, championing a
multidisciplinary co-create approach that brings teams
together to understand the different factors that
influence how a new product or solution will appear,
perform and behave. Philips Design is widely
recognized as a world leader in design and in 2015
alone received 156 design awards, including the IDSA
silver award for the Connected NICU (Neo-Natal
Intensive Care Unit), a concept aimed at supporting
family-centered and developmental care, improved
parental experience, long-term development and
quality of life for pre-term babies.
Increasingly we are leveraging our design capabilities
and processes to work directly with our customers and
our customer-facing teams. For example, the long-
term deals announced in 2015 with Mackenzie Health
in Canada and Westchester Medical Center include
innovation and design consulting. Innovating directly
with our customers enables Philips Design to deliver
people-focused improvements that optimize the
patient experience and overall performance of their
healthcare systems across the health continuum.
Annual Report 2015
61
Sector performance 6.4.1
Philips Healthcare Incubator
The Philips Healthcare Incubator is a group dedicated
to identifying, developing and bringing breakthrough
products and services to market that will drive the future
of healthcare. One of the ventures is Digital Pathology
Solutions, which empowers pathologists with a
complete connected digital pathology solution that is
designed to optimize productivity and workflow, and
ultimately to improve the quality of diagnosis.
Another venture is Handheld Diagnostics, with its
Minicare proposition, which provides direct diagnostic
information at the patients’ bedside, enabling
physicians to make medical decisions on the spot.
Based on innovative technologies, we have designed
easy-to-use, patient-centric IVD (in-vitro diagnostics)-
enabled solutions and connected services that have the
potential to revolutionize health management and
improve existing workflows. The Home Clinical
Monitoring venture performs remote monitoring to
support patients during chemotherapy. Finally, the
acquisition of the Danish medical technology company
Unisensor led to the establishment of Philips Biocell,
which has released the oCelloScope System, an
analytical instrument that is, among other applications,
used within microbiological studies on a research
application basis.
Philips Emerging Business Areas
Philips Emerging Business Areas identify, create and
grow new activities that are outside the scope of the
current operating businesses. The portfolio is managed
on a venturing basis. The opportunities and business
models identified by the individual new business
activities determine the approach to commercial
partnerships, sourcing of technology, and platforms to
reach customers. Current examples of successful new
solution businesses or enablers for these include
Horticulture LED Solutions*, Light for Health,
Photonics, Wearable Sensing Technologies, Elder Care
Solutions and Mental Vitality.
Philips Horticulture LED Solutions stands for solutions
that improve growers’ business performance. With
customized ‘light recipes’ we can help optimize crop
yield and quality. We combine crop growth knowledge
and technology, and value long-term partnerships in
business and research. Hundreds of projects have been
realized in different regions in different segments. In
July 2015, Philips CEO Frans van Houten opened the
state-of-the-art GrowWise Center at the High Tech
Campus in Eindhoven, the Netherlands. Research being
conducted by Philips will provide tailor-made LED light
recipes, making it possible for producers to increase
their yields and grow tasty and healthy food indoors all
year round, while reducing waste, limiting food miles
and using practically no land or water.
Leveraging its advanced understanding of the
biological effects of light, a team of Philips Light for
Health researchers, collaborating with leading research
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Annual Report 2015
institutions and hospitals, has developed a number of
products like Philips BlueControl, which feature LED
light and offer proven medical benefits.
Philips Photonics is a global leader in VCSEL
technology and designs, manufactures, markets and
sells VCSEL-based solutions for data communications,
consumer and industrial applications. VCSELs are LED-
like lasers enabling applications like gesture control,
environmental sensing, precise scene illumination for
surveillance cameras, and ultra-fast data
communication. Philips Photonics has enabled the
introduction of laser-based PC mice and high-bit-rate
active optical cables, as well as introducing VCSEL-
based solutions for industrial processing of plastic
materials.
* Philips Horticulture LED Solutions will move to Philips
Lighting in 2016.
Philips Intellectual Property & Standards
Philips IP&S proactively pursues the creation of new
Intellectual Property (IP) in close co-operation with
Philips’ operating businesses and Philips Group
Innovation. IP&S is a leading industrial IP organization
providing world-class IP solutions to Philips’
businesses to support their growth, competitiveness
and profitability.
Philips’ IP portfolio currently consists of 76,000 patent
rights, 47,000 trademarks, 91,000 design rights and
5,000 domain names. Philips filed 1,750 patents in 2015,
with a strong focus on the growth areas in health and
well-being.
IP&S participates in the setting of standards to create
new business opportunities for the Philips operating
businesses. A substantial portion of revenue and costs
is allocated to the operating businesses. Philips
believes its business as a whole is not materially
dependent on any particular patent or license, or any
particular group of patents and licenses.
Group and Regional Costs
Group and Regional organizations support the creation
of value, connecting Philips with key stakeholders,
especially our employees, customers, governments
and society. These organizations include the Executive
Committee, Brand Management, Sustainability, New
Venture Integration, the Group functions related to
strategy, human resources, legal and finance, as well as
country and regional management.
Accelerate! investments
Innovation, Group & Services plays an important role in
the Accelerate! program, notably by helping to improve
the end-to-end value chain. The End2End approach
consists of three core processes: Idea-to-Market,
Market-to-Order, and Order-to-Cash. Innovation,
Group & Services supports a more efficient and effective
Idea-to-Market process in five focal areas: speeding up
time-to-market, portfolio optimization, driving
Sector performance 6.4.1
breakthrough innovation, improving innovation
competencies, and strengthening the position of
Philips as an innovation leader.
EBITA at Group Innovation was a EUR 25 million higher
net cost than in 2014, mainly due to higher investments
in emerging business areas.
EBITA at Group and Regional costs were EUR 364
million lower than in 2014, reflecting EUR 183 million
related to the separation of the Lighting business and
higher charges mainly related to information security
and Quality & Regulatory.
Accelerate! investments amounted to EUR 113 million in
2015 and included investments in IT infrastructure,
internal departments and external consultancy
dedicated to the Accelerate! program.
EBITA at Pensions amounted to a net cost of EUR 355
million and represents costs related to deferred
pensioners covered by company plans. 2015 included
charges of EUR 345 million related to pension de-
risking settlements.
EBITA at Service Units and Other increased from a loss
of EUR 415 million in 2014 to a gain of EUR 56 million in
2015. The increase of EUR 471 million was largely due
to lower restructuring costs and CRT antitrust litigation
charges reported in 2014.
Net operating capital improved to negative EUR 3.4
billion, mainly due to a decrease in provisions.
Cash flows before financing activities decreased from
an outflow of EUR 1,586 million in 2014 to an outflow of
EUR 2,086 million.
6.4.3 2016 and beyond
From an external financial reporting perspective, it
should be noted that Royal Philips will introduce new
segment reporting from Q1 2016 onwards. The current
Innovation, Group & Services will be split and allocated
to the segments of Royal Philips and Philips Lighting.
The remaining unallocated corporate items will contain
certain legacy items and separation costs. For more
details on the new segment reporting in 2016 and
onwards, please refer to the introduction of chapter 6,
Sector performance, of this Annual Report.
Further updates will be provided in the course of 2016.
Pensions
Pensions manage and oversee post-employment
benefits of all Philips employees.
Service Units and Other
Service Units and Other provide shared functional
services to businesses in areas such as IT, Real Estate
and Accounting, thereby helping to drive global cost
efficiencies.
6.4.2 2015 financial performance
Philips Innovation, Group & Services
Key data in millions of EUR unless otherwise stated
2013 - 2015
Sales
Sales growth
2013
2014
2015
665
605
574
% increase (decrease), nominal
6%
(9)%
(5)%
% increase (decrease),
comparable1)
EBITA of:
Group Innovation
IP Royalties
Group and regional costs
Accelerate! investment
Pensions
Service units and other
EBITA 1)
EBIT
0%
(12)%
5%
(134)
312
(175)
(137)
(41)
(124)
(299)
(302)
(197)
299
(205)
(131)
(12)
(415)
(661)
(675)
(222)
284
(569)
(113)
(355)
56
(919)
(934)
Net operating capital (NOC)1)
(2,922)
(3,718)
(3,382)
Cash flows before financing
activities1)
(2,140)
(1,586)
(2,086)
Employees (in FTEs)
12,703
13,853
14,233
1) For a reconciliation to the most directly comparable GAAP measures,
see chapter 15, Reconciliation of non-GAAP information, of this Annual
Report
In 2015, sales amounted to EUR 574 million, and were
mainly related to IP Royalties. Sales were EUR 31 million
lower than in 2014, mainly due to the divestment of the
OEM remote control business, partly offset by higher
sales at Philips’ emerging businesses such as Digital
Pathology and Photonics.
EBITA amounted to a net cost of EUR 919 million,
compared to EUR 661 million in 2014. EBITA in 2015
included a EUR 20 million net release of restructuring
charges, compared to EUR 113 million restructuring
charges in 2014. EBITA in 2015 also included charges of
EUR 183 million related to the separation of the Lighting
business, EUR 345 million mainly related to settlements
for pension de-risking, and a EUR 37 million gain related
to the sale of real estate assets. EBITA in 2014 included
EUR 244 million of charges related to the CRT
settlement and a EUR 27 million past-service pension
cost gain.
Annual Report 2015
63
Risk management 7
7 Risk management
7.1 Our approach to risk management
and business control
The following section presents an overview of Philips’
approach to risk management and business controls and a
description of the nature and the extent of its exposure to
risks. Philips’ risk management focuses on the following risk
categories: Strategic, Operational, Compliance and
Financial risks. These categories are further described in
section 7.2, Risk categories and factors, of this Annual
Report. The risk overview highlights the main risks known
to Philips, which could hinder it in achieving its strategic and
financial business objectives. The risk overview may,
however, not include all the risks that may ultimately affect
Philips. Some risks not yet known to Philips, or currently
believed not to be material, could ultimately have a major
impact on Philips’ businesses, objectives, revenues, income,
assets, liquidity or capital resources.
All forward-looking statements made on or after the date
of this Annual Report and attributable to Philips are
expressly qualified in their entirety by the factors described
in the cautionary statement included in chapter 19,
Forward-looking statements and other information, of this
Annual Report and the overview of risk factors described in
section 7.2, Risk categories and factors, of this Annual
Report.
Risk management and controls forms an integral part of the
business planning and review cycle. The company’s risk and
control policy is designed to provide reasonable assurance
that objectives are met by integrating management control
into the daily operations, by ensuring compliance with legal
requirements and by safeguarding the integrity of the
company’s financial reporting and its related disclosures. It
makes management responsible for identifying the critical
business risks and for the implementation of fit-for-
purpose risk responses. Philips’ risk management 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, among other things, solid internal controls and high
ethical standards.
The quality of Philips’ systems of business controls and the
findings of internal and external audits are reported to and
discussed by the Audit Committee of the Supervisory Board.
Internal auditors monitor the quality of the business
controls through risk-based operational audits, inspections
of financial reporting controls and compliance audits. Audit
& Risk committees at group level (Group, Finance and IT)
64
Annual Report 2015
and at Business Group, Market and Function level meet
quarterly to address weaknesses in the business controls
infrastructure as reported by internal and external auditors
or revealed by self-assessment of management, and to take
corrective action where necessary. These Audit & Risk
committees are also involved in determining the desired
company-wide internal audit planning as approved by the
Audit Committee of the Supervisory Board. Whilst
recognizing the responsibilities of the Audit Committee, the
Supervisory Board also established the Quality and
Regulatory Committee in 2015. The Q&R Committee assist
the Supervisory Board in fulfilling its oversight
responsibilities particularly in respect of the quality of the
Company’s products, systems, services and software and
the development, testing, manufacturing, marketing and
servicing thereof, and regulatory requirements relating
thereto. As such, the establishment of the Q&R Committee
supports the Company’s risk management in the relevant
risk areas. An in-depth description of Philips’ corporate
governance structure can be found in chapter 11, Corporate
governance, 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 integrated
management control of the company’s operations, in order
to ensure the integrity of the financial reporting, as well as
compliance with laws and regulations. Philips has designed
its BCF based on the “Internal Control-Integrated
Framework (2013)” established by the Committee of
Sponsoring Organizations of the Treadway Commission
(COSO). Philips continuously evaluates and improves BCF
to align with business dynamics and good practice.
As part of the BCF, Philips has implemented a global
standard for internal control over financial reporting (ICS).
The ICS, together with Philips’ established accounting
procedures, is designed to provide reasonable assurance
that assets are safeguarded, that the books and records
properly reflect transactions necessary to permit preparation
of financial statements, that policies and procedures are
carried out by qualified personnel and that published
financial statements are properly prepared and do not
contain any material misstatements. ICS has been deployed
in all material reporting units, where business process owners
perform an extensive number of controls, document the
results each quarter, and take corrective action where
necessary. ICS supports business and functional
management in a quarterly cycle of assessment and
monitoring of its control environment. The findings of
management’s evaluation are reported to the Executive
Committee and the Supervisory Board quarterly.
As part of the Annual Report process, management’s
accountability for business controls is enforced through the
formal issuance of a Statement on Business Controls and a
Letter of Representation by Business Group, Market and
Functional management to the Executive Committee. Any
deficiencies noted in the design and operating
effectiveness of controls over financial reporting which
were not completely remediated are evaluated at year-end
by the Board of Management. The Board of Management’s
report, including its conclusions regarding the effectiveness
of internal control over financial reporting, can be found in
section 12.1, Management’s report on internal control, of this
Annual Report.
Philips General Business Principles
The Philips General Business Principles (GBP) incorporate
the fundamental principles for all Philips businesses. They
set the standard for business conduct, both for individual
employees and for the company itself. They also provide a
reference for the business conduct we expect from our
business partners and suppliers. Translations are available
in 32 languages, allowing almost every employee to read
the GBP in their native language. Detailed underlying
policies, manuals, training and tools are in place to give
employees practical guidance on how to apply the GBP in
their day-to-day work.
In addition, there are separate Codes of Ethics that apply
to employees working in specific areas of our business, i.e.
the Procurement Code of Ethics and the Financial Code of
Ethics. Details can be found at: www.philips.com/gbp.
In a continued effort to raise GBP awareness and create
engagement, every year a GBP communications and
training plan is deployed. In 2015, over the course of several
communication waves, employees were informed about a
variety of GBP topics, the Philips Ethics Line, the Business
Integrity Survey, and the deployment of e-learnings on the
GBP and related legal compliance topics. The mandatory
GBP e-learning, which was launched in October, has been
sent to all employees with a Philips e-mail account.
The GBP form an integral part of labor contracts in virtually
every country in which Philips operates. It is the
responsibility of each employee to live up to our GBP, and
employees are requested to state their commitment after
having completed the GBP e-training. In addition, each year
the relevant employees are asked to sign off on the
Financial and the Supply Management Codes of Ethics, and
all executives are asked to sign off on the General Business
Principles to confirm their awareness and compliance with
the respective codes.
The GBP Review Committee is responsible for the
effective deployment of the GBP. The GBP Review
Committee is a virtual body chaired by the Chief Legal
Officer, and its members include the Chief HR Officer,
the Chief Market Leader and the Chief Financial Officer.
They are supported by a secretariat and a network of
GBP compliance Officers in all countries and at all major
sites where Philips has operations. Related roles and
responsibilities are laid down in the Charter of the GBP
Review Committee. In December 2015 the GBP Review
Committee adopted a revised charter. These revisions
were deemed necessary in view of the external
Risk management 7.1
regulatory developments in business ethics and
compliance and they have an impact on the
composition of the GBP Review Committee, the roles
and responsibilities of its members as well as the
composition, roles and responsibilities of the GBP
Compliance function. Deployment of this revised
charter will follow in 2016.
The GBP are supported by mechanisms that ensure
standardized reporting and escalation of concerns.
These mechanisms are based on the GBP Reporting
policy that urges employees to report any concerns
they may have regarding business conduct in relation
to the GBP either through a GBP Compliance Officer or
through the Philips Ethics Line. The Philips Ethics Line
enables employees and, as of March 2015, also third
parties to report a concern either by telephone or online
via a web intake form. All concerns raised are registered
consistently in a single database and are investigated
in accordance with standardized investigation
procedures.
As part of the Philips Business Control Framework, a
GBP self-assessment process is fully embedded in an
automated workflow application, which helps
management to monitor the internal controls. With the
GBP self-assessment forming part of ICS, GBP
compliance necessarily forms part of management’s
quarterly ICS/SOx (Sarbanes-Oxley) monitoring
process. Management of each business unit signs off on
compliance with the GBP, with this confirmation
forming part of the annual Statement on Business
Controls. Non-compliance issues are highlighted and, if
significant, they are reported to the Executive
Committee through the Quarterly Certification
Statement process.
The results from the monitoring facilities that are in
place are given in chapter 14, 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 senior management in
the Philips Finance Leadership Team who head the
Finance 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 were considered
necessary and no changes have been made to the
Financial Code of Ethics since its adoption and no
waivers have been granted therefrom to the officers
mentioned above in 2015.
For more information, please refer to sub-section 5.2.7,
General Business Principles , of this Annual Report.
Annual Report 2015
65
Risk management 7.2
7.2 Risk categories and factors
Risks categories
Risks
Strategic
Operational
Compliance
Financial
• Macroeconomic changes
• Changes in industry/market
• Growth of emerging
markets
• Joint ventures
• Acquisitions
• Intellectual property rights
• Transformation programs
• Innovation process
• Intellectual Property
• Supply chain
• IT
• People
• Product quality and liability
• Reputation
• Legal
• Market practices
• Regulatory
• General Business Principles
• Internal controls
• Data privacy/Product
security
• Treasury
• Tax
• Pensions
• Accounting and reporting
Corporate Governance
Philips Business Control Framework
Philips General Business Principles
Taking risks is an inherent part of entrepreneurial behavior. A
structured risk management process allows management to
take risks in a controlled manner. In order to provide a
comprehensive view of Philips’ business activities, risks and
opportunities are identified in a structured way combining
elements of a top-down and bottom-up approach. Risks are
reported on a regular basis as part of the ‘Business
Performance Management’ process. All relevant risks and
opportunities are prioritized in terms of impact and
likelihood, considering quantitative and/or qualitative
aspects. The bottom-up identification and prioritization
process is supported by workshops with the respective
management at Business, Market and Group Function level.
During 2015, several risk management workshops were held.
The top-down element allows potential new risks and
opportunities to be discussed at management level and
included in the subsequent reporting process, if found to be
applicable. Reported risks and opportunities are analyzed for
potential cumulative effects and are aggregated at Business,
Market and Group level. In line with the above, amongst
others, the following actions were performed during 2015:
• In 2015 the Supervisory Board established the Quality and
Regulatory Committee. The establishment of the Q&R
Committee further strengthens Philips’ risk management
efforts in respect of the quality of Philips’ products,
systems, services and software and the development,
testing, manufacturing, marketing and servicing thereof.
• As per February 2015, Philips acquired 100% of US-
based Volcano Corporation. Similarly, in the second
half of 2014 the Philips acquired 51% of Saudi-based
General Lighting Company (GLC). Philips successfully
integrated Volcano and GLC into the Philips Business
Control Framework in the course of 2015.
• As a next phase in the Accelerate! program, Philips
announced in 2014 its plan to establish two stand-
alone companies focused on the HealthTech and the
Lighting opportunities respectively. The separation
risk was described as from 2014 (refer to section 7.7,
Separation risk, of this Annual Report) and in 2015 we
have paid particular attention to risks related to the
separation as this is a very complex process.
• Philips had substantial defined benefit pension plans
which carry financial risk. During 2015 the Company
further de-risked pension exposure by means of
settling the Dutch, UK and (partly) US defined benefit
pension plans.
• The challenging global economic developments had
an impact on our results. Even though the managing
of risks related to these developments did not change
compared to 2014, we continuously monitor the
impact on our risk profile.
Philips has a structured risk management process to address
different risk categories: Strategic, Operational, Compliance
and Financial risks. Risk appetite is different for the
various risk categories:
• Strategic risks and opportunities may affect Philips’
strategic ambitions. Strategic risks include economic
and political developments and anticipating and
timely responding to market circumstances. Philips is
prepared to take considerable strategic risks given
the necessity to invest in research & development
and manage the portfolio of businesses, including
acquisitions and divestments, in a highly uncertain
global political and economic environment.
• Operational risks include adverse unexpected
developments resulting from internal processes,
people and systems, or from external events that are
linked to the actual running of each business
(examples are solution and product creation, and
supply chain management). Philips aims to minimize
downside risks due to the need for high quality of its
products and services, reliable IT systems and
sustainability commitments.
• Compliance risks cover unanticipated failures to
implement, or comply with, appropriate laws,
regulations, policies and procedures. Philips has a
zero tolerance policy towards non-compliance in
relation to breaches of its GBP.
• Within the area of Financial risks, Philips identifies
risks related to Treasury, Accounting and reporting,
Pensions and Tax. Philips does not classify these risk
categories in order of importance. Separation risk is
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Annual Report 2015
covered in section 7.7, Separation risk, of this Annual
Report. Philips is prudent with regard to financial risks
and the risk appetite is embedded in various chapters
of this annual report, including note 31, Details of
treasury / other financial risks.
Philips describes the risk factors within each risk category in
order of Philips’ current view of expected significance, to give
stakeholders an insight into which risks and opportunities it
considers more prominent than others at present. The risk
overview highlights the main risks and opportunities known
to Philips, which could hinder it in achieving its strategic and
financial business objectives. The risk overview may,
however, 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.
7.3 Strategic risks
As Philips’ business is global, its operations are exposed
to economic and political developments in countries
across the world that could adversely impact its
revenues and income.
Philips’ business environment is influenced by political
and economic conditions in the domestic and global
markets. Philips experienced the impact from changes
in macro-economic development in various
geographies during 2015 in particular in China where
economic growth was at the lowest level in the last 25
years. This has triggered interventions by the Chinese
government on the official exchange rate of the Chinese
Renminbi. Also the economic growth of countries highly
dependent on revenues from energy, raw materials and
commodities has been adversely affected by the
slowdown of growth in China, most strongly in
emerging market countries. Monetary interventions by
the European Central Bank have not yet resulted in an
increase of inflation nor in stronger economic growth in
the European Union. The disparate macroeconomic
outlook for the main geographies, political conflicts and
the unknown impact of Eurozone monetary policy
continues to provide uncertainty on the levels of capital
expenditures in general, unemployment levels and
consumer and business confidence, which could
adversely affect demand for products and services
offered by Philips. These economic conditions may
have an adverse effect on financial markets which could
affect the ability of Philips to sell off strategic
divestments at reasonable price levels or within a
reasonable period of time.
Risk management 7.2
The general global political environment remains
unfavorable for the business environment due to a rise in
political conflicts and terrorism. Numerous other factors, such
as sustained lower levels of energy and raw material prices,
regional political conflicts in the Middle East, Russia and
Ukraine and other regions, as well as large-scale
(in)voluntary migration and profound social instability could
continue to impact macroeconomic factors and the
international capital and credit markets. Economic growth
and the business environment in the European Union may
be adversely affected by potential exits from the Eurozone
(Greece), exits from the European Union (Great Britain) or
secession of regions from European countries (e.g. Cataluña
and Scotland). Economic and political uncertainty may have
a material adverse impact on Philips’ financial condition or
results of operations and can also make it more difficult for
Philips to budget and forecast accurately. Philips may
encounter difficulty in planning and managing operations
due to the lack of adequate infrastructure and unfavorable
political factors, including unexpected legal or regulatory
changes such as foreign exchange import or export controls,
increased healthcare regulation, nationalization of assets or
restrictions on the repatriation of returns from foreign
investments. Given that growth geographies are increasingly
important in Philips’ operations, the above-mentioned risks
are also expected to grow and could have a material adverse
effect on Philips’ financial condition and operating results.
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.
Fundamental shifts in the industry, like the transition
from traditional lighting to LED lighting, may drastically
change the business environment. If Philips is unable to
recognize these changes in good time, is late in
adjusting its business models, or if circumstances arise
such as pricing actions by competitors, then this could
have a material adverse effect on Philips’ growth
ambitions, financial condition and operating result.
Philips’ overall performance in the coming years is
dependent on realizing its growth ambitions in growth
geographies.
Growth geographies are becoming increasingly important in
the global market. In addition, Asia is an important
production, sourcing and design center for Philips. Philips
faces strong competition to attract the best talent in tight
labor markets and intense competition from local companies
as well as other global players for market share in growth
geographies. Philips needs to maintain and grow its position
in growth geographies, invest in local talents, understand
developments in end-user preferences and localize the
portfolio in order to stay competitive. If Philips fails to achieve
this, then this could have a material adverse effect on growth
ambitions, financial condition and operating result.
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Risk management 7.3
The growth ambitions of Philips may be adversely
affected by economic volatility inherent in growth
geographies and the impact of changes in
macroeconomic circumstances on growth economies.
Philips may not control joint ventures or associated
companies in which it invests, which could limit the
ability of Philips to identify and manage risks.
of factors, including innovation. The value of the IP
portfolio is dependent on the successful promotion and
market acceptance of standards developed or co-
developed by Philips. This is particularly applicable to
Consumer Lifestyle where third-party licenses are
important and a loss or impairment could have a
material adverse impact on Philips’ financial condition
and operating results.
Philips has invested or will invest in joint ventures and
associated companies in which Philips will have a non-
controlling interest. In these cases, Philips has limited
influence over, and limited or no control of, the
governance, performance and cost of operations of
joint ventures and associated companies. Some of
these joint ventures and associated companies may
represent significant investments. The joint ventures
and associated companies that Philips does not control
may make business, financial or investment decisions
contrary to Philips’ interests or decisions different from
those, which Philips itself may have made. Additionally,
Philips partners or members of a joint venture or
associated company may not be able to meet their
financial or other obligations, which could 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.
Acquisitions could expose Philips to integration risks
and challenge management in continuing to reduce the
complexity of the company.
Philips’ acquisitions may continue to expose Philips in the
future to integration risks in areas such as sales and service
force integration, logistics, regulatory compliance,
information technology and finance. Integration difficulties
and complexity may adversely impact the realization of an
increased contribution from acquisitions. Philips may incur
significant acquisition, administrative and other costs in
connection with these transactions, including costs related
to the integration of acquired businesses.
Furthermore, organizational simplification and resulting cost
savings may be difficult to achieve. Acquisitions may also
lead to a substantial increase in long-lived assets, including
goodwill. Write-downs of these assets due to unforeseen
business developments may have a material adverse effect
on Philips’ earnings, particularly in Healthcare and Lighting,
which have significant amounts of goodwill (see also note 11,
Goodwill).
Philips’ inability to secure and retain intellectual
property rights for products, whilst maintaining overall
competitiveness, could have a material adverse effect
on its results.
Philips is dependent on its ability to obtain and retain
licenses and other intellectual property (IP) rights
covering its products and its design and manufacturing
processes. The IP portfolio is the result of an extensive
patenting process that could be influenced by a number
7.4 Operational risks
Transformation programs
In 2011 Philips started a very extensive transformation
program (Accelerate!) to unlock Philips’ full potential.
Accelerate! spans a time period of several years. In 2014
as a next phase in the Accelerate! transformation
program Philips announced its plan to sharpen its
strategic focus by establishing two stand-alone
companies focused on the HealthTech and Lighting
opportunities respectively. Failure to achieve the
objectives of the transformation programs may have a
material adverse effect on the mid-term and long-term
financial targets.
In addition, the transformation program of the Finance
function may expose Philips to adverse changes in the
quality of its systems of internal control.
Failure to achieve improvements in Philips’ solution and
product creation process and/or increased speed in
innovation-to-market could hamper Philips’ profitable
growth ambitions.
Further improvements in Philips’ solution and product
creation process, ensuring timely delivery of new
solutions and products at lower cost and upgrading of
customer service levels to create sustainable
competitive advantage, are important in realizing
Philips’ profitable growth ambitions. The emergence of
new low-cost competitors, particularly in Asia, further
underlines the importance of improvements in the
product creation process. The success of new solution
and product creation, however, depends on a number
of factors, including timely and successful completion
of development efforts, market acceptance, Philips’
ability to manage the risks associated with new
products and production ramp-up issues, the ability of
Philips to attract and retain employees with the
appropriate skills, the availability of products in the
right quantities and at appropriate costs to meet
anticipated demand and the risk that new products and
services may have quality or other defects in the early
stages of introduction. Accordingly, Philips cannot
determine in advance the ultimate effect that new
solutions and product creations will have on its financial
condition and operating results. If Philips fails to
accelerate its innovation-to-market processes and fails
to ensure that end-user insights are fully captured and
translated into solution and product creations that
improve product mix and consequently contribution, it
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may face an erosion of its market share and
competitiveness, which could have a material adverse
effect on its financial condition and operating results.
Risk of unauthorized use of intellectual property rights
Philips produces and sells products and services which
incorporates technology protected by intellectual property
rights. Philips develops and acquires intellectual property
rights on regular basis. Philips is exposed to the risk that
intellectual property rights on technology applied in its
products and services is claimed to be owned by third
parties, who, in case their claims of infringement of such
intellectual property rights are awarded, would be entitled
to damages and fines.
If Philips is unable to ensure effective supply chain
management, e.g. facing an interruption of its supply
chain, including the inability of third parties to deliver
parts, components and services on time, and if it is
subject to rising raw material prices, it may be unable to
sustain its competitiveness in its markets.
Philips is continuing the process of creating a leaner
supply base with fewer suppliers, while maintaining
dual / multiple sourcing strategies where possible. This
strategy very much requires close cooperation with
suppliers to enhance, among other things, time to
market and quality. In addition, Philips is continuing its
initiatives to reduce assets through outsourcing. These
processes may result in increased dependency on
external suppliers and providers. Although Philips
works closely with its suppliers to avoid supply-related
problems, there can be no assurance that it will not
encounter supply problems in the future or that it will
be able to timely replace a supplier that is not able to
meet its demand.
Shortages or delays could materially harm its business.
Most of Philips’ activities are conducted outside of the
Netherlands, and international operations bring
challenges. For example, production and procurement
of products and parts in Asian countries are increasing,
and this creates a risk that production and shipping of
products and parts could be interrupted by regional
conflicts or a natural disaster. A general shortage of
materials, components or subcomponents as a result of
natural disasters also bears the risk of unforeseeable
fluctuations in prices and demand, which could have a
material adverse effect on its financial condition and
operating results.
Businesses purchase raw materials including so-called
rare earth metals, copper, steel, aluminum, noble gases
and oil-related products, which exposes them to
fluctuations in energy and raw material prices. In recent
times, commodities have been subject to volatile
markets, and such volatility is expected to continue. If
Philips is not able to compensate for increased costs or
pass them on to customers, price increases could have
a material adverse impact on Philips’ results. In contrast,
in times of falling commodity prices, Philips may not
Risk management 7.4
fully benefit from such price decreases as Philips
attempts to reduce the risk of rising commodity prices
by several means, such as including long-term
contracting or physical and financial hedging.
Diversity in information technology (IT) could result in
ineffective or inefficient business management. IT
outsourcing and off-shoring strategies could result in
complexities in service delivery and contract
management.
Philips is engaged in a continuous drive to create a more
open, standardized and consequently, more cost-
effective IT landscape. This is leading to an approach
involving further outsourcing, off-shoring,
commoditization and ongoing reduction in the number
of IT systems. This could introduce additional risk with
regard to the delivery of IT services, the availability of
IT systems and the scope and nature of the
functionality offered by IT systems.
Philips observes a global increase in IT security threats
and higher levels of sophistication in computer crime,
posing a risk to the confidentiality, availability and
integrity of data and information.
The global increase in security threats and higher levels
of professionalism in computer crime have increased
the importance of effective IT security measures,
including proper identity management processes to
protect against unauthorized systems access.
Nevertheless, Philips’ systems, networks, products,
solutions and services remain potentially vulnerable to
attacks, which could potentially lead to the leakage of
confidential information, improper use of its systems
and networks or defective products, which could in turn
materially adversely affect Philips’ financial condition
and operating results. In recent years, the risks that we
and other companies face from cyber-attacks have
increased significantly. The objectives of these cyber-
attacks vary widely and may include, among things,
disruptions of operations including provision of services
to customers or theft of intellectual property or other
sensitive information belonging to us or other business
partners. Successful cyber-attacks may result in
substantial costs and other negative consequences,
which may include, but are not limited to, lost revenues,
reputational damage, remediation costs, and other
liabilities to customers and partners. Furthermore,
enhanced protection measures can involve significant
costs. Although we have experienced cyber-attacks but
to date have not incurred any significant damage as a
result and did not incur significant monetary cost in
taking corrective action, there can be no assurance that
in the future Philips will be as successful in avoiding
damages from cyber-attacks. Additionally, the
integration of new companies and successful
outsourcing of business processes are highly
dependent on secure and well controlled IT systems.
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Risk management 7.4
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.
The attraction and retention of talented employees in sales
and marketing, research and development, finance and
general management, as well as of highly specialized
technical personnel, especially in transferring technologies
to low-cost countries, is critical to Philips’ success. This is
particularly valid in times of economic recovery. The loss of
specialized skills could also result in business interruptions.
There can be no assurance that Philips will continue to be
successful in attracting and retaining all the highly qualified
employees and key personnel needed in the future.
Warranty and product liability claims against Philips
could cause Philips to incur significant costs and affect
Philips’ results as well as its reputation and
relationships with key customers.
Philips is from time to time subject to warranty and product
liability claims with regard to product performance and
effects. Philips could incur product liability losses as a result
of repair and replacement costs in response to customer
complaints or in connection with the resolution of
contemplated or actual legal proceedings relating to such
claims. In addition to potential losses arising from claims and
related legal proceedings, product liability claims could
affect Philips’ reputation and its relationships with key
customers (both customers for end products and customers
that use Philips’ products in their production process). As a
result, product liability claims could materially impact Philips’
financial condition and operating results.
Any damage to Philips’ reputation could have an
adverse effect on its businesses.
Philips is exposed to developments which could affect its
reputation. Such developments could be of an
environmental or social nature, or connected to the behavior
of individual employees or suppliers and could relate to
adherence to regulations related to labor, health and safety,
environmental and chemical management. Reputational
damage could materially impact Philips’ financial condition
and operating results.
7.5 Compliance risks
Legal proceedings covering a range of matters are
pending in various jurisdictions against Philips and its
current and former group companies. Due to the
uncertainty inherent in legal proceedings, it is difficult
to predict the final outcome.
Philips, including a certain number of its current and
former group companies, is involved in legal
proceedings relating to such matters as competition
issues, commercial transactions, product liability,
participations and environmental pollution. Since the
ultimate outcome of asserted claims and proceedings,
or the impact of any claims that may be asserted in the
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Annual Report 2015
future, cannot be predicted with certainty, Philips’
financial position and results of operations could be
affected materially by adverse outcomes.
Please refer to note 26, Contingent assets and
liabilities, for additional disclosure relating to specific
legal proceedings.
Philips is exposed to governmental investigations and
legal proceedings with regard to possible anti-
competitive market practices.
Philips is facing increased scrutiny by national and
European authorities of possible anti-competitive
market practices. Philips’ financial position and results
could be materially affected by an adverse final
outcome of governmental investigations and litigation,
as well as any potential related claims.
Philips’ global presence exposes the company to
regional and local regulatory rules, changes to which
may affect the realization of business opportunities and
investments in the countries in which Philips operates.
Philips has established subsidiaries in over 80
countries. These subsidiaries are exposed to changes in
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 a dependency on the available funding for healthcare
systems. In addition, changes in reimbursement
policies may affect spending on healthcare.
Philips is exposed to non-compliance with General
Business Principles.
Philips’ attempts to realize its growth ambitions could
expose it to the risk of non-compliance with the Philips
General Business Principles, such as anti-bribery
provisions. This risk is heightened in growth
geographies as the legal and regulatory environment is
less developed in growth geographies compared to
mature geographies. Examples include commission
payments to third parties, remuneration payments to
agents, distributors, consultants and the like, and the
acceptance of gifts, which may be considered in some
markets to be normal local business practice (See also
note 26, Contingent assets and liabilities).
Defective internal controls would adversely affect our
financial reporting and management process.
The reliability of reporting is important in ensuring that
management decisions for steering the businesses and
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 safety 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
laws. In Philips Healthcare, privacy and product safety
and security issues may arise, especially with respect to
remote access or monitoring of patient data or loss of
data on our customers’ systems. Philips is exposed to
the risk that its products, including components or
materials procured from suppliers, may prove to be not
compliant with safety laws, e.g. chemical safety
regulations. Such non-compliance could result in a ban
on the sale or use of these products.
Philips operates in a highly regulated product safety
and quality environment. Philips’ products are subject
to regulation by various government agencies,
including the FDA (US) and comparable foreign
agencies. Obtaining their approval is costly and time
consuming, but a prerequisite for market introduction.
A delay or inability to obtain the necessary regulatory
approvals for new products could have a material
adverse effect on business. The risk exists that product
safety incidents or user concerns could trigger FDA
business reviews which, if failed, could lead to business
interruption which in turn could adversely affect Philips’
financial condition and operating results. E.g. the
voluntary, temporary suspension in 2014 of new
production at our Healthcare facility in Cleveland, Ohio
targeted to further strengthen manufacturing process
controls after certain issues in this area were identified
during an ongoing FDA inspection.
