0000313216 phg:ForwardContractsLongTermMember 2017-12-310000313216phg:CommunicationAndItCostsMember2020-12-31
As filed with the Securities and Exchange Commission on February 26, 201922, 2022
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
Washington, D.C. 20549
Form 20-F
(Mark one)
☐ | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b)
OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☐ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
☒ | ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20182021
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
☐ | SHELL COMPANY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☐ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report . . . . . . . . . . . . . . . . . . .
For the transition period from ___________________________ to ___________________________
Commission file number 001-05146-01
KONINKLIJKE PHILIPS NV
(Exact name of Registrant as specified in its charter)
ROYAL PHILIPS
(Translation of Registrant’sRegistrant's name into English)
The Netherlands
(Jurisdiction of incorporation or organization)
Philips Center, Amstelplein 2, 1096 BC Amsterdam, The Netherlands
(Address of principal executive office)
offices)
Marnix van Ginneken, Chief Legal Officer
+31 20 592059 77232, marnix.van.ginneken@philips.com, Philips Center, Amstelplein 2, 1096 BC Amsterdam, The Netherlands
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:Act.
| Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
| Common Shares - par value | | PHG | | New York Stock Exchange |
|
| Euro (EUR) 0.20 per share | | | | |
Securities registered or to be registered pursuant to Section 12(g) of the Act:Act.
None
None
(Title of class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:Act.
None
(Title of class)
None
Indicate the number of outstanding shares of each of the issuer’'sissuer's classes of capital or common stock as of the close of the period covered by the annual report:report.
| | |
| Class | | Outstanding at December 31, 20182021 |
| KONINKLIJKE PHILIPS NV | | 914,184,087870,182,445 shares |
| Common Shares par value EUR 0.20 per share | | |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☒ Yes☒Yes ☐ No☐
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to sectionSection 13 or 15(d) of the Securities Exchange Act of 1934. ☐ Yes ☒ No
Note-CheckingNote - Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☒Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer”filer,"accelerated filer,” and “emerging"emerging growth company”company" in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ Emerging growth company ☐
If an emerging growth company that prepares its financialfinancial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financialfinancial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐
† The term “new or revised financialfinancial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards CodificationCodification after April 5, 2012.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the
effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.
7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
| | | | |
U.S. GAAP ☐ | | International Financial Reporting Standards as issued by by the International Accounting Standards Board ☒
| | Other ☐ |
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. ☐ Item 17 ☐ Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
IFRS basis of presentation
The financial information included in this document is based on IFRS, as explained in Significant accounting policies, unless otherwise indicated.
References to Philips
References to the Company or company, to Philips or the (Philips) Group or group, relate to Koninklijke Philips N.V. and its subsidiaries, as the context requires. Royal Philips refers to Koninklijke Philips N.V.
Philips Lighting/Signify
References to 'Signify' in this Annual Report relate to Philips' former Lighting segment (prior to deconsolidation as from the end of November 2017 and when reported as discontinued operations), Philips Lighting N.V. (before or after such deconsolidation) or Signify N.V. (after its renaming in May 2018), as the context requires.
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).
Front cover: In 2018, Philips launched its Lumify with Reacts mobile tele-ultrasound solution in Kenya and Nigeria. This solution is based on Philips’ Lumify portable ultrasound system and powered by Innovative Imaging Technologies’ Reacts collaborative platform. It connects clinicians in real time by turning a compatible smart device into an integrated tele-ultrasound solution, combining two-way audio-visual calls with live ultrasound streaming.
1Introduction
This document contains information required for the Annual Report on Form 20-F for the year ended December 31, 20182021 of Koninklijke Philips N.V. (the 20182021 Form 20-F). Reference is made to the Form 20-F cross reference table herein. Only (i) the information in this document that is referenced in the Form 20-F cross reference table, (ii) this introduction and the cautionary statement “forward-looking statements” on the next two pages and (iii) the Exhibits shall be deemed to be filed with the Securities and Exchange Commission for any purpose. Any additional information in this document which is not referenced in the Form 20-F cross reference table, or the Exhibits themselves, shall not be deemed to be so incorporated by reference, shall not be part of the 20182021 Form 20-F and is furnished to the Securities and Exchange Commission for information only.
The terms “Philips”, “Company”, “Philips Group”, “Group”, “we”, “our” and “us” refer
References to Philips
References to the Company or company, to Philips or the (Philips) Group or group, relate to Koninklijke (Royal) Philips N.V. and as applicable to its subsidiaries, and/or its interest in joint ventures and associates.
References to 'Signify' relate to Philips' former Lighting segment (prior to deconsolidation as from the end of November 2017 and when reported as discontinued operations), Philips Lighting N.V. (before or after such deconsolidation) or Signify N.V. (after its renaming in May 2018), as the context requires.
Royal Philips refers to Koninklijke Philips N.V.
IFRS based information
The audited consolidated financial statements as of December 31, 20182021 and 2017,2020, and for each of the years in the three-year period ended December 31, 2018,2021, included in the 20182021 Form 20-F have been prepared in accordance with International Financial Reporting Standards (IFRS) as endorsed by the European Union (EU). All standards and interpretations issued by the International Accounting Standards Board (IASB) and the IFRS Interpretations Committee effective 20182021 have been endorsed by the EU; consequently, the accounting policies applied by Philips also comply with IFRS as issued by the IASB. These accounting policies have been applied by group entities. Comparative results have been restated to reflect the treatment of the Domestic Appliances business as a discontinued operation (for more information, please refer to Discontinued operations and assets classified as held for sale).
Use of non-IFRS information
In presenting and discussing the Philips financial position, operating results and cash flows, management uses certain financial measures that are not measures of financial performance or liquidity under IFRS (‘non-IFRS’). These non-IFRS measures should not be viewed in isolation as alternatives to the equivalent IFRS measure and should be used in conjunction with the most directly comparable IFRS measures. Non-IFRS measures do not have standardized meaning under IFRS and therefore may not be comparable to similar measures presented by other issuers. A reconciliation of these non-IFRS measures to the most directly comparable IFRS measures is contained in this document. Reference is made in Reconciliation of non-IFRS information.
Third-party market share data
Statements regarding market share, contained in this document, including those regarding Philips’ competitive position, are based on outside sources such as specialized research institutes, industry and dealer panels in combination with management estimates. Where full year information regarding 20182021 is not yet available to Philips, market share statements may also be based on estimates and projections prepared by management and/or based on outside sources or management. Rankingsof information. Management's estimates of rankings are based on order intake or sales, unless otherwise stated.
Use of fair-value measurements
In presentingdepending on 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 are not readily available, fair values are estimated using valuation models, and unobservable inputs. Such fair value estimates 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.business.
Documents on display
Philips’sPhilips’ SEC filings are publicly available through the SEC’s website at www.sec.gov. The SEC website contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. Philips’ Internetinternet address is www.philips.com/investor. The contents of any websites referred to herein shall not be considered a part of or incorporated by reference into this document.
For definitions and abbreviations reference is made in Definitions and abbreviations
1.12Forward-looking statements
Pursuant to provisions of the United States Private Securities Litigation Reform Act of 1995, Philips is providing the following cautionary statement.
This document, including the information referred to in the Form 20-F cross reference table, contains certain forward-looking statements with respect to the financial condition, results of operations and business of Philips and certain of the plans and objectives of Philips with respect to these items, in particular, among other statements, certain statements in Item 4 “Information on the Company” with regard to management objectives, market trends, market standing, product volumes, business risks, the implementation of our Accelerate! program, the statements in Item 5 “Operating and financial review and prospects” with regards to trends in results of operations, margins overall market trends, risk management, exchange rates, the statements in Item 8 “Financial Information” relating to legal proceedings and goodwill and statements in Item 11 “Quantitative and qualitative disclosure about market risks” relating to risk caused by derivative positions, interest rate fluctuations and other financial exposure are forward-looking in nature. Forward-looking statements can be identified generally as those containing words such as “anticipates”, “assumes”, “believes”, “estimates”, “expects”, “should”, “will”, “will likely result”, “forecast”, “outlook”, “projects”, “may” or similar expressions. By their nature, these 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 statements.
These factors include but are not limited to: global economic and business conditions; political instability, including developments within the European Union, with adverse impact on financial markets; the successful implementation of Philips’ strategy and the ability to realizegain leadership in health informatics in response to developments in the benefits of this strategy; thehealth technology industry; Philips’ ability to developtransform its business model to health technology solutions and market new products; changes in legislation; legal claims; changes in currency exchange ratesservices; macroeconomic and interest rates; future changes in tax ratesgeopolitical changes; integration of acquisitions and regulations, including trade tariffs; pension coststheir delivery on business plans and actuarial assumptions; changes in raw materials prices; changes in employee costs; thevalue creation expectations; securing and maintaining Philips’ intellectual property rights, and unauthorized use of third-party intellectual property rights; ability to identifymeet expectations with respect to ESG-related matters; failure of products and complete successful acquisitions,services to meet quality or security standards, adversely affecting patient safety and to integrate those acquisitions into the business, thecustomer operations; breach of cybersecurity; ability to successfully exit certain businesses or restructureexecute and deliver on programs on business transformation and IT system changes and continuity; the operations; the rateeffectiveness of technological changes; cyber-attacks, breaches of cybersecurity; political, economicour supply chain; attracting and retaining personnel; COVID-19 and other developmentspandemics; challenges to drive operational excellence and speed in countries where Philips operates; industry consolidationbringing innovations to market; compliance with regulations and competition;standards including quality, product safety and the state(cyber) security; compliance with business conduct rules and regulations; treasury and financing risks; tax risks; reliability of international capital markets as they may affect the timinginternal controls, financial reporting and nature of the disposal by Philips of its remaining interests in Signify (formerly Philips Lighting).management process.
As a result, Philips’ actual future results may differ materially from the plans, goals and expectations set forth in such forward-looking statements. For a discussion of factors that could cause future results to differ from such forward-looking statements, reference is made to the information in Item 3D “Risk Factors”Risk factors.
34Message from the CEO
Our transformation into a customer-centric solutions company is gathering momentum, and with our focus on innovation and continuous improvement we will unlock further value.
Frans van Houten
CEO Royal Philips
Dear Stakeholder,
Amidst the ongoing impact of COVID-19 on society, 2021 was an eventful and challenging year. Our continued strategic progress and strong growth in the first half of the year were overshadowed by the unprecedented scale of the global supply chain disruptions in the second half of the year, as well as the Philips Respironics voluntary field action to remediate the component quality issue in certain of its products.
The intensified global supply chain headwinds and postponement of customer equipment installations due to COVID-19 presented challenges to fully convert our opportunities to revenue in the second half of the year. These factors, combined with the sales consequences of the recall, resulted in full-year sales of EUR 17.2 billion, down 1% year-on-year.
As we work to overcome these headwinds and look to the future, I am very encouraged by the underlying performance of our businesses. Our Diagnosis & Treatment businesses and Personal Health businesses performed well in 2021, recording 8% and 9% comparable sales growth*) respectively. Following in the wake of 2020’s high COVID-19-related demand for hospital ventilation and monitoring & analytics solutions, our Connected Care businesses posted a 23% decline in comparable sales in 2021, which also reflects the effect of the Philips Respironics recall.
We have strengthened our portfolio through our R&D programs, partnerships, and acquisitions. The relevance of our innovative products and solutions and customer interest in partnering with Philips, is underscored by the 4% growth in comparable order intake, resulting in an order book that is 18% higher year-on-year.
Nevertheless, I would like to emphasize that I very much regret the impact of the Philips Respironics recall on patients, care providers and shareholders. We identified – through our post-market surveillance processes – that the sound abatement foam used since 2008 in certain of our sleep and respiratory care products may degrade under certain circumstances. Subsequently, we issued a voluntary recall notification for affected devices to address potential health risks. We have ramped up production, service and repair capacity to ensure patients receive a repaired or replacement device as fast as possible.
As of January 2022, Philips Respironics has shipped a total of approximately 750,000 repair kits and replacement devices to customers and aims to complete the repair and replacement program in the fourth quarter of 2022. In 2018close dialogue with regulators across the world, we made furtherare conducting a comprehensive test and research program to better characterize health risks. In parallel, we have captured and applied learnings from this recall across the entire company, as patient safety, quality and integrity are of the utmost importance to us.
Continued progress on our journey to extend our leadership as a health technology company. strategic roadmap
In my frequent meetings with our hospital customers, they tell me how they appreciate2021, we saw sustained traction for our strategy to help transform the delivery of care across the health continuum, and are keenour innovative portfolio resonates very strongly with customers.
Inspired by our purpose to engage with us. They wantimprove people’s health and well-being, we innovate solutions that deliver meaningful impact. In the consumer domain, for instance, our new Sonicare 9900 Prestige electric toothbrush leverages AI to know more aboutoptimize the user’s brushing technique, ensuring full coverage of their teeth, and instills brushing habits that improve oral health.
For healthcare providers, our innovative solutions – suitessmart combinations of systems, smart devices, software and services – that can help them deliver on the Quadruple Aim of improved patient experience, better health outcomes, improved patient and staff experience, and lower cost of care. Atcare:
- Giving clinicians smart connected imaging tools like our new Spectral CT 7500 system, which deliver high-quality spectral images for every patient on every scan, helping them make precision diagnoses without the
same time, we see a real interest among consumers,need for multiple re-scans. Or our new MR 5300 1.5T ‘helium-free for life’ system, which combines operational and clinical excellence with reduced environmental impact.
- Enabling real-time, remote collaboration between technologists, radiologists and imaging operations teams across multiple sites with our vendor-neutral, multimodality Radiology Operations Command Center.
- Helping surgeons in the interventional lab perform personalized, minimally invasive procedures with solutions like our Azurion next-generation image-guided therapy platform, which was further expanded with breakthrough applications in 2021.
- Enabling healthcare professionals
insurersto orchestrate care delivery, also for patients recovering at home, with connected care solutions like our Patient Flow Capacity Suite, which helps hospitals manage the complete patient journey, and policy makersAcute Care Telehealth, which builds on our successful Tele-ICU solutions.
We signed 80 long-term strategic partnerships with hospitals and health systems around the world in 2021, underlining customers’ appreciation of our holistic approach to help people towardshealthcare. Solutions-based sales and recurring revenues continue to generate a healthier lifestyle and support primary and secondary preventiongrowing proportion of total sales, with the figure now standing at around 45%. In order to maintain the strong flow of health challenges. We see this as a validation of our strategytechnology innovations going forward, we invested EUR 1.8 billion in R&D in 2021.
Major divestment completed, acquisitions to drive future growth
In September, we completed the sale of the Domestic Appliances business to Hillhouse Investment, concluding our line of major divestments. We believe this will allow us to focus on extending our leadership in health technology innovation alongsolutions.
To support future growth and the health continuumdelivery of data-enabled care across care settings, we again invested significantly in our data science, informatics and disease pathways. As a result,cloud technology capabilities in 2021. The acquisitions of BioTelemetry, Capsule Technologies and Cardiologs (the latter completed in January 2022) strengthen our position in patient care management in the hospital and the home. In January 2022, we have seen growing demand foralso closed the acquisition of Vesper Medical, further expanding our image-guided therapy devices portfolio with venous stents.
Delivering on our ESG commitments
We reached 1.67 billion people with our products and solutions, an increaseservices in long-term strategic partnerships, and substantial growth2021, including 167 million in underserved communities – taking us a step closer to our goal of order intake.improving 2 billion lives per year by 2025, including 300 million in underserved communities.
With comparable sales growth of 5%*and the Adjusted EBITA*margin improving by 100 basis points to 13.1% in 2018, we continueWe continued to deliver on the other key commitments set out in our financial targets. Having said that, our performance at segment level shows we still have scope for further improvement. Our DiagnosisEnvironmental, Social & Treatment businesses had a very good year in terms of sales growth, order intake growth and improved earnings. At Connected Care & Health Informatics, topline growth was flat and we continued to make substantial investments in R&D, but the expanding order book gives us confidence we are on the right path to boost growth. Personal Health had a slower year, in part due to internal execution challenges, but we have taken decisive action.Governance (ESG) framework. We are confident about the road ahead, given the exciting array of innovative new productsalready carbon-neutral in our operations and services we are bringing onto the market. We also made a number of complementary acquisitions in 2018now engaging with suppliers and customers to strengthen businessesreduce emissions across our portfolio.entire value chain, as well as driving the transition to a circular economy.
In light ofWe again received recognition for our sustainability efforts in 2021 – achieving a CDP ‘A List’ rating for the continuous performance improvement overninth consecutive year for our climate action, and securing second-highest place in the last three years and the strength of our balance sheet, we propose to increase the dividend by 6%.global Dow Jones Sustainability Indices (DJSI) list.
Looking ahead
While the current geopolitical and macroeconomic uncertainty is a challenge, we are making progress with our ‘self-help’ initiatives to address headwinds such as trade tariffs and emerging-market currency volatility, for instance by adjusting our supply base, leveraging our multi-modality factories, and extending our productivity plans. Last year I wrote that making further progress on product performance and quality was our highest priority for 2018. We continue to invest substantially in driving quality and compliance, and while there is still work to do, we are starting to reap the benefits of our improvement efforts, positioning us well for the future.
Transforming healthcare through innovation
Meeting the growing demand and improving the delivery of care while containing costs – that is the very substantial challenge faced by health systems around the world. It is driving the shift towards value-based care, the consolidation of hospitals into Integrated Delivery Networks, and the consumerization of healthcare, as well as increasing the importance of preventative care, early disease detection, and the management of chronic disease outside the hospital.
Innovative health technology is helping to transform healthcare, supporting improved outcomes as well as productivity gains. The growing role of data, informatics and Artificial Intelligence (AI) is having a major impact, principally in the areas of precision diagnosis, clinical decision support, care orchestration, telehealthfuture, further improving operational excellence and not least, in helping consumers to live a healthy life or cope with chronic disease. In this market, which has attractive growth rates and profit pools, we have strong positions across the health continuum.
At Philips, we believe in integrated, connected care – connecting consumers/patients, providers and payers more effectively and leveraging informatics for better outcomes at lower cost.
We enable clinicians to make precision diagnosis and deliver personalized, minimally invasive therapies throughgrowing our digital imaging and clinical informatics solutions. A shining example is our Azurion image-guided therapy platform, which has secured a +300 basis points gain in market share and over 1,000 orders since its launch in 2017.
We empower care professionals with healthcare informatics solutions like our IntelliSpace Portal data integration, visualization and analysis platform for enhanced diagnostic confidence, and monitoring, predictive analytics solutions like our IntelliVue Guardian with Early Warning Scoring, which enables nursing staff to identify patients whose condition may be deteriorating rapidly.
We enable people to recover, or live with chronic disease, at home, thanks to solutions such as our new Trilogy Evo home ventilation platform plus Care Orchestrator cloud-based management system. Likewise, we enable people to stay healthy and prevent disease by means of connected products like our Pregnancy+ parenting app and our Sonicare DiamondClean electric toothbrush with Sonicare app, which includes teledentistry and automatic brush-head reordering services.
Joining up the dots from the ICU to the home, our HealthSuite platforms support the seamless flow of data needed to care for people in real time, wherever they are.
Our innovation strength has been key to these transformational solutions, and I am convinced there is even better to come. We continue to maintain a high level of investment in R&D, with a strong focus on software and data science, and we now apply the Quadruple Aim as a guide in all our development choices, so that our innovations have maximum impact and are fully scalable.
Delivering on our sustainability commitments
Reflecting our commitment to the United Nations’ Sustainable Development Goals, we continue to embed sustainability deeper in the way we do business. With its focus on access to care, circular economy and climate action, our ‘Healthy people, Sustainable planet’ program is the vehicle that will enable us to deliver on these commitments. In December 2018, Philips became the world’s first health technology company to have its CO2 emission targets approved by the Science Based Targets initiative. Our sustainability performance received renewed recognition when – in the first year since our reclassification to the Health Care Equipment & Services industry group – we took second place in the 2018 Dow Jones Sustainability Index. With health systems the world over increasingly keen to reduce their environmental footprint, we remain convinced that sustainability can be a key competitive differentiator.
Roadmap to win
Withcore business, while driving our transformation into a digital, customer-first solutions company gathering pace,company. I am very confident in our ability to overcome our current challenges. Against this background, and reflecting the importance we have identified three main drivers of continuedattach to dividend stability, we propose to maintain the dividend at EUR 0.85 per share.
Based on good customer demand and our growing order book, we expect to resume our growth and improved profitability: Better serve customersmargin expansion trajectory in the course of 2022. In the short term, however, we continue to see significant volatility and improve quality; Boostheadwinds related to COVID-19 and supply chain challenges, despite our ongoing mitigation efforts. Due to this, the Respironics field action and the strong growth in core business; WinQ1 2021, we expect to start the year with solutions alonga comparable sales decline, followed by a recovery and strong second half of the health continuum.
We believe that by engaging more deeply with our customers and consumers, making it easier for them to do business with us, developing more compelling solutions, and acting with increased agility, speed and efficiency,year. For the full year, we will deliver greater value for all our stakeholders.
This means making a big step up in quality, operational excellence and productivity, and continuing to drive the digital transformation in every area of our business. It means capturing geographic growth opportunities and pivoting to consultative customer partnerships and business models that offer a much deeper relationship, with recurring revenue streams. In that regard, our multi-year ‘patient monitoring as a service’ agreement with Miami's Jackson Health System and our medical technology partnership agreements with Children’s Health hospital in Dallas and Munich Municipal Hospital are a blueprint for the way to go. It also means continuing the shift from products to innovative value-added, integrated solutions, supported by organic growth and disciplined M&A.
Together, these measures will drive sustained performance improvement as we pursue our overall targets of 4-6%target 3-5% comparable sales growth*)and ana 40-90 basis-points improvement in Adjusted EBITA*)margin improvement of 100 basis points on average per year for the period 2017–2020. We also expect to increase the annual free cash flow*to above EUR 1.5 billion by 2020. margin.
In the end, culture is foundational to our strategic ambitions. At Philips we place five key elements high on our culture agenda: putting customers first, acting with quality and integrity, teaming up to win, taking ownership to deliver fast, and improving and inspiring each other. These behaviors create a shared understanding of how we all need to act in order to delight the customer and drive market success.In conclusion
closing
On a personal note, I would like to thank our customers, shareholderssuppliers and other stakeholderspartners for the confidence they have shown in Philipstheir continued support over the past year. 12 months. And a special word of thanks to our employees for their fantastic contribution through another year of often difficult working circumstances due to the pandemic.
I would also like to thankexpress my appreciation to our employeesshareholders for their hard workthe confidence they continue to show in Philips’ long-term future. This is a future founded on purpose and dedication, as we seek to combine day-to-day performancethe robust, growing demand for health technology, which Philips will serve with a profound, customer-focused transformation.
Pleased with the progress we are making, yet conscious that we still have a way to go, I strongly believe that the combinationrelentless focus on customer needs, its strong portfolio of our sense of purpose, innovation strength, culture of customer centricityinnovations, and deepan unwavering commitment to continuous improvement is a potent recipe for Philips to win and make the world healthier and more sustainable.improvement.
