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AnnualReport_20120221-044128258716 - Annual Report 2010...

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Unformatted text preview: Annual Report 2010 Financial, social and environmental performance simply making a difference Please note: this PDF contains only the pages highlighted in the list of contents below. The contents of this file are qualified in their entirety by reference to the printed version of the Philips Annual Report 2010. The information on this PDF has been derived from the audited financial statements 2009 of Koninklijke Philips Electronics N.V. KPMG has issued unqualified auditors’ reports on these financial statements. This is a customized selection from the Annual Report 2010 Contents 11 Supervisory Board report - 12 Corporate governance - 13 Grey text indicates parts not included in this selection from the Group financial statements Philips Annual Report 2010. Performance highlights 4 President’s message - 1 Our company 6 2 Vision 2015 - our strategic focus - 3 Our strategy in action 8 3.1 3.2 3.3 3.4 3.5 3.6 Professional Healthcare Home Healthcare Healthy Life & Personal Care Home Living & Lifestyle Entertainment Home Lighting Professional Lighting 8 4 Our planet, our partners, our people 4.1 4.2 4.3 4.4 4.5 4.6 Climate change Our environmental footprint Partnerships for progress Supplier sustainability Working at Philips Working in our communities 5 Group performance 51 5.1 5.2 5.3 5.4 5.5 5.6 Management discussion and analysis Liquidity and capital resources Other performance measures Sustainability Proposed distribution to shareholders Outlook 51 6 Sector performance 74 6.1 6.2 6.3 6.4 Healthcare Consumer Lifestyle Lighting Group Management & Services 76 7 Risk management - 8 Board of Management - 9 Group Management Committee - 10 Supervisory Board - 2 This is a customized selection from the Annual Report 2010 13 16 20 24 28 33 33 36 39 42 45 48 59 64 67 72 73 82 88 94 13.1 Management’s report on internal control 13.2 Reports of the independent auditor 13.3 Auditors’ report on internal control over financial reporting 13.4 Consolidated statements of income 13.5 Consolidated statements of comprehensive income 13.6 Consolidated balance sheets 13.7 Consolidated statements of cash flows 13.8 Consolidated statements of changes in equity 13.9 Information by sector and main country 13.10 Significant accounting policies 97 98 100 100 101 103 104 106 108 109 113 13.11 Notes 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 Income from operations Financial income and expenses Income taxes Investments in associates Discontinued operations Acquisitions and divestments Property, plant and equipment Goodwill Intangible assets excluding goodwill Non-current receivables Other non-current financial assets Other non-current assets Inventories Current financial assets Other current assets Current receivables Shareholders’ equity Long-term debt and short-term debt Provisions Other non-current liabilities Accrued liabilities Other current liabilities Contractual obligations Contingent liabilities Cash from (used for) derivatives and securities Proceeds from non-current financial assets Assets in lieu of cash from sale of businesses Pensions and other postretirement benefits Share-based compensation Related-party transactions Information on remuneration Fair value of financial assets and liabilities Details of treasury risks Subsequent events 13.12 Independent auditor’s report - Group 126 Sustainability statements - 16 Reconciliation of non-GAAP information - 17 Five-year overview 142 18 Investor Relations 189 143 18.1 18.2 18.3 18.4 18.5 18.6 18.7 18.8 The Philips investment proposition The year 2010 Share information Risk management Performance in relation to market indices Philips’ acquisitions Financial calendar Investor contact 189 19 Definitions and abbreviations 20 Forward-looking statements and other information 133 134 139 144 145 145 145 145 146 146 F G H I J 194 195 196 197 197 - 151 151 151 199 152 152 155 156 156 156 161 164 164 170 171 175 176 177 E 190 192 148 149 178 C 186 140 Balance sheets before appropriation of results Statements of income Statements of changes in equity Notes D 185 15 128 Company financial statements Investments in affiliated companies Other non-current financial assets Receivables Shareholders’ equity Long-term debt and short-term debt Other current liabilities Net income Employees Contingent liabilities Audit fees 14.5 Independent auditor’s report - Company 184 132 14.1 14.2 14.3 14.4 B Subsequent events 128 14 A K 126 IFRS basis of presentation The financial information included in this document is based on IFRS, unless otherwise indicated. Forward-looking statements and other information Please refer to chapter 20, Forward-looking statements and other information, of this Annual Report for more information about forwardlooking statements, third-party market share data, fair value information, IFRS basis of preparation, use of non-GAAP information, statutory financial statements and management report, and reclassifications. Dutch Financial Markets Supervision Act This document comprises regulated information within the meaning of the Dutch Financial Markets Supervision Act (Wet op het Financieel Toezicht). Statutory financial statements and management report The chapters Group financial statements and Company financial statements contain the statutory financial statements of the Company. The introduction to the chapter Group financial statements sets out which parts of this Annual Report form the Management report within the meaning of Section 2:391 of the Dutch Civil Code (and related Decrees). 179 179 180 180 180 181 181 183 183 183 183 183 184 This is a customized selection from the Annual Report 2010 3 Performance highlights Performance highlights Comparable sales growth by market cluster1) as a % ■-Philips Group--■-emerging markets--■-mature markets 15 10 11.9 10.2 6.4 6.5 6.3 5 4.9 4.3 3.5 2.8 0.9 0 Financial table 2008 Sales 2009 2010 26,385 EBIT 1,050 10.0 54 as a % of sales Net income (loss) 614 2.6 2006 424 2009 2008 2010 ■-2006--■-2007--■-2008--■-2009--■-2010 10 8.1 (92) 2007 Comparable sales growth by operating sector1) as a % 2,065 0.2 1) (10.8) (11.4) (11.7) (15) 2,552 4.5 (5.4) (10) 25,419 2.8 as a % of sales 23,189 744 EBITA1) (2.7) (5) all amounts in millions of euros unless otherwise stated 4 1,452 8.8 8.2 3.7 3.9 8.7 6.5 6.3 5.6 3.5 3.1 1.2 (2) (2.7) (8) per common share in euros - basic (0.09) - diluted (0.09) 0.46 12,071 863 1,333 15,544 Shareholders’ equity 12,649 14,595 (14) 1.53 773 Free cash flows1) 0.46 14,069 Net operating capital1) (8.9) 1.54 15,046 121,398 115,924 (16.5) (20) Healthcare ■-Healthcare--■-Consumer Lifestyle--■-Lighting--■-GM&S 18.8 18.4 3.7 119,001 18.8 4.1 5.0 15 1) 2) Lighting Consumer Lifestyle Sales per sector in mature markets2) in billions of euros 20 Employees at December 31 (12.6) For a reconciliation to the most directly comparable GAAP measures, see chapter 16, Reconciliation of non-GAAP information, of this Annual Report For a definition of emerging and mature markets, see chapter 19, Definitions and abbreviations, of this Annual Report 1.1 0.5 8.7 8.5 16.3 0.3 4.7 0.2 0.2 6.7 5.4 5.3 6.4 6.4 6.9 2008 2009 2010 10 5 4.3 17.1 5.5 5.5 2006 2007 0 Equity and EBITA per common share1) in euros ■-shareholders’ equity per common share - basic --EBITA per common share - diluted 25 1.29 20.87 20 1.91 20.41 5 0.75 16.84 1.13 15.74 2.69 15.89 4 3 15 2 10 Sales per sector in emerging markets2) in billions of euros ■-Healthcare--■-Consumer Lifestyle --■-Lighting--■-GM&S 10 8 8.0 7.9 2.0 6 2.2 0.4 4.4 1 0 0.2 4.5 2.4 2.9 6.9 0.2 0.1 2.2 0.1 4.2 3.1 4 0 5 8.3 8.0 3.6 2 2007 2008 2009 2010 0 4 This is a customized selection from the Annual Report 2010 1.1 1.1 1.2 1.5 1.7 2006 2006 2007 2008 2009 2010 Performance highlights Net income (loss) in millions of euros 6,000 5,000 19.3 5,157 ■-in value----as a % of sales 24 18.2 4,880 Net Promoter Score % of businesses with (co-)leadership scores 75 20 16 60 3,000 50 2008 59 2009 2010 51 2007 4,000 12 5.7 1,452 2,000 0 4 2006 (4) 2008 2007 EBIT and EBITA1) in millions of euros 2009 7.8 2,094 1,000 21 10.0 2,552 5.7 1,528 1,336 192 7 0 2007 2008 2009 0 2010 2009 2008 20 614 0 2006 68 40 436 54 75 69 14 4.5 1,050 690 80 60 2,065 2.8 744 Employee Engagement Index % favorable 64 487 1,867 227 0 2010 ■-EBIT --■-EBITA----EBITA as a % of sales ■ 3,000 25 0 (92) (0.3) (1,000) 2,000 8 1.8 424 1,000 50 2007 Operating cash flows in millions of euros ■-net capital expenditures--■-free cash flows ■ ■-operating cash flows----free cash flows as a % of sales 2010 Sales of Green Products as a % of total sales 1) 3,000 5.2 1,333 2,156 3.1 824 1,752 2,000 2.9 773 3.7 863 1,648 1,545 1,000 0 (1,000) (2,000) 10 2007 (682) (875) 2008 (823) (10) 23.2 2009 0 2007 2010 2008 2009 2010 Operational carbon footprint in millions of tons CO2-equivalent 2.5 21.9 2.2 20 15.6 15 15.1 14.6 10 2.1 1.9 2.0 1.8 1.5 5 0.6 0 1.0 (0.1) (2.0) (1.2) 0.5 (5.2) (10) 2006 ratio: 20 10 ■-net debt (cash)--■-group equity (5) 20 (5) Net debt (cash) to group equity1) in billions of euros 25 31 30 0 (928) (348) (1.3) 2006 38 23 5 639 (987) 40 15 2007 2008 2009 2010 (9) : 109 (31) : 131 4 : 96 (1) : 101 (8) : 108 0 2007 2008 2009 2010 This is a customized selection from the Annual Report 2010 5 1 Our company 1 - 1 1 Our company Philips is a people-focused, market-driven company that is organized around customers and markets. By understanding trends in society and obtaining deep insight into issues confronting people in their daily lives, we ensure that people’s needs remain at the heart of everything we do. Our mission We improve the quality of people’s lives through the timely introduction of meaningful innovations Innovation does not only mean “new technology”. It can also mean an exciting application, a new business model or a unique customer proposition brought about by an innovative partnership. In other words, an innovation is not the same as an invention. Technology remains very important, but insight into the needs and aspirations of consumers and customers is equally, if not more important and must always be our starting point. Our vision In a world where complexity increasingly touches every aspect of our daily lives, we will lead in bringing “sense and simplicity” to people Our corporate vision describes what we see as one of the biggest challenges facing people today – and how we can help them meet that challenge. We have identified the difficulty of coping with complexity as a major challenge for people in our time. One of the things that makes life today so complex is the fact that technological progress comes to us very often in a way that is too difficult to experience. We believe that this situation can be changed, and that we can help to make the benefits of our products and solutions easier to access and more relevant to people’s needs and aspirations. By “health” we mean not only medical aspects of health, but also keeping fit, having a healthy diet, and generally living a healthy lifestyle. By “well-being” we mean a general sense of fulfillment, feeling good and at ease. “Well-being” also refers to the sense of comfort, safety and security people feel in their environment – at home, at work, when shopping or on the road. Our focus on health and wellbeing automatically implies that we contribute to building a sustainable society. Our brand promise We promise “sense and simplicity” We differentiate ourselves through our brand promise “sense and simplicity”. Our brand promise is comprised of three pillars: • We design our solutions around the needs of people. • We apply advanced thinking and technology to deliver a better solution. • We ensure our solutions are easy to experience. Our values Our values, the four Ds, are like a compass - guiding us in how we behave every day, and reminding us of the attitude we should have towards our work, our customers and our colleagues Delight customers We anticipate and exceed customer expectations Deliver great results We continually raise the bar Develop people We get the best from ourselves and each other Our domain We operate in the health and well-being domain We seek to improve the quality of people’s lives through focusing on their health and well-being. Quite simply, we want to help people live a healthy, fulfilled life. 6 This is a customized selection from the Annual Report 2010 Depend on each other We deliver more value by working as One Philips 1 Our company 1 - 1 35% 100 118 7 female countries with sales and service outlets production sites research laboratories spread over Europe, North America and Asia 3 36,000 3,900 63,000 50,000 Manufacturing sites incubators registered trademarks domain names design rights Research laboratories patent rights Employees This is a customized selection from the Annual Report 2010 7 3 Our strategy in action 3 - 3.1 3 3.1 Our strategy in action Professional Healthcare Global demographic and environmental trends, such as aging populations and the spread of chronic diseases like obesity and diabetes to the developing world, will require a fundamental shift in the way healthcare is provided. In the professional domain, we are driven to improve the way both patients and professionals experience healthcare, to improve clinical outcomes, and to enable the delivery of quality healthcare at lower cost. By focusing on the range of medical issues associated with oncology, cardiology and women’s health, we can deliver better, more differentiated solutions that are more clinically relevant. 8 This is a customized selection from the Annual Report 2010 3 Our strategy in action 3.1 - 3.1 Opening the door to a new era in radiology Today, people expect quality healthcare, yet invariably there is less money to treat them. So we are helping radiologists to go further – with a new way of working. Based on feedback from clinicians across the globe, our answer to the dilemma of increased demand and fewer resources is simple: smarter teamwork through innovation. Just as Web 2.0 redefined the way people connect, share and use the internet, Philips has coined “Imaging 2.0” to refer to the new era in radiology science, which is opening up a world of possibilities for clinicians and patients. Imaging 2.0 encompasses the launch of a brand new portfolio of Philips imaging solutions across multiple modalities. For instance, with the IntelliSpace Portal, the radiologist can now integrate information from CT, MR and Nuclear Medicine to increase diagnostic confidence. Plus, it includes a feature called Collaborator – an intelligent, rapid tool linking the radiologist to colleagues and peers virtually anywhere in the world, enabling them to share images and data, and to discuss cases in real-time. Efficient, personalized patient care – one of the key benefits delivered by Imaging 2.0. This level of collaboration and integration, combined with increased patient focus and improved economic value, is helping clinicians achieve what was unimaginable just a few This is a customized selection from the Annual Report 2010 9 3 Our strategy in action 3.1 - 3.1 short years ago – faster and more accurate diagnoses and treatment, as well as lower costs for the healthcare system. Teamwork in all dimensions Throughout our activities in radiology we aim to facilitate and enhance clinical collaboration. For example, our 3D imaging systems are bringing surgeons and radiologists increasingly close together in daily interaction. Functioning like a ‘human GPS’, the highly detailed 3D images mean that radiologists can supply clear ‘roadmaps’ that surgeons depend on to make accurate interventions. As Osman Ratib, M.D. Professor & Chair, Nuclear Medicine in Geneva says, “If an image is worth a thousand words, then a 3D image is worth a million. We can now convey those images to our referring physicians in a way that we never could before.” to-noise ratio by up to 40%. This enables the delivery of crisp image clarity that clinicians need to make informed decisions in a wide range of procedures, including traditional applications like neuro and musculoskeletal and fast-growing applications like body and cardiac. When combined with other new solutions in Ultrasound and Diagnostic X-Ray, these innovations provide a powerful illustration of how Imaging 2.0 is opening up a new era in radiology. As Steven Braff, M.D. Professor and Chairman of Radiology at Fletcher Allen Health Care says, “I’d seen the advent of CAT scanning, PET scanning and MRI scanning. And I was beginning to think, ‘Well maybe that’s it, there’s not going to be anything that exciting anymore’. But I’m very pleased to say that I was wrong.” * 510(k) pending; not available for sale in the USA Imaging 2.0 facilitates new levels of collaboration between radiologists Our imaging technology is opening up richer views, so clinicians can and referring physicians. perform procedures that are less invasive while delivering the information they need. Host of new innovations At the 96th annual meeting of the Radiological Society of North America (RSNA) in Chicago in November 2010, we launched Imaging 2.0 with the unveiling of a wealth of pioneering, innovative and cost-effective solutions for radiology. These include our Ingenuity CT and Ingenuity TF PET/CT, a premium hybrid imaging modality combining PET (positron emission tomography) and CT. Both the CT and PET/CT incorporate new innovations to lower radiation and contrast dose. For instance, Ingenuity CT can provide up to 80% less dose, up to 15% less injected contrast, high image quality and fast reconstruction in seconds rather than minutes. Other introductions designed to advance diagnosis and radiology workflow include our revolutionary wholebody Ingenuity TF PET/MR solution*, which integrates the molecular imaging capabilities of PET with the superior soft tissue contrast of MR. Another groundbreaking introduction was our Ingenia MR solution*, the first-ever digital broadband MRI system. Ingenia can improve signal- 10 This is a customized selection from the Annual Report 2010 3 Our strategy in action 3.1 - 3.1 Confidence and speed in clinical diagnosis All solutions start with insight. But groundbreaking ones start with truly deep, expert understanding – as in the case of the Stroke Navigator. In the event of a stroke, some 2 million brain cells start to die every minute. Fast diagnosis and treatment is essential, as captured by the slogan ‘time is brain’. The best possible care requires hospitals to provide 24/7 access to neurological services. Small, rural hospitals however can often not afford to have neurologists on staff around the clock. Such hospitals increasingly make use of telemedicine centers that provide remote, 24/7 neurological services to subscribers. To minimize time-totreatment, and to help prevent clinical errors due to miscommunication, efficient and reliable collaboration between bedside care providers and telemedicine center is needed. Both hospitals and telemedicine centers can now benefit from Stroke Navigator, a new clinical decision support tool developed by Philips Research in close cooperation with Philips Healthcare Visicu. As a collaborative tool, it provides contextual forms that allow care providers on both sides to efficiently access and exchange patient data. A doctor performs an initial assessment of the presence/severity of stroke. It also assists them in following stroke care protocols, for example, by helping to make sure that all relevant data is collected and is known when, where and by whom it is This is a customized selection from the Annual Report 2010 11 3 Our strategy in action 3.1 - 3.1 needed; and progress bars indicate how much time is left for critical steps. In short, Stroke Navigator helps to improve a stroke patient’s chances of successful recovery. Stroke Navigator helps clinicians diagnose the correct stroke sub-type. For several years our researchers worked closely with the Philips business and healthcare professionals in Europe and the United States, designing the system and testing the results in the field. It was a long and detailed process, a journey of discovery and understanding. “Sometimes groundbreaking solutions don’t require new technology,” says Charles Lagor of Philips Research. “What they do require is a thorough understanding of users’ needs.” Medical staff conduct a patient re-assessment after treatment for ischemic stroke. Visicu utilized the diagnostic and therapeutic timers, societal guidelines and back-end reporting structure in Stroke Navigator to develop its first version of eConsultant. Visicu clients now have the best multiple user software for managing remote stroke care that is integrated into the eICU center and provides for a coordinated tele-stroke network. 12 This is a customized selection from the Annual Report 2010 3 Our strategy in action 3.2 - 3.2 3.2 Home Healthcare Overburdened hospitals with limited resources and challenging financial circumstances will be hard pressed to care effectively for the growing numbers of longterm patients with chronic ailments such as sleep disorders and heart disease. New solutions must be found. Addressing the growing demographic need for care in the home, we provide both equipment – for sleep-disordered breathing, home respiratory care and respiratory drug delivery – and home monitoring services to support cardiac and elderly care. We work together with our clinical provider customers to improve the quality of life for at-risk individuals in the home through better awareness, diagnosis, treatment, monitoring and management of their conditions. This is a customized selection from the Annual Report 2010 13 3 Our strategy in action 3.2 - 3.2 An extra level of reassurance This year, millions of older people will suffer a fall and some may be unable to press their help button. That’s why we developed a new way to access help. For an elderly person, a fall can have devastating consequences. Without immediate help, they may be incapacitated for hours – suffering physical pain, emotional distress, or serious secondary medical problems such as dehydration or hypothermia. For many of these people, it takes just a single press on one of our Lifeline pendants to raise the alarm. But some fallers will be disoriented, unconscious, immobilized, or otherwise unable to push the help button. To ensure that everyone is able to access help when needed, we developed the AutoAlert option for our Philips Lifeline medical alert service. Lifeline with AutoAlert provides an added layer of protection by automatically placing a call for help if a fall is detected. Sensing falls - not everyday movement AutoAlert distinguishes between normal movements and falls by monitoring not just movement but also the associated acceleration and change in height. This ensures that daily activities such as sitting down or walking down stairs are not falsely interpreted as a fall. 14 This is a customized selection from the Annual Report 2010 The AutoAlert option is just one of many ways we are helping older people to continue living independently – by helping to provide the backup and support they need as soon as it’s required 3 Our strategy in action 3.2 - 3.2 Helping people in India get a good night’s sleep In enabling healthcare institutes to diagnose and treat sleeping disorders, we are having a positive impact on people’s quality of life – and much more. Sleep is not optional – it is absolutely essential to people’s health and well-being. There is growing evidence that lack of sleep affects our mental and physical health, work performance, mood and personal relationships. So when a nationwide survey in India found that 95% of the working population was sleep-deprived, we decided to take action. Over the last year we helped establish around 120 sleep labs across the country. Each lab contains a complete diagnostic system, with various sensors for attachment to the head and chest of a patient, who is monitored during sleep. The collected data is then used to determine the type and severity of the sleep disorder. Patients diagnosed with Obstructive Sleep Apnea (OSA), for example, are often given a Philips CPAP (Continuous Positive Airway Pressure) device, which ensures continual airflow throughout the night and thereby a healthier sleep. As a global leader in the sleep management market and the treatment of OSA, Philips assists hospitals and clinics across the globe in setting up sleep labs. We provide not only the required equipment, but also the specific training. This is a customized selection from the Annual Report 2010 15 3 Our strategy in action 3.3 - 3.3 3.3 Healthy Life & Personal Care We look for opportunities where “sense and simplicity” can truly make a difference. Our Healthy Life platform takes a holistic approach to enhancing consumers’ health, addressing the need for mental and physical health and for healthy relationships. Our Personal Care platform addresses consumers’ need to look and feel their best, and so helps people feel more confident. 16 This is a customized selection from the Annual Report 2010 3 Our strategy in action 3.3 - 3.3 Wake up the town A unique initiative to help residents of an Arctic town wake up more naturally improves their moods and energy levels through the long months of Polar Night. Few of us relish getting out of bed during the dark winter months, but most of us have at least a few hours of sunlight to look forward to, even on the shortest of days. But imagine living in the Arctic Circle, where almost four months of continuous darkness makes waking in the morning all that much tougher. It is total darkness when you wake up, when you go to work, and when you come home again. Getting up in winter is difficult in normal circumstances, but when there is absolutely no natural indication of night-time turning to day, the task of waking up can be even more challenging. That is why in October 2010 we launched a special experiment called Wake up the town to help the residents of Longyearbyen – the world’s most northerly town, on the Norwegian archipelago of Svalbard – wake up more refreshed and ready to take on the day. We provided many of them with a Philips Wake-up Light, which simulates sunrise by gradually increasing light output over a half-hour period. From October 28, to February 14, the sun never peaks over the horizon and Longyearbyen enters a period of total darkness. This sunrise simulation has a profound effect, as Daniel Adams, light therapy expert and Senior Application Scientist at Philips, explains. “From our research we know that every person’s body clock is sensitive to light. When it is introduced naturally and slowly in the morning it effectively helps to ‘wash away’ our sleep hormones. People wake up feeling more refreshed and with higher energy levels. This is in stark contrast to the jilting effect of This is a customized selection from the Annual Report 2010 17 3 Our strategy in action 3.3 - 3.3 an alarm clock, which sometimes causes what we call sleep inertia, which quite literally means difficulty in getting going because your body still thinks it is sleeping time.” worldwide via Facebook and the campaign website www.philips.com/wakeup, which also features a documentary by award-winning film maker Doug Pray. High expectations fulfilled Before the experiment, three quarters of the volunteer subjects (72%) said that they found it difficult to get out of bed during the winter darkness. Some 65% also said that their energy levels are lower during this season. Adams continues, “Light is essential to our well-being as humans, and with the absence of natural sunlight on winter mornings, it can be challenging to wake up to a normal schedule and feel alert, in a good mood and ready for the tasks of the day ahead. The residents of Longyearbyen were acutely aware of the challenges darkness poses to waking up in the morning, which made them perfect candidates to trial the Wake-up Light.” At the end of the six-week trial – the world’s largest light therapy field experiment – 87% of respondents found that they awake feeling more refreshed, alert and ready for the day. One resident even said that the Wake-up Light made her feel as though actual sunlight came into her bedroom each morning – exactly what she needed during the season of perpetual darkness. 86% confirmed the Wakeup Light’s positive impact on their mood. And the vast majority (98%) stated that they will continue to use the Wake-up Light in preference to their previous method of waking up. The project volunteers used Wake-up Light model HF3470, which combines advanced ‘sun rising simulation’ light technology with new, personalized sound options. Svalbard calling the world Designed to raise awareness of the potential of light therapy, the Wake up the town experience wasn’t just limited to those living in Longyearbyen. The residents were able to share their experiences with consumers 18 This is a customized selection from the Annual Report 2010 “Earlier I used to snooze for at least 30 minutes before I dragged myself out of bed, now I am actually awake when I wake up.” 3 Our strategy in action 3.3 - 3.3 Fulfilling lifestyle aspirations in emerging markets As the growth of the urban middle class in emerging markets continues to accelerate, we are supporting their well-being with innovative lifestyle products. With an estimated 200 million middle-class households in emerging markets by the year 2015, spending power for lifestyle products is set to explode – especially in China. Demand is expected to be high for lifestyle products that offer quality and style in answering the needs of this consumer group, which is increasingly focused on individual self-expression. This was borne out by reaction to the recent launch of our new SensoTouch 3D electric shaver. scores high in consumer perception, and we are well placed to continue answering lifestyle needs in the dynamic emerging markets. Building upon Philips’ 70-year heritage in electric shaving, the stylish SensoTouch 3D is our most advanced shaver yet, minimizing skin irritation. It was met with tremendous enthusiasm at its launch onto the key Chinese market in October last year. Road shows featuring 3D movies ensured high impact for thousands of consumers in department stores, while web-based and broadcast marketing initiatives communicated the product benefits to millions more across the country. As always, during face-to-face touch-point events, we gathered a wealth of customer insight. Special product demonstrations and interviews confirmed that our brand This is a customized selection from the Annual Report 2010 19 3 Our strategy in action 3.4 - 3.4 3.4 Home Living & Lifestyle Entertainment Our Home Living platform addresses consumers’ pressing need to have more time to spend on themselves or with family and friends. We do this by creating highquality solutions that enable quick and convenient cooking, preparation of beverages, cleaning, caring and home comfort. Lifestyle Entertainment is about enjoying entertainment and the little events in everyday life: sharing time with family and friends, having time off from a hectic schedule, and moments of comfort, fun and caring. 20 This is a customized selection from the Annual Report 2010 3 Our strategy in action 3.4 - 3.4 Making business sense with sustainable TVs As increasing numbers of people demand sustainable products and services, we continue to make simple, but highly effective, green changes to the way we operate. Being a leading global company in health and well-being, we are naturally committed to the principles of sustainability – after all, sustainability is essentially about the health and well-being of our planet. But in addition, we also firmly believe that minimizing our impact on the environment leads to substantial business opportunities. Firstly, because people prefer brands with a proven sustainability record, and increasingly they are placing sustainability issues at the center of their purchase decisions. Secondly, by reducing energy consumption and waste during manufacturing, we also reduce our own operating costs, which obviously makes good business sense. That’s why more than 25 years ago we started to systematically address the challenge of environmental care. At first we implemented waste management and energy efficiency programs in our manufacturing processes, but soon after we became active in designing energy-saving products, including of course TVs. All this was combined with advanced processes that, where possible, used recycled materials. 40% reduction in TV energy consumption In recent years we have made substantial progress in the energy efficiency of our TVs – an average 40% reduction compared to previous models. This reduction in energy consumption has been achieved through, for instance, the introduction of LED backlight technology. And it is not just when the TV is switched on that energy savings are made: in standby mode, advanced technology has driven power consumption down to less than 20% of the EU’s legal requirements – one of the lowest standby energy consumption rates available on the market today. 37,500 trees saved every year Our Television business saves huge quantities of paper by using recycled packaging, and we also use biodegradable polystyrene. And, in addition to using recycled paper in This is a customized selection from the Annual Report 2010 21 3 Our strategy in action 3.4 - 3.4 our packaging, we also avoid using it in our marketing materials – for instance, by developing electronic pointof-sale information that is displayed on the TVs in each shop, and incorporating electronic user manuals within the TVs themselves. These and other measures save a total of 15 million kilos of paper, equivalent to 37,500 trees, every year. As a leader in sustainability, Philips continuously strives to make it simple for consumers to reduce their impact on the environment. A holistic approach to product design A powerful example of our commitment to sustainability is the award-winning Econova LED TV. This performance LED TV consumes 60% less power than its predecessor, an impressive energy efficiency that is further enhanced by its innovative ‘zero power switch’. Even the remote control is efficient – powered by solar energy. The TV is also completely free of PVC and brominated flame retardants. Add to that the fact that 60% of the aluminum used in the set is recycled and it’s not surprising that the Econova LED TV (42PFL6805) won the prestigious EISA award ‘European Green TV 2010-2011’. The remote control is charged via a solar cell, which works even in indoor light conditions. 22 This is a customized selection from the Annual Report 2010 3 Our strategy in action 3.4 - 3.4 A fine blend One year on from the acquisition of Saeco, consumers are enjoying the wonderful taste of espresso from the first dual-branded products The acquisition of Saeco in 2009 fitted perfectly with our ambition to expand our coffee portfolio. One of the central themes during the merger has been applying the concept of simplicity – in everything, from creating new products to interacting with customers. “Saeco’s strength has always been the taste of the coffee its machines produce,” says Iwald Mons, Post-Merger Integration Leader. “This is something we obviously want to preserve. And when you mix this with simplicity, and with innovation based on real consumer insights, you get the best of both worlds. That’s a very exciting prospect.” The same approach – combining strengths – is being taken on brand level. Over the years, Saeco has built up an excellent reputation, and it is important to leverage on this value. As a result, the first products with dual branding – Philips Saeco – were launched in 2010. Each coffee machine is a combination of exclusive design, innovative technology and cutting-edge materials: together they guarantee great-tasting espresso and ease of use. Clearly Philips and Saeco share common values: bringing “sense and simplicity” to the lives of consumers! This is a customized selection from the Annual Report 2010 23 3 Our strategy in action 3.5 - 3.5 3.5 Home Lighting Our innovative home lighting solutions beautify and inspire, empowering consumers to define the ambience in their personal spaces. Lighting can enhance form and function, improve people’s sense of well-being and enable them to express their identity and style. We believe that making homes more beautiful, comfortable and functional – and doing so responsibly – enhances lives. 24 This is a customized selection from the Annual Report 2010 3 Our strategy in action 3.5 - 3.5 A lighting revolution in the home Home lighting is no longer only about practical illumination – increasingly it’s about the power of lighting to enable people to personalize their interiors. At the end of a hard day, home is the place most of us want to go to unwind. That’s where we can be ourselves – and relax, energize or socialize. It’s where we’re surrounded by the objects we treasure, the things that reflect our identity and personality. lighting offers unprecedented freedom in terms of color, dynamics, miniaturization, architectural integration and energy efficiency, opening up exciting new ways for consumers to use and experience light. Transforming a house into a home is all about creating the right atmosphere. The color of the walls, the way in which a room is furnished and the amount of natural light that flows in through the windows, are all factors that contribute to the atmosphere of individual spaces. In the home, light has traditionally been seen as something to switch on or off as needed for sight. But light is so much more than this. Today, light is no longer static. It is no longer about dimming or switching on and off a single tone of light. We have entered a new era, in which lighting can do more – much more – than simply illuminate. Our lighting industry is in the midst of a revolution, driven by the demand for energy efficiency, the shift from components toward connected lighting systems, and the transition from analog to digital lighting. Digital or LED Lighting - expressing who we are and how we feel LEDs provide a palette of millions of colors or a thousand shades of white light and dynamic effects that conventional lighting cannot match in terms of scene-setting and ambiance. Our LED-based home lighting solutions enable This is a customized selection from the Annual Report 2010 25 3 Our strategy in action 3.5 - 3.5 consumers to move from homogeneous white light to variable color temperature, and from static light effects to dynamic ‘light scenes’. Thanks to the emergence of LEDbased solutions, such as our LivingAmbiance wireless system, they can enhance and personalize their home spaces by changing the color, brightness and dynamics of the light – creating the ideal ambiance to match the occasion or mood. And there is even more on the horizon. Increasingly, design is an important factor in a consumer’s choice of lighting. With LEDs being so small, new designs can be created that were never possible before, as designers are no longer constricted by the form factor of legacy light sources. And this design freedom will open up new possibilities – with newly shaped luminaires enabling consumers to further define their individual style and identity. Reflecting the growing importance of design as a differentiating factor in the consumer luminaires segment, we acquired Milan-based Luceplan, an iconic design brand in the premium design segment, in 2010. Luceplan’s portfolio includes table, suspension, wall and ceiling luminaires for residential applications, with a number also used in professional applications. New ‘light experiences’ Our innovative LED-based home lighting solutions are designed to beautify and inspire, while empowering people to define their personal environments through design and style. The result? A completely new experience of light. Life at home will never be the same again. 26 This is a customized selection from the Annual Report 2010 3 Our strategy in action 3.5 - 3.5 Breakthrough LED bulb for ambience and economy At Light+Building 2010 we announced the market introduction of our new dimmable 12 W lamp – the industry’s first LED replacement for the 60 W incandescent bulb. With this new lamp, marketed in the United States as EnduraLED A19, facility managers and property owners now have an alternative to the most common incandescent bulb – one that delivers the same warm white light they are familiar with, and that has excellent dimming properties. other lamp companies were vying for this coveted award, so this was a particular feather in our cap – especially as the award was judged by independent US lighting industry experts such as the Pacific Northwest National Laboratory and the California Lighting Technology Center. Replacing a standard 60 W bulb with EnduraLED A19, which uses just 12 watts of power and delivers an industry benchmark of 806 lumens, could save a business or commercial property up to USD 120 over the course of the life of the lamp. Fending off the competition This breakthrough lamp first came to prominence at the end of 2009, when it was named as the 3rd best invention of the year by TIME Magazine. “With the flick of a switch, Philips may have just dramatically lowered America’s electric bill,” TIME commented. And at its annual conference in September, the American Lighting Association recognized EnduraLED as the best LED replacement solution in the US A19 class. Twelve This is a customized selection from the Annual Report 2010 27 3 Our strategy in action 3.6 - 3.6 3.6 Professional Lighting The professional lighting market is in the midst of a radical transformation, driven by the energy efficiency imperative, the LED lighting revolution and the increasing focus on application-based lighting solutions. In our endeavor to meet the needs of our customers in the office, outdoor, industry, retail, hospitality, entertainment, healthcare and automotive segments, we are delivering new, responsible forms of lighting – customer-centric, simplicity-led innovations that enhance people’s experience of light. 28 This is a customized selection from the Annual Report 2010 3 Our strategy in action 3.6 - 3.6 Better light, better learning Children are no different from adults – they feel better, and perform better, in an environment that is attractive, stimulating and designed around their specific needs. We have conducted extensive research, together with leading German and Dutch universities, which shows that our dedicated classroom lighting can promote learning by boosting children’s concentration, motivation and behavior and supporting their general feeling of wellbeing. SchoolVision is an innovative classroom lighting solution, which allows teachers to adjust both the brightness and warmth of the light. Settings for different lighting moods can be activated by a single button on a control panel. The teachers can choose between four settings – Energy, Calm, Standard or Concentration. Energy corresponds to the light of a bright, cloudless summer day around noon, while Calm is the equivalent of gentle evening sunshine. “Both teachers and children now enjoy working in the classrooms”, says Jane van der Heijden, Principal of Wintelre Primary School. Dedicated lighting enhancing performance In collaboration with the Netherlands’ University of Twente we carried out a pilot project in two classes at Wintelre Primary School. The cool-white high-intensity light in the Energy scene was used in the morning and after lunch to give the children a boost. The standard light levels in the Standard scene were used for regular classroom activities. For more challenging tasks, the Concentration This is a customized selection from the Annual Report 2010 29 3 Our strategy in action 3.6 - 3.6 scene, with its cool-white, very bright light, created the right atmosphere to help the pupils focus. Finally, the warm color and lower intensity of the Calm scene helped to calm children down and encouraged them to work well together. Both teachers and children enjoy working in the classrooms lit with SchoolVision. “We begin in the morning with bright lighting that generates energy,” explains Jane van der Heijden, Principal of Wintelre Primary School, “and we normally end the day with warm lighting that offers calm and tranquility, and in which a good discussion can be held or creative activities can be carried out.” This change in lighting is appreciated by both pupils and teachers. “We are noticing an increase in the level of concentration and calm in the class, and the pupils even let us know if they would prefer to carry out a certain type of activity under a certain type of lighting.” Good lighting can create a sense of well-being and help pupils to stay alert and concentrated. Additional benefit - substantial energy savings Besides having a positive impact on the learning environment and pupil performance, our innovative school lighting offers a further, extremely significant benefit – substantial energy savings. At Elouges Primary School in the Belgian district of Dour, for example, the combination of intelligent lighting controls and the latest low-energy light sources is helping to save as much as 80% of the electricity used by the old system. With budgets everywhere under tremendous pressure, this is potentially very good news for all schools. 30 This is a customized selection from the Annual Report 2010 With SchoolVision, different lighting moods can be activated at the push of a button. Win-win, today and going forward Our future increasingly depends on our ability to generate and manage knowledge and innovation. This all starts with our children in schools. Our dedicated school lighting helps teachers create the ideal learning atmosphere in the classroom. In this way, we are helping deliver a dual gain for this and future generations – better learning results for children, while at the same time saving energy. 3 Our strategy in action 3.6 - 3.6 Creating livable cities with light Our innovative, energy-efficient lighting solutions can help municipal authorities create towns and cities that are safe and enjoyable to live, work and relax in. The challenge of growing urbanization Less than a century ago, fewer than 10% of the world’s population lived in cities. Today, that figure stands at over 50%, and it is estimated that by 2030 nearly six billion people – three quarters of the world’s population – will be living in cities, as some 130 million people move into urban areas every year. Urban growth and transformation on this scale presents new social, economic and environmental challenges for those who live, work and do business in cities. Quality of life (safety, security, health and well-being), the promotion of commerce, entrepreneurism and tourism, and historic preservation are all high on municipal agendas. At the same time, towns and cities are looking to reduce their ecological impact: urban environments contribute heavily to the consumption and cost of energy, while also disturbing the balance of nature through artificial light, pollution and waste. In the emerging markets, we are seeing a rapid expansion of the number of conurbations with 20 million or more inhabitants. Safer, more attractive urban spaces Quite simply, light helps make a city safer and more attractive, enhancing its brand identity – the distinctive signature that defines its appeal and differentiates it from other cities. This is important not only for civic pride, but also to ensure that the city remains viable and competitive in the global marketplace. This is a customized selection from the Annual Report 2010 31 3 Our strategy in action 3.6 - 3.6 To retain both private and corporate citizens, cities must maintain safety and security, by preventing crime, and by providing safer streets for both motorists and pedestrians. Choosing the right lighting can make a world of difference. For example, at the same light level, more than 80% of people feel safer with bright, white light than with traditional yellow street-lighting solutions. White light’s high levels of perceived brightness and superior color rendering help people feel safer and make it easier to distinguish objects, colors, shapes and other details. Well-designed urban lighting not only provides city residents with safe, livable environments, but also urban spaces that are unique and beautiful, and that welcome recreation. This enriches the city fabric, attracting new residents, new businesses and inward investment that boosts tourism, retailing and other boons to economic growth and employment. Commuters in Hong Kong enjoy brighter and safer journeys at night thanks to our LED and ceramic metal-halide lighting on the new Stonecutters Bridge. The right light - no less, and no more Lighting must play a balanced role in the urban landscape. We believe that our lighting solutions, powered by innovative technologies such as LED, can create more value, more beauty, more safety and more visibility – and yet can do so with less consumed power and less environmental impact. City authorities could, for example, save around EUR 3 billion in energy costs and 10 million tons of CO2 a year, just by switching from older road lighting to our latest energy-efficient technology. No less important, light is encroaching upon our natural habits – affecting both our human sleep patterns (and therefore our health and well-being), as well as the reproductive and migratory patterns of animals. Night skies in densely populated cities can, for example, be as much as 500 times brighter than our ‘natural’ night skies. We don’t want light all the time, everywhere, so our flexible solutions offer exactly the right amount of light, in the right places, at the right time. 32 This is a customized selection from the Annual Report 2010 “To me, lighting design is not about just giving light to a space. It’s about giving the best light to the people, to give them love of their own space and time.” 4 Our planet, our partners, our people 4 - 4.1 4 4.1 Our planet, our partners, our people Climate change Recognizing that energy efficiency is one essential answer to climate change, we have made a serious commitment to develop, promote and market more energy-efficient solutions for people in all markets. We meet this challenge with our Green Products and Green Innovations and by inspiring individuals to make simple changes that can have profound results. We seek to facilitate new solutions to drive responsible energy practices, and have long focused on the energy efficiency of our products and production processes. This is a customized selection from the Annual Report 2010 33 4 Our planet, our partners, our people 4.1 - 4.1 Bringing life-enhancing innovations to Africa From May to July, our ‘Cairo to Cape Town’ roadshow demonstrated how our solar-powered LED lighting and innovative medical solutions can improve life for millions of people in Africa. Our journey took us to 15 cities in nine countries, clocking up a total of 9,000 km. On the way, we hosted a number of Lighting and Healthcare events and roundtable discussions with media, stakeholders and other key decision-makers from government, industry and NGOs. These fruitful dialogs gave us many valuable insights that we can now feed into our innovation pipeline – to ensure we meet African needs even more effectively. Extending the day In Africa, it gets dark at about 7.00 pm all year round. As some 560 million people in Africa have no effective lighting at night, this darkness holds countries back, both socially 34 This is a customized selection from the Annual Report 2010 4 Our planet, our partners, our people 4.1 - 4.1 and economically. Sustainable solar lighting has the potential to transform Africa’s economic, social, educational and cultural life. We have developed solar lighting solutions to help people in Africa extend the day, including a small LED reading light that enables children to do their homework at night or adults to follow evening classes. These lights are affordable and offer the potential for a major boost in literacy across the continent. We have also developed the world’s first solar-powered LED floodlighting solution that allows people with little or no access to electricity to enjoy playing or watching sport long into the night – while at the same time increasing safety outdoors. On the tour, we partnered with Dutch soccer legend Ruud Gullit and the Right To Play Foundation, which works to improve the lives of children in some of the most disadvantaged areas of the world through sport and play. Matthijs Huizing, director of Right To Play Netherlands, said: “We are pleased to join forces in communicating the power of sport and play for development, health and peace, strengthened by the new opportunities that solar LED lighting offers.” Across the continent, our messages around solarpowered lighting and healthcare provision clearly resonated with audiences. For instance, Simon D’Ujanga, Uganda’s Minister of State for Energy, commented: “In the country, as many of our people strive for energy, we’ve been promoting renewable energy and efficiency in the use of energy, so this seems to be the right answer for our problems. This is what we have been waiting for.” As Young & Rubicam’s Chris Harrison said: “Just imagine how future innovation in Philips products will be received in rural communities who know that Philips brought them soccer after dark.” As Ruud Gullit explains: “For us, floodlight is normal: as a kid you play with it, you can do training in the evening after school, … it’s part of our life. If Africa now had this opportunity they could have the same thing, the same opportunities that I had, to use it to my advantage, to use it in the evening after school so that I could do all my sport activities.” Saving energy – and winning friends “There is significant growth potential in Africa. Philips sees partnership opportunities in Africa for innovation, solution supply, and knowledge sharing. We want to provide meaningful lighting and healthcare solutions across the continent,” says Gottfried Dutiné, Global Head of Markets & Innovation, and member of the Board of Management. This is a customized selection from the Annual Report 2010 35 4 Our planet, our partners, our people 4.2 - 4.2 4.2 Our environmental footprint The significant issues for our company – and our industry – in the environmental area continue to be energy efficiency, chemical content of products, and collection and recycling. We remain committed to giving our full attention to these challenges. To reduce our ecological footprint we are maintaining our focus on overall environmental performance improvement, driven by our EcoVision programs. Working with stakeholders, we aim to share expertise and co-create innovative solutions that will make a difference to future generations. 36 This is a customized selection from the Annual Report 2010 4 Our planet, our partners, our people 4.2 - 4.2 Improving our footprint We believe that addressing the effects of mankind’s environmental footprint, such as climate change, requires meaningful, sustainable innovation. Sustainability at the heart of health and well-being up Sustainable health and well-being space Ecological Footprint down ‘Lead in Sustainability’ is one of the key objectives of our Vision 2015 strategic plan – a goal we pursue systematically through our EcoVision programs. In the EcoVision5 program, leadership is profiled with three Key Performance Indicators (KPIs), which track our activities in the areas of Green and Social Innovation, the building blocks for Sustainable Innovation. Green Innovation focuses on reducing the Environmental or Ecological Footprint of our products. Social Innovation comprises contributions to the improvement of the Human Development Index (HDI), for instance by delivering products and services for accessible and affordable healthcare in emerging markets. Human Development Index The Human Development Index is a United Nations parameter and incorporates three elements, life expectancy, purchasing power and education level. Leadership KPIs In our EcoVision5 program, the first leadership KPI – ‘care’ – drives Social Innovation, while the other two – ‘energy efficiency’ and ‘materials’ – drive Green Innovation. This is a customized selection from the Annual Report 2010 37 4 Our planet, our partners, our people 4.2 - 4.2 Examples of such innovations can be found throughout this report, such as solar-powered LED lighting, EnduraLED and the Econova LED TV. Greening our operations With energy, waste, water and emission reduction as performance indicators, we drive a reduction of our environmental footprint in our operations. Philips was recognized as a leader in carbon disclosure and carbon performance by the Carbon Disclosure Project (CDP) 2010 Global 500 report. The CDP collects emissions data from over 3,000 organizations in 60 countries. Philips received a score of 94 (out of 100) for carbon disclosure results and was awarded an ‘A’ for its overall carbon performance, making it a company with “both higher degrees of maturity in their climate change initiatives and achievement of their objectives” according to the CDP. Green Products and Green Innovation In 2010, Green Products represented 38% of our revenues globally, compared to 20% in 2007, as a result of investments of more than EUR 1 billion in Green Innovation during the last three years. In 2010 we set a target to further increase the share of Green Products to 50% of Group sales by 2015. We use the Philips Green logo to identify an increasing number of our Green Products. To further raise awareness and encourage individuals to make smart daily choices, we have expanded the reach of our asimpleswitch.com website. Collection and recycling In 2009 we collected and recycled over 100,000 tons of Waste Electrical and Electronic Equipment (WEEE). More than 90% of WEEE was collected and recycled in Europe due to the widespread implementation of product takeback legislation. We have also expanded our voluntary collection and recycling activities in countries such as the United States, Argentina, Brazil and India. Furthermore, 38 This is a customized selection from the Annual Report 2010 we continued to actively advise on and support the introduction or revision of product take-back legislation in countries like Argentina, Brazil, China, the European Union, India, Russia, Thailand, Turkey and the United States. Chemical content of products In 2010, Philips asked more than 3,000 suppliers to declare their compliance with REACH, RoHS and other chemical substances requirements by making BOMcheck declarations. BOMcheck is an online industry platform that systematically collects declarations from suppliers in order to fulfill REACH and other regulations. Philips introduced a large number of consumer products that are free of polyvinyl chloride (PVC) and brominated flame retardants (BFR) in 2010, including the Econova LED TV, the first PVC/BFR-free television in the world. The lessons learned from the introduction of these products in 2010 allowed us to create a detailed roadmap for new PVC/BFR-free consumer products for 2011 and clearly identify where PVC/BFR-free alternatives are not yet possible due to technical, safety or regulatory requirements. “The Econova TV puts Philips on track to meet its commitment to phase out these hazardous substances by the end of 2010, well ahead of other TV manufacturers.” Tom Dowdall, Greener electronics campaign coordinator, Greenpeace 4 Our planet, our partners, our people 4.3 - 4.3 4.3 Partnerships for progress World leaders from rich and poor countries alike, representing all United Nations member states, have pledged to achieve the eight Millennium Development Goals (MDGs) by the year 2015 – to significantly reduce poverty, illiteracy, inequity, diseases and improve environmental quality in poor countries. Our experience has shown that developing these markets requires tailor-made solutions, a different approach to marketing and distribution, and multi-sector partnerships. Multi-stakeholder engagement is needed to improve working conditions in the supply chain – another important contribution towards the MDGs. This is a customized selection from the Annual Report 2010 39 4 Our planet, our partners, our people 4.3 - 4.3 Driving sustainability in the supply chain We are committed to partnering with governmental and civil society organizations and business partners to further embed sustainability in the supply chain. As a responsible corporate citizen, we strive to conduct our business with a high level of integrity. And, in keeping with our brand values, we also support our suppliers to help them achieve higher standards. To this end, we actively seek dialog with industry partners, civil society and governmental organizations, and we are an active member of a number of initiatives implementing sustainability programs. For example, we are a member of the Electronic Industry Citizenship Coalition (EICC), an important sustainability alliance for the electronics industry. The EICC was established in 2004 and promotes an industry code of conduct for global supply chains to improve working and environmental conditions. Today, it includes more than 50 global electronics companies and their suppliers. Another initiative in which we are involved is the Dutch Sustainable Trade Initiative (IDH). IDH brings together government, frontrunner companies, civil society organizations and labor unions. The mission of IDH is to accelerate and up-scale sustainable trade in mainstream commodity markets from the emerging countries to Western Europe. In this way, IDH is working on the Millennium Development Goals for poverty reduction, environmental protection and an open trading and financial system. 40 This is a customized selection from the Annual Report 2010 4 Our planet, our partners, our people 4.3 - 4.3 Philips is participating in the IDH Electronics Program, which has set itself the target of improving the working conditions of 500,000 workers in China’s Pearl River delta. This multi-stakeholder program expects to engage with local civil society organizations, authorities, and management and workers of companies in the supply chain. It aims to identify needs related to a number of key themes, including workplace health and safety and communication between workers and management, and to implement improvement plans, using available best practices. Transparency on emissions To further increase transparency on greenhouse gas emissions and climate strategy in our supply chain, we became a member of the Carbon Disclosure Project 2010 Supply Chain program. This program provides a triedand-tested, standardized methodology to support effective collaboration with the company’s suppliers and peers around climate change and greenhouse gas emissions. We will use the program to create awareness and drive action in our supply chain. Furthermore, we will continue to increase the number of suppliers that we invite to participate in the years to come. Additional stakeholder activities Other stakeholder engagement activities in 2010 included workshops with representatives from civil society organizations and labor unions, such as Amnesty International, GoodElectronics, MakeITfair, FNV Global and FNV Allies. As a member of the UN Global Compact Advisory group we also provided input to the UN Global Compact Office in their development of a guidance tool for Supply Chain Sustainability. And we financially sponsored the pilot by the tin branch association ITRI to improve supply chain transparency on conflict minerals – metals that can be mined in the Democratic Republic of Congo (DRC), where profits from the minerals trade may be fueling conflict and human rights abuses. We further addressed the issue of conflict minerals via the EICC extractives working group, and by maintaining a dialog with politicians and civil society organizations, as well as requesting our relevant suppliers to ensure that they are not sourcing conflict minerals from the DRC. Pauline Overeem, GoodElectronics: “The GoodElectronics Network welcomes the increasingly open and collaborative stance of Philips concerning genuine engagement with civil society stakeholders. For the coming year(s), GoodElectronics encourages Philips to go that extra mile, in working towards full compliance with international labor standards, in its own operations as well as throughout its supply chain. Significant progress can be made by engaging with trade unions at the global level, and by practicing full supply chain transparency.” This is a customized selection from the Annual Report 2010 41 4 Our planet, our partners, our people 4.4 - 4.4 4.4 Supplier sustainability We believe in engaging with our suppliers to encourage them to share our commitment to sustainability. This includes sound environmental and ethical standards as well as providing working conditions for their employees that reflect both the Philips General Business Principles and the Electronic Industry Citizenship Coalition (EICC) Code of Conduct. We continue to focus on the Philips Supplier Sustainability Involvement Program, closely collaborating with our supplier partners and relevant stakeholders to drive progress. It’s about improving conditions in the chain. 