As filed with the Securities and Exchange Commission on February 25, 2014
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 20-F
(Mark one)
¨ | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2013
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
¨ | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 001-05146-01
KONINKLIJKE PHILIPS N.V.
(Exact name of Registrant as specified in charter)
ROYAL PHILIPS
(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 office)
Eric Coutinho, Chief Legal Officer & Secretary to the Board of Management
+31 20 59 77232, eric.coutinho@philips.com, Breitner Center, Amstelplein 2, 1096 BC Amsterdam, The Netherlands
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |||
Common Shares par value | New York Stock Exchange | |||
Euro (EUR) 0.20 per share |
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
(Title of class)
Indicate the number of outstanding shares of each of the issuers classes of capital or common stock as of the close of the period covered by the annual report:
Class | Outstanding at December 31, 2013 | |
Koninklijke Philips N.V. | 937,845,789 shares, including | |
Common Shares par value EUR 0.20 per share | 24,508,022 treasury shares |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. x Yes ¨ No
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934. ¨ Yes x No
Note-Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ¨ Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP ¨ |
International Financial Reporting Standards as issued by by the International Accounting Standards Board x |
Other ¨ |
If Other has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. ¨ Item 17 ¨ Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No
2 Annual Report 2013
11 | Group financial statements | 154 | ||||||
11.1 |
154 | |||||||
11.2 |
155 | |||||||
11.3 |
Auditors report on internal control over financial reporting |
155 | ||||||
11.4 |
156 | |||||||
11.5 |
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11.6 |
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11.7 |
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11.8 |
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11.9 |
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Discontinued operations and other assets classified as held for sale |
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Cash from (used for) derivatives and current financial assets |
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11.10 |
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12 | Company financial statements | 216 | ||||||
12.1 |
217 | |||||||
12.2 |
218 | |||||||
12.3 |
218 | |||||||
12.4 |
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Contractual obligations and contingent liabilities not appearing in the balance sheet |
221 | ||||||
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12.5 |
222 | |||||||
13 | Sustainability statements | 223 | ||||||
13.1 |
227 | |||||||
13.2 |
227 | |||||||
13.3 |
234 | |||||||
13.4 |
238 | |||||||
13.5 |
239 | |||||||
14 | Reconciliation of non-GAAP information | 251 | ||||||
15 | Five-year overview | 256 | ||||||
16 | Investor Relations | 257 | ||||||
16.1 |
257 | |||||||
16.2 |
259 | |||||||
16.3 |
261 | |||||||
16.4 |
262 | |||||||
16.5 |
265 | |||||||
16.6 |
266 | |||||||
16.7 |
266 | |||||||
16.8 |
268 | |||||||
16.9 |
272 | |||||||
17 | Definitions and abbreviations | 273 | ||||||
18 | Exhibits | 276 | ||||||
18.1 |
276 | |||||||
18.2 |
277 | |||||||
18.3 |
Exhibits |
279 | ||||||
18.4 |
Exhibit 8 List of subsidiaries |
280 | ||||||
18.5 |
Exhibit 12 (a) Certification |
288 | ||||||
18.6 |
Exhibit 12 (b) Certification |
289 | ||||||
18.7 |
Exhibit 13 (a) |
290 | ||||||
18.8 |
Exhibit 13 (b) |
291 |
Annual Report 2013 3
18.9 | Exhibit 15 (a) | 292 | ||||
18.10 | Exhibit 15 (b) | 293 |
4 Annual Report 2013
Introduction
This document contains information required for the annual report on Form 20-F for the year ended December 31, 2013 of Koninklijke Philips N.V. (the 2013 Form 20-F). Reference is made to the Form 20-F cross reference table herein. Only (i) the information in this document that is referenced in the Form 20-F cross reference table, (ii) this introduction, the cautionary statement forward-looking statements and explanation on use of non-GAAP information on the next three pages and (iii) the Exhibits shall be deemed to be filed with the Securities and Exchange Commission for any purpose. Any additional information in this document which is not referenced in the Form 20-F cross reference table, or the Exhibits themselves, shall not be deemed to be so incorporated by reference, shall not be part of the 2013 Form 20-F and is furnished to the Securities and Exchange Commission for information only.
The terms Philips, the Company, Group, we, our and us refer to Koninklijke Philips N.V. and as applicable to its subsidiaries and or its interest in joint ventures and associates.
IFRS based information
The audited consolidated financial statements as of December 31, 2013 and 2012, and for each of the years in the three-year period ended December 31, 2013, included in the 2013 Form 20-F have been prepared in accordance with International Financial Reporting Standards (IFRS) as endorsed by the European Union (EU). All standards and interpretations issued by the International Accounting Standards Board (IASB) and the IFRS Interpretations Committee effective year-end 2013 have been endorsed by the EU, except that the EU did not adopt certain paragraphs of IAS 39 applicable to certain hedge transactions. Philips has no hedge transactions to which these paragraphs are applicable. Consequently, the accounting policies applied by Philips also comply fully with IFRS as issued by the IASB.
Non-GAAP information
In presenting and discussing the Philips Groups financial position, operating results and cash flows, management uses certain non-GAAP financial measures such as: comparable growth; adjusted income from operations; net operating capital; net debt; cash flow before financing activities; net capital expenditures and free cash flow. These non-GAAP financial measures should not be viewed in isolation as alternatives to the equivalent IFRS measure and should be used in conjunction with the most directly comparable IFRS measure(s). Reference is made to the section titled Use of non-GAAP information for further information.
Third-party market share data
Statements regarding market share, contained in this document, including those regarding Philips competitive position, are based on outside sources such as specialized research institutes, industry and dealer panels in combination with management estimates. Where full year information regarding 2013 is not yet available to Philips, market share 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 quoted prices or observable market values do not exist, fair values are estimated using valuation models, which we believe are appropriate for their purpose. They require management to make significant assumptions with respect to future developments which are inherently uncertain and may therefore deviate from actual developments. Critical assumptions used are disclosed in the financial statements. In certain cases, independent valuations are obtained to support managements determination of fair values.
Documents on display
It is possible to read and copy documents referred to in the 2013 Form 20-F that have been filed with the SEC at the SECs public reference room located at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms and their copy charges. Philips SEC filings are also publicly available through the SECs website at www.sec.gov.
Annual Report 2013 5
Introduction
For definitions and abbreviations reference is made to chapter 17, Definitions and abbreviations, of this report.
Pursuant to provisions of the United States Private Securities Litigation Reform Act of 1995, Philips is providing the following cautionary statement.
This document, including the information referred to in the Form 20-F cross reference table, 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, among other statements, certain statements in Item 4 Information on the Company with regard to management objectives, market trends, market standing, product volumes, business risks, the implementation of our Accelerate! program, the statements in Item 8 Financial Information relating to legal proceedings, the statements in Item 5 Operating and financial review and prospects with regard to trends in results of operations, margins, overall market trends, risk management, exchange rates and statements in Item 11 Quantitative and qualitative disclosures about market risks relating to risk caused by derivative positions, interest rate fluctuations and other financial exposure are forward-looking in nature. Forward-looking statements can be identified generally as those containing words such as anticipates, assumes, believes, estimates, expects, should, will, will likely result, forecast, outlook, projects, may or similar expressions. By their nature, forward-looking statements involve risk and uncertainty, because they relate to events that depend on circumstances that will occur in the future. There are a number of 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, developments within the euro zone, the successful implementation of our strategy and our ability to realize the benefits of this strategy, our ability to develop and market new products, changes in legislation, legal claims, changes in exchange and interest rates, changes in tax rates, pension costs and actuarial assumptions, raw materials and employee costs, our ability to identify and complete successful acquisitions and to integrate those acquisitions into our business,
6 Annual Report 2013
Introduction
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, reference is made to the information in Item 3D Risk Factors.
Koninklijke Philips N.V. (the Company) believes that an understanding of sales performance is enhanced when the effects of currency movements and acquisitions and divestments (changes in consolidation) are excluded. Accordingly, in addition to presenting nominal growth, comparable growth is provided.
Comparable sales exclude the effects of currency movements and changes in consolidation. As indicated in the note 1, Significant accounting policies, sales and income are translated from foreign currencies into the Companys reporting currency, the euro, at the exchange rate on transaction dates during the respective years. As a result of significant currency movements during the years presented, the effects of translating foreign currency sales amounts into euros could have a material impact on our sales figures. Therefore, these impacts have been excluded in arriving at the comparable sales in euros. Currency effects have been calculated by translating previous years foreign currency sales amounts into euros at the following years exchange rates in comparison with the sales in euros as historically reported. The years under review were characterized by a number of acquisitions and divestments, as a result of which activities were consolidated or deconsolidated. The effect of consolidation changes has also been excluded in arriving at the comparable sales. For the purpose of calculating comparable sales growth, when a previously consolidated entity is sold or contributed to a venture that is not consolidated by the Company, relevant sales are excluded from impacted prior-year periods. Similarly, when an entity is acquired, relevant sales are excluded from impacted periods.
Philips discusses adjusted income from operations in the 2013 Form 20-F. Adjusted income from operations represents income from operations before amortization and impairment of intangible assets generated in acquisitions (excluding software and capitalized development expenses).
Annual Report 2013 7
Introduction
The Company uses the term adjusted income from operations to evaluate the performance of the Philips Group and its sectors. Referencing adjusted income from operations is considered appropriate in light of the following:
Philips has announced that one of its strategic drivers is to increase profitability through re-allocation of its resources towards opportunities offering more consistent and higher returns. Moreover, Philips intends to redeploy capital through value-creating acquisitions. Since 2006, management has used the adjusted income from operations measurement internally to monitor performance of the businesses on a comparable basis. As of 2007, Philips has also set external performance targets based on this measurement as it will not be distorted by the unpredictable effects of future, unidentified acquisitions.
Non US investors are advised that such presentation is different from the terms used in Philips results announcements and 2013 Annual Report. Philips believes that an understanding of the Groups financial condition is enhanced by the disclosure of net operating capital (NOC), as this figure is used by Philips management to evaluate the capital efficiency of the Philips Group and its operating sectors. NOC is defined as: total assets excluding assets from discontinued operations less: (a) cash and cash equivalents, (b) deferred tax assets, (c) other (non)-current financial assets, (d) investments in associates, and after deduction of: (e) provisions, (f) accounts and notes payable, (g) accrued liabilities, (h) current/noncurrent liabilities.
Net debt is defined as the sum of long- and short-term debt minus cash and cash equivalents. The net debt position as a percentage of the sum of group equity (shareholders equity and non-controlling interests) and net debt is presented to express the financial strength of the Company. This measure is widely used by management and investment analysts and is therefore included in the disclosure.
Cash flows before financing activities, being the sum total of net cash from operating activities and net cash from investing activities, and free cash flow, being net cash from operating activities minus net capital expenditures, are presented separately to facilitate the readers understanding of the Companys funding requirements.
Net capital expenditures comprise of purchase of intangible assets, expenditures on development assets, capital expenditures on property, plant and equipment and proceeds from disposals of property, plant and equipment. This measure is widely used by management to calculate free cash flow.
8 Annual Report 2013
Form 20-F cross reference table
Form 20-F cross reference table
Only (i) the information in this document that is referenced in the Form 20-F cross reference table, (ii) the Introduction, the cautionary statements concerning Forward-looking statements and explanation on use of non-GAAP information, of this report on pages 5-8, and (iii) the Exhibits shall be deemed to be filed with the Securities and Exchange Commission for any purpose. The content of Philips websites and other websites referenced herein should not be considered to be a part of or incorporated into the 2013 Form 20-F. Any additional information which is not referenced in the Form 20-F cross reference table or the Exhibits themselves shall not be deemed to be so incorporated by reference, shall not be part of the 2013 Form 20-F and is furnished to the Securities and Exchange Commission for information only.
The table below sets out the location in this document of the information required by SEC Form 20-F. The exact location is included in the column Location in this document. The column Page includes the starting page of the section/paragraph for reference only.
Annual Report 2013 9
Form 20-F cross reference table
Item | Form 20-F caption | Location in this document | Page | |||||
Part 1 | ||||||||
1 |
Identity of directors, senior management and advisors | Not applicable | ||||||
2 |
Offer statistics and expected timetable | Not applicable | ||||||
3 |
Key information | |||||||
A Selected financial data | 15. Five-year overview | 256 | ||||||
16.1. Key financials and dividend policy - Proposed distribution | 257 | |||||||
16.1. Key financials and dividend policy - Information for US investors | 257 | |||||||
B Capitalization and indebtedness | Not applicable | |||||||
C Reason for the offer and use of proceeds | Not applicable | |||||||
D Risk factors | 6.2. Risk categories and factors - Second paragraph | 119 | ||||||
6.3. Strategic risks | 120 | |||||||
6.4. Operational risks | 121 | |||||||
6.5. Compliance risks | 123 | |||||||
6.6. Financial risks | 125 | |||||||
4 |
Information on the Company | |||||||
A History and development of the company | 2.1. Our rich heritage | 33 | ||||||
4.1.11. Discontinued operations | 60 | |||||||
4.1.13. Acquisitions and divestments | 61 | |||||||
4.1.15. Cash flows provided by continuing operations | 62 | |||||||
5. Sector performance - Our structure | 91 | |||||||
10. Corporate governance - Corporate governance of the Philips group | 142 | |||||||
Note 7 Discontinued operations and other assets classified as held for sale | 180 | |||||||
Note 9 Acquisitions and divestments | 182 | |||||||
Note 36 Subsequent events | 213 | |||||||
16.5. Philips acquisitions | 265 | |||||||
16.7. Investor contact - How to reach us | 266 | |||||||
B Business Overview | Introduction - Third-party market share data | 5 | ||||||
4.1. Financial performance- from 4.1.1 to 4.1.2 and from 4.1.4 to 4.1.14 | 50 | |||||||
4.1.24. Supply management | 70 | |||||||
4.2.11. Conflict minerals: issues further down the chain | 80 | |||||||
5. Sector performance - Our structure | 91 | |||||||
5.1.2. About Philips Healthcare | 94 | |||||||
5.1.4. 2013 financial performance | 96 | |||||||
5.2.2. About Philips Consumer Lifestyle | 100 | |||||||
5.2.4. 2013 financial performance | 101 | |||||||
5.3.2. About Philips Lighting | 106 | |||||||
5.3.4. 2013 financial performance | 107 | |||||||
5.4.1. About Innovation, Group & Services | 111 | |||||||
5.4.2. 2013 financial performance | 114 | |||||||
6.1. Our approach to risk management and business control | 116 | |||||||
6.4. Operational risks - Third paragraph | 121 | |||||||
Note 36 Subsequent events | 213 | |||||||
13.2.2. Supplier indicators -Issues further down the chain | 228 | |||||||
17. Definitions and abbreviations | 274 | |||||||
C Organizational structure | 5. Sector performance - Our structure | 91 | ||||||
Note 2 Information by sector and main country | 171 | |||||||
Note 6 Interests in entities | 179 | |||||||
18.4. Exhibit 8 List of subsidiaries | 281 |
10 Annual Report 2013
Form 20-F cross reference table
Item | Form 20-F caption | Location in this document | Page | |||||
D Property, plant and equipment | Note 2 Information by sector and main country | 171 | ||||||
Note 10 Property, plant and equipment | 184 | |||||||
Note 21 Provisions | 192 | |||||||
Note 25 Contractual obligations | 194 | |||||||
Note 26 Contingent assets and liabilities -Environmental remediation
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195 | |||||||
4A | Unresolved staff comments | Not applicable | ||||||
5 | Operating and financial review and prospects | |||||||
A Operating results | Use of non-GAAP information | 7 | ||||||
4.1. Financial performance - Management summary | 50 | |||||||
4.1. Financial performance - from 4.1.1 to 4.1.2 and from 4.1.4 to 4.1.14 | 50 | |||||||
5.1.2. About Philips Healthcare - Regulatory requirements | 94 | |||||||
5.1.4. 2013 financial performance | 96 | |||||||
5.2.2. About Philips Consumer Lifestyle - Regulatory requirements | 100 | |||||||
5.2.4. 2013 financial performance | 101 | |||||||
5.3.2. About Philips Lighting - Regulatory requirements | 106 | |||||||
5.3.4. 2013 financial performance | 107 | |||||||
5.4.2. 2013 financial performance | 114 | |||||||
4.6. Critical accounting policies | 87 | |||||||
Note 4 Financial income and expenses | 175 | |||||||
Note 7 Discontinued operations and other assets classified as held for sale | 180 | |||||||
Note 9 Acquisitions and divestments | 182 | |||||||
Note 11 Goodwill | 185 | |||||||
Note 12 Intangible assets excluding goodwill | 186 | |||||||
Note 35 Details of treasury / other financial risks | 210 | |||||||
6.3. Strategic risks | 120 | |||||||
6.5. Compliance risks | 123 | |||||||
6.6. Financial risks | 125 | |||||||
14. Reconciliation of non-GAAP information | 251 | |||||||
B Liquidity and capital resources | 4.1. Financial performance - from 4.1.15 to 4.1.23 | 50 | ||||||
Note 20 Long-term debt and short-term debt | 191 | |||||||
Note 25 Contractual obligations | 194 | |||||||
Note 19 Equity | 189 | |||||||
Note 35 Details of treasury / other financial risks | 210 | |||||||
C Research and development, patents and licenses, etc. | 4.1.4. Research and development | 55 | ||||||
5.4.1. About Innovation, Group & Services | 111 | |||||||
D Trend information | 4.5. Outlook | 87 | ||||||
E Off-balance sheet arrangements | 4.1.23. Cash obligations | 69 | ||||||
Note 25 Contractual obligations | 194 | |||||||
Note 26 Contingent assets and liabilities | 195 | |||||||
Note 35 Details of treasury / other financial risks | 210 | |||||||
F Tabular disclosure of contractual obligations | 4.1.23. Cash obligations | 69 | ||||||
Note 25 Contractual obligations | 194 | |||||||
G Safe Harbor | Forward-looking statements | 6 | ||||||
6 | Directors, senior management and employees | |||||||
A Directors and senior management | 7. Management | 127 | ||||||
8. Supervisory Board | 129 |
Annual Report 2013 11
Form 20-F cross reference table
Item | Form 20-F caption | Location in this document | Page | |||
10.1. Board of Management - Introduction | 142 | |||||
10.1. Board of Management - (Term of) Appointment and conflicts of interest | 142 | |||||
10.2. Supervisory Board - (Term of) Appointment, individual data and conflicts of interests | 144 | |||||
B Compensation | Note 30 Post-employment benefits | 197 | ||||
Note 31 Share-based compensation | 200 | |||||
Note 33 Information on remuneration | 204 | |||||
9.2. Report of the Remuneration Committee | 135 | |||||
C Board practices | 7. Management | 127 | ||||
8. Supervisory Board | 129 | |||||
9. Supervisory Board report | 131 | |||||
10.1. Board of Management | 142 | |||||
10.2. Supervisory Board | 144 | |||||
10.4. Logistics of the General Meeting of Shareholders and provision of information - Internal controls and disclosure policies | 147 | |||||
10.4. Logistics of the General Meeting of Shareholders and provision of information - Auditor information | 147 | |||||
D Employees | 4.2.4. Employment | 73 | ||||
Note 3 Income from operations - Employees | 174 | |||||
E Share ownership | 10.1. Board of Management- Amount and composition of the remuneration of the Board of Management | 142 | ||||
Note 20 Long-term debt and short-term debt - Short-term debt | 191 | |||||
Note 19 Equity | 189 | |||||
Note 31 Share-based compensation | 200 | |||||
Note 33 Information on remuneration
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204 | |||||
7 | Major shareholders and related party transactions | |||||
A Major shareholders | 10.5. Investor Relations - Major shareholders and other information for shareholders | 149 | ||||
10.6. Additional information- Major shareholders as filed with SEC | 149 | |||||
B Related party transactions | 10.1. Board of Management | 142 | ||||
Note 6 Interests in entities | 179 | |||||
Note 32 Related-party transactions | 204 | |||||
Note 36 Subsequent events | 213 | |||||
C Interests of experts and counsel | Not applicable
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8 | Financial information | |||||
A Consolidated statements and other financial information | 11. Group financial statements | 154 | ||||
16.1. Key financials and dividend policy - Dividend policy | 257 | |||||
B Significant changes | Note 36 Subsequent events
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213 | ||||
9 | The offer and listing | |||||
A Offer and listing details | 10.4. Logistics of the General Meeting of Shareholders and provision of information - Preference shares and the Stichting Preferente Aandelen Philips | 147 | ||||
10.5. Investor Relations - Major shareholders and other information for shareholders | 149 | |||||
10.6. Additional information | 149 | |||||
Note 19 Equity | 189 | |||||
16.4. Performance in relation to market indices | 262 |
12 Annual Report 2013
Form 20-F cross reference table
Item | Form 20-F caption | Location in this document | Page | |||
B Plan of distribution | Not applicable | |||||
C Markets | 16.4. Performance in relation to market indices | 262 | ||||
D Selling shareholders | Not applicable | |||||
E Dilution | Not applicable | |||||
F Expense of the issue | Not applicable
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10 | Additional information | |||||
A Share capital | Not applicable | |||||
B Memorandum and articles of association | 10.1. Board of Management - (Term of) Appointment and conflicts of interest | 142 | ||||
10.2. Supervisory Board - (Term of) Appointment, individual data and conflicts of interest | 144 | |||||
10.3. General Meeting of Shareholders - Main powers of the General Meeting of Shareholders | 146 | |||||
10.6. Additional information | 149 | |||||
18.1. Index of exhibits Exhibit 1 | 277 | |||||
10.4. Logistics of the General Meeting of Shareholders and provision of information | 147 | |||||
C Material contracts | 9.2.2. Contracts | 135 | ||||
18.3. Exhibits - Exhibit 4 (a), (b) and (c) | 280 | |||||
D Exchange controls | 10.6. Additional information- Exchange controls | 149 | ||||
E Taxation | 16.8. Taxation | 268 | ||||
F Dividends and paying agents | Not applicable | |||||
G Statements by experts | Not applicable | |||||
H Documents on display | Introduction - Documents on display | 5 | ||||
I Subsidiary information | Not applicable
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11 | Quantitative and qualitative disclosure about market risk | |||||
A Quantitative information about market risk | Note 35 Details of treasury / other financial risks | 210 | ||||
B Qualitative information about market risk | Note 35 Details of treasury / other financial risks | 210 | ||||
C Interim periods | Not applicable | |||||
D Safe harbor | Note 35 Details of treasury / other financial risks Forward-looking statements |
210 6 | ||||
E Small business issuers | Not applicable
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12 | Description of securities other than equity securities | |||||
A Debt securities | Not applicable |
Annual Report 2013 13
Form 20-F cross reference table
Item | Form 20-F caption | Location in this document | Page | |||
B Warranty and rights | Not applicable | |||||
C Other securities | Not applicable | |||||
D American depository shares | 16.9. New York Registry Shares
|
272 | ||||
Part 2 | ||||||
13 | Defaults, dividend arrearages and delinquencies | Not applicable | ||||
14 | Material modifications to the rights of security holders and use of proceeds | Not applicable | ||||
15 | Controls and procedures | |||||
A Disclosure controls and procedures | 11.1.1. Disclosure controls and procedures | 154 | ||||
B Management annual report on internal control over financial reporting | 11.1. Managements report on internal control | 154 | ||||
C Attestation report of the registered public accounting firm | 11.3. Auditors report on internal control over financial reporting | 155 | ||||
D Changes in internal control over financial reporting
|
11.1.2. Changes in internal control over financial reporting | 154 | ||||
16A | Audit Committee Financial Expert | 10.2. Supervisory Board - The Audit Committee | 144 | |||
16B | Code of Ethics | 6.1. Our approach to risk management and business control - Financial Code of Ethics | 116 | |||
16C | Principal Accountant Fees and Services | 9.3. Report of the Audit Committee | 140 | |||
10.4. Logistics of the General Meeting of Shareholders and provision of information - Auditor policy | 147 | |||||
Note 3 Income from operations - Audit fees | 174 | |||||
16D | Exemptions from the Listing Standards for Audit Committees | Not applicable | ||||
16E | Purchases of Equity Securities by the Issuer and Affiliated Purchasers | Note 19 Equity - Treasury shares | 189 | |||
10.3. General Meeting of Shareholders - Repurchase and issue of (rights to) own shares | 146 | |||||
16.2. Share information - Share repurchase programs for capital reduction purposes
|
259 | |||||
16F | Change in Registrants Certifying Accountant | Not applicable | ||||
16G | Corporate Governance | 9. Supervisory Board report | 131 | |||
10. Corporate governance
|
142 | |||||
Part 3 | ||||||
17 | Financial statements | Not applicable | ||||
18 | Financial statements | 11. Group financial statements | 154 | |||
19 | Exhibits | 18.1. Index of exhibits | 277 |
14 Annual Report 2013
Performance highlights
Prior-period financial statements and related information have been restated for the treatment of Audio, Video, Multimedia and Accessories as discontinued operations (see note 7, Discontinued operations and other assets classified as held for sale) and the adoption of IAS 19R, which mainly relates to accounting for pensions (see note 30, Post-employment benefits). For a reconciliation to the most directly comparable GAAP measures, see Reconciliation of non-GAAP information.