Frans van Houten
Chief Executive Officer
45Board of Management and Executive Committee
KoninklijkeRoyal Philips N.V.has a two-tier board structure consisting of a Board of Management and a Supervisory Board, each of which is managed by anaccountable to the General Meeting of Shareholders for the fulfillment of its respective duties. The Board of Management is entrusted with the management of the company. The other members of the Executive Committee which comprises the members ofhave been appointed to support the Board of Management and certain key officers from functions, businesses and markets.
The Executive Committee operates underin the chairmanship of the Chief Executive Officer and shares responsibility for the deployment of Philips’ strategy and policies, and the achievementfulfilment of its objectives and results.
Under Dutch Law, the Board of Management is accountable for the actions of the Executive Committee and has ultimate responsibility for the management and external reporting of Koninklijke Philips N.V. and is answerablemanagerial duties. Please also refer to shareholders at the Annual General Meeting of Shareholders. Pursuant to the two-tier corporate structure, the Board of Management is accountable for its performance to a separate and independent Supervisory Board.
The Rules of Procedure of the Board of Management and Executive Committee are published on within the company’s website (www.philips.com/investor).chapter Corporate governance.
Members of the Board of Management
Frans van Houten
Born 1960, Dutch
Chief Executive Officer (CEO)
Chairman of the Board of Management and the Executive Committee since April 2011
For
Frans van Houten first joined Philips in 1986 and has held multiple global leadership positions across the company on three continents, including the role of co-CEO of the Consumer Electronics division. After temporarily leaving the company to become CEO of NXP/Philips Semiconductors, he rejoined Philips as its CEO. Frans served as co-chair at the World Economic Forum in Davos in 2017. He was one of the initiators and is current co-chair of the WEF Platform to Accelerate the Circular Economy. Frans is also a full résumé, click heremember of the European Round Table for Industry, an advocacy organization comprising the 50 largest European multinationals. He is co-founder and advocate of NL2025, a platform of Dutch influencers who support initiatives to create a better future for the Netherlands in the areas of education, vitality and sustainable growth. He is co-founder of the Graduate Entrepreneur start-up ecosystem in the Netherlands. Frans was appointed a member of the Board of Directors of Novartis in February 2017 and is a member of its Audit Committee since 2021.
Abhijit Bhattacharya
Born 1961, Indian
Executive Vice President
Member of the Board of Management since December 2015
Chief Financial Officer
Abhijit Bhattacharya first joined Philips in 1987 and has held multiple senior leadership positions across various businesses and functions in Europe, Asia Pacific and the U.S. Through 2010 – 2014, he was the Head of Investor Relations of Philips, and subsequently, CFO of Philips Healthcare, Philips’ largest sector at the time. Prior to 2010, Abhijit was Head of Operations & Quality at ST-Ericsson, the joint venture of ST Microelectronics and Ericsson, and he was CFO of NXP’s largest business group.
Marnix van Ginneken
Born 1973, Dutch
Executive Vice President
Member of the Board of Management since November 2017
Chief Legal Officer
Marnix van Ginneken joined Philips in 2007 and became Head of Group Legal in 2010. In this role he was responsible for the various Group Legal departments, including Corporate & Financial Law, Legal Compliance and Legal M&A. In 2014, Marnix became Chief Legal Officer of Royal Philips and Member of the Executive Committee. Before joining Philips, Marnix worked for Akzo Nobel and before that as an attorney in a private practice. Since 2011, he is also Professor of International Corporate Governance at the Erasmus School of Law in Rotterdam.
Other members of the Executive Committee
Sophie Bechu
Born 1960, French/American
Executive Vice President
Chief of Operations
For a full résumé, click here Officer
Abhijit Bhattacharya
Born 1961, Indian
Executive Vice President
Member of the Board of Management since December 2015
Chief Financial OfficerFor a full résumé, click hereRob Cascella
Born 1954, American
Executive Vice President
Chief Business Leader of Diagnosis & Treatment*For a full résumé, click hereMarnix van Ginneken
Born 1973, Dutch/American
Executive Vice President
Member of the Board of Management since November 2017Chief Legal OfficerFor a full résumé, click hereAndy Ho
Born 1961, ChineseChinese/Canadian
Executive Vice President
Chief Market Leader of Philips Greater China
For a full résumé, click hereRoy Jakobs
Born 1974, Dutch/German
Executive Vice President
Chief Business Leader ofConnected Care
Deeptha Khanna
Born 1976, Singaporean
Executive Vice President
Chief Business Leader Personal Health
For a full résumé, click hereHenk Siebren de JongBert van Meurs
Born 1964,1961, Dutch
Executive Vice President
Chief Business Leader Image Guided Therapy and jointly responsible for Diagnosis & Treatment
Chief of International Markets
For a full résumé, click here
Ronald de JongEdwin Paalvast
Born 1967,1963, Dutch
Executive Vice President
Chief of International Markets
Chief Human Resources Officer, Chairman Philips Foundation
For a full résumé, click here
Carla KriwetShez Partovi
Born 1971, German1967, Canadian
Executive Vice President
Chief Innovation & Strategy Officer
Chief Business Leader of Connected Care & Health Informatics*For a full résumé, click hereVitor Rocha
Born 1969, Brazilian/American
Executive Vice President
Chief Market Leader of Philips North America
For a full résumé, click here
Jeroen TasDaniela Seabrook
Born 1959,1973, Swiss
Executive Vice President
Chief Human Resources Officer
Kees Wesdorp
Born 1976, Dutch
Executive Vice President
Chief Business Leader Precision Diagnosis and jointly responsible for Diagnosis & Treatment
Chief Innovation and Strategy Officer
For a full résumé, click here
* This page reflects the compositioncurrent overview of the Executive Committee as per December 31, 2018. As announced on January 10, 2019, Philips has realigned the composition of its reporting segments. Effective as of January 1, 2019, the Sleep & Respiratory Care business has shifted from the Personal Health segment to the renamed Connected Care segment and most of the Healthcare Informatics business have shifted from the renamed Connected Care segment to the Diagnosis & Treatment segment. The Diagnosis & Treatment segment is comprised of two clusters: Precision Diagnosis led by Rob Cascella and Image-Guided Therapy led by Bert van Meurs. Mr. van Meurs wasmembers, see also appointed as a member of the Executive Committee, effective as of January 1, 2019.
56Strategy and Businesses
5.16.1TransformingDriven by purpose
At Philips, our purpose to improve people’s health and well-being through meaningful innovation is at the center of everything we do. This core principle has never been more important than it is in these challenging times.
As a leading health technology company, we believe that – viewed through the lens of customer needs – innovation can improve people's health and healthcare through innovation
Healthcare challengesoutcomes, as well as making care more accessible, personal, connected and sustainable. In concrete terms, we aim to improve the world over
All around the world, trends such as growing, aging populations, the increaselives of 2 billion people a year by 2025, including 300 million in chronic illnesses and changing reimbursement systems have created a need for more efficient, effective and sustainable models of care. At the same time, a growing focus on healthy living and prevention means people are looking for new ways to monitor and manage their health. In underserved communities, meanwhile, accessrising to 2.5 billion and 400 million respectively by 2030.
Guided by this purpose, it is our strategy to lead with innovative solutions that combine products, systems, software and services and leverage clinical and operational data, to help our customers deliver on the Quadruple Aim (better health outcomes, improved patient experience, improved staff experience, lower cost of care) and help people take better care remains a pressing issue.
A clear vision guiding our actions
Led by our vision of making the world healthier and more sustainable through innovation, Philips is driving the digital health revolution to unlock the value of seamless care, helping people to look after their health at every stage of life –life.
We strive to deliver superior, long-term value to our customers and shareholders, while acting responsibly towards our planet and society, in partnership with our stakeholders.
We aim to grow Philips responsibly and sustainably. To this end, we have deployed a comprehensive set of commitments across all the goalEnvironmental, Social and Governance (ESG) dimensions that guide the execution of improving the lives of 3 billion people a year by 2025.
This ambition demands an approach that addresses both the socialour strategy and ecological dimensions, as reflected insupport our commitmentcontribution to the United Nations’UN Sustainable Development Goals 3 12 and 13:
- (Ensure healthy lives and promote well-being for all at all ages
- ), 12 (Ensure sustainable consumption and production patterns
- ) and 13 (Take urgent action to combat climate change and its impacts
With its focus).
Our view on access to care, circular economy and climate action, our ‘Healthy people, Sustainable planet’ program, running from 2016-2020, is designed to help us deliverhealthcare
Besides the healthcare sector's natural drivers of growth – aging populations, the rise of chronic diseases, increased spending on these commitments.
Innovating care
The desire for affordable and effective healthcare delivery, without compromising the future availability of natural resources, is driving the adoption of value-based care. Thisin emerging markets – we believe that health technology will first requirebe a shift from volume to value, which Philips is driving through innovation, as well as by transforming the way we engage with customers and shape business models. Secondly, it will require the balance to shift from acute and episodic care more towards primary and secondary preventative caremajor growth driver in the community and home, improving overall population health.years to come.
At Philips, we like to visualizesee healthcare as a continuum since it– this puts people at thepeople’s health journeys front and center and supports the idea of enables integrated care pathways.pathways. Believing that healthcare should be safe, seamless, efficient and effective, we ‘join upstrive to ‘connect the dots’ for our customers and consumers. Dataconsumers, supporting the flow of real-time data needed to provide precision diagnoses, treatment and informaticschronic care for patients.
Going forward, we believe the digital transformation of healthcare and – accelerated by COVID-19 – the increasing adoption of virtual care, or ‘telehealth’ will play an ever-increasinga major role in helping people to live healthily and/orand cope with disease, and in enabling care providers to meet people’s health needs, deliver better outcomes and improve productivity.
Applying
Helping our extensivecustomers address their healthcare challenges
In the consumer insights,domain, we develop locally relevant, connectedinnovative solutions that support healthier lifestyles, prevent or cure disease, and help people to live well with chronic disease,illness, also in the home and community settings.
In addition to leveraging retail trade partnerships and new business models, we are focused on accelerating growth through online channels, delivering products and services direct to consumers, and supporting longer-term relationships to maximize the benefit consumers can derive from our solutions.
In clinics and hospitals, we are teaming up with healthcare providers in long-term strategic partnerships to innovate and transform the way care is delivered.
We listen closely to our customers’ needs and together we co-create solutions – suitesthat help our customers improve outcomes, patient and staff experience and productivity, and so deliver on the Quadruple Aim of systems, smart devices, software and services that drive improvements in patient outcomes, quality of care delivery and cost productivity. value-based care.
Increasingly, we are partneringworking together with our health systems customers in newnovel business models, where we take co-responsibilityincluding outcome-oriented payment models, that align their interests and ours in long-term partnerships. The combination of compelling solutions and consultative partnership contracts, including a broad range of professional services, drives growth rates above the group average, as well as a higher proportion of recurring revenues.
We are embedding AI and data science in our propositions – for our customers’ key performance indicators.
Integrated solutions addressing the Quadruple Aim
Philips sees significant value in integrated healthcare,instance, applying the power of predictive data analytics and artificial intelligence at the point of care while at– to leverage the same time optimizing care delivery acrossvalue of data in the health continuum. This includes an increased focus on both primaryclinical and secondary preventionoperational domains, aiding clinical decision making and population health management programs.improving the quality and efficiency of healthcare services.
With our global reach, market leadership positions, deep clinical and technological insights, and innovative strength,customer-centric innovation capability, we are uniquely positionedstrongly placed to create further value in ‘the last yard’a changing healthcare world through our propositions in:
Diagnosis & Treatment
- Precision Diagnosis – providing smart, connected systems, optimized workflows, and integrated diagnostic insights, leading to
consumersclear care pathways and care providers, delivering:connected products and services supporting the health and well-being of peoplepredictable outcomesintegrated modalities and clinical informatics to deliver precision diagnosisreal-time guidance and smart devices forImage Guided Therapy – innovating minimally invasive interventionsconnected productsprocedures in a growing number of therapeutic areas, with significantly better outcomes and services for chronic care.productivity, while patients have a much better experience and can return home faster
Connected Care
Underpinning these solutions,Driving better care management by providing a wealth of actionable data about patients' condition and spanning the health continuum, our connected carehospital operations, and health informatics solutions enable us to:
enhance personal hygieneOur key strategic imperatives and value creation objectives
By addressing healthcareOur roadmap – with its three strategic imperatives – is our guide as a ‘connected whole’ in this way, we are ablecontinue our transformation journey to unlock gains and efficienciesattain HealthTech industry leadership and drive innovations that helpvalue creation.
Based on good customer demand and our customersgrowing order book, we expect to deliver onresume our growth and margin expansion trajectory in the Quadruple Aimcourse of value-based healthcare: improved patient experience, better health outcomes, improved staff experience, and lower cost of care.
We are focusing on end-to-end pathways – at present primarily cardiology, oncology, respiratory care, and pregnancy and parenting – where we believe our integrated approach can add even greater value.
The road ahead
As2022. In the short term, however, we continue onto see significant volatility and headwinds related to COVID-19 and supply chain challenges, despite our health technology journey,ongoing mitigation efforts. Due to this, the drivers set outRespironics field action and the strong growth in Q1 2021, we expect to start the roadmap below are designedyear with a comparable sales decline, followed by a recovery and strong second half of the year. For the full year, we target 3-5% comparable sales growth* and a 40-90 basis-points improvement in Adjusted EBITA*) margin.
5.26.2How we create value
Based on the International Integrated Reporting Council framework, and with the Philips Business System at the heart of our endeavors, we use six forms of capitalvarious resources to create value for our stakeholders in the short, medium and long term.
As we drive our transformation to become a solutions provider to our customers and consumers, we have adopted a single standard operating model that defines how we work together effectively to achieve our company objectives – the Philips Business System (PBS). The PBS integrates key aspects of how we operate:
Strategy
Our strategy defines our path to sustainable value creation for customers and shareholders.
Governance
Clear governance, roles and responsibilities empower people to collaborate and act fast.
Processes
Simplified standard processes, systems and practices enable lean and agile ways of working.
People
We value and develop people and teams, rewarding them for sustainable results.
Culture
We live the Philips culture, which sets standards on behaviors, such as ensuring patient safety, quality and integrity, and putting the customer first.
Performance
Through disciplined performance management and continuous improvement we achieve our goals.
Having a single business system increases speed and agility, and enhances standardization, quality and productivity, while driving a better, more consistent experience for our customers.
Philips Business System
With its four interlocking elements, the Philips Business System (PBS) is designed to help us deliver on our mission and vision – and to ensure that success is repeatable. As we execute our strategy and invest in the best opportunities, leverage our unique strengths and become operationally excellent, we will be able to consistently deliver value to our customers, consumers, shareholders, and other stakeholders.
Strategy - Where we invest
We manage our portfolio with clearly defined strategies and allocate resources to maximize value creation.
Capabilities, Assets and Positions - Our unique strengths
We strengthen and leverage our core Capabilities, Assets and Positions as they create differential value: deep customer insight, technology innovation, our brand, global footprint, and our people.
Excellence - How we operate
We are a learning organization that applies common operating principles and practices to deliver to our customers with excellence.
Path to Value - What we deliver
We define and execute business plans that deliver sustainable results along a credible Path to Value.
The six capitals
Human
We employ diverse and talented people and give them the skills and training they need to ensure their effectiveness and their personal development and employability.
Intellectual
We apply our innovation and design expertise to create new products and solutions that meet local customer needs.
Financial
We generate the funds we need through our business operations and where appropriate raise additional financing from capital providers.
Manufacturing
We apply Lean techniques to our manufacturing processes to produce high-quality products. We manage our supply chain in a responsible way.
Natural
We are a responsible company and aim to minimize the environmental impact of our supply chain, our operations, and also our products and solutions.
Social
We contribute to our customers and society through our products and solutions, our tax payments, the products and services we buy, and our investments in local communities.
Value outcomes
Output
The result of the application of the six forms of capitalvarious resources to Philips’ business activities and processes as shaped by the Philips Business System
Human
- Employee Engagement Index
74%79% favorable - Sales per employee EUR
234,121219,419 - Safety 213 Total Recordable Cases
Intellectual
- New patent filings
1,120860 IP Royalties Adjusted EBITA*) EUR 272382.5 million141182 design awards
Financial
- Comparable sales growth*)
5% 64% Green Revenues
(1.2)%- Adjusted EBITA*) as a % of sales
13.1%12.0% NetFree cash provided by operating activities flow*)EUR 1.8 billionNet capital expenditures EUR 796900 million
Manufacturing
- EUR
18.112.0 billion revenues from products and solutionsgoods sold
Natural
12%70.5% Green/EcoDesigned Revenues- 16% revenues from circular propositions
- Net CO2 emissions from own operations down to
436zero kilotonnes 257,00073,500 tonnes (estimated) materials used to put products on the market- Waste
down to 24.5 kilotonnes,22,204 tonnes, of which 84% recycled87% repurposed
Social
- Brand value USD 12.1 billion (Interbrand)
- Partnerships with UNICEF, Red Cross, Amref and Ashoka
Societal impact
Impact
The societal impact of Philips thoughthrough its supply chain, its operations, and its products and solutions
Human
- Employee benefit expenses EUR
5,2876,246 million, all staff paid at least a Living Wage - Appointed
77% 72% of our senior positions from internal sources 21% 28% of Leadership positions held by women
Intellectual
- Around
40%60% of revenues from new products and solutions introduced in the last three years - Over 65% of sales from leadership positions
Financial
- Market capitalization EUR
28.329 billion at year-end
- Long-term credit rating A- (Fitch), Baa1 (Moody's), BBB+ (Standard & Poor's)
- Dividend EUR
738773 million
Manufacturing
90%100% electricity from renewable sources
240,000 employees impacted at suppliers participating in the 'Beyond Auditing' program
Natural
- Environmental impact of Philips operations down to EUR
175106 million
1st All 25/25 industrial sites 'Zero Waste to Landfill' at year-end 2021- First health technology company to have its CO2 reductions assessed and approved by the Science Based Targets initiative
Social
1.541.67 billion Lives Improved, (2.24 billion including Signify),of which 175167 million in underserved communities (including 2.2 million via Philips Foundation)- 430,000 employees impacted at suppliers participating in the 'Beyond Auditing' program
- Total tax contribution EUR 4,090 million (taxes paid/withheld)
- Income tax
paidbenefit EUR 301103 million; the geographic statutoryeffective income tax rate is 25% of the result before tax
(20.0)%
6.4Our businesses
Our reporting structure in 20182021
Koninklijke Philips N.V. (Royal Philips) is the parent company of the Philips Group, headquartered in Amsterdam, the Netherlands. The company is managed by the Executive Committee (comprising the Board of Management and certain key officers) under the supervision of the Supervisory Board. The Executive Committee operates under the chairmanship of the Chief Executive Officer and shares responsibility for the deployment of Philips’ strategy and policies, and the achievement of its objectives and results.
Group. In 2018,2021, the reportable segments were Diagnosis & Treatment businesses, Connected Care & Health Informatics businesses, and Personal Health businesses, each having been responsible for the management of its business worldwide. Additionally, Philips identifies the reportable segment Other. The results in this report are based on
Since the 2018 structure shown below:
To further align its businesses with customer needs, Philips announced in January 2019 the realignmentcompletion of the three reportable segments – Diagnosis & Treatment, Connected Care & Health Informatics and Personal Health – effective January 1, 2019. The most notable changes are the shiftsale of the Sleep & Respiratory CareDomestic Appliances business from(formerly part of the Personal Health segment tobusinesses), it is no longer consolidated by Philips as from September 1, 2021 and therefore is not included in the renamed Connected Carefollowing discussion.
Philips Group
Total sales by reportable segment and the shift of the Healthcare Informatics business (excluding the Tasy EMR business and IntelliSpace Enterprise Edition) from the Connected Care segment to the Diagnosis & Treatment segment.
As of January 1, 2019, Philips’ reporting segments are composed as follows:
Diagnosis & Treatment, which unites the businesses related to the promise of precision diagnosis and disease pathway selection, and the businesses related to image-guided, minimally invasive treatments. This segment comprises the Diagnostic Imaging, Ultrasound, Healthcare Informatics and Image-Guided Therapy businesses.
Connected Care, which focuses on patient care solutions, advanced analytics and patient and workflow optimization inside and outside the hospital, and aims to unlock synergies from integrating and optimizing patient care pathways and leveraging provider-payer-patient business models. This segment comprises the Monitoring & Analytics, Therapeutic Care, Population Health Management, and Sleep & Respiratory Care businesses (including the Home Respiratory Care business).
Personal Health, which focuses on healthy living and preventative care. This segment comprises the Personal Care, Domestic Appliances, Oral Healthcare, and Mother & Child Care businesses.
| 2021 |
|---|
| Diagnosis & Treatment | 50% |
| Connected Care | 27% |
| Personal Health | 20% |
| Other | 3% |
6.4.1Diagnosis & Treatment businesses
The Chief Business Leader of the Diagnosis & Treatment businesses segment, Rob Cascella, joined Philips in April 2015. He has more than 30 years of experience in the healthcare industry and has served on the boards of several companies, including 10 years as President and later CEO of Hologic Inc.
About Diagnosis & Treatment businesses in 2018
Our Diagnosis & Treatment businesses are foundational to our health technology strategy, delivering on the promisecreate value through their unique portfolio of innovative solutions – consisting of systems, smart devices, software and services, powered by AI-enabled informatics – that support precision medicinediagnoses and least-invasive treatmentminimally invasive procedures in therapeutic areas such as cardiology, peripheral vascular, neurology, surgery, and therapy. Weoncology. With these solutions, we enable our customers to realize the full potential of the Quadruple Aim – anbetter health outcomes, improved patient experience, better health outcomes, an improved staff experience, and lower cost of care.
Serving diagnostic enterprise imaging markets globally, we see significant opportunity to enable precise diagnoses while at the same time supporting adjacent needs for guidance across care pathways and increasing departmental productivity. We do this through smart diagnostic systems, connected workflow solutions, integrated diagnostics and clear care pathways, driving enterprise-wide operational efficiency and supporting clinicians to provide an early and definitive diagnosis, enabling them to select tailored care pathways and predictable outcomes for every patient.
We also provide integrated solutions combining imaging systems and diagnostic and therapeutic devices, which optimize interventional procedures and so deliver more effective treatment, better outcomes and higher productivity. Building upon our leading-edge Image Guided Therapy System – by connecting people, dataAzurion, we continue to innovate, optimizing clinical and technology.operational lab performance through advances in workflow and integration for routine procedures, and expanding the role of image-guided interventions to treat new groups of patients such as those with complex diseases including stroke, lung cancer and spine disorders. We are focused on solutions (consisting of suites of systems, smart devices, softwarealso innovating the way we engage with our customers in new business models across different care settings, including out-of-hospital settings such as office-based labs and services) that are robustambulatory surgical centers, which offer clear clinical, financial and easy to use, while providing the most efficient path to obtaining a precise diagnosis by integrating multiple sources of information and combining the data to create a comprehensive patient view. By bringing together imaging morphology, pathology and genomics, we are able to extract and analyze the information needed to offer highly personalized care. Informatics is central to everything we do: our KLAS-awarded IntelliSpace Portal platform, for example, provides artificial intelligence to make more consistent decisions, as well as making it easier to share and collaborate.