42 This is a customized selection from the Annual Report 2010 4 Our planet, our partners, our people 4.4 - 4.4 Helping to identify areas for improvement Our suppliers play a pivotal role in helping us achieve our EcoVision5 objectives. We continue to support them in their efforts to improve the overall sustainability of their business. As a leading health and well-being company taking an integrated approach to sustainability, we are committed to helping our suppliers achieve high standards that benefit their employees, the environment and, where possible, their profitability. Supplier Sustainability and the road to Vision 2015 In October 2010 our Purchasing Leadership Board made a strategic change to the Supplier Sustainability Involvement Program – towards a more collaborative approach with our strategic and preferred suppliers. This has resulted in a more diversified approach on the reach and depth of a joint supplier compliance program, as well as exploration of areas of (joint) sustainable innovation. At the same time, the Program remains firm on the need for suppliers to show continued sustainable performance. Going forward, coaching our suppliers will become an increasingly important part of the Program, in order to further increase its effectiveness. “Within the next five years we want to have not only strengthened our reputation as a leader in supplier sustainability, but also to have engaged our global supply base to help us achieve our EcoVision5 and other sustainability objectives as defined in Vision 2015,” says Sonny Kwok, Head of Supplier Sustainability. This is a customized selection from the Annual Report 2010 43 4 Our planet, our partners, our people 4.4 - 4.4 companies benchmarked for performance in this area. Our scores have showed continual improvement over the last four years, increasing from 62% in 2006 to 93% in 2010. We were commended for thorough and transparent reporting, dedication to supporting suppliers in improving their sustainability performance, and embedding supplier sustainability within the company strategy. Raising the audit bar To enable our suppliers to continuously improve their sustainability performance, we upgraded our auditing process in 2010. For the past few years we have audited our suppliers in high-risk countries based on the Electronic Industry Citizenship Coalition (EICC) code of conduct, which we also supplemented with stricter requirements on freedom of association and collective bargaining. In 2010, in addition to auditing suppliers from acquisitions and other newly introduced suppliers, we started auditing suppliers that had already been audited in the past in order to validate their continued conformance to the code. Almost half the total number of audits conducted in 2010 were such follow-up audits. The main areas of non-compliance – and therefore areas for improvement – remain working hours, emergency preparedness, and the management of hazardous substances. However, thanks to our follow-up audit initiative, these shortcomings are being addressed and remedial action taken. Repeat recognition In recognition of our efforts in the area of responsible supply chain management, the Dutch Association of Investors for Sustainable Development (VBDO) ranked us first among the forty largest publicly-listed Dutch 44 This is a customized selection from the Annual Report 2010 Mr Alexander Rinnooy Kan, President of the Netherlands’ Social and Economic Council (SER) and chairman of the jury, commented: “Philips achieved the highest score in the benchmark for the fourth consecutive year. That is an unprecedented achievement. The sustainability strategy is focused both on the reduction of risks as well as the pursuit of market opportunities. Philips’ supplier sustainability program goes beyond audits and truly supports suppliers in improving their sustainability performance. Philips is leading in many areas.” 4 Our planet, our partners, our people 4.5 - 4.5 4.5 Working at Philips To become an even more market-driven and people-centric company, we have been working to increase organizational effectiveness and simplify our structure. We believe it is important that employees are engaged – that they feel part of a team, know their ideas and suggestions count, trust their manager, and value diverse perspectives. It is crucial that everyone is given full opportunity to use their individual talents – and to grow with Philips, enabling them to secure their future. This is a customized selection from the Annual Report 2010 45 4 Our planet, our partners, our people 4.5 - 4.5 Grow with Philips Developing our people is one of our core values, so in 2010 we launched ‘Grow with Philips’, a program that opens up more opportunities for change and growth. We have always sought to develop our employees’ skills, so that they can maximize and reach their potential and increase their contribution to the company’s success. We start by encouraging staff to annually discuss and plan their ambitions with their departmental and HR managers. Employees are then encouraged to develop themselves by gaining new skills and competences on the job, using our extensive training programs and supported by coaching and mentoring programs. The new ‘Grow with Philips’ program adds to those efforts, with two new important components. The first makes it easier for our employees to grow their careers across functions, business units and geographies. By simply ticking a special box on their online employee profile they indicate that they are interested in changing jobs within Philips. This enables our recruiters to pro-actively search for suitable people within our organization before conducting an external search. Although vacancies are still posted online for all Philips people to see, this new approach makes internal recruiting faster and more thorough, with less dependence on people reacting to job 46 This is a customized selection from the Annual Report 2010 postings. By allowing every employee to easily indicate they are available for a move, we create a transparent internal labor market and promote internal mobility. The second main component of ‘Grow with Philips’ is the new training possibilities that are now available. After researching the training needs of our people, we found that they prefer informal ‘bite-size’ training modules, which give them advice and information when they need it. Hence, in 2010 we created our Learning@Philips web portal, a wide-ranging database of training modules that 4 Our planet, our partners, our people 4.5 - 4.5 are practical and aligned with our business needs. The modules range from five-minute videos to one-minute action tips and easy-to-read PDFs. This makes it easier than ever for Philips people at all levels to develop new skills and move their careers forward. Securing a better future These latest initiatives to help our people develop and reach their potential are part of our global activities in the area of corporate social responsibility. In the Netherlands, for instance, we have for many years played a pioneering role with our national Vocational Qualification Program (CV) and the Philips Employment Scheme (WGP). The CV project has been running since 2004 and targets Philips employees who know their trade well, but do not have a diploma to prove it. That makes them vulnerable in today’s volatile labor market, where a job for life is a thing of the past. CV provides a solution by awarding these people a recognized qualification. To date, more than 1,500 participants have obtained a qualification that will help set them up for the future – either within Philips or elsewhere. Via WGP, we offer vulnerable groups of external jobseekers work experience placements, usually combined with some form of training, in order to increase their chances of finding and retaining a job. Over the 25 years that we have been running WGP, an average of 70% of the participants have found paid work within one year of completing our WGP program. Moreover, a recent doctoral research carried out by the University of Maastricht has revealed that it is still the best-performing employment scheme in the Netherlands. This is a customized selection from the Annual Report 2010 47 4 Our planet, our partners, our people 4.6 - 4.6 4.6 Working in our communities We at Philips have long been active in the communities where we live and work. Initiatives around the world bring “sense and simplicity” to people’s health and wellbeing in a number of local projects. SimplyHealthy@Schools is the global community program we have been rolling out, with strong employee engagement, to inspire and educate children to improve their health and well-being. By linking our social investment initiatives with the scope of our business, we make our core competencies available to simply make a difference in people’s lives. 48 This is a customized selection from the Annual Report 2010 4 Our planet, our partners, our people 4.6 - 4.6 SimplyHealthy@Schools Our SimplyHealthy@Schools program was born out of a desire to make our health and well-being expertise and resources available to a wider community. Growing and aging populations, increasing healthcare demands and the growing pressure of lifestyle-related diseases make current healthcare systems unsustainable. Some of us do not have a choice, simply having no access to the essentials that many take for granted – clean air and water, adequate nutrition, basic sanitation and access to healthcare. Others do have a choice – to eat a diet lower in saturated fats, do more exercise or give up smoking, and so reduce our risk of suffering cardiovascular disease, diabetes or cancer. But for most, old habits die hard, requiring innovative lifestyle solutions to help us change. For the next generation we can make it much easier. By educating them from an early age about their lifestyle and what it takes to stay healthy – and hopefully nurturing attitudes and habits that will stay with them into adulthood. Inspiring schoolchildren around the world Our SimplyHealthy@Schools community program builds on past experience where employees applied their knowledge and volunteered in local schools to upgrade lighting and educate children on energy efficiency. In 2010, we expanded the program into 38 countries, reaching almost 63,000 students, going to over 660 schools and actively involving more than 3,500 employees from around the world on the ground and many thousands more online. This is a customized selection from the Annual Report 2010 49 4 Our planet, our partners, our people 4.6 - 4.6 The SimplyHealthy@Schools Healthy Heroes toolkit is aimed at children aged 8-12 years old and illustrates simple ways of increasing your health and well-being by paying special attention to air, light, water and oral hygiene, as well as to exercise and environmental care. When these factors are improved, children perform better and their overall mental and physical well-being also improves. Simultaneously, the Healthy Heroes program makes children aware of the positive influence that they can have themselves on their lifestyle and their environment. The participating schools around the world also receive a free upgrade of the lighting in their classrooms to energy-efficient solutions that reduce energy consumption while enhancing teachers’ and pupils’ sense of well-being. In Taiwan, De-Hong Tseng, principal of Shi-Lei elementary school, enthused: “We are so happy to have Philips’ volunteers come all the way up to the mountain and engage our children with such fun and meaningful activities. Philips really cares about a sustainable society and contributes with real action.” Everyone benefits Our employee volunteers also get a lot out of the SimplyHealthy@Schools experience. 71% of all employees responded favorably to the Employee Engagement Survey question: “Philips does a good job of contributing to the communities we live in (e.g. social investment programs such as SimplyHealthy@Schools)”. When employees who had participated in the program were asked the same question, the favorable response advanced to 91%. When asked if they would recommend participation to a colleague, 58 out of 60 people replied “Yes, absolutely!” 50 This is a customized selection from the Annual Report 2010 To be continued... The program’s success means it will be continued and expanded in 2011 to include more schools, extra activities and countries such as South Africa, Botswana and Ghana. 5 Group performance 5 - 5.1 5 Group performance “Our return on invested capital rose to 11.7%, and that compares to a cost of capital slightly in excess of 8% for the Group. That puts us on the path to achieve our Vision 2015 goals.” Pierre-Jean Sivignon, Chief Financial Officer € 2,552 million EBITA 5.1 € 1,454 million cash flows before financing activities Management discussion and analysis Management summary The year 2010 • In 2010, despite experiencing a recovery in certain markets, overall worldwide market conditions remained challenging, particularly in developed countries. We recorded moderate 4% comparable sales growth; however, as a result of continued focus on cost management, significant improvements in EBIT, € 7.8 billion liquidity EBITA and Net income were achieved. Additionally, our cash flow from operating activities was higher than in 2009. • EBIT of EUR 2,065 million, or 8.1% of sales, was significantly higher than the EUR 614 million, or 2.6% of sales, achieved in 2009. Significant EBIT improvement, led by Lighting, was achieved in all sectors. As a percentage of sales, 2010 EBIT and EBITA were at the highest levels since 2000. • Following a strong rebound in the first six months of the year, sales growth slowed in the second half, ending at 10% nominal for the full year. Adjusted for favorable currency effects, comparable sales were 4% higher than in 2009, attributable to growth in all sectors, notably Lighting. Within Lighting, growth in automotive and LED markets was strong, partly mitigated by limited growth at Professional Luminaires due to weak construction markets in the US and Western Europe; Healthcare sales grew 4%, supported by 6% growth in This is a customized selection from the Annual Report 2010 51 5 Group performance 5.1 - 5.1 • • • • 52 all businesses except Imaging Systems, which was broadly in line with 2009. Growth at Consumer Lifestyle was limited to 1%, as solid growth at Health & Wellness and Personal Care was tempered by limited growth at Television and sales declines at Audio & Video Multimedia and Accessories. 12% comparable sales growth was achieved in emerging markets, while mature markets grew 1%. Emerging markets accounted for 33% of total sales, up from 30% in 2009. We continued to invest in strategically aligned, highgrowth companies to strengthen our portfolio. In 2010, we completed 11 acquisitions, contributing to all three sectors, notably Discus Holdings in Consumer Lifestyle. The cash outflow related to acquisitions amounted to EUR 239 million. During the year, particularly in the first three quarters, Television showed a significant year-on-year improvement in EBITA. However, with high inventory in retail, and severe price erosion in the fourth quarter, the Television business did not achieve break-even for the year. To improve profitability in the business and reduce exposure, we concluded brand licensing agreements in India and China. We will take further action to address the profitability issue in the business in 2011. We generated EUR 2.2 billion of cash flow from operating activities, EUR 611 million higher than in 2009. Our cash flows before financing activities were EUR 128 million higher than 2009, as higher cash flow from operating activities was partly offset by lower proceeds from the sale of stakes. This is a customized selection from the Annual Report 2010 Key data in millions of euros unless otherwise stated 2008 Sales EBITA1) as a % of sales EBIT 1) as a % of sales Financial income and expenses Income tax expense Results of investments in associates Income (loss) from continuing operations Income (loss) from discontinued operations 2009 2010 26,385 23,189 25,419 744 1,050 2,552 2.8 4.5 10.0 2,065 54 614 0.2 2.6 8.1 88 (166) (122) (256) (100) (509) 19 76 18 (95) 424 1,452 − − (92) 424 1,452 Per common share - basic (0.09) 0.46 1.54 Per common share - diluted (0.09) 0.46 1.53 12,649 12,071 Net income (loss) 3 Net income (loss): Net operating capital (NOC)1) Cash flows before financing activities1) Employees (FTEs) 1) 14,069 (1,606) 121,398 1,326 1,454 115,924 119,001 For a reconciliation to the most directly comparable GAAP measures, see chapter 16, Reconciliation of non-GAAP information, of this Annual Report 5 Group performance 5.1.1 - 5.1.2 5.1.1 Sales The composition of sales growth in percentage terms in 2010, compared to 2009, is presented in the table below. Sales growth composition 2010 versus 2009 in % consolidation changes comparable growth currency effects nominal growth Healthcare 3.9 6.0 (0.2) Consumer Lifestyle 1.2 4.7 (0.7) 5.2 Lighting 8.7 6.0 0.7 15.4 GM&S 6.4 3.0 (2.6) 6.8 Philips Group 4.3 5.5 (0.2) 9.6 9.7 Group sales amounted to EUR 25,419 million in 2010, 10% nominal growth compared to 2009. Excluding a 6% favorable currency effect, comparable sales were 4% above 2009. Comparable sales were 9% higher at Lighting and 4% higher at Healthcare, though were tempered by 1% higher sales at Consumer Lifestyle. Healthcare sales amounted to EUR 8,601 million, which was 4% higher than in 2009 on a comparable basis, driven by 6% growth at Patient Care & Clinical Informatics, Home Healthcare Solutions, and Customer Services. Sales at Imaging Systems were broadly in line with 2009, as growth in emerging markets was largely offset by lower sales in North America. Consumer Lifestyle reported sales of EUR 8,906 million, which was EUR 439 million higher than in 2009, or 1% higher on a comparable basis. We achieved double-digit growth at Health & Wellness and high single-digit growth at Personal Care. This was tempered by 1% comparable growth at Television and year-on-year sales declines at Audio & Video Multimedia and Accessories. recoveries of EUR 57 million. Gross margin percentage was higher than in 2009 in all operating sectors, notably Lighting. Selling expenses increased from EUR 5,159 million in 2009 to EUR 5,246 million in 2010. 2010 included EUR 88 million of restructuring and acquisition-related charges, compared to EUR 185 million in 2009. The year-on-year increase was mainly attributable to higher expenses aimed at supporting higher sales, and increased investments in advertising and promotion. In relation to sales, selling expenses decreased from 22.2% to 20.6%. Expenses were lower than in 2009 in all sectors. General and administrative expenses amounted to EUR 735 million in 2010, compared to EUR 734 million in 2009. As a percentage of sales, costs improved from 3.2% in 2009 to 2.9%. Research and development costs declined from EUR 1,631 million in 2009 to EUR 1,576 million in 2010. The year-on-year decline was largely attributable to lower restructuring and acquisition-related charges, which amounted to EUR 13 million in 2010, compared to EUR 73 million in 2009, and to the discontinuation of certain activities in the field of Molecular Healthcare and 3D Displays. As a percentage of sales, research and development costs decreased from 7.0% in 2009 to 6.2%. The overview below shows sales, EBIT and EBITA according to the 2010 sector classifications. Sales, EBIT and EBITA 2010 in millions of euros unless otherwise stated 5.1.2 EBIT Healthcare 8,601 922 10.7 1,186 Consumer Lifestyle 8,906 595 6.7 639 7.2 Lighting Lighting sales amounted to EUR 7,552 million, which was EUR 1 billion higher than in 2009, or 9% higher on a comparable basis. Growth was largely driven by doubledigit growth at Lumileds, Automotive Lighting, and Lighting Systems & Controls. Ongoing weakness in residential and commercial construction markets meant our Luminaires businesses yielded little growth. sales 7,552 695 9.2 869 11.5 GM&S Philips Group 1) 360 25,419 (147) 2,065 % EBITA1) − 8.1 (142) 2,552 % 13.8 − 10.0 For a reconciliation to the most directly comparable GAAP measures, see chapter 16, Reconciliation of non-GAAP information, of this Annual Report Earnings In 2010, Philips’ gross margin was EUR 9,546 million, or 37.6% of sales, compared to EUR 8,079 million, or 34.8% of sales, in 2009. Gross margin in 2010 included EUR 111 million restructuring and acquisition-related charges, whereas 2009 included EUR 268 million of restructuring and acquisition-related charges and net asbestos-related This is a customized selection from the Annual Report 2010 53 5 Group performance 5.1.2 - 5.1.3 Lighting Sales, EBIT and EBITA 2009 in millions of euros unless otherwise stated sales EBIT1) % EBITA1) EBITA amounted to EUR 869 million, or 11.5% of sales, which included EUR 96 million of restructuring and acquisition-related charges. EUR 247 million of restructuring and acquisition-related charges were included in 2009. The EBITA improvement was also driven by higher sales, improved gross margin and fixed cost savings from restructuring programs. % Healthcare 7,839 591 7.5 848 10.8 Consumer Lifestyle 8,467 321 3.8 339 4.0 Lighting 6,546 (16) (0.2) 145 2.2 337 (282) GM&S Philips Group 23,189 614 − 2.6 (282) 1,050 − 4.5 Group Management & Services 1) For a reconciliation to the most directly comparable GAAP measures, see chapter 16, Reconciliation of non-GAAP information, of this Annual Report EBITA improved from a loss of EUR 282 million in 2009 to a loss of EUR 142 million in 2010. EBITA in 2009 included a EUR 134 million gain related to curtailment for retiree medical benefit plans, EUR 57 million of net asbestosrelated recoveries, and EUR 46 million of asset write-offs. 2009 also included EUR 63 million restructuring charges. 2010 results included a EUR 119 million gain from a change in a pension plan. The year-on-year EBITA improvement was largely attributable to higher license revenue, discontinuation of Molecular Healthcare, and lower costs in the global service units. In 2010, EBIT increased by EUR 1,451 million compared to 2009, to EUR 2,065 million, or 8.1% of sales. 2010 included EUR 233 million of restructuring and acquisition-related charges, compared to EUR 551 million in 2009. In addition to lower restructuring and acquisition-related charges, the year-on-year improvement was mainly driven by higher sales and a higher gross margin percentage in each of the operating sectors, and lower costs in Group Management & Services. Amortization of intangibles, excluding software and capitalized product development, amounted to EUR 487 million in 2010, compared to EUR 436 million in 2009. Amortization charges were higher than in 2009 due to acquisitions. EBITA increased from EUR 1,050 million, or 4.5% of sales, in 2009 to EUR 2,552 million, or 10.0% of sales, in 2010. Higher EBITA was visible in all sectors, notably Lighting. Healthcare EBITA increased from EUR 848 million, or 10.8% of sales, in 2009 to EUR 1,186 million, or 13.8% of sales, in 2010. EBITA improvements were realized across all businesses, largely as a result of higher sales, favorable currency impact and cost-saving programs. Restructuring and acquisition-related charges totaled EUR 77 million, compared to EUR 106 million in 2009. Consumer Lifestyle EBITA improved from EUR 339 million, or 4.0% of sales, in 2009 to EUR 639 million, or 7.2% of sales, in 2010. Restructuring and acquisition-related charges amounted to EUR 61 million in 2010, compared to EUR 136 million in 2009. The year-on-year EBITA improvement was largely driven by higher sales, fixed cost savings, EUR 48 million product recall related charges in 2009, and lower restructuring charges. EBITA was higher than in 2009 in all businesses. Notable improvements were achieved in Domestic Appliances, Television, and Licenses. 54 This is a customized selection from the Annual Report 2010 For further information regarding the performance of the sectors, see chapter 6, Sector performance, of this Annual Report. 5.1.3 Pensions The net periodic pension costs of defined-benefit pension plans amounted to a credit of EUR 103 million in 2010, compared to a cost of EUR 3 million in 2009. The definedcontribution pension cost amounted to EUR 118 million, EUR 11 million higher than in 2009, mainly due to a gradual shift from defined-benefit to defined-contribution pension plans. The 2010 costs were impacted by the recognition of EUR 119 million of negative prior-service costs. These resulted from a reduction of pension benefits expected to be paid in the future, in part due to a change in indexation. In 2010, a curtailment gain of EUR 9 million on one of our retiree medical plans was recognized due to the partial closure of a US site. In 2009, curtailment gains totaling EUR 134 million, relating to changes in retiree medical plans, positively impacted the result. These curtailment gains are the result of changes in the benefit level and the scope of eligible participants of a retiree medical plan, which became effective and irreversible in 2009. For further information, refer to note 28. 5 Group performance 5.1.4 - 5.1.5 5.1.4 Restructuring and impairment charges at reduction of the fixed cost structure, mainly impacting Imaging Systems (Netherlands), Home Healthcare Solutions and Patient Care & Clinical Informatics (various locations in the US). In 2010, EBIT included net charges totaling EUR 162 million for restructuring and related asset impairments. 2009 included EUR 450 million of restructuring and related asset impairment charges. In addition to the annual goodwill impairment tests for Philips, trigger-based impairment tests were performed during the year, resulting in no goodwill impairments. Other restructuring projects focused on reducing the fixed cost structure of Corporate Technologies, Philips Information Technology, Philips Design, and Corporate Overheads within Group Management & Services. For further information on sensitivity analysis, please refer to note 8. Restructuring and related charges For further information on restructuring, refer to note 19. 5.1.5 in millions of euros 2008 2009 2010 63 42 48 Consumer Lifestyle 198 120 245 225 A breakdown of Financial income and expenses is presented in the table below. 42 Lighting Financial income and expenses 74 Restructuring charges per sector: Healthcare GM&S Financial income and expenses 35 63 541 450 (2) 162 in millions of euros 2008 Interest expense (net) Sale of securities Value adjustments on securities Personnel lay-off costs Release of provision Restructuring-related asset impairment Other restructuring-related costs 374 399 155 (81) 84 19 53 481) 65 (2) 541 1) (105) (252) (225) 1,406 126 162 (1,148) (58) (2) (65) 18 (57) (166) (122) (77) 116 2010 88 Other Cost breakdown of restructuring charges: 2009 450 162 Includes EUR 22 million of costs which were expensed as incurred The net interest expense in 2010 was EUR 27 million lower than in 2009, mainly as a result of lower interest expense. Sale of securities in millions of euros The restructuring charges in 2010 were mainly attributable to the operating sectors. Within Healthcare, the largest projects related to the reorganization of the commercial organization in Imaging Systems (Germany, Netherlands, and the US). Consumer Lifestyle restructuring charges were mainly in Television, particularly in China due to the brand licensing agreement with TPV. Restructuring projects in Lighting were focused on reduction of production capacity in traditional lighting technologies, such as incandescent. The largest projects were initiated in Brazil, France, and the US. In 2009, the most significant restructuring projects related to Lighting and Consumer Lifestyle. Restructuring projects at Lighting centered on Lamps. The largest restructuring projects were in the Netherlands, Belgium, Poland and various locations in the US. Consumer Lifestyle restructuring projects focused on Television (primarily Belgium and France), Accessories (mainly Technology & Development in the Netherlands) and Domestic Appliances (mainly Singapore and China). Healthcare initiated various restructuring projects aimed 2008 2009 2010 − − 154 1,205 − − 158 69 − Gain on sale of D&M shares 20 − − Gain on sale of Pace shares − 48 − 23 9 8 1,406 126 162 Gain on sale of NXP shares Gain on sale of TSMC shares Gain on sale of LG Display shares Others In 2010, income from the sale of securities of EUR 162 million was mainly attributable to the sale of NXP shares. In 2009, income from the sale of securities totaled EUR 126 million. This included a EUR 69 million gain from the sale of the remaining shares in LG Display, and a EUR 48 million gain from the sale of the remaining shares in Pace Micro Technology. This is a customized selection from the Annual Report 2010 55 5 Group performance 5.1.5 - 5.1.10 Value adjustments on securities 5.1.7 in millions of euros 2008 2009 The results related to investments in associates declined from EUR 76 million in 2009 to EUR 18 million in 2010. 2010 NXP (599) (48) − LG Display (448) − − TPO Display (71) − − Pace Micro Technology (30) − − Prime Technology − (6) (2) Other − (4) − (58) (2) (1,148) Results of investments in associates in millions of euros 2008 For further information, refer to note 2. For further information, refer to note 3. 56 This is a customized selection from the Annual Report 2010 23 14 (2) − 5 12 − − (Reversal of) investment impairment and guarantee charges (72) 53 (1) 19 76 18 The company’s participation in income declined from EUR 23 million in 2009 to EUR 14 million in 2010, mainly due to the sale of our remaining stake in TPV Technology. In 2009, following recovery of the TPV share price, the accumulated value adjustment of the shareholding in TPV recognized in 2008 was reversed by EUR 55 million. The company’s participation in income of EUR 23 million in 2009 was mainly attributable to results on Intertrust. For further information, refer to note 4. 5.1.8 Non-controlling interests Net income attributable to non-controlling interests amounted to EUR 6 million in 2010, compared to EUR 14 million in 2009. 5.1.9 Net income Net income increased from EUR 424 million in 2009 to EUR 1,452 million. The improvement was driven by EUR 1,451 million higher EBIT and EUR 44 million lower costs in Financial income and expenses, partly offset by EUR 409 million higher income tax charges and EUR 58 million lower income from our investments in associates. Income taxes amounted to EUR 509 million, compared to EUR 100 million in 2009. The year-on-year increase was largely attributable to higher taxable earnings. For 2011, the effective tax rate excluding incidental nontaxable items is expected to be between 30% and 32%. 81 Gains arising from dilution effects Income taxes The tax burden in 2010 corresponded to an effective tax rate of 26.2%, compared to 22.3% in 2009. The increase in the effective tax rate was attributable to a change in the country mix of income tax rates and a change in the mix of profits and losses in the various countries, as well as 2009’s recognition of a deferred tax asset for Lumileds previously not recognized. This was partly offset by a number of tax settlements. 2010 Results on sale of shares Other financial expenses amounted to a EUR 57 million expense in 2010, compared to EUR 18 million income in 2009. 2010 primarily consisted of a EUR 21 million loss related to the revaluation of the convertible bonds received from TPV Technology and CBaySystems Holdings (CBAY), and a EUR 20 million accretion expense mainly associated with discounted provisions. Other financial expenses in 2009 primarily consisted of a EUR 19 million gain related to the revaluation of the convertible bonds received from TPV Technology and CBAY, and dividend income totaling EUR 16 million, EUR 12 million of which related to holdings in LG Display. Other financial expenses included EUR 15 million accretion expenses, mainly associated with discounted asbestos provisions. 2009 Company’s participation in income 2009 was impacted by impairment charges amounting to EUR 58 million, mainly from shareholdings in NXP. 5.1.6 Results of investments in associates Net income attributable to shareholders per common share increased from EUR 0.44 per common share in 2009 to EUR 1.54 per common share in 2010. 5.1.10 Acquisitions and divestments In 2010 Philips completed eleven strategically-aligned acquisitions, benefiting all three operating sectors. In 2010, acquisitions resulted in integration and purchaseaccounting charges totaling EUR 70 million: Healthcare EUR 29 million, Consumer Lifestyle EUR 19 million, and Lighting EUR 22 million. 5 Group performance 5.1.10 - 5.1.11 In 2009, acquisitions led to integration and purchaseaccounting charges totaling EUR 101 million: Healthcare EUR 63 million, Consumer Lifestyle EUR 16 million, and Lighting EUR 22 million. Acquisitions in 2009 In 2009 we completed eight acquisitions. Healthcare acquisitions included Meditronics, Traxtal, and InnerCool. Within Lighting, Philips completed the acquisition of four companies: Dynalite, Teletrol Systems, Ilti Luce, and Selecon. Within Consumer Lifestyle, Philips acquired Saeco International. For further information, refer to note 6. Acquisitions Divestments Within Healthcare, we completed six acquisitions to expand our global presence, particularly in emerging markets: Somnolyzer, Tecso Informatica, Shanghai Apex Electronics, CDP Medical, Wheb Sistemas, and medSage Technologies. In 2010, Philips divested 9.4% of the shares in TPV Technology Ltd (TPV). The TPV shares were sold to CEIC Lrd, a Hong Kong-based technology company, for a cash consideration of EUR 98 million. Tecso Informatica in Brazil was our first acquisition in healthcare informatics in an emerging market. This acquisition was complemented by our subsequent acquisition of Wheb Sistemas in Brazil. These acquisitions position us to be one of the leading clinical informatics companies in Brazil, further strengthening our offering toward high-growth markets. In China, we purchased Shanghai Apex Electronics, a leading manufacturer of ultrasound transducers, strengthening our portfolio of high-quality transducers aimed specifically towards emerging markets. Within mature markets in Healthcare, we acquired Israelbased CDP Medical, a provider of Picture Archiving and Communication Systems (PACS) and in Austria we acquired Somnolyzer, an automated scoring solutions business which will help improve the productivity of sleep centers. Our final acquisition of 2010 was medSage Technologies, a US-based provider of patient interaction and management applications, which will allow Philips to offer a web-based solution to aid home care providers. Divestments in 2009 In 2009, Philips continued to transform the Television business from one based on scale to one based on innovation and differentiation by transferring the IT Displays business to TPV Technology Limited in a brand licensing agreement. Within Healthcare, Philips sold its shares in FIMI to Barco NV, in line with its strategy to divest non-core activities and focus on expanding its growth platforms. For details, please refer to note 6. 5.1.11 Performance by market cluster In 2010, sales grew 4% on a comparable basis, driven by growth in all sectors, notably in emerging markets. Comparable sales growth by market cluster1) as a % ■-Philips Group--■-emerging markets--■-mature markets 15 11.9 7.5 4.3 3.5 Within Consumer Lifestyle, Philips acquired Discus Holdings, the leading manufacturer of professional tooth whitening products, complementing our oral healthcare portfolio and further building our relationship with professional dentists. 0.9 0 (2.7) (5.4) (7.5) (11.4) (10.8) (11.7) (15) Within Lighting, Philips completed four acquisitions. In Italy, we acquired Luceplan SpA, a leading consumer luminaires company in the lighting design segment in Europe. In Norway, we acquired Burton Medical Products, provider of specialized lighting solutions for healthcare facilities. In Denmark, we acquired Street Controls from Amplex A/S, an energy-efficient solutions provider. Additionally, in Hong Kong, we acquired NCW Holdings, a leading designer, manufacturer and distributor of LED and conventional entertainment lighting and lighting control solutions for global markets. 2008 1) 2009 2010 For a reconciliation to the most directly comparable GAAP measures, see unknown section of this Annual Report Sales in mature markets were EUR 824 million higher than in 2009, or 1% higher on a comparable basis. Sales in Western Europe were below the 2009, mainly due to lower sales at Consumer Lifestyle, which more than offset growth at Healthcare. Sales in North America were slightly higher than in 2009, attributable to low single-digit growth in Lighting and Consumer Lifestyle. Healthcare This is a customized selection from the Annual Report 2010 57 5 Group performance 5.1.11 - 5.1.12 sales in North America were on par with 2009 on a comparable basis. Sales in other mature markets, however, grew by double-digits in all sectors. employees increased in all sectors except Consumer Lifestyle, which was lower, mainly due to a reduction of temporary employees in Television. In emerging markets, sales grew by 12%, driven by growth in all sectors, notably Lighting (more than 20%). Solid double-digit growth was visible in China, driven by Healthcare and Lighting. Sales in Russia also showed double-digit growth, attributable to strong sales performance at Consumer Lifestyle and Lighting. Approximately 55% of the Philips workforce is located in mature markets, and about 45% in emerging markets. In 2010, the number of employees in mature markets slightly declined as additional headcount from acquisitions was more than offset by headcount reduction from organizational right-sizing projects. Emerging market headcount increased by 3,195, mainly from increases at Lighting to support higher factory production. Sales per market cluster in millions of euros ■-Western Europe--■-North America--■-other mature--■-emerging 30,000 26,385 25,419 in FTEs at year-end 7,577 1,269 9,518 6,609 2010 35,551 34,296 35,479 Consumer Lifestyle 17,145 18,389 17,706 Lighting 57,367 51,653 53,888 GM&S 11,335 11,586 11,928 121,398 115,924 119,001 2009 2010 Western Europe 36,966 35,496 34,613 North America 27,883 8,337 6,931 20,000 2009 2008 23,189 2008 Healthcare 8,021 10,000 Employees per sector 7,086 1,260 8,389 8,363 20091) 1,633 2010 0 2008 1) 5.1.12 Revised to reflect an adjusted market cluster allocation Employees per market cluster in FTEs at year-end Employment The total number of employees of the Philips Group was 119,001 at the end of 2010, compared to 115,924 at the end of 2009. Approximately 45% were employed in the Lighting sector, due to the continued relatively strong vertical integration in this business. Some 30% were employed in the Healthcare sector and approximately 15% of the workforce was employed in the Consumer Lifestyle sector. 31,336 27,069 Other mature markets 2,119 3,095 3,046 Total mature markets 70,421 65,660 65,542 Emerging markets 50,977 50,264 53,459 121,398 115,924 119,001 Employment Employees per sector 2010 in FTEs at year-end in FTEs 2008 2009 2010 123,801 121,398 115,924 - new consolidations 12,673 2,432 1,457 - deconsolidations (1,571) (276) Comparable change (13,505) (7,630) Position at year-end 121,398 Group Management & Services 11,928 Healthcare 35,479 Lighting 53,888 Consumer Lifestyle 17,706 The increase in headcount in 2010 was mainly attributable to acquisitions and an increase in temporary employees in Lighting to support higher levels of activity. The number of 58 This is a customized selection from the Annual Report 2010 Position at beginning of year Consolidation changes: 115,924 (307) 1,927 119,001 5 Group performance 5.2 - 5.2.1 5.2 Liquidity and capital resources Cash flows from operating activities and net capital expenditures in millions of euros ■-cash flows from operating activities--■-net capital expenditures 2,500 1,752 1,648 1,545 1,500 1,000 Philips’ diverse liquidity sources and strong management ensure maximum flexibility in meeting changing business needs. 5.2.1 2,156 2,000 0 (500) (1,000) Cash flows provided by continuing operations 639 500 (1,500) (987) 2006 (875) (928) 2007 2008 (682) 2009 (823) 2010 Cash flows from operating activities Cash flows from investing activities Net cash flow from operating activities amounted to EUR 2,156 million in 2010, compared to EUR 1,545 million in 2009. The year-on-year improvement was largely attributable to higher earnings across all sectors and last year’s EUR 485 million final asbestos settlement payment, partly offset by higher working capital requirements. Cash flows from investing activities resulted in a net outflow of EUR 702 million, attributable to EUR 823 million cash used for net capital expenditures and EUR 239 million used for acquisitions, chiefly for Discus Holdings, NCW Holdings LTD and medSage. This was partly offset by EUR 385 million proceeds from divestment, including the sale of 9.4% of the shares in TPV and the redemption of the TPV and CBAY convertible bonds. Condensed consolidated statements of cash flows for the years ended December 31, 2008, 2009 and 2010 are presented below: Condensed consolidated cash flow statements1) in millions of euros 2008 2009 2010 424 1,452 Cash flows from operating activities: Net income (loss) (92) Adjustments to reconcile net income to net cash provided by operating activities 1,740 1,121 704 Net cash provided by operating activities 1,648 1,545 2,156 Net cash (used for) provided by investing activities (3,254) Cash flows before financing activities2) (1,606) Net cash used for financing activities (3,575) (545) Cash (used for) provided by continuing operations (5,181) 781 1,358 (37) − 2009 cash flows from investing activities resulted in a net outflow of EUR 219 million, due to EUR 682 million cash used for net capital expenditures, EUR 300 million used for acquisitions, and EUR 39 million outflow related to derivatives and securities, partly offset by EUR 802 million inflows received mostly from the sale of other noncurrent financial assets (mainly LG Display and Pace Micro Technology). − Net cash (used for) discontinued operations Effect of changes in exchange rates on cash and cash equivalents Total change in cash and cash equivalents Cash and cash equivalents at the beginning of year Cash and cash equivalents at the end of year - continuing operations 1) 2) (219) 1,326 (702) 1,454 Net capital expenditures Net capital expenditures totaled EUR 823 million, which was EUR 141 million higher than 2009. Higher investments were visible in all sectors, notably additional growth-focused investments in Lighting. (96) Cash flows from acquisitions, divestments and derivatives in millions of euros ■-divestments and derivatives--■-acquisitions 7,000 (39) (5,257) (15) 766 4,628 89 1,447 6,130 3,500 8,877 3,620 4,386 0 (2,498) 3,620 4,386 5,833 Please refer to section 13.7, Consolidated statements of cash flows, of this Annual Report Please refer to chapter 16, Reconciliation of non-GAAP information, of this Annual Report (3,500) (1,502) 763 463 360 121 (300) 2,937 384 (239) (2,114) (5,316) (2,379) (7,000) 2006 2007 2008 2009 This is a customized selection from the Annual Report 2010 2010 59 5 Group performance 5.2.1 - 5.2.4 Acquisitions 5.2.3 Net cash impact of acquisitions in 2010 was a total of EUR 239 million, mainly Discus Holdings (EUR 129 million), NCW Holdings LTD (EUR 13 million) and medSage Technologies (EUR 14 million). Financing Condensed consolidated balance sheets for the years 2008, 2009 and 2010 are presented below: Condensed consolidated balance sheet information1) in millions of euros 2008 In 2009, a total of EUR 300 million cash was used for acquisitions, mainly Saeco (EUR 171 million), Dynalite (EUR 31 million) and Traxtal (EUR 18 million). Intangible assets 11,757 11,523 12,233 3,496 3,252 3,265 Inventories 3,491 2,913 3,865 Receivables Cash proceeds of EUR 385 million were received from divestments, including EUR 98 million from the sale of 9.4% shares in TPV, EUR 165 million and EUR 74 million from the redemption of the TPV and CBAY convertible bonds respectively. The transaction related to the sale of the remaining NXP shares to Philips UK pension fund which was cash-neutral. Cash flows used for derivatives led to a EUR 25 million outflow. 7,548 7,188 6,296 Accounts payable and other liabilities (9,292) (9,166) (10,180) Provisions (2,837) (2,450) Other financial assets 5.2.2 Cash flows from discontinued operations During 2010 and 2009 there was no cash used for discontinued operations. 60 This is a customized selection from the Annual Report 2010 984 (2,339) 596 293 281 181 16,161 14,525 13,917 Cash and cash equivalents 3,620 5,833 (4,267) (4,658) (568) Non-controlling interests 119 (49) Net cash (debt) Shareholders’ equity 4,386 (4,188) Debt (49) 1,175 (46) (15,544) (14,595) (15,046) (16,161) (14,525) (13,917) 1) Net cash used for financing activities in 2009 was EUR 545 million. Philips’ shareholders were paid EUR 647 million in the form of a dividend payment. The net impact of changes in debt was an increase of EUR 60 million, including the drawdown of a EUR 250 million loan, EUR 62 million increase from finance lease and bank loans, offset by repayments on short-term debts and other long-term debt amounting to EUR 252 million. Additionally, net cash inflows for share delivery totaled EUR 29 million. 1,705 Investments in associates In 2009, cash proceeds of EUR 628 million and EUR 76 million were received from the final sale of stakes in LG Display and Pace Micro Technology respectively. Cash flows from derivatives and securities led to a net cash outflow of EUR 39 million. Net cash used for financing activities in 2010 was EUR 96 million. Philips’ shareholders were paid EUR 650 million in the form of a dividend of which cash dividend amounted to EUR 296 million. The net impact of changes in debt was an increase of EUR 135 million, including a EUR 214 million increase from finance lease and bank loans, partially offset by repayments on short-term debts and other long-term debt amounting to EUR 79 million. Additionally, net cash inflows for share delivery totaled EUR 65 million. 2010 Property, plant and equipment Divestments and derivatives Cash flows from financing activities 2009 5.2.4 Please refer to section 13.6, Consolidated balance sheets, of this Annual Report Cash and cash equivalents In 2010, cash and cash equivalents increased by EUR 1,447 million to EUR 5,833 million at year-end. Cash inflow from operations amounted to EUR 2,156 million, a total outflow on net capital expenditure of EUR 823 million, and there was EUR 385 million proceeds from divestments including EUR 268 million from the sale of stakes. This was partly offset by an outflow of EUR 296 million related to the cash dividend payout, EUR 239 million for acquisitions and favorable currency translation effects of EUR 89 million. In 2009, cash and cash equivalents increased by EUR 766 million to EUR 4,386 million at year-end. Cash inflow from operations amounted to EUR 1,545 million, and there was EUR 802 million proceeds from divestments including EUR 718 million from the sale of stakes. This was partly offset by an outflow of EUR 647 million related to the annual dividend, EUR 300 million for acquisitions and small unfavorable currency translation effects of EUR 15 million. 5 Group performance 5.2.4 - 5.2.7 Cash balance movements in 2010 in millions of euros 64 1,333 6,000 135 65 5,833 (239) 4,386 (296) 385 4,000 2,000 0 2009 1) 2) 3) 4) 5.2.5 Divestments1) Free cash flow2) Other3) Acquisitions4) Debt Treasury share delivery Dividend 2010 Includes the redemption of convertible bonds from TPV Technology and CBAY and the sale of 9.4% shares in TPV Please refer to unknown section of this Annual Report Includes cash outflow for derivatives and currency effect Includes the acquisitions of Discus Holdings, NCW Holdings LTD and medSage Debt position 5.2.6 Total debt outstanding at the end of 2010 was EUR 4,658 million, compared with EUR 4,267 million at the end of 2009. Net debt to group equity Philips ended 2010 in a net cash position (cash and cash equivalents, net of debt) of EUR 1,175 million, compared to a net cash position of EUR 119 million at the end of 2009. Changes in debt in millions of euros 2008 New borrowings Repayments 2009 (2,088) (312) Net debt (cash) to group equity1) in billions of euros 2010 (214) 1,708 252 ■-net debt (cash)--■-group equity 23.2 25 21.9 20 79 Consolidation and currency effects (245) (19) (256) (625) (79) (391) 15.6 15 Total changes in debt 2) 15.1 14.6 10 5 In 2010, total debt increased by EUR 391 million. The increase in borrowings including finance leases was EUR 214 million. Repayments under finance leases amounted to EUR 50 million, while EUR 29 million was used to reduce other long-term debt. Other changes resulting from consolidation and currency effects led to an increase of EUR 256 million. Long-term debt as a proportion of the total debt stood at 60% at the end of 2010 with an average remaining term of 10.8 years, compared to 85% at the end of 2009. (0.1) (2.0) (5) (1.2) (5.2) (10) 2006 ratio: 1) 2) In 2009, total debt increased by EUR 79 million. In January, Philips drew upon a EUR 250 million bank loan. The increase in other borrowings including finance leases was EUR 62 million. Repayments under finance leases amounted to EUR 42 million, while EUR 9 million was used to reduce other long-term debt. Furthermore Philips repaid short-term debt of EUR 201 million. Other changes resulting from consolidation and currency effects led to an increase of EUR 19 million. 0.6 0 5.2.7 2007 2008 2009 2010 (9) : 109 (31) : 131 4 : 96 (1) : 101 (8) : 108 For a reconciliation to the most directly comparable GAAP measures, see unknown section of this Annual Report Shareholders’ equity and non-controlling interests Shareholders’ equity Shareholders’ equity increased by EUR 451 million in 2010 to EUR 15,046 million at December 31, 2010. The increase was mainly as a result of a EUR 630 million improvement within total comprehensive income. The dividend payment to shareholders in 2010 reduced equity by EUR 304 million. The decrease was partially offset by a EUR 111 million increase related to delivery of treasury shares and net share-based compensation plans. Shareholders’ equity declined by EUR 949 million in 2009 to EUR 14,595 million at December 31, 2009. The decrease was mainly as a result of a EUR 404 million reduction from total comprehensive income. The dividend payment to shareholders in 2009 further This is a customized selection from the Annual Report 2010 61 5 Group performance 5.2.7 - 5.2.8 reduced equity by EUR 647 million. The decrease was partially offset by a EUR 102 million increase related to re-issuance of treasury shares and net share-based compensation plans. The number of outstanding common shares of Royal Philips Electronics at December 31, 2010 was 947 million (2009: 927 million). At the end of 2010, the Company held 37.7 million shares in treasury to cover the future delivery of shares (2009: 43.1 million shares). This was in connection with the 54.9 million rights outstanding at the end of 2010 (2009: 62.1 million rights) under the Company’s long-term incentive plan and convertible personnel debentures. At the end of 2010, the Company held 1.9 million shares for cancellation (2009: 1.9 million shares). 5.2.8 Liquidity position Including the Company’s net debt (cash) position (cash and cash equivalents, net of debt), listed available-for-sale financial assets, listed investments in associates, as well as its EUR1.8 billion revolving credit facility, and EUR 200 million committed undrawn bilateral loan, the Company had access to net available liquid resources of EUR 3,445 million as of December 31, 2010, compared to EUR 2,412 million one year earlier. Liquidity position in millions of euros 2008 Cash and cash equivalents 2009 2010 3,620 4,386 5,833 Committed revolving credit facility/ CP program/Bilateral loan 2,274 1,936 2,000 Liquidity 5,894 6,322 7,833 599 244 270 Available-for-sale financial assets at market value Main listed investments in associates at market value − 60 113 Short-term debt (722) (627) (1,840) Long-term debt (3,466) (3,640) (2,818) 2,365 2,412 3,445 Net available liquidity resources The fair value of the Company’s available-for-sale financial assets, based on quoted market prices at December 31, 2010, amounted to EUR 270 million. Philips disposed 9.4% of the shareholdings in TPV technology in 2010 as the main listed investments in associates, and reclassified the remaining 3% shareholdings to available-for-sale financial assets. Philips has a EUR 1.8 billion committed revolving credit facility due in 2015 that can be used for general corporate purposes. In addition, Philips also has a EUR 200 million 62 This is a customized selection from the Annual Report 2010 committed undrawn bilateral loan in place that can be drawn before April 2011. Furthermore Philips has a USD 2.5 billion commercial paper program, under which it can issue commercial paper up to 364 days in tenor, both in the US and in Europe, in any major freely convertible currency. There is a panel of banks, 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 the program. As at December 31, 2010, Philips did not have any loans outstanding under these facilities. Philips’ existing long-term debt is rated A3 (with stable outlook) by Moody’s and A- (with stable outlook) by Standard & Poor’s. It is Philips’ objective to manage our financial ratios to be in line with A. There is no assurance that we 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 material adverse change clause, financial covenants or credit-rating-related acceleration possibilities. As at December 31, 2010, Philips had total cash and cash equivalents of EUR 5,833 million. Philips pools cash from subsidiaries to the extent legally and economically feasible. Cash not pooled remains available for local operational or investment needs. Philips had a total gross debt position of EUR 4,658 million at year-end 2010 within which EUR 1,012 million bonds will mature in Q1 and Q2 2011. 5 Group performance 5.2.8 - 5.2.9 5.2.9 Cash obligations recognize these liabilities as trade payables and will settle the liabilities in line with the original payment terms of the related invoices. Contractual cash obligations Presented below is a summary of the Group’s contractual cash obligations and commitments at December 31, 2010. Contractual cash obligations at December 31, 2010 in millions of euros payments due by period total less than 1 year 1-3 years 3-5 years after 5 years 3,808 1,111 493 254 1,950 178 44 65 29 40 Short-term debt 686 686 − − − Operating leases1) 640 173 234 123 110 Long-term debt1) Finance lease obligations1) 1,2) Derivative assets and liabilities1) 472 47 374 51 − Interest on debt3) 1,596 161 207 190 1,038 Trade and other payables4) 3,691 3,691 − − − 11,071 5,913 1,373 647 The estimated total purchase obligations as of December 31, 2010, amount to EUR 365 million. This amount can be split in EUR 324 million with a payment due in less than 1 year, EUR 17 million due in 1-3 years, EUR 6 million due in 3-5 years and EUR 18 million due in more than 5 years. As part of the recovery plan for the UK pension fund, Philips Electronics UK has committed to a contingent cash contribution scheme as a back-up for liability savings to the UK fund to be realized through a member choice program. If this member choice program fails to deliver part or all of the expected liability savings with a net present value of GBP 250 million, Philips Electronics UK will pay cash contributions into the UK pension fund to make up for the difference during the years 2015 and 2022. No cash (further) payments will be made under the scheme when the UK pension fund is fully funded. 3,138 Other cash commitments 1) 2) 3) 4) Short-term debt, long-term debt, lease obligations and derivatives are included in the Company’s consolidated balance sheet Excluding current portion of long-term debt Approximately 45% of the debt bears interest at a floating rate. Interest on debt has been estimated based upon average rates in 2010 Excluding derivatives, shown separately Philips has no material commitments for capital expenditures. On December 1, 2009, Philips entered into an outsourcing agreement to acquire IT services from TSystems GmbH over a period of 5 years at a total cost of approximately EUR 300 million. The agreement, which is effective January 1, 2010, provides that penalties may be charged to the Company if Philips terminates the agreement prior to its expiration. The termination penalties range from EUR 40 million if the agreement is cancelled within 12 months to EUR 6 million if the agreement is cancelled within 36 months. 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, 2010 approximately EUR 330 million of the Philips accounts payables were known to have been sold onward under such arrangements whereby Philips confirms invoices. Philips continues to The Company and its subsidiaries sponsor pension plans in many countries in accordance with legal requirements, customs and the local situation in the countries involved. Additionally, certain postretirement benefits are provided in certain countries. The Company is reviewing the future funding of the existing regulatory deficits in pension plans in the US and UK. Refer to note 28 for a discussion of the plans and expected cash outflows. The company had EUR 226 million restructuring-related provisions by the end of 2010, of which EUR 177 million is expected to result in cash outflows in 2011. Refer to note 19 for details of restructuring provisions and potential cash flow impact for 2010 and further. A proposal will be submitted to the General Meeting of Shareholders to pay a dividend of EUR 0.75 per common share (up to EUR 710 million), in cash or shares at the option of the shareholder, against the net income for 2010 of the Company. 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 2010, the total fair value of guarantees recognized by Philips in other non-current liabilities was EUR 9 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, 2009 and 2010. This is a customized selection from the Annual Report 2010 63 5 Group performance 5.2.9 - 5.3.1 Expiration per period 2010 5.3 in millions of euros total amounts committed less than 1 year 302 100 Businessrelated guarantees Creditrelated guarantees 1-5 years after 5 years 133 69 49 22 8 19 351 122 141 88 The section Other performance measures provides an insight into the performance of key cross-sector functions – brand, marketing, research and development and supply management – in 2010. Expiration per period 2009 in millions of euros total amounts committed Businessrelated guarantees Creditrelated guarantees Other performance measures less than 1 year 5.3.1 1-5 years after 5 years Marketing Brand and NPS 266 134 70 62 42 31 5 6 308 165 75 68 A consistent focus on building brand loyalty amongst both professionals and consumers led to the 7% increase in the value of the Philips brand value to USD 8.7 billion, outpacing the average increase of 4% shown by brands measured in the 2010 Interbrand ranking. Additionally, Philips’ brand value has doubled in 6 years and it remains one of the top 50 most valuable brands in the world, measured by the Interbrand ranking of the 100 best global brands. Philips’ total 2010 marketing expenses approximated EUR 934 million, a 16% increase compared to 2009. The additional spend was primarily to support the company’s marketing strategy of more focused growth in emerging and other strategic markets. In line with this, the company increased its 2010 marketing spend in key emerging markets by 48% compared to 2009. Additionally, the company continued its focus on organizing around customers and markets, resulting in more local marketing investment as a percentage of sales. Total 2010 marketing investment in emerging markets approximated 22% of sales, compared to 17% of sales in 2009. In 2010, we have continued to expand our coverage of Net Promoter Score (NPS) program to include additional markets strategic to Philips’ growth. Philips stayed the course despite tough economic times, having improved our NPS leadership score in Consumer Lifestyle and maintaining a strong performance in Healthcare. While Lighting performance noted a decrease, it remains a clear leader in its industry. In particular, we achieved strong performance in BRIC markets and in Western Europe, most notably with BRIC outright leadership positions increasing by 18 points. Whilst we noted a decrease in North America and the rest of EMEA, Philips continues to occupy strong leadership positions in these 64 This is a customized selection from the Annual Report 2010 5 Group performance 5.3.1 - 5.3.2 regions. Overall, the result is stable, and 59% of our businesses currently hold industry leadership positions (60% in 2009). In line with our growth targets in Vision 2015, in 2011 we will continue to drive for further leadership in NPS in key markets. The implementation of this measure has confirmed that outstanding customer and consumer loyalty is critical to achieving growth. Online Philips continued to build brand loyalty and promoters via its online marketing strategies in 2010. Within the Lighting sector, the company launched a new social media-enabled platform designed to showcase the company’s leadership in the lighting industry and more importantly, drive meaningful dialog among existing and prospective customers and stakeholders. Additionally, in 2010, the company developed several online communities, which, supported by social media capabilities, enabled the company to facilitate dialog and networking with its professional audiences in both Lighting and Healthcare. Going forward, the company will continue to drive its online marketing efforts with the use of new enabling technologies and communication platforms and leveraging the platform as a sales enabler. In 2010, Philips’ online sales reached EUR 570 million, a 41% increase from 2009 where online sales reached EUR 405 million. Online sales in from emerging markets represented approximately 30% of total online sales in 2010 and grew by 94% over the prior year. In further support of sustainability and corporate responsibility, the company continued its efforts with asimpleswitch.com, its online platform that promotes smart energy efficiency and consumption. Since its launch in 2009, the site has gained in momentum and popularity, building an online supporter base of over 100,000 individuals by year-end. Marketing expenses in millions of euros 1,200 900 3.2 865 3.7 994 ■-in value----as a % of sales 12 3.6 949 3.5 804 3.7 934 9 600 6 300 5.3.2 Research & development R&D spending declined as a percentage of sales from 7.0% in 2009 to 6.2%. Philips has continued to expand its vast knowledge and intellectual property base. Early and continuous involvement of customers in new technologies, application and business concepts ensures deep insight into their needs – the foundation for our innovations. To better capitalize on opportunities in fastgrowing emerging markets, innovation is managed at board level in the Markets & Innovation function, underlining our focus on market-driven innovation. Innovation leading to new businesses in incubators and internal ventures is managed separately from the traditional business to ensure focus on these growth initiatives. The effectiveness of innovation has been improved by streamlining our organization in Corporate Technologies, leading to more focus, alignment and enhanced offering of value propositions. The scope of the new organization covers early innovation and predevelopment activities, supplemented by small series production. Research and development expenses in millions of euros 2,000 5.8 1,556 6.0 1,601 6.7 1,777 ■-in value----as a % of sales 7.0 1,631 20 6.2 1,576 1,500 15 1,000 10 500 5 0 0 2006 2007 2008 2009 2010 Healthcare R&D expenses increased EUR 19 million in 2010, reflecting our continued investment in emerging markets and home healthcare, though declined as a percentage of sales. Lighting’s expenses were broadly in line with 2009, with an increase in digital lighting and a reduction in traditional lighting. In Consumer Lifestyle, R&D spend was lower than in 2009, mainly due to a focus on fewer, but bigger projects and lower restructuring charges. GM&S lowered its R&D expenses through discontinuation of certain activities in the field of Molecular Healthcare and in the field of 3D Displays. 3 0 0 2006 2007 2008 2009 2010 This is a customized selection from the Annual Report 2010 65 5 Group performance 5.3.2 - 5.3.3 Research and development expenses per sector in millions of euros 2008 2009 2010 Healthcare 672 679 698 Consumer Lifestyle 513 395 369 Lighting 345 351 355 GM&S 247 206 154 1,777 1,631 1,576 Philips Group Our new product sales – products introduced within 2010 (for B2C products) or three years (for B2B products) – increased from 48% of total sales in 2009 to 52% in 2010. Philips aims to maintain this ratio at around 50%, while at the same time focusing on the profitability of new products and reallocating innovation spend more towards new business creation. 5.3.3 Supply management Executing Vision 2015 and strengthening our health and well-being leadership requires enhancing our Supply strategy and governance approach. Our vision is to create a Customer Value Chain that enables better customer solutions, boosts our NPS, and powers growth. Customer Value Chain is a series of activities that collectively provide greater value than their sum. A more integrated Supply community will ensure that every part of the value chain works seamlessly together to benefit our customers and our company. The Supply organization encompasses three focused functions: Commercial and Service Supply Chain, Operations, and Purchasing. Collectively, they comprise approximately 58,000 Philips employees and are responsible for sourcing, making and delivering products and solutions. Management of shortages and management of commodity price increases The recovery of the global economy led to tight supply of especially semiconductor components in the course of 2010. The scarcity and increased commodity prices led to upward price pressure. We have been able to delay price increases and smoothened out volatility through commodity hedging and negotiations with our component suppliers. The raw material price trends have also further accelerated the wide deployment of Value Engineering throughout the company, in close cooperation between Supply and R&D. We achieved Bill of Material (BOM) savings of 4.9% and Non Product Related (NPR) savings of 5.2%. 