7.6 Financial risks
Risk management 7.5
Negative developments impacting the global liquidity
markets could affect the ability of Philips to raise or re-
finance debt in the capital markets or could lead to
significant increases in the cost of such borrowing in the
future. If the markets expect a downgrade or
downgrades by the rating agencies or if such a
downgrade has actually taken place, it could increase
the cost of borrowing, reduce our potential investor
base and adversely affect our business.
Philips operates in approximately 100 countries and its
earnings are therefore inevitably exposed to
fluctuations in exchange rates of foreign currencies
against the euro. Philips’ sales are sensitive in particular
to movements in the US dollar, Japanese yen and a
wide range of other currencies from developed and
emerging markets. However, Philips’ sourcing and
manufacturing spend is concentrated in the Eurozone,
United States and China. Therefore the net (revenues
less spend) sensitivity of Income from Operations to US
dollar and Chinese renminbi is relatively small. Income
from Operations is sensitive to movements in currencies
from countries where the Group has none or small
manufacturing/sourcing activity such as Japan and a
range of emerging markets such as Russia, Korea,
Indonesia, India and Brazil.
The credit risk of financial and non-financial counterparties
with outstanding payment obligations creates exposures for
Philips, particularly in relation to accounts receivable with
customers and liquid assets and fair values of derivatives and
insurance receivables contracts with financial counterparties.
A default by counterparties in such transactions can have a
material adverse effect on Philips’ financial condition and
operating results.
Philips’ supply chain is exposed to fluctuations in
energy and raw material prices. Commodities such as
oil are subject to volatile markets and significant price
increases from time to time. If Philips is not able to
compensate for, or timely pass on, its increased costs
to customers, such price increases could have an
adverse impact on its financial condition and operating
results.
Philips is exposed to interest rate risk, particularly in
relation to its long-term debt position; this risk can take
the form of either fair value or cash flow risk. Failure to
effectively hedge this risk can impact Philips’ financial
condition and operating results.
For further analysis, please refer to note 31, Details of
treasury / other financial risks.
Philips is exposed to a number of different fiscal
uncertainties which could have a significant impact on
local tax results.
Philips is exposed to a variety of treasury risks and other
financial risks including liquidity risk, currency risk,
interest rate risk, commodity price risk, credit risk,
country risk and other insurable risk.
Philips is exposed to a number of different tax
uncertainties which could result in double taxation,
penalties and interest payments. These include transfer
pricing uncertainties on internal cross-border deliveries
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71
Risk management 7.6
of goods and services, tax uncertainties related to
acquisitions and divestments, tax uncertainties related
to the use of tax credits and permanent establishments,
tax uncertainties due to losses carried forward and tax
credits carried forward and potential changes in tax law
that could result in higher tax expense and payments.
Those uncertainties may have a significant impact on
local tax, results which in turn could adversely affect
Philips’ financial condition and operating results.
The value of the losses carried forward is subject to
having sufficient taxable income available within the
loss-carry-forward period, but also to having sufficient
taxable income within the foreseeable future in the
case of losses carried forward with an indefinite carry-
forward period. The ultimate realization of the
Company’s deferred tax assets, including tax losses and
credits carried forward, is dependent upon the
generation of future taxable income in the countries
where the temporary differences, unused tax losses
and unused tax credits were incurred and during the
periods in which the deferred tax assets become
deductible. Additionally, in certain instances,
realization of such deferred tax assets is dependent
upon the successful execution of tax planning
strategies. Accordingly, there can be no absolute
assurance that all (net) tax losses and credits carried
forward will be realized.
For further details, please refer to the tax risks
paragraph in note 8, Income taxes.
longevity, expected cost of medical care and expected rates
of compensation. Movements (e.g. due to the movements
of financial markets) in these assumptions can have a
significant impact on the Defined Benefit Obligation and net
interest cost. A negative performance of the financial markets
could have a material impact on cash funding requirements
and net interest cost and also affect the value of certain
financial assets and liabilities of the company.
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.
For important critical reporting risk areas identified
within Philips we refer to the “Use of estimates” section
in note 1, Significant accounting policies, as the
Company assessed that reporting risk is closely related
to the use of estimates and application of judgment.
Philips is exposed to uncertainty on the timing and
proceeds of a sale of Lumileds.
7.7 Separation risk
On January 22, 2016 Philips announced the termination
of its agreement with GO Scale Capital to sell a stake of
80.1% in Lumileds due to the inability to mitigate
regulatory concerns in the US. Philips is engaging with
other parties that have expressed an interest in the
Lumileds business. Adverse market conditions during
the bidding and sale process and regulatory restrictions
may have an adverse effect on the timing of a sale
transaction and the potential proceeds from such a
transaction. Prolonged adverse conditions could trigger
a requirement to no longer classify Lumileds as being
held for sale and being reported as discontinued
operations. This would have a material impact on the
balance sheet and EBITA as reported by Royal Philips.
Philips has defined-benefit pension plans and other
post-retirement plans in a number of countries. The
funded status and the cost of maintaining these plans
are influenced by movements in financial market and
demographic developments, creating volatility in
Philips’ financials.
A significant proportion of (former) employees in Europe and
North and Latin America is covered by defined-benefit
pension plans and other post-retirement plans. The
accounting for such plans requires management to make
estimates on assumptions such as discount rates, inflation,
Philips is exposed to risks associated with the
separation of its Lighting business.
In September 2014 Philips announced its plan to
sharpen its strategic focus by establishing two stand-
alone companies focused on HealthTech and Lighting
opportunities respectively. This is a complex process
which involves certain risks to Philips. Although a stand-
alone structure for Philips Lighting was established on
February 1, 2016, there are still a number of important
milestones to be completed in the separation process.
Philips is reviewing all strategic options for Philips
Lighting, including public offerings of ownership stakes
and a private sale. The completion could take more time
than originally planned or anticipated. There is no
certainty as to the method or timing of the separation,
which may expose Philips to risks regarding the
proceeds from a sale of Philips Lighting, additional
costs and other adverse consequences.
The separation into Royal Philips and Philips Lighting is
unlike divestments or carve out transactions that Philips
has implemented in the past, which affected very
specific parts of the business of Philips. The separation
impacts all businesses and markets as well as all
supporting functions and all assets and liabilities of the
Group and will continue to require complex and time
consuming disentanglement efforts.
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The design and execution of the separation requires the
devotion of substantial time and attention from
management and staff. Although Philips has set-up a
dedicated senior project team to work on a successful
separation, the separation efforts could distract from
and have an adverse effect on the conduct of normal
business and our strategy. The separation could
increase the likelihood of occurrence and/or potential
impact of the risks as described in section 7.2, Risk
categories and factors, of this Annual Report, such as
strategic risks (e.g. insufficient integration of
acquisitions), operational risks (e.g. delays in
innovation-to-market), compliance risk (e.g. ineffective
internal controls) and financial risks (e.g. reporting risks).
The design and execution of the separation will involve
and depend on support from external legal, tax,
financial and other professional consultants and as a
result Philips will incur substantial cost. The separation
could take more time than originally anticipated, which
may expose Philips to risks of additional cost and other
adverse consequences.
The separation of businesses, assets, liabilities,
contractual or contingent rights and obligations and
legal entities may require Philips to recognize expenses
and/or incur financial payments, which otherwise
would not have been incurred.
While it is the firm intention to complete the separation,
Philips has reserved the right not to proceed with the
separation if it determines that it would be in the
Company’s interest not to do so. If it does proceed with
the separation, no assurances can be given that the
separation will ultimately lead to the increased benefits
contemplated by Philips currently.
Risk management 7.7
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73
Management 8
8 Management
Koninklijke Philips N.V. is managed by an Executive
Committee which comprises the members of the Board
of Management and certain key officers from functions,
businesses and markets.
The Executive 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.
In September 2014 Philips announced its plan to
sharpen its strategic focus by establishing two stand-
alone companies focused on the HealthTech and
Lighting opportunities respectively. Early 2016, a stand-
alone structure for Philips Lighting was established,
within the Royal Philips Group. Until the right strategic
option for its future is identified and executed, the Royal
Philips Executive Committee will, under the supervision
of the Supervisory Board, continue to oversee the
Philips Lighting business.
Under Dutch Law, the Board of Management is
accountable for the actions of the Executive Committee
and has ultimate responsibility for the management
and external reporting of Koninklijke Philips N.V. and is
answerable to shareholders at the Annual General
Meeting of Shareholders. Pursuant to the two-tier
corporate structure, the Board of Management is
accountable for its performance to a separate and
independent Supervisory Board.
The Rules of Procedure of the Board of Management
and Executive Committee are published on the
Company’s website (www.philips.com/investor).
Corporate governance
A full description of the Company’s corporate
governance structure is published in chapter 11,
Corporate governance, of this Annual Report.
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Annual Report 2015
Frans van Houten
Born 1960, Dutch
President/Chief Executive Officer (CEO)
Chairman of the Board of Management since April 2011
Group responsibilities: Chairman of the Executive Committee, Health
Systems, Internal Audit, Information Technology, Supply Management,
Innovation & Strategy, Sustainability, Accelerate! - Overall transformation,
End2End, Quality and Regulatory Compliance
Abhijit Bhattacharya
Born 1961, Indian
Executive Vice President &
Chief Financial Officer (CFO)
Member of the Board of Management since December 2015
Group responsibilities: Finance, Capital structure, Mergers & Acquisitions,
Investor Relations, Accelerate! - Operating Model
Marnix van Ginneken
Born 1973, Dutch/American
Executive Vice President & Chief Legal Officer
Group responsibilities: Legal and General Secretary
Management 8
Denise Haylor
Born 1964, British/American
Executive Vice President &
Chief Human Resources Officer
Eric Rondolat
Born 1966, Italian/French
Executive Vice President &
Chief Executive Officer Philips Lighting
Group responsibilities: Human Resources, Accelerate! - Culture
Group responsibilities: Philips Lighting
Ronald de Jong
Born 1967, Dutch
Executive Vice President &
Chief Market Leader
Group responsibilities: Markets, Countries (all except Greater China & North
America), Government Affairs, Accelerate! - Customer centricity
Pieter Nota
Born 1964, Dutch
Executive Vice President & Chief Executive Officer of Personal Health,
Chief Marketing Officer, Member of the Board of Management since April
2011
Group responsibilities: Sector Consumer Lifestyle, Accelerate! - Resource to
Win, Marketing
Annual Report 2015
75
Supervisory Board 9
9 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 10,
Supervisory Board report, of this Annual Report and
section 11.2, Supervisory Board, of this Annual Report.
1) member of the Audit Committee
2) member of the Remuneration Committee
3) member of the Corporate Governance and Nomination & Selection
Committee
4) member of the Quality & Regulatory Committee
5) member of the Separation Committee
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Annual Report 2015
Jeroen van der Veer
Born 1947, Dutch 2),3),5)
Chairman
Chairman of the Corporate Governance and
Nomination & Selection Committee
Member of the Supervisory Board since 2009;
second term expires in 2017
Former Chief Executive and Non-executive Director of Royal Dutch Shell
and currently Chairman of the Supervisory Board of ING Group. Member of
the Supervisory Board of Concertgebouw N.V. and Royal Boskalis
Westminster N.V.
Neelam Dhawan
Born 1959, Indian 1)
Member of the Supervisory Board since 2012;
first term expires in 2016
Currently Managing Director of Hewlett-Packard Enterprise India
Orit Gadiesh
Born 1951, Israeli/American 1)
Member of the Supervisory Board since 2014;
first term expires in 2018
Currently Chairman of Bain & Company and the International Business
Leaders’ Advisory Council for the Mayor of Shanghai (IBLAC). Member of
the Foundation Board of the World Economic Forum (WEF). Also serves on
the Advisory Board for the British-American Business council
Supervisory Board 9
Ewald Kist
Born 1944, Dutch 2)
Member of the Supervisory Board since 2004;
third term expires in 2016
Heino von Prondzynski
Born 1949, Swiss/German 2),3),4)
Chairman of the Remuneration Committee
Member of the Supervisory Board since 2007;
Former Chairman of the Executive Board of ING Group and currently
third term expires in 2019
member of the Supervisory Boards of the Dutch Central Bank, DSM and
Former member of the Corporate Executive Committee of the F. Hofmann-
Moody’s Investor Service
La Roche Group and former CEO of Roche Diagnostics, currently Chairman
of the Supervisory Boards of HTL Strefa and Epigenomics AG. Member of
the Supervisory Board of Quotient Ltd.
Kees van Lede
Born 1942, Dutch 5)
Chairman of the Separation Committee
Member of the Supervisory Board since 2003;
fourth term expires in 2017
David Pyott
Born 1953, British 1),4)
Member of the Supervisory Board since 2015;
first term expires in 2019
Former Chairman and Chief Executive Officer of Allergan, Inc. (since 2001 and
Former Chairman of the Board of Management of Akzo Nobel. Currently
1998, respectively, until 2015). Currently Director of Avery Dennison
member of the Supervisory Boards of AirFrance/KLM and Senior Advisor
Corporation and its Lead Independent Director (since 1999 and 2010,
JP Morgan Plc.
respectively). Member of the Board of Directors of Alnylam Pharmaceuticals
Inc. and of BioMarin Pharmaceutical Inc. Also member of the Board of
Trustees of Chapman University, member of the Governing Board of the
London Business School, President of the International Council of
Ophthalmology Foundation and member of the Advisory Board of the
Foundation of the American Academy of Ophthalmology.
Christine Poon
Born 1952, American 2),3),4)
Vice-chairman and Secretary
Chairman of the Quality & Regulatory Committee
Member of the Supervisory Board since 2009;
second term expires in 2017
Jackson Tai
Born 1950, American 1),4),5)
Chairman of Audit Committee
Member of the Supervisory Board since 2011;
second term expires in 2019
Former Vice-Chairman and CEO of DBS Group and DBS Bank Ltd and
Former Vice-Chairman of Johnson & Johnson’s Board of Directors and
former Managing Director at J.P. Morgan &Co. Incorporated. Currently a
Worldwide Chairman of the Pharmaceuticals Group and former dean of
member of the Boards of Directors of The Bank of China Limited,
Ohio State University’s Fisher College of Business. Currently member of the
MasterCard Incorporated and Eli Lilly and Company, Also Non-Executive
Board of Directors of Prudential and Regeneron
Director of privately-held Russell Reynolds Associates and of Vaporstream
Annual Report 2015
77
Supervisory Board report
10
10 Supervisory Board report
Introduction
We as members of the Supervisory Board are fully
committed to our role and responsibility in respect of
the proper functioning of the corporate governance of
Philips. The Supervisory Board supervises and advises
the Board of Management and Executive Committee in
performing their management tasks and setting the
direction of the business of the Philips Group. The
Supervisory Board acts, and we as individual members
of the Board act, in the interests of Koninklijke Philips
N.V., its business and all its stakeholders. This report
includes a more specific description of the Supervisory
Board’s activities during the financial year 2015 and
other relevant information on its functioning.
Activities of the Supervisory Board
The overview below indicates a number of matters that
we discussed during meetings throughout 2015:
• Establishing Philips Lighting as a stand-alone
company, and reviewing the strategic options for its
separation. Please also refer to the activities of the
Separation Committee, as included below in this
Supervisory Board report;
• Developing the strategic direction for Philips to
capture higher growth in the health technology
market opportunities, and for Lighting to transition
from conventional lighting to LED applications;
• Performance of the Philips Group and its underlying
businesses and financial headroom;
• Philips’ annual management commitment and
annual operating plan for 2016;
• Capital allocation, including the dividend policy and
continuance of the share buyback program;
• Quality and regulatory systems and processes,
including the interactions with the United States
Food and Drug Administration and the remedial
efforts in Cleveland and other sites. Please also refer
to the description below in this Supervisory Board
report of the activities of the Quality & Regulatory
Committee that was established in 2015;
• Significant mergers, acquisitions and divestments,
notably the extensive efforts to obtain regulatory
clearance for the sale of the Lumileds and
Automotive business to a consortium led by GO Scale
Capital which was terminated in January 2016;
• Customers and new business models, including the
increasing importance of large scale and managed
equipment projects in both the HealthTech and
Lighting business areas;
• Business transformation and the progress being
made in the Accelerate! Program;
• Enterprise risk management (which included an
annual risk assessment and discussion of the
changing nature of the risks faced by Philips and the
possible impact of such risks). Such risks included the
challenges of an increasingly digital environment,
information security, including product security, new
business models in the context of changing public
policies and the execution risk associated with the
separation of the Company;
• The Company’s program to de-risk its future pension
liabilities, and the implications thereof;
• Changes in the composition of the Executive
Committee and the Board of Management, including
the appointment of a new Chief Financial Officer;
• Significant civil litigation claims and public
investigations against or into the Company; and
• A review of the Company’s sustainability programs
and goals.
The Supervisory Board conducted “deep dives” on a
range of topics including:
• The North American Market, which included the
recovery of the Diagnostic Imaging business, the
scaling of solutions businesses and the importance
of unlocking the potential of the Professional
Lighting business; and
• The strategy for the Lighting business and its
translation to an equity story for potential investors.
The Supervisory Board also reviewed Philips’ annual
and interim financial statements, including non-
financial information, prior to publication thereof.
Supervisory Board meetings and attendance
In 2015, the Supervisory Board convened for seven
regular meetings and one extraordinary meeting.
Moreover, we collectively and individually interacted
with members of the Executive Committee and with
senior management outside the formal Supervisory
Board meetings. The Chairman of the Supervisory
Board and the CEO met regularly for bilateral
discussions about the progress of the Company on a
variety of matters. The Supervisory Board also held
bilateral meetings with several members of the
Executive Committee to discuss a range of topics.
The Supervisory Board meetings were well attended in
2015. The attendance percentage at the meetings -
including the committee meetings - was again high (in
excess of 90%). The Supervisory Board visited the
Company’s site in Somerset, the United States, and
toured its Lighting Application Center, to view
demonstrations of its innovations in the Lighting market
and meet with employees. The Supervisory Board also
visited the Company’s site in Best, the Netherlands,
where we reviewed, among other things, the quality
system of the Image Guided Therapy business group.
The Supervisory Board committees also 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 Board. In
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Annual Report 2015
addition to the formal meetings of the Board and its
Committees, the Board members also held private
meetings. We as members of the Board devoted
sufficient time to engage (proactively if the
circumstances so required) in our supervisory
responsibilities.
Composition, diversity and self-evaluation by
the Supervisory Board
The Supervisory Board is a separate corporate body
that is independent of the Board of Management (and
the Executive Committee). Its independence is also
reflected in the requirement that a member of the
Supervisory Board cannot be a member of the Board of
Management, of the Executive Committee or an
employee of Philips. The Supervisory Board
furthermore considers all its members to be
independent pursuant to the Dutch Corporate
Governance Code. We will continue to pay close
attention to applicable independence criteria.
The Supervisory Board currently consists of nine
members, after the appointment of Mr David Pyott at
the 2015 Annual General Meeting.
The agenda for the upcoming 2016 Annual General
Meeting of Shareholders will include a proposal to
reappoint Mrs Neelam Dhawan to the Supervisory
Board for an additional term of four years. The current
term of appointment of Mr Ewald Kist will expire at the
end of such meeting, after serving three consecutive
terms on the Board. We are grateful to Ewald for his
years of service, which included him being Chairman of
the Audit Committee, for his dedication and the wisdom
that he brought to Supervisory Board discussions and
decisions.
In 2015, there were also a number of changes to the
chairmanships and memberships within the Board.
David Pyott was appointed as member of the
Supervisory Board and became a member of the Audit
Committee. Jackson Tai, Heino von Prondzynski and
Kees van Lede were re-appointed as members of the
Supervisory Board. Kees van Lede and Heino von
Prondzynski stepped down from the Audit Committee.
In 2015, we also established two new Supervisory Board
Committees: the Separation Committee and the Quality
& Regulatory Committee. Please refer to the description
of the activities of such committees below in this
Supervisory Board report.
The profile of the Supervisory Board aims for an
appropriate combination of knowledge and experience
among its members, encompassing marketing,
manufacturing, technology, financial, economic, social,
quality & regulatory and legal aspects of international
business, government and public administration in
relation to the global and multi- product character of
Philips’ businesses. The Supervisory Board pays great
value to diversity in its composition. More particular it
aims for having members with both European and non-
European backgrounds (nationality, working
Supervisory Board report
10
experience or otherwise) and one or more members
who have held an executive or similar position in
business or society.
In addition, we support Philips’ policy to appoint a well-
balanced mix of women and men to its Board of
Management, Executive Committee and Supervisory
Board, including the policy of having at least 30% of the
seats on the Board of Management and the Supervisory
Board held by women and at least 30% of the seats held
by men.
Currently, the Supervisory Board’s gender diversity is
within the statutory criteria. We note that there may be
various pragmatic reasons – such as other relevant
selection criteria and the availability of suitable
candidates within Philips – that could play a role in the
achievement of our diversity targets.
In 2015, the members of the Supervisory Board again
completed a questionnaire to verify compliance in 2015
with applicable corporate governance rules and its
Rules of Procedure. The outcome of this survey was
satisfactory.
In addition, we each submitted to the Chairman
responses to a questionnaire designed to self-evaluate
the functioning of the Supervisory Board. As in previous
years, the questionnaire covered topics such as the
composition and competence of the Supervisory Board
(for example, the Board’s size and the education and
training requirements of its members), access to
information, the frequency and quality of the meetings,
quality and timeliness of the meeting materials, the
nature of the topics discussed during meetings and the
functioning of the Supervisory Board’s committees.
The responses to the questionnaire were aggregated
into a report, which was discussed by the Supervisory
Board in a private meeting. Certain areas were identified
that could be improved and it was decided that the
Chairman would follow-up with individual members to
address specific issues. This resulted in a number of
suggestions to improve the quality of the discussion in
Board meetings, which will be implemented in 2016. All
members of the Supervisory Board had a ‘one to one’
discussion with the Chairman, and the Chairman was
evaluated by the Vice-Chairman. The responses
provided by the Supervisory Board members indicated
that the Board continues to be a well-functioning team
and we believe a diversity of experience and skills is
represented on the Board. The Board has spent time
throughout 2015 considering its composition and it will
continue to devote attention to this topic during 2016.
The functioning of the Supervisory Board committees
was considered to be commendable (or better) and
specific feedback was addressed by the Chairman of
each committee with its members.
The use of an external evaluator to measure the
functioning of the Supervisory Board may be
considered in the future.
Annual Report 2015
79
Supervisory Board report
10
Supervisory Board committees
The Supervisory Board has assigned certain of its tasks
to the three long-standing committees, also referred to
in the Dutch Corporate Governance Code: the
Corporate Governance and Nomination & Selection
Committee, the Remuneration Committee and the
Audit Committee. The separate reports of these
committees are part of this Supervisory Board report
and are published below. As explained below, the
Supervisory Board additionally established the
Separation Committee and the Quality & Regulatory
Committee in 2015. The function of all of the Board’s
committees is to prepare the decision-making of the
full Supervisory Board, and the committees currently
have no independent or assigned powers. The full
Board retains overall responsibility for the activities of
its committees.
Separation Committee
We have established the Separation Committee
following the Company’s decision to establish two
standalone companies focused on the HealthTech and
Lighting opportunities respectively. The Separation
Committee assists the Supervisory Board in its oversight
responsibilities relating to the implementation of this
decision. Its members are Jeroen van der Veer and
Jackson Tai, chaired by Kees van Lede. The Separation
Committee met 5 times in 2015. The Separation
Committee reviewed the details of the separation
across all Lighting businesses and Markets, and
discussed the separation of items including intellectual
property (including use of the Philips brand),
information technology infrastructure, real estate and
legacy liabilities. The allocation of employees between
Royal Philips and Philips Lighting was also reviewed.
The Separation Committee reported to the full
Supervisory Board that it was impressed by the high
standard of professionalism and efficiency displayed by
the Management throughout the year and commends
the Company on a well planned and executed
separation.
Quality & Regulatory Committee
We have established the Quality and Regulatory
Committee in view of the continued relevance of the
quality of the Company’s products, systems, services
and software and the development, testing,
manufacturing, marketing and servicing thereof, and
regulatory requirements relating thereto. The Q&R
Committee assists the Supervisory Board in fulfilling its
oversight responsibilities in this area, whilst recognizing
that the Audit Committee assists the Supervisory Board
in the oversight of other areas of regulatory, compliance
and legal matters. Its members are Heino von
Prondzynski, David Pyott and Jackson Tai, chaired by
Christine Poon. The Q&R Committee met 5 times in
2015. In each meeting, the Q&R Committee reviewed
material developments, the quality and regulatory
dashboards, which display key performance indicators
for business groups and markets, the status of ongoing
internal and external audits and any remediation
actions underway or completed. In addition, the Q&R
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Annual Report 2015
Committee reviewed the roadmap to simplify the
Company’s supplier base, the talent and succession
planning in the Quality & Regulatory function and the
training and education efforts around Quality &
Regulatory matters being implemented in the
Company. Members of the Q&R Committee visited sites
and reviewed quality systems in the United States and
the Netherlands.
Supervisory Board remuneration
The agenda for the upcoming 2016 Annual General
Meeting of Shareholders will include a proposal to
determine the remuneration of the members of the
Quality & Regulatory Committee of the Supervisory
Board which will be in line with the remuneration of the
members of the Separation Committee as approved at
the 2015 Annual General Meeting.
Financial Statements 2015
The financial statements of the company for 2015, as
presented by the Board of Management, have been
audited by KPMG Accountants N.V. as independent
external auditor appointed by the General Meeting of
Shareholders. Its reports have been included in section
13.5, Independent auditor’s report, 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
2015 financial statements. We likewise recommend to
shareholders that they adopt the proposal of the Board
of Management to make a distribution of EUR 0.80 per
common share (up to EUR 740 million), in cash or in
shares at the option of the shareholder, against the net
income for 2015 and retained earnings.
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.
February 23, 2016
The Supervisory Board
Jeroen van der Veer
Christine Poon
Neelam Dhawan
Orit Gadiesh
Ewald Kist
Kees van Lede
David Pyott
Heino von Prondzynski
Jackson Tai
Further information
To gain a better understanding of the responsibilities of
the Supervisory Board and the internal regulations and
procedures governing for its functioning and that of its
committees, please refer to chapter 11, Corporate
governance, of this Annual Report and to the following
documents published on the company’s website:
• Articles of Association
• Rules of Procedure Supervisory Board, including the
Charters of the Board committees
• Rules of Conduct with respect to Inside Information
Changes and re-appointments
Supervisory Board and committees
2015
• Jackson Tai, Heino von Prondzynski and Kees
van Lede were re-appointed as members of the
Supervisory Board.
• David Pyott was appointed as member of the
Supervisory Board and was appointed as a
member of the Audit Committee.
• The Quality & Regulatory Committee, Chaired by
Christine Poon, and the Separation Committee,
Chaired by Kees van Lede, were established.
Changes and re-appointments
Supervisory Board 2016
• It is proposed to re-appoint Neelam Dhawan as
a member of the Supervisory Board. The term of
appointment of Ewald Kist will expire at the end
of the 2016 AGM.
Changes Management 2015
• Frans van Houten and Pieter Nota were re-
appointed as Chief Executive Officer and
member of the Board of Management,
respectively.
• Abhijit Bhattacharya was appointed as a
member of the Board of Management and Chief
Financial Officer.
• Ron Wirahadiraksa and Jim Andrew left the
company, Patrick Kung retired.
10.1 Report of the Corporate Governance
and Nomination & Selection
Committee
The Corporate Governance and Nomination & Selection
Committee is chaired by Jeroen van der Veer and its
other members are Christine Poon and Heino von
Prondzynski.
Supervisory Board report
10
The Committee is responsible for the review of
selection criteria and appointment procedures for the
Board of Management, the Executive Committee,
certain other key management positions, as well as the
Supervisory Board.
In 2015, the Committee met five times and devoted time
on the appointment or reappointment of candidates to
fill current and future vacancies on the Board of
Management, Executive Committee and Supervisory
Board. In particular, the Committee discussed the
outcome of comprehensive third-party reviews of the
management of the Royal Philips and Lighting
businesses, which included an analysis of
competencies and succession planning. The
Committee consulted with the CEO and other members
of the Board of Management. Following those
consultations it prepared decisions and advised the
Supervisory Board on the candidates for appointment.
This resulted in Abhijit Bhattacharya succeeding Ron
Wirahadiraksa as CFO, including Abhijit’s appointment
as member of the Board of Management at the
Extraordinary General Meeting of Shareholders held on
December 18, 2015.
This also resulted in the proposed re-appointment at
the upcoming 2016 Annual General Meeting of
Shareholders of Neelam Dhawan as a member of the
Supervisory Board, as well as the appointment of
Christine Poon as Vice-Chairman of the Supervisory
Board. As it does each year, the Committee discussed
succession planning for Executive Committee
members. The Committee furthermore discussed the
resignation of Jim Andrew and reviewed candidates for
his successor, leading to the appointment of Jean Botti
as Philips’ new Chief Innovation & Strategy Officer in
January 2016, as well as the retirement of Patrick Kung
and his succession by Andy Ho.
The Committee spent considerable time, also in
consultation with the Separation Committee Chairman,
reviewing the implications of the separation of the
Company into two companies for governance,
succession and talent development.
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
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. In 2015, there was special
Annual Report 2015
81
Supervisory Board report
10.1
focus on the management teams of the two operating
committees responsible for the day-to-day
management of the businesses addressing the
HealthTech and Lighting opportunities.
With respect to corporate governance matters, the
Committee discussed relevant developments and
legislative changes during two meetings. The
Committee reviewed the corporate governance of
Royal Philips and considered options for governance
models for Philips Lighting should it become a
company listed at a stock exchange. Given this
possibility, the Committee also reviewed potential
candidates for a supervisory board of Philips Lighting.
10.2 Report of the Remuneration
Committee
Introduction
The Remuneration Committee is chaired by Heino von
Prondzynski. Its other members are Jeroen van der
Veer, Ewald Kist and Christine Poon. The Committee is
responsible for preparing decisions of the Supervisory
Board on the remuneration of individual members of
the Board of Management and the Executive
Committee. In performing its duties and responsibilities
the Remuneration Committee is assisted by an external
consultant and in-house remuneration expert acting on
the basis of a protocol which ensures that he acts on
the instructions of the Remuneration Committee.
Currently, no member of the Remuneration Committee
is a member of the management board of another listed
company. In line with applicable statutory and other
regulations, this report focuses on the terms of
engagement and remuneration of the members of the
Board of Management. The Committee met six times in
2015.
10.2.1 Remuneration policy
The objective of the remuneration policy for members
of the Board of Management, as adopted by the
general meeting of shareholders, is in line with that for
executives throughout the Philips Group. That is, to
attract, motivate and retain qualified senior executives
of the highest caliber with an international mindset and
the background essential for the successful leadership
and effective management of a large global company.
The Board of Management remuneration policy is
benchmarked regularly against companies in the
general industry and aims at the median market
position.
One of the goals behind the policy is to focus on
improving the performance of the company and to
enhance the value of the Philips Group. Consequently,
the remuneration package includes a variable part in
the form of an annual cash incentive and a long-term
incentive consisting of performance shares. The policy
does not encourage inappropriate risk-taking.
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Annual Report 2015
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 payout 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 Dutch legislation effective January 1, 2014, incentives
may, under certain circumstances, be amended or
clawed back pursuant to statutory powers. For more
information please refer to chapter 11, Corporate
governance, of this Annual Report. Further information
on the performance targets is given in the chapters on
the Annual Incentive (see sub-section 10.2.6, Annual
Incentive, of this Annual Report) and the Long-Term
Incentive Plan (see sub-section 10.2.7, Long-Term
Incentive Plan, of this Annual Report) respectively.
Key features of our Executive Committee
Compensation Program
The list below highlights Philips’ approach to
remuneration, in particular taking into account
Corporate Governance practices in the Netherlands.
What we do
• We pay for performance
• We conduct scenario analyses
• We have robust stock ownership guidelines
• We have claw-back policies incorporated into our
incentive plans
• We have a simple and transparent remuneration
structure in place
What we do not do
• We do not pay dividend equivalents on stock options,
or restricted share units and performance share units
that do not vest
• We do not offer executive contracts with longer than
12 months’ separation payments
• We do not have a remuneration policy in place that
encourages our Board of Management to take any
inappropriate risks or to act in their own interests
• We do not reward failing members of the Board of
Management upon termination of contract
• We do not grant loans or give guarantees to the Board
of Management
10.2.2 Contracts for the provision of services
Below, the main elements of the contracts for the
provision of services of the members of the Board of
Management are included.
Term of appointment
The members of the Board of Management are
engaged for a period of 4 years, it being understood
that this period expires no later than at the end of the
following AGM held in the fourth year after the year of
appointment.
Supervisory Board report
10.2.2
options and restricted share rights columns are the
accounting cost of multi-year Long-Term Incentive
grants given to members of the Board of Management.
The performance shares granted in 2013, 2014 and 2015
to Mr R.H. Wirahadiraksa have lapsed per November 30,
2015. The same applies to the premium shares awarded
as a result of restricted share right releases in the past.
No more restricted share rights were outstanding on
November 30, 2015. Vested stock options may be
exercised up to May 30, 2016, and July 29, 2016,
respectively. All in accordance with the terms and
conditions of the applicable Long-Term Incentive plans.
For further details on the pension allowances and
pension costs see sub-section 10.2.8, Pensions, of this
Annual Report.
10.2.5 Annual base compensation
The annual compensation of the members of the Board
of Management has been reviewed in April 2015 as part
of the regular remuneration review. The annual
compensation of Frans van Houten has been increased
per April 1, 2015, from EUR 1,150,000 to EUR 1,175,000.
The annual compensation of Pieter Nota has been
increased from EUR 650,000 to EUR 680,000.
Both increases were made to move base compensation
levels closer to market levels. The annual compensation
of the CFO, Abhijit Bhattacharya, has been determined
per appointment as CFO at EUR 650,000.
10.2.6 Annual Incentive
Each year, a variable cash incentive (Annual Incentive)
can be earned, based on the achievement of specific
and challenging targets. The Annual Incentive criteria
are made up for 80% of the financial indicators of the
Company and for 20% of the team targets comprising,
among others, targets as part of our sustainability
program.
The on-target Annual Incentive percentage is set at
80% of the annual base compensation for the CEO and
at 60% of the annual base compensation for other
members of the Board of Management. The maximum
Annual Incentive achievable is 160% of the annual base
compensation for the CEO and 120% of the annual base
compensation for members of the Board of
Management.
Philips Group
Contract terms for current members
F.A. van Houten
A. Bhattacharya
P.A.J. Nota
end of term
AGM 2019
AGM 2019
AGM 2019
Notice period
Termination of the contract for the provision of services
is subject to six months’ notice for both parties.
Severance payment
The severance payment is set at a maximum of one
year’s base compensation.
Share ownership
Simultaneously with the introduction of the current
Long-Term Incentive Plan (LTI) in 2013, the guideline for
members of the Board of Management to hold a certain
number of shares in the Company was increased to the
level of at least 200% of base pay (300% for the CEO).
Until this level has been reached the members of the
Board of Management are required to retain all after-
tax shares derived from any long-term incentive plan.
Pieter Nota has reached the required share ownership
level, the CEO has increased his ownership significantly
throughout the year to currently 81% of his target and
Abhijit Bhattacharya is at 53% of his target.
10.2.3 Scenario analysis
The Remuneration Committee conducts a scenario
analysis annually. This includes the calculation of
remuneration under different scenarios, whereby
different Philips performance assumptions and
corporate actions are examined. The Supervisory Board
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 believes that the Annual and Long-Term
Incentive Plans support this relationship.
10.2.4 Remuneration costs
The table below gives an overview of the costs incurred
by the Company in the financial year in relation to the
remuneration of the Board of Management. Costs
related to performance shares, stock option and
restricted share right grants are taken by the Company
over a number of years. As a consequence, the costs
mentioned below in the performance shares, stock
Philips Group
Remuneration Board of Management1) in EUR
2015
Costs in the year
annual
base
compen-
sation2)
base
compen-
sation
realized
annual
incentive
perfor-
mance
shares
stock
options
restricted
share
rights
pension
allowan-
ces
pension
scheme
costs
other
compen-
sation
F.A. van Houten
1,175,000
1,168,750
768,920
1,273,940
17,713
28,279
529,387
25,241
78,035
A. Bhattacharya
650,000
23,551
11,937
8,968
−
183
7,315
P.A.J. Nota
680,000
672,500
383,112
605,749
1,864,801
1,163,969
1,888,657
12,045
29,758
21,964
270,529
50,426
807,231
886
26,302
52,429
998
104,918
183,951
1) Reference date for board membership is December 31, 2015
2) Base compensation as of April 1, 2015 and for Mr Bhattacharya as of date of appointment as a member of the Board of Management
Annual Report 2015
83
Supervisory Board report
10.2.6
To support the performance culture, the Annual
Incentive plan is based on (financial) targets at ‘own
level’ and ‘group’ level results (line-of-sight). The 2015
payouts, shown in the table below, reflect the at or
above threshold performance of CSG, EBITA and
Working Capital at the Group level.
Philips Group
Annual Incentive realization in EUR
2015 (payout in 2016)
F.A. van Houten
A. Bhattacharya1)
P.A.J. Nota
realized annual
incentive
as a % of base
compensation
(2015)
768,920
11,937
383,112
65.4%
50.7%
56.3%
1) Pay-out related to board membership period only
10.2.7 Long-Term Incentive Plan
Grants made under the 2015 LTI Plan consist of
performance shares only.
