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SECURITIES AND EXCHANGE COMMISSION
FORM 6-K
REPORT OF FOREIGN ISSUER
Pursuant to Rule 13a-16 or 15d-16 of the
Securities Exchange Act of 1934
For the period commencing January 29
through February 18, 2008
KONINKLIJKE PHILIPS ELECTRONICS N.V.
(Exact name of registrant as specified in its charter)
Royal Philips Electronics
(Translation of registrants name into English)
The Netherlands
(Jurisdiction of incorporation or organization)
Breitner Center, Amstelplein 2, 1096 BC Amsterdam, The Netherlands
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports under cover Form
20-F or Form 40-F.
Form 20-F þ Form 40-F o
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by
Regulation S-T Rule101(b)(1):
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by
Regulation S-T Rule101(b)(7):
Indicate by check mark whether the registrant by furnishing the information contained in this Form
is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the
Securities Exchange Act of 1934.
Yes o
No þ
Name and address of person authorized to receive notices
and communications from the Securities and Exchange Commission:
E.P. Coutinho
Koninklijke Philips Electronics N.V.
Amstelplein 2
1096 BC Amsterdam The Netherlands
This report comprises a copy of the Annual Report of the Philips Group for the year ended December
31, 2007, dated February 18, 2008, as well as copy of the press releases entitled:
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf, by the undersigned, thereunto duly authorized at Amsterdam,
on the 18th day of February 2008.
KONINKLIJKE PHILIPS ELECTRONICS N.V.
/s/ G. J. Kleisterlee
(President,
Chairman of the Board of Management)
/s/
P. J. Sivignon
(Chief Financial Officer,
Member of the Board of Management)
Simpler, stronger, better
Annual Report 2007
Philips taps teams of futurists, cultural anthropologists, designers and scientists to develop
user-centered products and services.
BusinessWeek.com, 9/10/07
BusinessWeek innovation ranking
In the BusinessWeek-Boston Consulting Groups annual ranking of the worlds most innovative
companies, Philips jumped from No. 67 in 2006 to No. 38 in 2007.
Awards
In 2007 we received over 45 design awards recognizing our commitment to people-focused solutions.
These included 16 coveted iF awards. We also won two prestigious awards from the European Imaging &
Sound Association (EISA). The 47PFL9732D FlatTV with Ambilight was named European Full-HD LCD TV
2007-2008, while the HTS8100 SoundBar DVD Home Theater with Ambisound technology was named European
Home Theater Compact System 2007-2008.
Simplicity Event 2007
Philips Simplicity Events use simplicity-led design concepts to provide an insight into possible
solutions three to five years ahead. The 2007 edition in London showcased how the inventive use of
technology, coupled with intuitive, personalized design, can enhance care for peoples well-being
at home, in the hospital and on the move.
...they are at the heart of our thinking
Live Earth / asimpleswitch.com
On July 7,2007, Philips sponsored the Live Earth concerts at eight different locations around the
world, attracting an audience of two billion people. On the asimpleswitch.com website, over 600,000
people have pledged to replace a total of over 3.3 million light bulbs with energy-efficient
alternatives.
56%
Sales of innovative products
In 2007,56% of our sales came from products introduced in the last three years.
500 million and counting
In May 2007 our 500 millionth shaver was produced in Drachten (Netherlands). We also ushered in the
future of shaving with the launch of the revolutionary Arcitec shaver. With its ergonomic design
and three independently flexing heads, Arcitec offers optimum skin contact in curved areas for a
faster, closer, more efficient shave.
Philips not only talks simplicity, it lives simplicity
Dr
Jurgen Hausler, [ILLEGIBLE]
CEO Interbrand Zintzmeyer & Lux
Interbrand ranking
Philips was one of the ten fastest-growing brands in terms of total brand value in the 2007 ranking
of the top-100 global brands as compiled by leading brand consultant Interbrand. Our brand value
rose 15% to an estimated USD 7.7 billion, making Philips the 42nd most valuable brand in the world.
We are inspired by people
World
of wonder
Philips has redefined home entertainment with Aurea. The Aurea experience is like stepping
into a different world, as scenes radiate an aura of light and color beyond the frame. The result
is a totally immersive, ambient viewing experience.
Better images, lower impact
The 256-slice Philips Brilliance iCT scanner can capture an image of the entire heart
in just two beats, while reducing radiation doses by up to 80%.
Energy-saving potential
Designed for offices and schools, for instance, Philips MASTER TL-D Eco fluorescent
lamps save 15% energy compared to traditional T8 fluorescent lamps, of which the EU
alone has an installed base of more than 1 billion.
This Annual Report is available online in dynamic, interactive form at the address below. Key
financial data are available as Excel downloads. The Report can also be downloaded in full or per
chapter in PDF.
www.philips.com/annualreport
In parallel and complementary to this Annual Report 2007, we have published our Sustainability
Report 2007 (www.philips.com/sustainability).
Forward-looking statements
This document contains certain forward-looking statements with respect to the financial condition,
results of operations and business of Philips and certain of the plans and objectives of Philips
with respect to these items, in particular the Outlook section of the chapter The Philips Group in
this Annual Report. Examples of forward-looking statements include statements made about our
strategy, estimates of sales growth, future EBITA and future developments in our organic business.
By their nature, forward-looking statements involve risk and uncertainty because they relate to
future events and circumstances and there are many factors that could cause actual results and
developments to differ materially from those expressed or implied by these forward-looking
statements.
These factors include but are not limited to domestic and global economic and business conditions,
the successful implementation of our strategy and our ability to realize the benefits of this
strategy, our ability to develop and market new products, changes in legislation, legal claims,
changes in exchange and interest rates, changes in tax rates, pension costs, raw materials and
employee costs, our ability to identify and complete successful acquisitions and to integrate those
acquisitions into our business, our ability to successfully exit certain businesses or restructure
our operations, the rate of technological changes, political, economic and other developments in
countries where Philips operates, industry consolidation and competition. As a result, Philips
actual future results may differ materially from the plans, goals, and expectations set forth in
such forward-looking statements. For a discussion of factors that could cause future results to
differ from such forward-looking statements, see also the chapter Risk management.
Third-party market share data
Statements regarding market share, including those regarding Philips competitive position,
contained in this document are based on outside sources such as specialized research institutes,
industry and dealer panels in combination with management estimates. Where full-year information
regarding 2007 is not yet available to Philips, those statements may also be based on estimates and
projections prepared by outside sources or management. Rankings are based on sales unless otherwise
stated.
Fair value information
In presenting the Philips Groups financial position, fair values are used for the measurement of
various items in accordance with the applicable accounting standards. These fair values are based
on market prices, where available, and are obtained from sources that are deemed to be reliable.
Readers are cautioned that these values are subject to changes over time and are only valid at the
balance sheet date. When a readily determinable market value does not exist, fair values are
estimated using valuation models, which we believe are appropriate for their purpose. They require
management to make significant assumptions with respect to future developments which are inherently
uncertain and may therefore deviate from actual developments. Critical
assumptions used are disclosed in the financial statements. In certain cases, independent
valuations are obtained to support managements determination of fair values.
US GAAP basis of presentation
The financial information included in this document is based on US GAAP, unless otherwise
indicated. As used in this document, the term EBIT has the same meaning as Income from operations
(IFO).
Use of non-US GAAP information
In presenting and discussing the Philips Groups financial position, operating results and cash
flows, management uses certain non-US GAAP financial measures like: comparable growth; EBITA; NOC;
net debt (cash); and cash flow before financing activities. These non-US GAAP financial measures
should not be viewed in isolation as alternatives to the equivalent US GAAP measures.
Further information on non-US GAAP information and a reconciliation of such measures to the most
directly comparable US GAAP measures can be found in the chapter Reconciliation of non-US GAAP
information.
Statutory financial statements and management report
The chapters IFRS financial statements and
Company financial statements contain the statutory financial statements. The introduction to the
chapter IFRS 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).
Reclassification
On November 2, 2007, Philips announced that it has decided to proceed with the sale of its
approximately 70% ownership interest in MedQuist. Amongst others, in order to ensure comparison
between different financial years and to achieve optimal transparency for users of the Annual
Report, all consolidated financial statements of prior years have been restated to present the
MedQuist business as a discontinued operation. The original consolidated financial statements of
prior years are available on the Companys website.
As of January 2007, the following key portfolio changes have been applied to the Philips Group
structure: Other Activities was renamed Innovation & Emerging Businesses; Unallocated was renamed
Group Management & Services; GSU activities and Miscellaneous were transferred from Innovation &
Emerging Businesses to Group Management & Services; Consumer Healthcare Solutions was moved from
DAP to Innovation & Emerging Businesses. Also, as of January 2007, certain
Corporate/Regional/Country overhead and Corporate Intellectual Property costs were allocated to the
operating divisions to further improve transparency of the total cost structure. As a consequence
of the aforementioned, prior-year financials have been restated.
6 Philips Annual Report 2007
Contents
Philips Annual Report 2007 7
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8 Financial highlights
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10 Message from the President
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16 The Philips Group |
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62 The Philips sectors |
Financial highlights
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all amounts in millions of euros unless otherwise stated |
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2005 |
1) |
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2006 |
1) |
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2007 |
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Sales |
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25,445 |
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26,682 |
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26,793 |
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EBITA2) |
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1,652 |
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1,386 |
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2,065 |
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as a % of sales |
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6.5 |
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5.2 |
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7.7 |
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EBIT |
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1,558 |
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1,201 |
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1,852 |
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as a % of sales |
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6.1 |
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4.5 |
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6.9 |
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Results relating to equity-accounted investees |
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1,754 |
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(157 |
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763 |
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Income from continuing operations |
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2,879 |
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901 |
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4,601 |
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Income (loss) from discontinued operations |
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(11 |
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4,482 |
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(433 |
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Net income |
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2,868 |
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5,383 |
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4,168 |
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per common share in euros |
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- basic |
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2.29 |
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4.58 |
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3.84 |
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- diluted |
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2.29 |
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4.55 |
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3.80 |
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Net operating capital2) |
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5,439 |
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8,518 |
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10,586 |
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Cash flows before financing activities2) |
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2,841 |
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(2,472 |
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5,449 |
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Stockholders equity |
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16,666 |
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22,997 |
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21,684 |
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Net debt : group equity ratio2) |
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(4):104 |
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(10):110 |
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(32):132 |
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Employees at December 31 3) |
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159,226 |
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121,732 |
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123,801 |
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1) |
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Restated to present the MedQuist business as a discontinued operation |
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2) |
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For a reconciliation to the most directly comparable US GAAP measures, see the
chapter Reconciliation of non-US GAAP information |
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3) |
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Includes discontinued operations 44,174 at December 31, 2005,6,640 at December
31, 2006 and 5,703 at December 31, 2007 |
8 Philips Annual Report 2007
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98 Risk management
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112 Our leadership
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116 Report of the Supervisory Board
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126 Financial Statements |
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5%
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1.90
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7.7%
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4,168 |
comparable sales growth
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EBITA per common share
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EBITA as a % of sales
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net income in millions of euros |
Philips
Annual Report 2007 9
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8 Financial highlights
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10 Message from the President
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16 The Philips Group
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62 The Philips sectors |
Message from the President
Dear shareholder,
2007 was a dynamic and exciting year for our company, with good progress on many fronts. However,
this did not translate into an equally exciting share performance. Operationally, we delivered once
again on our Group targets, with 5% comparable sales growth and an EBITA margin of 7.7%, thanks to
good execution, a strong innovation pipeline and a balanced portfolio that proved its robustness in
a weakening economic environment.
We continued to advance well in our drive to become a truly market-focused, people-centric company
that is geared to creating value through sustained profitable growth.
Strategically, we made significant steps in building strong market leadership positions across the
portfolio, by investing in high-growth high-margin businesses while continuing to divest some
low-growth low-margin businesses, largely completing our portfolio transformation.
In particular, the announced acquisitions of Genlyte and Respironics will boost our leadership
position in Lighting and Home Healthcare respectively.
At the same time, we also tightened the focus of our portfolio with, among others, the sale of our
mobile phone operation, as well as the projected divestment of our set-top box activity and our
ownership interest in MedQuist.
We continued to invest in strengthening our position in important emerging markets in Asia, Eastern
Europe and Latin America. Across our businesses, growth in emerging markets was particularly strong
in 2007, and they now account for approximately 30% of our sales. We intend to further expand our
presence in these markets by growing considerably faster than their respective economies.
We also continued to invest heavily in the things that really set Philips apart our brand and our
end-user-driven innovation and design moving us to 38th place in Business Weeks ranking of the worlds
most innovative companies (up from 67th place in 2006) and further increasing our brand value by
15% (according to Interbrand).
Financially, we accelerated our disciplined redeployment of capital with the announcement of a new
EUR 5 billion (tax-free) share repurchase plan, on the back of a change to Dutch tax law. At the
same time, we moved forward with our program to sell down our financial holdings, lowering our
stakes in TSMC and LG.Philips LCD. With our capital reallocation process now largely completed, we
are well on our way to arriving at an efficient balance sheet before the end of 2009.
In 2007 we also launched our EcoVision IV program, which aims to double sales of our Green Products
over the next five years to 30% of total revenues, in comparison to 15% in 2006. And we have
pledged to double investments in green innovations to EUR 1 billion by 2012. Concentrating on areas
where we can make an impact with our capabilities and expertise, we are focusing our sustainability
efforts on two global challenges: energy efficiency and available and affordable healthcare.
Crucially, in September we announced Vision 2010, a strategic blueprint defining the company we
want Philips to be a simpler, stronger company that is better placed to meet peoples need for
high-quality but affordable healthcare, energy-efficient lighting and rewarding lifestyle
experiences, while at the same time providing significant shareholder value by delivering on our
target to double EBITA per share by 2010.
As stated above, good progress on many fronts, though for you, our shareholder, only a flat share
price performance, more or less in line with the market. With that, we rankon three-year TSR
(Total Shareholder Return) 5th in our old peer group of 24 companies and, for the first time in
our new peer group, 6th among 12
10 Philips Annual Report 2007
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98 Risk management
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112 Our leadership
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116 Report of the Supervisory Board
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126 Financial Statements |
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8 Financial highlights
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10 Message from the President
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16 The Philips Group
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62 The Philips sectors |
companies. Our ambition and your expectation are clearly higher, and so with our agenda for
2008 we will drive even more relentlessly for value creation and delivery.
Performance against targets
As I do every year, I would also like to update you on how we did on the things we had set out to
do as part of our 2007 Management Agenda.
Maintain annual average sales growth of 5-6% and achieve above 7.5% EBITA
I am glad to say we achieved our Group targets of 5-6% annual average sales growth and EBITA above
7.5%.
At 5%, comparable sales growth was at the low end of the bandwidth as particularly high growth at
DAP and solid growth at Lighting were offset by a flat performance at Consumer Electronics, caused
by a loss of market share in the first half of the year at Connected Displays a highly
competitive business that we continue to manage for profitability while Medical Systems sales
growth was hampered by a declining US imaging market, triggered by the Deficit Reduction Act.
At 7.7% of sales, our EBITA margin is the highest in recent years, up from 5.2% in 2006 an
excellent starting position towards our 2010 targets. Operationally, we executed very well in our
DAP and Lighting businesses, which achieved EBITA margins of 17.6% and 11.9% respectively, even
though Lighting was hampered by the sharp decline in the very profitable UHP business and the
closure of our LCD backlighting activity. However, we had some issues at Consumer Electronics,
especially Connected Displays, with losses in the US for the whole year. Despite this, Consumer
Electronics managed to exceed its target of 3% EBITA margin. At Medical Systems we were impacted by
the slowdown of the US imaging market. The shortfall in the US could not be compensated entirely by
a good operational performance of the non-imaging businesses and in the rest of the world, which
resulted in slight under-performance against margin targets, EBITA remaining virtually stable
at 13.5%.
Delivering on our 2007 objectives puts us in a good starting position to meet the more ambitious
medium-term targets set as part of Vision 2010, especially as this portfolio of activities has
shown resilience in earlier periods of economic downturn.
Continue to redeploy capital in a disciplined way through value-creating acquisitions, share
buy-backs and dividends
In 2007 we continued to further strengthen our key businesses and create
true market leadership positions by means of both small fill-in and largerplatform acquisitionsall high-growth high-margin businesses.
Besides our acquisition drive, which resulted in 2007 in a total cash-out of EUR 1.5 billion, we
continued our policy of repurchasing shares, buying back some EUR 1.6 billion worth of shares, of
which EUR 0.8 million for cancellation. Unfortunately the buy-back through the so-called second
trading line brought us only about half of the EUR 1.6 billion we had targeted. However, on the
back of a change to Dutch tax law, we were able, in December, to announce a new EUR 5 billion
buy-back plan, through which we will more than catch up on our target.
With our year-end announcements of the Respironics acquisition and our latest share buy-back plan,
we passed the EUR 10 billion mark twice for closed and announced acquisitions, as well as for the
total of realized and intended share buy-backs. In total we have re-allocated over EUR 20 billion
of capital since 2005, largely completing our capital re-allocation program and putting us well on
track to deliver, as promised, an efficient balance sheet before the end of 2009.
With our strong focus on economic value added as well as return on invested capital, our
projections show that
12 Philips Annual Report 2007
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98 Risk management
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112 Our leadership
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116 Report of the Supervisory Board
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126 Financial Statements |
Our sectors share a common brand that stands for innovation delivered with sense
and simplicity.
this combination of accretive acquisitions and share buy-backs is the best way to create
shareholder value.
I am also pleased to announce that, consistent with our policy to pay out 40-50% of continuing net
income as an annual dividend, we are proposing to the upcoming General Meeting of Shareholders to
declare a dividend of EUR 0.70 per common share, an increase for the fourth year in a row and a
statement of our confidence for the future.
Drive a culture of superior customer experience by delivering on the brand promise and implementing
the Net Promoter Score measure in the company
In 2007, Philips was one of the ten fastest-growing
brands in terms of total brand value in the annual ranking of the top-100 global brands compiled by
Interbrand a clear sign that the brands core messages resonate with customers. Our brand value
rose 15% to an estimated USD 7.7 billion, making Philips the 42nd most valuable brand in the world.
We drove the further deployment of the Net Promoter Score (NPS) as our single key metric of
customer experience. NPS measures the answer to just one question:How likely is it that you would
recommend this company/ product to a friend or colleague? Brands with high NPS scores tend to grow
faster and more profitably than their competitors. At present, close to 50% of our key businesses
have industry-leading scores, and we aim to increase this figure to 70% by 2010 a significant but
vital challenge.
Be an exciting place to work and bring employee engagement to a high-performance benchmark
level within 2 to 3 years
Philips is a fantastically exciting place to work. We offer our employees excellent working
conditions, energizing career challenges and international development opportunities. And we are
unstinting in our efforts to create a diverse and inclusive working environment, in which all
employees feel valued for their talents and contribution.
We are also stimulating a culture where people are encouraged to be ambitious and take calculated
risks, and where failure is understood to be part of learning.
We measure the progress of our people initiatives through our annual Employee Engagement Survey. In
2007, the response was 92%, up from 85% in 2006, and the results show definite improvement. The
Employee Engagement Index figure rose to 64%, from 61% in 2006. Our goal is to reach the
high-performance benchmark of 70% by 2009.
We also use the Engagement Survey to gauge how our people judge their leaders. Our People
Leadership Index measuring 12 aspects relating to ones direct manager-rose to 64% from 59% in
2006, equally moving towards the high-performance benchmark of 70%.
Vision 2010 creating a simpler, stronger and better company
In September 2007 we launched Vision 2010, organizing Philips in three market-oriented sectors -
Healthcare, Lighting and Consumer Lifestyle effective January 2008, with the ambition to build a
company with a significantly higher shareholder value by delivering on our target to double EBITA
per share by 2010 from our 2007 starting point
Vision 2010 represents a step up of ambition in our drive to become a truly market-driven,
people-centric company with a well-balanced portfolio of professional and consumer businesses with
attractive EBITA margins and effective business models one that has already demonstrated
resilience in a challenging economic environment
Our sectors address specific yet interlinked markets, with a strong focus on people and their
health and well-being, and they share a common brand that stands for innovation delivered with
sense and simplicity.
Philips Annual Report 2007 13
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8 Financial highlights
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10 Message from the President
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16 The Philips Group
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62 The Philips sectors |
Healthcare
Our new Healthcare sector brings together Medical Systems and our growing Home Healthcare Solutions
business formerly Consumer Healthcare Solutions. We now deliver innovative solutions based on
the combination of human insights and clinical expertise-across the entire care cycle, from the
hospital to the home. We believe the link bridging the hospital and the home is going to be
increasingly important in delivering better patient outcomes while containing costs.
In the hospital market we strengthened our global leadership in critical care with the acquisition
of VISICU, providing advanced IT solutions for monitoring of patients in the intensive care unit.
Complementary to our established leadership position in the professional healthcare technology
market, our proposed acquisition of Respironics a leading US-based global provider of innovative
respiratory and sleep therapy solutions for hospital and home use is part of our strategy to
create a global leadership position in the fast-growing home healthcare solutions market as well.
Given the unsustainably high healthcare costs in many markets and increased emphasis on both
efficiency and patient comfort, we are seeing a gradual shift towards diagnosing, treating and
monitoring patients in their homes rather than in hospitals. Demand for home healthcare is also
growing due to the increasing number of elderly people and the rising incidence of chronic
diseases. With our expertise in consumer insights in the consumer lifestyle space, we feel we are
ideally positioned to be one of the leading companies driving this emerging trend.
Completion of this stage of our acquisition drive will create a Healthcare sector with sales of
over EUR 7 billion going forward and global leadership positions in areas such as cardiac care,
acute care, and now also home healthcare. We will continue to grow our business organically and
further expand profitability by maintaining our focus on operational excellence and by leveraging
our 2007 acquisitions.
Lighting
In both the professional and consumer domains, Philips Lighting is increasingly shifting its focus
towards applications, rather than products, supported by the growing demand for energy-efficient
solutions and the rise of solid-state lighting. In 2007 we underscored our ambitions by completing
a number of major acquisitions totaling EUR 1.2 billion to boost growth and position ourselves
for the future.
14 Philips Annual Report 2007
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98 Risk management
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112 Our leadership
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116 Report of the Supervisory Board
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126 Financial Statements |
We completed the acquisition of Partners in Lighting International, the leading European
manufacturer of home luminaires, an area where solid-state lighting (SSL) will bring major benefits
in terms of creating atmospheres and reducing energy consumption.
Further lighting acquisitions included Color Kinetics, a US-based leader in innovative LED lighting
systems, with a broad technology and intellectual property portfolio (controls and intelligent
technology). In this way we are building a strong position through the complete SSL value chain for
future growth in energy-efficient lighting solutions using LED sources.
Toward the end of the year we announced the acquisition of major North American luminaire
manufacturer Genlyte, giving us the leading position in the US market for professional lighting
applications.
Together, these actions have significantly strengthened our global leadership position in the
market for advanced, energy-efficient lighting solutions, creating a Lighting sector with sales of
over EUR 7 billion going forward. Leveraging end-user-driven innovation, marketing and supply
excellence, we will drive profitability by managing for growth.
Consumer Lifestyle
Combining CE and DAPs complementary strengths will boost Philips consumer lifestyle proposition
as a whole, creating a new business sector based on deep end-user insight, cutting-edge design and
rich consumer experiences, rather than product categories.
In Consumer Lifestyle we have chosen a strategic direction which is based on the fundamental
insight that our target customer is increasingly interested in personal well-being. Exploiting
Philips innovative capability, brand and distribution strength will enable Consumer Lifestyle to
further drive the portfolio in the direction of sustainable high-margin positions in the well-being
space, as well as providing us with a platform to grow into new value spaces. At the same time, the
coming year will see us take decisive steps to structurally deal with the issue of unsatisfactory
profitability at Connected Displays.
Focus on execution
We are close to being the Philips we envisaged when we set out to transform the company in 2001. We
are no longer inward-looking, but market and customer-oriented, no longer volatile and cyclical,
but ready to continue to progress in spite of economic headwind. I am convinced that unrelenting focus on the
needs of the market, along with rigorous and consistent execution of our plans, will enable us to
continue delivering on our promise of sustained profitable growth.This will bring us a step closer
to the realization of our Vision 2010 ambition and create lasting value for all our stakeholders
and in particular for you, our shareholder.
Final thoughts
On a personal note, I would like to thank Theo van Deursen, who will be retiring on April 1 this
year, for his outstanding contribution over a period of some 35 years, latterly as CEO of Philips
Lighting, where he has been the architect and driving force of the new, expanding Lighting sector.
I wish him all the best for his retirement
With Rudy Provoost we have a good successor for Theo, one who will steer the next phase of growth
and expansion at Philips Lighting, having profoundly transformed our Consumer Electronics
businesses. I am also very pleased to have Andrea Ragnetti as the leader of our Consumer Lifestyle
sector, where he will combine his marketing skills with the best of DAP and CE. Together with Steve
Rusckowskis in-depth knowledge and experience of Healthcare, we have three strong sector leaders
working closely together with me and my colleagues Pierre-Jean
Sivignon and Gottfried Dutiné to
provide Philips with the leadership it needs to move to a higher performance level.
We also have to say goodbye to Wim de Kleuver, the Chairman of our Supervisory Board, whose
stewardship, wisdom and experience we have always valued. I wish him the very best for the future.
Finally, on behalf of the entire Board of Management, I would like to express my thanks to you, our
shareholders, for your continued support as we strive supported by the dedication and drive of
our people to fulfil the promise of the future set out in Vision 2010.
Gerard Kleisterlee
President
Philips Annual Report 2007 15
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8 Financial highlights
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10 Message from the President
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16 The Philips Group
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62 The Philips sectors |
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The Philips Way |
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The Philips Way
Our company was founded in Eindhoven (Netherlands) in 1891 to manufacture incandescent
lamps and other electrical products. Ever since then, we have been simplifying and enhancing
peoples lives with a steady flow of pioneering innovations, for instance in the fields of medical
imaging, television, lighting, optical technology and integrated circuits. Today, we remain
committed to building upon this rich heritage to make peoples lives simpler, more enjoyable and
more productive.
Vision 2010
In 2001 we started out on a journey to transform Philips into a focused, market-driven company
capable of delivering sustained profitable growth, and so creating value for our stakeholders. Over
the course of the intervening years, we have fundamentally repositioned Philips from a rather
volatile, technology-focused, vertically integrated electronics company to an
applications-oriented, customer-centric and more predictable company. This involved a massive
capital re-allocation, away from cyclical technology businesses and toward expansion of our
high-margin core businesses through acquisitions, innovation and brand injections, as well as
returning capital to shareholders through tax-efficient share buy-backs and dividends. In 2007 we
took another major step forward with the announcement of our Vision 2010 strategic blueprint.
Vision 2010 places the customer at the very heart of everything we do. Accordingly, we have
realigned our entire organization around the needs we see in the marketplace. Effective January
1,2008, we now have three sectors Healthcare, Lighting and Consumer Lifestyle.
Insights and empowerment
Our mission is to improve the quality of peoples lives through the timely introduction of
meaningful innovations. In a world where complexity grows to touch every aspect of our daily lives,
we will lead in bringing sense and simplicity to people.
Based on a deep understanding of what people really need and want, and delivering on our promise of
simplicity, we empower our customers both healthcare and lighting professionals and end-consumers
with solutions that are advanced, yet designed around them and easy to experience. Specifically,
we address these needs and desires in the four domains of my space, my body, my appearance and my
mind.
As well as expressing a commitment to eliminate unnecessary complexity and to deliver the
meaningful benefits of technology, our sense and simplicity brand promise also defines how we
want to be seen by all our stakeholders open and transparent, approachable, easy to do business
with.
Today, Philips is a much simpler company focused on the market, centered around the brand and
driven by innovation. We see tremendous potential in both mature and emerging markets and leverage
our competencies in design, technology and marketing to capture value from some of the major
economic, social and demographic trends, e.g. the growing demand for better healthcare at lower
cost consumer empowerment the rise of emerging markets and the need for energy efficiency.
16 Philips Annual Report 2007
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98 Risk management
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112 Our leadership
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116 Report of the Supervisory Board
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126 Financial Statements |
As we strive to enhance the quality of peoples lives, our 7 strategic
drivers are helping us become a simpler stronger and better company.
Vision 2010 ambition to significantly increase shareholder value
|
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Improve the EBITA margin of our current businesses
to exceed 10% by year-end 2010 |
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Through improved margin management, increased contribution from recent acquisitions, a better
product mix, the effects of the organizational simplification and reduced corporate brand spend. |
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Drive comparable sales growth at a minimum of 6%
(compound annual growth rate) for the period
2008-2010 |
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Fuelled by organic growth, and through a specific focus on emerging markets and developing
economies. |
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Arrive at an efficient balance sheet by the end of 2009 |
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Through a combination of further value-creating
acquisitions and continued return of capital to
shareholders. |
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Thanks to the combined effect of these measures, we expect EBITA per common share to more than
double by 2010 from the 2007 level. |
Management Agenda 2008
As a result of a thorough review of our 2007 achievements and remaining challenges, as well as our
expectations for the development of the global economy and the competitive environment, we have
adopted the following management agenda for 2008:
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Integrate and leverage recent acquisitions, delivering
the anticipated return on investment |
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Take decisive steps to structurally deal with
unsatisfactory EBITA margins at Connected Displays |
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Improve productivity as a driver of margin expansion |
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Step up resource investment in emerging markets
to accelerate growth in excess of 2x GDP |
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Increase innovation focus in support of Philips
growth ambition |
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Continue to drive a culture of superior customer
experience |
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Bring employee engagement to high-performance
benchmark |
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Philips Annual Report 2007 17
Our 7
strategic drivers
1
We are a people-centric company that organizes around customers and markets
Vision 2010 positions Philips as a market-driven company with an organizational structure that
reflects the needs of its customer base.
Our three new sectors, Healthcare, Lighting and Consumer Lifestyle, each address different markets,
but have one thing in common the customer is at the center.
By bringing together Medical Systems and our growing Home Healthcare Solutions business, for
example, we can develop solutions that deliver value throughout the
complete cycle of care from
disease prevention to screening and diagnosis through to treatment, monitoring and health
management.
And by combining CE and DAP, we will leverage our competencies to create competitive advantages in
a challenging marketplace. Merging sales teams, for example, will create greater focus and reach
within our chosen markets. Optimizing supply and service processes will improve customer-centric
effectiveness. And combining consumer insights will enable us to deliver even more compelling value
propositions.
2
We invest in a strong brand and consistently deliver on our brand promise of sense and simplicity
in our actions, products and services
The 2007 wave of our brand campaign showcased a range of simplicity solutions that empower
consumers, particularly families, to manage their health and well-being. These advertisements
underscore the deep consumer knowledge and insights that set Philips apart in the healthcare
industry.
By
investing consistently in our brand also through activities
like our Simplicity Events we
are seeing its value increase significantly, as evidenced by our fourth successive rise in the
annual Interbrand top 100.
3
We deliver innovation by investing in world-class strengths in end-user insights, technology,
design and superior supplier networks
Technology continues to drive many of our innovations, and innovation is integral to everything we
do. But to ensure it is relevant and meaningful, we take end-user insights as its starting point.
Product creation and development begins with an understanding of peoples needs and aspirations. We
make extensive use of our Experience Labs, where we can study people interacting naturally with our
product concepts. If they find the concepts too complex, we make them simpler or go on to the next
innovation.
The Philips Wake-Up Light is a new, medically proven wake-up solution based on the simulation of
dawn. It emits light that gradually increases to the intensity you have selected, gently preparing
your body to wake up. This dawn light positively affects your energy hormones, enabling you to
rise naturally and easily, feeling energized and refreshed.
4
We develop our peoples leadership, talent and engagement and align ourselves with high-performance
benchmarks
In the
2007 edition of our annual Employee Engagement Survey, almost 100,000
Philips employees from across all sectors and functions were invited to answer the same 39 questions on leadership,
management capabilities, alignment with Philips vision, identification with the brand, and reward
recognition.
The Employee Engagement Index figure increased to 64%, from 61% in 2006. We have set ourselves the
goal of reaching the high-performance norm of 70% by 2009. So while we are on the right track, the
remaining gap still needs to be closed.
5
We invest in high-growth and profitable businesses and emerging geographies to achieve market
leadership positions
We are well positioned to benefit from major trends that will determine global GDP development in
the coming decade, i.e. the need of a growing and longer-living population for more and affordable
healthcare, the need for energy-efficient solutions (e.g. for lighting) and developments in the
consumer space. We are also well placed to realize profitable growth in emerging markets, while
contributing to the sustainable development of these economies.
We continue to pursue opportunities to make value-creating acquisitions that can further our growth
ambitions. The acquisitions we announced in 2007, for example, strengthened or established our
leadership positions in promising markets, or gave us access to new markets. The successful
integration of Partners in Lighting International, Color Kinetics and Genlyte will significantly
boost our global leadership position in the market for advanced lighting solutions, while the
announced acquisition of Respironics puts us firmly at the forefront of the fast-growing market for
home healthcare solutions.
Now, the priority is to successfully integrate and leverage these acquisitions in order to capture
their full value and so deliver the anticipated growth and margins.
6
We are committed to sustainability and focus on making the difference in efficient energy use
Global climate change, rising energy costs and pressure to meet targets on reduction of
CO2 emissions are major issues facing the world today. Addressing these imperatives and
the opportunities they present will have a major impact on global business.
Philips has a long-standing commitment to providing solutions that improve peoples lives and are
environmentally sound. Now we are the industry leader in energy-efficient lighting with, for
example, our state-of-the-art TL5 lamps and LED light sources, electronic gear, high-efficiency
optics and energy-saving lighting controls.
We are aiming for our Green Products to generate 30% of total revenues by 2012, compared with 15%
of Group sales in 2006. This commitment is part of our latest EcoVision program, which aims to
double investment in green innovations to EUR 1 billion in the next five years and to increase the
energy efficiency of our operations by 25%.
During 2007 we launched our Green Logo, a simple tool to help consumers find Philips Green
Products in stores and make responsible choices.
7
We drive operational excellence and quality to best-in-class levels, allowing us to make strategic
investments in our businesses
Philips Business Excellence (PBE) provides a holistic framework for assessing an organizations
position relative to world-class performance, identifying strengths as well as improvement
opportunities that support business objectives.
In few areas are the demands for manufacturing excellence higher than in the automobile industry.
This drives our Automotive Lighting business, which has adopted a
zero-defects policy not as a
philosophy but as a hard target.
Using the Philips Business Excellence program, our people at Automotive Lighting identify what
improvements are needed, and formalize them in the management agenda. The policy is based on
management attention and shop floor focus. Black Belts (process experts) and Green Belts
(operational and tactical experts) lead improvement teams focused on product quality issues. Our
Lighting Quality Improvement Competition provides a platform where the teams can share their
experiences and learn from each other, as well as motivating and engaging our people.
I feel
more secure now
Philips and healthcare
I live on my own and have severe arthritis, which makes me fall sometimes. Now, I can get help
when I need it. When I fell last week I pressed the button, and immediately my panic was gone.
Within a few minutes the paramedics were here.
Philips Lifeline is an easy-to-use personal response service that lets you summon help any time of
the day or night even if you cant speak. All you have to do is
press your personal help button, worn on a wristband or pendant, and a trained response center
associate will ensure you get help fast.
Philips Annual Report 2007 23
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8 Financial highlights
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10 Message from the President
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16 The Philips Group
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62 The Philips sectors |
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The Philips Way |
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Healthcare
Our focus
is on the people at the center of healthcare the patient and the care provider. Based on
both user insights and clinical excellence, our innovative solutions simplify and improve care, and
empower people to manage their own health.
Whether in the hospital or the home, we seek to improve patient outcomes throughout the entire care
cycle from prevention and screening to diagnosis, treatment, monitoring and management.
Patient comfort
The Philips Panorama HFO magnetic resonance system provides high-quality
performance in a truly open configuration, allowing three times more patient space than cylindrical
high-field systems. This creates a more acceptable imaging environment for claustrophobic or
anxious patients.
For demanding caseloads
Philips
X-ray angiography systems - such as the Allura Xper range deliver flexibility and workflow
control, while ensuring exceptional image quality and superb dose management. Designed for cardiac,
vascular and neuro interventions, these systems help increase clinical efficiency.
Get closer
The Philips BrightView SPECT system offers exceptional image quality in a fast, easy-to-use
package. Its BodyGuard feature automatically contours to the patient, using a customizable scan
distance preset by the operator.
Anytime, anywhere
Philips iSite PACS is an enterprise-wide medical image and information management system. From an
easy-to-use interface to having all images archived online and available at the click of a mouse,
iSite PACS delivers the power of radiology to the point of patient care.
24 Philips Annual Report 2007
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98 Risk management
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112 Our leadership
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116 Report of the Supervisory Board
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126 Financial Statements |
Addressing daily challenges
With its image quality, ease of
use, automated quantification and
workflow solutions, the Philips iU22
intelligent ultrasound system gives clinicians tools that increase confidence in diagnoses
and improve throughput.
Quality gains
The Philips Gemini PET/CT scanner with TruFlight technology delivers 20% better spatial and
contrast resolution, providing faster, more sensitive scanning than conventional PET. This
facilitates earlier disease detection, regardless of patient size.
Delivering clear information
The Philips IntelliVue family of patient monitors gives care teams throughout the hospital more of
the information they need right at the patients side. All share a common user interface and
Philips innovative portal technology.
Superior imaging
Philips Brilliance CT systems provide the clinical advantages needed to attract referrals and the
productivity advantages needed to keep them. Their appeal is powered not only by technological
innovations for superior speed, accuracy and reliability, but also by advances in user interaction.
Care in the home
Philips Remote Patient Management has a comprehensive offering of telehealth products and services
for monitoring of chronically ill patients after they have been discharged from hospital.
People-focused healthcare
Philips Ambient Experience integrates design and enabling technology to provide each patient with a
personalized experience that eases anxiety, thereby facilitating procedures and increasing
operational effectiveness.
Philips Annual Report 2007 25
I can create different moods now
Philips and lighting
My shop is constantly changing in terms
of merchandise, theme, floor layout,
etc. And my customers motivation or
mood for shopping can be different at
different times. Now, I can tailor
the ambience to my clientele at the
touch of a button, or adapt the
lighting to events such as a summer
sale or the launch of a new
collection.
Philips AmbiScene is a flexible lighting
concept designed to help retailers create
inspiring and meaningful shopping
experiences. It can change the lighting in
every conceivable way (e.g. color, tones of
white, intensity), addressing different
shopping moods and supporting retail
communication strategies. AmbiScene comprises
a broad portfolio of luminaires and controls,
including solid-state lighting, allowing
dynamic lighting and special effects.
Philips Annual Report 2007 27
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8
Financial
highlights
|
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10 Message from the
President
|
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16
The Philips
Group
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62
The Philips Sectors |
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The Philips Way
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Lighting
Lighting has a major impact on our well-being, moods and emotions. It inspires, attracts,
communicates, sets the scene and enhances our experience of architectural spaces.
Combining our understanding of peoples needs, desires and aspirations with our technological
leadership, we are able to deliver the advanced, energy-efficient products and systems that will
help us create a sustainable future.
Safer driving
A study by
the independent safety research organization TÜV Rheinland showed that if all vehicles
on German roads were equipped with Xenon car lights, 18% of all fatalities could be avoided, saving
1,200 lives annually.
Enjoy your stay!
Philips MASTERCIassic
is a retrofit halogen
bulb for hospitality
applications, which
cuts energy
consumption by 50%,
lasts three times
longer than an
incandescent bulb and
provides outstanding
sparkling white light.
Living streets
Philips CosmoPolis delivers a very high-quality white light and uses 50% less energy than the
mercury-vapor street-lighting systems still in use all over the world, saving more than 100 kg of
CO2 per year per lamp.
Simply irresistible
Philips MASTERColour COM Elites crisp white light, high output and superior color rendering adds
sparkle to retail environments, displaying merchandise to best effect and attracting consumers.
28 Philips Annual Report 2007
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98 Risk management
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112 Our leadership
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116 Report of the Supervisory Board
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126 Financial Statements |
Cities for people
Offering
unprecedented design
freedom in terms of
color, dynamics,
miniaturization and
energy efficiency,
solid-state lighting
is bringing towns and
cities to life in
ways we could
previously only dream
of.
The thrill of the action
Philips ArenaVision was
the worlds first
sports-lighting system
specifically designed
to increase
dramatically the
theatrical and
emotional value of
sports for TV
audiences, spectators
and players alike.
Home comforts
Philips Mini Softone is the first range of energy-saving lamps with the size, shape, warm light
quality and output required for decorative lighting fixtures in the home.