We continue to expand the applications for image-guided treatment and therapy – where clinicians are provided with the technology necessary to determine the presence of disease, guide procedures, deliver least-invasive treatment, and confirm effectiveness. Our solutions enable patient-specific treatment planning and selection, simplify complex procedures through integrated real-time guidance, and provide clinically proven treatment solutions. In 2018, Philips completed the roll-out of its new Ingenia range of digital MR systems. This was part of a broader renewal of the company’s Diagnostic Imaging portfolio, 70% of which has been introduced in the past two years. We provide image guidance both in our proprietary products and by partnering with radiation therapy companies like Elekta and IBA to deliver real-time, precise cancer treatment.operational benefits.
In Image-Guided Therapy, iFR –2021, the Diagnosis & Treatment businesses benefited from a technology used to assess coronary lesions that is unique to Philips – continued to gain tractionpartial resumption of elective procedures and was incorporated intoexams as the European Society of Cardiology’s updated guidelinesCOVID-19 restrictions eased, and strong order growth for revascularization.capital equipment, which bodes well for 2022. We continued to expandmake advances in innovation, strengthening our portfolio in Image-Guided Therapyand providing clinical and economic evidence to support the adoption of our solutions. In oncology care, we deepened our collaboration with leading precision radiation therapy company Elekta, with the acquisitionaim of EPD Solutions, an innovatoradvancing comprehensive and personalized cancer care through precision oncology solutions. The launch of the Spectral Computed Tomography 7500 system is a significant step forward in image-guided procedures for cardiac arrhythmias. We announcedintegrating the additional diagnostic benefits of spectral CT into standard workflows, and in combination with Image Guided Therapy System – Azurion – represents the world’s first always-on spectral detector angio-CT solution. Significant new clinical data demonstrated the value of intravascular ultrasound, in which Philips is a partnership with Innovative Imaging Technologies to launch an industry-first integrated tele-ultrasound solution based on Philips’ Lumify portable ultrasound system. We also announced a partnership agreement with innovative women’s health company Hologic to offer care professionals integrated solutions comprising diagnostic imaging modalities, advanced informatics and services forglobal leader, in the screening, diagnosis and treatment of women.
Our Diagnosis & Treatment businesses’ value proposition to customers is based on combining our extensive clinical experience with oura broad portfoliorange of technologies – making us uniquely capable to provide meaningful solutions that ultimately can improve the lives of the patients we serve while lowering the cost of care delivery for our customers.
Through our various businesses, Diagnosis & Treatment is focused on growing market share and profitability by leveraging:
industry-leading tailored applications and sharper imaging to drive growth in the core and adjacencies in Ultrasoundour unique suite of innovative procedural solutions to support delivery of the right therapy in real-time in Image-Guided Therapyintelligent, AI-enabled applications combined with successful innovations in our systems platforms in Diagnostic Imagingenhanced offerings in oncology, cardiology and radiology, and expanding our solutions offering, which comprises systems, smart devices, software and services
Philips is one of the world’s leading health technology companies (based on sales) along with Medtronic, General Electric and Siemens Healthineers. The competitive landscape in the healthcare industry is evolving with the emergence of new market players.peripheral vascular patient populations.
In 2018,2021, the Diagnosis & Treatment segment consisted of the following areas of business:
Diagnostic Imaging: Magnetic Resonance Imaging (MRI), with helium-free for life operations, bundled with associated software to streamline workflows, optimize diagnostic quality, and improve patient experience; X-ray systems, together with associated software to streamline workflows and optimize diagnostic quality; advanced and efficient Computed Tomography Advanced Molecular Imaging, Diagnostic X-Ray, as well as integrated clinical(CT) systems and software, including detector-based Spectral CT; molecular and hybrid imaging solutions which include radiation oncology treatment planning, disease-specific oncologyfor nuclear medicine
- Ultrasound: echography solutions
and X-Ray dose management Image-Guided Therapy: interventional X-ray systems, encompassing cardiology, radiology and surgery, and interventional imaging and therapy devices that include Intravascular Ultrasound (IVUS), fractional flow reserve (FFR) and instantaneous wave-free ratio (iFR), and atherectomy catheters and drug-coated balloons for the treatment of coronary artery and peripheral vascular disease
Ultrasound: imaging products focused on diagnosis, treatment planning and guidance for cardiology, general imaging, obstetrics/gynecology, and point-of-care applications, as well as proprietary software capabilities to enable advanced diagnostics and interventions.
interventions- Enterprise Diagnostic Informatics: a suite of integrated products and services that deliver a comprehensive platform designed to connect clinical data and optimize workflows around every step in the patient’s journey across a range of diagnostic (radiology, point-of-care, laboratory) and clinical (oncology, cardiology, neurology) service lines
- Image Guided Therapy: Systems – integrated interventional systems that combine information from imaging systems, interventional devices, navigation tools and patient health records to provide interventional staff with the control and information they need to perform procedures efficiently; Devices – interventional diagnostic and therapeutic devices to treat coronary artery and peripheral vascular disease, including Intravascular Ultrasound (IVUS), Intracardiac Echo (ICE), fractional flow reserve (FFR) and instantaneous wave-free ratio (iFR) physiology measurement, atherectomy catheters, a dissection repair implant, as well as drug-coated balloons and lead extraction devices
Diagnosis & Treatment
Total sales by business
as a %
2018
| 2021 |
|---|
| Diagnostic Imaging | 42% |
| Ultrasound | 19% |
| Enterprise Diagnostic Informatics | 8% |
| Image Guided Therapy | 31% |
Revenue is predominantly earned through the sale of products, leasing, customer services fees, recurring per-procedure fees for disposable devices, and software license fees. For certain offerings, per studyper-study fees or outcome-based fees are earned over the contract term.
Sales channels are a mix of a direct sales force, especially in all the larger markets, combined withthird-party distributors and an online sales portal and distributors – thisportal. This varies by product, market and price segment. Sales are mostly driven by a directOur sales force that hasorganizations have an intimate knowledge of technologies and clinical applications, as well as the proceduressolutions necessary to solve problems for which our devices are used, and visits our customer base frequently.customers.
SalesUnder normal circumstances, sales at Philips’ Diagnosis & Treatment businesses are generally higher in the second half of the year, largely due to the timing of new product availability and customer spending patterns.
At year-end 2018,2021 Diagnosis & Treatment had 27,381around 32,000 employees worldwide.
With regard to regulatory compliance and quality, please refer to Our commitment to Quality, Regulatory Compliance and Integrity.
With regard to sourcing, please refer to Supplier indicators.
20182021 business highlights
ContinuingPhilips received US FDA clearance for its SmartCT (Cone Beam CT) application for the renewalAzurion image-guided therapy system, which provides interventionalists with CT-like 3D images to enhance procedural outcomes and fits seamlessly into existing workflows. An industry-first, Philips also introduced ClarifEye Augmented Reality Surgical Navigation, advancing minimally invasive spine procedures in the hybrid operating room.
Philips has pioneered spectral CT diagnostics. The company’s new Spectral CT 7500, which enables customers to benefit from a reduction in follow-up scans, increased certainty in lesion characterization, and reduced time to diagnosis, is attracting strong customer demand. For example, the University Medical Center Utrecht in the Netherlands installed two Spectral CT systems, with the aim of its diagnostic imaging portfolio, Philips launchedproviding greater confidence in mainstream clinical diagnosis – for all patients and in all exams.
Building on the Ingenia Elition 3.0T and Ingenia Ambition 1.5T MR systems. Both systems offer superb image quality while performing exams up to 50% faster. An industry first, the Ingenia Ambition enables imaging departments to perform more productive, helium-free operations. The company also received CFDA approval to market its advanced Vereos Digital PET/CT in China.
The expansionsuccess of the Ultrasound business beyond its core strengthIntraSight interventional applications platform, we further reinforced Philips’ leading position in cardiac ultrasound into attractive adjacencies continuesimage- guided therapy with the introduction of IntraSight Mobile, which offers users in hospitals and office-based labs the integration, flexibility and affordability of a single mobile system for intravascular imaging, physiology measurements and co-registration for seamless workflows and enhanced patient care.
Philips announced progress on several clinical studies including the positive two-year clinical study results for the Tack Endovascular System for dissection repair, the first patient enrollment in the DEFINE GPS multicenter study to be successful, driven by innovations such as an advanced transducer optimizedfurther drive the adoption of iFR for OB/GYN and General Imaging applications,percutaneous coronary interventions based on clinical evidence, and the telehealth capabilitiesstart of the WE-TRUST multicenter stroke study to shorten treatment times by identifying, planning and treating ischemic stroke patients in the interventional suite. Moreover, Philips announced the first structural heart repair procedure at Mayo Clinic using its Lumify app-based ultrasound solution.new 3D intracardiac echocardiography catheter VeriSight Pro.
As a leaderBuilding on Philips’ leadership in image-guided therapy Philips launchedsolutions in cardiology, the company is further strengthening its EPIQ CVxi ultrasound system combinedposition in fast- growing adjacencies such as neurology and oncology. For example, USA-based Piedmont Health equipped its neurosurgical operating rooms with the latesta specialized version of its unique EchoNavigator software specifically designed for minimally invasive structural heart repairs, a fast-growing image-guided therapy segment.
Philips’ Image-Guided Therapy Devices continued its strong momentum, supported by a growing amount of clinical data. Results from the DEFINE FLAIR trial demonstrated that an iFR-guided strategy reduces costs, improves patient comfort compared to an FFR-guided strategy, and delivers consistent patient outcomes. The adoption of Philips’ proprietary iFR technology also reached a major milestone after its inclusion in the European Society of Cardiology’s updated guidelinesPhilips Azurion for the assessmenttreatment of coronary artery lesions.
To further strengthen Philips’ businesses through targeted acquisitions, the company acquired EPD Solutions, an innovator that has developedstroke. Philips also announced positive results of a breakthrough technology for image-guided treatments for cardiac arrhythmia.
Philips launched an extension to the successful Azurion image-guided therapy platform,clinical study aimed at setting a new standard of safety and accuracy in the industry. Azuriondiagnosis of small peripheral lung lesions using Philips Lung suite.
Philips launched next-generation digital pathology solution, Philips Digital Pathology Suite – IntelliSite – which features a comprehensive, scalable suite of software tools and capabilities designed to help streamline workflows, enhance diagnostic confidence, facilitate team collaboration, integrate artificial intelligence (AI) and increase the efficiency of pathology labs. Underlining its leading role in digital pathology, the company partnered with FlexArm includes innovationsHealius Pathology, one of Australia's leading providers of private medical laboratory and pathology services, to deploy a multi-site digital pathology solution across Healius’ National Pathology Network.
Philips introduced new AI-enabled software and systems in MR, including the MR 5300, its second helium-free for optimal visualization acrosslife MR operations 1.5T system, the whole patient in 2DMR 7700 3.0T system for neuro applications, and 3DMR Workspace, which simplifies the path from image acquisition to simplifydiagnosis.
The company enhanced its EPIQ and Affiniti ultrasound systems with tele-ultrasound capabilities, as well as adding liver fat quantification tools that allow allows non-invasive diagnosis of early-stage fatty liver disease.
A new addition to its Ambient Experience portfolio, Philips launched Pediatric Coaching, a holistic solution designed to be a less stressful experience for parents and their children undergoing MRI scans. The company also announced an initiative with the Walt Disney Company EMEA to test the effects of custom-made animations, including specially-made Disney stories, within Philips’ Ambient Experience hospital environments.
Philips further expanded its leading image-guided therapy portfolio through the acquisition of Vesper Medical, adding a venous stenting solution to address the root cause of chronic deep venous disease and enhance a broad range of procedures. Additionally, patient care. This will complement Philips’ strong IVUS offering in venous imaging and expand the company's growth in the vascular therapy market.
Philips announcedreceived FDA clearance for its new MR 5300 system, continuing the enrolmentadvancement of the first patient incompany’s helium-free for life operating portfolio. Powered by AI, the MR 5300 simplifies and automates complex clinical and operational tasks for outpatient clinical use and MR departments to help accelerate workflows and improve access to affordable, quality care.
Further expanding the company’s comprehensive CT portfolio, Philips introduced the new Stellarex ILLUMENATE Below-the-Knee (BTK) Investigational Device Exemption (IDE) study in the US.CT 5100 Incisive with CT Smart Workflow, comprising AI-enabled capabilities designed to accelerate workflows, enhance diagnostic confidence, and maximize system up-time.
About Connected Care & Health Informatics businesses in 2018
Spanning the entire health continuum, the Connected Care & Health Informatics businesses (as perhelp broaden the 2018 reporting structure) aimreach and deepen the impact of healthcare – with solutions that unite devices, informatics, data and people across care networks. In this way, Philips connects patients and caregivers across care settings, delivering clinical, operational and therapeutic solutions that help our customers address the Quadruple Aim of better health outcomes, improved patient and staff experience, and lower cost of care.
In 2021, Connected Care continued to play a crucial role in fulfilling patient and customer needs created by the COVID-19 global pandemic – delivering core systems such as patient monitors, supporting the expansion of telehealth for the ICU, providing ventilators and oxygen, and delivering remote patient care safely.
COVID-19 continues to accelerate the digital transformation of healthcare, enabled by, for example, cloud and SaaS offerings. Increasingly, our customers need to support the transition of care, in the hospital and from the hospital to the home, making virtual care services an essential part of healthcare delivery. At the same time, they want to be able to unlock data siloes and translate data into clinical and operational insights to support better outcomes. And they want to leverage automation and remote support in order to improve patient outcomes, increase efficiencyworkflows and enhance patientalleviate staffing constraints.
In 2021, Connected Care rose to these challenges in large, growing and caregiver satisfaction, driving towards value-based care. Our solutions builddiverse markets, supported by the recent acquisitions in clinical data services and the increased focus on Philips’ strength in patient monitoring and clinical informatics to improve clinical and economic outcomes in all care settings, within and outside the hospital.informatics.
Philips has a deep understanding of clinical care and the patient experience that, when coupled withinside and outside the hospital. The combination of our advanced technological solutions and consultative approach allows us to be an effective partner forto our customers in their transformation, both across the enterprise and at the level of the individual clinician. Philips deliversclinician, nurse and patient. Our consultation services that take the burden off hospital staff with optimizedare set up to help redesign and optimize patient and data flow, a smooth integration process, improved workflow,work flows, as well as to provide predictive analytics, customized training and improved accessibility across our application landscape.landscape, thus reducing the burden on hospital staff and improving patient safety.
This requires a secure common digital platformdata platforms that connectsconnect and alignsalign consumers, patients, payers and healthcare providers.providers in an interoperable manner. Philips’ platforms aggregate and leverage information from clinical personaldevices, patient and historical data to support care providers in delivering first-time-right diagnosespatient engagement, diagnostics, (ambulatory) patient monitoring and treatment. Philips continually builds out new capabilities within Philips HealthSuite – a cloud-based connected health ecosystem of devices, apps and digital tools – to accomplish just that. For information on how Philips manages cybersecurity risk, please refer to Operational risks.
Philips delivers personalized insights by applying predictive analytics and artificial intelligence across our(clinical) therapy solutions. As an example, we are able to support healthcare professionals caring for elderly patients living independently at home in making clinical decisions and alerting medical teams to potential issues. Our integrated and data-driven approach promotes seamless patient care, helps identify risks and needs of different groups within a population, and provides clinical decision support.
In 2018,June 2021, our subsidiary, Philips Respironics, initiated a voluntary recall notification in the United States and field safety notice outside the United States for certain sleep and respiratory care products to address identified potential health risks related to the polyester-based polyurethane (PE-PUR) sound abatement foam in these devices. Following the substantial ramp-up of its production, service and repair capacity in 2021, the repair and replacement program in the United States and several other markets is under way. As of January 2022, Philips Respironics has shipped a total of approximately 750,000 repair kits and replacement devices to customers and aims to complete the repair and replacement program in the fourth quarter of 2022.
In 2021, the Connected Care & Health Informatics segment consisted of the following areas of business:
- Hospital Patient Monitoring: This business delivers acute patient management solutions to improve clinical and patient outcomes and achieve operational and economic efficiencies. Leveraging a strong presence in the ICU, Hospital Patient Monitoring
& Analytics is a solutions business enabling smart decision-making for caregivers, administratorsenhance customers’ experience and patients,improve patient outcomes with seamless patient data monitoring from admission to help control costs, increase efficiency,discharge, and support better health. Monitoring & Analytics solutions encompass: integratedby turning patient monitoring systems for all price levels, wearable biosensors, advanced intelligence platforms providing keydata into clinical insights and clinical decision support to clinicians when and where they need it, for real-time clinical informationthat are actionable at the patient’s bedside; patient analytics, including diagnostic ECG data management for improved quality of cardiac care; the eICU/Tele-ICU program. Monitoring & Analytics also includes maintenance, clinicalright time and IT services as well as consumables.
Therapeutic Care is expanding accessspecific to and quality of respiratorytargeted care resuscitation, and emergency care solutions (including devices, services, and digital/data solutions). Hospital Respiratory Care (HRC) and settings. - Emergency Care
& Resuscitation (ECR) solutions are helping caregivers: Our business propositions play a critical role in connected acute care management, both inside and outside the hospital, including cardiac resuscitation (e.g. AEDs) and emergency care solutions (devices, services, and digital/data solutions). - Sleep & Respiratory Care: Philips’ cloud-based sleep and respiratory patient management solutions enable the care of more than 10.5 million connected patients, driving adherence, reimbursement and remote patient management. This extends from ambulatory patient care solutions for obstructive sleep apnea, to end-to-end solutions that encompass consumer engagement, diagnostics, people-centric therapy, cloud-based connected propositions and care management services for patients with COPD (Chronic Obstructive Pulmonary Disease) and respiratory conditions. Hospital Respiratory Care provides invasive and non-invasive ventilators for acute and sub-acute hospital
environments and respiratory monitoring devices; consumables acrossenvironments; Home Respiratory Care supports chronic care management in the patient monitoring and therapeutic care businesses; customer service, including clinical, IT, technical and remote customer propositions. In 2018, Philips acquired Remote Diagnostic Technologies (RDT), a UK-based leading innovator of advanced solutions for the pre-hospital market providing monitoring, cardiac therapy and data management. RDT’s portfolio of comprehensive connected emergency care solutions complements and strengthens Philips’ current range of proven monitoring and therapeutic products and solutions to help emergency medical services, hospitals and lay responders accelerate the delivery of care at the scene.home.
HealthcareConnected Care Informatics*): This business includes: advanced healthcare IT, clinical and advanced visualization and quantification informatics solutions for radiology, cardiology and oncology departments; Universal Data Management solutions, Picture Archiving and Communication Systems (PACS) andincludes a fully integrated Electronic Medical Record (EMR) systems& Care Management business, which enables centralized management of clinical, organizational and operational processes, virtual care delivery propositions, including remote patient management, and real-time monitoring in acute care, including telehealth in the ICU. Philips’ Tele-ICU program continues to support healthcare enterprisesplay a pivotal role, enabling clinicians and nursing staff to remotely monitor a scalable number of ICU beds from a central monitoring facility with predictive analytics, enabled by Philips’ HealthSuite Platform. In 2021, Philips acquired Capsule Technologies, Inc., which now forms part of Clinical Data Services. Capsule is a leading player in optimizing health system performance; advanced clinicalmedical device and hospital IT platforms which are leveraged across Philips. Our IntelliSpace Portal application platform is recognized as industry-leading by KLAS. We use artificial intelligence at the point of care to optimize the clinician experience, help improve productivity and total cost of ownership, and streamline patient experiencesdata integration across the clinical pathway. Proof of clinical and economic outcomes, connectivity and cybersecurity are key priorities of our engagemententerprise, integrating with our customers. The acquisition of interoperability software solutions provider Forcare provides Philips with critical standardsmore than 1,000 vendor-agnostic device models. Building on its core integration and interoperability expertise to interconnect healthcare information systems, share and exchange clinicalcapabilities, along with the Philips HealthSuite Platform, we will fuel our data and offer securehealthcare Internet of Things (IoT) capabilities in support of integrated workflow solutions for the hospital. In 2021, Philips also acquired BioTelemetry, Inc. and reliable access to digital health information for medical staffit now forms part of the Ambulatory Monitoring & Diagnostics business. BioTelemetry holds a leading position in patient care management in ambulatory and patients across multiple organizationshome care settings in North America through a suite of cardiac diagnostic and care settings.
Population Health Management: Our services and solutions leverage data, analytics and actionable workflow products formonitoring solutions to improve clinical and financial results and increase patient engagement, satisfaction and compliance. These solutions include: technology-enabled monitoring and intervention support outside the hospital (telehealth, remote patient monitoring, personal emergency response systems and care coordination) to improve the experience of elderly people and those living with chronic conditions; actionable programs to predict risk (including medication and care compliance, outreach, and fall prediction); cloud-based solutions for health organizations to manage population health. Leveraging our acquisitions of Wellcentive, VitalHealth and BlueWillow Systems, our solutions enable health systems to analyze their patient population along clinical and financial criteria, coordinate care outside the hospital, and engage patients in their health. They help drive quality improvement and business transformation for those transitioning to value-based care.
identify heart rhythm disorders supported by Artificial Intelligence algorithms.
Connected Care & Health InformatIcs
Total sales by business
as a %
2018
| 2021 |
|---|
| Hospital Patient Monitoring | 43% |
| Emergency Care | 5% |
| Sleep & Respiratory Care | 37% |
| Connected Care Informatics | 15% |
RevenueIn most of the Connected Care businesses, revenue is earned through the sale of products and solutions, customer services fees and software license fees. Where bundled offerings result in solutions for our customers, or offerings are based on the number of people being monitored, we see more usage-based earnings models. In the patient care management businesses (Ambulatory Monitoring & Diagnostics and Sleep & Respiratory Care), revenue is generated through clinical services, product sales and through rental models, whereby revenue is generated over time.
Sales channels include a mix of a direct salesforce, partly paired with an online sales portal and distributors (varying by product, market and price segment). Sales are mostly driven by a direct salesforce with an intimate knowledge of the procedures that use our integrated solutions’ smart devices, systems, software and services. Philips works with customers and partners to co-create solutions, drive commercial innovation and adapt to new models such as monitoring-as-a-service.
Sales at Philips’ Connected Care & Health Informatics businesses are generally higher in the second half of the year, largely due to customer spending patterns. However, in 2021, the Philips Respironics voluntary recall notification in the Sleep & Respiratory Care business in June had a negative impact on sales in the second half of the year.
At year-end 2018,2021, the Connected Care & Health Informaticsbusinesses had 10,517around 18,000 employees worldwide.
With regard
*)In Q3 2021, Personal Emergency Response Services and Senior Living, including the Aging & Care Giving business, was sold to regulatory compliance and the consent decree agreed to by Philips and the US government, as announced in Philips’ press release on October 11, 2017, please refer to Consent Decree.With regard to sourcing, please refer to Supplier indicators.
Connect America. 20182021 business highlights
BuildingPhilips launched two new HealthSuite informatics solutions which are scalable across the enterprise, to support its customers in achieving the Quadruple Aim of healthcare: Patient Flow Capacity Suite, a solution that helps hospitals manage the complete patient journey, and Acute Care Telehealth, which builds on Philips’ successful Tele-ICU solutions.