Grant size
The annual grant size is set by reference to a multiple
of base compensation. For the CEO the annual grant
size is set at 120% of base compensation and for the
other members of the Board of Management at 100%
of base compensation. This is broadly at a mid-market
level against leading European listed companies. The
actual number of performance shares to be awarded is
determined by reference to the average of the closing
price of the Philips share on the day of publication of
the first quarterly results and the four subsequent
dealing days.
Vesting schedule
Dependent upon the achievement of the performance
conditions, cliff-vesting applies three years after the
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 by 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.
84
Annual Report 2015
The following performance-incentive zone applies for
EPS:
Philips Group
Performance-incentive zone for EPS in %
Below
threshold
Threshold
Target Maximum
Payout
0
40
100
200
The EPS targets are set annually by the Supervisory
Board. Given 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. For realizaton of the 2013 grant,
see the table on vesting 2013 awards at the end of this
section.
TSR
The TSR peer group for the LTI Plan consists of the
following 21 companies:
Philips Group
TSR peer group
ABB
Covidien
Danaher
Eaton
Hitachi
Panasonic
Honeywell Int.
Procter & Gamble
Johnson Controls
Schneider Electric
Johnson & Johnson
Siemens
Electrolux
Legrand
Smiths Group
Emerson Electric LG Electronics
General Electric Medtronic
Toshiba
3M
A ranking approach to TSR applies with Philips itself
excluded from the peer group to permit interpolation.
On January 26, 2015, Medtronic completed the
acquisition of Covidien. To address the delisting of
Covidien the Supervisory Board adopted the approach
of recognizing Covidien’s performance through the
delisting date and as a proxy for future performance,
assumed reinvestment in an index of the remaining 20
peer companies, therefore, effectively retaining a peer
group of 21 companies.
The performance incentive-zone is outlined in the table
below:
Philips Group
Performance-incentive zone for TSR in %
≥
9
≥
21-14
Position
≥
10
≥
12
≥
11
≥
13
≥
8
≥
7
≥
6-1
Payout
0 60 60
100
120
140
160
180 200
Under the LTI Plan members of the Board of
Management were granted 93,018 performance shares
in 2015.
The following tables provide an overview at end
December 2015 of stock option grants, restricted share
rights grants and performance share grants. The
reference date for board membership is December 31,
2015.
For more details of the LTI Plan see note 28, Share-
based compensation.
Realization of 2013 performance share grant
The 3-year performance period of the 2013
performance share grant ended on December 31, 2015.
The payout results are explained below.
TSR (50% weighting)
The TSR achieved by Philips during the performance
period was 34.15%. This positioned Philips between the
12th and 13th ranked company in the peer group shown
in the table below, resulting in a payout of 60%.
Supervisory Board report
10.2.7
TSR results Philips LTI Plan 2013 grants Koninklijke Philips:
34.15%
Total Shareholder Return ranking per December 31, 2015
Start date: December 2012
End date: December 2015
Company
Panasonic
Covidien
Medtronic
Legrand
3M
Honeywell International
Danaher
Johnson Controls
Hitachi
Johnson & Johnson
Electrolux
General Electric
Siemens
Procter & Gamble
Eaton
Schneider Electric
ABB
Toshiba
Emerson Electric
Smiths Group
LG Electronics
total return
rank number
202.52%
99.10%
88.74%
82.06%
81.03%
76.37%
74.71%
68.72%
65.40%
56.87%
53.12%
52.78%
29.97%
22.03%
19.13%
16.17%
12.96%
11.35%
4.24%
3.43%
(30.08)%
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
Philips Group
Stock options
F.A. van Houten
A. Bhattacharya
P.A.J. Nota
1) Value based on Black & Scholes value
2) Accelerate! Grant
Philips Group
Restricted share rights
F.A. van Houten
A. Bhattacharya
P.A.J. Nota
grant date
number of
stock options
value at
grant date1)
end of
lock-up period
2012
20132)
2012
2012
20132)
75,000
55,000
16,500
51,000
38,500
212,550
242,534
46,761
144,534
169,773
2015
2016
2015
2015
2016
value at
end of
lock-up period1)
732,368
n.a.
161,121
498,010
n.a.
number of
restricted share
rights originally
granted
20,001
4,401
13,602
grant date
2012
2012
2012
value at
grant date
296,415
65,223
201,582
number of
restricted share
rights
released in 2015
6,667
1,467
4,534
value at
release date
in 2015
181,209
39,873
123,234
Annual Report 2015
85
Supervisory Board report
10.2.7
Adjusted EPS growth (50% weighting)
The EPS payouts and targets set at the beginning of the
performance period were as follows:
below
threshold
threshold
target
maximum
EPS
(euro)
Payout
<1.30
0%
1.30
40%
1.50
100%
1.80
200%
EPS is based on the underlying income from continuing
operations attributable to shareholders, as included in
the Annual Report, adjusted for changes in accounting
principles. Furthermore, the Supervisory Board has also
deemed it appropriate to make adjustments relating to
certain other items that were not contemplated when
the targets were set in 2012. These relate to costs
associated with M&A activity, earnings from acquired
companies, charges relating to the recent pension de-
risking, and impact of foreign exchange variations
versus plan. In addition, we have added back in
earnings from Lumileds, even though classed as
discontinued operations, since planned earnings from
this business were included in the original EPS targets.
The resulting EPS achievement was determined by the
Supervisory Board as 110%, resulting in a payout of 55%.
In view of the above, the following performance
achievement and vesting levels have been determined
by the Supervisory Board in respect of the 2013 grant of
performance shares:
metric
achievement
weighting
vesting level
TSR
EPS
total
60%
110%
50%
50%
30%
55%
85%
The original grant in 2013 has been downward adjusted
by 15% to reflect the performance. The 2013 grant
shown in the table headed ‘Philips Group -
Performance Shares’ in this section does not reflect this
adjustment.
10.2.8 Pensions
Due to legislative changes in the Netherlands, effective
January 1, 2015 a new pension arrangement applies to
the Board of Management, the other members of the
Executive Committee and the Executives working under
a Dutch contract.
As of this date pension plans which allow pension
accrual based on a pensionable salary exceeding an
amount of EUR 100,000 are, for fiscal purposes,
considered to be non-qualifying schemes. For this
reason the Executive Pension Plan in the Netherlands
has been terminated.
The following pension arrangement is in place for the
members of the Board of Management with effect from
January 1, 2015:
• Flex Pension Plan in the Netherlands, which is a
Collective Defined Contribution plan with a fixed
contribution of 26.2% up to the maximum
pensionable salary of EUR 100,000. The Flex Plan
has a target retirement age of 67 and a target accrual
rate of 1.85%;
• A gross Pension Allowance equal to 25% of the base
compensation exceeding EUR 100,000;
• A temporary gross Transition Allowance, for a
maximum period of 8 years (first 5 years in full; year
6: 75%; year 7: 50%, year 8: 25%) for members of the
Board who were participants of the former Executive
Pension Plan. The level of the allowance is based on
the age and salary of the Board member on
December 31, 2014.
The total pension cost of the Company related to this
new pension arrangement (including the temporary
Transition Allowance for the remaining 7 years) is at a
comparable level over a period of time to the pension
cost under the former Executive Pension Plan.
10.2.9 Additional arrangements
In addition to the main conditions as stipulated in the
contracts for the provision of services, a number of
additional arrangements apply to members of the
Board of Management. These additional arrangements,
such as expense and relocation allowances, medical
Philips Group
Performance shares1)
F.A. van Houten
A. Bhattacharya
P.A.J. Nota
number of
performance
shares
originally
granted
grant date
2013
2014
2015
2013
2014
2015
2013
2014
2015
62,559
59,075
54,877
11,848
10,702
11,676
29,621
27,825
26,465
value at
grant date
1,320,000
1,380,000
1,410,000
250,000
250,000
300,000
625,000
650,000
680,000
end of
vesting
period
number of
performance
shares
vested in 2015
value
at vesting
date in 2015
2016
2017
2018
2016
2017
2018
2016
2017
2018
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
1) Dividend performance shares not included
86
Annual Report 2015
Supervisory Board report
10.2.9
In respect of the HealthTech business we expect minimal
changes in target levels of remuneration that will apply
to the Board of Management in 2016.
10.3 Report of the Audit Committee
The Audit Committee is chaired by Jackson Tai, and its
other members are Neelam Dhawan, Orit Gadiesh and
David Pyott. Jeroen van der Veer also regularly
participated in Audit Committee meetings. The
Committee assists the Supervisory Board in fulfilling its
supervisory responsibilities for (inter alia) ensuring the
integrity of the Company’s financial statements and
reviewing the Company’s internal controls.
The Audit Committee met five times during 2015,
including at the conclusion of each quarter, and
reported its findings to the plenary Supervisory Board.
The CEO, the CFO, the Chief Legal Officer, the Head of
Internal Audit, the Group Controller and the external
auditor (KPMG Accountants N.V.) attended all regular
meetings.
As decided by the 2015 Annual General Meeting of
Shareholders, Ernst & Young Accountants LLP were
appointed as the company’s new external auditor
effective January 1, 2016. To ensure a smooth transition
between KPMG Accountants N.V. and Ernst & Young
Accountants LLP, the Audit Committee also invited the
lead partner from Ernst & Young Accountants LLP to
attend Audit Committee meetings during the second
half of 2015. KMPG Accountants N.V. and Ernst & Young
Accountants LLP each reported that the transition
between auditors was proceeding well and the Audit
Committee has confidence that Ernst & Young
Accountants LLP will assume its auditor duties without
interruption.
Furthermore, for each meeting, the Committee met
separately with each of the CEO, the CFO, the Chief
Legal Officer, the Head of Internal Audit and the
external auditor as well as on an ad hoc basis with other
company employees, such as the Group Treasurer, the
Group Accountant, the Head of Mergers, Acquisitions
and Divestments and the Head of Financial Risk and
Pensions Management.
insurance, accident insurance and company car
arrangements, are in line with those for Philips
executives in the Netherlands. In the event of
disablement, members of the Board of Management
are entitled to benefits in line with those for other
Philips executives in the Netherlands.
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, like reasonable costs of defending claims, as
formalized in the Articles of Association. Under certain
circumstances, described in the Articles of Association,
such as an action 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.
10.2.10 Remuneration of the Supervisory Board
As the base fee for the members of the Supervisory
Board had not changed since 2008, and in view of the
increased activities and responsibilities of the
Supervisory Board, a revised remuneration structure
was proposed and approved by the 2015 General
Shareholders’ Meeting. The table below gives an
overview of this new remuneration structure.
Philips Group
Remuneration Supervisory Board1) in EUR
2015
Chairman
Vice
Chairman
Supervisory Board
135,000
90,000
Audit Committee
22,500
Member
80,000
13,000
10,000
7,500
10,000
n.a.
n.a.
n.a.
n.a.
15,000
15,000
15,000
2,500
2,500
2,500
5,000
5,000
5,000
Remuneration
Committee
Corporate
Governance and
Nomination &
Selection Committee
Separation
Committee
Attendance fee per
inter-European trip
Attendance fee per
intercontinental trip
Entitlement to
Philips product
arrangement
2,000
2,000
2,000
The overview below indicates some of the matters that
were discussed during meetings throughout 2015:
1) For more details, see note 29, Information on remuneration
10.2.11 Year 2016
2016 will be a momentous year for Philips with the
planned separation into two world-class companies
focused on HealthTech and Lighting opportunities. As a
result of this separation, during 2016 we will review the
remuneration and long-term incentive policies that
apply to both companies and submit whatever is
required by the financial and regulatory authorities and
request shareholder approvals, as appropriate.
• The Company’s 2015 annual and interim financial
statements, including non-financial information,
prior to publication thereof. The Committee also
assessed in its quarterly meetings the adequacy and
appropriateness of internal control policies and
internal audit programs and their findings.
• Matters relating to accounting policies, financial risks
and compliance with accounting standards.
Compliance with statutory and legal requirements
and regulations, particularly in the financial domain,
was also reviewed. Important findings, Philips’ major
Annual Report 2015
87
monitored closely the Company’s internal control
certification processes, in particular compliance with
section 404 of the US Sarbanes-Oxley Act and its
requirements regarding assessment, review and
monitoring of internal controls. It also discussed on a
regular basis the developments in and findings
resulting from investigations into alleged violations of
the General Business Principles and, if required, any
measures taken.
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
assessed the overall performance of the external
auditor, as required by the Auditor Policy. The
Committee also reviewed its own Charter and
concluded that it was satisfactory.
Supervisory Board report
10.3
areas of risk (including the internal auditor’s reporting
thereon, and the Chief Legal Officer’s review of
litigation and other claims) and follow-up actions
and appropriate measures were examined
thoroughly. The Committee again reviewed the
Company’s pension liabilities and its program to de-
risk future pension liabilities and related employee,
economic, financial accounting and reporting
implications, as well as the implementation of that
program. Each quarter, the Committee reviewed the
Company’s cash flow generation, liquidity and
headroom, capital structure throughout the year and
the implications for the Company’s credit ratings and
its ability to undertake its financial commitments,
including the Company’s share repurchase program
and payment of dividends. The Committee also
reviewed the goodwill impairment test performed in
the second quarter, risk management, tax issues,
information security, developments in regulatory
investigations as well as legal proceedings including
antitrust investigations and related provisions and
environmental exposures.
• Specific finance topics included the implications to
the Company’s capital structure following the
proposed sale of Lumileds and Automotive
(including its classification as discontinued
operations), the Volcano acquisition and the
accounting therefore, the intended separation of the
Lighting business and its potential impact on the 2015
financial statements, as well as taxation, the activities
of Philips Capital, the Company’s currency hedging
practices and the impact of certain potential
acquisitions.
• With regard to the internal audit, the Committee
reviewed, and if required approved, the internal audit
charter, audit plan, audit scope and its coverage in
relation to the scope of the external audit, as well as
the staffing, independence and organizational
structure of the internal audit function. The
separation of the audit function for Royal Philips and
Philips Lighting, including staffing capabilities and its
management succession, was also discussed.
• With regard to the external audit, the Committee
reviewed the proposed audit scope, approach and
fees, the independence of the external auditor, non-
audit services provided by the external auditor in
conformity with the Philips Auditor Policy, as well as
any changes to this policy. The Committee also
reviewed the independence as well as its
professional fitness and good standing of the
external auditor and its engagement partners. For
information on the fees of KPMG Accountants N.V.,
please refer to the table ‘Fees KPMG’ in note 6,
Income from operations.
• The Company’s policy on business controls, the
General Business Principles including the
deployment thereof and amendments thereto. The
Committee was informed on, and it discussed and
88
Annual Report 2015
11 Corporate governance
Corporate governance 11
Corporate governance of the Philips Group -
Introduction
Koninklijke Philips N.V., a company organized under
Dutch law, is the parent company of the Philips 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 15, 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.
11.1 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. 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 corporate governance report, 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.
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
Annual Report 2015
89
Corporate governance 11.1
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 by 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 8, 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 (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
90
Annual Report 2015
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. Dutch legislation
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 20 million; (ii) the net
turnover exceeds EUR 40 million; or (iii) the average
number of employees equals or exceeds 250. During
the financial year 2015 all members of the Board of
Management complied with the limitations on Non-
Executive Directorships described above.
Since 2013, Dutch legislation on board diversity
provided that 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 relevant rule ceased to have effect
on January 1, 2016, but a bill aimed at reintroducing the
rule was announced in November 2015. For more
details on board diversity please be referred to section
10.1, Report of the Corporate Governance and
Nomination & Selection Committee, of this Annual
Report.
Dutch legislation on conflicts of interests 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 2015.
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 Annual 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
section 10.2, Report of the Remuneration Committee, of
this Annual Report.
Pursuant to Dutch legislation, the implementation of
the remuneration policy during the financial year 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.
All current members of the Board of Management are
engaged by means of a services agreement
(overeenkomst van opdracht), as Dutch legislation
prohibits a member of the Board of Management to be
employed by means of a contract of employment. In
case of the appointment or re-appointment of a
member of the Board of Management, the main
elements of the services agreement - including the
amount of the fixed base compensation, the structure
and amount of the variable compensation 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 (re-)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 the services agreement
of the members of the Board of Management is set at
Corporate governance 11.1
four years and, in case of termination, severance
payment is limited to a maximum of one year’s base
compensation.
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. Since the full revision in 2013 of the LTI Plan
applicable to members of the Board of Management,
the plan consists of performance shares only, with a
three year post-grant performance measurement. For
more details please be referred to section 10.2, 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 Dutch legislation
(effective January 1, 2014), the Supervisory Board is
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. No such moderation or claim for
repayment has occurred during the financial year 2015.
Dutch legislation also provides for 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
Annual Report 2015
91
Corporate governance 11.1
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. The 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 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 2015, nor are any loans or guarantees
outstanding as of December 31, 2015.
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
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Annual Report 2015
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 based on the “Internal Control-
Integrated Framework (2013)” established by 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 chapter 7,
Risk management, of this Annual Report. 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 group and Business Group, Market and
Function Audit & Risk 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 2015. 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 section 12.1,
Management’s report on internal control, of this Annual
Report.
Next to the Philips General Business Principles (GBP),
the Company has a Financial Code of Ethics which
additionally applies to designated senior executives,
including the CEO and the CFO, and employees working
in the Finance and Accounting departments. The GBP
and the Financial Code of Ethics have 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. The Company’s whistleblower
mechanisms furthermore allow employees and, since
May 2015, external parties to confidentially and
anonymously report grievances to the Company, also
on other topics than those that relate to questionable
accounting or auditing matters. The Company does not
tolerate retaliation against (internal) whistleblowers
that report a concern in good faith. More information on
GBP governance and our whistleblower procedures can
be found in chapter 14, Sustainability statements, of this
Annual Report and chapter 7, Risk management, of this
Annual Report.
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 the CFO
under US law, each individual member of the Board of
Management and the Supervisory Board 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 as referred to in chapter 12, Group financial
statements, of this Annual Report, as required by
applicable Dutch company law and securities law.
11.2 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
Corporate governance 11.1
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 Group’s performance, (b) the 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 are 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 2015, 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.
Annual Report 2015
93
Corporate governance 11.2
Since 2013, Dutch legislation on board diversity
provided that the Company must 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 relevant rule ceased to have effect on
January 1, 2016, but a bill aimed at reintroducing the rule
was announced in November 2015. For more details on
board diversity please be referred to section 10.1,
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 as mentioned in the Dutch
Corporate Governance Code, 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 2015, the Supervisory Board additionally established
the Separation Committee and the Quality &
Regulatory Committee. Please refer to chapter 10,
Supervisory Board report, of this Annual Report for
more information on the composition and activities of
these committees.
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 11.2 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 nine), including a Chairman, Vice-Chairman
and Secretary. The Dutch ‘large company regime’ does
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Annual Report 2015
not apply to the Company itself. Members are currently
appointed 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 are
eligible for re-election twice (unless the Supervisory
Board resolves to deviate in a specific case). 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,
Dutch legislation provides that no member of the
Supervisory Board shall hold more than five Non-
Executive Directorships at ‘large’ companies or
foundations as defined under Dutch law (see section
11.1, Board of Management, of this Annual Report), with
a position as chairman counting for two. During the
financial year 2015 all members of the Supervisory
Board complied with the limitations on Non-Executive
Directorships described above.
Dutch legislation on conflicts of interests 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 2015.
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 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
Corporate governance 11.2
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.
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
Annual Report 2015
95
Corporate governance 11.2
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 CEO and the Executive Committee on candidates to
fill vacancies on the Supervisory Board, the Board of
Management and 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 external
consultant and 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. None of the members of
the Audit Committee is designated as an Audit
Committee financial expert as defined under the
regulations of the US Securities and Exchange
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Annual Report 2015
Commission. The Supervisory Board considers the fact
of being compliant with the Dutch Corporate
Governance Code, in combination with the expertise
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. The Audit Committee may not be chaired
by the Chairman of the Supervisory Board or by a
(former) member of the Board of Management.
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 CEO, the CFO,
the internal auditor and the external auditor.
11.3 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
Corporate governance 11.2
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 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, 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 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 Dutch legislation, 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
Annual Report 2015
97
Corporate governance 11.3
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 Annual General Meeting of
Shareholders. 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.
A resolution to dissolve the Company or change its
Articles of Association can be adopted at a 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) shares
At the 2015 Annual General Meeting of Shareholders it
was 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 6, 2016. The maximum
number of shares the company may hold, will not
exceed 10% of the issued share capital as of May 7, 2015,
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, at the 2015 Annual General Meeting of
Shareholders it was 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 6, 2016. This
authorization is limited to a maximum of 10% of the
number of shares issued as of May 7, 2015 plus 10% of
the issued capital in connection with or on the occasion
of mergers, acquisitions and/or strategic alliances.
11.4 Meeting logistics and other
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
98
Annual Report 2015
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. Holders of common shares
in bearer form will also be able to give voting
instructions via Internet (assuming the agenda for such
meeting includes voting items). In addition, the
Company will distribute a voting instruction form for a
General Meeting of Shareholders. By giving voting
instructions via Internet or by returning the 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.
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, 2015. 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.
Corporate governance 11.4
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 P.A.F.W.
Elverding, M.W. den Boogert and F.J.G.M. Cremers. 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.
Annual financial statements
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 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 at the Annual General Meeting of
Shareholders, to be convened subsequently. The
Company, under US securities regulations, separately
Annual Report 2015
99
Corporate governance 11.4
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.
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 assess 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, 2011 and
2014 General Meetings of Shareholders resolved to re-
appoint KPMG Accountants N.V. as auditor, at the latest
meeting up to and including the financial year 2015. Mr
E.H.W. Weusten is the current partner of KPMG
Accountants N.V. in charge of the audit duties for
Philips.
100
Annual Report 2015
The 2015 Annual General Meeting of Shareholders
appointed Ernst & Young Accountants LLP as the
Company’s new auditor as of January 1, 2016. Mr C.B.
Boogaart is the current partner of Ernst & Young
Accountants LLP N.V. in charge of the audit duties for
Philips.
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.
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.
Auditor policy
Dutch law requires the separation of audit and non-
audit services, meaning the Company’s external auditor
is no longer allowed to provide non-audit services. In
light of this 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
2015, there were no services provided to the Company
by the external auditor which were not pre-approved
by the Audit Committee.
11.5 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.
From time to time the Company communicates with
investors via road shows, broker conferences and a
Capital Markets Day, announced in advance on the
Company’s website. 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 take place either
at the initiative of the Company or at the initiative of
investors. The Company is generally represented by its
Investor Relations department during these
interactions, however, on a limited number of occasions
the Investor Relations department is accompanied by
one or more members of the senior management. The
subject matter of the bilateral communications ranges
from individual queries from investors to more
elaborate discussions following 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
Corporate governance 11.4
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 on persons holding certain interests 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. The statutory 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 June 23, 2015 the Company received notification
from the AFM that it had received disclosure under the
Dutch Act on Financial Supervision of 4.97% of the
voting rights by Dodge & Cox. On July 24, 2015 the
Company received notification from the AFM that it had
received disclosure under such Act of a substantial
holding of 4.06%, and of 5% of the voting rights by
Blackrock, Inc. On January 7, 2016 the Company
received notification from the AFM that it had received
disclosure under such Act of a substantial holding (and
voting rights) of 4.99% by Harris Associates L.P. As per
December 31, 2015, 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 1,124 holders of record, including Cede &
Co. Cede & Co acts as nominee for the Depository Trust
Company holding the shares (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
Annual Report 2015
101
Corporate governance 11.5
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
Philips 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 23, 2016
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Annual Report 2015
12 Group financial statements
Group financial statements 12
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
2015 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 4, Our strategic focus, of this Annual Report
• chapter 5, Group performance, of this Annual Report
• chapter 6, Sector performance, of this Annual Report
• chapter 7, Risk management, of this Annual Report
• chapter 10, Supervisory Board report, of this Annual
Report
• section 10.1, Report of the Corporate Governance and
Nomination & Selection Committee, of this Annual
Report
• section 10.2, Report of the Remuneration Committee,
of this Annual Report
• chapter 11, Corporate governance, of this Annual
Report
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 13.5, Independent auditor’s report, of this
Annual Report, section 5.4, Proposed distribution to
shareholders, of this Annual Report, and note 32,
Subsequent events.
Please refer to chapter 19, 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 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
Abhijit Bhattacharya
Pieter Nota
• chapter 19, Forward-looking statements and other
February 23, 2016
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 2015 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,
Annual Report 2015
103
12.1.1 Changes in internal control over financial
reporting
During the year ended December 31, 2015, 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.
12.2 Report of the independent auditor
Management’s report on internal control over financial
reporting is set out in section 12.1, Management’s report
on internal control, of this Annual Report. The report set
out in section section 12.3, Independent auditors’ report
on internal control over financial reporting, of this
Annual Report, is provided in compliance with
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, 2015.
KPMG Accountants N.V. has also issued a report on the
consolidated financial statements and the company
financial statements, in accordance with Dutch law,
including the Dutch standards on auditing, of
Koninklijke Philips N.V., which is set out in section 13.5,
Independent auditor’s report, of this Annual Report.
KPMG Accountants N.V. has also issued a report on the
consolidated financial statements in accordance with
the 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 23, 2016.
Group financial statements 12.1
12.1 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 (2013)” 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, 2015,
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, 2015, 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
Abhijit Bhattacharya
Pieter Nota
February 23, 2016
104
Annual Report 2015
12.3 Independent auditors’ 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.’s internal
control over financial reporting as of December 31, 2015,
based on criteria established in Internal Control —
Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway
Commission (COSO). Koninklijke Philips N.V.’s
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 12.1, “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.
Group financial statements 12.3
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. maintained, in all
material respects, effective internal control over
financial reporting as of December 31, 2015, based on
criteria established in Internal Control — Integrated
Framework (2013) 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, 2015 and 2014, 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, 2015, and our
report dated February 23, 2016, expressed an
unqualified opinion on those consolidated financial
statements.
Amsterdam, The Netherlands
February 23, 2016
KPMG Accountants N.V.
Annual Report 2015
105
Group financial statements 12.4
12.4 Consolidated statements of income
Philips Group
Consolidated statements of income in millions of EUR unless otherwise stated
For the years ended December 31
Sales
Cost of sales
Gross margin
Selling expenses
Research and development expenses
General and administrative expenses
Impairment of goodwill
Other business income
Other business expenses
Income from operations
Financial income
Financial expenses
Income before taxes
Income tax expense
Income after taxes
Results relating to investments in associates:
Company’s participation in income
Other results
Income from continuing operations
6
7
7
8
5
3 Discontinued operations - net of income tax
Net income
Attribution of net income (loss)
Net income attributable to Koninklijke Philips N.V. shareholders
Net income attributable to non-controlling interests
Philips Group
Earnings per common share attributable to shareholders1) in EUR unless otherwise stated
For the years ended December 31
Basic earnings per common share in EUR
Income from continuing operations attributable to shareholders
Net income attributable to shareholders
Diluted earnings per common share in EUR
Income from continuing operations attributable to shareholders
Net income attributable to shareholders
9
9
9
9
The accompanying notes are an integral part of these consolidated financial statements.
1) Shareholders in this table refer to shareholders of Koninklijke Philips N.V.
2013
21,990
(12,653)
9,337
(5,057)
(1,659)
(825)
(28)
122
(35)
1,855
70
(400)
1,525
(466)
1,059
5
(30)
1,034
138
1,172
1,169
3
2013
1.13
1.28
1.12
1.27
2014
21,391
(13,185)
8,206
(5,124)
(1,635)
(747)
(3)
63
(274)
486
114
(415)
185
(26)
159
30
32
221
190
411
415
(4)
2014
0.25
0.45
0.24
0.45
2015
24,244
(14,388)
9,856
(5,815)
(1,927)
(1,209)
-
137
(50)
992
98
(467)
623
(239)
384
10
20
414
245
659
645
14
2015
0.44
0.70
0.43
0.70
106
Annual Report 2015
12.5 Consolidated statements of comprehensive income
Philips Group
Consolidated statements of comprehensive income in millions of EUR unless otherwise stated
For the years ended December 31
Net income for the period
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
Currency translation differences:
Net current period change, before tax
Income tax effect
Reclassification adjustment for gain 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 for the period
Total comprehensive income attributable to:
Shareholders of Koninklijke Philips N.V.
Non-controlling interests
The accompanying notes are an integral part of these consolidated financial statements.
Group financial statements 12.5
2013
1,172
139
(77)
(31)
31
62
(427)
(35)
(14)
(5)
-
6
68
(2)
(62)
(471)
(409)
763
760
3
2014
411
(972)
289
(10)
10
(683)
600
203
(5)
30
(4)
(54)
(40)
10
(7)
733
50
461
465
(4)
2015
659
(101)
9
(9)
9
(92)
643
187
(1)
33
-
(4)
(38)
-
63
883
791
1,450
1,436
14
Annual Report 2015
107
Group financial statements 12.6
12.6 Consolidated balance sheets
Philips Group
Consolidated balance sheets in millions of EUR unless otherwise stated
As of December 31
Non-current assets
2
10 25 Property, plant and equipment:
- At cost
- Less accumulated depreciation
2
2
11 Goodwill
12
Intangible assets excluding goodwill:
- At cost
- Less accumulated amortization
16 Non-current receivables
5
Investments in associates
13 Other non-current financial assets
30 Non-current derivative financial assets
8 Deferred tax assets
14 Other non-current assets
Total non-current assets
Current assets
15
Inventories
13 Current financial assets
14 Other current assets
30 Current derivative financial assets
8
Income tax receivable
16
27 Receivables:
- Accounts receivable
- Accounts receivable from related parties
- Other current receivables
3
Assets classified as held for sale
31 Cash and cash equivalents
Total current assets
Total assets
2014
2015
6,844
(4,749)
8,020
(4,652)
4,476
14
233
7,217
(4,895)
9,251
(5,558)
4,727
16
239
2,322
8,523
3,693
191
181
489
58
2,758
68
18,283
3,463
12
444
103
114
4,982
1,809
1,766
12,693
30,976
2,095
7,158
3,368
177
157
462
15
2,460
69
15,961
3,314
125
411
192
140
4,723
1,613
1,873
12,391
28,352
108
Annual Report 2015
Equity
17
Shareholders’ equity:
Preference shares, par value EUR 0.20 per share:
- Authorized: 2,000,000,000 shares (2014: 2,000,000,000 shares),
issued none
Common shares, par value EUR 0.20 per share:
- Authorized: 2,000,000,000 shares (2014: 2,000,000,000 shares)
- Issued and fully paid: 931,130,387 shares (2014: 934,819,413 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 14,026,801 shares (2014: 20,430,544 shares)
17 Non-controlling interests
Group equity
Non-current liabilities
18
25
Long-term debt
30 Non-current derivative financial liabilities
19
20 Long-term provisions
8 Deferred tax liabilities
22 Other non-current liabilities
Total non-current liabilities
Current liabilities
18
25
Short-term debt
30 Derivative financial liabilities
8
Income tax payable
25
27 Accounts and notes payable:
- Trade creditors
- Accounts payable to related parties
21 Accrued liabilities
19
20 Short-term provisions
3
Liabilities directly associated with assets held for sale
22 Other current liabilities
Total current liabilities
Total liabilities and group equity
The accompanying notes are an integral part of these consolidated financial statements.
Group financial statements 12.6
2014
2015
187
2,181
8,790
13
229
27
(13)
(547)
2,495
4
186
2,669
8,040
4
1,058
56
12
(363)
2,669
4
11,662
118
11,780
4,095
695
2,392
164
1,782
9,128
1,665
238
116
2,673
2,863
833
407
1,273
10,068
30,976
10,867
101
10,968
3,712
551
2,500
107
1,838
8,708
392
306
102
2,499
2,692
945
349
1,391
8,676
28,352
Annual Report 2015
109
Group financial statements 12.7
12.7 Consolidated statements of cash flows
Philips Group
Consolidated statements of cash flows in millions of EUR unless otherwise stated
For the years ended December 31
Cash flows from operating activities
Net income
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
Interest income
Interest expense on debt, borrowings and other liabilities
Income taxes
Results from investments in associates
Decrease (Increase) in working capital
Decrease (Increase) in receivables and other current assets
Decrease (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
Interest paid
Interest received
Dividends received from investments in associates
Dividends paid to non-controlling interests
Income taxes paid
Net cash provided by operating activities
Cash flows from investing activities
Net capital expenditures
Purchase of intangible assets
Expenditures on development assets
Capital expenditures on property, plant and equipment
Proceeds from sales of property, plant and equipment
Cash 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
23
24
24
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 on long-term debt
Proceeds from issuance of long-term debt
Re-issuance of treasury shares
Purchase of treasury shares
Dividends paid
Net cash provided by (used for) financing activities
Net cash used for continuing operations
Cash flows from discontinued operations
Net cash provided by (used for) operating activities
Net cash provided by (used for) investing activities
Net cash (used for) provided by discontinued operations
Net cash used for 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
2013
2014
2015
411
(190)
659
(245)
1,187
1,281
1,172
(138)
1,177
38
(54)
(54)
258
466
25
(1,167)
(486)
(165)
(516)
(264)
(194)
299
(267)
52
6
(7)
(436)
912
(830)
(49)
(326)
(482)
27
(101)
(13)
14
(11)
79
21
(83)
(39)
231
26
(62)
312
(75)
(77)
464
(412)
640
(242)
(232)
38
41
-
(344)
1,303
(806)
(114)
(295)
(437)
40
(7)
(81)
107
(177)
(20)
(862)
(984)
(285)
(186)
64
107
(669)
(272)
(1,241)
(1,191)
(68)
(47)
(115)
(1,306)
(63)
3,834
2,465
(37)
(333)
69
117
(713)
(292)
(1,189)
(870)
105
88
193
(677)
85
2,465
1,873
48
(110)
(48)
278
239
(10)
67
161
22
(116)
(135)
(278)
(99)
(265)
48
17
-
(280)
1,167
(842)
(121)
(314)
(522)
115
(72)
(21)
53
(1,116)
57
(1,941)
1,241
(104)
94
81
(506)
(298)
508
(266)
79
-
79
(187)
80
1,873
1,766
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.
110
Annual Report 2015
Group financial statements 12.8
12.8 Consolidated statements of changes in equity
Philips Group
Consolidated statements of changes in equity in millions of EUR unless otherwise stated
For the year ended December 31
ca pital in excess of p ar valu e
retain e d e arnin gs
availa ble-for-sale fin a ncial assets
curre ncy tra nslatio n differe nces
revalu atio n reserve
cash flo w h e d g es
tre asury sh ares at cost
total sh are h old ers’ e q uity
n o n-co ntrollin g interests
Gro u p e q uity
m o n sh ares
co m
191
1,304
10,724
54
(93)
Dividend distributed
4
402
Dividend distributed
3
433
Balance as of Jan. 1,
2013
Total comprehensive
income (loss)
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
Balance as of Dec. 31,
2013
Total comprehensive
income (loss)
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
Balance as of Dec. 31,
2014
Total comprehensive
income (loss)
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
Balance as of Dec. 31,
2015
(7)
(36)
105
21
(4)
(31)
(476)
1,262
(678)
-
(780)
(38)
(75)
54
1
20
(1,103)
11,151
34
11,185
4
-
787
760
(272)
-
-
(631)
(669)
229
118
105
21
3
763
(272)
(24)
(24)
-
(669)
118
105
21
188
1,796
10,415
23
(569)
55
24
(718)
11,214
13
11,227
(258)
(729)
-
(529)
(26)
(10)
798
(28)
(37)
-
533
(4)
92
465
(293)
-
-
(688)
(714)
(127)
(83)
326
461
(293)
92
-
(714)
116
88
(9)
116
88
(9)
88
(9)
187
2,181
8,790
562
(730)
(513)
(12)
(57)
13
(9)
229
829
27
29
(13)
(547)
10,867
101
10,968
25
-
1,436
(298)
517
-
14
3
1,450
(298)
3
-
(495)
(507)
(507)
162
82
101
(19)
82
101
(19)
(4)
(23)
101
(19)
Dividend distributed
3
429
186
2,669
8,040
4
1,058
56
12
(363)
11,662
118
11,780
The accompanying notes are an integral part of these consolidated financial statements.
Annual Report 2015
111
Group financial statements 12.9
1
12.9 Notes
Notes to the Consolidated financial statements of
the Philips Group
1 Significant accounting policies
The Consolidated financial statements in the Group
financial statements 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 2015 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. Koninklijke Philips N.V. (hereafter:
the ‘Company’ or ‘Philips’) has no hedge transactions to
which these paragraphs are applicable. Consequently,
the accounting policies applied by Philips also comply
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 euro, which is the
presentation currency.
On February 23, 2016, the Board of Management
authorized the Consolidated financial statements for
issue. The Consolidated financial statements as
presented in this report are subject to adoption by the
Annual General Meeting of Shareholders, to be held on
May 12, 2016.
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 a 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.
The Company evaluates 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
112
Annual Report 2015
assessing the accounting treatment with respect to
commitments and contingencies. The Company revises
material estimates if changes occur in the
circumstances or there is new information or
experience on which an estimate was or can be based.