66 This is a customized selection from the Annual Report 2010 In order to minimize the impact on our customer service levels and sales, a number of initiatives have been taken. Actions have been taken to rapidly improve our forecast reliability and sales and operational planning processes, both short term and longer term, in order to reduce such risks for the future. Additional investments were made in the emerging markets to ensure optimal local presence of the supply function. Concentration and consolidation of supply base In line with our brand promise of “sense and simplicity”, Philips Supply continued its focus on leveraging the supply base by bringing more spend to fewer, selected suppliers. In the area of BOM the number of suppliers has been reduced by approximately 25%, whereas in the area of NPR approximately 15% reduction has been realized. Creating long term strategic partnerships with suppliers is an important enabler of Philips’ growth ambitions. In 2010 the number of suppliers to cover 80% of spend has been reduced by approximately 10% on BOM and by approximately 25% on NPR. Standardization of payment terms has helped us to create uniformity and positively influence Days Payable Outstanding. Supplier risk management We are monitoring our top 400 suppliers on a constant basis. Risks are measured and, if required, contingency plans are prepared. Innovation with the supply base Philips is putting a lot of emphasis on Open Innovation programs by increasingly using the innovative power of our suppliers. In the Supplier Forum 2010 with our top suppliers Open Innovation was one of the key themes. Combining Philips innovation with the innovative capabilities and capacities of the supply base is expected to deliver acceleration of profitable growth. Sustainability in the supply chain Philips remains focused on improving working conditions and environmental performance in its supply chain and encourages its suppliers to have the same focus. For more information, refer to sub-section 5.4.5, Supplier performance, of this Annual Report. 5 Group performance 5.4 - 5.4.2 5.4 Sustainability • Closing the materials loop Target: Double global collection and recycling amounts and recycled materials in products by 2015 compared to 2009. Management summary In 2010, we did touch over 420 million lives, mainly driven by our Healthcare sector. Further, the energy efficiency of our products improved by 4%. The sector that contributed most to this improvement was Lighting. With regard to ‘Closing the materials loop’, we determined the baseline for global collection and recycling amounts at over 100,000 tons and the amount of recycled materials in our products at 7,500 tons, and developed plans to double these in the years to come. More information on these parameters can be found in chapter 15, Sustainability statements, of this Annual Report. Results in 2010 In 2010 we made good progress against our Sustainability targets, focusing on: • driving the implementation of our EcoVision programs, • strengthening the Green Product and Green Innovation approach at both Healthcare and Consumer Lifestyle, leveraging the experience of our Lighting sector, and • driving sustainability in the supply chain, including suppliers of recent acquisitions, through our Supplier Sustainability Involvement Program. 5.4.2 In the company’s Vision 2015, that was launched in 2010, “Lead in Sustainability” has been identified as a strategic objective, of which the implementation will be driven by the EcoVision programs. Results are summarized on the following pages and detailed in chapter 15, Sustainability statements, of this Annual Report. 5.4.1 EcoVision5 Leveraging sustainability as an integral part of our strategy and additional growth driver At Philips, sustainability is all about enhancing the health and well-being of individuals and the communities they live in. At the same time we constantly endeavor to improve the environmental performance of our products and processes, and to drive sustainability throughout the supply chain. In 2010, we made leveraging sustainability an integral part of our strategy and an additional driver of growth, as reflected in the Philips Management Agenda. In February 2010, we announced our EcoVision5 program, which includes three sustainability leadership key performance indicators where we can bring our competencies to bear, namely ‘care’, ‘energy efficiency’ and ‘materials’: EcoVision4 With our environmental action program EcoVision4, launched in 2007, we have committed to realize the following by 2012: • generate 30% of total revenues from Green Products • double investment in Green Innovations to a cumulative EUR 1 billion • improve our operational energy efficiency by 25% and reduce CO2 emissions by 25%, all compared with the base year of 2007. Green Product sales In 2010, sales from Green Products increased 35% to EUR 9.5 billion, contributing significantly to the total revenue stream. As a percentage of the Group total, Green Product sales rose to 37.5%, up from 30.5% in 2009, and on track to reach the new target of 50% in 2015. Sales of Green Products as a % of total sales 40 38 31 30 23 20 20 10 • Bringing care to people Target: 500 million lives touched by 2015 • Improving energy efficiency of Philips products Target: 50% improvement by 2015 (for the average total product portfolio) compared to 2009 0 2007 2008 2009 2010 All sectors contributed to the overall sales increase, but the increase at Consumer Lifestyle was most significant, closely followed by Lighting. Consumer Lifestyle introduced 150 new Green Products in 2010. Healthcare This is a customized selection from the Annual Report 2010 67 5 Group performance 5.4.2 - 5.4.2 and Lighting increased the share of Green Product sales with the introduction of 5 and 1,300 new Green Products respectively. Overall, environmental improvements have been predominantly realized in energy efficiency of products, one of the Green Focal Areas in our EcoDesign process. The Lighting sector accounts for over half of the total spend on Green Innovations and also contributes to some 45% of Philips Green Product sales. The focus is on developing new energy-efficient lighting solutions, further enhancing current Green Products and driving toward technological breakthroughs, such as solid-state lighting. Corporate Technologies invested approximately EUR 46 million on a Green Innovation activity portfolio mainly focused on energy efficiency, and reduction of waste and water consumption. Green Product sales by sector in millions of euros Healthcare 2,136 Green Innovation investment in millions of euros Corporate Technologies 46 Lighting 4,376 Consumer Lifestyle 3,024 Green Innovations In 2010, Philips invested over EUR 450 million in Green Innovations – the Research & Development spend related to the development of new generations of Green Products and Green Technologies. This was the highest amount invested since we started EcoVision4 in 2007 – and as a result we achieved the 2012 target of EUR 1 billion cumulative invested in Green Innovations two years ahead of schedule. To maintain our Green Innovations momentum, we strive to invest a cumulative EUR 2 billion during the coming five years. Philips Healthcare innovation projects consider all of the Green Focal Areas and aim to reduce total life cycle impact. In particular, the sector focuses on reducing energy consumption, weight and radiation dose. Consumer Lifestyle’s investment in Green Innovations is dedicated to the development of new Green Products, focusing on further enhancing energy efficiency and on closing material loops. Green Innovations at Consumer Lifestyle amounted to EUR 115 million and the sector worked on the voluntarily phase-out of polyvinyl chloride (PVC) and brominated flame retardants (BFR), enabling our Lifestyle Entertainment and Personal Care businesses to launch products which are completely free of these substances. Another result of Consumer Lifestyle’s Green Innovation activities is, for example, the award-winning Econova LED TV. 68 This is a customized selection from the Annual Report 2010 Healthcare 60 Consumer Lifestyle 115 Lighting 230 Operational carbon footprint and energy efficiency In 2010, we took another good step in reaching our target of 25% CO2 reduction, as operational CO2 emissions decreased 7%. CO2 emissions from manufacturing decreased 17% due to a number of reasons, such as our ongoing energy efficiency program, the changing industrial footprint and mainly by the increase in purchased electricity from renewable sources. CO2 emissions from non-industrial sites decreased 26%, partly because of our continued focus on the most efficient use of facility space, for instance with our Work Place Innovation program (which enables flex-working), but also due to the increased share of purchased electricity from renewable sources. With sales picking up, the number of travel movements increased as well, resulting in an increase of CO2 emissions from business travel of 13%. We continue promoting videoconferencing and maintaining our green lease car policy. Therefore, emissions from business travel are still 11% below the level of 2007, the base year for our target setting. CO2 emissions from logistics increased 8%, because the number of products transported was higher than in 2009. Nonetheless, the emissions are 7% lower than in 2007, because of our continued focus on efficient container utilization, reducing mileage in road freight, and the shift from air to sea freight. 5 Group performance 5.4.2 - 5.4.4 Our operational energy efficiency improved 6%, from 1.35 terajoules per million euro sales in 2009 to 1.26 terajoules per million euro sales in 2010. increase compared to last year and exceeding the external high performance norm. The target for 2010 was to reach the high-performance score of 70%. Operational carbon footprint in kilotons CO2-equivalent Employee Engagement Index % favorable ■-logistics--■-business travel ■-non-industrial operations--■-manufacturing 80 75 2,500 2,157 2,000 2,144 948 959 1,937 910 1,500 60 1,808 218 276 216 265 500 2008 2009 754 715 704 2007 2008 193 220 614 247 2009 2010 664 143 0 20 0 Operational energy efficiency in terajoules per million euro sales 1.50 1.29 1.31 1.35 1.26 2006 2007 2010 Equally important is the insight we gained into ways we can improve. The biggest advancements in our EES scores were seen where teams worked on areas identified in 2009 as needing improvement. Diversity and inclusion 1.00 0.50 0 2007 2008 2009 2010 In 2010, 35% of the Philips workforce was female; 25% of newly appointed executives were female, a significant increase compared to 2009, illustrating our focus on diversity and inclusion. Due to the recruitment of more female executives, the total number increased to 11%. Our ambition for the Philips group is to employ 15% female executives in 2012, a target the Healthcare sector already achieved in 2010. Green Manufacturing 2015 Our EcoVision III environmental action program ended in 2009. EcoVision III mainly called for improvements in all major environmental parameters. In 2010, we developed our Green Manufacturing 2015 program in order to continue our efforts to improve our environmental performance in manufacturing. The program focuses on most contributors to climate change, recycling of waste, reduction of water consumption, and reduction of restricted and hazardous substances, and will run in parallel with EcoVision4 and 5. Full details, including our 2015 targets, can be found in chapter 15, Sustainability statements, of this Annual Report. 5.4.4 64 68 40 1,000 5.4.3 61 69 Social performance Employee engagement In 2010, 86% of our employees took part in the Philips Engagement Survey. The Employee Engagement Index – the single measure of the overall level of employee engagement at Philips – reached 75%, marking a 7 point Female executives as a % of total 12 11 10 9 6 10 2008 2009 8 6 3 0 2006 2007 2010 Overall, the 549 Philips executives at year-end represented more than 30 nationalities and the percentage of executives with BRIC nationality remained at 5%. This is a customized selection from the Annual Report 2010 69 5 Group performance 5.4.4 - 5.4.4 Moreover, 24% of our top potentials and 30% of our high potentials were female in 2010, an increase of 1% in both categories compared to 2009. The percentage of top potentials with BRIC nationality stood at 11%, with high potentials at 15%. Developing our people Our new learning strategy focuses on building skills that are strongly aligned with business needs. In 2010, we streamlined our class-room offerings in close alignment with businesses and functions to focus on their key priorities. The second important driver of our learning strategy is providing employees with free and unlimited access to a wide range of online learning options to drive their personal development and growth. Participation in these priority programs increased significantly, with over 20,000 employees participating in programs in our Core Curriculum during 2010, compared with 5,500 in 2009. Functional Core Curricula enrollment was over 15,500 in 2010, an increase from 11,000 in 2009. These Core Curricula have been developed for functions such as Marketing, Sales, Customer Services, IT, HRM, Supply Management and Finance. Additionally, approximately 35,000 executives and sales and marketing employees completed the anti-corruption training program. Our flagship leadership development programs for our talent pool are run in collaboration with leading business schools with a strong emphasis on blended learning. In 2010, our Inspire program for high potentials facilitated the completion of 20 project assignments. Top potentials in the Octagon program completed 5 business projects. These business projects are sponsored by senior business leaders and are designed to contribute to the realization of Philips’ strategic goals. Participation in our curriculum of internal and external programs for Executives remained stable. In line with our ‘Grow with Philips’ program, 65% of newly appointed executives were promotions and 35% external hires. 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. 70 This is a customized selection from the Annual Report 2010 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 global implementation of the One Philips Ethics hotline seeks to ensure that alleged violations are registered and dealt with consistently within one company-wide system. 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. Ongoing training The global roll-out of the updated version of the mandatory web-based GBP training, which is designed to reinforce awareness of the need for compliance with the GBP, was completed in 23 languages. More information on the Philips GBP can be found in chapter 7, Risk management, of this Annual Report. Results of the monitoring in place are provided in the Sustainability statements section. Health and safety In 2010 we recorded 482 Lost Workday Injuries cases, occupational injury cases where the injured person is unable to work the day after the injury. This is a 11% increase compared with 2009. The rate of Lost Workday Injuries also increased to 0.50 per 100 FTEs, compared with 0.44 in 2009. The increase in Lost Workday Injuries was particularly caused by new acquisitions which are included in our reporting for the first time in 2010. We started a number of health and safety initiatives in 2010 to drive down injury levels. 5 Group performance 5.4.4 - 5.4.5 Lost Workday Injuries per 100 FTEs Distribution of supplier audits by country 1.00 0.78 0.81 0.75 Others Mexico 5 Brazil 7 18 India 26 Indonesia 10 0.68 0.50 0.44 0.50 0.25 0 China 207 2010 The Philips Supplier Sustainability Involvement Program is built on five pillars: setting out our requirements; getting suppliers to understand these and commit themselves; monitoring identified risk suppliers through audits; working with suppliers to resolve issues; and engaging stakeholders. For more details see section 15.6, Supplier indicators, of this Annual Report. 2010 supplier audits Philips conducted 273 initial and continued conformance audits in 2010. During these audits an external specialized company visited the supplier sites in risk countries for a 2 to 4 man-days audit. ■-limited tolerance--■-zero tolerance 25 6 20 15 10 4 13 3 4 15 13 17 1 7 5 4 6 13 10 8 2 3 0 Average Supplier Sustainability Involvement Program Average non-compliances per audit Vietnam Philips remains focused on improving working conditions and environmental performance in its supply chain and encourages its suppliers to have the same focus. Recognizing that this is a huge challenge requiring industry-wide efforts, as well as active involvement of other societal stakeholders, we continue to be active in the Electronic Industry Citizenship Coalition (EICC). We encourage our strategic and preferred suppliers to join the EICC as well. We will continue to seek active cooperation with other societal stakeholders either directly or through institutions like the EICC or the multistakeholder program from the Dutch Sustainable Trade Initiative. Ukraine Our suppliers • Working hours, wages and benefits: excessive overtime, continual seven-day work weeks, recordkeeping of standard and overtime working hours, payment of overtime premiums. • Emergency preparedness: fire detection and suppression systems, blocked emergency exits, fire drills. • Occupational safety: immediate threat to health and safety. • Industrial hygiene: appropriate controls for worker exposures to chemical, biological and physical agents. • Hazardous substances: improper disposal of hazardous waste. • Lack of adequate management systems to safeguard compliance with the EICC code for labor and ethics, health and safety, and environment. Philippines The trend in outsourcing manufacturing activities continued in 2010, in addition to the increased focus on emerging countries. This implies an increased effort in managing our impact on our supply chain, as this impact is stronger in emerging countries, and will lead to an increase of risk suppliers, requiring a related increase in efforts in our supplier sustainability program. The most frequently observed areas of non-compliance were: Mexico Supplier performance India 2009 Indonesia 2008 China 5.4.5 2007 Brazil 2006 At the end of 2010 the identified zero-tolerance noncompliances were either resolved or still within the agreed deadline for resolution. For more details on audit results, please refer to section 15.6, Supplier indicators, of this Annual Report. This is a customized selection from the Annual Report 2010 71 5 Group performance 5.4.5 - 5.5 Roll-out in the supply chain The EICC code requests suppliers to roll-out the code in the supply chain to their next-tier suppliers. During the audits at risk suppliers, it is checked whether the facility implemented an effective process to ensure that their next-tier suppliers implemented the Code and are aware of their ethical and legal requirements. A limited number of second-tier suppliers were identified as high risk suppliers and audited in the 2010 program. ‘Conflict’ minerals: issues further down the chain Philips acknowledges the issues concerning working conditions at the base of the supply chain, specifically in the extractives sector for metals such as tin, tantalum and tungsten. In particular, we are concerned about the situation in the east of the Democratic Republic of Congo (DRC) where proceeds from the extractives sector are sometimes used to finance rebel conflicts in the region. Although Philips does not directly source minerals from the DRC and the mines are typically seven or more tiers removed from our direct suppliers, we address the issue through the means and influencing mechanisms available to us. For more details, please refer to section 15.6, Supplier indicators, of this Annual Report. 5.5 Proposed distribution to shareholders Pursuant to article 34 of the articles of association of Royal Philips Electronics, 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, 2010, 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 Electronics 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 2011 Annual General Meeting of Shareholders to declare a dividend of EUR 0.75 per common share (up to EUR 710 million), in cash or in shares at the option of the shareholder, against the net income for 2010. Shareholders will be given the opportunity to make their choice between cash and shares between April 7, 2011 and April 29, 2011. If no choice is made during this election period the dividend will be paid in shares. On April 29, 2011 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 Electronics N.V. at Euronext Amsterdam on 27, 28 and 29 April 2011. The Company will calculate the number of share dividend rights entitled to one new common share, such that the gross dividend in shares will be approximately 3% higher than the gross dividend in cash. Payment of the dividend and delivery of new common shares, with settlement of fractions in cash, if required, will take place from May 4, 2011. 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 May 2, 2011. 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 earnings and retained earnings is subject 72 This is a customized selection from the Annual Report 2010 5 Group performance 5.5 - 5.6 to 15% dividend withholding tax, but only in respect of the par value of the shares (EUR 0.20 per share). This withholding tax in case of dividend in shares will be borne by Philips. In 2010, a dividend of EUR 0.70 per common share was paid in cash or shares, at the option of the shareholder. Approximately 53% elected for a share dividend resulting in the issue of 13,667,015 new common shares, leading to a 1.5% percent dilution. The remainder of the dividend was paid in cash (EUR 296 million) against the retained earnings of the Company. The balance sheet presented in this report, as part of the Company financial statements for the period ended December 31, 2010, is before dividend, which is subject to shareholder approval after year-end. 5.6 Outlook 2011 will be a year of progress on our way to achieve the Vision 2015 objectives. Our strong order book provides confidence in our Healthcare business for the year ahead. We see first leading indicators of positive momentum in construction markets, which is expected to benefit Lighting sales in the latter half of 2011, supported by the increase adoption of LED products. We expect emerging markets to continue to support growth in all three sectors, while consumer sentiment in mature markets remains subdued. We will continue our initiatives to ignite growth in Consumer Lifestyle. Amsterdam, February 17, 2011 Board of Management This is a customized selection from the Annual Report 2010 73 6 Sector performance 6 - 6 6 Sector performance Imaging Systems • Home Healthcare Solutions • Television • Personal Care • Audio & Video Lamps • Consumer Luminaires • Professional Patient Care and Clinical Informatics • Multimedia • Domestic Appliances • Health & Luminaires • Lighting • Electronics and Controls • Customer Services Wellness • Accessories Automotive Lighting • Packaged LEDs • LED solutions Corporate Technologies • Overhead Cost • Pensions • Global Service Units • Corporate Investments • New Venture Integration • Design Our structure Koninklijke Philips Electronics N.V. (the ‘Company’) is the parent company of the Philips Group (‘Philips’ or the ‘Group’).The management of the Company is entrusted to the Board of Management under the supervision of the Supervisory Board. 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 Group Management & Services sector provides the operating sectors with support through shared service centers. Furthermore, country management organization supports the creation of value, connecting Philips with key stakeholders, especially our employees, customers, government and society. The sector also includes pensions. Organizational chart Board of Management Healthcare Consumer Lifestyle Lighting Group Management & Services The Board of Management and a number of heads of Corporate Staff departments and senior sector executives together form the Group Management Committee. Also included under Group Management & Services are the activities 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. At the end of 2010, Philips had 118 production sites in 27 countries, sales and service outlets in approximately 100 countries, and 119,001 employees. 74 This is a customized selection from the Annual Report 2010 6 Sector performance 6 - 6 EBITA per operating sector 20101) in millions of euros Lighting 869 Healthcare 1,186 1) Sales, EBIT and EBITA 2010 in millions of euros unless otherwise stated sales EBIT Healthcare 8,601 922 10.7 1,186 13.8 Consumer Lifestyle 8,906 595 6.7 639 7.2 Lighting 7,552 695 9.2 869 360 Philips Group 1) 25,419 (147) 2,065 − 8.1 % Cash used for acquisitions per operating sector 2008-2010 in millions of euros 11.5 GM&S % EBITA1) Consumer Lifestyle 639 For a reconciliation to the most directly comparable GAAP measures, see unknown section of this Annual Report. − (142) 2,552 10.0 For a reconciliation to the most directly comparable GAAP measures, see chapter 16, Reconciliation of non-GAAP information, of this Annual Report Healthcare 3,536 Consumer Lifestyle 306 Employees per operating sector 2010 in FTEs at year-end Sales per operating sector 2010 in millions of euros Lighting 7,552 Lighting 1,940 Healthcare 35,479 Healthcare 8,601 Lighting 53,888 Consumer Lifestyle 8,906 Consumer Lifestyle 17,706 This is a customized selection from the Annual Report 2010 75 6 Sector performance 6.1 - 6.1.1 6.1 Healthcare “In 2010 we continued to introduce more intuitive, affordable and effective solutions. We also made a number of value-adding acquisitions and expanded our presence in emerging markets. In still-challenging market conditions, we posted solid financial results, thanks to our ongoing focus on winning business and controlling cost.” Steve Rusckowski, CEO Philips Healthcare € 8.6 billion sales 13.8% EBITA as a % of sales • Healthcare challenges present major opportunities in the long term • Addressing the care cycle – our unique differentiator • Home healthcare is a core part of our healthcare strategy • Improved market leadership in core businesses 76 This is a customized selection from the Annual Report 2010 cash flows before financing activities the rise of chronic diseases, putting even more pressure on healthcare systems. At the same time the world is facing a global and growing deficit of healthcare professionals. In the long term, these challenges present Philips with an enormous opportunity. We focus our business on addressing the evolving needs of the healthcare market by developing meaningful innovations that contribute to better healthcare, at lower cost, around the world. Introduction The future of healthcare is one of the most pressing global issues of our time. Around the world, societies are facing the growing reality and burden of increasing and in some cases aging populations, as well as the upward spiraling costs of keeping us in good health. Worldwide, many more people live longer with chronic disease – such as cardiovascular diseases, cancer, diabetes – than in the past. Aging and unhealthy lifestyles are also contributing to € 1.1 billion 6.1.1 Healthcare landscape The global healthcare market is dynamic and growing. Over the past three decades, the healthcare industry has grown faster than Western world GDP, and has also experienced high rates of growth in emerging markets 6 Sector performance 6.1.1 - 6.1.3 such as China and India. Rising healthcare costs present a major challenge to society. The industry is looking to address this through continued innovation, both in traditional care settings and also in the field of home healthcare. This approach will not only help to lighten the burden on health systems, but will also help to provide a more comforting and therapeutic environment for patient care. 6.1.2 6.1.3 About Philips Healthcare Philips is one of the top-tier players in the healthcare technology market (based on sales) alongside General Electric (GE) and Siemens. Our Healthcare sector has global leadership positions in areas such as cardiac care, acute care and home healthcare. Philips Healthcare’s current activities are organized across four businesses: People-focused, healthcare simplified Philips’ distinctive approach to healthcare starts by looking beyond the technology to the people – patients and care providers – and the medical problems they face. By gaining deep insights into how patients and clinicians experience healthcare, we are able to identify market and clinical needs. In response, we can develop more intuitive, more affordable, and in the end more meaningful innovations to help take some of the complexity out of healthcare. This results in better diagnosis, more appropriate treatment planning, faster patient recovery and long-term health. We try to simplify healthcare by combining our clinical expertise with human insights to develop innovations that ultimately help to improve the quality of people’s lives. We believe that we are well positioned for the long term as global healthcare needs will continue to increase and our care cycle approach will drive towards better patient outcomes and reduced healthcare system costs. With a strong presence in cardiology, oncology and women’s health, we focus on many of the fundamental health problems with which people are confronted, such as congestive heart failure, lung and breast cancers and coronary artery disease. Our focus is on understanding the complete cycle of care – from disease prevention to screening and diagnosis through to treatment, monitoring and health management – and choosing to participate in the areas where we can add significant value. Philips is dedicated to making an impact wherever care is provided, within the hospital – critical care, emergency care and surgery – and, as importantly, in the home. The high-growth sector of home healthcare is a core part of Philips’ healthcare strategy. We provide innovative products and services for the home that connect patients to their healthcare providers and support individuals at risk in the home through better awareness, diagnosis, treatment, monitoring and management of their conditions. We also provide solutions that improve the quality of life for aging adults, for people with chronic illnesses and for their caregivers, by enabling healthier, independent living at home. • Imaging Systems: interventional X-ray, diagnostic X-ray, computed tomography (CT), magnetic resonance (MR), nuclear medicine (NM) and ultrasound imaging equipment, as well as women’s health • Patient Care & Clinical Informatics: cardiology informatics, including diagnostic electrocardiography (ECG); enterprise imaging informatics, including radiology information systems (RIS) and picture archiving and communication systems (PACS); patient monitoring and clinical informatics; perinatal care, including fetal monitoring and Philips Children’s Medical Ventures; and therapeutic care, which includes cardiac resuscitation, emergency care solutions, therapeutic temperature management, hospital respiratory systems, and ventilation • Home Healthcare Solutions: sleep management and respiratory care, medical alert services, remote cardiac services, remote patient management • Customer Services: consultancy, site planning and project management, clinical services, Ambient Experience, education, equipment financing, asset management and equipment maintenance and repair Total sales by business 2010 as a % Customer Services 25 Imaging Systems 40 Home Healthcare Solutions 14 Patient Care & Clinical Informatics 21 Products and services are sold to healthcare providers around the world, including academic, enterprise and stand-alone institutions, clinics, physicians, home healthcare agencies and consumer retailers. Marketing, sales and service channels are mainly direct. This is a customized selection from the Annual Report 2010 77 6 Sector performance 6.1.3 - 6.1.4 The United States is the largest healthcare market, currently representing close to 43% of the global market, followed by Japan and Germany. Approximately 20% of our annual sales are generated in emerging markets, and we expect these to continue to grow faster than the markets in Western Europe and North America. Philips Healthcare employs approximately 35,500 employees worldwide. With regard to sourcing, please refer to sub-section 5.3.3, Supply management, of this Annual Report. 6.1.4 Progress against targets The Annual Report 2009 set out a number of key targets for Philips Healthcare in 2010. The advances made in addressing these are outlined below. Drive performance • Continue to drive operational excellence and improve margins: We are building on successful initiatives to structurally reduce our overall cost structure and improve our organizational effectiveness. We are improving our margins through better product reliability, improved pricing initiatives, optimization of low-cost country sourcing, and increases in our service productivity and operational efficiency. In 2010 we continued to improve the efficiency and effectiveness of our organization, not only in response to the current economic climate, but, even more importantly, to further strengthen our position for the future. We continued to manage costs and reorganize our business, both to meet customer and market demands, as well as to enable profitable growth. In addition, we continue to drive the pace of operational improvement. Our Quote to Cash program has driven fundamental changes within our organization, focusing on process standardization and simplification. A direct result of those efforts was the formation of a centralized Commercial Operations organization – with the primary goal of making it easier for our customers to do business with us. • Drive emerging market growth: We continue to make key acquisitions to meet the diverse and growing needs of the different markets around the world. For example, our acquisition of Shanghai Apex Electronics in 2010 provides high-quality value ultrasound transducers, enabling Philips to further support the use of ultrasound, a widely used diagnostic procedure that provides a critical yet affordable and mobile modality for early diagnosis and real-time imaging. The acquisition marks another step in Philips’ expanding presence in emerging markets, complementing the acquisition of healthcare informatics company Tecso 78 This is a customized selection from the Annual Report 2010 Informatica in Brazil and the expansion of our clinical informatics portfolio with the acquisition of Wheb Sistemas, a leading Brazilian provider of clinical information systems. • Continue to pursue integration of our recent acquisitions: In 2010 we successfully completed steps to integrate prior-year acquisitions including InnerCool Therapies Inc., a pioneer in the field of therapeutic hypothermia, and Traxtal, a medical technology innovator in imageguided procedures. This included the launch of the Philips InnerCool RTx Endovascular System to help enhance patient care by managing therapeutic hypothermia. Accelerate change Our organic growth will be driven by continued expansion into emerging markets, more significant development of mid- and low-end products for customers around the world, increased brand preference, ongoing enhancement of our customer experience, and optimization of our care cycle approach. • Drive transformational activities to improve the customer experience: We are leveraging our product and services portfolio in innovative ways. We offer innovative financing and business modeling solutions to our customers to simplify and ease purchasing decisions. Additionally, we recently added consulting offerings, a further contributor to the continued growth of our Customer Services business. We have also introduced new low- and mid-range products, boosting growth in these market segments in both mature and emerging markets. • Organize around customers and markets to bring decisionmaking closer to the customer: We have improved operational excellence and increased our customer focus by aligning our sales and services organizations to better serve our customers and markets in which they operate. Creating smaller, more empowered teams of sales and services professionals will help us to react faster to customers’ requirements and offer better, broader solutions to the marketplace. • Accelerate introductions of low- and mid-end products as a platform for new growth opportunities: As part of our efforts to better serve our customers in key markets, we are looking for ways to improve how we design, develop and deliver products. We have partnered with Electron, a leading Russian medical equipment manufacturer, to develop and produce innovative imaging products for the Russian market. The partnership will initially focus on the development of CT scanners, with potential opportunities for future expansion with other healthcare products such as magnetic resonance, X-ray and ultrasound systems. In 6 Sector performance 6.1.4 - 6.1.4 October we completed Russia’s first installation of a domestically made CT scanner at the Hospital of War Veterans in St. Petersburg. We have also made significant progress in developing products that meet the varied needs of customers around the world. In fact, since 2009, companies we have acquired (primarily in emerging markets) introduced 15 new products. An example is the Allura FC catherization lab launched in India in 2010 – the first product developed and manufactured by Alpha X-ray, a recent Philips acquisition in India. Implement strategy • Move toward leadership position in imaging: In 2010 we unveiled a new approach to clinical collaboration that will drive innovation and efficiency in radiology: Imaging 2.0. Just as Web 2.0 redefined the way people connect, share and use the internet, Imaging 2.0 represents a new world of possibilities for radiology science. It is about integration and collaboration, and new levels of patient focus and safety that can help clinicians achieve what was unimaginable just a few short years ago. The introduction of Imaging 2.0 coincided with an unprecedented number of new product introductions in radiology, all designed to facilitate innovation and collaboration, focus on patient care and safety, and improve economic value. This year, Philips introduced the Ingenuity CT platform, which is designed to provide equivalent diagnostic image quality at up to 80% less dose. This advanced technology has also been incorporated into a new hybrid imaging system, the Ingenuity PET/CT, used to conduct studies in oncology imaging, cardiac perfusion and diagnostic CT. Other innovations in imaging include: - Ingenia MR, the first digital broadband MR system that improves image quality while shortening MR exam times by up to 30% - Ingenuity PET/MR, the first new imaging modality introduced in 10 years, which integrates the molecular imaging capabilities of PET with the superior soft tissue contrast of MR (magnetic resonance imaging) - IntelliSpace Portal, a new multimodality, multivendor workstation that, for the first time, uses advanced networking capabilities to facilitate collaboration between radiologists and referring clinicians anytime, anywhere, no matter the modality or vendor, ultimately helping to fuel improved patient outcomes - iU22 xMATRIX Ultrasound, a new ultrasound system that allows clinicians to capture twice as much clinical information in the same amount of time without moving, turning or rotating the transducer, helping clinicians make more informed care decisions, and potentially minimizing the frequent repetitive stress injuries experienced in the field of sonography. • Grow Home Healthcare: Philips is expanding its Home Healthcare business both by introducing new solutions, as well as by expanding its footprint around the globe. Seniors are living longer and remaining in their own homes; however, falls have become an epidemic problem that jeopardizes their chances to live independently. In order to help enable continued independence for seniors by improving access to help in the event of a fall, we introduced the breakthrough medical alert service, Philips Lifeline with AutoAlert. Available in the US, Lifeline with AutoAlert can detect falls – with a high rate of detection and low rate of false alarms – and automatically call for help. We also announced plans to make this enhanced service available in Japan in 2011. Additionally, there are more than one billion people suffering from chronic respiratory diseases worldwide. Of this group, an estimated 210 million people have Chronic Obstructive Pulmonary Disease (COPD). Three million people died from COPD in 2005, and 90% of those deaths were in low and middle-income countries, where effective strategies for prevention and control are not always implemented or accessible. Philips will train 2,000 physicians in emerging markets on respiratory disease like sleep apnea and COPD. In India, Philips recently supported the set-up of sleep labs in hospitals to help diagnose sleep disorders and help get affected patients the treatment needed to live a healthier life. • Continue to execute our care cycle strategy around women’s health, cardiology and oncology: we are concentrating our effort, investment and research on some of the most significant diseases and conditions within those areas. With a growing presence in these fields, we focus on the fundamental health problems with which people are confronted today – diseases such as congestive heart failure, breast and other cancers, coronary artery disease. • Leverage Sustainability as a driver of growth: We are making significant strategic investments in our industrial footprint in emerging markets in order to drive growth by better serving local customers and to reduce our overall cost position. In 2010, we invested EUR 60 million in Green Innovation and the share of Green Product sales increased from 23% in 2009 to 25% in 2010. We continue to focus our Green Innovation projects on lowering energy usage, weight, radiation This is a customized selection from the Annual Report 2010 79 6 Sector performance 6.1.4 - 6.1.5 dose, and hazardous material content. We play an active role in developing environmental legislation, such as EU legislation on chemical substances (RoHS and REACH), EcoDesign of products (e.g. energy efficiency; EuP directive) and electronic waste (WEEE). Key data in millions of euros 2008 2010 7,649 7,839 8,601 15 2 10 6 Sales 2009 (3) 4 Sales growth 6.1.5 % increase, nominal 2010 financial performance In 2010, sales amounted to EUR 8,601 million, 10% higher than in 2009 on a nominal basis, driven by higher sales in all businesses. Excluding a 6% favorable impact of currency effects, comparable sales were 4% higher. Mid-single-digit comparable sales growth was achieved by Patient Care & Clinical Informatics, Home Healthcare Solutions and Customer Services. Imaging Systems comparable sales were in line with 2009. Green Product sales amounted to EUR 2,136 million, a 19% year-on-year increase. % increase, comparable1) EBITA Net operating capital (NOC)1) 13.8 591 922 7.5 10.7 8,785 as a % of sales 1,186 8.1 EBIT1) 848 10.8 621 as a % of sales 8,434 8,908 889 1,139 34,296 35,479 Cash flows before financing activities1,2) (2,478) Employees (FTEs) 35,551 1) Geographically, comparable sales in mature markets were higher than in 2009 in all businesses except Imaging Systems. The year-on-year sales increase was largely attributable to Western Europe. Comparable sales in North America were broadly in line with 2009. In emerging markets we achieved 7% growth, largely driven by strong, double-digit growth in China and India. 839 11.0 1) 2) For a reconciliation to the most directly comparable GAAP measures, see chapter 16, Reconciliation of non-GAAP information, of this Annual Report Prior period amounts have been revised to reflect an adjusted sector allocation Sales per market cluster in millions of euros ■-Western Europe--■-North America--■-other mature--■-emerging 8,601 9,000 7,839 1,690 7,649 6,562 EBITA increased from EUR 848 million, or 10.8% of sales, in 2009 to EUR 1,186 million, or 13.8% of sales, in 2010. EBITA improvements were realized across all businesses in Healthcare, largely as a result of higher sales, favorable currency impact and cost-saving programs. Restructuring and acquisition-related charges were EUR 77 million, compared with EUR 106 million in 2009. EBIT amounted to EUR 922 million, or 10.7% of sales, and included EUR 263 million of charges related to amortization of intangible fixed assets. Net operating capital in 2010 increased by EUR 474 million to EUR 8.9 billion. Excluding a EUR 713 million currency impact, net operating capital decreased by EUR 239 million. Cash flows before financing activities increased from an inflow of EUR 889 million in 2009 to an inflow of EUR 1,139 million in 2010, mainly attributable to higher earnings. 80 This is a customized selection from the Annual Report 2010 1,271 1,450 1,049 1,097 642 3,167 559 3,215 670 3,747 763 3,685 3,901 1,704 1,767 1,961 1,941 2,042 2006 6,000 6,638 2007 2008 2009 2010 968 3,000 0 Sales and net operating capital in billions of euros ■-Sales----NOC 10 7.5 4.6 6.6 4.8 6.6 8.8 7.6 8.4 7.8 8.9 8.6 12 9 5 6 2.5 3 0 0 2006 2007 2008 2009 2010 6 Sector performance 6.1.5 - 6.1.7 Improve capabilities EBIT and EBITA1) in millions of euros 1,500 ■-EBIT in value--■-EBITA in value----EBITA as a % of sales ■ 45.0 13.8 1,186 1,000 13.3 874 763 500 111 12.7 846 137 709 11.0 839 10.8 848 218 257 621 591 2008 2009 264 30.0 922 15.0 0 0 2006 1) 6.1.6 2007 2010 For a reconciliation to the most directly comparable GAAP measures, see unknown section of this Annual Report. Regulatory requirements Philips Healthcare is subject to extensive regulation. It strives for full compliance with regulatory product approval and quality system requirements in every market it serves by addressing specific terms and conditions of local ministry of health or federal regulatory authorities, including agencies like the US FDA, EU Competent Authorities and Japanese MLHW. Environmental and sustainability requirements like the European Union’s Waste from Electrical and Electronic Equipment (WEEE) and Restriction of Hazardous Substances (RoHS) directives are met with comprehensive EcoDesign and manufacturing programs to reduce the use of hazardous materials. • Organize around customers and markets • Simplify the way we work to create more customer focus • Improve customer business administrative process • Improve service delivery • Achieve breakthrough cost innovation in product design • Drive growth and leadership in oncology • Extend our leadership in cardiology Implement strategy • Advance towards global leadership position in Imaging Systems • Grow Home Healthcare • Grow best-in-class clinical decision support, patient care and clinical informatics solution business • Grow in emerging markets faster than competition Philips Healthcare participates in COCIR, the European trade association for the Radiological, Electro-medical and Healthcare IT industry, which has committed to participate in the Energy-using Products Directive through a Self-Regulatory Initiative for imaging equipment. 6.1.7 Strategy and 2011 objectives Philips Healthcare will continue to play an important role in the realization of Philips’ strategic ambitions in the domain of health and well-being. Healthcare has defined the following key business objectives for 2011: Drive performance • • • • Deliver cost innovation and margin initiatives Expand service portfolio Continue to build the Philips Healthcare brand Deliver on our EcoVision sustainability commitments This is a customized selection from the Annual Report 2010 81 6 Sector performance 6.2 - 6.2 6.2 Consumer Lifestyle “In 2010 we continued to increase our profitability, driven by our leading positions in health and well-being, our global footprint and our strong brand. We set out on a journey to sharpen our focus, taking a granular approach to key categories and markets to ignite top-line growth.” Pieter Nota, CEO Philips Consumer Lifestyle € 8.9 billion sales 7.2% EBITA as a % of sales • Leading positions in categories such as male shaving and grooming, coffee appliances and oral healthcare • Further decisive action taken to reduce our exposure in the Television business • Increased focus on growth, taking a granular approach by making clear investment choices • Expanded business creation capabilities in emerging markets and investment in key enablers to accelerate growth Introduction Across the world, consumers aspire to improve their health and feeling of well-being, but struggle to balance this with the increasing complexity of their lives. This trend is creating a large and growing market in the developed and especially in the emerging economies, where Consumer 82 This is a customized selection from the Annual Report 2010 € 404 million cash flows before financing activities Lifestyle can benefit by delivering health and well-being solutions with advanced technology that meet people’s needs. We strive to understand consumer needs and translate those insights into breakthrough, meaningful innovations. Our competitive advantage is our solutions that are easy to experience, advanced and designed around the consumer. This strength is galvanized by our powerful global brand, our understanding of the markets we operate in and the many synergies with our channels, partners and supply chain. 6 Sector performance 6.2.1 - 6.2.3 6.2.1 Lifestyle retail landscape and attractive product portfolio. We focus on premium propositions with our differentiating brand promise of “sense and simplicity”, relevant to the target group. The fragile economic environment in 2010 continued to affect demand for many categories of consumer goods in developed markets. Whilst emerging markets saw consumer demand impacted by the economic environment, they demonstrated greater resilience. In focusing on the domain of health and well-being, we are tapping into significant trends – such as consumer empowerment, growth in emerging markets and aging populations – that will have a major impact on society in the future. However, underlying consumer trends driving our innovation remained stable: Healthy Life The Healthy Life value space takes a holistic approach to enhancing consumers’ health, addressing the needs for mental and physical health and for healthy relationships. • People are increasingly appearance-conscious and want to boost their self-confidence and self-identity through health and beauty regimes • People want to prepare food and drinks that are healthy and of good quality, and to do so quickly and without hassle • More and more consumers want to take control by monitoring their health and lifestyle • People want to create a home ‘haven’ – a space that provides a sense of well-being and comfort • Consumers want to create a digital command center at home, which performs the role of a social digital hub 6.2.2 Personal Care The Personal Care value space addresses the consumer need to “look and feel your best” and so helps people feel more confident. Home Living The Home Living value space addresses consumers’ pressing need to have more time to spend on themselves or with family and friends. We do this by creating highquality solutions that enable quick and convenient cooking, preparation of beverages, cleaning, caring and home comfort. Helping people achieve a healthier and better life Consumer Lifestyle makes a difference to people’s lives by making it easier for them to achieve a healthier and better lifestyle. We believe that “sense and simplicity” can be the goal of technology and apply that principle to create lifeenhancing solutions. Lifestyle Entertainment Lifestyle Entertainment is about enjoying entertainment and the little events in everyday life: sharing time with family and friends, having time off from a hectic schedule, and moments of comfort, fun and caring. Tracking trends and identifying opportunities Consumer Lifestyle works together with Philips Design to monitor trends ranging from consumer tastes to design aesthetics. With its global footprint, Consumer Lifestyle is well positioned to understand emerging needs in local markets. Country organizations are our interface with the consumer, allowing us to accurately identify local needs, tastes and commercial opportunities. Applying insights to develop innovative solutions We apply a rigorous product development process when creating new value propositions. At its heart are validated consumer insights, which show that the propositions meet a market need. The combination of insight, simplicity and innovation differentiates us from our competition and creates a platform for sustainable business success. 6.2.3 About Consumer Lifestyle The Philips Consumer Lifestyle sector is organized around its markets, customers and consumers, and is focused on value creation through category development and delivery through operational excellence. The market-driven approach is applied with particular emphasis at local level, enabling Consumer Lifestyle to address a variety of market dynamics and allowing the sales organizations to operate with shorter lines of communication with the sector’s six businesses. This also promotes customer-centricity in day-to-day operations. Where we play In 2010 the sector consisted of the following areas of business: We are active in our four value spaces in health and wellbeing: Healthy Life, Personal Care, Home Living and Lifestyle Entertainment, complemented by Accessories. This portfolio is aligned with our brand equity and enables us to provide our retail customers with a highly relevant • Health & Wellness: mother and child care, oral healthcare • Personal Care: shaving and grooming, female depilation, haircare, vitalight, skincare This is a customized selection from the Annual Report 2010 83 6 Sector performance 6.2.3 - 6.2.4 • Domestic Appliances: kitchen appliances, beverages/ espresso, garment care, floor care, water, air • Television • Audio & Video Multimedia: home audio, home video, home cinema sound, portable audio and video • Accessories: on-the-go accessories, together@home accessories, personal displays, speech processing Domestic Appliances 17 Other incl. Licenses 4 Accessories 10 Health & Wellness 7 Television 36 Audio & Video Multimedia 13 We also partner with leading companies from other fields, such as Sara Lee/Douwe Egberts and Beiersdorf (NIVEA), in order to deliver customer-focused appliance/ consumable combinations. Consumer Lifestyle continues to focus on international key accounts, particularly in emerging markets. We have pioneered innovative approaches in online and social media to build our brand and drive sales. We offer a broad range of products from high to low price/value quartiles, necessitating a diverse distribution model. We are expanding our portfolio to increase its accessibility, particularly for lower-tier cities in emerging markets. We are also developing new retail channels, for instance selling our innovative Intense Pulsed Light depilation solution, Philips Lumea, in branches of Douglas, the pan-European beauty retailer. Under normal economic conditions, the Consumer Lifestyle business experiences seasonality, with higher sales in the fourth quarter resulting from the holiday sales. Consumer Lifestyle employs approximately 17,700 people worldwide. Our global sales and service organization covers more than 50 mature and emerging markets. In addition, we operate manufacturing and business creation organizations in the Netherlands, France, Belgium, Austria, Hungary, Singapore, Argentina, Brazil and China. Consumer Lifestyle strives for full compliance with relevant regulatory requirements. 84 6.2.4 Progress against targets The Annual Report 2009 set out a number of key targets for Philips Consumer Lifestyle in 2010. The progress made in addressing these targets is outlined below. Drive performance Total sales by business 2010 as a % Personal Care 13 With regard to sourcing, please refer to sub-section 5.3.3, Supply management, of this Annual Report. This is a customized selection from the Annual Report 2010 • Further increase cash flow by aggressively managing cash targets: We strictly managed working capital, which has been negative in many recent quarters. We effectively managed our credit and risk, including significantly reducing overdue customer payments. There was an increase in the number of suppliers using supplier finance, which reduced total cost in the supply chain. As part of Philips’ drive to harmonize supplier terms, we improved overall payment terms by 7 days. • Continue to reduce fixed costs and improve the overall agility of the cost base: We acted fast in the downturn and are benefiting from improved gross margin and a lower cost base, supporting year-on-year EBITA margin improvement. We continued to manage costs via our Earn 2 Invest Program, reinvesting savings to drive growth. • Strengthen excellence in execution and further develop “sense and simplicity” as a competitive edge: We have implemented an improved management decision support system with granular insight into integral performance per business, market and customer down to product level. We are also striving to install a return on investment (ROI) culture in order to drive, and increase resources for, more effective advertising and promotional campaigns. Accelerate change • Continually optimize the business portfolio, while prioritizing profitable growth and success in selected new value spaces: We have driven double-digit growth in our Health & Wellness business and high single-digit growth in Personal Care, as well as low single-digit growth in Domestic Appliances. We have taken a granular approach to ignite growth, focusing investments at a category/country level. • Nourish existing leadership positions, and increase leadership positions in other categories by delighting consumers and winning their preference: We have market share leadership or co-leadership positions in 45% of our businesses in emerging markets and 32% in mature markets. We have Net Promoter Score leadership – a key leading indicator for sales growth – in mother and child care, power toothbrushes and male shaving and grooming, as well as across a range of categories and countries. 6 Sector performance 6.2.4 - 6.2.5 Implement strategy • Grow Health & Wellness: The Health & Wellness business grew in every quarter of 2010. The acquisition of Discus Holdings expands our oral healthcare portfolio and creates synergies with the established dental professional relationships we have through Philips Sonicare. We continue to focus on marketing innovation and expansion in emerging markets to capture this large growth opportunity. • Manage TV to profitability: We successfully extended our brand licensing partnerships with Videocon (India) and TPV (China). We continued to reduce costs, and we established forward integration and co-location partnerships with TPV, LG Display and Sharp. However, due to high stock levels in retail and strong price erosion, as well as a deterioration of results in China as a consequence of a delay in closing the local licensing agreement, TV was not profitable over the full year. Year-on-year improvement in profitability generated an EBITA loss of EUR 95 million, excluding restructuring charges of EUR 30 million. • Improve geographical coverage and strengthen position in Brazil, Russia, India and China through managerial focus and investment: We substantially increased our advertising and promotion spend in emerging markets, and continued to invest in local talent. We announced our intention to move the global headquarters of our Domestic Appliances business to Shanghai, as well as investing in local business creation capabilities for kitchen appliances across four local innovation centers. Three of these centers are located in emerging markets. • Accelerate excellence in key strategic capabilities: leadership, professional endorsement, new channels, online, category management and new business models: We pioneered online and social media, including the Philips AVENT support center for mothers, an impartial resource supported by healthcare professionals. We also implemented a major online and social media campaign for our Wake-up Light, which featured the residents of the most northerly town on Earth, where almost four months of darkness makes waking in the morning all that much tougher. We grew our online sales by more than 20% year-on-year. • Drive profitable growth through Green Products: We introduced more than 150 new Green Products to our portfolio in 2010, resulting in total Green Product sales of 34% of sector sales. While the increase in Green Product sales was achieved across all business areas, the green focal area that saw the greatest improvement was energy efficiency. We have also worked on the voluntary phase-out of polyvinyl chloride (PVC) and brominated flame retardants (BFR), enabling our Lifestyle Entertainment and Personal Care businesses to launch products which are completely free of these substances. We launched the Econova LED TV, Europe’s greenest LED TV, with a solar remote control. Named “European Green TV 2010-2011” by the European Imaging & Sound Association (EISA), the Econova LED TV addresses people’s concerns about the environment without compromising on performance. It reduces energy consumption by up to 60% – the lowest in its category – and is made from 60% recycled aluminum. Its packaging is 100% paper-based cardboard, and it is completely PVC- and BFR-free. 6.2.5 2010 financial performance 2010 proved to be a challenging year for driving sales growth in Consumer Lifestyle. We began the year with strong comparable sales growth in the first two quarters, though we experienced sales declines in the last two quarters, with high stock levels in retail and, consequently, strong price erosion, particularly in Television. For the year, our sales increased by EUR 439 million, or 5% nominal growth. However, adjusted for favorable currency and unfavorable portfolio changes, comparable sales growth was limited to 1%. Key data in millions of euros 2008 Sales 2009 2010 10,889 8,467 8,906 4,724 of which Television 3,122 3,155 Sales growth % increase (decrease), nominal (17) (22) 5 (9) % increase (decrease), comparable1) (17) 1 (13) (13) 8 Sales growth excl. Television % increase (decrease), nominal % increase (decrease), comparable1) (6) EBITA1) Net operating capital (NOC) 1) of which Television Employees (FTEs) of which Television 1) 2) 7.2 321 595 (179) (130) 1.0 as a % of sales (125) 4.0 (436) of which Television (179) 110 EBIT1) 639 1.2 as a % of sales Cash flows before financing activities1,2) 1 339 (436) of which Television of which Television (12) 126 3.8 6.7 798 625 911 (238) (386) (299) 238 598 404 (487) (16) (117) 17,145 18,389 17,706 4,742 4,766 3,613 For a reconciliation to the most directly comparable GAAP measures, see chapter 16, Reconciliation of non-GAAP information, of this Annual Report Prior period amounts have been revised to reflect an adjusted sector allocation This is a customized selection from the Annual Report 2010 85 6 Sector performance 6.2.5 - 6.2.5 We achieved double-digit growth at Health & Wellness and high single-digit growth at Personal Care, driven by our increased investment in advertising and promotion. Sales at Domestic Appliances showed low single-digit growth, as strong growth in emerging markets, notably China, was partly offset by lower sales in mature markets. Comparable sales growth at Television was limited to 1%, while sales declined at Audio & Video Multimedia and Accessories. From a geographical perspective, we recorded 6% comparable sales growth in emerging markets, which was partly offset by a 2% decline in mature markets, mainly in Western Europe. Sales growth in emerging markets was driven by solid growth in Latin America and Russia, though this was tempered by a sales decline in China. The decline in China was substantially due to a delay in the implementation of the brand licensing agreement for Television with TPV. Emerging markets’ share of sector sales increased from 37% in 2009 to 41% in 2010. Green Product sales amounted to over EUR 3 billion and increased from 23% of total sales in 2009 to 34% in 2010. EBITA significantly improved from EUR 339 million, or 4.0% of sales, in 2009 to EUR 639 million, or 7.2% of sales, in 2010. Restructuring and acquisition-related charges amounted to EUR 61 million in 2010, compared to EUR 136 million in 2009. The year-on-year EBITA improvement was largely driven by improved gross margin, fixed cost savings, the previous year’s EUR 48 million product recall-related charges, and lower restructuring charges. EBITA was higher than in 2009 in all businesses, notably Domestic Appliances and Television. EBIT amounted to EUR 595 million, or 6.7% of sales, which included EUR 44 million of amortization charges, mainly related to amortization of intangible fixed assets at Health & Wellness and Domestic Appliances. Sales per market cluster in millions of euros ■-Western Europe--■-North America--■-other mature--■-emerging 15,000 13,102 12,914 4,481 4,369 10,889 4,230 10,000 2,939 298 5,000 2,623 347 5,308 5,651 Cash flows before financing activities declined from an inflow of EUR 598 million in 2009 to an inflow of EUR 404 million. The decline was mainly attributable to lower cash inflow from changes in working capital, partly offset by higher earnings. 86 This is a customized selection from the Annual Report 2010 3,180 1,084 3,987 1,741 4,631 287 3,608 1,156 3,874 216 268 0 2006 1) 2007 20091) 2008 2010 Revised to reflect an adjusted market cluster allocation. Sales and net operating capital in billions of euros 15 ■-Sales----NOC 3.0 1.1 13.1 1.1 12.9 0.8 10.9 0.9 8.9 0.6 8.5 10 2.0 5 1.0 0 0 2006 2007 2008 2009 2010 EBIT and EBITA1) in millions of euros 1,000 750 ■-EBIT in value--■-EBITA in value----EBITA as a % of sales ■ 5.3 692 9 4.0 339 1.2 126 16 110 0 2006 1) 7.2 639 789 16 683 500 16.0 6.1 805 250 Net operating capital increased from EUR 625 million in 2009 to EUR 911 million in 2010, primarily due to higher inventories at Television and an increase in assets following the acquisition of Discus Holdings. 