Smart energy saving
Philips ActiLume is an intelligent lighting control for offices. It detects when people are present
and switches the lights on or off accordingly. It also dims the lights when there is sufficient
incident daylight. In this way, energy savings of up to 75% can be realized.
Philips Annual Report 2007 29
We feel healthier now
Philips and lifestyle
As a parent, I want to know that my
children are getting all the
goodness they need. Now, I can
easily add essential minerals and
vitamins to our daily diet.
Juicing cleanses, flushes, alkalizes and
revitalizes the body. With its extra-large
feeding tube and powerful motor, the Philips
Juicer can turn any fruit or vegetable
chopped or whole into juice instantly.
Philips Annual Report 2007 31
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8 Financial highlights
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10 Message from the President
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16 The Philips Group
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62 The Philips sectors |
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The Philips Way |
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Consumer Lifestyle
Todays empowered consumers are characterized by a desire for both wellness and pleasure.
They want to enjoy a healthy life balance to look and feel good, and to benefit emotionally from
rich, pleasurable technology experiences, both at home and on the move.
Through the application of design and deep consumer insight, we develop meaningful and innovative
solutions that fulfill peoples lifestyle needs and desires.
Total immersion
Philips Ambilight FlatTVs project a soft glow of light onto the walls around the TV set which
automatically changes to match the colors and brightness of the picture, creating an immersive
entertainment experience.
Safe to drink
The Philips Intelligent Water Purifier uses advanced UV technology and activated carbon to purify
water, freeing consumers from the threat of water-borne diseases.
Entertainment on the go
Philips GoGear players can store thousands of MP3 music files, WMV videos and JPEG pictures,
making it easy for consumers to enjoy their personal multimedia libraries while on the
move.
One touch
Philips one-touch Espresso machine allows you to make a variety of coffee drinks at the push of a
button.
Convenient communication
VoIP telephony has enabled millions of people to stay in touch via
the Internet. Philips flagship DECT phone, the VOIP841, uniquely allows Skype calls from anywhere
in the house without the need for a computer.
32 Philips Annual Report 2007
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98 Risk management
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112 Our leadership
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116 Report of the Supervisory Board
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126 Financial Statements |
Realistic gaming
Philips amBX technology extends games beyond the screen, adding sensory experiences to gameplay
through the use of light, color, sound, vibration and even air flow.
Fresh and confident
Philips Sonicare power toothbrushes with patented sonic technology and innovative brush-head
design guarantee improved oral health and naturally whiter.
Music everywhere
Philips Streamium wireless music systems allow consumers to store their entire CD collections, and
then stream that music throughout the home via WiFi.
A chore made easy
The Philips Wardrobe Care solution helps consumers keep their clothes looking like new with minimum
effort.
Feels good
The Philips Moisturizing shaving system with integrated Nivea for Men shaving conditioner delivers
an extra-comfortable shave that also conditions your skin.
Rest easy
Philips Avent DECT baby monitors are completely interference-free, offering excellent sound quality
and total peace of mind.
Philips Annual Report 2007 33
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8 Financial highlights
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10 Message from the President
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16 The Philips Group
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62 The Philips sectors |
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Management discussion and
analysis |
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Management discussion and analysis
Please refer to page 6 for more information about forward-looking
statements, third-party market share data, fair value information,
US GAAP basis of preparation, use of non-US GAAP information,
statutory financial statements and management report, and
reclassifications.
The analysis of the 2006 financial results
compared to 2005, 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
2007, which is filed electronically with the US Securities and
Exchange Commission.
In 2007 we continued on the growth path we
have been following in recent years redirecting resources to high-growth
opportunities, making acquisitions, growing
in emerging markets, leveraging our brand,
and innovating and marketing for further
organic growth.
34 Philips Annual Report 2007
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98 Risk management
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112 Our leadership
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116 Report of the Supervisory Board
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126 Financial Statements |
Management summary
The year 2007
|
|
2007 was a successful year for Philips. We delivered
on our growth target, realizing 5% comparable sales
growth, and exceeded our profit target with EBITA
of 7.7%. Our strong innovation pipeline and balanced
portfolio proved their robustness in a weakening
economic environment. |
|
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In 2007 we accelerated the transformation of Philips
into a market-focused, people-centric company capable
of delivering sustained profits. |
|
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We invested a total of EUR 1.5 billion in acquiring
high-growth, high-margin businesses to strengthen our
leadership position in promising markets and to gain
access to new markets. |
|
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At the end of the year, we announced the two
largest acquisitions in recent company history,
Genlyte and Respironics. The integration of these
highly profitable companies is in line with our
Vision 2010 strategy. |
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|
In 2007 we further reduced our shareholdings in LG.
Philips LCD and TSMC to 19.9% and 5.0% respectively,
generating cash inflows of EUR 5.4 billion and a gain
of over EUR 3 billion. |
|
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|
We bought back shares for EUR 1.6 billion and returned
EUR 0.6 billion cash to our shareholders via the annual
dividend payment. |
|
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At the end of 2007 we announced a further
EUR 5 billion share buy-back program, which we
intend to largely complete by the end of 2008. In
addition, we are proposing a dividend of EUR 0.70
per share in 2008, a 17% increase compared to 2007. |
Key data
in millions of euros unless otherwise stated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20051) |
|
20061) |
|
2007 |
Sales |
|
|
25,445 |
|
|
|
26,682 |
|
|
|
26,793 |
|
EBITA |
|
|
1,652 |
|
|
|
1,386 |
|
|
|
2,065 |
|
as a % of sales |
|
|
6.5 |
|
|
|
5.2 |
|
|
|
7.7 |
|
EBIT |
|
|
1,558 |
|
|
|
1,201 |
|
|
|
1,852 |
|
as a % of sales |
|
|
6.1 |
|
|
|
4.5 |
|
|
|
6.9 |
|
Financial income and expenses |
|
|
104 |
|
|
|
28 |
|
|
|
2,613 |
|
Income tax expense |
|
|
(526 |
) |
|
|
(167 |
) |
|
|
(622 |
) |
Results of equity-accounted
investees |
|
|
1,754 |
|
|
|
(157 |
) |
|
|
763 |
|
Minority interests |
|
|
(11 |
) |
|
|
(4 |
) |
|
|
(5 |
) |
Income from continuing operations |
|
|
2,879 |
|
|
|
901 |
|
|
|
4,601 |
|
Income (loss) from discontinued
operations |
|
|
(11 |
) |
|
|
4,482 |
|
|
|
(433 |
) |
Net income |
|
|
2,868 |
|
|
|
5,383 |
|
|
|
4,168 |
|
Per common share (in euro) basic |
|
|
2.29 |
|
|
|
4.58 |
|
|
|
3.84 |
|
Per common share (in euro) diluted |
|
|
2.29 |
|
|
|
4.55 |
|
|
|
3.80 |
|
|
Net operating capital (NOC) |
|
|
5,439 |
|
|
|
8,518 |
|
|
|
10,586 |
|
Cash flows before financing activities |
|
|
2,841 |
|
|
|
(2,472 |
) |
|
|
5,449 |
|
Employees (FTEs) |
|
|
159,226 |
|
|
|
121,732 |
|
|
|
123,801 |
|
of which discontinued operations |
|
|
44,174 |
|
|
|
6,640 |
|
|
|
5,703 |
|
|
|
|
1) |
|
Restated to present the MedQuist business as a discontinued operation |
In 2007 the Philips Group achieved comparable sales growth of 5%. However, because of a 3%
negative currency effect and the impact of acquisitions and divestments, nominal sales
remained stable compared to 2006.
|
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Philips Annual Report 2007
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35 |
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8 Financial highlights
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10 Message from the President
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16 The Philips Group
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62 The Philips sectors |
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Management discussion
and analysis |
|
|
Comparable sales growth was realized by all divisions, with DAP (15%) and Lighting (6%)
delivering particularly strong growth. Comparable sales growth at CE was limited to 1%, mainly due
to market share losses in Connected Displays in the first half of 2007, especially in the US. At
Medical Systems, comparable sales increased by 4%, despite a softening of the imaging market in the
US, due in part to the impact of the Deficit Reduction Act, and in Japan.
Sales growth was particularly strong in emerging markets, which will continue to be increasingly
important to Philips. Emerging markets, most notably China, Russia and India, contributed 60% to
our comparable sales increase in value, while accounting for 30% of total revenues.
EBIT amounted to EUR 1,852 million, compared to EUR 1,201 million in 2006.
The Groups EBITA improved by EUR 679 million and amounted to EUR 2,065 million, or 7.7% of sales,
the highest margin in recent years, up from 5.2% in 2006. The higher results were primarily driven
by DAP and Lighting, which achieved EBITA margins of 17.6% and 11.9% respectively. Additionally,
the EUR 146 million cost reduction in the Group Management & Services sector contributed
significantly to the earnings improvement. The increase in EBITA was also attributable to a EUR 256
million product liability charge in 2006.
Income from continuing operations amounted to EUR 4,601 million, an increase of EUR 3,700 million
compared to 2006. The improvement was driven by EUR 651 million higher operational earnings and EUR
2,585 million increased financial income, primarily due to the sale of shares in TSMC. Income tax
charges were EUR 455 million higher, at an effective tax rate of 13.9% in 2007 compared to 13.6% in
2006. Results of equity-accounted investees improved by EUR 920 million, including a EUR 508
million non-taxable gain from the sale of shares of LG.Philips LCD and a EUR 456 million
improvement in that companys operational results.
Income from discontinued operations showed a loss of EUR 433 million, mainly due to
MedQuist-related impairment charges, taking into account cumulative foreign currency translation
differences. In 2006, income from discontinued operations included a total gain of EUR 4,283
million from the sale of Philips majority stake in Semiconductors.
Net income for the Group resulted in a profit of EUR 4,168 million, or EUR 3.84 per share.
Cash flows before financing activities increased by EUR 7.9 billion, largely due to increased cash
flows from operating activities, higher inflows from the sale of stakes in TSMC and LG.Philips LCD,
and lower cash outflows for acquisitions.
Performance of the Group
Sales
In percentage terms, the composition of sales growth in 2007, compared to 2006, was as follows:
Sales growth composition 2007 versus 2006 1)
in%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
com- |
|
|
|
|
|
consoli- |
|
|
|
|
parable |
|
currency |
|
dation |
|
nominal |
|
|
growth |
|
effects |
|
changes |
|
growth |
Medical Systems |
|
|
3.6 |
|
|
|
(5.2 |
) |
|
|
1.9 |
|
|
|
0.3 |
|
DAP |
|
|
15.4 |
|
|
|
(3.1 |
) |
|
|
4.9 |
|
|
|
17.2 |
|
Consumer Electronics |
|
|
1.0 |
|
|
|
(2.2 |
) |
|
|
(0.8 |
) |
|
|
(2.0 |
) |
Lighting |
|
|
6.0 |
|
|
|
(3.1 |
) |
|
|
8.6 |
|
|
|
11.5 |
|
I&EB |
|
|
32.2 |
|
|
|
(4.5 |
) |
|
|
(80.6 |
) |
|
|
(52.9 |
) |
CMS |
|
|
30.8 |
|
|
|
(2.3 |
) |
|
|
(10.5 |
) |
|
|
18.0 |
|
Philips Group |
|
|
4.9 |
|
|
|
(3.3 |
) |
|
|
(1.2 |
) |
|
|
0.4 |
|
|
|
|
1) |
|
Restated to present the MedQuist business as a discontinued operation |
Group sales grew by 5% on a comparable basis to EUR 26,793 million in 2007. However, because of a
3% negative currency effect and a negative net impact of acquisitions and divestments, mainly due
to the divestment of Optical Storage and Mobile Phones, nominal sales remained stable
year-over-year.
The comparable sales growth was driven by all market clusters and all product divisions, and was
particularly strong at DAP (15.4%) and Lighting (6.0%).
The robust sales increase at DAP was driven by double-digit sales growth in all businesses, most
notably Domestic Appliances, and was visible throughout all market clusters, with especially strong
growth rates in emerging markets. The increase in Lighting sales was mainly attributable to solid
growth in energy-efficient lighting within the Lamps and Luminaires businesses.
|
|
|
36
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|
Philips Annual Report 2007 |
|
|
|
|
|
|
|
98 Risk management
|
|
112 Our leadership
|
|
116 Report of the Supervisory Board
|
|
126 Financial Statements |
Medical Systems growth (3.6%) was led by Ultrasound & Monitoring and Customer Services.
Overall sales growth was tempered by a decline at Imaging Systems, primarily due to a softening of
the market in the US (including the effect of the Deficit Reduction Act) and Japan. At CE, the
sales increase (1.0%) was driven by all businesses, except Connected Displays, which lost market
share in the first half of 2007, and was faced with fierce competition and price pressure in the
Flat TV segment, particularly in the US.
Earnings
In 2007, Philips gross margin of EUR 9,169 million, or 34.2% of sales, represented an improvement
of EUR 919 million compared to 2006 (EUR 8,250 million, or 30.9%). Adjusted for the product
liability charge in 2006 (EUR 256 million), gross margin improved from 31.9% of sales to 34.2%.
This improvement was primarily driven by higher gross margins at Medical Systems and Lighting.
Selling expenses increased from EUR 4,655 million in 2006 to EUR 4,980 million in 2007, largely due
to higher expenditures at Lighting and DAP, both partly related to acquisitions and higher sales.
As a percentage of sales, selling expenses increased from 17.4% in 2006 to 18.6% in 2007, mainly
attributable to Lighting (mostly due to acquisitions) and Medical Systems.
Research and development costs (EUR 1,629 million, or 6.1% of sales) declined slightly compared to
2006 (EUR 1,659 million, or 6.2% of sales), as lower expenditures at CE, mainly related to the
divestment of Mobile Phones, offset increased investments in Medical Systems, Lighting, DAP and
Innovation & Emerging Businesses.
General and administrative expenses (EUR 854 million) declined by 12% compared to 2006 (EUR 969
million), largely as a result of lower pension costs and reduced overhead costs in corporate and
regional organizations, following the simplification of the regional management structure. As a
percentage of sales, G&A costs declined from 3.6% in 2006 to 3.2% in 2007.
The following overview shows sales, EBIT and EBITA
according to the 2007 sector classification.
Philips Satinelle Ice is gentle for delicate skin and sensitive body areas thanks to a
hypoallergenic ceramic epilating system and a detachable ice cooler.
Sales, EBIT and EBITA 2007
in millions of euros unless otherwise stated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
sales |
|
EBIT |
|
% |
|
EBITA |
|
% |
Medical Systems |
|
|
6,470 |
|
|
|
743 |
|
|
|
11.5 |
|
|
|
875 |
|
|
|
13.5 |
|
DAP |
|
|
2,968 |
|
|
|
510 |
|
|
|
17.2 |
|
|
|
523 |
|
|
|
17.6 |
|
Consumer Electronics |
|
|
10,362 |
|
|
|
322 |
|
|
|
3.1 |
|
|
|
325 |
|
|
|
3.1 |
|
Lighting |
|
|
6,093 |
|
|
|
675 |
|
|
|
11.1 |
|
|
|
722 |
|
|
|
11.9 |
|
I&EB |
|
|
703 |
|
|
|
(101 |
) |
|
|
(14.4 |
) |
|
|
(83 |
) |
|
|
(11.8 |
) |
GMS |
|
|
197 |
|
|
|
(297 |
) |
|
|
|
|
|
|
(297 |
) |
|
|
|
|
Philips Group |
|
|
26,793 |
|
|
|
1,852 |
|
|
|
6.9 |
|
|
|
2,065 |
|
|
|
7.7 |
|
Sales, EBIT and EBITA 20061)
in millions of euros unless otherwise stated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
sales |
|
EBIT |
|
% |
|
EBITA |
|
% |
Medical Systems |
|
|
6,448 |
|
|
|
734 |
|
|
|
11.4 |
|
|
|
861 |
|
|
|
13.4 |
|
DAP |
|
|
2,532 |
|
|
|
370 |
|
|
|
14.6 |
|
|
|
378 |
|
|
|
14.9 |
|
Consumer Electronics |
|
|
10,576 |
|
|
|
313 |
|
|
|
3.0 |
|
|
|
314 |
|
|
|
3.0 |
|
Lighting |
|
|
5,466 |
|
|
|
577 |
|
|
|
10.6 |
|
|
|
608 |
|
|
|
11.1 |
|
I&EB |
|
|
1,493 |
|
|
|
(94 |
) |
|
|
(6.3 |
) |
|
|
(76 |
) |
|
|
(5.1 |
) |
GMS |
|
|
167 |
|
|
|
(699 |
) |
|
|
|
|
|
|
(699 |
) |
|
|
|
|
Philips Group |
|
|
26,682 |
|
|
|
1,201 |
|
|
|
4.5 |
|
|
|
1,386 |
|
|
|
5.2 |
|
|
|
|
1) |
|
Restated to present the MedQuist business as a discontinued operation |
|
|
|
|
|
|
|
|
|
Philips Annual Report 2007
|
|
|
37 |
|
|
|
|
|
|
|
|
8 Financial highlights
|
|
10 Message from the President
|
|
16 The Philips Group
Management discussion
and analysis
|
|
62 The Philips sectors |
Philips, together with the Dutch oil company NAM, has developed a new type of
lighting for offshore oil platforms, designed to reduce the number of birds being
attracted and interrupting their migration across the North Sea (often with fatal
consequences).
In 2007, EBIT increased by EUR 651 million compared to 2006, to EUR 1,852 million or 6.9%
of sales. Excluding the EUR 256 million product liability charge which was recognized in
2006, EBIT profitability improved by 1.4% in relation to sales, driven by the improved
performance of DAP, Lighting and Group Management & Services.
Total EBITA for the Group increased from EUR 1,386 million, or 5.2% of sales, in 2006 to
EUR 2,065 million, or 7.7% of sales, in 2007, exceeding the Groups profitability target of
7.5%.
The main drivers of the year-on-year EBITA improvement were the strong, mainly sales-driven
performance at DAP (EUR 145 million) and higher earnings at Lighting (EUR 114 million), as
a result of higher sales across almost all businesses and a lower loss in the
fluorescent-based LCD Backlighting business. Excluding the EUR 256 million negative impact
of product liability charges in 2006, Group Management & Services result improved by EUR
146 million due to reduced corporate and regional costs as well as lower pension and brand
campaign costs.
Medical Systems EBITA of EUR 875 million represented a slight increase compared to 2006,
both in absolute value and as a percentage of sales (13.5%).
Higher earnings at Customer Services, Ultrasound & Monitoring and Healthcare Informatics were
partly offset by lower earning at Imaging Systems, largely as a consequence of lower sales.
However, the division fell short of its 2007 target of 14-15% EBITA profitability, almost entirely
due to the challenging nature of the imaging market in 2007, especially in the US, which was
affected by the Deficit Reduction Act. The 2007 EBITA included EUR 8 million acquisition-related
charges for Intermagnetics, whereas EUR 78 million post-merger integration costs and
purchase-accounting charges related to the acquisitions of Witt Biomedical and Intermagnetics were
included in 2006.
Exceeding the targeted 15% EBITA profitability, DAPs EBITA increase of EUR 145 million compared to
2006 was primarily driven by strong sales growth, supported by the full-year contribution of Avent,
and rapid expansion in emerging markets with stable margins. In addition, effective cost management
supported the EBITA profitability increase of 2.7% of sales compared to 2006. All DAP businesses
supported the overall year-on-year improvement, both in nominal terms and as a percentage of sales.
CEs EBITA reached EUR 325 million, or 3.1% of sales, compared to 3.0% in 2006, in line with the
target set for the division. A sales decline and high margin pressure at Connected Displays,
particularly in North America, were more than offset by higher EBITA in the other businesses, most
notably Peripherals & Accessories and Entertainment Solutions.
Lightings EBITA improved to EUR 722 million, or 11.9% of sales, mainly due to higher earnings in
Lamps, Lumileds, Luminaires and additional EBITA from the acquisition of Partners in Lighting
International (PLI). The exit from the loss-making fluorescent lamp-based LCD backlighting business
at the beginning of 2007 also added to the EBITA improvement.
The EBITA loss at Innovation & Emerging Businesses amounted to EUR 83 million, compared to a loss
of EUR 76 million in 2006. EBITA in 2006 included an aggregated gain of EUR 76 million on the
divestment of several businesses within Corporate Investments and Corporate Technologies. In 2007,
EBITA improved due to EUR 44 million higher license income.
38 Philips Annual Report 2007
|
|
|
|
|
|
|
98 Risk management
|
|
112 Our leadership
|
|
116 Report of the Supervisory Board
|
|
126 Financial Statements |
EBITA at Group Management & Services improved by EUR 402 million compared to 2006, when the
EUR 256 million product liability charge was recognized. The improvement in EBITA was also driven
by a EUR 146 million reduction in Corporate, Country & Regional overheads, lower pension costs and
reduced investments in the brand campaign.
Pensions
In 2007, net periodic pension costs of defined-benefit pension plans amounted to EUR 27 million,
compared to EUR 75 million in 2006, mainly due to an increase in plan assets in 2006. The payments
to defined-contribution pension plans amounted to EUR 84 million, EUR 4 million higher than in
2006, largely due to acquisitions.
The accounting rule for pensions and other postretirement benefits (SFAS No. 158) requires
Philips to recognize the funded status of pensions and other postretirement benefit plans on the
balance sheet. As a consequence, new actuarial gains and losses and unrecognized prior service cost
resulting from plan amendments will directly affect stockholders equity through changes in other
comprehensive income. The amortization of such costs is removed from equity in the period that they
are included in the net periodic pension costs. The effect of SFAS 158 on stockholders equity
resulted in an increase in other comprehensive income of EUR 218 million in 2007, compared to a net
reduction of equity of EUR 477 million in 2006.
Restructuring charges
In 2007, EBIT included a net charge of EUR 37 million for restructuring.
Restructuring charges
in millions of euros
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
1) |
|
|
20061 |
1) |
|
|
2007 |
|
Restructuring: |
|
|
|
|
|
|
|
|
|
|
|
|
Medical Systems |
|
|
2 |
|
|
|
14 |
|
|
|
1 |
|
DAP |
|
|
4 |
|
|
|
13 |
|
|
|
1 |
|
Consumer Electronics |
|
|
67 |
|
|
|
12 |
|
|
|
7 |
|
Lighting |
|
|
35 |
|
|
|
48 |
|
|
|
28 |
|
I&EB |
|
|
26 |
|
|
|
|
|
|
|
1 |
|
GMS |
|
|
|
|
|
|
|
|
|
|
4 |
|
Reduction of excess provisions |
|
|
(8 |
) |
|
|
(5 |
) |
|
|
(5 |
) |
|
|
|
126 |
|
|
|
82 |
|
|
|
37 |
|
|
|
|
1) |
|
Restated to present the MedQuist business as a discontinued operation |
The most significant new restructuring projects in 2007 were related to Lighting and consisted
mainly of the exit from the fluorescent lamp-based LCD backlighting business and several projects
in the Lamps business.
The Companys remaining restructuring in 2007 covered a number of smaller projects.
The most significant restructuring projects in 2006 were Medical Systems transfer of the
production of SPECT cameras from Milpitas to Cleveland, the restructuring of the Klagenfurt site
(Austria), and a reduction of the fixed cost base and the creation of a more diverse and flexible
supply base in DAP. Other projects included the reallocation of parts of the Lighting activities in
Weert (Netherlands) to low-cost areas, the relocation in Mexico of all Juarez Lighting-plant
activities to the Monterrey plant, and Lightings relocation of the standard Lead in Wire business
from Deurne (Netherlands) to Poland.
|
|
|
|
|
|
|
|
|
Philips Annual Report 2007
|
|
|
39 |
|
|
|
|
|
|
|
|
8 Financial highlights
|
|
10 Message from the President
|
|
16 The Philips Group
Management discussion
and analysis
|
|
62 The Philips sectors |
Financial income and expenses
A breakdown of the financial income and expenses is shown in the table below.
Financial income and expenses
in millions of euros
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20051) |
|
|
|
20061) |
|
|
|
2007 |
|
Interest expense (net) |
|
|
(202 |
) |
|
|
(189 |
) |
|
|
(43 |
) |
Sale of securities |
|
|
233 |
|
|
|
|
|
|
|
2,549 |
|
Other |
|
|
73 |
|
|
|
217 |
|
|
|
107 |
|
|
|
|
104 |
|
|
|
28 |
|
|
|
2,613 |
|
|
|
|
1) |
|
Restated to present the MedQuist business as a discontinued operation |
The net interest expense in 2007 was EUR 146 million lower than in 2006, mainly as a result of the
higher average cash position of the Group and higher average interest rates applied to those
deposits. Additionally, interest expense decreased mainly as a result of a reduction in average
debt during 2007 compared to 2006.
Sale of securities
in millions of euros
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2006 |
|
2007 |
|
Gain on sale of Atos Origin shares |
|
|
185 |
|
|
|
|
|
|
|
|
|
Gain on sale of Great Nordic shares |
|
|
48 |
|
|
|
|
|
|
|
|
|
Gain on sale TSMC shares |
|
|
|
|
|
|
|
|
|
|
2,528 |
|
Loss on sale of JDS Uniphase |
|
|
|
|
|
|
|
|
|
|
(10 |
) |
Gain on sale of Nuance |
|
|
|
|
|
|
|
|
|
|
31 |
|
|
|
|
233 |
|
|
|
|
|
|
|
2,549 |
|
In 2007, a total gain of EUR 2,549 million was recognized on the sale of shares in TSMC, Nuance
and JDS Uniphase, whereas during 2006 there were no sales of securities.
Other financial income of EUR 107 million in 2007 included a cash dividend of EUR 128 million from
TSMC and a EUR 12 million gain related to the revaluation of the convertible bond received from
TPV Technology. This was partly offset by a EUR 36 million impairment of JDS Uniphase prior to the
sale.
In 2006, other financial income of EUR 217 million included a cash dividend of EUR 223 million
from TSMC, a gain of EUR 97 million upon the designation of the TSMC stock dividend as trading
securities, and a gain of EUR 29 million as a result of an increase in the fair value of these
trading securities.
This was partly offset by losses of EUR 77 million resulting from an impairment of the
available-for-sale holding in TPO Display and of EUR 61 million due to a decline in the fair value
of the share option within a convertible bond received from TPV Technology.
Income
taxes
Income taxes amounted to EUR 622 million, compared to EUR 167 million in 2006. The tax burden in
2007 corresponded to an effective tax rate of 13.9% on pre-tax income, compared to 13.6% in 2006.
The effective tax rate in 2007 was affected by tax-exempt items such as the non-taxable gain on the
sale of shares in TSMC. Non-taxable items in 2006 were the TSMC dividend, as well as the gains and
losses resulting from changes in the fair value of TSMC stock and the TPV convertible bond. Income
taxes in 2006 were also positively affected by a reduction in the Dutch corporate tax rate and
gains resulting from final agreements on prior-year taxes in various jurisdictions.
For 2008, the effective tax rate excluding non-taxable items is expected to be around 30%, broadly
in line with 2007.
For further information, please refer to note 6 of
the notes to the Group financial statements.
Results of equity-accounted investees
The results relating to equity-accounted investees increased by EUR 920 million compared to
2006 and resulted in income of EUR 763 million in 2007, a breakdown of which is given in the
table below.
Results of equity-accounted investees
in millions of euros
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20051) |
|
|
|
20061) |
|
|
|
2007 |
|
Companys participation in income
(loss) |
|
|
513 |
|
|
|
(180 |
) |
|
|
271 |
|
Results on sale of shares |
|
|
1,545 |
|
|
|
79 |
|
|
|
514 |
|
Gains arising from dilution effects |
|
|
165 |
|
|
|
14 |
|
|
|
|
|
Investment impairment and guarantee charges |
|
|
(469 |
) |
|
|
(70 |
) |
|
|
(22 |
) |
|
|
|
1,754 |
|
|
|
(157 |
) |
|
|
763 |
|
|
|
|
1) |
|
Restated to present the MedQuist business as a discontinued operation |
|
|
|
40
|
|
Philips Annual Report 2007 |
|
|
|
|
|
|
|
98 Risk management
|
|
112 Our leadership
|
|
116 Report of the Supervisory Board
|
|
126 Financial Statements |
The Companys participation in the net income of equity-accounted investees increased from a
loss of EUR 180 million in 2006 to a profit of EUR 271 million in 2007, mainly due to higher
earnings at LG.Philips LCD. Philips share in LG.Philips LCDs operational result in 2007 improved
by EUR 456 million compared to 2006, resulting in a profit of EUR 260 million, compared to a loss
of EUR 196 million in 2006.
Earnings from the sale of shares mainly consisted of the EUR 508 million non-taxable gain on the
sale of a 13% stake in LG.Philips LCD, reducing Philips shareholding from 32.9% to 19.9%. In 2006,
a EUR 76 million non-taxable gain was recognized on the sale of the remaining 8.4 million shares of
common stock in FEI, which reduced Philips shareholding from 24.8% to zero.
In 2006, gains and losses arising from dilution effects were mainly due to a EUR 14 million
dilution gain recorded for TPV.
In 2006, investment impairment and guarantee charges primarily related to a EUR 61 million loss
which was recognized as a result of agreements made with LG.Philips Displays for voluntary payments
(social contributions and environmental clean-up), mainly in France, Germany, the Netherlands and
the UK.
Minority
interests
The share of minority interests in the income of Group companies reduced income by EUR 5 million,
compared to EUR 4 million in 2006.
Discontinued
operations
In this Annual Report, Philips reports the results of Mobile Display Systems, Semiconductors and
MedQuist separately as discontinued operations. Consequently, the related results, including
transaction gains and losses, are shown separately in the financial statements under discontinued
operations.
The loss from discontinued operations of EUR 433 million in 2007 was primarily attributable to a
EUR 360 million impairment charge for MedQuist, taking into account EUR 325 million cumulative
foreign currency translation differences, which had previously been accumulated under equity since
the date of the acquisition in 2000. In addition, a EUR 43 million loss related to the 2006 sale of
a majority stake in the Semiconductors division was recognized, mainly due to pension settlements.
In 2007, Philips and the German Heart Institute in Berlin (DHZB) opened the first fully integrated
Philips Electrophysiology Lab. By creating a more intuitive working environment and integrating
data management, workflow efficiency is greatly improved. Being able to determine the ambient
environment of the lab puts patients at ease. The result better clinical focus and a friendlier
environment for patients.
In 2006, the Company sold a majority stake in its Semiconductors division to a private equity
consortium. The transaction consisted of the sale of the division for a total consideration of EUR
7,913 million and the simultaneous acquisition of a minority interest in the recapitalized
organization at a cost of EUR 854 million. A net gain of EUR 4,283 million was recorded on the
sale.
The 2006 results of discontinued operations also included a EUR 29 million gain on the sale of
Mobile Display Systems to TPO.
|
|
|
|
|
|
|
|
|
Philips Annual Report 2007
|
|
|
41 |
|
|
|
|
|
|
|
|
8 Financial highlights
|
|
10 Message from the President
|
|
16 The Philips Group
Management discussion
and analysis
|
|
62 The Philips sectors |
The market launch of the first dual-branded products in September made the combined
strengths of Philips and Avent clearly visible to our consumers.
Net income
In 2007, income from continuing operations amounted to EUR 4,601 million, an increase of EUR 3,700
million compared with 2006. The improvement was driven by EUR 651 million higher EBIT and a EUR
2,585 million increase in financial income, primarily due to the sale of shares in TSMC.The EUR 455
million higher income tax charges were more than offset by a EUR 920 million increase in results
relating to equity-accounted investees, which included a EUR 508 million gain on the sale of shares
of LG.Philips LCD as well as a EUR 456 million increase in that companys operational results.
The loss from discontinued operations amounted to EUR 433 million, mainly due to the aforementioned
MedQuist-related losses, whereas 2006 included a total gain of EUR 4,283 million from the sale of a
majority stake in the Semiconductors division.
Net income for the Group showed a profit of EUR 4,168 million, or EUR 3.84 per common share,
compared to EUR 5,383 million, or EUR 4.58 per common share, in 2006.
Performance by market cluster
Philips monitors its performance on a geographical axis based on the following market clusters:
|
|
key emerging markets, including China, India and Latin
America |
|
|
|
other emerging markets, including emerging markets
in Central and Eastern Europe, Russia, Ukraine and
Central Asia, the Middle East and Africa, Turkey and
the ASEAN zone |
|
|
|
mature markets, including Western Europe, North
America, Japan, Korea, Australia and New Zealand. |
In 2007, sales growth was particularly strong in emerging markets, which will continue to be a
focal area of growth for Philips. Emerging markets, most notably China, Russia and India,
contributed 60% to our comparable sales increase in value, while accounting for approximately one
third of total revenues.
Key emerging markets showed strong comparable growth, primarily driven by Lighting, Medical
Systems and DAP, partly offset by a sales decline at CE, mainly due to Connected Displays in
Latin America.
Other emerging markets delivered strong double-digit sales growth compared to 2006, driven by the
outstanding performance of DAP and CE as well as robust expansion of Lighting and Medical Systems
in these countries.
Sales in Western Europe showed a solid increase on a comparable basis, visible in all sectors,
most notably the double-digit increase at DAP, followed by good performances by CE, Lighting and
Medical Systems.
|
|
|
42
|
|
Philips Annual Report 2007 |
|
|
|
|
|
|
|
98 Risk management
|
|
112 Our leadership
|
|
116 Report of the Supervisory Board
|
|
126 Financial Statements |
In North America, sales on a comparable basis remained stable compared to 2006. A strong
performance by DAP, driven by the successful introduction of new shaving and oral healthcare
products, and moderate growth at Medical Systems, despite a decline at Imaging Systems, were
largely offset by lower comparable sales at CE, predominantly attributable to strong competition
and price pressure in Flat TV.
EBITA in
mature markets in Europe increased by EUR 328 million, driven by
DAP, CE and
Lighting. The EBITA improvement in North America was largely due to the EUR 256 million product
liability charge in 2006. Key emerging markets generated EBITA of EUR 209 million, a EUR 84 million
improvement compared to 2006, mainly driven by significantly higher EBITA at DAP and Lighting.
EBITA declined in other emerging markets, largely due to CE.
EBITA per market cluster
in millions of euros
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
1) |
|
|
2006 |
1) |
|
|
2007 |
|
Western Europe |
|
|
1,036 |
|
|
|
953 |
|
|
|
1,281 |
|
North America |
|
|
296 |
|
|
|
23 |
|
|
|
315 |
|
Other mature markets |
|
|
37 |
|
|
|
32 |
|
|
|
41 |
|
Total mature markets |
|
|
1,369 |
|
|
|
1,008 |
|
|
|
1,637 |
|
Key emerging markets |
|
|
79 |
|
|
|
125 |
|
|
|
209 |
|
Other emerging markets |
|
|
204 |
|
|
|
253 |
|
|
|
219 |
|
|
|
|
1,652 |
|
|
|
1,386 |
|
|
|
2,065 |
|
|
|
|
1) |
|
Restated to present the MedQuist business as a discontinued operation |
EBIT per market cluster
in millions of euros
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
1) |
|
|
2006 |
1) |
|
|
2007 |
|
Western Europe |
|
|
1,034 |
|
|
|
944 |
|
|
|
1,215 |
|
North America |
|
|
206 |
|
|
|
(151 |
) |
|
|
171 |
|
Other mature markets |
|
|
37 |
|
|
|
32 |
|
|
|
41 |
|
Total mature markets |
|
|
1,277 |
|
|
|
825 |
|
|
|
1,427 |
|
Key emerging markets |
|
|
77 |
|
|
|
123 |
|
|
|
206 |
|
Other emerging markets |
|
|
204 |
|
|
|
253 |
|
|
|
219 |
|
|
|
|
1,558 |
|
|
|
1,201 |
|
|
|
1,852 |
|
|
|
|
1) |
|
Restated to present the MedQuist business as a discontinued operation |
Marketing
Philips continues to increase its focus
on insight-driven innovation to fuel
growth. 2007 saw improvements in our
ability to understand user needs and to
translate these insights into compelling
solutions. The increase in quality of
our user insights is evidenced by the
top-tier performance against industry
benchmark of more than half our end-user
insight projects, an improvement of 20%
compared to 2006.
Key products and solutions launched in 2007 such as HeartStart MRx, Arcitec, Aurea and AmbiScene,
are examples of products based on compelling user insights in Medical Systems, DAP, CE and Lighting
respectively. Our progress in insight-driven innovation enables us to develop solutions which are
truly differentiating in the perception of people using them. This puts us in a better position to
maintain premium price levels and therefore to drive sustainable profitable growth.
In 2007, total Philips marketing expenditures amounted to EUR 994 million, or 3.7% of sales,
compared to 3.3 % of sales in 2006. The spend increases in advertising and promotion our largest
spend categories were partly offset by efficiency gains realized in cost of infrastructure. In
addition, we invested more in marketing intelligence to strengthen our understanding of end-user
and customer insights.
|
|
|
|
|
|
|
|
|
Philips Annual Report 2007
|
|
|
43 |
|
|
|
|
|
|
|
|
8 Financial highlights
|
|
10 Message from the President
|
|
16 The Philips Group
Management discussion
and analysis
|
|
62 The Philips sectors |
In 2007, we continued to invest in building the Philips brand, supported by a EUR 111 million
investment in the global brand campaign. These efforts resulted in a substantial year-on-year
increase in our brand value, as reported by Interbrand, rising from USD 6.7 billion in 2006 to USD
7.7 billion in 2007. The Philips brand was ranked the 42nd most valuable global brand in 2007, up
from 48th in 2006, according to Interbrand.
The 2007 development was primarily driven by increased appreciation of our Medical Systems
business, which currently has the highest brand value within the Group. The Interbrand analysis
showed that 35% of sales decisions in the healthcare sector are made based on brand. This
demonstrates the importance of a strong brand for driving sales in the business-to-business as well
as the business-to-consumer environment. The Philips brand is strongly positioned to do so.
Research and development
Strong performance in innovation is critical for Philips to increase its market competitiveness.
Through substantial investments in research & development (R&D), Philips has created a vast
knowledge base. In direct response to the needs of the market, Philips has adopted a more
end-user-oriented approach to innovation in recent years, in order to balance investments between
projects with more apparent short-term commercial prospects and projects creating new options for
medium and long-term value-creation.
Philips R&D activities are shared across Corporate Technologies and the operating divisions.
The Chief Technology Officer (CTO) of Philips manages the enabling technologies across the
Company.
Corporate Technologies, employing 2,800 people, invests in world-class competencies and
technologies that are relevant to the entire Philips Group. In the operating divisions, some 7,800
employees in 26 countries are predominantly engaged in the development of products and
applications.
Technology,
competence and innovation management
The CTO office is focused on technology
management, competence management and innovation effectiveness across Philips. Competence
management in R&D is supported by a company-wide R&D core curriculum. The CTO office also runs the
Innovation Excellence program, a cross-functional drive towards a market-driven alignment of all
Philips-wide innovation processes.
|
|
|
44
|
|
Philips Annual Report 2007 |
|
|
|
|
|
|
|
98 Risk management
|
|
112 Our leadership
|
|
116 Report of the Supervisory Board
|
|
126 Financial Statements |
In 2007, Philips invested EUR 1.6
billion, or 6.1% of sales, in research
and development, slightly less than in
2006. Higher investments in Medical
Systems, Lighting, DAP and Innovation &
Emerging Businesses were more than offset
by lower expenditures in CE, largely due
to the divestment of Mobile Phones.
Research
and development expenditures per sector 2)3)
in millions of euros
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20051) |
|
|
20061) |
|
|
2007 |
|
Medical Systems |
|
|
517 |
|
|
|
566 |
|
|
|
584 |
|
DAP |
|
|
139 |
|
|
|
168 |
|
|
|
171 |
|
Consumer Electronics |
|
|
419 |
|
|
|
385 |
|
|
|
311 |
|
Lighting |
|
|
212 |
|
|
|
269 |
|
|
|
282 |
|
I&EB |
|
|
587 |
|
|
|
577 |
|
|
|
598 |
|
Inter-sector eliminations |
|
|
(281 |
) |
|
|
(306 |
) |
|
|
(317 |
) |
Philips Group |
|
|
1,593 |
|
|
|
1,659 |
|
|
|
1,629 |
|
|
|
|
1) |
|
Restated to present the MedQuist business as a discontinued operation |
|
2) |
|
Includes the write-off of acquired in-process research and development of EUR 13
million in 2007 (2006: EUR 33 million, 2005: EUR 6 million) |
|
3) |
|
Total R&D expenditures include costs related to external contract research,
accounting for 2%, 3% and 5% of the Companys R&D expenditures for the years 2005, 2006 and
2007, respectively. |
Medical Systems increase in R&D investment was primarily related to the acquisition of
Intermagnetics at the end of 2006. DAPs expenditures on research and development were on par with
2006, including investments in the new Arcitec shaver and the FlexCare toothbrush, both launched in
the second half of 2007. CE reduced its R&D expenditures, primarily due to the divestment of the
Mobile Phones business. Lightings research and development costs increased slightly compared to
2006, primarily due to acquisitions. Research and development expenditures at Innovation & Emerging
Businesses increased year-on-year, primarily due to higher R&D investments in the Healthcare and
Lifestyle Incubators within Corporate Technologies.