The areas where the most significant judgments and
estimates are made are goodwill, deferred tax asset
recoverability, 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, uncertain tax positions 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, as
well as when determining the fair values of acquired
identifiable intangible assets based on an assessment
of future cash flows.
Further judgment is applied when analyzing
impairments of goodwill and intangible assets not yet
ready for use that 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. Furthermore, the
Company applies judgment when 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 healthcare costs, rates of future
compensation increases, turnover rates and life
expectancy.
Changes in accounting policies
The accounting policies set out in this section have
been applied consistently for all periods presented in
these Consolidated financial statements.
Prior-year information
The presentation of certain prior-year disclosures have
been adjusted to align with the current year disclosures.
Specific choices within IFRS
Sometimes IFRS allows alternative accounting
treatments for measurement and/or disclosure. The
most important of these alternative treatments are
mentioned below.
Tangible and intangible fixed assets
Under IFRS, an entity shall choose either the cost model
or the revaluation model as its accounting for tangible
and intangible fixed assets. In this respect, 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. Furthermore, the Company
chose to apply the cost model meaning that costs
relating to product development, the development and
purchase of software for internal use and other
intangible assets are capitalized and subsequently
amortized over the estimated useful life.
Employee benefit accounting
IFRS does not specify how an entity should present its
service costs related to pensions and net interest on the
net defined benefit liability (asset) in the Statement of
income. With regards to these elements, the Company
presents service costs in Income from operations and
the net interest expenses related to defined benefit
plans in Financial expense.
Cash flow statements
Under IFRS, an entity shall report cash flows from
operating activities using either the direct method
(whereby major classes of gross cash receipts and gross
cash payments are disclosed) or the indirect method
(whereby profit or loss is adjusted for the effects of
transactions of a non-cash nature, any deferrals or
accruals of past or future operating cash receipts or
payments, and items of income or expense associated
with investing or financing cash flows). In this respect,
the Company chose to prepare the cash flow
statements using the indirect method.
Furthermore, interest cash flows are presented in cash
flows from operating activities rather than financing or
investing cash flows, because they enter into the
determination of profit or loss. The Company chose to
present dividends paid to shareholders of Koninklijke
Philips N.V. as a component of cash flows from financing
activities, rather than to present such dividends as
operating cash flows which is an allowed alternative
under IFRS.
Policies that are more critical in nature
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 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 title and
risk have passed to the customer (depending on the
delivery conditions) and acceptance of the product has
been obtained. Examples of delivery conditions are
Group financial statements 12.9
‘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.
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
extended warranty 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.
Royalty income, which is generally earned based upon
Annual Report 2015
113
Group financial statements 12.9
a percentage of sales or a fixed amount per product
sold, is recognized on an accrual basis based on actual
or reliably estimated sales made by the licensees.
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.
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.
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Annual Report 2015
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.
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. The increase
in the provision due to passage of time is recognized as
interest expense. The accounting and presentation for
some of the Company’s provisions is as follows:
• Product warranty – 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.
• Environmental provisions – Measurement of
liabilities associated with environmental obligations,
is based on current legal and constructive
requirements. Liabilities and expected insurance
recoveries, if any, are recorded separately. The
carrying amount of environmental liabilities is
regularly reviewed and adjusted for new facts and
changes in law.
• Restructuring-related provisions – The provision for
restructuring relates to the estimated costs of
initiated restructurings, the most significant of which
have been approved by the Executive Committee,
and which generally involve the realignment of
certain parts of the industrial and commercial
organization. When such restructurings 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.
• Litigation provisions – In relation to legal claim
provisions and settlements, the relevant balances are
transferred to Other liabilities at the point the amount
and timing of cash outflows are no longer uncertain.
Settlements which are agreed for amounts in excess
of existing provisions are reflected as increases of
Other liabilities.
Goodwill
The measurement of goodwill at initial recognition is
described under Basis of consolidation below. Goodwill
is subsequently measured at cost less accumulated
impairment losses. In respect of investments in
associates, the carrying amount of goodwill is included
in the carrying amount of investment, and an
impairment loss on such investment is allocated to the
investment as a whole.
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 a
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.
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.
Group financial statements 12.9
Non-current assets held for sale and discontinued
operations are carried at the lower of carrying amount
or fair value less cost to sell. Any gain or loss from
disposal, 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 re-
presented for presentation of discontinued operations
in the Statement of cash flow and Statement of income.
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 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.
Impairment
Impairment of goodwill and intangible assets not yet
ready for use
Goodwill and intangible assets not yet ready for use are
not amortized but tested for impairment annually and
whenever impairment indicators require. In most cases
the Company identified its cash generating units for
goodwill at 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 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. Value in use is
measured as the present value of future cash flows
expected to be generated by the asset.
Impairment of non-financial assets other than
goodwill, intangible assets not yet ready for use,
inventories and deferred tax assets
Non-financial assets other than goodwill, intangible
assets not yet ready for use, inventories and deferred
tax assets are reviewed for impairment whenever
events or changes in circumstances indicate that the
Annual Report 2015
115
Group financial statements 12.9
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 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, which is based on estimated
future cash flows discounted at the asset’s original
effective interest rate. 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 recognized in the Statement of income
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Annual Report 2015
except for reversals of impairment of available-for-sale
equity securities, which are recognized in Other
comprehensive income.
Other policies
Basis of consolidation
The Consolidated financial statements comprise the
financial statements of Koninklijke Philips N.V. 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.
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.
Costs related to the acquisition, other than those
associated with the issue of debt or equity securities,
that the Company incurs 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 the timing
and amount of the consideration become more certain,
it is reclassified to Accrued liabilities. If the contingent
consideration that meets the definition of a financial
instrument 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.
Group financial statements 12.9
Non-controlling interests are measured at their
proportionate share of the acquiree’s identifiable net
assets at the date of acquisition.
equity stake resulting from gaining control over the
investee previously recorded as associate are recorded
under Results relating to investments in associates.
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.
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 either an equity-
accounted investee (associate) 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 does 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
Company’s investments 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
investments in 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. Dilution gains and losses arising from
investments in associates are recognized in the
Statement of income as part of Other results relating to
investments in associates. 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 an
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 currency of
the Company and presentation currency of the Group
financial statements. 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.
Foreign currency differences arising from translation
are recognized in the Statement of income, except for
available-for-sale equity investments which are
recognized in Other comprehensive income, unless
regarding an impairment in which case foreign currency
differences that have been recognized in Other
comprehensive income are reclassified to the
Statement of 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 transaction
date.
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 euro are recognized in Other
comprehensive income, and presented as part of
Currency translation differences in Equity. However, if
Annual Report 2015
117
Group financial statements 12.9
the operation is a non-wholly owned subsidiary, then
the relevant proportionate share of the translation
difference is allocated to 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 Currency translation
differences 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
respective 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 assets 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, 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.
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Annual Report 2015
Other non-current financial assets
Other non-current financial assets include held-to-
maturity investments, loans receivable 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’s documented risk
management or investment strategy. Financial assets at
fair value through profit or loss are measured at fair
value, and changes therein are recognized in the
Statement of income. Attributable transaction costs are
recognized in the Statement of income as incurred.
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
transaction 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.
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 accounted for at the trade date and
classified as current or non-current assets or liabilities
based on the maturity date or the earlier termination
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 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.
Group financial statements 12.9
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
The costs of Property, plant and equipment comprises
of all directly attributable costs (including the cost of
material and direct labor). Government grants for assets
are deducted from the cost of the related asset.
Depreciation is generally calculated using the straight-
line method over the useful life of the asset. 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.
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
Annual Report 2015
119
Group financial statements 12.9
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 the Company is the lessee and 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.
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.
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. Plans for
which the Company has no legal or constructive
obligation to pay further amounts, however for which
contributions paid by the Company are not fixed, are
also treated as defined benefit plan. The net pension
asset or liability recognized in the Consolidated
balance sheets 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.
120
Annual Report 2015
For the Company’s major plans, a full discount rate
curve of high-quality corporate bonds is used to
determine the defined benefit obligation. The curves
are based on Towers Watson’s RATE:Link methodology
which uses data of corporate bonds rated AA or
equivalent. For the other plans a single point discount
rate is used based on corporate bonds for which there
is a deep market and 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.
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 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 is the
difference between the present value of the defined
benefit obligation being settled, as determined on the
date of settlement, and the settlement price, including
any plan assets transferred and any payments made
directly by the Company in connection with the
settlement. In this respect, the amount of the plan
assets transferred is adjusted for the effect of the asset
ceiling. 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 (curtailment), 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 incentives
based on a formula that takes into consideration the
profit attributable to the Company’s shareholders after
certain adjustments.
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
Statement of income 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.
Financial income and expenses
Financial income comprises interest income on funds
invested (including available-for-sale financial assets),
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 preexisting
available-for-sale interest in an acquiree, and net gains
on foreign exchange impacts 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 expenses on
borrowings, 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 foreign
exchange impacts that are recognized in the Statement
of income.
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.
Cash flow statements
Cash flows arising from transactions in a foreign
currency are translated in the Company’s functional
currency using the exchange rate at the date of the cash
flow. Cash flows from derivative instruments that are
accounted for as 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 as investing cash flow.
Segment information
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 Executive
Committee of the Company). The Executive Committee
decides how to allocate resources and assesses
performance. Reportable segments comprise the
Group financial statements 12.9
operating sectors Healthcare, Consumer Lifestyle and
Lighting. Innovation, Group & Services (IG&S) is a sector
but not a separate reportable segment and holds,
among others, headquarters, overhead and regional/
country organization expenses. Segment accounting
policies are the same as the accounting policies applied
by the Company.
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 (loss)
attributable to shareholders by the weighted average
number of common shares outstanding during the
period, adjusted for own shares held. Diluted EPS is
determined by adjusting the Net income (loss)
attributable to shareholders and the weighted average
number of common shares outstanding during the
period, adjusted for own shares held, for the effects of
all dilutive potential common shares, which comprises
of restricted shares, performance shares and share
options granted to employees.
New standards and interpretations
IFRS accounting standards adopted as from 2015
The Company has adopted the following amended
standard as of January 1, 2015:
Defined Benefit Plans: Employee Contributions
(Amendments to IAS 19)
The amendment introduces a relief regarding the
accounting for contributions from employees related to
defined benefit plans that involve such contributions.
The relief is that when certain conditions are met, a
company is permitted (but not required) to recognize
the employee contributions as a reduction of the
service cost in the period in which the related service is
rendered. The amendments apply retrospectively for
annual periods beginning on or after July 1, 2014.
Philips traditionally deducted employee contributions
from service cost as per the above, that became formal
guidance with the issuance of this amendment. As such,
there was no retrospective impact of the
implementation of this amendment.
Changes to other policies, following from amendments
to standards, interpretations and the annual
improvement cycles, did not have a material impact on
the Group financial statements. In case of the absence
of explicit transition requirements for new accounting
pronouncements, the Company accounts for any
change in accounting policies retrospectively.
IFRS accounting standards to be adopted as from
2016 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, 2016 or later periods, and the Company has
not early adopted them. Those which may be the most
Annual Report 2015
121
Under IFRS 16 a lessee recognizes a right-of-use asset
and a lease liability. The right-of-use asset is treated
similarly to other non-financial assets and is
depreciated accordingly. The lease liability is initially
measured at the present value of the lease payments
payable over the lease term, discounted at the rate
implicit in the lease if that can be readily determined,
and the liability accrues interest. As with current IAS 17,
under IFRS 16 lessors classify leases as operating or
finance in nature.
IFRS 16 must be applied for periods beginning on or
after January 1, 2019, with earlier adoption permitted if
abovementioned IFRS 15 has also been applied. IFRS
16 is not yet endorsed by the EU. The Company is
currently assessing the impact of the new standard.
Group financial statements 12.9
relevant to the Company are set out below. Changes to
other standards, following from amendments and the
annual improvement cycles, are not expected to have
a material impact on the Company’s financial
statements.
IFRS 9 Financial Instruments
IFRS 9 Financial Instruments brings together the
classification and measurement, impairment and hedge
accounting phases of the IASB’s project to replace IAS
39 Financial Instruments: Recognition and
Measurement.
IFRS 9 adds a new expected loss impairment model
and amendments to classification and measurement
for financial assets. The impairment model is based on
the concept of providing for expected losses at
inception of a contract, except in the case of purchased
or originated credit-impaired financial assets, where
expected credit losses are incorporated into the
effective interest rate.
The standard supersedes all previous versions of IFRS
9 and is effective for periods beginning on or after
January 1, 2018. It is not yet endorsed by the EU. The
Company is currently in the process of assessing the
impact of the new Standard.
IFRS 15 Revenue from Contracts with Customers
IFRS 15 specifies how and when revenue is recognized
as well as describes more informative and relevant
disclosures. The standard supersedes IAS 18 Revenue,
IAS 11 Construction Contracts and a number of revenue-
related interpretations.
The new standard provides a single, principles based
five-step model to be applied to all contracts with
customers. Furthermore, it provides new guidance on
whether revenue should be recognized at a point in
time or over time. The standard also introduces new
guidance on costs of fulfilling and obtaining a contract,
specifying the circumstances in which such costs
should be capitalized. Costs that do not meet the
criteria must be expensed when incurred.
IFRS 15 must be applied for periods beginning on or
after January 1, 2018. It is not yet endorsed by the EU.
The Company is currently assessing the impact of the
new standard.
IFRS 16 Leases
For lessees, IFRS 16 (issued on January 13, 2016)
requires most leases to be recognized on-balance
(under a single model), eliminating the distinction
between operating and finance leases. Lessor
accounting however remains largely unchanged and
the distinction between operating and finance leases is
retained. IFRS 16 supersedes IAS 17 Leases and related
interpretations.
122
Annual Report 2015
2
Group financial statements 12.9
2
Information by sector and main country
Philips Group
Information on income statement and cash flow by sector in millions of EUR unless otherwise stated
2013 - 2015
sales including
intercompany
research and
development
expenses
income from
operations
income from
operations as a
% of sales
cash flow before
financing
activities
2015
Healthcare
Consumer Lifestyle
Lighting
Innovation, Group & Services
Inter-sector eliminations
sales
10,912
5,347
7,411
574
Philips Group
24,244
2014
Healthcare
Consumer Lifestyle
Lighting
Innovation, Group & Services
Inter-sector eliminations
Philips Group
2013
Healthcare
Consumer Lifestyle
Lighting
Innovation, Group & Services
Inter-sector eliminations
9,186
4,731
6,869
605
21,391
9,575
4,605
7,145
665
Philips Group
21,990
10,933
5,360
7,454
777
(280)
24,244
9,209
4,739
6,927
934
(418)
21,391
9,600
4,622
7,211
977
(420)
21,990
In 2015, our sectors were organized based on the nature
of the products and services. The four sectors
comprised Healthcare, Consumer Lifestyle, Lighting
and Innovation, Group & Services. A short description
of these sectors is as follows:
Healthcare consisted of the following businesses -
Imaging Systems, Healthcare Informatics, Services &
Solutions, Patient Care & Monitoring Solutions, and
Customer Services.
Consumer Lifestyle consisted of the following
businesses - Personal Care, Domestic Appliances, and
Health & Wellness.
Lighting consisted of the following businesses - Light
Sources & Electronics, Professional Lighting Solutions,
and Consumer Luminaires.
Innovation, Group & Services consisted of group
headquarters, as well as the overhead expenses of
regional and country organizations. Also included are
the net results of group innovation, intellectual
(1,073)
(301)
(315)
(238)
(1,927)
(822)
(263)
(330)
(220)
(1,635)
(810)
(268)
(313)
(268)
819
621
486
(934)
992
456
520
185
(675)
486
1,315
429
413
(302)
7.5%
11.6%
6.6%
-
4.1%
5.0%
11.0%
2.7%
-
2.3%
13.7%
9.3%
5.8%
-
81
589
642
(2,086)
(774)
910
553
442
(1,586)
319
1,292
480
418
(2,140)
(1,659)
1,855
8.4%
50
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 related to
services provided by the sector Innovation, Group &
Services to the other sectors. The pricing of such
transactions was determined on an arm’s length basis.
From an external financial reporting perspective, it
should be noted that Royal Philips will introduce new
segment reporting, from Q1 2016 onwards. The new
reporting structure will be based on different segments
than the sectors currently presented and discussed in
this Annual Report. Philips’ health technology activities
will be reported in three segments (Personal Health,
Diagnosis & Treatment, Connected Care & Health
Informatics), the Philips Lighting businesses within one
segment, and the remaining unallocated corporate
items will contain certain legacy items and separation
costs. For more details on the new segment reporting
in 2016 and onwards, please refer to the introduction of
chapter 6, Sector performance, of this Annual Report.
Annual Report 2015
123
Group financial statements 12.9
Philips Group
Information on balance sheet and capital expenditure in millions of EUR
2013 - 2015
net
operating
capital
total
liabilities
excl. debt
current accounts
receivable, net
tangible and
intangible
assets
depreciation
and
amortization1)
capital
expenditures
2015
Healthcare
Consumer Lifestyle
Lighting
Innovation, Group & Services
Sector totals
Assets classified as held for sale
Total assets/liabilities (excl.
debt)
2014
Healthcare
Consumer Lifestyle
Lighting
Innovation, Group & Services
Sector totals
total
assets
13,363
3,080
5,875
6,849
29,167
1,809
30,976
11,274
3,049
5,739
6,677
26,739
9,212
1,453
3,813
(3,382)
11,096
7,565
1,353
3,638
(3,718)
8,838
Assets classified as held for sale
1,613
Total assets/liabilities (excl.
debt)
28,352
2013
Healthcare
Consumer Lifestyle
Lighting
Innovation, Group & Services
Sector totals
10,465
2,832
6,711
6,044
26,052
7,437
1,261
4,462
(2,922)
10,238
Assets classified as held for sale
507
Total assets/liabilities (excl.
debt)
26,559
2,343
853
1,442
89
4,727
2,112
791
1,438
135
4,476
1,978
743
1,567
132
4,420
8,587
1,658
3,303
990
14,538
6,934
1,647
3,167
873
12,621
6,467
1,574
3,857
648
12,546
(618)
(205)
(281)
(177)
(1,281)
(480)
(198)
(351)
(158)
(1,187)
(517)
(199)
(333)
(128)
(1,177)
154
107
88
173
522
127
109
84
117
437
132
135
117
98
482
4,095
1,627
2,043
5,264
13,029
407
13,436
3,629
1,696
2,081
5,525
12,931
349
13,280
2,943
1,571
2,229
4,340
11,083
348
11,431
1)
Includes impairments of tangible and intangible assets excluding goodwill
Philips Group
Goodwill assigned to sectors in millions of EUR
2014 - 2015
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
2015
Healthcare
Consumer
Lifestyle
Lighting
Innovation, Group
& Services
Philips Group
2014
Healthcare
Consumer
Lifestyle
Lighting
Innovation, Group
& Services
Philips Group
4,779
686
1,676
17
7,158
4,275
632
1,586
11
6,504
-
-
-
-
-
-
-
-
-
-
636
-
-
-
636
1
-
58
9
68
-
-
8
-
8
8
-
-
-
8
-
-
-
-
-
-
-
-
-
-
-
-
(1)
1
-
(2)
-
(155)
(3)
(160)
514
47
161
(1)
721
497
54
187
-
738
5,929
733
1,844
17
8,523
4,779
686
1,676
17
7,158
124
Annual Report 2015
Philips Group
Main countries in millions of EUR
2013 - 2015
2015
Netherlands
United States
China
Germany
Japan
India
France
Other countries
Total main countries
Assets classified as held for sale
Total tangible and intangible assets
2014
Netherlands
United States
China
Germany
Japan
France
United Kingdom
Other countries
Total main countries
Assets classified as held for sale
Total tangible and intangible assets
2013
Netherlands
United States
China
Germany
Japan
France
United Kingdom
Other countries
Total main countries
Assets classified as held for sale
Total tangible and intangible assets
1) The sales are reported based on country of destination.
3
Group financial statements 12.9
sales1)
tangible and intangible assets
639
7,522
2,774
1,357
992
845
806
9,309
24,244
594
6,160
2,362
1,351
908
839
722
8,455
21,391
649
6,325
2,616
1,316
943
890
677
8,574
21,990
970
9,291
1,194
170
455
134
48
2,276
14,538
1,159
15,697
937
7,649
1,135
153
379
52
594
1,722
12,621
989
13,610
915
7,384
1,057
288
401
80
573
1,848
12,546
62
12,608
3 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 consist of the combined Lumileds and
Automotive businesses and certain other divestments
reported as discontinued operations.
Discontinued operations: Combined Lumileds and
Automotive businesses
The combined businesses of Lumileds and Automotive
were reported as discontinued operations in the
Consolidated statements of income and Consolidated
statements of cash flows with the related assets and
liabilities as per the end of November 2014 included as
Assets classified as held for sale and Liabilities directly
associated with assets held for sale in the Consolidated
balance sheet.
As announced on January 22, 2016, Philips and GO
Scale Capital have withdrawn their filing with the
Committee on Foreign Investment in the United States
(CFIUS) and terminated the agreement pursuant to
which the consortium led by GO Scale Capital would
have acquired an 80.1% interest in the combined
businesses of Lumileds and Automotive. Despite the
parties’ extensive efforts to mitigate CFIUS’ concern,
regulatory clearance has not been granted for this
particular transaction. Philips is actively engaging with
other parties that have expressed an interest in the
businesses.
Annual Report 2015
125
In 2015, property, plant and equipment divested assets
classified as held for sale amounted to EUR 43 million
with proceeds of EUR 88 million. Other non-current
financial assets divested classified as held for sale
amounted to EUR 20 million with proceeds of EUR 20
million. Businesses divested net assets classified as
held for sale amounted to EUR 9 million. The
businesses divested had proceeds of EUR 59 million.
In 2014, property, plant and equipment divested assets
classified as held for sale amounted to EUR 17 million
with proceeds of EUR 19 million. Other non-current
financial assets divested classified as held for sale
amounted to EUR 76 million with proceeds of EUR 76
million. Businesses divested net assets classified as
held for sale amounted to EUR 46 million. The
businesses divested had proceeds of EUR 45 million.
4 Acquisitions and divestments
2015
Acquisitions
Philips completed four acquisitions in 2015. These
acquisitions involved an aggregated net cash outflow
of EUR 1,116 million, with Volcano Corporation (Volcano)
being the most notable acquisition.
On February 17, 2015, Philips completed the acquisition
of Volcano for a total cash consideration of EUR 1,250
million. This amount involved the purchase price of
shares (EUR 822 million), the payoff of certain debt
(EUR 405 million) and the settlement of outstanding
stock options (EUR 23 million). The overall cash position
of Volcano on the transaction date was EUR 158 million,
resulting in a net cash outflow related to this acquisition
of EUR 1,092 million.
Volcano is a US-based global leader in catheter-based
imaging and measurement solutions for cardiovascular
applications and is very complementary to the Philips
vision, strategy, and portfolio in image-guided therapy.
Group financial statements 12.9
4
The following table summarizes the results of the
combined businesses of Lumileds and Automotive
included in the Consolidated statements of income as
discontinued operations.
Philips Group
Results of combined Lumileds and Automotive Lighting
businesses in millions of EUR
2013 - 2015
Sales
Costs and expenses
Income before taxes
Income tax expense
Results from discontinued
operations
2013
1,268
2014
1,416
2015
1,619
(1,134)
(1,202)
(1,320)
134
(1)
214
(73)
299
(53)
133
141
246
Upon disposal, the associated currency translation
differences, part of Shareholders’ equity, will be
recognized in the Consolidated statement of income. At
December 31, 2015, the estimated release amounts to a
EUR 76 million gain.
The following table presents the assets and liabilities of
the combined Lumileds and Automotive business, as
Assets classified as held for sale and Liabilities directly
associated with assets classified as held for sale in the
Consolidated balance sheet as from 2014.
Philips Group
Assets and liabilities of combined Lumileds and Automotive
Lighting businesses in millions of EUR
2014- 2015
2014
2015
Property, plant and equipment
Intangible assets including goodwill
Inventories
Accounts receivable
Other assets
Assets classified as held for sale
Accounts payable
Provisions
Other liabilities
666
295
248
278
14
1501
(134)
(34)
(149)
762
379
285
314
34
1,774
(192)
(39)
(170)
Liabilities directly associated with
assets held for sale
(317)
(401)
Discontinued operations: Other
Certain results of other divestments, including the
Audio, Video, Multimedia & Accessories business and
the Television business, reported as discontinued
operations are included, with a net loss of EUR 1 million
in 2015 (2014: a net gain of EUR 49 million; 2013: a net
gain of EUR 5 million).
Other assets classified as held for sale
Assets and liabilities directly associated with assets
held for sale relate to property, plant and equipment for
an amount of EUR 1 million (December 31, 2014: EUR 23
million) and businesses net assets classified as held for
sale amounted to EUR 28 million at December 31, 2015
(December 31, 2014 EUR 19 million).
126
Annual Report 2015
Transaction-related costs that were recognized in
General and administrative expenses amounted to EUR
15 million. As of February 17, 2015, Volcano is 100%
consolidated as part of the Healthcare sector. The
condensed balance sheet of Volcano, immediately
before and after the acquisition was as follows:
Volcano
Balance sheet in millions of EUR
2015
before
acquisition date
after acquisition
date
Goodwill
Other intangible assets
Property, plant and equipment
Other assets
Other liabilities
Working Capital
Cash
Total assets and liabilities
Group Equity
Loans
Financed by
133
87
105
80
(41)
112
158
634
(219)
(415)
(634)
627
320
105
50
(142)
156
158
1,274
(1,250)
(24)
(1,274)
The goodwill is primarily related to synergies expected
to be achieved from integrating Volcano within the
Healthcare sector. The goodwill is not tax-deductible.
Other intangible assets are comprised of the following:
Volcano
Other intangible assets in millions of EUR
2015
amount
amortization
period in years
Installed base
Developed technology - Systems
Developed technology - Disposables
Developed technology - Peripheral
Therapeutics
IPR&D
Trade names
Total other intangible assets
62
155
58
26
6
13
320
6
15
15
15
n/a
10
For the period from February 17, 2015, Volcano
contributed sales of EUR 286 million and a loss from
operations of EUR 113 million, which includes
acquisition related costs of EUR 103 million.
Divestments
Philips completed seven divestments during 2015, with
the sale of the 20% interest in Assembléon Holding B.V.
and the sale of the Remote Control activities being the
most notable divestments. The seven divestments
involved an aggregated cash consideration of EUR 59
million.
2014
Acquisitions
Philips completed three acquisitions in 2014. These
acquisitions involved an aggregated purchase price of
EUR 171 million.
5
Group financial statements 12.9
One of the acquisitions in 2014, was General Lighting
Company (GLC), domiciled in the Kingdom of Saudi
Arabia (KSA). This acquisition enables Philips to grow
its business in KSA, the largest economy in the Middle
East by GDP, particularly in LED lighting.
On September 2, 2014, the Company acquired 51% of
GLC from a consortium of shareholders for a total
amount of EUR 146 million (on a cash-free, debt-free
basis). Taking into account closing conditions, Philips
paid an amount of EUR 148 million.
Divestments
Apart from the divestment of the Audio, Video,
Multimedia & Accessories business, Philips completed
two other divestments of business activities during 2014,
which related to Healthcare and Lighting activities. The two
transactions involved an aggregate consideration of EUR 43
million.
5
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 relates to:
• Interests in subsidiaries
• Investments in associates
Interests in subsidiaries
Wholly owned subsidiaries
The Group financial statements comprise the assets
and liabilities of approximately 450 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.
Annual Report 2015
127
Group financial statements 12.9
6
Philips Group
Interests in materially wholly owned subsidiaries
in alphabetical order
2015
Legal entity name
Invivo Corporation
Lumileds Malaysia Sdn. Bhd.
Philips (China) Investment Company, Ltd.
Philips Consumer Lifestyle B.V.
Principal country
of business
United States
Malaysia
China
Netherlands
Philips Electronics North America Corporation
United States
Philips Electronics Singapore Pte Ltd
Philips GmbH
Philips Innovative Applications
Philips Lighting B.V.
Philips Medizin Systeme Böblingen GmbH
Philips Nederland B.V.
Philips Oral Healthcare, LLC
Philips Respironics GK
Philips Ultrasound, Inc.
RI Finance, Inc.
RIC Investments, LLC
Singapore
Germany
Belgium
Netherlands
Germany
Netherlands
United States
Japan
United States
United States
United States
Not wholly owned subsidiaries
In total, 19 consolidated subsidiaries are not wholly
owned by the Company. Among the consolidated legal
entities is Saudi Lighting Company Limited created after
the acquisition of General Lighting Company (GLC)
where the Company owns 51% of the voting power. The
Company controls this entity. The sales, income from
operations and net income of this entity is 3% of the
consolidated financial data. The non-controlling
interest of 49% represents an amount of EUR 102
million as per December 31, 2015.
Also among the consolidated legal entities is Philips
India Limited where the Company owns 96% of the
voting power. The non-controlling interest of 4%
represents an amount of EUR 10 million as per
December 31, 2015.
The sales, income from operations and net income of
the remaining not wholly owned subsidiaries (before
any intra-group eliminations) are less than 2% of the
consolidated financial data of the Company and are
therefore not considered material.
Investments in associates
Philips has investments in a number of associates, none
of them are regarded as individually material.
The changes during 2015 are as follows:
Philips Group
Investments in associates in millions of EUR
2015
Total investments
Balance as of January 1, 2015
Changes:
Acquisitions/additions
Reclassifications
Share in income
Share in other comprehensive income
Impairments
Dividends declared
Translation and exchange rate differences
Balance as of December 31, 2015
157
1
18
10
1
(2)
(17)
13
181
Included in the line reclassifications is an investment of
EUR 18 million that was reclassified from available-for-
sale financial assets. The Company owns less than 20%
in the capital of the underlying company but is able to
exercise significant influence and is therefore
accounted for as an Investment in associate.
The Company owns one equity interest which
represents more than 20% in the capital of the
underlying company. With respect to this equity
interest, the Company cannot exercise significant
influence based on governance agreements concluded
among shareholders. This equity interests is accounted
for as Other non-current financial assets. In 2015, the
Company’s share in the net income of this entity was
insignificant.
6
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.
Philips Group
Sales and costs by nature in millions of EUR
2013 - 2015
Sales
2013
2014
2015
21,990
21,391
24,244
Costs of materials used
(7,494)
(7,296)
(8,446)
Employee benefit expenses
(5,814)
(6,080)
(7,107)
Depreciation and amortization
Shipping and handling
Advertising and promotion
Lease expense 1)
(1,177)
(762)
(869)
(344)
(1,187)
(1,281)
(741)
(913)
(318)
(806)
(1,000)
(324)
Other operational costs 2)
(3,734)
(4,156)
(4,375)
Impairment of goodwill
Other business income (expenses)
Income from operations
(28)
87
1,855
(3)
(211)
486
-
87
992
1) Lease expense includes EUR 35 million (2014: EUR 35 million, 2013: EUR
42 million) of other costs, such as fuel and electricity, and taxes to be
paid and reimbursed to the lessor
2) Other operational costs contain items which are dissimilar in nature and
individually insignificant in amount to disclose separately. These costs
contain among others expenses for outsourcing services, mainly in IT
and HR, 3rd party workers, consultants, warranty, patents and costs for
travelling and external legal services.
128
Annual Report 2015
Sales composition
Philips Group
Sales composition in millions of EUR
2013 - 2015
Goods
Services
Royalties
Sales
2013
2014
2015
18,398
17,972
20,659
3,130
2,948
3,080
462
471
505
21,990
21,391
24,244
Philips has no single external customer that represents
10% or more of sales.
Costs of materials used
Cost of materials used represents the inventory
recognized in cost of sales.
Employee benefit expenses
Philips Group
Employee benefit expenses in millions of EUR
2013 - 2015
Salaries and wages
Post-employment benefits costs
Other social security and similar
charges:
- Required by law
- Voluntary
2013
4,722
354
2014
5,018
326
2015
5,533
780
621
117
623
113
664
130
Employee benefit expenses
5,814
6,080
7,107
The employee benefit expense relate to employees
who are working on the payroll of Philips, both with
permanent and temporary contracts.
For further information on post-employment benefit
costs, see note 20, Post-employment benefits.
For details on the remuneration of the members of the
Board of Management and the Supervisory Board, see
note 29, Information on remuneration.
Employees
The average number of employees by category is
summarized as follows:
Philips Group
Employees in FTEs
2013 - 2015
Production
50,628
48,110
46,869
2013
2014
2015
Research and development
11,757
11,714
31,673
32,684
94,058
92,508
92,342
11,462
34,011
Other
Employees
Group financial statements 12.9
Depreciation and amortization
Depreciation of property, plant and equipment and
amortization of intangible assets, including
impairments, are as follows:
Philips Group
Depreciation and amortization1) in millions of EUR
2013 - 2015
Depreciation of property, plant and
equipment
Amortization of software
Amortization of other intangible assets
Amortization of development costs
2013
2014
2015
521
39
393
224
592
32
332
231
582
48
380
271
Depreciation and amortization
1,177
1,187
1,281
1)
Includes impairments
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 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.
Audit fees
Philips Group
Fees KPMG in millions of EUR
2013 - 2015
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
- other
Fees KPMG
2013
15.6
10.1
5.5
2.2
0.4
0.7
1.1
0.8
0.8
1.3
1.3
2014
14.9
2015
15.3
9.6
5.3
3.9
2.4
0.6
0.9
0.2
0.2
0.0
0.0
9.8
5.5
4.9
3.6
0.6
0.7
1.1
1.1
0.0
0.0
21.3
19.9
19.0
1) The percentage of audit-related fees in 2015 is 23.0% of the total fees
2) The percentage of tax fees in 2015 is 5.2% of the total fees
3rd party workers
12,194
12,562
13,314
Continuing operations
106,252
105,070
105,656
Discontinued operations
10,792
9,222
8,556
This table ’Fees KPMG’ forms an integral part of the
Company Financial Statements, please refer to note B,
Audit fees.
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
external companies.
Impairment of goodwill
In 2014, goodwill impairment charges amount to EUR 3
million consisting of impairments on divested
businesses in Healthcare and Lighting. In 2013, goodwill
Annual Report 2015
129
Group financial statements 12.9
7
impairment charges amounted to EUR 28 million,
including EUR 26 million as result of reduced growth
expectations in Consumer Luminaires, see note 11,
Goodwill.
7 Financial income and expenses
Philips Group
Financial income and expenses in millions of EUR
2013 - 2015
Other business income (expenses)
Other business income (expenses) consists of the
following:
Philips Group
Other business income (expenses) in millions of EUR
2013 - 2015
Result on disposal of businesses:
- income
- expense
Result on disposal of fixed assets:
- income
- expense
Result on other remaining businesses:
- income
- expense
Other business income (expenses)
Total other business income
Total other business expense
2013
2014
2015
50
(1)
18
(13)
54
(21)
87
122
(35)
7
(2)
18
(1)
38
(271)
(211)
63
(274)
4
(5)
79
(9)
54
(36)
87
137
(50)
In 2015, result on disposal of businesses was mainly due
to divestment of non-strategic businesses. For further
information, see note 4, Acquisitions and divestments.
In 2015, result on disposal of fixed assets was mainly
due to sale of real estate assets.
In 2015, result on other remaining businesses mainly
relates to non-core revenue and various legal matters.
In 2014 remaining business expense mainly relates to
certain parts of the Cathode Ray Tube antitrust litigation
as mentioned in note 26, Contingent assets and
liabilities for which the Company concluded it was able
to make a reliable estimate of the cash outflow or was
able to reach a settlement with the relevant plaintiffs.
For more details reference is made to note 19,
Provisions - litigation provisions and note 26,
Contingent assets and liabilities - legal proceedings.
130
Annual Report 2015
Interest income
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
Other financial income
Financial income
Interest expense
Interest on debt and borrowings
Finance charges under finance
lease contract
Interest expenses - pensions
Provision-related accretion and
interest
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
Other financial expenses
Financial expense
Financial income and expenses
54
32
22
5
-
-
11
70
(323)
(245)
(7)
(71)
(25)
(6)
(10)
2013
2014
2015
39
22
17
4
48
21
27
6
60
20
-
11
114
(290)
(224)
(7)
(59)
(80)
(1)
(17)
4
20
98
(350)
(271)
(7)
(72)
(35)
(11)
(46)
-
-
(25)
(467)
(369)
(9)
(6)
(3)
(24)
(400)
(330)
(2)
(19)
(415)
(301)
Net financial income and expense showed a EUR 369
million expenses in 2015, which was 68 million higher
than in 2014. Interest expense in 2015 was EUR 60
million higher than in 2014, mainly due to weaker EUR
against USD in relation to interest expenses on USD
bonds. The gain from disposal of financial assets in 2015
amounted to EUR 20 million, mainly from Assembléon,
Silicon & Software Systems and other equity interest.
The impairment charges in 2015 amounted to EUR 46
million mainly due to valuation allowances on Other
current receivables. Provision-related accretion and
interest in 2015 primarily consisted of interest expense
related to the jury verdict in the Masimo litigation, and
accretion expense associated with other discounted
provisions and uncertain tax positions.