8,906 8,467 2007 2008 12.0 595 44 321 8.0 4.0 18 0 2009 2010 For a reconciliation to the most directly comparable GAAP measures, see unknown section of this Annual Report 6 Sector performance 6.2.5 - 6.2.6 6.2.6 Strategy and 2011 objectives Philips Consumer Lifestyle will continue to play an important role in the realization of Philips’ strategic ambitions in the domain of health and well-being. Consumer Lifestyle has defined the following key business objectives for 2011: Drive performance • Accelerate top-line growth, growing market shares and increasing market penetration in selected business/ market combinations • Maintain market share and optimize profitability in selected other business/market combinations • Increase outright leadership positions in Net Promoter Score, underpinned by a strong focus on product performance and quality • Drive operational excellence end-to-end through the value chain • Deliver on our EcoVision sustainability commitments Improve capabilities • Champion consumer and retailer responsiveness, organizing around customers and markets and moving decision-making closer to markets • Develop new go-to-market channels and opportunities • Accelerate high-impact innovation relevant to local consumer needs to beat competition • Drive an agile organization with fast decision-making and clear accountabilities Implement strategy • Grow Personal Care, Health & Wellness, Domestic Appliances and Coffee businesses • Continue to strengthen Television business and manage it towards profitability • Maintain position in Audio & Video Multimedia and Accessories while driving growth in selected business/ market combinations • Grow emerging markets and make China a global home, building business creation capabilities • Strengthen our portfolio with targeted mergers and acquisitions This is a customized selection from the Annual Report 2010 87 6 Sector performance 6.3 - 6.3 6.3 Lighting “In terms of performance, 2010 was a record year for Lighting, with significant growth of our top line and our profitability. As an organization, we are becoming much more customer-centric, and this is enabling us to capture attractive opportunities in both professional and consumer markets.” Rudy Provoost, CEO Philips Lighting € 7.6 billion sales 11.5% EBITA as a % of sales • Lighting industry undergoing a radical transformation • Important global trends underpinning strategy • Winning in LED Introduction A number of global trends are changing the way people use light. Lighting solutions are transforming urban environments, creating livable cities through the use of light to enhance safety, municipal identity and residential well-being; consumers are increasingly applying lighting to create their own ambience at home as a statement of their lifestyle; building owners and retailers are recognizing the benefits of energy-efficient lighting in reducing their operational costs; and schools are learning how lighting can improve education. 88 This is a customized selection from the Annual Report 2010 € 590 million cash flows before financing activities At the same time, more and more people are keen to help tackle the issues of climate change and rising energy costs. Many countries and regions have introduced legislative measures to address energy consumption and the emission of greenhouse gases, which are linked to climate change. In particular, 2010 saw further legislation to phase out old, incandescent lighting and other energy-inefficient forms of electric lighting. Philips will continue to play a significant role in encouraging and enabling the switch to energy-efficient lighting solutions, helping our customers to save on energy costs while making a positive contribution to the environment. Another key development is the ongoing trend toward custom solutions. Increasingly aware of the possibilities beyond standard solutions, consumers, businesses and national and municipal authorities demand highly adaptable lighting solutions which they can use to 6 Sector performance 6.3 - 6.3.3 customize their indoor and outdoor environments as and when they desire. Flexible and dynamic, our LED lighting solutions allow a much higher degree of customization and provide significantly greater possibilities for ambience creation than solutions based on conventional technologies. 6.3.1 Automotive and Lumileds markets benefited most from regained confidence and economic growth. Luminaires markets are still slow, particularly in the mature markets. Total world construction spend is expected to increase at a compound annual growth rate of about 5% over the period 2010-15. Early signs of revival in 2010 could be observed in the infrastructure sector, with 1.5% growth year-on-year. Lighting landscape We see three main transitions that will affect the lighting industry in the years to come. The first is a move towards energy-efficient light sources, in response to rising energy prices and increased awareness of climate change. 6.3.2 The second transition is the move from traditional vacuum-based technologies to solid-state lighting technology (LEDs). LED lighting is the most significant development in lighting since the invention of electric light well over a century ago. Offering unprecedented freedom in terms of color, dynamics, miniaturization, architectural integration and energy efficiency, LED lighting is opening up exciting new possibilities. We aim to be the true front-runner in design-led, market and consumer-driven innovation – both in conventional lighting and in solid-state lighting – while continuing to contribute to responsible energy use and sustainable growth. The third transition is from bulbs and components as the point of value creation to end-user-driven applications and solutions. Increasingly, these applications and solutions will include lighting controls. We believe that, going forward, a key differentiator among lighting suppliers will be the innovative strength to create systems and solutions that are truly customer-centric. Between now and 2015, we expect the value of the global lighting market to grow by 7% on a compound annual basis, assuming global economic growth (GDP) of around 4%. The majority of the value will be in LED-based solutions and products – heading towards 50% by 2015. As one of the global leaders in LED components, applications and solutions, with a strong global presence across the LED value chain, we believe we are well positioned for the changes at hand. The lighting industry as a whole has been recovering in 2010 from the global economic developments in 2009, though recovery is unevenly spread, with demand picking up in emerging markets in particular. For example, the Chinese authorities are expected to calibrate policy to ensure that the economy continues to grow at around 8% in 2011, despite the slowdown in the West. Emerging markets have rebounded strongly (with the exception of much of Eastern Europe, which is constrained by an ongoing public- and private-sector balance-sheet adjustment), but indicators suggest that most of the rebound is now over, with expansion expected to settle into a more sustainable trajectory. Simply enhancing life with light Philips Lighting is dedicated to enhancing life with light through the introduction of innovative and energyefficient solutions or applications for lighting. Our approach is based on obtaining direct input both from customers and from end-users/consumers. Through a market segment-based approach, we can assess customer needs in a targeted way, track changes over time and define new insights that fuel our innovation process and ultimately increase the success rate of new propositions introduced onto the market. We believe the rise of LED, coupled with our global leadership, positions us well to continue to deliver on our mission to simply enhance life with light. 6.3.3 About Philips Lighting Philips Lighting is a global market leader, with recognized expertise in the development, manufacturing and application of innovative lighting solutions. We have pioneered many of the key breakthroughs in lighting over the past 100 years, laying the basis for our current position. We address people’s lighting needs across a full range of market segments. Indoors, we offer specialized lighting solutions for homes, shops, offices, schools, hotels, factories and hospitals. Outdoors, we provide lighting for public spaces, residential areas and sports arenas. We also help to make roads and streets safer for traffic and other road users (car lights and street lighting). In addition, we address the desire for light-inspired experiences through architectural projects. Finally, we offer specific applications of lighting in specialized areas, such as horticulture, refrigeration lighting and signage, as well as heating, air and water purification, and healthcare. This is a customized selection from the Annual Report 2010 89 6 Sector performance 6.3.3 - 6.3.4 Philips Lighting spans the entire lighting value chain – from lighting sources, electronics and controls to full applications and solutions – via the following businesses: digital lighting, a wide range of new entrants are active in the transition to LED lighting as well as in the transition to applications and solutions. • Lamps: incandescent, halogen, (compact) fluorescent, high-intensity discharge • Consumer Luminaires: functional, decorative, lifestyle, scene-setting • Professional Luminaires: city beautification, road lighting, sports lighting, office lighting, shop/hospitality lighting, industry lighting • Lighting Systems & Controls: electronic and electromagnetic gear, controls, modules and drivers • Automotive Lighting: car headlights, car signaling, interior • Packaged LEDs • LED solutions: modules, LED replacement lamps Philips Lighting has manufacturing facilities in some 25 countries in all regions of the world and sales organizations in more than 60 countries. Commercial activities in other countries are handled via dealers working with our International Sales organization. Lighting has approximately 53,000 employees worldwide. Lighting strives for compliance with relevant regulatory requirements, including the European Union’s Waste from Electrical and Electronic Equipment (WEEE), Restriction of Hazardous Substances (RoHS), Energyusing Products (EuP) and Energy Performance of Buildings (EPBD) directives. With regard to sourcing, please refer to sub-section 5.3.3, Supply management, of this Annual Report. Total sales by business 2010 as a % Lighting Systems & Controls 13 Automotive Lighting 8 Consumer Luminaires 6 Professional Luminaires 26 6.3.4 Lamps 40 The Annual Report 2009 set out a number of key targets for Philips Lighting in 2010. The advances made in addressing these are outlined below. Drive performance Packaged LEDs/ LED solutions 7 The Lamps business conducts its sales and marketing activities through the professional, OEM and consumer channels, the latter also being used by our Consumer Luminaires business. Professional Luminaires is organized in a trade business (commodity products) and a project solutions business (project luminaires, systems and services). For the latter, the main focus is on specifiers, lighting designers, architects and urban planners. Automotive Lighting is organized in two businesses: OEM and After-market. Lighting Systems & Controls, Special Lighting Applications and Packaged LEDs/LED solutions conduct their sales and marketing through both the OEM and professional channels. The conventional lamps industry is highly consolidated, with GE and Siemens/Osram as key competitors. The LED lamps and fluorescent retrofit industry is in its early days, with a huge number of competitors entering the marketplace. The luminaires industry is fragmented, with our competition varying per region and per segment. Our Lighting Systems & Controls and Automotive Lighting businesses are again more consolidated. In the world of 90 Progress against targets This is a customized selection from the Annual Report 2010 • Drive our performance through capturing growth while managing cost and cash: Nominal sales grew by 15%, delivering a significant improvement in profitability and cash flow. • Win with customers in key markets: Our market share remained steady, and over two-thirds of our business/ market combinations have a leadership position in NPS. • Improve our relative position in emerging markets, especially China, India and Latin America: Comparable sales in emerging markets grew from 34% to 38% of total sales, driven by double-digit growth in China, India and Latin America. Accelerate change • Further drive the transitions needed to retain the industry lead in the LED era; optimize the lamps lifecycle, expand share of leading LED solutions in professional and consumer segments: Significant progress was made in growing LED as a percentage of sales from 8% in 2009 to 13% in 2010. We also undertook significant restructuring and rightsizing efforts aimed at gearing up our organization to take full advantage of the LED-driven future opportunities in the lighting industry and adjusting our cost structure to current market conditions. We added a number of acquisitions to our portfolio to strengthen our ability to offer LED solutions across segments. These include Burton, a leading provider of specialized 6 Sector performance 6.3.4 - 6.3.5 lighting solutions for healthcare facilities, and NCW Holdings, a leading Chinese provider of entertainment lighting and lighting control solutions. • Continue to invest in extending technological leadership in LED: We made significant R&D and capital investments in LED, including Lumileds, and made considerable progress in creating an integrated LED value chain across Lighting. Implement strategy • Become the lighting solutions leader in the Outdoor segment: We significantly expanded our LED road lighting portfolio in all regions. We have a healthy project pipeline for LED road lighting in China and continue to invest in R&D and our sales force to enhance our offering into turnkey projects. In 2010 we also acquired Amplex’s street lighting controls business to further expand our street lighting offering. • Grow our Consumer Luminaires business: We made considerable progress in expanding the business outside Europe. Overall, sales remained broadly in line with 2009 due to ongoing weakness in the residential market in Europe, the business’s core market. The acquisition of Luceplan, a leading high-end design brand in consumer lighting has further strengthened our portfolio. • Implement our new Lighting mission, identity and sustainability story – “Simply enhancing life with light”: We have trained more than 85% of all our employees on our new Lighting mission and have seen the uptake reflected in our Employee Engagement Survey and in the positive reactions of external stakeholders, e.g. at Light + Building 2010 and our Capital Markets Day. In 2010 we invested EUR 230 million in Green Innovation, compared to EUR 185 million in 2009. The energy efficiency of our total product portfolio improved by 9%. 6.3.5 2010 financial performance growth was limited to low single-digits due to lower demand in North America and Western Europe, particularly for Professional and Consumer Luminaires. A rebound in the global automotive market supported solid, double-digit sales growth in this business. Our general Lamps business also grew strongly compared to 2009, buoyed by demand for high-end lamps in retail and emerging geographies. Ongoing softness in both the residential and commercial construction markets – particularly in mature geographies – meant that sales in our Luminaires businesses remained broadly in line with 2009. Sales of LED-based products grew to over 13% of total sales, up from 8% in 2009, driven by Lumileds, Lamps and Professional Luminaires. Sales of energy-efficient Green Products exceeded EUR 4 billion, or 58% of sector sales. EBITA amounted to EUR 869 million, or 11.5% of sales, which included EUR 96 million of restructuring and acquisition-related charges. This compared to EUR 247 million of restructuring and acquisition-related charges in 2009. The EBITA improvement was driven by higher sales, improved gross margin and fixed cost savings from restructuring programs. EBIT amounted to EUR 695 million, or 9.2% of sales, which included EUR 174 million of amortization of intangible fixed assets, mainly from Lumileds and Genlyte. Net operating capital increased by EUR 457 million to EUR 5.6 billion, due to unfavorable currency translation, higher activity levels and additional LED-related capital expenditures. Cash flows before financing activities declined from EUR 624 million in 2009 to EUR 590 million, reflecting higher cash earnings which were more than offset by higher working capital requirements and additional growthfocused investments in capital expenditures. Sales amounted to EUR 7,552 million, a nominal increase of 15% compared to 2009, driven by a rebound in sales of general and automotive lamps as well as ongoing growth of our Lumileds LED business. Excluding a 6% favorable currency impact and a 1% contribution from acquisitions, comparable sales increased by 9%. The year-on-year sales increase was substantially driven by growth in emerging markets, which grew over 20% on a comparable basis. Emerging market sales grew to over 38% of total Lighting sales, driven by China, India and Brazil, compared to 34% in 2009. In mature markets, sales This is a customized selection from the Annual Report 2010 91 6 Sector performance 6.3.5 - 6.3.6 Key data EBIT and EBITA1) in millions of euros in millions of euros 2008 2009 ■-EBIT in value--■-EBITA in value----EBITA as a % of sales ■ 2010 30 1,200 Sales 7,362 6,546 7,552 800 Sales growth % increase, nominal 16 EBITA1) 15 3 % increase, comparable1) (11) (13) 9 480 as a % of sales 2.2 11.5 24 EBIT 1) (16) (0.2) 5,712 Cash flows before financing activities1,2) Employees (FTEs) 53,888 1) Sales per market cluster in millions of euros ■-Western Europe--■-North America--■-other mature--■-emerging 9,000 7,552 7,362 6,000 5,660 1,943 3,000 1,274 347 2,096 1,219 308 2,524 2,211 2,041 276 1,811 253 1,989 367 2,271 2,297 2009 2,665 2010 0 2006 2007 2008 Sales and net operating capital in billions of euros 9 6 2.8 5.7 4.1 6.3 5.7 7.4 ■-Sales----NOC 5.1 6.5 5.6 7.6 3 0 0 2006 92 9 6 3 2007 2008 2009 2010 This is a customized selection from the Annual Report 2010 2007 2008 2009 2010 For a reconciliation to the most directly comparable GAAP measures, see unknown section of this Annual Report Strategy and 2011 objectives Philips Lighting will continue to play an important role in the realization of Philips’ strategic ambitions in the domain of health and well-being. Lighting has defined the following key business objectives for 2011: Drive performance 2,899 6,546 2,270 0 (10) 2006 6.3.6 2,380 161 (400) 590 51,653 10 2.2 145 (16) For a reconciliation to the most directly comparable GAAP measures, see chapter 16, Reconciliation of non-GAAP information, of this Annual Report Prior period amounts have been revised to reflect an adjusted sector allocation 6,321 456 24 5,561 624 57,367 2) 664 74 695 0 9.2 5,104 (1,181) 1) 71 20 174 6.5 480 695 0.3 Net operating capital (NOC)1) 564 11.7 738 869 6.5 as a % of sales 145 400 11.6 635 11.5 869 • Accelerate growth and gain market share in: - LED lighting - Segment-specific solutions - Emerging markets • Enhance customer service levels • Increase outright NPS leadership positions and brand preference • Continue to optimize profit, minimize cost, maximize cash Improve capabilities • Reinforce a growth culture based on: - Speed - Customer responsiveness - Empowerment • Improve market impact through integral business models and end-to-end value chain execution • Drive innovation effectiveness - Faster innovation cycles - Better time-to-market - Seamless strategy/design/marketing/technology cooperation • “Resource to win” through strategic workforce planning and by enhancing diversity, talent and competency management 6 Sector performance 6.3.6 - 6.3.6 Implement strategy • Lead in LED light sources while further optimizing conventional lighting • Win in LED-powered lighting solutions, focusing on: - Professional applications in Outdoor, Retail, Office, and specific local priorities - Philips brand expansion in consumer lighting • Deliver on our EcoVision sustainability ambitions • Strengthen emerging markets This is a customized selection from the Annual Report 2010 93 6 Sector performance 6.4 - 6.4.1 6.4 Group Management & Services “In 2010 we continued to shift resources to emerging markets, expanding our commercial and industrial footprint, increasing our innovation and sourcing capabilities, and developing local competences and talent.” Gottfried Dutiné, Member of the Board of Management 6.2% R&D spend as a % of sales 33% of sales from emerging markets Philips’ performance by market cluster is based on the following: • Emerging markets, including key markets in China, India, and Latin America and other markets including Central and Eastern Europe, Russia, Ukraine and Central Asia, the Middle East and Africa, Turkey and ASEAN zone • Mature markets, including Western Europe, North America, Japan, Korea, Israel, Australia and New Zealand 45% of employees located in emerging markets shared business services for purchasing, finance, human resources, IT, real estate and supply are reported in this sector. 6.4.1 Corporate Technologies Corporate Technologies feeds the innovation pipeline, enabling its business partners – the three Philips operating sectors and external companies – to create new business options through new technologies, venturing and intellectual property development, improve time-tomarket efficiency, and increase innovation effectiveness via focused research and development activities. Introduction Group Management & Services comprises the activities of the corporate center including Philips’ global management and sustainability programs, country and regional management costs, and costs of pension and other postretirement benefit plans, as well as Corporate Technologies, Corporate Investments, New Venture Integration and Philips Design. Additionally, the global 94 This is a customized selection from the Annual Report 2010 Corporate Technologies encompasses Corporate Research, the Incubators, Intellectual Property & Standards (IP&S), the Philips Innovation Campus as well as Applied Technologies. In total, Corporate Technologies employs about 3,900 professionals around the globe. 6 Sector performance 6.4.1 - 6.4.3 Corporate Technologies actively participates in ‘open innovation’ through relationships with academic and industrial partners, as well as via European and regional projects, in order to improve innovation efficiency and share the related financial exposure. The High Tech Campus in Eindhoven, the Netherlands, the Philips Innovation Campus in Bangalore, India, and Research Shanghai, China, are prime examples of environments enabling open innovation. In this way, we ensure proximity of innovation activities to emerging markets. the products they should use. Our novel Crystalize imaging technology gives women factual, objective information and better knowledge about their skin so they can make smarter choices and achieve a more beautiful skin. Philips further developed digital pathology solutions to ease the workload and support decision making in central and hospital-based pathology departments. Philips IP&S proactively pursues the creation of new intellectual property in close co-operation with Philips’ operating sectors and the other departments within Corporate Technologies. IP&S is a leading industrial IP organization providing world-class IP solutions to Philips’ businesses to support their growth, competitiveness and profitability. Philips’ IP portfolio currently consists of about 50,000 patent rights, 36,000 trademarks, 63,000 design rights and 3,900 domain name registrations. Philips filed approximately 1,300 patents in 2010, with a strong focus on the growth areas in health and well-being. IP&S participates in the setting of standards to create new business opportunities for the Healthcare, Consumer Lifestyle and Lighting sectors. A substantial portion of revenue and costs is allocated to the operating sectors. Philips believes its business as a whole is not materially dependent on any particular patent or license, or any particular group of patents and licenses. Philips Research is a key innovation partner for Philips’ business sectors. It has three main roles. Firstly, it creates new technologies that help to spur the growth of the Philips businesses. Secondly, it develops unique intellectual property (IP), which will enable longer-term business and creates standardization opportunities for Philips. Lastly, it prepares the ground for the creation of adjacent businesses in the sectors based on technologyenabled innovation in strategically aligned application areas. In 2010, scientists from Philips Research developed the first-ever organic light-emitting diode (OLED) module that can be powered directly from a mains electricity supply. The prototype opens the door to OLED systems that can be directly plugged into standard power outlets without the need for bulky power management circuitry. This will reduce the bill of materials and simplify luminaire design for future OLED-based systems aimed at massmarket general illumination applications. In the Healthcare area, Philips Research is developing a Radio Frequency Ablation Cockpit, which covers preparation, planning and execution of minimally invasive tumor ablation procedures by clinicians. For therapy planning, the cockpit leverages the tumor visualization capabilities of preoperative CT and/or PET imaging plus automated generation of target ablation plans. For targeted needle placement, it combines these with the real-time imaging capabilities of ultrasound and precision needle-tip navigation technology based on electromagnetic tracking. Philips has three incubation organizations: the Healthcare, Consumer Lifestyle and Lighting & Cleantech Incubators. The main purpose of the Incubators is to create strategic growth opportunities for Philips. In some cases, spin-out or technology licensing is considered. In Healthcare, Philips made an anchor investment in the healthcare technology fund Gilde Healthcare III, which has a target size of EUR 200 million. In Consumer Lifestyle, DirectLife, launched in 2009, now has over 30,000 active users losing weight, getting fit and staying healthy. In the second half of 2010, a new Skin Care venture became operational to help women who are confused about their skin type and Applied Technologies is a showcase for our open innovation approach, supporting customers both inside and outside Philips through new technologies, new business ideas, consultancy and new product development and introduction services. Applied Technologies is an active player in solutions for the healthcare sector and energy solutions, including solar cells and energy management. 6.4.2 Corporate Investments The remaining business within Corporate Investments – Assembléon – is a wholly owned subsidiary that develops, assembles, markets and distributes a diverse range of surface-mount technology placement equipment. In 2010 we announced our attention to sell a majority stake in Assembléon to H2 Equity Partners, an independent private equity firm. Philips will retain a 20% stake in Assembléon once the transaction is completed. 6.4.3 New Venture Integration The New Venture Integration group focuses on the integration of newly acquired companies across all sectors. This is a customized selection from the Annual Report 2010 95 6 Sector performance 6.4.4 - 6.4.5 6.4.4 Philips Design Philips Design is one of the longest-established design organizations of its kind in the world. It is headquartered in Eindhoven, the Netherlands, with branch studios in Europe, the US and Asia Pacific. Its creative force comprises designers, psychologists, ergonomists, sociologists, philosophers and anthropologists working together to understand people’s needs and desires, in order to generate designs which support people in accomplishing and experiencing things in natural, intuitive ways. Philips Design’s forward-looking exploration projects deliver vital insights for new business development, supporting the transformation towards a health and wellbeing company. 6.4.5 2010 financial performance In 2010, sales were EUR 23 million higher than in 2009, mainly due to higher license revenues and higher sales at Assembléon. EBITA in 2010 amounted to a loss of EUR 142 million, compared to a loss of EUR 282 million in 2009. The yearon-year improvement in EBITA was mainly attributable to higher revenue, lower overhead costs and the discontinuation of Molecular Healthcare. Cash flows before financing activities improved from an outflow of EUR 785 million in 2009 to an outflow of EUR 679 million, mainly attributable to higher cash earnings and the EUR 485 million of final asbestos payments in 2009. This was partly offset by lower proceeds on the sale of stakes, mainly reflecting the sale of LG Display and Pace Micro Technology in 2009. Key data in millions of euros 2008 Sales Corporate & Regional costs were EUR 32 million lower than in 2009, attributable to lower restructuring charges and continuous focus on cost reduction. EBITA at Pensions was EUR 42 million lower than in 2009, in part due to that year’s EUR 134 million curtailment gain on retiree medical benefit plans, partly offset by a EUR 119 million gain in 2010, in part due to a change in indexation. EBITA at Service Units and other improved from a loss of EUR 88 million in 2009 to a loss of EUR 37 million. The improvement was largely driven by lower restructuring charges in our global service units. Net operating capital declined to negative EUR 3.3 billion, mainly attributable to lower prepaid pension cost related to the pension plan in Netherlands, which is no longer recognized as an asset. 96 This is a customized selection from the Annual Report 2010 2010 485 337 360 (34) (31) Sales growth % increase (decrease), nominal % increase (decrease), comparable1) 7 (26) (30) 6 EBITA Corporate Technologies (126) (162) (63) EBITA Corporate & Regional costs (234) (174) (142) 14 142 100 EBITA Service Units and other (355) (88) (37) EBITA1) (701) (282) (142) EBITA Pensions EBIT1) Net operating capital (NOC)1) Cash flows before financing activities1,2) Employees (FTEs) 1) EBITA at Corporate Technologies was EUR 99 million higher than in 2009, attributable to higher license revenue, the discontinuation of Molecular Healthcare and 2009’s asset write-offs. 2009 2) (701) (282) (147) (1,226) (1,514) (3,309) 1,815 11,335 (785) 11,586 (679) 11,928 For a reconciliation to the most directly comparable GAAP measures, see chapter 16, Reconciliation of non-GAAP information, of this Annual Report Prior period amounts have been revised to reflect an adjusted sector allocation 13 Group financial statements 13 - 13 13 Group financial statements Introduction This section of the Annual Report contains the audited consolidated financial statements including the notes thereon that have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU) and with the statutory provisions of Part 9, Book 2 of the Dutch Civil Code. The Consolidated financial statements in this section have been prepared in accordance with International Financial Reporting Standards (IFRS) as endorsed by the European Union (EU). All standards and interpretations issued by the International Accounting Standards Board (IASB) and the IFRS Interpretations Committee effective year-end 2010 have been endorsed by the EU, except that the EU did not adopt some paragraphs of IAS 39 applicable to certain hedge transactions. Philips has no hedge transactions to which these paragraphs are applicable. Consequently, the accounting policies applied by Philips also comply fully with IFRS as issued by the IASB. Together with the section Company financial statements, this section contains the statutory financial statements of the Company. The following sections and chapters of this Annual Report: • chapter 1, Our company, of this Annual Report • chapter 2, Vision 2015 - our strategic focus, of this Annual Report • chapter 3, Our strategy in action, of this Annual Report • chapter 4, Our planet, our partners, our people, of this Annual Report • chapter 5, Group performance, of this Annual Report • chapter 6, Sector performance, of this Annual Report • chapter 7, Risk management, of this Annual Report • section 11.2, Report of the Remuneration Committee, of this Annual Report • chapter 12, Corporate governance, of this Annual Report • chapter 20, Forward-looking statements and other information, of this Annual Report form the Management report within the meaning of section 2:391 of the Dutch Civil Code (and related Decrees). The sections Group performance and Sector performance provide an extensive analysis of the developments during the financial year 2010 and the results. The term EBIT has the same meaning as Income from operations (IFO), and is used to evaluate the performance of the business. These sections also provide information on the business outlook, investments, financing, personnel and research and development activities. The Statement of income included in the section Company financial statements has been prepared in accordance with section 2:402 of the Dutch Civil Code, which allows a simplified Statement of income in the Company financial statements in the event that a comprehensive Statement of income is included in the consolidated Group financial statements. For ‘Additional information’ within the meaning of section 2:392 of the Dutch Civil Code, please refer to section 13.12, Independent auditor’s report - Group, of this Annual Report on the Group financial statements, section 14.5, Independent auditor’s report - Company, of this Annual Report on the Company financial statements, section 5.5, Proposed distribution to shareholders, of this Annual Report, and note 34 for subsequent events. Please refer to chapter 20, Forward-looking statements and other information, of this Annual Report for more information about forward-looking statements, thirdparty market share data, fair value information, and revisions and reclassifications. The Board of Management of the Company hereby declares that, to the best of our knowledge, the Group financial statements and Company financial statements give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole and that the management report referred to above gives a true and fair view concerning the position as per the balance sheet date, the development and performance of the business during the financial year of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks that they face. Board of Management This is a customized selection from the Annual Report 2010 97 13 Group financial statements 13 - 13.1 February 17, 2011 13.1 Management’s report on internal control Management’s report on internal control over financial reporting pursuant to section 404 of the US Sarbanes-Oxley Act The Board of Management of Koninklijke Philips Electronics N.V. (the Company) is responsible for establishing and maintaining an adequate system of internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the US Securities Exchange Act). Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting for external purposes in accordance with IFRS as issued by the IASB. Internal control over financial reporting includes maintaining records that, in reasonable detail, accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of our financial statements; providing reasonable assurance that receipts and expenditures of company assets are made in accordance with management authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of company assets that could have a material effect on our financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected. The Board of Management conducted an assessment of the Company’s internal control over financial reporting based on the “Internal Control-Integrated Framework” established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that assessment, the Board of Management concluded that, as of December 31, 2010, the Company’s internal control over Group financial reporting is considered effective. The effectiveness of the Company’s internal control over financial reporting as of December 31, 2010, as included in this section Group financial statements, has been audited 98 This is a customized selection from the Annual Report 2010 13 Group financial statements 13.1 - 13.1 by KPMG Accountants N.V., an independent registered public accounting firm, as stated in their report which follows hereafter. Board of Management February 17, 2011 This is a customized selection from the Annual Report 2010 99 13 Group financial statements 13.1 - 13.3 13.2 Reports of the independent auditor The report set out below is provided in compliance with auditing standards of the Public Company Accounting Oversight Board in the US and includes an opinion on the effectiveness of internal control over financial reporting as at December 31, 2010. Management’s report on internal control over financial reporting is set out in section 13.1, Management’s report on internal control, of this Annual Report. KPMG Accountants N.V. has also issued reports on the consolidated financial statements in accordance with Dutch law, including the Dutch standards on auditing, which is set out in section 13.12, Independent auditor’s report - Group, of this Annual Report, and in accordance with auditing standards of the Public Company Accounting Oversight Board in the US, which will be included in the Annual Report on Form 20-F to be filed with the US Securities and Exchange Commission on February 18, 2011. KPMG Accountants N.V. has also reported separately on the Company Financial Statements of Koninklijke Philips Electronics N.V. This audit report is set out in section 14.5, Independent auditor’s report Company, of this Annual Report. Content you didn’t download 13.3 Auditors’ report on internal control over financial reporting 100 This is a customized selection from the Annual Report 2010 13 Group financial statements 13.4 - 13.4 13.4 Consolidated statements of income in millions of euros unless otherwise stated Consolidated statements of income (including earnings per share) of the Philips Group for the years ended December 31 2008 Sales 2009 2010 26,385 23,189 25,419 Cost of sales (17,938) (15,110) (15,873) Gross margin 8,447 8,079 9,546 (5,518) (5,159) (5,246) Selling expenses General and administrative expenses (972) (734) (735) Research and development expenses (1,777) (1,631) (1,576) Impairment of goodwill (301) − − Other business income 261 97 100 Other business expenses (86) (38) (24) 1 Income from operations 54 614 2 Financial income 2 Financial expenses 2,065 1,594 225 214 (1,506) (391) (336) Income before taxes Income tax expense (256) (100) (114) 348 1,434 81 23 14 - Other results (62) 53 4 Income (loss) from continuing operations 4 448 Income (loss) after taxes 3 142 (95) 424 1,452 − − (92) 424 1,452 (91) 410 1,446 (1) 14 6 (509) Results relating to investments in associates: - Company’s participation in income 5 1,943 Discontinued operations - net of income tax Net income (loss) 3 Attribution of net income (loss) Net income (loss) attributable to shareholders Net income (loss) attributable to non-controlling interests The accompanying notes are an integral part of these consolidated financial statements This is a customized selection from the Annual Report 2010 101 13 Group financial statements 13.4 - 13.4 Earnings per share 2008 2010 991,420,017 Weighted average number of common shares outstanding (after deduction of treasury shares) during the year 2009 925,481,395 939,861,226 Plus incremental shares from assumed conversions of: Options and restricted share rights Convertible debentures Dilutive potential common shares Adjusted weighted average number of shares (after deduction of treasury shares) during the year 5,191,635 3,555,559 7,548,916 102,249 − 314,874 5,293,884 3,555,559 7,863,790 996,713,901 929,036,954 947,725,016 Basic earnings per common share in euros Net income (loss) (0.09) 0.46 1.54 Net income (loss) attributable to shareholders (0.09) 0.44 1.54 Net income (loss) (0.09)2) 0.46 1.53 Net income (loss) attributable to shareholders (0.09)2) 0.44 1.53 0.70 0.70 0.70 Diluted earnings per common share in euros1) Dividend distributed per common share in euros 1) 2) 102 In 2010, 2009 and 2008, respectively 36 million, 52 million and 48 million securities that could potentially dilute basic EPS were not included in the computation of dilutive EPS because the effect would have been antidilutive for the periods presented In 2008, the incremental shares from assumed conversion are not taken into account as the effect would be antidilutive This is a customized selection from the Annual Report 2010 13 Group financial statements 13.5 - 13.5 13.5 Consolidated statements of comprehensive income in millions of euros unless otherwise stated Consolidated statements of comprehensive income of the Philips Group for the years ended December 31 2008 Net income (loss) (92) 2009 2010 424 1,452 Other comprehensive income: Actuarial gains (losses) on pension plans: Net current period change, before tax Income tax on net current period change (1,496) (1,110) (1,948) 463 177 602 (16) (15) (16) 16 15 16 126 (64) 535 Revaluation reserve: Release revaluation reserve Reclassification into retained earnings Currency translation differences: Net current period change, before tax Net current period change - discontinued operations, before tax Income tax on net current period change 4 − − (52) − (5) Reclassification adjustment for (gain) loss realized 8 − (4) Non-controlling interests 1 (1 ) − Available-for-sale financial assets: Net current period change (269) 272 180 Reclassification adjustment for gain realized (939) (127) (161) (24) (19) (44) 18 (15) 5 Reclassification adjustment for loss (gain) realized (50) 72 24 Other comprehensive income (loss) for the period (2,210) (815) (816) Total comprehensive income (loss) for the period (2,302) (391) 636 (2,302) (404) 630 Cash flow hedges: Net current period change, before tax Income tax on net current period change Total comprehensive income (loss) attributable to: Shareholders Non-controlling interests − 13 6 The accompanying notes are an integral part of these consolidated financial statements This is a customized selection from the Annual Report 2010 103 13 Group financial statements 13.6 - 13.6 13.6 Consolidated balance sheets in millions of euros unless otherwise stated Consolidated balance sheets of the Philips Group as of December 31 Assets 2009 2010 Non-current assets 7 23 Property, plant and equipment: - At cost - Less accumulated depreciation 8,054 8,325 (4,802) (5,060) 3,252 8 9 3,265 7,362 Goodwill 8,035 Intangible assets excluding goodwill: - At cost - Less accumulated amortization 6,466 7,197 (2,305) (2,999) 4,161 4,198 85 88 281 181 691 479 Deferred tax assets 1,243 1,351 12 Other non-current assets 1,543 75 18,618 17,672 2,913 3,865 14 Current financial assets 191 5 15 Other current assets 334 348 32 Derivative financial assets 102 112 81 79 10 Non-current receivables 4 Investments in associates 11 Other non-current financial assets 3 Total non-current assets Current assets 13 Inventories - net 3 Income tax receivable 16 30 Current receivables: - Accounts receivable - net - Accounts receivable from related parties - Other current receivables 3,669 4,104 14 20 219 231 3,902 4,355 33 Cash and cash equivalents 4,386 5,833 Total current assets 11,909 14,597 30,527 32,269 The accompanying notes are an integral part of these consolidated financial statements 104 This is a customized selection from the Annual Report 2010 13 Group financial statements 13.6 - 13.6 Equity and liabilities 2009 2010 Equity 17 Shareholders’ equity: Preference shares, par value EUR 0.20 per share: - Authorized: 2,000,000,000 shares (2009: 2,000,000,000 shares), issued none Common shares, par value EUR 0.20 per share: - Authorized: 2,000,000,000 shares (2009: 2,000,000,000 shares) - Issued and fully paid: 986,078,784 shares (2009: 972,411,769 shares) Capital in excess of par value Retained earnings Revaluation reserve Other reserves Treasury shares, at cost 39,572,400 shares (2009: 44,954,677 shares) 194 197 − 354 15,947 15,416 102 86 (461) 69 (1,187) (1,076) 14,595 49 15,092 3,640 2,818 1,734 Group equity 46 14,644 Non-controlling interests 15,046 1,716 Non-current liabilities 18 23 Long-term debt 19 24 28 Long-term provisions 3 Deferred tax liabilities 530 1,714 7,833 6,419 627 Total non-current liabilities 171 1,929 20 Other non-current liabilities 1,840 Current liabilities 18 23 Short-term debt 32 Derivative financial liabilities 276 564 3 118 291 Income tax payable 23 30 Accounts and notes payable: - Trade creditors - Accounts payable to related parties 2,775 3,686 95 5 2,870 21 Accrued liabilities 19 24 28 Short-term provisions 22 Other current liabilities Total current liabilities 3,691 2,740 2,995 716 623 703 754 8,050 10,758 30,527 32,269 23 24 Contractual obligations and contingent liabilities This is a customized selection from the Annual Report 2010 105 13 Group financial statements 13.7 - 13.7 13.7 Consolidated statements of cash flows in millions of euros Consolidated statements of cash flows of the Philips Group for the years ended December 31 2008 2009 2010 (92) 424 1,452 (3) − − 1,422 Cash flows from operating activities Net (loss) income Income from discontinued operations Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 1,528 1,469 Impairment of goodwill, other non-current financial assets and investments in associates 1,509 2 Net gain on sale of assets 5 (1,536) (140) (211) (91) (23) (18) Dividends received from investments in associates 65 35 19 Dividends paid to non-controlling interests (2) (4) Income from investments in associates Decrease (increase) in receivables and other current assets (Increase) decrease in inventories (Decrease) increase in accounts payable and accrued and other current liabilities (Increase) in non-current receivables, other assets and other liabilities Increase (decrease) in provisions Other items Net cash provided by operating activities 234 (4) 496 (194) (705) (9) 687 (97) (479) 915 (379) (363) (291) 432 (612) (237) 89 53 3 1,648 1,545 2,156 Cash flows from investing activities Purchase of intangible assets (121) (96) (80) Expenditures on development assets (154) (188) (219) Capital expenditures on property, plant and equipment (770) (524) (653) 170 126 129 337 (39) (25) − (6 ) (16) Proceeds from disposals of property, plant and equipment 25 Cash from (used for) derivatives and securities Purchase of other non-current financial assets 26 Proceeds from other non-current financial assets 2,576 718 268 Purchase of businesses, net of cash acquired (5,316) (294) (223) Proceeds from sale of interests in businesses, net of cash disposed of Net cash used for investing activities 24 (3,254) 84 117 (219) (702) Cash flows from financing activities Proceeds from issuance of (payments on) short-term debt Principal payments on short-term portion of long-term debt Proceeds from issuance of long-term debt Treasury shares transaction (201) 143 (1,726) 18 (51) (79) 2,088 312 71 29 65 (698) (634) (296) Net cash used for financing activities (3,575) (545) (96) Net cash (used for) provided by continuing operations (5,181) 781 Dividends paid 106 This is a customized selection from the Annual Report 2010 (3,257) 1,358 13 Group financial statements 13.7 - 13.7 2008 2009 2010 (49) − − 12 − − (37) − − (5,218) 781 1,358 Cash flows from discontinued operations Net cash used for operating activities Net cash provided by investing activities Net cash used for discontinued operations Net cash (used for) provided by continuing and discontinued operations Effect of changes in exchange rates on cash and cash equivalents (39) (15) 89 Cash and cash equivalents at the beginning of the year 8,877 3,620 4,386 Cash and cash equivalents at the end of the year 3,620 4,386 5,833 2008 2009 2010 Pensions (379) (422) (474) Interest (123) (244) (226) Income taxes (352) (197) (206) Supplemental disclosures to the Consolidated statements of cash flows Net cash paid during the year for: Net gain on sale of assets: Cash proceeds from the sale of assets Book value of these assets 2,770 928 514 (1,341) (788) (668) Non-cash proceeds − − 4 107 − 361 1,536 Deferred results on sale and leaseback transactions 140 211 148 − 3 9 3 6 Non-cash investing and financing information 27 Assets in lieu of cash from the sale of businesses: Shares/share options/convertible bonds Conversion of convertible personnel debentures Treasury shares transaction: Shares acquired Exercise of stock options (3,298) 41 − − 29 65 The accompanying notes are an integral part of these consolidated financial statements. For a number of reasons, principally the effects of translation differences and consolidation changes, certain items in the statements of cash flows do not correspond to the differences between the balance sheet amounts for the respective items This is a customized selection from the Annual Report 2010 107 13 Group financial statements 13.8 - 13.8 13.8 Consolidated statements of changes in equity in millions of euros unless otherwise stated Consolidated statements of changes in equity of the Philips Group outstanding number of shares in thousands common share capital in excess of par value retained earnings revaluation reserve other reserves Balance as of Jan. 1, 2008 1,064,893 228 − 22,998 133 598 (1,108) (16) Total comprehensive income (loss) Dividend distributed treasury shares at cost (2,216) (1,178) share- non-conholders’ trolling inequity terests1) 21,741 (2,302) (720) (34) (4,062) 4,096 (146,453) (3,298) 4,542 (71) Share-based compensation plans (7) 130 (35) (141,911) Balance as of Dec. 31, 2008 922,982 − (5,897) (16) 194 − 17,101 117 (580) (15) 119 (508) Dividend distributed (1,178) 928 (1,288) (647) 106 (35) (6,197) (78) (6,275) 15,544 49 15,593 13 (391) (647) (13) (13) − 32 32 65 65 65 5 4,477 5 5 (70) 1 101 − − (1,154) (15) 119 Balance as of Dec. 31, 2009 927,457 194 − 15,947 102 (461) (16) 530 3 343 Total comprehensive income (loss) 116 13,667 101 (1,187) (949) 49 630 6 (650) (304) (6) (949) 14,644 636 (304) (9) (15) − 5,397 (49) Share-based compensation plans 9 111 55 Income tax share-based compensation plans 5 3 197 Balance as of Dec. 31, 2010 946,506 This is a customized selection from the Annual Report 2010 354 354 − 71 71 55 (15) 19,049 − 14,595 (6) Non-controlling interests buy out / movement 108 52 − 4,475 Re-issuance of treasury shares (3,298) 52 − Income tax share-based compensation plans Purchase of treasury shares (3,298) (404) (2) Share-based compensation plans Dividend distributed (78) − (647) Non-controlling interests movement Re-issuance of treasury shares − (35) (34) Total comprehensive income (loss) Purchase of treasury shares (2,302) 106 106 Income tax share-based compensation plans 21,868 (720) (78) Cancellation of treasury shares Re-issuance of treasury shares − (720) Non-controlling interests movement Purchase of treasury shares 127 group equity 55 5 (531) 15,416 The accompanying notes are an integral part of these consolidated financial statements. 1) Of which discontinued operations EUR (77) million at August 6, 2008 due to sale of MedQuist (16) 530 86 69 111 (1,076) 451 15,046 5 (3) 46 448 15,092 13 Group financial statements 13.8 - 13.9 13.9 Information by sector and main country in millions of euros Information by sector and main country Sectors research and development expenses sales sales including intercompany 8,601 8,611 (698) income from results relating cash flow before income from operations as a to investments in financing operations % of sales associates activities1) 2010 Healthcare 922 10.7 8 1,139 Consumer Lifestyle 8,906 8,926 (369) 595 6.7 2 404 of which Television 3,155 3,165 (87) (130) (4.1) − (117) 7,552 7,563 (355) 695 9.2 (6) 590 530 (154) (147) (40.8) 14 (679) 8.1 18 1,454 Lighting Group Management & Services 360 Inter-sector eliminations (211) 25,419 25,419 (1,576) 2,065 2009 Healthcare 7,839 7,849 (679) 591 7.5 5 889 Consumer Lifestyle 8,467 8,486 (395) 321 3.8 (1 ) 598 of which Television 3,122 3,130 (95) (179) (5.7) − (16) 6,546 6,555 (351) (16) (0.2) (3) 624 337 455 (206) (282) (83.7) 75 (785) 23,189 23,189 614 2.6 76 1,326 (2,478) Lighting Group Management & Services Inter-sector eliminations (156) (1,631) 2008 7,649 7,663 (672) 621 8.1 8 Consumer Lifestyle Healthcare 10,889 10,923 (513) 110 1.0 − 238 of which Television 4,724 4,741 (106) (436) (9.2) − (487) 7,362 7,371 (345) 24 0.3 1 (1,181) 624 (247) (701) 10 1,815 19 (1,606) Lighting Group Management & Services 485 Inter-sector eliminations 26,385 1) (144.5) (196) 26,385 (1,777) 54 0.2 Prior period amounts have been revised to reflect an adjusted sector allocation Our sectors are organized based on the nature of the products and services. The four sectors comprise Healthcare, Consumer Lifestyle, Lighting and Group Management & Services as shown in the table above. A short description of these sectors is as follows: Healthcare: Consists of the following businesses - Imaging Systems, Home Healthcare Solutions, Patient Care & Clinical Informatics, and Customer Services. Consumer Lifestyle: Consists of the following businesses Television, Personal Care, Audio & Video Multimedia, Domestic Appliances, Accessories, Health & Wellness, and Licenses. Lighting: Consists of the following businesses - Lamps, Professional Luminaires, Consumer Luminaires, Lighting Systems & Controls, Automotive, and Lumileds. This is a customized selection from the Annual Report 2010 109 13 Group financial statements 13.9 - 13.9 GM&S: Consists of the corporate center, as well as the overhead expenses of regional and country organizations. Also included are the costs of Philips’ pension and other postretirement benefit costs not directly allocated to the other sectors. Transactions between the sectors mainly relate to services provided by the sector Group Management & Services to the other sectors. The pricing of such transactions is determined on an arm’s length principle. Sectors total net operating liabilities excl. total assets capital debt1) impairment of property, plant and depreciation equipment and and intangible amortization2) assets accounts receivable, net tangible and intangible assets 2,978 1848 8,194 (563) (5) 179 148 capital expenditures 2010 Healthcare 11,962 8,908 Consumer Lifestyle 3,858 911 2,946 1082 1,525 (260) (27) of which Television 893 (299) 1,188 377 70 (66) (6) 33 7,379 5,561 1,800 1072 5,014 (458) (17) 273 Lighting Group Management & Services 9,070 (3,309) 4,795 102 765 (141) (17) 53 32,269 12,071 12,519 4,104 15,498 (1,422) (66) 653 10,969 8,434 2,464 1,571 7,766 (584) (17) 164 3,286 625 2,660 1,096 1,383 (248) (21) 137 2009 Healthcare Consumer Lifestyle 599 (386) 984 334 61 (74) (8) 30 Lighting of which Television 6,748 5,104 1,633 909 4,860 (503) (81) 165 Group Management & Services 9,524 (1,514) 4,859 93 766 (134) (24) 58 30,527 12,649 11,616 3,669 14,775 (1,469) (143) 524 11,423 8,785 2,566 1,586 8,117 (486) (1) 206 3,576 798 2,776 1,235 1,210 (358) (93) 171 988 (238) 1,224 535 79 (115) (12) 62 7,222 5,712 1,494 874 5,138 (547) (373) 304 2008 Healthcare Consumer Lifestyle of which Television Lighting Group Management & Services 1) 2) 110 9,689 (1,226) 5,293 118 788 (137) (15) 89 31,910 14,069 12,129 3,813 15,253 (1,528) (482) 770 2009: adjusted for tax and intercompany financing liabilities Includes impairments This is a customized selection from the Annual Report 2010 13 Group financial statements 13.9 - 13.9 Goodwill assigned to sectors carrying value at January 1 acquisitions translation differences and other impairment changes carrying value at December 31 2010 Consumer Lifestyle Lighting Group Management & Services 4,923 21 − 437 5,381 463 49 − 20 532 1,976 14 − 132 2,122 − − − − 7,362 Healthcare 84 − 589 8,035 4,923 2009 Healthcare Consumer Lifestyle Lighting Group Management & Services 4,961 26 − (64) 364 80 − 19 1,955 43 − (22) − − − − 7,280 149 − (67) This is a customized selection from the Annual Report 2010 463 1,976 − 7,362 111 13 Group financial statements 13.9 - 13.9 Main countries sales1) tangible and intangible assets2) 2010 Netherlands 816 1,274 United States 6,459 10,032 Germany 2,003 282 China 1,976 446 France 1,457 100 Brazil 1,092 148 Japan 862 568 10,754 2,648 25,419 15,498 Other countries 2009 Netherlands 872 1,194 United States 6,130 9,513 Germany 1,968 288 China 1,714 369 France 1,501 111 936 128 Brazil Japan 678 489 9,390 2,683 23,189 14,775 Netherlands 1,017 1,392 United States 7,015 9,959 Germany 2,048 302 China 1,747 378 France 1,691 143 Brazil 1,077 97 Japan 606 479 11,184 2,503 26,385 15,253 Other countries 2008 Other countries The sales are reported based on country of destination. 1) Amounts of 2009 revised to reflect an adjusted country allocation 2) Amounts of 2008 revised to reflect an adjusted country allocation 112 This is a customized selection from the Annual Report 2010 13 Group financial statements 13.10 - 13.10 13.10 Significant accounting policies The Consolidated financial statements in this section have been prepared in accordance with International Financial Reporting Standards (IFRS) as endorsed by the European Union (EU). All standards and interpretations issued by the International Accounting Standards Board (IASB) and the IFRS Interpretations Committee effective year-end 2010 have been endorsed by the EU, except that the EU did not adopt some paragraphs of IAS 39 applicable to certain hedge transactions. Philips has no hedge transactions to which these paragraphs are applicable. Consequently, the accounting policies applied by Philips also comply fully with IFRS as issued by the IASB. The Consolidated financial statements have been prepared under the historical cost convention, unless otherwise indicated. Basis of consolidation The Consolidated financial statements include the accounts of Koninklijke Philips Electronics N.V. (‘the Company’) and all subsidiaries that fall under its power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The existence and effect of potential voting rights that are currently exercisable are considered when assessing whether the Company controls another entity. Subsidiaries are fully consolidated from the date that control commences until the date that control ceases. All intercompany balances and transactions have been eliminated in the Consolidated financial statements. Unrealized losses are eliminated in the same way as unrealized gains, but only to the extent that there is no evidence of impairment. From January 1, 2010 the Company has applied IFRS 3 Business Combinations (2008) in accounting for business combinations. The change in accounting policy has been applied prospectively; reference is made to the subparagraph ‘IFRS accounting standards adopted as from 2010’ included in this section. Business combinations are accounted for using the acquisition method. Under the acquisition method, the identifiable assets acquired, liabilities assumed and any non-controlling interest in the acquiree are recognized as at the acquisition date, which is the date on which control is transferred to the Company. Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, the Company takes into consideration potential voting rights that currently are exercisable. Acquisitions on or after January 1, 2010 For acquisitions on or after January 1, 2010, the Company measures goodwill at the acquisition date as: • The fair value of the consideration transferred; plus • The recognized amount of any non-controlling interest in the acquiree; plus if the business combination is achieved in stages, the fair value of the existing equity interest in the acquiree; less • The net recognized amount (generally fair value) of the identifiable assets acquired and liabilities assumed. The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts are generally recognized in the Statement of income. Costs related to the acquisition, other than those associated with the issue of debt or equity securities, that the Company incurs in connection with a business combination are expensed as incurred. Any contingent consideration payable is recognized at fair value at the acquisition date. If the contingent consideration is classified as equity, it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent changes to the fair value of the contingent consideration are recognized in the Statement of income. Acquisitions between January 1, 2004 and January 1, 2010 For acquisitions between January 1, 2004 and January 1, 2010, goodwill represents the excess of the cost of the acquisition over the Company’s interest in the recognized amount (generally fair value) of the identifiable assets, liabilities and contingent liabilities of the acquiree. Transaction costs, other than those associated with the issue of debt or equity securities, that the Company incurred in connection with business combinations were capitalized as part of the cost of the acquisition. Loss of control Upon the loss of control, the Company derecognizes the assets and liabilities of the subsidiary, any non-controlling interests and the other components of equity related to the subsidiary. Any surplus or deficit arising on the loss of control is recognized in profit of loss. If the Company retains any interest in the previous subsidiary, then such interest is measured at fair value at the date the control is This is a customized selection from the Annual Report 2010 113 13 Group financial statements 13.10 - 13.10 lost. Subsequently it is accounted for as an investment in associate or as an available-for-sale financial asset depending on the level of influence retained. expected investment returns on plan assets, rates of increase in health care costs, rates of future compensation increases, turnover rates, and life expectancy. Use of estimates Foreign currencies The preparation of the Consolidated financial statements in conformity with IFRS requires management to make judgment, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. The Consolidated financial statements are presented in euros, which is the Company’s functional and presentation currency. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the date of the Consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. We evaluate these estimates and judgments on an ongoing basis and base our estimates on experience, current and expected future conditions, third-party evaluations and various other assumptions that we believe are reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities as well as identifying and assessing the accounting treatment with respect to commitments and contingencies. Actual results may differ from these estimates. Estimates significantly impact goodwill and other intangibles acquired, tax on activities disposed, impairments, financial instruments, the accounting for an arrangement containing a lease, revenue recognition (multiple elements arrangement), assets and liabilities from employee benefit plans, other provisions and tax and other contingencies. The fair values of acquired identifiable intangibles are based on an assessment of future cash flows. Impairment analyses of goodwill and indefinite-lived intangible assets are performed annually and whenever a triggering event has occurred to determine whether the carrying value exceeds the recoverable amount. These analyses are based on estimates of future cash flows. The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. The Company uses its judgment to select from a variety of common valuation methods including the discounted cash flow method and option valuation models and to make assumptions that are mainly based on market conditions existing at each balance sheet date. Actuarial assumptions are established to anticipate future events and are used in calculating pension and other postretirement benefit expense and liability. These factors include assumptions with respect to interest rates, 114 This is a customized selection from the Annual Report 2010 Foreign currency transactions Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or valuation where items are remeasured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the Statement of income, except when deferred in other comprehensive income as qualifying cash flow hedges and qualifying net investment hedges. Changes in the fair value of financial assets denominated in foreign currency classified as available for sale are analyzed between translation differences resulting from changes in the amortized cost of the security and other changes in the carrying amount of the security. Translation differences related to changes in amortized cost are recognized in the Statement of income, and other changes in carrying amount are recognized in other comprehensive income. Translation differences on non-monetary financial assets and liabilities such as equities held at fair value through profit or loss are recognized in the Statement of income as part of the fair value gain or loss. Translation differences on non-monetary financial assets, such as equities classified as available for sale, are included in other comprehensive income. Foreign operations The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated to euro at exchange rates at the reporting date. The income and expenses of foreign operations, are translated to euro at exchange rates at the dates of the transactions. Foreign currency differences arising on translation of foreign operations into the group’s presentation currency are recognized in other comprehensive income, and presented in the foreign currency translation reserve (translation reserve) in equity. However, if the operation is a non-wholly owned subsidiary, then the relevant proportionate share of the translation difference is 13 Group financial statements 13.10 - 13.10 allocated to the non-controlling interests. When a foreign operation is disposed of such that control, significant influence or joint control is lost, the cumulative amount is the translation reserve related to the foreign operation is reclassified to the Statements of income as part of the gain or loss on disposal. When the Company disposes of only part of its interest in a subsidiary that includes a foreign operation while retaining control, the relevant proportion of the cumulative amount is reattributed to noncontrolling interests. When the Company disposes of only part of its investment in an associate or joint venture that includes a foreign operation while retaining significant influence or joint control, the relevant proportion of the cumulative amount is reclassified to the Statements of income. Discontinued operations and non-current assets held for sale Non-current assets (disposal groups comprising assets and liabilities) that are expected to be recovered primarily through sale rather than through continuing use are classified as held for sale. A discontinued operation is a component of an entity that either has been disposed of, or that is classified as held for sale, and (a) represents a separate major line of business or geographical area of operations; and (b) is a part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations; or (c) is a subsidiary acquired exclusively with a view to resale. Non-current assets held for sale and discontinued operations are carried at the lower of carrying amount or fair value less costs to sell. Any gain or loss from disposal of a business, together with the results of these operations until the date of disposal, is reported separately as discontinued operations. The financial information of discontinued operations is excluded from the respective captions in the Consolidated financial statements and related notes for all years presented. Segments Operating segments are components of the Company’s business activities about which separate financial information is available that is evaluated regularly by the chief operating decision maker (the Board of Management of the Company). The Board of Management decides how to allocate resources and assesses performance. Reportable segments comprise the operating sectors: Healthcare, Consumer Lifestyle, Lighting, and the business Television which is part of Consumer Lifestyle. Segment accounting policies are the same as the accounting policies as applied to the Group. Earnings per share The Company presents basic and diluted earnings per share (EPS) data for its common shares. Basic EPS is calculated by dividing the net income attributable to shareholders of the Company by the weighted average number of common shares outstanding during the period, adjusted for own shares held. Diluted EPS is determined by adjusting the profit or loss attributable to shareholders and the weighted average number of common shares outstanding, adjusted for own shares held, for the effects of all dilutive potential common shares, which comprise convertible personnel debentures, restricted shares and share options granted to employees. Revenue recognition Revenue from the sale of goods in the course of the ordinary activities is measured at the fair value of the consideration received or receivable, net of returns, trade discounts and volume rebates. Revenue for sale of goods is recognized when the significant risks and rewards of ownership have been transferred to the buyer, recovery of the consideration is probable, the associated costs and possible return of the goods can be estimated reliably, there is no continuing involvement with goods, and the amount of revenue can be measured reliably. If it is probable that discounts will be granted and the amount can be measured reliably, then the discount is recognized as a reduction of revenue as the sales are recognized. Cash flow statements Cash flow statements are prepared using the indirect method. Cash flows in foreign currencies have been translated into euros using the weighted average rates of exchange for the periods involved. Cash flows from derivative instruments that are accounted for as fair value hedges or cash flow hedges are classified in the same category as the cash flows from the hedged items. Cash flows from other derivative instruments are classified consistent with the nature of the instrument. Transfer of risks and rewards varies depending on the individual terms of the contract of sale. For consumertype products in the Sectors Lighting and Consumer Lifestyle, these criteria are met at the time the product is shipped and delivered to the customer and, depending on the delivery conditions, title and risk have passed to the customer and acceptance of the product, when contractually required, has been obtained, or, in cases where such acceptance is not contractually required, when management has established that all aforementioned conditions for revenue recognition have been met. Examples of the above-mentioned delivery This is a customized selection from the Annual Report 2010 115 13 Group financial statements 13.10 - 13.10 conditions are ‘Free on Board point of delivery’ and ‘Costs, Insurance Paid point of delivery’, where the point of delivery may be the shipping warehouse or any other point of destination as agreed in the contract with the customer and where title and risk in the goods pass to the customer. Revenues of transactions that have separately identifiable components are recognized based on their relative fair values. These transactions mainly occur in the Healthcare sector and include arrangements that require subsequent installation and training activities in order to become operable for the customer. However, since payment for the equipment is contingent upon the completion of the installation process, revenue recognition is generally deferred until the installation has been completed and the product is ready to be used by the customer in the way contractually agreed. Shipping and handling costs billed to customers are recognized as revenues. Expenses incurred for shipping and handling costs of internal movements of goods are recorded as cost of sales. Shipping and handling costs related to sales to third parties are recorded as selling expenses and disclosed separately. Service revenue related to repair and maintenance activities for goods sold is recognized ratably over the service period or as services are rendered. A provision for product warranty is made at the time of revenue recognition and reflects the estimated costs of replacement and free-of-charge services that will be incurred by the Company with respect to the products. For certain products, the customer has the option to purchase an extension of the warranty, which is subsequently billed to the customer. Revenue recognition occurs on a straight-line basis over the contract period. Revenue from services is recognized when the Company can reliably measure the amount of revenue and the associated cost related to the stage of completion of a contract or transaction, and the recovery of the consideration is considered probable. Revenues are recorded net of sales taxes, customer discounts, rebates and similar charges. For products for which a right of return exists during a defined period, revenue recognition is determined based on the historical pattern of actual returns, or in cases where such information is not available, revenue recognition is postponed until the return period has lapsed. Return policies are typically based on customary return arrangements in local markets. Royalty income, which is generally earned based upon a percentage of sales or a fixed amount per product sold, is recognized on an accrual basis. For products for which a residual value guarantee has been granted or a buy-back arrangement has been concluded, revenue recognition takes place when significant risks and rewards of ownership are transferred to the customer. The following are the principal factors that the Company considers in determining that the Company has transferred significant risks and rewards: Grants from the government are recognized at their fair value where there is a reasonable assurance that the grant will be received and the Company will comply with all attached conditions. Government grants relating to costs are deferred and recognized in the Statements of income over the period necessary to match them with the costs that they are intended to compensate. • The period from the sale to the repurchase represents the major (normally at least 75%) part of the economic life of the asset; • The difference between the proceeds received on the initial transfer and the amount of any residual value or repurchase price, measured on a present value basis, amounts to substantially all (normally at least 90%) of the fair value of the asset at the sale date; • Insurance risk is borne by the customer; however, if the customer bears the insurance risk but the Company bears the remaining risks, then risks and rewards have not been transferred to the customer; and • The repurchase price is equal to the market value at the time of the buy-back. Employee benefit accounting In case of loss under a sales agreement, the loss is recognized immediately. 116 This is a customized selection from the Annual Report 2010 A defined contribution plan is a post-employment benefit plan under which an entity pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contributions pension plans are recognized as an employee benefit expense in the Statement of income in the periods during which services are rendered by employees. A defined benefit plan is a post-employment benefit plan other than a defined contribution plan. The net pension asset or liability recognized in the Consolidated balance sheet in respect of defined-benefit postemployment plans is the fair value of plan assets less the present value of the projected defined-benefit obligation at the balance sheet date, together with adjustments for projected 13 Group financial statements 13.10 - 13.10 unrecognized past-service costs. The projected definedbenefit obligation is calculated annually by qualified actuaries using the projected unit credit method. Recognized assets are limited to the present value of any reductions in future contributions or any future refunds. To the extent that post-employment benefits vest immediately following the introduction of a change to a defined-benefit plan, the resulting past service costs are recognized immediately. For the Company’s major plans, a full discount rate curve of high-quality corporate bonds (Bloomberg AA Composite) is used to determine the defined-benefit obligation, whereas for the other plans a single-point discount rate is used based on the plan’s maturity. Plans in countries without a deep corporate bond market use a discount rate based on the local sovereign curve and the plan’s maturity. Pension costs in respect of defined-benefit postemployment plans primarily represent the increase of the actuarial present value of the obligation for postemployment benefits based on employee service during the year and the interest on this obligation in respect of employee service in previous years, net of the expected return on plan assets. Actuarial gains and losses arise mainly from changes in actuarial assumptions and differences between actuarial assumptions and what has actually occurred. The Company recognizes all actuarial gains and losses directly in equity through the Consolidated statements of comprehensive income. The Company recognizes gains and losses on the curtailment or settlement of a defined benefit plan when the curtailment or settlement occurs. The gain or loss on curtailment comprises any resulting change in the fair value of plan assets, change in the present value of defined benefit obligation and any related actuarial gains and losses and past service cost that had not previously been recognized. In certain countries, the Company also provides postretirement benefits other than pensions. The costs relating to such plans consist primarily of the present value of the benefits attributed on an equal basis to each year of service and interest cost on the accumulated postretirement benefit obligation, which is a discounted amount. The Company recognizes a liability and an expense for bonuses and profit-sharing, based on a formula that takes into consideration the profit attributable to the Company’s shareholders after certain adjustments. The Company recognizes a provision where contractually obliged or where there is a past practice that has created a constructive obligation. Share-based payment The Company recognizes the estimated fair value, measured as of grant date of equity instruments granted to employees as personnel expense over the vesting period on a straight-line basis, taking into account expected forfeitures. The Company uses the BlackScholes option-pricing model to determine the fair value of equity instruments. The fair value of the amount payable to employees in respect of share appreciation rights, which are settled in cash, is recognized as an expense, with a corresponding increase in liabilities, over the vesting period. The liability is remeasured at each reporting date and at settlement date. Any changes in fair value of the liability are recognized as personnel expense in the Statement of income. Financial income and expenses Financial income comprises interest income on funds invested (including available-for-sale financial assets), dividend income, net gains on the disposal of available-forsale financial assets, net fair value gains on financial assets at fair value through profit or loss, net gains on the remeasurement to fair value of any pre-existing interest in an acquiree, and net gains on hedging instruments that are recognized in the Statement of income. Interest income is recognized on accrual basis in the Statement of income, using the effective interest method. Dividend income is recognized in the Statement of income on the date that the Company’s right to receive payment is established, which in the case of quoted securities is normally the exdividend date. Financial expense comprise interest expense on borrowings, unwinding of the discount on provisions and contingent consideration, losses on disposal of availablefor-sale financial assets, net fair value losses on financial assets at fair value through profit or loss, impairment losses recognized on financial assets (other than trade receivables), and net losses on hedging instruments that are recognized in the Statement of income. This is a customized selection from the Annual Report 2010 117 13 Group financial statements 13.10 - 13.10 Borrowing costs that are not directly attributable to the acquisition, construction or production of a qualifying asset are recognized in the Statement of income using the effective interest method. Foreign currency gains and losses are reported on a net basis as either financial income or financial cost depending on whether foreign currency movements are in a net gain or net loss position. Deferred tax liabilities for withholding taxes are recognized for subsidiaries in situations where the income is to be paid out as dividend in the foreseeable future, and for undistributed earnings of unconsolidated companies to the extent that these withholding taxes are not expected to be refundable or deductible. Changes in tax rates are reflected in the period when the change has been enacted or substantively enacted by the reporting date. Leases Income tax Income tax comprises current and deferred tax. Income tax is recognized in the Statement of income except to the extent that it relates to a business combination, or items recognized directly within equity or in other comprehensive income. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Deferred tax assets and liabilities are recognized, using the balance sheet method, for the expected tax consequences of temporary differences between the carrying amounts of assets and liabilities and the amounts used for taxation purposes. Deferred tax is not recognized for the following temporary differences: the initial recognition of goodwill, the initial recognition of assets and liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit, and differences relating to investments in subsidiaries to the extent that they probably will not reverse in the foreseeable future. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net bases or their tax assets and liabilities will be realized simultaneously. A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which they can be utilized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in the countries where the deferred tax assets originated and during the periods when the deferred tax assets become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. 118 This is a customized selection from the Annual Report 2010 Leases in which substantially all risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are recognized in the Statements of income on a straight-line basis over the term of the lease. Leases in which the Company is the lessee and has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalized at the commencement of the lease at the lower of the fair value of the leased assets and the present value of the minimum lease payments. Each lease payment is allocated between the liability and finance charges. The interest element of the finance cost is charged to the Statement of income over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The corresponding rental obligations, net of finance charges, are included in other short-term and other non-current liabilities. The property, plant and equipment acquired under finance leases is depreciated over the shorter of the useful life of the assets and the lease term. Derivative financial instruments, including hedging accounting The Company uses derivative financial instruments principally to manage its foreign currency risks and, to a more limited extent, for managing interest rate and commodity price risks. All derivative financial instruments are classified as current assets or liabilities and are accounted for at trade date. Embedded derivatives are separated from the host contract and accounted for separately if the economic characteristics and risks of the host contract and the embedded derivative are not closely related. The Company measures all derivative financial instruments based on fair values derived from market prices of the instruments or from option pricing models, as appropriate. Gains or losses arising from changes in fair value of derivatives are recognized in the Statement of income, except for derivatives that are highly effective and qualify for cash flow or net investment hedge accounting. Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the Statement of income, together with any changes in the fair 13 Group financial statements 13.10 - 13.10 value of the hedged asset or liability that are attributable to the hedged risk. For interest rate swaps designated as a fair value hedge of an interest bearing asset or liability that are unwound, the amount of the fair value adjustment to the asset or liability for the risk being hedged is released to the Statement of income over the remaining life of the asset or liability based on the recalculated effective yield. Changes in the fair value of a derivative that is highly effective and that is designated and qualifies as a cash flow hedge, are recorded in equity, until the Statement of income is affected by the variability in cash flows of the designated hedged item. To the extent that the hedge is ineffective, changes in the fair value are recognized in the Statement of income. The Company formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. When it is established that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, the Company discontinues hedge accounting prospectively. When hedge accounting is discontinued because it is expected that a forecasted transaction will not occur, the Company continues to carry the derivative on the Balance sheet at its fair value, and gains and losses that were accumulated in equity are recognized immediately in the Statement of income. If there is a delay and it is expected that the transaction will still occur, the amount in equity remains there until the forecasted transaction affects income. In all other situations in which hedge accounting is discontinued, the Company continues to carry the derivative at its fair value on the Balance sheet, and recognizes any changes in its fair value in the Statements of income. Foreign currency differences arising on the retranslation of a financial liability designated as a hedge of a net investment in a foreign operation are recognized directly as a separate component of equity, to the extent that the hedge is effective. To the extent that the hedge is ineffective, such differences are recognized in the Statements of income. Non-derivative financial instruments Non-derivative financial instruments are recognized initially at fair value when the Company becomes a party to the contractual provisions of the instrument. Regular way purchases and sales of financial instruments are accounted for at trade date. Dividend and interest income are recognized when earned. Gains or losses, if any, are recorded in financial income and expenses. Cash and cash equivalents Cash and cash equivalents include all cash balances and short-term highly liquid investments with an original maturity of three months or less that are readily convertible into known amounts of cash. Receivables Receivables are carried at the lower of amortized cost or the present value of estimated future cash flows, taking into account discounts given or agreed. The present value of estimated future cash flows is determined through the use of allowances for uncollectible amounts. As soon as individual trade accounts receivable can no longer be collected in the normal way and are expected to result in a loss, they are designated as doubtful trade accounts receivable and valued at the expected collectible amounts. They are written off when they are deemed to be uncollectible because of bankruptcy or other forms of receivership of the debtors. The allowance for the risk of non-collection of trade accounts receivable takes into account credit-risk concentration, collective debt risk based on average historical losses, and specific circumstances such as serious adverse economic conditions in a specific country or region. In the event of sale of receivables and factoring, the Company derecognizes receivables when the Company has given up control or continuing involvement. The Company derecognizes receivables in case of sale and factoring when: • The Company has transferred its rights to receive cash flows from the receivables or has assumed an obligation to pay the received cash flows in full without any material delay to a third party under a ‘pass-through’ arrangement; and • either (a) the Company has transferred substantially all of the risks and rewards of the ownership of the receivables, or (b) the Company has neither transferred nor retained substantially all of the risks and rewards, but has transferred control of the assets. However, in case the company neither transfers nor retains substantially all the risks and rewards of ownership of the receivables nor transfers control of the receivables, the receivable is recognized to the extent of the Company’s continuing involvement in the assets. In which case, the Company also recognizes an associated liability. The transferred receivable and associated liability are measured on a basis that reflects the rights and obligations that the Company has retained. This is a customized selection from the Annual Report 2010 119 13 Group financial statements 13.10 - 13.10 Investments in associates Associates are all entities over which the group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method of accounting and are initially recognized at cost. The group’s investment in associates includes goodwill identified on acquisition, net of any accumulated impairment loss. The Company’s share of the net income of these companies is included in results relating to associates in the Consolidated statements of income. When the Company’s share of losses exceeds its interest in an associate, the carrying amount of that interest (including any long-term loans) is reduced to nil and recognition of further losses is discontinued except to the extent that the Company has incurred legal or constructive obligations or made payments on behalf of an associate. Unrealized gains on transactions between the Company and its associates are eliminated to the extent of the Company’s interest in the associates. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Investments in associates include loans from the Company to these investees. Accounting for capital transactions of a consolidated subsidiary or an associate The Company recognizes dilution gains or losses arising from the sale or issuance of stock by a consolidated subsidiary or an associate in the Statement of income, unless the Company or the subsidiary either has reacquired or plans to reacquire such shares. In such instances, the result of the transaction will be recorded directly in equity. Dilution gains and losses arising in investments in associates are recognized in the Consolidated statements of income under “Results relating to investments in associates”. Other non-current financial assets Other non-current financial assets include held-tomaturity investments, loans and available-for-sale financial assets and financial assets at fair value through profit and loss. Held-to-maturity investments are those debt securities which the Company has the ability and intent to hold until maturity. Held-to-maturity debt investments are 120 This is a customized selection from the Annual Report 2010 recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts using the effective interest method. Loans receivable are stated at amortized cost, less the related allowance for impaired loans receivable. Available-for-sale financial assets are non-derivatives financial assets that are designated as available-for-sale and that are not classified in any of the other categories of financial assets. Subsequent to initial recognition, they are measured at fair value and changes therein, other than impairment losses and foreign currency differences on available for sale-debt instruments are recognized in other comprehensive income and presented in the fair value reserve in equity. When an investment is derecognized, the gain or loss accumulated in equity is reclassified to the Statements of income. Available-for-sale financial assets including investments in privately held companies that are not associates, and do not have a quoted market price in an active market and whose fair value could not be reliably determined, are carried at cost. A financial asset is classified as at fair value through profit or loss if it is classified as held for trading or is designated as such upon initial recognition. Financial assets are designated at fair value through profit or loss if the Company manages such investments and makes purchase and sale decisions based on their fair value in accordance with the Company documented risk management or investment strategy. Attributable transaction costs are recognized in the Statement of income as incurred. Financial assets at fair value through the Statement of income are measured at fair value, and changes therein are recognized as available for sale. Impairment of financial assets A financial asset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset. In case of available-for-sale financial assets, a significant or prolonged decline in the fair value of the financial assets below its cost is considered an indicator that the financial assets are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss - measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in the Statement of income - is removed from equity and recognized in the Statement of income. 13 Group financial statements 13.10 - 13.10 If objective evidence indicates that financial assets that are carried at cost need to be tested for impairment, calculations are based on information derived from business plans and other information available for estimating their fair value. Any impairment loss is charged to the Statement of income. An impairment loss related to financial assets is reversed if in a subsequent period, the fair value increases and the increase can be related objectively to an event occurring after the impairment loss was recognized. The loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, if no impairment loss had been recognized. Reversals of impairment are recognized in the Statement of income except for reversals of impairment of available-for-sale equity securities, which are recognized in other comprehensive income. Inventories Inventories are stated at the lower of cost or net realizable value. The cost of inventories comprises all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. The costs of conversion of inventories include direct labor and fixed and variable production overheads, taking into account the stage of completion and the normal capacity of production facilities. Costs of idle facility and abnormal waste are expensed. The cost of inventories is determined using the first-in, first-out (FIFO) method. Inventory is reduced for the estimated losses due to obsolescence. This reduction is determined for groups of products based on purchases in the recent past and/or expected future demand. Property, plant and equipment Items of property, plant and equipment are measured at cost less accumulated depreciation and accumulated impairment losses. The useful lives and residual values are evaluated every year. Assets manufactured by the Company include direct manufacturing costs, production overheads and interest charges incurred for qualifying assets during the construction period. Government grants are deducted from the cost of the related asset. Depreciation is calculated using the straight-line method over the useful life of the asset. Depreciation of special tooling is generally also based on the straight-line method. Gains and losses on the sale of property, plant and equipment are included in other business income. Costs related to repair and maintenance activities are expensed in the period in which they are incurred unless leading to an extension of the original lifetime or capacity. Plant and equipment under finance leases and leasehold improvements are amortized using the straight-line method over the shorter of the lease term or the estimated useful life of the asset. The gain realized on sale and operating leaseback transactions that are concluded based upon market conditions is recognized at the time of the sale. The Company capitalizes interest as part of the cost of assets that take a substantial period of time to become ready for use. Intangible assets other than goodwill Acquired definite-lived intangible assets are amortized using the straight-line method over their estimated useful life. The useful lives are evaluated every year. Patents and trademarks with a definite useful live acquired from third parties either separately or as part of the business combination are capitalized at cost and amortized over their remaining useful lives. Intangible assets acquired as part of a business combination are capitalized at their acquisition-date fair value. The Company expenses all research costs as incurred. Expenditure on development activities, whereby research findings are applied to a plan or design for the production of new or substantially improved products and processes, is capitalized as an intangible asset if the product or process is technically and commercially feasible and the Company has sufficient resources and the intention to complete development. The development expenditure capitalized includes the cost of materials, direct labor and an appropriate proportion of overheads. Other development expenditures and expenditures on research activities are recognized in the Statement of income. Capitalized development expenditure is stated at cost less accumulated amortization and impairment losses. Amortization of capitalized development expenditure is charged to the Statement of income on a straight-line basis over the estimated useful lives of the intangible assets. Costs relating to the development and purchase of software for both internal use and software intended to be sold are capitalized and subsequently amortized over the estimated useful life. This is a customized selection from the Annual Report 2010 121 13 Group financial statements 13.10 - 13.10 Impairment of non-financial assets other than goodwill, inventories and deferred tax assets Non-financial assets other than goodwill, inventories and deferred tax assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is recognized and measured by a comparison of the carrying amount of an asset with the greater of its value in use and its fair value less cost to sell. Value in use is measured as the present value of future cash flows expected to be generated by the asset. If the carrying amount of an asset is deemed not recoverable, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the recoverable amount. The review for impairment is carried out at the level where discrete cash flows occur that are independent of other cash flows. Impairment losses recognized in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if and to the extent there has been a change in the estimates used to determine the recoverable amount. The loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized. Reversals of impairment are recognized in the Statements of income. Goodwill Measurement of goodwill at initial recognition is described under ‘Basis of consolidation’. Goodwill is subsequently measured at cost less accumulated impairment losses. In respect of investment in associates, the carrying amount of goodwill is included in the carrying amount of investment, and an impairment loss on such investment is not allocated to any asset, including goodwill, that forms part of the carrying amount of investment in associates. Impairment of goodwill Goodwill is not amortized but tested for impairment annually and whenever impairment indicators require. In most cases the Company identified its cash generating units as one level below that of an operating segment. Cash flows at this level are substantially independent from other cash flows and this is the lowest level at which goodwill is monitored by the Board of Management. The Company performed and completed annual impairment tests in the same quarter of all years presented in the Consolidated Statements of income. A goodwill 122 This is a customized selection from the Annual Report 2010 impairment loss is recognized in the Statement of income whenever and to the extent that the carrying amount of a cash-generating unit exceeds the recoverable amount of that unit. An impairment loss on an investment in associates is not allocated to any asset, including goodwill, that forms part of the carrying amount of the investment in associates. Share capital Common shares are classified as equity. Incremental costs directly attributable to the issuance of shares are recognized as a deduction from equity. Where the Company purchases the Company’s equity share capital (treasury shares), the consideration paid, including any directly attributable incremental costs (net of income taxes) is deducted from equity attributable to the company’s equity holders until the shares are cancelled or reissued. Where such ordinary shares are subsequently reissued, any consideration received, net of any directly attributable incremental transaction costs and the related income tax effects, is included in equity attributable to the company’s equity holders. Debt and other liabilities Debt and liabilities other than provisions are stated at amortized cost. However, loans that are hedged under a fair value hedge are remeasured for the changes in the fair value that are attributable to the risk that is being hedged. Provisions Provisions are recognized if, as a result of a past event, the Company has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognized as interest expense. A provision for warranties is recognized when the underlying products or services are sold. The provision is based on historical warranty data and a weighing of possible outcomes against their associated probabilities. The Company accrues for losses associated with environmental obligations when such losses are probable and can be estimated reliably. Measurement of liabilities is based on current legal and constructive requirements. Liabilities and expected insurance recoveries, if any, are 13 Group financial statements 13.10 - 13.10 recorded separately. The carrying amount of liabilities is regularly reviewed and adjusted for new facts and changes in law. The provision for restructuring relates to the estimated costs of initiated reorganizations that have been approved by the Board of Management, and which involve the realignment of certain parts of the industrial and commercial organization. When such reorganizations require discontinuance and/or closure of lines of activities, the anticipated costs of closure or discontinuance are included in restructuring provisions. A liability is recognized for those costs only when the Company has a detailed formal plan for the restructuring and has raised a valid expectation with those affected that it will carry out the restructuring by starting to implement that plan or announcing its main features to those affected by it. Guarantees The Company recognizes a liability at the fair value of the obligation at the inception of a financial guarantee contract. The guarantee is subsequently measured at the higher of the best estimate of the obligation or the amount initially recognized. the entity is remeasured to fair value, and a gain or loss is recognized in profit or loss. The Company applied IAS 27 (revised) prospectively to transactions with noncontrolling interests as from January 1, 2010. Revision to IFRS 3, ‘Business Combinations’ The revised standard continues to apply the acquisition method to business combinations, with some significant changes. For example, all payments to purchase a business are to be recorded at fair value at the acquisition date, with contingent payments classified as debt subsequently re-measured through the Statements of income. The definition of a business has been broadened, which likely results in more acquisitions being treated as business combinations. There is a choice on an acquisition-byacquisition basis to measure the non-controlling interest in the acquiree at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net assets. All acquisition-related costs other than share and debt issuance costs, should be expensed. The Company applied IFRS 3 (revised) prospectively to all business combinations as from January 1, 2010. IFRIC 17, ‘Distribution of Non-cash Assets to Owners’ Accounting changes In the absence of explicit transition requirements for new accounting pronouncements, the Company accounts for any change in accounting principle retrospectively. Reclassifications Certain items previously reported under specific financial statement captions have been reclassified to conform to the current year presentation. IFRS accounting standards adopted as from 2010 The accounting policies set out above have been applied consistently to all periods presented in these Consolidated financial statements except as explained below which addresses changes in accounting policies. The Company has adopted the following new and amended IFRSs as of January 1, 2010. Revision to IAS 27 ‘Consolidated and Separate Financial Statements’ The revised standard requires the effects of all transactions with non-controlling interests to be recorded in equity if there is no change in control and these transactions will no longer result in goodwill or gains and losses. The standard also specifies the accounting when control is lost. Any remaining interest in The interpretation is part of the IASB’s annual improvements project published in April 2009. This interpretation provides guidance on accounting for arrangements whereby an entity distributes non-cash assets to shareholders either as a distribution of reserves or as dividends. IFRS 5 has also been amended to require that assets are classified as held for distribution only when they are available for distribution in their present condition and the distribution is highly probable. The Company applied IFRIC 17 prospectively from January 1, 2010, which did not have a material impact on the Company’s Consolidated financial statements. Amendment to IAS 39 ‘Financial Instruments: Recognition and Measurement – Eligible Hedged Items’ The amendment to IAS 39 provides additional guidance on the designation of a hedged item. The amendment clarifies how the existing principles underlying hedge accounting should be applied in two particular situations. It clarifies the designation of a one-sided risk in a hedged item and inflation in a financial hedged item. This amendment was adopted on January 1, 2010 and did not have a material impact on the Company’s Consolidated financial statements. Amendments to IFRIC 9 and IAS 39 ‘Embedded Derivatives’ This is a customized selection from the Annual Report 2010 123 13 Group financial statements 13.10 - 13.10 The amendments require entities to assess whether they need to separate an embedded derivative from a hybrid (combined) financial instrument when financial assets are reclassified out of the fair value through profit or loss category. When the fair value of an embedded derivative that would be separated cannot be measured reliably, the reclassification of the hybrid (combined) financial asset out of the fair value through profit or loss category is not permitted. The amendments did not have a material impact on the Company’s Consolidated financial statements. Improvements to IFRSs 2009 In April 2009, the IASB issued ‘Improvements to IFRSs 2009‘, a collection of amendments to twelve International Financial Reporting Standards, as part of its program of annual improvements to its standards, which is intended to make necessary, but non-urgent, amendments to standards that will not be included as part of another major project. The amendments resulting from this standard mainly have effective dates for annual periods beginning on or after January 1, 2010. The improvements did not have a material impact on the Company’s Consolidated financial statements. Amendment to IFRS 2 ‘Group Cash-settled and Share-based Payment Transactions’ hedge accounting will be applicable from the year 2013, although entities are permitted to adopt earlier. The Company is currently evaluating the impact that this new standard will have on the Company’s Consolidated financial statements. Amendments to IFRS 7 Financial Instruments: Disclosures The revised standard addresses additional disclosure notes in situations where assets are reclassified. This amendment is applicable to the Company on January 1, 2012. The change in accounting policy impacts disclosures only. Improvements to IFRSs 2010 In May 2010, the IASB issued ‘Improvements to IFRSs 2010‘, a collection of amendments to seven International Financial Reporting Standards, as part of its program of annual improvements to its standards, which is intended to make necessary, but non-urgent, amendments to standards that will not be included as part of another major project. The amendments resulting from this standard mainly have effective dates for annual periods beginning on or after January 1, 2011. The improvements are not expected to have a material impact on the Company’s Consolidated financial statements. Revised IAS 24 ‘Related Parties Disclosures’ In addition to incorporating IFRIC 8, ‘Scope of IFRS 2’, and IFRIC 11, ‘IFRS 2 – Group and treasury share transactions’, the amendments expand on the guidance in IFRIC 11 to address the classification of group arrangements that were not covered by that interpretation. The new guidance had no material impact on the Company’s Consolidated financial statements. The revised standard simplifies the definition of a related party, clarifying its intended meaning and eliminating inconsistencies from the definition. The Company will apply IAS 24 (revised) retrospectively from January 1, 2011. The change in accounting policy impacts disclosures only. IFRS accounting standards adopted as from 2011 and onwards Amendment to IAS 32 ‘Classification of Rights Issues’ The following standards and amendments to existing standards have been published and are mandatory for the Company beginning on or after January 1, 2011 or later periods, but the Company has not early adopted them: The amendment addresses the accounting for rights issues (rights, options or warrants) that are denominated in a currency other than the functional currency of the issuer. Previously, such rights issues were accounted for as derivative liabilities. The amendment requires that, provided certain conditions are met, such rights issues are classified as equity regardless of the currency in which the exercise price is denominated. This amendment is applicable to the Company on January 1, 2011 and is not expected to have a material impact on the Company’s Consolidated financial statements. IFRS 9 ‘Financial Instruments’ This standard introduces certain new requirements for classifying and measuring financial assets and liabilities. IFRS 9 divides all financial assets that are currently in the scope of IAS 39 into two classifications, those measured at amortized cost and those measured at fair value. The standard along with proposed expansion of IFRS 9 for classifying and measuring financial liabilities, derecognition of financial instruments, impairment, and 124 This is a customized selection from the Annual Report 2010 Amendment to IFRIC 14 ‘Prepayments of a Minimum Funding Requirement’ 13 Group financial statements 13.10 - 13.10 This amendment allows for the recognition of an asset for any surplus arising from the voluntary prepayment of minimum funding contributions for defined-benefit plans in respect of future service. The amendment to IFRIC 14 will be adopted on January 1, 2011, will be applied retrospectively and is not expected to have a material impact on the Company’s Consolidated financial statements. IFRIC 19 ‘Extinguishing Financial Liabilities with Equity Instruments’ IFRIC 19 clarifies the accounting when the terms of debt are renegotiated with the result that the liability is extinguished by the debtor issuing its own equity instruments to the creditor (referred to as a ‘debt for equity swap’). The interpretation requires a gain or loss to be recognized in profit or loss when a liability is settled through the issuance of the entity’s own equity instruments. The reclassification of the carrying value of the existing financial liability into equity (with no gain or loss being recognized in profit or loss) is no longer permitted. IFRIC 19 is applicable on January 1, 2011 and will be applied retrospectively. The application of this IFRIC is not expected to have a material impact on the Company’s Consolidated financial statements. This is a customized selection from the Annual Report 2010 125 1 13 Group financial statements 13.10 - 13.11 13.11 Notes All amounts in millions of euros unless otherwise stated. Notes to the Consolidated financial statements of the Philips Group 1 Income from operations For information related to Sales and Income from operations on a geographical and sector basis, see section 13.9, Information by sector and main country, of this Annual Report. Sales and costs by nature 2008 Sales Costs of materials used 2009 2010 26,385 23,189 25,419 (12,017) (9,660) (10,114) Employee benefit expenses (5,981) (5,825) (5,968) Depreciation and amortization (1,528) (1,469) (1,422) Shipping and handling (595) (505) (485) Advertising and promotion (949) (804) (934) Lease expense (322) (352) (301) (4,813) (4,019) (4,206) Other operational costs Impairment of goodwill Other business income and expenses (301) − − 175 59 76 54 614 2,065 2008 2009 2010 Goods 23,568 20,254 22,012 Services 2,325 2,527 2,869 492 408 538 26,385 23,189 25,419 Income from operations Sales composition Licenses and royalties Philips has no single external customer that represents 10 percent or more of revenues and therefore no further information is disclosed. Costs of materials used Cost of materials used represent the inventory recognized in cost of sales. 126 This is a customized selection from the Annual Report 2010 13 Group financial statements 13.11 - 13.11 Employee benefit expenses 2008 2009 2010 sales. Amortization (including impairment) of development cost is included in research and development expenses. 5,094 5,075 5,190 Shipping and handling 75 110 15 - Required by law 6881) 6391) 597 - Voluntary 124 11) 166 Salaries and wages Pension costs Other social security and similar charges: 1) 5,981 1) 5,825 5,968 Revised allocation Shipping and handling costs are included in selling expenses. Advertising and promotion Advertising and promotion costs are included in selling expenses. Other business income (expenses) In 2009, the voluntary charges include an amount of EUR 134 million related to curtailment gains for retiree medical benefit plans. See note 28 for further information on pension costs. Other business income (expenses) consists of the following: 2008 2009 2010 Result on disposal of businesses: For remuneration details of the members of the Board of Management and the Supervisory Board, see note 31. - income 136 13 9 - expense (45) (13) (8) Employees - income 72 33 54 The average number of employees by category is summarized as follows (in FTEs): - expense (16) (13) (9) Result on other remaining businesses: 37 - income 2008 Production Research & development Other Permanent employees 2009 2010 66,675 60,179 57,756 11,926 11,563 12,388 34,365 35,922 33,588 112,966 107,664 103,732 Temporary employees 13,493 9,923 13,318 Continuing operations 126,459 117,587 117,050 Depreciation and amortization Depreciation of property, plant and equipment and amortization of intangibles are as follows: 2008 Result on disposal of fixed assets: 2009 2010 729 746 106 389 436 318 181 1,469 59 76 Total other business income 261 97 100 Total other business expense (86) (38) (24) The results on the disposal of businesses in 2008 are mainly related to the sale of the Set-Top Boxes and Connectivity Solutions activities to Pace Micro Technology which resulted in a gain of EUR 42 million, and the sale of Philips Speech Recognition activities to Nuance Communications which resulted in a gain of EUR 45 million. The result on the disposal of fixed assets is mainly related to the sale of fixed assets in Taiwan with a gain of EUR 39 million. 168 1,528 (7) 175 487 Amortization of development costs (12) 89 Amortization of other intangible assets 51 (25) 678 92 53 - expense 1,422 Depreciation of property, plant and equipment Amortization of internal-use software Depreciation of property, plant and equipment and amortization (including impairment) of software and other intangible assets are primarily included in cost of This is a customized selection from the Annual Report 2010 127 2 2 3 13 Group financial statements 13.11 - 13.11 Financial income and expenses 2008 Interest income Interest income from loans and receivables 2009 2010 141 45 40 14 18 17 Interest income from cash and cash equivalents 127 27 23 Dividend income from available for sale financial assets 25 16 6 Net gains from disposal of financial assets 1,406 126 162 − 20 − 1 Net change in fair value of financial assets at fair value through profit or loss Net foreign exchange gains Other finance income Finance income Interest expense Interest on debts and borrowings Finance charges under finance lease contract Unwind of discount of provisions Net foreign exchange losses Impairment loss of financial assets Net change in fair value of financial assets at fair value through profit or loss Other finance expenses Finance expense Financial income and expenses − − 22 18 225 In 2008, net financial income and expense was EUR 88 million income. Financial income was EUR 1,594 million and included a EUR 1,406 million net gain from disposal of financial assets, including EUR 1,205 million from the sale of shares in TSMC, a EUR 158 million gain on the sale of shares in LG Display and EUR 20 million gain on the sale of shares in D&M. Furthermore, Philips received EUR 25 million of dividend income, primarily from TSMC. Total finance expense was EUR 1,506 million, including impairment charges amounting to EUR 1,148 million related to shareholdings in NXP (EUR 599 million), LG Display (EUR 448 million), TPO (EUR 71 million) and Pace Micro Technology (EUR 30 million). Furthermore, there was a net fair value loss of EUR 48 million, including EUR 37 million from revaluation of the convertible bond received from TPV Technology. 5 1,594 214 (246) (297) (265) (243) (294) (263) (3) (3) (2) (25) (15) (20) (13) (7) − (1,148) (58) (2) − (21) (48) (26) (14) (28) (1,506) (391) (336) (166) (122) 88 Net financial income and expense was EUR 122 million expense in 2010 which was EUR 44 million lower than in 2009. Total finance income of EUR 214 million included EUR 162 million gain on the disposal of financial assets, of which EUR 154 million resulted from the sale of shares in NXP (please refer to note 11 for more details) and EUR 4 million resulted from the sale of SHL Telemedicine Ltd.. Interest income from loans and receivables included EUR 15 million related to interest received on the convertible bonds received from TPV Technology and CBaySystems Holdings (CBAY). Total finance expense of EUR 336 million included EUR 21 million of losses mainly in relation to fair value revaluations on the convertible bonds received from TPV Technology and CBAY prior to their redemption in September and October respectively. Net financial income and expense was EUR 166 million expense in 2009, which was EUR 254 million higher than in 2008. Financial income was EUR 225 million and included EUR 126 million income from the disposal of financial assets, including a EUR 69 million gain from the sale of 128 remaining shares in LG Display, and a EUR 48 million gain from the sale of remaining shares in Pace Micro Technology. During 2009, Philips had a net EUR 20 million fair value gain mainly related to the revaluation of the convertible bonds received from TPV Technology and CBAY. Philips also received EUR 16 million dividend income, of which EUR 12 million related to holdings in LG Display. Total financial expense was EUR 391 million, including impairment charges amounting to EUR 58 million mainly from shareholdings in NXP, and EUR 15 million of accretion expenses mainly associated with discounted asbestos and environmental provisions. This is a customized selection from the Annual Report 2010 3 Income taxes The tax expense on income before tax amounted to EUR 509 million (2009: EUR 100 million, 2008: EUR 256 million). 13 Group financial statements 13.11 - 13.11 The components of income before taxes and income tax expense are as follows: 2008 2009 2010 330 175 935 (188) 273 1,008 142 448 1,943 A reconciliation of the weighted average statutory income tax rate to the effective income tax rate is as follows: in % 2008 Netherlands Foreign Income before taxes Current taxes 20 (16) (106) Deferred taxes (120) (72) (144) (100) (88) (250) Current taxes (289) (201) (207) Deferred taxes 133 189 (52) (156) (12) (259) (256) (100) (509) The components of deferred tax expense are as follows: 2008 2009 2010 Previously unrecognized tax loss carried forwards realized Current year tax loss carried forwards not realized 21 1 9 (98) (60) (55) Temporary differences (not recognized) recognized (2) 2 (5 ) Prior year results (7) 119 (16) Tax rate changes (1) − (4 ) 100 55 (125) 13 117 (196) Deferred tax income (expense) (18.5) 17.4 26.7 (14.5) (0.3) (0.5) 69.3 13.3 2.8 1.6 (0.4) 0.3 Changes related to: - utilization of previously reserved loss carryforwards - new loss carryforwards not expected to be realized - addition (releases) Foreign: Origination and reversal of temporary differences 2010 Tax rate effect of: Netherlands: Income tax expense Weighted average statutory income tax rate 2009 Philips’ operations are subject to income taxes in various foreign jurisdictions. The statutory income tax rates vary from 10.0% to 40.7%, which causes a difference between the weighted average statutory income tax rate and the Netherlands’ statutory income tax rate of 25.5% (2009: 25.5%; 2008: 25.5%). Non-tax-deductible impairment charges − 283.1 3.1 (315.0) (25.9) (7.6) Non-tax-deductible expenses 91.9 26.3 3.9 Withholding and other taxes (5.1) 4.7 1.2 1.0 (0.1) 0.2 37.2 8.3 (0.4) 49.2 (24.1) (0.4) 180.2 22.3 26.2 Non-taxable income Tax rate changes Tax expenses due to other liabilities Tax incentives and other Effective tax rate The weighted average statutory income tax rate increased in 2010 compared to 2009, as a consequence of a change in the country mix of income tax rates, as well as a change of the mix of profits and losses in the various countries. The effective income tax rate is lower than the weighted average statutory income tax rate in 2010, attributable to non-taxable gains on the sale of securities and other nontaxable income, and incidental tax benefits, which were partly offset by non-tax-deductible costs, new losses carried forward not expected to be realized, and income tax expenses due to tax provisions for uncertain tax positions. This is a customized selection from the Annual Report 2010 129 13 Group financial statements 13.11 - 13.11 Deferred tax assets and liabilities Net deferred tax assets relate to the following balance sheet captions and tax loss carryforwards (including tax credit carryforwards), of which the movements during the years 2010 and 2009, respectively are as follows: December 31, 2009 Intangible assets Property, plant and equipment Inventories Prepaid pension assets Other receivables Other assets recognized in income recognized in equity 97 − (3) (93) (1,218) acquisitions/ divestments other1) December 31, 2010 (1,217) 15 34 − − (9 ) 40 193 44 − − 5 242 (387) (75) 462 − (1 ) (1) 36 4 − − (2) 38 118 (94) − − 4 28 450 (58) 150 − 27 569 11 − − − − 11 100 (34) − − 2 68 Provisions: - pensions - guarantees - termination benefits - other postretirement benefits 91 (7 ) (10) − 5 79 - other provisions 567 (71) 5 (1) 45 545 Other liabilities (29) 107 − − 4 82 Tax loss carryforwards (including tax credit carryforwards) 766 (143) Net deferred tax assets 713 (196) 1) (1) 1 73 696 (3) 606 60 1,180 Primarily includes foreign currency translation differences which were recognized in equity December 31, 2008 Intangible assets Property, plant and equipment Inventories Prepaid pension costs recognized in income recognized in equity acquisitions/ divestments other1) December 31, 2009 (1,298) 115 − (11) (24) (146) 28 − 7 126 15 147 33 − 4 9 193 (510) (80) 160 − 43 (387) (1,218) Other receivables 41 2 − 14 (21) 36 Other assets 61 (20) (14) − 91 118 432 450 Provisions: (9) 8 − 19 9 1 − 1 − 11 61 34 − − 5 100 - other postretirement benefits 108 (15) 10 − (12) 91 - other provisions 751 (111) - pensions - guarantees - termination benefits Other liabilities 3 3 (79) 567 − 1 (107) (29) 138 − 12 1 766 117 167 31 51 713 76 1 Tax loss carryforwards (including tax credit carryforwards) 615 Net deferred tax assets 347 1) 130 Primarily includes balance sheet changes amounting to EUR 46 million and foreign currency translation differences which were recognized in equity This is a customized selection from the Annual Report 2010 13 Group financial statements 13.11 - 13.11 Deferred tax assets and liabilities relate to the balance sheet captions, as follows: assets liabilities net 2010 Intangible assets 104 (1,321) Property, plant & equipment 106 (66) 40 Inventories 267 (25) 242 2 (3) (1) Other receivables 53 (15) 38 Other assets 50 (22) 28 Prepaid pension costs (1,217) Provisions: - pensions 571 (2) 569 - guarantees 11 − 11 - termination benefits 70 (2) 68 - other postretirement 78 1 79 - other 579 (34) 545 Other liabilities 110 (28) 82 Tax loss carryforwards (including tax credit carryforwards) 696 − 2,697 Set-off of deferred tax positions Net deferred tax assets (1,517) (1,346) 1,346 1,351 (171) assets liabilities 696 1,180 − 1,180 net 2009 Intangible assets 172 (1,390) Property, plant & equipment 109 (94) 15 Inventories 206 (13) (387) The net deferred tax assets of EUR 1,180 million (2009: EUR 713 million) consist of deferred tax assets of EUR 1,351 million (2009: EUR 1,243 million) in countries with a net deferred tax asset position and deferred tax liabilities of EUR 171 million (2009: EUR 530 million) in countries with a net deferred tax liability position. Of the total deferred tax assets of EUR 1,351 million at December 31, 2010, (2009: EUR 1,243 million), EUR 812 million (2009: EUR 616 million) is recognized in respect of fiscal entities in various countries where there have been fiscal losses in the current or preceding period. Management’s projections support the assumption that it is probable that the results of future operations will generate sufficient taxable income to utilize these deferred tax assets. At December 31, 2010 and 2009, there were no recognized deferred tax liabilities for taxes that would be payable on the unremitted earnings of certain foreign subsidiaries of Philips Holding USA (PHUSA) since it has been determined that undistributed profits of such subsidiaries will not be distributed in the foreseeable future. The temporary differences associated with the investments in subsidiaries of PHUSA, for which a deferred tax liability has not been recognized, aggregate to EUR 34 million (2009: EUR 29 million). 193 Prepaid pension costs Other receivables Other assets (1,218) become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. 3 (390) 45 (9) 36 135 (17) 118 452 (2) 450 11 − 11 105 (5) 100 Provisions: - pensions - guarantees - termination benefits - other postretirement - other Other liabilities Tax loss carryforwards (including tax credit carryforwards) 91 − 91 590 (23) 567 73 (102) (29) 766 − 2,758 Set-off of deferred tax positions Net deferred tax assets In the current year one of our acquisitions has recognized a deferred tax asset of EUR 18 million, which was not recognized at acquisition date. Based on an audit by the local tax authorities the intercompany loan policy has been reviewed and adjusted, which has led to a lower intercompany interest rate. As a consequence the related deferred tax asset became recoverable. (2,045) (1,515) 1,515 1,243 (530) At December 31, 2010, operating loss carryforwards expire as follows: 766 713 − Total 4,452 2011 2012 2013 2014 2015 14 23 17 38 28 2016/ 2020 later unlimited 25 949 3,358 713 Deferred tax assets are recognized for temporary differences, unused tax losses, and unused tax credits to the extent that realization of the related tax benefits are probable. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in the countries where the deferred tax assets originated and during the periods when the deferred tax assets The Company also has tax credit carryforwards of EUR 112 million, which are available to offset future tax, if any, and which expire as follows: Total 112 2011 2012 2013 2014 2015 2016/ 2020 later unlimited − 24 68 12 1 3 1 3 This is a customized selection from the Annual Report 2010 131 4 13 Group financial statements 13.11 - 13.11 Tax uncertainties due to disentanglements and acquisitions At December 31, 2010 , operating loss and tax credit carryforwards for which no deferred tax assets have been recognized in the balance sheet, expire as follows: Total 1,689 2011 2012 2013 2014 2015 − 2 − 6 2016/ 2020 later unlimited 28 16 When a subsidiary of Philips is disentangled, or a new company is acquired, related tax uncertainties arise. Philips creates merger and acquisition (M&A) teams for these disentanglements or acquisitions. In addition to representatives from the involved sector, these teams consist of specialists from various corporate functions and are formed, amongst other things, to identify hidden tax uncertainties that could subsequently surface when companies are acquired and to reduce tax claims related to disentangled entities. These tax uncertainties are investigated and assessed to mitigate tax uncertainties in the future as much as possible. Several tax uncertainties may surface from M&A activities. Examples of uncertainties are: applicability of the participation exemption, allocation issues, and non-deductibility of parts of the purchase price. 1,632 5 Classification of the income tax payable and receivable is as follows: 2009 Income tax receivable Income tax receivable - under non-current receivables Income tax payable Income tax payable - under non-current liabilities 2010 81 79 2 2 (118) (291) (1) (1) Fiscal risks Tax uncertainties due to permanent establishments Philips is exposed to fiscal uncertainties. These uncertainties include the following: In countries where e.g. Philips starts new operations or alters business models, the issue of permanent establishment may arise. This is because when operations in a country are led from another country, there is a risk that tax claims will arise in the former country as well as in the latter country. Transfer pricing uncertainties Philips has issued transfer pricing directives, which are in accordance with international guidelines such as those of the Organization of Economic Co-operation and Development. As transfer pricing has a cross-border effect, the focus of local tax authorities on implemented transfer pricing procedures in a country may have an impact on results in another country. In order to mitigate the transfer pricing uncertainties, audits are executed by Corporate Fiscal and Internal Audit on a regular basis to safeguard the correct implementation of the transfer pricing directives. 4 Investments in associates Results relating to investments in associates Due to the centralization of certain activities in a limited number of countries (such as research and development, centralized IT, corporate functions and head office), costs are also centralized. As a consequence, for tax reasons these costs and/or revenues must be allocated to the beneficiaries, i.e. the various Philips entities. For that purpose, apart from specific allocation contracts for costs and revenues, general service agreements (GSAs) are signed with a large number of entities. Tax authorities review the implementation of GSAs, apply benefit tests for particular countries or audit the use of tax credits attached to GSAs and royalty payments, and may reject the implemented procedures. Furthermore, buy in/out situations in the case of (de)mergers could affect the tax allocation of GSAs between countries. The same applies to the specific allocation contracts. 