Financial table
all amounts in millions of euros unless otherwise stated
2011 | 2012 | 2013 | ||||||||||
Sales |
20,992 | 23,457 | 23,329 | |||||||||
Adjusted IFO |
1,435 | 1,106 | 2,451 | |||||||||
as a % of sales |
6.8 | 4.7 | 10.5 | |||||||||
IFO |
(479 | ) | 648 | 1,991 | ||||||||
as a % of sales |
(2.3 | ) | 2.8 | 8.5 | ||||||||
Net income (loss) |
(1,456 | ) | (30 | ) | 1,172 | |||||||
Net income attributable to shareholders per common share in euro: |
||||||||||||
- basic |
(1.53 | ) | (0.04 | ) | 1.28 | |||||||
- diluted |
(1.53 | ) | (0.04 | ) | 1.27 | |||||||
Net operating capital |
10,382 | 9,316 | 10,238 | |||||||||
Free cash flows |
(97 | ) | 1,627 | 172 | ||||||||
Shareholders equity |
12,328 | 11,151 | 11,214 | |||||||||
Employees at December 31 |
125,240 | 118,087 | 116,681 | |||||||||
of which discontinued operations |
5,645 | 2,005 | 1,992 |
1) | Mid-term financial targets |
2) | Including restructuring and acquisitions |
3) | Excluding Mergers & Acquisitions impact |
4) | Based on the results of 60 pulse surveys as there was no full-scope Employee Engagement Survey in 2012 |
5) | For a definition of of mature and growth geographies, see chapter 17, Definitions and abbreviations, of this report |
6) | As measured by Interbrand |
Financial performance 2013
Target1) | Actual | |||||||
CAGR 2012 - 2013 % |
4-6 | % | 4.5 | % | ||||
Adjusted IFO as % of sales2) |
10-12 | % | 10.5 | % | ||||
ROIC %3) |
12-14 | % | 15.3 | % |
Annual Report 2013 15
Performance highlights
Performance
in millions of euros
Group | Healthcare |
Consumer Lifestyle |
Lighting |
|||||||||||||||||||||||||||||||||||||||||||||
2012 | 2013 | 2012 | 2013 | 2012 | 2013 | 2012 | 2013 | |||||||||||||||||||||||||||||||||||||||||
Sales |
23,457 | 23,329 | 1% | 9,983 | 9,575 | 4% | 4,139 | 4,605 | 7% | 8,442 | 8,413 | 0% | ||||||||||||||||||||||||||||||||||||
Green product sales |
10,981 | 11,815 | 8% | 3,610 | 3,690 | 2% | 1,619 | 2,270 | 40% | 5,572 | 5,855 | 2% | ||||||||||||||||||||||||||||||||||||
Sales in mature geographies5) |
15,407 | 14,825 | 4% | 7,615 | 7,154 | 6% | 2,365 | 2,418 | 2% | 5,010 | 4,758 | 5% | ||||||||||||||||||||||||||||||||||||
Sales in growth geographies5) |
8,050 | 8,504 | 6% | 2,368 | 2,421 | 2% | 1,954 | 2,187 | 12% | 3,432 | 3,655 | 6% | ||||||||||||||||||||||||||||||||||||
Adjusted IFO |
1,106 | 2,451 | 122% | 1,226 | 1,512 | 23% | 456 | 483 | 6% | 128 | 695 | 443% | ||||||||||||||||||||||||||||||||||||
Net operating capital |
9,316 | 10,238 | 10% | 7,976 | 7,437 | 7% | 1,205 | 1,261 | 5% | 4,635 | 4,462 | 4% |
16 Annual Report 2013
Message from the CEO
Our Accelerate! initiatives helped us to achieve our mid-term 2013 targets. We are implementing the Philips Business System across the company to improve customer focus and operational excellence, and drive our businesses systematically to global leadership performance. With our mission to deliver meaningful innovation to make the world healthier and more sustainable, we are well positioned to improve our growth rate. Frans van Houten, CEO
Dear stakeholder,
In 2013 we passed a major milestone on our Accelerate! transformation journey to unlock Philips full potential. Despite economic headwinds, especially in Europe and the United States, our Accelerate! initiatives helped us to achieve our mid-term 2013 targets. I am delighted with this result, as it underlines yet again that Philips is, above all, a case of self-help.
Accelerate! is helping us get closer to our customers, as illustrated by our landmark alliance with Georgia Regents Medical Center. And the transformation of our value chains is speeding up the introduction of locally relevant innovations in key markets around the world. Innovations like our EPIQ ultrasound imaging system, our Smart Air Purifier and Airfryer home appliances, and our energy-efficient CityTouch lighting management system.
Annual Report 2013 17
Message from the CEO
We are also seeing the steady development of a growth and performance culture characterized by strong employee engagement, teamwork, the drive for operational excellence and accountability for results. This is making us more agile, entrepreneurial and innovative.
Financial performance
The economic environment in 2013 was challenging. Full-year sales declined by 1% in nominal terms, but increased by 3% on a comparable basis. Closing the year with strong 7% top-line growth in the fourth quarter, we delivered a compound annual growth rate for comparable sales over the period 2012-2013 of 4.5%, compared to our target of 4-6%. In regional terms, our growth geographies delivered 11% comparable sales growth in 2013 and now make up 36% of total sales.
Profitability improved significantly on the back of increased gross margins and productivity gains from our Accelerate! program. This resulted in a reported Adjusted IFO of 10.5%, within the target bandwidth of 10-12%. And our return on invested capital was 15.3%, above the targeted range of 12-14%.
Our Healthcare business increased operational earnings despite a virtually flat top line. With the issues surrounding health care reform in the US and budget constraints in key markets, we are increasingly focusing on becoming the technology solutions partner of choice to major hospitals as a way to unlock new growth. Reflecting the success of its innovative propositions for personal health and well-being, Consumer Lifestyle posted strong growth and good earnings, while Lighting recorded higher sales, driven by a 38% increase in LED-based sales, and improved operational earnings.
In 2013 we also completed the execution of our EUR 2 billion share buy-back program, thereby improving the efficiency of our balance sheet, and announced a new EUR 1.5 billion program to be concluded over the next 2-3 years. By the end of 2013 we had completed 7% of this new program.
Other 2013 highlights
In 2013 we rose to # 40 on Interbrands annual ranking of the top-100 global brands, with our brand value increasing by 8% to close to USD 10 billion. And in November we unveiled our new brand positioning and brand line innovation and you and our redesigned shield, which enjoyed an enthusiastic reception from customers, employees and other stakeholders.
In 2014 we celebrate 100 years of Philips Research, and over the past year we underlined our commitment to innovation by investing EUR 1.7 billion in research and development. We filed over 1,500 patent applications in 2013. Other innovation highlights included the increasing adoption of our Digital Pathology solution and the development of the 200 lm/W TLED prototype to replace fluorescent tube lighting.
We also continued to deliver on our EcoVision sustainability commitments in 2013, improving the lives of 1.8 billion people around the globe and hitting our Green Product sales target of 50% of total sales two years ahead of schedule. In Buenos Aires we were awarded the order to renovate most of the citys 125,000 street lights with our CityTouch system, and in Dubai we were selected to transform over 260 Municipality buildings with intelligent LED solutions both projects reducing energy consumption by some 50%. Our efforts to create a healthier and more sustainable world received recognition in the form of a rise to 23rd place in Interbrands ranking of the top 50 Best Global Green Brands, as well as a top rating from the Carbon Disclosure Project.
Of course, no year is entirely free of disappointment, and in 2013 we had to contend with the termination of the deal with Funai for our Audio, Video, Multimedia and Accessories business. We also faced compliance issues relating to our General Business Principles, which we are refining and strengthening.
Looking ahead our Path to Value by 2016
Philips is a diversified technology company with a portfolio of some 40 businesses across various strategic domains. Over half of these businesses hold global leadership positions. Our portfolio is underpinned by strong assets: deep market insights; world-class innovation capabilities technology, know-how and strong IP positions; our global footprint; our talented, engaged people; and the Philips brand.
The significant changes we have made to our portfolio in recent years have created a better growth platform with higher profit potential. And with the transformation of our business model architecture, we are increasingly becoming a technology solutions partner, with recurring revenue streams accounting for over 25% of sales.
Meeting the needs of a changing world
In light of the mega-trends and challenges the world is facing, we are confident in our chosen strategic direction. With its focus on health and sustainability, our
18 Annual Report 2013
Message from the CEO
vision to improve the lives of 3 billion people a year by 2025 helps to differentiate us from the competition, have a closer relationship with our customers, create IP and ultimately create more value.
We see the shift from a linear to a circular economy as a further opportunity to create value. In a linear economy, products are used briefly and then discarded as waste. In a circular economy, products are designed so they become part of a value network where re-use and refurbishment ensure continuous re-exploitation of resources.
We are redesigning our products in order to capture their residual value. And we are shifting from transactions to relationships via service and solution business models. A good example is the 10-year performance contract we were awarded to install, monitor and maintain 13,000 connected lighting fixtures and energy management controls for parking garages in Washington, DC. Because we are ensuring light levels and delivering the solutions as a service that is paid for by the energy savings, Washington gets brighter, safer LED lighting for its garages with none of the up-front cost, thereby removing one of the main barriers to the adoption of energy-efficient technology.
Driving productivity improvement
Over the coming years we will continue to drive operational excellence and invest in innovation and sales development. We will also continue to focus on improving profitability, e.g. by further reducing overhead costs and driving value engineering through our Design for Excellence (DfX) program. Altogether we see significant potential to improve productivity over the next few years. We also have scope for value-creating bolt-on acquisitions, but will remain prudent with our capital allocation. Most of our growth opportunities are organic.
In 2014 we will roll out a new IT landscape to make Philips a truly real-time company, and we will further embed the Philips Business System (PBS). The PBS is the way we run our company to ensure business success is repeatable. This year will also see our new brand positioning being activated across the globe.
New growth initiatives
I am pleased to say that Philips has multiple new growth opportunities in the making. Within our Healthcare sector we have established the Healthcare Informatics Solutions & Services business group, which is focusing on a digital connected healthcare delivery platform, advanced informatics and big data analytics, and world-class integration and consulting services. At Consumer Lifestyle we have a new business initiative on Personal Health. And in our Innovation, Group & Services sector we have several highly promising start-ups, although it will be a few years before they are margin-accretive because of the necessary investments. Examples of these exciting new business areas include point-of-care diagnostics as well as horticultural and city farming technology.
Confident in the future
While remaining cautious about the short-term macro- economic outlook, we are committed to delivering on our 2016 financial performance targets. As a sign of our confidence in Philips future, we are proposing to the upcoming General Meeting of Shareholders to increase this years dividend to EUR 0.80 per common share, in cash or stock.
On behalf of my colleagues on the Executive Committee, I wish to thank all our employees for embracing Accelerate!, helping to build a great company fit for the demands of the 21st century, and delivering innovations that matter to people the world over. And I would like to thank our customers, shareholders and other stakeholders, for their continued trust and support.
Frans van Houten,
Chief Executive Officer
Annual Report 2013 19
Driving change and improvement
Now in its third year, Accelerate! is making Philips a more agile and entrepreneurial innovator. The program, which is set to run through 2017, is made up of five streams designed to:
Annual Report 2013 21
Accelerated! in action
22 Annual Report 2013
Annual Report 2013 23
With the help of patient advisors like Alice Reece, Philips and Georgia Regents Medical Center are working to redefine patient and family care.
When I think about the future of healthcare we have to re-think everything: every square foot, every person, every dollar, every resource. And that forces real dynamic change in a way that this industry hasnt seen in years.
David Hefner
Executive Vice President
Georgia Regents Medical Center
Providing care requires us to be innovative, requires us to think differently. The partnership that we now have with Philips really stresses a better outcome for our patients.
Dr Ricardo Azziz
CEO
Georgia Regents Health System
24 Annual Report 2013
Around the world, we are working together with our partners and customers to optimize every step in the value chain. This end-to-end approach is enabling us to innovate and execute faster and more efficiently.
Driving growth in oral healthcare
In Germany, we are building on our professional recommendation strategy and driving conversion of manual toothbrush users to electric tooth brushing through innovation leadership, portfolio expansion and distribution via new channels. This end-to-end approach resulted in a market share improvement of over 7%.
With only a third of German households owning a rechargeable toothbrush, there is a significant opportunity to expand our leadership in the sonic toothbrush segment. Taking an end-to-end perspective, we identified three key drivers for expansion: driving and communicating innovation leadership with superior propositions; creating a Philips Sonicare proposition at a price-point accessible for a broader audience; and making that proposition available to consumers in channels like drugstores and hypermarkets.
Philips Sonicare is already leading in the German market, with consumers responding to superior propositions like Flexcare Platinum and DiamondClean. In 2013, our leadership position was further supported through celebrity endorsement, which is driving awareness and conversion.
To present current manual toothbrush users with more alternatives from Philips Sonicare, driving growth in the mid-segment, we created a more accessibly priced proposition, the Philips Sonicare PowerUp. This product features similar brushing movements to manual and is gentle and effective. Research showed that over 90% of consumers surveyed preferred the Sonicare PowerUp over their manual toothbrush.
The majority of electric toothbrushes and replacement brush heads are sold in drugstores and hypermarkets. To leverage this opportunity, Sonicare PowerUp launched in DM and Budni drugstores, as well as Kaufland and Marktkauf hypermarkets, adding 2,000 stores to our distribution. We optimized our supply chain to work with these partners, designing bespoke packaging, significantly reducing time-to-market and improving transparency.
In less than a year our end-to-end strategy resulted in strong market share gains and double-digit growth in brush head sales. Consumer satisfaction increased, with patients advised by their dentist to switch to electric brushing conveniently able to purchase a Philips Sonicare and replacement brush heads at their local drugstore.
Annual Report 2013 25
LED façade lighting faster to market
Through our end-to-end transformation program, we have identified and driven improvements along the entire LED value chain in China. This has resulted in a broad range of competitively priced façade lighting solutions for the mid-tier market segment in China, with a 40% reduction in time-to-market for new product introductions and a significant increase in on-time delivery.
In 2012, market intelligence showed that we were missing out on the LED façade lighting segment in China a segment predicted to reach 520 million by 2015, 70% of which will be taken by mid-range solutions. The problem was that in China we only offered top-range LED façade solutions. Clearly, something had to be done.
An end-to-end transformation program was immediately initiated, and a cross-functional team representing both the business and our market organization was assembled to address all opportunities along the value chain. The team took ownership of the common goal to achieve ambitious cost targets. It invested in market research and started with market sizing and customer segmentation, before developing imaginative strategies for product positioning, go-to-market and time-to-market. From the outset, everyone knew that the new product line had to be conceived, developed and fine-tuned extremely quickly.
The result was a new range of competitive LED façade lighting solutions specially designed for the mid-range market in China. And all in just under 28 weeks a massive reduction compared to the 12 months it previously took to bring a new product line to market. Another benefit of this end-to-end collaboration is that achievement of the delivery time target of 25 days has increased from 43% to 66%, with a further rise to 95% expected by 2015.
26 Annual Report 2013
In 2013 we continued to drive structural change through our multi-year transformation program Accelerate! We are seeing the steady emergence of a growth and performance culture that is making us more agile, entrepreneurial and innovative.
With our Accelerate! behaviors Eager to win, Take ownership and Team up to excel firmly embedded in the organization, we are rolling out a wide range of initiatives designed to harness the talents, viewpoints and experience of our employees and so build a winning culture. A culture anchored by our General Business Principles.
Transformation and change
To date, over 1,350 of our leading executives have taken part in our Accelerate! Leadership Program (ALP). This immersive program is designed to strengthen our leaders transformational capabilities so they can drive change in the organization. Complementing the ALP, the Accelerate! Team Performance (ATP) is a transformational session designed to reinforce behaviors that enhance team effectiveness. By year-end, more than 200 teams and 3,650 participants had been through the program, which also touched more than 2,000 employees via viral events.
The transformation drive is being embraced across the organization. In Healthcare, to name just one example, a group of over 160 employee advocates or Culture Champions is now in place, role-modeling and instilling the new culture from the middle of the organization outwards. They are providing invaluable insights and helping to drive changes in day-to-day activities and behaviors.
Capability building
ALP and ATP are also an integral part of our capability-building efforts. In 2013 we took the next steps in becoming a learning organization by completing the organizational design of Philips University. This involved a fundamental shift to align our learning activities with the organizational development priorities we have set to enable us to deliver on our business strategy. New flagship learning programs will be introduced early in 2014, and a move to one single learning management system is scheduled for the second half of the year.
Employee engagement
In October 2013 we launched our renewed bi-annual Employee Engagement Survey (EES), emphasizing the dimensions of employee behavior that affect performance, including change agility, alignment, and engagement. The overall engagement index shows a positive score of 75% 3 percentage points above the chosen global external high-performance benchmark.
Annual Report 2013 27
Bringing our brand to life
Reflecting this culture of engagement, our employees also play a crucial role as ambassadors of our brand. In May 2013 our Employee Brand Jam focused on engaging employees around our new brand promise. They were asked to share, via a dedicated dashboard, their stories about how Philips delivers innovation to them. This campaign won a European Excellence Award in the Internal Communications category.
In the lead-up to brand launch day, 13 November, we invited the world to uncover our redesigned shield through a mosaic launched via social media. Over 14,000 individuals took part in the 48 hours ahead of the reveal. On the day itself, over 60 sites around the world hosted simultaneous events linked to a live feed of the unveiling at our head office in Amsterdam. In this way, a highly engaged workforce was brought together to celebrate a landmark event in the history of the company.
Diversity and inclusion
Having an inclusive culture where differences are honored, respected and encouraged and a diverse workforce that mirrors the markets were active in, enables us to deliver innovation that matters to our customers and consumers and thus to create value for Philips and its stakeholders. Our new Diversity & Inclusion Policy defines our global standards and the role all employees need to play to create a diverse and inclusive workplace.
28 Annual Report 2013
In 2011, Philips embarked on a comprehensive program to significantly increase the efficiency of its overhead structure: those activities which take place mainly above the level of operational businesses and market organizations. Since then, real progress has been made with more work to be done over the coming years.
The Accelerate! productivity program looked first to benchmarks to what was currently industry best-in-class and subsequently leveraged this insight to re-engineer the companys overhead activities such as IT, Finance, Human Resources and Real Estate. The objective was to deliver improved service levels to internal customers in a faster, simpler, easier-to-experience way at lower cost.
The focus of the program was on the operating model how the function was set up to deliver its services. These smarter functions looked to pool services into Centers of Expertise which then provide high-quality, 24/7 support to a wide range of businesses and geographies from a single hub. Equally impactful was the increased use of output-based delivery, swapping contract workers brought into Philips to support initiatives for clear output-based contracts with the 3rd-party suppliers. Last, but by no means least, was the reduction in managerial layers and subsequent increase in span of control of individual managers; this has led to less bureaucracy and faster decision making across the company.
Finance is a good example. Traditionally, finance professionals were spread widely across Philips, each supporting business management in everything from basic bookkeeping to analysis of upcoming Asian competition. As of 2013, we have re-engineered the operating model of our Finance activity, pooling knowledge into efficient, dedicated Centers of Expertise one focused on fundamental bookkeeping and internal control, another on financial planning and analysis of business performance, yet another on expert company-wide advice on specific topics ranging from foreign exchange to pensions. This has led to a simpler, leaner, more effective operating model which, critically, is able to deliver faster, better services to its internal customers. Similar transformations in the other functions and indeed more broadly in business management have, collectively, allowed us to substantially improve the efficiency and effectiveness of our overhead structure and in the process report a gross cost reduction of over EUR 1 billion through the end of 2013.
Annual Report 2013 29
Our 2013 results
30 Annual Report 2013
The journey continues
First milestone passed
Accelerate! is working and driving our transformation. We are pleased to have achieved the first major milestone on our Accelerate! journey our mid-term 2013 financial targets. However, we still have a way to go before we have delivered Philips full potential.
New targets on Path to Value
Thats why we have set ourselves challenging new targets, to be realized by the end of 2016. These indicate the value we create, as measured by sales growth, profitability and our use of capital:
Annual Report 2013 31
A born innovator
Philips was founded in Eindhoven, Netherlands, in 1891 by Frederik and Gerard Philips later joined by Gerards brother Anton to manufacture incandescent lamps and other electrical products. For the 120-plus years since then, we have been improving peoples lives with a steady flow of ground-breaking innovations.
Today, we are building upon this rich heritage as we touch billions of lives each year with our innovative healthcare and lighting solutions and our personal health and well-being products.
What we aspire to
At Philips, we strive to make the world healthier and more sustainable through innovation.
Our goal is to improve the lives of 3 billion people a year by 2025.
We will be the best place to work for people who share our passion.
Together we will deliver superior value for our customers and shareholders.
Annual Report 2013 33
Responding to global challenges
With our understanding of many of the longer-term challenges our world faces, we see major opportunities to apply our innovative competencies and create value for our stakeholders.
34 Annual Report 2013
Ensuring success is repeatable
The Philips Business System is the way we run our company to deliver on our mission and vision. It is designed to ensure that success is repeatable, i.e. that we create value for our stakeholders time after time.
Group Strategy: We manage our portfolio with clearly defined strategies and allocate resources to maximize value creation.
CAPs: We strengthen and leverage our core Capabilities, Assets and Positions as they create differential value: deep customer insight, technology innovation, our brand, global footprint, and our people.
Excellence: We are a learning organization that applies common operating principles to deliver Philips Excellence.
Path to Value: We define and execute business plans that deliver sustainable results along a credible Path to Value.
Engaged employees crucial for success
We need all our people collaborating effectively in a diverse and inclusive environment, where they can grow and fulfill their ambitions. Engagement supports our culture of growth and performance improvement, reinforcing our goal of being the best place to work for people who share our passion.
36 Annual Report 2013
Find out more about the scale and location of our activities throughout the world.
Annual Report 2013 37
Who do we mean by you?
Philips delivers innovation that matters to you.
But just who is you? And what matters to you? To get ever closer to our customers, these are questions we ask every day.
With our global presence we have customer-facing staff in over 100 countries and our trusted brand, we are uniquely placed to capture local customer insights.
By understanding the challenges local people face whether they be a hospital director, a city planner, a doctor or a consumer we ensure that their actual needs and aspirations drive our innovation efforts. So we can deliver what really matters to them.
Annual Report 2013 39
2. Understanding peoples needs
What matters to you?
40 Annual Report 2013
Annual Report 2013 41
42 Annual Report 2013
Ralph and Helen McCurdy, a loving husband and wife who can live together at home and receive high-quality health care, thanks to an innovative and efficient telemedicine program from Philips and Banner Health.
Without communication, Ralph and I could have never survived the 64 years. To be able to talk to a doctor on a video and we dont have to wait two or three days for a doctor appointment, its fabulous.