Interest expense in 2014 was EUR 33 million lower than
in 2013, mainly as a result of lower average outstanding
debt and lower interest related to pensions in 2014. The
gain from disposal on financial assets in 2014 amounted
to EUR 60 million, mainly from Neusoft, Chimei Innolux,
Gilde III and Sapiens. In 2014 impairment charges
amounted to EUR 17 million. Provision-related
accretion and interest in 2014 primarily consisted of
interest expense related to the jury verdict in the
Masimo litigation, and accretion expense associated
with other discounted provisions and uncertain tax
positions.
Net financial income and expense showed a EUR 330
million expense in 2013. Total financial income of EUR
70 million included a EUR 54 million interest income.
8
Income taxes
The income tax expense of continuing operations
amounted to EUR 239 million (2014: EUR 26 million,
2013: EUR 466 million).
The components of income before taxes and income
tax expense are as follows:
Philips Group
Income tax expense in millions of EUR
2013 - 2015
Netherlands
Foreign
2013
281
1,244
2014
665
(480)
2015
229
394
Income before taxes of continuing
operations
1,525
185
623
Netherlands:
Current tax (expense) benefit
Deferred tax expense
5
(107)
(12)
(29)
Total tax (expense) benefit of
continuing operations (Netherlands)
(102)
(41)
8
-
8
8
Group financial statements 12.9
Philips Group
Deferred income tax expense in millions of EUR
2013 - 2015
Tax loss carryforwards previously
unrecognized
Current year tax loss carryforwards
unrecognized
Tax assets relating to temporary
differences unrecognized
Prior year tax (expense) benefit
Tax rate changes
Deferred tax (expense) benefit
recognized for the current year
Deferred tax (expense) benefit
2013
2014
2015
20
18
7
(29)
(65)
(86)
(3)
15
-
(200)
(197)
(47)
34
12
284
236
(31)
(7)
(19)
131
(5)
Philips’ operations are subject to income taxes in
various foreign jurisdictions. The statutory income tax
rates vary from 10.0% to 39.0%, which results in a
difference between the weighted average statutory
income tax rate and the Netherlands’ statutory income
tax rate of 25.0% (2014: 25.0%; 2013: 25.0%).
A reconciliation of the weighted average statutory
income tax rate to the effective income tax rate of
continuing operations is as follows:
Philips Group
Effective tax rate in %
2013 - 2015
Weighted average statutory income
tax rate in %
29.2
7.9
29.8
2013
2014
2015
Foreign:
Current tax expense
Deferred tax (expense) benefit
Total tax (expense) benefit of
continuing operations (foreign)
Income tax expense of continuing
operations
(274)
(90)
(250)
265
(242)
(5)
(364)
15
(247)
Increase (Decrease) in tax rate
resulting from:
- recognition of previously
unrecognized tax loss
carryforwards
(1.3)
(9.6)
(1.2)
(466)
(26)
(239)
- current year tax loss carryfowards
unrecognized
1.9
34.9
13.7
Income tax expense of continuing operations excludes
the tax expense of the discontinued operations of EUR
54 million (2014: EUR 11 million, 2013: EUR 11 million).
The components of income tax expense of continuing
operations are as follows:
- current year temporary
differences unrecognized
Non-deductible impairment charges
Non-taxable income
Non-deductible expense
Withholding and other taxes
Tax rate changes
0.2
0.7
25.5
1.8
(8.9)
(100.1)
8.1
0.9
-
51.6
13.4
(6.3)
Prior year tax expense
(0.2)
(30.8)
Philips Group
Current income tax expense in millions of EUR
2013 - 2015
Tax expense (benefit) due to other
liabilities
Current year tax expense
Prior year tax (expense) benefit
2013
(262)
(7)
2014
(241)
(21)
2015
(244)
10
Tax incentives
Others, net
Effective tax rate
0.3
(0.7)
0.4
30.6
5.6
(7.4)
27.6
14.1
4.9
0.1
(30.7)
20.5
4.9
3.0
(0.4)
(5.9)
(0.7)
0.4
38.4
Current tax expense
(269)
(262)
(234)
The weighted average statutory income tax rate
increased in 2015 compared to 2014, as a consequence
of a significant change in the geographical mix of actual
profits.
The effective income tax rate is higher than the
weighted average statutory income tax rate in 2015,
mainly due to the non-deductible expenses, new loss
carryforwards and temporary differences not expected
to be realized which are partly offset by non-taxable
income. Non-taxable income is partly attributable to
favorable tax regulations relating to R&D investments.
Annual Report 2015
131
Group financial statements 12.9
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 2015 and 2014 respectively are presented in
the tables below.
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 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
The net deferred tax assets of EUR 2,594 million (2014:
EUR 2,353 million) consist of deferred tax assets of EUR
2,758 million (2014: EUR 2,460 million) in countries with
a net deferred tax asset position and deferred tax
liabilities of EUR 164 million (2014: EUR 107 million) in
Philips Group
Deferred tax assets and liabilities in millions of EUR
2015
Balance as of
January 1, 2015
recognized in
income
statement
Intangible assets
Property, plant and equipment
Inventories
Prepaid pensions
Other receivables
Other assets
Provisions:
- pensions
- guarantees
- termination benefits
- other postretirement benefits
- other provisions
Other liabilities
Deferred tax assets on tax loss
carryforwards (including tax credit
carryforwards)
Set-off deferred tax positions
Net deferred tax assets
(980)
73
311
98
49
24
562
4
109
71
783
209
1,040
2,353
131
(50)
10
(142)
-
13
(23)
(1)
(40)
1
(3)
(33)
132
(5)
Balance as of
December 31,
2015
(1,089)
other1)
(240)
Assets
Liabilities
(4)
33
41
2
(20)
30
-
1
(2)
5
19
381
246
19
354
(3)
51
17
569
3
70
70
785
195
195
63
360
-
57
31
569
3
71
70
805
216
1,553
2,594
1,553
(1,235)
2,758
(1,284)
(44)
(6)
(3)
(6)
(14)
-
-
(1)
-
(20)
(21)
-
1,235
(164)
1) Other includes the movements of assets and liabilities recognized in OCI, which includes foreign currency translation differences, and acquisitions and
divestments.
Philips Group
Deferred tax assets and liabilities in millions of EUR
2014
Balance as of
January 1, 2014
recognized in
income
statement
Intangible assets
Property, plant and equipment
Inventories
Prepaid pension
Other receivables
Other assets
Provisions:
- pensions
- guarantees
- termination benefits
- other postretirement benefits
- other provisions
Other liabilities
Deferred tax assets on tax loss
carryforwards (including tax credit
carryforwards)
Set-off deferred tax positions
Net deferred tax assets
(871)
58
264
(1)
50
32
426
29
97
57
567
192
699
1,599
59
9
24
(40)
6
(8)
(49)
(25)
23
2
126
(1)
110
236
Balance as of
December 31,
2014
(980)
other1)
(168)
6
23
139
(7)
-
185
-
(11)
12
90
18
231
518
73
311
98
49
24
562
4
109
71
783
209
1,040
2,353
Assets
Liabilities
114
120
317
99
58
45
562
4
109
71
791
226
(1,094)
(47)
(6)
(1)
(9)
(21)
-
-
-
-
(8)
(17)
1,040
(1,096)
2,460
-
1,096
(107)
1) Other includes the movements of assets and liabilities recognized in OCI, which includes foreign currency translation differences, and acquisitions and
divestments.
132
Annual Report 2015
countries with a net deferred tax liability position. Of the
total deferred tax assets of EUR 2,758 million at
December 31, 2015, (2014: EUR 2,460 million), EUR 2,119
million (2014: EUR 1,352 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, 2015 and 2014, 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 78 million (2014: EUR 47 million).
At December 31, 2015, net operating loss carryforwards
expire as follows:
Philips Group
Expiry years of net operating loss carryforwards in millions of EUR
un-
limi-
ted
2021/
2025
Total 2016
2020
2019
2018
later
2017
7,566
-
2
9
176
207
2,459
1,456 3,257
The Company also has tax credit carryforwards of EUR
217 million, which are available to offset future tax, if
any, and which expire as follows:
Philips Group
Expiry years of tax credit carryforwards in millions of EUR
Total
2016
2017
2018 2019
2020
2021/
2025
later
un-
limi-
ted
217
-
4
5
4
2
39
146
17
At December 31, 2015, net operating loss and tax credit
carryforwards for which no deferred tax assets have
been recognized in the balance sheet, expire as follows:
Philips Group
Net operating loss and tax credit carryforwards for which no
deferred tax asset has been recognized in millions of EUR
Total
2016
2017
2018 2019
2020
2021/
2025
later
un-
limi-
ted
2,507
-
4
5
84
103
335
550
1,426
At December 31, 2015, the amount of deductible
temporary differences for which no deferred tax asset
has been recognized in the balance sheet is EUR 139
million (2014: EUR 190 million).
Group financial statements 12.9
Classification of the income tax payable and receivable
is as follows:
Philips Group
Income tax payables and receivables in millions of EUR
2014 - 2015
Income tax receivables
Income tax receivables - under non-current
receivables
Income tax payables
Income tax payables - under non-current
liabilities
2014
140
-
(102)
2015
114
-
(116)
(1)
-
Tax risks
Philips is exposed to tax uncertainties. These
uncertainties include, among 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, potential adjustments by 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 and specific
service agreements and licensing agreements
Due to the centralization of certain activities in a limited
number of countries (such as research and
development, 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, service contracts such as intra-group service
agreements and licensing agreements are signed with
a large number of group entities. Tax authorities review
these intra-group service and licensing agreements,
and may reject the implemented intra-group charges.
Furthermore, buy in/out situations in the case of
(de)mergers could affect the cost allocation resulting
from the general service agreements between
countries. The same applies to the specific service
agreements.
Tax uncertainties due to disentanglements and
acquisitions
When a subsidiary of Philips is disentangled, or a new
company is acquired, related tax uncertainties may
arise. Philips creates merger and acquisition (M&A)
teams for these disentanglements or acquisitions. In
addition to representatives from the involved business,
these teams consist of specialists from various group
functions and are formed, among 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
Annual Report 2015
133
Group financial statements 12.9
9
assessed to mitigate tax uncertainties in the future to
the extent possible. Examples of tax uncertainties are:
applicability of participation exemptions, allocation
issues, and issues related to (non-)deductibility.
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.
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
9 Earnings per share
Philips Group
Earnings per share in millions of EUR unless otherwise stated1)
2013 - 2015
Income from continuing operations
Income (loss) attributable to non-controlling interest
Income from continuing operations attributable to
shareholders
Income from discontinued operations
Net income 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:
2013
2014
2015
1,034
3
1,031
138
1,169
221
(4)
225
190
415
414
14
400
245
645
911,071,970
915,192,683
916,086,943
Options
Performance shares
Restricted share rights
Convertible debentures
5,464,833
662,973
4,768,777
103,899
4,617,109
614,010
2,290,472
3,565,682
2,479,923
1,491,960
Dilutive potential common shares
11,000,482
7,521,591
7,537,565
Adjusted weighted average number of shares (after
deduction of treasury shares) during the year
922,072,452
922,714,274
923,624,508
Basic earnings per common share in EUR2)
Income from continuing operations
Income from discontinued operations
Income from continuing operations attributable to
shareholders
Net income attributable to shareholders
Diluted earnings per common share in EUR2,3,4)
Income from continuing operations
Income from discontinued operations
Income from continuing operations attributable to
shareholders
Net income attributable to shareholders
Dividend distributed per common share in euros
1.13
0.15
1.13
1.28
1.12
0.15
1.12
1.27
0.75
0.24
0.21
0.25
0.45
0.24
0.21
0.24
0.45
0.80
0.45
0.27
0.44
0.70
0.45
0.27
0.43
0.70
0.80
1) Shareholders in this table refer to shareholders of Koninklijke Philips N.V.
2) The effect on income of convertible debentures affecting earnings per share is considered immaterial
3)
In 2015, 2014 and 2013, respectively 12 million, 19 million and 14 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
134
Annual Report 2015
10
Group financial statements 12.9
10 Property, plant and equipment
Philips Group
Property, plant and equipment in millions of EUR
2015
Balance as of January 1, 2015:
Cost
Accumulated depreciation
Book value
Change in book value:
Capital expenditures
Assets available for use
Acquisitions
Disposals and sales
Depreciation
Impairments
Transfer (to) from assets classified as
held for sale
Translation differences
Total changes
Balance as of December 31, 2015:
Cost
Accumulated depreciation
Book value
land and buildings
machinery and
installations
other equipment
prepayments and
construction in
progress
1,803
(931)
872
13
59
-
(3)
(83)
(8)
26
37
41
1,864
(951)
913
3,127
(2,520)
607
113
139
107
(3)
(252)
(27)
(10)
61
128
3,260
(2,525)
735
1,745
(1,298)
447
62
140
2
(6)
(196)
(16)
-
21
7
1,873
(1,419)
454
169
-
169
387
(338)
-
-
-
-
(2)
4
51
220
-
220
Philips Group
Property, plant and equipment in millions of EUR
2014
land and buildings
machinery and
installations
other equipment
prepayments and
construction in
progress
Balance as of January 1, 2014:
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, 2014:
Cost
Accumulated depreciation
Book value
1,899
(872)
1,027
6
79
7
-
(91)
(26)
(190)
60
(155)
1,803
(931)
872
3,948
(2,885)
1,063
86
220
6
(5)
(295)
(74)
(451)
57
(456)
3,127
(2,520)
607
1,586
(1,155)
431
68
132
4
(7)
(178)
(21)
(10)
28
16
1,745
(1,298)
447
259
-
259
368
(431)
2
-
-
(1)
(37)
9
(90)
169
-
169
total
6,844
(4,749)
2,095
575
-
109
(12)
(531)
(51)
14
123
227
7,217
(4,895)
2,322
total
7,692
(4,912)
2,780
528
-
19
(12)
(564)
(122)
(688)
154
(685)
6,844
(4,749)
2,095
Land with a book value of EUR 142 million at December
31, 2015 (2014: EUR 89 million) is not depreciated. The
acquisitions through business combinations in 2015
mainly consist of the acquired machinery and
installations of Volcano for EUR 104 million. Transfer
from assets classified as held for sale mainly includes a
property reclassified back to property, plant and
equipment for EUR 56 million, as it is no longer
expected to be sold in 2016.
Transfer to assets classified as held for sale in 2014
mainly relates to the combined businesses of Lumileds
and Automotive. Impairment charges of EUR 49 million
are related to industrial assets in Lighting in 2014.
Property, plant and equipment includes financial lease
assets with a book value of EUR 203 million at
December 31, 2015 (2014: EUR 192 million).
Annual Report 2015
135
Group financial statements 12.9
11
The expected useful lives of property, plant and
equipment are as follows:
Philips Group
Useful lives of property, plant and equipment in years
Buildings
from 5 to 50 years
Machinery and installations
Other equipment
from 3 to 20 years
from 1 to 10 years
11 Goodwill
The changes in 2014 and 2015 were as follows:
Goodwill allocated to the cash-generating units
Respiratory Care & Sleep Management, Image-Guided
Therapy, Patient Care & Monitoring Solutions and
Professional Lighting Solutions is considered to be
significant in comparison to the total book value of
goodwill for the Group at December 31, 2015. The
amounts associated as of December 31, 2015, are
presented below:
Philips Group
Goodwill allocated to the cash-generating units in millions of EUR
2014 - 2015
Philips Group
Goodwill in millions of EUR
2014 - 2015
Balance as of January 1:
Cost
Respiratory Care & Sleep Management
Imaging Systems
Image-Guided Therapy
Patient Care & Monitoring Solutions
Professional Lighting Solutions
Other (units carrying a non-significant
goodwill balance)
2014
2015
8,596
9,151
Amortization and impairments
(2,092)
(1,993)
Book value
2014
1,704
1,592
1,317
1,470
1,075
7,158
2015
1,884
1,066
1,452
1,626
2,495
8,523
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
6,504
7,158
68
8
-
(160)
738
636
8
-
-
721
9,151
10,704
(1,993)
(2,181)
7,158
8,523
Goodwill increased by EUR 627 million in 2015 due to
the acquisition of Volcano. The increase of EUR 721
million in translation differences was mainly due to the
increase in the USD/EUR rate which impacted the
goodwill denominated in USD.
In 2014 the movement acquisitions mainly related to the
acquisition of General Lighting Company (GLC) for EUR
58 million. Divestments and transfer to assets classified
as held for sale in 2014 relate to the sectors Healthcare
and Lighting. In 2014 the movement of EUR 738 million
in translation differences is mainly explained by the
increase of the USD/EUR rate which impacted the
goodwill nominated in USD.
In 2015, the activities of Imaging Systems in the sector
Healthcare were split over three new cash-generating
units: Image-Guided Therapy, Ultrasound and
Diagnostic Imaging. As a result of the change, the
goodwill associated with Imaging Systems was
allocated over these three new units.
For impairment testing, goodwill is allocated to (groups
of) cash-generating units (typically one level below
operating sector level), which represent the lowest level
at which the goodwill is monitored internally for
management purposes.
The basis of the recoverable amount used for the units
disclosed in this note is the value in use. In the annual
impairment test performed in the second quarter and in
the tests performed in the second half of 2015, the
estimated recoverable amounts of the cash-generating
units tested approximated or exceeded the carrying
value of the units, therefore no impairment loss was
recognized.
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 2015 to 2019 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 mentioned units is
expected to increase over the projection period as a
result of volume growth and cost efficiencies. In
anticipation of the new reporting structure in 2016, the
impact of an additional allocation of central overhead
costs over the projection period has been considered
for units which performed an updated test in the
second half of 2015.
Cash flow projections of Respiratory Care & Sleep
Management, Image-Guided Therapy, Patient Care &
Monitoring Solutions and Professional Lighting
Solutions for 2015 were based on the key assumptions
136
Annual Report 2015
included in the table below. These assumptions are
based on the annual impairment test performed in the
second quarter except for the unit Professional Lighting
Solutions which performed an updated test in Q4 2015.
Philips Group
Key assumptions in %
2015
compound sales growth rate1)
initial
forecast
period
extra-
polation
period2)
used to
calculate
terminal
value
pre-tax
discount
rates
6.9
3.0
6.0
5.0
5.6
2.4
4.8
5.1
2.7
2.7
2.7
2.7
11.5
12.2
13.4
15.1
Respiratory Care &
Sleep Management
Image-Guided
Therapy
Patient Care &
Monitoring
Solutions
Professional
Lighting Solutions
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 2014 cash flow
projections were as follows:
Philips Group
Key assumptions in %
2014
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
4.2
3.3
4.9
10.1
3.6
3.1
3.8
6.5
2.7
2.7
2.7
2.7
11.4
12.8
12.8
13.8
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
Among the mentioned units, Professional Lighting
Solutions has the lowest excess of the recoverable
amount over the carrying amount. The headroom of
Professional Lighting Solutions was estimated at EUR
100 million. The following changes could, individually,
cause the value in use to fall to the level of the carrying
value:
Philips Group
Sensitivity analysis
increase in
pre-tax
discount rate,
basis points
decrease in
compound
long-term
sales growth
rate, basis
points
decrease in
terminal value
amount, %
Professional
Lighting
Solutions
40
80
5.5
Group financial statements 12.9
The results of the annual impairment test of Respiratory
Care & Sleep Management, Image-Guided Therapy and
Patient Care & Monitoring Solutions indicate that a
reasonably possible change in key assumptions would
not cause the value in use to fall to the level of the
carrying value.
Additional information 2015
In addition to the units with significant goodwill, other
cash-generating 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 estimated at EUR 30 million. An
increase of 130 points in the pre-tax discounting rate, a
320 basis points decline in the compound long-term
sales growth rate or a 19% 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, 2015 amounts to EUR 32
million.
Based on the most recent impairment test, it was noted
that with regard to the headroom for the cash-
generating unit Consumer Luminaires the estimated
recoverable amount approximates the carrying value of
this cash-generating unit. Consequently, any adverse
change in key assumptions would, individually, cause
an impairment loss to be recognized. The goodwill
allocated to Consumer Luminaires at December 31,
2015 amounts to EUR 127 million.
Please refer to note 2, Information by sector and main
country for a specification of goodwill by sector.
Annual Report 2015
137
Group financial statements 12.9
12
12
Intangible assets excluding goodwill
The changes were as follows:
Philips Group
Intangible assets excluding goodwill in millions of EUR
2015
other intangible assets
product development
software
total
Balance as of January 1, 2015:
Cost
Amortization/ impairments
Book value
Changes in book value:
Additions
Acquisitions
Purchase price allocation adjustment
Amortization
Impairments
Divestments and transfers to assets
classified as held for sale
Translation differences
Total changes
Balance as of December 31, 2015:
Cost
Amortization/ impairments
Book Value
5,721
(3,371)
2,350
50
326
(10)
(372)
(8)
-
210
196
6,539
(3,993)
2,546
1,853
(964)
889
315
-
(230)
(41)
(2)
61
103
2,190
(1,198)
992
446
(317)
129
70
-
(45)
(3)
-
4
26
522
(367)
155
8,020
(4,652)
3,368
435
326
(10)
(647)
(52)
(2)
275
325
9,251
(5,558)
3,693
Philips Group
Intangible assets excluding goodwill in millions of EUR
2014
other intangible assets
product development
software
total
Balance as of January 1, 2014:
Cost
Amortization/ impairments
Book value
Changes in book value:
Additions
Acquisitions
Purchase price allocation adjustment
Amortization
Impairments
Divestments and transfer to assets
classified as held for sale
Translation differences
Total changes
Balance as of December 31, 2014:
Cost
Amortization/ impairments
Book value
5,533
(3,173)
2,360
15
170
(8)
(355)
(1)
(62)
231
(10)
5,721
(3,371)
2,350
1,761
(916)
845
323
2
(231)
(25)
(96)
71
44
1,853
(964)
889
344
(287)
57
101
1
(31)
(2)
-
3
72
446
(317)
129
7,638
(4,376)
3,262
439
173
(8)
(617)
(28)
(158)
305
106
8,020
(4,652)
3,368
The additions for 2015 contain internally generated
assets of EUR 315 million (2014: EUR 323 million) for
product development, and EUR 56 million (2014: EUR
83 million) for software. The acquisitions through
business combinations in 2015 mainly consist of the
acquired intangible assets of Volcano for EUR 320
million.
In addition, other intangible fixed assets changed due
to the finalization of purchase price accounting related
to acquisitions in the prior year. Transfer to assets
classified as held for sale in 2014 mainly relate to
combined businesses of Lumileds and Automotive.
The impairment charges in 2015 for product
development relate to various projects mainly within
Healthcare.
138
Annual Report 2015
13
Group financial statements 12.9
The increase of EUR 275 million in translation
differences was mainly due to the increase of the USD/
EUR rate which impacted the intangibles denominated
in USD.
At December 31, 2015 the carrying amount of developed
technology related to systems for Volcano (now “Image
Guided Technology - Devices”) was EUR 150 million
(USD 164 million) with a remaining amortization period
of 14.1 years.
The amortization of intangible assets is specified in
note 6, Income from operations.
13 Other financial assets
Other intangible assets consist of:
The changes during 2015 were as follows:
Philips Group
Amortization of other intangible assets in millions of EUR
2014 -2015
Philips Group
Other non-current financial assets in millions of EUR
2015
Balance as of
December 31,
2014
amortization/
impairments
gross
Brand names
1,018
(497)
Customer
relationships
Technology
Other
Other
intangibles
3,045
1,543
115
(1,622)
(1,151)
(101)
Balance as of
December 31,
2015
amortization/
impairments
(582)
(1,925)
(1,373)
(113)
gross
1,102
3,324
1,977
136
5,721
(3,371)
6,539
(3,993)
The estimated amortization expense for other
intangible assets for each of the next five years is:
Philips Group
Estimated amortization expense for other intangible assets
in years
2016
2017
2018
2019
2020
The expected useful lives of the intangible assets
excluding goodwill are as follows:
Philips Group
Expected useful lives of intangible assets excluding goodwill
in years
Brand names
Customer relationships
Technology
Other
Software
Product development
357
328
318
298
281
2-20
2-25
3-20
1-8
1-10
3-7
The weighted average expected remaining life of other
intangible assets is 8.4 years as of December 31, 2015
(2014: 8.5 years).
The capitalized product development costs and
software, for which amortization has not yet
commenced, amounted to EUR 491 million as of
December 31, 2015 (2014: EUR 450 million).
At December 31, 2015 the carrying amount of customer
relationships of Respiratory Care & Sleep Management
was EUR 466 million (USD 509 million) with a remaining
amortization period of 8.2 years (2014: EUR 468 million,
USD 569 million; 9.2 years).
availa-
ble-for-
sale fi-
nancial
assets
loans
and re-
ceiva-
bles
held-
to-ma-
turity
invest-
ments
finan-
cial as-
sets at
fair val-
ue
through
profit or
loss
total
210
226
2
24
462
(18)
31
(23)
(4)
1
31
(9)
35
(13)
-
(2)
1
4
(16)
232
222
(27)
71
(37)
(4)
(1)
35
(10)
5
(1)
3
2
33
489
-
-
-
2
Balance as of
January 1, 2015
Changes:
Reclassifica-
tions
Acquisitions/
additions
Sales/
redemptions/
reductions
Impairment
Transfer from
and (to) assets
classified as
held for sale
Value
adjustments
Translation and
exchange
differences
Balance as of
December 31,
2015
Available-for-sale financial assets
The Company’s investments in available-for-sale
financial assets mainly consist of investments in
common shares of companies in various industries. The
line reclassifications mainly represents an investment
transferred to investments in associates due to the fact
that the Group is able to exercise significant influence.
The line additions/acquisitions includes investments of
EUR 21 million which relate to the acquisition of Volcano
(refer to note 4 Acquisitions and divestments). The
remainder mainly relates to capital calls for certain
investment funds. The line sales/redemptions/
reductions includes the sale of one of Volcano’s
investments for an amount of EUR 16 million and the
sale of certain government bonds for an amount of EUR
6 million.
Loans and receivables
The acquisitions/additions line mainly relates to vendor
loans issued to an amount of EUR 17 million in relation
to the sale of an equity interest. The current portion of
this loan (EUR 8 million) was in the course of 2015
reclassified to Current financial assets. The remainder
of the loan will be redeemed in 2017.
Annual Report 2015
139
Group financial statements 12.9
14
15
16
17
14 Other assets
The aging analysis of accounts receivable, net, is set out
below:
Other non-current assets
Other non-current assets in 2015 are comprised of
prepaid pension costs of EUR 3 million (2014: EUR 2
million) and prepaid expenses of EUR 65 million (2014:
EUR 67 million).
For further details see note 20, Post-employment
benefits.
Other current assets
Other current assets include prepaid expenses of EUR
444 million (2014: EUR 411 million).
15
Inventories
Inventories are summarized as follows:
Philips Group
Aging analysis in millions of EUR
2014 - 2015
current
overdue 1-30 days
overdue 31-180 days
overdue > 180 days
2014
3,719
251
335
171
2015
4,003
237
337
150
Accounts receivable-net
4,476
4,727
The above net accounts receivable represent current
and overdue but not impaired receivables.
The changes in the allowance for doubtful accounts
receivable are as follows:
Philips Group
Allowance for doubtful accounts receivable in millions of EUR
2013 - 2015
Philips Group
Inventories in millions of EUR
2014 - 2015
Raw materials and supplies
Work in process
Finished goods
Inventories
2014
962
481
2015
1,068
475
1,871
1,920
3,314
3,463
Balance as of January 1
Additions charged to expense
Deductions from allowance1)
Other movements
Balance as of December 31
2013
230
29
(33)
(22)
204
2014
204
48
(46)
21
227
2015
227
78
(25)
21
301
The write-down of inventories to net realizable value
amounted in 2015 to EUR 170 million (2014: EUR 217
million). The write-down is included in cost of sales.
16 Receivables
Non-current receivables
Non-current receivables are associated mainly with
customer financing in Healthcare and insurance
receivables in Innovation, Group & Services. The
balance as per December 31, 2015 includes an
allowance for doubtful accounts of EUR 1 million (2014:
EUR 2 million).
Current receivables
The accounts receivable, net, per sector are as follows:
Philips Group
Accounts receivables-net in millions of EUR
2014 - 2015
Healthcare
Consumer Lifestyle
Lighting
Innovation, Group & Services
2014
2,112
791
1,438
135
2015
2,343
853
1,442
89
Accounts receivable-net
4,476
4,727
1) Write-offs for which an allowance was previously provided
The allowance for doubtful accounts receivable has
been primarily established for receivables that are past
due.
Included in above balances as per December 31, 2015
are allowances for individually impaired receivables of
EUR 272 million (2014: EUR 200 million; 2013: EUR 172
million).
17 Equity
Common shares
As of December 31, 2015, the issued and fully paid share
capital consists of 931,130,387 common shares, each
share having a par value of EUR 0.20.
In June 2015, Philips settled a dividend of EUR 0.80 per
common share, representing a total value of EUR 730
million. Shareholders could elect for a cash dividend or
a share dividend. Approximately 59% of the
shareholders elected for a share dividend, resulting in
the issuance of 17,671,990 new common shares. The
settlement of the cash dividend resulted in a payment
of EUR 298 million including tax and service charges.
140
Annual Report 2015
Group financial statements 12.9
The following table shows the movements in the
outstanding number of shares:
The following transactions took place resulting from
employee option and share plans:
Philips Group
Outstanding number of shares in number of shares
2014 - 2015
Philips Group
Employee option and share plan transactions
2014 - 2015
Balance as of January 1
913,337,767
914,388,869
Shares acquired
Dividend distributed
18,811,534
17,671,990
Average market price
2014
2015
2014
7,254,606
EUR 24.53
2015
Purchase of treasury shares
(28,537,921)
(20,296,016)
Amount paid
EUR 178 million
Re-issuance of treasury shares
10,777,489
5,338,743
Shares delivered
Balance as of December 31
914,388,869
917,103,586
Average market price
10,777,489
EUR 30.26
5,338,743
EUR 30.35
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, 2015, no preference shares have been
issued.
Options, restricted and performance shares
The Company has granted stock options on its common
shares and rights to receive common shares in the
future (see note 28, 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 (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.
When treasury shares are reissued under the
Company’s option plans, the difference between the
cost and the cash received is recorded in retained
earnings. When treasury shares are reissued under the
Company’s share plans, the difference between the
market price of the shares issued and the cost is
recorded in retained earnings, the market price is
recorded in capital in excess of par value.
Dividend withholding tax in connection with the
Company’s purchase of treasury shares for capital
reduction purposes is recorded in retained earnings.
Cost of delivered shares
EUR 326 million
EUR 162 million
Total shares in treasury
at year-end
17,127,544
11,788,801
Total cost
EUR 470 million
EUR 308 million
In 2015, no additional share purchase was needed to
cover our share-based compensation plan
commitments.
In order to reduce share capital, the following
transactions took place:
Philips Group
Share capital transactions
2014 - 2015
Shares acquired
Average market price
2014
21,283,315
EUR 23.95
2015
20,296,016
EUR 24.39
Amount paid
EUR 510 million
EUR 495 million
Reduction of capital
stock (shares)
Reduction of capital
stock (EUR)
Total shares in treasury
at year-end
21,837,910
21,361,016
EUR 533 million
EUR 517 million
3,303,000
2,238,000
Total cost
EUR 77 million
EUR 55 million
Share purchase transactions related to share plans, as
well as transactions related to the reduction of share
capital involved a cash outflow of EUR 506 million,
which includes the impact of taxes. Settlements of
share-based compensation plans involved a cash
inflow of EUR 81 million.
Dividend distribution
A proposal will be submitted to the 2016 Annual
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 2015 net income
and retained earnings of the Company.
Limitations in the distribution of shareholders’
equity
As at December 31, 2015, pursuant to Dutch law, certain
limitations exist relating to the distribution of
shareholders’ equity of EUR 2,274 million. Such
limitations relate to common shares of EUR 186 million,
as well as to legal reserves required by Dutch law
included under retained earnings of EUR 958 million,
revaluation reserves of EUR 4 million, unrealized
currency translation differences of EUR 1,058 million,
Annual Report 2015
141
Group financial statements 12.9
available-for-sale financial assets of EUR 56 million
and unrealized gains related to cash flow hedges of
EUR 12 million.
The legal reserve required by Dutch law of EUR 958
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.
As at December 31, 2014, these limitations in
distributable amounts were EUR 1,515 million and
related to common shares of EUR 187 million, as well as
to legal reserves required by Dutch law included under
retained earnings of EUR 1,059 million, revaluation
reserves of EUR 13 million, available-for-sale financial
assets of EUR 27 million and unrealized currency
translation gains EUR 229 million. The unrealized losses
related to cash flow hedges of EUR 13 million, although
qualifying as a legal reserve, reduce the distributable
amount by their nature.
Non-controlling interests
Non-controlling interests relate to minority stakes held
by third parties in consolidated group companies. The
Net income attributable to non-controlling interests
amounted to EUR 14 million in 2015 (Net loss
attributable to non-controlling interests 2014: EUR 4
million).
The non-controlling interests mainly relate to General
Lighting Company (GLC), in which Alliance Holding
domiciled in Kingdom of Saudi Arabia holds 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.
Philips Group
Net operating capital composition in millions of EUR
2013 - 2015
Intangible assets
Property, plant and equipment
Remaining assets
Provisions
Other liabilities
Net operating capital
The Company believes that an understanding of the
Philips Group’s financial condition is enhanced by the
disclosure of 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) long-term provisions and
short-term provisions, (f) accounts and notes payable,
(g) accrued liabilities, (h) income tax payable, (i) non-
current derivative financial liabilities and derivative
financial liabilities and (j) 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
retain a strong investment grade credit rating.
Furthermore, the Group’s aim when managing the net
debt position is dividend stability and a pay-out ratio
of 40% to 50% of continuing net income. Following the
intended separation of the Lighting business, the
dividend pay-out ratio with respect to future years
could be subject to change.
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.
2013
9,766
2,780
8,699
(2,554)
(8,453)
10,238
2014
10,526
2,095
9,041
(3,445)
(9,379)
8,838
2015
12,216
2,322
9,423
(3,225)
(9,640)
11,096
142
Annual Report 2015
Philips Group
Composition of net debt to group equity in millions of EUR unless otherwise stated
2013 - 2015
Long-term debt
Short-term debt
Total debt
Cash and cash equivalents
Net debt1)
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
Philips Group
Composition of cash flows in millions of EUR
2013 - 2015
Cash flows from operating activities
Cash flows from investing activities
Cash flows before financing activities
18
Group financial statements 12.9
2013
3,309
592
3,901
2,465
1,436
11,214
13
11,227
12,663
11%
89%
2013
912
(862)
50
2014
3,712
392
4,104
1,873
2,231
10,867
101
10,968
13,199
17%
83%
2014
1,303
(984)
319
2015
4,095
1,665
5,760
1,766
3,994
11,662
118
11,780
15,774
25%
75%
2015
1,167
(1,941)
(774)
In 2015, total debt increased by EUR 1,656 million. New
borrowings of EUR 1,335 million were mainly due to a
short-term bridge loan used for the Volcano acquisition
while repayments amounted to EUR 104 million. Other
changes resulting from consolidation and currency
effects led to an increase of EUR 425 million.
18 Debt
Long-term debt
Philips Group
Long-term debt in millions of EUR unless otherwise stated
2014 - 2015
(range of)
interest rates
average rate
of interest
amount
outstanding
in 2015
amount due
in 1 year
amount due
after 1 year
amount due
after 5 years
average
remaining
term (in
years)
amount
outstanding
in 2014
USD bonds
3.8 - 7.8%
Bank borrowings
0.0-11.0%
Other long-term
debt
Institutional
financing
0.8 - 7.0%
Finance leases
0 - 16.4%
Long-term debt
Corresponding
data of previous
year
5.6%
1.7%
3.8%
3.2%
5.2%
3,733
259
42
4,034
211
4,245
-
45
39
84
66
150
3,733
214
2,595
201
3
1
3,950
145
4,095
2,797
34
2,831
11.7
5.0
1.3
3.4
5.2%
3,860
148
3,712
2,578
3,355
258
52
3,665
195
3,860
3,671
Annual Report 2015
143
Group financial statements 12.9
19
The following amounts of long-term debt as of
December 31, 2015, are due in the next five years:
19 Provisions
Philips Group
Provisions in millions of EUR
2014 - 2015
Provisions for defined-
benefit plans (see note 20)
Other postretirement
benefits (see note 20)
Product warranty
Environmental provisions
Restructuring-related
provisions
Litigation provisions
Other provisions
Provisions
2014
2015
long-
term
short-
term
long-
term
short-
term
881
52
841
51
226
77
301
150
480
385
16
225
59
230
173
190
220
67
278
69
518
399
2,500
945
2,392
10
222
57
228
60
205
833
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 to be utilized mainly within the next year.
Philips Group
Provision for product warranty in millions of EUR
2013 - 2015
Balance as of January 1
Changes:
Additions
Utilizations
Transfer to assets classified as held
for sale
Translation differences
Balance as of December 31
2013
319
2014
266
350
(363)
(24)
(16)
266
332
(316)
(3)
23
2015
302
327
(357)
-
17
302
289
Environmental provisions
The environmental provisions include accrued losses
recorded with respect to environmental remediation 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.
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 as well
as changes in judgments and discount rates.