In 2007, investments in innovative technologies increased, especially in energy-efficient and
solid-state lighting solutions as well as in the areas of healthcare and wellness.
Philips strong innovation pipeline contributed significantly to the Companys sales growth in
2007, as 56% of Group sales came from newly introduced products, mainly driven by above-average
contributions from CE and Medical Systems. Philips aims to maintain its new-product-to-sales ratio
above 50%, while at the same time focusing on the profitability of new products.
At the Izmir Sirinyer Hippodrome in Turkey, a new lighting installation featuring state-of-the-art
Philips ArenaVision
floodlights has been commissioned to allow night-time racing for the very first time.
Philips Annual Report 2007 45
|
|
|
|
|
|
|
8 Financial highlights
|
|
10 Message from the President
|
|
16 The Philips Group
|
|
62 The Philips sectors |
|
|
|
|
|
|
|
|
|
|
|
Management discussion |
|
|
|
|
|
|
and analysis |
|
|
Opening at Schiphol Airport, Amsterdam, in early 2008, the first implementation of
Philips One Star is Bornconcept by hotel chain citizenM has been developed to offer
guestsaffordable luxury. Integrating multiple functionalities, this innovative solution puts the
consumer at the heart of the hotel experience and enables hotel owners to optimize operating costs.
Employment
Employment
in FTEs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
Position at beginning of year |
|
|
161,586 |
|
|
|
159,226 |
|
|
|
121,732 |
|
Consolidation changes: |
|
|
|
|
|
|
|
|
|
|
|
|
- new consolidations |
|
|
1,795 |
|
|
|
4,834 |
|
|
|
6,654 |
|
- deconsolidations |
|
|
(2,552 |
) |
|
|
(44,085 |
) |
|
|
(3,535 |
) |
Comparable change |
|
|
(1,603 |
) |
|
|
1,757 |
|
|
|
(1,050 |
) |
Position at year-end |
|
|
159,226 |
|
|
|
121,732 |
|
|
|
123,801 |
|
of which: |
|
|
|
|
|
|
|
|
|
|
|
|
continuing operations |
|
|
115,052 |
|
|
|
115,092 |
|
|
|
118,098 |
|
discontinued operations |
|
|
44,174 |
|
|
|
6,640 |
|
|
|
5,703 |
|
Excluding discontinued operations (MedQuist in 2007 and Semiconductors in 2006), the total number
of employees of the Philips Group was 118,098 at the end of 2007, compared to 115,092 at the end of
2006. Approximately 46% were employed in the Lighting sector, due to the strong vertical
integration of this business, and about 23% at Medical Systems. The consumer businesses DAP and CE
accounted for 20% of Philips workforce.
The main employee increase in 2007 came from acquisitions made in Lighting (Partners in
Lighting International, Color Kinetics), CE (Digital Lifestyle Outfitters) and in Innovation &
Emerging Businesses (Health Watch and Raytel Cardiac Services).
The largest reductions in 2007 occurred due to the sale of business interests in Innovation &
Emerging Businesses (most notably Optical Storage), in CE (primarily the Mobile Phones business)
and in Group Management & Services (principally the Financial Shared Services operations).
46 Philips Annual Report 2007
|
|
|
|
|
|
|
98 Risk management
|
|
112 Our leadership
|
|
116 Report of the Supervisory Board
|
|
126 Financial Statements |
Employees per sector
in FTEs at year-end
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
Medical Systems |
|
|
24,221 |
|
|
|
26,203 |
|
|
|
27,441 |
|
DAP |
|
|
8,203 |
|
|
|
9,933 |
|
|
|
9,881 |
|
Consumer Electronics |
|
|
15,537 |
|
|
|
14,486 |
|
|
|
13,516 |
|
Lighting |
|
|
45,649 |
|
|
|
47,739 |
|
|
|
54,323 |
|
I&EB |
|
|
15,130 |
|
|
|
9,852 |
|
|
|
7,638 |
|
CMS |
|
|
6,312 |
|
|
|
6,879 |
|
|
|
5,299 |
|
|
|
|
115,052 |
|
|
|
115,092 |
|
|
|
118,098 |
|
Discontinued operations |
|
|
44,174 |
|
|
|
6,640 |
|
|
|
5,703 |
|
|
|
|
159,226 |
|
|
|
121,732 |
|
|
|
123,801 |
|
Some 60% of Philips workforce is located in mature markets, and some 40% in emerging
markets. In 2007, key emerging markets saw a nominal employee decline compared to 2006, largely due
to the sale of the Financial Shared Services operations in India and the divestment of Mobile
Phones within CE. The sale of the Financial Shared Services operations in Poland and Thailand was
the main reason for the employee decline in other emerging markets. In mature markets in Europe,
the number of employees increased, mainly due to the acquisition of Belgium-based PLI. North
America saw an increase in employees mainly related to the acquisitions of Color Kinetics, DLO,
Health Watch and Raytel Cardiac Services.
Employees per market cluster
in FTEs at year-end
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
Western Europe |
|
|
42,226 |
|
|
|
38,852 |
|
|
|
46,466 |
|
North America |
|
|
17,455 |
|
|
|
20,501 |
|
|
|
21,682 |
|
Other mature markets |
|
|
1,900 |
|
|
|
1,831 |
|
|
|
1,850 |
|
Total mature markets |
|
|
61,581 |
|
|
|
61,184 |
|
|
|
69,998 |
|
Key emerging markets |
|
|
32,469 |
|
|
|
31,893 |
|
|
|
30,323 |
|
Other emerging markets |
|
|
21,002 |
|
|
|
22,015 |
|
|
|
17,777 |
|
|
|
|
115,052 |
|
|
|
115,092 |
|
|
|
118,098 |
|
Discontinued operations |
|
|
44,174 |
|
|
|
6,640 |
|
|
|
5,703 |
|
|
|
|
159,226 |
|
|
|
121,732 |
|
|
|
123,801 |
|
Sales per employee decreased by 2% from EUR 228,000 in 2006 to EUR 224,000 in 2007, affected by 4%
unfavorable currency movements compared to 2006.
Adjusted for the adverse foreign currency impact in 2007, average sales per employee increased by
2%. This rise was driven by the significantly improved performance in CE, DAP and Lighting, partly
offset by declines in Medical Systems, primarily due to the further vertical integration related to
the acquisition of Intermagnetics, and in Innovation & Emerging Businesses, related to the
divestment of Optical Storage.
Philips Annual Report 2007 47
|
|
|
|
|
|
|
8 Financial highlights
|
|
10 Message from the President
|
|
16 The Philips Group
|
|
62 The Philips sectors |
|
|
|
|
|
|
|
|
|
|
|
Liquidity and |
|
|
|
|
|
|
capital resources |
|
|
Liquidity and capital resources
Cash flows provided by continuing
operations
Condensed consolidated
statements of cash flows for the
years ended December 31, 2005, 2006
and 2007 are presented below:
Condensed consolidated cash flow statements
in millions of euros
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20051) |
|
|
20061) |
|
|
2007 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
2,868 |
|
|
|
5,383 |
|
|
|
4,168 |
|
(Income) loss from discontinued operations |
|
|
11 |
|
|
|
(4,482 |
) |
|
|
433 |
|
Adjustments to reconcile net income to net
cash provided by operating activities |
|
|
(1,732 |
) |
|
|
(571 |
) |
|
|
(3,082 |
) |
Net cash provided by operating activities |
|
|
1,147 |
|
|
|
330 |
|
|
|
1,519 |
|
Net cash provided by (used for) investing
activities |
|
|
1,694 |
|
|
|
(2,802 |
) |
|
|
3,930 |
|
Cash flows before financing activities |
|
|
2,841 |
|
|
|
(2,472 |
) |
|
|
5,449 |
|
Net cash used for financing activities |
|
|
(2,589 |
) |
|
|
(3,715 |
) |
|
|
(2,368 |
) |
Cash provided by (used for) continuing
operations |
|
|
252 |
|
|
|
(6,187 |
) |
|
|
3,081 |
|
Net cash provided by (used for) discontinued
operations |
|
|
533 |
|
|
|
7,114 |
|
|
|
(115 |
) |
Effect of changes in exchange rates on cash
positions |
|
|
159 |
|
|
|
(197 |
) |
|
|
(112 |
) |
Total change in cash and cash equivalents |
|
|
944 |
|
|
|
730 |
|
|
|
2,854 |
|
Cash and cash equivalents at beginning of year |
|
|
4,349 |
|
|
|
5,293 |
|
|
|
6,023 |
|
Less cash and cash equivalents at end of year
- discontinued operations |
|
|
150 |
|
|
|
137 |
|
|
|
108 |
|
Cash and cash equivalents at end of year -
continuing operations |
|
|
5,143 |
|
|
|
5,886 |
|
|
|
8,769 |
|
|
|
|
1) |
|
Restated to present the MedQuist business as a discontinued operation.
Please refer to the consolidated statements of cash flows which are part of the chapter
Group financial statements. |
Net cash from operating activities amounted to EUR 1,519 million in 2007, compared to cash flows of
EUR 330 million in 2006. This EUR 1,189 million increase was driven by higher cash generation at
DAP, CE and GMS, due to increased earnings and lower working capital requirements. In addition, the
improvement was related to a EUR 742 million reduction in pension contributions compared to 2006,
which positively affected working capital.
Net capital expenditures totaled EUR 698 million, broadly in line with 2006. Reduced
expenditures in Lighting mainly related to higher investments in the acquired Lumileds
business in 2006 and DAP were partly offset by higher investments at Medical Systems and CE.
Proceeds from the sale of fixed assets were lower than in 2006.
The EUR 4,105 million proceeds from the sale of other non-current financial assets were primarily
related to the further reduction of our financial holding in TSMC, which yielded EUR 3,895 million.
48 Philips Annual Report 2007
|
|
|
|
|
|
|
98 Risk management
|
|
112 Our leadership
|
|
116 Report of the Supervisory Board
|
|
126 Financial Statements |
Additionally, EUR 1,640 million cash was generated from the sale of interests in businesses,
including the sale of 46.4 million shares in LG. Philips LCD, resulting in a cash inflow of EUR
1,547 million, as well as the divestments of the remaining parts of Optical Storage and Mobile
Phones. Furthermore, a net amount of EUR 385 million cash was generated from maturing currency
hedges.
During 2007, a total of EUR 1,502 million was utilized for acquisitions, notably PLI (EUR 561
million) and Color Kinetics (EUR 515 million), as well as DLO, Health Watch and Raytel Cardiac
Services.
In 2006, a total of EUR 2,498 million was used for acquisitions, notably Intermagnetics (EUR 993
million), Avent (EUR 689 million), Lifeline (EUR 583 million) and Witt Biomedical (EUR 110
million). The divestment of businesses, primarily within Innovation
& Emerging Businesses, generated
EUR 384 million cash.
Cash flow from discontinued operations
In 2007, EUR 115 million cash was used by discontinued operations, the majority of which related to
tax payments in connection with the 2006 sale of Philips majority stake in the Semiconductors
business and operating cash flows of MedQuist in 2007.
In 2006, discontinued operations generated cash flows of EUR 7,114 million, predominantly related
to the sale of a majority stake in the Semiconductors division, which generated EUR 7,059 million.
Cash flows from financing activities
Net cash used for financing activities in 2007 was EUR 2,368 million. The impact of changes in debt
was a reduction of EUR 281 million, including a EUR 113 million repayment of long-term bank
borrowings. Philips shareholders were paid EUR 659 million in dividend. Additionally, cash
outflows for share repurchase totaled EUR 1,609 million. This included EUR 810 million related to
hedging of obligations under the long-term employee incentive and employee stock purchase programs,
and a total of EUR 823 million related to the repurchases of the shares for cancellation, offset by
EUR 24 million representing dividend tax credit facility. Partially offsetting these cash outflows
was a net cash inflow of EUR 161 million due to the exercise of stock options.
Net cash used for financing activities in 2006 was EUR 3,715 million. The impact of changes in debt
was a reduction of EUR 437 million, including a EUR 208 million scheduled bond repayment Philips
shareholders were paid EUR 523 million in dividend. Additionally, cash outflows for share
repurchase totaled EUR 2,899 million. This included EUR 414 million final repurchases related to
the EUR 1.5 billion share repurchase program announced in August 2005 that was completed in
February 2006, a total of EUR 118 million related to
Philips Annual Report 2007 49
|
|
|
|
|
|
|
8 Financial highlights
|
|
10 Message from the President
|
|
16 The Philips Group
|
|
62 The Philips sectors |
|
|
|
|
|
|
|
|
|
|
|
Liquidity and |
|
|
|
|
|
|
capital resources |
|
|
hedging of obligations under the long-term employee incentive and employee stock purchase
programs, and a total of EUR 2,367 million of share repurchases for cancellation between July and
December 2006. Offsetting
the cash outflows in part was a net cash inflow of EUR 145 million due to the exercise of stock
options.
Financing
The consolidated balance sheet for the years 2007,2006 and 2005 is presented below:
Condensed consolidated balance sheet
in millions of euros
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20051) |
|
|
20061) |
|
|
2007 |
|
Cash and cash equivalents |
|
|
5,143 |
|
|
|
5,886 |
|
|
|
8,769 |
|
Receivables |
|
|
8,874 |
|
|
|
9,651 |
|
|
|
9,500 |
|
Assets of discontinued operations |
|
|
4,484 |
|
|
|
431 |
|
|
|
333 |
|
Inventories |
|
|
2,797 |
|
|
|
2,880 |
|
|
|
3,203 |
|
Equity-accounted investees |
|
|
5,338 |
|
|
|
2,974 |
|
|
|
1,886 |
|
Other non-current financial assets |
|
|
729 |
|
|
|
8,055 |
|
|
|
3,183 |
|
Property, plant and equipment |
|
|
2,999 |
|
|
|
3,084 |
|
|
|
3,180 |
|
Intangible assets |
|
|
3,541 |
|
|
|
5,536 |
|
|
|
6,289 |
|
Total assets |
|
|
33,905 |
|
|
|
38,497 |
|
|
|
36,343 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and other liabilities |
|
|
8,433 |
|
|
|
8,129 |
|
|
|
7,799 |
|
Liabilities of discontinued operations |
|
|
1,627 |
|
|
|
169 |
|
|
|
157 |
|
Provisions |
|
|
2,634 |
|
|
|
3,293 |
|
|
|
3,104 |
|
Debt |
|
|
4,487 |
|
|
|
3,869 |
|
|
|
3,557 |
|
Minority interests |
|
|
58 |
|
|
|
40 |
|
|
|
42 |
|
Stockholders equity |
|
|
16,666 |
|
|
|
22,997 |
|
|
|
21,684 |
|
Total liabilities and equity |
|
|
33,905 |
|
|
|
38,497 |
|
|
|
36,343 |
|
|
|
|
1) |
|
Restated to present the MedQuist business as a discontinued operation. Please refer to
the consolidated balance sheets which are part of the chapter
Group financial statements. |
Cash and cash equivalents
In 2007, cash and cash equivalents from continuing operations increased by EUR 2,883 million to EUR
8,769 million at year-end. Cash proceeds from divestments amounted to EUR 5,745 million, including
a net cash inflow of EUR 3,895 million as a result of the sale of shares in TSMC and EUR 1,547
million for LG. Philips LCD. The share buyback programs led to a cash outflow of EUR 1,609 million.
There were further cash outflows for acquisitions of EUR 1,502 million, including EUR 561 million
for Partners in Lighting International, EUR 515 million for the acquisition of Color Kinetics, EUR
94 million for Health Watch, EUR 55 million for TIR Systems, EUR 77 million for Digital Lifestyle
Outfitters and EUR 74 million for Raytel Cardiac Services. Furthermore, a
dividend of EUR 659 million was paid. Currency changes during 2007 decreased cash and cash
equivalents by EUR 112 million.
In 2006, cash and cash equivalents from continuing operations increased by EUR 743
million to EUR 5,886 million at year-end.
Cash proceeds from divestments amounted to EUR 7,218 million, including a net cash inflow of
EUR 7,059 million as a result of the sale of a majority stake in the Semiconductors division.
The share buyback programs led to a cash outflow of EUR 2,899 million. There were further cash
outflows for acquisitions of EUR 2,498 million, including EUR 583 million for the acquisition
of Lifeline, EUR 689 million for Avent, EUR 993 million for Intermagnetics and EUR 110 million
for Witt Biomedical. Furthermore, a dividend of EUR 523 million was paid. Currency changes
during 2006 decreased cash and cash equivalents by EUR 197 million.
Debt position
Total debt outstanding at the end of 2007 was EUR 3,557 million, compared with EUR 3,869
million at the end of 2006.
Changes in debt
in millions of euros
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20051) |
|
|
20061) |
|
|
2007 |
|
New borrowings |
|
|
74 |
|
|
|
106 |
|
|
|
29 |
|
Repayments |
|
|
(398 |
) |
|
|
(543 |
) |
|
|
(310 |
) |
Consolidation and currency effects |
|
|
298 |
|
|
|
(181 |
) |
|
|
(31 |
) |
Total changes in debt |
|
|
(26 |
) |
|
|
(618 |
) |
|
|
(312 |
) |
|
|
|
1) |
|
Restated to present the MedQuist business as a discontinued operation |
During the year, total debt decreased by EUR 312 million. Philips repaid EUR 113 million of bank
facilities; repayments under capital leases were EUR 24 million and EUR 15 million resulted from
reductions in other long-term debt. Repayments under short-term debt totaled EUR 158 million. New
borrowings totaled EUR 29 million. Other changes resulting from consolidation and currency effects
led to a reduction of EUR 31 million.
In 2006, total debt decreased by EUR 618 million. Philips repaid EUR 208 million in a scheduled
bond repayment. The remaining repayments consisted of bank facilities of EUR 277 million, capital
lease transactions of EUR 8 million and EUR 50 million resulting from reductions in other debt. New
borrowings of EUR 106 million included EUR 97
million from increased short-term borrowings.
50 Philips Annual Report 2007
|
|
|
|
|
|
|
98 Risk management
|
|
112 Our leadership
|
|
116 Report of the Supervisory Board
|
|
126 Financial Statements |
Other changes resulting from consolidation and currency effects led to a reduction of EUR
181 million.
Long-term debt as a proportion of the total debt stood at 34% at the end of 2007, compared to 78%
at the end of 2006.
Net debt to group equity
The Company had a net cash position (cash and cash equivalents, net of debt) of EUR 5,212 million
at the end of 2007, compared to a net cash position at the end of 2006 of EUR 2,017 million.
Stockholders equity
Stockholders equity decreased by EUR 1,313 million to EUR 21,684 million at December 31,2007. The
decrease was mainly attributable to share repurchase programs for both capital reduction purposes
and the hedging of long-term incentive and employee stock purchase programs, which reduced equity
by a total of EUR 1,633 million. The dividend payment to shareholders in 2007 further reduced
equity by EUR 659 million. The decrease was offset by EUR 305 million related to re-issuance of
treasury stock and share-based compensation plans and a further EUR 674 million increase related to
total changes in comprehensive income net of tax.
Stockholders equity increased by EUR 6,331 million to EUR 22,997 million at December 31,2006. Net
income contributed EUR 5,383 million, while unrealized gains on available-for-sale securities had
an upward effect of EUR 4,291 million, mainly related to the changed accounting treatment of TSMC.
The unrealized gain on the value of TSMC was partly offset by EUR 2,899 million due to the share
repurchase programs for both capital reduction purposes and the hedging of long-term incentive and
employee stock purchase programs, and by EUR 523 million due to the dividend payment to
shareholders in 2006. There was a net decrease of EUR 263 million related to pension liabilities,
including the effect of adoption of SFAS No. 158.
The number
of outstanding common shares of Royal Philips Electronics at December 31, 2007, was
1,065 million (2006:1, 107 million).
At the end of 2007, the Company held 52.1 million shares in treasury to cover the future delivery
of shares in connection with the 61.4 million rights outstanding at year-end 2007 under the
Companys long-term incentive plan and convertible personnel debentures. At the end of 2007, the
Company held 25.8 million shares for cancellation. At the end of 2006, the Company held 35.9
million shares in treasury to cover the future delivery of shares in connection with the 65.5
million rights outstanding at year-end 2006 under the Companys long-term incentive plans and
convertible personnel debentures. Treasury shares are accounted for as a reduction of stockholders
equity.
Liquidity position
Including the Companys net cash position, listed available for-sale securities, trading securities
and listed equity-accounted investees, as well as its USD 2.5 billion commercial paper program
supported by the revolving credit facility, the Company had access to net available liquidity
resources of EUR 11,374 million as of December 31, 2007, compared to EUR 13,439 million one year
earlier.
Philips Annual Report 2007 51
|
|
|
|
|
|
|
8 Financial highlights
|
|
10 Message from the President
|
|
16 The Philips Group
|
|
62 The Philips sectors |
|
|
|
|
|
|
|
|
|
|
|
Liquidity and |
|
|
|
|
|
|
capital resources |
|
|
Liquidity position
in millions of euros
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20052) |
|
|
20062) |
|
|
2007 |
|
Cash and cash equivalents |
|
|
5,143 |
|
|
|
5,886 |
|
|
|
8,769 |
|
Long-term debt |
|
|
(3,320 |
) |
|
|
(3,006 |
) |
|
|
(1,212 |
) |
Short-term debt |
|
|
(1,167 |
) |
|
|
(863 |
) |
|
|
(2,345 |
) |
Net cash |
|
|
656 |
|
|
|
2,017 |
|
|
|
5,212 |
|
Available-for-sale
securities at market
value |
|
|
113 |
|
|
|
6,529 |
|
|
|
1,776 |
|
Trading securities |
|
|
|
|
|
|
192 |
|
|
|
|
|
Main listed investments
in equity-accounted
investees at market
value |
|
|
11,139 |
|
|
|
2,803 |
|
|
|
2,688 |
|
Net available liquidity |
|
|
11,908 |
|
|
|
11,541 |
|
|
|
9,676 |
|
Revolving credit
facility / CP
program1) |
|
|
2,109 |
|
|
|
1,898 |
|
|
|
1,698 |
|
Net available liquidity
resources |
|
|
14,017 |
|
|
|
13,439 |
|
|
|
11,374 |
|
|
|
|
1) |
|
The revolving credit facility could act as a back-up for the CP program |
|
2) |
|
Restated to present the MedQuist business as a discontinued operation |
The fair value of the Companys listed available-for-sale securities, based on quoted market
prices at December 31, 2007, amounted to EUR 1,776 million, of which EUR 1,699 million
related to TSMC. Philips shareholdings in its main listed equity-accounted investees had a
fair value of EUR 2,688 million based on quoted market prices at
December 31, 2007, and
consisted primarily of the Companys holdings in LG.Philips LCD with a value of EUR 2,556
million and TPV Technology with a value of EUR 130 million. The Company has a lock-up period
associated with the sale of shares in TPV that expires in September 2008 and LG.Philips LCD
that expired in January 2008.
Philips has a USD 2.5 billion commercial paper program, under which it 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, six in Europe and five in the US, that support the
program. When Philips wants to fund through the commercial paper program, it contacts the
panel of banks. 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. There
are no limitations on Philips use of the program, save for market considerations, e.g. that
the commercial paper market itself is not open. If this were to be the case, Philips USD 2.5
billion committed revolving credit facility could act as back-up for short-term financing
requirements that normally would be satisfied through the commercial paper program. The USD
2.5 billion revolving credit facility does not have a material adverse change clause, has no
financial covenants and does not have credit-rating-related
acceleration possibilities. As of December 31, 2007, Philips did not
have any commercial paper outstanding.
As at
December 31, 2007, the Company had total cash and cash equivalents of EUR 8,769 million; the
Company pools cash from subsidiaries in the extent legally and economically feasible. Cash in
subsidiaries is not necessarily freely available for alternative uses due to possible legal or
economic restrictions. The amount of cash not immediately available is not considered material for
the Company to meet its cash obligations. The Company had a total debt position of EUR 3,557
million at year-end 2007.
The Company expects to have significant cash outflows during 2008 that will affect the overall
liquidity position of the Company. In November 2007, the Company announced the aquisition of
Genlyte Group Incorporated for an expected purchase price of EUR 1.8 billion. This acquisition was
completed in January 2008. During December 2007 the Company announced further acquisitions
including Respironics for an expected purchase price of EUR 3.6 billion and VISICU for EUR 290
million. The Company has also announced its intention to repurchase a further EUR 5 billion of
shares for cancellation, and this program is largely expected to be completed during 2008. Also
included within total short-term debt is EUR 1,692 million of bonds, with EUR 130 million due to
mature in February 2008 and EUR 1,562 million due to mature in May 2008. The dividend for 2008 is
expected to be some EUR 715 million.
Guarantees and contractual cash obligations
Guarantees
Guarantees issued or modified after December 31,2003, having characteristics defined in FASB
Interpretation No. 45 Guarantors Accounting and Disclosure Requirements for Guarantees, including
Indirect Guarantees of Indebtedness of Others (FIN 45), are measured at fair value and recognized
on the balance sheet. At the end of 2007, the total fair value of guarantees recognized by the
Company was EUR 3 million.
Guarantees
issued before December 31, 2003, and
not modified afterwards, and guarantees issued after
December 31, 2003, which do not have
characteristics defined in FIN 45, remain off-balance sheet.
52 Philips Annual Report 2007
|
|
|
|
|
|
|
98 Risk management
|
|
112 Our leadership
|
|
116 Report of the Supervisory Board
|
|
126 Financial Statements |
Philips policy is to provide only guarantees and other letters of support, in
writing. Philips does not stand by other forms of support. The following table outlines the
total outstanding off-balance sheet credit-related guarantees and business-related guarantees
provided by Philips for the benefit of unconsolidated companies and third parties as at
December 31,2007.
Expiration per period 2007
in millions of euros
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
total |
|
|
less |
|
|
|
|
|
|
|
|
|
|
amounts |
|
|
than 1 |
|
|
|
|
|
|
after 5 |
|
|
|
committed |
|
|
year |
|
|
1-5 years |
|
|
years |
|
Business-related
guarantees |
|
|
432 |
|
|
|
142 |
|
|
|
95 |
|
|
|
195 |
|
Credit-related
guarantees |
|
|
45 |
|
|
|
5 |
|
|
|
16 |
|
|
|
24 |
|
|
|
|
477 |
|
|
|
147 |
|
|
|
111 |
|
|
|
219 |
|
Expiration per period 2006
in millions of euros
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
total |
|
|
less |
|
|
|
|
|
|
|
|
|
|
amounts |
|
|
than 1 |
|
|
|
|
|
|
after 5 |
|
|
|
committed |
|
|
year |
|
|
1-5 years |
|
|
years |
|
Business-related
guarantees |
|
|
466 |
|
|
|
151 |
|
|
|
80 |
|
|
|
235 |
|
Credit-related
guarantees |
|
|
42 |
|
|
|
14 |
|
|
|
2 |
|
|
|
26 |
|
|
|
|
508 |
|
|
|
165 |
|
|
|
82 |
|
|
|
261 |
|
Contractual cash obligations
Presented below is a summary of the Groups contractual cash obligations, contingent
obligations resulting from guarantees provided, and the capital resources available to
fund the cash requirements.
Cash obligations at December 31,2007 2)
in millions of euros
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
payments due by period |
|
|
|
|
|
|
|
less |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
than 1 |
|
|
1-3 |
|
|
3-5 |
|
|
after 5 |
|
|
|
total |
|
|
year |
|
|
years |
|
|
years |
|
|
years |
|
Long-term
debt1) |
|
|
2,973 |
|
|
|
1,841 |
|
|
|
19 |
|
|
|
754 |
|
|
|
359 |
|
Capital lease
obligations1) |
|
|
88 |
|
|
|
8 |
|
|
|
15 |
|
|
|
8 |
|
|
|
57 |
|
Short-term
debt1) |
|
|
496 |
|
|
|
496 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
leases1) |
|
|
730 |
|
|
|
147 |
|
|
|
232 |
|
|
|
134 |
|
|
|
217 |
|
Bond interest |
|
|
655 |
|
|
|
171 |
|
|
|
143 |
|
|
|
97 |
|
|
|
244 |
|
|
|
|
4,942 |
|
|
|
2,663 |
|
|
|
409 |
|
|
|
993 |
|
|
|
877 |
|
|
|
|
1) |
|
Short-term debt long-term debt and capital lease obligations are included in the Companys
consolidated balance sheet; please refer to note 23, note 24
and note 26 of the notes to the group financial statements |
|
2) |
|
For further details about uncertain tax positions, amounting to EUR 627 million,
see note 6 of the notes to the Group financial statements |
The Company has a number of commercial agreements such as supply agreements, that provide that
certain penalties may be charged to the Company if the Company does not fulfill its commitments.
Based on past operating performance and current prospects, supported by the Companys balance sheet
and unused borrowing capacity, Philips believes that working capital is sufficient for the
Companys present requirements. Furthermore, the Company has no material commitments for capital
expenditures.
The Company had total amounts payable in relation to accrued interest on debt of EUR 110
million as at December 31,2007.
The Company sponsors pension plans in many countries in accordance with legal requirements, customs
and the local situation in the countries involved. The majority of employees in Europe and North
America are covered by defined-benefit plans.
Contributions to funded pension plans are made by the Company, as necessary, to provide sufficient
assets to meet future benefits payable to plan participants. These contributions are determined by
various factors, including funded status, legal and tax considerations and local customs.
The Company currently expects cash outflows in relation to employee benefits which are estimated to
amount to EUR 314 million in 2008 (2007: EUR 433 million), consisting of EUR 160 million employer
contributions to defined-benefit pension plans, EUR 89 million employer contributions to
defined-contribution pension plans, and EUR 65 million expected cash outflows in relation to
unfunded pension plans.
The expected cash outflows in 2008 and subsequent years are uncertain and may change substantially
as a consequence of statutory funding requirements as well as changes in actual versus currently
assumed discount rates, estimations of compensation increases and returns on pension plan assets.
for further details about cash obligations related to pension plans, see note 20 of the group
financial statements.
Philips Annual Report 2007 53
|
|
|
|
|
|
|
8 Financial highlights
|
|
10 Message from the President
|
|
16 The Philips Group
|
|
62 The Philips sectors |
|
|
|
|
|
|
|
|
|
|
|
Acquisitions |
|
|
Acquisitions
In the course of 2007 we completed ten strategically aligned acquisitions and announced three
more acquisitions that are expected to be, or have been, completed
in the first quarter of 2008. At the same time, we divested a
number of non-core activities and reduced our shareholdings in
cyclical businesses in a responsible manner
The Color Kinetics-illuminated London
Eye is the worlds largest observation
wheel at nearly 135 metres high. A new
LED-based lighting system brings
dynamic, visually appealing color to the
structure while at the same time
alleviating the maintenance costs
and requirements of the previous fluorescent
system.
54 Philips Annual Report 2007
|
|
|
|
|
|
|
98 Risk management
|
|
112 Our leadership
|
|
116 Report of the Supervisory Board
|
|
126 Financial Statements |
Medical Systems
VMI-Sistemas Medicos
In professional healthcare, Philips acquired Brazils leading general X-ray manufacturer,
VMI-Sistemas Medicos.
XIMIS
Philips also acquired US-based healthcare IT company XIMIS, which focuses on systems to help reduce
errors and streamline workflow in hospital radiology wards.
Emergin
Philips acquired Emergin, the leading US provider of software utilized to rapidly transmit medical
alarm signals throughout hospitals. Through this acquisition, Philips will expand the use of
information technology in healthcare and specifically in its patient monitoring business to
improve patient outcomes and help hospitals work more efficiently.
VISICU
In December 2007, Philips announced a merger agreement with clinical IT and service provider
VISICU. Based in Baltimore, USA, VISICU makes clinical IT systems that enable critical-care medical
staff to actively monitor patients in hospital intensive care units (ICUs) from remote locations.
VISICUs patented clinical IT system, called the elCU program, provides real-time 24/7 patient
monitoring in ICUs by centrally networking critical-care physicians and nurses to ICU beds using
voice and video. Equipped with artificial intelligence algorithms, the system also offers advanced
clinical support. The merger will boost the creation of products to give more clinical decision
support to hospital staff, while allowing them to monitor greater numbers of critically ill
patients.
Consumer Electronics
Digital Lifestyle Outfitters
In the fast-growing, high-margin area of electronics peripherals and accessories, Philips acquired
US-based Digital Lifestyle Outfitters, which designs, markets and distributes accessories for
mobile audio-visual devices such as MP3 and video players. Through this deal, Philips has bolstered
its position as a leading player in peripherals and accessories for the mobility domain, further
strengthening its contacts with key international retailers.
Lighting
Color Kinetics
In the professional lighting sector, Philips acquired Color Kinetics (EUR 515 million), based in
Boston, USA. Color Kinetics is a leader in the design and marketing of innovative light-emitting
diode (LED) lighting systems.
TIR Systems
We also completed the acquisition of Vancouver, Canada-based TIR Systems, a leading company in LED
technology for modules that generate high-quality white light.
The acquisitions of Color Kinetics and TIR Systems will give Philips a leading position in the
entire LED lighting value chain, bolstering its strong LED intellectual property portfolio and
further adding to this fast-growing new segment. Philips is increasingly benefiting from its
leadership position in the shift to energy-efficient lighting solutions, both in the professional
and consumer domains.
Partners in Lighting International
In the consumer lighting sector, Philips completed its
acquisition of Partners in Lighting International (PLI) (EUR 561 million), the leading European
manufacturer of home luminaires. PLI develops, manufactures and markets a wide portfolio of more
than 10,000 distinct home lighting luminaire products, currently mainly for the
Philips Annual Report 2007 55
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Acquisitions
Building upon our 2006 purchase of Lifeline, in 2007 we announced a number of strategically
aligned acquisitions Respironics, Health Watch and Raytel Cardiac Services designed to further
strengthen our position in the fast-growing home healthcare solutions market.
European
market. This acquisition will strengthen Philips presence in LEDs especially for home
lighting, where solid-state lighting (SSL) will bring major benefits in terms of creating
atmospheres and reducing energy consumption.
Lighting
Technologies International
In November 2007, Philips acquired Lighting Technologies
International (LTI), a US-based manufacturer of high-power xenon lamps for the entertainment
industry and a leading supplier of cinema projection lighting in the United States. LTIs strong
presence in applications for high-power xenon lamps will round off Philips portfolio of xenon
lamps.
Genlyte
In January 2008, Philips completed the acquisition of North American luminaires company Genlyte, a
leader in the North American construction luminaires market, for EUR 1.8 billion. Genlyte designs,
manufactures and sells lighting fixtures, controls and related products for a wide variety of
applications, including solid-state lighting. This acquisition builds on our earlier acquisitions
of Color Kinetics, TIR Systems, Partners in Lighting International and provides us with a leading
position in the North American luminaires market. Through this acquisition, Philips has established
a solid platform for further profitable growth, building on Genlytes extensive presence in North
America to speed up the adoption of energy-saving, green lighting technologies.
Consumer Healthcare Solutions
Unsustainably high healthcare costs in many markets, the aging of the population and the
expectation that seniors will double as a percentage of the total population over the next 25 years
in Western Europe and the US, are factors underpinning Philips drive to become a global player in
the home healthcare market.
Health Watch
In 2007, Philips acquired personal emergency response company Health Watch, a US-based,
privately-held provider of personal emergency response services. This acquisition will further
strengthen our leadership position in the fast-growing market for emergency response services,
building on the Lifeline Systems acquisition in 2006.
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The inclusion of Health Watch increases the number of healthcare organizations and
healthcare referral sources in the Philips Lifeline network, further contributing to future growth.
Raytel Cardiac Services
Philips also acquired US-based Raytel Cardiac Services, a leading US provider of home cardiac
monitoring services that doctors prescribe to heart patients. Acquiring Raytel Cardiac Services
represents a further step in our healthcare strategy of improving patient outcomes in specific care
cycles, such as cardiology, and builds on our leading position in medical technologies for heart
disease (the most common cause of death in the developed world). Philips has invested heavily over
the years to become the top supplier to hospitals of medical equipment for managing heart disease.
Respironics
In December 2007, Philips announced the projected acquisition of Respironics for EUR 3.6 billion,
which would be its biggest-ever acquisition. Respironics is a global leader in the treatment of
Obstructive Sleep Apnea (OSA), a sleep disorder characterized by the repeated cessation of
breathing during sleep. Research in recent years has shown a link between OSA, heart disease,
stroke and diabetes. Additionally, Respironics has a leading position in non-invasive ventilation
and has recently introduced new home oxygen technologies to serve the needs of respiratory-impaired
patients in the home. The remainder of Respironics business is focused on the hospital channel and
includes non-invasive and invasive ventilation, respiratory monitoring, neonatal products and
respiratory drug delivery technologies for the treatment of respiratory diseases. The deal adds new
product categories in OSA and home respiratory care to our existing businesses in this field.
Respironics fits well into Philips strategy to become the world leader in the fast-growing home
healthcare market.
Divestments
In the course of 2007, we sold, or decided to sell, several of our non-core business interests.
Also, we continued to reduce our financial holdings in cyclical businesses.
On March 31, 2007, the Company completed the sale of its remaining Mobile Phones activities to
China Electronics Corporation (CEC). CEC has received an exclusive license to market and sell
mobile phones under the Philips brand for the coming five years.
On November 2, 2007, Philips announced that a decision has been made to proceed with the sale of
its approximate 70% ownership interest in MedQuist, as the Company considers its MedQuist ownership
interest as a non-core holding.
On December 19, 2007, Philips announced it has reached an agreement in principle to sell its
Set-Top Boxes and Connectivity Solutions activities, currently part of its Home Networks business
unit within Consumer Electronics, to Pace Micro Technology. After completion, Philips will become
shareholder of some 23% in the combined business. The transaction is expected to close at February
20, 2008.
As part of a multi-phase plan to facilitate an orderly exit from the Companys shareholding in
Taiwan Semiconductor Manufacturing Company, Philips sold 2.8 billion common shares in TSMC in the
course of 2007. This plan, announced on March 9, 2007, aims to reduce Philips holding in TSMC to
zero before the end of 2010.
In line with Philips strategy to further reduce its holding in LG.Philips LCD in a structured and
responsible manner, the Company sold 46.4 million shares of common stock in LG.Philips LCD,
thereby reducing its shareholding to 19.9%. The transaction provided Philips with net proceeds of
EUR 1.5 billion.
Philips Annual Report 2007 57
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Other information
Other information
Share repurchase programs
On January 22, 2007, the Company started a EUR 1.6 billion share repurchase program for capital
reduction purposes through a second trading line on Euronext Amsterdam. Under this program, shares
are repurchased from shareholders who are tax-exempt or are able to achieve tax compensation. Under
this program, a total of 25,813,898 shares were acquired worth EUR 0.8 billion. The mechanics of
the second trading line and all transactions in Philips shares under this share repurchase program
are published on the Companys website.
On September 5, 2007, the Company started a program to repurchase approximately 15 million
additional Philips shares on Euronext Amsterdam in connection with cumulative obligations resulting
from its existing long-term incentive and employee stock purchase programs. These repurchases were
completed in 2007 and increased the number of shares held by the Company versus shares due under
the programs. The shares repurchased are held by the Company as treasury shares until they are
required.
On December 19, 2007, the Company announced that it plans to repurchase up to approximately EUR 5
billion worth of Philips shares for the purpose of capital reduction, which program is expected to
be largely completed by the end of 2008. This program includes the portion of the Companys EUR 1.6
billion second trading line repurchase program that has yet to be completed. Through its second
trading line program, Philips repurchased EUR 0.8 billion worth of shares for cancellation in 2007.
The Company started the new repurchase program on January 2, 2008, and will enter into subsequent
discretionary management agreements
with one or more banks to repurchase Philips shares within the limits of relevant laws and
regulations (in particular EC Regulation 2273/2003) and Philips articles of association. The
appropriate authorizations to complete the program will be proposed to the 2008 Annual General
Meeting of Shareholders.