132 This is a customized selection from the Annual Report 2010 2009 2010 Company’s participation in income 81 23 14 Results on sales of shares Tax uncertainties on general service agreements and specific allocation contracts 2008 (2) − 5 Gains from dilution effects 12 − − (72) 53 (1) 19 76 18 Investment impairment / other charges Detailed information on the aforementioned individual line items is provided below. Company’s participation in income 2008 2009 2010 LG Display 66 − − Others 15 23 14 81 23 14 Philips’ influence on LG Display’s operating and financial policies including representation on the LG Display board was reduced in February 2008. Consequently, the investment in LG Display (at that date 19.9%) was 13 Group financial statements 13.11 - 13.11 transferred from Investments in associates to Other noncurrent financial assets, as Philips was no longer able to exercise significant influence. Reclassifications mainly relate to the accounting of TPV Technology Ltd. (TPV). On March 9, 2010 Philips sold 9.4% of the shares in TPV to a third party for a cash consideration of EUR 98 million. Philips retained 3.0% of the TPV shares, which were transferred to Other noncurrent financial assets, because Philips was no longer able to exercise significant influence with respect to TPV. The transaction resulted in a gain of EUR 5 million, which was recognized under Results relating to investments in associates. Results on sales of shares 2008 2009 2010 TPV Technology Ltd. − − 5 Others (2) − − (2) − 5 Summarized information of investments in associates (unaudited) Investment impairment/other income and expenses 2008 2009 − (9) − (2) (1) (72) Others − 55 (4) TPV Technology Ltd. Summarized financial information on the Company’s investments in associates, on a combined basis, is presented below. 2010 (59) LG.Philips Displays 5 53 (1) The gradual decline of the amounts stated in the table is due to the accounting for the investments in LG Display in February 2008 and TPV in March 2010 as other noncurrent financial assets. This is based on the most recent available financial information. In 2009, the TPV Technology Ltd. impairment charge of 2008 was reversed (EUR 55 million) based on the 2009 stock price. 2008 In 2008, Philips performed impairment reviews on the book value of the investment in TPV resulting in an impairment charge of EUR 59 million. The impairment reviews were triggered by the deteriorating economic environment of the flat panel industry, the weakening financial performance of TPV and the stock price performance of TPV. The valuation as per December 31, 2008 was based on the stock price of TPV as of that date on the Hong Kong Stock Exchange. Net sales Income before taxes Income taxes Other income (loss) 2009 2010 6,951 4,165 353 538 142 47 (109) (30) (16) − (6) − 429 106 31 81 23 14 2009 2010 Current assets 1,987 760 Non-current assets 1,400 282 3,387 1,042 Net income Total share in net income of associates recognized in the Consolidated statements of income Investments in associates The changes during 2010 are as follows: Investments in associates loans Balance as of January 1, 2010 investments total 7 274 281 − 18 18 Sales − (89) (89) Reclassifications (4) (34) (38) Share in income/value adjustments − 18 18 Impairments − (5) (5) Dividends received − (19) (19) Translation and exchange rate differences − 15 15 Current liabilities Changes: Acquisitions/additions Balance as of December 31, 2010 3 178 181 Non-current liabilities Net asset value Investments in associates included in the Consolidated balance sheet 5 (1,418) (817) (631) (99) 1,152 312 274 178 Discontinued operations 2010 and 2009 During 2009 and 2010, there were no results from discontinued operations. This is a customized selection from the Annual Report 2010 133 6 13 Group financial statements 13.11 - 13.11 2008 2008 MedQuist Sales On August 6, 2008, the Company announced that it had completed the sale of its approximately 70% ownership interest in MedQuist to CBAY for a consideration of USD 287 million. The consideration was composed of a cash payment of USD 98 million, a promissory note of USD 26 million, a convertible bond of USD 91 million, and a preclosing cash dividend of USD 72 million. The promissory note was redeemed during 2009. The convertible bond was redeemed in October 2010; please refer to note 14. The financial results attributable to the Company’s interest in MedQuist have been presented as discontinued operations. Costs and expenses − Gain (loss) on sale of discontinued operations (3) Income (loss) before taxes (3) Income taxes (4) Results from discontinued operations (7) The following table summarizes the results of the MedQuist business included in the Consolidated statements of income as discontinued operations for 2008: 2008 Sales Costs and expenses Gain on sale of discontinued operations Impairment charge 128 (131) 15 − Income (loss) before taxes 12 Income taxes (3) Result of investments in associates − Non-controlling interests Results from discontinued operations 1 10 Semiconductors On September 29, 2006, the Company sold a majority stake in its Semiconductors division to a private equity consortium led by Kohlberg Kravis Robert & Co. (KKR). The transaction consisted of the sale of the division and a simultaneous acquisition of non-controlling interests in the recapitalized organization NXP Semiconductors (NXP). The operations of the Semiconductors division have been presented as discontinued operations. The Company’s ownership interest in NXP was 19.8% on December 31, 2009. During 2010, the Company sold its entire interest in NXP, please refer to note 11. The following table summarizes the results of the Semiconductors division included in the Consolidated statements of income as discontinued operations. The 2008 results mainly related to the settlement of income taxes, largely operational in nature. 6 Acquisitions and divestments 2010 During 2010, Philips entered into 11 acquisitions. These acquisitions involved an aggregated purchase price of EUR 235 million and have been accounted for using the acquisition method. Measured on an annualized basis, the aggregated impact of the 11 acquisitions on group Sales, Income from operations, Net income and Net income per common share (on a fully diluted basis) is not material in respect of IFRS 3 disclosure requirements. On March 9, 2010, Philips divested 9.4% of the shares in TPV Technology Ltd. (TPV). The TPV shares were sold to CEIEC Ltd., a Hong Kong-based technology company, for a cash consideration of EUR 98 million. The transaction resulted in a gain of EUR 5 million, which was reported under Results relating to Investments in Associates. The remaining divestments in 2010 involved an aggregated consideration of EUR 22 million and were therefore deemed immaterial in respect of IFRS 3 disclosure requirements. 2009 During 2009, Philips entered into a number of acquisitions and completed several divestments. Saeco International Group S.p.A. of Italy (Saeco) was the largest acquisition in 2009. Other acquisitions, both individually and in the aggregate, as well as divestments were deemed immaterial with respect to the IFRS 3 disclosure requirements. The acquisition of Saeco is summarized in the following table and described in the paragraph below. Acquisitions net cash outflow Saeco 1) 134 This is a customized selection from the Annual Report 2010 − 171 net assets other intangible acquired1) assets goodwill 17 74 Net assets acquired includes an adjustment of EUR 10 million for Noncontrolling interests and is net of cash acquired 80 13 Group financial statements 13.11 - 13.11 Saeco On July 24, 2009, Philips reached an agreement with Saeco’s senior lenders. Under the terms of the agreement, Philips acquired full ownership of Saeco through the assumption of all outstanding senior debt and related financial instruments for an upfront payment of EUR 170 million plus a deferred consideration of EUR 30 million payable no later than the 5th anniversary of the transaction. The impact of the Saeco acquisition on Philips’ net cash position in 2009 was EUR 171 million, including acquisition-related costs of EUR 7 million and a loan of EUR 8 million provided by Philips to finance working capital. The acquisition-related costs include legal fees and due diligence costs. This acquisition allowed Philips to strengthen its position in the espresso machine market through the addition of a comprehensive range of espresso solutions. As of the acquisition date, Saeco is consolidated as part of the Consumer Lifestyle sector. before acquisition date Other intangible assets amount amortization period in years Core technology 25 5 Trademarks and trade names 49 4-10 74 For the period from July 24 to December 31, 2009, Saeco contributed sales of EUR 143 million and a loss from operations of EUR 18 million. Pro forma disclosures on acquisitions The following table presents the 2009 year-to-date unaudited pro-forma results of Philips, assuming Saeco had been consolidated as of January 1, 2009: January-December 2009 Philips pro forma Group adjustments1) after acquisition date Assets and liabilities Goodwill Other intangible assets comprised of the following: Unaudited The condensed balance sheet of Saeco, immediately before and after the acquisition date was as follows: 1) The goodwill is primarily related to the synergies expected to be achieved from integrating Saeco in the Consumer Lifestyle sector. Sales − 80 182 74 Property, plant and equipment 94 43 38 Deferred tax assets 31 40 (32) (48) 14 14 332 239 100 185 10 10 − 30 66 23,255 Income from operations 614 (20) 594 Net income (loss) 410 (18) 392 Earnings per share - in euros 0.44 0.42 41 Working capital 23,189 pro forma Philips Group Provisions Cash Financed by Group equity Non-controlling interests Deferred consideration Loans 14 332 1) 222 239 Unaudited figures Non-controlling interests relate to minority stakes held by third parties in some of Saeco’s group companies. 1) Pro forma adjustments include sales, income from operations and net income from continuing operations of Saeco from January 1, 2009 to the date of acquisition 2008 During 2008, Philips entered into a number of acquisitions and completed several divestments. The acquisitions in 2008 primarily consisted of Genlyte Group Inc. (Genlyte), Respironics Inc. (Respironics) and VISICU Inc. (VISICU). The remaining acquisitions, both individually and in the aggregate, were deemed immaterial with respect to the IFRS 3 disclosure requirements. Sales and income from operations related to activities divested in 2008, included in the Company’s Consolidated statement of income for 2008, amounted to EUR 176 million and nil, respectively. The most significant acquisitions and divestments are summarized in the next two tables and described in the paragraph below. This is a customized selection from the Annual Report 2010 135 13 Group financial statements 13.11 - 13.11 Acquisitions net cash outflow net assets other intangible acquired1) assets goodwill Genlyte 1,894 10 Respironics 3,196 198 VISICU 860 1,186 2,162 (10) 33 175 before acquisition date1) after acquisition date 1,024 (152) The condensed balance sheet of Genlyte, immediately before and after the acquisition date was as follows: Assets and liabilities Goodwill 1) inflow of cash and other assets1) Set-Top Boxes and Connectivity Solutions Philips Speech Recognition Systems 1) 2) 3) recognized gain 860 129 191 Working capital net assets divested 102 Property, plant and equipment Divestments 1,024 Other intangible assets Net of cash acquired 254 134 160 − 3 Other current financial assets Deferred tax liabilities 742) 653) (32) (20) 42 45 Net of cash divested Assets received in lieu of cash Of which EUR 22 million cash (12) (300) Provisions (18) (36) Cash On January 22, 2008, Philips completed the purchase of all outstanding shares of Genlyte, a leading manufacturer of lighting fixtures, controls and related products for the commercial, industrial and residential markets. Through this acquisition Philips established a solid platform for further growth in the area of energy-saving and green lighting technology. The acquisition created a leading position for Philips in the North American luminaires market. Philips paid a total net cash consideration of EUR 1,894 million. This amount included the cost of 331,627 shares previously acquired in August 2007, the pay-off of certain debt and the settlement of outstanding stock options. The net impact of the Genlyte acquisition on Philips’ net cash position in 2008, excluding the pay-off of debt, was EUR 1,805 million. As of the acquisition date, Genlyte is consolidated as part of the Lighting sector. 57 646 1,959 568 1,951 Financed by Group equity Genlyte 57 Loans 8 646 1) 78 1,959 Unaudited figures The goodwill recognized is related to the complementary technological expertise and talent of the Genlyte workforce and the synergies expected to be achieved from integrating Genlyte into the Lighting sector. Other intangible assets are comprised of the following: amount amortization period in years Core technology and designs 81 1-8 In-process R&D 11 5 142 2-14 5 2-5 614 9-17 Order backlog 6 0.25 Software 1 3 Group brands Product brands Customer relationships and patents 860 For the period from January 22 to December 31, 2008, Genlyte contributed EUR 1,024 million to Sales and EUR 34 million to Income from operations. 136 This is a customized selection from the Annual Report 2010 13 Group financial statements 13.11 - 13.11 Respironics Other intangible assets are comprised of the following: On March 10, 2008, Philips acquired 100% of the shares of Respironics, a leading provider of innovative solutions for the global sleep and respiratory markets. Respironics designs, develops, manufactures and markets medical devices used primarily for patients suffering from Obstructive Sleep Apnea (OSA) and respiratory disorders. The acquisition of Respironics added new product categories in OSA and home respiratory care to the existing Philips business. This acquisition formed a solid foundation for the Home Healthcare Solutions business of the Company. Philips acquired Respironics’ shares for a net cash consideration of EUR 3,196 million. As of the acquisition date, Respironics is consolidated as part of the Healthcare sector. The condensed balance sheet of Respironics, immediately before and after the acquisition date was as follows: before acquisition date1) after acquisition date Assets and liabilities Goodwill Other intangible assets 165 2,162 39 1,186 Property, plant and equipment 123 137 Working capital 214 215 Other non-current financial assets Provisions Deferred tax assets/ liabilities Cash 11 10 (27) 135 135 3,379 647 3,331 48 48 695 1) 9-13 21 4-7 3 3 Developed non-core technology In-process R&D Trade name 72 16-18 3 Other 6 732 Customer relationships 1-3 1,186 For the period from March 10 to December 31, 2008, Respironics contributed Sales of EUR 831 million and EUR 10 million to Income from operations. VISICU On February 20, 2008, Philips acquired 100% of the shares of VISICU, a leading IT company which develops remote patient monitoring systems. The acquisition of VISICU will facilitate the creation of products to provide increased clinical decision support to hospital staff, while allowing them to monitor a greater number of critically ill patients. Philips paid a total net cash consideration of EUR 198 million. As of the acquisition date, VISICU is consolidated as part of the Healthcare sector. The condensed balance sheet of VISICU, immediately before and after the acquisition date was as follows: before acquisition date1) after acquisition date Assets 3,379 Unaudited figures The goodwill recognized is related to the complementary technical skills and talent of the Respironics workforce and the synergies expected to be achieved from integrating Respironics into the Healthcare sector. Goodwill − 175 Other intangible assets Financed by Loans 355 Core technology (439) 695 Group equity amortization period in years (27) 35 amount − 33 Property, plant and equipment 1 − (2) (4) Other non-current financial assets 3 − Deferred tax assets/ liabilities 7 (4) Working capital Deferred revenue (25) (2) 74 74 58 Cash 272 58 272 Financed by Group equity 1) Unaudited figures This is a customized selection from the Annual Report 2010 137 13 Group financial statements 13.11 - 13.11 The goodwill recognized is related to the complementary technological skills and talent of VISICU’s workforce and the synergies expected to be achieved from integrating VISICU into the Healthcare sector. Other intangible assets comprised of the following: amount amortization period in years Core technology 20 7 In-process R&D 4 3 Patents and trademarks 1 6 Customer relationships 5 2-15 Backlog 3 1-3 33 For the period from February 20 to December 31, 2008, VISICU contributed EUR 10 million to Sales and a loss from operations of EUR 13 million. Pro forma disclosures on acquisitions The following table presents the 2008 year-to-date unaudited pro-forma results of Philips, assuming Genlyte, Respironics and VISICU had been consolidated as of January 1, 2008: Unaudited January-December 2008 Philips pro forma Group adjustments1) Sales Income from operations Net income (loss) Loss per share - in euros 1) 26,385 pro forma Philips Group 230 26,615 54 (29) 25 (91) (13) (104) (0.09) (0.10) Pro forma adjustments include sales, income from operations and net income from continuing operations of the three acquired companies from January 1, 2008 to the date of acquisition Set-Top Boxes and Connectivity Solutions On April 21, 2008, Philips completed the sale of its SetTop Boxes (STB) and Connectivity Solutions (CS) activities to the UK-based technology provider Pace Micro Technology (Pace). Philips received 64.5 million Pace shares, representing a 21.6% shareholding, with a market value of EUR 74 million at that date. Philips recognized a gain on this transaction of EUR 42 million which was recognized in Other business income. Two days later, Philips reduced its interest to 17%. The Pace shares were treated as available-for-sale financial assets and presented under Other non-current financial assets. In April 2009, Philips sold all shares in Pace. 138 This is a customized selection from the Annual Report 2010 Philips Speech Recognition Systems On September 28, 2008, Philips sold its speech recognition activities to the US-based Nuance Communications for EUR 65 million. Philips realized a gain of EUR 45 million on this transaction which was recognized in Other business income. 13 Group financial statements 13.11 - 13.11 7 7 Property, plant and equipment other equipment prepayments and construction in progress total 3,692 1,708 207 8,054 (1,013) (2,518) (1,271) 1,434 1,174 land and buildings machinery and installations 2,447 Balance as of January 1, 2010: Cost Accumulated depreciation Book value 437 − (4,802) 207 3,252 653 Change in book value: Capital expenditures 67 134 24 428 Assets available for use 24 212 126 (362) 1 2 5 (1 ) 7 (32) (32) (19) (4) (87) Depreciation (95) (357) (176) − (628) Impairments (18) (12) (20) − (50) Translation differences 48 46 19 5 118 Total changes (5) (7) (41) 66 13 273 8,325 Acquisitions Disposals and sales − Balance as of December 31, 2010: Cost 3,851 1,715 (1,057) (2,684) (1,319) 1,429 1,167 land and buildings Accumulated depreciation Book value 2,486 machinery and installations − (5,060) 396 273 3,265 other equipment prepayments and construction in progress total 3,576 1,746 347 (2,354) (1,299) Balance as of January 1, 2009: Cost Accumulated depreciation 2,396 (916) − 8,065 (4,569) 1,480 1,222 447 347 3,496 21 120 87 296 524 Assets available for use 32 285 117 (434) Acquisitions 17 12 12 5 Book value Change in book value: Capital expenditures − 46 Disposals and sales (15) (23) (11) (5) (54) Depreciation (89) (344) (192) − (625) Impairments (9) (84) (23) (5) (121) Translation differences (3) (14) − 3 (46) (48) (10) Total changes (140) (14) (244) Balance as of December 31, 2009: Cost Accumulated depreciation Book value 2,447 3,692 1,708 (1,013) (2,518) (1,271) 1,434 1,174 Land with a book value of EUR 193 million at December 31, 2010 (2009: EUR 186 million) is not depreciated. Property, plant and equipment include lease assets with a book value of EUR 156 million at December 31, 2010 (2009: EUR 128 million). The total book value of assets no 437 207 − 207 8,054 (4,802) 3,252 longer productively employed, mainly included in land and buildings, amounted to EUR 15 million at December 31, 2010 (2009: EUR 11 million). Included in the costs of land and buildings are assets held for sale amounting to EUR 213 million in 2010 with related accumulated depreciation of EUR 93 million. This is a customized selection from the Annual Report 2010 139 8 13 Group financial statements 13.11 - 13.11 The expected useful lives of property, plant and equipment are as follows: Buildings from 5 to 50 years Machinery and installations from 3 to 20 years Lease assets from 1 to 15 years Other equipment from 1 to 10 years Capitalized interest included in capital expenditures is not significant. Changes in expected useful lives and residual values have an insignificant effect on depreciation in current and future years. 8 Goodwill In 2010, the organizational structure of the Healthcare sector was changed. As a result of the change, part of the goodwill of Clinical Care Systems was allocated to Imaging Systems and the other part to Patient Care & Clinical Informatics (former Healthcare Informatics). Furthermore, Respiratory Hospital and related goodwill were transferred to Patient Care & Clinical Informatics. Goodwill allocated to the cash generating units Respiratory Care and Sleep Management, Professional Luminaires, Imaging Systems and Patient Care & Clinical Informatics is considered to be significant in comparison to the total book value of goodwill for the Group at December 31, 2010. The amounts allocated are presented below. Last year’s amounts are based on the revised 2010 structure for the Healthcare sector: The changes in 2009 and 2010 were as follows: 2010 Balance as of January 1: Cost Amortization / Impairments 7,952 (672) 8,021 (659) 7,280 7,362 Acquisitions 149 84 Impairments − − Book value Changes in book value: Translation differences (67) 589 Balance as of December 31: Cost Amortization / Impairments Book value 8,021 (659) 7,362 8,742 (707) 8,035 Acquisitions in 2010 include goodwill related to the acquisition of Discus Holdings, Inc. for EUR 47 million and several other companies. In addition, goodwill changed due to the finalization of purchase price accounting related to acquisitions in the prior year. Acquisitions in 2009 include goodwill related to the acquisition of Saeco for EUR 80 million and several other companies. In addition, goodwill changed due to the finalization of purchase price accounting related to acquisitions in the prior year. For impairment testing, goodwill is allocated to (groups of) cash-generating units (typically one level below operating sector level), which represent the lowest level at which the goodwill is monitored internally for management purposes. 140 This is a customized selection from the Annual Report 2010 2010 Respiratory Care and Sleep Management 1,995 2,209 Professional Luminaires 2009 2009 1,408 1,485 Imaging Systems 1,316 1,422 Patient Care & Clinical Informatics 1,189 1,297 The basis of the recoverable amount used in the annual (performed in the second quarter) and trigger-based impairment tests is the value in use. Key assumptions used in the impairment tests for the units in the table above were sales growth rates, adjusted income from operations and the rates used for discounting the projected cash flows. These cash flow projections were determined using management’s internal forecasts that cover an initial period from 2010 to 2015 that matches the period used for our strategic review. For the 2009 test, a shorter initial forecast period was used. Projections were extrapolated with stable or declining growth rates for a period of 5 years, after which a terminal value was calculated. For terminal value calculation, growth rates were capped at a historical long term average growth rate. The sales growth rates and margins used to estimate cash flows were based on past performance, external market growth assumptions and industry long-term growth averages. Adjusted income from operations in all units is expected to increase over the projection period as a result of volume growth and cost efficiencies. 13 Group financial statements 13.11 - 13.11 Cash flow projections of Respiratory Care and Sleep Management, Professional Luminaires, Imaging Systems and Patient Care & Clinical Informatics for 2010 were based on the following key assumptions (based on the annual impairment test performed in Q2): The following changes could, individually, cause the value in use to fall to the level of the carrying value: increase in pre-tax decrease in discount long-term rate, basis growth rate, points basis points in % compound sales growth rate1) initial extrapre-tax forecast polation terminal discount period period value rates Respiratory Care and Sleep Management Professional Luminaires 9.4 5.0 2.7 10.2 11.3 7.2 2.7 14.0 Imaging Systems 5.2 4.0 2.7 11.1 Patient Care & Clinical Informatics 6.5 5.4 2.7 12.1 1) Compound sales growth rate is the annualized steady growth rate over the forecast period The assumptions used for the 2009 cash flow projections, based on the 2009 organizational structure of the Healthcare sector, were as follows: in % compound sales growth rate1) extrapre-tax forecast polation terminal discount period period value rates Respiratory Care and Sleep Management 9.4 4.2 2.7 10.4 Professional Luminaires 8.0 4.9 2.7 3.8 3.0 2.7 Professional Luminaires 30 50 5 250 280 34 The results of the annual impairment test of Imaging Systems and Patient Care & Clinical Informatics have indicated that a reasonably possible change in key assumptions would not cause the value in use to fall to the level of the carrying value. Based on the Q4 trigger-based impairment test, it was noted that the headroom for the cash-generating unit Home Monitoring was EUR 26 million. An increase of 34 basis points in pre-tax discounting rate, a 50 basis points decline in the compound long term sales growth rate or a 6% decrease in terminal value would cause its value in use to fall to the level of its carrying value. The goodwill allocated to Home Monitoring at December 31, 2010 amounts to EUR 450 million. Please refer to section 13.9, Information by sector and main country, of this Annual Report for a specification of goodwill by sector. 14.0 Imaging Systems Respiratory Care and Sleep Management decrease in terminal value amount, % 10.0 1) Compound sales growth rate is the annualized steady growth rate over the forecast period These assumptions were based on the 2009 annual impairment test performed in the second quarter of last year, except for Respiratory Care and Sleep Management for which the figures were based on the Q4 test. Based on the annual test in 2010 the recoverable amounts of the cash generating units were estimated to be higher than the carrying amounts, and management therefore did not identify any impairments. Among the mentioned units, Respiratory Care and Sleep Management and Professional Luminaires have the highest amount of goodwill and the lowest excess of the recoverable amount over the carrying amount. The headroom of Respiratory Care and Sleep Management was estimated at EUR 100 million, the headroom of Professional Luminaires at EUR 600 million. This is a customized selection from the Annual Report 2010 141 9 9 13 Group financial statements 13.11 - 13.11 Intangible assets excluding goodwill other intangible assets The changes were as follows: other intangible assets product development software total Cost Accumulated amortization Accumulated amortization Book value 5,040 820 606 6,466 (1,484) (436) (385) (2,305) 3,556 384 221 4,161 Acquisitions and purchase price allocation adjustments Amortization/ deductions Impairment losses Translation differences Other Total changes Book value 64 131 219 (13) 76 1 359 Book Value 702 6,528 (1,137) (448) (466) (2,051) 3,884 357 236 4,477 14 188 91 293 Acquisitions and purchase price allocation adjustments Additions 102 25 − 127 (433) (165) (103) (701) 119 Impairment losses (3) (16) (3) (22) Translation differences (18) (4) − (22) (484) (155) (89) (728) (3) (13) − (16) 296 268 17 11 (2) 20 (11) 7 (26) 75 (12) 37 Other Total changes 5,486 1,046 665 7,197 (1,956) (587) (456) (2,999) 3,530 459 209 4,198 10 (1 ) − (328) 27 (15) 5,040 820 606 6,466 (1,484) (436) (385) (2,305) 3,556 384 221 4,161 9 (316) Balance as of December 31, 2009: Accumulated amortization Balance as of December 31, 2010: Accumulated amortization 805 Changes in book value: Cost Cost 5,021 Amortization/ deductions Changes in book value: Additions total Balance as of January 1, 2009: Cost Balance as of January 1, 2010: product development software Book Value The additions for 2010 contain internally generated assets of EUR 219 million and EUR 70 million for product development and software, respectively (2009: EUR 188 million, EUR 76 million). The acquisitions through business combinations in 2010 consist of the acquired intangible assets of Discus Holdings, Inc. for EUR 67 million and several other smaller acquisitions. The acquisitions through business combinations in 2009 mainly consist of the acquired intangible assets of Saeco for EUR 74 million. The amortization of Intangible assets is specified in note 1. 142 This is a customized selection from the Annual Report 2010 13 Group financial statements 13.11 - 13.11 10 Other intangible assets consist of: The estimated amortization expense for other intangible assets for each of the next five years are: December 31, 2009 December 31, 2010 accumulated amortization accumulated amortization gross Brand names 939 (212) 843 Customer relationships 2,581 (534) 2,839 1,472 (712) 1,743 (948) 48 (26) 61 (40) 5,040 (1,484) 5,486 309 2015 293 (762) Technology 384 2014 (206) 471 426 2013 gross 2011 2012 (1,956) Other The expected useful lives of the intangible assets excluding goodwill are as follows: Brand names 2-20 years Customer relationships 2-25 years Technology 3-20 years Other 1-8 years Software 3 years Development 3-5 years The expected weighted average remaining life of other intangible assets is 9.1 years as of December 31, 2010 (2009: 11.3 years). The Group assessed the useful life of intangible assets with indefinite lives and reviewed the amortization period for intangible assets with definite lives. This assessment resulted in the following changes in amortization expense, mainly recognized in cost of sales, for 2010 and future years: in thousands of euros 2010 2011 2012 2013 2014 later Increase in amortization expense 16 15 15 15 15 196 The unamortized costs of computer software to be sold, leased or otherwise marketed amounted to EUR 82 million (2009: EUR 95 million). The amounts charged to the Consolidated statements of income for amortization or impairment of these capitalized computer software costs amounted to EUR 25 million (2009: EUR 38 million). 10 Non-current receivables Non-current receivables include receivables with a remaining term of more than one year, and the noncurrent portion of income taxes receivable amounting to EUR 2 million (2009: EUR 2 million). This is a customized selection from the Annual Report 2010 143 11 13 Group financial statements 13.11 - 13.11 11 Other non-current financial assets Main investments in available-for-sale financial assets consist of: The changes during 2010 are as follows: financial assets availaheld-to- at fair value ble-forsale maturity through investprofit or financial loans and receivables ments loss assets Balance as of January 1, 2010 581 76 2 32 2009 691 (44) (17) − 22 (39) Acquisitions/ additions 25 10 − 1 (387) (22) − (2) (411) Value adjustments 179 − − 5 184 8 6 − 4 carrying value 854,313,000 207 − − TPO Displays 677,839,047 81 − − − − 85,891,073 89 85 162,855,739 63 Chimei Innolux TCL Corporation 162,855,739 − 61 − − 434 CBAY1) − 152 18 1) Translation and exchange differences Balance as of December 31, 2010 362 53 2 62 Reclassifications Reclassifications include the 3.0% retained interest in TPV Technology Ltd (TPV) which was reclassified from Investments in associates subsequent to the sale of 9.4% of the TPV shares to a third party. For further details, please refer to note 4. Additionally they include the reclassification of the CBAY investment (EUR 77 million) from Other non-current financial assets (included in available-for-sale financial assets) to Current financial assets prior to redemption in October, 2010. For further details, please refer to note 14. Investments in available-for-sale financial assets The Company’s investments in available-for-sale financial assets mainly consists of investments in common stock of companies in various industries. 144 number of shares 36 Sales/ redemptions/ reductions carrying value NXP total Changes: Reclassifications 2010 number of shares This is a customized selection from the Annual Report 2010 479 CBAY is the underlying bond within the convertible instrument During 2010, Philips reduced its shareholding portfolio of available-for-sale financial assets by selling its entire interest in NXP. On December 31, 2009 Philips held 19.8% of the common shares in NXP Semiconductors B.V. (NXP). The interest in NXP resulted from the sale of a majority stake in the Semiconductors division in September 2006. Until August 5, 2010 NXP was a privately-held company that was not quoted in any active market and consequently carried at impaired cost because the fair value could not be reliably determined. Until that date Philips performed impairment reviews on the carrying value of the investment in NXP. According to IAS 39, if there is objective evidence that an impairment loss has been incurred for an unquoted equity investment carried at cost, the amount of the impairment loss is measured as the difference between the carrying amount of the investment and the present value of the estimated discounted future cash flows. The discounted future cash flows for NXP were estimated using various valuation techniques including multiplier calculations (‘EBITDA multiples’), calculations based on the share price performance of a peer group of listed (semiconductor) companies and discounted cash-flow models based on unobservable inputs. The latter methodology involved estimates of revenues, expenses, capital spending and other costs, as well as a discount rate calculated from the risk profile of the semiconductor industry. At the end of the first quarter of 2009, impairment charges were recognized in the amount of EUR 48 million, which resulted in a carrying amount of EUR 207 million, being management’s best estimate of future cash flows for the NXP investment at that time. 13 Group financial statements 13.11 - 13.11 12 13 14 15 Based on the impairment reviews performed between the end of the first quarter 2009 and August 5, 2010 it was concluded that no further impairments were necessary. On August 6, 2010 NXP completed an initial public offering (IPO) of newly issued common shares at the NASDAQ. The consequence of this IPO was firstly that the interest held by Philips was diluted to 17% and secondly that a reliable measure became available in order to fair value the NXP shares held by Philips. The difference between the fair value determined on the basis of the initial offering price (EUR 455 million) and the impaired cost (EUR 207 million) was recorded in equity (Other comprehensive income) in August 2010. Subsequent changes in the fair value until September 7, 2010 were also recognized in equity. On September 7, 2010 Philips sold its entire holding of common shares in NXP to Philips Pension Trustees Limited (herein after referred to as “UK Pension Fund”) for a consideration of EUR 361 million which was 8% below the fair value determined on the stock price as of the close of the previous business day. The transaction resulted in a gain of EUR 154 million, reported under Financial income. Innolux Corporation (Chimei Innolux). The shares held by Philips in TPO Displays were exchanged into shares of Chimei Innolux. Valuation differences between the shares were recognized in Other comprehensive income. Loans and receivables Loans and receivables mainly relate to restricted liquid assets. 12 Other non-current assets in 2010 are comprised of prepaid pension costs of EUR 14 million (2009: EUR 1,518 million) and prepaid expenses of EUR 61 million (2009: EUR 25 million). The decrease of the prepaid pension cost in 2010 is attributable to the pension plan in the Netherlands, the surplus of which no longer is recognized as an asset. For further details see note 28. 13 On March 18, 2010 TPO Displays Corp. (TPO Displays) merged with Innolux Display Corp. and Chi Mei Optoelectronics into a new company named Chimei Inventories Inventories are summarized as follows: 2009 2010 Raw materials and supplies 871 1,131 Work in process 408 510 1,634 2,224 2,913 The purchase agreement with the UK Pension Fund includes an arrangement that may entitle Philips to a cash payment from the UK Pension Fund on or after September 7, 2014 if the value of the NXP shares has increased by this date to a level in excess of a predetermined threshold, which at the time of the transaction was substantially above the transaction price, and the UK Pension Fund is in a surplus (on the regulatory funding basis) on September 7, 2014. The arrangement qualifies as a financial instrument, which must be accounted for at fair value, with fair value changes to be reported in financial income and expenses. The fair value of the arrangement was estimated to be zero at the transaction date. As of December 31, 2010, the share price of NXP exceeded the threshold in the arrangement, however, the UK Pension Fund was still in a regulatory deficit position on this date. Management estimates, based on the risks, the current progress and the long term nature of the recovery plan, that it is still highly uncertain that the UK Pension Fund will achieve a regulatory surplus by September 7, 2014. Therefore, the fair value of the arrangement on December 31, 2010 is estimated to be zero. Other non-current assets 3,865 Finished goods The amounts recorded above are net of allowances for obsolescence. In 2010, the write-down of inventories to net realizable value amounted to EUR 228 million (2009: EUR 219 million). The write-down is included in cost of sales. 14 Current financial assets Other current financial assets were EUR 5 million as at December 31, 2010 (2009: EUR 191 million). During 2010, two convertible bonds previously issued to Philips by TPV Technology Limited and CBAY were redeemed generating a total of EUR 239 million cash inflow. During 2010, a fair value loss of EUR 21 million was recognized in financial income and expense, mainly related to these instruments. 15 Other current assets Other current assets include prepaid expenses of EUR 348 million (2009: EUR 334 million). This is a customized selection from the Annual Report 2010 145 13 Group financial statements 13.11 - 13.11 16 17 16 Current receivables The accounts receivable, net, per sector are as follows: 2009 2010 Healthcare 1,571 1,848 Consumer Lifestyle 1,096 1,082 909 1,072 Lighting Group Management & Services 93 102 3,669 4,104 The aging analysis of accounts receivable, net, is set out below: 2009 current 2010 3,075 3,439 overdue 1-30 days 307 297 overdue 31-180 days 241 283 overdue > 180 days 46 85 3,669 4,104 elected for a share dividend, resulting in the issuance of 13,667,015 new common shares. The settlement of the cash dividend resulted in a payment of EUR 304 million. Preference shares The ‘Stichting Preferente Aandelen Philips’ has been granted the right to acquire preference shares in the Company. Such right has not been exercised. As a means to protect the Company and its stakeholders against an unsolicited attempt to acquire (de facto) control of the Company, the General Meeting of Shareholders in 1989 adopted amendments to the Company’s articles of association that allow the Board of Management and the Supervisory Board to issue (rights to acquire) preference shares to a third party. As of December 31, 2010, no preference shares have been issued. Option rights/restricted shares The Company has granted stock options on its common shares and rights to receive common shares in the future (see note 29). Treasury shares A large part of overdue trade accounts receivable relates to public sector customers with slow payment approval processes. The allowance for doubtful accounts receivable has been primarily established for receivables that are past due. The changes in the allowance for doubtful accounts receivable are as follows: 2008 2009 2010 300 280 261 Additions charged to income 33 23 24 Deductions from allowance (63) (58) (37) 10 16 36 280 261 284 Balance as of January 1 1) Other movements2) Balance as of December 31 1) 2) 17 Write-offs for which an allowance was previously provided Including the effect of translation differences and consolidation changes Shareholders’ equity Common shares As of December 31, 2010, the issued and fully paid share capital consists of 986,078,784 common shares, each share having a par value of EUR 0.20. In April 2010, Philips settled a dividend of EUR 0.70 per common share, representing a total value of EUR 650 million. Shareholders could elect for a cash dividend or a share dividend. Approximately 53% of the shareholders 146 This is a customized selection from the Annual Report 2010 In connection with the Company’s share repurchase programs, shares which have been repurchased and are held in treasury for (i) delivery upon exercise of options and convertible personnel debentures and under restricted share programs and employee share purchase programs, and (ii) capital reduction purposes, are accounted for as a reduction of shareholders’ equity. Treasury shares are recorded at cost, representing the market price on the acquisition date. When issued, shares are removed from treasury shares on a first-in, first-out (FIFO) basis. Any difference between the cost and the cash received at the time treasury shares are issued, is recorded in capital in excess of par value, except in the situation in which the cash received is lower than cost and capital in excess of par has been depleted. 13 Group financial statements 13.11 - 13.11 Limitations in the distribution of shareholders’ equity The following transactions took place resulting from employee option and share plans: 2009 Shares acquired Average market price Amount paid Shares delivered Average market price Amount received Total shares in treasury at year-end Total cost 2010 2,128 15,237 EUR 19.10 EUR 25.35 − − 4,477,364 5,397,514 EUR 13.76 EUR 23.99 EUR 32 million EUR 71 million 43,102,679 37,720,402 EUR 1,162 million EUR 1,051 million In 2009 and 2010 there were no transactions to reduce share capital: 2009 2010 Shares acquired − − Average market price − − Amount paid − − Reduction of capital stock − − Total shares in treasury at year-end Total cost 1,851,998 1,851,998 EUR 25 million EUR 25 million Net income attributable to shareholders A proposal will be submitted to the General Meeting of Shareholders to pay a dividend of EUR 0.75 per common share, in cash or shares at the option of the shareholder, against the net income attributable to shareholders for 2010. Pursuant to Dutch law, limitations exist relating to the distribution of shareholders’ equity of EUR 1,500 million (2009: EUR 1,310 million). Such limitations relate to common shares of EUR 197 million (2009: EUR 194 million) as well as to legal reserves required by Dutch law included under revaluation reserves of EUR 86 million (2009: EUR 102 million), retained earnings of EUR 1,078 million (2009: EUR 884 million) and other reserves of EUR 139 million (2009: EUR 130 million). In general, gains related to available-for-sale financial assets, cash flow hedges and currency translation differences cannot be distributed as part of shareholders’ equity as they form part of the legal reserves protected under Dutch law. By their nature, losses relating to available-for-sale financial assets, cash flow hedges and currency translation differences, reduce shareholders’ equity, and thereby distributable amounts. Therefore, gains related to available-for-sale financial assets (2010: EUR 139 million) included in other reserves limit the distribution of shareholders’ equity. The losses related to cash flow hedges (2010: EUR 5 million) and currency translation differences (2010: EUR 65 million) reduce the distributable amount. The legal reserve required by Dutch law of EUR 1,078 million (2009: EUR 884 million) included under retained earnings relates to any legal or economic restrictions on the ability of affiliated companies to transfer funds to the parent company in the form of dividends. This is a customized selection from the Annual Report 2010 147 18 18 13 Group financial statements 13.11 - 13.11 Long-term debt and short-term debt Long-term debt (range of) average rate of interest rates interest amount outstanding due in 1 year due after 1 year average due after 5 remaining term (in years) years amount outstanding 2009 Eurobonds 6.1% 6.1% 750 750 − − − 750 USD bonds 1.4 - 7.8% 5.7% 2,687 262 2,425 1,943 12.0 2,494 51 Convertible debentures 0.3% 0.3% 38 38 − − − Private financing 1.0 - 2.0% 1.0% 1 − 1 − 1.5 7 Bank borrowings 0.4 - 14.8% 3.1% 268 10 258 7 3.2 277 Finance leases 0.0 - 13.8% 2.3% 164 43 121 36 4.7 138 Other long-term debt 1.3 - 18.1% 5.4% 2.3 Corresponding data of previous year 64 13 − 1,154 2,818 1,986 3,786 3,786 5.5% 51 3,972 146 3,640 1,848 3,602 The following amounts of long-term debt as of December 31, 2010, are due in the next five years: 2011 1,154 2012 46 2013 508 2014 11 Total In 2010, EUR 3.7 million of long-term and short-term debt was secured by collateral of EUR 3.8 million manufacturing assets (2009: EUR 3.5 million of long-term and short-term debt was secured by collateral of EUR 3.7 million manufacturing assets). 1,986 Corresponding amount of previous year Secured liabilities 267 2015 1,710 Short-term debt 2009 Short-term bank borrowings Other short-term loans 2009 2010 6.122% 750 Unsecured USD Bonds Due 5/15/25; 7 3/4% 7.429% 69 74 Due 6/01/26; 7 1/5% 6.885% 115 124 Due 8/15/13; 7 1/4% 6.382% 99 107 Due 5/15/25; 7 1/8% 6.794% 71 77 Due 03/11/11; 3 3/8%1) 3.128% 243 262 Due 03/11/13; 4 5/8%1) 4.949% 347 374 Due 03/11/18; 5 3/4%1) 6.066% 868 935 Due 03/11/38; 6 7/8%1) 7.210% 694 748 Adjustments2) (12) 2,494 1) 2) 462 670 19 16 146 1,154 1,840 750 Unsecured Eurobonds Due 5/16/11; 6 1/8% 2010 627 effective rate 148 69 (14) 2,687 The provisions applicable to these bonds, issued in March 2008, contain a ‘Change of Control Triggering Event’. If the Company would experience such an event with respect to a series of corporate bonds, the Company may be required to offer to purchase the bonds of the series at a purchase price equal to 101% of the principal amount, plus accrued and unpaid interest, if any. Adjustments relate to issued bond discounts, transaction costs and fair value adjustments for interest rate derivatives This is a customized selection from the Annual Report 2010 Current portion of long-term debt During 2010, the weighted average interest rate on the bank borrowings was 8.5% (2009: 8.1%). In the Netherlands, the Company issued personnel debentures with a 5-year right of conversion into common shares of Royal Philips Electronics. Convertible personnel debentures may not be converted within a period of 3 years after the date of issue. These convertible personnel debentures were available to most employees in the Netherlands and were purchased by them with their own funds and were redeemable on demand. The convertible personnel debentures become nonconvertible debentures at the end of the conversion period. 13 Group financial statements 13.11 - 13.11 19 Although convertible debentures have the character of long-term financing, the total outstanding amounts are classified as current portion of long-term debt. At December 31, 2010, an amount of EUR 38 million (2009: EUR 51 million) of convertible personnel debentures was outstanding, with an average conversion price of EUR 21.15. The conversion price varies between EUR 14.19 and EUR 31.59 with various conversion periods ending between January 1, 2011 and December 31, 2013. As of January 1, 2009, Philips no longer issues these debentures. Product warranty The provision for product warranty reflects the estimated costs of replacement and free-of-charge services that will be incurred by the Group with respect to products sold. The Group expects the provision will be utilized mostly within the next year. The changes in the provision for product warranty are as follows: 2008 Balance as of January 1 Furthermore, Philips has a USD 2.5 billion Commercial Paper Program; a EUR 1.8 billion committed revolving facility that can be used for general corporate purpose, and a committed bilateral loan of EUR 200 million. As of December 31, 2010 Philips did not have any loans outstanding under any of these facilities. 19 2009 2010 323 310 335 Changes: Additions Utilizations Translation differences Changes in consolidation Balance as of December 31 333 333 309 (357) (324) (312) (3) 3 16 14 13 − 310 335 348 Loss contingencies (environmental remediation and product liability) Provisions 2009 2010 longterm shortterm longterm shortterm Provisions for defined-benefit plans (see note 28) 669 61 719 52 Other postretirement benefits (see note 28) 296 21 297 21 Postemployment benefits and obligatory severance payments 106 29 95 21 Product warranty 108 227 94 254 Loss contingencies (environmental remediation and product liability) 186 14 222 28 78 318 49 177 This provision primarily includes accrued losses recorded with respect to environmental remediation and asbestos product liability. The asbestos liability was settled in 2009. At December 31, 2010, the provision relates to environmental remediation. Approximately half of this provision is expected to be utilized within the next 5 years. The remaining portion relates to longer-term remediation activities. Restructuring-related provisions Other provisions The changes in this provision are as follows: 2008 Balance as of January 1 291 46 240 70 1,734 716 1,716 623 Postemployment benefits and obligatory severance payments The provision for postemployment benefits covers benefits provided to former or inactive employees after employment but before retirement, including salary continuation, supplemental unemployment benefits and disability-related benefits. The provision for obligatory severance payments covers the Group’s commitment to pay employees a lump sum upon the employee’s dismissal or resignation. In the event that a former employee has passed away, the Group may have a commitment to pay a lump sum to the deceased employee’s relatives. 2009 2010 451 812 200 Changes: Additions 318 25 50 Utilizations (15) (583) (8) Releases 37 − (2) Translation differences 21 (54) 10 812 200 250 Balance as of December 31 Restructuring-related provisions The most significant projects in 2010 The restructuring charges in 2010 were mainly attributable to the operating sectors. • Within Healthcare, the largest projects were reorganizations of the commercial organizations in Imaging Systems (Germany, Netherlands, and the US). • Consumer Lifestyle restructuring charges were mainly in Television, particularly in China due to the brand licensing agreement with TPV. This is a customized selection from the Annual Report 2010 149 13 Group financial statements 13.11 - 13.11 • Restructuring projects in Lighting were focused on reduction of production capacity in traditional lighting technologies, such as incandescent. The largest projects were in Brazil, France, and the US. The movements in the provisions and liabilities for restructuring in 2010 are presented by sector as follows: Dec. 31, 2009 additions utilized Healthcare 24 63 Consumer Lifestyle 142 Lighting 164 GM&S reother leased changes1) Dec. 31, 2010 (17) 2 32 (78) (14) (7) 75 65 (128) (26) (5) 70 66 11 (30) (20) 21 48 171 (275) (77) 11 226 Other changes primarily relate to translation differences and transfers between sectors The most significant projects in 2009 • Healthcare initiated various restructuring projects aimed at reduction of the fixed cost structure, mainly impacting Imaging Systems (Netherlands), Home Healthcare Solutions and Clinical Care Systems (various locations in the US). • Consumer Lifestyle restructuring projects focused on Television (primarily Belgium and France), Peripherals & Accessories (mainly Technology & Development in the Netherlands) and Domestic Appliances (mainly Singapore and China). • Restructuring projects at Lighting aimed at further increasing organizational effectiveness, and centered on Lamps. The largest restructuring projects were in the Netherlands, Belgium, Poland and various locations in the US. • In Group Management & Services restructuring projects focused on reducing the fixed cost structure of Corporate Research Technologies, Philips Information Technology, Philips Design, and Corporate Overheads. In 2009, restructuring provisions of EUR 81 million were released, mainly as a result of transferring employees within the Group and the release of a restructuring provision in conjunction with the sale of Hoffmeister (Lighting). While all these projects have been communicated, many of these projects have been completed in 2010 and will be completed early 2011, and will affect approximately 5,000 employees. 150 Dec. 31, 2008 This is a customized selection from the Annual Report 2010 additions utilized reother leased changes1) Healthcare 58 37 (61) (11) Consumer Lifestyle 137 134 (109) Lighting 135 186 (116) GM&S 42 68 372 425 33 396 1) (39) The movements in the provisions and liabilities for restructuring in 2009 are presented by sector as follows: 1) Dec. 31, 2009 1 24 (23) 3 142 (41) − 164 (37) (6) (1) 66 (323) (81) 3 396 Other changes primarily relate to translation differences The most significant projects in 2008 • Healthcare’s restructuring projects were undertaken to reduce operating costs and simplify the organization. The projects affected many locations, most notably sites in Hamburg (Germany), Helsinki (Finland) and Andover (US). • Consumer Lifestyle’s main projects primarily relate to the integration of the former DAP and CE businesses, the exit of TV in North America, the restructuring and subsequent sale of the Television factory in Juarez (Mexico) and the optimization of the European supply footprint within almost all businesses. • In Lighting, over 60 restructuring projects were active during 2008 and a total amount of EUR 156 million was added to the provision and liability for restructuring. A significant portion of the charge related to actions taken to address the ongoing shift from incandescent bulbs to energy-efficient lighting solutions. Other main projects within the Lighting sector included the closure of lamp phosphor production in Maarheeze (the Netherlands), the consolidation of production activities from Fairmont to Salina (US), the reorganization of the wire & lead coiling activities in Turnhout (Belgium) and Maarheeze (the Netherlands), the reorganization of R&D activities within traditional lighting, mainly in Turnhout (Belgium) and Roosendaal (the Netherlands), and the reorganization and staff reductions of the headquarters in Eindhoven (the Netherlands). Other smaller projects in Lighting, in various locations, were aimed at further increasing organizational effectiveness and reducing the fixed cost base. • Within Group Management & Services, most of the costs relate to the move of the US country organization headquarters from New York to Andover, initiated in 2007, and the restructuring of Assembleon. 13 Group financial statements 13.11 - 13.11 20 21 22 The movements in the provisions and liabilities for restructuring in 2008 are presented by sector as follows: Dec. 31, 2007 additions utilized 21 Accrued liabilities Accrued liabilities are summarized as follows: Dec. 31, 2008 2009 2010 - Salaries and wages 392 474 - Accrued holiday entitlements 168 184 - Other personnel-related costs 190 183 - Gas, water, electricity, rent and other 55 70 Other taxes payable 10 11 Communication & IT costs reother leased changes 13 10 Distribution costs 73 91 Personnel-related costs: Healthcare − 62 (2 ) − (2) 58 Consumer Lifestyle 10 174 (48) − 1 137 Lighting 14 156 (34) (2) 1 135 GM&S 20 35 (12) − (1) 42 44 427 (96) (2) (1) 372 Fixed-asset-related costs: Other provisions Other provisions include provisions for employee jubilee funds totaling EUR 80 million (2009: EUR 77 million), selfinsurance liabilities of EUR 64 million (2009: EUR 65 million), liabilities related to business combinations totaling EUR 24 million (2009: EUR 46 million) and provisions for expected losses on existing projects/orders of EUR 7 million (2009: EUR 10 million). The Group expects to utilize the liabilities related to business combinations and self-insurance liabilities mainly within the next three years, and the provision for expected losses on existing projects/orders mainly within the next year. The provisions for employee jubilee funds and all other provisions are expected to be mainly utilized within the next five years. 20 Sales-related costs: - Commission payable 52 56 - Advertising and marketing-related costs 92 139 - Other sales-related costs 183 145 Material-related costs 165 197 Interest-related accruals Deferred income Other accrued liabilities 87 87 651 807 22 609 541 2,740 2,995 Other current liabilities Other current liabilities are summarized as follows: 2009 Accrued pension costs Income tax payable 1,307 2010 Advances received from customers on orders not covered by work in process 243 291 275 227 Other short-term liabilities 185 236 703 Other non-current liabilities are summarized as follows: 2010 Other taxes including social security premiums Other non-current liabilities 2009 754 1,044 1 1 25 28 Other tax liability 486 483 Other liabilities 110 158 1,929 1,714 Asset retirement obligations The decrease in the accrued pension costs is mainly attributable to the funding of the UK plan. See also note 28. Please refer to note 3 for a specification on the income tax payable. This is a customized selection from the Annual Report 2010 151 13 Group financial statements 13.11 - 13.11 23 24 23 Finance lease liabilities Contractual obligations 2009 Contractual cash obligations at December 31, 2010 in millions of euros future minimum lease payments payments due by period total less than 1 year 1-3 years 3-5 years after 5 years 3,808 1,111 493 254 1,950 178 44 65 29 40 Short-term debt 686 686 − − − Operating leases1) 640 173 234 123 110 Long-term debt1) Finance lease obligations1) 1,4) Derivative assets and liabilities1) 472 47 374 51 Interest on debt 1,596 161 207 190 3,691 3,691 − − − 11,071 5,913 1,373 647 3,138 1) 2) 3) 4) Short-term debt, long-term debt, lease obligations and derivatives are included in the Company’s consolidated balance sheet Approximately 45% of the debt bears interest at a floating rate. Interest on debt has been estimated based upon average rates in 2010 Excluding derivatives, shown separately Excluding current portion of long-term debt The estimated total purchase obligations as of December 31, 2010, amount to EUR 365 million. This amount can be split in EUR 324 million with a payment due in less than 1 year, EUR 17 million due in 1-3 years, EUR 6 million due in 3-5 years and EUR 18 million due in more than 5 years. 