Helen McCurdy
This is the future. Its really an amazing model of care that doesnt exist anywhere else yet. When I have a team of people, augmented by a lot of Philips technology, I can catch things earlier, treat things earlier, and intervene in a way that allows me to accomplish what I set out to do as a geriatrician, and ultimately to do some good in these patients lives.
Edward Perrin, MD
Geriatric Care Specialist & Medical Director
Banner Hospice
Annual Report 2013 43
The Philips Airfryer lets Dable Kwan prepare spring rolls and other delicious fried foods with much less oil. Who knew innovation could be so good for you, and taste so good too?
My name is Dable and I live in Hong Kong. Im a housewife and I love to cook. I really started to cook seriously about 10 years ago.
My husband loves fried food. Back then I would tell him, No, theres too much oil and grease, and its not good for your health. But since getting the Philips Airfryer, ah, what a happy man.
It really makes cooking much easier, much healthier, and much more fun. Now, Im using less oil, less salt, less everything else. We just had our check-ups and our cholesterol, blood sugar and everything else are at very healthy levels.
44 Annual Report 2013
The port of Da Nang has grown in prosperity since Philips LEDs began lighting up the Dragon Bridge. See how the lives of fisherman Le Van Khe and his daughter Le Thi Vinh are improving.
The lights make the structure more vibrant and interesting for people who come to marvel at it The bridge has been central to our overall growth. This year were hoping to receive around 3 million tourists.
Tran Chi Cuong
Deputy Director
Danang Department of Culture, Sports and Tourism
I have my own sugarcane juice cart near the Dragon Bridge. When the bridge opened I saw a lot of tourists arrive and figured that selling sugarcane to them would be better than working at the factory. My father is very happy that I no longer have to struggle working at the factory.
On a Saturday and Sunday its so much fun to see the show. The bridge is very important to my family and me. My life lit up because the bridge lit up. It has changed our lives for the better.
Le Thi Vinh
Annual Report 2013 45
How we innovate for you
Armed with deep insights into local customer needs, we then bring together our R&D and design expertise and our local business-creation capabilities to address these needs.
The locally relevant solutions we develop often in collaboration with our customers do not always involve new technology. Instead, they may mean a new application or a unique customer proposition brought about by an innovative partnership.
Discover overleaf how we applied our innovation and design capability to help women breastfeed for longer.
46 Annual Report 2013
Almost 25% of mothers stop breastfeeding within the first three months because it becomes too painful. A further 40% stop because of a decreased milk supply. Discover how the Philips AVENT Natural range addresses these problems.
Using a breast pump to express milk can make it easier for mothers to continue breastfeeding. People researchers at Philips discovered that moms thought pumps were too cold and mechanical, and forced them to lean forward to make sure the milk flows down into the bottle.
Around the same time, a clinical study by Philips confirmed that comfort is physiologically essential to helping mothers produce lots of milk. Pain, stress or discomfort hampers the release of oxytocin, the hormone responsible for triggering milk production.
Philips AVENT Comfort breast pump
Therefore we took comfort as the starting point of the design and reshaped the pump to make it possible for moms to sit back in a more relaxing position to express milk. Using ultrasound and MRI scanners, we studied how babies actually suckle. To mimic that, we added five oval petals that gently massage the areas around the nipple to stimulate more milk. We changed the texture of the cushioned silicone funnel that cups the breast, giving it a silky feel that is warm and gentle against the skin.
Philips AVENT Natural bottle
We used the same insights to create a new baby bottle, designed to tackle two things: teat acceptance (also known as latch on) and colic. When babies suckle at the breast, they cause the nipple to elongate in a rhythmic way, so we created a teat to stretch in the same way. To create a more natural breast-like shape, the designers made the teat much wider at the base. And to prevent babies swallowing too much air when they are feeding, we added an anti-colic twin-valve system that allows air to vent into the bottle rather than the babys stomach.
Both the bottle and the breast pump have received several awards for outstanding design.
Annual Report 2013 47
We take a two-dimensional approach social and ecological to improving peoples lives. Products and solutions that directly support the curative (care) or preventive (well-being) side of peoples health, determine the contribution to the social dimension.
The contribution to the ecological dimension is determined by means of our Green product portfolio, such as our energy-efficient lighting. For additional information, please visit www.philips.com/sustainability.
48 Annual Report 2013
4 Group performance
2013 was a significant step forward on our Path to Value. Despite stronger headwinds than initially anticipated, we succeeded in achieving our mid-term 2013 financial targets. We delivered a compound annual growth rate for comparable sales over the period 2012-2013 of 4.5%, compared to our target of 4-6%. We achieved a reported Adjusted IFO of 10.5% of sales, within our target bandwidth of 10-12%. And our return on invested capital reached 15.3% at year-end, above the targeted range of 12-14%.
Ron Wirahadiraksa, CFO
Annual Report 2013 49
4 Group performance 4.1 - 4.1
Prior-period financial statements have been restated for the treatment of Audio, Video, Multimedia and Accessories as discontinued operations (see note 7, Discontinued operations and other assets classified as held for sale) and the adoption of IAS 19R, which mainly relates to accounting for pensions (see note 30, Post-employment benefits).
Management summary
Key data
in millions of euros unless otherwise stated
2011 | 2012 | 2013 | ||||||||||
Sales |
20,992 | 23,457 | 23,329 | |||||||||
Adjusted IFO1) |
1,435 | 1,106 | 2,451 | |||||||||
as a % of sales |
6.8 | 4.7 | 10.5 | |||||||||
IFO |
(479 | ) | 648 | 1,991 | ||||||||
as a % of sales |
(2.3 | ) | 2.8 | 8.5 | ||||||||
Financial income and expenses |
(331 | ) | (329 | ) | (330 | ) | ||||||
Income tax expense |
(251 | ) | (185 | ) | (466 | ) | ||||||
Results of investments in associates |
15 | (211 | ) | (25 | ) | |||||||
|
|
|||||||||||
Income (loss) from continuing operations |
(1,046 | ) | (77 | ) | 1,170 | |||||||
Income (loss) from discontinued operations - net of income tax |
(410 | ) | 47 | 2 | ||||||||
|
|
|||||||||||
Net income (loss) |
(1,456 | ) | (30 | ) | 1,172 | |||||||
Net income attributable to shareholders per common share in euros: |
||||||||||||
basic |
(1.53 | ) | (0.04 | ) | 1.28 | |||||||
diluted |
(1.53 | ) | (0.04 | ) | 1.27 | |||||||
Net operating capital (NOC)1) |
10,382 | 9,316 | 10,238 | |||||||||
Cash flows before financing activities1) |
(515 | ) | 1,157 | 141 | ||||||||
Employees (FTEs) |
125,240 | 118,087 | 116,681 | |||||||||
of which discontinued operations |
5,645 | 2,005 | 1,992 |
1) | For a reconciliation to the most directly comparable GAAP measures, see chapter 14, Reconciliation of non-GAAP information, of this report |
The year 2013
| In 2013 we continued to make good progress in a challenging economic environment, particularly in the United States and Western Europe. We recorded 3% comparable sales growth (1% nominal decline), with a strong contribution from growth geographies. The profitability improved substantially, with all sectors delivering solid earnings. Net income for the year amounted to EUR 1,172 million, mainly driven by strong operational performance, including significant gross margin improvement and productivity gains coming from the Accelerate! program. |
| Sales amounted to EUR 23.3 billion, a 1% nominal decline for the year. Excluding unfavorable currency effects, comparable sales were 3% above 2012, driven by all three operating sectors. Healthcare sales grew 1%, mainly driven by Customer Services. Lighting sales were 3% above 2012, driven by Lumileds and Automotive, partly tempered by a sales decline at Consumer Luminaires. Sales at Consumer Lifestyle were 10% above 2012, with double-digit growth at Domestic Appliances and high-single-digit growth at Personal Care and Health & Wellness. |
| Our growth geographies achieved 11% comparable growth, while mature geographies declined by 1%, as a result of the overall macroeconomic developments, including the continued weakness of the Western European markets and the continued economic uncertainty in North America. In 2013, growth geographies accounted for 36% of total sales, compared to 34% in 2012. |
| IFO amounted to EUR 1,991 million, or 8.5% of sales, compared to EUR 648 million, or 2.8% of sales, in 2012. IFO improvement was seen at all sectors, but was mainly driven by Lighting and Healthcare. |
| In 2013 we generated EUR 1,138 million of cash flow from operating activities, which was EUR 944 million lower than in 2012. The decrease is mainly a result of the payment of the European Commission fine in Q1 2013, increased working capital requirements and the payout of restructuring provisions in 2013. Our cash flows before financing activities were EUR 1,016 million lower than in 2012, due to a decrease in cash flows from operating activities and proceeds from divestments, partly offset by lower outflows related to acquisitions of new businesses. |
| In 2013 we completed the execution of our EUR 2 billion share buy-back program, thereby improving the efficiency of our balance sheet, and announced a new EUR 1.5 billion program to be concluded over the next 2-3 years. By the end of the year we had completed 7% of this program. |
The year 2012
| Despite strong economic headwinds, we continued on our steady path of improvement driven by our multi-year change and performance program, Accelerate!. We recorded 6% comparable sales growth (12% nominal growth), with a strong contribution from growth geographies. Healthcare and Consumer Lifestyle delivered solid earnings, |
50 Annual Report 2013
4 Group performance 4.1.1 - 4.1.1
while Lighting gained momentum in its turnaround. Net income for the year amounted to a net loss of EUR 30 million, and was impacted by substantial restructuring charges as well as the European Commission fine related to alleged violation of competition rules in the Cathode-Ray Tube (CRT) industry. |
| Sales amounted to EUR 23.5 billion, a 12% nominal increase for the year. Excluding favorable currency effects and portfolio changes, comparable sales were 6% above 2011, driven by all three operating sectors. Healthcare sales grew 6%, with solid growth in all businesses. Lighting sales were 4% above 2011, with strong growth coming from Light Sources & Electronics, mainly fueled by market demand for LED, and Automotive, partly tempered by a sales decline at Lumileds. Sales at Consumer Lifestyle were 9% above 2011, with double-digit growth at Domestic Appliances and Health & Wellness and mid-single-digit growth at Personal Care. |
| Our growth geographies achieved 13% comparable growth, while mature geographies grew by a modest 2%, as a result of the overall macroeconomic developments and the continued weakness of the Western European markets, particularly Southern Europe. In 2012, growth geographies accounted for 34% of total sales, compared to 32% in 2011. |
| IFO amounted to EUR 648 million, or 2.8% of sales, compared to a loss of EUR 479 million, or negative 2.3% of sales, in 2011. Excluding impairment charges of EUR 1,355 million in 2011, significant IFO improvement was seen at Consumer Lifestyle and Healthcare, while Lighting was impacted by charges related to restructuring activities. |
| In 2012, we completed the divestment of our Television business to TP Vision and extended our partnership in Senseo with Sara Lee. Additionally, we completed the acquisition of Indal, strengthening our position in outdoor lighting. |
| In 2012 we generated EUR 2,082 million of cash flow from operating activities, which was EUR 1,322 million higher than in 2011. The increase was largely a result of lower working capital requirements and higher cash earnings. Our cash flows before financing activities were EUR 1,672 million above the level of 2011, due to higher cash flow from operating activities, higher proceeds from divestments, and lower outflows related to acquisitions of new businesses. |
4.1.1 Sales
The year 2013
The composition of sales growth in percentage terms in 2013, compared to 2012, is presented in the table below.
Sales growth composition 2013 versus 2012
in %
comparable growth |
currency effects |
consolidation changes |
nominal growth |
|||||||||||||
Healthcare |
0.8 | (4.6 | ) | (0.3 | ) | (4.1 | ) | |||||||||
Consumer Lifestyle |
10.0 | (3.4 | ) | 0.0 | 6.6 | |||||||||||
Lighting |
3.2 | (3.5 | ) | 0.0 | (0.3 | ) | ||||||||||
IG&S1) |
(2.0 | ) | (0.5 | ) | 5.7 | 3.2 | ||||||||||
|
|
|||||||||||||||
Philips Group |
3.3 | (3.9 | ) | 0.1 | (0.5 | ) |
1) | Innovation, Group & Services |
Group sales amounted to EUR 23,329 million in 2013, which represents a 1% nominal decline compared to 2012.
Adjusting for a 4% negative currency effect comparable sales were 3% above 2012. Comparable sales were up 10% at Consumer Lifestyle, while Lighting was 3% higher and Healthcare 1% higher than the previous year.
Healthcare sales amounted to EUR 9,575 million, which was EUR 408 million lower than in 2012, but 1% higher on a comparable basis. Higher comparable sales were driven by mid-single-digit growth at Customer Services, while Home Healthcare Solutions and Patient Care & Clinical Informatics recorded low-single-digit growth. This was partly offset by a mid-single-digit decline at Imaging Systems. Increases in growth geographies were tempered by a decline in North America and Western Europe.
Consumer Lifestyle reported sales of EUR 4,605 million, which was EUR 286 million higher than in 2012, or 10% higher on a comparable basis. We achieved double-digit growth at Domestic Appliances and high-single-digit growth at Health & Wellness and Personal Care.
Lighting sales amounted to EUR 8,413 million, which was EUR 29 million lower than in 2012, but 3% higher on a comparable basis. Growth was largely driven by double-digit growth at Automotive and Lumileds and low-single-digit growth at Light Sources & Electronics. This was tempered by a low-single-digit decline at Consumer Luminaires. while Professional Lighting Solutions was flat year-on-year.
Annual Report 2013 51
4 Group performance 4.1.2 - 4.1.2
IG&S reported sales of EUR 736 million, which was EUR 23 million higher than in 2012, due to higher royalty income.
The year 2012
The composition of sales growth in percentage terms in 2012, compared to 2011, is presented in the table below.
Sales growth composition 2012 versus 2011
in %
comparable growth |
currency effects |
consolidation changes |
nominal growth |
|||||||||||||
Healthcare |
6.4 | 6.4 | 0.0 | 12.8 | ||||||||||||
Consumer Lifestyle |
8.7 | 4.4 | 1.4 | 14.5 | ||||||||||||
Lighting |
3.8 | 4.6 | 2.1 | 10.5 | ||||||||||||
IG&S |
0.3 | 1.7 | (4.4 | ) | (2.5 | ) | ||||||||||
|
|
|||||||||||||||
Philips Group |
5.7 | 5.2 | 0.8 | 11.7 |
Group sales amounted to EUR 23,457 million in 2012, which represents 12% nominal growth compared to 2011.
Adjusting for a 5% favorable currency effect and a 1% favorable portfolio effect, comparable sales were 6% above 2011. Comparable sales were up 9% at Consumer Lifestyle, while Healthcare was 6% higher and Lighting 4% higher than the previous year.
Healthcare sales amounted to EUR 9,983 million, which was EUR 1,131 million higher than in 2011, or 6% higher on a comparable basis. High-single-digit comparable sales growth was achieved by Imaging Systems, Home Healthcare Solutions and Patient Care & Clinical Informatics, while Customer Services showed low-single-digit growth
Consumer Lifestyle reported sales of EUR 4,319 million, which was EUR 548 million higher than in 2011, or 9% higher on a comparable basis. We achieved double-digit growth at Domestic Appliances and Health & Wellness and mid-single-digit growth at Personal Care.
Lighting sales amounted to EUR 8,442 million, which was EUR 804 million higher than in 2011, or 4% higher on a comparable basis. Growth was largely driven by high-single-digit growth at Automotive and mid-single-digit growth at Light Sources & Electronics. This was tempered by low-single-digit growth at Professional Lighting Solutions and Consumer Luminaires and a sales decline at Lumileds.
IG&S reported sales of EUR 713 million, which was EUR 18 million lower than in 2011, mainly due to the divestment of Assembléon in the prior year.
4.1.2 Earnings
The year 2013
In 2013, Philips gross margin was EUR 9,688 million, or 41.5% of sales, compared to EUR 8,991 million, or 38.3% of sales, in 2012. Gross margin in 2013 included EUR 52 million of restructuring and acquisition-related charges, whereas 2012 included EUR 289 million of restructuring and acquisition-related charges. Higher gross margin percentages were seen in all sectors.
Selling expenses decreased from EUR 5,334 million in 2012 to EUR 5,075 million in 2013. 2013 included EUR 45 million of restructuring and acquisition-related charges, compared to EUR 184 million of restructuring charges in 2012. The year-on-year decrease was mainly attributable to lower restructuring activities and overhead reductions in our commercial organizations. In relation to sales, selling expenses decreased from 22.7% to 21.8%. Selling expenses as a percentage of sales were lower in all sectors.
General and administrative expenses amounted to EUR 949 million in 2013, compared to EUR 845 million in 2012. As a percentage of sales, costs increased from 3.6% in 2012 to 4.1%. 2013 included EUR 5 million of restructuring and acquisition related-charges, compared to EUR 31 million in 2012. The 2012 figure included a EUR 25 million past-service pension cost gain from a change in a medical retiree plan, while 2013 included a pension settlement loss of EUR 31 million.
Research and development costs decreased from EUR 1,831 million in 2012 to EUR 1,733 million in 2013. Research and development costs in 2013 included EUR 15 million of restructuring and acquisition-related charges, compared to EUR 57 million in 2012. The year-on-year decrease was largely attributable to lower restructuring charges and currency effects. As a percentage of sales, research and development costs decreased from 7.8% in 2012 to 7.4% in 2013.
The overview below shows sales, IFO and Adjusted IFO according to the 2013 sector classifications.
52 Annual Report 2013
4 Group performance 4.1.2 - 4.1.2
Sales, IFO and Adjusted IFO
in millions of euros unless otherwise stated
sales | IFO | % | Adjusted IFO1) |
% | ||||||||||||||||
2013 |
||||||||||||||||||||
Healthcare |
9,575 | 1,315 | 13.7 | 1,512 | 15.8 | |||||||||||||||
Consumer Lifestyle |
4,605 | 429 | 9.3 | 483 | 10.5 | |||||||||||||||
Lighting |
8,413 | 489 | 5.8 | 695 | 8.3 | |||||||||||||||
IG&S |
736 | (242 | ) | | (239 | ) | | |||||||||||||
|
|
|||||||||||||||||||
Philips Group |
23,329 | 1,991 | 8.5 | 2,451 | 10.5 | |||||||||||||||
2012 |
||||||||||||||||||||
Healthcare |
9,983 | 1,026 | 10.3 | 1,226 | 12.3 | |||||||||||||||
Consumer Lifestyle |
4,319 | 400 | 9.3 | 456 | 10.6 | |||||||||||||||
Lighting |
8,442 | (66 | ) | (0.8 | ) | 128 | 1.5 | |||||||||||||
IG&S |
713 | (712 | ) | | (704 | ) | | |||||||||||||
|
|
|||||||||||||||||||
Philips Group |
23,457 | 648 | 2.8 | 1,106 | 4.7 |
1) | For a reconciliation to the most directly comparable GAAP measures, see chapter 14, Reconciliation of non-GAAP information, of this report |
In 2013, IFO increased by EUR 1,343 million year-on-year to EUR 1,991 million, or 8.5% of sales. 2013 included EUR 117 million of restructuring and acquisition-related charges, compared to EUR 561 million in 2012. 2013 IFO was also impacted by a net gain of EUR 47 million from a past-service pension cost gain and related settlement loss in the US, as well as a EUR 21 million gain on the sale of a business in Healthcare. 2012 IFO included a EUR 313 million impact of the European Commission fine related to the alleged violation of competition rules in the Cathode-Ray Tube (CRT) industry, EUR 132 million of provisions related to various legal matters, a net gain on EUR 197 million on the sale of assets, mainly for the Senseo and High Tech Campus transactions, and a EUR 81 million loss on the sale of industrial assets at Lighting. In addition, 2012 IFO also included a past-service cost gain of EUR 25 million related to a retiree medical plan.
Amortization and impairment of intangibles, excluding software and capitalized product development costs, amounted to EUR 432 million in 2013, compared to EUR 458 million in 2012. Additionally, goodwill impairment charges of EUR 26 million were taken in the fourth quarter of 2013 mainly as a result of reduced growth expectations at Consumer Luminaires.
Adjusted IFO improved from EUR 1,106 million, or 4.7% of sales, in 2012 to EUR 2,451 million, or 10.5% of sales, in 2013. Adjusted IFO showed a year-on-year increase at all Sectors.
Healthcare
Adjusted IFO improved from EUR 1,226 million, or 12.3% of sales, in 2012 to EUR 1,512 million, or 15.8% of sales, in 2013. Adjusted IFO improvements were realized across all businesses, due to higher sales and reduced expenses resulting from cost-saving programs. Restructuring and acquisition-related charges in 2013 were close to zero, compared to EUR 134 million in 2012. 2013 included a past-service pension cost gain of EUR 61 million and a gain on the sale of a business of EUR 21 million.
Consumer Lifestyle
Adjusted IFO improved from EUR 456 million, or 10.6% of sales, in 2012 to EUR 483 million, or 10.5% of sales, in 2013. Restructuring and acquisition-related charges amounted to EUR 14 million in 2013, compared to EUR 56 million in 2012. 2012 Adjusted IFO included a EUR 160 million gain on the Senseo transaction, while 2013 Adjusted IFO included a past-service pension cost gain of EUR 1 million.
Lighting
Adjusted IFO improved from EUR 128 million, or 1.5% of sales, in 2012 to EUR 695 million, or 8.3% of sales, in 2013. Restructuring and acquisition-related charges amounted to EUR 100 million in 2013, compared to EUR 315 million in 2012. 2012 Adjusted IFO included EUR 81 million of losses related to the sale of industrial assets, while 2013 Adjusted IFO included a past-service pension cost gain of EUR 10 million. Excluding these impacts, the increase in Adjusted IFO was mainly attributable to higher operational performance.
Innovation, Group & Services
Adjusted IFO improved from a loss of EUR 704 million in 2012 to a loss of EUR 239 million in 2013. Restructuring and acquisition-related charges amounted to EUR 3 million in 2013, compared to EUR 56 million in 2012. 2013 Adjusted IFO included a net EUR 25 million loss from a past-service pension cost gain and related settlement loss. 2012 Adjusted IFO included a EUR 313 million impact of the European Commission fine, EUR 132 million of provisions related to various legal matters, a EUR 37 million gain on the sale of the High Tech Campus, and a EUR 25 million past-service cost gain related to a medical retiree plan.
For further information regarding the performance of the sectors, see chapter 5, Sector performance, of this report.
Annual Report 2013 53
4 Group performance 4.1.2 - 4.1.2
The year 2012
In 2012, Philips gross margin was EUR 8,991 million, or 38.3% of sales, compared to EUR 8,260 million, or 39.3% of sales, in 2011. Gross margin in 2012 included EUR 289 million of restructuring and acquisition-related charges, whereas 2011 included EUR 52 million of restructuring and acquisition-related charges. Compared with 2011, the gross margin percentage was higher at Healthcare, but lower at Lighting and Consumer Lifestyle.
Selling expenses increased from EUR 5,025 million in 2011 to EUR 5,334 million in 2012. 2012 included EUR 184 million of restructuring and acquisition-related charges, compared to EUR 53 million of restructuring charges in 2011. The year-on-year increase was mainly attributable to restructuring activities and higher expenses aimed at supporting a higher level of sales. In relation to sales, selling expenses decreased from 23.9% to 22.7%. Selling expenses as a percentage of sales were lower in all sectors.
General and administrative expenses amounted to EUR 845 million in 2012, compared to EUR 802 million in 2011. As a percentage of sales, costs decreased from 3.8% in 2011 to 3.6%.
Research and development costs increased from EUR 1,605 million in 2011 to EUR 1,831 million in 2012. The year-on-year increase was largely attributable to higher investments in growth and innovation. As a percentage of sales, research and development costs increased from 7.6% in 2011 to 7.8% in 2012.