In accordance with Dutch law, the Company has informed the Netherlands Authority for the Financial
Markets of its holdings of Philips shares. All transactions in Philips shares under these share
repurchase programs have been and will be reported on the Companys website on a weekly basis.
Capital reduction
On January 18, 2008, the Company started the procedure for the cancellation of Philips shares
acquired or to be acquired pursuant to the share repurchase programs for capital reduction purposes
initiated in January 2007 and January 2008. The number of shares to be cancelled shall be
determined by the Board of Management but shall not exceed 114,282,676 shares. Pursuant to the
relevant statutory provisions, cancellation may not be effected earlier than March 18, 2008.
Legal proceedings
The Company and certain of its (former) group companies are involved as a party in legal
proceedings, including regulatory and other governmental proceedings, relating to such matters as
competition issues, commercial transactions, product liability, participations and environmental
pollution. In respect of antitrust laws, the Company and certain of its (former) group companies
are involved in investigations by competition law authorities in several jurisdictions and are
engaged in litigation in this respect
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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 Companys
consolidated financial position and
consolidated results of operations for a
particular period.
For a description of the legal proceedings
relating to asbestos, MedQuist, LG.Philips
LCD and CRT investigations and other
matters, please refer to note 27.
IFRS-only
Currently, Philips primary external and
internal reporting is based on US GAAP. In
addition, Philips issues quarterly and
annual financial information prepared in
accordance with International Financial
Reporting Standards (IFRS).
The US Securities and Exchange Commission
(SEC) has issued a final ruling that
eliminates the requirement that Foreign
Private Issuers such as Philips file US
GAAP-based financial statements (or a
reconciliation thereto) and will accept
reporting based solely on IFRS.
Consequently, Philips will simplify its
reporting by moving to IFRS as its sole
reporting standard no later than from
January 1, 2009, and will discontinue the
use of US GAAP as of the same date.
Philips Annual Report 2007 59
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Proposed dividend to shareholders
Outlook
Proposed dividend to shareholders
Pursuant to article 34 of the articles of
association of Royal Philips Electronics,
first a dividend will 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, 2007,
the issued share capital consists only of
common shares; no preference shares have
been issued.
A proposal will be submitted to the 2008
Annual General Meeting of Shareholders to
declare a dividend of EUR 0.70 per common
share, which, dependent on the progress
of the current share repurchase program,
will result in an expected dividend of
EUR 715 million. In 2007, a dividend was
paid of EUR 0.60 per common share (EUR
659 million) in respect of the financial
year 2006.
Pursuant to article 33 of the articles of
association of Royal Philips Electronics,
and with the approval of the Supervisory
Board, the remainder of the net income
for the financial year 2007 has been
retained by way of reserve. The balance
sheet presented in this report, as part
of the consolidated financial statements
for the period ended December 31, 2007,
is before dividend, which is subject to
shareholder approval after year-end
60 Philips Annual Report 2007
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Outlook
With our portfolio restructuring nearing
completion, and having once again
delivered on our targets, we look forward
with confidence. 2008 is going to be a
challenging but exciting year for Philips
one in which we expect to take further
solid steps towards achieving our Vision
2010 objectives.
The successful integration of acquisitions
will be high on the management agenda for
2008. We completed the Genlyte acquisition
in late January 2008 and expect to
complete the announced acquisition of
Respironics in the early part of this
year. Following the completion of these
acquisitions, we will be in a position to
inform the market on the contribution of
the sectors to the realization of our
Vision 2010 plans; this will include our
objective for return on invested capital.
We also expect to make substantial
progress towards achieving an efficient
balance sheet, which we will continue to
base on an A-/A3 credit rating with both
our rating agencies. We plan to continue
the responsible sell-down of our remaining
stakes during the year and we expect that
our recently announced EUR 5 billion share
repurchase program will be largely
completed by the end of 2008.
While we recognize the markets caution on
2008 macro-economic developments
particularly in North America and Europe
we are confident that our sustained growth
in the emerging markets, a strong
innovation pipeline, a balanced portfolio
and synergies from our acquisitions will
allow us to continue on our improvement
path through 2008 and to meet our targets
as set out in Vision 2010.
Amsterdam, February 18, 2008
Board of Management
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The Philips sectors
Our structure
Koninklijke Philips Electronics N.V. (the Company) is the parent company of the Philips Group
(Philips or the Group). Its shares are listed on the stock markets of Euronext Amsterdam and
the New York Stock Exchange. The management of the Company is entrusted to the Board of Management
under the supervision of the Supervisory Board.
The businesses are the source of value creation. They are provided with effective and efficient
support through shared service centers. Country management supports value creation, connecting Philips with key stakeholders, especially our employees, customers,
government and society.
In 2007, Philips activities were organized on a divisional basis: Medical Systems, Domestic
Appliances and Personal Care, Consumer Electronics, Lighting, Innovation & Emerging Businesses, and
Group Management & Services.
At the end of 2007, Philips had approximately 100 production sites in 29 countries, sales
and service outlets in approximately 150 countries, and some 123,800 employees.
2007
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Philips in 2008
As of January 1, 2008, Philips activities are organized on a sectoral basis, with each operating
sector Healthcare, Lighting and Consumer Lifestyle being responsible for the management of its
businesses worldwide. The Healthcare sector brings together the former Medical Systems division and
Home Healthcare Solutions formerly Consumer Healthcare Solutions which has been transferred from
Innovation & Emerging Businesses. The former Consumer Electronics and Domestic Appliances and
Personal Care divisions have been integrated in the Consumer Lifestyle sector.
By leveraging Philips brand, technology base and distribution network, the Company aims, through
the Innovation & Emerging Businesses sector, to invest in projects that are not currently part of
Philips operating sectors, but which will lead to additional organic growth or create value
through future spin-offs. Innovation & Emerging Businesses includes Corporate Research, Philips
Incubators and Intellectual Property & Standards, as well as Philips Design. The sector Group
Management & Services includes the global service units, corporate and regional centers, pensions
and the global brand activities.
2008
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Medical Systems
Medical Systems
Philips innovative healthcare
solutions are designed to make a
difference in how clinicians diagnose,
treat and monitor disease, and allow
them to focus more on their patients.
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6%
currency-comparable
growth of order intake
at Medical Systems
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Human insight is combined with a solid clinical understanding to create integrated
offerings across the cycle of care. |
Philips Medical Systems is a global provider of innovative healthcare solutions, designed to
address the needs of patients as well as healthcare professionals, with a particular focus on
diagnostic imaging cardiology, oncology and womens health and critical care. Whether it is in
the hospital or in the home, we seek to improve patient outcomes throughout the entire cycle of
care from prevention and screening to diagnosis, treatment,
monitoring and management.
In order to simplify healthcare for our customers and the patients they serve, innovation at
Philips is driven by gaining insight into the needs of the people who use our products. Within
healthcare, this human insight is combined with a solid clinical understanding to create integrated
offerings across the cycle of care that truly support clinical excellence.
In 2007 we were comprised of four areas of business*:
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Imaging Systems x-ray, computed tomography, magnetic resonance and nuclear medicine
equipment,
designed to create diagnostic images and to support
minimally invasive therapy |
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Ultrasound and Monitoring Solutions ultrasound imaging, patient monitoring and cardiac
systems |
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Healthcare Informatics picture archiving and communication systems (PACS), clinical
decision-support information, cardiology IT and document services |
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Customer Services consultancy, clinical services, education, equipment financing, asset
management, as well as equipment maintenance and repair; supports the optimization of workflow
and maintenance in all markets served. |
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* |
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Following the announcement on November 2, 2007, of Philips intention to dispose of its
majority stake in MedQuist, this business is presented as a discontinued operation in this
Annual Report and not consolidated with the results of Medical Systems. |
Products and services are sold to healthcare providers around the world, including academic,
enterprise and stand-alone institutions, clinics, physicians and consumer retailers. Marketing,
sales and service channels are mainly direct.
Major drivers of the medical technology market include a growing and longer-living world
population, the associated rising incidence of chronic diseases, insufficient staffing levels, and
government funding and reimbursement. Healthcare reforms in some countries and increased price
competition among major players may have a limiting impact on future market growth. In light of
these factors, technology has a significant role to play, enabling new solutions for early and
better diagnoses and less labor-intensive treatment. Therefore the technology share of the
healthcare bill is set to increase more rapidly than overall healthcare spending. We believe that
bridging the hospital and the home is going to be increasingly important in delivering better
patient outcomes while containing costs. This conviction is driving Philips investment in building
up a leading home healthcare business, as outlined in the Consumer Healthcare Solutions business
description within Innovation & Emerging Businesses that begins on page 93 of this Annual Report.
We intend to maintain our high level of product innovation and strengthen our sales and
distribution channels. The United States is the largest healthcare
market, currently
representing close to 50% of the global market, followed by Japan and Germany.
The medical systems market is subject to some seasonality as a relatively large proportion of
revenue is recognized in the fourth quarter, mainly reflecting public/governmental budget spending.
We employ approximately 27,000 employees worldwide, including 8,000 in services.
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Medical Systems
With regard to sourcing, please refer to the business description of Philips Supply
Management that begins on page 96 of this Annual Report.
Progress against targets
The Annual Report 2006 set out a number of key targets for Medical Systems in 2007. The advances
made in addressing these are outlined below.
Continue to grow faster than the market
We continued to grow slightly faster than the market by: intensifying the focus on emerging market
growth, resulting in double-digit order intake growth in China, India and Latin America;
maintaining the solid innovation rate and further increasing service-contract penetration by
slightly more than 2%; and making strategically aligned acquisitions.
In 2007 we continued to broaden our position in strategic growth areas and increased penetration
into international markets through focused investments in products and channels.
The acquisition of XIMIS, a company that focuses on systems to help reduce medical errors and
streamline workflow in hospitals, further expands our growing presence in the radiology informatics
market. This was followed by the announcement, toward the end of the year, of the acquisitions of
the US-based clinical IT specialists Emergin (closed in 2007) and VISICU (to be finalized in 2008),
enhancing our capability to offer full monitoring solutions.
In line with the strategy to bolster our healthcare presence in emerging markets, we acquired
Brazils leading general X-ray manufacturer, VMI-Sistemas Medicos, thereby expanding our position
in the Latin American market. We also entered into a number of strategic agreements, e.g. with
Artemis Health Institute in Gurgaon, India, to supply medical equipment and undertake integrated
medical technology planning as well as research and development, enabling Philips to capture
real-time scientific data.
Support care providers throughout the entire care cycle by developing disease-based product and
service solutions
Cardiology
Philips innovations are driving integration of cardiology products and services, bridging
previously disparate cardiac patient events, from arrival at healthcare facilities, through
transfers to non-invasive, interventional intensive care. This process is supported by one of the
broadest cardiology portfolios on the market, encompassing multi-disciplinary diagnoses and
inclusive treatments, with fewer mistakes and repeated procedures. Our goal is the delivery of
better, more efficient care through earlier diagnosis, fewer disabilities, faster recoveries and,
in cases of long-term care, slower progression of disease.
By way of example, in 2007 Philips introduced its HeartStart MRx Monitor/Defibrillator, which
enables paramedics to transmit patient data from the ambulance to the hospitals emergency
department. By allowing a hospital to begin organizing its resources before the patient arrives,
the MRx can help reduce the time to treatment.
Another example of how Philips optimizes timely delivery of diagnosis and treatment in the cardiac
care cycle is the recently introduced ultrasound transducer for Live 3D transesophageal
echocardiography (Live 3D TEE), which provides views of cardiac structure and function available
for the first time. Along with new advanced software, this enables 2D imaging as well as real-time
3D visualization of the heart, in particular the hearts valves, giving clinicians the ability to
carry out a complete analysis, which allows a faster, more precise diagnosis.
Oncology
Our commitment in oncology is to provide technologies and support that enable physicians to make
effective treatment decisions for cancer patients at every point of care. As our collective
understanding of how to detect, stage and treat cancer continues to evolve, so does our ability to
detect disease earlier, to stage disease more accurately and to pursue image-guided interventional
treatment techniques.
Clinical insights in the treatment of oncology patients led to the 2007 introduction of the
GEMINI Big Bore PET-CT to complement the Brilliance Big Bore CT. This offering allows radiation
oncologists to see both the biological cell intensity combined with anatomical tumor location
in the treatment position, and where
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necessary to incorporate the effects of respiratory motion with 4D for the most accurate
tumor targeting. For patients undergoing treatment, this means more targeted treatment that allows
healthy tissue around the tumor to be spared.
Womens health
Advances in technology and medical science continue to transform womens healthcare, as our
understanding of screening, prevention and education evolves in parallel to improvements in disease
management.
Philips maintains its long-term commitment to introducing innovations for every season of a womans
health from adulthood through helping seniors maintain independence later in life. Whether it is
in obstetrical care, where our technologies allow vigilant and reassuring surveillance before,
during and after pregnancy, or alerting medical emergency services from home when needed, Philips
offers women around the globe a sense of confidence and reliability.
For breast cancer, we developed important MR technologies in 2007 such as the Smart Exam as well
as integrated MRI coils and the DynaCAD® Workstation to support optimal screening and
early detection.
Customer loyalty
We use the Net Promoter Score to measure customer loyalty. We are investing significantly to
improve our patient-and-provider focus through products that address the care cycle, better
communication from our customer-facing employees and improved service performance. These
initiatives are intended to increase the bond of trust we have with our customers, a leading
indicator of purchase and repurchase behavior. In 2007, we implemented customer-loyalty programs to
better understand how our products and services are viewed in the marketplace.
Cultivate leadership talent
In order to support our business excellence we continued to build the strategic leadership
capabilities of our people. It is our goal to be one of the best places to work. Therefore we must
offer energizing challenges and development opportunities for our people to fully exploit their
talent.
In 2007 we deployed employee recognition programs in different parts of the organization. We also
enhanced our ability to recruit, develop and retain top talent, attracting 25 senior managers from
outside the company.
Philips MRI Breast Solution is fast, easy and accurate. It enables physicians to provide
patients with the best diagnostic information and, if needed, to perform MRI-guided
biopsies, helping patients avoid unnecessary stress.
Focus on operational excellence
Throughout 2007 we continued to focus on improving the key business processes.
By adopting one common logistics process for equipment and one global logistics partner for
spare parts, we dramatically improved our customer delivery performance. We also deployed
global project tools, resulting in more predictable and efficient installation activity.
Harmonizing global order types is reducing the complexity of commercial and industrial
transactions. Finally, by beginning to consolidate our industrial footprint, we have been
able to focus on core competencies and on integrating acquisitions.
Process improvements remain a key focus as we simplify interfaces and gain leverage with our
supply base. Initiatives built around supplier development and collaboration continue to
yield improvements in the areas of early supplier involvement, accelerated time-to-market
and supplier quality performance.
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Medical Systems
Improve service satisfaction
Service satisfaction continues to be a focal area for us. Serviceability features that allow
quick problem resolution have been designed-in to all product lines using a new standardized
process. The process has yielded a 30% improvement in serviceability features over the last
three product release cycles.
We also implemented a robust business management system designed to take operational performance to
world-class level. This system is founded upon the integrated application of Philips Business
Excellence/ Process Survey Tools, Six Sigma, Breakthrough Management (Hoshin) and, specifically,
extensive benchmarking.
2007 financial performance
Sales in 2007 totaled EUR 6,470 million, a stable nominal performance compared to 2006. Excluding
the 2% positive impact of portfolio changes and the 5% unfavorable currency effect, comparable
sales growth was 4%. Particularly strong growth in Ultrasound & Monitoring and Customer Services
was partly offset by the decline in Imaging Systems which was negatively affected by the continued
softening of the imaging market in the US, in part a result of the impact of the Deficit Reduction
Act, and in Japan.
From a regional perspective, single-digit comparable sales growth was achieved in the mature
markets, including North America, which generated double-digit growth in all businesses except
Imaging Systems. The key emerging markets experienced 10% comparable growth, with particularly
strong performance in India (17%) and solid growth of 9% each in China and Latin America.
EBITA amounted to EUR 875 million or 13.5% of sales in 2007, compared to EUR 861 million or 13.4%
in 2006. Earnings fell short of the divisional target of 14-15%, as higher earnings at Ultrasound &
Monitoring, Customer Services and Healthcare Informatics were largely offset by lower sales-driven
earnings at Imaging Systems, partly due to the impact of the Deficit Reduction Act.
EBIT improved from EUR 734 million in 2006 to EUR 743 million in 2007.
Cash flows before financing activities included net payments totaling EUR 70 million for the
acquisitions of Emergin, VMI and XIMIS in 2007, while 2006 included acquisition-related cash
outflows of EUR 1,103 million, for Intermagnetics and Witt Biomedical. Excluding these
acquisition-related disbursements, cash flows before financing activities were EUR 186 million
below 2006, mainly due to higher working capital requirements and increased capital expenditures.
Key data
in millions of euros
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20051) |
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20061) |
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2007 |
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Sales |
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6,013 |
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6,448 |
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6,470 |
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Sales growth |
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% increase, nominal |
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9 |
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|
|
7 |
|
|
|
0 |
|
% increase, comparable |
|
|
8 |
|
|
|
8 |
|
|
|
4 |
|
EBITA |
|
|
768 |
|
|
|
861 |
|
|
|
875 |
|
as a % of sales |
|
|
12.8 |
|
|
|
13.4 |
|
|
|
13.5 |
|
EBIT |
|
|
688 |
|
|
|
734 |
|
|
|
743 |
|
as a % of sales |
|
|
11.4 |
|
|
|
11.4 |
|
|
|
11.5 |
|
Net operating capital (NOC) |
|
|
3,179 |
|
|
|
4,125 |
|
|
|
4,104 |
|
Cash flows before financing activities |
|
|
505 |
|
|
|
(427 |
) |
|
|
420 |
|
Employees (FTEs) |
|
|
24,221 |
|
|
|
26,203 |
|
|
|
27,441 |
|
|
|
|
1) |
|
Restated to present the MedQuist business as a discontinued operation
|
|
|
|
For a
reconciliation to the most directly comparable US GAAP measures, see the chapter Reconciliation of
non-US GAAP information |
68 Philips Annual Report 2007
|
|
|
|
|
|
|
98 Risk management
|
|
112 Our leadership
|
|
116 Report of the Supervisory Board
|
|
126 Financial Statements |
For 2008, strong sales growth is anticipated in Patient Monitoring, Cardiac Care, Home
Healthcare Solutions and Customer Services, tempered by limited growth in Imaging Systems.
Regulatory requirements
Medical Systems is subject to extensive regulation. It strives for full compliance with regulatory
product approval and quality system requirements in every market it serves by addressing specific
terms and conditions of local ministry of health or federal regulatory authorities, including
agencies like the US FDA, EU Competent Authorities and Japanese MLHW. Environmental and
sustainability requirements like the European Unions Waste from Electrical and Electronic
Equipment (WEEE) and the Restriction of Hazardous Substances (RoHS) directives are met with
comprehensive EcoDesign and manufacturing programs to reduce the use of hazardous materials.
Continuous clinical innovation and breakthroughs, in combination with collaborative customer
relationships, drive growth and profitability. However, the success of clinical innovation is often
dependent upon appropriate reimbursement. In the US, concern over rapid and sustained growth in
imaging services has attracted increased scrutiny by the Federal government and commercial payers.
This has resulted in the adoption of new strategies designed to curb growth that could continue to
impact Philips Healthcare in 2008 and beyond. The Deficit Reduction
Act of 2005 came into effect in February 2006 and included substantial reductions in Medicare payments for imaging
services performed in non-hospital settings. Commercial payers are also implementing several types
of utilization management strategies designed to curb growth. Philips will continue to work closely
with legislators, payers and providers to avoid further unwarranted reimbursement reductions and to
ensure a more rational approach to payment for innovative technologies, particularly advanced
imaging services.
Strategy and 2008 objectives
Following the announcement of Vision 2010 in September 2007, the former Medical Systems division
and Consumer Healthcare Solutions business now renamed Home Healthcare Solutions have been
integrated effective January 1, 2008, and going forward will be reported as the Healthcare sector.
Philips Healthcare will play an important role in the realization of Philips Vision 2010 ambition.
For 2008 and beyond, Healthcare has put in place a number of specific value-creating initiatives
which it will drive through a framework of Growth, Talent and Simplicity:
|
|
Extract value from acquisitions through successful
integration |
|
|
|
Expand presence in emerging markets |
|
|
|
Cultivate leadership talent and recognize and reward
top talent |
|
|
|
Deliver on care cycle solutions from the hospital
to the home. |
Philips Annual Report 2007 69
|
|
|
|
|
|
|
8 Financial highlights
|
|
10 Message from the President
|
|
16 The Philips Group
|
|
62 The Philips sectors |
Domestic Appliances
and Personal Care
Domestic Appliances and Personal Care
More than 15 million consumers around
the world already use a Philips
Sonicare toothbrush. With the launch
of the FlexCare model developed in
cooperation with a team of
periodontists and bioengineers
Philips Sonicare once again raises the
bar for premium power toothbrushes.
70 Philips Annual Report 2007
|
|
|
|
|
|
|
98 Risk management
|
|
112 Our leadership
|
|
116 Report of the Supervisory Board
|
|
126 Financial Statements |
|
|
|
28%
comparable sales
growth in emerging
markets for DAP
|
|
The domestic appliances and personal care retail landscape continues to evolve, with major emerging
markets such as Brazil, Russia, China and India maintaining their strong growth. |
Philips Domestic Appliances and Personal Care (DAP) empowers consumers with a wide range of
technologically advanced yet easy-to-use products that enhance their sense of well-being and
appearance, as well as helping them to prepare food and beverages and take care of their homes and
garments.
We are engaged in the development, manufacturing and marketing of innovative propositions through
our three businesses:
|
|
Shaving & Beauty electric shavers, female depilation
appliances, haircare and male grooming products |
|
|
|
Domestic Appliances kitchen appliances, floor
care, garment care, water and air purifiers and
beverage appliances |
|
|
|
Health & Wellness oral health care and mother
and child care. |
We also partner with leading companies from other fields, like Sara Lee/Douwe Egberts and Nivea
Beiersdorf, in order to deliver exciting appliance/consumable combinations.
With our extensive product portfolio, we are able to service traditional and emerging distribution
channels, e.g. general retailers, electronic retailers, mass merchants, retailer specialists,
online retailers, distributors/wholesalers.
The domestic appliances and personal care retail landscape continues to evolve, with major emerging
markets such as Brazil, Russia, China and India maintaining their strong growth, and retailers
driving their expansion, both into new geographies, as well as into the online sector.
DAP has a host of top 3 positions across its portfolio and across key markets in Europe, North
America and Asia. For example, the global No. 1 position in male dry shaving, as well as top 3
positions for Garment Care in Europe, Female Depilation and Oral Healthcare in Asia Pacific, and
Kitchen Appliances and Floorcare in Europe.
We have a strong global presence with manufacturing sites in nine countries and sales organizations
in more than 60. Our Centers of Competence, located in four different countries, play an important
role in the development of our products. In total, DAP employs nearly 10,000 people.
DAP complies with all relevant regulatory requirements, most notably the ED WEEE (Waste from
Electrical and Electronic Equipment) Directive and the RoHS (Restriction of Hazardous Substances)
Directive.
With regard to sourcing, please refer to the business description of Philips Supply Management
that begins on page 96 of this Annual Report.
Progress against objectives
The Annual Report 2006 set out a number of key targets for DAP in 2007. The advances made in
addressing these are outlined below.
Increase customer focus: category management, international key account management and channel
strategy
While upgrading its key account management teams and implementing innovative customer intimacy
programs, DAP significantly intensified its focus on global customers. We deepened our strategic
alignment with international key accounts by holding strategy review meetings designed to involve
key retail partners in our product creation process with the aim of gaining direct feedback. This
new approach towards our retailers, based on trust and open communication, helped to accelerate
profitable growth while providing better value to both our retailers and consumers. We are now
executing common 3-year global business plans with our largest international key accounts across
all product categories and countries. In 2007, DAP accelerated growth with key accounts via the
successful introduction of ground-breaking products such as the Arcitec shaver.
Philips Annual Report 2007 71
|
|
|
|
|
|
|
8 Financial highlights
|
|
10 Message from the President
|
|
16 The Philips Group
|
|
62 The Philips
sectors |
Domestic Appliances
and Personal Care
With Philips Arcitec, men can be confident that theyll get a perfectly close shave, even on
their neck. Three independently flexing heads ensure optimum skin contact in curved areas.
Building on the successful healthy living positioning, the Domestic Appliances business completed
its juicer range in 2007, with the Alu model becoming a global image carrier for the appliances
business. Continuing the Senseo success story, Domestic Appliances also introduced a range of
Espresso makers in Europe, thereby entering the high-value coffee category with the highest growth
rate 13% within the small appliances segment. In the Home environment segment Domestic
Appliances extended its scope with its newly introduced water purification products, addressing the
global need for safe drinking water. These products are initially available in India and Brazil,
but are to be rolled out to other markets in 2008.
Growth of the Domestic Appliances business in 2007 was strongly supported by a dedicated program to
develop business jointly with the trade. Cooperation on marketing campaigns led to significant
category growth, e.g. through the healthy living positioning, especially in juicing and blending.
Good relationships have been developed with key international distribution chains. The dedicated
program resulted in three-quarters of market share growth in Western Europe being achieved with
DAPs top 10 international retailers.
DAP further expanded its global leading position in electric dry- and wet male shaving and grooming
products in 2007. The Shaving & Beauty business celebrated the milestone of producing its 500
millionth shaver and achieved record sales and earnings for the second consecutive year. 2007 also
saw the global introduction of two innovative shaver ranges, Arcitec and the Moisturizing Shaving
System, which offer a much improved shaving performance combined with an innovative design.
The Beauty business continued its rapid expansion by offering a range of female depilation,
haircare and male grooming products, among which the Bodygroom for males was particularly
successful. The Bodygroom was further rolled out in Eastern Europe, Middle East and Africa and
reached more than one million new consumers in Europe and North America.
In the Oral Healthcare category, the September 2007 launch of Flexcare firmly established Philips
Sonicare as the world leader in the sonic power toothbrush category, according to GfK,
72 Philips Annual Report 2007
|
|
|
|
|
|
|
98 Risk management
|
|
112 Our leadership
|
|
116 Report of the Supervisory Board
|
|
126 Financial Statements |
Focus resource allocation on mission-critical initiatives
The successful launches of Arcitec, the Moisturizing Shaving System and the FlexCare toothbrush
are proof-points of organizational emphasis on mission-critical initiatives.
The initiative to develop business jointly with the trade in the field of domestic appliances is
recognized by retail partners as a positive change agent. This program is gaining momentum and will
be rolled out beyond Domestic Appliances in 2008.
Ensure functional leadership to maximize cost efficiencies and speed
2007 saw the deployment of a sector-wide cost-reduction initiative Earn-to-lnvest, which is
designed to free up and redirect resources toward drivers of growth. In R&D, for example, this
resulted in over 100 local initiatives to reduce costs (e.g. by moving prototype testing to
lower-cost locations) and increase speed (e.g. by reducing rework required on models and moulds).
Further develop consumer-centric innovation competence
DAP enhanced its innovative capability by leveraging (online) external networks and knowledge
more intensely during the early phases of innovation (e.g. via the YourEncore online experts
network). Posting the right technology questions in expert communities outside Philips
increases the chances of getting better answers faster.
In June 2007, the Health & Wellness business organized the Avent Innovation Wave, at which all DAP
employees worldwide were triggered to think as consumers for Mother & Childcare products. The event
gathered over 1,200 validated consumer insights and over 500 product solutions, ensuring
distinctive new propositions for the Philips Avent portfolio as well as for expansion into new
value spaces.
Focus on talent by securing engagement and internationalizing the talent pipeline
An Engagement Master Class has been introduced for all senior managers, and employee engagement
data are used in leadership assessment/development and promotions.
The Senseo coffee system from Philips and Sara Lee/DE offers a winning combination of
sensational-tasting coffee, cool design and easy-to-use technology.
Philips Annual Report 2007 73
|
|
|
|
|
|
|
8 Financial highlights
|
|
10 Message from the President
|
|
16 The Philips Group
|
|
62 The Philips sectors |
Domestic Appliances
and Personal Care
Diversity is vital. To reflect DAPs global business, our leaders need to have broad,
multifunctional and international experience. For teams with global/ regional reach, DAP
requires that a minimum of 50% of the employees on each team originate from the markets in
question.
Simplify the organization by creating a direct link between markets and the business
As of January 1, 2007, DAP removed the regional management layer between its global business units
and country sales organizations, simplifying its organization and processes to facilitate maximum
growth and realize untapped potential.
Redesign and simplify the innovation process towards Open Innovation
Building on the increasing application of the Value Proposition House methodology for arriving at a
unique and discriminating positioning for a product, the marketing and R&D communities simplified
the process to translate a Value Proposition House into a technical product specification. In
addition, dedicated research was done on returned products to better understand consumer
requirements, thereby augmenting the consumer insight knowledge base from which new products will
be developed.
2007 financial performance
2007 was a very successful year for DAP. Full-year sales increased by EUR 436 million, or 17% on a
nominal basis. Adjusted for the 5% positive effect from the integration of Avent (acquired in
September 2006) and adverse currency developments (3%), comparable sales grew by 15%, significantly
ahead of the 7% growth target set at the beginning of the year.
Double-digit comparable sales growth was achieved by all businesses and market clusters. From a
business perspective, growth was led by excellent performance at Domestic Appliances, mainly driven
by the Kitchen Appliances business, benefiting from our investments in innovation and the brand.
Shaving & Beauty benefited from the successful introduction of two new shavers (Arcitec and the
Moisturizing Shaving System) and the continued acceptance and further roll-out of Bodygroom
products. At Health & Wellness, sales increased largely as a result of the good market acceptance
of Oral Healthcare products, supported by the launch of the new FlexCare toothbrush and the
successful market introduction of the Wake-up Light.
From a geographical perspective, comparable sales growth was evident in all countries, with
double-digit increases in all market clusters. Emerging markets including China, India, Brazil and
Russia representing about one third of DAPs sales contributed 28% comparable sales growth in
2007.
Key data
in millions of euros
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
Sales |
|
|
2,194 |
|
|
|
2,532 |
|
|
|
2,968 |
|
Sales growth |
|
|
|
|
|
|
|
|
|
|
|
|
% increase, nominal |
|
|
7 |
|
|
|
15 |
|
|
|
17 |
|
% increase, comparable |
|
|
6 |
|
|
|
11 |
|
|
|
15 |
|
EBITA |
|
|
328 |
|
|
|
378 |
|
|
|
523 |
|
as a % of sales |
|
|
14.9 |
|
|
|
14.9 |
|
|
|
17.6 |
|
EBIT |
|
|
324 |
|
|
|
370 |
|
|
|
510 |
|
as a % of sales |
|
|
14.8 |
|
|
|
14.6 |
|
|
|
17.2 |
|
Net operating capital (NOC) |
|
|
370 |
|
|
|
1,138 |
|
|
|
1,136 |
|
Cash flows before financing activities |
|
|
384 |
|
|
|
(287 |
) |
|
|
415 |
|
Employees (FTEs) |
|
|
8,203 |
|
|
|
9,933 |
|
|
|
9,881 |
|
For a reconciliation to the most
directly comparable US GAAP measures,
see the chapter Reconciliation of
non-US GAAP information
74 Philips Annual Report 2007
|
|
|
|
|
|
|
98 Risk management
|
|
112 Our leadership
|
|
116 Report of the Supervisory Board
|
|
126 Financial Statements |
Compared to 2006, EBITA increased by EUR 145 million to EUR 523 million, corresponding to a
profitability improvement of 2.7% of sales, reaching 17.6% of sales in 2007, well above the
targeted 15%. The year-on-year earnings rise was largely driven by higher sales and tight cost
management. EBITA improvements were visible both in absolute amounts and relative to sales in
all businesses.
EBIT increased by EUR 140 million to EUR 510 million in 2007, compared to EUR 370 million in 2006.
DAP
generated EUR 415 million cash flows before financing activities, broadly in line with last
year, excluding the EUR 689 million net cash payment for the acquisition of Avent. Higher
earnings were largely offset by increased working capital needs.
Strategy and 2008 objectives
Following the announcement of Vision 2010 in September 2007, the former Consumer Electronics and
Domestic Appliances and Personal Care divisions have been integrated effective January 1, 2008, and
going forward will be reported as the Consumer Lifestyle sector.
Philips Consumer Lifestyle will play an important role in the realization of Philips Vision 2010
ambition.
For 2008 and beyond, Consumer Lifestyle has put in place a number of specific value-creating
initiatives which it will drive through a framework of Growth, Talent and Simplicity:
|
|
Leverage post-integration synergies, particularly
with regard to customers, markets and key account
management, as well as in supply chain optimization
and the sectors relationships with third-party suppliers
and partners; synergies will also be realized across
all operational processes, through the organizational blueprint and way-of-working design |
|
|
|
Open up new value spaces in the consumer lifestyle field to further strengthen our business
portfolio and to deliver upon our growth ambition |
|
|
|
Create a unified, engaged and high-performance organization in which growth and diversity
can be nurtured within our leadership community and talent pipeline |
|
|
|
Maximize our structure to be fully market-driven, in terms of our customer relationships
and our business portfolio. |
Philips Annual Report 2007 75
|
|
|
|
|
|
|
8 Financial highlights
|
|
10 Message from the President
|
|
16 The Philips Group
|
|
62 The Philips sectors |
|
|
|
|
|
|
|
Consumer Electronics |
|
|
|
Consumer Electronics
|
|
18
|
|
|
CES Innovation Awards for
|
|
|
Consumer Electronics |
We have taken the notion of immersive technology a dramatic step further with our new Aurea FlatTV.
Aurea radiates light, color and sound from its unique active frame, creating a truly seductive
ambient viewing experience.
76 Philips Annual Report 2007
|
|
|
|
|
|
|
98 Risk management
|
|
112 Our leadership
|
|
116 Report of the Supervisory Board
|
|
126 Financial Statements |
With value creation and margin management our main objective, our 2007 activities
centered on leveraging the strength of our asset-light operating model, as well as
driving differentiation in the marketplace.
Placing consumers needs at the very heart of its strategy and activities, Philips Consumer
Electronics (CE) is dedicated to providing consumers with great lifestyle entertainment experiences
and services whenever and wherever they want.
Applying relevant innovation powered by simplicity-led design to address the twin consumer desires
of wellness and pleasure, Philips has a distinctive position in the consumer electronics space
offering applications with ambient benefits that support both the individuals desire for
entertainment content as well as differentiated sensorial experiences.
Income is derived principally from two sources: products (including product/service
combinations) and licensing activities.
In 2007, CE consisted of the following areas of business:
|
|
Connected Displays including FlatTVs such as the new Aurea and the Ambilight range, the
Perfect Pixel HD Engine picture quality platform, LCD PC monitors, and professional and
business display solutions, such as Hotel TV and public signage displays |
|
|
|
Entertainment Solutions, consisting of Video & Multimedia Applications including the Cineos
SoundBar DVD Home Theater with Ambisound technology, Hard Disk/DVD Recorders and Blu-ray Disc
players and Audio & Multimedia Applications including GoGear portable audio and video
players, Streamium Wireless Music Systems, entertainment docks for portable audio/video
players such as Philips GoGear range and Apples iPod |
|
|
|
Peripherals & Accessories including Prestigo remote controls, Philips-Swarovski Active
Crystal fashion accessories, the PhotoFrame range, amBX PC gaming peripherals, DECT and VoIP
cordless phones, webcams and USB PC add-on drives |
|
|
|
Home Networks including a complete range of digital set-top boxes such as HDTV receivers,
along with Streamium wireless audio-video links. |
The license activities offer third parties access to new and inventive Philips technologies by
making licenses available under Philips intellectual property relevant to these technologies.
Licenses can be obtained for various products, like DVD/Blu-ray players, recorders and discs.
CE products are channeled towards the consumer primarily through national and international
retailers. The division offers a broad range of products from high to low price/value quartiles,
necessitating a diverse distribution model that includes mass merchants, retail chains,
independents and small specialty stores often represented by buying groups. In order to work in the
most effective way with these retail channels, Philips has created an organization designed around
its retail customers, with Global Key Account Managers and Country Ambassadors.
The consumer electronics retail landscape continues to evolve, with the major emerging markets like
Russia, China and India maintaining their strong growth, and retailers driving their expansion,
both into new geographies, as well as into the online sector. Price pressure remains a key
challenge for the industry.
The CE business experiences seasonality, with higher sales in the fourth quarter resulting from the
holiday sales.
CE employs approximately 14,000 people worldwide, with a global sales and service organization
embracing more than 50 mature and emerging markets in Europe, North America, Latin America, Asia
Pacific, the Middle East and Africa. In addition, we operate manufacturing and business creation
organizations in the Netherlands, France, Belgium, Hungary, Mexico, Argentina and Brazil, as well
as overseeing licensed manufacturing activities in China.
Philips Annual Report 2007 77
|
|
|
|
|
|
|
8 Financial highlights
|
|
10 Message from the President
|
|
16 The Philips Group
|
|
62 The Philips sectors |
|
|
|
|
|
|
|
Consumer Electronics |
Having passed the milestone of selling its one millionth Digital PhotoFrame, Philips has
launched a new range of the stylish, high-resolution digital picture displays. The 2007 collection
includes 5.6-inch and 10-inch models capable of storing up to 1000 images.
CE complies with all relevant
regulatory requirements, most notably
the EU WEEE (Waste from Electrical
and Electronic Equipment) Directive
and the RoHS (Restriction of
Hazardous Substances) Directive.
With regard to sourcing, please
refer to the business description
of Philips Supply Management that
begins on page 96 of this Annual
Report.
Progress against targets
With value creation and margin
management our main objective, our
2007 activities centered on leveraging
the strength of our asset-light
operating model, as well as driving
differentiation in the marketplace.
Growth
We achieved 1% comparable sales growth, with 9% comparable growth in the second half of the year.
This overall growth was supported by double-digit growth with our top eight retail accounts. We
maintained our strong relationships with major retailers, driving greater customer intimacy and
dedication through a combination of more efficient distribution models, increased application of
category management, and closer co-operation on supply chain management.
Overall, the consistent delivery of solid financial results has supported the strategic ambitions
of sustainable performance through CEs asset-light operating model (including minimal to negative
net operating capital levels) and an EBITA of around 3%.
Our Peripherals & Accessories business grew further with the acquisition of the US-based Digital
Lifestyle Outfitters (DLO), a leading supplier of computer and digital music player accessories.
Over the past years the Peripherals & Accessories organization has established a successful track
record of integrating such acquisitions quickly and effectively. Along with its acquisition
program, Peripherals & Accessories organic growth has benefited from the application of innovative
brand alliances, such as the Philips-Swarovski Active Crystals range and the assortment of
accessories for Nokia mobile phones.
78 Philips Annual Report 2007
|
|
|
|
|
|
|
98 Risk management
|
|
112 Our leadership
|
|
116 Report of the Supervisory Board
|
|
126 Financial Statements |
Continuing our active portfolio management, in line with our growth strategy, we completed
the sale of our remaining Mobile Phone activities to China Electronics Corporation (CEC) in March
2007. This transaction included the transfer of the Xenium product brand and the granting of an
exclusive license to market and sell mobile phones under the Philips brand for the coming five
years. In December 2007, Philips announced that it has reached an agreement to sell its Set-Top
Boxes and Connectivity Solutions activities, part of the Home Networks business unit, to Pace Micro
Technology of the UK. Upon completion of the deal, Philips will become a shareholder of some 23% in
the combined business.
Relevant innovation continues to be a key driver of our business. Major 2007 product launches
included the Aurea FlatTV, which we unveiled at IFA 2007 in Berlin. Taking Ambilight a dramatic
step further, Aurea creates a halo of dynamic light within the frame and around the TV for an
immersive viewing experience. The Cineos SoundBar with Ambisound technology simplifies the home
entertainment experience, delivering real 5.1-channel surround sound from a single unit, reducing
the need for multiple speakers and cabling. In PC gaming, we introduced a range of accessories
applying Philips amBX technology for even more immersive gaming.
Simplicity-led design is a key differentiator in the consumer electronics marketplace. Its
application together with relevant innovation and deep consumer insight has enabled CE to
create unique and compelling lifestyle propositions. Early in 2007, CE appointed a dedicated Chief
Design Officer to ensure a more structural and consistent implementation of a differentiating
design strategy throughout the business creation process.
CE also continues to harness Philips recommended brand status, driving Net Promoter Scores
across all key categories, processes, functions and consumer touch-points, in particular delivering
consistent top-tier results above 60% levels for the Ambilight Flat TV category.