Philips’ recently acquired Capsule business continued to add new device drivers to its strengthsMedical Device Information Platform, which will be integrated with HealthSuite. With more than 1,000 unique types of medical devices capable of integrating with the platform, customers can connect more devices to advance health systems’ digital transformation with intelligent, vendor-agnostic tools that turn complex data streams into actionable insights.
Philips introduced its integrated Interventional Hemodynamic System with the portable Patient Monitor IntelliVue X3, providing advanced vital signs measurements at the tableside in healthcare informatics, the interventional suite and continuous monitoring across care settings. Uninterrupted patient monitoring can help to improve clinical decision making and timely detection of potential adverse events at every stage.
Expanding its portable patient management offering, Philips introduced the Medical Tablet, a portable monitoring kit designed to help clinicians remotely monitor larger patient populations during emergency situations. This new offering, which is available in North America, Europe and Japan, provides remote access to patient data to improve workflows and better manage increased patient volumes.
Philips entered into a multi-year partnership agreement with St. Andrew’s Toowoomba HospitalOrbita Inc., a provider of conversational artificial intelligence (AI) solutions for healthcare, to co-create next-generation conversational virtual assistants for Philips’ consumer health and patient support applications.
Philips announced a collaboration with USA-based MedChat to integrate MedChat’s live chat and AI-driven chatbot services into Philips Patient Navigation Manager. With the combined offering, Philips enables its customers in AustraliaNorth America to create automated communication workflows that function seamlessly alongside patient access and call center operations.
Highlighting the company’s leading position in high-acuity care settings, Philips received FDA clearance for the hospital-wide installation of Philips TasyIntelliVue MX750 and an integrated EMR system improvingMX850 patient caremonitors, which are uniquely designed to support scalability, alarm management, cybersecurity, and safety, hospital management, supplyenhanced infection prevention within the hospital.
Building on the ambulatory cardiac diagnostics and financials. Philips will fully digitize the hospital’s entire care management processes and enable anytime, anywhere access to clinical analytics.
Philips partnered with Children’s Health in Dallas – one of the top pediatric hospitals in the US – to improve pediatric care with its patient monitoring and healthcare informatics solutions.
Philips acquired Remote Diagnostic Technologies, a leading provider of advanced monitoring, cardiac therapy and data management solutions for the pre-hospital market. RDT’s portfolio will complement Philips’ Therapeutic Care business and strengthen its leadership position in the estimated EUR 1.4 billion resuscitation and emergency care market.
Highlighting Philips’ leadership in healthcare informatics, IntelliSpace Portal, Philips’ advanced data integration, visualization and analysis platform, was named 2018 Category Leader in the Advanced Visualization category in the 2018 Best in KLAS: Software & Services report.
Philips and Miami's Jackson Health System – one of the largest public health systems in the US – entered into an agreement involving an industry-first ‘enterprise patient monitoring as a service’ business model. This will enable Jackson to standardize patient monitoring at all acuity levels for each care setting across its network for a per-patient fee.
Partnering with Showa University, Philips launched the first tele-intensive care eICU program in Japan. This delivers near real-time remote patient monitoring and early intervention through predictive analytics and advanced audio-visual technology. It has already been successfully implemented in the US, the UK, Australia and the Middle East.
To expand its leadership in patient monitoring solutions resulting from the BioTelemetry acquisition, Philips launched FocusPoint,announced the acquisition of Cardiologs (closed on January 7, 2022), adding a web-based operational performance management application for its patient monitoring solutions. The application aggregates, processesvendor-neutral heart disorder screener and stores statistical and alert information, which are presented on a dashboard for optimal management of the technology.
Philips partnered with the Dana-Farber Cancer Institute to deploy best practices in cancer care. The incorporation of the Institute’s Clinical Pathways in Philips’ IntelliSpace Oncology Platform will help oncologists reach the most appropriate cancer treatments for patients,ECG analysis applications based on a unified view of themachine learning algorithms. This technology will accelerate diagnostic reporting and streamline clinician workflow and patient across diagnostic modalities and the embedded knowledge of both partners.care.
NewYork-Presbyterian Hospital selected Philips’ IntelliSpace Enterprise Edition as its in-hospital clinical decision support platform to help address the Quadruple Aim of improved patient experience, better health outcomes, improved staff experience, and lower cost of care across its sites.
Leveraging Philips’ expertise in remote monitoring solutions, the company partnered with Dartmouth-Hitchcock Health in the US to implement Philips’ eICU technology at their hospital sites. Following the success of similar programs across the globe, Dartmouth-Hitchcock Health is the latest health system to incorporate this telehealth model to improve critical care support across multiple sites.
6.4.3Personal Health businesses
Roy Jakobs was appointed Chief Business Leader of the Personal Health businesses effective October 1, 2018, succeeding Egbert van Acht. Roy joined Philips in 2010 as Chief Marketing Officer for Philips Lighting and in 2012 he became Market Leader for Philips Middle East & Turkey. Between 2015 and 2018 he led the Domestic Appliances business group.
About Personal Health businesses in 2018
Our Personal Health businesses (as per the 2018 reporting structure) play an important role on the health continuum – in the healthy living, prevention and home care stages – delivering integrated, connected and personalized solutions that support healthier lifestyles and those living with chronic disease.
Leveraging our deep consumer expertise and extensive healthcare know-how, wecompelling value propositions to enable people to live a healthy life in a healthy home environment, and to proactively manage their own health.
Supported by meaningfulWe aim to drive profitable growth through a relentless focus on innovation and high-impact marketing, we are focused onacross three key objectives:areas:
GrowingReaching more people through consumer-driven product and solutions innovation - Accelerating online growth and engaging more people through an end-to-end digital approach
- Expanding our
core businessesecosystem through geographical expansionpartnerships with leading retailers and increased penetration Unlocking business value through direct digital consumer engagement, leading to higher brand preference and recurring revenuesExtending our core businesses with innovative solutions andscaling new business models to address unmet consumer needs
Personal Health has many distinct product categories and associated competitors, including Procter & Gamble in Personal Care and Oral Healthcare, Groupe SEB inIn September 2021, Philips completed the sale of its Domestic Appliances and,business to Hillhouse Investment, a global investment firm. The results of this transaction, which Philips announced in 2018, ResMedMarch 2021, are reported under Discontinued operations for 2021. As a result, in Sleep & Respiratory Care.
In 2018,2021, the Personal Health segment consisted of the following remaining areas of business:
HealthOral Healthcare: power toothbrushes for a range of price segments, from entry-level battery-operated toothbrushes for a young audience, to premium intuitive power toothbrushes connected to the Sonicare app with in-app coaching and teledentistry service; brush heads, which are also available as a subscription service; products for interdental cleaning and for teeth whitening- Mother &
WellnessChild Care: oral healthcare, motherproducts to support parents and child carebabies in the first 1,000 days, including infant feeding (breast pumps, baby bottles, sterilizers), digital parental solutions (Pregnancy+ and Baby+ apps) Sleep & Respiratory Care: healthy sleeping, respiratory care- Personal Care: products from entry-level to premium for male grooming (shavers, OneBlade, groomers, trimmers, hair clippers), including premium solutions with SkinIQ technology and in-app coaching for a personalized shave, blade subscriptions; beauty
Domestic Appliances: food preparation, home solutions (skin care, hair care, hair removal), including solutions with the latest SenseIQ technology that sense and adapt for personalized care, also available through subscription models.
Personal Health
Total sales by business
as a %
2018
| 2021 |
|---|
| Oral Healthcare | 34% |
| Mother & Child Care | 10% |
| Personal Care | 56% |
Through our Personal Health businesses, we offer a broad range of solutions in various consumer price segments, always aiming to offer and realize premium value. We continue to rationalize our portfolio of locally relevant innovations and increase its accessibility, particularly in lower-tier cities in growth geographies. We are well positioned to capture further growth inA notable aspect of our commercial strategy is driving increased direct-to-consumer relationships and sales through our consumer communities and online store. Worldwide about half of our Personal Health sales and continue to build our digital and e-commerce capabilities.now take place online.
We are leveraging connectivity to offer new business models, partnering with other players in the health ecosystem, e.g. insurance companies, with the goal of extending opportunities for people to live healthily, prevent or manage disease. We are engaging consumers in their health journey in new and impactful ways through social media and digital innovation.
For example, withwe strongly believe in the introduction ofconnection between good oral care and good overall health - a belief underpinned by the World Health Organization (WHO), which adopted a resolution on oral healthcare in May 2021. Good oral care is important for everyone. And since everyone is different, oral healthcare should also be personalized to each user, so they can get the best health outcome. Philips Sonicare Solutions Teledentistry Service in 2018, Philips’ Sonicareoffers a wide range of solutions for complete oral care solution has become even more wide-reaching, enabling professional, remote dental consultations. The Philips Sonicare app acts as a ‘virtual hub’ for personal oral healthcare, helpingcare: from intelligent and intuitive power toothbrushes to interdental cleaning solutions and apps that help users to manage their complete oral care on a daily basis and give the option to share brushing data with their dental practitioners, putting personalized guidance and advice at their fingertips.
We also offer mobile solutions to support parents and parents-to-be for a more informed, more connected and healthier journey to parenthood. The Pregnancy+ app and Baby+ app offer parents supportive content at every stage of their first 1,000-day journey. Pregnancy+ also offers state-of-the-art, photo-realistic and interactive 3D fetal models to make the experience even more exciting, with new, personalized content for each day of the pregnancy. As of year-end 2021, the Pregnancy+ app and Baby+ app combined have more than 56 million downloads, almost 2 million daily active users, and are available in 22 languages.
The company’s wide portfolio of connected consumer health platforms – such as our Sonicare dental solutions and our Dream Family sleep care solution – leverages Philips HealthSuite Platform, a cloud-enabled connected health ecosystem of devices, apps and digital tools that enablesupport personalized health and continuous care.
The revenue model is mainly based on product sale at the point in time the products are delivered to retailers and online platforms. We are increasingly diversifying the end-user or wholesalers or distributors. In Sleep & Respiratory Care, revenue is generated both through product salesmodel with new business models, including direct-to-consumer, subscriptions and through rental models whereby revenue is generated over time.services.
Under normal economic conditions, Philips’The Personal Health businesses experience seasonality, with higher sales around key national and international events and holidays.
At year-end 2018,2021, Personal Health employed 22,471around 10,000 people worldwide.
With regard to regulatory compliance and quality, please refer to Our commitment to Quality, Regulatory Compliance and Integrity.
With regard to sourcing, please refer to Supplier indicators.
20182021 business highlights
In lineThe global launch of Philips’ most advanced electric toothbrush, the Sonicare 9900 Prestige, was positively received by consumers. The premium electric toothbrush leverages AI to optimize the user’s brushing technique, ensuring full coverage of their teeth, and instills brushing habits that improve oral health.
Toward the end of the year, Philips completed the successful roll-out of the Sonicare 9900 Prestige in North America, China, Europe, Middle East and Asia Pacific. It finished #1 in the Stiftung Warentest, Europe’s leading consumer organization. Philips further expanded its oral healthcare portfolio with the launch of innovative interdental cleaning devices in North America, China and Asia Pacific.
Underlining Philips’ focus on innovation,strategy to deliver locally relevant solutions, the company launched theseveral oral healthcare innovations targeting multiple price points in China, including two new electric toothbrushes. In addition, Philips Sonicare ProtectiveClean power toothbrushlaunched its professional teeth whitening offering Zoom in North America,China through a local partnership with further roll-out around the world. This introduction will further boost the profitable growthLinkedCare, one of the Oral Healthcare business.largest dental solution providers in the Chinese dental market.
Philips completely renewedExpanding the high-end range of itscompany’s leading male grooming portfolio, withPhilips introduced the introduction of theShaver Series 9000 Prestigewith SkinIQ technology in markets around the world, including China, North America and Europe. The premium shaver which cuts facialleverages AI and sensors to offer a personalized shave tailored to each unique skin and hair feeling as close as a wet blade, while being very gentle on the skin. In 2018 we passed the all-time milestone of 1 billion shavers sold – a landmark achievement by our Personal Care business.type.
Philips continued the roll-out ofproduced its 100 millionth OneBlade, male grooming innovation, adding another 10 countries, with many more to follow, on the way to being a EUR 200 million business just a few5 years after its launch.launch in 2016. The Philips OneBlade has disrupted shaving markets worldwide, creating a new category for shaving, trimming, and edging.
At IFA 2018, Philips introduced the High-Speed Connected Blender,Lumea IPL 9000 series with SenseIQ technology for personalized hair removal, which can help people achieve specific health goals, such as boosting their energy, reducing their sugar and calorie intake, or increasing their general well-being.is now also available through a Try&Buy subscription model in various European countries.
The No. 1 worldwide pregnancy app that’s the most recommended app by midwives and pediatricians, the Philips Pregnancy+ app, debuted in India. The Philips Pregnancy+ app is currently available in 175+ countries worldwide, and offers a fully immersive experience for expecting parents, enabling them to track their baby’s growth, all with personalized content supported by clinical expertise.
Philips’ newest baby tech launched in North America (with subsequent markets launching throughout 2022): the Philips Avent is designed to support a healthy full-term pregnancy plus a safe deliveryNatural Baby Bottle with Natural Response nipple, which releases milk only when baby actively drinks, just like breastfeeding, easing the switch between breast and gives expectant parents a comprehensive guide through all stages of pregnancy.
Philips’ Sleep & Respiratory Care business continues to gain traction for its market-leading home ventilation offerings, such as the new Trilogy Evo ventilator platform, which is the only portable life support solution designed to stay with patients as they change care environments. Integrated with Care Orchestrator, Philips’ sleep and respiratory care cloud-based management system, Trilogy Evo will help to ease the burden of managing chronic conditions such as Chronic Obstructive Pulmonary Disease (COPD) by allowing physicians, clinicians, and care providers to collaborate and coordinate care from hospital to home by storing their patient prescription and therapy information in a single secure location.
Philips acquired NightBalance, a digital health scale-up company based in the Netherlands that has developed an innovative, easy-to-use device to treat positional obstructive sleep apnea and positional snoring.
At the consumer electronics show CES 2018, Philips introduced SmartSleep, the world’s first and only clinically proven wearable solution for consumers to improve deep sleep quality for people who do not get enough sleep. SmartSleep joins Philips’ growing portfolio of smart digital platforms and intelligent solutions that give consumers data-driven insights into their health and access to professional expertise and advice.
Highlighting the success of Philips’ patient-centric product designs in sleep care, Philips has sold more than 10 million DreamWear CPAP masks and cushions in just three years after the Dream Family platform introduction, growing the DreamWear patient interface sales faster than the market.bottle.
6.4.4Other
In our external reporting on Other we report on the items Innovation & Strategy, IP Royalties, Central costs, and other small items. At year-end 2021, around 18,000 people worldwide were working in these areas.
About Other
Innovation & Strategy
The role of Innovation & Strategy organization includes, among others,is to listen to the voice of the customer and, in collaboration with the operating businesses and the markets, direct the company strategy and innovation roadmap to achieve our growth and profitability ambitions. The various components of Innovation & Strategy include: the Chief Technology Office (CTO), Research, HealthSuite Platforms,Platform, the Chief Medical Office, Product Engineering Solutions, Experience Design, Healthcare Transformation Services, Strategy, and Sustainability.Partnerships. Our four largest Innovation Hubs are in Eindhoven (Netherlands), Cambridge (USA), Bangalore (India) and Shanghai (China).
Innovation & Strategy, in collaboration with the operating businesses and the markets, is responsible for directing the company strategy, in line with our growth and profitability ambitions.
The Innovation & Strategy function facilitatestunes into industry trends and customer signals to develop innovations that solve real-world problems for healthcare customers and consumers. Innovation & Strategy advances innovation from ‘idea’ to ‘market’ (I2M) as co-creator and strategic partner for the Philipstogether with Philips' businesses, markets and partners. It does so throughThis entails cooperation between research, design, medical affairs, professional services, marketing, strategy and businesses in interdisciplinary teams along the innovation chain,a multi-disciplinary fashion, from early exploration and advanced development to first-of-a-kind proposition development. In addition, it opens up new value spaces beyond the direct scope of current businesses through internal and external venturing, manages the company-funded R&D portfolio, and creates synergies for cross-segment initiatives and integrated solutions.offerings.
Innovation & Strategy actively participates in Open Innovation through relationships with academic, clinical, industrial partners and start-ups, as well as via public-private partnerships. It does so in order to improve innovation speed effectiveness and efficiency;agility, to capture and generate new ideas, and in some cases to leverage third-party capabilities. This may include sharing the related financial exposure and benefits.
Finally, Innovation & Strategy sets the agenda and drivesto drive continuous improvement in the Philips product and solution portfolio,portfolios. Innovation & Strategy improves the efficiency and effectiveness of innovation the creation and adoptionthrough Centers of (digital) platforms, and the uptake of high-impact technologiesExcellence, such as data science,Platform Modularity & Re-use, Data Science, Artificial Intelligence and the Internet of Things.
Chief Technology Office (CTO) and Product Engineering organizationPhilips Research
The CTOChief Technology Office orchestrates customer-centric innovation strategy and Product Engineering organization is a groupportfolio management, and drives adoption of innovation teams that orchestrates innovationdigital architecture and platforms, Data Science and AI, as well as excellence in software, across Philips’ businesses and markets, initiatingmarkets. Philips Research initiates game-changing innovations – based on deep customer insights and technology advancements – that disrupt and cross boundaries in health technology and care delivery. It does so to address opportunities for betterincrease the availability and accuracy of healthcare and improve clinical and economic outcomes, and supportas well as supporting the associated transformation of Philips into a digital solutions company. It encompassesCTO and Research encompass the following organizations:
- Innovation Management, responsible for end-to-end innovation strategy and portfolio management, integrated roadmaps
linkedlinking products, systems and software to solutions, New Business Creation Excellence, R&D competency management, innovation performance managementClinical Research Board, Innovation Transformation and Performance Management and public funding programs. Philips Research, the co-creator and strategic partner of the Philips businesses, markets and complementary open innovation ecosystem participants, driving front-end innovation and clinical research at sites across the globe.Philips HealthWorks, responsible for accelerating breakthrough innovation. HealthWorks incubates early-stage ventures and engages with the external start-up ecosystem.I2M Excellence is a global program driven centrally to improve and harmonize Philips' capabilities, processes and tools.
- The Chief Architect Office
, responsible for defining, steering and ensuring compliance and uptake of defines the Philips HealthSuitereference architecture for configurablethe HealthSuite Platform, domain-specific digital application platforms, and interoperableModular Systems, covering all systems, products, services, solutions and digital propositions.IT in Philips. - The Software
and System Engineering CentersCenter of Excellence, driving drives adoption of industry best practices in writingcreating and maintaining application-level software, modular and configurable system design and model-based system engineering. - The Data Science and AI Center of Excellence defines and deploys strategies and best practices for dealing with Data Science and AI in a responsible and compliant way, and develops common tools to facilitate the development process and co-creation of innovative propositions with clinical and business partners.
- Philips Research, as co-creator and strategic partner of the Philips businesses, markets and complementary Open Innovation
Services provides hardwareecosystem partners, drives customer needs-focused front-end innovation and embedded softwareclinical research at sites across the globe. The role of Research increasingly goes beyond early-stage proof-of-concept, including advanced development & engineering, technology consulting,of smart connected devices and low-volume specialized manufacturing.systems, and integrated solutions and services, fitting regionally relevant digital ecosystems.
Philips HealthSuite Platform
Philips HealthSuite constitutes our common digital framework that connects consumers, patients, healthcare providers, payers and partners in a cloud-based connected health ecosystem of devices, apps and tools.
HealthSuite Digital Platform (HSDP) ishelps unlock the secure Philips cloud and IoT (Internet of Things) solution that forms the basis for our digital software stack, with key functionalities including hosting, authorization, connecting, storing, sharing, and analysispower of data to enable healthcare professionals, patients and applications. New functionality is continuously being addedconsumers to engage in connected care. Its modular set of re-usable digital capabilities liberate, integrate and enable actionable insights on data from disparate systems within a secure environment. HealthSuite Platform helps accelerate the platform, like building blocks for federated data management, workflow management,development and patient engagement.HealthSuite Premise is the recently launched extensiondeployment of HSDP to form a hybrid-cloud solution, offering more flexibility in deployment and implementation.
The Philips HealthSuite Platforms are managed and orchestrated across Innovation & Strategy and all Philips businesses. The majority of professional and consumer-oriented digital propositions offeredacross the health continuum, supporting better health outcomes, improved patient/consumer and staff experience, and lower cost of care.
Chief Medical Office
The Chief Medical Office is responsible for clinical innovation and strategy, healthcare economics, clinical evidence generation, medical affairs and market access, clinical education, as well as medical thought leadership, with a focus on healthcare governance and organization, the Quadruple Aim and value-based care. This includes engaging with stakeholders across the health continuum to extend Philips’ leadership in health technology and acting on new value-based reimbursement models that benefit the patient, health professional, care provider and payer.
Leveraging the knowledge and expertise of the medical professional community across Philips, the Chief Medical Office includes many healthcare professionals who practice(d) in the world’s leading health systems. Its activities include strategic guidance built on clinical and scientific knowledge, building and nurturing customer partnerships and growth opportunities, fostering peer-to-peer relationships in relevant medical communities, driving co-innovation with customers, liaising with medical regulatory bodies, and supporting clinical and economic evidence development.
Engineering Solutions
Engineering Solutions is accountable for bringing engineering capabilities in Philips to world-class level to realize innovations that deliver on our customers’ needs, advancing the Quadruple Aim. Taking a customer-first approach, Engineering Solutions turns ideas into working innovations by Philips leverage HealthSuite,providing deep engineering expertise, cross-business product platforms, and there isinnovation processes and tools. Engineering Solutions also a growing number of third-party customers doingworks for selected external companies in the same.healthcare, high-tech and semiconductor industries.
Innovation Hubs
To drive innovation effectivenessPersonal Health
| 2021 |
|---|
| Oral Healthcare | 34% |
| Mother & Child Care | 10% |
| Personal Care | 56% |
Through our Personal Health businesses, we offer a broad range of solutions in various consumer price segments, always aiming to offer and efficiency, andrealize premium value. We continue to enablerationalize our portfolio of locally relevant innovations and increase its accessibility, particularly in lower-tier cities in growth geographies. A notable aspect of our commercial strategy is driving increased direct-to-consumer relationships and sales through our consumer communities and online store. Worldwide about half of our Personal Health sales now take place online.
We are leveraging connectivity to offer new business models, partnering with other players in the health ecosystem, e.g. insurance companies, with the goal of extending opportunities for people to live healthily, prevent or manage disease. We are engaging consumers in their health journey in new and impactful ways through social media and digital innovation.
For example, we strongly believe in the connection between good oral care and good overall health - a belief underpinned by the World Health Organization (WHO), which adopted a resolution on oral healthcare in May 2021. Good oral care is important for everyone. And since everyone is different, oral healthcare should also be personalized to each user, so they can get the best health outcome. Philips Sonicare offers a wide range of solutions for complete oral care: from intelligent and intuitive power toothbrushes to interdental cleaning solutions and apps that help users to manage their complete oral care on a daily basis and give the option to share brushing data with their dental practitioners, putting personalized guidance at their fingertips.