Philips Group
Long-term debts due in the next five years in millions of EUR
2014 - 2015
2016
2017
2018
2019
2020
Long term debt
Corresponding amount of previous year
150
53
1,182
18
11
1,414
1,282
Philips Group
Unsecured USD Bonds in millions of EUR unless otherwise stated
2014 - 2015
Due 5/15/25; 7 3/4%
Due 6/01/26; 7 1/5%
Due 5/15/25; 7 1/8%
Due 3/11/18; 5 3/4%1)
Due 3/11/38; 6 7/8%1)
Due 3/15/22; 3 3/4%1)
Due 3/15/42; 5%1)
Adjustments2)
effective
rate
7.429%
6.885%
6.794%
2014
2015
81
136
84
91
152
94
6.066%
1,028
1,144
7.210%
3.906%
5.273%
823
823
411
(31)
915
915
458
(36)
Unsecured USD Bonds
3,355
3,733
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 2015, none of the long-term and short-term debt was
secured by collateral (2014: EUR nil million).
Short-term debt
Philips Group
Short-term debt in millions of EUR
2014 - 2015
Short-term bank borrowings
Other short-term loans
Current portion of long-term debt
Short-term debt
2014
225
19
148
392
2015
1,510
5
150
1,665
During 2015, the weighted average interest rate on the
bank borrowings was 1.6% (2014: 8.3%) due to the
bridging loan with low interest rate used for the Volcano
acquisition.
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 purposes and as a backstop of
its commercial paper program and will mature in
February 2018. As of December 31, 2015 Philips did not
have any loans outstanding under either facility.
144
Annual Report 2015
Group financial statements 12.9
Philips Group
Environmental provisions in millions of EUR
2013 - 2015
Balance as of January 1
2013
375
2014
311
2015
360
Restructuring projects at Lighting centered on the
conventional lamps industry and Professional Lighting
Solutions, the largest of which took place in France and
Indonesia.
Changes:
Additions
Utilizations
Releases
Changes in discount rate
Accretion
Purchase price allocation adjustment
Changes in consolidation
Reclassification
Translation differences
Balance as of December 31
30
(21)
(16)
(40)
6
(15)
-
-
(8)
311
29
(23)
(15)
30
8
-
4
-
16
360
27
(24)
(36)
(7)
7
-
1
(8)
15
335
The release of the provision in 2015 originates from
additional insights in relation to factors as the estimated
cost of remediation, changes in regulatory
requirements and efficiencies in completion of various
site work phases.
For more details on the environmental remediation
reference is made to note 26, Contingent assets and
liabilities.
Approximately half of this provision is expected to be
utilized within the next five years. The remaining portion
relates to longer-term remediation activities.
Restructuring-related provisions
Philips Group
Restructuring-related provisions in millions of EUR
2015
Jan. 1,
2015
addi-
tions
uti-
liza-
tions
relea-
ses
other
changes1)
Healthcare
48
51
(38)
(11)
Consumer
Lifestyle
Lighting
Innovation,
Group and
Services
Philips
Group
12
195
30
84
(6)
(106)
(3)
(25)
125
29
(39)
(49)
380
194
(189)
(88)
(1)
(1)
-
2
-
Dec.
31,
2015
49
32
148
68
297
1) Other changes primarily relate to translation differences and assets
classified as held for sale reclassifications
The most significant projects in 2015
In 2015, restructuring projects at Healthcare mainly took
place in the US and France.
Consumer
Lifestyle
Lighting
Innovation,
Group and
Services
Philips
Group
Innovation, Group & Services restructuring projects
were mainly related to Group and Regional
organizations and centered primarily in France and the
Netherlands. The release mainly results from
unforeseen changes to the IT restructuring plan in 2015.
The movements in the provisions and liabilities for
restructuring in 2014 by Sector are presented as follows:
Philips Group
Restructuring-related provisions in millions of EUR
2014
Jan. 1,
2014
addi-
tions
uti-
liza-
tions
relea-
ses
other
changes1)
Healthcare
17
67
(27)
(9)
21
130
7
180
(10)
(90)
(7)
(16)
Dec.
31,
2014
48
12
195
-
1
(9)
35
110
(15)
(5)
-
125
203
364
(142)
(37)
(8)
380
1) Other changes primarily relate to translation differences and transfers
between sectors
The most significant projects in 2014
In 2014, restructuring projects at Healthcare mainly took
place in the US and the Netherlands.
Consumer Lifestyle restructuring projects were mainly
in the Netherlands.
The most significant restructuring projects related to
Lighting and IG&S and were driven by industrial
footprint rationalization and the Accelerate!
transformation program.
Restructuring projects at Lighting centered on Light
Sources & Electronics and Professional Lighting
Solutions, the largest of which took place in Belgium,
the Netherlands and France.
Innovation, Group & Services restructuring projects
mainly were related to IT and group and country
overheads and centered primarily in the Netherlands,
US and Belgium.
Consumer Lifestyle restructuring projects were mainly
in Italy.
The Company expects the provision will be utilized
mainly within the next year.
The most significant restructuring projects were mainly
related to the industrial footprint rationalization
projects in Lighting.
Annual Report 2015
145
Consumer
Lifestyle
Lighting
Innovation,
Group and
Services
Philips
Group
Group financial statements 12.9
The movements in the provisions and liabilities for
restructuring in 2013 are presented by sector as follows:
Philips Group
Restructuring-related provisions in millions of EUR
2013
Jan. 1,
2013
addi-
tions
uti-
liza-
tions
relea-
ses
other
changes1)
Healthcare
77
14
(50)
(23)
48
198
11
64
(27)
(110)
(10)
(19)
Dec.
31,
2013
17
21
130
(1)
(1)
(3)
62
16
(30)
(15)
2
35
385
105
(217)
(67)
(3)
203
1) Other changes primarily relate to translation differences and transfers
between sectors
The most significant projects in 2013
In 2013, 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).
The most significant restructuring projects related to
Lighting and were driven by the industrial footprint
rationalization.
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.
Litigation provisions
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.
Philips Group
Litigation provisions in millions of EUR
2013 - 2015
Balance as of January 1
Changes:
Additions
Utilizations
Transfer to other current liabilities
Changes in discount rate
Releases
Accretion
Translation differences
2013
238
2014
236
2015
653
48
(17)
-
-
(15)
-
(18)
563
(32)
(138)
-
(23)
6
41
66
(25)
(161)
8
(25)
12
50
578
Balance as of December 31
236
653
146
Annual Report 2015
2015
The majority of the ending balance as of December 31,
2015 relates to the patent infringement lawsuit by
Masimo Corporation as mentioned in the 2014
paragraph.
The majority of the transfers to other current liabilities
relates to certain parts of the Cathode Ray Tube (CRT)
antitrust litigation as mentioned in note 26, Contingent
assets and liabilities for which the Company was able
to reach a settlement. These settlements were
subsequently paid out in 2015.
The movement of EUR 50 million in translation
differences is mainly explained by the increase of the
USD/EUR rate which impacted the litigation provisions
nominated in USD.
The Company expects to use the provisions within the
next three years. For more details reference is made to
note 26, Contingent assets and liabilities.
2014
The additions and ending balance in 2014 include the
patent infringement lawsuit by Masimo Corporation in
the United States District Court for the District of
Delaware against Philips in which Masimo was
awarded a compensation of USD 467 million (EUR 366
million) in 2014.
The majority of the remaining additions and remaining
ending balance as of December 31, 2014 relates to
certain parts of the CRT antitrust litigation for which the
company concluded it was able to make a reliable
estimate of the cash outflow or was able to reach
settlement.
The transfer to other current liabilities in the schedule
above relates to certain parts of the CRT antitrust
litigation where the Company was able to reach
settlement. Settlements in excess of provisions
recognized previously were recognized as an increase
of other current liabilities as disclosed in note 22, Other
liabilities. These settlements were subsequently paid
out in 2015.
As a result of the aforementioned changes in estimates
for the CRT antitrust litigation, the results of other
business expenses of EUR 271 million in 2014 as
included in note 6, Income from operations mainly
relate to certain parts of the CRT antitrust litigation for
which the company concluded it was able to make a
reliable estimate of the cash outflow or where the
Company was able to reach settlement.
For more details reference is made to note 26,
Contingent assets and liabilities.
Other provisions
Philips Group
Other provisions in millions of EUR
2013 - 2015
Balance as of January 1
Changes:
Additions
Utilizations
Releases
Reclassification
Liabilities directly associated with
assets held for sale
Accretion
Changes in consolidation
Translation differences
Balance as of December 31
2013
529
2014
519
2015
575
198
(224)
(48)
80
(3)
-
(1)
(12)
519
213
(153)
(37)
17
(13)
6
(1)
24
575
198
(186)
(35)
14
(1)
7
24
8
604
The main elements of other provisions are: provision for
post-employment benefits and obligatory severance
payments of EUR 47 million (2014: 50 million), onerous
contract provisions for unfavorable supply contracts as
part of divestment transactions, onerous (sub)lease
contracts and expected losses on existing projects /
orders totaling EUR 106 million (2014: 103 million),
provision for employee jubilee funds EUR 71 million
(2014: EUR 74 million), self-insurance liabilities of EUR
70 million (2014: EUR 65 million), provisions for rights of
return of EUR 52 million (2014: EUR 52 million),
provision for possible taxes/social security of EUR 99
million (2014: EUR 97 million) and provision for
decommissioning costs of EUR 52 million (2014: EUR 36
million).
Provisions of EUR 24 million have been assumed as a
result of the acquisition of Volcano.
The provision for self-insurance liabilities is expected
to be used within the next five years. More than half of
the provision for possible taxes/social security and
provision for decommissioning costs and less than half
of the provision for employee jubilee funds is expected
to be utilized within next five years. All other provisions
are expected to be utilized mainly within the next three
years, except for provision for rights of return, which the
Company expects to use within the next year.
20 Post-employment benefits
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.
Most employees that take part in a Company pension
plan are covered by defined contribution (DC) pension
plans. The Company also 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.
20
Group financial statements 12.9
The benefits provided by these plans are typically
covering a part of the healthcare insurance costs after
retirement.
The largest defined benefit pension plans are in:
• The Netherlands (settled per May 1, 2015),
• The United Kingdom (UK) (settled per December 31,
2015) and
• The United States (US)
At the start of 2015 these plans accounted for more than
90% of the total defined benefit obligation and plan
assets. Philips is one of the sponsors of Philips
Pensionskasse VVaG in Germany, which is a multi-
employer plan and is accounted for as a DC plan.
The Netherlands
For the pension plan in the Netherlands (the Flexplan)
the Company has no other financial obligation to the
Pension Fund than to pay an agreed fixed contribution
for the annual accrual of active members. The
pensionable age is 67 year. The Flexplan is executed by
a Company Pension Fund. A mandatory cap imposed
by Dutch legislation of EUR 100 thousand applies on
the pension salary for future pension accrual.
Employees earning more than this cap receive a wage
allowance and can join a voluntary net pension saving
scheme, at their own expense, for the salary part above
the cap. The net pension saving scheme and some
related risk insurances are executed by an external
provider other than the Company Pension Fund.
Up to May 2015, the Company accounted for the
Flexplan as a defined benefit (DB) pension plan as it still
ran actuarial and investments risks by means of being
entitled to a discount arrangement. This discount
arrangement would result in potential future variable
pension contributions to be paid by the Company.
Beginning of May 2015, the Company surrendered its
right to future discounts and as a result the plan
qualified as a defined contribution plan. Reason for
surrendering the discount arrangement was a
significant reduction in 2015 of the outlook for a
potential discount due to increased pension
obligations and a regulatory deficit at the fund (because
of a lower regulatory discount rate and higher solvency
buffers due to change in investment strategy),
combined with the need to avoid unwanted complexity
of an allocation of the Dutch fund as a DB plan as part
of the separation. Consequently, the plan was classified
as a DC plan. This triggered the accounting settlement
of the plan which at the time had a EUR 20 million
surplus. As the surplus was not recognized in the
balance sheet due to the asset ceiling test, and because
no further payments were made directly related to the
settlement, as per the Company’s accounting policy the
Company did not recognize a settlement result in the
income statement but in remeasurements for pensions
in the Consolidated statements of Comprehensive
Income.
Annual Report 2015
147
Group financial statements 12.9
At the end of 2013 the Company agreed to transfer a
one-off EUR 600 million to the Company Pension Fund
of which EUR 433 million was paid in 2014; the
remainder of EUR 167 million (excluding interest) was
paid in the first quarter of 2015.
United Kingdom
The UK plan is executed by a Company Pension Fund
currently being wound up. 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.
In November 2015 the Trustee of the UK Fund entered
into two further bulk insurance contracts - buy-in
contracts - which provide for payment in respect of all
remaining parts of the Fund’s pensioners not covered
under earlier buy-in contracts. Subsequently, the
Company requested the Trustee for a wind-up of the
UK Fund in December 2015 resulting in a complete buy-
out of the plan. As part of the buy-out, an additional
payment of EUR 305 million was made by the Company
to the insurance company taking over the plan
liabilities. The buy-out triggers a complete settlement
of the UK defined benefit plan. The existing surplus
before the extra payment was EUR 375 million. As this
surplus was not recognized in the balance sheet, due to
the asset ceiling test, per the Company’s accounting
policy the Company did not recognize this as a
settlement result in the income statement but in
remeasurements for pensions in the Consolidated
statements of Comprehensive Income. However, the
above mentioned payment of EUR 305 million for EUR
274 million is booked as a related settlement loss in the
income statement and for EUR 31 million as a past
service cost in the income statement being the increase
in the DBO for a plan change required by the Insurers.
Before and during the wind up of the Fund several other
de-risking actions were held resulting in a settlement
loss of EUR 27 million and a past service cost gain of
EUR 14 million.
United States
The US defined benefit plan covers certain hourly
workers and salaried workers hired before January 1,
2005. 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 accrual for salaried workers in the US plan as
decided in 2013 would end per December 31, 2015 after
which the remaining members become eligible for the
existing US DC plan. In 2015 the end date was
accelerated to July 1, 2015 triggering a EUR 1 million past
service cost gain.
In 2015 in preparation of the split of the Company into
Lighting Solutions and HealthTech the benefits of a
group of former US employees not having worked for
148
Annual Report 2015
any of the current businesses were transferred to a
separate plan covered by ERISA section 4044, which
ensures a correct split of the plan assets among others
based on the maturity of the plan. In October 2015 all
the benefits of this plan were transferred to a
consortium of three insurance companies. The
Company made a EUR 141 million contribution to the
plan to enable the transfer. The transfer to the
insurance companies triggered a settlement of the plan.
The difference between the DBO and settlement price
at transfer date amounted to EUR 33 million and is
recognized as a settlement loss in the income
statement. The effects of ERISA section 4044 for the
surviving defined benefit plan will be adjusted by a
contribution to the surviving plan early in 2016 which is
included in the 2016 cash projection further on in this
note. A de-risking action held in the remaining pension
plan providing lump sums resulted in a EUR 6 million
settlement gain.
Risks related to defined-benefit plans
The remaining 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
some smaller plans 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 de-risking 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
2015 change to DC for the Dutch plan and the other
settlements 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 surplus in our plan in Brazil is not recognized as
a net defined benefit asset because in Brazil the
regulatory framework 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.
Summary of pre-tax costs for post-
employment benefits
The below table contains the total of current- and past
service costs, administration costs and settlement
results as included in Income from operations and the
interest cost as included in Financial expenses.
Defined benefit plans: Pensions
Movements in the net liabilities and assets for defined
benefit pension plans:
Philips Group
Defined-benefit obligations in millions of EUR
2014 - 2015
Balance as of January 1
Service cost
Interest cost
Employee contributions
Actuarial (gains) / losses
- demographic assumptions
- financial assumptions
- experience adjustment
(Negative) past service cost
Acquisitions
Divestments
Settlements
Benefits paid
Exchange rate differences
Miscellaneous
Balance as of December 31
Group financial statements 12.9
Philips Group
Pre-tax costs for post-employment benefits in millions of EUR
2013 - 2015
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
2013
2014
2015
297
220
71
6
142
134
245
182
59
561
487
72
4
2
148
144
299
293
8
4
6
2014
2015
Netherlands
other
total
Netherlands
other
total
14,294
7,911
22,205
17,616
9,465
27,081
174
478
5
(80)
3,487
23
(68)
-
-
-
65
361
4
197
782
25
(1)
12
-
(9)
239
839
9
117
4,269
48
(69)
12
-
(9)
77
120
5
-
1,796
(176)
-
-
-
60
345
4
-
(271)
27
14
-
(12)
137
465
9
-
1,525
(149)
14
-
(12)
(19,197)
(5,193)
(24,390)
(699)
(506)
(1,205)
(234)
-
2
624
-
624
2
17,616
9,465
27,081
(553)
635
(1)
(787)
635
(1)
4,520
4,527
3,635
3,635
885
892
-
7
-
7
Present value of funded obligations at December 31
17,609
8,532
26,141
Present value of unfunded obligations at December 31
7
933
940
Philips Group
Plan assets in millions of EUR
2014 - 2015
Balance as of January 1
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
Balance as of December 31
Funded status
Unrecognized net assets
Net balance sheet position
2014
2015
Netherlands
other
total
Netherlands
other
total
14,843
6,728
21,571
17,847
8,016
25,863
508
(9)
2,534
5
665
-
-
(699)
-
330
(6)
674
4
199
-
(8)
(445)
540
838
(15)
3,208
9
864
-
(8)
(1,144)
540
17,847
8,016
25,863
231
(1,449)
(1,218)
(238)
(554)
(792)
(7)
(2,003)
(2,010)
123
(3)
1,233
5
245
-
311
(6)
(315)
4
302
(7)
434
(9)
918
9
547
(7)
(19,217)
(5,623)
(24,840)
(233)
-
-
(7)
-
(7)
(492)
520
(725)
520
2,710
2,710
(1,810)
(1,817)
(90)
(90)
(1,900)
(1,907)
Annual Report 2015
149
Group financial statements 12.9
The classification of the net balance is as follows:
Philips Group
Net balance of defined-benefit pension plans in millions of EUR
2014 - 2015
Prepaid pension costs under other non-current assets
Accrued pension costs under other liabilities
Provision for pensions under provisions
Provision in assets held for sale
Net balance of defined-benefit plans
Philips Group
Changes in the effect of the asset ceiling in millions of EUR
2014 - 2015
Balance as of January 1
Interest on unrecognized assets
Remeasurements
Exchange rate differences
Balance as of December 31
2014
2015
Netherlands
other
total
Netherlands
other
total
-
-
(7)
-
(7)
2
2
(1,072)
(1,072)
(926)
(933)
(7)
(7)
(2,003)
(2,010)
-
-
(7)
-
(7)
3
3
(1,018)
(1,018)
(885)
(892)
-
-
(1,900)
(1,907)
2014
Netherlands
other
555
19
(336)
-
238
428
28
73
25
554
total
983
47
(263)
25
792
2015
Netherlands
other
total
238
2
(240)
-
-
554
27
(493)
2
90
792
29
(733)
2
90
Plan assets allocation
The asset allocation in the Company’s pension plans at
December 31 was as follows:
Philips Group
Plan assets allocation in millions of EUR
2014 - 2015
2014
2015
Netherlands
other
Netherlands
other
In the US the issued MP-2015 mortality improvement
scale, not adopted by the Company yet due to the
limited extra period (2 years) of observation, would
lower the DBO by about EUR 40 million.
The weighted averages of the assumptions used to
calculate the defined-benefit obligations as of
December 31 were as follows:
Matching
portfolio:
- Debt
securities
10,663
5,051
1,523
- Other
Return portfolio:
- Equity
securities
- Real estate
- Other
Total assets
-
1,299
5,088
1,784
388
13
312
1,265
17,847
8,016
740
9
438
2,710
Asset values related to buy-in contracts are now
included in the Matching portfolio under Other.
The assets in 2015 contain 51% (2014: 17%) unquoted
assets, the increase compared to 2014 fully related to
the exclusion of the UK and NL plan assets. Plan assets
in 2015 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 2014 including
experience rating TW2014.
• UK: SAPS 2002- Core CMI 2011 projection
• US: RP2014 HA/EE Fully Generational scaled with
MP2014
Philips Group
Assumptions used for defined-benefit obligations in %
2014 - 2015
2014
2015
Netherlands
other
Netherlands
other
Discount rate
Rate of
compensation
increase
2.1%
3.7%
2.0%
3.0%
-
-
4.0%
2.7%
The Discount rate for the Netherlands at the moment of
the change to DC was 1.55%. Due to the nature of the
pension plan in the Netherlands until May 1, 2015 an
assumption was required for the future pension accrual
rate. If the fixed premium did not cover the cost of the
target accrual of 1.85% per annum a lower percentage
must be applied for which the cost will be covered by
the fixed premium. The Fund in the Netherlands has set
aside part of the EUR 600 million received for active
members accrual or indexation. The accrual rate for the
next 5 years starting 2015 was expected to be 1.85% but
per 31 December 2014 the average future accrual rate
used to calculate the defined-benefit obligation and
service cost was fixed at 1.74% as after the five year
period a lower percentage would apply assuming the
current fixed premium level. Per May 1, 2015 this no
longer applies due to the change to DC.
The average duration of the defined-benefit obligation
of the pension plans is 10 years (2014: 12 years).
150
Annual Report 2015
-
-
• EUR 18 million in relation to unfunded retiree medical
plans.
Defined-benefit plans: retiree medical plans
Movements in the net liability for retiree medical plans:
Philips Group
Liability for retiree medical plans in millions of EUR
2014 - 2015
Balance as of January 1
Service cost
Interest cost
Actuarial (gains) or losses arising from:
- Demographic assumptions
- Financial assumptions
- Experience adjustment
Past service cost
Benefits paid
Exchange rate differences
Balance as of December 31
Present value of funded obligations as of
December 31
Present value of unfunded obligations as of
December 31
Funded status
Net balances
2014
213
2015
241
2
11
3
9
(3)
-
(15)
21
241
-
12
-
(2)
(17)
-
(13)
9
230
241
(241)
(241)
230
(230)
(230)
Classification of the net balance is as follows:
Provision for other postretirement benefits
(241)
(230)
The weighted average assumptions used to calculate
the defined-benefit obligations for retiree medical
plans as of December 31 were as follows:
Philips Group
Weighted average assumptions for retiree medical plans in %
2014 - 2015
Discount rate
Compensation increase (where applicable)
2014
5.0%
0.0%
2015
5.1%
0.0%
Assumed healthcare cost trend rates at December 31:
Philips Group
Assumed healthcare cost trend rates in %
2014 - 2015
Healthcare cost trend rate assumed for next
year
Rate that the cost trend rate will gradually reach
2014
2015
7.0%
5.3%
7.5%
5.3%
Year of reaching the rate at which it is assumed
to remain
2024
2025
The average duration of the defined-benefit obligation
of the retiree medical plans is 8 years (2014: 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 plan assets of the Philips pension plan in the US 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
Group financial statements 12.9
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 2016
The Company expects considerable cash outflows in
relation to post-employment benefits which are
estimated to amount to EUR 660 million in 2016,
consisting of:
• EUR 209 million employer contributions to defined
benefit pension plans
• EUR 372 million employer contributions to defined
contribution pension plans
• EUR 61 million expected cash outflows in relation to
unfunded pension plans and
The employer contributions to defined benefit pension
plans are expected to amount to EUR 174 million for the
US and EUR 35 million for other countries. 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 service and administration cost for 2016 is
expected to amount to EUR 43 million, consisting of
EUR 42 million for defined-benefit pension plans and
EUR 1 million for defined-benefit retiree medical plans.
The interest expense for 2016 is expected to amount to
EUR 66 million, consisting of EUR 55 million for
defined-benefit pension plans and EUR 11 million for
defined-benefit retiree medical plans. The cost for
defined-contribution pension plans in 2016 is expected
to amount to EUR 204 million in the Netherlands and
EUR 168 million in other countries.
Sensitivity analysis
The table below illustrates the approximate impact on
the defined benefit obligation (DBO) 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.
Annual Report 2015
151
Group financial statements 12.9
21
22
Philips Group
Key assumptions in millions of EUR
2015
Increase
Discount rate (1% movement)
Wage change (1% movement)
Inflation (1% movement)
Longevity (see explanation)
Medical benefit level (1% price
increase)
Decrease
Discount rate (1% movement)
Wage change (1% movement)
Inflation (1% movement)
Philips Group
Key assumptions in millions of EUR
2014
Defined benefit obligation
Pension
Netherlands
Pension
other
Retiree
medical
21 Accrued liabilities
Accrued liabilities are summarized as follows:
Philips Group
Accrued liabilities in millions of EUR
2014 - 2015
(468)
(18)
2014
2015
23
115
80
550
(20)
(104)
Personnel-related costs:
- Salaries and wages
- Accrued holiday entitlements
- Other personnel-related costs
Fixed-asset-related costs:
- Gas, water, electricity, rent and other
Communication and IT costs
7
13
20
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
Accrued liabilities
22 Other liabilities
502
179
119
47
51
112
17
161
68
132
56
869
379
567
180
196
53
46
107
20
168
54
147
69
932
324
2,692
2,863
Defined benefit obligation
Pension
Netherlands
Pension
other
Retiree
medical
Increase
Discount rate (1% movement)
(2,309)
(1,056)
(18)
Wage change (1% movement)
Inflation (1% movement)
Longevity (see explanation)
Medical benefit level (1% price
increase)
Decrease
107
1,341
492
31
555
267
-
-
Discount rate (1% movement)
2,998
1,250
Wage change (1% movement)
Inflation (1% movement)
(132)
(1,185)
(28)
(486)
-
-
7
14
19
-
-
Longevity also impacts post-employment defined
benefit obligation. 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 healthcare cost trend rates can
have a significant effect on the amounts reported for the
retiree medical plans. A 1%-point increase in medical
benefit level is therefore included in the above table as
a likely scenario.
152
Annual Report 2015
Other non-current liabilities
Other non-current liabilities are summarized as follows:
Philips Group
Other non-current liabilities in millions of EUR
2014 - 2015
Accrued pension costs
Deferred income
Other tax liability
Other liabilities
2014
1,061
176
499
102
2015
970
257
454
101
Other non-current liabilities
1,838
1,782
The decrease in the accrued pension costs is mainly
attributable to the US defined benefit plan. See also
note 20, Post-employment benefits.
For further details on tax related liabilities refer to
note 8, Income taxes.
Other current liabilities
Other current liabilities are summarized as follows:
Philips Group
Other current liabilities in millions of EUR
2014 - 2015
2014
2015
Accrued customer rebates that cannot be offset
with accounts receivables for those customers
535
544
Advances received from customers on orders
not covered by work in process
Other taxes including social security premiums
Other liabilities
Other current liabilities
312
176
368
375
177
177
1,391
1,273
The decrease of the balance of other liabilities as per
December 31, 2015 mainly relates to the pay out of
liabilities in 2015 which were accrued as per December
31, 2014 for certain parts of the Cathode Ray Tube
antitrust litigation for which the Company was able to
reach settlement. The liabilities per December 31, 2014
include transfers of provisions previously recognized.
For more details reference is made to note 19,
Provisions and note 26, Contingent assets and liabilities
- legal proceedings.
23 Cash used for derivatives and current
financial assets
In 2015, a total of EUR 193 million cash was paid with
respect to foreign exchange derivative contracts
related to activities for liquidity management and
funding.
(2014: EUR 13 million outflow; 2013: EUR 93 million
outflow).
In 2015, a total of EUR 121 million was received with
respect to current financial assets mainly related to
loans TPV Technology Limited (2014: EUR 6 million
inflow; 2013: EUR 8 million outflow).
24 Purchase and proceeds from non-current
financial assets
In 2015, the net cash inflow of EUR 32 million was mainly
due to the sale of stakes in Silicon & Software Systems
and other equity interest.
In 2014, the net cash inflow of EUR 26 million was
mainly due to the sale of stakes in Neusoft, Chimei
Innolux, and Sapiens, offset by loans provided to TPV
Technology Limited.
In 2013, there were no significant cash flows resulting
from investing activities.
23
24
25
Group financial statements 12.9
25 Contractual obligations
Philips Group
Contractual cash obligations1) in millions of EUR
2015
payments due by period
less
than 1
year
total
1-3
years
3-5
years
after 5
years
Long-term debt2)
4,034
84
1,152
1
2,797
Finance lease
obligations
Short-term debt
Operating lease
obligations
Derivative
liabilities
Interest on debt3)
Purchase
obligations4)
Trade and other
payables
Contractual cash
obligations
242
1,515
72
1,515
92
-
36
-
42
-
952
243
280
162
267
995
2,767
253
221
383
438
156
334
203
1,774
175
68
69
30
2,673
2,673
-
-
8
-
13,353
5,129
2,414
719
5,091
1) Obligations in this table are undiscounted
2) Long-term debt includes short-term portion of long-term debt and
excludes finance lease obligations
3) Approximately 32% 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 Company entered into contracts with several
venture capitalists where it committed itself to make,
under certain conditions, capital contributions to
investment funds for an aggregated remaining amount
of EUR 22 million (2014: EUR 35 million) until June 30,
2021. As at December 31, 2015 capital contributions
already made to these investment funds are recorded
as available-for-sale financial assets within Other non-
current financial assets.
The operating lease obligations 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 2015 totaled EUR 36 million (2014:
EUR 42 million).
The remaining minimum payments under sale-and-
leaseback arrangements included in operating lease
obligations above are as follows:
Philips Group
Operating lease - minimum payments under sale-and-leaseback
arrangements in millions of EUR
2015
2016
2017
2018
2019
2020
Thereafter
36
35
34
32
28
115
Annual Report 2015
153
Group financial statements 12.9
26
Finance lease liabilities
Philips Group
Finance lease liabilities in millions of EUR
2014 - 2015
2014
2015
future
mini-
mum
lease
pay-
ments
present
value
of min-
imum
lease
pay-
ments
future
mini-
mum
lease
pay-
ments
inter-
est
present
value
of min-
imum
lease
pay-
ments
inter-
est
61
7
54
72
6
66
117
19
98
128
17
111
54
11
43
42
232
37
195
242
8
31
34
211
Less
than one
year
Between
one and
five
years
More
than five
years
Finance
lease
26 Contingent assets and liabilities
Contingent assets
Zoll
In June 2010, Philips filed a patent infringement lawsuit
against Zoll Medical Corporation claiming that its
defibrillator related patents were infringed by Zoll’s
Automatic External Defibrillator (AED) products. Zoll
filed a countersuit claiming patent infringement by
Philips’ Advanced Life Support (ALS) products and a
method for testing defibrillator electrodes.
In December 2013, the liability phase of the Zoll lawsuit
was tried before a jury in the United States District Court
for the District Massachusetts. Philips and Zoll were
both held to infringe each other’s patents. Philips
expects that it will result in a net difference in favor of
Philips. The Zoll liability judgment is now pending
before the United States Court of Appeals for the
Federal Circuit (CAFC). Resolution of the amount
ultimately owed to Philips in the Zoll lawsuit is
contingent upon both the CAFC affirming the December
2013 jury decision on liability (expected in the first half
of 2016) and the subsequent damages trial (expected
to take place during the second half of 2016).
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 2015, the total fair
value of guarantees recognized on the balance sheet
amounted to EUR nil million (December 31, 2014: EUR
nil million). Remaining off-balance-sheet business and
credit-related guarantees provided on behalf of third
parties and associates increased by EUR 16 million
during 2015 to EUR 37 million (December 31, 2014: EUR
21 million).
154
Annual Report 2015
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.
Legal proceedings
The Company and certain of its group companies and
former group companies are involved as a party in legal
proceedings, 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.
While it is not feasible to predict or determine the
ultimate outcome of all pending or threatened legal
proceedings, regulatory and governmental
proceedings, the Company is of the opinion that the
cases described below may have, or have had in the
recent past, a significant impact on the Company’s
consolidated financial position, results of operations
and cash flows.
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 in 2012 and the fine was paid in the first
quarter of 2013. The Company appealed the decision of
the European Commission with the General Court
which appeal was denied on September 9, 2015. On
November 23, 2015 the Company lodged an appeal
against the decision of the General Court with the
European Court of Justice.
United States
Subsequent to the public announcement of these
investigations in 2007, certain Philips Group companies
were named as defendants in class action antitrust
complaints by direct and indirect purchasers of CRTs
filed in various federal district courts in the United
States. These actions alleged anticompetitive conduct
by manufacturers of CRTs and sought treble damages
on a joint and several liability basis. In addition, sixteen
individual plaintiffs, principally large retailers of CRT
products who opted out of the direct purchaser class,
filed separate complaints against the Company and
other defendants based on the same substantive
allegations. All these actions have been consolidated
for pre-trial proceedings in the United States District
Court for the Northern District of California.
The Company reached settlements with both the direct
purchaser plaintiffs and indirect purchaser plaintiffs
fully resolving all claims of the direct and indirect
purchaser class. The direct purchaser settlement was
approved by the court in 2012, while the indirect
purchaser settlement is still subject to court approval
with a hearing on the final approval scheduled for
March 2016. In the past years the Company also
reached settlements with a number of the individual
plaintiffs resolving all claims by those retailers on a
global basis. The settlements reached to date represent
the vast majority of CRT sales attributed to the
Company by the individual plaintiffs. In effect, all cases
originally scheduled for trial in the Northern District of
California have now been resolved, leaving unresolved
certain of the cases that were consolidated in the
California case for pre-trial purposes that have to be
transferred back to their original venue for further
proceedings. Trial dates have not yet been set for those
cases.
In addition, the state attorneys general of California,
Florida, Illinois, Oregon and Washington filed actions
against the Company and other defendants seeking to
recover damages on behalf of the states and, acting as
parens patriae, their consumers. In 2012 the Florida
complaint was withdrawn. In 2013 a settlement
agreement was reached with the state attorney general
of California that has been approved subject to review
by the California Court of Appeal. The actions brought
by the state attorneys general of Illinois, Oregon and
Washington are pending in the respective state courts
of the plaintiffs. The Oregon Attorney General action
has tentatively been set for trial in January 2017. Trial
dates for the Washington and Illinois actions have not
been set and there is no timetable for resolution of
these cases.
Canada
In 2007, certain Philips Group companies were also
being named as defendants in proposed class
proceedings in Ontario, Quebec and British Columbia,
Canada, along with numerous other participants in the
industry. After years of inactivity, in 2014, plaintiffs in the
Ontario action initiated the class certification
proceedings. Class certification hearings took place late
January 2016 and a decision on class certification is
expected in the first half of 2016.
Other civil claims related to CRT
In 2014, the Company was named as a defendant in a
consumer class action lawsuit filed in Israel in which
damages are claimed against several defendants based
on alleged anticompetitive activities in the CRT
industry. In addition, an electronics manufacturer filed
a claim against the Company and several co-
defendants with a court in the Netherlands, also
seeking compensation for the alleged damage
sustained as a result from the alleged anticompetitive
activities in the CRT industry. In 2015, the Company
became involved in further civil CRT antitrust litigation
with previous CRT customers in the United Kingdom,
Group financial statements 12.9
Germany, Brazil and Denmark. In all cases the same
substantive allegations about anticompetitive activities
in the CRT industry are made and damages are sought.
The Company has received indications that more civil
claims may be filed in due course.
Except for what has been provided or accrued for as
disclosed in note 19, Provisions and note 22, Other
liabilities, the Company has concluded that due to the
considerable uncertainty associated with certain of
these matters, on the basis of current knowledge,
potential losses cannot be reliably estimated with
respect to these matters.
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 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.
In July 2012, the European Commission issued a
Statement of Objections addressed to (former) ODD
suppliers including the Company and PLDS. The
European Commission granted the Company and PLDS
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. On October 21, 2015 the European
Commission issued its fining decisions in which it
granted immunity to the Company, Lite-On IT
Corporation and PLDS.
The antitrust authority in one remaining jurisdiction is
still investigating the matter.
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 actions
have been consolidated for pre-trial proceedings in the
United States District Court for the Northern District of
California. Initially the plaintiffs’ applications for
certification of both the direct and indirect purchaser
classes were denied. In May 2015, the indirect purchaser
plaintiffs filed a revised motion for class certification
seeking to certify a class of end consumers as plaintiffs,
which was granted on February 8, 2016.
Annual Report 2015
155
Group financial statements 12.9
In September 2015, prior to the resubmission of a class
certification motion by the direct purchaser plaintiffs,
PLDS entered into a settlement agreement with the
direct purchaser plaintiffs under which the Company
was released from the direct purchaser claims.
In addition, various 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. 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.
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. The defendants’ motion to dismiss has been
denied and Philips filed an answer to the complaint.
This case has been joined with the ODD class action
cases in the Northern District of California for pre-trial
purposes.
The Company and certain Philips Group companies
have also been named as defendants, in proposed
class proceedings in Ontario, Quebec, British Columbia,
Manitoba and Saskatchewan, 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. Plaintiffs in the British
Columbia case have proceeded with their application
to certify that proceeding as a class action. The hearing
was held in January 2015. The Court’s decision on class
certification is still pending.
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.
Consumer Electronics products and small Domestic
Appliances
Several companies, among which the Company, are
involved in an investigation by the European
Commission into alleged restrictions of online sales of
consumer electronic products and small domestic
appliances. This investigation commenced in
December 2013 when Philips was one of the companies
that was inspected by officials of the European
Commission. Philips is fully cooperating with the
European Commission.