In 2007, Philips added mobile phone company Nokia to its partnerships in consumer electronics
accessories. The Made for Nokia XpressMusic range of audio headphones is designed to deliver
highest-quality multimedia entertainment for Nokias growing portfolio of music-optimized devices
and smartphones.
Philips Annual Report 2007 79
|
|
|
|
|
|
|
8 Financial highlights
|
|
10 Message from the President
|
|
16 The Philips Group
|
|
62 The Philips sectors |
|
|
|
|
|
|
|
Consumer Electronics |
Talent
Transformational leadership was reinforced by the launch, in April, of a strategic initiative to
apply consumer and customer-centric behavior throughout the organization. This initiative was
underpinned by a new structural framework entailing key changes simplifying the way CE operates
designed to engender greater outside-in thinking.
This initiative was carried further into the project to integrate CE and DAP in the Consumer
Lifestyle sector, which commenced in September following the Philips Vision 2010 announcement.
CEs People Leadership ranking showed a score of 76% in 2007, clearly above the high-performance
benchmark.
Simplicity
CE has contributed significantly to the increase in Philips brand value by applying simplicity to
products, services and the way we interact and communicate with our customer base.
CE has also worked directly with retailers in addressing the environmental impact of electrical
consumer appliances. Major retail partners have sought Philips expertise in this area, leveraging
the companys EcoVision product creation strategy. Furthermore, the launch, in 2007, of a green
logo on CEs most environmentally-friendly products provided clear and easy in-store
guidance to consumers about the environmental impact of Philips products they wish to purchase.
2007 financial performance
Sales totaled EUR 10,362 million in 2007, reflecting a nominal decline of 2% compared to 2006.
Adjusted for 1% portfolio changes (mainly the sale of Mobile Phones in March 2007 and the
acquisition of DLO in May 2007) and 2% negative currency effects, comparable sales increased by 1%.
Year-on-year sales growth was delivered by all businesses except Connected Displays, which suffered
from challenging market conditions and a loss of market share in the first half of the year. The
sales decline at Connected Displays was due to the positive effect, in 2006, of soccers World Cup,
as well as increased competition and price pressure in Flat TV, the latter particularly in the US.
However, in the second half of the year Connected Displays showed 10% comparable growth.
From a geographical perspective, sales growth was strong in Europe and the emerging markets in Asia
Pacific, driven by increases in all businesses. Sales declined in North America and Latin America,
primarily due to Connected Displays.
CEs focus on margin management resulted in an EBITA of EUR 325 million, or 3.1% of sales, compared
to 3.0% in 2006, in line with the target set for the division. Significant margin pressure at
Connected Displays,
Key data
in millions of euros
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
Sales |
|
|
10,422 |
|
|
|
10,576 |
|
|
|
10,362 |
|
Sales growth |
|
|
|
|
|
|
|
|
|
|
|
|
% increase (decrease), nominal |
|
|
5 |
|
|
|
1 |
|
|
|
(2 |
) |
% increase, comparable |
|
|
5 |
|
|
|
5 |
|
|
|
1 |
|
EBITA |
|
|
405 |
|
|
|
314 |
|
|
|
325 |
|
as a % of sales |
|
|
3.9 |
|
|
|
3.0 |
|
|
|
3.1 |
|
EBIT |
|
|
404 |
|
|
|
313 |
|
|
|
322 |
|
as a % of sales |
|
|
3.9 |
|
|
|
3.0 |
|
|
|
3.1 |
|
Net operating capital (NOC) |
|
|
(296 |
) |
|
|
(228 |
) |
|
|
(246 |
) |
Cash flows before financing activities |
|
|
548 |
|
|
|
248 |
|
|
|
357 |
|
Employees (FTEs) |
|
|
15,537 |
|
|
|
14,486 |
|
|
|
13,516 |
|
For a reconciliation to the
most directly comparable US GAAP
measures, see the chapter
Reconciliation of non-US GAAP
information
80 Philips Annual Report 2007
|
|
|
|
|
|
|
98 Risk management
|
|
112 Our leadership
|
|
116 Report of the Supervisory Board
|
|
126 Financial Statements |
particularly in the US, was more than offset by higher EBITA in the other businesses.
EBIT reached EUR 322 million (3.1% of sales), compared to EUR 313 million (3.0% of sales) in 2006.
Net operating capital at the end of 2007 amounted to negative EUR 246 million (2006: negative EUR
228 million), reflecting the continued success of the divisions asset-light strategy.
Cash flows before financing activities improved from EUR 248 million in 2006 to EUR 357 million
in 2007, primarily driven by tight working capital management at Connected Displays.
In December 2007, Philips agreed to sell its Set-Top Boxes and Connectivity Solutions activities to
UK-based technology provider Pace Micro Technology. Closure of the deal is expected in Q1 2008.
Strategy and 2008 objectives
Following the announcement of Vision 2010 in September 2007, the former Consumer Electronics and
Domestic Appliances and Personal Care divisions have been integrated effective January 1, 2008, and
going forward will be reported as the Consumer Lifestyle sector.
Philips Consumer Lifestyle will play an important role in the realization of Philips Vision 2010
ambition. For 2008 and beyond, Consumer Lifestyle has put in place a number of specific
value-creating initiatives which it will drive through a framework of Growth, Talent and
Simplicity:
|
|
Leverage post-integration synergies, particularly with regard to customers, markets and key
account management, as well as in supply chain optimization and the sectors relationships
with third-party suppliers and partners; synergies will also be realized across all
operational processes, through the organizational blueprint and way-of-working design |
|
|
|
Open up new value spaces in the consumer lifestyle field to further strengthen our business
portfolio and to deliver upon our growth ambition |
|
|
|
Create a unified, engaged and high-performance organization in which growth and diversity can
be nurtured within our leadership community and talent pipeline |
|
|
|
Maximize our structure to be fully market-driven, in terms of our customer relationships and
our business portfolio. |
Philips Annual Report 2007 81
|
|
|
|
|
|
|
8 Financial highlights
|
|
10 Message from the President
|
|
16 The Philips Group
|
|
62 The Philips sectors |
|
|
|
|
|
|
|
Lighting |
|
|
|
Lighting
|
|
48%
|
|
|
of Lighting sales attributable |
|
|
to Green Products |
The LED-based Living Colors lets people create whatever atmosphere they like in their room by
choosing from 16 million LED colors with a simple remote control.
82 Philips Annual Report 2007
|
|
|
|
|
|
|
98 Risk management
|
|
112 Our leadership
|
|
116 Report of the Supervisory Board
|
|
126 Financial Statements |
We are building a strong position through the complete solid-state lighting
value chain for future growth in energy-efficient lighting solutions using LED
sources.
Philips Lighting is the global market leader, with recognized expertise in the development,
manufacturing and application of innovative lighting solutions. Philips pioneered many of the key
breakthroughs in lighting technology, creating a solid basis for both its present activities and
future aspirations. Through its expertise and in-depth understanding of the customer and the
end-user, the division is a market-driven innovator in lighting and a shaper of the lighting
industry landscape. As stated in its mission, Philips Lighting understands people and improves
their lives with lighting.
Lightings products are found throughout the home and in professional applications at work, on
the move, in shops, in the city, hospitals, sports stadiums, etc. The division consists of the
following businesses:
|
|
Lamps incandescent; halogen; (compact) fluorescent; high-intensity discharge |
|
|
|
Consumer Luminaires functional; decorative; lifestyle |
|
|
|
Professional Luminaires city beautification; road lighting; sports lighting; office
lighting; shop/hospitality lighting; industry lighting |
|
|
|
Lighting Electronics electronic gear; electromagnetic gear; controls |
|
|
|
Automotive and Special Lighting Applications
car headlights; car signaling; other transport vehicles; optical lighting; infrared; ultraviolet;
projection |
|
|
|
Solid-State Lighting Components and Modules
retrofits; modules; flashlight; display; LUXEON. |
Two key trends are shaping the global lighting market: the need for energy efficiency and the
emergence of solid-state lighting.
Lighting presents a clear opportunity to save energy and slow climate change. It accounts for some
19% of global electricity consumption. Innovative lighting solutions can realistically save up to
40% energy on todays installed base, while also improving the quality of the light.
Solid-state or LED lighting represents the most significant development in lighting since the
discovery of electric light well over a century ago. Offering unprecedented design freedom in terms
of color, dynamics, miniaturization, architectural integration and energy effciency, it is opening
up exciting new possibilities, e.g. for ambience creation.
Our customers are mainly in the professional market. The Lamps business operates its sales and
marketing activities through the professional, OEM and consumer channels, the latter also being
used by our consumer luminaires business. Professional Luminaires is organized in a Trade business
(commodity products) and a Projects business (project luminaires); for the latter, the main focus
is on lighting designers, architects and urban planners. Automotive Lighting is organized in two
businesses: OEM and After-market. Special Lighting and solid-state lighting components and modules
are OEM businesses, while Lighting Electronics sales and marketing are conducted through both the
OEM and wholesale channels.
The division has manufacturing facilities in 25 countries, and sales organizations in more than 60.
Commercial activities in other countries are handled via dealers working with the International
Sales organization. Lighting has some 54,000 employees worldwide.
Lighting complies with all relevant regulatory requirements, most notably the EU WEEE (Waste from
Electrical and Electronic Equipment) Directive and the RoHS (Restriction of Hazardous Substances)
Directive.
With regard to sourcing, please refer also to the business description of Philips Supply Management
that begins on page 96 of this Annual Report.
Philips Annual Report 2007 83
|
|
|
|
|
|
|
8 Financial highlights
|
|
10 Message from the President
|
|
16 The Philips Group
|
|
62 The Philips sectors |
|
|
|
|
|
|
|
Lighting |
At the Dutch coastal town of Breskens, the promenade is now lit by a combination of Philips
CitySoul luminaires and CosmoPolis light sources. Road safety, energy effciency, respect for the
environment and aesthetics were key considerations for the new lighting scheme.
Progress against targets
In the Annual Report 2006, Lighting identifed a number of key objectives for 2007. The progress
made in addressing these is discussed below.
Emerging markets
We continue to build on our strong position in key emerging, fast-growth markets, such as Latin
America, China, the Indian subcontinent, Central and Eastern Europe and the ASEAN zone, which
together now account for 37% of Lighting sales. In these markets, our comparable growth in 2007 was
16%.
Developing our distribution networks in these countries continues to receive our full attention. In
China, for example, we are expanding our distribution network to second and third-tier cities, of
which there are some 660 with populations of between half a million and two million. In 2007, we
added 8,000 outlets (or 30 per day), giving a total of 11,600. We expect this figure to rise to
18,700 by the end of 2008. Our China Sourcing Group, formed in 2004 as a Lighting entity to
facilitate our businesses sourcing from China through one window, is on course to deliver USD 1
billion supply value by 2010.
Energy-efficient lighting solutions
In 2007, Lighting built on its strong position in the value chain towards professional end-users
and consumers, especially by drawing attention to the worldwide energy and climate-saving
opportunity offered by our energy-efficient lighting. Our new innovative lighting solutions can
realistically save up to 40% energy on all todays installed lighting, whether outdoors, in offices
or shops, or in the home. At the same time they offer a clear improvement in the quality of the
light.
Saving 50% on energy costs and creating a safer environment, over 50,000 Philips CosmoPolis street
lighting systems have already been installed in 50 cities in Europe, and interest is increasing in
Asia, and particularly China, where energy-efficient products already represent 44% of our total
Lighting sales.
The switch-over rate to energy-efficient lighting, however, is still too low given the
energy-saving opportunity. We are working hard to remove the obstacles to accelerating this
switch-over via awareness campaigns (public and private), supporting new legislation (e.g. energy
certification for buildings) and partnerships (public, private, non-government
84 Philips Annual Report 2007
|
|
|
|
|
|
|
98 Risk management
|
|
112 Our leadership
|
|
116 Report of the Supervisory Board
|
|
126 Financial Statements |
organizations and utilities). In 2007, sales of our Green products rose further and now account for
48% of Lighting sales.
Solid-state lighting
In 2007 we strengthened our position as the leader in solid-state lighting and are the only company
covering the whole value chain from LED components via modules to luminaires and systems. Over the
past few years we have invested nearly EUR 4 billion in acquiring high-growth businesses in the
areas of solid-state lighting and luminaires. This figure includes the sum of EUR 1.8 billion
agreed in November 2007 for the acquisition of Genlyte Group Incorporated, a leading North American
luminaire manufacturer, which we completed on January 22, 2008.
Besides growing our presence in North America, this transaction deepens our contacts to end-users,
such as wholesalers, contractors, architects and lighting designers, helping us speed up the market
roll-out of more energy-efficient lighting and the introduction of new lighting technologies, like
solid-state lighting.
Early in 2007 we closed the acquisition of Partners in Lighting International (PLI), the leading
European manufacturer of home luminaires. This acquisition strengthens our presence in the home
lighting market, where solid-state lighting will bring major benefits in terms of creating
atmospheres and reducing energy consumption. Successfully integrated, PLI is now organized as a
global business in its own right and is running well ahead of its business plan.
Next came our acquisition of TIR Systems, based in Vancouver, Canada, a leading company in
solid-state lighting technology for products that generate high-quality white light and a leader in
SSL modules. TIR has a sizeable intellectual property portfolio.
In September we completed the acquisition of Color Kinetics, a recognized innovator and leading
player in the SSL luminaire business with a strong presence in the USA and a broad technology and
intellectual property portfolio (controls and intelligent technology).
In this way we are building a strong position through the complete SSL value chain for future
growth in energy-efficient lighting solutions using LED sources. These acquisitions strengthen our
technology base and intellectual property position, and provide us with a strong presence in all
continents. At the same time
In the frozen food department of supermarkets, the performance of LEDs in freezers is far superior
to that of the customary fluorescent lamps in terms of light output, energy efficiency and
lifetime.
Philips Annual Report 2007 85
|
|
|
|
|
|
|
|
|
|
|
8 Financial highlights
|
|
10 Message from the President
|
|
16 The Philips Group
|
|
|
|
|
|
62 The Philips sectors |
|
|
|
|
|
|
|
|
|
|
|
Lighting |
we continue to develop and invest in new OLED (Organic LED) and solid-state laser activities.
Talent
Under the heading Building competence, we have been driving the quality of our leadership, training
more than half our marketing people in the past two years on using end-user insights to drive
innovation, the Value Proposition House methodology and marketing planning and execution. We have
hired around 20 executive potentials per year over the past four years.
Under the heading Building a strong culture of excellence, we have been establishing a growth
culture and have seen our progress reflected in, for example, a considerable advance in our
Employee Engagement Survey score towards the high-performance benchmark and over 40% employee
participation in our annual Quality Improvement Competition.
Simplicity
To bring ourselves closer to our customers, we have shifted our focus from product management to
market segments. This move toward added value is reflected in the lighting solutions we offer in
the various segments.
For example, in the home environment, we let people create the atmosphere to suit their mood by
choosing the color of their light with LivingColors. And our flexible AmbiScene lighting concept
lets retailers tailor the in-store ambience at the touch of a button, to offer consumers an
inspiring shopping experience.
In line with this, we have organized our country sales groups around the customer channels
wholesale, projects, OEM and mass retail and leveraged our back-office activities across our
businesses as shared service departments.
We made significant progress in 2007 in our drive for supply chain excellence specifically in the
area of organizing the China supply chain, where volume doubled in the last year thanks to
several initiatives to improve processes and ways of working (e.g. direct shipments and planning).
2007 financial performance
Lighting sales in 2007 grew 11% in nominal terms, supported by the contribution of the acquired
companies PLI and Color Kinetics. Excluding these acquisitions and the negative currency impact of
3%, comparable growth reached 6%, led by robust growth of energy-efficient lighting, primarily
within Lamps and Luminaires. Sales of Solid-State Lighting applications grew 281% year-on-year,
reaching EUR 160 million, helped by the acquisition of Color Kinetics. Automotive Lighting and
Lighting Electronics also achieved further comparable growth. However, the remaining businesses
showed comparable declines, mainly due to the contracting rear-projection TV market (Special
Lighting Applications).
Geographically, the division showed strong growth in all markets clusters except North America.
Emerging markets delivered particularly strong growth of 17% in currency-comparable terms,
attributable to solid
Key data
in millions of euros
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
Sales |
|
|
4,775 |
|
|
|
5,466 |
|
|
|
6,093 |
|
Sales growth |
|
|
|
|
|
|
|
|
|
|
|
|
% increase, nominal |
|
|
6 |
|
|
|
14 |
|
|
|
11 |
|
% increase, comparable |
|
|
4 |
|
|
|
8 |
|
|
|
6 |
|
EBITA |
|
|
508 |
|
|
|
608 |
|
|
|
722 |
|
as a % of sales |
|
|
10.6 |
|
|
|
11.1 |
|
|
|
11.9 |
|
EBIT |
|
|
499 |
|
|
|
577 |
|
|
|
675 |
|
as a % of sales |
|
|
10.5 |
|
|
|
10.6 |
|
|
|
11.1 |
|
Net operating capital (NOC) |
|
|
2,491 |
|
|
|
2,527 |
|
|
|
3,886 |
|
Cash flows before financing activities |
|
|
(236 |
) |
|
|
451 |
|
|
|
(648 |
) |
Employees (FTEs) |
|
|
45,649 |
|
|
|
47,739 |
|
|
|
54,323 |
|
For a reconciliation to the most directly comparable US GAAP measures, seethe chapter
Reconciliation of non-US GAAP information
86 Philips Annual Report 2007
|
|
|
|
|
|
|
98 Risk management
|
|
112 Our leadership
|
|
116 Report of the Supervisory Board
|
|
126 Financial Statements |
growth across all businesses except for Special Lighting Applications in Asia, related to the rapid
contraction of the rear-projection TV market. Sales growth was notably strong in China (18%) and
India (16%).
EBITA in 2007 amounted to EUR 722 million, growing by EUR 114 million year-on-year to reach 11.9%
of sales, compared to EUR 608 million or 11.1% in 2006. This improvement was driven by solid
earnings growth at Lamps and Luminaires, additional EBITA following the successful integration of
PLI, and lower losses related to the fluorescent-based backlighting solutions business which we
exited in Q1 2007.
EBIT improved by EUR 98 million to reach EUR 675 million, or 11.1% of sales. Restructuring charges,
purchase-accounting-related charges and other net incidental items totaled EUR 55 million, compared
to EUR 48 million in 2006.
Cash flows before financing included acquisition-related investments totaling EUR 1,162 million in
2007, most notably the net payments of EUR 561 million for Partners in Lighting International and
of EUR 515 million for Color Kinetics. Net capital expenditures declined by EUR 88 million compared
to 2006, mainly due to higher investments in Lumileds in 2006.
Net inventories increased to 15.4% of sales, compared to 13.5% in 2006, primarily due to higher
inventory levels within PLI (due to rapid order fulfillment requirements and above-average lead
times from PLI-owned factories in China) and at Lamps (due to increased lead times resulting from
the transfer of the production of energy-efficient lamps to Asia).
Strategy and 2008 objectives
Philips Lighting will play an important role in the realization of Philips Vision 2010 ambition.
For 2008 and beyond, Lighting has put in place a number of specific value-creating initiatives
which it will drive through a framework of Growth, Talent and Simplicity:
|
|
Accelerate growth, both organically and through
the successful integration of acquisitions, on the basis of strength in emerging markets and in
energy-efficient lighting solutions |
|
|
|
Expand in the direction of system solutions, closely connected to the applications in the market,
in the areas of professional luminaires and consumer luminaires |
|
|
|
Continue to build on the leading position in solid-state lighting |
|
|
|
Strengthen the leadership bench via proactive talent recruitment |
|
|
|
Continue to build on the strong culture of excellence, while creating a learning organization
focused on continuous improvement |
|
|
|
Streamline ways of working by implementing segment marketing, strengthening customer focus and
driving for supply excellence. |
Philips Annual Report 2007 87
|
|
|
|
|
|
|
|
|
|
|
8 Financial highlights
|
|
10 Message from the President
|
|
16 The Philips Group
|
|
|
62 |
|
|
The Philips sectors |
|
|
|
|
|
|
|
|
|
|
|
Innovation & |
|
|
|
|
|
|
|
|
|
|
Emerging Businesses |
Innovation & Emerging Businesses
|
|
|
|
|
|
Philips Designs Skin Probes, winner of the Red Dot
best of the best 2007.
|
|
|
|
|
|
|
|
|
|
|
|
88 Philips Annual Report 2007
|
|
|
|
|
|
|
98 Risk management
|
|
112 Our leadership
|
|
116 Report of the Supervisory Board
|
|
126 Financial Statements |
Introduction
In 2007 this sector comprised Corporate Technologies, Corporate Investments, Design and Consumer
Healthcare Solutions. The latter renamed Home Healthcare Solutions became part of the
Healthcare sector as of January 1, 2008.
Key data
in millions of euros
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
Sales |
|
|
1,905 |
|
|
|
1,493 |
|
|
|
703 |
|
Sales growth |
|
|
|
|
|
|
|
|
|
|
|
|
% decrease, nominal |
|
|
(18 |
) |
|
|
(22 |
) |
|
|
(53 |
) |
% increase (decrease), comparable |
|
|
(5 |
) |
|
|
(9 |
) |
|
|
32 |
|
EBIT |
|
|
(165 |
) |
|
|
(94 |
) |
|
|
(101 |
) |
as a % of sales |
|
|
(8.7 |
) |
|
|
(9 |
) |
|
|
(14.4 |
) |
EBITA Corporate Technologies |
|
|
(108 |
) |
|
|
(91 |
) |
|
|
(76 |
) |
EBITA Corporate Investments/ Other |
|
|
(57 |
) |
|
|
17 |
|
|
|
(5 |
) |
EBITA CHS |
|
|
|
|
|
|
(2 |
) |
|
|
(2 |
) |
EBITA |
|
|
(165 |
) |
|
|
(76 |
) |
|
|
(83 |
) |
as a % of sales |
|
|
(8.7 |
) |
|
|
(5.1 |
) |
|
|
(11.8 |
) |
Net operating capital (NOC) |
|
|
226 |
|
|
|
748 |
|
|
|
1,001 |
|
Cash flows before financing activities |
|
|
(96 |
) |
|
|
(625 |
) |
|
|
(348 |
) |
Employees (FTEs) |
|
|
15,130 |
|
|
|
9,852 |
|
|
|
7,638 |
|
For a reconciliation to the most directly comparable US GAAP measures, see the chapter
Reconciliation of non-US GAAP information.
In 2007 this sector previously reported under the heading Other Activities was positioned as
Innovation & Emerging Businesses, reflecting Philips ambition for future growth. By leveraging its
brand, technology, IP base and distribution network, Philips invests, through this sector, in
projects that are not currently part of the operating divisions, but which will Philips believes
lead to additional organic growth or value creation through future spin-offs.
Corporate Technologies
Corporate Technologies feeds the innovation pipeline, enabling its business partners Philips
divisions and external businesses to improve their time-to-market and innovation effectiveness,
and thus achieve profitable growth.
It includes Corporate Research, Philips Incubators, Intellectual Property & Standards, campuses in
India and China, as well as Applied Technologies.
Corporate Technologies supports Philips operating divisions in turning innovations into advanced
products, creating company-wide technology synergies through its shared labs and competencies. The
High Tech Campus in Eindhoven, Netherlands, and the Philips Innovation Campus in Bangalore, India
and Shanghai, China are prime examples of this approach.
Innovations are developed in close interaction with end-users and partners, in order to ensure that
as well as being advanced, they are designed around users needs and are easy to experience.
Corporate Technologies reaches out to others in the innovation eco-system through relationships
with institutes, academia and industrial partners, as well as via European and regional projects
and presence at clinical sites. By adopting an Open Innovation strategy, Corporate Technologies
also leverages the joint innovative power of its partners to bring more innovations to market
faster and more effectively.
Corporate Technologies invests in new business opportunities as well as in building world-class
competencies and technologies that are essential for the Philips businesses, but also provides
these to external customers, in order to realize maximum return on investment. Technologies and
applications are made available in the form of patent and technology licenses, software and
hardware components, prototypes, competencies and services (design, system integration,
Philips Annual Report 2007 89
|
|
|
|
|
|
|
|
|
|
|
8 Financial highlights
|
|
10 Message from the President
|
|
16 The Philips Group
|
|
|
62 |
|
|
The Philips sectors |
|
|
|
|
|
|
|
|
|
|
|
Innovation & |
|
|
|
|
|
|
|
|
|
|
Emerging Businesses |
Philips Research has developed the SmartExam system dedicated scan-planning software that makes
MRI scanners easy to operate, while also shortening scanning time and increasing the
reproducibilrty of the images obtained.
product introduction services and testing). Where appropriate, emerging businesses are incubated
until they are ready for transfer to a sector or spin-out, in part or in whole, to a third-party
investor.
In total, Corporate Technologies employs around 4,200 professionals at some 20 locations worldwide.
Research
Philips Research supports Philips operating divisions with innovations, inventions and long-range
vision. It employs approximately 1,800 professionals around the globe. Founded in 1914, Philips
Research is one of the worlds major private research organizations, with main laboratories in the
Netherlands, Germany, the United Kingdom, the United States, China and India. The activities are
driven by user insights, and Philips Research runs an ExperienceLab, consisting of HomeLab, ShopLab
and CareLab, in order to obtain continuous feedback on how well its concepts meet end-user
expectations.
Incubation and emerging businesses
In line with its strategy, Philips has established three corporate venturing organizations: the
Healthcare, Lifestyle and Technology Incubators, employing close to 200 professionals. Their
charter is to identify new growth opportunities for Philips and to help business teams transform
ideas into new business, by matching unmet market needs with a unique value proposition. The
necessary capabilities can be sourced internally, or acquired externally, e.g. in the start-up
community. These initiatives are governed by boards which are chaired by a member of the Board of
Management. In 2007 an external financing round was successfully structured for Silicon Hive,
diluting Philips stake in this venture into that of the largest minority shareholding. In addition
to the Incubator activities, a Molecular Healthcare business initiative has been created.
Philips Intellectual Property & Standards (IP&S)
Philips IP&S proactively pursues the creation of new Intellectual Property (IP) in strategic areas
and uses this IP to support the growth and competitiveness of Philips businesses. IP&S manages the
Philips IP portfolio, which currently consists of about 60,000 patent rights, 29,000 trademarks,
43,000 design rights and 2,000 domain name registrations. By participating in the creation of new
standards, IP&S also facilitates market adoption of new innovations. Employing close to 450 people,
IP&S has a strong global presence with offices in the major countries, which allows it to create
and exploit the Philips IP portfolio close to its internal and external customers.
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.
Applied Technologies
Philips Applied Technologies supports its customers by providing technology and developing
first-of-a-kind products and applications. Approximately 850 professionals working at six
locations across Europe, Asia and the US create new technologies and transform ideas into
competitive products. In addition, customers are served through New Product Introduction Services.
Progress against targets
In the Annual Report 2006, Corporate Technologies defined a number of key focal areas for 2007 and
beyond. The progress made in these is outlined below.
Developing advanced technologies to create meaningful innovations
Corporate Technologies contributed to a host of meaningful innovations in 2007. In healthcare, for
example, the concept of SmartExam was introduced to MRI, leading to simpler procedures and an
improved
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98 Risk management
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112 Our leadership
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116 Report of the Supervisory Board
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126 Financial Statements |
workflow for high-quality scans. For CT, a totally new hardware architecture has been developed,
including an air-bearing gantry and new x-ray optics, allowing extremely high-speed multiple-slice
scanning, which yields much sharper heart images. In solid-state lighting, Lumiramics technology
has been transferred to Philips Lighting, providing the business with a breakthrough in color
consistency for white LED products, a key component in the solid-state lighting revolution.
Generating patents
Philips filed approximately 1,625 patents in 2007. Currently, Philips is in the process of
reshaping its intellectual property portfolio in line with its new strategic focus on Healthcare,
Lighting and Consumer Lifestyle.
Incubating new businesses
The Philips Incubators are separate business units within Corporate Technologies. In 2007 there was
public presence for 3D Solutions, amBX, Handshake Solutions, Lumalive, Content Identification,
Beatbrew, Care Servant and Handheld Diagnostics, including a commercialization agreement with
Cozart on drugs-of-abuse testing. The combined incubator pipelines contain more than 25 ventures.
To ensure more effective management of the ventures in the pipeline, Bell-Mason stage gating was
introduced in 2006, with preceding phases added in Philips Research. In 2007, more than 500 people
across Philips were trained in this methodology.
Stimulating end-user focus
Philips has introduced the Value Proposition House methodology to capture end-user insights and
create meaningful innovations. Marketing, supply management and R&D have worked closely together to
create a process for value propositions and how to translate them into successful innovations.
2007 financial performance
Corporate Technologies EBITA improved to a loss of EUR 76 million, compared to a loss of EUR 91
million in 2006, which included a EUR 31 million gain on the sale of CryptoTec. The improvement in
EBITA was largely attributable to an increase in income from intellectual property and cost
efficiencies at Research, partly offset by increased investment in the Healthcare and Lifestyle
Incubators and in research activities in emerging markets. In 2007, Corporate Technologies
recognized a gain on the sale of TASS (EUR 6 million), which was divested in the first quarter.
The generation of (white) light with highly controlled color characteristics is a key enabling
factor for solid-state lighting to enter the general lighting market. Lumiramic technology enables
high-volume production of white LEDs with a very specific correlated color temperature, ensuring
luminaire-to-luminaire consistency.
Strategy and 2008 objectives
Corporate Technologies strategy for 2008 and beyond will focus on:
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Developing advanced technologies and applications to create meaningful innovations |
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Generating patents to protect these innovations, particularly in key areas of growth |
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Incubating new businesses as a driver of sustainable growth |
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Improving innovation effectiveness by stimulating end-user focus and cross-functional
collaboration with marketing and supply management |
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Establishing closer links to the business sectors by reinforcing the account management function.
This will ensure sharing of user insights, roadmap continuity and awareness of business options. |
Philips Annual Report 2007 91
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8 Financial highlights
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10 Message from the President
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16 The Philips Group
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The Philips sectors |
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Innovation & |
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Emerging Businesses |
Corporate Investments
Divested activities
In line with Philips strategy to reduce its portfolio of non-core, strategically unaligned
activities, most of the remaining activities within Corporate Investments were divested in the
course of 2007.
Philips Power Solutions Supplies
Philips Power Solutions Supplies develops and markets
integrated modules for electronic power conversion and has some 85 employees; sold to Bobinados de
Transformadores S.L.
Ommic
Ommic develops, produces and markets Low Noise Amplifiers, smart antenna core chips and epitaxy/foundry services and has some 70 employees; sold to Financiére Victoire SAS of France.
Philips Optical Storage Optical Media & Technology
Optical Media & Technology, part of Optical
Storage, is engaged in the development and verification/certification of formats/standards in
optical media and the development and marketing of test disks and has some 55 employees; sold to
MoserBaer.
Philips Optical Storage Automotive Playback Modules
Automotive Playback Modules develops and
markets playback modules for the automotive industry and has some 1,600 employees; sold to LiteOn
IT Corporation.
Remaining activities
As of the end of 2007, Corporate Investments consists of Assembléon and High-tech Plastics
Optics.
Assembléon
Assembléon is a wholly owned subsidiary that develops, assembles, markets and distributes a diverse
range of surface-mount technology placement equipment. Its customers use Assembléon machines to
place surface-mount devices and other electronic components on printed circuit boards. Assembléon
employs some 750 people, mainly in the Netherlands.
High-tech Plastics Optics
High-tech Plastics Optics develops, manufactures and markets high-end plastics, opto- and
opto-mechanical products. It employs some 360 people, almost all in China.
In 2008, Corporate Investments will be repositioned as the New Venture Integration Group, which
will focus on the integration of newly acquired companies across all sectors.
2007 financial performance
As a result of the portfolio clean-up within Corporate Investments, sales declined by EUR 930
million, or 78%, in 2007. Adjusted for portfolio changes (81%) and unfavorable currency movements
(4%), comparable sales increased by 21%, which was almost entirely attributable to Assembléon.
EBITA in 2007 amounted to a loss of EUR 4 million. This included a total loss of EUR 4 million on
the divestment of the remaining activities within Philips Optical Storage (Automotive Playback
Module), Philips Business Communication in China and Ommic, whereas 2006 included gains on
divestments totaling EUR 44 million.
Philips Design
Philips Design is one of the largest and longest-established design organizations of its kind in
the world. It is headquartered in Eindhoven, the Netherlands, with branch studios in Europe, the
USA and Asia Pacific.
Its creative force of some 550 professionals contains more than 30 different nationalities,
embracing disciplines as diverse as psychology, cultural sociology, anthropology and trend research
in addition to conventional design-related skills.
Philips Design works according to a proprietary methodology known as High Design. High Design is
completely human-focused and research-based, and always uses a deep understanding of peoples needs
as the starting point for the design process. It also provides the framework for translating these
insights into imaginative yet feasible solutions.
In this way Philips Design is an important driver in making the Philips brand promise of sense and
simplicity tangible. Philips believes it is only by appreciating the values and motivations of
end-users that it can create sustainable propositions that are simple to experience and enrich the
quality of peoples lives.
92 Philips Annual Report 2007
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116 Report of the Supervisory Board
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Philips Design offers a full range of design services to many different types of clients both
within and outside the Philips organization.These include design management, corporate identity
creation and innovation design, as well as design of products, communication materials, interfaces
and solutions for internet and new media.
In 2007, Philips received an outstanding total of over 35 design awards. The Red Dotbest of the
best for designs considered pioneering in their field was awarded to the Philips Design Skin
Probes, which also featured in TIME Magazines list of best inventions 2007. These far-future
research initiatives track trends and developments that may ultimately evolve into mainstream
issues with a significant impact on Philips business.
In 2007, Philips Design also received the first ever Design Management Europe award for its
successful integration of design into business.
Consumer Healthcare Solutions
Philips Consumer Healthcare Solutions* provides products and services that improve the quality of
life for at-risk seniors, people with chronic illnesses and their caregivers, by enabling
independent living at home.
Given the unsustainable level of healthcare costs in many markets and the growing emphasis on both
efficiency and patient comfort, we are witnessing a gradual shift towards diagnosing, treating and
monitoring patients in their homes rather than in hospitals. Demand for home healthcare is also
growing due to the increasing number of elderly people and the rising incidence of chronic
diseases.
The business consists of Lifeline and Philips Remote Patient Management.
Lifeline is the North American market leader for medical alert services. Its 1,100 employees work
closely with community hospitals, homecare agencies and referral networks to provide emergency
medical alert services and social support to the at-risk elderly to enhance their independence and
quality of life.
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In 2007, Consumer Healthcare Solutions was reported in the sector Innovation & Emerging
Businesses. As of January 1, 2008, Consumer Healthcare Solutions renamed Home Healthcare
Solutions has been incorporated in the new Philips Healthcare
sector. |
In February 2007, Philips again headed the ranking of the World Intellectual Property Organization
with 2,495 patent applications published in 2006.
Philips Annual Report 2007 93
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In 2007, Lifeline continued to realize double-digit organic growth of its subscriber base. With the
purchase of Health Watch, Lifeline now monitors over 700,000 subscribers. The Senior Living
division, which serves the independent and assisted living market, now services nearly 150,000
residents in senior living facilities.
In 2008, Lifeline will continue to develop its core business by leveraging healthcare channels in
local communities, as well as investing in innovation to stimulate further market development and
deploying new marketing tools, such as customer relationship management software for more touch
points with potential subscribers. The consolidation of the Health Watch platform into Lifeline is
well under way and will be completed in 2008.
In 2007, Philips Remote Patient Management with some 400 employees focused on building
awareness within the home health industry of its comprehensive offering of telehealth products and
services for post-hospital discharge monitoring of chronically ill patients.
This offering includes wireless home telemonitoring devices and web-based clinical review software,
as well as a suite of services such as data review, program development and deployment support
designed to help customers build or improve their telehealth programs.
In 2008, Philips Remote Patient Management will continue to focus on the home care market. By
implementing initiatives designed to leverage Lifelines relationships with home health agencies,
and by developing strategic relationships with home care associations and technology partners,
Philips expects patient enrollment to increase gradually and consistently throughout the year.
The recent acquisition of Raytel Cardiac Services, a provider of solutions for pacemaker, implanted
defibrillator, holter, event and anticoagulation monitoring, complements Philips portfolio of home
healthcare solutions. By adding home cardiac monitoring services and clinical call center
competencies, the acquisition allows Philips to better serve the home healthcare market and exploit
potential synergies with its cardiology competency. Over the next several years, Philips will
leverage Raytels clinical call center infrastructure, referral base and experience in
out-of-hospital services to enhance its home healthcare business.
Our proposed acquisition of Respironics a leading US-based global provider of innovative
respiratory and sleep therapy solutions for hospital and home use is part of Philips strategy to
create a global leadership position in the fast-growing home healthcare market, where we can
leverage our Philips brand and our understanding of peoples needs. Building upon the prior 2007
acquisitions of Health Watch and Raytel Cardiac Services, the acquisition of Respironics will
establish us as the market leader in home healthcare solutions.
2007 financial performance
Consumer Healthcare Solutions sales grew by 47% on a nominal basis, reaching EUR 168 million in
2007, partly due to the acquisition of Health Watch in the second quarter and Raytel Cardiac in the
fourth. On a comparable basis, sales growth of 10% was largely driven by Lifeline.
EBITA was in line with 2006, at a loss of EUR 2 million. The improved performance at Lifeline was
offset by post-merger integration costs of EUR 6 million, mainly related to Health Watch.
EBIT showed a loss of EUR 19 million, in line with the 2006 loss of EUR 18 million.
The positive cash flow generated by operating activities was more than offset by cash outflows for
the acquisitions of Health Watch and Raytel Cardiac. In 2006, the acquisition of Lifeline Systems
resulted in a cash outflow of EUR 583 million.
With regard to sourcing, please refer to the business description of Philips Supply Management that
begins on page 96 of this Annual Report.
With regard to regulatory requirements, please refer to regulatory requirements in the business
description of Medical Systems that begins on page 69 of this Annual Report.
With regard to strategy and 2008 objectives, please refer to the Philips Healthcare strategy and
2008 objectives that begins on page 69 of this Annual Report.
94 Philips Annual Report 2007
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116 Report of the Supervisory Board
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126 Financial Statements |
Group Management & Services
The sector Group Management & Services comprises the activities of the corporate center including
Philips global brand management and sustainability programs, as well as country and regional
overhead costs, and costs of pension and other postretirement benefit plans. Additionally, the
Global Service Units such as Philips General Purchasing and Real Estate are reported in this
sector.
Key data
in millions of euros
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20051) |
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20061) |
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2007 |
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Sales |
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136 |
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167 |
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197 |
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Sales growth |
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% increase (decrease), nominal |
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(60 |
) |
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23 |
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18 |
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% increase (decrease), comparable |
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(20 |
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14 |
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31 |
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EBIT |
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(192 |
) |
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(699 |
) |
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(297 |
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EBITA Corporate & regional costs |
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(171 |
) |
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(226 |
) |
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(156 |
) |
EBITA Brand campaign |
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(138 |
) |
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(126 |
) |
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(111 |
) |
EBITA Service Units, Pensions, Other |
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117 |
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(347 |
) |
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(30 |
) |
EBITA |
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(192 |
) |
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(699 |
) |
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(297 |
) |
Net operating capital (NOC) |
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(531 |
) |
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208 |
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705 |
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Cash flows before financing activities |
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1,736 |
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(1,832 |
) |
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5,253 |
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Employees (FTEs) |
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6,312 |
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6,879 |
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5,299 |
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1) |
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Restated to present the MedQuist business as a discontinued operation For a reconciliation to
the most directly comparable US GAAP measures, see the chapter Reconciliation of non-US GAAP
information. |
The EBITA of corporate and country overheads improved significantly in 2007 compared to 2006,
primarily as a result of the simplification of the regional management structure and lower costs
related to Sarbanes-Oxley compliance, which totaled EUR 26 million in 2006.
Investments in the global brand campaign amounted to EUR 111 million, a EUR 15 million reduction
compared to 2006.
Pension and other postretirement benefit costs recorded under Group Management & Services were EUR
53 million lower than in 2006, largely due to an increase in plan assets in 2006.
The EBITA improvement in the Global Service Units and other businesses was primarily attributable
to a product liability charge of EUR 256 million recognized in 2006. EBITA in 2007 was positively
impacted by the result of the Real Estate Service Unit, with various gains on real estate
transactions amounting to EUR 50 million, partly offset by additional legal expenses, mainly in the
US, as well as investments in projects which target the further simplification of the service
units. In 2006, real estate transactions yielded a profit of EUR 54 million.
On October 1, 2007, Philips completed the sale of the Finance Shared Services Centers to Infosys.