Sales, IFO and Adjusted IFO
in millions of euros, unless otherwise stated
sales | IFO | % |
Adjusted IFO1) |
% | ||||||||||||||||
2011 |
||||||||||||||||||||
Healthcare |
8,852 | 27 | 0.3 | 1,080 | 12.2 | |||||||||||||||
Consumer Lifestyle |
3,771 | 109 | 2.9 | 153 | 4.1 | |||||||||||||||
Lighting |
7,638 | (408 | ) | (5.3 | ) | 399 | 5.2 | |||||||||||||
IG&S |
731 | (207 | ) | | (197 | ) | | |||||||||||||
|
|
|||||||||||||||||||
Philips Group |
20,992 | (479 | ) | (2.3 | ) | 1,435 | 6.8 |
1) | For reconciliation to the most directly comparable GAAP measures, see chapter 14, Reconciliation of non-GAAP information, of this report |
In 2012, IFO increased by EUR 1,127 million year-on-year, to EUR 648 million, or 2.8% of sales. 2012 included EUR 561 million of restructuring and acquisition-related charges, compared to EUR 159 million in 2011. The year-on-year increase was mainly attributable to goodwill impairments of EUR 1,355 million in 2011 and higher gross margin percentages in Healthcare and Consumer Lifestyle, but was partly offset by the EUR 313 million impact of the European Commission fine.
Amortization of intangibles, excluding software and capitalized product development costs, amounted to EUR 458 million in 2012, compared to EUR 559 million in 2011.
Adjusted IFO decreased from EUR 1,435 million, or 6.8% of sales, in 2011 to EUR 1,106 million, or 4.7% of sales, in 2012. Adjusted IFO showed a year-on-year increase at Consumer Lifestyle and Healthcare, but was lower at Lighting.
Healthcare
Adjusted IFO increased from EUR 1,080 million, or 12.2% of sales, in 2011 to EUR 1,226 million, or 12.3% of sales, in 2012. Adjusted IFO improvements were realized across Patient Care & Clinical Informatics, Home Healthcare Solutions and Imaging Systems, mainly due to higher sales and reduced expenses as a result of cost-saving programs. Restructuring and acquisition-related charges totaled EUR 134 million, compared to EUR 21 million in 2011.
Consumer Lifestyle
Adjusted IFO increased from EUR 153 million, or 4.1% of sales, in 2011 to EUR 456 million, or 10.6% of sales, in 2012. Restructuring and acquisition-related charges amounted to EUR 56 million in 2012, compared to EUR 49 million in 2011. 2012 results included a EUR 160 million one-time gain from the extension of our partnership with Sara Lee, including the transfer of our 50% ownership rights to the Senseo trademark. Excluding this one-time gain, the year- on-year Adjusted IFO increase was driven by higher sales across all growth businesses as well as lower net costs formerly reported as part of the Television business.
Lighting
Adjusted IFO decreased from EUR 399 million, or 5.2% of sales, in 2011 to EUR 128 million, or 1.5% of sales, in 2012. Restructuring and acquisition-related charges amounted to EUR 315 million, compared to EUR 66 million in 2011. The decrease in Adjusted IFO was mainly attributable to higher restructuring and acquisition- related charges, as well as losses on the sale of industrial assets amounting to EUR 81 million, partly offset by higher sales. Compared to 2011, Adjusted IFO declined in all businesses except Automotive.
54 Annual Report 2013
4 Group performance 4.1.3 - 4.1.4
Innovation, Group & Services
Adjusted IFO decreased from a loss of EUR 197 million in 2011 to a loss of EUR 704 million in 2012. Results in 2012 were negatively impacted by a charge of EUR 313 million related to the European Commission fine and provisions related to various legal matters totaling EUR 132 million. Adjusted IFO in 2012 also included a EUR 25 million gain from a change in a medical retiree benefit plan and a EUR 37 million gain on the sale of the High Tech Campus, while 2011 included a EUR 21 million gain related to a change in a pension plan.
Restructuring and acquisition-related charges amounted to EUR 56 million in 2012, compared to EUR 23 million in 2011.
For further information regarding the performance of the sectors, see chapter 5, Sector performance, of this report.
4.1.3 Advertising & Promotion
The year 2013
Philips total advertising and promotion expenses were EUR 882 million in 2013, an increase of 5% compared to 2012. The increase was mainly due to the launch of our new brand positioning as well as higher investments in growth geographies, such as China. As in 2012, the Company allocated a higher proportion of its total advertising and promotion spend to growth geographies and strategic markets. Accordingly, the advertising and promotion spend in key growth geographies increased by 4% compared to 2012. The total advertising and promotion investment as a percentage of sales was 3.8% in 2013, compared to 3.6% in 2012.
Philips increased its brand value by 8% in 2013 to over USD 9.8 billion in the ranking of the worlds 100 most valuable brands, as measured by Interbrand. In the 2013 listing, Philips moved up one position to the 40th most valuable brand in the world.
The year 2012
Philips total advertising and promotion expenses approximated EUR 841 million in 2012, a decrease of 3% compared to 2011, mainly due to decreased investments in Western Europe.
Consistent with 2011, the Company allocated a higher proportion of its total advertising and promotion spend towards growth geographies and strategic markets, priority areas for the Companys growth strategy. Accordingly, the Company increased its advertising and promotion spend in key growth geographies by 5% compared to 2011. Total advertising and promotion investment as a percentage of sales 3.6% in 2012, compared to 4.1% in 2011.
4.1.4 Research and development
The year 2013
Research and development costs decreased from EUR 1,831 million in 2012 to EUR 1,733 million in 2013. 2013 included EUR 15 million of restructuring and acquisition-related charges, compared to EUR 57 million in 2012. As a percentage of sales, research and development costs decreased from 7.8% in 2012 to 7.4%. The year-on-year decrease was largely attributable to currency effects and lower restructuring charges.
Research and development costs within Healthcare decreased by EUR 43 million, mainly due to lower restructuring activities at Imaging Systems and Patient Care and Clinical Informatics. At Lighting, research and development costs decreased by EUR 21 million,
Annual Report 2013 55
4 Group performance 4.1.5 - 4.1.5
primarily in the conventional businesses within Light Sources & Electronics. At Consumer Lifestyle, research and development spending was EUR 10 million higher than in 2012, mainly in Health & Wellness. In Innovation, Group & Services, research and development expenses decreased by EUR 44 million, due to lower restructuring, productivity savings as well as lower costs at Intellectual Property & Standards.
Research and development expenses per sector
in millions of euros
2011 | 2012 | 2013 | ||||||||||
Healthcare |
754 | 823 | 780 | |||||||||
Consumer Lifestyle |
249 | 251 | 261 | |||||||||
Lighting |
416 | 462 | 441 | |||||||||
Innovation, Group & Services |
186 | 295 | 251 | |||||||||
|
|
|||||||||||
Philips Group |
1,605 | 1,831 | 1,733 |
The year 2012
Research and development costs increased from EUR 1,605 million in 2011 to EUR 1,831 million in 2012. The year-on-year increase was largely attributable to higher investments in growth and innovation, including an increased focus on new value spaces. As a percentage of sales, research and development costs increased from 7.6% in 2011 to 7.8%.
Research and development costs within Healthcare increased by EUR 69 million, mainly at Imaging Systems and Home Healthcare Solutions. At Lighting, research and development costs increased by EUR 46 million, primarily at Lumileds and our Controls business within Professional Lighting Solutions. At Consumer Lifestyle, research and development spending was EUR 2 million higher than in 2011. In Innovation, Group & Services, R&D expenses increased by EUR 109 million, driven by investments in new value spaces as well as innovation and design initiatives.
4.1.5 Pensions
The year 2013
In 2013, the total costs of post-employment benefits amounted to EUR 294 million for defined-benefit plans and EUR 139 million for defined-contribution plans, compared to EUR 289 million and EUR 139 million respectively in 2012.
The above costs are reported in operating expenses except for the included net interest cost component which is reported in financial income and expense. The net interest cost for defined-benefit plans was EUR 71 million in 2013 (2012: EUR 85 million).
2013 included past-service cost gains of EUR 81 million, which included EUR 78 million related to the announced freeze of accrual after December 31, 2015 for salaried workers in the Companys US defined-benefit pension plan. In the same US plan a settlement loss of EUR 31 million was recognized in 2013 following a lump-sum offering to terminated vested employees. This offering resulted in settling the pension obligations towards these employees. The past-service cost gain is allocated to the respective sectors of the US employees involved whereas the settlement loss is allocated fully to Pensions in IG&S as it related to inactive employees.
In 2012, past-service cost gains of EUR 31 million were recognized of which EUR 25 million in the Dutch pension plan due to a restructuring. In one of the Companys defined-benefit retiree medical plans, a past-service cost gain of EUR 25 million was recognized due to a benefit change.
The overall funded status of our defined-benefit pension plans in 2013 was comparable to that of 2012. The deficits recognized on our balance sheet decreased by approximately EUR 400 million due to a higher discount rate in the US, cash contributions and the US events described above. The surpluses of the plans in the Netherlands and UK decreased, but as Philips does not recognize a surplus in these countries, the net balance sheet position was not impacted.
In 2013, major progress was made in managing the financial exposure to defined-benefit plans, such as the changes in the funding of the Dutch pension plan, the changes in the US plan as described above, and a buy-in in the UK plan.
For further information, refer to note 30, Post-employment benefits.
The year 2012
In 2012, the total costs of post-employment benefits amounted to EUR 289 million for defined benefit plans and EUR 139 million for defined contribution plans, compared to EUR 248 million and EUR 117 million respectively in 2011.
56 Annual Report 2013
4 Group performance 4.1.6 - 4.1.6
The funded status of our defined-benefit plans improved in 2012, in spite of decreasing discount rates and improved life expectancy assumptions in the Netherlands and UK plans. The surpluses of the plans in the Netherlands and UK increased, but Philips does not recognize the surplus in these countries, the net balance sheet position was not impacted.
In 2012, past-service cost gains of EUR 31 million were recognized of which 25 million in the Dutch pension plan due to a restructuring. In one of the Companys defined-benefit retiree medical plans, a past service cost gain of EUR 25 million was recognized due to a benefit change.
In 2011, the company recognized a past-service cost gain of EUR 40 million, including a EUR 19 million curtailment gain.
For further information, refer to note 29, Post-employment benefits
4.1.6 Restructuring and impairment charges
The year 2013
In 2013, IFO included net charges totaling EUR 101 million for restructuring. In addition to the annual goodwill-impairment tests for Philips, trigger-based impairment tests were performed during the year, resulting in a goodwill impairment of EUR 26 million at Consumer Luminaires, mainly as a consequence of reduced growth rates resulting from a slower-than-anticipated recovery of certain markets, as well as delays in the introduction of new product ranges.
2012 included EUR 511 million of restructuring charges.
For further information on sensitivity analysis, please refer to note 11, Goodwill.
Restructuring and related charges
in millions of euros
2011 | 2012 | 2013 | ||||||||||
Restructuring and related charges per sector: |
||||||||||||
Healthcare |
3 | 116 | (6 | ) | ||||||||
Consumer Lifestyle |
5 | 38 | 10 | |||||||||
Lighting |
54 | 301 | 94 | |||||||||
Innovation, Group & Services |
23 | 56 | 3 | |||||||||
|
|
|||||||||||
Continuing operations |
85 | 511 | 101 | |||||||||
Discontinued operations |
18 | 29 | 16 | |||||||||
Cost breakdown of restructuring and related charges: |
||||||||||||
Personnel lay-off costs |
105 | 423 | 103 | |||||||||
Release of provision |
(44 | ) | (35 | ) | (64 | ) | ||||||
Restructuring-related asset impairment |
10 | 66 | 36 | |||||||||
Other restructuring-related costs |
14 | 57 | 26 | |||||||||
|
|
|||||||||||
Continuing operations |
85 | 511 | 101 | |||||||||
Discontinued operations |
18 | 29 | 16 |
In 2013, the most significant restructuring projects related to Lighting and were driven by the industrial footprint rationalization. Restructuring projects at Lighting centered on Luminaires businesses and Light Sources & Electronics, the largest of which took place in the United States, France and Belgium. Innovation, Group & Services restructuring projects mainly focused on the Financial Operations Service Unit, primarily in Italy, France and the United States. Consumer Lifestyle restructuring charges mainly related to Personal Care (primarily in the Netherlands and Austria) and Coffee (mainly Italy).
In 2012, the most significant restructuring projects related to Lighting and Healthcare and were driven by Accelerate! transformation program. Restructuring projects at Lighting centered on Luminaires businesses and Light Sources & Electronics, the largest of which took place in the Netherlands, Germany and various locations in the United States. In Healthcare, the largest projects were undertaken at Imaging Systems and Patient Care & Clinical Informatics, in various locations in the United States, to reduce operating costs and simplify the organization. Innovation, Group & Services restructuring projects focused on the IT and Financial Operations Service Units (primarily in the Netherlands), Group & Regional Overheads (mainly in the Netherlands and Italy) and Philips Innovation Services (in the Netherlands and Belgium). Consumer Lifestyle restructuring charges mainly related to Coffee (mainly Italy) and Health & Wellness (in the United States).
Annual Report 2013 57
4 Group performance 4.1.7 - 4.1.7
For further information on restructuring, refer to note 21, Provisions.
The year 2012
2012 included EUR 511 million of restructuring. In addition to the annual goodwill impairment tests for Philips, trigger-based impairment tests were performed during the year, resulting in no goodwill impairment.
For further information on sensitivity analysis, please refer to note 11, Goodwill.
In 2012, the most significant restructuring projects related to Lighting and Healthcare and were driven by Accelerate! transformation program. Restructuring projects at Lighting centered on Luminaires businesses and Light Sources & Electronics, the largest of which took place in the Netherlands, Germany and various locations in the US. In Healthcare, the largest projects were undertaken at Imaging Systems and Patient Care & Clinical Informatics, in various locations, in the United States to reduce operating costs and simplify the organization. Innovation, Group & Services restructuring projects focused on the IT and Financial Operations Service Units (primarily in the Netherlands), Group & Regional Overheads (mainly in the Netherlands and Italy) and Philips Innovation Services (in the Netherlands and Belgium). Consumer Lifestyle restructuring charges mainly related to Coffee (mainly Italy) and Health & Wellness (in the United States).
In 2011, the most significant restructuring projects related to Lighting and Innovation, Group & Services and were mainly driven by Accelerate! transformation program. Restructuring projects at Lighting centered on Luminaires businesses and Light Sources & Electronics, the largest of which took place in the Netherlands, Brazil and in the United States. Innovation, Group & Services restructuring projects focused on the Global Service Units (primarily in the Netherlands), Corporate and Country Overheads (mainly in the Netherlands, Brazil and Italy) and Philips Design (the Netherlands). At Healthcare, the largest projects were undertaken at Imaging Systems, Home Healthcare Solutions and Patient Care & Clinical Informatics, in various locations in the United States to reduce operating costs and simplify the organization. Consumer Lifestyle restructuring charges mainly related to the remaining Television operations in Europe.
4.1.7 Financial income and expenses
The year 2013
A breakdown of Financial income and expenses is presented in the table below.
Financial income and expenses
in millions of euros
2011 | 2012 | 2013 | ||||||||||
Interest expense (net) |
(302 | ) | (325 | ) | (268 | ) | ||||||
Sale of securities |
51 | 1 | | |||||||||
Impairments |
(34 | ) | (8 | ) | (10 | ) | ||||||
Other |
(46 | ) | 3 | (52 | ) | |||||||
|
|
|||||||||||
(331 | ) | (329 | ) | (330 | ) |
The net interest expense in 2013 was EUR 57 million lower than in 2012, mainly as a result of lower average outstanding debt and interest related to pensions in 2013.
Other financial income was a EUR 52 million loss in 2013, primarily consisting of a EUR 25 million accretion expense (mainly associated with discounted provisions) and EUR 24 million of other financing charges.
Other financial income was a EUR 3 million gain in 2012, primarily consisting of a EUR 46 million gain related to a change in estimate on the valuation of long-term derivative contracts and remaining other financial income of EUR 20 million. This was offset by a EUR 22 million accretion expense (mainly associated with discounted provisions) and EUR 41 million other financing charges.
Impairments
in millions of euros
2011 | 2012 | 2013 | ||||||||||
TPV |
(25 | ) | | | ||||||||
Chi-Mei Innolux |
(4 | ) | (1 | ) | (1 | ) | ||||||
BG Medicine |
(2 | ) | (1 | ) | (1 | ) | ||||||
Prime Technology |
(1 | ) | | | ||||||||
Tendris |
| (5 | ) | (1 | ) | |||||||
Gilde III |
| (1 | ) | (2 | ) | |||||||
Lighting Science Group |
| | (3 | ) | ||||||||
Other |
(2 | ) | | (2 | ) | |||||||
|
|
|||||||||||
(34 | ) | (8 | ) | (10 | ) |
58 Annual Report 2013
4 Group performance 4.1.8 - 4.1.9
Impairment charges in 2013 amounted to EUR 10 million, mainly from shareholdings in Lighting Science Group and Gilde III. In 2012, impairment charges amounted to EUR 8 million, mainly from shareholdings in Tendris.
For further information, refer to note 4, Financial income and expenses.
The year 2012
The net interest expense in 2012 was EUR 23 million higher than in 2011, mainly as a result of higher average outstanding debt.
In 2012 there was a EUR 1 million gain on the sale of securities. In 2011, income from the sale of securities totaled EUR 51 million, including a EUR 44 million gain on the sale of the remaining shares in TCL and a EUR 6 million gain on the sale of shares of Digimarc.
Impairment charges in 2012 amounted to EUR 8 million, mainly from shareholdings in Tendris. In 2011, impairment charges amounted to EUR 34 million, mainly from shareholdings in TPV Technologies Ltd.
Other financial income was a EUR 3 million gain in 2012, primarily consisting of a EUR 46 million gain related to a change in estimate on the valuation of long-term derivative contracts and remaining other financial income of EUR 20 million. This was offset by a EUR 22 million accretion expense (mainly associated with discounted provisions) and EUR 41 million other financing charges.
Other financial expenses in 2011 primarily consisted of a EUR 34 million other financing charge and a EUR 33 million accretion expense (mainly associated with discounted provisions) offset by EUR 11 million dividend income and other financial income, including a net gain of EUR 6 million mostly from the revaluation impact of the option related to NXP.
For further information, refer to note 4, Financial income and expenses.
4.1.8 Income taxes
The year 2013
Income taxes amounted to EUR 466 million, compared to EUR 185 million in 2012. The effective income tax rate was 28.1%, compared to 58.0% in 2012. Excluding the non-tax-deductible European Commission fine and charges related to various legal matters in 2012, the effective tax rate in 2012 was 25.5%. The 2.6 percentage points increase in 2013 was mainly related to a higher weighted average statutory income tax rate in 2013 due to a change in the country mix of profit and loss, which was partly offset by lower valuation allowances.
For 2014, the effective tax rate excluding incidental non-taxable items is expected to be between 30% and 32%.
For further information, refer to note 5, Income taxes.
The year 2012
Income taxes amounted to EUR 185 million, compared to EUR 251 million in 2011. The year-on-year decrease was largely attributable to lower incidental tax expenses.
The tax burden in 2012 corresponded to an effective income tax rate of 58.0%, compared to negative 31.0% in 2011. In 2011, the negative effective income tax rate was attributable to goodwill impairment losses of EUR 1,355 million, which were largely non-tax-deductible. The effective income tax rate in 2012 included the impact of the non-tax-deductible charge of EUR 509 million arising from the European Commission fine. Excluding the European Commission fine and charges related to various legal matters in 2012, the effective tax rate in 2012 was 25.5%.
For further information, refer to note 5, Income taxes.
4.1.9 Results of investments in associates
The year 2013
The results related to investments in associates improved from a loss of EUR 211 million in 2012 to a loss of EUR 25 million in 2013, largely attributable to a charge of EUR 196 million related to the former LG.Philips Displays joint venture in 2012.
The European Commission imposed fines in relation to alleged violations of competition rules in the Cathode-Ray Tube industry. Philips recorded a total charge of EUR 509 million, of which EUR 313 million was directly related to Philips and therefore recorded in Income from operations, while EUR 196 million related to LG.Philips Displays and was therefore recorded in Results of investments in associates.
Annual Report 2013 59
4 Group performance 4.1.10 - 4.1.11
Results of investments in associates
in millions of euros
2011 | 2012 | 2013 | ||||||||||
Companys participation in income |
18 | (5 | ) | 5 | ||||||||
Investment impairment and other charges |
(3 | ) | (206 | ) | (30 | ) | ||||||
|
|
|||||||||||
15 | (211 | ) | (25 | ) |
The Companys participation in income increased from a loss of EUR 5 million in 2012 to a gain of EUR 5 million in 2013. The gain in 2013 was mainly attributable to the results of Philips Medical Capital, while the loss in 2012 was mainly due to the results of EMGO.
For further information, refer to note 6, Interests in entities.
The year 2012
The results related to investments in associates declined from income of EUR 15 million in 2011 to a loss of EUR 211 million in 2012, largely attributable to a charge of EUR 196 million related to the former LG.Philips Displays joint venture.
The European Commission imposed fines in relation to alleged violations of competition rules in the Cathode-Ray Tube industry. Philips recorded a total charge of EUR 509 million, of which EUR 313 million was directly related to Philips and therefore recorded in Income from operations, while EUR 196 million related to LG.Philips Displays and was therefore recorded in Results of investments in associates.
The Companys participation in income decreased from EUR 18 million in 2011 to negative EUR 5 million in 2012. The loss in 2012 was mainly attributable to the results of EMGO, while the income in 2011 was mainly due to the results of Intertrust.
For further information, refer to note 6, Interests in entities.
4.1.10 Non-controlling interests
The year 2013
Net income attributable to non-controlling interests amounted to EUR 3 million in 2013, compared to EUR 5 million in 2012.
The year 2012
Net income attributable to non-controlling interests amounted to EUR 5 million in 2012, compared to EUR 4 million in 2011.
4.1.11 Discontinued operations
The year 2013
Discontinued operations consist of the Audio, Video, Multimedia and Accessories (AVM&A) business, the Television business and certain divestments formerly reported as discontinued operations. The results related to these businesses are reported under Discontinued operations in the Consolidated statements of income and Consolidated statements of cash flows.
Philips had reached an agreement to transfer the AVM&A business to Funai Electric Co. Ltd in Q1 2013. This agreement was terminated on October 25, 2013. Since then, Philips has received expressions of interest in the business from various parties and has been actively discussing the sale of the business with potential buyers. In the meantime, the AVM&A business operates as a standalone entity named WOOX Innovations.
The Television business was divested as part of a strategic partnership agreement with TPV Technology Ltd (TPV) that was signed on April 1, 2012. Philips retained a 30% interest in TP Vision Holdings BV (TP Vision venture). On January 20, 2014, Philips announced that it has signed a term sheet to transfer the remaining 30% stake in TP Vision to TPV.
After completion, TPV will fully own TP Vision, which will enable further integration with TPVs TV business.
Income from discontinued operations decreased by EUR 45 million to EUR 2 million in 2013. The decrease was mainly attributable to lower operational results and higher disentanglement costs in the AVM&A business. In 2012, income from discontinued operations of EUR 47 million was composed of EUR 78 million of net income related to AVM&A, partly offset by a EUR 31 million net loss related to the Television business.
For further information, refer to note 7, Discontinued operations and other assets classified as held for sale.
The year 2012
Discontinued operations consist of the Audio, Video, Multimedia and Accessories (AVM&A) business, the Television business and certain divestments formerly reported as discontinued operations. The results related to these businesses are reported under Discontinued operations in the Consolidated statements of income and Consolidated statements of cash flows.
60 Annual Report 2013
4 Group performance 4.1.12 - 4.1.13
In 2012, income from discontinued operations of EUR 47 million included EUR 78 million of net income related to AVM&A, partly offset by a EUR 31 million net loss related to the Television business. In 2011, income from discontinued operations amounted to a loss of EUR 410 million and was primarily composed of EUR 78 million of net income related to AVM&A, offset by a EUR 515 million net loss related to the Television business. The net loss in the Television business was composed of a EUR 353 million transaction loss recorded on the sale of the business, as well as net operational losses of EUR 162 million.
For further information, refer to note 7, Discontinued operations and other assets classified as held for sale.