156
Annual Report 2015
Due to the considerable uncertainty associated with
this matter, on the basis of current knowledge, the
Company has concluded that potential losses cannot
be reliably estimated with respect to these matters.
Masimo
On October 1, 2014 a jury awarded USD 467 million (EUR
366M) to Masimo Corporation (Masimo) in the patent
infringement lawsuit by Masimo in the United States
District Court for the District of Delaware against the
Company. The decision by the jury is part of extensive
litigation, which started in 2009, between Masimo and
the Company involving several claims and
counterclaims related to a large number of patents in
the field of pulse oximetry. The lawsuit filed by Masimo
alleges that certain Philips products infringe certain
Masimo patents. In response to these claims, the
Company filed its answer and counterclaims alleging
infringement of a number of Philips’ patents and
violation of US antitrust laws and patent misuse by
Masimo. The Court has decided to handle the litigation
in several phases, the first phase of which was tried in
September 2014. The October 2014 decision by the jury
is associated with this first phase of the litigation. An
additional ongoing (i.e. second) phase of the litigation
addresses the alleged infringement of certain Masimo
patents which were not included in the first phase of the
litigation.
In February 2015 the United States District Court for the
District of Delaware held a bench trial regarding the
enforceability of one of Masimo’s patents and a hearing
addressing several post-trial motions following the
October 2014 jury decision. In May 2015, the Court
decided that the Masimo patent was not held
unenforceable, denied the Company’s motions to
reverse the October 2014 jury decision regarding the
validity of the Masimo patents-in-suit and/or the
damages awarded by the jury to Masimo and denied
the Company’s request for a new trial. The Court also
denied Masimo’s motion to dismiss the Company’s
complaint directed to antitrust violations and patent
misuse by Masimo. The antitrust and patent misuse (i.e.
third) phase of the litigation has now proceeded to the
merits phase. The Company continues to pursue all
avenues of appeal regarding the October 2014 decision
before the Appellate courts in the US. In September
2015, the Court scheduled both the second and third
phases of the litigation for trial during the first quarter
of 2017.
Due to the considerable uncertainty associated with
these next phases of the litigation, including the impact
of the appeals thereon, the Company has concluded
that, on the basis of current knowledge, potential losses
cannot be reliably estimated with respect to the
remaining phases of the litigation.
Miscellaneous
As part of the divestment of the Television and Audio,
Video, Multimedia & Accessories businesses in 2012
and 2014, the Company transferred economic
ownership and control in some legal entities or divisions
thereof, while retaining (partial) legal ownership.
Considering the current challenging business
environment, the Company might face employee and
operational liabilities in case of certain adverse events.
Given the uncertain nature of the relevant events and
liabilities, it is not practicable to provide information on
the estimate of the financial effect, if any, or timing. The
outcome of the uncertain events could have a material
impact on the Company’s consolidated financial
position, results of operations and cash flows.
27 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.
Philips Group
Related-party transactions in millions of EUR
2013 - 2015
Sales of goods and services
Purchases of goods and services
Receivables from related parties
Payables to related parties
2013
305
143
39
4
2014
215
85
14
4
2015
222
87
16
4
Non-recourse financing of third-party receivables
provided by an associate amounted to EUR 135 million
in 2015 (2014: EUR 103 million; 2013: EUR 84 million).
In light of the composition of the Executive Committee,
the Company considers the members of the Executive
Committee and the Supervisory Board to be the key
management personnel as defined in IAS 24 ‘Related
parties’.
For remuneration details of the Executive Committee,
the Board of Management and the Supervisory Board
see note 29, Information on remuneration.
For employee benefit plans see note 20, Post-
employment benefits.
28 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:
• performance shares: rights to receive common shares
in the future based on performance and service
conditions;
• restricted shares: rights to receive common shares in
the future based on a service condition;
27
28
Group financial statements 12.9
• Options on its common shares, including the 2012
and 2013 Accelerate! grant.
Since 2013 the Board of Management and other
members of the Executive Committee, executives and
certain selected employees are granted performance
shares. Restricted shares are granted only to new
employees or certain selected employees. Prior to 2013,
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.
Furthermore, as part of the Accelerate! program, the
Company has granted options (Accelerate! options) 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.
Under the terms of employee stock purchase plans
established by the Company in various countries,
employees are eligible to purchase a limited number of
Philips shares at discounted prices through payroll
withholdings.
Share-based compensation costs were EUR 99 million
(2014: EUR 85 million, 2013: EUR 104 million). This
includes the employee stock purchase plan of 4 million,
which is not a share-based compensation that affects
equity. The share-based compensation costs excludes
the cost for discontinued operations of EUR 6 million.
In the consolidated statements of changes in equity
EUR 101 million is recognized in 2015 related to the
share-based compensation plans. The amount
recognized as an expense is adjusted for forfeiture.
USD-denominated performance shares, restricted
shares and options are granted to employees in the
United States only.
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 amount recognized as an expense is adjusted for
actual performance of adjusted Earnings Per Share
growth since this is a non-market performance
condition. It is not adjusted for non-vesting or extra
vesting of performance shares due to a relative Total
Shareholders’ Return performance that differs from the
performance anticipated at the grant date, since this is
a market-based performance condition.
Annual Report 2015
157
Philips Group
Assumptions used in Monte-Carlo simulation for valuation in %
2015
EUR-denominated
Outstanding at January 1, 2015
A summary of the status of the Company’s performance
share plans as of December 31, 2015 and changes
during the year are presented below:
Philips Group
Performance share plans
2015
shares1)
6,304,002
3,067,530
976,550
Granted
Forfeited
Outstanding at December 31, 2015
8,394,982
USD-denominated
Outstanding at January 1, 2015
4,200,900
Granted
Forfeited
1,985,066
411,266
Outstanding at December 31, 2015
5,774,700
weighted
average
grant-date
fair value
22.92
28.54
24.18
24.83
30.44
30.19
30.48
30.35
1) Excludes dividend declared on outstanding shares between grant date
and vesting date that will be issued in shares (EUR-denominated:
566,851 shares and USD-denominated: 395,970 shares)
At December 31, 2015, a total of EUR 157 million of
unrecognized compensation costs relate to non-vested
performance shares. These costs are expected to be
recognized over a weighted-average period of 1.8
years.
Restricted shares
The fair value of restricted shares is equal to the share
price at grant date less the present value, using the risk-
free interest rate, of estimated future 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.
Group financial statements 12.9
The fair value of the performance shares is measured
based on Monte-Carlo simulation, which takes into
account dividend payments between the grant date
and the vesting date by including reinvested dividends,
the market conditions expected to impact relative Total
Shareholders’ Return performance in relation to
selected peers, 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
2015
(0.11)%
4.0%
25%
(0.10)%
4.0%
27%
The assumptions were used for these calculations only
and do not necessarily represent an indication of
Management’s expectation of future developments for
other purposes. The Company has based its volatility
assumptions on historical experience measured over a
ten-year period.
The approach in calculating relative Total Shareholders
Return performance was determined to be based on
local currency instead of translating to the euro. This
clarification in the share-based compensation
arrangement did not result in accounting implications
for the grant of 2013 and 2014. For the grant of 2015 an
incremental fair value of EUR 6 million was recognized
in July and will be spread over the remaining vesting
period. The incremental fair value was measured using
the same assumptions used in the Monte-Carlo
simulation for the valuation of the 2015 grant, except for
the risk-free interest rate which was updated to (0.17)%.
158
Annual Report 2015
Group financial statements 12.9
A summary of the status of the Company’s restricted
shares as of December 31, 2015 and changes during the
year are presented below:
The total intrinsic value of options exercised during
2015 was EUR 21 million (2014: EUR 11 million, 2013: EUR
15 million).
Philips Group
Restricted shares
2015
EUR-denominated
Outstanding at January 1, 2015
Granted
Vested/Issued
Forfeited
shares1)
525,462
871,881
381,915
6,753
Outstanding at December 31, 2015
1,008,675
USD-denominated
Outstanding at January 1, 2015
Granted
Vested/Issued
Forfeited
Outstanding at December 31, 2015
600,679
601,206
422,288
21,188
758,409
weighted
average
grant-date
fair value
16.44
23.63
15.27
14.56
23.41
21.51
26.08
19.15
26.88
26.90
1) Restricted shares granted before 2013 excludes 20% additional
(premium) shares that may be received if shares delivered under the
plan are not sold for a three-year period. Restricted shares granted after
2013 excludes dividend declared on outstanding shares between grant
date and vesting date that will be issued in shares.
At December 31, 2015, a total of EUR 24 million of
unrecognized compensation costs relate to non-vested
restricted shares. These costs are expected to be
recognized over a weighted-average period of 1.6
years.
Option plans
The Company granted options that expire after 10
years. These options vest after 3 years, provided that
the grantee is still employed with the Company.
The following tables summarize information about the
Company’s options as of December 31, 2015 and
changes during the year:
Philips Group
Options on EUR-denominated listed share
2015
Philips Group
Options on USD-denominated listed share
2015
weighted
average
exercise price
options
Outstanding at January 1, 2015
11,361,836
Exercised
Forfeited
Expired
1,013,652
569,858
101,519
Outstanding at December 31, 2015
9,676,807
29.84
20.90
33.46
25.38
30.62
Exercisable at December 31, 2015
9,670,357
30.62
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, 2015, was 3.7 years. The aggregate
intrinsic value of the options outstanding and options
exercisable at December 31, 2015, was USD 16 million.
The total intrinsic value of options exercised during
2015 was USD 8 million (2014: USD 9 million, 2013: USD
17 million).
At December 31, 2015 there were no unrecognized
compensation costs related to outstanding options.
Cash received from exercises under the Company’s
option plans amounted to EUR 72 million in 2015 (2014:
EUR 77 million, 2013: EUR 84 million). The actual tax
deductions realized as a result of option exercises
totaled approximately EUR 3 million in 2015 (2014: EUR
3 million, 2013: EUR 5 million).
The outstanding options as of December 31, 2015 are
categorized in exercise price ranges as follows:
Philips Group
Outstanding options
2015
weighted
average
remaining
contractual
term
intrinsic
value in
millions
weighted
average
exercise price
options
exercise price
options
EUR-denominated
Outstanding at January 1, 2015
15,076,954
Exercised
Forfeited
Expired
2,868,531
466,739
94,370
Outstanding at December 31, 2015
11,647,314
21.65
18.57
26.68
19.45
22.23
10-15
15-20
20-25
25-30
30-35
3,077,645
86,137
5,281,935
1,306,224
1,895,373
30
1
7
Exercisable at December 31, 2015
11,630,889
22.23
Outstanding options
11,647,314
38
USD-denominated
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, 2015, was 3.6 years. The aggregate
intrinsic value of the options outstanding and options
exercisable at December 31, 2015, was EUR 38 million.
15-20
20-25
25-30
30-35
35-40
40-55
15
1
2,276,293
237,689
1,907,931
2,339,551
1,435,203
1,480,140
Outstanding options
9,676,807
16
5.5 yrs
5.8 yrs
4.2 yrs
0.3 yrs
1.3 yrs
3.6 yrs
5.6 yrs
6.0 yrs
5.2 yrs
2.7 yrs
2.2 yrs
1.3 yrs
3.7 yrs
Annual Report 2015
159
Group financial statements 12.9
29
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 2015 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, 2015.
The following table summarizes information about the
Company’s Accelerate! options as of December 31, 2015
and changes during the year:
Philips Group
Accelerate! options
2015
weighted
average
exercise price
options
EUR-denominated
Outstanding at January 1, 2015
Exercised
1,768,800
464,300
Outstanding at December 31, 2015
1,304,500
15.86
15.24
16.08
Exercisable at December 31, 2015
1,304,500
16.08
USD-denominated
Outstanding at January 1, 2015
Exercised
Forfeited
458,800
106,000
5,000
Outstanding at December 31, 2015
347,800
20.02
20.02
20.02
20.02
Exercisable at December 31, 2015
347,800
20.02
The exercise prices of the Accelerate! options are EUR
15.24 and EUR 22.43 for EUR-denominated options and
is USD 20.02 for USD-denominated options. The
weighted average remaining contractual term for EUR-
denominated Accelerate! options outstanding and
exercisable at December 31, 2015 was 6.2 years. The
weighted average remaining contractual term for USD-
Accelerate! options outstanding and exercisable at
December 31, 2015 was 6.1 years. The aggregate intrinsic
value of the EUR-denominated Accelerate! options
outstanding and exercisable at December 31, 2015, was
EUR 10 million. The aggregate intrinsic value of the
Philips Group
Remuneration costs of the Executive Committee in EUR
2013 - 2015
USD-denominated Accelerate! options outstanding
and exercisable at December 31, 2015, was USD 2
million.
The total intrinsic value of Accelerate! options exercised
during 2015 was EUR 5 million for EUR-denominated
options (2014: EUR 10 million) and USD 1 million for
USD-denominated options (2014: USD 5 million).
Cash received from exercises for EUR-denominated
and USD-denominated Accelerate! options amounted
to EUR 9 million in 2015 (2014: EUR 21 million). The
actual tax deductions realized as a result of Accelerate!
options exercises totaled approximately EUR 0.3
million in 2015 (2014: EUR 1 million).
29
Information on remuneration
Remuneration of the Executive Committee
In 2015, the total remuneration costs relating to the
members of the Executive Committee (including the
members of the Board of Management) amounted to
EUR 15,098,023 (2014: EUR 16,878,909, 2013: EUR
24,773,537) consisting of the elements in the table
below.
At December 31, 2015, the members of the Executive
Committee (including the members of the Board of
Management) held 843,461 (2014: 1,050,080; 2013:
1,479,498) stock options at a weighted average exercise
price of EUR 18.67 (2014: EUR 18.53; 2013: EUR 18.69).
Remuneration of the Board of Management
In 2015, the total remuneration costs relating to the
members of the Board of Management amounted to
EUR 6,612,092 (2014: EUR 6,635,334; 2013: EUR
10,928,951).
At December 31, 2015, the members of the Board of
Management held 479,881 stock options (2014:
586,500; 2013: 586,500) at a weighted average
exercise price of EUR 19.52 (2014: EUR 19.60; 2013: EUR
19.60).
Salary/Base compensation
Annual incentive1)
Performance shares2)
Stock options2)
Restricted share rights2)
Pension allowances
Pension scheme costs
Other compensation3)
2013
6,011,557
4,422,732
6,478,554
2,020,040
1,115,504
−
2,277,705
2,447,445
2014
6,513,027
1,526,658
3,357,142
583,755
409,809
−
2,458,759
2,029,759
2015
5,974,928
2,705,560
2,740,004
88,775
91,339
2,193,409
209,462
1,094,546
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
3) The stated amounts mainly 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. In 2013 a crisis levy tax has been
imposed by the Dutch government, amounting in total to EUR 1,245,944. This amount is included in the amount stated under Other compensation
160
Annual Report 2015
Group financial statements 12.9
For further information on remuneration costs, see sub-
section 10.2.4, Remuneration costs, of this Annual
Report.
The tables below give an overview of the performance
share plans, restricted share rights and the stock option
plans of the Company, held by the members of the
Board of Management:
Philips Group
Number of performance shares (holdings) in number of shares
2015
January 1,
2015
awarded
2015
F.A. van Houten
A. Bhattacharya
P.A.J. Nota
66,903
61,113
−
12,670
11,071
−
31,678
28,785
−
Performance shares (holdings)
212,220
−
−
54,877
−
−
11,676
−
−
26,465
93,018
awarded
dividend
shares
2015
2,194
2,004
1,800
416
363
383
1,039
944
868
10,011
realized
2015
December 31,
2015
vesting date
−
−
−
−
−
−
−
−
−
−
69,097
05.03.2016
63,117
56,677
13,086
11,434
12,059
32,717
29,729
27,333
315,249
04.28.2017
05.05.2018
05.03.2016
04.28.2017
05.05.2018
05.03.2016
04.28.2017
05.05.2018
Philips Group
Number of restricted share rights (holdings) in number of shares
2015
F.A. van Houten
A. Bhattacharya1)
P.A.J. Nota
Restricted share rights
(holdings)
January 1, 2015
awarded 2015
released 2015
December 31, 2015
6,667
1,467
4,534
12,668
−
−
−
−
6,667
1,467
4,534
12,668
−
−
−
−
potential
premium shares
7,010
1,374
4,291
12,675
1) Awarded before date of appointment as a member of the Board of Management
Philips Group
Remuneration costs of individual members of the Board of Management in EUR
2013 - 2015
Base
compen-
sation/
salary
annual
incentive1)
perfor
mance
shares2)
stock
options2)
restric-
ted share
rights2)
pension
allowances
pension
scheme
costs
other
compen-
sation3)
total
costs
2015
F.A. van Houten
1,168,750
768,920
1,273,940
17,713
28,279
529,387
25,241
78,035
3,890,265
A. Bhattacharya
23,551
11,937
8,968
−
183
7,315
886
998
53,838
R.H. Wirahadiraksa
664,583
239,250
(652,049)
12,045
(37,210)
290,772
24,002
29,477
570,870
P.A.J. Nota
672,500
383,112
605,749
12,045
21,964
270,529
26,302
104,918
2,097,119
2,529,384
1,403,219
1,236,608
41,803
13,216
1,098,003
76,431
213,428
6,612,092
2014
F.A. van Houten
1,137,500
349,600
860,564
101,344
76,951
R.H. Wirahadiraksa
712,500
156,600
446,337
68,914
52,965
P.A.J. Nota
643,750
258,180
406,358
68,914
57,200
2,493,750
764,380
1,713,259
239,172
187,116
20134)
F.A. van Houten
1,100,000
1,081,520
1,594,675
461,215
190,441
R.H. Wirahadiraksa
656,250
497,745
1,040,393
307,699
128,856
P.A.J. Nota
618,750
561,713
1,025,153
352,608
146,626
2,375,000
2,140,978
3,660,221
1,121,522
465,923
−
−
−
−
−
−
−
−
485,655
86,554
3,098,168
298,995
35,909
1,772,220
267,037
63,507
1,764,946
1,051,687
185,970
6,635,334
468,407
75,906
4,972,164
263,451
35,732
2,930,126
253,605
68,206
3,026,661
985,463
179,844
10,928,951
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 10.2.6, 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 mainly 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
4) A crisis levy of 16% has been imposed by the Dutch government amounting to in total EUR 681,596 for 2013. This crisis tax levy was payable by the employer and
was charged over income of employees exceeding a EUR 150,000 threshold in 2013. These expenses do not form part of the remuneration costs mentioned
Annual Report 2015
161
Group financial statements 12.9
Philips Group
Stock options (holdings) in number of shares
2015
January 1,
2015
granted
exercised
expired
December
31, 2015
grant
price
(in euros)
F.A. van Houten
A. Bhattacharya
P.A.J. Nota
20,4001)
75,000
75,000
55,000
3,6811)
16,5001)
16,5001)
20,0001)
16,5001)
40,8001)
51,000
51,000
38,500
Stock options (holdings)
479,881
−
–
−
−
−
−
−
−
−
−
–
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
20,400
75,000
75,000
55,000
3,681
16,500
16,500
20,000
16,500
40,800
51,000
51,000
38,500
479,881
22.88
20.90
14.82
22.43
26.28
22.88
20.90
15.24
14.82
22.88
20.90
14.82
22.43
1) Awarded before date of appointment as a member of the Board of Management
share
(closing)
price on
exercise
date
−
−
−
−
−
−
−
−
−
−
−
−
−
expiry date
10.18.2020
04.18.2021
04.23.2022
01.29.2023
04.18.2016
10.18.2020
04.18.2021
01.30.2022
04.23.2022
10.18.2020
04.18.2021
04.23.2022
01.29.2023
At December 31, 2015 the members of the Supervisory
Board held no stock options.
The individual members of the Supervisory Board
received, by virtue of the positions they held, the
following remuneration (in EUR):
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 derivatives of
Philips securities.
Philips Group
Shares held by Board members1) in number of shares
2015
J. van der Veer
H. von Prondzynski
J.P. Tai
F.A. van Houten
A. Bhattacharya
P.A.J. Nota
December
31, 2014
December
31, 2015
17,784
3,519
3,284
18,366
3,633
3,716
109,570
121,762
26,807
59,491
29,415
66,133
1) Reference date for board membership is December 31, 2015
See note 28, Share-based compensation for further
information on performance shares, stock options and
restricted share rights as well sub-section 10.2.7, 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 EUR):
Philips Group
Accumulated annual pension entitlements and pension related
costs in EUR
2015
age at
December 31,
2015
accumulated
annual
pension as of
December 31,
20151)
total
pension
related costs2)
F.A. van Houten
A. Bhattacharya
P.A.J. Nota
R.H. Wirahadiraksa
Pension costs
55
54
51
55
291,722
554,628
22,254
42,434
109,141
8,201
296,831
314,774
1,174,434
1) Total of entitlements under Philips pension scheme, including - if
applicable - transferred pension entitlements under pension scheme(s)
of previous employer(s)
2) Cost related to period of board membership and include paid pension
allowances as well as pension premium paid by employer to Collective
Defined Contribution plan
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 2015, 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 1,083,667 (2014: EUR 816,668;
2013: EUR 747,000) former members received no
remuneration.
162
Annual Report 2015
30
Group financial statements 12.9
Philips Group
Remuneration of the Supervisory Board in EUR
2013 - 2015
membership
committees
other compensation1)
total
20152)
J.A. van der Veer
C. Poon
C.J.A. van Lede
E. Kist
H. von Prondzynski
J.P. Tai
N. Dhawan
O. Gadiesh
D.E.I. Pyott (May-Dec.)
20142)
J.A. van der Veer
J.J. Schiro (Jan.-Aug.)
C. Poon
C.J.A. van Lede
E. Kist
H. von Prondzynski
J.P. Tai
N. Dhawan
O. Gadiesh (May-Dec.)
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
135,000
90,000
80,000
80,000
80,000
80,000
80,000
80,000
80,000
785,000
110,000
65,000
65,000
65,000
65,000
65,000
65,000
65,000
65,000
630,000
110,000
65,000
65,000
65,000
65,000
65,000
65,000
65,000
31,667
17,500
14,333
10,000
26,833
29,167
13,000
13,000
8,667
164,167
20,500
12,334
14,000
10,000
8,000
15,167
15,000
10,000
6,667
111,668
20,500
18,500
10,000
8,000
10,000
14,000
15,000
10,000
565,000
106,000
7,000
15,000
7,000
2,000
19,500
35,000
20,000
17,000
12,000
134,500
2,000
2,000
17,000
2,000
2,000
2,000
23,000
23,000
2,000
75,000
5,000
8,000
5,000
5,000
5,000
11,000
20,000
17,000
76,000
173,667
122,500
101,333
92,000
126,333
144,167
113,000
110,000
100,667
1,083,667
132,500
79,334
96,000
77,000
75,000
82,167
103,000
98,000
73,667
816,668
135,500
91,500
80,000
78,000
80,000
90,000
100,000
92,000
747,000
1) The amounts mentioned under other compensation relate to the fee for intercontinental travel, inter-european travel (effective 2015) and the entitlement of EUR
2,000 under the Philips product arrangement
2) As of 2013, part of the remuneration of members of the Supervisory Board living in the Netherlands is subject to VAT. The amounts mentioned in this table are
excluding VAT
30 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.
Annual Report 2015
163
Group financial statements 12.9
Philips Group
Fair value of financial assets and liabilities in millions of EUR
2014 - 2015
Financial assets
Carried at fair value:
Available-for-sale financial assets - non-current
Securities classified as assets held for sale
Fair value through profit and loss - non-current
Derivative financial instruments
Financial assets carried at fair value
Carried at (amortized) cost:
Cash and cash equivalents
Loans and receivables:
Loans - current
Non-current loans and receivables
Other non-current loans and receivables
Loans classified as assets held for sale
Receivables - current
Receivables - non-current
Held-to-maturity investments
Available-for-sale financial assets
Financial assets carried at (amortized) costs
Financial liabilities
Carried at fair value:
Derivative financial instruments
Financial liabilities carried at fair value
Carried at (amortized) cost:
Accounts payable
Interest accrual
Debt (Corporate bond and finance lease)
Debt (Bank loans, overdrafts etc.)
Financial liabilities carried at (amortized) costs
Balance as of December 31, 2014
Balance as of December 31, 2015
carrying amount
estimated fair value
carrying amount
estimated fair value
143
38
24
207
412
1,873
125
86
140
-
4,723
177
2
67
7,193
(857)
(857)
(2,499)
(56)
(3,551)
(553)
(6,659)
143
38
24
207
125
86
177
(857)
(4,164)
199
(1)
33
161
392
1,766
12
88
134
2
4,982
191
2
33
7,210
(933)
(933)
(2,673)
(69)
(3,944)
(1,816)
(8,502)
199
(1)
33
161
88
191
(933)
(4,294)
164
Annual Report 2015
Philips Group
Fair value hierarchy in millions of EUR
2015
Balance as of December 31, 2015
Available-for-sale financial assets - non-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
Receivables - non-current
Total financial assets
Derivative financial instruments - liabilities
Debt
Total financial liabilities
Balance as of December 31, 2014
Available-for-sale financial assets - non-current
Securities classified as assets held for sale
Financial assets designated at fair value through profit and
loss - non-current
Derivative financial instruments - assets
Loans - current
Non-current loans and receivables
Receivables - non-current
Total financial assets
Derivative financial instruments - liabilities
Debt
Total financial liabilities
Group financial statements 12.9
level 1
level 2
level 3
total
76
(1)
-
-
-
-
75
-
(4,084)
(4,084)
17
1
-
-
-
-
-
18
-
(3,969)
(3,969)
68
-
33
161
88
191
541
(933)
(210)
(1,143)
105
-
24
207
125
86
177
724
(857)
(195)
(1,052)
55
-
-
-
-
-
55
-
-
-
21
37
-
-
-
-
-
58
-
-
-
199
(1)
33
161
88
191
671
(933)
(4,294)
(5,227)
143
38
24
207
125
86
177
800
(857)
(4,164)
(5,021)
The table above represents categorization of
measurement of the estimated fair values of financial
assets and liabilities.
inputs required to fair value an instrument are based on
observable market data, the instrument is included in
level 2.
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.
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
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.
Level 3
If one or more of the significant inputs are not based on
observable market data, the instrument is included in
level 3.
Transfers between levels
At 31 December 2015, an available-for-sale equity
security with a carrying amount of EUR 51 million was
transferred from Level 2 to Level 1 due to its listing with
quoted prices in the market. An available-for-sale
equity security with a carrying amount of EUR 23 million
was transferred to Level 3 due to the updated fair value
from a private financing round. The classifications of fair
value hierarchies of financial assets were restated for
2014.
Annual Report 2015
165
Group financial statements 12.9
31
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.
Philips Group
Reconciliation of the fair value hierarchy in millions of EUR
2015
financial assets
Balance as of January 1, 2015
Gains and losses recognized in:
- in profit or loss
- in other comprehensive income
Transfer into level 3
Purchase
Sales
Balance as of December 31, 2015
58
9
15
13
7
(47)
55
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.
Philips Group
Financial assets subject to offsetting, enforceable master netting
arrangements or similar agreements in millions of EUR
2014 - 2015
2014
2015
Derivatives
Gross amounts of recognized financial assets
207
161
Gross amounts of recognized financial liabilities
offset in the balance sheet
Net amounts of financial assets presented in
the balance sheet
-
-
207
161
Related amounts not offset in the balance sheet
Financial instruments
Cash collateral received
Net amount
(161)
-
46
(81)
-
80
Philips Group
Financial liabilities subject to offsetting, enforceable master
netting arrangements or similar agreements in millions of EUR
2014 - 2015
2014
2015
Derivatives
Gross amounts of recognized financial liabilities
(857)
(933)
Gross amounts of recognized financial assets
offset in the balance sheet
-
-
Net amounts of financial liabilities presented in
the balance sheet
(857)
(933)
Related amounts not offset in the balance sheet
Financial instruments
Cash collateral received
Net amount
161
-
81
-
(696)
(852)
166
Annual Report 2015
31 Details of treasury / other financial risks
Philips is exposed to several types of financial risks. 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 30, 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, 2015, Philips had EUR 1,766 million in cash
and cash equivalents (2014: EUR 1,873 million), within
which short-term deposits of EUR 855 million (2014:
EUR 1,057 million) and other liquid assets of EUR 171
million (2014: EUR 121 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.
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, 2015, Philips did not have
any amounts outstanding under any of these facilities.
Additionally Philips also held EUR 75 million of equity
investments in available-for-sale financial assets (fair
value at December 31, 2015).
Currency risk
Currency risk is the risk that reported financial
performance or the fair value or future cash flows of a
financial instrument will fluctuate because of changes
in foreign exchange rates. Philips operates in many
countries and currencies and therefore currency
fluctuations may impact Philips’ financial results.
Philips is exposed to currency risk in the following
areas:
• Transaction exposures, related to anticipated sales
and purchases and on-balance-sheet receivables/
payables resulting from such transactions
• Translation exposure of foreign-currency
intercompany and external debt and deposits
• Translation exposure of net income in foreign entities
• 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 to reduce the potential year on year
volatility caused by foreign-currency movements on its
net earnings by hedging the anticipated net exposure
of foreign currencies resulting from foreign-currency
sales and purchases. In general net anticipated
exposures for the Group are hedged during a period of
15 months in layers of 20% up to a maximum hedge of
80%, using forwards and currency options. Philips’
policy requires significant committed foreign currency
exposures to be fully hedged, generally using forwards.
However not every foreign currency can or shall be
hedged as there may be regulatory barriers or
prohibitive hedging cost preventing Philips from
effectively and/or efficiently hedging its currency
exposures. As a result, hedging activities cannot and
will not eliminate all currency risks for anticipated and
committed transaction exposures.
During 2015 Philips has changed its hedging policy with
regard to anticipated transaction exposures. The
previous hedging policy focused on protecting against
changes in value of forecasted individual transactions
and cash flows. Under the previous policy the hedging
ratio and period were set by individual businesses
based on their ability to forecast cash flows, the time
horizon for the cash flows and their ability to adapt to
changing levels of foreign currency rates. Existing
hedges under the old policy are continued until they
mature against the original forecasted transactional
exposures.
Group financial statements 12.9
The following table outlines the estimated nominal
value in millions of EUR for transaction exposure and
related hedges for Philips’ most significant currency
exposures consolidated as of December 31, 2015:
Philips Group
Estimated transaction exposure and related hedges
in millions of EUR
2015
Receivables
Payables
exposure
hedges
exposure
hedges
Balance as of
December 31,
2015
Exposure currency
USD
GBP
JPY
CAD
AUD
CHF
PLN
SEK
CNY
DKK
Others
Total 2015
Total 2014
1,691
(1,329)
(1,297)
1,120
473
473
199
165
143
112
77
63
42
777
4,215
5,557
(267)
(283)
(86)
(90)
(74)
(90)
(42)
(63)
(22)
(603)
(2,949)
(3,800)
(39)
(25)
(13)
(2)
(2)
(14)
(5)
(358)
-
(204)
(1,959)
(2,277)
26
22
11
1
1
14
2
200
-
131
1,528
1,492
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, 2015, a gain
of EUR 12 million was deferred in equity as a result of
these hedges. The result deferred in equity will be
released to earnings mostly during 2016 at the time
when the related hedged transactions affect the
income statement. During 2015, a net loss of EUR 2
million was recorded in the consolidated statement of
income as a result of ineffectiveness on certain
anticipated cash flow hedges.
The total net fair value of hedges related to transaction
exposure as of December 31, 2015 was an unrealized
asset of EUR 17 million. An instantaneous 10% increase
in the value of the EUR against all currencies would lead
to an increase of EUR 66 million in the value of the
derivatives; including a EUR 25 million increase related
to foreign exchange transactions of USD against EUR, a
EUR 18 million increase related to foreign exchange
transactions of the GBP against euro, a EUR 14 million
increase related to foreign exchange transactions of the
JPY and a EUR 7 million increase related to PLN. This
Annual Report 2015
167
Group financial statements 12.9
was partially offset by a EUR 34 million decrease related
to foreign exchange transactions of the EUR against the
USD.
The EUR 66 million increase includes a gain of EUR 5
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 gain of EUR 61 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, 2014 was an unrealized
liability of EUR 27 million. An instantaneous 10%
increase in the value of the EUR against all currencies
would lead to an increase of EUR 96 million in the value
of the derivatives; including a EUR 73 million increase
related to foreign exchange transactions of the USD
against the EUR, a EUR 14 million increase related to
foreign exchange transactions of the JPY against EUR,
a EUR 14 million increase related to foreign exchange
transactions of the GBP, partially offset by a EUR 46
million decrease related to foreign exchange
transactions of the EUR against the USD.
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. Net current period change,
before tax, of the currency translation reserve of EUR
644 million relates to the positive impact of the weaker
EUR against the foreign currencies of countries in which
Philips’ operations are located, partially offset by net
investment hedging instruments. The change in
currency translation reserve was mostly related to
development of the USD and to a lesser extent to other
currencies such as the CNY, JPY and SAR.
As of December 31, 2015 cross currency interest rate
swaps and foreign exchange forward contracts with a
fair value liability of EUR 812 million and external bond
168
Annual Report 2015
funding for a nominal value of USD 4,059 million were
designated as net investment hedges of our financing
investments in foreign operations. During 2015 a total
gain of EUR 0.1 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, 2015, was a liability of EUR 794 million.
An instantaneous 10% increase in the value of the euro
against all currencies would lead to an increase of EUR
187 million in the value of the derivatives, including a
EUR 210 million increase related to the USD.
As of December 31, 2014 cross currency interest rate
swaps and foreign exchange forward contracts with a
fair value liability of EUR 655 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
2014 a total gain of EUR 0.2 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, 2014, was a
liability of EUR 623 million. An instantaneous 10%
increase in the value of the EUR against all currencies
would lead to an increase of EUR 301 million in the value
of the derivatives, including a EUR 323 million increase
related to the USD.
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 5,760 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 1,766 million in cash and
cash equivalents, total long-term debt of EUR 4,095
million and total short-term debt of EUR 1,665 million.
At December 31, 2015, Philips had a ratio of fixed-rate
long-term debt to total outstanding debt of
approximately 68%, compared to 85% one year earlier.
A sensitivity analysis conducted as of January 2016
shows that if long-term interest rates were to decrease
instantaneously by 1% from their level of December 31,
2015, with all other variables (including foreign
exchange rates) held constant, the fair value of the
long-term debt would increase by approximately EUR
303 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 302 million.
If interest rates were to increase instantaneously by 1%
from their level of December 31, 2015, with all other
variables held constant, the annualized net interest
expense would increase by approximately EUR 1
million. This impact was based on the outstanding net
cash position at December 31, 2015.
A sensitivity analysis conducted as of January 2015
shows that if long-term interest rates were to decrease
instantaneously by 1% from their level of December 31,
2014, with all other variables (including foreign
exchange rates) held constant, the fair value of the
long-term debt would increase by approximately EUR
342 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 341 million.
If interest rates were to increase instantaneously by 1%
from their level of December 31, 2014, with all other
variables held constant, the annualized net interest
expense would decrease by approximately EUR 13
million. This impact was based on the outstanding net
cash position at December 31, 2014.
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 some publicly listed
companies, including Corindus Vascular Robotics. As a
result, Philips is exposed to potential financial loss
through movements in their share prices. The aggregate
equity price exposure in such financial assets
amounted to approximately EUR 75 million at year-end
2015 (2014: EUR 12 million). Philips does not hold
derivatives in its own shares or in the above mentioned
listed companies. Philips is also a shareholder in several
privately-owned companies amounting to EUR 48
million. As a result, Philips is exposed to potential value
adjustments.
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 2015, a loss of EUR 0.2 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,
2015 would increase the fair value of the derivatives by
less than EUR 0.1 million.
As of December 2014, a loss of EUR 0.7 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, 2014 would increase the fair value of the
derivatives by EUR 0.7 million.
Group financial statements 12.9
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, 2015:
Philips Group
Credit risk with number of counterparties
for deposits above EUR 25 million
2015
AA-rated bank
counterparties
A-rated bank
counterparties
25-100 million
100-500 million
4
4
2
2
4
For an overview of the overall maximum credit
exposure of the group’s financial assets, please refer to
note 30, Fair value of financial assets and liabilities for
details of carrying amounts and fair value.
Annual Report 2015
169
own re-insurance captive, which during 2015 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, 2015, for the coming year,
whereby the re-insurance captive retentions remained
unchanged.
32 Subsequent events
Financing Volcano
In 2015, Philips financed the acquisition of Volcano with
a short-term loan of USD 1.3 billion. Philips decided in
December 2015 to amend and extend the loan which
was actually executed in January 2016. The loan will
mature in December 2016.
Group financial statements 12.9
32
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, 2015, the Company had country risk
exposure of EUR 10.3 billion in the United States, EUR
1.7 billion in China (including Hong Kong), EUR 1.1 billion
in Singapore and EUR 1.1 billion in Belgium. Other
countries higher than EUR 500 million are Germany
(EUR 770 million), United Kingdom (EUR 739 million),
Japan (EUR 662 million), Netherlands (EUR 549
million), Poland (EUR 519 million) and Malaysia (EUR
507 million). Countries where the risk exceeded EUR
300 million but was less than EUR 500 million are Saudi
Arabia and India. 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 cyber. 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 an 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 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 5,000,000 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
170
Annual Report 2015
Company financial statements 13
13 Company financial
statements
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
endorsed 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.