As of 2007, parts of the corporate services costs (EUR 162 million) have been allocated to the
operating divisions, which drive and create value from these resources. Previous years have been
restated accordingly.
Cash flows before financing activities turned from an outflow of EUR 1,832 million in 2006 to an
inflow of EUR 5,232 million in 2007. This inflow was primarily attributable to cash receipts
related to the sale of shares in TSMC (EUR 3,895 million) and LG.Philips LCD (EUR 1,547 million).
Cash flows from operating activities improved, primarily due to EUR 742 million lower pension
contributions as compared to 2006.
Philips Annual Report 2007 95
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10 Message from the President
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16 The Philips Group
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The Philips sectors |
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& Services |
Investments in the global brand campaign are expected to be lower in 2008 at about EUR 95 million
as the corporate campaign will be largely phased out over the coming two years. Pension and
postretirement benefit costs are expected to be broadly in line with 2007.
Supply Management
The Companys mission for supply management is to create value by leveraging the power of One
Philips and transforming the transactional purchasing function into strategic supply management.
2007 marks the fourth year of a comprehensive change program. Supply Management plays a key role in
value creation, and 74% of Philips spend is now centralized or center-led. From 2003 until 2007
the total number of active suppliers was reduced from more than 50,000 to less than 20,000.80% of
spend on Bill of Material (BOM) is now concentrated on 255 suppliers, and in Non-Product-Related
(NPR) on 670 suppliers.
Leveraging the power of One Philips
Leveraging the companys spend and resources in key areas and negotiating as One Philips improves
time-to-market, reduces total cost of ownership and increases quality. Strategic priorities are:
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NPR spend: Philips has centralized its NPR spend. In addition to enhancing negotiating power,
this organization initiates cost-saving projects together with operational units and suppliers, in
the areas of cost avoidance and efficiency enhancement. During 2007 the transactional shared
service centers for NPR purchasing were outsourced, together with the Finance Shared Service
activities, to Infosys. |
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Cross-divisional BOM opportunities: ownership of some EUR 3 billion cross-divisional spend is
concentrated centrally. Cross-divisional teams led by divisional Chief Purchasing Officers are
active in ten commodity areas, including metals and electronic components. Centralized One
Philips leveraging of this spend with fewer, more strategic suppliers has resulted in significant
value creation. |
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Outsourcing strategy and guidance: this initiative supports industrial strategy
decision-making, addressing the shift in resources required to manage the change to an outsourcing
relationship. The Companys total OEM/ ODM outsourcing spend has almost doubled in the past three
years to EUR 6.5 billion. To encourage development of more strategic relationships, the number of
preferred EMS suppliers has been reduced from 61 in 2004 to 8 in 2007. |
Supply Management set a target in 2005 to achieve two-year cumulative savings of EUR 1 billion in
the One Philips spend categories. This target was met in the 2006/2007 time frame and has helped
to improve Philips competitiveness.
Transforming toward strategic supply management
Strategic suppliers
Philips can realize more value by working closely with a strong network of strategic suppliers. The
Partners for Growth strategic supplier relationship management program brings Philips together
with its top 30 suppliers to identify and exploit concrete business opportunities. Philips
business with Partners for Growth suppliers has increased by 29% since 2004.
More than 50% of total product costs are defined in the early development stages. Therefore, early
supplier/supply management involvement in the product creation process is essential in realizing
quality plus time- and cost-saving initiatives. This priority has led to an increased involvement
of supply management and strategic suppliers in the creation process, also via a wider application
of tools like design-in workshops.
Supplier Performance Measurement
A Global Supplier Rating System (GSRS) is now operational in all
businesses, resulting in a more professional and structural supplier performance measurement and
subsequent improvement actions. In 2007 the rating system covered 84% of the total spend.
96 Philips Annual Report 2007
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112 Our leadership
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116 Report of the Supervisory Board
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126 Financial Statements |
Supplier consolidation
Supplier concentration is a key element in reducing complexity in the supply chain. For example,
Medical Systems sources sub-assembly units from a limited number of global suppliers. The drive
towards supplier consolidation continues, with Medical Systems on target to procure 80% of its BOM
from fewer than 100 preferred suppliers.
Sustainability
In support of the Companys strong commitment to sustainability, all suppliers with spend above EUR
100,000 in risk areas are audited, partially with the help of external, independent auditing firms.
A rigorous program is in place to follow up any issues that may occur. As part of the Dow Jones
Sustainability Index assessment, the rating for this practice went up from 81 to 92 in 2007.
Managing sourcing risk
To enhance risk management in the supply chain, Consumer Electronics has for many years implemented
a dual-sourcing strategy to ensure competitive sourcing and continuity of supplies. It has done
this through strategic partnerships, mainly in the areas of LCD panels and EMS. In 2007 the major
challenge was to manage the tightening market in LCD panels. In another example of reducing
sourcing risk, Lighting has established partnership agreements with those key suppliers on which it
depends for the supply of critical lamp components.
Low-cost country sourcing
Low-cost country sourcing activities have continued to be a major source of value in supply
management. For example, Lighting utilizes a global supply base to support its varied manufacturing
operations. A dedicated China Sourcing Group is in place to source products for both local and
export markets. While China is the main area of attention, other countries are also under review
for further extension of the supply base presence. In 2007, 58% of BOM spend and 24% of NPR spend
took place in low-cost countries.
E-contract management
E-contract management is being rolled out across the company. In 2007, EUR 2.6 billion (or 14%) in
spend was managed via e-bidding events, compared to around EUR 387 million in 2005.
Market intelligence
In 2007 a central-led Supply Market Intelligence and Services group (SMIS) was created with
presence in key supply markets (China, India, Korea, Japan and Taiwan). The SMIS teams work closely
together with businesses to identify supply market opportunities.
Philips Annual Report 2007 97
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8 Financial highlights
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10 Message from the President
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16 The Philips Group
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62 The Philips sectors |
Risk management
The following sections present an overview of Philips approach to risk management and business
control and a description of the nature and the extent of its exposure to risks. Philips recognizes
different risk categories, namely Strategic risks, Market risks, Operational risks, Financial
risks, and Compliance risks. These are further described in the section Risk categories of this
Annual Report. The risk overview highlights the main risks that may hinder Philips in achieving the
Vision 2010 objectives. The risk overview is, however, not exhaustive. Some risks not yet known to
Philips, or currently believed not to be material, could later turn out to have a major impact on
Philips businesses, objectives, revenues, income, assets, liquidity or capital resources.
The risk factors should be considered in connection with the forward-looking statements.
Our approach to risk management and business control
Risk management forms an integral part of business management. The companys 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 companys 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,
and in the actual periodic business planning and review cycles.
Corporate governance
Corporate governance is the system by which a company is directed and controlled. Philips believes
that good corporate governance is a critical factor in achieving business success. Good corporate
governance derives from, amongst other things, solid internal controls and high ethical standards.
Risk management is a well-established part of Philips corporate governance structure.
The quality of Philips systems of business controls and the findings of internal and external
audits are reported to and discussed in 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 committees at corporate
and divisional levels meet on a quarterly basis to address weaknesses in the business control
infrastructure as reported by the auditors or revealed by self-assessments, and to take corrective
action where necessary. These audit committees are also involved in determining the desired
company-wide internal audit coverage as approved by the Audit Committee of the Supervisory Board.
An in-depth description of Philips corporate governance structure can be found in the chapter
Corporate governance that begins on page 250 of this Annual Report.
Philips Business Control Framework
The Philips Business Control Framework (BCF), derived from the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) framework on internal control, sets the standard
for risk management and business control in Philips. The objectives of the BCF are to maintain
integrated management control of the companys operations, to ensure integrity of the financial
reporting and business processes, as well as compliance with laws and regulations.
Philips has reviewed and further strengthened the fundamentals of its BCF over recent years. The
first of these developments was the drive to harmonize enterprise resource planning systems, with
SAP as the leading standard, enabling Philips to replace time-consuming manual controls with
embedded, automated
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126 Financial Statements |
controls. Thereafter, Philips introduced a program to systematically certify the critical IT
systems against an internal control standard which is based on the generally accepted standards:
control objectives for information and related technology (COBIT) and COSO. Furthermore, as part of
BCF, Philips implemented a global standard for internal control over financial reporting (ICS). ICS
supports management in a quarterly cycle of assessment and monitoring, enhancing transparency of
its control environment. ICS has been deployed in all main reporting units, where business process
owners perform an extensive number of controls, document the results each quarter, and take
corrective action where necessary.
With respect to financial reporting, a structured company-wide assessment and monitoring process is
in place to enable the Companys President/Chief Executive Officer and Chief Financial Officer to
review and report on the effectiveness of risk management and business controls. Each quarter,
division management and functional management at Group level involved in the external reporting
process issue a formal certification statement to confirm the adequacy of the design and
effectiveness of disclosure controls and internal controls over financial reporting, which is
subject to review by the Board of Management. Annually, as part of the Annual Report process,
managements accountability for business controls is enforced through the formal issuance of a
Statement on Business Controls and a Letter of Representation by each business unit, resulting, via
a cascade process, in a statement by each division. The Statements on Business Controls and Letters
of Representation are subject to review by the Board of Management.
Section 404 Sarbanes-Oxley Act
Under section 404 of the US Sarbanes-Oxley Act, the Board of
Management is, amongst other things, responsible for establishing and maintaining a system of
internal control over US GAAP financial reporting for Philips. This internal control framework and
its established accounting procedures and related controls are 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 US GAAP financial statements are properly prepared
and do not contain any material misstatements.
The Board of Management has assessed the design and operating effectiveness of controls within the
scope of section 404 of the US Sarbanes-Oxley Act. The Board of Managements evaluation included
controls at Group and division level, and transactional controls at significant locations across
all of the Philips divisions. The scope also included relevant IT controls. Any deficiencies noted
in design and operating effectiveness were not completely remedied were formally evaluated at
year-end. The Board of Managements report, including its conclusions, regarding the effectiveness
of its internal control over US GAAP financial reporting, can be found in the chapter Group
financial statements of this Annual Report.
Philips General Business Principles
The Philips General Business Principles (GBP) govern Philips business decisions and actions
throughout the world, applying equally to corporate actions and the behavior of individual
employees. They incorporate the fundamental principles within Philips for doing business. The
intention of the GBP is to ensure compliance with laws and regulations, as well as with Philips
norms and values.
The GBP are available in most of the local languages and are an integral part of the labor
contracts in virtually all countries where Philips has business activities. Responsibility for
compliance with the principles rests principally with the management of each business. Every
country organization and each main production site has a compliance officer. Confirmation of
compliance with the GBP is an integral part of the annual Statement on Business Controls that has
to be issued by the management
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of each business unit. The GBP incorporate a whistleblower policy, standardized complaint reporting
and a formal escalation procedure.
The global implementation of the One Philips Ethics Line ensures that alleged violations are
registered and dealt with consistently within one company-wide system. In 2007, the French privacy
authorities granted approval for the roll-out of the hotline in that country (completed in
November). In Germany, the workers representation bodies also approved the introduction of a
hotline. These approvals now ensure comprehensive company-wide implementation.
To drive the practical deployment of the GBP, a set of directives has been published, including a
Supply Management Code of Ethics and a Financial Code of Ethics (www.philips.com/about/investor).
In 2007, the updated version of the GBP Directives was approved and adopted, reflecting ongoing
developments in codes of conduct and business integrity legislation. The main updates related to
Philips endorsement of the UN Global Compact, policy on HIV/AIDS, health and safety policy,
integrity and ethics in advertising, and in particular directives on the giving of gifts. To ensure
compliance with the highest standards of transparency and accountability by all employees
performing important financial functions, the Financial Code of Ethics contains, amongst other
things, standards to promote honest and ethical conduct, and full, accurate and timely disclosure
procedures to avoid conflicts of interest. The Company did not grant any waivers of the Financial
Code of Ethics in 2007.
In order to publicize the updated GBP Directives, a global internal communications program was
rolled out in the first half of 2007, with participation of the Board of Management and Group
Management Committee and the respective Area and Country Management.
A company-wide toolkit has been developed and rolled out in 2007 for the compulsory registration of
gifts to third parties to ensure full transparency in monitoring compliance with company standards.
To reinforce awareness of the need for compliance with the GBP, a web-based GBP training tool has
been rolled out throughout the company in 22 different languages, covering more than 95% of the
employees with on-line access.
The e-training program for (new) compliance officers (including complaint-handling procedures and
dilemma training) was updated in 2007. Furthermore, 2007 saw the development and worldwide roll-out
of a train-the-trainer program for compliance awareness. Two-day training sessions were held in
Latin America, Asia Pacific and Europe, with the remaining sessions scheduled for the first quarter
of 2008. This program provides for an annual refresher course.
Risk categories
Taking risks is an inherent part of entrepreneurial behavior. A structured risk management process
encourages management to take risks in a controlled manner. Philips has a structured risk
management process in place that recognizes different risk categories at Strategic, Market,
Operational, Financial and Compliance level.
Strategic risks address threats and opportunities that influence Philips strategic ambitions. The
Market risks cover the effect that changes in the market may have on Philips. Risks related to
areas such as economic and political developments are likely to affect all market participants in a
similar manner. 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 product creation and supply chain management). Within the area of
Financial risks, Philips identifies risks related to Treasury, Pensions, Fiscal and Legal.
Compliance risks cover unanticipated failures to enact appropriate policies and procedures.
Strategic risks
Failure to deliver the Philips strategy may negatively impact shareholder value.
Through its Vision 2010, Philips aims to achieve profitable growth. Philips inability to transform this vision into
action and to meet the financial targets as planned, may cause its share price to drop.
End-user-driven innovation and identification of new sources of differentiation are important in
realizing Philips profitable growth ambitions.
Philips longer-term success depends on, amongst
other things, innovation based on end-user insight using technology as value enabler. Moreover,
some of Philips divisions continue to face diminishing opportunities to differentiate on the basis
of technical performance only. This makes the identification of new sources of both tangible and
intangible differentiation essential.
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Concurrently, it is imperative to understand changes in patterns related to end-user needs and
preferences, and to align differentiation initiatives and innovations with the brand promise of
sense and simplicity. If Philips fails in this area, its growth ambitions may be hampered.
Acquisitions could expose Philips to integration risks and challenge management in continuing to
reduce the complexity of the company.
Philips has recently completed and announced acquisitions, and may continue to do so in the future,
exposing Philips 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.
Furthermore, organizational simplification and resulting cost savings may be difficult to achieve.
The ability to secure and retain intellectual property rights for products, whilst maintaining
overall competitiveness, is important.
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
results from an extensive patenting process that could be influenced by, amongst other things,
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 important for
Consumer Electronics where third-party licenses are important and a loss or impairment could
negatively impact Philips results.
Philips ongoing investments in the sense and simplicity campaign, with a focus on simplifying
the interaction with its customers, translating awareness into preference and improving its
international brand recognition, could have less impact than anticipated.
Philips has made large investments in the reshaping of the Group into a more market-driven company focusing on delivering
advanced and easy-to-use products and easy relationships with Philips for its customers. The brand
promise of sense and simplicity is important for both external and internal development. If
Philips fails to deliver on its sense and simplicity concept, its growth opportunities may be
hampered.
Philips may be inflexible in adapting swiftly to changes in industry or market circumstances.
Paradigmatic shifts in the industry or market, like the transition from traditional lighting to
energy-saving and LED lighting, may drastically change the business environment. If Philips is
unable to recognize these changes in good time, or is too inflexible to rapidly adjust its business
models, growth in ambitions and financial results could be affected.
Market risks
Philips overall performance in the coming years is dependent on realizing its growth ambitions in
emerging markets.
Emerging markets are becoming increasingly important in the global market. 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
Asian companies as well as other global players for market share in Asia. Philips needs to be part
of the growth of emerging markets, 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, its growth ambition and financial results could be affected.
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.
The business
environment is influenced by economic
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and political uncertainties that continue to affect the global economy and the international
capital markets. Economic and political developments could have a material adverse effect on
Philips operating results. For example, the crisis that began in the US financial markets in the
second half of 2007 has negatively impacted consumer borrowing and spending, and has exposed the
cyclical commercial construction sector on which growth in the luminaires industry is strongly
dependent.
Philips is exposed to markets with high complexity, and is facing continued competition.
Philips
continually faces competitive challenges such as speed of innovation, fast-moving market trends,
rapid technological change, evolving standards, shortening product life cycles, the cyclical nature
of certain sectors and price erosion. Earnings improvement is highly exposed to these increased
competitive challenges, which requires margin management through measures such as price management,
cost reduction and/or efficiency increase. One example is solid-state lighting and the fast-growing
LED market. If Philips cannot quickly offset margin erosion by upgrading its offering via, for
instance, innovation or differentiation, cost reduction and/or efficiency measures, operating
results may be hampered.
Philips global presence exposes the company to regional and local regulatory rules which may
interfere with the realization of business opportunities and investments in the countries in which
Philips operates.
Philips has established subsidiaries in over 60 countries. These subsidiaries are
exposed to changes in governmental regulations and unfavorable political developments, which may
limit the realization of business opportunities or impair Philips local investments. An increased
focus on medical and health care increases the exposure to highly regulated markets, where
obtaining clearances or approvals for new products is of great importance, and the dependency on
the funding available for healthcare systems. In addition, changes in reimbursement policies may
affect spending on healthcare technology. For example, as evidenced during 2007, cuts in
reimbursement for imaging services mandated under the US Deficit Reduction Act (DRA) may continue
to have an adverse impact on spending in US out-of-hospital markets.
Philips is exposed to increased scrutiny of possible anti-competitive market practices.
Philips is
facing increased scrutiny of possible anti-competitive market practices by national and European
authorities, especially in product segments where Philips has significant market shares. For
example, Philips and certain of its (former) group companies are involved in investigations by
competition law authorities in several jurisdictions into possible anti-competitive activities in
the Cathode-Ray Tubes, or CRT, industry and are engaged in litigation in this respect. Philips
financial position and results could be materially affected by an adverse final outcome of these
investigations and litigation, as well as any potential claims in this respect. Furthermore,
increased scrutiny may hamper planned growth opportunities provided by potential acquisitions.
Operational risks
Integral customer management is important for maintaining a sustainable competitive advantage. A
set-back in Global Key Account Management or Category Management could hamper expected growth and
damage Philips image.
Philips commitment to sense and simplicity is not restricted to new products; it also covers the
wide range of support facilities Philips offers to its customers. An example of this is the
provision of category management solutions to key retailers for supporting consumers in their
decision-making. A setback in the management of international key retail accounts could hamper
growth and damage Philips reputation and brand image.
Failure to achieve improvements in Philips product creation process and/or increased speed in
innovation-to-market may hamper Philips profitable growth ambitions.
Further improvements in
Philips product creation process, ensuring timely delivery of new products at lower cost and
upgrading of customer service levels to create sustainable competitive advantages, are important in
realizing Philips profitable growth ambitions. The emergence of new low-cost players, particularly
in Asia, further underlines the importance of improvements in the product creation process. In
addition, if Philips fails to accelerate its innovation-to-market processes and fails to ensure
that end-user insights are fully captured and translated into product creations that improve
product mix and consequently contribution, it may face an erosion of its market share and
competitiveness.
If Philips is unable to ensure effective supply chain management, 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 sourcing strategies where possible. This strategy strongly
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supports close cooperation with suppliers to enhance, amongst others, time to market and quality.
In addition, Philips is continuing its initiatives to reduce assets through outsourcing. These
processes may result in increased dependency.
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 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. The loss of
specialized skills could also result in business interruptions.
Diversity in the IT landscape could result in ineffective or inefficient business management. IT
outsourcing and off-shoring strategies could result in complexities in service delivery and
contract management. Furthermore, we observe a global increase in IT security threats and higher
levels of professionalism in computer crime, posing a risk to the confidentiality, availability and
integrity of data and information.
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,
offshoring, commoditization and ongoing reduction in the number of IT systems. The global increase
in security threats and higher levels of professionalism in computer crime have raised our
awareness of the importance of effective IT security measures, including proper identity management
processes to protect against unauthorized systems access. The integration of new companies and
successful outsourcing of business processes are highly dependent on secure and well controlled IT
systems.
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. 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
impact Philips financial position and results.
Financial risks
Philips is exposed to a variety of financial risks, including currency risk, interest rate risk,
liquidity risk, equity price risk, commodity price risk, credit risk, country risk and other
insurable risks which may impact Philips results.
Philips is a global company and as a direct
result the financial results of the Group may be impacted through currency fluctuations.
Furthermore, Philips is exposed to other movements in the financial markets in the form of interest
rate risk, commodity price risk and also equity price risk as Philips holds minority stakes in a
number of listed companies where market value currently exceeds the equity investment reported in
the financial statements. A decline in the market value of these investments could result in a
future impairment. Moreover, failure to further improve capital management may reduce investor,
creditor and market confidence.
For further analysis, please refer to the section Treasury that begins on page 104 of this Annual
Report.
Philips has deflned-beneflt pension plans in a number of countries. The funded status and the cost
of maintaining these plans are influenced by financial market and demographic developments,
creating volatility in Philips results.
The majority of employees in Europe and North America are
covered by these plans. The accounting for deflned-beneflt pension plans requires management to
determine discount rates, expected rates of compensation and expected returns on plan assets.
Changes in these variables can have a significant impact on the projected benefit obligations and
net periodic pension costs. A negative performance of the financial markets could have a material
impact on funding requirements and net periodic pension costs and also affect the value of certain
financial assets of the company.
For further analysis of pension-related exposure to changes in financial markets, please refer to
the section Pensions that begins on page 109 of this Annual Report, and for quantitative and
qualitative disclosure of pensions, please refer to note 20.
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Philips is exposed to a number of different tax uncertainties which could have a significant impact
on local tax results. Philips is exposed to a number of different tax uncertainties which could
result in double taxation, penalties and interest payments. These include, amongst others, transfer
pricing uncertainties on internal cross-border deliveries of goods and services, tax uncertainties
related to acquisitions and divestments, tax uncertainties related to the use of tax credits and
permanent establishments, and tax uncertainties due to losses carried forward and tax credits
carried forward. Those uncertainties may have a significant impact on local tax results.
For further details, please refer to the section Fiscal that begins on page 111 of this Annual
Report.
Legal proceedings covering a range of matters are pending in various jurisdictions against Philips
and its (former) group companies. Due to the uncertainty inherent in legal proceedings, it is
difficult to predict the final outcome. Adverse outcomes might impact Philips financial position
and results.
Philips, including a certain number of its (former) group companies, is involved in legal
proceedings relating to such matters as competition issues, commercial transactions, product
liability (including allegations of personal injury from alleged asbestos exposure), participations
and environmental pollution. Since the ultimate disposition of asserted claims and proceedings, or
the impact of any claims that may be asserted in the future, cannot be predicted with certainty,
Philips financial position and results of operations could be affected by adverse outcomes.
Please refer to note 27 for additional disclosure relating to specific legal proceedings.
Compliance risks
Exposure to non-compliance with general business principles in emerging markets.
Corporate
governance systems, including information structures and ethical standards, are less developed in
emerging markets compared to mature markets. Realization of growth targets in emerging markets
exposes Philips management to risk of non-compliance with general business principles. Examples
include commission payments to third parties, remuneration payments to agents, distributors,
commissioners and the like (Agents), or the acceptance of gifts, which may be considered normal
local business practice. For further details, please refer to the section Philips General Business
Principles of the Risk Management chapter of this Annual Report.
Reliability of reporting, correctness of disclosures and safeguarding of assets.
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
may have a negative impact on the Philips share price.
Compliance procedures have been adopted by management to ensure that the use of resources is
consistent with laws, regulations and policies, and that resources are safeguarded against waste,
loss and misuse. Ineffective compliance procedures relating to the safeguarding of assets could
have an adverse effect on the financial results.
Non-compliance with data privacy and product security laws
Philips brand image and reputation will
be adversely impacted by non-compliance with the various (patient) data privacy and (medical)
product security laws. Privacy and product security issues may arise with respect to remote access
or monitoring of patient data or loss of data on customers systems.
Details of financial risks
This section provides further details of the financial risks, which are categorized along the lines
of the corporate processes Treasury, Pensions, Fiscal and Legal.
Treasury
Philips is, as mentioned before, exposed to several types of financial risk. This section further
analyzes financial risks. Philips does not purchase or hold derivative instruments for speculative
purposes. Information regarding financial instruments is included in note 36 and note 69 of the
notes to the financial statements.
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This Treasury section up to Other insurable risks forms an integral part of the IFRS
financial statements.
Currency risk
Currency fluctuations may impact Philips financial results.
Philips is exposed to currency risk in the following areas:
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Transaction exposures, such as forecasted sales and purchases and on-balance-sheet
receivables/payables resulting from such transactions; |
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Translation exposure of net income in foreign entities; |
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Translation exposure of foreign-currency intercompany and external debt and deposits; |
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Translation exposure of equity invested in consolidated foreign entities; |
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Exposure to equity interests in non-functional-currency equity-accounted investees and
available-for-sale investments. |
It is Philips policy that significant transaction exposures are hedged by the businesses.
Accordingly, all businesses are required to identify and measure their exposures resulting from
material transactions denominated in currencies other than their own functional-currency. Philips
policy generally requires committed foreign currency exposures to be fully hedged using forwards.
Anticipated transactions may be hedged using forwards or options or a combination thereof. The
hedge tenor varies per business and is a function of the ability to forecast cash flows and the way
in which the businesses can adapt to changed levels of foreign-currency exchange rates. As a
result, hedging activities may not eliminate all currency risks for these transaction exposures.
Generally, the maximum tenor of these hedges is 18 months.
The following table outlines the estimated nominal value in millions of euros for transaction
exposure and related hedges for Philips most significant currency exposures as of December 31,
2007:
Estimated transaction exposure and related hedges
in millions of euros
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
maturity 0-60 days |
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maturity over 60 days |
|
|
|
exposure |
|
|
hedges |
|
|
exposure |
|
|
hedges |
|
Hedges of receivable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
USD vs EUR |
|
|
425 |
|
|
|
(379 |
) |
|
|
1,615 |
|
|
|
(1,014 |
) |
JPY vs EUR |
|
|
32 |
|
|
|
(31 |
) |
|
|
118 |
|
|
|
(101 |
) |
GBP vs EUR |
|
|
83 |
|
|
|
(81 |
) |
|
|
105 |
|
|
|
(72 |
) |
PLN vs EUR |
|
|
56 |
|
|
|
(53 |
) |
|
|
110 |
|
|
|
(69 |
) |
EUR vs SEK |
|
|
33 |
|
|
|
(33 |
) |
|
|
33 |
|
|
|
(21 |
) |
USD vs AED |
|
|
8 |
|
|
|
(5 |
) |
|
|
61 |
|
|
|
(31 |
) |
EUR vs USD |
|
|
155 |
|
|
|
(138 |
) |
|
|
606 |
|
|
|
(127 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedges of payables |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
USD vs CAD |
|
|
(20 |
) |
|
|
18 |
|
|
|
(52 |
) |
|
|
40 |
|
PLN vs EUR |
|
|
(49 |
) |
|
|
38 |
|
|
|
(285 |
) |
|
|
163 |
|
USD vs EUR |
|
|
(696 |
) |
|
|
649 |
|
|
|
(1,477 |
) |
|
|
969 |
|
EUR vs GBP |
|
|
(18 |
) |
|
|
16 |
|
|
|
(77 |
) |
|
|
67 |
|
MYR vs USD |
|
|
(12 |
) |
|
|
8 |
|
|
|
(51 |
) |
|
|
26 |
|
MXN vs USD |
|
|
(19 |
) |
|
|
15 |
|
|
|
(67 |
) |
|
|
36 |
|
EUR vs SEK |
|
|
(48 |
) |
|
|
48 |
|
|
|
(81 |
) |
|
|
49 |
|
The first currency displayed is the exposure that is being hedged followed by the functional
currency of the hedging entity.
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
cost of sales. Hedges related to forecasted transactions are accounted for as cash flow hedges.
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The results from such hedges are deferred in other comprehensive income within equity.
Currently, a gain of EUR 29 million is deferred in equity as a result of these hedges. The result
deferred in equity will mostly be released to earnings during 2008 at the time when the related
hedged transactions affect the income statement. During 2007, a net gain of EUR 4 million was
recorded in the income statement as a result of ineffectiveness of transaction hedges.
The total net fair value of hedges related to transaction exposure as of December 31, 2007 was an
unrealized gain of EUR 19 million. The most significant transaction exposures relate to the US
dollar and the pound sterling. An instantaneous 10% increase in the value of the euro against all
currencies would lead to a decrease in the value of the derivatives of EUR 13 million, including a
EUR 45 million decrease related to deals of the euro against the US dollar offset by a EUR 19
million increase due to deals of the euro against the pound sterling. The net change in value in
other derivatives would be an increase of EUR 13 million with the most significant other currency
pair being the euro against Japanese yen for an amount of EUR 10 million.
The change in fair value of the hedges of transactions in the case of a 10% appreciation in the
euro for deals of the euro against the US dollar and the euro against the pound sterling can be
further broken down as follows:
Sensitivity to a 10% increase in euro versus USD
in millions of euros
|
|
|
|
|
|
|
|
|
|
|
maturity 0-12 |
|
|
maturity > 12 |
|
|
|
months |
|
|
months |
|
Change in fair value of forwards |
|
|
(49 |
) |
|
|
2 |
|
Change in fair value of options |
|
|
2 |
|
|
|
0 |
|
Sensitivity to a 10% increase in euro versus GBP
in millions of euros
|
|
|
|
|
|
|
|
|
|
|
maturity 0-12 |
|
|
maturity > 12 |
|
|
|
months |
|
|
months |
|
Change in fair value of forwards |
|
|
18 |
|
|
|
1 |
|
Philips does not hedge the translation exposure of net income in foreign entities.
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 Companys external funding
and liquid assets is matched with the required financing of subsidiaries either directly by
external foreign currency loans and deposits, or synthetically by using foreign exchange
derivatives. 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 translation exposure are recognized within
financial income and expenses in the income statement and are largely offset by the revaluation of
the hedged items. The total net fair value of these derivatives as of December 31, 2007, was an
unrealized gain of EUR 89 million. An instantaneous 10% increase in the value of the euro against
all currencies would lead to an increase in the value of the derivatives of EUR 348 million,
including a EUR 192 million increase due to the US dollar and a EUR 163 million increase due to the
pound sterling.
Translation exposure of equity invested in consolidated foreign entities is partially hedged. If a
hedge is entered into, it is accounted for as a net investment hedge. As at December 31, 2007, the
total fair value of derivatives accounted for as net investment hedges was EUR 12 million. An
instantaneous 10% increase in the value of the euro against all currencies would lead to an
increase in the value of these derivatives of EUR 24 million. During 2007, Philips recorded a gain
of EUR 23 million in other comprehensive income under currency translation differences as a result
of net investment hedges.
Philips does not currently hedge the foreign exchange exposure arising from equity interests in non
functional currency equity-accounted investees and available-for-sale financial assets.
Interest rate risk
Philips has significant outstanding debt, which creates an inherent interest rate risk. Failure to
effectively hedge this risk could negatively impact financial results. At year-end, Philips held
EUR 8,769 million in cash and cash equivalents and had total long-term debt of EUR 1,212 million
and total short-term debt of EUR 2,345 million. At December 31, 2007, Philips had a ratio of
fixed-rate long-term debt to total outstanding debt of approximately 34%, compared to 74% one year
earlier. Philips partially hedges the interest-rate risk inherent in the external debt. As of
year-end 2007, the company had six USD interest rate swaps outstanding, on which the company
receives fixed interest and pays floating interest on the equivalent of
106 Philips Annual Report 2007
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EUR 347 million. Fair value hedge accounting is applied to these interest rate swaps.
Including the effect of the interest rate swaps the ratio of fixed long-term debt to total
outstanding debt as at December 31, 2007, is 24%, compared to 64% one year earlier. Total
short-term debt includes three bonds for a total book value of EUR 1,692 million of which EUR 130
million is due to mature in February 2008, while the remaining balance of EUR 1,562 million matures
in May 2008.
Certain past interest rate hedges related to bonds were unwound during 2004. The fair value
adjustments to the bonds are amortized to the income statement based on the recalculated effective
yield. In 2007, a gain of EUR 5 million was released to the income statement.
As of December 31, 2007, the majority of debt consisted of bonds.
A sensitivity analysis shows that if long-term interest rates were to decrease instantaneously by
1% from their level of December 31, 2007, with all other variables (including foreign exchange
rates) held constant, the fair value of the long-term debt would increase by approximately EUR 63
million. This change would be partially offset by the change in fair value of the interest rate
swaps, which would increase by EUR 38 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 63 million.
This change would be partially offset by the change in fair value of the interest rate swaps, which
would decrease by EUR 33 million.
If interest rates were to increase instantaneously by 1% from their level of December 31, 2007,
with all other variables held constant, the annualized net interest expense would decrease by
approximately EUR 54 million due to Philips significant cash position. This impact is based on the
outstanding net cash position at December 31, 2007.
Liquidity risk
The rating of the Companys debt by major rating services may improve or deteriorate. As a result,
Philips borrowing capacity may be influenced and its financing costs may fluctuate. Philips has
various sources to mitigate the liquidity risk for the group, including EUR 8,769 million in cash
and cash equivalents, a USD 2,500 million Commercial Paper Program, and a USD 2,500 million
committed revolving facility that could serve as back-up for short-term financing requirements that
would normally be satisfied through the Commercial Paper Program and EUR 4,464 million of investments in
its main available-for-sale securities and listed equity-accounted investees at market value at
December 31, 2007. The Company has a lock-up period associated with the sale of shares in TPV
Technology that expires in September 2008 and a further lock up period associated with the sale of
shares in LG.Philips LCD that expired in January 2008.
Equity price risk
Philips is a shareholder in several publicly listed companies including TSMC, LG.Philips LCD and
TPV Technology Ltd. As a result, Philips is exposed to potential financial loss through movements
in the share prices. The aggregate equity price exposure of publicly listed investments in its main
available-for-sale securities, trading securities and listed equity-accounted investees amounted to
approximately EUR 4,464 million at year end 2007 (2006: EUR 9,524 million including shares that
were sold during 2007). Philips also holds options on the shares of TPV through a convertible bond
issued to Philips in September 2005, the face value of the bond being the USD equivalent of EUR 143
million and the fair value of the option at year-end EUR 47 million. Philips does not hold
derivatives in its own stock or in the above-mentioned listed companies except for the embedded
derivatives in the convertible bond already mentioned.
Commodity price risk
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 concluded as cash flow hedges to offset forecasted purchases. Currently, a loss of
EUR 1 million is deferred in equity as a result of these hedges. A 10% increase in the market price
of all commodities as at December 31, 2007, would increase the fair value of the derivatives by EUR
4 million.
Credit risk
Credit risk represents the loss that would be recognized at the reporting date if counterparties
failed completely to perform their payment obligations as contracted. Credit risk is present within
Philips trade receivables. To reduce exposure to credit risk, Philips performs ongoing evaluations
of the financial condition of its customers and adjusts payment terms and credit limits when
appropriate.
Philips Annual Report 2007 107
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8 Financial highlights
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10 Message from the President
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16 The Philips Group
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62 The Philips sectors |
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 counterparties 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 counterparty default. These worst-case scenario losses
are monitored and limited by the company. As of December 31, 2007 Philips had credit risk exceeding
EUR 25 million with the following number of counterparties:
Credit risk with number of counterparties
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25-100 |
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100-500 |
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500-2,000 |
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million |
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million |
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million |
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AAA-rated governments |
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1 |
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2 |
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2 |
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AAA-rated government banks |
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1 |
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2 |
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AAA-rated bank counterparties |
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1 |
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AA-rated bank counterparties |
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5 |
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2 |
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A rated bank counterparties |
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2 |
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The company does not enter into any financial derivative instruments to protect against default by
financial counterparties. However, where possible the company requires all financial counterparties
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 & Poors and Moods Investor
Services. Philips also regularly monitors the development of credit default swap prices 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. As at December 31, 2007, Philips expects no impact as a result of
the sub-prime mortgage crisis.
Country risk
Philips is exposed to country risk by the very nature of running a global business. 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, guarantees (unless country risk is explicitly excluded
in the guarantee), accounts receivable from third parties and intercompany accounts receivable.
The country risk is monitored on a regular basis.
As of December 31, 2007, the Company had country risk exposure in the Netherlands of EUR 13 billion
and in the United States of EUR 6 billion. Other countries exceeding EUR 1 billion but less than
EUR 5 billion included Belgium, China (including Hong Kong), South Korea and Taiwan. Countries
where the risk exceeded EUR 200 million included Austria, France, Italy, Japan, Malaysia, Poland,
Spain, Switzerland and the United Kingdom. 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 range of different kinds of losses by global insurance policies in the
areas of property damage, business interruption, general and products liability, transport,
directors and officers liability, employment practice liability, fraud, and aviation product
liability.
To lower exposures and to avoid potential losses, Philips has a worldwide Risk Engineering program
in place. The main focus in this program is on property damage and business interruption risks,
which also include interdependencies. Philips sites, and also a limited number of sites of key
suppliers, are inspected on a regular basis by the Risk Engineering personnel of the insurer.
Inspections are carried out against predefined Risk Engineering standards which are agreed between
Philips and the insurers. Recommendations are made in a Risk Management report and are reviewed
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 500,000 per occurrence and this variance is designed to differentiate
between the existing risk categories within Philips. Above this first layer of working deductibles,
Philips operates its own re-insurance captive, which during 2007 retained EUR 2.5 million per
occurrence for the 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, 2007 for
the coming year, whereby the reinsurance captive retentions remained unchanged.
108 Philips Annual Report 2007
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Fair value measurement
The company calculates the fair value of derivatives and sensitivities based on observed liquid
market quotations. Where the instrument is not directly observable, the valuation techniques used
are qualified and benchmarked regularly with industry.
Pensions
This section further analyzes the pension exposure and possible risks thereof.
Pension-related
exposure to changes in financial markets.
With pension obligations in more than
forty countries, Philips has devoted considerable attention and resources to ensuring disclosure,
awareness and control of the resulting exposures.
Depending on the investment policies of the respective pension funds, developments in financial
markets may have significant effects on the funded status and the net periodic pension cost (NPPC)
of Philips pension plans. To monitor this exposure to investment risk, Philips uses a Global Risk
Reward Model. The model, which covers approximately 95% of the companys total pension liabilities
and contains separate modules for the Netherlands, the UK, the US and Germany, allows stochastic
simulations of the pension accounting figures.
The dispersion of the outcomes of these simulations around their average (or expected) values
provides an indication of Philips risk exposure. The bar charts below show the maximum deviations
from the expected Funded Status as per year-end 2007 and year-end 2008 and the expected NPPC for
2008 and 2009, respectively, if the 5% worst possible outcomes are excluded. These
Funded-Status-at-risk and NPPC-at-risk measures are based on the plan assets and liabilities
and the bond and equity market valuations on December 31, 2006 and December 31,2007 respectively,
and may therefore be seen as indicators of the funding and NPPC risks on these same dates.
The bar charts also show the impact of model updates and changes in economic assumptions to account
for recent developments in financial markets and benefit from new modeling techniques. Their impact
may be seen by comparing the first and the second bars in each of the charts below. The most
important effects are increased estimates of interest rate risk, lower estimated equity risk and
increased estimates of inflation
risk. These effects are, however, more than offset by an increased diversification between regions
and an increased correlation between interest rates and inflation.
The impact of plan changes, changes in investment policy and changes in financial market conditions
during 2007 may be seen by comparing the second and the third bars in the graphs below. The
differences between those bars are largely attributable to changes to the investment portfolio of
the Dutch pension fund, which reduced its equity and real estate allocations in the last few months
of the year. The proceeds of these changes were used to increase the fixed income allocation and
reduce interest rate risk. The changes to the funds investment portfolio were the first steps
towards implementation of a change in its investment strategy. The remaining steps towards
implementation are planned to be made in 2008.
The US plan has also changed its investment strategy. The change entails decreases in equity and
interest rate risk. Some first steps towards implementation of this new strategy were made in 2007
and additional steps are planned to be made in 2008. The impact of the additional steps by the
Dutch and the US pension funds towards full implementation of their revised strategies may be seen
by comparing the third and the fourth bars in the graphs below.
The composition of the respective bars shows how funding risk may be attributed to economic factors
(interest rate risk, equity risk, inflation risk and foreign exchange risk) and country factors
(risk exposures in the Netherlands, the US, the UK and Germany). Because of the less than 100% (or
even negative) correlation between the different economic and/or country factors, the total risk
may well be lower than the sum of the underlying factors. This is called the diversification
effect, which is also shown in the graphs.