4.1.12 Net income
The year 2013
Net income increased from a net loss of EUR 30 million in 2012 to a net profit of EUR 1,172 million in 2013. The increase was largely due to EUR 1,343 million higher IFO and better results relating to investments in associates of EUR 186 million, offset by higher income tax charges of EUR 281 million.
Basic earnings per common share from net income attributable to shareholders increased from negative EUR 0.04 per common share in 2012 to EUR 1.28 per common share in 2013.
The year 2012
Net income increased from a loss of EUR 1,456 million in 2011 to a loss of EUR 30 million in 2012. The increase was largely due to EUR 1,127 million higher IFO, EUR 457 million lower costs related to discontinued operations and lower income tax of EUR 66 million, partly offset by lower results relating to investments in associates of EUR 226 million.
Basic earnings per common share from net income increased from negative EUR 1.53 per common share in 2011 to negative EUR 0.04 per common share in 2012.
4.1.13 Acquisitions and divestments
Acquisitions
In 2013, there were four minor acquisitions. Acquisitions in 2013 and previous years led to post-merger integration charges totaling EUR 16 million in 2013: Healthcare EUR 6 million, Consumer Lifestyle EUR 4 million, and Lighting EUR 6 million.
In 2012, Philips completed the acquisition of Indal within Lighting. Acquisitions in 2012 and previous years led to post-merger integration charges totaling EUR 50 million in 2012: Healthcare EUR 18 million, Consumer Lifestyle EUR 18 million, and Lighting EUR 14 million.
In 2011, we completed six acquisitions. Healthcare acquisitions included Sectra, AllParts Medical and Dameca. Within Consumer Lifestyle, Philips completed the acquisition of Preethi and Povos. Within Lighting, Philips acquired Optimum Lighting. Acquisitions in 2011 and previous years led to post-merger integration charges totaling EUR 74 million in 2011: Healthcare EUR 17 million, Consumer Lifestyle EUR 45 million, and Lighting EUR 12 million.
Divestments
During 2013, Philips completed several divestments of business activities, mainly related to certain Healthcare activities.
During 2012, Philips completed several divestments of business activities, namely the Television business (for further information see note 7, Discontinued operations and other assets classified as held for sale), certain Lighting manufacturing activities, Speech Processing activities and certain Healthcare service activities. The Speech Processing activities were sold to Invest AG, in line with our strategy.
In 2012, Philips agreed to extend its partnership with Sara Lee Corp (Sara Lee) to drive growth in the global coffee market. Under a new exclusive partnership framework, which will run through to 2020, Philips will be the exclusive Senseo consumer appliance manufacturer and distributor for the duration of the agreement. As part of the agreement, Philips divested its 50% ownership right in the Senseo trademark to Sara Lee.
In 2011, Philips completed several divestments, of which Assembléon was the most significant. Philips sold 80% of the shares in Assembléon to H2 Equity Partners, an Amsterdam-based private equity firm, for a consideration of EUR 14 million.
For details, please refer to note 9, Acquisitions and divestments.
Annual Report 2013 61
4 Group performance 4.1.14 - 4.1.15
4.1.14 Performance by geographic cluster
The year 2013
In 2013, sales grew 3% on a comparable basis (-1% nominally), driven by growth at Consumer Lifestyle, notably in growth geographies.
Sales in mature geographies were EUR 582 million lower than in 2012, or 1% lower on a comparable basis. Sales in Western Europe were impacted by macroeconomic developments and were flat on a comparable basis. Growth at Lighting and Consumer Lifestyle was offset by a decline at Healthcare. Sales in North America declined by EUR 429 million or 2% lower on a comparable basis, mainly due to declines at Healthcare and Lighting. Both nominal and comparable sales in other mature geographies showed strong growth. Comparable sales in other mature geographies showed mid-single-digit growth, mainly driven by strong performance at Consumer Lifestyle and Healthcare.
In growth geographies, sales grew by EUR 454 million, or 11% on a comparable basis, driven by double-digit growth at Consumer Lifestyle and Lighting. In China and Latin America, we achieved solid double-digit nominal and comparable growth.
The year 2012
In 2012, sales grew 6% on a comparable basis (12% nominally), driven by growth at Consumer Lifestyle and Healthcare, notably in growth geographies.
Sales in mature geographies were EUR 1,235 million higher than in 2011, or 2% higher on a comparable basis. Sales in Western Europe were impacted by macroeconomic developments, resulting in a 1% decline in comparable sales, attributable to Lighting and Healthcare. On a nominal basis, sales in Western Europe were EUR 156 million higher than in 2011, driven by the acquisition of Indal in Lighting. Sales in North America were EUR 722 million higher, or 3% higher on a comparable basis, driven by single-digit growth in all sectors. Both nominal and comparable sales in other mature geographies showed strong growth. Comparable sales in other mature geographies showed double-digit growth at Consumer Lifestyle and Lighting, while Healthcare recorded high-single-digit growth.
In growth geographies, sales grew by EUR 1,230 million, or 13% on a comparable basis, driven by double-digit growth at Healthcare and Consumer Lifestyle. In China, all Sectors recorded solid double-digit nominal and comparable growth. Sales in Russia & Central Asia also showed double-digit comparable sales growth, attributable to strong sales performance at Consumer Lifestyle and Healthcare.
4.1.15 Cash flows provided by continuing operations
The year 2013
Cash flows from operating activities
Net cash flow from operating activities amounted to EUR 1,138 million in 2013, which is EUR 944 million lower than in 2012. The decrease is mainly a result of the
62 Annual Report 2013
4 Group performance 4.1.15 - 4.1.15
payment of the European Commission fine, increased working capital usage and the payout of restructuring charges in 2013.
Condensed consolidated statements of cash flows for the years ended December 31, 2011, 2012 and 2013 are presented below:
Condensed consolidated cash flow statements1)
in millions of euros
2011 | 2012 | 2013 | ||||||||||
Cash flows from operating activities: |
||||||||||||
Net income (loss) |
(1,456 | ) | (30 | ) | 1,172 | |||||||
Adjustments to reconcile net income to net cash provided by operating activities |
2,216 | 2,112 | (34 | ) | ||||||||
|
|
|||||||||||
Net cash provided by operating activities |
760 | 2,082 | 1,138 | |||||||||
Net cash (used for) provided by investing activities |
(1,275 | ) | (925 | ) | (997 | ) | ||||||
|
|
|||||||||||
Cash flows before financing activities2) |
(515 | ) | 1,157 | 141 | ||||||||
Net cash used for financing activities |
(1,790 | ) | (293 | ) | (1,241 | ) | ||||||
|
|
|||||||||||
Cash (used for) provided by continuing operations |
(2,305 | ) | 864 | (1,100 | ) | |||||||
Net cash (used for) discontinued operations |
(374 | ) | (126 | ) | (206 | ) | ||||||
Effect of changes in exchange rates on cash and cash equivalents |
(7 | ) | (51 | ) | (63 | ) | ||||||
|
|
|||||||||||
Total change in cash and cash equivalents |
(2,686 | ) | 687 | (1,369 | ) | |||||||
Cash and cash equivalents at the beginning of year |
5,833 | 3,147 | 3,834 | |||||||||
|
|
|||||||||||
Cash and cash equivalents at the end of year |
3,147 | 3,834 | 2,465 |
1) | Please refer to section 11.7, Consolidated statements of cash flows, of this report |
2) | Please refer to chapter 14, Reconciliation of non-GAAP information, of this report |
Cash flows from investing activities
In 2013, cash flows from investing activities resulted in a net outflow of EUR 997 million. This was attributable to EUR 966 million cash used for net capital expenditures, EUR 101 million cash used for derivatives and current financial assets, as well as EUR 24 million used for acquisitions of businesses and non-current financial assets, partly offset by EUR 94 million of net proceeds from divestments.
In 2012, cash flows from investing activities resulted in a net outflow of EUR 925 million. This was attributable to EUR 455 million cash used for net capital expenditures, EUR 261 million used for acquisitions, as well as a EUR 167 million outflow for financial assets, mainly due to loans provided to TPV and the TP Vision venture in connection with the divestment of the Television business (EUR 151 million in aggregate).
Net capital expenditures
Net capital expenditures totaled EUR 966 million, which was EUR 511 million higher than in 2012, mainly reflecting the impact of proceeds received in 2012 from the sale of the High Tech Campus of EUR 425 million and the 2012 divestment of Philips 50% ownership right in the Senseo trademark to Sara Lee for EUR 170 million. Excluding these impacts in 2012, net capital expenditures were EUR 84 million lower than in 2012, mainly due to lower investments at Lighting.
Acquisitions and financial assets
The net cash impact of acquisitions of businesses and financial assets in 2013 was a total of EUR 24 million. There was a EUR 11 million outflow for acquisitions of businesses and a EUR 13 million outflow for financial assets.
The net cash impact of acquisitions of businesses and financial assets in 2012 was a total of EUR 428 million, mainly related to the acquisition of Indal. The EUR 167
Annual Report 2013 63
4 Group performance 4.1.15 - 4.1.15
million outflow for financial assets mainly related to loans provided to TPV and the TP Vision venture in connection with the divestment of the Television business (EUR 151 million in aggregate).
Divestments and derivatives
Cash proceeds of EUR 94 million were received from divestments, mainly of non-strategic businesses within Healthcare. Cash flows from derivatives and current financial assets led to a net cash outflow of EUR 101 million.
In 2012, cash proceeds of EUR 4 million were received from divestments. Cash flows from derivatives and securities led to a net cash outflow of EUR 46 million.
Cash flows from financing activities
Net cash used for financing activities in 2013 was EUR 1,241 million. Philips shareholders were given EUR 678 million in the form of a dividend, of which the cash portion of the dividend amounted to EUR 272 million. The net impact of changes in debt was a decrease of EUR 407 million, including the redemption of a USD 143 million bond. Additionally, net cash outflows for share buyback and share delivery totaled EUR 562 million.
Net cash used for financing activities in 2012 was EUR 293 million. Philips shareholders were given EUR 687 million in the form of a dividend, of which the cash portion of the dividend amounted to EUR 255 million. The net impact of changes in debt was an increase of EUR 730 million, including the issuance of USD 1.5 billion in bonds, partially offset by the early redemption of a USD 500 million bond. Additionally, net cash outflows for share buy-back and share delivery totaled EUR 768 million.
The year 2012
Cash flows from operating activities
Net cash flow from operating activities amounted to EUR 2,082 million in 2012, compared to EUR 760 million in 2011. The year-on-year improvement was largely attributable to lower working capital outflows, mainly related to accounts payable, as well as higher cash earnings. The increase in other current liabilities included a payable of EUR 509 million related to the European Commission fine. Excluding the fine payable, the increase in accounts payable and accrued and other current liabilities was attributable to increased volume from higher sales, while the outflow in 2011 was attributable to a tightening of vendor payments in the operating sectors.
Cash flows from investing activities
2012 cash flows from investing activities resulted in a net outflow of EUR 925 million. This was attributable to EUR 455 million cash used for net capital expenditures, EUR 261 million used for acquisitions, as well as a EUR 167 million outflow for financial assets, mainly due to loans provided to TPV and the TP Vision venture in connection with the divestment of the Television business (EUR 151 million in aggregate).
In 2011, cash flows from investing activities resulted in a net outflow of EUR 1,275 million. This was attributable to EUR 857 million cash used for net capital expenditures and EUR 550 million used for acquisitions, mainly for Povos, Preethi and Sectra. This was partly offset by EUR 106 million proceeds from the sale of financial assets and divestments, mainly TCL and Digimarc shares.
Net capital expenditures
Net capital expenditures totaled EUR 455 million, which was EUR 402 million lower than in 2011, mainly reflecting the impact of proceeds received from the sale of the High Tech Campus of EUR 425 million (consisting of a EUR 373 million cash transaction and an amount of EUR 52 million that will be received in future years) and the divestment of Philips 50% ownership right in the Senseo trademark to Sara Lee for EUR 170 million. Excluding these impacts, higher investments were visible in all sectors, notably additional growth-focused investments at Lighting.
Acquisitions and financial assets
The net cash impact of acquisitions of businesses and financial assets in 2012 was a total of EUR 428 million, mainly related to the acquisition of Indal. The EUR 167 million outflow for financial assets mainly related to loans provided to TPV and the TP Vision venture in connection with the divestment of the Television business (EUR 151 million in aggregate).
The net cash impact of acquisitions of businesses and financial assets in 2011 was a total of EUR 550 million, mainly related to the acquisitions of Povos, Preethi and Sectra.
Divestments and derivatives
In 2012, cash proceeds of EUR 4 million were received from divestments. Cash flows from derivatives and securities led to a net cash outflow of EUR 46 million.
In 2011, cash proceeds of EUR 106 million were received from divestments, including EUR 69 million from the sale of remaining shares in TCL, as well as divestments
64 Annual Report 2013
4 Group performance 4.1.16 - 4.1.18
of non- strategic businesses within Consumer Lifestyle and Healthcare. Cash flows from derivatives and securities led to a net cash inflow of EUR 26 million.
Cash flows from financing activities
Net cash used for financing activities in 2012 was EUR 293 million. Philips shareholders were given EUR 687 million in the form of a dividend of which the cash portion of the dividend amounted to EUR 255 million. The net impact of changes in debt was an increase of EUR 730 million, including the issuance of USD 1.5 billion in bonds, partially offset by the early redemption of a USD 500 million bond. Additionally, net cash outflows for share buyback and share delivery totaled EUR 768 million.
Net cash used for financing activities in 2011 was EUR 1,790 million. Philips shareholders were given EUR 711 million in the form of a dividend of which the cash portion of the dividend amounted to EUR 259 million. The net impact of changes in debt was a decrease of EUR 860 million, including the redemption of a EUR 750 million bond, a USD 350 million bond and other debts totaling EUR 1,314 million, partially offset by the drawdown of a EUR 200 million committed facility and other new long-term borrowing totaling EUR 454 million. Additionally, net cash outflows for share buyback and share delivery totaled EUR 671 million.
4.1.16 Cash flows from discontinued operations
The year 2013
In 2013, EUR 206 million cash was used by discontinued operations. The Television business used net cash of EUR 138, attributable to cash outflows of EUR 91 million for operating activities and EUR 47 million for investing activities. The Audio, Video Multimedia and Accessories business used net cash of EUR 68 million attributable to operating activities.
In 2012, EUR 126 million cash was used by discontinued operations. The Television business used net cash of EUR 256 million, attributable to operating cash outflows of EUR 296 million partly offset by cash inflows from investing activities of EUR 40 million. The Audio, Video Multimedia and Accessories business generated a cash inflow of EUR 130 million attributable to operating activities.
The year 2012
In 2012, EUR 126 million cash was used by the discontinued operations. The Television business used net cash of EUR 256 million, attributable to operating cash outflows of EUR 296 million partly offset by cash inflows from investing activities of EUR 40 million. The Audio, Video Multimedia and Accessories business generated a cash inflow of EUR 130 million attributable to operating activities.
In 2011, EUR 374 million cash was used by the discontinued operations of the Television and Audio, Video Multimedia and Accessories businesses. The Television business used net cash of EUR 364 million, attributable to operating cash outflows of EUR 270 million and cash outflows to investing activities of EUR 94 million. The Audio, Video Multimedia and Accessories business used EUR 10 million of net cash, attributable to operating activities.
4.1.17 Financing
The year 2013
Condensed consolidated balance sheets for the years 2011, 2012 and 2013 are presented below:
Condensed consolidated balance sheet information1)
in millions of euros
2011 | 2012 | 2013 | ||||||||||
Intangible assets |
11,012 | 10,679 | 9,766 | |||||||||
Property, plant and equipment |
3,014 | 2,959 | 2,780 | |||||||||
Inventories |
3,625 | 3,495 | 3,240 | |||||||||
Receivables |
5,117 | 4,858 | 4,892 | |||||||||
Assets held for sale |
551 | 43 | 507 | |||||||||
Other assets |
2,931 | 3,213 | 2,909 | |||||||||
Payables |
(6,563 | ) | (6,210 | ) | (5,435 | ) | ||||||
Provisions |
(2,680 | ) | (2,956 | ) | (2,554 | ) | ||||||
Liabilities directly associated with assets held for sale |
(61 | ) | (27 | ) | (348 | ) | ||||||
Other liabilities |
(3,871 | ) | (4,169 | ) | (3,094 | ) | ||||||
|
|
|||||||||||
13,075 | 11,885 | 12,663 | ||||||||||
Cash and cash equivalents |
3,147 | 3,834 | 2,465 | |||||||||
Debt |
(3,860 | ) | (4,534 | ) | (3,901 | ) | ||||||
|
|
|||||||||||
Net cash (debt) |
(713 | ) | (700 | ) | (1,436 | ) | ||||||
Non-controlling interests |
(34 | ) | (34 | ) | (13 | ) | ||||||
Shareholders equity |
(12,328 | ) | (11,151 | ) | (11,214 | ) | ||||||
|
|
|||||||||||
(13,075 | ) | (11,885 | ) | (12,663 | ) |
1) | Please refer to section 11.6, Consolidated balance sheets, of this report |
4.1.18 Cash and cash equivalents
The year 2013
In 2013, cash and cash equivalents decreased by EUR 1,369 million to EUR 2,465 million at year-end. The decrease was mainly attributable to an outflow on net capital expenditures of EUR 966 million, cash outflows
Annual Report 2013 65
4 Group performance 4.1.19 - 4.1.19
for treasury share transactions of EUR 562 million, cash dividend payout of EUR 272 million, EUR 407 million from decreases in debt and a EUR 206 million outflow related to discontinued operations. This was partly offset by a EUR 1,138 million inflow from operations.
In 2012, cash and cash equivalents increased by EUR 687 million to EUR 3,834 million at year-end. The increase was mainly attributable to cash inflows from operations amounting to EUR 2,082 million and EUR 730 million from increases in debt. This was partly offset by a EUR 768 million outflow for treasury share transactions, an outflow on net capital expenditures of EUR 455 million, a EUR 428 million outflow for acquisitions of businesses and financial assets, a EUR 255 million outflow for the cash dividend payout, and a EUR 126 million outflow related to discontinued operations.
The year 2012
In 2012, cash and cash equivalents increased by EUR 687 million to EUR 3,834 million at year-end. The increase was mainly attributable to cash inflows from operations amounting to EUR 2,082 million and EUR 730 million from increases in debt. This was partly offset by a EUR 768 million outflow for treasury share transactions, an outflow on net capital expenditures of EUR 455 million, a EUR 428 million outflow for acquisitions of businesses and financial assets, a EUR 255 million outflow for the cash dividend payout, and a EUR 126 million outflow related to discontinued operations.
In 2011, cash and cash equivalents decreased by EUR 2,686 million to EUR 3,147 million at year-end. The decrease was mainly attributable to an outflow on net capital expenditures of EUR 857 million, a EUR 860 million decrease in debt, a EUR 671 million outflow for treasury share transactions, a EUR 550 million outflow for acquisitions of businesses and financial assets, and a EUR 259 million outflow for the cash dividend payout. This was partly offset by cash inflows from operations amounting to EUR 760 million, EUR 106 million in proceeds from divestments, and a EUR 374 million outflow related to discontinued operations.
4.1.19 Debt position
The year 2013
Total debt outstanding at the end of 2013 was EUR 3,901 million, compared with EUR 4,534 million at the end of 2012.
Changes in debt
in millions of euros
2011 | 2012 | 2013 | ||||||||||
New borrowings |
(454 | ) | (1,361 | ) | (64 | ) | ||||||
Repayments |
1,314 | 631 | 471 | |||||||||
Consolidation and currency effects |
(62 | ) | 56 | 226 | ||||||||
|
|
|||||||||||
Total changes in debt |
798 | (674 | ) | 633 |
In 2013, total debt decreased by EUR 633 million. New borrowings of EUR 64 million consisted mainly of replacements to lease contracts. Repayment of EUR 471 million included a USD 143 million redemption on USD bonds as well as payments on short-term debt. Other changes resulting from consolidation and currency effects led to a decrease of EUR 226 million.
In 2012, total debt increased by EUR 674 million. New borrowings of EUR 1,361 million included the issuance of USD 1.5 billion in bonds. Repayment of EUR 631
66 Annual Report 2013
4 Group performance 4.1.20 - 4.1.21
million included early redemption of a USD 500 million bond. Other changes resulting from consolidation and currency effects led to a decrease of EUR 56 million.
Long-term debt as a proportion of the total debt stood at 85% at the end of 2013 with an average remaining term of 12.8 years, compared to 82% and 12.7 years at the end of 2012.
For further information, please refer to note 20, Long-term debt and short-term debt.
The year 2012
Total debt outstanding at the end of 2012 was EUR 4,534 million, compared with EUR 3,860 million at the end of 2011.
In 2012, total debt increased by EUR 674 million. New borrowings of EUR 1,361 million included the issuance of USD 1.5 billion in bonds. Repayment of EUR 631 million included early redemption of a USD 500 million bond. Other changes resulting from consolidation and currency effects led to a decrease of EUR 56 million.
In 2011, total debt decreased by EUR 798 million. The repayment of EUR 1,314 million included redemption of a EUR 750 million bond, a USD 350 million bond, and a EUR 217 million repayment of short-term debt. New borrowing and finance leases amounted to EUR 454 million. Other changes resulting from consolidation and currency effects led to an increase of EUR 62 million.
Long-term debt as a proportion of the total debt stood at 82% at the end of 2012 with an average remaining term of 12.7 years, compared to 85% and 10.4 years at the end of 2011.
For further information, please refer to note 20, Long-term debt and short-term debt.
4.1.20 Net debt to group equity
The year 2013
Philips ended 2013 in a net debt position (cash and cash equivalents, net of debt) of EUR 1,436 million, compared to a net debt position of EUR 700 million at the end of 2012.
The year 2012
Philips ended 2012 in a net debt position (cash and cash equivalents, net of debt) of EUR 700 million, compared to a net debt position of EUR 713 million at the end of 2011.
4.1.21 Shareholders equity
The year 2013
Shareholders equity increased by EUR 63 million in 2013 to EUR 11,214 million at December 31, 2013. The increase was mainly a result of EUR 1,169 million net income, partially offset by EUR 476 million of currency translation losses and EUR 669 million related to the purchase of treasury shares. The dividend payment to shareholders in 2013 reduced equity by EUR 272 million, while the delivery of treasury shares increased equity by EUR 118 million and the share premium due to share-based compensation plans increased equity by EUR 105 million.
Shareholders equity decreased by EUR 1,177 million in 2012 to EUR 11,151 million at December 31, 2012. The decrease was mainly as a result of EUR 816 million related to the purchase of treasury shares, EUR 100 million of currency translation losses and a EUR 35 million net loss. The dividend payment to shareholders in 2012 reduced equity by EUR 259 million. The decrease was partially offset by a EUR 50 million increase related to the delivery of treasury shares and a EUR 84 million increase in share premium due to share-based compensation plans.
The number of outstanding common shares of Royal Philips at December 31, 2013 was 913 million (2012: 915 million).
Annual Report 2013 67
4 Group performance 4.1.22 - 4.1.22
At the end of 2013, the Company held 20.7 million shares in treasury to cover the future delivery of shares (2012: 28.7 million shares). This was in connection with the 44.3 million rights outstanding at the end of 2013 (2012: 52.3 million rights) under the Companys long-term incentive plans. At the end of 2013, the Company held 3.9 million shares for cancellation (2012: 13.8 million shares).
The year 2012
Shareholders equity decreased by EUR 1,177 million in 2012 to EUR 11,151 million at December 31, 2012. The decrease was mainly as a result of EUR 816 million related to the purchase of treasury shares, EUR 100 million of currency translation losses and a EUR 35 million of net loss. The dividend payment to shareholders in 2012 reduced equity by EUR 259 million. The decrease was partially offset by a EUR 50 million increase related to the delivery of treasury shares and a EUR 84 million increase in share premium due to share-based compensation plans.
Shareholders equity decreased by EUR 2,693 million in 2011 to EUR 12,328 million at December 31, 2011. The decrease was mainly as a result of a EUR 1,460 million net loss as well as EUR 751 million related to the purchase of treasury shares. The dividend payment to shareholders in 2011 reduced equity by EUR 263 million. The decrease was partially offset by a EUR 46 million increase related to the delivery of treasury shares and a EUR 56 million increase in share premium due to share-based compensation plans.