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 13.5, Independent auditor’s report, of this
Annual Report, and section 5.4, Proposed distribution
to shareholders, of this Annual Report.
Adjustments
The presentation of certain prior-year disclosures have
been adjusted to align with the current year disclosures.
Annual Report 2015
171
Company financial statements 13.1
13.1 Balance sheets before appropriation of results
Koninklijke Philips N.V.
Balance sheets in millions of EUR unless otherwise stated
As of December 31
Assets
Non-current assets:
Property, plant and equipment
C
D
Intangible assets
Financial fixed assets
Non-current receivables
Deferred tax assets
E Other non-current financial assets
Total non-current assets
Current assets:
Current financial assets
F
Receivables
Assets classified as held for sale
Cash and cash equivalents
Total current assets
Total assets
Liabilities and shareholders’ equity
G
Shareholders’ equity:
Preference shares, par value EUR 0.20 per share:
- Authorized: 2,000,000,000 shares (2014: 2,000,000,000 shares)
- Issued: none
Common shares, par value EUR 0.20 per share:
- Authorized: 2,000,000,000 shares (2014: 2,000,000,000 shares)
- Issued and fully paid: 931,130,387 shares (2014: 934,819,413 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
A Net income1)
Treasury shares, at cost: 14,026,801 shares (2014: 20,430,544 shares)
Total equity
Non-current liabilities:
H
Long-term debt
Long-term provisions
Deferred tax liabilities
Other non-current liabilities
Total non-current liabilities
H
I
Current liabilities:
Short-term debt
Other current liabilities
Total current liabilities
K
Contractual obligations and contingent liabilities not appearing in the balance sheet
Liabilities and shareholders’ equity
1) Prepared before appropriation of results
172
Annual Report 2015
2014
2015
1
57
19,676
61
479
229
121
8,454
54
701
187
2,181
13
27
(13)
1,059
229
7,316
415
(547)
3,555
10
12
670
1
81
21,176
88
766
279
20,503
22,391
10
8,298
-
730
9,330
29,833
9,038
31,429
186
2,669
4
56
12
958
1,058
6,437
645
(363)
10,867
11,662
3,933
5
12
789
4,247
4,739
14,060
659
14,528
500
14,719
29,833
15,028
31,429
Company financial statements 13.2
2014
(432)
847
415
2015
(44)
689
645
13.2 Statements of income
Koninklijke Philips N.V.
Statements of income in millions of EUR unless otherwise stated
For the year ended December 31
Net loss from affiliated companies
Other net income
A Net income
13.3 Statement of changes in equity
Koninklijke Philips N.V.
Statement of changes in equity in millions of EUR unless otherwise stated
For the year ended December 31
ca pital in excess of p ar valu e
revalu atio n
m o n sh ares
co m
availa ble-for-sale fin a ncial assets
cash flo w h e d g es
curre ncy tra nslatio n differe nces
affiliate d co m p a nies
retain e d e arnin gs
n et inco m e
tre asury sh ares
sh are h old ers’ e q uity
legal reserves
187
2,181
13
27
(13)
1,059
229
7,316
415
(547)
10,867
(9)
33
(38)
(101)
643
-
(4)
-
63
187
(1)
429
3
(4)
(23)
101
(19)
(415)
645
415
9
9
(730)
(513)
(12)
(57)
645
-
546
187
58
(298)
517
-
(495)
(507)
162
82
101
(19)
186
2,669
4
56
12
958
1,058
6,437
645
(363)
11,662
Balance as of
January 1, 2015
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, 2015
Annual Report 2015
173
Koninklijke Philips N.V.
Financial fixed assets in millions of EUR
2015
investments
in group
companies
investments
in associates
loans
total
12,660
66
6,950
19,676
283
(183)
(66)
(1,689)
8,018
8,301
(6,225)
(6,408)
(66)
(1,689)
829
7
526
1,362
11,834
73
9,269
21,176
Balance as of
January 1, 2015
Changes:
Acquisitions/
additions
Sales/
redemptions
Net income from
affiliated
companies
Dividends
received
Translation
differences
Balance as of
December 31,
2015
Investment in group companies
The acquisitions/additions line mainly relates to capital
injections into group companies. One group company
made a capital repayment of EUR 127 million which is
reflected as part of the movement sales/redemptions.
The same group company paid an interim dividend of
EUR 1,464 million included in the dividends received
line. The remaining movements in sales/redemptions
reflect restructuring transactions within the group.
Loans
In December 2015, the Company revisited its foreign
based intra-group finance activities. In this context
intra-group funding of certain group companies was
directly provided by Koninklijke Philips N.V. and no
longer via a foreign based group finance entity. The
newly provided direct funding by the Company,
resulted in loan additions by EUR 6,485 million. The
change resulted in the redemption of loans by EUR
5,314 million, which were initially provided by the
Company to the foreign based group finance entity.
Company financial statements 13.4
A
B
C
D
13.4 Notes
Notes to the Company financial statements
A Net income
Net income from affiliated companies represents the share
of the company in the results of these affiliated companies.
B Audit fees
For a summary of the audit fees, please refer to the
Group Financial statements, note 6, Income from
operations, which is deemed incorporated and
repeated herein by reference.
C
Intangible assets
Intangible assets includes mainly licenses and patents.
The changes during 2015 are as follows;
Koninklijke Philips N.V.
Intangible assets in millions of EUR
2015
Balance as of January 1, 2015:
Cost
Amortization/ impairments
Book value
Changes in book value:
Additions
Amortization
Total changes
Balance as of December 31, 2015:
Cost
Amortization/ impairments
Book value
D Financial fixed assets
87
(30)
57
44
(20)
24
131
(50)
81
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 provided to group companies are stated at
amortized cost, less impairment.
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,
Netherlands.
174
Annual Report 2015
E
F
G
Company financial statements 13.4
E Other financial assets
G Shareholders’ equity
The changes during 2015 were as follows:
Koninklijke Philips N.V.
Other non-current financial assets in millions of EUR
2015
available
-for-sale
financial
assets
loans and
receivables
financial
assets at
fair value
through
profit and
loss
total
96
133
-
229
(8)
17
(6)
5
2
4
(8)
25
(7)
(4)
1
43
3
(1)
(4)
1
37
132
138
9
279
Balance as of
January 1, 2015
Changes:
Reclassifications
Acquisitions/
additions
Sales/
redemptions/
reductions
Impairments
Transfer to assets
classified as held
for sale
Value adjustments
Balance as of
December 31,
2015
Available-for-sale financial assets
The Company’s investments in available-for-sale
financial assets mainly consist of investments in
common shares of companies in various industries. The
line additions/acquisitions mainly relates to capital
calls for certain investment funds. The impairment
movement relates to a specific investment’s declining
financial performance.
Loans and receivables
The acquisitions/additions line mainly relates to vendor
loans issued to an amount of EUR 17 million in relation to the
sale of an equity interest. The current portion of this loan
(EUR 8 million) was in the course of 2015 reclassified to
Current financial assets. The remainder of the loan will
be redeemed in 2017.
F Receivables
Koninklijke Philips N.V.
Receivables in millions of EUR
2014 - 2015
Trade accounts receivable
Affiliated companies
Other receivables
Advances and prepaid expenses
Derivative instruments - assets
Receivables
2014
105
2015
91
7,916
7,966
48
15
370
64
19
158
8,454
8,298
Common shares
As of December 31, 2015, the issued and fully paid-up
share capital consists of 931,130,387 common shares,
each share having a par value of EUR 0.20.
In June 2015, Philips settled a dividend of EUR 0.80 per
common share, representing a total value of EUR 730
million. Shareholders could elect for a cash dividend or
a share dividend. Approximately 59% of the
shareholders elected for a share dividend, resulting in
the issuance of 17,671,990 new common shares. The
settlement of the cash dividend resulted in a payment
of EUR 298 million including tax and service charges.
The following table shows the movements in the
outstanding number of shares:
Koninklijke Philips N.V.
Outstanding number of shares in number of shares
2014 - 2015
2014
2015
Balance as of January 1
913,337,767
914,388,869
Dividend distributed
18,811,534
17,671,990
Purchase of treasury shares
(28,537,921)
(20,296,016)
Re-issuance of treasury shares
10,777,489
5,338,743
Balance as of December 31
914,388,869
917,103,586
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, 2015, no preference shares have been issued.
Options, restricted and performance shares
The Company has granted stock options on its common
shares and rights to receive common shares in the
future. Please refer to note 28, 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 (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 FIFO basis.
When treasury shares are reissued under the
Company’s option plans, the difference between the
cost and the cash received is recorded in retained
Annual Report 2015
175
Legal reserves
As of December 31, 2015, legal reserves relate to the
revaluation of assets and liabilities of acquired
companies in the context of multi-stage acquisitions of
EUR 4 million (2014: EUR 13 million), unrealized gains on
available-for-sale financial assets of EUR 56 million
(2014: EUR 27 million), unrealized gains on cash flow
hedges of EUR 12 million (2014: EUR 13 million
unrealized losses), ‘affiliated companies’ of EUR 958
million (2014: EUR 1,059 million) and unrealized
currency translation gains of EUR 1,058 million (2014:
EUR 229 million unrealized losses).
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 2,274 million
as at December 31, 2015. Such limitations relate to
common shares of EUR 186 million, as well as to legal
reserves included under ‘revaluation’ of EUR 4 million,
available-for-sale financial assets of EUR 56 million,
unrealized gains related to cash flow hedges of EUR 12
million, unrealized currency translation gains of EUR
1,058 million and ‘affiliated companies’ of EUR 958
million.
As at December 31, 2014 the limitations on distributable
amounts were EUR 1,515 million and related common
shares of EUR 187 million, as well as to legal reserves
included under ‘revaluation’ of EUR 13 million,
available-for-sale financial assets of EUR 27 million,
unrealized currency gains of EUR 229 million and
‘affiliated companies’ of EUR 1,059 million. The
unrealized losses related to cash flow hedges of EUR 13
million, although qualifying as a legal reserve, reduce
the distributable amount by their nature.
Company financial statements 13.4
earnings. When treasury shares are reissued under the
Company’s share plans, the difference between the
market price of the shares issued and the cost is
recorded in retained earnings, the market price is
recorded in capital in excess of par value.
Dividend withholding tax in connection with the
Company’s purchase of treasury shares for capital
reduction purposes is recorded in retained earnings.
The following transactions took place resulting from
employee option and share plans:
Koninklijke Philips N.V.
Employee option and share plan transactions
2014 - 2015
Shares acquired
Average market price
Amount paid
Shares delivered
Average market price
2014
7,254,606
EUR 24.53
EUR 178 million
10,777,489
EUR 30.26
2015
5,338,743
EUR 30.35
Cost of delivered shares
EUR 326 million
EUR 162 million
Total shares in treasury
at year-end
17,127,544
11,788,801
Total cost
EUR 470 million
EUR 308 million
In 2015, there was no need to acquire additional shares
to cover our commitments under share-based
compensation plans.
In order to reduce share capital, the following
transactions took place:
Koninklijke Philips N.V.
Share capital transactions
2014 - 2015
Shares acquired
Average market price
2014
21,283,315
EUR 23.95
2015
20,296,016
EUR 24.39
Amount paid
EUR 510 million
EUR 495 million
Reduction of capital
stock (shares)
Reduction of capital
stock (EUR)
Total shares in treasury
at year-end
21,837,910
21,361,016
EUR 533 million
EUR 517 million
3,303,000
2,238,000
Total cost
EUR 77 million
EUR 55 million
Share purchase transactions related to employee
option and share plans, as well as transactions related
to the reduction of share capital involved a cash outflow
of EUR 506 million, which includes the impact of taxes.
Settlements of share-based compensation plans
involved a cash inflow of EUR 81 million.
Dividend distribution
A proposal will be submitted to the 2016 Annual
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 2015 net income
and retained earnings of the Company.
176
Annual Report 2015
H
I
J
K
L
Company financial statements 13.4
H Debt
Long-term debt
Koninklijke Philips N.V.
Long-term debt in millions of EUR, unless otherwise stated
2014 - 2015
USD bonds
Intercompany
financing
Bank borrowings
(range of)
interest
rates
3.8 - 7.8%
0.0 - 7.7%
1.13-1.33%
Other long-term debt
1.3-7.0%
Corresponding data
previous year
average
interest rate
amount
outstanding
in 2015
amount due
in 1 year
amount due
after 1 year
amount due
after 5 years
average
remaining
term (in
years)
amount
outstanding
in 2014
5.6%
3,733
3,733
2,595
12
3,355
1.9%
1.3%
3.9%
1,660
200
39
5,632
1,660
39
1,699
200
200
3,933
2,795
6
1
6,623
3,068
3,555
2,533
3,025
200
43
6,623
5,751
The following amounts of the long-term debt as of
December 31, 2015, are due in the next five years:
K Contractual obligations and contingent
liabilities not appearing in the balance sheet
Koninklijke Philips N.V.
Long-term debt due in the next five years in millions of EUR
2015
2016
2017
2018
2019
2020
Long -term debt
Corresponding amount previous year
1,699
1,138
2,837
4,090
Short-term debt
Short-term debt includes the current portion of
outstanding external and intercompany long-term debt
of EUR 1,699 million (2014: EUR 3,068 million), other
debt to group companies totaling EUR 11,578 million
(2014: EUR 10,929 million) and short-term bank
borrowings of EUR 1,245 million (2014: EUR 63 million).
I Other current liabilities
Koninklijke Philips N.V.
Other current liabilities in millions of EUR
2014 - 2015
Other short-term liabilities
Accrued expenses
Derivative instruments - liabilities
Other current liabilities
J Employees
2014
2015
63
138
458
659
59
127
314
500
The number of persons employed by the Company at
year-end 2015 was 7 (2014: 9). For the remuneration of
past and present members of both the Board of
Management and the Supervisory Board, please refer to
note 29, Information on remuneration, which is deemed
incorporated and repeated herein by reference.
The Company has entered into a contract with a venture
capitalist where it committed itself to make, under certain
conditions, capital contributions to its investment funds
to an aggregated amount of EUR 22 million (2014: EUR 35
million) until June 30, 2021. As at December 31, 2015
capital contributions already made to this investment
fund are recorded as available-for-sale financial assets
within Other non-current financial assets. Furthermore,
the Company made commitments to third parties in 2015
of EUR 26 million (2014: EUR 10 million) with respect to
sponsoring activities. The majority of the amounts are due
over a term of 10 years.
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 1,374 million as of
year-end 2015 (2014: EUR 1,546 million).
Guarantees totaling EUR 698 million (2014: EUR 636
million) have also been given on behalf of other group
companies. As at December 31, 2015 there has been no
credit guarantees given on behalf of unconsolidated
companies and third-parties (2014: EUR 4 million). 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.
L Subsequent events
Financing Volcano
In 2015, Philips financed the acquisition of Volcano with
a short-term loan of USD 1.3 billion. Philips decided in
December 2015 to amend and extend the loan which
was actually executed in January 2016. The loan will
mature in December 2016.
Annual Report 2015
177
Company financial statements 13.5
13.5 Independent auditor’s report
To: The Annual General Meeting of Shareholders of
Koninklijke Philips N.V.
Report on the audit of the financial statements
2015
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, 2015, and of its result and its
cash flows for 2015 in accordance with International
Financial Reporting Standards as endorsed by the
European Union (EU-IFRS) and with Part 9 of Book 2
of the Netherlands Civil Code;
• the company financial statements give a true and fair
view of the financial position of Koninklijke Philips
N.V. as at December 31, 2015, and of its result for 2015
in accordance with Part 9 of Book 2 of the
Netherlands Civil Code.
What we have audited
We have audited the financial statements 2015 of
Koninklijke Philips N.V. (the Company), based in
Eindhoven, the Netherlands. The financial statements
include the consolidated financial statements and the
company financial statements.
The consolidated financial statements comprise:
1.
2.
3.
the consolidated balance sheet as at December 31,
2015;
the following statements for 2015: consolidated
statements of income, comprehensive income,
cash flows and changes in equity for the year then
ended; and
the notes comprising a summary of the significant
accounting policies and other explanatory
information.
The company financial statements comprise:
1.
2.
3.
the company balance sheet as at December 31,
2015;
the company statements of income and changes in
equity for 2015; and
the notes comprising a summary of the significant
accounting policies and other explanatory
information.
Basis for our opinion
We conducted our audit in accordance with Dutch law,
including the Dutch Standards on Auditing. Our
responsibilities under those standards are further described
in the ‘Our responsibilities for the audit of the financial
statements’ section of our report.
178
Annual Report 2015
We are independent of Koninklijke Philips N.V. in accordance
with the “Verordening inzake de onafhankelijkheid van
accountants bij assurance-opdrachten” (ViO) and other
relevant independence regulations in the Netherlands.
Furthermore, we have complied with the “Verordening
gedrags- en beroepsregels accountants” (VGBA).
We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our opinion.
Audit approach
Summary
Materiality
• Overall materiality of EUR 60 million
• 0.25% of sales
Audit scope
• Sufficient and appropriate on account balances
Key audit matters
• Company separation and Finance
Transformation
• Acquisitions and disposals
• Valuation of goodwill
• Accounting for income tax
• Revenue recognition
• Contingent liabilities and provisions from claims,
proceedings and investigations
Materiality
Misstatements can arise from fraud or error and are
considered material if, individually or in aggregate, they
could reasonably be expected to influence the economic
decisions of users taken on the basis of these financial
statements. The materiality affects the nature, timing and
extent of our audit procedures and the evaluation of the
effect of identified misstatements on our opinion.
Based on our professional judgment we determined the
materiality for the financial statements as a whole at EUR
60 million (2014: EUR 80 million). We have reduced
materiality to EUR 60 million in anticipation of the
separation of the company. The materiality is determined
with reference to sales. We consider sales as the most
appropriate benchmark given the nature of the business
and size of the Company and materiality approximates
0.25% of sales. We have also taken into account
misstatements and/or possible misstatements that in our
opinion are material for qualitative reasons for the users of
the financial statements, such as possible misstatements in
the information on remuneration disclosures.
We agreed with the Supervisory Board that misstatements
in excess of EUR 3 million, which are identified during the
audit, would be reported to them, as well as smaller
misstatements that in our view must be reported on
qualitative grounds.
Scope of our group audit
Koninklijke Philips N.V. is the parent company of the Philips
Group (the Group). The financial information of the Group is
included in the financial statements of Koninklijke Philips N.V.
Considering our ultimate responsibility for the opinion, we
are also responsible for directing, supervising and performing
the group audit. In this context, we have determined the
nature and extent of the audit procedures to be performed
for group entities (components). Decisive factors were the
significance and / or the risk profile of the components. On
this basis, we selected the components for which an audit
of account balance or specified procedures had to be
performed. Furthermore, we have determined the nature and
extent of the audit procedures that we perform at group
level, sector level and in the accounting operations centers.
We scope components to be involved with the audits of
account balances into the group audit where account
balances are of significant size, have significant risks of
material misstatement to the Group associated with them or
are considered significant for other reasons. Where this does
not give adequate coverage we use our judgment to scope
additional procedures on account balances or request the
component auditors to perform specified procedures. As a
result of our scoping of account balances and the
performance of audit procedures at different levels in the
organization, our actual coverage varies per account balance
and the depth of our audit procedures per account balance
varies depending on our risk assessment.
Accordingly, our audit coverage per account balance
included in the key audit matters stated below, can be
summarized as follows:
Company financial statements 13.5
Audits of account balances or specified procedures were
performed to materiality levels, the majority of which were
based on the relevant local statutory audit materiality which
is considerably lower than Group materiality. In the other
cases, component materiality was determined by the
judgment of the group auditor, having regard to the
materiality for the financial statements as a whole and the
reporting structure within the Group. Component materiality
did not exceed EUR 42 million and the majority of our
component auditors applied a component materiality that is
significantly less than this threshold.
We sent detailed instructions to all component auditors,
covering the significant areas that should be covered (which
included the relevant risks of material misstatement detailed
below) and set out the information required to be reported
to the group auditor. Based on our risk assessment, the group
auditor visited component locations in China, Poland, the
Netherlands, Saudi Arabia, the United Kingdom, Japan and
multiple component locations in the USA. Most of our
component auditors visited the Netherlands in 2014 to attend
our global audit conference, which is held every three years,
to discuss the Group audit, risks, audit approach and
instructions. Telephone calls were also held with the auditors
of components. During these visits and meetings, the audit
approach, findings and observations reported to the group
auditor were discussed in more detail. We have used to a
limited extent other (non-KPMG) auditors for audit
procedures on certain components outside the Netherlands.
By performing the procedures mentioned above at
components, combined with additional procedures at group
level, sector level and at accounting operations centers, we
have been able to obtain sufficient and appropriate audit
evidence regarding the group’s financial information to
provide an opinion on the financial statements.
Our key audit matters
Key audit matters are those matters that, in our professional
judgment, were of most significance in our audit of the
financial statements. We have communicated the key audit
matters to the Supervisory Board. The key audit matters are
not a comprehensive reflection of all matters discussed.
Key audit matters were addressed in the context of our audit
of the financial statements as a whole and in forming our
opinion thereon, and we do not provide a separate opinion
on these matters.
Compared to last year the intended separation of the
Company into HealthTech and Lighting, the acquisition of
Volcano Corporation and the continued classification of the
Lumileds and Automotive business as Assets Held for Sale
and Discontinued operations have been included as a key
audit matter.
Annual Report 2015
179
Coverage in % 2015Goodwill81 891123152889876219Incometaxes1)Revenue2)LegalAcquisitions and disposalsLimited proceduresCentral audit proceduresLocal audit proceduresCombined central and local audit procedures51)2)The number of local entities in scope is 10The number of local entities in scope is 37 Company financial statements 13.5
Company separation and Finance Transformation
Key audit matter
In September 2014 Philips announced its plan to establish two standalone companies focused on the
HealthTech and Lighting opportunities respectively with a scheduled completion of the separation of the
Lighting business in the first half of 2016. As the separation is expected to impact all businesses, markets and
support functions and expected to impact all assets and liabilities of the Company, we have identified the
separation as a significant risk for our 2015 audit.
Our response
Furthermore, the Company continued to implement its global Accelerate! initiative, which includes a Finance
Transformation program. The Finance Transformation has a significant impact on the Company’s business
processes, control activities and internal control responsibilities. We focused on the Finance Transformation as
part of our audit because there is a significant risk that a material misstatement could occur if the program is not
implemented with proper oversight and a focus on maintaining effective internal controls throughout the
process.
Our audit procedures included, amongst others, meeting with the Board of Management and the Audit
Committee of the Supervisory Board on a regular basis during the year to understand and monitor the potential
impact of the scheduled separation of the Company on the assets and liabilities in the 2015 financial statements.
The potential impact of the separation on the valuation of goodwill and (deferred) tax positions were assessed
as part of the audit procedures on these accounts as further detailed in the key audit matters below.
Furthermore we have used these meetings to understand and monitor the effects of the scheduled separation of
the Company and the Finance Transformation on the Company’s internal control environment, across the
organization. We have also instructed our component auditors to perform procedures designed to provide
reasonable assurance that a material misstatement did not exist in the financial statements as a result of the
scheduled separation and the Finance Transformation. We also tested monitoring activities executed at different
levels of the organization designed to ensure continued effectiveness of the internal control framework during
the separation process and the Finance Transformation.
Acquistions and disposals
Key audit matter The acquisition of Volcano Corporation was significant to our audit due to the complexity of and significant
Our response
judgments and assumptions involved in the purchase price allocation for Volcano Corporation. At the acquisition
date February 17, 2015, the increase in the intangibles recognized under goodwill and other intangibles related to
Volcano Corporation amounted to EUR 947 million.
The continued classification of the Lumileds and Automotive business as Assets Held for Sale and Discontinued
operations, following the termination of the agreement pursuant to which the consortium led by GO Scale would
have acquired an 80.1% interest in the combined businesses of Lumileds and Automotive, was significant to our
audit due to the complexity of the assessment process and significant judgments and assumptions involved.
With respect to the accounting for the Volcano Corporation acquisition, we have, amongst others, read the asset
purchase agreements, confirming the correct accounting treatment has been applied and appropriate disclosure
has been made; assessed the valuation and accounting for the consideration payable and traced payments to
bank statements; audited the identification and fair valuation of the assets and liabilities the Group acquired
including any fair value adjustments; and assessed the valuation assumptions such as discount, tax and royalty
rates by recalculating these, evaluating and challenging assumptions used in such calculations amongst others
based on external evidence.
In doing so we have utilized valuation specialists to assist with the audit of the identification and valuation of the
assets and liabilities acquired. We have also tested the effectiveness of the Company’s internal controls around
the accounting for the acquisition of Volcano.
We have assessed management’s evaluation in relation to the continued classification of the Lumileds and
Automotive business as Assets Held for Sale and Discontinued operations, in accordance with the classification
criteria under EU-IFRS, as this has a material effect on the presentation of the financial statements. We also
assessed the adequacy of the disclosures in Section 12.9, Note 4 Acquisitions and Divestments (Volcano
Corporation) and Note 3 Discontinued operations and other assets classified as held for sale (Lumileds and
Automotive).
180
Annual Report 2015
Company financial statements 13.5
Valuation of goodwill
Key audit matter Under EU-IFRSs, the Company is required to test the amount of goodwill for impairment, both annually and if
there is a trigger for testing. The impairment tests were significant to our audit due to the complexity of the
assessment process and significant judgments and assumptions involved which are affected by expected future
market or economic conditions. At December 31, 2015, the goodwill amounted to EUR 8.5 billion.
Our response
Our audit procedures included, amongst others, the involvement of a valuation expert to assist us in evaluating
the assumptions and methodologies used by the Company, in particular those relating to the compound sales
growth rate and pre-tax discount rate. The cash flow projections, mainly for Healthcare cash-generating units
(Respiratory Care & Sleep Management, Image-Guided Therapy, Patient Care & Monitoring Solutions and Home
Monitoring) and Lighting cash-generating units (Professional Lighting Solutions and Consumer Luminaires) have
been assessed and challenged by us, and includes an assessment of the historical accuracy of management’s
estimates and evaluation of business plans. We have also tested the effectiveness of the Company’s internal
controls around the valuation of goodwill.
We believe the assumptions used are within the acceptable range. Based on the impairment test, it was noted
that with regard to the headroom for cash-generating unit Consumer Luminaires, the estimated recoverable
amount approximates the carrying value of the cash-generating unit. Furthermore, we noted that the headroom
for the cash-generating units Professional Lighting Solutions and Home Monitoring is relatively limited. We also
assessed the adequacy of the disclosures in Section 12.9, Note 11 Goodwill relating to those assumptions to
which the outcome of the impairment test is most sensitive, that is, those that have the most significant effect on
the determination of the recoverable amount of goodwill.
Accounting for income tax positions
Key audit matter
Income tax was significant to our audit because the assessment process is complex and the amounts involved
are material to the financial statements as a whole. The Company has extensive international operations and in
the normal course of business makes judgments and estimates in relation to tax issues and exposures resulting
in the recognition of other tax liabilities. At December 31, 2015, the net deferred tax assets are valued at EUR 2.8
billion and the other tax liability related to tax uncertainties is valued at EUR 454 million.
Our response
We have tested the completeness and accuracy of the amounts reported for current and deferred tax, including
the assessment of disputes with tax authorities, based on the developments in 2015 and the impact of the
scheduled separation of the Company. In this area our audit procedures included, amongst others, assessment
of correspondence with the relevant tax authorities, testing the effectiveness of the Company’s internal controls
around the recording and continuous re-assessment of the other tax liabilities, and the involvement of our local
component auditors including tax specialists in those components determined to be the regions with significant
tax risk. In respect of deferred tax assets, we analyzed and tested management’s assumptions used to determine
the probability that deferred tax assets recognized in the balance sheet will be recovered through taxable
income in the countries where the deferred tax assets originated and during the periods when the deferred tax
assets become deductible. During our procedures, we use amongst others budgets, forecasts and tax laws and in
addition we assessed the historical accuracy of management’s assumptions. We believe the assumptions used
are within the acceptable range. We also assessed the adequacy of the Company’s disclosure included in
Section 12.9, Note 8 Income taxes in respect of income tax positions and uncertain tax positions.
Revenue recognition
Key audit matter Sales contracts for certain projects in the Healthcare and Lighting sectors typically involve multi-element
Our response
contracts, for example a single sales transaction that combines the delivery of goods and rendering of services,
and involve separately identifiable components that are recognized based on relative fair value. This gives rise to
the risk that sales could be misstated due to the complexity of the multi-element contracts and the incorrect
valuation of the relative fair value elements. Other sales are generally recognized when the risks and rewards of
the underlying products have been transferred to the customer and tend not to have multiple deliverable
elements. There is a risk that sales may be deliberately overstated as a result of management override resulting
from the pressure management may feel to achieve planned results. The management of the Group focuses on
sales as a key performance measure which could create an incentive for sales to be recognized before the risks
and rewards have been transferred.
Our audit procedures included, amongst others, assessing the appropriateness of the Company’s revenue
recognition accounting policies including those relating to multi-element contracts and assess compliance with
the policies in terms of EU-IFRS. We tested the effectiveness of the Company’s controls over calculation of
rebates, fair value determination of multi-element sales contracts, and the correct timing of revenue recognition.
We also assessed sales transactions taking place before and after year-end to ensure that revenue was
recognized in the correct period and assessed the accuracy of the sales recorded, based amongst others on
inspection of sales contracts, hand over certificates and installation hours reported after recognition of revenue.
We also assessed the adequacy of the sales disclosures contained in Section 12.9, Note 2 Information by sector
and main country and Note 6 Income from operations.
Annual Report 2015
181
Company financial statements 13.5
Contingent liabilities and provisions from claims, proceedings an investigations (Legal)
Key audit matter 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 as well as investigations by authorities.
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 financial position, results of
operations and cash flows, resulting in the identification of a significant risk.
Our response
The accounting and disclosure for (contingent) liabilities from claims, proceedings and investigations is complex
and judgmental, and the amounts involved are, or can be material to the financial statements as a whole. At
December 31, 2015, the provisions from legal proceedings amount to EUR 578 million and the litigation payables
which were transferred to other current liabilities in 2015 at the moment the Company was able to reach a
settlement. In case the company has a present legal or constructive obligation that cannot be estimated reliably,
no provisions have been recognized.
In response to these risks, our audit procedures included, amongst others, testing the effectiveness of the
Company’s controls around the identification and evaluation of claims, proceedings and investigations at
different levels in the organization, and the recording and continuous re-assessment of the related (contingent)
liabilities and provisions and disclosures, in accordance with EU-IFRS. We also inquired with both legal and
financial staff in respect of ongoing investigations or claims, proceedings and investigations, inspected relevant
correspondence, inspected the minutes of the meetings of the Audit Committee, Supervisory Board and
Executive Committee, requested external legal confirmation letters from a selection of external legal counsel,
met with external legal counsel when deemed necessary and obtained a legal representation letter from the
Company.
We evaluated and tested the Company’s policies, procedures and controls surrounding the application of the
General Business Principles (GBP), the identification and reporting of violations, and assessed management’s
response to any GBP violations. We also assessed the disclosure regarding (contingent) liabilities from legal
proceedings and investigations as contained in Section 12.9, Note 19 Provisions, Note 22 Other Liabilities and
Note 26 Contingent assets and liabilities.
Responsibilities of the Board of Management
and the Supervisory Board for the financial
statements
The Board of Management is responsible for the preparation
and fair presentation of the financial statements in
accordance with EU-IFRS and with Part 9 of Book 2 of the
Netherlands Civil Code and for the preparation of the
Management report in accordance with Part 9 of Book 2 of
the Netherlands Civil Code. Furthermore, the Board of
Management is responsible for such internal control as Board
of Management determines is necessary to enable the
preparation of the financial statements that are free from
material misstatement, whether due to errors or fraud.
In preparing the financial statements, the Board of
Management is responsible for assessing the Company’s
ability to continue as a going concern. Based on the financial
reporting frameworks mentioned, the Board of Management
should prepare the financial statements using the going
concern basis of accounting unless the Board of
Management either intends to liquidate the Company or to
cease operations, or has no realistic alternative but to do so.
The Board of Management should disclose events and
circumstances that may cast significant doubt on the
Company’s ability to continue as a going concern in the
financial statements. The Supervisory Board is responsible
for overseeing the Company’s financial reporting process.
Our responsibilities for the audit of the financial
statements
Our objective is to plan and perform the audit assignment in
a manner that allows us to obtain sufficient and appropriate
audit evidence for our opinion. Our audit has been performed
with a high, but not absolute, level of assurance, which means
we may have not detected all errors and fraud. For a further
description of our responsibilities in respect of an audit of
financial statements in general, we refer to the website of the
professional body for accountants in the Netherlands (NBA).
www.nba.nl/standardtexts-auditorsreport.
Report on other legal and regulatory
requirements
Report on the Management report and the other
information
Pursuant to legal requirements under Part 9 of Book 2 of the
Dutch Civil Code (concerning our obligation to report about
the Management report and other information):
• We have no deficiencies to report as a result of our
examination whether the Management report, to the
extent we can assess, has been prepared in accordance
with Part 9 of Book 2 of the Dutch Civil Code, and
whether the information as required by Part 9 of Book 2
of the Dutch Civil Code has been annexed.
• We report that the Management report, to the extent we
can assess, is consistent with the financial statements.
Engagement
We were engaged before 2003 for the first time as auditor
of Koninklijke Philips N.V. and operated as auditor since then.
We were re-appointed by the Annual General Meeting of
Shareholders as auditor of Koninklijke Philips N.V. on May 1,
2014, for the year 2015, after which we will rotate off from the
Philips audit.
Amsterdam, The Netherlands
February 23, 2016
KPMG Accountants N.V.
E.H.W. Weusten RA
182
Annual Report 2015
14 Sustainability statements
Sustainability statements 14
Approach to sustainability reporting
Philips has a long tradition of sustainability reporting,
beginning with our first environmental Annual Report
published in 1999. 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. For more information, please refer
to chapter 4, Our strategic focus, of this Annual Report.
This is our eighth annual integrated financial, social and
environmental report which has been prepared in line
with the International Integrated Reporting Council
(IIRC) Integrated Reporting (IR) framework, including a
visualization of our value creation process section 4.2,
How we create value, of this Annual Report.
Philips publishes its integrated Annual Report with the
highest (reasonable) assurance level on the financial,
social and environmental performance. With that
overall reasonable assurance level Philips is a
frontrunner in this field.
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,
non-governmental organizations (NGO), and following
the resulting media coverage.
Stakeholders
We derive significant value from our diverse
stakeholders across all our activities and engage with,
listen to and learn from them. Working in partnerships
is crucial in delivering on our vision to make the world
healthier and more sustainable through innovation.
When appropriate and relevant to our business, we
incorporate their feedback on specific areas of our
business into our planning and actions. In addition to
engagement with our customers, our suppliers,
employees, investors, local communities and
governments and non-governmental organizations, we
participate in meetings and task forces as a member of
organizations including the WBCSD, World Economic
Forum, Electronic Industry Citizenship Coalition (EICC)
and the Ellen MacArthur Foundation.
A multi-stakeholder project with the Sustainable Trade
Initiative (IDH), a number of NGOs, and electronics
companies was started in 2011 and expanded in 2014
and 2015 to include suppliers in the Yangtzhe river delta.
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 as
well as a variety of investors and analysts.
In addition to face-to-face meetings, webinars and
social media channels provide us with ongoing
feedback on our strategy, performance and emerging
topics. Our sustainability e-mail account
(philips.sustainability@philips.com) enables
stakeholders to share their issues, comments and
questions with the sustainability team. As described in
the Materiality section below, various stakeholder
groups have been invited to provide input to the
materiality analysis which was updated for the Annual
Report 2015. The table below provides an overview of
the different stakeholder groups, examples of those
stakeholders and topics discussed.
Annual Report 2015
183
Sustainability statements 14
Stakeholder overview (non-exhaustive)
Examples
Processes
Employees
Customers
Suppliers
- European Works Council
- Individual employees
Regular meetings, quarterly My Accelerate! Surveys, employee development process,
quarterly update webinars. For more information refer to section 5.2, Social
performance, of this Annual Report.
- Hospitals
- Real estate developers
- Consumers
Joint (research) projects, business development, Lean value chain projects, consumer
panels, Net Promoter Scores, Philips Customer Care centers, Training centers, social
media
- Chinese suppliers in the Pearl
and Yangtzhe river deltas
- HP, Randstad, Maersk
Supplier development activities (including topical training sessions), supplier forums,
supplier website, participation in industry working groups like COCIR and EICC. For more
information refer to sub-section 14.2.8, Supplier indicators, of this Annual Report.
Governments,
municipalities, etc.
- European Union
- Authorities in Los Angeles,
Issues meetings, annual Innovation Experience, research projects, policy and legislative
developments, business development
NGOs
Investors
Singapore
- Dutch Sustainable Trade
initiative (IDH)
- Friends of the Earth
- Mainstream investors
- ESG investors
Issues meetings, cross-sector (multi-stakeholder) projects, joint projects, social
investment program and Philips Foundation
Webinars, roadshows, capital markets day, investor relations and sustainability accounts
Reporting standards
In this report, we have followed relevant best practice
standards and international guidelines; the IIRC
Integrated Reporting
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