Funded status
The model update and the changes in economic assumptions referred to above have caused an increase
in the estimated total contribution of the respective risk factors to the overall
Funded-Status-at-Risk. However, as this is more than offset by an increased diversification effect,
the net impact has been a decrease in the estimated Funded-Status-at-Risk. The Funded
Status-at-Risk has also decreased as a result of the aforementioned changes in the investment
portfolio of the Dutch pension fund. The additional changes in
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10 Message from the President |
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16 The Philips Group
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62 The Philips sectors |
investment policy, planned in the Netherlands and the US, to fully implement their new
investment strategies will lead to a further reduction in Funded-Status-at-Risk.
Equity risk is the major source of risk to the Funded Status. It results from the relatively large
allocation to equities in the US and the large absolute exposure to equities in the Dutch pension
fund, even after the reduction in its equity allocation in the last few months of 2007. The
contribution of interest rate risk results from the interest rate mismatches between assets and
liabilities in the Netherlands, the US and Germany. Although interest rate risk in the Netherlands
was reduced in the last few months of 2007, the Dutch pension fund still contributes most to
interest rate risk. This will change as a result of the planned investment changes in 2008.
Following these changes, the remaining exposure in the US will be the dominant contribution to
interest rate risk. The Dutch pension fund contributes most to inflation risk, due to its size and
indexation policy. Foreign exchange risk contributes relatively little to the
Funded-Status-at-risk. The diversification effect is largely attributable to the positive
correlation between inflation and interest rates and the negative correlation between bonds and
equities.
The country decomposition shows that the Dutch pension fund contributes most to the
Funded-Status-at-risk. Although its equity and real estate allocations were reduced in 2007, while
its fixed income allocation was increased, the funds remaining exposure to equity markets is still
significant. This, combined with the size of the fund, explains the major part of its contribution
to total risk.
NPPC
The aforementioned model update and the simultaneous changes in economic assumptions have increased
the estimated NPPC-at-risk. It has not changed much as a result of the changed asset allocation.
Nor is it expected to change much as a result of the additional changes planned for 2008. A lower
Funded-Status-at-Risk does not necessarily lead to a lower NPPC-at-Risk.
The country decomposition shows that the Dutch pension fund contributes most to NPPC-at-risk. This
is attributable to its size and its exposure to equities.
In summary, the estimated Funded-Status-at-risk decreased in 2007. NPPC-at-risk, on the other hand,
has hardly changed. The lower Funded-Status-at-risk is attributable to the reduced asset-liability
mismatch of the Dutch pension fund. The Dutch pension fund still contributes most to the risk
statistics, due to its size and its exposure to equities. Some further risk reduction may be
expected from the additional portfolio changes in the Netherlands and the US to fully implement
their new investment strategies.
110 Philips Annual Report 2007
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98 Risk management
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112 Our leadership
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116 Report of the Supervisory Board |
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126 Financial Statements |
Fiscal
Philips is, as mentioned before, exposed to fiscal uncertainties. This section further describes
this exposure.
Transfer pricing uncertainties
Philips has issued transfer pricing directives, which are in accordance with guidelines of the
Organization of Economic Co-operation and Development. As transfer pricing has a cross-border
effect, the focus of local tax authorities on implemented transfer pricing procedures in a country
may have an impact on results in another country. In order to mitigate the transfer pricing
uncertainties, audits are executed on a regular basis to safeguard the correct implementation of
the transfer pricing directives.
Tax uncertainties on general service agreements and specific allocation contracts
Due to the centralization of certain activities in a limited number of countries (such as research
and development costs, centralized costs for IT, and costs for corporate functions and head
office), costs are also centralized. As a consequence, for tax reasons these costs and / or
revenues must be allocated to the beneficiaries, i.e. the various Philips entities. For that
purpose, apart from specific allocation contracts for costs and revenues, general service
agreements (GSAs) are signed with a large number of entities. Tax authorities review the
implementation of GSAs, often auditing on benefit test for a particular country or the use of tax
credits attached to GSAs and royalty payments, and may reject
the implemented procedures. Furthermore, buy in/out situations in the case of (de)mergers could
affect the tax allocation of GSAs between countries. The same applies to the specific allocation
contracts.
Tax uncertainties due to disentanglements and acquisitions
When a subsidiary of Philips is
disentangled, or a new company is acquired, related tax uncertainties arise. Philips creates merger
and acquisition (M&A) teams for these disentanglements or acquisitions. These teams consist of
specialists from various corporate functions and are formed, amongst other things, to identify
hidden tax uncertainties that could subsequently surface when companies are acquired and to avoid
tax claims related to disentangled entities. These tax uncertainties are investigated and assessed
to mitigate tax uncertainties in the future as much as possible. Several tax uncertainties may
surface from M&A activities. Examples of uncertainties are: applicability of the participation
exemption, allocation issues, and non-deductibility of parts of the purchase price.
Tax uncertainties due to permanent establishments
In countries where Philips starts new operations,
the issue of permanent establishment may arise. This is due to the fact that when operations in new
countries are led from other countries, there is a risk that tax claims will arise in the new
country as well as in the initial country. Philips assesses these uncertainties before the new
activities are started in a particular country.
Tax uncertainties of losses carried forward and tax credits carried forward
The value of the losses carried forward is not only a matter of having sufficient profits available
within the loss-carried forward period, but also a matter of sufficient profits within the
foreseeable future in the case of losses carried forward with an indefinite carryforward period.
Valuation allowances of deferred tax asset positions are in place where considered necessary.
Legal
Please refer to note 27 for additional disclosure relating to specific legal proceedings.
Philips Annual Report 2007 111
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8 Financial highlights
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10 Message from the President |
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16 The Philips Group
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62 The Philips sectors |
Our leadership
The executive management of Philips is entrusted to its
Board of Management under the supervision of the
Supervisory Board. The Group Management Committee is
the highest consultative body within Philips. This
chapter presents the Board of Management, the Group
Management Committee and the Supervisory
Board as of December 31, 2007.
From left
to right Gottfried Dutiné, Rudy Provoost, Pierre-Jean Sivignon, Theo van Deursen, Gerard
Kleisterlee, Steve Rusckowski, Andrea Ragnetti
Gottfried Dutiné
1952, German
Executive Vice-President
Member of the Board of Management since April 2002 and member
of the Group Management Committee since February 2002
Corporate responsibilities: Areas and Countries,
Government Relations, Strategic Initiatives, Emerging Markets,
Business KAM Board
Pierre-Jean Sivignon
1956, French
Executive Vice-President
and Chief Financial Officer (CFO)
CFO and member of the Board of Management and the Group Management
Committee since June 2005
Corporate responsibilities: Control, Treasury, Fiscal, Mergers & Acquisitions,
Investor Relations, Information Technology, Pensions, Real Estate, Corporate
Investments, Supply Management
Rudy Provoost
1959, Belgian
Executive Vice-President
Member of the Board of Management since April 2006, member of the Group
Management Committee since August 2003 and CEO of the Consumer
Electronics division since 2004
Corporate responsibilities: Consumer
Electronics, International Retail Board Management, LG.Philips LCD
112 Philips Annual Report 2007
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116 Report of the Supervisory Board |
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126 Financial Statements |
What we have changed in the way we approach our
leadership is first of all that we have required everyone to look beyond the boundaries of his or
her own activity.
Second, we have tried to create a culture where people are encouraged to take calculated risks,
and where failure is not something never permitted. Failure is part of learning.
We have also tried to move away from big single initiatives to smaller experimental
initiatives.
There is no one big bang that is suddenly going to get us into growth mode. Each of our leaders
has to work on several initiatives. Some will fail and some will succeed. You nurture the ones that
promise to be successful.
Gerard Kleisterlee speaking to Peter Lorange,
president of IMD, in European Business Forum, spring 2007
Gerard Kleisterlee
1946, Dutch
President/Chief Executive Officer (CEO) and Chairman of the
Board of Management and the Group Management Committee
President/CEO and Chairman of the Board of Management since April 2001,
member of the Board of Management since April 2000 and member of
the Group Management Committee since January 1999
Corporate responsibilities: Communications, Internal Audit, Legal, Human
Resources Management, Strategy, Technology Management, Consumer Healthcare Solutions
Steve Rusckowski
1957, American
Executive Vice-President
Member of the Board of Management since April 2007
and CEO of Philips Medical Systems since November 2006
Corporate responsibilities: Medical Systems, Healthcare New Business
Development Board
Theo van Deursen
1946, Dutch
Executive Vice-President
Member of the Board of Management since April 2006, member
of the Group Management Committee since April 2003 and
CEO of the Lighting division since 2003
Corporate responsibilities: Lighting, Quality Policy Board, Technology
New Business Development Board
Andrea Ragnetti
1960, Italian
Executive Vice-President
Member of the Board of Management since April 2006, member of the Group
Management Committee since January 2003, Chief Marketing Officer since 2003
and CEO of the Domestic Appliances and Personal Care division since 2005
Corporate responsibilities: Domestic Appliances and Personal Care, Global
Marketing Management, Design, Lifestyle New Business Development Board
Philips Annual Report 2007 113
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8 Financial highlights |
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16 The Philips Group |
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62 The Philips sectors |
Board of Management
The Board of Management operates under the chairmanship of the President/Chief Executive Officer.
The members of the Board of Management have collective powers and responsibilities. They share
responsibility for the management of Koninklijke Philips Electronics N.V. (the Company), the
deployment of its strategy and policies, and the achievement of its objectives and results. The
Board of Management has, for practical purposes, adopted a division of responsibilities reflecting
the functional and business areas monitored and reviewed by the individual members. According to
the Companys corporate objectives and Dutch law, the Board of Management is guided by the
interests of the Company and its affiliated enterprises within the Group, taking into consideration
the interests of the Companys stakeholders,
and is accountable for the performance of its assignment to the Supervisory Board and the General
Meeting of Shareholders. The Rules of Procedure of the Board of Management are published on the
Companys website (www.philips.com/investor).
In connection with the creation of the sectors Healthcare, Lighting and Consumer Lifestyle as of
January 1, 2008, Steve Rusckowski became CEO of Healthcare as per January 1, 2008. With effect from
the same date, Rudy Provoost, CEO of the Consumer Electronics division, has moved to the Lighting
sector, transitioning to take over as CEO from Theo van Deursen, who will retire on April 1, 2008.
Andrea Ragnetti, CEO of DAP, became CEO of the Consumer Lifestyle sector from January 1, 2008.
Corporate governance
A full description of the Companys corporate governance structure is published in the chapter
Corporate governance of this Annual Report.
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* |
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Member of the Audit Committee |
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** |
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Member of the Remuneration Committee |
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*** |
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Member of the Corporate Governance and Nomination & Selection Committee |
Group Management Committee
The Group Management
Committee consists of
the members of the
Board of Management
and certain key
officers. Members
other than members of
the Board of
Management are
appointed by the
Supervisory Board. The
task of the Group
Management Committee,
the highest
consultative body
within Philips, is to
ensure that business
issues and practices
are shared across
Philips and to
implement common
policies.
Daniel Hartert
1958, German
Member of the GMC since August 2003 and CEO Imaging Systems business since September 2007
Corporate responsibilities: Imaging Systems business
Barbara Kux
1954, Swiss
Member of the GMC since October 2003
and Chief Procurement Officer since 2003
Corporate
responsibilities: Supply Management,
Sustainability
Rick Harwig
1949, Dutch
Member of the GMC and Chief Technology
Officer since April 2006
Corporate responsibilities: Technology Management, Research, Applied
Technologies, Incubators, Intellectual Property & Standards, Molecular Diagnostics, PIC Bangalore
Hayko Kroese
1955, Dutch
Member of the GMC since February 2007; responsible for Human Resources Management since 2007
Corporate responsibilities: Human Resources Management
Gerard Ruizendaal
1958, Dutch
Member of the GMC since February 2007, Head of Control since October 2001 and
Chief Strategy Officer since May 2005
Corporate responsibilities: Strategy and Control
Eric Coutinho
1951, Dutch
Member of the GMC since February 2007,
Secretary to the Board of Management and
Chief Legal Officer since May 2006
Corporate responsibilities: Legal, Company Secretary, Company
Manual, General Business Principles
Maarten de Vries
1962, Dutch
Member of the GMC and Chief Information
Officer since September 2007
Corporate responsibilities: Information Technology
114 Philips Annual Report 2007
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98 Risk management
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112 Our leadership
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116 Report of the Supervisory Board
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126 Financial Statements |
Supervisory Board
The Supervisory Board supervises the policies of the executive management (the Board of Management)
and the general course of affairs of Philips and advises the executive management thereon. The
Supervisory Board, in the two-tier corporate structure under Dutch law, is a separate and
independent body from the Board of Management. The Rules of Procedure of the Supervisory Board are
published on the Companys website.
Mr de Kleuver who joined the Supervisory Board in 1998, and has been Chairman since 2005, has
expressed his wish to relinquish his position as a member of the Supervisory Board as from the
closing of the 2008 Annual General Meeting of Shareholders. The Supervisory Board has appointed Mr
Hessels as its Chairman as from the closing of the 2008 Annual General Meeting of Shareholders.
W. de Kleuver
1936, Dutch*****
Chairman
Member of the Supervisory Board since 1998; third term expires in 2010
Former Executive
Vice-President of Royal Philips Electronics
L. Schweitzer
1942, French***
Vice-Chairman and Secretary
Member of the Supervisory Board since 1997; third term expires in 2009
Former CEO of Renault and
Renault-Nissan BV. Chairman of the Board of Renault and AstraZeneca, Non-executive director of BNP
Paribas, Electricité de France, Veolia Environnement, Volvo AB and LOréal
Sir Richard Greenbury
1936, British**
Member of the Supervisory Board since 1998;
third term expires in 2010
Former Chairman and CEO of Marks & Spencer
and former Director of Lloyds TSB, British Gas,
ICI, Zeneca and Electronics Boutique Plc.
J-M. Hessels
1942, Dutch*
Member of the Supervisory Board since 1999; third term expires in 2011
Former CEO of Royal Vendex
KBB and currently Chairman of the Board of NYSE Euronext Inc, member of the Supervisory Boards of
Heineken and Fortis and member of the International Advisory Board of Blackstone Group
Prof. K.A.L.M. van Miert
1942, Belgian*
Member of the Supervisory Board since 2000; second term expires in 2008
Former Vice-President of
the European Commission and former President of Nyenrode University, member of the Supervisory
Boards of RWE, Agfa Gevaert, De Persgroep, Munich Re, Anglo American, Vivendi Universal, Sibelco
and Solvay and member of the Advisory Board of Goldman Sachs, Uni-Credto and FITCH
C.J.A. van Lede
1942, Dutch**
Member of the Supervisory Board since 2003; second term expires in 2011
Former
Chairman of the Board of Management of Akzo Nobel and currently Chairman of the Supervisor Board of Heineken, temporary member of the Supervisory Board of Stork, non-executive member of the
Boards of AirFrance/KLM, Sara Lee Corporation, Air Liquide, Chairman of the Board of Directors of
INSEAD and Senior Advisor JP Morgan Plc
J.M. Thompson
1942, Canadian*****
Member of the Supervisory Board since 2003; second term expires in 2011
Former Vice-Chairman of the
Board of Directors of IBM, and director of Hertz and Robert Mondavi; currently Chairman of the
Board of Toronto Dominion Bank and a Director of Thomson Corporation
E. Kist
1944, Dutch*
Member of the Supervisory Board since 2004;
first term expires in 2008
Former Chairman of the Executive Board of ING
Group and currently member of the Supervisory
Boards of the Dutch Central Bank, DSM, Moodys
Investor Service and Stage Entertainment
Wong Ngit Liong
1941, Singaporean
Member of the Supervisory Board since 2005;
first term expires in 2009
Chairman and CEO of the Venture Group of companies. Also a board member of DBS Bank and DBS Group
Holdings Ltd, Chairman of the National University of Singapore Board
of Trustee, and a member of
the Research Innovation and Enterprise Council
J.J. Schiro
1946, American*
Member of the Supervisory Board since 2005;
first term expires in 2009
CEO of Zurich Financial Services and Chairman of the Group Management Board. Also serves on various
boards of private and listed companies including PepsiCo as Chairman of the Audit Committee and
member of the Supervisory Board, Chairman of the Swiss American Chamber of Commerce
H. von Prondzynski
1949, German
Member of the Supervisory Board since 2007;
first term expires in 2011
Former member of the Corporate Executive
Committee of the F. Hofmann-La Roche Group
and former CEO of the Division Diagnostics
Roche and currently member of the
Supervisory Board of Qiagen
Philips Annual Report 2007 115
|
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|
|
|
|
|
8 Financial highlights
|
|
10 Message from the President
|
|
16 The Philips Group
|
|
62 The Philips sectors |
Report of the Supervisory Board
General
The supervision of the policies and actions of the executive management (the Board of Management)
of Koninklijke Philips Electronics N.V. (the Company) is entrusted to the Supervisory Board,
which, in the two-tier corporate structure under Dutch law, is a separate body and fully
independent of the Board of Management. This independence is also reflected in the requirement that
members of the Supervisory Board 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 under the applicable
US standards and pursuant to the Dutch Corporate Governance Code of December 9, 2003 (the Dutch
Corporate Governance Code). The Supervisory Board, acting in the interests of the Company and the
Philips Group, supervises and advises the Board of Management in performing its management tasks
and setting the direction of the Philips Groups business. It is empowered to recommend to the
General Meeting of Shareholders persons to be appointed as members of the Supervisory Board or the
Board of Management. Major management decisions, including the Philips Group strategy, require the
approval of the Supervisory Board. The Supervisory Board further supervises the structure and
management of systems of internal business controls and the financial reporting process. It
determines the remuneration of the individual members of the Board of Management within the
remuneration policy adopted by the General Meeting of Shareholders. While retaining overall
responsibility, the Supervisory Board assigns certain of its tasks to three permanent committees:
the Corporate Governance and Nomination & Selection Committee, the Remuneration Committee and the
Audit Committee. The separate reports of these committees are part of this report and are published
below. As in previous years, Philips addresses its overall corporate governance structure in the
chapter Corporate governance that begins on page 250 of this Annual Report
Meetings and activities of the Supervisory Board
The Supervisory Board met 10 times in the course of 2007, including meetings by telephone
conference; none of its members who were in office during the full year were frequently absent in
these meetings. The members of the Board of Management were present at the meetings of the
Supervisory Board except when they discussed the composition and functioning of the Board of
Management and the Group Management Committee, as well as the remuneration and performance of
individual members of the Board of Management and the Group Management Committee. Extensive
evaluation of the functioning of the Supervisory Board and its members has taken place, resulting
in several suggestions, which will be given further consideration. Furthermore, the training
program for members of the Supervisory Board was continued and members of the Supervisory Board
visited (head) offices of four divisions to further familiarize themselves with the business and
the respective management teams. The Supervisory Board also spent two days in Shanghai where it
discussed the Philips business in China and visited, amongst other locations, a lighting factory,
shops where Philips products are sold and the Philips research center. An evaluation of the Board
of Management and its members has also taken place, resulting in several suggestions. In addition
to the scheduled meetings, the Chairman and other members of the Supervisory Board had regular
contact with the President/Chief Executive Officer and other members of the Board of Management as
well as senior executives of the Company throughout the year.
During the year the Supervisory Board again devoted considerable time to discussing the Companys
strategy. In particular the integration of CE and DAP into the Consumer Lifestyle Sector and the
growth targets for 2010 (Vision 2010) were discussed extensively.
116 Philips Annual Report 2007
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98 Risk management
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112 Our leadership
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|
116 Report of the Supervisory Board
|
|
126 Financial Statements |
The Supervisory Board also discussed the capital structure of the Philips Group and approved
the share repurchase program announced in 2007 as well as the sale of part of the Companys shares
in TSMC and LG. Philips LCD. The Supervisory Board also evaluated opportunities for acquisitions
and partnerships and approved several acquisitions, such as Color Kinetics, Genlyte and
Respironics.
Other discussion topics included:
|
|
financial performance of the Philips Group and the divisions |
|
|
|
status of merger and acquisition projects |
|
|
|
management agenda Board of Management |
|
|
|
remuneration policy |
|
|
|
management development and succession planning |
|
|
|
geographic performance and growth opportunities in Emerging Markets |
|
|
|
the Philips Groups annual budget 2008 and significant capital expenditures |
|
|
|
the situation at Philips Pension Fund in The Netherlands |
|
|
|
the investigations into possible anticompetitive activities in the CRT industry. |
Composition and remuneration of the Supervisory Board
The Supervisory Board aims for an appropriate combination of knowledge and experience among its
members in relation to the global and multi-product character of the Companys businesses.
Consequently the Supervisory Board aims for an appropriate level of experience in marketing,
technological, manufacturing, financial, economic, social and legal aspects of international
business and government and public administration. The Supervisory Board further aims to have
available appropriate experience within Philips by having one former Philips executive as a member.
Members are appointed for fixed terms of four years and may be re-appointed for two additional
four-year terms.
The Supervisory Board currently consists of eleven members, who are listed in the chapter Our
leadership that begins on page 112 of this Annual Report. At the 2007 General Meeting of
Shareholders Messrs Hessels, Van Lede and Thompson were re-appointed and Mr Von Prondzynski was
elected to the Supervisory Board. At the 2008 General Meeting of Shareholders, the present term of
Messrs Van Miert and Kist will end. The Supervisory Board very much welcomes the fact that these
gentlemen, who have brought valuable experience and knowledge to our Board, are available for
re-appointment. We shall make a proposal to the 2008 General Meeting of Shareholders to re-appoint
Messrs Van Miert and Kist. Mr de Kleuver who joined the Supervisory Board in 1998, and has been
Chairman since 2005, has expressed his wish to relinquish his position as a member of the
Supervisory Board as from the closing of the 2008 Annual General Meeting of Shareholders. We wish
to express our sincere appreciation for the way Mr de Kleuver has guided the Supervisory Board as
its Chairman through the last three years and his valuable contributions to the Company during his
ten-year term as a member of our Board. We wish him well for the future. The Supervisory Board has
appointed Mr Hessels as its Chairman as from the closing of the 2008 Annual General Meeting of
Shareholders. Mr Kist will succeed Mr Hessels as Chairman of the Audit Committee and Mr von
Prondzynski will become a member of the Audit Committee as of the same date.
The remuneration of the members of the Supervisory Board and the additional remuneration for its
Chairman and the members of its committees is determined by the General Meeting of Shareholders.
The current fee structure for the Chairman and members of the Supervisory Board is EUR 75,000 per
year for the Chairman and EUR 41,000 per year for members of the Supervisory Board. The annual
remuneration for a regular member of a committee is EUR 4,500, for the chairman of a committee EUR
6,000 and for
Philips Annual Report 2007 117
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|
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|
8 Financial highlights
|
|
10 Message from the President
|
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16 The Philips Group
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62 The Philips sectors |
the chairman of the Audit Committee EUR 7,000; details are disclosed in note 34.
Report of the Corporate Governance and Nomination & Selection Committee
The Corporate Governance and Nomination & Selection Committee currently consists of three members,
who are listed in the chapter Our leadership. In line with the New York Stock Exchange listing
rules and other developments in the field of corporate governance, 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. As in prior years,
the committee discussed developments in the area of corporate governance and legislative changes as
well as further steps the Company could take to improve its corporate governance structure. In view
hereof, the Supervisory Board will propose to the 2008 General Meeting of Shareholders amendments
to the current articles of association of the Company, which proposal together with explanatory
notes is available on the Companys website (www.philips.com/investor). The proposal addresses
legislative changes such as the implementation of the Dutch Act on Electronic Means of
Communications and the Transparancy Directive and includes amendments with respect to the
implementation of share repurchase programs as well as the remuneration of the members of the
Supervisory Board.
In accordance with its charter, the Corporate Governance and Nomination & Selection Committee
consulted in 2007 with the President/CEO and other members of the Board of Management on the
appointment or re-appointment of candidates for Supervisory Board membership and candidates to fill
current and future vacancies on the Board of Management and the Group Management Committee,
prepared decisions and advised the Supervisory Board on the candidates for appointment, and
supervised the policy of the Board of Management on the selection criteria and appointment
procedures for Philips senior management.
At the 2007 General Meeting of Shareholders, Mr Kleisterlee was re-appointed as President/CEO, Mr
Dutiné was re-appointed as member of Board of Management and Mr Rusckowski, CEO of the Medical
Systems division, was appointed as member of Board of Management.
On September 10, 2007, the Company announced its plan to simplify its business structure by
creating three core sectors: Philips Healthcare, Philips Ligthing and Philips Consumer Lifestyle
and to integrate its Consumer Electronics and Domestic Appliances and Personal Care divisions into
one Consumer Lifestyle sector as of January 1, 2008. Furthermore the Company also announced the
combination of Consumer Healthcare Solutions, renamed as Home Healthcare Solutions, with Philips
Medical Systems, under the new name of Philips Healthcare. In connection therewith, Mr Rusckowski
became CEO of Philips Healthcare as per January 1, 2008. With effect from the same date, Mr
Provoost, CEO of the Consumer Electronics division, has moved to the Philips Lighting sector,
transitioning to take over as CEO from Mr van Deursen, who will retire on April 1, 2008. Mr
Ragnetti, CEO of DAP, became CEO of the Consumer Lifestyle sector from January 1, 2008. We would
like to thank Mr van Deursen for his significant contribution to Philips, in particular in the
Companys lighting business.
In respect of the Group Management Committee, the following other changes occurred in 2007. On
September 1, 2007, Mr de Vries was appointed as member of the Group Management Committee and
succeeded Mr Hartert as Chief Information Officer who has been appointed CEO of the Imaging Systems
business within the Medical Systems division.
Report of the Remuneration Committee
The Remuneration Committee, currently consisting of four members, who are listed in the chapter Our
leadership, is responsible for preparing decisions of the Supervisory Board on the remuneration of
individual members of the Board of Management and the Group Management Committee. It met five times
in 2007. The Remuneration Committee proposes to the Supervisory Board the remuneration policy for
members of the Board of Management and other members of the Group Management Committee, and reports
annually to the Supervisory Board on the implementation of this remuneration policy. The
Supervisory Board, through the Remuneration Committee, implements this policy and determines on the
basis of this policy the remuneration of the individual members of the Board of Management and
other members of the Group Management Committee. In performing its duties and responsibilities the
Remuneration Committee is assisted by a remuneration expert acting on the basis of a protocol
118 Philips Annual Report 2007
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98 Risk management
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|
112 Our leadership
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|
116 Report of the Supervisory Board
|
|
126 Financial Statements |
ensuring that the expert acts on the instructions of the Remuneration Committee and on an
independent basis in which conflicts of interest are avoided. The Remuneration Committees tasks
are laid down in the Charter of the Remuneration Committee that forms part of the Rules of
Procedure of the Supervisory Board. Currently, no member of the Remuneration Committee is a member
of the management board of another listed company.
General remuneration policy
The objective of the remuneration policy for members of the Board of Management, approved by the
2004 General Meeting of Shareholders, lastly amended by the 2007 General Meeting of Shareholders
and published on the Companys website, is in line with that for Philips executives throughout the
Philips Group: to focus on improving the performance of the Company and enhancing the value of the
Philips Group, to motivate and retain them, and to be able to attract highly qualified executives,
when required.
In order to link executive remuneration to the Companys performance, the remuneration package
includes a significant variable part in the form of an annual cash incentive and a long-term
incentive in the form of restricted share rights and stock options.
Contracts of employment
Members of the Board of Management have a contract of employment with the Company. The form of
contract used for members of the Board of Management is in line with the standard form used for
other Philips executives. As from August 1, 2003, for newly appointed members of the Board of
Management and the other members of the Group Management Committee, the term of the contract is set
at four years. In case the Company terminates the contract of employment, the maximum severance
payment is in principle limited to one year of base salary in line with the Dutch Corporate
Governance Code but subject to mandatory Dutch law, to the extent applicable. If the maximum of one
years salary would be manifestly unreasonable for a member of the Board of Management who is
dismissed during his first term of office, the member of the Board of Management shall be eligible
for a severance payment not exceeding twice the annual salary.
The contract of employment of the President/CEO was renewed as of April 1, 2007 for another 4
years. For the duration of the contract, the base salary is fixed at EUR 1,100,000. It was decided
to grant an increased
number of Long Term Incentives. No further accrual of pension entitlements will take place. The
contract terms for current members of the Board of Management are presented in the table below.
Contract terms for current members1)
|
|
|
|
|
end of term |
G.J. Kleisterlee
|
|
April 1, 2011 |
P-J. Sivignon
|
|
June 15, 2009 |
G.H.A. Dutiné
|
|
April 1, 2011 |
T.W.H.P. van Deursen
|
|
April 1, 2008 |
R.S. Provoost
|
|
April 1, 2010 |
A. Ragnetti
|
|
April 1, 2010 |
S.H. Rusckowski
|
|
April 1, 2011 |
|
|
|
1) |
|
Reference date for board membership is December 31, 2007 |
Base salary1)
in euros
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
G.J. Kleisterlee |
|
|
1,020,000 |
|
|
|
1,042,500 |
|
|
|
1,087,500 |
|
P-J. Sivignon |
|
|
|
|
|
|
568,750 |
|
|
|
637,500 |
|
G.H.A. Dutiné |
|
|
511,000 |
|
|
|
540,750 |
|
|
|
587,500 |
|
T.W.H.P. van Deursen |
|
|
|
|
|
|
412,500 |
|
|
|
587,500 |
|
R.S. Provoost |
|
|
|
|
|
|
393,750 |
|
|
|
562,500 |
|
A. Ragnetti |
|
|
|
|
|
|
356,250 |
|
|
|
531,250 |
|
S.H. Rusckowski |
|
|
|
|
|
|
|
|
|
|
431,250 |
|
|
|
|
1) |
|
Annual review date is April 1, therefore amounts shown are partly (3 months) based on salary
level before April 1 and partly (9 months) on salary level after April 1. Reference date for
board membership is December 31, 2007. |
In line with market developments shown by benchmark research and additional market studies, the
salary levels in 2007 have been increased. The annual review date for the base salary is April 1.
Information on the individual remuneration of the members of the Board of Management is shown in
the table in note 34.
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 for 80% the financial indicators of the Company and for 20% team
targets in the areas of responsibility monitored by the individual members of the Board of
Management. The related targets for the individual members of the Board of Management are
determined annually at the beginning of the year by the Remuneration Committee on behalf
Philips Annual Report 2007 119
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|
8 Financial highlights
|
|
10 Message from the President
|
|
16 The Philips Group
|
|
62 The Philips sectors |
of the Supervisory Board. The (2007) financial targets (net income with a cash flow
threshold and comparable sales growth, based on US GAAP) are determined upfront with measurable
quantitative performance criteria and will not be adjusted during the year.
The on-target Annual Incentive percentage is set at 60% of the base salary for members of the Board
of Management and 80% of the base salary for the President/CEO, and the maximum Annual Incentive
achievable is 90% of the annual base salary and for the President/CEO 120% of the annual base
salary. In exceptional circumstances, the Remuneration Committee may decide to increase this
percentage by 20% (resulting in an Annual Incentive percentage of 108% for members and 144% for the
President/CEO). The Annual Incentive pay-out in any year relates to the achievements of the
preceding financial year in relation to agreed targets. As a result, Annual Incentives paid in 2007
relate to the salary levels and the performance in the year 2006. Similarly, the Annual Incentive
payable in 2008 will be calculated on the basis of the 2007 annual results.
The Annual Incentive pay-out in 2007 and for
the previous two years is shown in the next tables.
Pay-out in 20071)
in euros
|
|
|
|
|
|
|
|
|
|
|
realized annual |
|
|
as a % of base |
|
|
|
incentive |
|
|
salary (2006) |
|
G.J. Kleisterlee |
|
|
1,186,618 |
|
|
|
113.0 |
% |
P-J. Sivignon |
|
|
508,550 |
|
|
|
84.8 |
% |
G.H.A. Dutiné |
|
|
513,691 |
|
|
|
93.4 |
% |
T.W.H.P. van Deursen |
|
|
380,190 |
|
|
|
92.2 |
%2) |
R.S. Provoost |
|
|
335,551 |
|
|
|
85.2 |
%2) |
A. Ragnetti |
|
|
354,894 |
|
|
|
99.6 |
%2) |
S.H. Rusckowski |
|
|
|
|
|
|
|
3) |
|
|
|
1) |
|
Reference date for board membership is December 31, 2007 |
|
2) |
|
Pay-out related to period April 1 December 31, 2006 |
|
3) |
|
No pay-out related
to period of board membership |
Pay-out in 20061)
in euros
|
|
|
|
|
|
|
|
|
|
|
realized annual |
|
|
as a % of base |
|
|
|
incentive |
|
|
salary (2005) |
|
G.J. Kleisterlee |
|
|
1,150,560 |
|
|
|
112.8 |
% |
P-J. Sivignon |
|
|
219,191 |
|
|
|
84.6 |
%2) |
G.H.A. Dutiné |
|
|
433,998 |
|
|
|
84.6 |
% |
T.W.H.P. van Deursen |
|
|
|
|
|
|
|
3) |
R.S. Provoost |
|
|
|
|
|
|
|
3) |
A. Ragnetti |
|
|
|
|
|
|
|
3) |
|
|
|
1) |
|
Reference date for board membership is December 31, 2007 |
|
2) |
|
Pay-out related to period June 15 December 31, 2005 |
|
3) |
|
No pay-out related to period of board membership |
Pay-out in 20051)
in euros
|
|
|
|
|
|
|
|
|
|
|
realized annual |
|
|
as a % of base |
|
|
|
incentive |
|
|
salary (2004) |
|
G.J. Kleisterlee |
|
|
1,028,160 |
|
|
|
100.8 |
% |
P-J. Sivignon |
|
|
|
|
|
|
|
2) |
G.H.A. Dutiné |
|
|
509,040 |
|
|
|
100.8 |
% |
|
|
|
1) |
|
Reference date for board membership is December 31, 2007 |
|
2) |
|
No pay-out in 2005 since Mr Sivignon joined Philips on June 15, 2005 |
Based upon the 2007 results as published in this Annual Report, the realized Annual Incentive
amounts mentioned in the table below will be paid to members of the Board of Management in April
2008.
Pay-out in 20081)
in euros
|
|
|
|
|
|
|
|
|
|
|
realized annual |
|
|
as a % of base |
|
|
|
incentive |
|
|
salary (2007) |
|
G.J. Kleisterlee |
|
|
490,512 |
|
|
|
44.6 |
% |
P-J. Sivignon |
|
|
217,386 |
|
|
|
33.4 |
% |
G.H.A. Dutiné |
|
|
200,664 |
|
|
|
33.4 |
% |
T.W.H.P. van Deursen |
|
|
267,984 |
|
|
|
44.7 |
% |
R.S. Provoost |
|
|
247,607 |
|
|
|
43.1 |
% |
A. Ragnetti |
|
|
329,571 |
|
|
|
59.9 |
% |
S.H. Rusckowski |
|
|
103,164 |
|
|
|
23.9 |
%2) |
|
|
|
1) |
|
Reference date for board membership is December 31, 2007 |
|
2) |
|
Pay-out related to period of board membership April 1 December 31, 2007 |
120 Philips Annual Report 2007
|
|
|
|
|
|
|
98 Risk management
|
|
112 Our leadership
|
|
116 Report of the Supervisory Board
|
|
126 Financial Statements |
Long-Term Incentive Plan
For many years Philips has operated a Long-Term Incentive Plan (LTIP), which has served to align
the interests of the participating employees with the shareholders interests and to attract,
motivate and retain participating employees. Until 2002, the long-term incentive awards consisted
exclusively of stock options, but since 2003 an LTIP approved by the General Meeting of
Shareholders has been in place consisting of a mix of restricted share rights and stock options.
By granting additional (premium) shares after the grantees have held the restricted shares for
three years after delivery, provided they are still in service, grantees will be more stimulated to
focus on the longer term as shareholders of the Company.
The actual number of long-term incentives that will be granted to members of the Board of
Management, the other members of the Group Management Committee, executives and other key employees
depends on the team and/or individual performance and on the share performance of Philips and are
aimed at median level of the relevant markets. As the value of the grants was below market median,
the grant levels were increased in 2007.
The share performance of Philips is measured on the basis of the Philips Total Shareholder Return
(TSR) compared to the TSR of a peer group of leading multinational electronics/electrical equipment
companies over a three-year period. Since the sale of a majority stake in the Semiconductors
division, the list of TSR peer group companies as approved in 2003 contained companies with which
Philips did not compare itself any longer. The 2007 General Meeting of Shareholders approved a new
list of peer group companies and a new simplified TSR-based LTI multiplier based on the ranking
table below:
|
|
|
|
|
Philips position compared to peer companies1) |
|
LTI Multiplier |
|
Top 4 |
|
|
1.2 |
|
Middle 4 |
|
|
1.0 |
|
Bottom 4 |
|
|
0.8 |
|
|
|
|
1) |
|
Electrolux, Emerson Electric, General Electric, Hitachi, Honeywell International,
Johnson & Johnson, Matsushita, Philips, Schneider Siemens, Toshiba, 3M |
For 2007, the Supervisory Board has applied (under the old system) a multiplier of 1.1, based on
the Philips share performance over the period from the last working day in December 2003 to
December 31, 2006.
In 2007,7,270,713 stock options and 2,423,541 restricted share rights were granted under the LTIP
(excluding the premium shares to be delivered after a three-year holding period); in 2006,
7,164,384 stock options and 2,466,189 restricted share rights were granted.
The 2006 General Meeting of Shareholders approved the amendment of the maximum allocation from 2.5%
to 3.0% of the annual LTIP pool-size to members of the Board of Management.
Grants to members of the Board of Management under the LTIP:
Long-Term Incentive Plan 20071)2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
restricted share |
|
|
|
stock options |
|
|
rights |
|
GJ. KIeisterlee |
|
|
73,926 |
|
|
|
24,642 |
|
P-J. Sivignon |
|
|
42,903 |
|
|
|
14,301 |
|
G.H.A. Dutiné |
|
|
39,600 |
|
|
|
13,200 |
|
T.W.H.P. van Deursen |
|
|
39,600 |
|
|
|
13,200 |
|
R.S. Provoost |
|
|
39,600 |
|
|
|
13,200 |
|
A. Ragnetti |
|
|
39,600 |
|
|
|
13,200 |
|
S.H. Rusckowski |
|
|
42,903 |
|
|
|
14,301 |
|
|
|
|
1) |
|
Reference date for board membership is December 31, 2007 |
|
2) |
|
Long-Term Incentive Multiplier of 1.1 applied |
Long-Term Incentive Plan 20061)2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
restricted share |
|
|
|
stock options |
|
|
rights |
|
GJ. KIeisterlee |
|
|
48,006 |
|
|
|
16,002 |
|
P-J. Sivignon |
|
|
33,003 |
|
|
|
11,001 |
|
G.H.A. Dutiné |
|
|
30,006 |
|
|
|
10,002 |
|
T.W.H.P. van Deursen |
|
|
30,006 |
|
|
|
10,002 |
|
R.S. Provoost |
|
|
30,006 |
|
|
|
10,002 |
|
A. Ragnetti |
|
|
27,000 |
|
|
|
9,000 |
|
|
|
|
1) |
|
Reference date for board membership is December 31, 2007 |
|
2) |
|
Long-Term Incentive Multiplier of 1.0 applied |
Philips Annual Report 2007 121
|
|
|
|
|
|
|
8 Financial highlights
|
|
10 Message from the President
|
|
16 The Philips Group
|
|
62 The Philips sectors |
Long-Term Incentive Plan 20051)2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
restricted share |
|
|
|
stock options |
|
|
rights |
|
G.J. KIeisterlee |
|
|
48,006 |
|
|
|
16,002 |
|
P-J. Sivignon |
|
|
32,004 |
|
|
|
10,668 |
|
G.H.A. Dutiné |
|
|
32,004 |
|
|
|
10,668 |
|
|
|
|
1) |
|
Reference date for board membership is December 31, 2007 |
|
2) |
|
Long-Term Incentive Multiplier of 1.0 applied |
For more details of the LTIP, see note 33.
According to Philips Rules of Conduct with respect to inside information, members of the Board of
Management (and the other members of the Group Management Committee) are only allowed to trade in
Philips securities (including the exercise of stock options) during windows of ten 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.
To further align the interests of the members of the Board of Management and shareholders,
restricted shares granted to the Board of Management members shall be retained for a period of at
least five years or until at least the end of their employment, if this period is shorter.
Similarly for other Philips Senior Executives compulsory share ownership was introduced in 2004.