The number of outstanding common shares of Royal Philips at December 31, 2012 was 915 million (2011: 926 million).
At the end of 2012, the Company held 28.7 million shares in treasury to cover the future delivery of shares (2011: 33.6 million shares). This was in connection with the 52.3 million rights outstanding at the end of 2012 (2011: 47.1 million rights) under the Companys long-term incentive plan and convertible personnel debentures. At the end of 2012, the Company held 13.8 million shares for cancellation (2011: 49.3 million shares).
4.1.22 Liquidity position
Including the Companys net debt (cash) position (cash and cash equivalents, net of debt), listed available-for-sale financial assets, as well as its EUR 1.8 billion committed revolving credit facility, the Company had access to net available liquid resources of EUR 429 million as of December 31, 2013, compared to EUR 1,220 million one year earlier.
Liquidity position
in millions of euros
2011 | 2012 | 2013 | ||||||||||
Cash and cash equivalents |
3,147 | 3,834 | 2,465 | |||||||||
Committed revolving credit facility/CP program/Bilateral loan |
3,200 | 1,800 | 1,800 | |||||||||
|
|
|||||||||||
Liquidity |
6,347 | 5,634 | 4,265 | |||||||||
Available-for-sale financial assets at fair value |
110 | 120 | 65 | |||||||||
Short-term debt |
(582 | ) | (809 | ) | (592 | ) | ||||||
Long-term debt |
(3,278 | ) | (3,725 | ) | (3,309 | ) | ||||||
|
|
|||||||||||
Net available liquidity resources |
2,597 | 1,220 | 429 |
The fair value of the Companys available-for-sale financial assets amounted to EUR 65 million.
Philips has a EUR 1.8 billion committed revolving credit facility that can be used for general corporate purposes and as a backstop of its commercial paper program. In January 2013, the EUR 1.8 billion facility was extended by 2 years until February 2018. The commercial paper program amounts to USD 2.5 billion, under which Philips can issue commercial paper up to 364 days in tenor, both in the US and in Europe, in any major freely convertible currency. There is a panel of banks, in Europe and in the US, which service the program. The interest is at market rates prevailing at the time of issuance of the commercial paper. There is no collateral requirement in the commercial paper program. Also, there are no limitations on Philips use of funds from the program. As at December 31, 2013, Philips did not have any loans outstanding under these facilities.
Philips existing long-term debt is rated A3 (with stable outlook) by Moodys and A- (with stable outlook) by Standard & Poors. It is Philips objective to manage its financial ratios to be in line with an A3/A- rating. There is no assurance that Philips will be able to achieve this goal. Ratings are subject to change at any time. Outstanding long-term bonds and credit facilities do not have a repetitive material adverse change clause, financial covenants or credit-rating-related acceleration possibilities.
As at December 31, 2013, Philips had total cash and cash equivalents of EUR 2,465 million. Philips pools cash from subsidiaries to the extent legally and economically feasible. Cash not pooled remains
68 Annual Report 2013
4 Group performance 4.1.22 - 4.1.23
available for local operational or investment needs. Philips had a total gross debt position of EUR 3,901 million at year-end 2013.
Philips believes its current working capital is sufficient to meet its present working capital requirements.
4.1.23 Cash obligations
Contractual cash obligations
Presented below is a summary of the Groups contractual cash obligations and commitments at December 31, 2013.
Contractual cash obligations at December 31, 2013
in millions of euros1)
payments due by period | ||||||||||||||||||||
less | ||||||||||||||||||||
than 1 | 1-3 | 3-5 | after 5 | |||||||||||||||||
total | year | years | years | years | ||||||||||||||||
Long-term debt2) |
3,472 | 308 | 2 | 900 | 2,262 | |||||||||||||||
Finance lease obligations |
241 | 61 | 78 | 34 | 68 | |||||||||||||||
Short-term debt |
230 | 230 | | | | |||||||||||||||
Operating leases |
1,017 | 237 | 316 | 182 | 282 | |||||||||||||||
Derivative liabilities |
337 | 112 | 93 | 92 | 40 | |||||||||||||||
Interest on debt3) |
2,421 | 185 | 346 | 315 | 1,575 | |||||||||||||||
Purchase obligations4) |
184 | 81 | 76 | 26 | 1 | |||||||||||||||
Trade and other payables |
2,462 | 2,462 | | | | |||||||||||||||
|
|
|||||||||||||||||||
10,364 | 3,676 | 911 | 1,549 | 4,228 |
1) | Data in this table are undiscounted |
2) | Long-term debt includes short-term portion of long-term debt and excludes finance lease obligations |
3) | Approximately 20% of the debt bears interest at a floating rate. The majority of the interest payments on variable interest rate loans in the table above reflect market forward interest rates at the period end and these amounts may change as the market interest rate changes |
4) | Philips has commitments related to the ordinary course of business which in general relate to contracts and purchase order commitments for less than 12 months. In the table, only the commitments for multiple years are presented, including their short-term portion |
Philips has no material commitments for capital expenditures.
Additionally, Philips has a number of commercial agreements, such as supply agreements, which provide that certain penalties may be charged to the Company if it does not fulfill its commitments.
Certain Philips suppliers factor their trade receivables from Philips with third parties through supplier finance arrangements. At December 31, 2013 approximately EUR 343 million of the Philips accounts payables were known to have been sold onward under such arrangements whereby Philips confirms invoices. Philips continues to recognize these liabilities as trade payables and will settle the liabilities in line with the original payment terms of the related invoices.
Other cash commitments
The Company and its subsidiaries sponsor post-employment benefit plans in many countries in accordance with legal requirements, customs and the local situation in the countries involved. For a discussion of the plans and expected cash outflows, please refer to note 30, Post-employment benefits.
The Company had EUR 203 million restructuring-related provisions by the end of 2013, of which EUR 128 million is expected to result in cash outflows in 2014. Refer to note 21, Provisions for details of restructuring provisions and potential cash flow impact for 2014 and further.
A proposal will be submitted to the General Meeting of Shareholders to declare a distribution of EUR 0.80 per common share (up to EUR 740 million), in cash or shares at the option of the shareholder, against the net income for 2013. Further details will be given in the agenda for the General Meeting of Shareholders, to be held on May 1, 2014.
Guarantees
Philips policy is to provide guarantees and other letters of support only in writing. Philips does not provide other forms of support. At the end of 2013, the total fair value of guarantees recognized by Philips in other non-current liabilities amounted to less than EUR 1 million. The following table outlines the total outstanding off- balance sheet credit-related guarantees and business-related guarantees provided by Philips for the benefit of unconsolidated companies and third parties as at December 31, 2012 and 2013.
Annual Report 2013 69
4 Group performance 4.1.23 - 4.1.24
Expiration per period
in millions of euros
total amounts committed |
less than 1 year |
1-5 years | after 5 years | |||||||||||||
2013 |
||||||||||||||||
Business-related guarantees |
292 | 107 | 117 | 68 | ||||||||||||
Credit-related guarantees |
41 | 19 | 7 | 15 | ||||||||||||
|
|
|||||||||||||||
333 | 126 | 124 | 83 | |||||||||||||
2012 |
||||||||||||||||
Business-related guarantees |
295 | 113 | 114 | 68 | ||||||||||||
Credit-related guarantees |
27 | 11 | | 16 | ||||||||||||
|
|
|||||||||||||||
322 | 124 | 114 | 84 |
4.1.24 Supply management
The year 2013
Throughout 2013 the average market prices for energy and raw materials, which represent approximately 15% of our direct and indirect spend, remained fairly stable compared to the average for 2012. The potential impact of improving economic conditions in mature economies in the second half of the year was offset by a simultaneous slow-down of demand in growth geographies, especially in China. Steel and other metals prices were stable at a historically low level, while oil and plastics stabilized at a higher level. Given the economic circumstances it was remarkable that packaging market prices increased in 2013.
Rare earth prices continued to slide, and this has contributed to realizing higher savings levels in 2013. Contingency measures are in place to delay and mitigate the impact of a possible new hike in the price of rare earths in the future. The major successes of Eco-Halogen lamps and similar products in the market have fueled demand for Xenon, which is used as a filler gas in these lamps. Since global production has not increased, this has led to tight supply and a price peak. Therefore a major effort was made resulting in replacement of Xenon by an alternative gas for a large part of the portfolio by the end of 2013. The availability of helium remains a constant concern, though acute shortages have not occured. Technical measures have been taken to almost completely prevent loss of helium in our operations.
Thanks to a rigid procurement focus on organizational set-up and performance drivers, the overall procurement performance improved substantially in 2013 in accordance with the plan to save an additional EUR 1 billion. This is supporting the competitiveness of our business propositions. All parts of the new Procurement organization have contributed to this improvement.
The year 2012
In the course of 2012, the market prices of energy and raw materials, which together represent 15% of our purchasing spend, showed diverse trends in a very volatile market. Prices of most metals dropped from their high levels in 2011 largely as a consequence of the slowdown of the global economy, and especially due to slower Chinese consumption growth. In spite of the economic slowdown, energy prices kept their high price levels in 2012, mainly due to market fears and uncertainty from turbulence in various oil-producing countries in 2012.
70 Annual Report 2013
4 Group performance 4.2 - 4.2.2
Our businesses provide innovative solutions that address major trends affecting the world the demand for affordable healthcare, the need for greater energy efficiency and the desire for personal well-being.
In 2013, Philips further strengthened its focus on sustainability. This is rooted in our long-standing belief that sustainability is a key enabler of value creation and offers opportunities to innovate our way out of the challenging economic circumstances. Therefore, sustainability is an integral part of Philips vision and strategy.
4.2.1 Improving peoples lives
At Philips, we strive to make the world healthier and more sustainable through innovation. Our goal is to improve the lives of 3 billion people a year by 2025. To guide our efforts and measure our progress, we take a two-dimensional approach social and ecological to improving peoples lives. Products and solutions from our portfolio that directly support the curative (care) or preventive (well-being) side of peoples health, determine the contribution to the social dimension. As healthy ecosystems are also needed for people to live a healthy life, the contribution to the ecological dimension is determined by means of our Green Product portfolio, such as our energy-efficient lighting.
Through Philips products and solutions that directly support the curative or preventive side of peoples health, we improved the lives of 630 million people in 2013, driven by our Healthcare sector. Additionally, our well-being products that help people live a healthy life, and our Green Products that contribute to a healthy ecosystem, improved the lives of 290 million and 1.49 billion people respectively. After the elimination of double counts - people touched multiple times - we arrived at 1.8 billion lives. This is an increase of 100 million compared to our total baseline of 1.7 billion people a year, established in 2012. More information on this metric can be found in chapter 13, Sustainability statements, of this report.
4.2.2 Employee engagement
Employee engagement is key to our competitive performance. Engaged employees help us meet our business goals and help make Philips a great place to work. We have used employee engagement surveys for over a decade to gather feedback and focus areas and have seen tangible results along our journey.
In 2012, we announced our intention to move from an annual measurement of Employee Engagement Survey data to a bi-annual basis in order to allow more time for teams to analyze results and implement improvement actions. We also used this as an opportunity to review the way we approach engagement, with the aim of improving the link between the high levels of employee engagement that we achieve and improved business results.
In 2013 we applied a more contemporary model relevant for the next steps in our journey. While our employee survey using the refreshed methodology is not directly comparable to our historical metric, we see
Annual Report 2013 71
4 Group performance 4.2.2 - 4.2.3
that 75% of our employees provided a favorable response to our new engagement index, 3 points above the external high-performing benchmark. This is a very encouraging result; especially given the speed and scale of our current transformation.
The survey results indicate the following areas as strengths:
| Clarity of strategic direction provided by senior leadership |
| Adopting good ideas from all over the company |
| Making good use of skills and abilities |
| Providing opportunities for employees to grow and develop |
| Senior leaders belief in the future of Philips |
There are also improvement areas:
| Making the changes necessary to compete effectively and applying these changes in a consistent manner |
| Ability as an organization to fix problems so they dont happen again |
| Senior leaders have to do more to ensure we drive collaboration, execution and improvement across organizational boundaries |
| Focus on customers must continue to strengthen |
| Need to create a diverse workforce and inclusive culture where people of all backgrounds can succeed in Philips |
Engagement is now an integral part of how we build our culture and is an ingredient in a broader portfolio of initiatives and measurement tools. For example, in our end-to-end transformations, we use surveys to ensure forward progress while creating opportunities for team dialogues. We will use shorter, targeted surveys and dialogue platforms to maintain focus on key areas until the next full-census employee survey in 2015.
4.2.3 Diversity and inclusion
We set measurable objectives for achieving diversity and inclusion within Philips. Measuring performance against defined metrics twice annually, Executive Committee members hold their organizations accountable for progress and review actions and outcomes as part of business reviews.
With the roll-out of a revised Diversity and Inclusion (D&I) strategy and the launch of a new global D&I policy in 2013, Philips has taken major steps to clearly anchor diversity and inclusion as priorities and to engage all employees and leaders in contributing to an inclusive work environment. This policy prescribes:
| Championing workforce diversity. We embrace unique individuals regardless of race, color, age, gender, gender identity or expression, sexual orientation, language, religion, political or other opinion, disability, national or social origin or birth. |
| Valuing diverse perspectives. We leverage the diverse thinking, skills, experience and working styles of everyone in our company. |
| Building a flexible organization. We provide opportunities for work arrangements that accommodate the diverse needs of people at different career and life stages. |
| Respecting stakeholder diversity. We develop strong and sustainable relationships with diverse stakeholders including customers, communities, governments, suppliers and shareholders. |
Progress has been made in ensuring a better representation of women in leadership roles: women now constitute 15% of Philips executive population, an increase of 1 percentage point year-on-year. Also, we have been appointing more local leaders: at year-end 2013, over 75% of senior leaders in countries were of local origin.
Going forward, driving D&I remains a priority for Philips. While female representation has also increased at professional and management level, Philips has made this an attention point for the coming year as well, recognizing that this is necessary in order to strengthen the leadership pipeline and create a strong basis for sustainable change. Therefore, a commitment has been made to increase the share of women in corporate grades 70 90 (refer to professionals and management category in the graphs) by 5 percentage points (per
72 Annual Report 2013
4 Group performance 4.2.3 - 4.2.4.1
grade) by 2016 compared to the 2012 baseline. Over the same period, the share of female executives is to increase to 20% of the total executive population.
Philips has two women on its Executive Committee and two female members of the Supervisory Board. Philips executives come from more than 30 countries.
In 2013, Philips employed 35% females, a decrease of 1 percentage point compared to 2012.
In 2013, employee turnover amounted to 16% (15% in non-manufacturing sites; 20% in manufacturing locations), an increase compared to 2012 caused by the changing industrial footprint, divestments at Healthcare, the companys overhead reduction program and high turnover of manufacturing staff in our factories, mainly in the growth markets.
Employee turnover
in %
2011 | 2012 | 2013 | ||||||||||
Female |
13 | 14 | 18 | |||||||||
Male |
10 | 13 | 15 | |||||||||
|
|
|||||||||||
Philips Group |
11 | 14 | 16 |
Employee turnover: manufacturing vs non-manufacturing sites
in %
2012 | 2013 | |||||||
Manufacturing staff |
17 | 20 | ||||||
Non-manufacturing staff |
12 | 15 | ||||||
|
|
|||||||
Group |
14 | 16 |
4.2.4 Employment
The year 2013
The total number of Philips Group employees (Continued operations) was 114,689 at the end of 2013, compared to 116,082 at the end of 2012. Approximately 41% were employed in the Lighting sector, due to the continued vertical integration in this business. Some 32% were employed in the Healthcare sector and approximately 16% in the Consumer Lifestyle sector.
Annual Report 2013 73
4 Group performance 4.2.4.1 - 4.2.4.1
Compared to 2012, the number of employees in continuing operations decreased by 1,393. This decrease reflects a reduction of 688 employees, mainly related to the industrial footprint rationalization at Lighting. It also reflects the departure of 705 employees due to divestments in Healthcare.
Approximately 52% of the Philips workforce was located in mature geographies, and about 48% in growth geographies. In 2013, the number of employees in mature geographies decreased by 1,614, mainly attributable to reductions relating to the companys overhead reduction program and the industrial footprint reduction in Lighting. Growth geographies headcount increased by 221, primarily in the growth businesses in Consumer Lifestyle.
Employees per sector
in FTEs at year-end
2011 | 2012 | 2013 | ||||||||||
Healthcare |
37,955 | 37,460 | 37,008 | |||||||||
Consumer Lifestyle |
15,471 | 16,542 | 17,854 | |||||||||
Lighting |
53,168 | 50,224 | 46,890 | |||||||||
Innovation, Group & Services |
13,001 | 11,856 | 12,937 | |||||||||
|
|
|||||||||||
Continuing operations |
119,595 | 116,082 | 114,689 | |||||||||
Discontinued operations |
5,645 | 2,005 | 1,992 | |||||||||
|
|
|||||||||||
125,240 | 118,087 | 116,681 |
Employees per geographic cluster
in FTEs at year-end
2011 | 2012 | 2013 | ||||||||||
Western Europe |
32,901 | 31,126 | 30,514 | |||||||||
North America |
28,129 | 26,134 | 25,080 | |||||||||
Other mature geographies |
3,232 | 3,359 | 3,478 | |||||||||
|
|
|||||||||||
Total mature geographies |
64,262 | 60,619 | 59,072 | |||||||||
Growth geographies |
55,333 | 55,463 | 55,617 | |||||||||
|
|
|||||||||||
Continuing operations |
119,595 | 116,082 | 114,689 | |||||||||
Discontinued operations |
5,645 | 2,005 | 1,992 | |||||||||
|
|
|||||||||||
125,240 | 118,087 | 116,681 |
Employment
in FTEs
2011 | 2012 | 2013 | ||||||||||
Position at beginning of year |
119,775 | 125,240 | 118,087 | |||||||||
Consolidation changes: |
||||||||||||
acquisitions |
4,759 | 909 | | |||||||||
divestments |
(479 | ) | (1,024 | ) | (705 | ) | ||||||
comparable changes |
(850 | ) | (3,398 | ) | (688 | ) | ||||||
Divestment and other changes in discontinued operations |
2,035 | (3,640 | ) | (13 | ) | |||||||
|
|
|||||||||||
Position at year-end |
125,240 | 118,087 | 116,681 | |||||||||
of which: |
||||||||||||
continuing operations |
119,595 | 116,082 | 114,689 | |||||||||
discontinued operations |
5,645 | 2,005 | 1,992 |
The year 2012
The total number of Philips Group employees was 116,082 at the end of 2012, compared to 119,595 at the end of 2011. Approximately 43% were employed in the Lighting sector, due to the continued vertical integration in this business. Some 32% were employed in the Healthcare sector and approximately 14% in the Consumer Lifestyle sector.
Compared to 2011, the number of employees decreased by 3,513. This decrease reflects a reduction of 3,398 employees, mainly related to the companys overhead reduction program, primarily at Lighting and IG&S. It also reflects the departure of 1,024 employees, mainly due to the industrial footprint reduction at Lighting, and the addition of 909 employees from acquisitions (mainly Indal).
Approximately 52% of the Philips workforce was located in mature geographies, and about 48% in growth geographies. In 2012, the number of employees in mature geographies decreased by 5,036, as the additional headcount from acquisitions was more than offset by reductions relating to the companys
74 Annual Report 2013
4 Group performance 4.2.5 - 4.2.6
overhead reduction program and the industrial footprint reduction in Lighting. Growth geographies headcount increased by 1,523, primarily in the growth businesses in Consumer Lifestyle.
4.2.5 Developing our people
Philips vision statement includes the following affirmation: We will be the best place to work for people who share our passion. Together we will deliver superior value for our customers and shareholders.
As part of our drive to build a learning organization, learners at Philips are supported by a personalized University Portal accessible through all media, which facilitates individual learning journeys according to the 70 (on-the-job experience): 20 (coaching): 10 (classroom) model.
Our key 2013 objective in terms of leadership development was the creation of a Leadership Academy, based on a strategic framework that differentiates the learning needs of leaders at every level in the organization: Transformation, Transition and Accelerate.
The Academy flagship leadership development programs (including the market program Shaping Markets and the first-time manager program Leading People@Philips) are being co-created in collaboration with leading suppliers and business schools, with a strong emphasis on helping people to develop on the job and through external coaching and mentoring.
In 2013 we also started building a stronger, more focused and cost-effective approach to assessment for development. We introduced two new assessment tools Manager Ready, a powerful virtual manager readiness assessment solution which was piloted in key markets (China, India, ASEAN, Central Europe, Benelux, Middle East & Turkey, and the US) and the renewed 360 program based on the new Leadership Competencies and Philips behaviors.
Enrollment in functional curricula programs, including Marketing, Finance, IT, Sales, HR, Procurement and Innovation, decreased to 19,000 from 24,000 in 2012. One of the reasons for this reduction is that many functional curricula were reviewed and content rationalized in 2013, allowing us to redeploy the investment into development of new content.
number of enrollments
2009 | 2010 | 2011 | 2012 | 2013 | ||||||||||||||||
Core Curriculum programs |
5,500 | 20,000 | 39,500 | 43,000 | 32,500 |
The Legal curriculum hit the record of 63,000 enrollments, largely driven by the global roll-out of mandatory Compliance programs. In 2013, we also introduced local market programs with specific training modules for our staff in various geographies, including China, India and Africa.
We recorded 1,000 enrollments for the new Philips Excellence curriculum and around 2,500 registrations for the End2End curriculum programs.
Other programs
Philips has played a pioneering role in the Netherlands with its national Vocational Qualification Program (CV) and the Philips Employment Scheme (WGP). The CV project has been running since 2004 and targets employees who know their trade well, but do not have a diploma to prove it. CV provides a solution by awarding these people a recognized qualification. To date, some 1,800 participants have obtained a qualification that will help them in their future careers.
Via WGP, we offer vulnerable groups of external jobseekers a work experience placement, usually combined with some kind of training. The program started in 1983 and over 12,500 people have participated since. After participating in the program, about 70% find a job. In 2013, Philips employed some 150 persons via the WGP program, including young people with autism who are training to become a test engineer. Of the previous group of 10 autistic persons, eight found a job, one proceeded with a course of study, and the other is applying for jobs.
Training spend
Our external training spend in 2013 amounted to EUR 47.3 million, in line with EUR 46.9 million in 2012.
4.2.6 Health and Safety
Philips strives for an injury-free and illness-free work environment, with a sharp focus on decreasing the number of injuries and process improvements. This is defined as a KPI, on which we set yearly targets for the company and our individual sectors.
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We regret to report three fatalities in 2013, all involving contractors. In Pakistan and Colombia, two contractors died while working on a Lighting project. In Poland a contractor died while working on a reconstruction at one of our factories.
In 2013, we recorded 307 Lost Workday Injuries cases, i.e. occupational injury cases where the injured person is unable to work one or more days after the injury, a significant decrease compared with 345 in 2012. The number of Lost Workdays caused by these injuries amounted to 9,603 days down from 12,630 days in 2012. The rate of Lost Workday Injuries decreased to 0.28 per 100 FTEs compared with 0.31 in 2012.
Lost Workday Injuries
per 100 FTEs
2009 | 2010 | 2011 | 2012 | 2013 | ||||||||||||||||
Healthcare |
0.20 | 0.25 | 0.20 | 0.22 | 0.19 | |||||||||||||||
Consumer Lifestyle |
0.26 | 0.26 | 0.23 | 0.25 | 0.24 | |||||||||||||||
Lighting |
0.76 | 0.80 | 0.64 | 0.45 | 0.41 | |||||||||||||||
Innovation, Group & Services |
0.07 | 0.13 | 0.04 | 0.05 | 0.04 | |||||||||||||||
|
|
|||||||||||||||||||
Philips Group |
0.44 | 0.50 | 0.38 | 0.31 | 0.28 |
All sectors showed a decrease in the Lost Workday Injury rate. At Lighting, a dedicated action program, Safety First, was launched five years ago to drive down injury levels. In 2012, various regional Health & Safety improvement programs and peer audit programs were started and further expanded in 2013. Since 2010, Lighting achieved a strong decline in reported accident rates mainly attributed to active management involvement, launch of a new policy on machine safety improvements and further strengthening of management systems at major sites implementing the Safety First program. Lighting initiated a work stream to address Health & Safety management in Turnkey projects, headed by the Lighting market leaders. In efforts to further reduce injury rates, Lighting will also roll-out a Behavior Based Safety program in 2014.