We also offer mobile solutions to support parents and parents-to-be for a more informed, more connected and healthier journey to parenthood. The Pregnancy+ app and Baby+ app offer parents supportive content at every stage of their first 1,000-day journey. Pregnancy+ also offers state-of-the-art, photo-realistic and interactive 3D fetal models to make the experience even more exciting, with new, personalized content for each day of the pregnancy. As of year-end 2021, the Pregnancy+ app and Baby+ app combined have more than 56 million downloads, almost 2 million daily active users, and are available in 22 languages.
The company’s wide portfolio of connected consumer health platforms leverages Philips HealthSuite Platform, a cloud-enabled connected health ecosystem of devices, apps and digital tools that support personalized health and continuous care.
The revenue model is mainly based on product sale at the point in time the products are delivered to retailers and online platforms. We are increasingly diversifying the revenue model with new business models, including direct-to-consumer, subscriptions and services.
The Personal Health businesses experience seasonality, with higher sales around key national and international events and holidays.
At year-end 2021, Personal Health employed around 10,000 people worldwide.
2021 business highlights
The global launch of Philips’ most advanced electric toothbrush, the Sonicare 9900 Prestige, was positively received by consumers. The premium electric toothbrush leverages AI to optimize the user’s brushing technique, ensuring full coverage of their teeth, and instills brushing habits that improve oral health.
Toward the end of the year, Philips completed the successful roll-out of the Sonicare 9900 Prestige in North America, China, Europe, Middle East and Asia Pacific. It finished #1 in the Stiftung Warentest, Europe’s leading consumer organization. Philips further expanded its oral healthcare portfolio with the launch of innovative interdental cleaning devices in North America, China and Asia Pacific.
Underlining Philips’ strategy to deliver locally relevant solutions, the company launched several oral healthcare innovations targeting multiple price points in China, including two new electric toothbrushes. In addition, Philips launched its professional teeth whitening offering Zoom in China through a local partnership with LinkedCare, one of the largest dental solution creation,providers in the Chinese dental market.
Expanding the company’s leading male grooming portfolio, Philips introduced the Shaver Series 9000 with SkinIQ technology in markets around the world, including China, North America and Europe. The premium shaver leverages AI and sensors to offer a personalized shave tailored to each unique skin and hair type.
Philips produced its 100 millionth OneBlade, just 5 years after its launch in 2016. The Philips OneBlade has disrupted shaving markets worldwide, creating a new category for shaving, trimming, and edging.
Philips introduced the Lumea IPL 9000 series with SenseIQ technology for personalized hair removal, which is now also available through a Try&Buy subscription model in various European countries.
The No. 1 worldwide pregnancy app that’s the most recommended app by midwives and pediatricians, the Philips Pregnancy+ app, debuted in India. The Philips Pregnancy+ app is currently available in 175+ countries worldwide, and offers a fully immersive experience for expecting parents, enabling them to track their baby’s growth, all with personalized content supported by clinical expertise.
Philips’ newest baby tech launched in North America (with subsequent markets launching throughout 2022): the Philips Avent Natural Baby Bottle with Natural Response nipple, which releases milk only when baby actively drinks, just like breastfeeding, easing the switch between breast and bottle.
6.4.4Other
In our external reporting on Other we have establishedreport on the items Innovation & Strategy, IP Royalties, Central costs, and other small items. At year-end 2021, around 18,000 people worldwide were working in these areas.
About Other
Innovation & Strategy
The role of Innovation & Strategy is to listen to the voice of the customer and, in collaboration with the operating businesses and the markets, direct the company strategy and innovation roadmap to achieve our growth and profitability ambitions. The various components of Innovation & Strategy include: the Chief Technology Office (CTO), Research, HealthSuite Platform, the Chief Medical Office, Engineering Solutions, Experience Design, Healthcare Transformation Services, Strategy, and Partnerships. Our four largest Innovation Hubs for the Philips Group:are in Eindhoven (Netherlands), Cambridge (US)(USA), Bangalore (India) and Shanghai (China). Each Hub includes a combination of technical, design and clinical capabilities, representing Group
The Innovation & Strategy selected R&D groups from our businesses, market innovation teamsfunction tunes into industry trends and other functions. These Hubs, where most of the Groupcustomer signals to develop innovations that solve real-world problems for healthcare customers and consumers. Innovation & Strategy organization is concentrated, complement the business-specificadvances innovation capabilities of our R&D centers that are integratedtogether with Philips' businesses, markets and partners. This entails cooperation between research, design, medical affairs, professional services, marketing, strategy and businesses in our global business sites.a multi-disciplinary fashion, from early exploration to first-of-a-kind offerings.
Philips Innovation Center Eindhoven is Philips’ largest cross-functional& Strategy actively participates in Open Innovation Hub worldwide, hosting the global headquarters of many of our innovation organizationsthrough relationships with academic, clinical, industrial partners and start-ups, as well as many collaborationvia public-private partnerships. ManyIt does so in order to improve innovation speed and agility, to capture and generate new ideas, and in some cases to leverage third-party capabilities. This may include sharing the related financial exposure and benefits.
Finally, Innovation & Strategy sets the agenda to drive continuous improvement in the Philips product and solution portfolios. Innovation & Strategy improves the efficiency and effectiveness of the company’s core research programs are run from here.
- innovation through Centers of Excellence, such as Platform Modularity & Re-use, Data Science, Artificial Intelligence and Internet of Things.
Chief Technology Office (CTO) and Philips Innovation Center Cambridge, MA
is focused onResearchThe Chief Technology Office orchestrates customer-centric innovation strategy and portfolio management, and drives adoption of digital architecture and platforms, Data Science and AI, among other things. Being within close proximity to the MIT campus and clinical collaboration partners allows researchers to collaborate easily on jointly defined research programs, validate clinical relevance, as well as excellence in software, across Philips’ businesses and markets. Philips Research initiates game-changing innovations – based on deep customer insights and technology advancements – that disrupt and cross boundaries in health technology and care delivery. It does so to participateincrease the availability and accuracy of healthcare and improve clinical and economic outcomes, as well as supporting the associated transformation of Philips into a digital solutions company. CTO and Research encompass the following organizations:
- Innovation Management, responsible for end-to-end innovation strategy and portfolio management, integrated roadmaps linking products, systems and software to solutions, New Business Creation Excellence, R&D competency management, Clinical Research Board, Innovation Transformation and Performance Management and public funding programs.
- The Chief Architect Office defines the reference architecture for the HealthSuite Platform, domain-specific digital application platforms, and Modular Systems, covering all systems, products, services, solutions and digital IT in Philips.
- The Software Center of Excellence drives adoption of industry best practices in creating and maintaining application-level software, modular and configurable system design and model-based system engineering.
- The Data Science and AI Center of Excellence defines and deploys strategies and best practices for dealing with Data Science and AI in a responsible and compliant way, and develops common tools to facilitate the development process and co-creation of innovative propositions with clinical and business partners.
- Philips Research, as co-creator and strategic partner of the Philips businesses, markets and complementary Open Innovation
projects. Philips Innovation Center Bangalore hosts activities from mostecosystem partners, drives customer needs-focused front-end innovation and clinical research at sites across the globe. The role of our operating businesses, Research Design, Intellectual Property & Standards,increasingly goes beyond early-stage proof-of-concept, including advanced development of smart connected devices and IT. This is our largest software-focused site, with over 3,500 engineers. The Center works with growth geographies to build market-specificsystems, and integrated solutions and several businesses have also located business organizations focusingservices, fitting regionally relevant digital ecosystems.
Philips HealthSuite Platform
Philips HealthSuite Platform helps unlock the power of data to enable healthcare professionals, patients and consumers to engage in connected care. Its modular set of re-usable digital capabilities liberate, integrate and enable actionable insights on growth geographies atdata from disparate systems within a secure environment. HealthSuite Platform helps accelerate the site.
Philips Innovation Center Shanghai combinesdevelopment and deployment of digital innovation, researchpropositions across the health continuum, supporting better health outcomes, improved patient/consumer and solutions development for the China market, while severalstaff experience, and lower cost of its locally relevant innovations are also finding their way globally.
Alongside the hubs, where most of the central Innovation & Strategy organization is concentrated together with selected business R&D and market innovation teams, we continue to have significant, more focused innovation capabilities integrated into key technology centers at our other global business sites.care.
Chief Medical Office
The Chief Medical Office is responsible for clinical innovation and strategy, hospitalhealthcare economics, clinical evidence generation, medical affairs and market access, clinical education, as well as medical thought leadership, with a focus on healthcare governance and organization, the Quadruple Aim and value-based care. This includes engaging with stakeholders across the health continuum to extend Philips’ leadership in health technology and acting on new value-based reimbursement models that benefit the patient, health professional, care provider and care provider.payer.
Leveraging the knowledge and expertise of the medical professional community across Philips, the Chief Medical Office includes many healthcare professionals who practicepractice(d) in the world’s leading health systems. Supporting the company’s objectives across the health continuum, itsIts activities include strategic guidance built on clinical and scientific knowledge, building and nurturing customer partnerships and growth opportunities, fostering peer-to-peer relationships in relevant medical communities, driving co-innovation with customers, liaising with medical regulatory bodies, and supporting clinical and marketingeconomic evidence development.
Engineering Solutions
Engineering Solutions is accountable for bringing engineering capabilities in Philips Design
Philips Design isto world-class level to realize innovations that deliver on our customers’ needs, advancing the global design functionQuadruple Aim. Taking a customer-first approach, Engineering Solutions turns ideas into working innovations by providing deep engineering expertise, cross-business product platforms, and innovation processes and tools. Engineering Solutions also works for the company, ensuring that the user experiences of our innovations are meaningful, people-focused and locally relevant. Design is also responsible for ensuring that the Philips brand experience is differentiating, consistently expressed, and drives customer preference.
Philips Design partners with stakeholders across the organization to develop methodologies and enablers to define value propositions, implement data-enabled design tools and processes to create meaning from data, and leverage Co-create methodologies to define solutions. Our Co-create approach facilitates collaboration with customers and patients to create solutions that are tailored specifically to the challenges facing them, as local circumstances and workflows are key ingredientsselected external companies in the successful implementation of solutions.
To ensure that we connect end users along the health continuum we create a consistent experience across all touchpoints. A key enabler for this is a consistenthealthcare, high-tech and differentiating design language that applies to software, hardware and services across our operating businesses. In recognition of our continued excellence, Philips Design received 141 awards in 2018.semiconductor industries.
Emerging Businesses
Emerging Businesses is a business group in emerging spaces with a mission to bring intelligence to diagnosis in pathology and neurology and to guide therapy. It includes:
Digital & Computational Pathology digitizes diagnosis in anatomic pathology and uses Artificial Intelligence to aid detection of disease and progression to reduce inter-observer variability and improve outcomes. Philips is the global market leader in routine primary diagnosis using Digital Pathology and the only company in the market to have an FDA-approved solution for primary diagnosis.Philips Neuro is focused on a mission to advance neuroscience for better care. The business provides an integrated neurology solution comprising Full Head HD EEG with diagnostic imaging to map brain activity and anatomy for a wide range of neuro disorders, and uses machine learning to improve diagnosis of various neuro disorders.
IP Royalties
Philips Intellectual Property & Standards (IP&S) proactively pursues the creation of new Intellectual Property (IP) in close co-operation with Philips’ operating businesses and Innovation & Strategy. IP&S is a leading industrial IP organization providing world-class IP solutions to Philips’ businesses to support their growth, competitiveness and profitability.
Royal Philips’ total IP portfolio currently consists of 65,000 patent rights, 39,400 trademarks, 61,300 design rights and 3,200 domain names. Philips filed 1,120 new patents in 2018, with a strong focus on the growth areas in health technology services and solutions.
IP&S participates in the setting of standards to create new business opportunities for the Philips operating businesses. A substantial portion of revenue and costs is allocated to the operating businesses. License fees and royalties are earned on the basis of usage, or fixed fees over the term of the contract.
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.
Central costs
We recharge the directly attributable part of the central costs to the business segments. The remaining part includes the Executive Committee, Brand Management and Sustainability, as well as functional services such as IT and Real Estate.
Real estate
Philips is present in more than 70 countries globally and has its corporate headquarters located in Amsterdam, the Netherlands. Our real estate sites are well spread around the globe, with key manufacturing and R&D sites in the Americas, Asia and Europe. In 2018, we reduced our footprint in India (Chennai, Pune), Indonesia (Jakarta) and China. We also rightsized and upgraded our Milan, Madrid, Zurich and Herrsching sites in Europe and expanded our global business solutions in India, Poland and the United States. To attract R&D talent, we invested in R&D locations such as Bangalore, Shanghai, Eindhoven and others. We also made strategic investments in manufacturing sites in the Americas and Asia. The vast majority of our locations consist of leased property, and we manage these closely to keep the overall vacancy rates of our property below 5% and to ensure the right level of space efficiency and flexibility to follow our business dynamic. The net book value of our land and buildings at December 31, 2018, represented EUR 621 million; construction in progress represented EUR 46 million. Our current facilities are adequate to meet the requirements of our present and foreseeable future operations.
5.4Our commitment to Quality, Regulatory Compliance and Integrity
Our business success depends on the quality of our products, services and solutions and compliance with many regulations and standards. We continue on our transformation journey to have customer-focused global processes, procedures, standards and a quality mindset to help us maintain the highest possible level of quality in all our products.
For Philips, as a business with a significant global footprint, compliance with evolving regulations and standards including data privacy and cybersecurity has resulted, and may continue to result, in increased costs, new compliance challenges, and the threat of increased regulatory enforcement activity. Our business relies on the secure electronic transmission, storage and hosting of sensitive information, including personal information, protected health information, financial information, intellectual property and other sensitive information related to our customers and workforce. For information on how Philips manages cybersecurity risk, please refer to Operational risks.
Philips actively maintains FDA/ISO Quality Systems globally that establish standards for its product design, manufacturing, and distribution processes. Our businesses are subject to compliance with regulatory product approval and quality system requirements in every market we serve, and to specific requirements of local and national regulatory authorities including the US FDA, the NMPA in China and comparable agencies in other countries, as well as the European Union’s Waste from Electrical and Electronic Equipment (WEEE), Restriction of Hazardous Substances (RoHS) and Registration, Evaluation, Authorization and Restriction of Chemicals (REACH), Energy-using Products (EuP) and Product Safety Regulations. We have a growing portfolio of medically regulated products in our Health & Wellness, Personal Care and Sleep & Respiratory Care businesses. Through our growing oral healthcare, mother and child care and beauty product portfolio the range of applicable regulations has been extended to include requirements relating to cosmetics and, on a very small scale, pharmaceuticals.
In almost all cases, new products that we introduce are subject to a regulatory approval process (e.g. pre-market notification – the 510(k) process – or pre-market approval (PMA) for FDA approvals in the USA, the CE Mark in the European Union). Failing to comply with the regulatory requirements can have severe legal consequences. The number and diversity of regulatory bodies in the various markets we operate in globally adds complexity and time to product introductions.
In the EU, a new Medical Device Regulation (EU MDR) was published in 2017, which will impose significant additional pre-market and post-market requirements. Since the announcement of the EU MDR, Philips has been developing a comprehensive strategic plan to ensure compliance with the MDR requirements that will come into effect by May 2020. The company has engaged in a top-to-bottom review of our full portfolio of products and solutions that fall under the mandate, and has developed a robust and detailed framework for a seamless transition by the time the Medical Device Regulation is operative. We will make a one-time EU MDR investment, estimated at EUR 45 million, in 2019, in addition to ongoing compliance costs for the new regulations of around EUR 25 million per year. We believe the global regulatory environment will continue to evolve, which could impact the cost, the time needed to approve, and ultimately, our ability to maintain existing approvals or obtain future approvals for our products.
Philips is committed to delivering the highest quality products, services and solutions compliant to all applicable laws and standards. We are investing substantially in driving quality into our culture, reaping the benefits of our improvement efforts addressing the past and positioning for the future. We will continue to raise the performance bar. Quality is embedded in the evaluation of all senior management. With consistency of purpose, top-down accountability, standardization, leveraging continuous improvement we aim to drive greater speed in the adoption of a quality mindset throughout the enterprise.
While pursuing our business objectives, we aim to be a responsible partner in society, acting with integrity towards our employees, customers, business partners and shareholders, as well as the wider community in which we operate. The Philips General Business Principles (GBP) incorporate and represent the fundamental principles by which all Philips businesses and employees around the globe must abide. They set the minimum standard for business conduct, both for individual employees and for the company and our subsidiaries. More information on the Philips GBP can be found in Our approach to risk management. The results of the monitoring measures in place are given in General Business Principles.
Consent Decree
In October 2017, Philips North America LLC reached agreement on a consent decree with the US Department of Justice, representing the Food and Drug Administration (FDA), related to compliance with current good manufacturing practice requirements arising from past inspections in and before 2015, focusing primarily on Philips’ Emergency Care & Resuscitation (ECR) business operations in Andover (Massachusetts) and Bothell (Washington). The decree also provides for increased scrutiny, for a period of years, of the compliance of the other Monitoring & Analytics businesses at these facilities with the Quality System Regulation.
Under the decree, Philips has suspended the manufacture and distribution, for the US market, of external defibrillators manufactured at these facilities, subject to certain exceptions, until FDA certifies through inspection the facilities’ compliance with the Quality System Regulation and other requirements of the decree. The decree allows Philips to continue the manufacture and distribution of certain automated external defibrillator (AED) models and Philips can continue to service ECR devices and provide consumables and the relevant accessories, to ensure uninterrupted availability of these highly reliable life-saving devices in the US. Philips continues to be able to export ECR devices under certain conditions. Philips is continuing to manufacture and distribute the devices of businesses other than ECR at these facilities.
Substantial progress has been made in our compliance efforts. However, we cannot predict the outcome of this matter, and the consent decree authorizes the FDA, in the event of any violations in the future, to order us to cease manufacturing and distributing ECR devices, recall products, pay liquidated damages and take other actions. We also cannot currently predict whether additional monetary investment will be incurred to resolve this matter or the matter’s ultimate impact on our business.
Results of operations
Sales
The composition of sales growth in percentage terms in 2018, compared to 2017 and 2016, is presented in the table below.
Philips Group
Sales
in millions of EUR unless otherwise stated
2016 - 2018
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Diagnosis & Treatment businesses | | | |
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Comparable sales growth (%) 1 | | | |
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Connected Care & Health Informatics businesses | | | |
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Comparable sales growth (%) 1 | | | |
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Personal Health businesses | | | |
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Comparable sales growth (%) 1 | | | |
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Comparable sales growth (%) 1 | | | |
Group sales amounted to EUR 18,121 million in 2018, an increase of 2% on a nominal basis. Adjusted for a 2.8% negative currency effect and consolidation impact, comparable sales*were 5% above 2017.
Group sales amounted to EUR 17,780 million in 2017 and increased 2% on a nominal basis. Adjusted for a 1.8% negative currency effect and consolidation impact, comparable sales*were 4% above 2016.
Diagnosis & Treatment businesses
In 2018, sales amounted to EUR 7,245 million, 5% higher than in 2017 on a nominal basis. Excluding a 1.7% negative currency effect and consolidation impact, comparable sales*increased by 7%, reflecting double-digit growth in Image-Guided Therapy and Ultrasound and low-single-digit growth in Diagnostic Imaging.
In 2017, sales amounted to EUR 6,891 million, 3% higher than in 2016 on a nominal basis. Excluding a 1% negative currency effect and consolidation impact, comparable sales*increased by 3%, driven by mid-single-digit growth in Ultrasound and Image-Guided Therapy and low-single-digit growth in Diagnostic Imaging.
Connected Care & Health Informatics businesses
In 2018, sales amounted to EUR 3,084 million, a decrease of 2% on a nominal basis compared to 2017. Excluding a 3% negative currency effect and consolidation impact, comparable sales*remained flat, reflecting low-single-digit growth in Healthcare Informatics while Monitoring & Analytics and Therapeutic Care remained flat year-on-year. Therapeutic Care includes a negative impact from the consent decree of a 135 basis points.
In 2017, sales amounted to EUR 3,163 million and remained flat compared with 2016 on a nominal basis. The 3% increase on a comparable basis*was driven by mid-single-digit growth in Patient Care & Monitoring Solutions and low-single-digit growth in Healthcare Informatics.
Personal Health businesses
In 2018, sales amounted to EUR 7,228 million, a nominal decrease of 1% compared to 2017. Excluding a 4% negative currency effect and consolidation impact, comparable sales*were 3% higher year-on-year, reflecting high-single-digit growth in Sleep & Respiratory Care and low-single-digit growth in Personal Care and Domestic Appliances, while Health & Wellness remained flat year-on-year.
In 2017, sales amounted to EUR 7,310 million, a nominal increase of 3% compared to 2016. Excluding a 3% negative currency impact, comparable sales*were 6% higher year-on-year, driven by high-single-digit growth in Health & Wellness and mid-single-digit growth in Sleep & Respiratory Care, Domestic Appliances and Personal Care.
Other
In 2018, sales amounted to EUR 564 million, compared to EUR 416 million in 2017. The increase was mainly due to higher IP royalty income and revenue from innovation. Following deconsolidation at the end of November 2017, license income from Signify (formerly Philips Lighting) is reported as third-party sales.
In 2017, sales amounted to EUR 416 million compared to EUR 479 million in 2016, mainly due to lower royalty income.
Performance per geographic cluster
Philips Group
Sales by geographic area
in millions of EUR unless otherwise stated
2016 - 2018
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Comparable sales growth (%) 1 | | | |
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Comparable sales growth (%) 1 | | | |
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Sales in mature geographies in 2018 were EUR 303 million higher than in 2017, or 3% higher on both a nominal and a comparable basis*. Sales in Western Europe were 5% higher year-on-year on a nominal basis and 3% higher on a comparable basis*. Comparable sales*in Western Europe reflected high-single-digit growth in the Connected Care & Health Informatics businesses, mid-single-digit growth in the Diagnosis & Treatment businesses, and a low-single digit decline in the Personal Health businesses. Sales in North America decreased by EUR 72 million, or 1% on a nominal basis, and increased 1% on a comparable basis*). Comparable sales*) in North America reflected mid-single-digit growth in the Diagnosis & Treatment businesses, flat sales in the Personal Health businesses, and a mid-single-digit decline in the Connected Care & Health Informatics businesses. Sales in other mature geographies increased by 11% on a nominal basis and by 14% on a comparable basis*). Comparable sales* in other mature geographies showed high-single-digit growth in the Personal Health businesses and mid-single-digit growth in the Diagnosis & Treatment businesses and Connected Care & Health Informatics businesses.
Sales in mature geographies were EUR 92 million higher in 2017 than in 2016, or 1% higher on a nominal basis and 2% higher on a comparable basis*. Sales in Western Europe were 1% higher than in 2016 on a nominal basis and 3% higher on a comparable basis*. Comparable sales*in Western Europe reflected mid-single-digit growth in the Connected Care & Health Informatics businesses and Personal Health businesses, and flat year-on-year sales in the Diagnosis & Treatment businesses. Sales in North America increased by EUR 130 million, or 2% on a nominal basis and 3% on a comparable basis*. Comparable sales*in North America reflected mid-single-digit growth in the Connected Care & Health Informatics businesses and low-single-digit growth in the Personal Health businesses and Diagnosis & Treatment businesses. Sales in other mature geographies decreased by 5% on a nominal basis and by 2% on a comparable basis*. Comparable sales*in other mature geographies showed low-single-digit growth in the Diagnosis & Treatment businesses, while the Connected Care & Health Informatics businesses and Personal Health businesses recorded a low-single-digit decline.