Total cash pay-out
The total cash pay-out in any year is the sum of the base salary received in the year concerned
and the bonus pay-out related to the previous year. The total cash pay-out in 2007 (and in
previous two years) for each member of the Board of Management is presented in the next table.
Total cash pay-out1)
in euros
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
G.J. KIeisterlee |
|
|
2,048,160 |
|
|
|
2,543,060 |
3) |
|
|
2,274,118 |
|
P-J. Sivignon |
|
|
259,091 |
2) |
|
|
1,087,941 |
3) |
|
|
1,146,050 |
|
G.H.A. Dutiné |
|
|
1,020,040 |
|
|
|
974,748 |
|
|
|
1,101,191 |
|
T.W.H.P. van Deursen |
|
|
|
4) |
|
|
412,500 |
5) |
|
|
967,690 |
|
R.S. Provoost |
|
|
|
4) |
|
|
393,750 |
5) |
|
|
898,051 |
|
A. Ragnetti |
|
|
|
4) |
|
|
356,250 |
5) |
|
|
886,144 |
|
S.H. Rusckowski |
|
|
|
6) |
|
|
|
6) |
|
|
431,250 |
7) |
|
|
|
1) |
|
Reference date for board membership is December 31, 2007 |
|
2) |
|
Related to period June 15 December 31, 2005 |
|
3) |
|
Including a special payment for the sale of the Semiconductors division |
|
4) |
|
Before date of appointment as member of the Board of Management
(April 1, 2006) |
|
5) |
|
Related to period April 1 December 31, 2006 |
|
6) |
|
Before date of appointment as member of the Board of Management
(April 1, 2007) |
|
7) |
|
Related to period April 1 December 31, 2007 |
Percentage variable remuneration
The variable performance-based reward part of the members of the Board of Management is
presented in the table below.
Variable remuneration as % of total remuneration1)2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
G.J. Kleisterlee |
|
|
62.1 |
% |
|
|
65.7 |
% |
|
|
70.2 |
% |
P-J. Sivignon |
|
|
|
|
|
|
58.4 |
% |
|
|
67.2 |
% |
G.H.A. Dutiné |
|
|
64.8 |
% |
|
|
64.0 |
% |
|
|
68.0 |
% |
T.W.H.P. van Deursen |
|
|
|
|
|
|
|
3) |
|
|
65.5 |
% |
R.S. Provoost |
|
|
|
|
|
|
|
3) |
|
|
65.6 |
% |
A. Ragnetti |
|
|
|
|
|
|
|
3) |
|
|
67.2 |
% |
S.H. Rusckowski |
|
|
|
|
|
|
|
|
|
|
|
3) |
|
|
|
1) |
|
Reference date for board membership is December 31, 2007 |
|
2) |
|
Restricted shares based upon actual grant price and stock options based upon
Black-Scholes value of the actual grant price in a particular year (see note 33 share-based
compensation) |
|
3) |
|
Due to incomplete year as member of the Board of Management, no variable remuneration
related to Board of Management period is mentioned |
122 Philips Annual Report 2007
|
|
|
|
|
|
|
98 Risk management
|
|
112 Our leadership
|
|
116 Report of the Supervisory Board
|
|
126 Financial Statements |
Pensions
As of January 1, 2006, a new pension plan is in force for all Philips executives in the Dutch
pension fund born after January 1, 1950. This includes members of the Board of Management and other
members of the Group Management Committee. The new plan is based on a combination of
defined-benefit (career average) and defined-contribution and replaces the previous final pay plan.
The target retirement age under the new plan is 62.5. The plan does not require employee
contributions. Messrs Kleisterlee and Van Deursen continued to participate in the old plan till
they reached the age of 60. Since then no further accrual took place under this plan.
Additional arrangements
In addition to the main conditions of employment, a number of additional arrangements apply to
members of the Board of Management. These additional arrangements, such as expense and relocation
allowances, medical insurance, accident insurance and company car arrangements, are broadly 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.
In line with regulatory requirements, the Companys policy forbids personal loans to members of the
Board of Management as well as to other members of the Group Management Committee, and consequently
no loans were granted to such members in 2007, nor were such loans outstanding as of December 31,
2007.
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 act or failure to act by a member of the Board
of Management or a member of the Supervisory Board that can be characterized as intentional
(opzettelijk), intentionally reckless (bewust roekeloos) or seriously culpable (ernstig
verwijtbaar), there will be no entitlement to this reimbursement. The Company has also taken out
liability insurance (D&O - Directors & Officers) for the persons concerned.
Outlook 2008
Based on the trends in the market (European General Industry), the Supervisory Board proposes to
amend the remuneration policy for members of Board of Management as follows.
Annual Incentive on-target levels are determined as a percentage of base salary. The current
maximum pay-out structure under the plan shall be replaced by a simplified maximum equal to twice
the on-target Annual Incentive levels. For the Board of Management the consequences of this change
are reflected below.
Annual Incentive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On-target (as % |
|
|
Current |
|
|
Proposed |
|
|
|
of base salary) |
|
|
maximum |
|
|
maximum |
|
CEO |
|
|
80 |
% |
|
|
144 |
% |
|
|
160 |
% |
BoM member |
|
|
60 |
% |
|
|
108 |
% |
|
|
120 |
% |
The 2008 Annual Incentive criteria are i) net income, cash flow and comparable sales growth and ii)
team targets.
It is proposed to determine the restricted share grant levels in accordance with a multiplier of
zero to 2. The current plan has limited downside and equally upside. With the range of the new
proposed multiplier, the restricted share right grants will be better aligned with Philips
relative TSR performance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proposed TSR |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TSR Ranking |
|
|
1 |
|
|
|
2 |
|
|
|
3 |
|
|
|
4 |
|
|
|
5 |
|
|
|
6 |
|
Multiplier (current) |
|
|
1.2 |
|
|
|
1.2 |
|
|
|
1.2 |
|
|
|
1.2 |
|
|
|
1 |
|
|
|
1 |
|
Multiplier (proposed) |
|
|
2 |
|
|
|
1.8 |
|
|
|
1.6 |
|
|
|
1.4 |
|
|
|
1.2 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proposed TSR |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TSR Ranking |
|
|
7 |
|
|
|
8 |
|
|
|
9 |
|
|
|
10 |
|
|
|
11 |
|
|
|
12 |
|
Multiplier (current) |
|
|
1 |
|
|
|
1 |
|
|
|
0.8 |
|
|
|
0.8 |
|
|
|
0.8 |
|
|
|
0.8 |
|
Multiplier (proposed) |
|
|
1 |
|
|
|
0.8 |
|
|
|
0.6 |
|
|
|
0.4 |
|
|
|
0.2 |
|
|
|
0 |
|
As stock options are intrinsically performance related, it will be proposed that grant levels for
stock options are no longer determined in accordance with the
TSR-multiplier of 0.8 1.2. The
intrinsic performance condition lies in the fact that the share price upon exercise must exceed the
share price upon grant (exercise price) in order to provide a value to the grantee.
Philips Annual Report 2007 123
|
|
|
|
|
|
|
8 Financial highlights
|
|
10 Message from the President
|
|
16 The Philips Group
|
|
62 The Philips sectors |
The proposed changes to the plan can be accommodated within the current pool size of maximum
17.5 million shares. The actual number of stock options and restricted share rights that will be
granted in any particular year will be determined by the Supervisory Board in accordance with the
terms and conditions of the LTIP.
As the base fee for the Supervisory Board has not been changed since 1998, a proposal shall be made
to the 2008 General Meeting of Shareholders to adjust the fee structure for the chairman and
members of the Supervisory Board with effect from January 1, 2008.
The above-mentioned proposals will be submitted to the 2008 General Meeting of Shareholders for
approval.
Report of the Audit Committee
The Audit Committee, currently consisting of four members of the Supervisory Board, who are listed
in the chapter Our leadership, assists the Supervisory Board in fulfilling its supervisory
responsibilities for the integrity of the Companys 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 auditors qualifications, independence and performance, as
well as the Companys process for monitoring compliance with laws and regulations and the General
Business Principles (GBP).
The Audit Committee met 10 times in 2007 and reported its findings periodically to the plenary
Supervisory Board. The President, the Chief Financial Officer, the Internal Auditor, the Group
Controller and the External Auditor attended all regular meetings. Furthermore, the Audit Committee
met each quarter separately with each of the President, the Chief Financial Officer, the Internal
Auditor and the External Auditor. In accordance with its charter, which is part of the Rules of
Procedure of the Supervisory Board, the Audit Committee in 2007 reviewed the Companys annual and
interim financial statements, including non-financial information, prior to publication thereof. It
also assessed in its quarterly meetings the adequacy and appropriateness of internal control
policies and internal audit programs and their findings.
In its 2007 meetings, the Audit Committee reviewed periodically matters relating to accounting
policies and compliance with accounting standards. Compliance with statutory and legal requirements
and regulations, particularly in the financial domain, was also reviewed. Important findings and
identified risks were examined thoroughly in order to allow appropriate measures to be taken. With
regard to the internal audit, the Audit 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. With regard to the external audit, the Audit Committee reviewed the proposed audit scope,
approach and fees, the independence of the external auditors, non-audit services provided by the
external auditors in conformity with the Philips Policy on Auditor Independence, as well as any
changes to this policy. Within the framework of the Philips policy on auditor independence, the
evaluation of the performance of the external auditor takes place every three years and the Audit
Committee has discussed the detailed evaluation report and has presented the conclusions to the
Supervisory Board. After assessing the performance of the external auditors in accordance with the
Philips Policy on Auditor Independence, the Audit Committee has advised the Supervisory Board to
propose to the General Meeting of Shareholders to
re-appoint KPMG Accountants N.V. for another
three-year term. The Audit Committee also considered the report of the external auditors with
respect to the annual financial statements and advised on the Supervisory Boards statement to
shareholders in the annual accounts.
The aggregate fees billed by KPMG for professional services rendered for the fiscal years 2005,
2006 and 2007 were as follows:
Aggregate fees KPMG
in millions of euros
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
Audit fees |
|
|
14.4 |
|
|
|
20.6 |
|
|
|
17.6 |
|
Audit-related fees |
|
|
5.0 |
|
|
|
9.8 |
|
|
|
3.9 |
|
Tax fees |
|
|
1.3 |
|
|
|
0.9 |
|
|
|
1.2 |
|
Other fees |
|
|
2.9 |
|
|
|
2.4 |
|
|
|
2.3 |
|
|
|
|
23.6 |
|
|
|
33.7 |
|
|
|
25.0 |
|
124 Philips Annual Report 2007
|
|
|
|
|
|
|
98 Risk management
|
|
112 Our leadership
|
|
116 Report of the Supervisory Board
|
|
126 Financial Statements |
Audit fees consist of fees for the examination of both the consolidated financial statements
(EUR 7.2 million) and statutory financial statements (EUR 4.7 million), as well as the audit of
internal controls over financial reporting (EUR 5.7 million). Audit-related fees consist of fees in
connection with audits of acquisitions and divestments (EUR 2.3 million) and other audit-related
fees (EUR 1.6 million). Tax fees (EUR 1.2 million) mainly relate to tax compliance and expatriate
tax services. Other fees comprise royalty audit fees (EUR 1.9 million) and sustainability and other
services (EUR 0.4 million).
In 2007, the Audit Committee further periodically discussed the Companys policy on business
controls, the GBP including the deployment thereof, and the Companys major areas of risk,
including the internal auditors reporting thereon. The Audit Committee was informed on, discussed
and monitored closely the Companys internal control certification processess, 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 tax issues, litigation (including
asbestos) and related provisions, environmental exposures and financial exposures in the area of
treasury, dividend, pensions (including the situation at Philips Pension Fund in The Netherlands),
accounting treatment of share repurchases, financial holdings, the sale of shared service centers,
the investigations into possible anticompetitive activities in the CRT industry and MedQuist, as
well as a financial evaluation of the investments made in 2004.
Financial statements 2007
The financial statements of Koninklijke Philips Electronics N.V. for 2007, as presented by the
Board of Management, have been audited by KPMG Accountants N.V., independent auditors. Their
reports have been included in the chapter IFRS financial statements on page 239 and the chapter
Company financial statements on page 245 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 2007 financial statements. We likewise recommend
to shareholders that they adopt the proposal of the Board of Management to pay a dividend of EUR
0.70 per common share.
Finally, we would like to express our thanks to the members of the Board of Management, the
Group Management Committee and all other employees for their continued contribution during
the year.
February 18, 2008
The Supervisory Board
Philips Annual Report 2007 125
|
|
|
|
|
|
|
8 Financial highlights
|
|
10 Message from the President
|
|
16 The Philips Group
|
|
62 The Philips sectors |
Financial statements
|
|
|
|
|
|
|
|
|
Group financial statements |
|
128 |
|
|
Managements report |
|
129 |
|
|
Auditors report |
|
130 |
|
|
Consolidated statements of income |
|
132 |
|
|
Consolidated balance sheets |
|
134 |
|
|
Consolidated statements of cash flows |
|
136 |
|
|
Consolidated statements of stockholders equity |
|
137 |
|
|
Information by sectors and main countries |
|
140 |
|
|
Significant accounting policies |
|
146 |
|
|
Notes to the Group financial statements |
|
|
|
|
|
|
|
|
|
IFRS financial statements |
|
189 |
|
|
IFRS management commentary |
|
194 |
|
|
Consolidated statements of income |
|
196 |
|
|
Consolidated balance sheets |
|
198 |
|
|
Consolidated statements of cash flows |
|
200 |
|
|
Consolidated statements of equity |
|
202 |
|
|
Information by sectors and main countries |
|
205 |
|
|
Significant IFRS accounting policies |
|
211 |
|
|
Notes to the IFRS financial statements |
|
239 |
|
|
Auditors report |
|
|
|
|
|
|
|
|
|
Company financial statements |
|
240 |
|
|
Balance sheets |
|
241 |
|
|
Statements of income |
|
241 |
|
|
Statement of equity |
|
243 |
|
|
Notes to the Company financial statements |
|
245 |
|
|
Auditors report |
|
|
|
|
|
|
246 |
|
|
Reconciliation of non-US GAAP information |
|
|
|
|
|
|
250 |
|
|
Corporate governance |
|
|
|
|
|
|
258 |
|
|
The Philips Group in the last ten years |
|
|
|
|
|
|
260 |
|
|
Investor information |
126 Philips Annual Report 2007
|
|
|
|
|
|
|
98 Risk management
|
|
112 Our leadership
|
|
116 Report of the Supervisory Board
|
|
126 Financial Statements |
Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes to the group financial statements |
146
|
|
|
1 |
|
|
Discontinued operations |
147
|
|
|
2 |
|
|
Acquisitions and divestments |
152
|
|
|
3 |
|
|
Income from operations |
153
|
|
|
4 |
|
|
Restructuring charges |
155
|
|
|
5 |
|
|
Financial income and expenses |
155
|
|
|
6 |
|
|
Income taxes |
157
|
|
|
7 |
|
|
Investments in equity-accounted investees |
159
|
|
|
8 |
|
|
Earnings per share |
159
|
|
|
9 |
|
|
Receivables |
159
|
|
|
10 |
|
|
Inventories |
159
|
|
|
11 |
|
|
Other current assets |
160
|
|
|
12 |
|
|
Other non-current financial assets |
160
|
|
|
13 |
|
|
Non-current receivables |
160
|
|
|
14 |
|
|
Other non-current assets |
161
|
|
|
15 |
|
|
Property, plant and equipment |
162
|
|
|
16 |
|
|
Intangible assets excluding goodwill |
162
|
|
|
17 |
|
|
Goodwill |
163
|
|
|
18 |
|
|
Accrued liabilities |
163
|
|
|
19 |
|
|
Provisions |
164
|
|
|
20 |
|
|
Pensions |
168
|
|
|
21 |
|
|
Postretirement benefits other than pensions |
171
|
|
|
22 |
|
|
Other current liabilities |
171
|
|
|
23 |
|
|
Short-term debt |
172
|
|
|
24 |
|
|
Long-term debt |
173
|
|
|
25 |
|
|
Other non-current liabilities |
173
|
|
|
26 |
|
|
Contractual obligations |
173
|
|
|
27 |
|
|
Contingent liabilities |
176
|
|
|
28 |
|
|
Stockholders equity |
176
|
|
|
29 |
|
|
Cash from derivatives |
176
|
|
|
30 |
|
|
Proceeds other non-current financial assets |
176
|
|
|
31 |
|
|
Assets in lieu of cash from sale businesses |
177
|
|
|
32 |
|
|
Related-party transactions |
177
|
|
|
33 |
|
|
Share-based compensation |
180
|
|
|
34 |
|
|
Information on remuneration |
184
|
|
|
35 |
|
|
Fair value of financial assets and liabilities |
185
|
|
|
36 |
|
|
Other financial instruments |
185
|
|
|
37 |
|
|
Subsequent events |
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes to the IFRS financial statements |
211
|
|
|
38 |
|
|
Discontinued operations |
212
|
|
|
39 |
|
|
Acquisitions and divestments |
217
|
|
|
40 |
|
|
Income from operations |
218
|
|
|
41 |
|
|
Financial income and expenses |
219
|
|
|
42 |
|
|
Income taxes |
221
|
|
|
43 |
|
|
Investments in equity-accounted investees |
224
|
|
|
44 |
|
|
Earnings per share |
224
|
|
|
45 |
|
|
Receivables |
225
|
|
|
46 |
|
|
Inventories |
225
|
|
|
47 |
|
|
Other current assets |
225
|
|
|
48 |
|
|
Other non-current financial assets |
225
|
|
|
49 |
|
|
Non-current receivables |
225
|
|
|
50 |
|
|
Other non-current assets |
226
|
|
|
51 |
|
|
Property, plant and equipment |
227
|
|
|
52 |
|
|
Intangible assets excluding goodwill |
227
|
|
|
53 |
|
|
Goodwill |
228
|
|
|
54 |
|
|
Accrued liabilities |
228
|
|
|
55 |
|
|
Provisions |
228
|
|
|
56 |
|
|
Pensions and postretirement benefits |
231
|
|
|
57 |
|
|
Other current liabilities |
232
|
|
|
58 |
|
|
Short-term debt |
232
|
|
|
59 |
|
|
Long-term debt |
233
|
|
|
60 |
|
|
Other non-current liabilities |
233
|
|
|
61 |
|
|
Contractual obligations |
234
|
|
|
62 |
|
|
Contingent liabilities |
236
|
|
|
63 |
|
|
Stockholders equity |
237
|
|
|
64 |
|
|
Cash from derivatives |
237
|
|
|
65 |
|
|
Proceeds other non-current financial assets |
237
|
|
|
66 |
|
|
Assets in lieu of cash from sale businesses |
237
|
|
|
67 |
|
|
Related-party transactions |
237
|
|
|
68 |
|
|
Fair value of financial assets and liabilities |
237
|
|
|
69 |
|
|
Other financial instruments |
238
|
|
|
70 |
|
|
Subsequent events |
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes to the company financial statements |
243
|
|
|
A |
|
|
Receivables |
243
|
|
|
B |
|
|
Investments in affiliated companies |
243
|
|
|
C |
|
|
Other non-current financial assets |
243
|
|
|
D |
|
|
Other current liabilities |
243
|
|
|
E |
|
|
Short-term debt |
243
|
|
|
F |
|
|
Provisions |
244
|
|
|
G |
|
|
Long-term debt |
244
|
|
|
H |
|
|
Stockholders equity |
244
|
|
|
I |
|
|
Net income |
244
|
|
|
J |
|
|
Employees |
245
|
|
|
K |
|
|
Obligations not appearing in the balance sheet |
245
|
|
|
L |
|
|
Subsequent events |
Philips Annual Report 2007 127
|
|
|
|
|
128 Group financial statements
|
|
188 IFRS information
|
|
240 Company financial statements |
- Managements report
- Auditors report
Group financial statements
Managements report on internal control
over financial reporting pursuant to
section 404 of the US Sarbanes-Oxley Act
The Board of Management of Koninklijke
Philips Electronics 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
accounting principles generally accepted
in the United States of America (US GAAP).
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.
The Board of Management conducted an
assessment of the Companys internal
control over financial reporting based on
the Internal Control-Integrated Framework
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, 2007, the Companys internal
control over US GAAP financial reporting
is considered effective.
The Board of Managements assessment of
the effectiveness of the Companys
internal control over financial reporting
as of December 31, 2007, excluded the
following companies acquired by the
Company after January 1, 2007: Health
Watch, Raytel Cardiac Services, VMI
Sistemas Medicos, XIMIS, Emergin, Color
Kinetics, TIR Systems, Partners in
Lighting International, Lighting
Technologies International and Digital
Lifestyle Outfitters. These acquisitions
are wholly-owned subsidiaries of the
Company of which total assets represented
4.3% of consolidated total assets and net
sales represented less than 2% of
consolidated net sales of the Company as
of and for the year ended December 31,
2007. If adequately disclosed, companies
are allowed to exclude acquisitions from
their assessment of internal control over
financial reporting during the first year
of an acquisition while integrating the
acquired company under guidelines
established by the US Securities and
Exchange Commission.
The effectiveness of the Companys internal
control over US GAAP
financial reporting as of December 31,
2007, as included in this chapter 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
February 18, 2008
128 Philips Annual Report 2007
|
|
|
|
|
|
|
246 Reconciliation of
non-US GAAP
information
|
|
250 Corporate governance
|
|
258 The Philips Group
in the last ten years
|
|
260 Investor information |
Report of independent registered public accounting firm
To the Supervisory Board and Shareholders of Koninklijke Philips
Electronics N.V.:
We have audited the accompanying consolidated balance sheets of Koninklijke Philips Electronics
N.V. and subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of
income, stockholders equity and cash flows for each of the years in the three-year period ended
December 31, 2007, appearing on page 130 to 186. We also have audited Koninklijke Philips
Electronics N.V. and subsidiaries internal control over financial reporting as of December 31,
2007, based on criteria established in Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Koninklijke Philips
Electronics N.V. and subsidiaries management is responsible for these consolidated financial
statements, 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 Managements Report on Internal Control over Financial Reporting appearing on page
128. Our responsibility is to express an opinion on these consolidated financial statements and an
opinion on the companys internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material misstatement and
whether effective internal control over financial reporting was maintained in all material
respects. Our audits of the consolidated financial statements included examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. Our audit of internal control over financial reporting 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 audits also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audits provide a
reasonable basis for our opinions.
A companys 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
companys 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 companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
Koninklijke Philips Electronics N.V. and subsidiaries acquired Health Watch, Raytel Cardiac
Services, VMI Sistemas Medicos, XIMIS, Emergin, Color Kinetics, TIR Systems, Partners in Lighting
International, Lighting
Technologies International and Digital Lifestyle Outfitters (together the Acquired Companies)
during 2007. Management excluded from its assessment of the effectiveness of Koninklijke Philips
Electronics N.V. and subsidiaries internal control over financial reporting as of December 31,
2007, the Acquired Companies internal control over financial reporting of which total assets
represented 4.3% of consolidated total assets and net sales represented less than 2% of
consolidated net sales included in the consolidated financial statements of Koninklijke Philips
Electronics N.V. and subsidiaries as of and for the year ended December 31, 2007. Our audit of
internal control over financial reporting of Koninklijke Philips Electronics N.V. and subsidiaries
also excluded an evaluation of the internal control over financial reporting of the Acquired
Companies.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Koninklijke Philips Electronics N.V. and subsidiaries
as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 2007, in conformity with accounting
principles generally accepted in the United States of America. Also in our opinion, Koninklijke
Philips Electronics N.V. and subsidiaries maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2007, based on criteria established in Internal
Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
As discussed in note 20 to the consolidated financial statements, effective December 31, 2006,
Koninklijke Philips Electronics N.V. and subsidiaries adopted the provisions of SFAS No. 158,
Employers
Accounting for Defined Benefit Pension and Other Postretirement Plans.
KPMG Accountants N.V.
Amstelveen, February 18, 2008
Philips Annual Report 2007 129
|
|
|
|
|
128 Group financial statements
|
|
188 IFRS information
|
|
240 Company financial statements |
Consolidated statements of income
Consolidated statements of income of the Philips Group for the years ended December 31
in millions of euros unless otherwise stated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
|
|
|
|
Sales |
|
|
25,445 |
|
|
|
26,682 |
|
|
|
26,793 |
|
|
|
|
|
Cost of sales |
|
|
(17,498 |
) |
|
|
(18,432 |
) |
|
|
(17,624 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
7,947 |
|
|
|
8,250 |
|
|
|
9,169 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses |
|
|
(4,439 |
) |
|
|
(4,655 |
) |
|
|
(4,980 |
) |
|
|
|
|
General and administrative expenses |
|
|
(774 |
) |
|
|
(969 |
) |
|
|
(854 |
) |
|
|
|
|
Research and development expenses |
|
|
(1,593 |
) |
|
|
(1,659 |
) |
|
|
(1,629 |
) |
|
|
|
|
Other business income |
|
|
417 |
|
|
|
234 |
|
|
|
146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 4 |
|
|
Income from operations |
|
|
1,558 |
|
|
|
1,201 |
|
|
|
1,852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
Financial income and expenses |
|
|
104 |
|
|
|
28 |
|
|
|
2,613 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes |
|
|
1,662 |
|
|
|
1,229 |
|
|
|
4,465 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 |
|
|
Income tax expense |
|
|
(526 |
) |
|
|
(167 |
) |
|
|
(622 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income after taxes |
|
|
1,136 |
|
|
|
1,062 |
|
|
|
3,843 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7 |
|
|
Results relating to equity-accounted investees |
|
|
1,754 |
|
|
|
(157 |
) |
|
|
763 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interests |
|
|
(11 |
) |
|
|
(4 |
) |
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
2,879 |
|
|
|
901 |
|
|
|
4,601 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
Discontinued operations |
|
|
(11 |
) |
|
|
4,482 |
|
|
|
(433 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8 |
|
|
Net income |
|
|
2,868 |
|
|
|
5,383 |
|
|
|
4,168 |
|
The years 2005 and 2006 are restated to present the MedQuist business as a discontinued
operation.
The accompanying notes are an integral part of these consolidated financial statements.
130 Philips Annual Report 2007
|
|
|
|
|
|
|
246 Reconciliation of
non-US GAAP
information
|
|
250 Corporate governance
|
|
258 The Philips Group
in the last ten years
|
|
260 Investor information |
Earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
Weighted average number of common shares outstanding (after deduction of treasury stock) during the year (in
thousands) |
|
|
1,249,956 |
|
|
|
1,174,925 |
|
|
|
1,086,128 |
|
Adjusted weighted average number of shares (after deduction of treasury stock) during the year (in thousands) |
|
|
1,253,330 |
|
|
|
1,182,784 |
|
|
|
1,097,435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share in euros |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
2.30 |
|
|
|
0.77 |
|
|
|
4.24 |
|
Income (loss) from discontinued operations |
|
|
(0.01 |
) |
|
|
3.81 |
|
|
|
(0.40 |
) |
Net income |
|
|
2.29 |
|
|
|
4.58 |
|
|
|
3.84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share in euros |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
2.30 |
|
|
|
0.76 |
|
|
|
4.19 |
|
Income (loss) from discontinued operations |
|
|
(0.01 |
) |
|
|
3.79 |
|
|
|
(0.39 |
) |
Net income |
|
|
2.29 |
|
|
|
4.55 |
|
|
|
3.80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend paid per common share in euros |
|
|
0.40 |
|
|
|
0.44 |
|
|
|
0.60 |
|
Philips Annual Report 2007 131
|
|
|
|
|
128 Group financial statements
|
|
188 IFRS information
|
|
240 Company financial statements |
Consolidated balance sheets
Consolidated balance sheets of the Philips Group as of December 31
in millions of euros unless otherwise stated
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
|
|
|
|
2007 |
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
|
|
|
|
5,886 |
|
|
|
|
|
|
|
8,769 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9 32 |
|
|
Receivables: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Accounts receivable net |
|
|
4,257 |
|
|
|
|
|
|
|
4,209 |
|
|
|
|
|
|
|
|
|
- Accounts receivable from related parties |
|
|
37 |
|
|
|
|
|
|
|
26 |
|
|
|
|
|
|
|
|
|
- Other receivables |
|
|
438 |
|
|
|
|
|
|
|
435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,732 |
|
|
|
|
|
|
|
4,670 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
Current assets of discontinued operations |
|
|
|
|
|
|
206 |
|
|
|
|
|
|
|
169 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10 |
|
|
Inventories net |
|
|
|
|
|
|
2,880 |
|
|
|
|
|
|
|
3,203 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11 |
|
|
Other current assets |
|
|
|
|
|
|
1,258 |
|
|
|
|
|
|
|
1,020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
|
|
|
|
14,962 |
|
|
|
|
|
|
|
17,831 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7 |
|
|
Investments in equity-accounted investees |
|
|
|
|
|
|
2,974 |
|
|
|
|
|
|
|
1,886 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 |
|
|
Other non-current financial assets |
|
|
|
|
|
|
8,055 |
|
|
|
|
|
|
|
3,183 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 |
|
|
Non-current receivables |
|
|
|
|
|
|
214 |
|
|
|
|
|
|
|
84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
Non-current assets of discontinued operations |
|
|
|
|
|
|
225 |
|
|
|
|
|
|
|
164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14 |
|
|
Other non-current assets |
|
|
|
|
|
|
3,447 |
|
|
|
|
|
|
|
3,726 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15 26 |
|
|
Property, plant and equipment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- At cost |
|
|
7,524 |
|
|
|
|
|
|
|
7,874 |
|
|
|
|
|
|
|
|
|
- Less accumulated depreciation |
|
|
(4,440 |
) |
|
|
|
|
|
|
(4,694 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,084 |
|
|
|
|
|
|
|
3,180 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16 |
|
|
Intangible assets excluding goodwill: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- At cost |
|
|
2,751 |
|
|
|
|
|
|
|
3,244 |
|
|
|
|
|
|
|
|
|
- Less accumulated amortization |
|
|
(938 |
) |
|
|
|
|
|
|
(1,090 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,813 |
|
|
|
|
|
|
|
2,154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17 |
|
|
Goodwill |
|
|
|
|
|
|
3,723 |
|
|
|
|
|
|
|
4,135 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-current assets |
|
|
|
|
|
|
23,535 |
|
|
|
|
|
|
|
18,512 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,497 |
|
|
|
|
|
|
|
36,343 |
|
The year 2006 is restated to present the MedQuist business as a discontinued operation.
The accompanying notes are an integral part of these consolidated financial statements.
132 Philips Annual Report 2007
|
|
|
|
|
|
|
246 Reconciliation of
non-US GAAP
information
|
|
250 Corporate governance
|
|
258 The Philips Group
in the last ten years
|
|
260 Investor information |
Liabilities and stockholders equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
|
|
|
|
2007 |
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32 |
|
|
Accounts and notes payable: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Trade creditors |
|
|
3,172 |
|
|
|
|
|
|
|
3,083 |
|
|
|
|
|
|
|
|
|
- Accounts payable to related parties |
|
|
271 |
|
|
|
|
|
|
|
289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,443 |
|
|
|
|
|
|
|
3,372 |
|
|
1 |
|
|
Current liabilities of discontinued operations |
|
|
|
|
|
|
46 |
|
|
|
|
|
|
|
46 |
|
|
18 |
|
|
Accrued liabilities |
|
|
|
|
|
|
3,297 |
|
|
|
|
|
|
|
2,984 |
|
|
19 20 21 27 |
|
|
Short-term provisions |
|
|
|
|
|
|
876 |
|
|
|
|
|
|
|
377 |
|
|
22 |
|
|
Other current liabilities |
|
|
|
|
|
|
605 |
|
|
|
|
|
|
|
509 |
|
|
23 24 |
|
|
Short-term debt |
|
|
|
|
|
|
863 |
|
|
|
|
|
|
|
2,345 |
|
|
|
|
|
|
Total current liabilities |
|
|
|
|
|
|
9,130 |
|
|
|
|
|
|
|
9,633 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24 26 |
|
|
Long-term debt |
|
|
|
|
|
|
3,006 |
|
|
|
|
|
|
|
1,212 |
|
|
19 20 21 27 |
|
|
Long-term provisions |
|
|
|
|
|
|
2,417 |
|
|
|
|
|
|
|
2,727 |
|
|
1 |
|
|
Non-current liabilities and minority
interests of discontinued operations |
|
|
|
|
|
|
123 |
|
|
|
|
|
|
|
111 |
|
|
25 |
|
|
Other non-current liabilities |
|
|
|
|
|
|
784 |
|
|
|
|
|
|
|
934 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-current liabilities |
|
|
|
|
|
|
6,330 |
|
|
|
|
|
|
|
4,984 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26 27 |
|
|
Contractual obligations and contingent liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interests |
|
|
|
|
|
|
40 |
|
|
|
|
|
|
|
42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28 |
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preference shares, par value EUR 0.20 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Authorized: 2,500,000,000 shares (2006: 2,500,000,000 shares) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Issued: none |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares, par value EUR 0.20 per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Authorized: 2,500,000,000 shares (2006: 2,500,000,000 shares) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Issued and fully paid: 1,142,826,763 shares (2006: 1,142,826,763 shares) |
|
|
228 |
|
|
|
|
|
|
|
228 |
|
|
|
|
|
|
|
|
|
Capital in excess of par value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings |
|
|
22,085 |
|
|
|
|
|
|
|
25,559 |
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss) |
|
|
1,607 |
|
|
|
|
|
|
|
(1,887 |
) |
|
|
|
|
|
|
|
|
Treasury shares, at cost 77,933,509 shares (2006: 35,933,526 shares) |
|
|
(923 |
) |
|
|
|
|
|
|
(2,216 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,997 |
|
|
|
|
|
|
|
21,684 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,497 |
|
|
|
|
|
|
|
36,343 |
|
Philips Annual Report 2007 133
|
|
|
|
|
128 Group financial statements
|
|
188 IFRS information
|
|
240 Company financial statements |
Consolidated statements of cash flows
Consolidated statements of cash flows of the Philips Group for the years ended December 31
in millions of euros unless otherwise stated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
|
|
|
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
2,868 |
|
|
|
5,383 |
|
|
|
4,168 |
|
|
|
|
|
Loss (income) from discontinued operations |
|
|
11 |
|
|
|
(4,482 |
) |
|
|
433 |
|
|
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
713 |
|
|
|
810 |
|
|
|
851 |
|
|
|
|
|
Impairment of equity-accounted investees and available-for-sale securities |
|
|
427 |
|
|
|
8 |
|
|
|
39 |
|
|
|
|
|
Net gain on sale of assets |
|
|
(2,104 |
) |
|
|
(289 |
) |
|
|
(3,159 |
) |
|
|
|
|
(Income) loss from equity-accounted investees |
|
|
(636 |
) |
|
|
228 |
|
|
|
(249 |
) |
|
|
|
|
Dividends received from equity-accounted investees |
|
|
312 |
|
|
|
|
|
|
|
48 |
|
|
|
|
|
Minority interests (net of dividends paid) |
|
|
29 |
|
|
|
3 |
|
|
|
5 |
|
|
|
|
|
Increase in receivables and other current assets |
|
|
(182 |
) |
|
|
(1,354 |
) |
|
|
(439 |
) |
|
|
|
|
(Increase) decrease in inventories |
|
|
(235 |
) |
|
|
2 |
|
|
|
(389 |
) |
|
|
|
|
Increase (decrease) in accounts payable, accrued and other liabilities |
|
|
302 |
|
|
|
(20 |
) |
|
|
186 |
|
|
|
|
|
Increase in non-current receivables/other assets |
|
|
(250 |
) |
|
|
(55 |
) |
|
|
(143 |
) |
|
|
|
|
(Decrease) increase in provisions |
|
|
(140 |
) |
|
|
83 |
|
|
|
(65 |
) |
|
|
|
|
Proceeds from sales of trading securities |
|
|
|
|
|
|
|
|
|
|
196 |
|
|
|
|
|
Other items |
|
|
32 |
|
|
|
13 |
|
|
|
37 |
|
|
|
|
|
Net cash provided by operating activities |
|
|
1,147 |
|
|
|
330 |
|
|
|
1,519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of intangible assets |
|
|
(74 |
) |
|
|
(101 |
) |
|
|
(118 |
) |
|
|
|
|
Capital expenditures on property, plant and equipment |
|
|
(637 |
) |
|
|
(694 |
) |
|
|
(661 |
) |
|
|
|
|
Proceeds from disposals of property, plant and equipment |
|
|
212 |
|
|
|
107 |
|
|
|
81 |
|
|
29 |
|
|
Cash from (to) derivatives |
|
|
(46 |
) |
|
|
62 |
|
|
|
385 |
|
|
|
|
|
Purchase of other non-current financial assets |
|
|
(18 |
) |
|
|
(31 |
) |
|
|
(17 |
) |
|
30 |
|
|
Proceeds from other non-current financial assets |
|
|
630 |
|
|
|
4 |
|
|
|
4,105 |
|
|
|
|
|
Purchase of businesses, net of cash acquired |
|
|
(1,089 |
) |
|
|
(2,467 |
) |
|
|
(1,485 |
) |
|
|
|
|
Proceeds from sale of interests in businesses |
|
|
2,716 |
|
|
|
318 |
|
|
|
1,640 |
|
|
|
|
|
Net cash provided by (used for) investing activities |
|
|
1,694 |
|
|
|
(2,802 |
) |
|
|
3,930 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in short-term debt |
|
|
(36 |
) |
|
|
97 |
|
|
|
(158 |
) |
|
|
|
|
Principal payments on long-term debt |
|
|
(362 |
) |
|
|
(543 |
) |
|
|
(152 |
) |
|
|
|
|
Proceeds from issuance of long-term debt |
|
|
74 |
|
|
|
9 |
|
|
|
29 |
|
|
|
|
|
Treasury stock transactions |
|
|
(1,761 |
) |
|
|
(2,755 |
) |
|
|
(1,448 |
) |
|
|
|
|
Dividends paid |
|
|
(504 |
) |
|
|
(523 |
) |
|
|
(639 |
) |
|
|
|
|
Net cash used for financing activities |
|
|
(2,589 |
) |
|
|
(3,715 |
) |
|
|
(2,368 |
) |
|
|
|
|
|
Net cash provided by (used for) continuing operations |
|
|
252 |
|
|
|
(6,187 |
) |
|
|
3,081 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for) operating activities |
|
|
942 |
|
|
|
524 |
|
|
|
(153 |
) |
|
|
|
|
Net cash (used for) provided by investing activities |
|
|
(409 |
) |
|
|
6,590 |
|
|
|
38 |
|
|
|
|
|
Net cash provided by (used for) financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for) discontinued operations |
|
|
533 |
|
|
|
7,114 |
|
|
|
(115 |
) |
|
|
|
|
|
Net cash provided by continuing and discontinued operations |
|
|
785 |
|
|
|
927 |
|
|
|
2,966 |
|
|
|
|
|
|
Effect of changes in exchange rates on cash positions |
|
|
159 |
|
|
|
(197 |
) |
|
|
(112 |
) |
|
|
|
|
Cash and cash equivalents at the beginning of the year |
|
|
4,349 |
|
|
|
5,293 |
|
|
|
6,023 |
|
|
|
|
|
Cash and cash equivalents at the end of the year |
|
|
5,293 |
|
|
|
6,023 |
|
|
|
8,877 |
|
|
|
|
|
Less cash and cash equivalents at the end of the year discontinued operations |
|
|
150 |
|
|
|
137 |
|
|
|
108 |
|
|
|
|
|
Cash and cash equivalents at the end of the year continuing operations |
|
|
5,143 |
|
|
|
5,886 |
|
|
|
8,769 |
|
The years 2005 and 2006 are restated to present the MedQuist business as a discontinued operation.
The accompanying notes are an integral part of these consolidated financial statements.
134 Philips Annual Report 2007
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246 Reconciliation of
non-US GAAP
information
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250 Corporate governance
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|
258 The Philips Group
in the last ten years
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|
260 Investor information |
Supplemental disclosures to the consolidated statements of cash flows
|
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|
2005 |
|
|
2006 |
|
|
2007 |
|
|
|
|
|
Net cash paid during the year for |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
|
178 |
|
|
|
211 |
|
|
|
49 |
|
|
|
|
|
Income taxes |
|
|
302 |
|
|
|
632 |
|
|
|
493 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain on sale of assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash proceeds from the sale of assets |
|
|
3,558 |
|
|
|
429 |
|
|
|
5,826 |
|
|
|
|
|
Book value of these assets |
|
|
(1,390 |
) |
|
|
(193 |
) |
|
|
(2,765 |
) |
|
|
|
|
Deferred results on s |