33 1 32 44 1 43 73 8 65 94 9 85 More than five years 24 47 6 41 40 4 36 153 15 138 178 14 164 Contingent liabilities Guarantees Philips’ policy is to provide guarantees and other letters of support only in writing. Philips does not stand by other forms of support. At the end of 2010, the total fair value of guarantees recognized by Philips in other non-current liabilities was EUR 9 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, 2010. Long-term operating lease commitments totaled EUR 640 million (2009: EUR 666 million). These leases expire at various dates during the next 20 years. The long-term operating leases are mainly related to the rental of buildings. Expiration per period A number of these leases originate from sale-andleaseback arrangements. Operating lease payments under sale-and-leaseback arrangements for 2010 totaled EUR 16 million (2009: EUR 17 million). The remaining minimum payments from operating leases originating from sale-and-leaseback arrangements are as follows: 2009 2011 16 2012 16 2013 16 2014 16 2015 12 Thereafter 152 future minimum lease payments Between one and five years 1,038 Trade and other payables3) present value of minimum lease payinterest ments Less than one year − 2) 2010 present value of minimum lease payinterest ments 48 This is a customized selection from the Annual Report 2010 in millions of euros businessrelated guarantees creditrelated guarantees total Total amounts committed 302 49 351 Less than 1 year 100 22 122 1-5 years 133 8 141 69 19 88 Total amounts committed 266 42 308 Less than 1 year 134 31 165 1-5 years 70 5 75 After 5 years 62 6 68 2010 After 5 years Environmental remediation The Company and its subsidiaries are subject to environmental laws and regulations. Under these laws, the Company and/or its subsidiaries may be required to remediate the effects of the release or disposal of certain chemicals on the environment. The Company accrues for 13 Group financial statements 13.11 - 13.11 losses associated with environmental obligations when such losses are probable and reliably estimable. Such amounts are recognized on a discounted basis since they reflect the present value of estimated future cash flows. Provisions for environmental remediation can change significantly due to the emergence of additional information regarding the extent or nature of the contamination, the need to utilize alternative technologies, actions by regulatory authorities and changes in judgments, assumptions, and discount rates. The Company and/or its subsidiaries have recognized environmental remediation provisions for sites in various countries. In the United States, subsidiaries of the Company have been named as potentially responsible parties in state and federal proceedings for the clean-up of certain sites. Legal proceedings The Company and certain of its group companies and former group companies are involved as a party in legal proceedings, including regulatory and other governmental proceedings, including discussions on potential remedial actions, relating to such matters as competition issues, commercial transactions, product liability, participations and environmental pollution. In respect of antitrust laws, the Company and certain of its (former) group companies are involved in investigations by competition law authorities in several jurisdictions and are engaged in litigation in this respect. Since the ultimate disposition of asserted claims and proceedings and investigations cannot be predicted with certainty, an adverse outcome could have a material adverse effect on the Company’s consolidated financial position, results of operations and cash flows. Provided below are disclosures of the more significant cases: LG Display On December 11, 2006, LG Display Co. Ltd (formerly LG Philips LCD Co. Ltd.), a company in which the Company then held a minority common stock interest, announced that officials from the Korean Fair Trade Commission had visited the offices of LG Display and that it had received a subpoena from the United States Department of Justice (DOJ) and a similar notice from the Japanese Fair Trade Commission in connection with inquiries by those regulators into possible anticompetitive conduct in the LCD industry. The Company sold its remaining shareholding in LG Display on March 11, 2009 and subsequently no longer holds shares in LG Display. On March 6, 2009, the Washington State Attorney General’s Office (the ‘Washington AG’) issued a Civil Investigative Demand (CID) to Philips Electronics North America Corporation (PENAC) pursuant to which PENAC was requested, among other things, to produce documents and to provide answers to interrogatories concerning the sale of thin-film transistor liquid crystal display panels (TFT-LCD panels) and the sale of TFT-LCD products. PENAC was also requested to provide to the Washington AG any documents previously produced to the DOJ as part of the DOJ’s ongoing investigation into the TFT-LCD industry. After discussions with the Washington AG, the Washington AG agreed to allow PENAC, instead of responding to the CID, to provide the limited amount of aggregate sales data and component data that was previously provided to the plaintiffs in the direct purchaser plaintiff’s class action. On March 27, 2009, PENAC produced that information to the Washington AG. Thereafter, PENAC provided the same information to the Missouri Attorney General’s Office and the Illinois Attorney General’s Office in response to a CID and subpoena issued, respectively, on March 18, 2009 and April 2, 2009 to PENAC. On May 28, 2009, the Company received a Statement of Objections from the European Commission. In this document the European Commission alleges that the Company is jointly and severally liable for the anticompetitive conduct of LG Display, in the market of LCDs, for the period in which the Company, according to the European Commission, exercised joint control. On July 28, 2009, the Company filed its Reply to the Statement of Objections, in which it vigorously opposed this allegation. On December 8, 2010, the European Commission announced its decision and imposed fines on six LCD panel producers but not on the Company. No Philips group company was an addressee of the decision and, as such, no finding of anti-competitive behavior has been made against any Philips group company. On February 11, 2011, the European Commission has formally closed the proceedings against the Company. Subsequent to the public announcement of these inquiries, certain Philips group companies were named as defendants in a number of class action antitrust complaints filed in the United States courts, seeking, among other things, damages on behalf of purchasers of products incorporating TFT-LCD panels, based on alleged anticompetitive conduct by manufacturers of such panels. Those lawsuits were consolidated in two master actions in the United States District Court for the Northern District of California: one, asserting a claim under federal antitrust law, on behalf of direct purchasers of TFT-LCD panels and products containing such panels, and another, This is a customized selection from the Annual Report 2010 153 13 Group financial statements 13.11 - 13.11 asserting claims under federal antitrust law, as well as various state antitrust and unfair competition laws, on behalf of indirect purchasers of such panels and products. On November 5, 2007 and September 10, 2008, the Company and certain other companies within the Philips group companies that were named as defendants in various of the original complaints entered into agreements with the indirect purchaser plaintiffs and the direct purchaser plaintiffs, respectively, that generally toll the statutes of limitations applicable to plaintiffs’ claims, following which the plaintiffs agreed to dismiss without prejudice the claims against the Philips defendants. On December 5, 2008, following the partial grant of motions to dismiss consolidated class action complaints in the master actions, the plaintiffs filed amended consolidated class action complaints, asserting essentially the same legal claims as those alleged in the prior complaints. On December 2, 2009, the direct purchaser plaintiffs filed a third consolidated class action complaint under seal. None of the companies within the Philips group of companies currently is named as a defendant in the pending amended complaints, although the Company and PENAC are named as co-conspirators with named defendants in the indirect purchaser case, but the litigation is continuing. In addition, a number of plaintiffs have filed separate, individual actions alleging essentially the same claims as those asserted in the class actions. The Company and PENAC are named as defendants in the actions brought by Best Buy Co. Inc. (and related entities) and Costco Wholesale Corporation, and PENAC also is named as a defendant in the action brought by Nokia Corporation and Nokia, Inc. Most of these actions have been designated as related to the consolidated actions already pending before Judge Illston in the United States District Court for the Northern District of California and have been consolidated for pre-trial purposes with the class actions. On November 23, 2009, Nokia Corporation also filed a claim in the UK courts against 25 defendants including three Philips entities (Koninklijke Philips Electronics N.V., Philips Components B.V. and Philips Components International B.V.). Nokia Corporation is seeking damages in respect of alleged losses it suffered as a result of alleged anti-competitive behavior of manufacturers of LCD-TFT panels. Due to the considerable uncertainty associated with these matters, on the basis of current knowledge, the Company has concluded that potential losses cannot be reliably estimated with respect to these matters. An adverse final 154 This is a customized selection from the Annual Report 2010 resolution of these investigations and litigation could have a materially adverse effect on the Company’s consolidated financial position, results of operations and cash flows. Cathode-Ray Tubes (CRT) On November 21, 2007, the Company announced that competition law authorities in several jurisdictions have commenced investigations into possible anticompetitive activities in the Cathode-Ray Tubes, or CRT industry. As one of the companies that formerly was active in the CRT business, Philips is subject to a number of these ongoing investigations. The Company has assisted the regulatory authorities in these investigations. In November 2009, the European Commission sent a Statement of Objections to Philips, indicating that it intends to hold Philips liable for antitrust infringements in the CRT industry. On May, 26 and May, 27, 2010, Philips presented its defense at the Oral Hearing. The EC decision is expected sometime in 2011. In the US, the Department of Justice has deferred Philips’ obligation to respond to the grand jury subpoena Philips received in November of 2007. On August 27, 2010, the Czech competition authority issued a decision in which it held that the Company had been engaged in anticompetitive activities with respect to Color Picture Tubes in the Czech Republic between September 21, 1999 and June 30, 2001. This decision is currently under appeal. No fine was imposed because the statute of limitation for the imposition of fine had expired. Subsequent to the public announcement of these investigations in 2007, certain Philips group companies were named as defendants in over 50 class action antitrust complaints filed in various federal district courts in the United States. These actions allege anticompetitive conduct by manufacturers of CRTs and seek treble damages on behalf of direct and indirect purchasers of CRTs and products incorporating CRTs. These complaints assert claims under federal antitrust law, as well as various state antitrust and unfair competition laws and may involve joint and several liability among the named defendants. These actions have been consolidated by the Judicial Panel for Multidistrict Litigation for pre-trial proceedings in the United States District Court for the Northern District of California. On March 30, 2010, the District Court adopted the Special Master’s Report and Recommendation denying the bulk of the motions to dismiss filed on behalf of all Philips entities in response to both the direct and indirect purchaser actions in the federal class actions pending in the Northern District of California. These cases have now proceeded to discovery. The Court has not set a trial date 13 Group financial statements 13.11 - 13.11 25 and there is no timetable for the resolution of these cases. Philips intends to continue to vigorously defend these lawsuits. Consolidated amended complaints were filed on August 26, 2010. Motions to dismiss these complaints have been filed by various other defendants and a hearing has been set. The motions seek to dismiss all claims against these defendants on various grounds. The Company, PLDS and Philips & Lite-On Digital Solutions USA, Inc. have not yet been required to move to dismiss or otherwise respond to the consolidated amended complaints. Discovery is being permitted to move forward, but is in preliminary stages. Philips intends to vigorously defend these actions. Certain Philips group companies have also been named as defendants, in proposed class proceedings in Ontario, Quebec and British Columbia, Canada and in proceedings in the UK Court, along with numerous other participants in the industry. Philips intends to vigorously oppose these claims, and the proceedings remain at a preliminary stage. In Canada, the plaintiffs have reached a settlement with the Chunghwa defendants, and the settlement is awaiting final court approval. At this time, no class proceeding has been certified as against the Philips defendants and no statement of defense has been filed. The Company and certain Philips group companies have also been named as defendants, in proposed class proceedings in Ontario, Quebec and British Columbia, Canada along with numerous other participants in the industry. These complaints assert claims against various ODD manufacturers under federal competition laws as well as tort laws and may involve joint and several liability among the named defendants. Philips intends to vigorously defend these lawsuits. Due to the considerable uncertainty associated with these matters, on the basis of current knowledge, the Company has concluded that potential losses cannot be reliably estimated with respect to these matters. An adverse final resolution of these investigations and litigation could have a materially adverse effect on the Company’s consolidated financial position, results of operations and cash flows. These matters are in their initial stages and due to the considerable uncertainty associated with these matters, on the basis of current knowledge, the Company has concluded that potential losses cannot be reliably estimated with respect to these matters. An adverse final resolution of these investigations and litigation could have a materially adverse effect on the Company’s consolidated financial position, results of operations and cash flows. Optical Disc Drive (ODD) On October 27, 2009, the Antitrust Division of the United States Department of Justice confirmed that it had initiated an investigation into possible anticompetitive practices in the Optical Disc Drive (ODD) industry. Philips Lite-On Digital Solutions Corp. (PLDS), a joint venture owned by the Company and Lite-On IT Corporation, as an ODD market participant, is included in this investigation. PLDS is also subject to similar investigations outside the US relating to the ODD market. PLDS and Philips intend to cooperate with the authorities in these investigations. Subsequent to the public announcement of these investigations in 2009, the Company, PLDS and Philips & Lite-On Digital Solutions USA, Inc., were named as defendants in eight class action antitrust complaints filed in various federal district courts in the United States. These actions allege anticompetitive conduct by manufacturers of ODDs and seek treble damages on behalf of direct and indirect purchasers of ODDs and products incorporating ODDs. These complaints assert claims under federal antitrust law, as well as various state antitrust and unfair competition laws and may involve joint and several liability among the named defendants. These actions have been consolidated by the Judicial Panel for Multidistrict Litigation for pre-trial proceedings in the United States District Court for the Northern District of California. Philips Polska In connection with an indictment issued by authorities in Poland in December 2009 against numerous individuals, including three former employees of Philips Polska sp. z.o.o., involved in the sale of medical equipment to hospitals in Poland, Philips has been conducting a review of certain activities related to sales of medical equipment for potential violations of the U.S. Foreign Corrupt Practices Act (FCPA). Philips has reported the review to the U.S. Department of Justice and the U.S. Securities and Exchange Commission and is cooperating with these authorities in connection with the review. Potential penalties for violations of the FCPA and related statutes and regulations include monetary penalties and criminal sanctions. The Company cannot at this time quantify meaningfully the possible loss or range of loss to which this matter may give rise. 25 Cash from (used for) derivatives and securities A total of EUR 25 million cash was paid with respect to foreign exchange derivative contracts related to financing activities (2009: EUR 35 million inflow; 2008: EUR 337 million inflow). This is a customized selection from the Annual Report 2010 155 26 27 28 13 Group financial statements 13.11 - 13.11 Cash flow from interest-related derivatives is part of cash flow from operating activities. During 2010, there was no cash flow in relation to these derivatives (2009: EUR nil million; 2008: EUR 28 million cash outflow). 26 Proceeds from non-current financial assets In 2010, the redemption of TPV and CBAY convertible bonds generated cash totaling EUR 239 million. In 2009, the sale of Philips’ interests in LG Display and Pace Micro Technology generated cash totaling EUR 704 million. In 2008, the sale of TSMC shares, LG Display shares, D&M and Pace Micro Technology shares generated cash totaling EUR 2,553 million. 27 Pensions and other postretirement benefits Defined-benefit plans: pensions Employee pension plans have been established in many countries in accordance with the legal requirements, customs and the local situation in the countries involved. The Company also sponsors a number of defined-benefit pension plans. The benefits provided by these plans are based on employees’ years of service and compensation levels. The measurement date for all defined-benefit plans is December 31. The Company’s contributions to the funding of definedbenefit pension plans are determined based upon various factors, including minimum contribution requirements, as established by local government, legal and tax considerations as well as local customs. Assets in lieu of cash from sale of businesses In August 2010, the Company acquired a 49.9% interest in Shapeways Inc. in exchange for the transfer of certain Consumer Lifestyle incubator activities, which represented a value of EUR 3 million at the date of the closing of that transaction. In 2009, the Company received only cash as consideration in connection with the sale of businesses. In April 2008, the Company acquired 64.5 million shares in Pace Micro Technology in exchange for the transfer of the Company’s Set-Top Boxes and Connectivity Solutions activities, which represented a value of EUR 74 million at the date of the closing of that transaction. The Pace shares were sold on April 17, 2009. In August 2008, Philips transferred its 69.5% ownership in MedQuist to CBAY. A part of the consideration was settled through the issuance of a convertible bond by CBAY which represented a fair value of EUR 53 million at the date of the closing of the transaction. The convertible bond, included in Other non-current financial assets, was redeemed on October 15, 2010. In September 2008, Philips acquired a 33.5% interest in Prime Technology Ventures III in exchange for the transfer of seven incubator activities which represented a value of EUR 21 million at the date of the closing of that transaction. 156 28 This is a customized selection from the Annual Report 2010 Funding of the UK Pension plan In 2010, the employer contributions contain a cash neutral EUR 361 million contribution being the value of the Company’s full NXP stake sold in September to the Philips UK Pension Fund as part of a recovery plan. The purchase agreement includes an arrangement which is further described in note 11. Summary of pre-tax costs for pensions and other postretirement benefits 2008 Defined-benefit plans (21) 2009 3 2010 (103) Defined-contribution plans including multi-employer plans 96 107 118 Retiree medical plans 31 (100) 11 106 10 26 The 2010 costs were impacted by the recognition of EUR 119 million of negative prior service costs. These resulted from a reduction of pension benefits expected to be paid in the future, in part due to a change in indexation. In 2010, a curtailment gain of EUR 9 million in one of our retiree medical plans was recognized due to the partial closure of a US site. In 2009, curtailment gains totaling EUR 134 million, relating to changes in retiree medical plans, positively impacted the result. These curtailment gains are the result of changes in the benefit level and the scope of eligible participants of a retiree medical plan, which became effective and irreversible in 2009. 13 Group financial statements 13.11 - 13.11 The table below provides a summary of the changes in the defined-benefit obligations for defined-benefit pension plans and the fair value of their plan assets for 2010 and 2009. It also provides a reconciliation of the funded status of these plans to the amounts recognized in the Consolidated balance sheets. 2009 2010 Netherlands Defined-benefit obligation at the beginning of year other total Netherlands other total 17,720 10,394 6,452 16,846 10,681 7,039 Service cost 107 75 182 92 77 169 Interest cost 532 395 927 521 418 939 Employee contributions Actuarial losses − 4 4 − 3 3 371 424 795 1,662 593 2,255 Plan amendments − (7 ) (7) − Acquisitions − (3 ) (3) − (113) − (113) − Divestments − 4 4 − (1 ) (1) Settlements − (95) (95) − (44) (44) (1) Curtailments − (5 ) (5) − (1 ) Reclassifications − (34) (34) − 5 (422) (1,147) Benefits paid (725) (730) (432) 5 (1,162) Exchange rate differences − 249 249 − Miscellaneous 2 2 4 − Defined-benefit obligation at end of year 10,681 7,039 17,720 12,226 7,940 20,166 Present value of funded obligations at end of year 10,671 6,319 16,990 12,217 7,178 19,395 10 720 730 9 762 771 Netherlands other total Netherlands other total Present value of unfunded obligations at end of year 398 (2 ) 2009 Fair value of plan assets at beginning of year 398 (2) 2010 13,003 4,896 17,899 13,329 5,141 18,470 Expected return on plan assets 758 343 1,101 743 344 1,087 Actuarial gains and (losses) on plan assets 125 117 95 625 720 (8 ) Employee contributions − 4 4 − 3 3 Employer contributions 623 166 51 217 165 458 Acquisitions − 2 2 − − − Divestments − − − − (1 ) (1) Settlements Benefits paid Exchange rate differences Miscellaneous Fair value of plan assets at end of year Funded status Unrecognized prior-service cost Unrecognized net assets Net balance sheet position − (723) − (94) (94) (352) (1,075) 299 299 − (727) − (40) (40) (370) (1,097) 313 313 − − − 1 1 2 13,329 5,141 18,470 13,606 6,474 20,080 2,648 (1,898) 750 1,380 (1,466) − − − (1,161) 1,487 − 6 (86) 6 (133) (1,294) (1,389) (345) (1,734) (2,031) (544) (9) (1,805) (1,814) This is a customized selection from the Annual Report 2010 157 13 Group financial statements 13.11 - 13.11 The classification of the net balance is as follows: 2009 Netherlands Prepaid pension costs under other non-current assets 1,497 − Accrued pension costs under other liabilities Provision for pensions under provisions (10) 1,487 Cumulative amount of actuarial (gains) and losses recognized in the Consolidated statements of comprehensive income (pre tax): EUR 3,291 million (2009: EUR 1,767 million). Plan assets in the Netherlands The Company’s pension plan asset allocation in the Netherlands at December 31, was as follows: 2009 2010 actual actual % Matching portfolio: 76 - Debt securities Return portfolio: - Equity securities - Real estate - Other % 70 76 24 70 30 19 18 4 5 1 7 100 100 The objective of the Matching portfolio is to match part of the interest rate sensitivity of the plan’s real pension liabilities. The Matching portfolio is mainly invested in euro-denominated government bonds and investment grade debt securities and derivatives. Leverage or gearing is not permitted. The size of the Matching portfolio is targeted to be at least 70% of the fair value of the plan’s real pension obligations (on the assumption of 2% inflation). The objective of the Return portfolio is to maximize returns within well-specified risk constraints. The long-term rate of return on total plan assets is expected to be 5.35% per annum, based on expected longterm returns on debt securities, equity securities and real estate of 4.50%, 9.00% and 8.00%, respectively. other total 2010 Netherlands other total 1,518 − (1,332) (1,332) − (720) (730) (9) (762) (771) (2,031) (544) (9) (1,805) (1,814) 21 14 (1,057) 14 (1,057) was notified that one former employee and one employee of an affiliate of the Company had been detained. This affiliate, Philips Real Estate Investment Management B.V., managed the real estate portfolio of the Philips Pension Fund between 2002 and 2008. The investigation by the public prosecutor concerns the potential involvement of (former) employees of a number of Dutch companies with respect to fraud in the context of certain real estate transactions. Neither the Philips Pension Fund nor any Philips entity is a suspect in this investigation. The Philips Pension Fund and Philips are cooperating with the authorities and have also conducted their own investigation. Formal notifications of suspected fraud have been filed with the public prosecutor against the (former) employees concerned and with our insurers. Furthermore, actions have been taken to claim damages from the responsible individuals and legal entities. This has resulted in a number of settlements. At this time it is not possible to assess the outcome of this matter nor the potential consequences. At present, it is management’s assessment that this matter will not cause a decline in plan assets nor an increase in pension costs in any material respect. Plan assets in other countries The Company’s pension plan asset allocation in other countries at December 31, is shown in the table below. This table also shows the target allocation for 2011: On November 13, 2007, various officials, on behalf of the Public Prosecutor’s office in the Netherlands, visited a number of offices of the Philips Pension Fund and the Company in relation to a widespread investigation into potential fraud in the real estate sector. The Company 158 This is a customized selection from the Annual Report 2010 2010 2011 actual target % % % Equity securities 19 23 22 Debt securities 76 70 77 Real estate Philips Pension Fund in the Netherlands 2009 actual 3 1 1 Other 2 6 − 100 100 100 Plan assets in 2010 do not include property occupied nor financial instruments held by the Philips Group. 13 Group financial statements 13.11 - 13.11 Pension expense of defined-benefit plans recognized in the Consolidated statements of income: 2008 Netherlands other Service cost 135 Interest cost on the defined-benefit obligation Expected return on plan assets 2009 total Netherlands other 84 219 107 524 398 922 (769) (392) (1,161) 2010 total Netherlands other total 75 182 92 77 169 532 395 927 521 418 939 (758) (743) (343) (1,101) (344) (1,087) Prior-service cost − 2 2 − (3) (3) − (119) (119) Settlement loss (gain) − − − − − − − (6) (6) Curtailment loss (gain) − − − − (5) (5) − (1) (1) Other (3) − (3 ) 2 1 3 1 1 2 (113) 92 (21) 120 3 Amounts recognized in the Consolidated statements of comprehensive income: 2008 2009 2010 Actuarial losses 773 678 1,535 Change in the effect of the cap on prepaids 772 369 427 Total recognized in Consolidated statements of comprehensive income 1,545 1,047 1,962 Total recognized in net periodic pension cost and Consolidated statements of comprehensive income 1,524 1,050 1,859 1,218 1,807 Actual return on plan assets (794) The pension expense of defined-benefit plans is recognized in the following line items in the Consolidated statements of income: 2008 Cost of sales 2009 2010 General and administrative expenses Research and development expenses (23) 7 7 24 13 12 (23) (14) (120) 1 (3) (21) Selling expenses 3 (2) (103) The Company also sponsors defined-contribution and similar types of plans for a significant number of salaried employees. The total cost of these plans amounted to EUR 118 million (2009: EUR 107 million, 2008: EUR 96 million). In 2010, the defined-contribution cost includes contributions to multi-employer plans of EUR 6 million (2009: EUR 5 million; 2008: EUR 4 million). (117) (129) 26 (103) Cash flows and costs in 2011 Philips expects considerable cash outflows in relation to employee benefits which are estimated to amount to EUR 627 million in 2011, consisting of EUR 421 million employer contributions to defined-benefit pension plans, EUR 125 million employer contributions to definedcontribution pension plans, EUR 56 million expected cash outflows in relation to unfunded pension plans and EUR 25 million in relation to unfunded retiree medical plans. The employer contributions to defined-benefit pension plans are expected to amount to EUR 186 million for the Netherlands and EUR 235 million for other countries. The Company plans to fund part of the existing deficit in the US pension plan in 2011, which amount is included in the amounts aforementioned. The cost for 2011 is expected to amount to EUR 208 million, consisting of EUR 66 million for defined-benefit pension plans, EUR 125 million for defined-contribution pension plans and EUR 17 million for defined-benefit retiree medical plans. Assumptions A significant demographic assumption used in the actuarial valuations is the mortality table. In 2010, a new mortality table was adopted for the plan in the Netherlands that caused the DBO in the Netherlands to increase by EUR 750 million. The mortality tables used for the Company’s major schemes are: Netherlands: Prognosis table 2010-2060 including experience rating TW2010 United Kingdom retirees: SAPS 2002- short cohort 2009 medium cohort 1% floor United States: RP2000 CH Fully Generational Germany: Richttafeln 2005 G.K. Heubeck This is a customized selection from the Annual Report 2010 159 13 Group financial statements 13.11 - 13.11 The Expected Return on Assets for any funded plan equals the average of the expected returns per asset class weighted by their portfolio weights in accordance with the fund’s strategic asset allocation. Where liability-driven investment (LDI) strategies apply, the weights are in accordance with the actual matching part and the strategic asset allocation of the return portfolio. The weighted averages of the assumptions used to calculate the defined-benefit obligations as of December 31 were as follows: Defined-benefit plans: other postretirement benefits In addition to providing pension benefits, the Company provides other postretirement benefits, primarily retiree medical benefits, in certain countries. The Company funds those other postretirement benefit plans as claims are incurred. Movements in the net liability for other defined-benefit obligations: 2009 2009 2010 353 295 2010 Netherlands other Netherlands other 5.0% 5.7% 4.7% 5.3% Defined-benefit obligation at the beginning of year Service cost Discount rate 2 2 Interest cost 32 20 63 (11) Actuarial (gains) or losses Rate of compensation increase * 4.1% * 4.0% The weighted averages of the assumptions used to calculate the net periodic pension cost for years ended December 31: 2009 Netherlands other 2010 Netherlands other Discount rate 5.3% 6.0% 5.0% 5.7% Expected returns on plan assets 5.9% 6.8% 5.7% 6.5% Rate of compensation increase Plan amendments (21) − Curtailment gains (134) (9) (6) Exchange rate differences 3.4% * 4.1% * The rate of compensation increase for the Netherlands consists of a general compensation increase and an individual salary increase based on merit, seniority and promotion. The average individual salary increase for all active participants for the remaining working lifetime is 0.75% annually. The assumed rate of general compensation increase for the Netherlands for calculating the projected benefit obligations amounts to 2.0% (2009: 2.0%). The indexation assumption used to calculate the projected benefit obligations for the Netherlands is 1.0% (2009: 1.0%). 24 − Present value of funded obligations at end of year Present value of unfunded obligations at end of year Funded status 297 − − 295 297 (295) Defined-benefit obligation at end of year 1 295 Miscellaneous Unrecognized prior-service cost * (25) 31 Benefits paid − (25) Changes in consolidation (297) (22) (21) (317) (318) (317) Net balances (318) Classification of the net balance is as follows: Provision for other postretirement benefits Other postretirement benefit expense recognized in the Consolidated statements of income: 2008 2009 2010 Historical data Present value of defined-benefit obligations 2007 2008 2009 2010 20,410 18,679 16,846 17,720 20,166 Fair value of plan assets 21,352 20,200 17,899 18,470 20,080 Surplus 942 1,521 1,053 750 (86) (0.9%) (0.8%) 1.2% (0.9%) 0.8% 0.8% 2.8% 10.9% (0.6%) (3.6%) Experience adjustments in % on: - defined-benefit obligations (gain) loss - fair value of plan assets (gain) loss 160 This is a customized selection from the Annual Report 2010 3 2 2 Interest cost on accumulated postretirement benefits 2006 Service cost 34 32 20 Prior-service cost (6) (1) (2) Curtailment loss (gain) − (134) (9) Other − 31 1 (100) − 11 13 Group financial statements 13.11 - 13.11 29 Sensitivity analysis Amounts recognized in the Consolidated statements of comprehensive income: 2008 Actuarial (gains) losses (49) Total recognized in net periodic pension cost and Consolidated statements of comprehensive income 2009 63 Assumed healthcare trend rates have a significant effect on the amounts reported for the retiree medical plans. A one percentage-point change in assumed healthcare cost trend rates would have the following effects as at December 31: 2010 (11) 2009 (18) (37) − increase of 1% The expense for other postretirement benefits is recognized in the following line items in the Consolidated statements of income: 2008 2009 4 2 3 (1) 1 24 (101) (100) 11 (1) 1 (1) 21 (18) 19 (17) 17 31 1 Effect on postretirement benefit obligation (7) Selling expenses General and administrative expenses Historical data 2006 Present value of defined-benefit obligation The weighted average assumptions used to calculate the postretirement benefit obligations other than pensions as of December 31 were as follows: 2009 Discount rate Compensation increase (where applicable) 6.6% − − The weighted average assumptions used to calculate the net cost for years ended December 31: 2009 Discount rate Compensation increase (where applicable) Fair value of plan assets (Deficit) 2010 9.7% 6.7% − − Assumed healthcare cost trend rates at December 31: 2009 2010 Healthcare cost trend rate assumed for next year 9.0% 8.4% Rate that the cost trend rate will gradually reach 5.0% 4.8% Year of reaching the rate at which it is assumed to remain 2018 2018 2007 2008 2009 2010 373 413 353 295 297 − − − − (373) Experience adjustments in % on defined-benefit obligations; (gains) and losses (1.6%) 2010 6.7% decrease of 1% Effect on total of service and interest cost 2010 Cost of sales 2010 decrease increase of 1% of 1% 29 − (413) (353) (295) (297) 0.2% 0.1% 4.9% (8.1%) Share-based compensation The Company has granted stock options on its common shares and rights to receive common shares in the future (restricted share rights) to members of the Board of Management and other members of the Group Management Committee, Philips executives and certain selected employees. The purpose of the share-based compensation plans is to align the interests of management with those of shareholders by providing incentives to improve the Company’s performance on a long-term basis, thereby increasing shareholder value. Under the Company’s plans, options are granted at fair market value on the date of grant. In contrast to the year 2001 and certain prior years, when variable (performance) stock options were issued, the share-based compensation grants as from 2002 consider the performance of the Company versus a peer group of multinationals. USD-denominated stock options and restricted share rights are granted to employees in the United States only. This is a customized selection from the Annual Report 2010 161 13 Group financial statements 13.11 - 13.11 Share-based compensation expense was EUR 83 million (EUR 66 million, net of tax), EUR 94 million (EUR 86 million, net of tax) and EUR 78 million (EUR 106 million, net of tax) in 2010, 2009 and 2008, respectively. The Company’s employee stock options have characteristics significantly different from those of traded options, and changes in the assumptions can materially affect the fair value estimate. Option plans The following tables summarize information about Philips stock options as of December 31, 2010 and changes during the year: The Company grants stock options that expire after 10 years. Generally, the options vest after 3 years; however, a limited number of options granted to certain employees of acquired businesses may contain accelerated vesting. Of the total stock options that are outstanding as of December 31, 2010, 2,500,000 options contain nonmarket performance conditions. The fair value of the Company’s 2010, 2009 and 2008 option grants was estimated using a Black-Scholes option valuation model and the following weighted average assumptions: EUR-denominated 2008 Risk-free interest rate 2009 2010 3.75% 2.88% 2.43% Expected dividend yield 2.4% 4.3% 6 yrs 6.5 yrs 6.5 yrs Expected share price volatility 26% 32% 30% 2008 2009 2010 shares Outstanding at January 1, 2010 Granted weighted average exercise price 35,375,485 27.16 3,246,371 24.83 Exercised 829,333 19.53 Forfeited 3,373,736 28.01 Expired 2,614,431 43.58 Outstanding at December 31, 2010 31,804,356 25.68 Exercisable at December 31, 2010 20,756,362 28.22 4.1% Expected option life Option plans, EUR-denominated USD-denominated Risk-free interest rate 3.17% 2.25% 2.43% Expected dividend yield 2.8% 4.1% 3.9% Expected option life 6 yrs 6.5 yrs 6.5 yrs Expected share price volatility 27% 33% 32% The assumptions were used for these calculations only and do not necessarily represent an indication of Management’s expectations of future developments. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of subjective assumptions, including the expected price volatility. The exercise prices range from EUR 12.63 to 37.60 The weighted average remaining contractual term for options outstanding and options exercisable at December 31, 2010, was 4.8 years and 3.0 years, respectively. The aggregate intrinsic value of the options outstanding and options exercisable at December 31, 2010, was EUR 47 million and EUR 16 million, respectively. The weighted average grant-date fair value of options granted during 2010, 2009, and 2008 was EUR 4.95, EUR 2.78 and EUR 5.69, respectively. The total intrinsic value of options exercised during 2010, 2009, and 2008 was approximately EUR 6 million, EUR 0 million and EUR 1 million, respectively. Option plans, USD-denominated shares 162 This is a customized selection from the Annual Report 2010 20,675,005 31.10 Granted 2,059,830 33.35 Exercised 1,170,594 26.22 Forfeited 1,335,556 31.45 Expired The Company has based its volatility assumptions on historical experience for a period equal to the expected life of the options. The expected life of the options is also based upon historical experience. Outstanding at January 1, 2010 weighted average exercise price 1,808,131 42.60 Outstanding at December 31, 2010 18,420,554 30.51 Exercisable at December 31, 2010 10,701,593 31.22 13 Group financial statements 13.11 - 13.11 The exercise prices range from USD 16.41 to 44.15 The weighted average remaining contractual term for options outstanding and options exercisable at December 31, 2010, was 5.5 years and 3.6 years, respectively. The aggregate intrinsic value of the options outstanding and options exercisable at December 31, 2010, was USD 56 million and USD 24 million, respectively. The weighted average grant-date fair value of options granted during 2010, 2009 and 2008 was USD 7.71, USD 3.83 and USD 7.97, respectively. The total intrinsic value of options exercised during 2010, 2009 and 2008 was USD 7 million, USD 1 million and USD 13 million, respectively. The outstanding options are categorized in exercise price ranges as follows: EUR-denominated shares intrinsic value in millions weighted average remaining contractual term 10-15 2,994,618 31 8.3 yrs 15-20 3,520,872 16 3.6 yrs 20-25 10,350,730 − 4,718,489 − 8,346,556 − 3.2 yrs 1,873,091 − 0.1 yrs 31,804,356 47 4.8 yrs The Company issues restricted share rights that vest in equal annual installments over a three-year period, starting one year after the date of grant. If the grantee still holds the shares after three years from the delivery date, Philips will grant 20% additional (premium) shares, provided the grantee is still with the Company on the respective delivery dates. 3.4 yrs 30-35 Restricted shares plans 6.9 yrs 25-30 compensation cost related to non-vested stock options. This cost is expected to be recognized over a weightedaverage period of 1.9 years. Cash received from option exercises under the Company’s option plans amounted to EUR 39 million, EUR 4 million and EUR 24 million in 2010, 2009, and 2008, respectively. The actual tax deductions realized as a result of stock option exercises totaled approximately EUR 2 million, nil and EUR 3 million, in 2010, 2009, and 2008, respectively. exercise price 35-55 A summary of the status of the Company’s restricted share plans as of December 31, 2010 and changes during the year are presented below: Restricted share rights, EUR-denominated1) shares Outstanding at January 1, 2010 Granted Vested/Issued Forfeited USD-denominated shares intrinsic value in millions weighted average remaining contractual term 15-20 2,864,670 39 6.9 yrs 20-25 380,635 3 1.6 yrs 25-30 3,353,104 14 7,368,684 − 5.4 yrs 35-40 2,248,560 − 7.2 yrs 2,204,901 − 6.3 yrs 18,420,554 56 5.5 yrs 2,028,565 18.56 826,577 23.42 1,037,427 21.86 120,347 17.89 1,697,368 18.96 3.1 yrs 30-35 Outstanding at December 31, 2010 weighted average grant-date fair value exercise price 40-50 The aggregate intrinsic value in the tables and text above represents the total pre-tax intrinsic value (the difference between the Company’s closing share price on the last trading day of 2010 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders if the options had been exercised on December 31, 2010. At December 31, 2010, a total of EUR 30 million of unrecognized 1) Excludes 20% additional (premium) shares that may be received if shares delivered under the restricted share rights plan are not sold for a three-year period Restricted share rights, USD-denominated1) shares Outstanding at January 1, 2010 weighted average grant-date fair value 1,602,001 27.06 Granted 522,606 31.46 Vested/Issued 807,408 31.08 Forfeited 118,157 27.16 1,199,042 26.28 Outstanding at December 31, 2010 1) Excludes 20% additional (premium) shares that may be received if shares delivered under the restricted share rights plan are not sold for a three-year period This is a customized selection from the Annual Report 2010 163 30 31 13 Group financial statements 13.11 - 13.11 At December 31, 2010, a total of EUR 35 million of unrecognized compensation cost related to non-vested restricted share rights. This cost is expected to be recognized over a weighted-average period of 2.0 years. 30 In the normal course of business, Philips purchases and sells goods and services from/to various related parties in which Philips typically holds a 50% or less equity interest and has significant influence. These transactions are generally conducted with terms comparable to transactions with third parties. Other plans Employee share purchase plan Under the terms of employee stock purchase plans established by the Company in various countries, substantially all employees in those countries are eligible to purchase a limited number of Philips shares at discounted prices through payroll withholdings, of which the maximum ranges from 8.5% to 10% of total salary. Generally, the discount provided to the employees is in the range of 10% to 20%. A total of 1,411,956 shares were sold to employees in 2010 under the plan at an average price of EUR 22.54 (2009: 2,185,647 shares at EUR 13.30, 2008: 1,051,206 shares at EUR 21.82). 2008 Lumileds plan In December 2006, the Company offered to exchange outstanding Lumileds Depository Receipts and options for cash and shared-based instruments settled in cash. The amount to be paid to settle the obligation, with respect to share-based instruments, will fluctuate based upon changes in the fair value of Lumileds. Substantially all of the holders of the options and the depository receipts accepted the Company offer. The amount of the sharebased payment liability, which is denominated in US dollars, recorded at December 31, 2009 was EUR 31.6 million. During 2010, the Company paid EUR 17.6 million as a part of the settlement of the liability. Additionally, an increase of EUR 24.1 million was recognized to reflect an adjustment to the value of the liability. The balance at December 31, 2010 amounted to EUR 38.1 million which will be settled in 2011 and 2012. 164 This is a customized selection from the Annual Report 2010 2009 2010 Sales of goods and services 174 150 169 Purchases of goods and services 692 424 229 Receivables from related parties 24 14 20 112 95 5 Payables to related parties For remuneration details of the members of the Board of Management and the Supervisory Board see note 31. For employee benefit plans see note 28. Convertible personnel debentures In the Netherlands, the Company issued personnel debentures with a 2-year right of conversion into common shares of Royal Philips Electronics starting three years after the date of issuance, with a conversion price equal to the share price on that date. The last issuance of this particular plan was in December 2008. From 2009 onwards, employees in the Netherlands are able to join an employee share purchase plan as described in the previous paragraph. The fair value of the conversion option of EUR 2.13 in 2008 was recorded as compensation expense. In 2010, 279,170 shares were issued in conjunction with conversions at an average price of EUR 20.86 (2009: 183,330 shares at an average price of EUR 19.56, 2008: 485,331 shares at an average price of EUR 19.13). Related-party transactions In 2010, Philips sold its entire stake in NXP to Philips Pension Trustees Limited. For further details of this related party transaction see note 11. 31 Information on remuneration Remuneration of the Board of Management In 2010, the remuneration costs relating to the members of the Board of Management amounted to EUR 9,018,514 (2009: EUR 6,526,741; 2008: EUR 7,611,602). When pension rights are granted to members of the Board of Management, necessary payments (if insured) and all necessary provisions are made in accordance with the applicable accounting principles. In 2010, no (additional) pension benefits were granted to former members of the Board of Management. In addition, in 2010, the members of the Board of Management were granted 276,000 stock options (2009: 259,200; 2008: 259,218) and 69,000 restricted share rights (2009: 69,132; 2008: 86,406). At December 31, 2010, the members of the Board of Management held 1,957,282 stock options (2009: 2,064,872; 2008: 1,805,672) at a weighted average exercise price of EUR 24.94 (2009: EUR 25.47; 2008: EUR 27.31). 13 Group financial statements 13.11 - 13.11 Remuneration costs of individual members of the Board of Management in euros salary annual incentive1) pension cost other compensation2) 2010 G.J. Kleisterlee 1,100,000 962,720 (255,757)3) P-J. Sivignon 711,250 459,480 240,051 28,122 G.H.A. Dutiné 643,750 410,250 203,404 135,459 R.S. Provoost 646,250 416,814 193,194 30,919 A. Ragnetti 429,583 416,814 134,353 433,4894) S.H. Rusckowski 321,778 646,250 416,814 216,814 76,713 4,177,083 3,082,892 732,059 1,026,480 1,100,000 220,000 (302,855)3) P-J. Sivignon 700,000 105,000 235,226 37,988 G.H.A. Dutiné 625,000 93,750 186,722 119,197 − 22,500 − − 635,000 95,250 187,073 25,465 42,777 2009 G.J. Kleisterlee T.W.H.P. van Deursen 5) R.S. Provoost A. Ragnetti 635,000 95,250 198,798 S.H. Rusckowski 635,000 221,470 217,410 4,330,000 329,117 66,603 853,220 722,374 6) 621,147 1,100,000 490,512 (314,893)3) 324,346 P-J. Sivignon 687,500 217,386 250,951 8,738 G.H.A. Dutiné 618,750 200,664 192,153 135,673 T.W.H.P. van Deursen7) 150,000 267,984 (32,885) 20,068 R.S. Provoost 620,000 247,607 192,003 26,406 A. Ragnetti 613,750 329,571 202,281 37,665 S.H. Rusckowski 8) 620,000 103,164 235,852 66,356 4,410,000 1,856,888 725,462 619,252 2008 G.J. Kleisterlee 1) 2) 3) 4) 5) 6) 7) 8) The annual incentives paid are related to the level of performance achieved in the previous year The stated amounts concern (share of) allowances to members of the Board of Management that can be considered as remuneration. In a situation where such a share of an allowance can be considered as (indirect) remuneration (for example, private use of the company car), then the share is both valued and accounted for here. The method employed by the fiscal authorities in the Netherlands is the starting point for the value stated As Mr Kleisterlee was born before January 1, 1950, he continued to be a member of the final pay plan with a pensionable age of 60. No further accrual takes place Remuneration costs stated relate to period January 1 - August 31, 2010. The other compensation amount includes an amount of EUR 400,000 as a one-off payment provided in conjunction with his departure from the Company. In addition an amount of EUR 127,555 for stock options and EUR 165,280 for restricted share rights are taken as cost in 2010 and an additional amount of EUR 297,785 for stock options and EUR 118,919 for restricted share rights for previously granted stock options and restricted share rights that are still outstanding Annual incentive figure relates to period January 1 - March 31, 2008 Revised based on actual figures Remuneration costs relate to period January 1 - March 31, 2008. As Mr Van Deursen was born before January 1, 1950 he continued to be a member of the final pay plan with a pensionable age of 60. No further accrual took place Annual incentive figure relates to period of board membership April 1 - December 31, 2007 This is a customized selection from the Annual Report 2010 165 13 Group financial statements 13.11 - 13.11 The tables below give an overview of the interests of the members of the Board of Management under the restricted share rights plans and the stock option plans of the Company: Number of restricted share rights December 31, potential 20101) premium shares January 1, 2010 awarded 2010 released 2010 G.J. Kleisterlee 41,070 18,000 21,655 37,415 19,797 P-J. Sivignon 23,543 10,200 12,448 21,295 11,693 G.H.A. Dutiné 23,176 10,200 12,081 21,295 10,605 R.S. Provoost 23,176 10,200 12,081 21,295 10,342 S.H. Rusckowski2) 23,543 10,200 12,448 21,295 11,873 134,508 58,800 70,713 122,595 64,310 1) 2) 166 Excluding potential premium shares Partly awarded before date of appointment as a member of the Board of Management This is a customized selection from the Annual Report 2010 13 Group financial statements 13.11 - 13.11 Stock options January 1, 2010 G.J. Kleisterlee December 31, 2010 granted exercised − − − 42.24 − 02.17.2010 − 52,5001) 105,000 expired share exercise (closing) price (in price on euros) exercise date − 105,000 37.60 − 02.08.2011 52,5001) expiry date 115,200 − − 115,200 30.17 − 02.07.2012 52,803 − − 52,803 16.77 − 04.15.2013 48,006 − − 48,006 24.13 − 04.13.2014 48,006 − − 48,006 19.41 − 04.18.2015 48,006 − − 48,006 26.28 − 04.18.2016 73,926 − − 73,926 30.96 − 04.16.2017 67,203 − − 67,203 23.11 − 04.14.2018 67,200 − − 67,200 12.63 − 04.14.2019 − 72,000 − 72,000 24.90 − 04.19.2020 32,004 − − 32,004 22.07 − 07.18.2015 33,003 − − 33,003 26.28 − 04.18.2016 42,903 P-J. Sivignon − − 42,903 30.96 − 04.16.2017 38,403 − 38,403 23.11 − 04.14.2018 − − 38,400 12.63 − 04.14.2019 − 40,800 − 40,800 24.90 − 04.19.2020 124,8001,2) − − 124,8001,2) 30.17 − 02.07.2012 35,208 − − 35,208 16.77 − 04.15.2013 32,004 G.H.A. Dutiné − 38,400 − − 32,004 24.13 − 04.13.2014 32,004 − − 32,004 19.41 − 04.18.2015 30,006 − − 30,006 26.28 − 04.18.2016 39,600 − − 39,600 30.96 − 04.16.2017 38,403 − − 38,403 23.11 − 04.14.2018 38,400 − 38,400 12.63 − 04.14.2019 40,800 − 40,800 24.90 − 04.19.2020 56,8751,2) − − 29,750 − − 29,7501) 49,2001,2) − − 49,2001,2) 30.17 − 02.07.2012 16,250 − − 16,2501,2) 34.78 − 04.16.2012 26,4061) − − 26,4061) 16.77 − 04.15.2013 8,6671) − − 8,6671) 22.12 − 10.14.2013 24,0031) − − 24,0031) 24.13 − 04.13.2014 24,003 R.S. Provoost − − 04.18.2015 1) 1,2) 56,8751,2) − 42.90 − 10.17.2010 37.60 − 02.08.2011 − − 24,003 19.41 − 30,006 − − 30,006 26.28 − 04.18.2016 39,600 − − 39,600 30.96 − 04.16.2017 1) 1) 38,403 1) − 38,403 23.11 − 04.14.2018 − − 38,400 12.63 − 04.14.2019 − 2) − 38,400 40,800 − 40,800 24.90 − 04.19.2020 Awarded before date of appointment as a member of the Board of Management (Partly) sign-on grant This is a customized selection from the Annual Report 2010 167 13 Group financial statements 13.11 - 13.11 Stock options January 1, 2010 December 31, 2010 granted exercised 27,0001,2) − − 27,0001,2) 2,700 1,2) − 31,5001,2) − 31,5001,2) 4,500 S.H. Rusckowski expired exercise share price (in (closing) euros or price on USD) exercise date expiry date − 04.13.2014 $28.78 2,700 $25.43 − 01.27.2015 − 31,5001,2) $25.28 − 04.18.2015 − − 31,5001,2) $32.25 − 04.18.2016 − 1,2) − 1,2) − 4,5001,2) $34.56 − 10.16.2016 42,903 42,903 30.96 − 04.16.2017 − 38,403 23.11 − 04.14.2018 − − 38,400 12.63 − 04.14.2019 − 40,800 − 40,800 24.90 − 04.19.2020 1,831,457 1) − − 38,400 2) − 38,403 235,200 − The accumulated annual pension entitlements and the pension costs of individual members of the Board of Management are as follows (in euros): pension costs2) G.J. Kleisterlee3) 64 835,015 (255,757) P-J. Sivignon 54 47,184 240,051 G.H.A. Dutiné 58 107,466 203,404 R.S. Provoost 51 85,013 193,194 A. Ragnetti 50 52,938 134,353 S.H. Rusckowski 53 29,396 216,814 732,059 3) 168 Remuneration of the Supervisory Board The remuneration of the members of the Supervisory Board amounted to EUR 759,000 (2009: EUR 795,500; 2008: EUR 851,250); former members received no remuneration. At December 31, 2010, the members of the Supervisory Board held no stock options. accumulated annual pension as age at of December December 31, 2010 31, 20101) 1) 1,957,282 Awarded before date of appointment as a member of the Board of Management Awarded under US stock option plan See note 29 for further information on stock options and restricted share rights. 2) 109,375 Under final pay or average pay plan Including costs related to employer contribution in defined-contribution pension plan As Mr Kleisterlee was born before January 1, 1950, he continued to be a member of the final pay plan with a pensionable age of 60. No further accrual takes place as of this age This is a customized selection from the Annual Report 2010 13 Group financial statements 13.11 - 13.11 The individual members of the Supervisory Board received, by virtue of the positions they held, the following remuneration (in euros): membership committees fee for inter-continental travel total 2010 J.-M.Hessels J.M. Thompson 110,000 20,500 3,000 133,500 65,000 14,000 12,000 91,000 R. Greenbury (Jan.-March) 32,500 2,000 − 34,500 C.J.A. van Lede 65,000 12,500 3,000 80,500 E. Kist 65,000 15,000 3,000 83,000 J.J. Schiro 65,000 14,500 9,000 88,500 H. von Prondzynski 65,000 10,000 3,000 78,000 C. Poon 65,000 7,500 15,000 87,500 J. van der Veer 65,000 14,500 3,000 82,500 597,500 110,500 51,000 759,000 130,500 2009 110,000 20,500 − J.M. Thompson 65,000 14,000 15,000 94,000 R. Greenbury 65,000 8,000 − 73,000 K.A.L.M. van Miert (Jan.-June) 32,500 5,000 − 37,500 J-M. Hessels C.J.A. van Lede 65,000 12,500 − 77,500 E. Kist 65,000 15,000 − 80,000 N.L. Wong (Jan-March) 32,500 − 3,000 35,500 J.J. Schiro 65,000 16,000 − 81,000 H. von Prondzynski 65,000 10,000 − 75,000 C. Poon (Apr.-Dec.) 65,000 − 9,000 74,000 32,500 5,000 − 37,500 662,500 106,000 27,000 795,500 W. de Kleuver (Jan.-March) 55,000 5,125 − 60,125 L. Schweitzer (Jan.-March) 32,500 1,500 − 34,000 J-M. Hessels 98,750 19,125 3,000 120,875 J.M. Thompson 65,000 14,000 9,000 88,000 J. van der Veer (July-Dec.) 2008 R. Greenbury 65,000 8,000 3,000 76,000 K.A.L.M. van Miert 65,000 10,000 3,000 78,000 C.J.A. van Lede 65,000 12,500 3,000 80,500 E. Kist 65,000 13,750 3,000 81,750 N.L. Wong 65,000 − 9,000 74,000 J.J. Schiro 65,000 14,500 3,000 82,500 H. von Prondzynski 65,000 7,500 3,000 75,500 706,250 106,000 39,000 851,250 Supervisory Board members’ and Board of Management members’ interests in Philips shares Members of the Supervisory Board and of the Board of Management are not allowed to hold any interests in derivative Philips securities. This is a customized selection from the Annual Report 2010 169 32 13 Group financial statements 13.11 - 13.11 Number of shares1) December 31, 2009 December 31, 2010 December 31, 2009 H. von Prondzynski 2,930 3,010 J.M. Thompson 1,000 1,000 J. van der Veer 5,450 5,586 G.J. Kleisterlee 197,362 224,877 P-J. Sivignon 37,249 52,172 G.H.A. Dutiné 60,626 72,815 R.S. Provoost 55,537 66,693 S.H. Rusckowski 54,893 71,019 carrycarrying estimated ing estimated amount fair value amount fair value December 31, 2010 Financial assets Carried at fair value: 32 Reference date for board membership is December 31, 2010 Fair value of financial assets and liabilities The estimated fair value of financial instruments has been determined by the Company using available market information and appropriate valuation methods. The estimates presented are not necessarily indicative of the amounts that will ultimately be realized by the Company upon maturity or disposal. The use of different market assumptions and/or estimation methods may have a material effect on the estimated fair value amounts. For cash and cash equivalents, current receivables, current payables, interest accrual and short-term debts, the carrying amounts approximate fair value, because of the short maturity of these instruments. The fair value of Philips debt is estimated on the basis of the quoted market prices for certain issues, or on the basis of discounted cash flow analysis based upon market rates plus Philips’ spread for the particular tenors of the borrowing arrangement. Accrued interest is not within the carrying amount or estimated fair value of debt. 305 305 270 270 Available-for-sale financial assets - current 145 145 − − Fair value through profit and loss - non-current 32 32 62 62 Fair value through profit and loss - current 1) Available-for-sale financial assets - non-current 25 25 − − Derivative financial instruments 102 102 112 112 609 609 444 444 Cash and cash equivalents 4,386 4,386 5,833 5,833 21 21 5 5 76 76 53 53 7 7 3 3 3,983 3,983 4,434 4,434 85 85 88 88 2 2 2 2 276 92 92 8,836 10,510 10,510 Carried at (amortized) cost: Other current financial assets Loans and receivables: Other non-current loans and receivables including guarantee deposits Loans to investments in associates Receivables - current Receivables - noncurrent Held-to-maturity investments Available-for-sale financial assets 276 8,836 Financial liabilities Carried at fair value: Derivative financial instruments (276) (276) (564) (564) (2,870) (3,691) (3,691) Carried at (amortized) cost: Accounts payable Interest accrual (2,870) 170 This is a customized selection from the Annual Report 2010 (87) (87) (4,267) (4,556) (4,658) (5,156) (7,224) Debt (87) (87) (7,513) (8,436) (8,934) 13 Group financial statements 13.11 - 13.11 33 The table below analyses financial instruments carried at fair value, by different hierarchy levels: regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis. Fair value hierarchy level 1 level 2 level 3 Level 2 total The fair value of financial instruments that are not traded in an active market (for example, over-the-counter derivatives or convertible bond instruments) are determined by using valuation techniques. These valuation techniques maximize the use of observable market data where it is available and rely as little as possible on entityspecific estimates. If all significant inputs required to fair value an instrument are based on observable market data, the instrument is included in level 2. December 31, 2010 Available-for-sale financial assets - non-current 298 298 Available-for-sale financial assets - current − − Financial assets designated at fair value through profit and loss - non-current 62 62 Financial asses designated at fair value through profit and loss - current − − Derivative financial instruments - assets Total financial assets carried at fair value 112 Derivative financial instruments - liabilities 112 − 472 (564) 360 The fair value of derivatives is calculated as the present value of the estimated future cash flows based on observable interest yield curves and foreign exchange rates. 112 − (564) 61 − 305 The valuation of convertible bond instruments uses observable market quoted data for the options and present value calculations using observable yield curves for the fair value of the bonds. December 31, 2009 Available-for-sale financial assets - non-current 244 Available-for-sale financial assets - current Financial assets designated at fair value through profit and loss - non-current 145 Derivative financial instruments - assets Total financial assets carried at fair value 274 32 25 102 Financial assets designated at fair value through profit and loss - current 2 25 30 Level 3 145 102 335 − 609 If one or more of the significant inputs are not based on observable market data, the instrument is included in level 3. The arrangement with the UK Pension Fund in conjunction with the sale of NXP is a financial instrument carried at fair value classified as level 3. At the end of 2010, the fair value of this instrument is estimated to be zero. Please refer to note 11 for more details. 33 Details of treasury risks Specific valuation techniques used to value financial instruments include: Philips is exposed to several types of financial risk. This note further analyzes financial risks. Philips does not purchase or hold derivative financial instruments for speculative purposes. Information regarding financial instruments is included in note 32. Level 1 Liquidity risk Derivative financial instruments - liabilities (276) (276) Instruments included in level 1 are comprised primarily of listed equity investments classified as available-for-sale financial assets, investees and financial assets designated at fair value through profit and loss. Liquidity risk is the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities. The fair value of financial instruments traded in active markets is based on quoted market prices at the balance sheet date. A market is regarded as active if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service, or Liquidity risk for the group is monitored through the Treasury liquidity committee which tracks the development of the actual cash flow position for the group and uses input from a number of sources in order to forecast the overall liquidity position both on a short and long-term basis. Corporate treasury invests surplus cash This is a customized selection from the Annual Report 2010 171 13 Group financial statements 13.11 - 13.11 in money market deposits with appropriate maturities to ensure sufficient liquidity is available to meet liabilities when due. The rating of the Company’s debt by major rating services may improve or deteriorate. As a result, Philips’ future borrowing capacity may be influenced and its financing costs may fluctuate. Philips has various sources to mitigate the liquidity risk for the group. At the reporting date, Philips had EUR 5,833 million in cash and cash equivalents (2009: EUR 4,386 million), within which short-term deposits of EUR 5,229 million (2009: EUR 3,740 million) and other liquid assets of EUR 104 million (2009: EUR 155 million). Philips pools cash from subsidiaries to the extent legally and economically feasible; cash not pooled remains available for local operational or investment needs. Furthermore, Philips had a USD 2.5 billion Commercial Paper Program; a EUR1.8 billion committed revolving facility that can be used for general corporate purpose and a committed bilateral loan of EUR 200 million. As of December 31, 2010, Philips did not have any loans outstanding under any of these facilities. Additionally Philips also held a EUR 270 million of equity investments in available-for-sale financial assets (fair value at December 31, 2010). options or a combination thereof. The amount hedged as a proportion of the total exposure identified varies per business and is a function of the ability to project cash flows, the time horizon for the cash flows and the way in which the businesses can adapt to changed levels of foreign-currency exchange rates. As a result, hedging activities will not eliminate all currency risks for these anticipated transaction exposures. Generally, the maximum tenor of these hedges is 18 months. The following table outlines the estimated nominal value in millions of euros for transaction exposure and related hedges for Philips’ most significant currency exposures consolidated as of December 31, 2010: Estimated transaction exposure and related hedges in millions of euros maturity 0-60 days exposure hedges maturity over 60 days exposure hedges Receivables Functional vs exposure currency EUR vs. USD 734 (712) 1,405 (955) USD vs. EUR 173 (132) 759 (409) EUR vs. JPY 39 (39) 164 (127) EUR vs. GBP 44 (39) 144 (85) Currency risk USD vs. JPY 38 (26) 122 (62) Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. Currency fluctuations may impact Philips’ financial results. Philips is exposed to currency risk in the following areas: EUR vs. PLN 38 (31) 104 (56) CNY vs. EUR 4 (2) 119 (24) CNY vs. USD 12 (7) 107 (65) EUR vs. SEK 38 (32) 78 (45) 171 (138) 437 (227) • Transaction exposures, related to forecasted sales and purchases and on-balance-sheet receivables/payables resulting from such transactions • Translation exposure of net income in foreign entities • Translation exposure of foreign-currency intercompany and external debt and deposits • Translation exposure of foreign-currency-denominated equity invested in consolidated companies • Translation exposure to equity interests in nonfunctional-currency investments in associates and available-for-sale financial assets. Payables EUR vs. USD (982) 972 (1,641) 946 USD vs. CNY (57) 57 (219) 118 BRL vs. USD (83) 66 (123) 59 EUR vs. PLN (48) 39 (156) 84 GBP vs. EUR (25) 20 (122) 64 CNY vs. EUR (18) 13 (106) 51 IDR vs. USD (21) 15 (98) 51 USD vs. SGD (17) 12 (84) 43 (290) 258 (524) 320 It is Philips’ policy that significant transaction exposures are hedged by the businesses. Accordingly, all businesses are required to identify and measure their exposures resulting from material transactions denominated in currencies other than their own functional currency. Philips’ policy generally requires committed foreign currency exposures to be fully hedged using forwards. Anticipated transactions may be hedged using forwards or 172 This is a customized selection from the Annual Report 2010 Others Functional vs exposure currency Others The derivatives related to transactions are, for hedge accounting purposes, split into hedges of on-balancesheet accounts receivable/payable and forecasted sales and purchases. Changes in the value of on-balance-sheet foreign-currency accounts receivable/payable, as well as 13 Group financial statements 13.11 - 13.11 the changes in the fair value of the hedges related to these exposures, are reported in the income statement under costs of sales. Hedges related to forecasted transactions, where hedge accounting is applied, are accounted for as cash flow hedges. The results from such hedges are deferred in other comprehensive income within equity to the extent that the hedge is effective. As of December 31, 2010, a gain of EUR 5 million was deferred in equity as a result of these hedges. The result deferred in equity will be released to earnings mostly during 2011 at the time when the related hedged transactions affect the income statement. During 2010, a net gain of EUR 7 million was recorded in the income statement as a result of ineffectiveness on certain anticipated cash flow hedges. The total net fair value of hedges related to transaction exposure as of December 31, 2010 was an unrealized liability of EUR 29 million. An instantaneous 10% increase in the value of the euro against all currencies would lead to an increase of EUR 20 million in the value of the derivatives; including a EUR 68 million increase related to foreign exchange transactions of the euro against the US dollar, offset by a EUR 14 million decrease related to foreign exchange transactions of the euro against the Japanese yen, and a EUR 14 million decrease related to foreign exchange transactions of the euro against the Pound sterling. The EUR 20 million increase includes a gain of EUR 33 million that would impact the income statement, which would largely offset the opposite revaluation effect on the underlying accounts receivable and payable, and the remaining loss of EUR 13 million would be recognized in equity to the extent that the cash flow hedges were effective. Foreign exchange exposure also arises as a result of intercompany loans and deposits. Where the Company enters into such arrangements the financing is generally provided in the functional currency of the subsidiary entity. The currency of the Company’s external funding and liquid assets is matched with the required financing of subsidiaries either directly through external foreign currency loans and deposits, or synthetically by using foreign exchange derivatives. In certain cases where group companies may also have external foreign currency debt or liquid assets, these exposures are also hedged through the use of foreign exchange derivatives. Changes in the fair value of hedges related to this translation exposure are recognized within financial income and expenses in the income statement and are largely offset by the revaluation of the hedged items. The total net fair value of these derivatives as of December 31, 2010, was a liability of EUR 425 million. An instantaneous 10% increase in the value of the euro against all currencies would lead to a increase of EUR 323 million in the value of the derivatives, including a EUR 315 million increase related to the US dollar. Philips does not hedge the translation exposure of net income in foreign entities. Translation exposure of foreign-currency equity invested in consolidated entities may be hedged. If a hedge is entered into, it is accounted for as a net investment hedge. As of December 31, 2010, Philips had no outstanding derivatives accounted for as net investment hedges. During 2010, Philips recorded a gain of EUR 9 million in other comprehensive income under currency translation differences as a result of net investment hedges. Philips does not currently hedge the foreign exchange exposure arising from equity interests in non-functionalcurrency investments in associates and available-for-sale financial assets. Interest rate risk Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Philips had outstanding debt of EUR 4,658 million, which created an inherent interest rate risk. Failure to effectively hedge this risk could negatively impact financial results. At year-end, Philips held EUR 5,833 million in cash and cash equivalents, total gross long-term debt of EUR 2,818 million and total short-term debt of EUR 1,840 million. At December 31, 2010, Philips had a ratio of fixed-rate gross long-term debt to total outstanding gross debt of approximately 55%, compared to 73% one year earlier. A sensitivity analysis shows that if long-term interest rates were to decrease instantaneously by 1% from their level of December 31, 2010, with all other variables (including foreign exchange rates) held constant, the fair value of the long-term debt would increase by approximately EUR 226 million. If there was an increase of 1% in long-term interest rates, this would reduce the market value of the long-term debt by approximately EUR 226 million. If interest rates were to increase instantaneously by 1% from their level of December 31, 2010, with all other variables held constant, the annualized net interest expense would decrease by approximately EUR 39 million. This impact was based on the outstanding net cash position at December 31, 2010. Equity price risk Equity price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in equity prices. This is a customized selection from the Annual Report 2010 173 13 Group financial statements 13.11 - 13.11 Philips is a shareholder in several publicly listed companies, including TCL Corporation and TPV Technology Ltd. As a result, Philips is exposed to potential financial loss through movements in their share prices. The aggregate equity price exposure of publicly listed investments in its main available-for-sale financial assets amounted to approximately EUR 270 million at year-end 2010 (2009: EUR 357 million including investments in associates shares that were sold during 2010). Philips does not hold derivatives in its own stock or in the abovementioned listed companies. The two options on the shares of TPV and CBAY were matured and redeemed in September and October 2010 respectively. Philips is also a shareholder in several privately owned companies amounting to EUR 24 million. As a result, Philips is exposed to potential value adjustments. As part of the sale of shares in NXP to Philips Pension Trustees Limited there is an arrangement that may entitle Philips to a cash payment from the UK Pension Fund on or after September 7, 2014 if the value of the NXP shares has increased by this date to a level in excess of a predetermined threshold, which at the time of the transaction was substantially above the transaction price, and the UK Pension Fund is in surplus (on the regulatory funding basis) on September 7, 2014. Commodity price risk Commodity price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in commodity prices. Philips is a purchaser of certain base metals, precious metals and energy. Philips hedges certain commodity price risks using derivative instruments to minimize significant, unanticipated earnings fluctuations caused by commodity price volatility. The commodity price derivatives that Philips enters into are accounted for as cash flow hedges to offset forecasted purchases. As of December 2010, a gain of less than EUR 1 million was deferred in equity as a result of these hedges. A 10% increase in the market price of all commodities as of December 31, 2010 would increase the fair value of the derivatives by less than EUR 1 million. creditworthiness of a customer is determined not to be sufficient to grant the credit limit required, there are a number of mitigation tools that can be utilized to close the gap including reducing payment terms, cash on delivery, pre-payments and pledges on assets. Philips invests available cash and cash equivalents with various financial institutions and is exposed to credit risk with these counterparties. Philips is also exposed to credit risks in the event of non-performance by financial institutions with respect to financial derivative instruments. Philips actively manages concentration risk and on a daily basis measures the potential loss under certain stress scenarios, should a financial institution default. These worst-case scenario losses are monitored and limited by the company. The company does not enter into any financial derivative instruments to protect against default by financial institutions. However, where possible the company requires all financial institutions with whom it deals in derivative transactions to complete legally enforceable netting agreements under an International Swap Dealers Association master agreement or otherwise prior to trading, and whenever possible, to have a strong credit rating from Standard & Poor’s and Moody’s Investor Services. Philips also regularly monitors the development of the credit risk of its financial counterparties. Wherever possible, cash is invested and financial transactions are concluded with financial institutions with strong credit ratings or with governments or government-backed institutions. Below table shows the credit ratings of the financial institutions with which Philips had short-term deposits above EUR 25 million as of December 31, 2010: Credit risk with number of counterparties for deposits above 25 million 25-100 million 100-500 million 500-2,000 million AAA-rated governments - - 1 AAA-rated government banks - - 2 - - 1 Credit risk AA-rated bank counterparties 1 2 - Credit risk represents the loss that would be recognized at the reporting date, if counterparties failed completely to perform their payment obligations as contracted. Credit risk is present within Philips trade receivables. To have better insights into the credit exposures, Philips performs ongoing evaluations of the financial and nonfinancial conditions of its customers and adjusts credit limits when appropriate. In instances where the 174 AAA-rated bank counterparties A-rated bank counterparties - 2 - 1 4 4 This is a customized selection from the Annual Report 2010 For an overview of the overall maximum credit exposure of the group’s financial assets, please refer to note 32 for details of carrying amounts and fair value. 