Sales in growth geographies in 2018 were EUR 39 million higher than in 2017, an increase of 1% on a nominal basis. The 8% increase on a comparable basis*reflected double-digit growth in the Diagnosis & Treatment businesses and high-single-digit growth in the Connected Care & Health Informatics businesses and Personal Health businesses. The increase was driven by double-digit growth in Latin America and mid-single-digit growth in China.
In growth geographies, sales were EUR 266 million higher in 2017 than in 2016 and increased 5% on a nominal basis. The 8% increase on a comparable basis*reflected double-digit growth in the Personal Health businesses, high-single-digit growth in the Diagnosis & Treatment businesses and low-single-digit growth in the Connected Care & Health Informatics businesses. The increase was driven by double-digit growth in Middle East & Turkey and high-single-digit growth in China, Latin America and Central & Eastern Europe.
Diagnosis & Treatment businesses
Philips Group
Diagnosis & Treatment businesses sales
in millions of EUR unless otherwise stated
2016 - 2018
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Comparable sales growth (%) 1 | | | |
From a geographic perspective, nominal sales in growth geographies increased by 4% in 2018, while comparable sales*showed double-digit growth, driven by double-digit growth in China and Latin America. Sales in mature geographies increased by 6% on a nominal basis, while comparable sales*showed mid-single-digit growth, reflecting mid-single-digit growth in North America, Western Europe and other mature geographies.
From a geographic perspective, nominal sales increased by 5% in growth geographies in 2017 and on comparable sales*showed high-single-digit growth, mainly driven by double-digit growth in China and high-single-digit growth in Latin America. Sales in mature geographies showed a 2% increase on a nominal basis and on a comparable basis*recorded low-single-digit-growth, reflecting low-single-digit growth in North America and other mature geographies, while sales in Western Europe were flat year-on-year.
Connected Care & Health Informatics businesses
Philips Group
Connected care & Health Informatics
in millions of EUR unless otherwise stated
2016 - 2018
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Comparable sales growth (%) 1 | | | |
From a geographic perspective, sales on a nominal basis remained flat in growth geographies in 2018 and on a comparable basis*showed high-single-digit growth, reflecting double-digit growth in Latin America and low-single-digit growth in China. Sales in mature geographies decreased by 3% on a nominal basis and showed a low-single-digit decline on a comparable basis*, reflecting high-single-digit growth in Western Europe and mid-single-digit growth in other mature geographies, offset by a mid-single-digit decline in North America.
From a geographic perspective, sales on a nominal basis decreased by 2% in growth geographies in 2017 and on a comparable basis sales*showed low-single-digit growth, mainly driven by low-single-digit growth in China. Sales in mature geographies increased by 1% on a nominal basis and showed low-single-digit growth on a comparable basis*, driven by mid-single-digit growth in Western Europe and North America, partly offset by a low-single-digit decline in other mature geographies.
Personal Health businesses
Philips Group
| 2021 |
|---|
| Oral Healthcare | 34% |
| Mother & Child Care | 10% |
| Personal Care | 56% |
Through our Personal Health businesses, we offer a broad range of solutions in various consumer price segments, always aiming to offer and realize premium value. We continue to rationalize our portfolio of locally relevant innovations and increase its accessibility, particularly in lower-tier cities in growth geographies. A notable aspect of our commercial strategy is driving increased direct-to-consumer relationships and sales through our consumer communities and online store. Worldwide about half of our Personal Health sales now take place online.
We are leveraging connectivity to offer new business models, partnering with other players in the health ecosystem, e.g. insurance companies, with the goal of extending opportunities for people to live healthily, prevent or manage disease. We are engaging consumers in their health journey in new and impactful ways through social media and digital innovation.
For example, we strongly believe in the connection between good oral care and good overall health - a belief underpinned by the World Health Organization (WHO), which adopted a resolution on oral healthcare in May 2021. Good oral care is important for everyone. And since everyone is different, oral healthcare should also be personalized to each user, so they can get the best health outcome. Philips Sonicare offers a wide range of solutions for complete oral care: from intelligent and intuitive power toothbrushes to interdental cleaning solutions and apps that help users to manage their complete oral care on a daily basis and give the option to share brushing data with their dental practitioners, putting personalized guidance at their fingertips.
We also offer mobile solutions to support parents and parents-to-be for a more informed, more connected and healthier journey to parenthood. The Pregnancy+ app and Baby+ app offer parents supportive content at every stage of their first 1,000-day journey. Pregnancy+ also offers state-of-the-art, photo-realistic and interactive 3D fetal models to make the experience even more exciting, with new, personalized content for each day of the pregnancy. As of year-end 2021, the Pregnancy+ app and Baby+ app combined have more than 56 million downloads, almost 2 million daily active users, and are available in 22 languages.
The company’s wide portfolio of connected consumer health platforms leverages Philips HealthSuite Platform, a cloud-enabled connected health ecosystem of devices, apps and digital tools that support personalized health and continuous care.
The revenue model is mainly based on product sale at the point in time the products are delivered to retailers and online platforms. We are increasingly diversifying the revenue model with new business models, including direct-to-consumer, subscriptions and services.
The Personal Health businesses experience seasonality, with higher sales around key national and international events and holidays.
At year-end 2021, Personal Health employed around 10,000 people worldwide.
2021 business highlights
The global launch of Philips’ most advanced electric toothbrush, the Sonicare 9900 Prestige, was positively received by consumers. The premium electric toothbrush leverages AI to optimize the user’s brushing technique, ensuring full coverage of their teeth, and instills brushing habits that improve oral health.
Toward the end of the year, Philips completed the successful roll-out of the Sonicare 9900 Prestige in North America, China, Europe, Middle East and Asia Pacific. It finished #1 in the Stiftung Warentest, Europe’s leading consumer organization. Philips further expanded its oral healthcare portfolio with the launch of innovative interdental cleaning devices in North America, China and Asia Pacific.
Underlining Philips’ strategy to deliver locally relevant solutions, the company launched several oral healthcare innovations targeting multiple price points in China, including two new electric toothbrushes. In addition, Philips launched its professional teeth whitening offering Zoom in China through a local partnership with LinkedCare, one of the largest dental solution providers in the Chinese dental market.
Expanding the company’s leading male grooming portfolio, Philips introduced the Shaver Series 9000 with SkinIQ technology in markets around the world, including China, North America and Europe. The premium shaver leverages AI and sensors to offer a personalized shave tailored to each unique skin and hair type.
Philips produced its 100 millionth OneBlade, just 5 years after its launch in 2016. The Philips OneBlade has disrupted shaving markets worldwide, creating a new category for shaving, trimming, and edging.
Philips introduced the Lumea IPL 9000 series with SenseIQ technology for personalized hair removal, which is now also available through a Try&Buy subscription model in various European countries.
The No. 1 worldwide pregnancy app that’s the most recommended app by midwives and pediatricians, the Philips Pregnancy+ app, debuted in India. The Philips Pregnancy+ app is currently available in 175+ countries worldwide, and offers a fully immersive experience for expecting parents, enabling them to track their baby’s growth, all with personalized content supported by clinical expertise.
Philips’ newest baby tech launched in North America (with subsequent markets launching throughout 2022): the Philips Avent Natural Baby Bottle with Natural Response nipple, which releases milk only when baby actively drinks, just like breastfeeding, easing the switch between breast and bottle.
6.4.4Other
In our external reporting on Other we report on the items Innovation & Strategy, IP Royalties, Central costs, and other small items. At year-end 2021, around 18,000 people worldwide were working in these areas.
About Other
Innovation & Strategy
The role of Innovation & Strategy is to listen to the voice of the customer and, in collaboration with the operating businesses and the markets, direct the company strategy and innovation roadmap to achieve our growth and profitability ambitions. The various components of Innovation & Strategy include: the Chief Technology Office (CTO), Research, HealthSuite Platform, the Chief Medical Office, Engineering Solutions, Experience Design, Healthcare Transformation Services, Strategy, and Partnerships. Our four largest Innovation Hubs are in Eindhoven (Netherlands), Cambridge (USA), Bangalore (India) and Shanghai (China).
The Innovation & Strategy function tunes into industry trends and customer signals to develop innovations that solve real-world problems for healthcare customers and consumers. Innovation & Strategy advances innovation together with Philips' businesses, markets and partners. This entails cooperation between research, design, medical affairs, professional services, marketing, strategy and businesses in a multi-disciplinary fashion, from early exploration to first-of-a-kind offerings.
Innovation & Strategy actively participates in Open Innovation through relationships with academic, clinical, industrial partners and start-ups, as well as via public-private partnerships. It does so in order to improve innovation speed and agility, to capture and generate new ideas, and in some cases to leverage third-party capabilities. This may include sharing the related financial exposure and benefits.
Finally, Innovation & Strategy sets the agenda to drive continuous improvement in the Philips product and solution portfolios. Innovation & Strategy improves the efficiency and effectiveness of innovation through Centers of Excellence, such as Platform Modularity & Re-use, Data Science, Artificial Intelligence and Internet of Things.
Chief Technology Office (CTO) and Philips Research
The Chief Technology Office orchestrates customer-centric innovation strategy and portfolio management, and drives adoption of digital architecture and platforms, Data Science and AI, as well as excellence in software, across Philips’ businesses and markets. Philips Research initiates game-changing innovations – based on deep customer insights and technology advancements – that disrupt and cross boundaries in health technology and care delivery. It does so to increase the availability and accuracy of healthcare and improve clinical and economic outcomes, as well as supporting the associated transformation of Philips into a digital solutions company. CTO and Research encompass the following organizations:
- Innovation Management, responsible for end-to-end innovation strategy and portfolio management, integrated roadmaps linking products, systems and software to solutions, New Business Creation Excellence, R&D competency management, Clinical Research Board, Innovation Transformation and Performance Management and public funding programs.
- The Chief Architect Office defines the reference architecture for the HealthSuite Platform, domain-specific digital application platforms, and Modular Systems, covering all systems, products, services, solutions and digital IT in Philips.
- The Software Center of Excellence drives adoption of industry best practices in creating and maintaining application-level software, modular and configurable system design and model-based system engineering.
- The Data Science and AI Center of Excellence defines and deploys strategies and best practices for dealing with Data Science and AI in a responsible and compliant way, and develops common tools to facilitate the development process and co-creation of innovative propositions with clinical and business partners.
- Philips Research, as co-creator and strategic partner of the Philips businesses, markets and complementary Open Innovation ecosystem partners, drives customer needs-focused front-end innovation and clinical research at sites across the globe. The role of Research increasingly goes beyond early-stage proof-of-concept, including advanced development of smart connected devices and systems, and integrated solutions and services, fitting regionally relevant digital ecosystems.
Philips HealthSuite Platform
Philips HealthSuite Platform helps unlock the power of data to enable healthcare professionals, patients and consumers to engage in connected care. Its modular set of re-usable digital capabilities liberate, integrate and enable actionable insights on data from disparate systems within a secure environment. HealthSuite Platform helps accelerate the development and deployment of digital propositions across the health continuum, supporting better health outcomes, improved patient/consumer and staff experience, and lower cost of care.
Chief Medical Office
The Chief Medical Office is responsible for clinical innovation and strategy, healthcare economics, clinical evidence generation, medical affairs and market access, clinical education, as well as medical thought leadership, with a focus on healthcare governance and organization, the Quadruple Aim and value-based care. This includes engaging with stakeholders across the health continuum to extend Philips’ leadership in health technology and acting on new value-based reimbursement models that benefit the patient, health professional, care provider and payer.
Leveraging the knowledge and expertise of the medical professional community across Philips, the Chief Medical Office includes many healthcare professionals who practice(d) in the world’s leading health systems. Its activities include strategic guidance built on clinical and scientific knowledge, building and nurturing customer partnerships and growth opportunities, fostering peer-to-peer relationships in relevant medical communities, driving co-innovation with customers, liaising with medical regulatory bodies, and supporting clinical and economic evidence development.
Engineering Solutions
Engineering Solutions is accountable for bringing engineering capabilities in Philips to world-class level to realize innovations that deliver on our customers’ needs, advancing the Quadruple Aim. Taking a customer-first approach, Engineering Solutions turns ideas into working innovations by providing deep engineering expertise, cross-business product platforms, and innovation processes and tools. Engineering Solutions also works for selected external companies in the healthcare, high-tech and semiconductor industries.
Innovation Hubs
To drive innovation effectiveness and efficiency, and to enable locally relevant solution creation, we have established four Innovation Hubs for the Philips Group: Eindhoven (Netherlands), Cambridge (USA), Bangalore (India) and Shanghai (China). The four hubs form a global network, together with the other smaller innovation and research sites in their respective regions, to provide access to each other’s capabilities to serve businesses, markets and customers globally.
- Philips Innovation Center Eindhoven, with satellites in Hamburg, Paris and Moscow, is Philips’ largest cross-functional Innovation Hub, hosting the global headquarters of most of our central innovation organizations. Many of the company’s core research programs are also run from here, as well as innovation for digital platforms and solution & services delivery.
- Philips Innovation Center Cambridge, MA is located at the heart of medical innovation within the North America market. It has innovation partnerships with top engineering institutions like MIT, with top clinical sites, and with government funding agencies like NIH (National Institutes of Health) and BARDA (Biomedical Advanced Research and Development Authority). The Research lab in Cambridge focuses on the application of Data Science and AI in radiology, ultrasound, and acute care.
- Philips Innovation Center Bangalore is our largest software-focused site, with over 3,400 engineers. In addition, it hosts, among others, R&D teams from most of our operating businesses and IT. The Center also functions as the hub for market-driven innovation in surrounding geographies in Asia Pacific, Africa, and Middle East & Turkey.
- Philips Innovation Center Shanghai is a key contributor to the healthcare and healthy living transformation of China. It combines digital innovation, research and solutions development for the China market, participating in local digital ecosystems, while several of its locally relevant innovations are also finding their way globally. Programs focus on personal health, clinical informatics for precision diagnosis, and connected care solutions.
Alongside the hubs, where most of the central Innovation & Strategy organization is concentrated together with selected business R&D and market innovation teams, we continue to have significant, but more focused innovation capabilities integrated into key technology centers at our other global business sites.
Philips Experience Design and Healthcare Transformation Services
Philips Experience Design is the global design function for the company, ensuring the user experiences of our innovations are inspiring, meaningful, people-focused, and locally relevant. Philips Experience Design also ensures the Philips brand experience is distinctive, consistently expressed across all customer touchpoints, and drives customer preference. A key enabler for this is an engaging and differentiating design language system (DLS) that is embedded in software, hardware, and services across our businesses. Philips Experience Design partners with stakeholders across the enterprise in applying creativity and design thinking, from defining value propositions to co-creating solutions with customers, as well as developing new approaches in areas such as data-enabled design tools and processes that help create meaning and capture value from data. Philips Experience Design received a record 182 awards for design excellence in 2021.
Philips Healthcare Transformation Services (HTS) is a consulting practice within Philips that helps our customers improve process efficiency and enhance the care experience. Our consultants leverage co-create methodologies with the aim of creating solutions that are tailored specifically to the challenges facing our customers, as local circumstances and workflows are key ingredients in the successful implementation of solutions. HTS is a team of healthcare transformation practitioners with clinical and consulting expertise delivering a portfolio of methods and tools in operational and clinical transformation, environment and experience design, and digital transformation and performance analytics.
IP Royalties
Philips Intellectual Property & Standards (IP&S) proactively pursues the creation of new Intellectual Property (IP) in close co-operation with Philips’ operating businesses and Innovation & Strategy. IP&S is a leading industrial IP organization providing world-class IP solutions to Philips’ businesses to support their growth, competitiveness and profitability.
Royal Philips’ IP portfolio currently consists of 57,000 patent rights, 33,000 trademarks, 114,000 design rights and 2,900 domain names. Philips filed 860 new patents in 2021, with a strong focus on the growth areas in health technology services and solutions.
Philips earns substantial annual income from license fees and royalties.
Philips believes its business as a whole is not materially dependent on any particular third-party patent or license, or any particular group of third-party patents and licenses.
Central costs
We recharge the directly attributable part of the functional costs to the business segments. The remaining part is accounted for as 'central costs', and includes costs related to the Executive Committee and Group functions such as Strategy, Legal and Audit fees.
Real estate
Philips is present in more than 75 countries globally and has its corporate headquarters in Amsterdam, Netherlands. Our real estate sites are spread around the globe, with key manufacturing and R&D sites in Europe, the Americas and Asia.
In 2021, we relocated key offices in Farnborough (UK), Stockholm (Sweden), Toronto (Canada), Gurgaon (India) and Istanbul (Turkey). We invested in, amongst others, our sites in Plymouth (USA), Eindhoven (Netherlands), Alajuela (Costa Rica), Pune (India) and Böblingen (Germany) to create an engaging workplace that can help attract and retain the best talent. We have continued to drive productivity by optimizing our footprint globally and reducing the number of sites through post-acquisition integration programs, as well as by implementing our Future of Work concept to support hybrid working in 2022.
We have fully transferred 33 properties and partially transferred 48 properties as part of the sale of our Domestic Appliances business.
In line with our Environmental ESG commitment towards 2025, we continue to actively optimize our real estate portfolio. Having met our goal of bringing our site-related CO2 emissions under 35 kilotons per year in 2020, we further reduced our CO2 emissions by 15% in 2021. In addition, we reached 73.9% renewable energy in 2021, meeting our 2021 target of 72% and on track to achieve our target of 75% by 2025.
The vast majority of our locations consist of leased property, and we manage these closely to keep the overall vacancy rates of our property below 5% and to ensure the right level of space efficiency and flexibility to follow our business dynamic. Occupancy rates in Philips office locations continued to decrease in 2021 as a result of COVID-19, and this trend is expected to continue in 2022. The net book value of our land and buildings at December 31, 2021, represented EUR 1,388 million; construction in progress represented EUR 24 million. Our current facilities are adequate to meet the requirements of our present and foreseeable future operations.
6.5Our geographies
6.5.1Our Markets
We address North America, Western Europe and other mature geographies, as well as Greater China and other growth geographies, via three market groups – North America, Greater China and International Markets – which are active in more than 100 countries worldwide.
The Markets’ core objective is to understand local market/customer needs, to create and activate the local marketing plans, to develop and manage the relationship with existing and new customers, to deliver orders, and to manage and service the installed base of equipment and informatics at our customer sites. The Markets manage the market-oriented profit-and-loss account (P&L). They act as the voice of the customer in the creation of the suite of solutions strategy, bring relevant products and solutions to market, and ensure local solution delivery and service execution, as well as managing the integral go-to-market approaches to our key customers and indirect channels – all with the aim of maximizing long-term customer value and gaining market share.
To take quick decisions that are locally relevant and as close to the customer as possible, our Businesses and Markets work closely together in Business-Market Combinations (BMCs) – Ultrasound-Japan, for example. Through the BMC process it is agreed where to compete and how to win. Businesses and Markets bear joint accountability for managing the operational end-to-end consumer and customer value chain and the collaborative P&L, while leveraging the functional excellence and shared infrastructure of the company.
6.5.2Macro-economic landscape in 2021
In 2021, the world economy experienced strong growth, largely due to the base effect from the recession suffered in 2020 as a result of the COVID-19 pandemic. The economic re-opening seen in 2021 has led to significant economic recoveries, although the COVID-19 pandemic and global supply bottlenecks persist. According to Oxford Economics, global real GDP is estimated to have grown by 5.8% in 2021, compared with the -3.5% estimated for 2021 in 2020. Across Philips’ markets, Latin America, Europe and Japan are estimated to have not yet reached their 2019 real GDP levels. Oxford Economics expects global real GDP growth to moderate to 4.2% in 2022.
6.5.32021 highlights from our Market Groups
North America
Philips continued to focus on helping customers drive innovation in areas such as cancer care, cardiovascular care and provider digital transformation, while forging strategic partnerships to advance artificial intelligence (AI) and data analytics. 2021 saw our long-term strategic partnerships continue to expand into these areas, as health systems looked to advance care for their communities.
New York University Langone Health’s Department of Pathology worked with us to integrate Philips Genomics Workspace into their EMR (electronic medical record) and enable the largest cancer sequencing test in the industry. We signed a long-term strategic partnership specifically focused on integrated cardiovascular solutions with Lankenau Heart Institute, part of Main Line Health, and formed a unique partnership with the University of California, San Francisco (UCSF), to develop AI technologies that will enable personalization and make it easier for patients to select providers, access their health information and receive virtual care at home. Further, Baptist Health signed a 10-year strategic partnership to help standardize patient monitoring solutions, supporting their digital transformation goals.
Our partnerships in 2021 also highlighted our commitment to health equity and sustainability. The US Chamber of Commerce Foundation, in partnership with Philips and the Platform for Accelerating the Circular Economy (PACE), expanded the Capital Equipment Coalition (CEC) to North America to accelerate transformation to a circular economy model. We are also working with the National Minority Quality Forum (NMQF), as part of a joint mission to raise awareness of and support on key issues such as maternal mortality among Black women, leveraging Philips resources and technology, e.g. the Pregnancy+ app, to help close the healthcare disparities gaps.
In keeping with our belief in the added value of AI, we announced the Philips Sonicare 9900 Prestige, an AI-enabled toothbrush with SenseIQ technology. Philips Sonicare continues to be the sonic toothbrush brand most recommended by US dental professionals, and we maintain a No. 1 market share in electric male grooming.
Greater China
In 2021 we continued our efforts to provide innovative health technology solutions in support of China’s national health strategy, Healthy China.
Philips provided the Yili Chuanxin Oncology hospital in Xinjiang, a newly established top-tier private hospital, with an Oncology solution to address the hospital’s clinical needs in screening, precision diagnosis, targeted treatment and rehabilitation of cancer patients. The solution includes IntelliSpace Digital Pathology and the Ingenia 3.0T MR, IQon Spectral CT, Incisive CT and CT Big Bore imaging systems, combined with IntelliSpace Portal for advanced visualization and analysis.
Driven by the China Healthcare Reform, PCI (Percutaneous Coronary Intervention) procedures are gradually being transferred from top-tier hospitals to low-tier hospitals, which urgently need medical technology to help doctors provide quality diagnosis and treatment to cardiovascular patients. We provided an integrated solution, including Azurion and IVUS (intravascular ultrasound), to a county-level hospital in Kaifeng, Henan Province, to address the hospital’s needs in the diagnosis and treatment of PCI patients.
Philips provided The First Affiliated Hospital of Zhengzhou University – one of the biggest hospitals in the world, with more than 10,000 beds – with a range of advanced diagnostic imaging and image-guided therapy systems, including IQon Spectral CT and the Azurion image-guided therapy platform.