The Health & Safety performance of Healthcare improved significantly in 2013. The Lost Workday Cases (LWC) decreased from 80 to 70 while the LWC Rate decreased from 0.22 to 0.19 compared to 2012 figures.
Healthcare targeted Health & Safety performance improvement actions within their Field Service Organization (FSO) to include organizational ownership and program management among other items. The FSO overall impact on the Sector Health & Safety performance decreased in 2013 compared to 2012. FSO Lost Workday Cases decreased from 46% to 38% of the Sector total while the number of Lost Workdays decreased from 49% to 38% of the Sector total compared to 2012. While the total number of Lost Workday Cases decreased in 2013, the number of Lost Workdays increased primarily due to isolated incidents with extended healing times.
Consumer Lifestyle continued to have low injury case levels. A new governance structure was launched in the Consumer Lifestyle organization to embed Health & Safety performance review and ownership in the businesses. The acquisitions Preethi and Povos started reporting their performance in 2013.
4.2.7 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 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 primarily 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 of each business unit. The GBP incorporate a whistleblower policy, standardized complaint reporting and a formal escalation procedure. The whistleblower policy is intended to supplement more specific local grievance or complaint procedures. If employees wish to raise an issue for which there is a more specific procedure or grievance channel available, they are free to use this, e.g. use the applicable human resources procedures for employment issues. However, in case of concerns of suspected violations of applicable laws or regulations employees are urged to always report these to either their GBP Compliance Officer or the Philips Ethics Line.
The global implementation of the Philips Ethics hotline seeks to ensure that alleged violations are registered and dealt with consistently within one company-wide system.
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To drive the practical deployment of the GBP, a set of directives has been published, which are applicable to all employees. There are also separate directives which apply to specific categories of employees, e.g. the Supply Management Code of Ethics and Financial Code of Ethics. Details can be found at www.philips.com/gbp.
In 2013, we introduced a mandatory sign-off on GBP for all executives.
Business Integrity Survey
In June 2013, a business integrity survey has been rolled out to all employees in eight most relevant languages to get their input on the effectiveness of our GBP program. The survey provides input on a number of aspects that are recognized to influence responsible business conduct. The insights that were derived from this survey were used to further enhance the effectiveness of the current compliance activities as well as the compliance road map.
The overall conclusion that could be drawn from the survey is that the Philips culture provides a sound basis to build upon, and that leaders are well positioned to manage integrity even more actively so as to support an environment in which employees feel comfortable to discuss or report potential issues and dilemmas.
Ongoing training
The business integrity survey provided the kickoff of a global GBP communications campaign, culminating in a global event called the GBP dialogue week held in October 2013, in which managers were invited to hold sessions with their teams to discuss GBP in relation to their function or business. In their feedback, participating managers indicated they experienced this week as very meaningful and worth repeating.
The mandatory web-based GBP training, which is designed to reinforce awareness of the need for compliance with the GBP, is available in 23 languages. Every quarter, all new hires get an invitation to take this training in their local language. In addition, targeted audiences have been invited to take a web-based training on specific topics, including anti-bribery, antitrust, privacy and export controls.
More information on the Philips GBP can be found in chapter 6, Risk management, of this report. Results of the monitoring in place are provided in the chapter 13, Sustainability statements, of this report.
4.2.8 Stakeholder engagement
In organizing ourselves around customers and markets, we create dialogues with our stakeholders in order to explore common grounds in addressing societal challenges, build partnerships and jointly develop supporting ecosystems for our innovations. Working with partners is crucial in delivering on our vision to make the world healthier and more sustainable through innovation. An overview of stakeholders is provided in chapter 13, Sustainability statements, of this report.
Strategic Partner of the World Economic Forum
In 2013, Philips entered into a strategic partnership with the World Economic Forum. The Forums mission of Improving the state of the world closely matches our own and the Forum engages business, political, academic and other leaders of society to shape global, regional and industry agendas in an informal, action focused way.
During the first year of our partnership, Philips contributed significantly to the Forums agenda, with active participation in three industry groups, numerous speaking roles at the various meetings and a co-chairmanship of Frans van Houten at the World Economic Forum on Africa summit in Cape Town. Furthermore, Deborah DiSanzo, CEO Healthcare, has accepted to chair a thought leadership initiative that will explore Health Systems Leapfrogging in Emerging Markets.
The Philips Center for Health and Well-being
Over the last 5 years, Philips has run The Philips Center for Health and Well-being as a knowledge-sharing forum that raised the level of dialogue on key societal questions that matter most to citizens and communities. In 2013, the Aging Well think tank, one of the initiatives of the Center, actively participated in a number of events, such as the Aging in America conference of the American Society on Aging, the International Congress on Telehealth and Telecare of the Kings Fund in the UK, and a well-attended expert roundtable to explore next-generation technologies for aging well. As of 2014, the activities of the Center will be merged with our other stakeholder engagement platforms and initiatives across the businesses and markets.
Partnering to improve healthcare in Africa
In November 2013, Philips and AMREF Flying Doctors announced that they will work together in a partnership to structurally improve healthcare infrastructure and provision in Africa. Both parties will leverage their respective strengths to help tackle inadequately
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equipped medical facilities and inadequately trained staff as a way to better address the growing incidence of non-communicable diseases across the continent. AMREF and Philips will also work with local stakeholders to develop and implement large-scale projects to make healthcare more accessible to the local population.
We sought similar partnerships in our Fabric of Africa campaign launched in 2013. The campaigns primary intent is to enter into public/private partnerships with local and international stakeholders to improve healthcare delivery in the areas of non-communicable diseases, maternal and child health, healthcare infrastructure, technology and clinical training. Philips has developed innovative, low-resource setting health technologies and e-Health solutions to address the challenges in the African market. More information on this campaign can be found at www.philips.com/FabricofAfrica.
Working on global issues
In 2013, Philips participated in a number of international conferences and events focused on sustainable development and climate change. These included the Climate Week in New York City (organized by The Climate Group), co-launching the Cities & Aging policy snapshot with the Global Cities Indicator Facility in Toronto, as well as the United Nations Climate Change Conference in Warsaw, Poland. Most notably we were invited as the only private sector company to join the UN Secretary Generals Chief Executives Board, with Ban Ki Moon and part of his UN leadership team. Here we highlighted that energy efficient and intelligent LED solutions will result in a 30% reduction of electricity consumption by the global lighting market in 2020 compared to 2006. This equates to a reduction of 515 megaton CO2 emissions, while also significantly reducing energy bills by around EUR 100 billion in 2020.
Innovation event
In November, Philips Research organized an Innovation Event at the High Tech Campus with external guest speakers, to share best practices, share Philips corporate ambition for more sustainable product solutions; initiate new innovative concepts to radically improve access to healthcare; new products that decrease food waste and help meet world food security goals; and to identify new approaches to the circular economy, focusing on concepts such as design for reuse and improved recycling efficiency. We believe these global challenges can only be addressed through Open Innovation and regional partnerships with all stakeholders involved. We collaborate with academics, universities through direct partnerships, Open Innovation initiatives and government driven initiatives, like FP7 and Horizon 2020, two European Union research programs.
4.2.9 Social Investment Programs
In 2013, we continued to develop and localize our global social investment program, SimplyHealthy@Schools. In Brazil, 230 employees from Philips offices and factories registered to volunteer in Fal@ndo em Bem-Estar, the local adaptation of SimplyHealthy@Schools. The program aims to empower kids from 8 to 12 to change their habits, health and environment and educates teenagers about safe sex and sexual transferable diseases prevention, a critical national issue.
Philips Brazil also rolled-out a new initiative in 2013 with an important Healthcare partner, Fleury. Based on the same topics and questions explored in our Fal@ndo em Bem-Estar, the project consists of a giant interactive board game, developed to be used in schools throughout the entire country by Fleury and Philips employees.
In North America, the Philips Cares program provides ways for employees to work together to improve peoples lives by creating healthy, sustainable communities that contribute to the success and well- being of future generations. This can take many forms: from helping a child to excel in math, to providing safety and energy efficient home improvements to the disadvantaged, to raising awareness about the importance of cardiac health. In 2013 alone, more than 5,000 employees participated in volunteer opportunities that suited their needs, schedules, and passions in partnerships with organizations such as American heart Association, March of Dimes, and Rebuilding Together.
At the end of 2012 we signed a three year partnership agreement with the Royal Dutch Football Association (KNVB) to support their WorldCoaches program by installing more than 100 solar lighting Light Centers in rural communities throughout Africa and South America. Working together with local communities and the KNVB, the Light Centers will provide safe and functional space for sports and other community activities after dark.
Throughout 2014, Philips will roll out a new three pillar social investment strategy, comprising of a disaster relief program, a local community investment program
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and a signature social innovation program. The main focus will be on access to healthcare, access to light and healthy futures.
4.2.10 Supplier sustainability
Many of our products are being created and manufactured in close cooperation with a wide range of business partners, both in the electronics industry and other industries. Philips needs suppliers to share our commitment to sustainability, and not just in the development and manufacturing of products but also in the way they conduct their business. We require suppliers to provide a safe working environment for their workers, to treat workers with respect, and to work in an environmentally sound way. Our programs are designed to engage and support our suppliers on a shared journey towards continuous improvement in supply chain sustainability.
As a leading company in sustainability, Philips will act as a catalyst and support our suppliers in their pursuit of continuous improvement of social and environmental performance. We recognize that this is a huge challenge requiring an industry-wide effort in collaboration with other societal stakeholders. Therefore, we remain active, together with peers in the industry, in the Electronic Industry Citizenship Coalition (EICC) and encourage our strategic suppliers to join the EICC too. We will also continue to seek active cooperation and dialogue with other societal stakeholders including governments and civil society organizations, either directly or through institutions like the EICC, the multi- stakeholder programs of the Sustainable Trade Initiative IDH, and the OECD.
Supplier Sustainability Involvement Program
The Philips Supplier Sustainability Involvement Program is our overarching program to help improve the sustainability performance of our suppliers. We create commitment from our suppliers by requiring them to comply with our Regulated Substances List and the Philips Supplier Sustainability Declaration, which we include in all purchasing contracts. The Declaration is based on the EICC code of conduct and we added requirements on Freedom of Association and Collective Bargaining. The topics covered in the Declaration are listed below. We monitor supplier compliance with the Declaration through a system of regular audits.
2013 supplier audits in risk countries
In 2013, Philips conducted 200 full-scope audits, including four joint audits conducted on behalf of Philips and other EICC member companies. Additionally, 59 audits of potential suppliers were performed. Potential suppliers are audited as part of the supplier approval process, and they need to close any zero-tolerance issues before they can start delivering to Philips. In our new audit approach, we place more focus on capacity building programs to realize structural improvements leading to better audit results.
As in previous years, the majority of the audits in 2013 were done in China. The total number of full-scope audits carried out since we started the program in 2005 is 2,162. This number includes repeated audits (131 in 2013), since we execute a full-scope audit at our risk suppliers every three years. The audit program covers 90% of our spend with risk suppliers.
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Audit findings
We believe it is important to be transparent about the issues we observe during the audits. Therefore we have published a detailed list of identified major non-compliances in our annual report since 2010.
To track improvements Philips measures the compliance rate for the identified risk suppliers, being the percentage of risk suppliers that was audited within the last 3 years, and do not have any or have resolved all major non-compliance. During 2013 we achieved a compliance rate of 77% (2012: 75%).
Please refer to sub-section 13.2.2, Supplier indicators, of this report for the detailed findings of 2013.
Supplier development and capacity building
Based on many years of experience with the audit program, we know that a combination of audits, capacity building, consequence management and structural attention from management is crucial to realize structural and lasting changes at supplier production sites. In 2013 we continued our focus on capacity building initiatives which are offered to help suppliers improve their practices. Our supplier sustainability experts in China, India and Brazil organized trainings, visited suppliers for on-site consultancy, conducted pre-audit checks and helped suppliers to train their own employees on topics like occupational health and safety, emergency preparedness and chemicals management.
We also teamed up with peers in the industry and civil innovative multi-stakeholder initiative sponsored by the Sustainable Trade Initiative (Initiatief Duurzame Handel). The goal is to improve working conditions for more than 500,000 employees in the electronics sector. Two years ago the program was kicked-off in Chinas Pearl River Delta, and now expanded to also cover supplier factories in the Yangtze River Delta area. A total of 15 Philips suppliers are now participating in the program.
4.2.11 Conflict minerals: issues further down the chain
In line with Philips commitment to supply chain sustainability, we feel obliged to implement measures in our chain to ensure that our products are not directly or indirectly funding human atrocities in the Democratic Republic of the Congo (DRC). We are concerned about the situation in eastern DRC where proceeds from the extractives sector are used to finance rebel conflicts in the region. Philips is committed to address this issue through the means and influencing mechanisms available to us, even though Philips does not directly source minerals from the DRC and mines are typically seven or more tiers removed from our direct suppliers.
Although this region has a rich supply of minerals, its economy has collapsed due to decades of ongoing conflict. In an effort to prevent minerals from financing war, many companies worldwide have shied away from purchasing minerals from the DRC, creating a de facto embargo in a region where mining is often the only source of income for local communities. We decided that this was not the right approach and instead of avoiding the DRC, we took the more difficult road, supporting conflict-free sourcing from the DRC. To promote cooperation and economic growth in the region outside the control of the rebels, we launched the Conflict-Free Tin Initiative. This initiative introduces a tightly controlled conflict-free supply chain of tin from a mine in the DRC all the way down to an end-product. Philips is one of the industry partners brought together by the Dutch government that initiated the program in 2012. To underline our commitment to conflict-free sourcing, we joined a delegation in February 2013 to visit the mine and engage with different local stakeholders in the DRC. At the end of 2013 we reached
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an important milestone when the first end-user products containing this conflict-free tin were made in our Philips Lighting factory.
During 2013 we continued our work with 349 priority suppliers to raise awareness and conduct supply chain investigations to determine the origin of the metals in our products. This resulted in the identification of 191 smelters in our supply chain involved to process these metals. We publish this smelter list on our website, creating transparency at deeper levels in our supply chain of those actors that we believe hold the key towards effectively addressing the concerns around conflict minerals. Philips encourages all smelters in our supply chain to join the Conflict Free Smelter program and demonstrate their conflict-free status via independent third party assessments. 29% of the smelters identified by our suppliers have now successfully passed the Conflict Free Smelter assessment. As sufficient conflict-free smelters for all four metals (Tin, Tantalum, Tungsten and Gold) will become available, Philips plans to direct its supply chain towards these smelters.
We believe that industry collaboration and stakeholder dialogue are important to create impact at these deeper levels of our supply chain. Therefore Philips continued its active contribution to the Conflict Free Sourcing Initiative, a joint effort of the EICC and GeSI and others to positively influence the social and environmental conditions in the metals extractives supply chain. To assist in developing a due diligence standard for conflict minerals, we continued our participation in the multi-stakeholder OECD-hosted program for the implementation of the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas. We also continued our engagement with relevant stakeholders including the European Parliament, other industry organizations and local as well as international NGOs in Europe and the U.S. to see how we can resolve the issue.
In line with the US Dodd-Frank Act, we started preparations for publishing a Philips Conflict Minerals Report, including an audit of the Conflict Minerals Report as required by the Act.
For more details and result of our supplier sustainability program, please refer to sub-section 13.2.2, Supplier indicators, of this report.
EcoVision
Philips has a long sustainability history stretching all the way back to our founding fathers. In 1994 we launched our first program and set sustainability targets for our own operations. Next we launched our first EcoVision program in 1998 which focused on operations and products. We also started to focus on sustainability in our supply chain in 2003. We extended our scope further in 2010 by including the social dimension of products and solutions, which is now reflected in our renewed company vision stating that we strive to make the world healthier and more sustainable through innovation. Our goal is to improve the lives of 3 billion people a year by 2025.
The main elements of the EcoVision program are:
| Improving peoples lives |
| Green Product sales |
| Green Innovation, including Circular Economy |
| Green Operations |
| Health & Safety |
| Supplier Sustainability |
In this environmental performance section an overview is given of the most important environmental parameters of the program. Improving peoples lives, Health & Safety, and Supplier Sustainability are addressed in the Social performance section. Details of the EcoVision parameters can be found in the chapter 13, Sustainability statements, of this report.
4.3.1 Green Innovation
Green Innovation is the Research & Development spend related to the development of new generations of Green Products and Green Technologies. We announced in 2010 our plan to invest a cumulative EUR 2 billion in Green Innovation during the coming 5 years. In 2013 Philips invested some EUR 509 million in Green Innovation, with the strongest contribution from Lighting mainly stemming from investments in LED.
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Healthcare
Philips Healthcare develops innovative solutions across the continuum of care in collaborating with clinicians and customers to improve patient outcomes, provide better value, and expand access to care. While doing so, we take into account all Green Focal Areas and aim to reduce environmental impact over the total lifecycle, with a focus on energy efficiency and dose reduction. Healthcare investments in Green Innovation in 2013 amounted to EUR 80 million, a significant decrease compared with 2012. This can be attributed to a number of significant Healthcare projects which were completed in 2012. Other areas covered include increased levels of recycled content in our products, remote servicing and closing the materials loop, e.g. through upgrading strategies, parts harvesting and refurbishing programs as well as reducing environmentally relevant substances from our products. Philips Healthcare actively supports a voluntary industry initiative (COCIR) for improving the energy efficiency of imaging equipment. Moreover, we are actively partnering with care providers to look together for innovative ways to reduce the environmental impact of healthcare, for example by optimizing energy efficient use of medical equipment.
Consumer Lifestyle
Green Innovation at Consumer Lifestyle amounted to EUR 75 million compared to EUR 70 million in 2012 and resulted in an increase in Green Product sales in all Business Groups. The sector continued its work on improving the energy efficiency of its products, closing the materials loop (e.g. by using recycled materials in products and packaging) and the voluntary phase-out of polyvinyl chloride (PVC), brominated flame retardants (BFR) and Bisphenol A (BPA) from food contact products. In particular, more than 80% of the shaving and grooming products are completely PVC/BFR-free.
Lighting
At Lighting, we strive to make the world healthier and more sustainable through energy-efficient lighting solutions. In 2013 Lighting invested EUR 327 million in line with EUR 325 million in 2012 to develop products and solutions that address environmental and social challenges. Investments are made to advance the LED revolution, which can substantially reduce carbon dioxide emissions (by switching from inefficient to energy-efficient lighting). Recent examples include the TLED and the Philips LUXEON Altilon product family in the Mercedes S-class Intelligent Lighting System, making this the first car in which all lighting functions are LED. Furthermore, Lighting has developed solutions for water purification, solar LEDs for rural and urban locations, and LED solutions for agricultural applications supporting biodiversity.
Philips Group Innovation
Philips Group Innovation invested EUR 27 million in Green Innovations, spread over projects focused on global challenges related to water, air, waste, energy, food and access to affordable healthcare. Group Innovation deployed the Sustainable Innovations Assessment tool in which innovation projects are mapped, categorized and scored along the environmental and social dimension to identify those innovation projects that drive sustainable innovation. One example of a Group Innovation project is related to low cost solar-powered LED lighting.
When the sun sets in Africa, over 600 million people on the continent rely on kerosene and candles to see in the dark. For most of the population who are at the Base of the Pyramid (BoP) these lighting solutions remain costly, give only low illumination and are highly non-sustainable. The BoP comprises four billion people living in our world today, and in the poorest socio-economic group. We engaged directly with BoP consumers in some of the poorest areas of Africa to understand their needs for lighting and energy and how they wish to use that light. The insights derived from these studies have resulted in a re-design of our entire portfolio of solar lighting for the consumer. At the same time the new products take advantage of the very latest developments in LED, solar panels and battery technology, resulting in a portfolio that is flexible in use-case, has a high performance, is robust and long lasting. All this is provided at price-points that match the spending power of the target consumers with a payback time within 3-6 months.
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Energy efficiency of products
Energy efficiency is a key Green Focal Area for our Green Products. About 97% of the energy consumed during the use phase of our products is attributable to Lighting products, according to our analysis. The remaining 3% is split over Consumer Lifestyle and Healthcare. Therefore, we focus on the energy efficiency of our Lighting products in the calculation. The annual energy consumption per product category is calculated by multiplying the power consumption of a product by the average annual operating hours and the annual pieces sold and then dividing the light output (lumens) by the energy consumed (watts). The average energy efficiency of our total product portfolio improved some 2% in 2013 (19% compared to 2009).
In 2013 LED sales continued to advance well, but demand for conventional lighting remained fairly stable due to the challenging economic environment. Since the number of traditional lamps sold is significantly higher than LEDs, the energy efficiency improvement of the total Lighting portfolio in 2013 was limited. As the traditional incandescent lamp will be banned in more countries, we expect the energy efficiency improvement to advance in the coming years. Our target for 2015 is a 50% improvement compared to the 2009 baseline. In this target setting, assumptions were made on the speed of the regulatory developments in this area, which stayed behind expectations. Therefore, in 2015 the target of 50% improvement will probably not yet be achieved. Further details on this parameter and the methodology can be found in the document Energy efficiency of Philips products at www.philips.com/sustainability.
Circular economy
For a sustainable world, the transition from a linear to a circular economy is a necessary boundary condition. A circular economy aims to decouple economic growth from the use of natural resources and ecosystems by using those resources more effectively. It is a driver for innovation in the areas of material-, component- and product reuse, as well as new business models such as solutions and services. In a circular economy, the more effective (re)use of materials enables to create more value, both by cost savings and by developing new markets or growing existing ones.
In 2013, Philips started its circular economy approach. Key characteristics are customer access over ownership (pay for performance e.g. pay per lux or pay per scan), business model innovations (from transactions to relationships via service and solution models), reverse cycles (including partners outside current value chains e.g. upstream-downstream integration and co-creation) and logistics, innovations for material-, component-, and product reuse, products designed for disassembly and serviceability. In 2013, Philips became a global partner of the Ellen McArthur Foundation, the leading organization on the concept of circular economy.
Closing the material loop
In 2013 we restated the 2009 baseline for global collection and recycling amounts at around 22,500 tonnes (excluding TV and AVM&A), based on the data retrieved from the WEEE collection schemes and from our own recycling and refurbishment services (mainly Healthcare). The amount of collection and recycling for 2012 (reported in 2013) was calculated at 31,000 tonnes, excluding AVM&A (which was calculated at 9,000 tonnes). A small improvement compared to the amount for 2011 due to an increase in recycled products in Healthcare.
Recycled materials
We calculated the amount of recycled materials in our products in 2013 at some 14,000 tonnes (2012: 15,000 tonnes), by focusing on the material streams plastics, aluminum, refurbished products, and spare parts harvesting depending on the relevance in each sector.
Our target is to double the global collection and recycling and the amount of recycled materials in our products by 2015 compared to 2009. Further details on this parameter and the methodology can be found in the document Closing the material loop at www.philips.com/sustainability.
4.3.2 Green Product sales
Green Products offer a significant environmental improvement in one or more Green Focal Areas: Energy efficiency, Packaging, Hazardous substances, Weight, Recycling and disposal and Lifetime reliability. Sales from Green Products increased from EUR 11.0 billion in 2012 to EUR 11.8 billion in 2013, or 51% of sales, thereby reaching the target of 50% we set ourselves for 2015.
All sectors contributed to the growth in Green Product sales, but Consumer Lifestyle achieved the highest Green Product nominal sales growth, followed by Healthcare and Lighting. The exclusion of AVM&A had a 10% positive impact in 2013 on the Green Product sales percentage of Consumer Lifestyle (2013: 49%).