13 Group financial statements 13.11 - 13.11 34 this first layer of working deductibles, Philips operates its own re-insurance captive, which during 2010 retained EUR 2.5 million per occurrence for the property damage and business interruption losses and EUR 5 million in the aggregate per year. For general and product liability claims, the captive retained EUR 1.5 million per claim and EUR 6 million in the aggregate. New contracts were signed on December 31, 2010, for the coming year, whereby the reinsurance captive retentions remained unchanged. Country risk Country risk is the risk that political, legal, or economic developments in a single country could adversely impact our performance. The country risk per country is defined as the sum of the equity of all subsidiaries and associated companies in country cross-border transactions, such as intercompany loans, accounts receivable from third parties and intercompany accounts receivable. The country risk is monitored on a regular basis. As of December 31, 2010, the company had country risk exposure in the United States of EUR 10 billion, and in Belgium of EUR 9.4 billion, EUR 1 billion in China (including Hong Kong). Other countries higher than EUR 500 million are Japan EUR 752 million, and United Kingdom of EUR 678 million. Countries where the risk exceeded EUR 300 million but was less than EUR 500 million are Netherlands, Germany, Poland, Italy and Canada. The degree of risk of a country is taken into account when new investments are considered. The company does not, however, use financial derivative instruments to hedge country risk. Other insurable risks Philips is covered for a broad range of losses by global insurance policies in the areas of property damage, business interruption, general and product liability, transport, directors’ and officers’ liability, employment practice liability, crime, and aviation product liability. 34 Subsequent events Acquisition of Optimum Lighting LLC On January 5, 2011, Philips announced that it acquired Optimum Lighting LLC, a privately owned company domiciled in the US, specialized in customized energyefficient lighting solutions for the office, industry and retail segments. Acquisition of Preethi business On January 24, 2011, Philips announced that it has agreed to acquire the assets of the Preethi business, a kitchen appliances company in India. Upon closing of this transaction, which is subject to certain contractual and other conditions such as regulatory approval, Preethi will become part of the Domestic Appliances business group within Philips’ Consumer Lifestyle sector. The counterparty risk related to the insurance companies participating in the above mentioned global insurance policies are actively managed. As a rule Philips only selects insurance companies with a S&P credit rating of at least A-. Throughout the year the counterparty risk is monitored on a regular basis. To lower exposures and to avoid potential losses, Philips has a worldwide Risk Engineering program in place. The main focus in this program is on property damage and business interruption risks, which also include interdependencies. Philips sites, and also a limited number of sites of key suppliers, are inspected on a regular basis by the Risk Engineering personnel of the insurer. Inspections are carried out against predefined Risk Engineering standards which are agreed between Philips and the insurers. Recommendations are made in a Risk Management report and are reviewed centrally. This is the basis for decision-making by the local management of the business as to which recommendations will be implemented. For all policies, deductibles are in place, which vary from EUR 250,000 to EUR 2,500,000 per occurrence and this variance is designed to differentiate between the existing risk categories within Philips. Above This is a customized selection from the Annual Report 2010 175 13 Group financial statements 13.12 - 13.12 Content you didn’t download 13.12 Independent auditor’s report - Group 176 This is a customized selection from the Annual Report 2010 14 Company financial statements 14 - 14 14 Company financial statements Introduction Statutory financial statements report - Company, of this Annual Report, and section 5.5, Proposed distribution to shareholders, of this Annual Report. The sections Group financial statements and Company financial statements contain the statutory financial statements of Koninklijke Philips Electronics N.V. (the Company). Accounting policies applied The financial statements of the Company included in this section are prepared in accordance with Part 9 of Book 2 of the Dutch Civil Code. Section 362 (8), Book 2, Dutch Civil Code, which allows companies that apply IFRS as adopted by the European Union in their consolidated financial statements to use the same measurement principles in their company financial statements. The Company has prepared these Company financial statements using this provision. The accounting policies are described in section 13.10, Significant accounting policies, of this Annual Report. Subsidiaries are accounted for using the net equity value in these Company financial statements. Presentation of Company financial statements The structure of the Company balance sheets is aligned with the Consolidated balance sheets in order to achieve optimal transparency between the Group financial statements and the Company financial statements. Consequently, the presentation of the Company balance sheets deviates from Dutch regulations. The Company balance sheet has been prepared before the appropriation of result. The Company statement of income has been prepared in accordance with Section 2:402 of the Dutch Civil Code, which allows a simplified Statement of income in the Company financial statements in the event that a comprehensive Statement of income is included in the consolidated Group financial statements. Additional information For ‘Additional information’ within the meaning of Section 2:392 of the Dutch Civil Code, please refer to section 13.12, Independent auditor’s report - Group, of this Annual Report, section 14.5, Independent auditor’s This is a customized selection from the Annual Report 2010 177 14 Company financial statements 14.1 - 14.1 Balance sheets before appropriation of results 14.1 Balance sheets of Koninklijke Philips Electronics N.V. as of December 31 in millions of euros 2009 2010 Assets Non-current assets: Property, plant and equipment 1 1 Intangible assets − 38 19,238 21,056 A Investments in affiliated companies1) Deferred tax assets B Other non-current financial assets2) 98 38 370 109 19,707 21,242 Current assets: C Receivables Cash and cash equivalents 1,043 1,668 3,550 3,527 4,593 5,195 24,300 26,437 Liabilities and shareholders’ equity D Shareholders’ equity: Preference shares, par value EUR 0.20 per share: - Authorized: 2,000,000,000 shares (2009: 2,000,000,000 shares) - Issued: none Common shares, par value EUR 0.20 per share: - Authorized: 2,000,000,000 shares (2009: 2,000,000,000 shares) - Issued and fully paid: 986,078,784 shares (2009: 972,411,769 shares) 194 197 − 354 Legal reserve: revaluation 102 86 Legal reserve: available-for-sale financial assets 120 139 Capital in excess of par value Legal reserve: cash flow hedges Legal reserve: affiliated companies2) Legal reserve: currency translation differences Retained earnings2) G Net income1,2,3) Treasury shares, at cost: 39,572,400 shares (2009: 44,954,677 shares) 10 (5 ) 884 1,078 (591) (65) 14,653 12,892 410 1,446 (1,187) (1,076) 14,595 15,046 Non-current liabilities: E Long-term debt 3,502 2,678 Long-term provisions 29 22 Deferred tax liabilities 425 41 Other non-current liabilities 39 52 3,995 2,793 Current liabilities: E Short-term debt1) F Other current liabilities 5,067 7,244 643 1,354 5,710 24,300 I 178 8,598 26,437 Contingent liabilities not appearing in the balance sheet This is a customized selection from the Annual Report 2010 1) 2) 3) Previous period amounts have been adjusted to reflect changes in the presentation of intercompany positions with group companies Prior period insignificant amounts have been reclassified due to new insights in line with accounting policies Prepared before appropriation of results 14 Company financial statements 14.1 - 14.3 14.2 Statements of income Statements of income of Koninklijke Philips Electronics N.V. for the years ended December 31 in millions of euros 2009 2010 Net income from affiliated companies 155 1,262 Other net income 255 184 410 1,446 G Net income 14.3 Statements of changes in equity Statement of changes in equity of Koninklijke Philips Electronics N.V. in millions of euros unless otherwise stated legal reserves outstanding number of shares in thousands Balance as of January 1, 2010 927,457 capital in comexcess mon of par shares value − 194 revaluation available- forsale financial assets cash flow hedges 102 120 10 affili- currency ated translacompation difnies1) ferences 884 renet tained inearnings1) come (591) 14,653 Appropriation of prior year result 410 Net income (16) Net current period change 180 (44) 5 13,667 3 194 24 343 (1,540) (675) − (141) (650) (304) (6) − (15) 5,397 (49) 9 111 71 55 946,506 197 55 5 Income tax on share-based compensation plans 1) 535 (6) Share-based compensation plans Balance as of December 31, 2010 − (4) Non-controlling interest buy out Re-issuance of treasury shares 1,446 (5) (161) Reclassification into income Purchase of treasury shares (410) 16 Income tax on net current period change shareholders’ equity (1,187) 14,595 1,446 Release revaluation reserve Dividend distributed 410 treasury shares at cost 5 354 86 139 (5) 1,078 (65) 12,892 1,446 (1,076) 15,046 Prior period insignificant amounts have been reclassified due to new insights in line with accounting policies This is a customized selection from the Annual Report 2010 179 14 Company financial statements 14.4 - 14.4 AB 14.4 Notes Included in Other, under Investments in Group companies are actuarial gains and losses of EUR 1,336 million related to defined-benefit plans of group companies. All amounts in millions of euros unless otherwise stated B Other non-current financial assets Notes to the Company financial statements A Investments in affiliated companies The investments in affiliated companies (including goodwill) are presented in the balance sheet based on either their net asset value in accordance with the aforementioned accounting principles of the consolidated financial statements, or at amortized cost. investment investment s in s in Group companies associates Balance as of January 1, 2010 Sales/redemptions Net income from affiliated companies loans total 11,273 70 7,895 19,238 8,631 3 275 8,909 Dividends received Translation differences (86) 1,250 − (7,315) 12 − (9) (7,401) − 4 869 (1,333) − − Balance as of December 31, 2010 1 − 370 (73) − (4) (77) 13 2 − 15 Sales/redemptions/ reductions (379) (2) − (381) Value adjustments 175 − 4 179 3 − − 3 108 1 − 109 Reclassifications Acquisitions/additions Translation and exchange differences Balance as of December 31, 2010 1,262 454 19,252 80 1,724 (946) 1,327 (1,333) 21,056 Previous period amounts have been adjusted to reflect changes in the presentation of intercompany positions with group companies A list of subsidiaries and affiliated companies, prepared in accordance with the relevant legal requirements (Dutch Civil Code, Book 2, Sections 379 and 414), is deposited at the Chamber of Commerce in Eindhoven, Netherlands. During 2010 Philips increased its foreign based financial center activities. In the context of these increased activities, the Company transferred EUR 7,162 million of its intercompany loans to a foreign subsidiary. This transfer is expressed under Loans in the line item Sales/ redemptions. In addition, the Company also provided further funding to this foreign subsidiary of EUR 1 billion giving a total capital contribution of EUR 8,162 million which is expressed under investments in group companies in the line item “Acquisitions/additions”. 180 369 1) (937) Other 1) Balance as of January 1, 2010 total1) Changes: 1) Changes: Acquisitions/ additions availablefor-sale financial assets financial assets at fair value loans and through receivable profit and s loss This is a customized selection from the Annual Report 2010 Prior period insignificant amounts have been reclassified due to new insights in line with accounting policies Reclassifications The CBAY investment (EUR 77 million) was reclassified to Current financial assets prior to redemption on October 15, 2010. Investments in available-for-sale financial assets The Company’s investments in available-for-sale financial assets mainly consists of investments in common stock of companies in various industries. During 2010, Philips reduced its shareholding portfolio of available-for-sale financial assets by selling its entire stake in NXP Semiconductors (NXP). Further details on the accounting treatment of NXP are discussed in note 11. 14 Company financial statements 14.4 - 14.4 C Receivables 2009 Trade accounts receivable Affiliated companies Other receivables 2010 95 106 721 1,261 11 28 Advances and prepaid expenses 43 183 230 1,043 D 33 Derivative instruments - assets 1,668 Shareholders’ equity Treasury shares are recorded at cost, representing the market price on the acquisition date. When issued, shares are removed from treasury shares on a FIFO basis. Any difference between the cost and the cash received at the time treasury shares are issued, is recorded in capital in excess of par value, except in the situation in which the cash received is lower than cost, and capital in excess of par has been depleted. The following transactions took place resulting from employee option and share plans: 2009 Common shares As of December 31, 2010, the issued and fully paid share capital consists of 986,078,784 common shares, each share having a par value of EUR 0.20. In April 2010, Philips settled a dividend of EUR 0.70 per common share, representing a total value of EUR 650 million. Shareholders could elect for a cash dividend or a share dividend. Approximately 53% of the shareholders elected for a share dividend, resulting in the issuance of 13,667,015 new common shares. The settlement of the cash dividend resulted in a payment of EUR 304 million. CD Shares acquired Average market price Amount paid Shares delivered Average market price Amount received Total shares in treasury at year-end Total cost 2010 2,128 15,237 EUR 19.10 EUR 25.35 − − 4,477,364 5,397,514 EUR 13.76 EUR 23.99 EUR 32 million EUR 71 million 43,102,679 37,720,402 EUR 1,162 million EUR 1,051 million In 2009 and 2010 there were no transactions to reduce share capital: Preference shares The ‘Stichting Preferente Aandelen Philips’ has been granted the right to acquire preference shares in the Company. Such right has not been exercised. As a means to protect the Company and its stakeholders against an unsolicited attempt to (de facto) take over control of the Company, the General Meeting of Shareholders in 1989 adopted amendments to the Company’s articles of association that allow the Board of Management and the Supervisory Board to issue (rights to acquire) preference shares to a third party. As of December 31, 2010, no preference shares have been issued. Option rights/restricted shares The Company has granted stock options on its common shares and rights to receive common shares in the future. Please refer to note 29, which is deemed incorporated and repeated herein by reference. Treasury shares In connection with the Company’s share repurchase programs, shares which have been repurchased and are held in treasury for (i) delivery upon exercise of options and convertible personnel debentures and under restricted share programs and employee share purchase programs, and (ii) capital reduction purposes, are accounted for as a reduction of shareholders’ equity. 2009 2010 Shares acquired − − Average market price − − Amount paid − − Reduction of capital stock − − Total shares in treasury at year-end Total cost 1,851,998 1,851,998 EUR 25 million EUR 25 million Net income A proposal will be submitted to the General Meeting of Shareholders to pay a dividend of EUR 0.75 per common share, in cash or shares at the option of the shareholder, against the net income for 2010. Legal reserves As of December 31, 2010, legal reserves relate to the revaluation of assets and liabilities of acquired companies in the context of multi-stage acquisitions of EUR 86 million (2009: EUR 102 million), unrealized gains on available-forsale financial assets of EUR 139 million (2009: EUR 120 million), unrealized losses on cash flow hedges of EUR 5 million (2009: unrealized gains of EUR 10 million), This is a customized selection from the Annual Report 2010 181 14 Company financial statements 14.4 - 14.4 ‘affiliated companies’ of EUR 1,078 million (2009: EUR 884 million) and currency translation losses of EUR 65 million (2009: EUR 591 million). The item ‘affiliated companies’ relates to the ‘wettelijke reserve deelnemingen’, which is required by Dutch law.This reserve relates to any legal or economic restrictions on the ability of affiliated companies to transfer funds to the parent company in the form of dividends. Limitations in the distribution of shareholders’ equity Pursuant to Dutch law, limitations exist relating to the distribution of shareholders’ equity of EUR 1,500 million (2009: EUR 1,310 million). As at December 31, 2010, such limitations relate to common shares of EUR 197 million (2009: EUR 194 million) as well as to legal reserves included under ‘revaluation’ of EUR 86 million (2009: EUR 102 million), available-for-sale financial assets of EUR 139 million (2009: 120 million) and ‘affiliated companies’ of EUR 1,078 million (2009: EUR 884 million). In 2009, limitations in the distribution were also affected by gains related to cash flow hedges of EUR 10 million. In general, gains related to available-for-sale financial assets, cash flow hedges and currency translation differences cannot be distributed as part of shareholders’ equity as they form part of the legal reserves protected under Dutch law. By their nature, losses relating to available-for-sale financial assets, cash flow hedges and currency translation differences, reduce shareholders’ equity, and thereby distributable amounts. 182 This is a customized selection from the Annual Report 2010 14 Company financial statements 14.4 - 14.4 E E F GH I Long-term debt and short-term debt Long-term debt (range of) interest rates average interest rate amount outstanding due in 1 year due after 1 year due after 5 years average remaining term (in years) amount outstanding 2009 Eurobonds 6.1% 6.1% 750 750 − − − 750 USD bonds 1.4 - 7.8% 5.7% 2,687 262 2,425 1,943 12.0 2,494 Convertible debentures 0.3% 0.3% 38 38 − − − 51 Intercompany financing 0.1 - 6.5% 0.6% 211 211 − − − 571 2.6 - 3.0% 2.8% 250 − 250 − 3.1 250 3.3 - 18.1% 5.5% 54 51 3 − 1.9 3,990 1,312 2,678 1,943 4,177 4,177 675 3,502 1,803 4,155 Bank borrowings Other long-term debt Corresponding data previous year The following amounts of the long-term debt as of December 31, 2010, are due in the next five years: 2011 G − 2013 482 2014 250 2015 3 H 2,374 Convertible debentures include Philips personnel debentures. For more information, please refer to note 18. For the remuneration of past and present members of both the Board of Management and the Supervisory Board, please refer to note 31, which is deemed incorporated and repeated herein by reference. Short-term debt Short-term debt includes the current portion of outstanding external and intercompany long-term debt of EUR 1,312 million (2009: EUR 675 million), other debt to group companies totaling EUR 5,869 million (2009: EUR 4,335 million) and short-term bank borrowings of EUR 63 million (2009: EUR 57 million). F Other current liabilities 2009 Income tax payable Other short-term liabilities Accrued expenses Derivative instruments - liabilities 2010 − 79 23 40 252 227 368 1,008 643 1,354 Employees The number of persons employed by the Company at year-end 2010 was 11 (2009: 12) and included the members of the Board of Management and the members of the Group Management Committee. 2,047 Corresponding amount previous year Net income Net income in 2010 amounted to a gain of EUR 1,446 million (2009: a gain of EUR 410 million). The increase of net results in 2010 compared to 2009 is especially realized by affiliated companies. 1,312 2012 61 I Contingent liabilities not appearing in the balance sheet General guarantees as referred to in Section 403, Book 2, of the Dutch Civil Code, have been given by the Company on behalf of several group companies in the Netherlands. The liabilities of these companies to third parties and investments in associates totaled EUR 1,434 million as of year-end 2010 (2009: EUR 1,038 million). Guarantees totaling EUR 266 million (2009: EUR 294 million) have also been given on behalf of other group companies and credit guarantees totaling EUR 29 million (2009: EUR 33 million) on behalf of unconsolidated companies and third parties. The Company is the head of a fiscal unity that contains the most significant Dutch wholly-owned group companies. The Company is therefore jointly and severally liable for the tax liabilities of the tax entity as a whole. For additional information, please refer to note 24. This is a customized selection from the Annual Report 2010 183 J J K 14 Company financial statements 14.4 - 14.4 Audit fees For a summary of the audit fees, please refer to the Supervisory Board report, table ‘Fees KPMG’ section 11.3, Report of the Audit Committee, of this Annual Report. K Subsequent events Acquisiton of Optimum Lighting LLC On January 5, 2011 Philips announced that it acquired Optimum Lighting LLC, a privately owned company domiciled in the US, specialized in customized energyefficient lighting solutions for the office, industry and retail segments. Acquisition of Preethi business On January 24, 2011, Philips announced that it has agreed to acquire the assets of the Preethi business, a kitchen appliances company in India. Upon closing of this transaction, which is subject to certain contractual and other conditions such as regulatory approval, Preethi will become part of the Domestic Appliances business group within Philips’ Consumer Lifestyle sector. February 17, 2011 The Supervisory Board The Board of Management 184 This is a customized selection from the Annual Report 2010 14 Company financial statements 14.5 - 14.5 Content you didn’t download 14.5 Independent auditor’s report - Company This is a customized selection from the Annual Report 2010 185 17 Five-year overview 17 - 17 17 Five-year overview All amounts in millions of euros unless otherwise stated. Due to factors such as acquisitions and divestments, the amounts, percentages and ratios are not directly comparable. General data Sales Percentage increase over previous year Income (loss) from continuing operations 20061,2,3) 20073) 2008 2009 2010 26,385 23,189 25,419 26,682 26,793 5 − (2 ) (12) 1,003 5,018 (95) 424 Discontinued operations 4,154 Net income (loss) 5,157 (138) 4,880 3 (92) 10 1,452 − − 424 1,452 Free cash flow (348) 824 773 863 1,333 Turnover rate of net operating capital 3.73 2.71 1.72 1.79 1.91 Total employees at year-end (in thousands) 1224) 1244) 121 116 119 1) 2) 3) 4) 5) 6) Discontinued operations reflects the effect of the sale of MDS in 2006 Discontinued operations reflects the effect of the sale of Semiconductors in 2006 Discontinued operations reflects the effect of classifying the MedQuist business as a discontinued operation in 2007, for which the previous year has been restated Including discontinued operations In millions of shares In manufacturing excluding new acquisitions Income 20061,2,3) 20073) EBIT 1,336 5.0 as a % of sales EBITA as a % of sales Income taxes as a % of income before taxes Income (loss) from continuing operations as a % of shareholders’ equity (ROE) Net income (loss) 186 This is a customized selection from the Annual Report 2010 2008 2009 2010 1,867 54 614 2,065 7.0 0.2 2.6 8.1 1,528 2,094 744 1,050 2,552 5.7 7.8 2.8 4.5 10.0 (223) (582) (256) (100) (509) (16.3) (12.3) (180.2) (22.3) (26.2) 1,003 5,018 (95) 424 1,452 4.8 22.8 (0.5) 2.9 9.6 5,157 4,880 (92) 424 1,452 17 Five-year overview 17 - 17 Capital employed 20061,2,3) 20073) 2008 2009 Cash and cash equivalents 5,886 8,769 3,620 4,386 5,833 Receivables and other current assets 5,502 5,292 5,038 4,610 4,899 Assets of discontinued operations Inventories Non-current financial assets/investments in associates Non-current receivables/assets 2010 427 319 − − − 2,940 3,213 3,491 2,913 3,865 10,924 5,000 1,624 972 660 3,905 3,959 2,884 2,871 1,514 Property, plant and equipment 3,102 3,194 3,496 3,252 3,265 Intangible assets 5,964 6,635 11,757 11,523 12,233 38,650 36,381 31,910 30,527 32,269 Capital expenditures for the year 698 658 770 524 653 Depreciation for the year 990 562 729 746 678 Capital expenditures : depreciation 0.7 1.2 1.1 0.7 1.0 11.0 12.0 13.2 12.6 15.2 45 44 42 40 46 Financial structure 20061,2,3) 20073) 2008 2009 2010 Other liabilities 8,837 8,469 9,292 9,166 10,180 78 78 − − − 3,878 3,563 4,188 4,267 4,658 Total assets Property, plant and equipment: Inventories as a % of sales Outstanding trade receivables, in days sales Liabilities of discontinued operations Debt Provisions 2,623 2,403 2,837 2,450 2,339 Total provisions and liabilities 15,416 14,513 16,317 15,883 17,177 Shareholders’ equity 23,099 21,741 15,544 14,595 15,046 135 127 49 49 46 Group equity and liabilities 38,650 36,381 31,910 30,527 32,269 Net debt : group equity ratio (9):109 (31):131 4:96 (1):101 (8):108 Market capitalization at year-end 31,624 31,436 12,765 19,170 21,705 Non-controlling interests This is a customized selection from the Annual Report 2010 187 17 Five-year overview 17 - 17 Key figures per share 20061,2,3) 20073) 2008 2009 2010 Sales per common share 27.04 22.71 24.67 26.62 25.07 EBITA per common share - diluted 1.29 1.91 0.75 1.13 2.69 Income (loss) from continuing operations per share 0.85 4.61 (0.09) 0.46 1.54 Dividend distributed per common share 0.44 0.60 0.70 0.70 0.70 Total shareholder return per common share 2.76 1.55 (14.99) 7.55 2.94 20.87 20.41 16.84 15.74 15.89 Shareholders’ equity per common share Price/earnings ratio 33.61 6.40 (153.67) 44.96 14.88 Share price at year-end 28.57 29.52 13.83 20.68 22.92 Highest closing share price during the year 29.31 32.99 28.94 21.03 26.94 Lowest closing share price during the year 21.89 26.71 12.09 10.95 20.34 Average share price 26.57 29.73 21.42 15.26 23.35 Common shares outstanding at year-end5) 1,107 1,065 923 927 947 Weighted average shares outstanding: - basic5) 1,175 1,086 991 925 940 - diluted5) 1,184 1,099 997 929 948 Sustainability 20061,2,3) 20073) 2008 2009 2010 Lives touched, in millions − − − − 420 Energy efficiency of products, in kWh/EUR − − − 10.5 10.1 Collection and recycling amount, in tons − − − − 100,000 Recycled material in products, in tons − − − − 7,500 15.0 19.8 22.6 30.6 37.5 Green Innovation, in millions of euros − − 282 410 451 Operational carbon footprint, in kilotons CO2-equivalent − 2,157 2,144 1,937 1,808 Green Product sales, as a % of total sales Operational energy efficiency, in terajoules per million euro sales Total energy consumption in manufacturing, in terajoules6) Total carbon emissions in manufacturing, in kilotons CO2-equivalent6) − 1.29 1.31 1.35 1.26 15,213 15,207 14,602 14,294 14,232 869 864 823 816 668 Water intake, in thousands m3 6) 4,171 4,209 3,996 4,216 4,217 Total waste, in kilotons6) 125.4 127.6 113.6 97.7 104.5 79 79 76 77 78 Restricted substances, in kilos 2,097 1,367 1,098 638 1,036 Hazardous substances, in kilos 68,100 Materials provided for recycling via external contractor per total waste, in % 119,455 90,807 46,316 33,644 ISO 14001 certification, as a % of all reporting organizations6) 92 90 95 92 95 Employee Engagement Index, % favorable 61 64 69 68 75 Female executives, in % of total 8 10 10 11 0.78 0.81 0.68 0.44 0.50 Initial and continual conformance audits, number of audits 188 6 Lost Workday Injuries, per 100 FTEs 365 166 277 360 273 This is a customized selection from the Annual Report 2010 18 Investor Relations 18 - 18.1 18 Investor Relations The goal of our Investor Relations department is to provide easy access to information on Philips in a transparent, accurate and timely manner to shareholders and bondholders, in compliance with the latest requirements of national and international disclosure regulations. This should enable investors to make informed investment decisions. 18.1 The Philips investment proposition Our Healthcare business, which is a world leader in many areas including cardiovascular X-ray, patient monitoring and home healthcare, which we see playing an increasingly important role in the years ahead. Equally, our Consumer Lifestyle business is built on a portfolio of leading businesses – including male shaving, oral healthcare, and mother and childcare. We are the world’s largest Lighting company with a leading position in LED lighting solutions – the future of this industry. We will continue to leverage our brand, with its promise of “sense and simplicity”, our rich technological heritage and our advanced insight into the needs of end-users to bring meaningful innovation to our customers. This is solidly complemented by our long-standing, strong presence in emerging markets, which already contribute a third of our revenues, with the target to take this figure to at least 40% by 2015. Our strategy Philips is a leading company in health and well-being. The year 2010 was a significant year for our company. It signaled the completion of our Vision 2010 strategic plan, where we achieved most of our objectives. Based on these successes, we have now built a solid platform, from which we have developed our plans for the next five years. Our Vision 2015 strategic plan is based on five critical global trends. We believe that the following growth drivers: • Accessible Healthcare: driven by population growth, aging, and higher healthcare aspirations • Consumer focus on health and well-being: led by increased prosperity and changing lifestyles • Energy-efficient lighting solutions: enabled by a massive shift from conventional to digital, dynamic lighting • Expanding emerging markets: growing in relative importance in the world economy • Sustainability: the fundamental need to reduce our environmental footprint, which will enhance the drive for energy efficiency Our financial targets Vision 2015: • Comparable sales growth on annual average basis at least 2 percentage points higher than real GDP growth • Reported EBITA margin between 10% and 13% of sales, of which: - Healthcare 16-18% - Consumer Lifestyle 9-11% - Lighting 12-14% • Growth of EPS at double the rate of comparable annual sales growth • Return on invested capital at least 4 percentage points above weighted average cost of capital Sustainability We seek to make constant progress in the sustainability of our business. A clear example of how we are driving business growth through sustainability is evidenced by the achievement of most of our EcoVision4 objectives, well ahead of schedule. Based on this we have further enhanced our objectives by launching our EcoVision5 program. will enable Philips to achieve its growth and profitability ambitions. Our leading and focused portfolio is aligned to these global trends, as evidenced by: This is a customized selection from the Annual Report 2010 189 18 Investor Relations 18.1 - 18.2 Success of our EcoVision4 program Targets over the period 2007-2012 • Generate 30% of total revenues from Green Products • Double investment in Green Innovations to a cumulative EUR 1 billion • Improve our operational energy efficiency by 25% and reduce CO2 emissions by 25%, all compared with the base year of 2007. In 2009 we achieved the Green Product sales target three years ahead of schedule, with 31% of total sales from Green Products. Subsequently, we increased the target to 50% in 2015. Green Product sales increased further in 2010 to 38%. In 2010 our cumulative investment in Green Innovations was over EUR 1.1 billion, two years ahead of schedule. Our operational energy efficiency and carbon footprint reduction are on track to reach the third target as planned in 2012. Launch of our EcoVision5 program In 2010, ‘Lead in Sustainability’ became one of the key objectives of our Vision 2015 program, driven by the launch of the EcoVision5 program, comprising of the following leadership KPIs: • Bringing care to people Target: 500 million lives touched by 2015 • Improving energy efficiency of Philips products Target: 50% improvement by 2015 (for the average total product portfolio) • Closing the materials loop Target: Double global collection and recycling amounts and recycled materials in products by 2015 compared to 2009 More information on the EcoVision programs can be found in section 5.4, Sustainability, of this Annual Report. 190 This is a customized selection from the Annual Report 2010 18.2 The year 2010 Emerging stronger from the crisis We finished a strong 2010 on a stable note, with growth in the second half of the year being slower than the first half. We rebounded strongly from the economic downturn caused by the financial crisis. Within the constraints of a much weaker economy, we successfully implemented a major part of our Vision 2010 strategy. With that we set the stage for a successful future as outlined by our Vision 2015 strategy. Last but not least, we started to prepare for a seamless transition to a new leadership team. For the whole year, we achieved revenues of EUR 25.4 billion, a 10% increase compared to 2009. On a comparable basis, that represents growth of 4.3%. For the whole year, we achieved an EBITA margin of 10%. Our adjusted EBITA margin, excluding non-recurring items, was 10.5%, compared to 6.4% in 2009, significantly higher than the target we set for ourselves as part of Vision 2010. Free cash flow, at EUR 1.3 billion, was almost EUR 500 million up on 2009 driven by improvements in all sectors. Our return on invested capital (ROIC) continued the strong recovery started in the second half of 2009 and reached 11.7% in the last quarter of 2010, which is very close to our Vision 2010 target of 12%, and well ahead of our WACC of 8.1%. We continued to make good strategic progress during 2010. We kept our focus firmly on customer centricity, which resulted in a further 7% increase in the value of the Philips brand. Our brand value, at USD 8.7 billion, has doubled since we launched our brand promise of “sense and simplicity” in 2004, a significant achievement. Our focus on becoming a leader in health and well-being is also resonating with our customer base, with 60% of our brand value being generated by our professional business. We also strengthened our position in emerging markets, the growth markets of the future. This is illustrated not only by the growth of our sales figures in our key emerging markets, i.e. China, India and Latin America, but also by the outstanding growth in other emerging geographies like the ASEAN countries, Ukraine, Central Europe, South Africa and the Middle East. We have acquired companies all over the world to further strengthen our portfolio, and have product propositions which are relevant for local markets. The year 2010 saw us making two acquisitions each in China and Brazil. 18 Investor Relations 18.2.1 - 18.2.3 18.2.1 Net income and EPS 18.2.2 Our aim is to sustainably grow our dividend over time. Philips’ present dividend policy is based on an annual payout ratio of 40 to 50% of continuing net income. Net income of the Philips Group showed a profit of EUR 1,452 million, or EUR 1.53 per common share, compared to a profit of EUR 424 million, or EUR 0.46 per common share, in 2009. Net income (loss) in millions of euros 6,000 5,000 4.4 5,157 6 5 4,000 4 3,000 3 1.5 1,452 2,000 0.5 424 1,000 0 2006 1 0 2007 (1) 2009 2008 EBIT and EBITA1) in millions of euros 2010 ■-EBIT--■-EBITA ■ 3,000 2,552 2,500 487 2,094 2,000 1,000 2 (92) (0.1) (1,000) 1,500 1,528 192 1,336 2,065 1,867 227 1,050 436 744 690 500 614 54 0 2006 1) 2007 2008 2010 2009 For a reconciliation to the most directly comparable GAAP measures, see unknown section of this Annual Report Operating cash flows in millions of euros ■-net capital expenditure--■-free cash flows --■-operating cash flows ■ 1) --free cash flow as a % of sales 3,000 3.1 824 2.9 773 1,752 2,000 3.7 863 1,648 15.0 2,156 (2,000) (987) 5.0 0 (928) (875) 2007 2008 (682) (823) (5.0) (348) (1.3) 2006 (10.0) 2009 18.2.3 Proposed distribution A proposal will be submitted to the 2011 Annual General Meeting of Shareholders to declare a dividend of EUR 0.75 per common share, in cash or in shares at the option of the shareholder, against the net income for 2010. Such dividend is expected to result in a payment of up to EUR 710 million. Shareholders will be given the opportunity to make their choice between cash and shares between April 7, 2011 and April 29, 2011. If no choice is made during this election period, the dividend will be paid in shares. On April 29, 2011, after close of trading, the number of share dividend rights entitled to one new common share will be determined based on the volume-weighted average price of all traded common shares of Koninklijke Philips Electronics N.V. at Euronext Amsterdam on 27, 28 and 29 April 2011. The Company will calculate the number of share dividend rights entitled to one new common share, such that the gross dividend in shares will be approximately 3% higher than the gross dividend in cash. Payment of the dividend and delivery of new common shares, with settlement of fractions in cash, if required, will take place from May 4, 2011. 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 May 2, 2011. 10.0 639 (1,000) 1) 5.2 1,333 1,545 1,000 0 Continuing net income, or net income excluding material non-recurring items and discontinued operations, is the base figure used to calculate the dividend payout for the year. For 2010, the key exclusions used to arrive at continuing net income are the gain on the sale of shares in NXP and TPV, the curtailment in the UK Pension Fund, and restructuring and post-acquisition charges. ■-net income ----net income per share in euros 4.5 4,880 Dividend policy 2010 For a reconciliation to the most directly comparable GAAP measures, see unknown section of this Annual Report 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 earnings and retained earnings is subject to 15% dividend withholding tax, but only in respect of the par value of the shares (EUR 0.20 per share). This withholding tax in the case of dividend in shares will be borne by Philips. In 2010, a dividend of EUR 0.70 per common share was paid in cash or shares, at the option of the shareholder. Approximately 53% elected for a share dividend resulting in the issue of 13,667,015 new common shares, leading to This is a customized selection from the Annual Report 2010 191 18 Investor Relations 18.2.3 - 18.3 a 1.5% dilution. The remainder of the dividend was paid in cash (EUR 296 million) against the retained earnings of the Company. ex-dividend date record date April 4, 2011 April 6, 2011 May 4, 2011 New York shares April 4, 2011 April 6, 2011 Share information Market capitalization payment date Amsterdam shares 18.3 May 4, 2011 Philips’ market capitalization was EUR 21.7 billion at yearend 2010. The highest closing price for Philips’ shares during 2010 in Amsterdam was EUR 26.94 on April 26, 2010 and the lowest was EUR 20.34 on January 22, 2010. The highest closing price for Philips’ shares during 2010 in New York was USD 35.90 on April 26, 2010 and the lowest was USD 26.84 on August 24, 2010. Dividend and dividend yield per common share ■-dividend per share in euros----yield in % 1) 1.00 3.3 2.4 5.1 3.4 0.75 0.70 0.70 0.70 2.1 0.60 0.80 0.60 0.40 1.7 2.1 0.9 1.1 2.2 1.6 0.40 0.44 0.36 0.36 0.36 0.36 Market capitalization in billions of euros 40 ■-market capitalization of Philips--■-of which publicly quoted stakes ■ 30 20 0.20 10 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20112) 1) 2) Definition: Dividend yield % is as of December 31 of previous year Subject to approval by the 2011 Annual General Meeting of Shareholders 0 2006 2007 2008 2009 2010 Share capital structure During 2010, Philips’ issued share capital increased by approximately 14 million common shares to a level of 986 million common shares. The reason for this is the elective dividend, resulting in the issue of 13,667,015 new common shares. The basic shares outstanding increased from 927 million at the end of December 2009 to 947 million at the end of 2010. As of December 31, 2010, the shares held in treasury amounted to 39.6 million shares, of which 37.7 million are held by Philips to cover long-term incentive and employee stock purchase plans. The Dutch Financial Markets Supervision Act (Wet op het financieel toezicht) imposes a duty to disclose percentage holdings in the capital and/or voting rights in the Company when such holding reaches, exceeds or falls below 5%, 10%, 15%, 20%, 25%, 30%, 40%, 50%, 60%, 75% and 95%. Such disclosure must be made to the Netherlands Authority for the Financial Markets (AFM) without delay. The AFM then notifies the Company. On December 1, 2009, the Company received notification from the AFM that it had received disclosures under the Financial Markets Supervision Act of a substantial holding of 5.03% by BlackRock Inc. in the Company’s common shares. This was subsequently reduced to below 5% as of July 2, 2010. The following 192 This is a customized selection from the Annual Report 2010 18 Investor Relations 18.3 - 18.3 months the holding of BlackRock Inc. moved around the 5% threshold and was reduced to below 5% as of October 18, 2010. Based on a survey in September 2010 and information provided by several large custodians, the following shareholder portfolio information is included in the graphs Shareholder by region and Shareholders by style. Shareholders by region (estimated)1) in % Other 3 North America 42 At the end of 2008 share repurchases totaling EUR 3.3 billion, or two-thirds of the planned EUR 5.0 billion, had been completed. Given the economic conditions in 2008, we announced on January 26, 2009 that, in line with our prudent financial management, we would suspend the share repurchase program until further notice. Further details on the share repurchase programs can be found on the Investor Relations website. For more information see chapter 12, Corporate governance, of this Annual Report. Western Europe 55 1) In December 2007, the Dutch parliament adopted an amendment to Dutch tax legislation, effective January 1, 2008, that increased the amount that companies may spend on repurchasing shares free of withholding tax. Subsequently, Philips announced that it planned to repurchase EUR 5 billion worth of common Philips shares. As a consequence of this new share repurchase program, which includes the portion of the second trading line program that had yet to be completed, Philips terminated its second trading line. Split based on identified shares in shareholder identification In 2008 the Company started the procedure for the cancellation of Philips shares acquired pursuant to the EUR 5.0 billion share repurchase program. The cancellation has been effected in several tranches. Shareholders by style (estimated)1) in % Other 14 Growth 15 Impact of share repurchases on share count Retail 7 in millions of shares 2006 2007 2008 2009 2010 1,143 1,143 972 972 986 36 78 49 45 39 1,107 1,065 923 927 947 Shares repurchased 102 26 146 − − Shares cancelled 173 − 170 − − Yield 6 Value 27 Index 10 1) 2) Shares issued Shares in treasury Shares outstanding GARP2) 21 Split based on identified shares in shareholder identification GARP: growth at reasonable price Share repurchase programs for capital reduction purposes On July 17, 2006, Philips announced a further EUR 1.5 billion share repurchase program, which was expanded to EUR 4.0 billion on August 3, 2006. Philips completed EUR 2.4 billion of this program in 2006. Philips planned to execute the remaining EUR 1.6 billion via a program using a second trading line on Euronext Amsterdam, which started on January 22, 2007. Through this second trading line EUR 0.8 billion worth of shares were purchased in 2007. This is a customized selection from the Annual Report 2010 193 18 Investor Relations 18.4 - 18.4 18.4 Risk management Taking risks is an inherent part of entrepreneurial behavior. A structured risk management process encourages management to take risks in a controlled manner. Philips has a structured risk management process in place that recognizes different risk categories at Strategic, Operational, Compliance and Financial level. A more extensive explanation is published in chapter 7, Risk management, of this Annual Report. Philips’ rating Philips’ existing long-term debt is rated A3 (with stable outlook) by Moody’s and A- (with stable outlook) by Standard & Poor’s. It is our objective to manage our financial ratios to be in line with A3 / A-. There is no assurance that we will be able to achieve this goal and ratings are subject to change at any time. Credit rating summary longterm outlook Standard and Poor’s A- A-2 Stable Moody’s 194 shortterm A3 P-2 Stable This is a customized selection from the Annual Report 2010 18 Investor Relations 18.5 - 18.5 18.5 Performance in relation to market indices Euronext Amsterdam Share price development in Amsterdam, 2010 (in euros) PHIA Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec High 22.33 22.31 25.28 26.94 25.92 26.72 26.23 24.49 24.08 24.19 23.11 23.08 Low 20.34 20.98 22.26 24.10 22.83 23.78 23.45 21.32 22.39 21.73 20.79 21.49 Average 21.25 21.60 23.80 25.08 24.53 25.21 24.53 22.84 23.28 22.94 22.31 22.58 8.25 7.46 6.84 9.80 11.09 7.74 7.09 7.07 7.46 8.32 7.33 5.70 Average daily volume* New York Stock Exchange Share price development in New York, 2010 (in US dollar) PHG Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec High 31.51 31.17 33.48 35.90 33.87 32.44 33.32 32.19 31.42 33.90 32.06 30.70 Low 28.26 28.38 30.22 32.25 28.63 28.09 30.03 26.84 29.51 30.45 27.10 28.15 Average 30.30 29.64 32.29 33.69 30.72 30.65 31.43 29.41 30.43 31.83 30.49 29.82 1.00 0.68 0.93 2.50 2.15 2.29 1.64 1.10 1.55 1.16 1.00 0.95 Average daily volume* * in millions of shares 5-year relative performance: Philips and Dow Jones base 100 = Dec 31, 2005 Philips NY closing share price Dow Jones monthly traded volume in Philips on Dow Jones, in millions 200 40 150 30 100 20 50 10 0 0 Jan ‘06 Share listings Ticker code Dec ‘10 Amsterdam, New York PHIA, PHG No. of shares issued at Dec. 31, 2010 EUR 986 million No. of shares outstanding issued at Dec. 31, 2010 EUR 947 million Market capitalization at year-end 2010 EUR 21.7 billion Industry classification MSCI: Capital Goods, Diversified Industrials ICB: Consumer Electronics1) 20105010 3743 Members of indices AEX, NYSE, DJSI, and others 1) ICB classification based on 2007 sales split This is a customized selection from the Annual Report 2010 195 18 Investor Relations 18.6 - 18.6 18.6 Philips’ acquisitions Announcement dates of Acquisitions acquired in 2010 February 11, 2010 Luceplan Consumer Luminaires Iconic brand in the premium design segment for residential applications February 24, 2010 Somnolyzer1) Home Healthcare Somnolyzer 24x7 automated-scoring solution that can improve the productivity of sleep centers March 26, 2010 Tecso Patient Care & Clinical Informatics Strengthen clinical informatics portfolio with leading Brazilian provider of radiology information systems July 13, 2010 Street Light Control Portfolio 1) Lighting Systems & Controls Strengthen outdoor lighting portfolio with acquisition of Street Lighting controls activities of Amplex A/S July 28, 2010 Apex Imaging Systems Strengthen portfolio of high-quality transducers aimed at the value segment in emerging markets August 2, 2010 CDP Medical1) Patient Care & Clinical Informatics Expand clinical informatics portfolio in high-growth markets in the area of PACS August 20, 2010 Burton Professional Luminaires Expand portfolio with leading provider of specialized lighting solutions for healthcare facilities September 13, 2010 Wheb Sistemas Patient Care & Clinical Informatics Strengthen clinical informatics portfolio with a leading Brazilian provider of clinical information systems October 11, 2010 Discus Health & Wellness Expand oral healthcare portfolio with leading manufacturer of professional tooth whitening products December 6, 2010 NCW Professional Luminaires Expand global leadership position of professional lighting entertainment solutions January 6, 2011 medSage Technologies1) Home Healthcare Allows Philips to offer a web-based solution that enables home care providers to manage ongoing compliance and replenishment services for individuals 1) Asset transaction Announcement dates of Acquisitions acquired in 2009 February 24, 2009 Ilti Luce Professional Luminaires Enhance ability to offer unique indoor architectural lighting solutions March 25, 2009 Dynalite Lighting Systems & Controls Provide further offering in lighting control systems for integral energy management April 1, 2009 Selecon1) Professional Luminaires Strengthen the breadth of solutions in the theatrical and architectural market May 4, 2009 Traxtal Imaging Systems Become one of the leading solution providers for image-guided medical procedures July 15, 2009 InnerCool1) Patient Care & Clinical Informatics Broaden offering in emergency care by adding body temperature management July 16, 2009 Teletrol Lighting Systems & Controls Adds to portfolio of intelligent light and energy management solutions July 27, 2009 Saeco Domestic Appliances Expand in high-growth, high-margin espresso market with strong product range 1) 196 Asset transaction This is a customized selection from the Annual Report 2010 18 Investor Relations 18.7 - 18.8 Financial calendar Communications concerning share transfers, lost certificates, dividends and change of address should be directed to: Financial calendar 18.7 The Royal Bank of Scotland N.V. Department Equity Capital Markets HQ3130 Gustav Mahlerlaan 10, 1082 PP Amsterdam, Netherlands Telephone: +31-20-46 43707 Fax: +31-20-46 41707 Annual General Meeting of Shareholders Record date Annual General Meeting of Shareholders March 3, 2011 Annual General Meeting of Shareholders March 31, 2011 Quarterly reports 2011 First quarterly report 2011 Second quarterly report 2011 Third quarterly report 2011 Fourth quarterly report 2011 April 18, 2011 July 18, 2011 October 17, 2011 January 23, 20121) Sector Capital Markets Days 2011 Capital Markets Day Healthcare May 12, 20111) Capital Markets Day Lighting tbc Capital Markets Day Consumer Lifestyle tbc 2012 Publication of 2011 results 1) 18.8 January 23, 20121) Subject to final confirmation Investor contact Shareholder services Holders of shares listed on Euronext Philips offers a dynamic print manager that facilitates the creation of a customized PDF. Non-US shareholders and other non-US interested parties can make inquiries about the Annual Report 2010 to: Royal Philips Electronics Annual Report Office Breitner Center, HBT 11-13 P.O. Box 77900, 1070 MX Amsterdam, Netherlands Telephone: +31-20-59 77500 E-mail: annual.report@philips.com Holders of New York Registry shares Philips offers a dynamic print manager that facilitates the creation of a customized PDF. Holders of shares of New York Registry and other interested parties in the US can make inquiries about the Annual Report 2010 to: Citibank Shareholder Service P.O. Box 43077 Providence, Rhode Island 02940-3077 Telephone: 1-877-CITI-ADR (toll-free) Telephone: 1-781-575-4555 (outside of US) Fax: 1-201-324-3284 Website: www.citi.com/dr E-mail: citibank@shareholders-online.com Communications concerning share transfers, lost certificates, dividends and change of address should be directed to Citibank. The Annual Report on Form 20-F (which incorporates major parts of this Annual Report) is filed electronically with the US Securities and Exchange Commission. International direct investment program Philips offers a dividend reinvestment and direct stock purchase plan designed for the US market. This program provides existing shareholders and interested investors with an economical and convenient way to purchase and sell Philips New York Registry shares and to reinvest cash dividends. Philips does not administer or sponsor the program and assumes no obligation or liability for the operation of the plan. For further information on this program and for enrollment forms, contact: Citibank Shareholder Service Telephone: 1-877-248-4237 (1-877-CITI-ADR) Monday through Friday 8:30 AM EST through 6:00 PM EST Website www.citibank.com/adr or by writing to: Citibank Shareholder Service International Direct Investment Program P.O. Box 2502, Jersey City, NJ 07303-2502 This is a customized selection from the Annual Report 2010 197 18 Investor Relations 18.8 - 18.8 Shareholders Communication Channel Philips is continually striving to improve relations with its shareholders. For instance, Philips was one of the key companies in the establishment of the Shareholders Communication Channel – a project of Euronext Amsterdam, banks in the Netherlands and several major Dutch companies to simplify contacts between a participating company and its shareholders. Philips will use the Shareholders Communication Channel to distribute the Agenda for this year’s Annual General Meeting of Shareholders as well as an instruction form to enable proxy voting at that meeting. For the Annual General Meeting of Shareholders on March 31, 2011, a record date of March 3, 2011, will apply. Those persons who on March 3, 2011, hold shares in the Company and are registered as such in one of the registers designated by the Board of Management for the Annual General Meeting of Shareholders, will be entitled to participate in and vote at the meeting. Investor relations activities From time to time the Company engages in communications with investors via road shows, one-onone meetings, group meetings, broker conferences and capital markets days. The purpose of these meetings is to inform the market on the results, strategy and decisions made, as well as to receive feedback from our shareholders. Also, the Company engages in bilateral communications with investors. These communications take place either at the initiative of the Company or at the initiative of individual investors. During these communications the Company is generally represented by its Investor Relations department. However, on a limited number of occasions the Investor Relations department is accompanied by one or more members of the Board of Management. The subject matter of the bilateral communications ranges from individual queries from investors to more elaborate discussions following disclosures that the Company has made such as its annual and quarterly reports. The Company is strict in its compliance with applicable rules and regulations on fair and non-selective disclosure and equal treatment of shareholders. More information on the activities of Investor Relations can be found in chapter 12, Corporate governance, of this Annual Report. Analysts’ coverage Philips is covered by almost 40 analysts who frequently issue reports on the company. 198 This is a customized selection from the Annual Report 2010 How to reach us Investor Relations contact Royal Philips Electronics Breitner Center, HBT 11-8 P.O. Box 77900, 1070 MX Amsterdam, Netherlands Telephone: +31-20-59 77221 Website: www.philips.com/investor E-mail: investor.relations@philips.com Abhijit Bhattacharya Executive Vice President – Investor Relations Telephone: +31-20-59 77222 Pim Preesman Manager – Investor Relations Telephone: +31-20-59 77447 Sustainability contact Philips Corporate Sustainability Office Building VS-4C.226 P.O. Box 218 5600 MD Eindhoven, The Netherlands Tel: +31 (0)40 27 83651 Fax: +31 (0)40 27 86161 Website: www.philips.com/sustainability E-mail: philips.sustainability@philips.com 20 Forward-looking statements and other information 20 - 20 20 Forward-looking statements and other information Forward-looking statements This document contains certain forward-looking statements with respect to the financial condition, results of operations and business of Philips and certain of the plans and objectives of Philips with respect to these items, in particular section 5.6, Outlook, of this Annual Report. Examples of forward-looking statements include statements made about our strategy, estimates of sales growth, future EBITA and future developments in our organic business. By their nature, forward-looking statements involve risk and uncertainty because they relate to future events and circumstances and there are many factors that could cause actual results and developments to differ materially from those expressed or implied by these forward-looking statements. Further information on non-GAAP information and a reconciliation of such measures to the most directly comparable GAAP measures can be found in chapter 16, Reconciliation of non-GAAP information, of this Annual Report. These factors include, but are not limited to, domestic and global economic and business conditions, the successful implementation of our strategy and our ability to realize the benefits of this strategy, our ability to develop and market new products, changes in legislation, legal claims, changes in exchange and interest rates, changes in tax rates, pension costs and actuarial assumptions, raw materials and employee costs, our ability to identify and complete successful acquisitions and to integrate those acquisitions into our business, our ability to successfully exit certain businesses or restructure our operations, the rate of technological changes, political, economic and other developments in countries where Philips operates, industry consolidation and competition. As a result, Philips’ actual future results may differ materially from the plans, goals and expectations set forth in such forward-looking statements. For a discussion of factors that could cause future results to differ from such forward-looking statements, see also chapter 7, Risk management, of this Annual Report. Analysis of 2009 compared to 2008 The analysis of the 2009 financial results compared to 2008, and the discussion of the critical accounting policies, have not been included in this Annual Report. These sections are included in Philips’ Form 20-F for the financial year 2010, which will be filed electronically with the US Securities and Exchange Commission. Statutory financial statements and management report The chapters Group financial statements and Company financial statements contain the statutory financial statements of the Company. The introduction to the chapter Group financial statements sets out which parts of this Annual Report form the management report within the meaning of Section 2:391 of the Dutch Civil Code (and related Decrees). 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 fullyear information regarding 2010 is not yet available to Philips, those statements may also be based on estimates and projections prepared by outside sources or management. Rankings are based on sales unless otherwise stated. Fair value information In presenting the Philips Group’s financial position, fair values are used for the measurement of various items in accordance with the applicable accounting standards. These fair values are based on market prices, where available, and are obtained from sources that are deemed to be reliable. Readers are cautioned that these values are subject to changes over time and are only valid at the balance sheet date. When quoted prices or observable market values do not exist, fair values are estimated using valuation models, which we believe are appropriate for their purpose. They require management to make significant assumptions with respect to future developments which are inherently uncertain and may therefore deviate from actual developments. Critical assumptions used are disclosed in the financial statements. In certain cases, independent valuations are obtained to support management’s determination of fair values. IFRS basis of presentation The financial information included in this document is based on IFRS, unless otherwise indicated. As used in this document, the term EBIT has the same meaning as Income from operations (IFO). Use of non-GAAP information In presenting and discussing the Philips Group’s financial position, operating results and cash flows, management uses certain non-GAAP financial measures like: comparable growth; EBITA; NOC; net debt (cash); free cash flow; and cash flow before financing activities. These non-GAAP financial measures should not be viewed in isolation as alternatives to the equivalent GAAP measures. This is a customized selection from the Annual Report 2010 199 ...
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