We signed a solutions contract with Gansu Provincial Maternity and Child Care Hospital to streamline and advance the delivery of critical care across multiple departments. The contract includes patient monitors, an ECG management system, and ICCA (IntelliSpace Critical Care and Anesthesia) informatics systems.
For consumers, we launched an integrated platform, Philips Healthy Living Lab, in which Philips is partnering with other brands, such as Unilever, IHG and Alibaba, to engage consumers with healthy living experiences.
Underlining our strategy to deliver locally relevant solutions, the company launched several oral healthcare innovations targeting multiple price points in China, including two new electric toothbrushes. In addition, Philips launched its professional teeth whitening offering Zoom in China through a local partnership with LinkedCare, one of the largest dental solution providers in the Chinese dental market.
Recognizing the need for local-for-local development and manufacturing in China, we continue to strengthen our innovation centers in China and aim to achieve 90% localization by the end of 2023.
International Markets
In our International Markets we strive to execute on a shared global vision whilst meeting the unique local needs and circumstances of our customers. Our goal is to elevate customer relationships and move from being a trusted supplier of equipment, services and software to a transformational partner directly contributing to our customers’ long-term success. To support this vision we have made great progress on leveling up our go-to-market model, developing scalable solutions and software, expanding fit-for-future capabilities, reinvesting revenue to enable new business models, and establishing new partnerships.
In 2021, Philips entered into many new customer partnerships, including the following:
Philips and Spanish healthcare group Vithas signed a 5-year strategic agreement, which will allow Vithas Group hospitals and medical centers to benefit from Philips’ latest innovations in diagnostic imaging technology, health informatics and equipment for minimally invasive interventional procedures.
In Germany, Philips signed a 10-year partnership agreement with the Brandenburg University Clinic. The agreement includes a wide range of integrated solutions along the health continuum. Furthermore, Philips will act as the general contractor for an extension to the central operating rooms and cardiology department.
As part of Philips’ 10-year partnership with Rutherford Health to open multiple Community Diagnostic Centers in England, the first center was opened in Taunton, for which Philips provided innovative diagnostic imaging systems, including Ingenia Ambition MR combined with Ambient Experience, which allows patients to control and personalize the imaging environment.
In France, Philips and Rennes University Hospital signed a 5-year technology, research and innovation partnership to advance patient care. The hospital will have access to Philips’ latest technologies and informatics solutions to enhance the diagnosis, treatment, monitoring and management of patients. The multi-year strategic partnership will accelerate clinical research focused on image-guided minimally invasive therapy, neurology, intensive care units and digital pathology.
In the Netherlands, Philips signed a 12-year strategic partnership with IJsselland Hospital, focusing on innovation, digitalization and optimization of care delivery, which also includes the delivery of patient monitoring and imaging solutions, including CT and MRI systems.
In Russia, Philips won several key projects, including one at Moscow City Healthcare Department for ultrasound systems, including lifetime service support for local clinics. The company also concluded a turnkey project for Sakha Republic (Yakutia), equipping the regional hospitals’ cardiology and oncology departments with, among others, our Azurion 7 image-guided therapy solution, MR Ingenia Ambition imaging system, and IntelliSpace Critical Care and Anesthesia informatics system.
In Poland, Philips delivered 15 systems from across the total Azurion portfolio to empower doctors serving patients’ needs in the area of interventional cardiology, electrophysiology (EP), neuroradiology and hybrid solutions.
In Latin America, Philips signed a strategic agreement with UnitedHealth Group, comprising a comprehensive portfolio of Diagnostic Imaging, Image Guided Therapy and Customer Services solutions and a turnkey solution for the renovation of 12 sites in Brazil. Under this agreement, the customer will have access to leading-edge technology, enabling them to dedicate more time to their patients. In Mexico, Philips worked with Digipath to establish the first digital pathology laboratory in the country, with Philips IntelliSite Pathology Solution enhancing productivity and supporting precision medicine and diagnostics.
Philips, together with the Saudi Data and Artificial Intelligence Authority (SDAIA), opened the first AI lab in the Kingdom of Saudi Arabia in October 2021. The Riyadh-based center will spearhead research and development of AI programs and standards to boost the use of AI in the healthcare technology sector, and build an ecosystem of highly skilled AI experts in Saudi Arabia.
6.6Supply chain and procurement
6.6.1Supply chain
Philips runs an Integrated Supply Chain, which encompasses supplier selection and management through procurement, manufacturing across all the industrial sites, logistics and warehousing operations, as well as demand/supply orchestration. When selecting and evaluating partners, we consider not only business metrics such as cost, quality and on-time delivery performance, but also environmental, social and governance factors. We use supplier classification models to identify critical suppliers, including those supplying materials, components and services that could influence the safety and performance of our products and solutions.
The COVID-19 pandemic has continued to test the resilience of supply chains globally. Philips has not been immune to the increasing impact of issues, such as the shortage of electronic components and logistical constraints. On the logistics front, we have established long-term contracts with suppliers, ensuring increased reliability – still not at pre-COVID-19 levels due to ports congestion – as well as secured costs and availability on contracted lanes. We have also expanded our rail and road transportation options to diversify our routes. For semiconductors, we have placed non-cancellable orders for an 18-month horizon to ensure our place in the queues. At the same time, we have intensified spot buys and alternate parts qualifications in partnership with Research & Development. In parallel, we continue our advocacy towards the industry and governments on prioritizing supplies for life-saving equipment. Much like the rest of the industry, however, we remain exposed to sudden breakouts of COVID-19 in various countries and among suppliers, which will continue to make it difficult to predict developments through at least the first half of 2022. All of these challenges have reinforced our strategy for a more ‘regional vs global’ approach to our end-to-end network design.
Philips has continued to progress the consolidation of its manufacturing footprint into versatile ‘multi-modality’ manufacturing sites that produce multiple product categories and are located within or near the regions they serve. We do this for enhanced scale, efficiency, and customer proximity. While our site count has continued to decrease, the number of locations equipped to make the same product is increasing. Philips is using its multi-modality sites, in combination with contract manufacturing partners, to regionally ‘multi-source’ many of its products. This will increase the resilience of our supply chain to manage future, unplanned disruptions and ensure access to public healthcare investment where ‘local’ requirements exist in our largest markets.
We have also made good progress on transforming our warehousing and distribution operations into a more customer-centric and agile network that is more responsive to market volatility. In the last three years, we have reduced our warehousing footprint by 35%, essentially through consolidation and servicing of multiple businesses from a single location.
In 2021 we finalized the implementation of artificial intelligence and machine learning in our baseline demand forecasting operations for all our businesses in order to improve demand forecasting accuracy and manage inventories more efficiently. We achieved an improved forecast accuracy for our Personal Health products of more than 20% in the markets Europe, North America and Greater China. The other markets are in the early operating phase. We have insourced the AI forecasting activities for our health systems and medical devices portfolio from a third-party supplier and increased the baseline demand forecasting accuracy by 8%.
In June 2021, our subsidiary, Philips Respironics, initiated a voluntary recall notification in the United States and field safety notice outside the United States for certain sleep and respiratory care products to address identified potential health risks related to the polyester-based polyurethane (PE-PUR) sound abatement foam in these devices. Following the substantial ramp-up of its production, service and repair capacity in 2021, the repair and replacement program in the United States and several other markets is under way. Production was doubled during the second half of 2021. Philips Respironics plans to treble production volumes during the first half of 2022, subject to availability of inputs and taking into account global semiconductor shortages.
Philips Group
Supplier spend analysis per region
in %
| 2021 |
|---|
| Western Europe | 31% |
| North America | 33% |
| Other mature geographies | 6% |
| Total mature geographies | 70% |
| Growth geographies | 30% |
| Philips Group | 100% |
6.6.2Procurement
In 2021, strong economic recovery led to sustained high demand. Combined with low levels of inventories and long lead times, this resulted in tightness and scarcity in many markets, as well as volatile spot-market price environments. Under these circumstances, the Procurement function’s priority was to endeavor to safeguard continuity of supply, with dedicated teams by modalities and types of commodities, so that Philips could continue to provide critical healthcare equipment and solutions to our customers all over the world.
Global manufacturing remained in catch-up mode throughout the year. In addition, supply chain bottlenecks and other incidents had direct significant impacts on the already tight markets. Many market risks were in play at the same time – COVID-related delays in supply ramp-ups, the US chemical industry hit by weather storms, the blockage of the Suez Canal, the global shipping container shortage, the energy crisis in China, as well as problems on the gas market in Europe. Especially in the components area, capacity remained a major issue, causing shortages across all end-markets.
6.6.3Supplier sustainability
Philips’ purpose to improve people’s lives applies throughout our value chain. An important area of focus for the Integrated Supply Chain is sustainability, and we are actively working on this together with our partners, whether these be component suppliers or energy or logistics providers. Close cooperation with our suppliers not only helps us deliver health technology innovations, it also supports new approaches that help us minimize our environmental impact and maximize the social and economic value we create.
Since 2003, our sustainability strategy has included dedicated supplier sustainability programs. We have a direct (tier 1) business relationship with approximately 5,800 product and component suppliers and 18,000 service providers. In many cases, social issues deeper in our supply chain require us to intervene beyond tier 1 of the chain.
We want to make a difference through sustainable supply management and responsible sourcing. This is more than simply managing compliance – it is about working together with our supply partners to have a positive and lasting impact. Therefore, the sustainability performance of our suppliers is fully embedded in our procurement organization and strategy.
In 2021, we focused on further maximizing our positive impact on the supply chain, strengthening our maturity-based approach to drive continuous improvement. Through the Supplier Sustainability Performance program, we improved the lives of 430,000 workers in our supply chain (2020: 302,000). We also launched new ways to engage our suppliers, performing deep-dives on human rights impacts and dedicated energy scans to identify cost-effective ways to decarbonize suppliers’ manufacturing environments.
Managing our large and diverse supply chain in a socially and environmentally responsible way requires a structured and innovative approach, while being transparent and engaging with a wide variety of stakeholders. In 2021, our programs focused specifically on improving suppliers’ sustainability performance, responsible sourcing of minerals, and reducing the environmental footprint of our supply base by driving the adoption of science-based targets.
7Financial performance
7.1.1Results of operations
Sales
The composition of sales growth in percentage terms in 2021, compared to 2020 and 2019, is presented in the following table.
Philips Group
Sales
in millions of EUR unless otherwise stated
| | 2019 | 2020 | 2021 |
|---|
| Diagnosis & Treatment businesses | 8,485 | 8,175 | 8,635 |
| Nominal sales growth | 9.8% | (3.7)% | 5.6% |
| Comparable sales growth1) | 5.5% | (2.3)% | 8.1% |
| | | | |
| Connected Care businesses | 4,674 | 5,568 | 4,593 |
| Nominal sales growth | 7.7% | 19.1% | (17.5)% |
| Comparable sales growth1) | 3.0% | 22.1% | (22.6)% |
| | | | |
| Personal Health businesses | 3,516 | 3,173 | 3,410 |
| Nominal sales growth | 7.2% | (9.8)% | 7.4% |
| Comparable sales growth1) | 5.4% | (6.9)% | 9.0% |
| | | | |
| Other | 472 | 396 | 519 |
| | | | |
| Philips Group | 17,147 | 17,313 | 17,156 |
| Nominal sales growth | 8.0% | 1.0% | (0.9)% |
| Comparable sales growth1) | 4.5% | 2.9% | (1.2)% |
Group sales amounted to EUR 17,156 million in 2021, 0.9% lower than in 2020 on a nominal basis. Considering a 0.3% positive effect from currency and consolidation, comparable sales*) decreased by 1.2%. While the currency effect was negative, mainly due to depreciation of currencies against the euro, and affected all business segments, this was more than offset by a positive consolidation impact from new acquisitions.
Group sales amounted to EUR 17,313 million in 2020, 1.0% higher than 2019 on a nominal basis. Considering a 1.9% negative currency effect and consolidation impact, comparable sales* increased by 2.9%. The negative currency effect was mainly due to depreciation of currencies against the euro and affected all business segments.
Diagnosis & Treatment businesses
In 2021, sales amounted to EUR 8,635 million, 5.6% higher than in 2020 on a nominal basis. Considering a 2.5% negative currency effect and consolidation impact, comparable sales*) increased by 8.1%. This was driven by double-digit growth in Image-Guided Therapy and mid-single-digit growth in Diagnostic Imaging and Ultrasound, reflecting demand for Philips' portfolio and positive market conditions.
In 2020, sales amounted to EUR 8,175 million, 3.7% lower than in 2019 on a nominal basis. Considering a 1.4% negative currency effect and consolidation impact, comparable sales* decreased by 2.3%, as low-single-digit growth in Diagnostic Imaging was more than offset by a high-single-digit decline in Image-Guided Therapy and Ultrasound due to the postponement of installations and elective procedures resulting from the impact of COVID-19.
Connected Care businesses
In 2021, sales amounted to EUR 4,593 million, 17.5% lower than in 2020 on a nominal basis. Considering a 5.1% positive currency effect and consolidation impact, comparable sales*) decreased by 22.6%, following the high COVID-19-generated demand in 2020 and the impact of the Respironics recall in 2021.
In 2020, sales amounted to EUR 5,568 million, 19.1% higher than in 2019 on a nominal basis. Considering a 3.0% negative currency effect and consolidation impact, comparable sales* increased by 22.1%, with double-digit growth in both Monitoring & Analytics and Sleep & Respiratory Care, as our innovations in these therapeutic areas were able to help our customers combat the pandemic.
Personal Health businesses
In 2021, sales amounted to EUR 3,410 million, 7.4% higher than in 2020 on a nominal basis. Considering a 1.6% negative currency effect and consolidation impact, comparable sales*) increased by 9.0%. This was driven by robust customer demand for new product introductions across the world.
In 2020, sales amounted to EUR 3,173 million, 9.8% lower than in 2019 on a nominal basis. Considering a 2.9% negative currency effect and consolidation impact, comparable sales* decreased by 6.9%, driven by a mid-single-digit decline in Personal Care and a high-single-digit decline in Oral Healthcare, mainly caused by lockdowns in several countries.
Other
In 2021, sales amounted to EUR 519 million, compared to EUR 396 million in 2020. The increase was mainly driven by supplies to a divested business and higher royalty income.
In 2020, sales amounted to EUR 396 million, compared to EUR 472 million in 2019. The decrease was mainly due to lower royalty income.
Performance per geographic cluster
Philips Group
Sales by geographic area
in millions of EUR unless otherwise stated
| | 2019 | 2020 | 2021 |
|---|
| Western Europe | 3,328 | 3,702 | 3,645 |
| North America | 6,904 | 6,884 | 6,781 |
| Other mature geographies | 1,804 | 1,750 | 1,694 |
| Total mature geographies | 12,036 | 12,336 | 12,120 |
| Nominal sales growth | 6% | 2% | (2)% |
| Comparable sales growth1) | 2% | 3% | (3)% |
| Growth geographies | 5,112 | 4,977 | 5,036 |
| Nominal sales growth | 12% | (3)% | 1% |
| Comparable sales growth1) | 11% | 3% | 3% |
| Philips Group | 17,147 | 17,313 | 17,156 |
Sales in mature geographies in 2021 were 2% lower than in 2020 on a nominal basis and 3% lower on a comparable basis*). Sales in Western Europe were 2% lower year-on-year on a nominal basis and 3% lower on a comparable basis*), with a double-digit decline in the Connected Care businesses, partly offset by high-single-digit growth in the Diagnosis & Treatment businesses and mid-single-digit growth in the Personal Health businesses. Sales in North America were 1% lower year-on-year on a nominal basis and decreased 3% on a comparable basis*), as double-digit growth in the Diagnosis & Treatment businesses and mid-single-digit growth in the Personal Health businesses were largely offset by a double-digit decline in the Connected Care businesses. Sales in other mature geographies decreased by 3% on a nominal basis and were in line with 2020 on a comparable basis*). Mid-single-digit comparable sales growth*) in the Personal Health businesses and Diagnosis & Treatment businesses was partly offset by a double-digit decline in the Connected Care businesses.
Sales in mature geographies in 2020 were 2% higher than in 2019 on a nominal basis and 3% higher on a comparable basis*. Sales in Western Europe were 11% higher year-on-year on a nominal basis and 10% higher on a comparable basis*, with double-digit growth in the Connected Care businesses and mid-single-digit growth in the Personal Health businesses, partly offset by a low-single-digit decline in the Diagnosis & Treatment businesses. Sales in North America were in line with 2019 on a nominal basis, and increased 1% on a comparable basis*, as double-digit growth in the Connected Care businesses was largely offset by a high-single-digit decline in the Diagnosis & Treatment businesses. Sales in other mature geographies decreased by 3% on both a nominal and comparable basis*. Double-digit comparable sales growth* in the Connected Care businesses was more than offset by a double-digit decline in the Personal Health businesses and a mid-single-digit decline in the Diagnosis & Treatment businesses.
Sales in growth geographies decreasedin 2021 increased by 1% on a nominal basis in 2018 and 3% on a comparable basis*)showed, with double-digit growth in the Personal Health businesses and high-single-digit growth reflectingin the Diagnosis & Treatment businesses, partly offset by a double-digit decline in the Connected Care businesses. The mid-single-digit comparable sales growth*) was driven by double-digit growth in India, high-single-digit growth in Russia & Central Asia, and mid-single-digit growth in Central & Eastern Europe and Latin America.
Sales in growth geographies in 2020 decreased by 3% on a nominal basis, mainly due to depreciation of their currencies against the euro, but increased 3% on a comparable basis*, with double-digit growth in the Connected Care businesses and mid-single-digit growth in the Diagnosis & Treatment businesses, partly offset by a double-digit decline in the Personal Health businesses. The mid-single-digit comparable sales growth* was driven by double-digit growth in Central & Eastern Europe and Russia & Central Asia and high-single-digit growth in Latin America, partly offset by a mid-single-digit decline in China.
Diagnosis & Treatment businesses
Philips Group
Diagnosis & Treatment businesses sales
in millions of EUR unless otherwise stated
| | 2019 | 2020 | 2021 |
|---|
| Western Europe | 1,586 | 1,589 | 1,743 |
| North America | 3,214 | 2,931 | 3,088 |
| Other mature geographies | 851 | 835 | 849 |
| Total mature geographies | 5,651 | 5,355 | 5,681 |
| Growth geographies | 2,834 | 2,820 | 2,954 |
| Sales | 8,485 | 8,175 | 8,635 |
| Nominal sales growth | 10% | (4)% | 6% |
| Comparable sales growth1) | 5% | (2)% | 8% |
Sales in growth geographies increased by 5% on a nominal basis in 2021, and on a comparable basis*) showed high-single-digit growth, driven by double-digit growth in Latin America, India and Central & Eastern Europe and mid-single-digit growth in China. Sales in mature geographies increased by 6% on a nominal basis and showed high-single-digit growth on a comparable basis*). Comparable sales*) increased, with double-digit growth in North America and high-single-digit growth in Western Europe.
In 2020, nominal sales in growth geographies were in line with 2019, while comparable sales* showed mid-single-digit growth, driven by double-digit growth in China, Russia & Central Asia and Central & Eastern Europe, partly offset by India and Middle East & Turkey. Sales in mature geographies showed a mid-single-digit decrease on a nominal and comparable basis*. Comparable sales* declined, with a low-single-digit decline in Western Europe and a high-single-digit decline in North America.
Connected Care businesses
Philips Group
Connected Care businesses sales
in millions of EUR unless otherwise stated
| | 2019 | 2020 | 2021 |
|---|
| Western Europe | 782 | 1,118 | 771 |
| North America | 2,624 | 2,882 | 2,606 |
| Other mature geographies | 646 | 723 | 606 |
| Total mature geographies | 4,052 | 4,724 | 3,983 |
| Growth geographies | 622 | 845 | 609 |
| Sales | 4,674 | 5,568 | 4,593 |
| Nominal sales growth | 8% | 19% | (18)% |
| Comparable sales growth1) | 3% | 22% | (23)% |
Sales in growth geographies decreased 1%by 28% on a nominal basis in 2021, and on a comparable basis*) showed a double-digit decline, with a double-digit decline across most regions. Sales in mature geographies decreased by 16% on a nominal basis and showed a double-digit decline on a comparable basis*), with a double-digit decline in Western Europe and North America and a mid-single-digit decline in Japan.
From a geographic perspective, sales on a nominal basis increased by 36% in growth geographies in 2020 and on a comparable basis* showed double-digit growth, with double-digit growth across all regions. Sales in mature geographies increased by 17% on a nominal basis and showed double-digit growth on a comparable basis*, with double-digit growth across all regions.
Personal Health businesses
Philips Group
Personal Health businesses sales
in millions of EUR unless otherwise stated
| | 2019 | 2020 | 2021 |
|---|
| Western Europe | 798 | 847 | 887 |
| North America | 956 | 931 | 935 |
| Other mature geographies | 266 | 189 | 197 |
| Total mature geographies | 2,020 | 1,966 | 2,019 |
| Growth geographies | 1,496 | 1,207 | 1,391 |
| Sales | 3,516 | 3,173 | 3,410 |
| Nominal sales growth | 7% | (10)% | 7% |
| Comparable sales growth1) | 5% | (7)% | 9% |
Sales in growth geographies increased by 15% on a nominal basis in 2021, and on a comparable basis*) showed double-digit growth, which was attributable to double-digit growth in Central & Eastern Europe, Russia & Central Asia and Latin America and mid-single-digit growth in China. Sales in mature geographies increased by 3% on a nominal basis, and on a comparable basis*)showed low-single-digit growth, reflecting high-single-digit growth in other mature geographies, flat sales in North America, and a low-single-digit decline in Western Europe.
Sales in growth geographies increased 7% on a nominal basis in 2017 and on a comparable basis*growth geographies showed double-digit growth, reflecting double-digit growth in Latin America, Middle East & Turkey and India, and high-single-digit growth in China and Central & Eastern Europe. Mature geographies increased 1% on a nominal basis and on a comparable basis*recorded low-single-digitmid-single-digit growth, driven by mid-single-digit growth in Western Europe and North America.
Sales in growth geographies decreased 19% on a nominal basis in 2020, and on a comparable basis* showed a double-digit decline, which was attributable to China. Sales in mature geographies decreased 3% on a nominal basis, and on a comparable basis* showed a low-single-digit decline, due to mid-single-digit growth in North America, partlyWestern Europe, which was more than offset by a low-single-digit decline in other mature geographies.
Cost of sales
Philips Group
Cost of sales components
in millions of EUR unless otherwise stated
| | 2019 | as a % of sales | 2020 | as a % of sales | 2021 | as a % of sales |
|---|
| Costs of materials used | 4,197 | 24.5% | 4,221 | 24.4% | 4,142 | 24.1% |
| Salaries and wages | 2,261 | 13.2% | 2,316 | 13.4% | 2,245 | 13.1% |
| Depreciation and amortization | 541 | 3.2% | 591 | 3.4% | 479 | 2.8% |
| Other manufacturing costs | 2,249 | 13.1% | 2,364 | 13.7% | 3,123 | 18.2% |
| Cost of sales | 9,249 | 53.9% | 9,493 | 54.8% | 9,988 | 58.2% |
Cost of sales includes only expenses directly or indirectly attributable to the production process, such as cost of materials used, salaries and wages, depreciation and amortization of assets used in manufacturing, and other manufacturing costs (such as repair and maintenance costs related to production, expenses incurred for shipping and handling of internal movements of goods, and other expenses related to manufacturing).