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New Green Products from each sector include the following examples.
Healthcare
During 2013, Healthcare expanded the Green Product portfolio with 13 new products to improve patient outcomes, provide better value, and expand access to care, while reducing environmental impact. Philips new EPIQ platform for example, delivers high-quality ultrasound imaging to every setting where echocardiography is used and at the same time reduces both energy use and product weight by almost 30% compared to the predecessor model. The energy consumption for each of Philips MRI models is lower than the market average according to COCIR. Other examples are new X-ray systems such as DuraDiagnost systems and a new Certeray X-ray generator, with significantly lower energy use and product weight versus predecessor models. Green Products from Patient Care & Clinical Informatics include MX400/450 and MX 500 patient monitors, for which product weight is significantly reduced (up to 27%) as well as energy consumption (up to 23%) when compared to their predecessor models.
Consumer Lifestyle
Consumer Lifestyle is focusing on the avoidance of substances of concern, the application of recycled materials and the energy efficiency of the products. In 2013, in China, Consumer Lifestyle introduced energy efficient living room Air purifiers. The products have an energy efficient motor, and score the highest grade (A) on the China energy label for Air purifiers.
Lighting
An example of a new Green Product introduced in 2013 is the Pacific LED Green Parking system covered parking solution. It ensures safety, whilst offering outstanding energy savings, low maintenance and long lifetimes. Through a mix of LED luminaires, wireless controls and presence detection, it can save up to 80% in running costs whilst typically delivering back the return on investment in under 3 years. As the solution is wireless, it is an easy retrofit solution that will match the lumen output of traditional fluorescents.
We aim to create products that have significantly less impact on the environment during their whole lifecycle through our EcoDesign process. Overall, the most significant improvements have been realized in our energy efficiency Green Focal Area, an important objective of our EcoVision program, although there was also growing attention for hazardous substances and recyclability in all sectors in 2013, the latter driven by our Circular Economy initiatives.
4.3.3 Green Operations
The Green Operations program focuses on the main contributors to climate change, recycling of waste, reduction of water consumption and reduction of emissions of restricted and hazardous substances.
Full details, can be found in chapter 13, Sustainability statements, of this report.
Carbon footprint and energy efficiency
After achieving our EcoVision4 carbon emissions reduction target in 2012 (25% operational CO2 emissions reduction compared to 2007, the baseline year) we continued our energy efficiency improvement programs across different disciplines in 2013. Examples are Work Place Innovation, partnering in the KLM BioFuel program and Green Logistics. However, in 2013 our Carbon Footprint increased by 2% to 1,654 kilotonnes CO2 as a result of increased carbon emissions from air transport (to mitigate supply shortages), the increased use of SF6 (a substance with high Global Warming Potential impact) and increased business travel due to our increasing focus on emerging markets. These were, however, partly offset by decreasing emissions resulting from reduced office space (Work Place Innovation), consolidation of warehouses, the changing industrial footprint, and the increase in purchased electricity from renewable sources.
In 2013, CO2 emissions from non-industrial sites decreased 20%, in large part attributable to our Work Place Innovation program which enables flex-working and thus reduces the floor space in our portfolio. But also our continuing focus on buildings energy efficiency and the increased share of purchased electricity from renewable sources have helped achieve this.
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After a decrease in 2012, total emissions from business travel increased 5% in 2013 as reduced emissions from our lease car fleet were off-set by increased air travel. We continue to promote video conferencing as an alternative to travel. In 2013, logistics CO2 emissions increased 5% in comparison with 2012. These were mainly caused by increased air shipments to mitigate supply shortages in our Lighting sector.
Our operational energy efficiency decreased 5% from 1.15 terajoules per million euro sales in 2012 to 1.21 terajoules per million euro sales in 2013 as a result of intensified industrial activities, increased business travel and increased logistics activities.
Ratios relating to carbon emissions and energy use
2009 | 2010 | 2011 | 2012 | 2013 | ||||||||||||||||
Operational CO2 emissions in kilotonnes CO2-equivalent |
1,930 | 1,845 | 1,771 | 1,614 | 1,654 | |||||||||||||||
Operational CO2 efficiency in tonnes CO2-equivalent per million euro sales |
83 | 73 | 70 | 65 | 71 | |||||||||||||||
Operational energy use in terajoules |
31,145 | 32,766 | 31,402 | 28,405 | 28,162 | |||||||||||||||
Operational energy efficiency in terajoules per million euro sales |
1.34 | 1.29 | 1.24 | 1.15 | 1.21 |
Operational carbon footprint by Greenhouse Gas Protocol scopes
in kilotonnes CO2-equivalent
2009 | 2010 | 2011 | 2012 | 2013 | ||||||||||||||||
Scope 1 |
447 | 441 | 431 | 443 | 465 | |||||||||||||||
Scope 2 |
636 | 485 | 427 | 409 | 387 | |||||||||||||||
Scope 3 |
847 | 919 | 913 | 762 | 802 | |||||||||||||||
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Philips Group |
1,930 | 1,845 | 1,771 | 1,614 | 1,654 |
Water
Total water intake in 2013 was 5.0 million m3, about 4% higher than in 2012. This increase was mainly due to a new acquisition in China that started to report in 2013, which accounted for 6% of group water consumption in 2013 as well as increased water use at two Lighting Lumileds sites, mitigated by water conservation activities across all sectors.
Lighting represents around 79% of total water usage. In this sector, water is used in manufacturing as well as for domestic purpose. The other sectors use water mainly for domestic purposes.
Water intake
in thousands m3
2009 | 2010 | 2011 | 2012 | 2013 | ||||||||||||||||
Healthcare |
363 | 256 | 308 | 421 | 454 | |||||||||||||||
Consumer Lifestyle |
315 | 351 | 338 | 303 | 586 | |||||||||||||||
Lighting |
3,531 | 3,604 | 3,682 | 4,133 | 4,004 | |||||||||||||||
Innovation, Group & Services |
7 | 7 | | | | |||||||||||||||
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Philips Group |
4,216 | 4,218 | 4,328 | 4,857 | 5,044 |
In 2013, 82% of water was purchased and 18% was extracted from groundwater wells.
Waste
Total waste increased 5% to 92 kilotonnes in 2013 from 88 kilotonnes in 2012. Lighting (77%) and Consumer Lifestyle (12%) account for 89% of our total waste. The increase was mainly due to one-time demolition scrap at a Lighting site in the Netherlands (10 kilotonnes) and a new acquisition in China, mitigated by the exclusion of the AVM&A business in CL and waste reduction programs in all sectors.
Total waste
in kilotonnes
2009 | 2010 | 2011 | 2012 | 2013 | ||||||||||||||||
Healthcare |
8.2 | 11.2 | 9.3 | 10.4 | 9.6 | |||||||||||||||
Consumer Lifestyle |
20.1 | 23.2 | 19.6 | 12.7 | 11.4 | |||||||||||||||
Lighting |
69.3 | 70.1 | 65.1 | 64.5 | 71.0 | |||||||||||||||
Innovation, Group & Services |
0.1 | 0.1 | 0.0 | 0.0 | 0.0 | |||||||||||||||
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Philips Group |
97.7 | 104.6 | 94.0 | 87.6 | 92.0 |
Total waste consists of waste that is delivered for landfill, incineration or recycling. Materials delivered for recycling via an external contractor comprised 74 kilotonnes, which equated to 81%, an improvement compared to 77% in 2012, as our manufacturing sites
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implemented recycling programs. Of the remaining waste, 14% comprised non-hazardous waste and 5% hazardous waste.
Emissions
Emissions of restricted substances totaled 9 kilos in 2013, a significant decrease compared to 55 kilos in 2012, due to a continued reduction in mercury emissions at Lighting and more accurate measurements. The level of emissions of hazardous substances decreased by some 40% from 70,093 to 40,451 kilos, mainly as a result of a decrease in total styrene emissions at Lighting and more accurate measurements mitigated by an increase in xylene emissions in CL. All sectors have reduction programs for the restricted and hazardous substances.
Restricted and hazardous substances
in kilos
2009 | 2010 | 2011 | 2012 | 2013 | ||||||||||||||||
Restricted substances |
272 | 188 | 111 | 55 | 9 | |||||||||||||||
Hazardous substances |
32,869 | 61,795 | 65,477 | 70,093 | 40,451 |
For more details on restricted and hazardous substances, please refer to sub-section 13.3.3, Green Operations, of this report.
4.4 Proposed distribution to shareholders
Pursuant to article 34 of the articles of association of Royal Philips, a dividend will first be declared on preference shares out of net income. The remainder of the net income, after reservations made with the approval of the Supervisory Board, shall be available for distribution to holders of common shares subject to shareholder approval after year-end. As of December 31, 2013, the issued share capital consists only of common shares; no preference shares have been issued. Article 33 of the articles of association of Royal Philips gives the Board of Management the power to determine what portion of the net income shall be retained by way of reserve, subject to the approval of the Supervisory Board.
A proposal will be submitted to the 2014 Annual General Meeting of Shareholders to declare a dividend of EUR 0.80 per common share (up to EUR 740 million), in cash or in shares at the option of the shareholder, against the net income for 2013.
Shareholders will be given the opportunity to make their choice between cash and shares between May 8, 2014 and May 30, 2014. If no choice is made during this election period the dividend will be paid in shares. On May 30, 2014 after close of trading, the number of share dividend rights entitled to one new common share will be determined based on the volume weighted average price of all traded common shares Koninklijke Philips N.V. at NYSE Euronext Amsterdam on 28, 29 and 30 May 2014. The Company will calculate the number of share dividend rights entitled to one new common share (the ratio), such that the gross dividend in shares will be approximately equal to the gross dividend in cash. On June 3, 2014 the ratio and the number of shares to be issued will be announced. Payment of the dividend and delivery of new common shares, with settlement of fractions in cash, if required, will take place from June 4, 2014. The distribution of dividend in cash to holders of New York registry shares will be made in USD at the USD/EUR rate fixed by the European Central Bank on June 2, 2014.
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Dividend in cash is in principle subject to 15% Dutch dividend withholding tax, which will be deducted from the dividend in cash paid to the shareholders. Dividend in shares paid out of net income is subject to 15% dividend withholding tax, but only in respect of the par value of the shares (EUR 0.20 per share).
In 2013, a dividend of EUR 0.75 per common share was paid in cash or shares, at the option of the shareholder. Approximately 59.8% elected for a share dividend resulting in the issue of 18,491,337 new common shares, leading to a 2.1% percent dilution. EUR 271,991,204 was paid in cash. For additional information, see chapter 16, Investor Relations, of this report.
The balance sheet presented in this report, as part of the Company financial statements for the period ended December 31, 2013, is before appropriation of the result for the financial year 2013.
Achieving the 2013 financial targets was an important milestone and we have now set our sights on reaching our 2016 targets. We are confident in our ability to further improve our performance by continuing the strong focus on our Accelerate! transformation program. Looking at 2014, we remain cautious because of the ongoing macro-economic uncertainties, currency headwinds and softer order intake in Q4 2013. Therefore, we expect that 2014 will be a modest step towards our 2016 targets, also taking into account restructuring to drive the new productivity targets and investments in additional growth initiatives.
4.6 Critical accounting policies
Critical accounting policies
The preparation of Philips financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities at the date of our financial statements. The policies that management considers both to be most important to the presentation of Philips financial condition and results of operations and to make the most significant demands on managements judgments and estimates about matters that are inherently uncertain are discussed below. Management cautions that future events often vary from forecasts and that estimates routinely require adjustment. A more detailed description of Philips accounting policies appears in the note 1, Significant accounting policies section.
Accounting for pensions and other postretirement benefits
Retirement benefits represent obligations that will be settled in the future and require assumptions to project benefit obligations and fair values of plan assets. Retirement benefit accounting is intended to reflect the recognition of future benefit costs over the employees approximate service period, based on the terms of the plans and the investment and funding decisions made. The accounting requires management to make assumptions regarding variables such as discount rate, rate of compensation increase, mortality rate and future healthcare costs. Pension assumptions are set centrally by management in consultation with its local, regional or country management and locally appointed actuaries at least once a year. For the Companys major plans, a full discount rate curve of high quality corporate bonds (using Towers Watson RATE:Link data) is used to determine the defined benefit obligation whereas for other plans a single point discount rate is used based on the plans maturity. Plans in countries without a deep corporate bond market, use a discount rate based on the local sovereign curve and the plans maturity. Relevant data regarding various local swap curves, sovereign bond curves and/or corporate AA bonds are set by local actuaries. Changes in the key assumptions can have a significant impact on the projected benefit obligations, funding requirements and periodic cost incurred.
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For a discussion of the current funded status, a sensitivity analysis with respect to pension plan assumptions, a summary of the changes in the accumulated postretirement benefit obligations and a reconciliation of the obligations to the amounts recognized in the consolidated balance sheet, please refer to note 30, Post-employment benefits.
Accounting for income taxes
As part of the process of preparing consolidated financial statements, the Company is required to estimate income taxes in each of the jurisdictions in which it conducts business. This process involves estimating actual current tax expense and temporary differences between tax and financial reporting. Temporary differences result in deferred tax assets and liabilities, which are included in the consolidated balance sheet. The Company regularly reviews the deferred tax assets for recoverability and will only recognize these if it is believed that sufficient future taxable profit is available, including income from forecasted operating earnings, the reversal of existing taxable temporary differences and established tax planning relating to the same taxation authority and the same taxable entity. For a discussion of the fiscal uncertainties, please refer to the information under the heading Tax risks in note 5, Income taxes.
Multi-element sales transactions
From time to time the Company is engaged in complex sales transactions relating to multi-element deliveries (for example a single sales transaction that combines of the delivery of goods and rendering of services). The process of revenue recognition of such multi-element sales transactions involves the identification of the different sales components, the allocation of revenue to these different components and the timing of revenue recognition per component. Each of these process steps can be complex and requires judgment. In order to identify different components in a single sales contract, the Company verifies if a component has a stand-alone value to the customer and whether the fair value of the component can be measured reliably. Allocation of revenue to the different components is performed based on either a relative fair value approach or by means of a residual or fair value method, depending on which method is deemed most appropriate to the transaction. Eventually, revenue for each component is recognised when meeting the revenue recognition criteria in accordance with IAS 18 or IAS 11.
Provisions and Contingent liabilities
The Company and certain of its group companies and former group companies are involved as a party in legal proceedings, including regulatory and other governmental proceedings, and discussions on potential remedial actions, relating to such matters as antitrust laws, competition issues, commercial transactions, product liabilities, participations and environmental pollution. 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 statements.
The Company recognizes a liability when it is probable that an outflow of resources embodying economic benefits will result from the settlement of a present obligation and the amount at which the settlement will take place can be measured reliably. If the likelihood of the outcome is less than probable and more than remote or a reliable estimate is not determinable, the matter is disclosed as a contingent liability if management concludes that it is material.
In determining the provision for losses associated with environmental remediation obligations, significant professional judgments are necessary. The Company utilizes experts in the estimation process. The Company accrues for losses associated with environmental obligations when such losses are probable and can be estimated reliably. The provisions are adjusted as new information becomes available and they are remeasured at the end of each period using the current discount rate.
Provisions on restructuring represents estimated costs of initiated reorganizations, the most significant of which have been approved by the Board of Management. A liability is recognized for those costs only when the Company has a detailed formal plan for the restructuring and has raised a valid expectation with those affected that it will carry out the restructuring by starting to implement that plan or announcing its main features to those affected by it.
Provisions on onerous contracts represent the lesser of the unavoidable costs of either fulfilling or exiting the related contract, and in which the costs to fulfill the contract exceed the benefits expected to be received under such contract. In determining the cost of fulfilling the contract, the payments due in the period in which the contract cannot be cancelled are considered, unless there is a lesser amount of penalty to exit the
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contract. Generally, unavoidable costs only include incremental costs related to the contract and exclude allocated or shared costs. Before a provision is established, the Company recognizes any impairment loss on the assets associated with that contract.
The Company provides for warranty costs based on historical trends in product return rates and the expected material and labor costs to provide warranty services. The provision is based on historical warranty data and a weighing of possible outcomes against their associated probabilities.
Accounting for obsolete inventories
The Company records its inventories at cost and accounts for the risk of obsolescence using the lower of cost and net realizable value principle. The expected future use of inventory is based on estimates about future demand and past experience with similar inventories and their usage.
Accounting for bad debt
The risk of uncollectability of accounts receivable is primarily estimated based on prior experience with, and the past due status of, doubtful debtors, while large accounts are assessed individually based on factors that include ability to pay, bankruptcy and payment history. In addition, debtors in certain countries are subject to a higher collectability risk, which is taken into account when assessing the risk of uncollectability. Should the outcome differ from the assumptions and estimates, revisions to the estimated valuation allowances would be required.
Impairment of non-financial assets
Goodwill is not amortized, but tested for impairment annually and whenever impairment indicators require so. The Company reviews non-financial assets, other than goodwill for impairment, when events or circumstances indicate that carrying amounts may not be recoverable.
In determining impairments of non-current assets like intangible assets, property, plant and equipment, investments in associates and goodwill, management must make significant judgments and estimates to determine whether the recoverable amount is lower than the carrying value. Changes in assumptions and estimates included within the impairment reviews and tests could result in significantly different results than those recorded in the consolidated financial statements.
The recoverable amount is the higher of the assets value in use and its fair value less costs to sell, the determination of which involves significant judgment and estimates from management.
Goodwill is allocated to the cash generating units. The basis of the recoverable amount used in the annual impairment test (performed in Q2) and trigger-based impairment tests is generally the value in use. Key assumptions used in the impairment tests were sales growth rates, income from operations and the rates used for discounting the projected cash flows. These cash flow projections were determined using managements internal forecasts that cover an initial period from 2013 to 2017 that matches the period used for our strategic review. Projections were extrapolated with stable or declining growth rates for a period of five years, after which a terminal value was calculated. For terminal value calculation, growth rates were capped at a historical long term average growth rate.
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The sales growth rates and margins used to estimate cash flows are based on past performance, external market growth assumptions and industry long-term growth averages. Income from operations in all units is expected to increase over the projection period as a result of volume growth and cost efficiencies. Please refer to note 11, Goodwill.
New Accounting Standards
For a description of the new pronouncements, please refer to the information under the heading IFRS accounting standard adopted as from 2013 in note 1, Significant accounting policies.
Off-balance sheet arrangements
Please refer to the information under the heading Guarantees in sub-section 4.1.23, Cash obligations, of this report and in note 26, Contingent assets and liabilities.
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Innovation, Group & Services
Group Innovation Design New Venture Integration Group and Regional Overheads Pensions and Global Service Units
Our structure
Koninklijke Philips N.V. (the Company) is the parent company of the Philips Group (Philips or the Group). The Company is managed by the members of the Board of Management and Executive Committee under the supervision of the Supervisory Board. The Executive Committee operates under the chairmanship of the Chief Executive Officer and shares responsibility for the deployment of Philips strategy and policies, and the achievement of its objectives and results.
Philips activities in the field of health and well-being are organized on a sector basis, with each operating sector Healthcare, Consumer Lifestyle and Lighting being responsible for the management of its businesses worldwide.
The Innovation, Group & Services sector includes the activities of Group Innovation, through which Philips invests in projects that are currently not part of the operating sectors, but which could lead to additional organic growth or create value through future spin-offs. Furthermore, Group and regional management organizations support the creation of value, connecting Philips with key stakeholders, especially our employees, customers, government and society. Additionally, the global shared business services for procurement, finance, human resources, IT and real estate are reported in this sector, as well as certain pension costs.
At the end of 2013, Philips had 111 production sites in 28 countries, sales and service outlets in approximately 100 countries, and 114,689 employees.
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Sales, IFO and Adjusted IFO 2013
in millions of euros unless otherwise stated
sales | IFO | % | Adjusted IFO1) | % | ||||||||||||||||
Healthcare |
9,575 | 1,315 | 13.7 | 1,512 | 15.8 | |||||||||||||||
Consumer Lifestyle |
4,605 | 429 | 9.3 | 483 | 10.5 | |||||||||||||||
Lighting |
8,413 | 489 | 5.8 | 695 | 8.3 | |||||||||||||||
Innovation, Group & Services |
736 | (242 | ) | | (239 | ) | | |||||||||||||
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Philips Group |
23,329 | 1,991 | 8.5 | 2,451 | 10.5 |
1) | For a reconciliation to the most directly comparable GAAP measures, see chapter 14, Reconciliation of non-GAAP information, of this report |
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As health systems around the world address the complexities of care delivery at their core, Philips Healthcare is responding to the global call for transformation through meaningful and intelligent innovation. Across our businesses, we are collaborating with customers to consistently provide better care at lower cost to more patients. Through our Accelerate! program, we are delivering on this commitment to our customers faster and more effectively than ever before. Deborah DiSanzo, CEO Philips Healthcare
| By focusing on innovations in key areas across the continuum of care and aligning our resources with customers and clinicians, we continue to provide solutions that offer more value while helping lower the cost of care. |
| The ongoing implementation of Accelerate! has been enhancing our ability to move quickly and efficiently in delivering the innovation that matters most to our customers. |
| We continue to drive profitable growth and deliver on our commitments, despite challenging economic headwinds, for instance in North America and Europe. |
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5 Sector performance 5.1.1 - 5.1.2
5.1.1 Health care landscape
Health systems in mature, developing and underserved markets around the world continue to press for new solutions that can help them provide accessible, affordable, quality care to diverse patient populations.
Increasingly, they are abandoning the notion that incremental improvements can resolve the overwhelming economic, demographic and logistic issues standing in the way of the care that is needed. Instead, they are pursuing new opportunities to approach the delivery of care differently.
This broader, deeper and bolder way of thinking is opening the door to a world of transformational solutions with far-reaching implications, ranging from cutting-edge technology platforms and protocols to innovative new business models and initiatives that are redefining the clinical experience across the continuum of care.
The demand for more effective care delivery is intensifying and unrelenting, as people live longer, suffer increasingly from chronic disease, and become bigger consumers of constrained healthcare resources. The burden that this places on health systems is unsustainable and driving the need for industry-defining solutions.
5.1.2 About Philips Healthcare
At Philips, we are dedicated to delivering innovation that matters to our customers and the patients they serve. We do this by developing innovative solutions across the continuum of care in partnership with clinicians and our customers to improve patient outcomes, provide more and better value, and expand access to care.
Philips is one of the worlds leading healthcare companies (based on sales) along with General Electric and Siemens. The United States, our largest market, represented 40% of Healthcares global sales in 2013, followed by China, Japan and Germany. Growth geographies accounted for 25% of Healthcare sales. Philips Healthcare has approximately 37,000 employees worldwide.
In 2013 our Healthcare business was organized around four strategic business groups*:
| Imaging Systems: Integrated clinical solutions that include radiation oncology, clinical applications and platforms, and portfolio management; advanced diagnostic imaging, including computed tomography (CT), magnetic resonance imaging (MRI) and molecular imaging (MI); diagnostic X-ray, including digital X-ray and mammography; interventional X-ray, encompassing cardiology, radiology, surgery and other areas; and ultrasound, a modality with diverse customers and broad clinical presence. |
| Patient Care & Clinical Informatics: Enterprise-wide patient monitoring solutions, from value solutions to sophisticated connected solutions, for real-time clinical information at the patients bedside; cardiology informatics and enterprise imaging informatics, including picture archiving and communication systems and other clinical information systems; patient monitoring and clinical informatics; mother and child care, including products and solutions for pregnancy, labor and delivery, newborn and neonatal intensive care and the transition home; and therapeutic care, including cardiac resuscitation, emergency care solutions, therapeutic temperature management, anesthesia care, hospital respiratory systems and ventilation. |
| Home Healthcare Solutions: Sleep management, respiratory care and non-invasive ventilation; medical alert and medication dispensing services for independent living; and remote patient monitoring. |
| Customer Services: Equipment services and support, including service contracts, installation, equipment maintenance, remote proactive monitoring and multi-vendor services; managed services, including equipment financing and asset management; and professional services, including consulting, site planning and project management, educati |