Philips’ cost of sales increased by EUR 495 million to EUR 9,988 million in 2021, compared to EUR 9,493 million in 2020, mainly due to the field action provision of EUR 719 million in connection with the Philips Respironics voluntary recall notification in the Sleep & Respiratory Care business reflected in other manufacturing costs. Other key factors influencing cost of sales were as follows:
- Costs of materials used decreased by EUR 79 million in 2021, mainly driven by productivity savings and a positive foreign currency impact, partly offset by the impact of increases in procurement and supply chain costs.
- Salaries and wages decreased by EUR 71 million in 2021, driven by productivity and restructuring savings, partly offset by acquisitions.
- Depreciation and amortization decreased by EUR 112 million in 2021, mainly due to lower impairments of technology assets of EUR 55 million compared to EUR 92 million in 2020.
Philips’ cost of sales increased by EUR 244 million to EUR 9,493 million in 2020, compared to EUR 9,249 million in 2019. Expressed as a percentage of sales, this represented an increase to 54.8% of sales in 2020, from 53.9% of sales in 2019.
Costs of materials used increased by EUR 24 million in 2020, due to higher volume, partly offset by procurement savings of EUR 222 million and a positive foreign currency impact.
Salaries and wages in 2020 increased by EUR 55 million, driven by higher volume, partly offset by productivity measures.
Depreciation and amortization in 2020 increased by EUR 50 million, mainly due to an impairment of a technology asset of EUR 92 million in 2020, compared to an impairment of EUR 50 million in 2019.
Other manufacturing costs increased by EUR 115 million in 2020, mainly due to a provision of EUR 38 million related to legal matters and charges of EUR 34 million due to changes in ventilator demand.
Gross margin
In 2018,2021, Philips’ gross margin increasedwas EUR 7,168 million, or 41.8% of sales, compared to EUR 8,5547,820 million, or 47.2% of sales, from EUR 8,181 million, or 46.0%45.2% of sales, in 2017. Gross margin in 2018 included EUR 79 million of restructuring and acquisition-related charges, whereas 2017 included EUR 98 million of restructuring and acquisition-related charges. 2018 also included EUR 28 million of charges related to the consent decree focused on defibrillator manufacturing in the US. Gross margin in 2017 also included EUR 40 million of charges related to quality and regulatory actions, EUR 14 million of charges related to the consent decree and a EUR 36 million net release of legal provisions.2020. The year-on-year increasedecrease in gross margin was mainly driven by improved operational performancethe field action provision of EUR 719 million (representing 4.2% of sales) in connection with the Philips Respironics voluntary recall notification in the DiagnosisSleep & Treatment businesses, Personal Health businesses and higher IP royalty income.Respiratory Care business.
In 2017,2020, Philips’ gross margin increasedwas EUR 7,820 million, or 45.2% of sales, compared to EUR 8,1817,899 million, or 46.0% of sales, from EUR 7,939 million, or 45.6%46.1% of sales, in 2016. Gross margin in 2017 included EUR 98 million of restructuring and acquisition-related charges, whereas 2016 included EUR 22 million of restructuring and acquisition-related charges. 2017 also included EUR 40 million of charges related to quality and regulatory actions, EUR 14 million of charges related to the consent decree and a EUR 36 million net release of provisions. Gross margin in 2016 also included a EUR 12 million net release of provisions and EUR 4 million of charges related to the separation of the Lighting business.2019. The year-on-year increasedecrease in gross margin was mainly driven by improved operational performancea EUR 70 million decrease in IP royalty income, as well as lower coverage of fixed costs in our industrial base, mainly due to the Personal Health, Diagnosis & Treatment and Connected Care & Health Informatics businesses, partly offset by higher restructuring and acquisition-related charges.impact of COVID-19.
Selling expenses
Selling expenses amounted to EUR 4,5004,258 million, in 2018, or 24.8% of sales, in 2021, compared to EUR 4,3984,054 million, or 24.7%23.4% of sales, in 2017.2020. The year-on-year increase in selling expenses of EUR 204 million was driven by the acquisitions of BioTelemetry and Capsule Technologies and higher investments in advertising and promotion, partly offset by a positive foreign currency impact and lower restructuring costs. Selling expenses include restructuring, acquisition-related and other charges of EUR 140 million in 2018 included EUR 86 million of restructuring and acquisition-related charges,2021, compared to EUR 127133 million in 2017. Selling expenses in 2018 also included a EUR 18 million charge related to the conclusion of the European Commission investigation into retail pricing and EUR 16 million related to the consent decree. Selling expenses in 2017 also included EUR 9 million related to the separation of Philips Lighting and EUR 4 million of charges related to the consent decree.2020.
Selling expenses amounted to EUR 4,3984,054 million, in 2017, or 24.7%23.4% of sales, in 2020, compared to EUR 4,1424,125 million, or 23.8%24.1% of sales, in 2016.2019. The year-on-year decrease in selling expenses of EUR 71 million was driven by savings from productivity improvements, a positive foreign currency impact and lower restructuring costs, partly offset by costs from new acquisitions. Selling expenses in 20172020 included EUR 127133 million of restructuring, acquisition-related and acquisition-relatedother charges, compared to EUR 47151 million in 2016. Selling expenses in 2017 also included EUR 9 million related to the separation of Philips Lighting and EUR 4 million of charges related to the consent decree. Selling expenses in 2016 also included EUR 38 million related to the separation of Philips Lighting.2019.
General and administrative expenses
General and administrative expenses increasedamounted to EUR 631599 million, or 3.5% of sales, in 2018,2021, compared to EUR 577630 million, or 3.2%3.6% of sales, in 2017. 2018 included2020. The year-on-year decrease of EUR 2931 million in general and administrative expenses was mainly driven by lower restructuring, acquisition-related and other charges.
General and administrative expenses amounted to EUR 630 million, or 3.6% of restructuring and acquisition related-charges,sales, in 2020, compared to EUR 19586 million, or 3.4% of sales, in 2019. The year-on-year increase of EUR 44 million in 2017. 2017 also includedgeneral and administrative expenses was mainly driven by charges of EUR 21 million related to the separation of Philips Lighting.
General and administrative expenses decreased to EUR 577 million, or 3.2% of sales, in 2017, compared to EUR 658 million, or 3.8% of sales, in 2016. 2017 included EUR 19 million of restructuring and acquisition related-charges, compared to EUR 5 million in 2016. General and administrative expenses in 2017 also included chargesthe Domestic Appliances business of EUR 21 million related to the separation of Philips Lighting. 2016 also included37 million. Higher restructuring, acquisition-related and other charges of EUR 109 million related to the separation of Philips Lighting, a EUR 26 million impairment of real estate assets, as well as a EUR 46 million gainwere largely offset by savings from the settlement of a pension-related claim.productivity programs.
Research and development expenses
Research and development costs decreased fromwere EUR 1,7641,806 million, or 9.9%10.5% of sales, in 20172021, compared to EUR 1,7591,822 million, or 9.7%10.5% of sales, in 2018. Research2020. The year-on-year decrease of EUR 16 million was mainly driven by lower restructuring, acquisition-related and development costs in 2018 includedother charges. 2021 includes EUR 64101 million of restructuring, acquisition-related and acquisition-relatedother charges, compared to EUR 72131 million in 2017. 2018 also included EUR 12 million of charges related to the consent decree.2020.
Research and development costs increased fromwere EUR 1,6691,822 million, or 9.6%10.5% of sales, in 20162020, compared to EUR 1,7641,790 million, or 9.9%10.4% of sales, in 2017. Research2019. The year-on-year increase of EUR 32 million was mainly driven by impairments of technology assets in the Connected Care businesses and developmentDiagnosis & Treatment businesses totaling EUR 54 million, offset by lower restructuring and acquisition-related costs in 2017and other charges. 2020 included EUR 72131 million of restructuring, acquisition-related and acquisition-relatedother charges, compared to EUR 21151 million in 2016. 2017 also included charges of EUR 22 million related to portfolio rationalization measures, EUR 7 million of charges related to quality and regulatory actions, and EUR 2 million of charges related to the consent decree. The year-on-year increase was mainly due to higher restructuring and acquisition-related charges. Excluding these charges, research and development costs amount to 9.3% of sales.2019.
Philips Group
Research and development expenses
in millions of EUR unless otherwise stated
2016 - 2018
| | | |
|---|
| | | |
Connected Care & Health Informatics | | | |
| | | |
| | | |
| | | |
| | | |
| | 2019 | 2020 | 2021 |
|---|
| Diagnosis & Treatment | 928 | 891 | 910 |
| Connected Care | 463 | 549 | 548 |
| Personal Health | 195 | 189 | 185 |
| Other | 204 | 194 | 163 |
| Philips Group | 1,790 | 1,822 | 1,806 |
| As a % of sales | 10.4% | 10.5% | 10.5% |
Net income, Income from operations (EBIT) and Adjusted EBITA*)
Net income is not allocated to segments, as certain income and expense line items are monitored on a centralized basis, resulting in them being shown on a Philips Group level only.
The following overview below shows Income from operations and Adjusted EBITA*)according to the 2018 segment classifications. by segment.
Philips Group
Income from operations and Adjusted EBITA1)1)
in millions of EUR unless otherwise stated
2016 - 2018
| | | | | | Income from operations | as a % of sales | Adjusted EBITA1) | as a % of sales |
|---|
| | | | |
| 2021 | | | | | |
| | | | | | 941 | 10.9% | 1,071 | 12.4% |
Connected Care & Health Informatics | | | | | | |
| Connected Care | | (732) | (15.9)% | 488 | 10.6% |
| | | | | | 585 | 17.2% | 599 | 17.6% |
| | | | | | (242) | | (105) | |
| | | | | | 553 | 3.2% | 2,054 | 12.0% |
| | | | |
| 2020 | | | | | |
| | | | | | 497 | 6.1% | 818 | 10.0% |
Connected Care & Health Informatics | | | | | | |
| Connected Care | | 711 | 12.8% | 1,198 | 21.5% |
| | | | | | 356 | 11.2% | 426 | 13.4% |
| | | | | | (300) | | (165) | |
| | | | | | 1,264 | 7.3% | 2,277 | 13.2% |
| 2019 | | | | | |
| Diagnosis & Treatment | | 660 | 7.8% | 1,078 | 12.7% |
| Connected Care | | 269 | 5.8% | 620 | 13.3% |
| Personal Health | | 589 | 16.8% | 672 | 19.1% |
| Other | | (152) | | (100) | |
| Philips Group | | 1,366 | 8.0% | 2,270 | 13.2% |
| | | | |
| | | | |
Connected Care & Health Informatics | | | | |
| | | | |
| | | | |
| | | | |
In 2018, netNet income decreased by EUR 773 million compared to 2017, mainly due to the deconsolidation of Signify.
In 2018, Income from operationsin 2021 increased by EUR 202 million year-on-year to EUR 1,719 million, or 9.5% of sales. Restructuring and acquisition-related charges amounted to EUR 258 million,2.1 billion compared to 2020, mainly driven by the gain on the sale of the Domestic Appliances business, partly offset by the EUR 316719 million in 2017. field action provision.
Income from operations in 20182021 amounted to EUR 553 million, or 3.2% of sales, compared to EUR 1,264 million, or 7.3% of sales, in 2020, mainly impacted by the EUR 719 million field action provision. Adjusted EBITA*) in 2021 was EUR 2,054 million and the margin amounted to 12.0%, compared to EUR 2,277 million and a margin of 13.1%, due to a decline in sales and the impact of supply chain headwinds, partly offset by productivity measures.
Amortization and goodwill impairment charges in 2021 were EUR 337 million. This includes a charge of EUR 13 million related to an impairment of goodwill and amortization charges of EUR 55 million related to an impairment of a technology asset. In 2020, amortization and goodwill impairment charges were EUR 521 million and included a charge of EUR 144 million related to an impairment of goodwill in the Connected Care segment, as well as amortization charges of EUR 92 million related to an impairment of a technology asset.
Restructuring, acquisition-related and other charges in 2021 were EUR 1,164 million. This includes a field action provision of EUR 719 million in connection with the Philips Respironics voluntary recall notification, provisions for quality actions of EUR 94 million and other matters of EUR 53 million in the Connected Care businesses, restructuring charges of EUR 80 million, acquisition-related charges of EUR 102 million partly offset by a EUR 87 million gain related to the re-measurement of contingent consideration liabilities, a loss of EUR 76 million related to a divestment, and separation costs of EUR 64 million related to the Domestic Appliances business. 2021 also included:includes a release of a legal provision of EUR 5638 million, a gain of EUR 33 million related to a minority participation, and a benefit from the re-measurement of environmental liabilities of EUR 22 million. 2020 charges were EUR 494 million and included EUR 200 million of restructuring charges, EUR 95 million of acquisition-related charges offset by a EUR 101 million gain related to the re-measurement of a contingent consideration liability, EUR 31 million related to impairments of capitalized development costs, EUR 43 million of charges due to changes in ventilator demand, EUR 42 million of separation costs related to the consent decree;Domestic Appliances business, a EUR 18 million of the total EUR 3038 million provision related to the conclusion of the European Commission investigation into retail pricing, of which the otherlegal matters, and EUR 1221 million was recognized in Discontinued operations. 2017 also included: EUR 47 million of charges related to quality and regulatory actions; EUR 31 million of charges related to the separation of the Lighting business; EUR 26 million of provisions related to the CRT (Cathode Ray Tube) litigationpension liability de-risking in the US; EUR 22 million of charges related to portfolio rationalization measures; EUR 20 million of charges related to the consent decree; a EUR 59 million net gain from the sale of real estate assets; a EUR 36 million net release of legal provisions.US.
Adjusted EBITA*amounted to EUR 2,366 million, or 13.1% of sales, and improved by EUR 213 million, or 100 basis points as a % of sales, compared to 2017. The improvement was mainly due to growth, operational improvements and higher IP royalty income.
The 2018 performance resulted in an increase of Income from continuing operations attributable to shareholders per common share of 29% from(in EUR) - diluted, was EUR 0.67 in 2021, compared to EUR 1.08 in 2017 to EUR 1.39 in 2018.2020. Adjusted income from continuing operations attributable to shareholders per common share (in EUR) - diluted*)increased by 14% from 1.54 was EUR 1.65 in 20172021, compared to EUR 1.761.74 in 2018.
2020.
In 2017 netNet income in 2020 increased by EUR 37922 million in 2020 compared to 2016, driven by improvements in operational performance,2019, mainly due to lower net financial expenses and higher discontinued operations results,lower income tax expenses, partly offset by higher restructuring and acquisition-relatedamortization charges and higher income taxes, which included a total non-cash tax charge of EUR 171 millionmainly due to the US Tax Cuts and Jobs Act.a EUR 144 million impairment of goodwill.
In 2017, Income from operations increased by EUR 53 million year-on-year to EUR 1,517 million, or 8.5% of sales. Restructuring and acquisition-related charges amounted to EUR 316 million, including the charges related to Spectranetics, compared to EUR 94 million in 2016. Income from operations in 2017 also2020 amounted to EUR 1,264 million, or 7.3% of sales, compared to EUR 1,366 million, or 8.0% of sales, in 2019. Adjusted EBITA* in 2020 was EUR 2,277 million and the margin amounted to 13.2%, mainly due to sales growth and productivity programs.
Amortization and goodwill impairment charges in 2020 were EUR 521 million and include a charge of EUR 144 million related to an impairment of goodwill in the Connected Care segment and amortization charges of EUR 92 million related to an impairment of a technology asset. 2019 amortization and goodwill impairment charges were EUR 441 million and included a EUR 47147 million impairment of acquired intangible assets.
Restructuring, acquisition-related and other charges in 2020 were EUR 494 million and include EUR 200 million of restructuring charges, EUR 95 million of acquisition-related charges offset by a EUR 101 million gain related to the release of a contingent consideration liability, EUR 31 million related to impairments of capitalized development costs, EUR 43 million of charges relateddue to quality and regulatory actions,changes in ventilator demand, EUR 3142 million of chargesseparation costs related to the separation of Philips Lighting,Domestic Appliances business, a EUR 2638 million provision related to legal matters, and EUR 21 million related to pension liability de-risking in the US. 2019 charges were EUR 463 million and included EUR 240 million of provisionsrestructuring charges (of which EUR 39 million related to the CRT (Cathode Ray Tube) litigation in the US,impairments of capitalized development costs), EUR 69 million of acquisition-related charges, EUR 22 million of charges related to portfolio rationalization measures,legal matters, EUR 2060 million related to an impairment of capitalized development costs, and EUR 44 million of charges related to the consent decree focused on the defibrillator manufacturing in the US,Consent Decree, partly offset by a gain of EUR 5964 million net gain from the sale of real estate assets, and a EUR 36 million net release of provisions. 2016 also included EUR 152 million of charges related to the separation of Philips Lighting, a EUR 26 million impairment of real estate assets, a EUR 12 million net release of provisions, and a EUR 46 million gain from the settlement of a pension-related claim.
Adjusted EBITA*amounted to EUR 2,153 million, or 12.1% of sales, and improved by EUR 232 million or 110 basis points as a % of sales compared to 2016. The improvement was mainly attributable to higher volumes, procurement savings and other cost productivity.divestment.
The 20172020 performance resulted in an increase ofin Income from continuing operations attributable to shareholders per common share (in EUR) - diluted of 21%2%, from 0.89EUR 1.06 in 20162019 to EUR 1.08 in 2017.2020. Adjusted income from continuing operations attributable to shareholders per common share*increased by 24% from 1.24 in 2016 (in EUR) - diluted* amounted to EUR 1.541.74 and was in 2017.
line with 2019.
Diagnosis & Treatment businesses
Income from operations in 2021 increased to EUR 600 million, or 8.3% of sales, compared to EUR 488 million, or 7.1% of sales, in 2017. The year 2018 included EUR 97 million of amortization charges, compared to EUR 55 million in 2017. These charges mainly relate to intangible assets in Image-Guided Therapy. Restructuring and acquisition-related charges to improve productivity were EUR 142941 million, compared to EUR 151497 million in 2017,2020. This was primarily due to sales growth and productivity measures. These factors also resulted in an increased Adjusted EBITA*), which also included thewas 12.4% of sales in 2021.
Amortization and goodwill impairment charges in 2021 were EUR 155 million and include EUR 55 million of charges related to an impairment of a technology asset in Image-Guided Therapy. 2020 charges were EUR 209 million and included EUR 92 million of charges related to an impairment of a technology asset in Image-Guided Therapy.
Restructuring, acquisition-related and other charges in 2021 amounted to a gain of EUR 25 million and include restructuring charges of EUR 44 million, acquisition-related charges of EUR 48 million offset by a EUR 85 million gain related to the acquisitionre-measurement of Spectranetics,contingent consideration liabilities, and a release of a legal provision of EUR 38 million. 2020 charges were EUR 112 million and included EUR 57 million of restructuring charges, EUR 73 million of acquisition-related charges offset by a EUR 101 million gain related to the re-measurement of a contingent consideration liability, EUR 38 million related to legal matters, and a EUR 31 million impairment of capitalized development costs.
Income from operations in 2020 decreased to EUR 497 million, compared to EUR 660 million in 2019. This was primarily due to lower volumes resulting in lower factory fixed-cost coverage, and an adverse mix impact as well asa result of lower sales in the higher-margin businesses of Ultrasound and Image-Guided Therapy due to the impact of COVID-19. These factors also impacted Adjusted EBITA*, which was 10.0% of sales in 2020.
Amortization and goodwill impairment charges in 2020 were EUR 209 million and included EUR 92 million of charges related to an impairment of a technology asset in Image-Guided Therapy. 2019 charges were EUR 196 million and included a EUR 69 million impairment of acquired intangible assets.
Restructuring, acquisition-related and other charges in 2020 were EUR 112 million and included EUR 57 million restructuring charges, EUR 73 million of acquisition-related charges offset by a EUR 101 million gain related to the release of a contingent consideration liability, EUR 38 million related to legal matters, and a EUR 31 million impairment of capitalized development costs. 2019 charges were EUR 222 million and included EUR 107 million of restructuring charges (of which EUR 39 million related to impairments of capitalized development costs), EUR 42 million of acquisition-related charges and EUR 60 million related to an impairment of capitalized development costs.
Connected Care businesses
Income from operations in 2021 decreased to EUR (732) million, compared to EUR 711 million in 2020. This was mainly due to the decline in sales and the impact of the Respironics recall on the Sleep & Respiratory Care business. These factors also impacted Adjusted EBITA*), which was 10.6% of sales in 2021.
Amortization and goodwill impairment charges in 2021 were EUR 161 million and include EUR 13 million impairment of goodwill related to the divested Personal Emergency Response Services (PERS) and Senior Living business. 2020 charges were EUR 278 million and included a EUR 144 million impairment of goodwill related to the Population Health Management business.
Restructuring, acquisition-related and other charges in 2021 were EUR 1,058 million and include a field action provision of EUR 719 million in connection with the Philips Respironics voluntary recall notification, EUR 93 million of restructuring and acquisition-related charges, provisions for quality actions of EUR 94 million and other matters of EUR 53 million, and a gain of EUR 33 million related to a minority participation. 2020 charges were EUR 209 million and included restructuring charges of EUR 76 million, acquisition-related charges of EUR 22 million, related to portfolio rationalization measures.
Adjusted EBITA*increased by EUR 122 million and the margin improved to 11.6%, mainly due to growth and operational improvements.
Income from operations decreased to EUR 488 million, or 7.1% of sales, compared to EUR 546 million, or 8.2% of sales, in 2016. The year 2017 included EUR 55 million of amortization charges, compared to EUR 48 million in 2016. These charges mainly related to intangible assets in Image-Guided Therapy. Restructuring and acquisition-related charges were EUR 151 million, compared to EUR 37 million in 2016. The year 2017 also included charges of EUR 2243 million relateddue to portfolio rationalization measures.changes in ventilator demand.
Adjusted EBITA*increased by EUR 85 million or 100 basis points as a % of sales year-on-year. The increase was mainly attributable to higher volumes.
Connected Care & Health Informatics businesses
Income from operations in 2018 decreased2020 amounted to EUR 179711 million, compared to EUR 206269 million in 2017. 2019. This was mainly due to operating leverage and productivity programs, which more than offset investments to ramp up production. These factors also impacted Adjusted EBITA*, which was 21.5% of sales in 2020.
The year 20182020 included EUR 46278 million of charges related to amortization and a goodwill impairment, compared to EUR 219 million of amortization charges comparedin 2019. 2019 included a charge of EUR 78 million related to EUR 44 million in 2017. Thesean impairment of goodwill; the amortization charges mainly related to acquired intangible assets in Population Health Management. Sleep & Respiratory Care and the divested Personal Emergency Response Services business.
Restructuring, acquisition-related and acquisition-relatedother charges amounted to EUR 59209 million in 2020, compared to EUR 91131 million in 2017. The year 2018 also2019. 2019 included EUR 5644 million of charges related to the consent decree. 2017 also included EUR 47 million of charges related to quality and regulatory actions, EUR 20 million of charges related to the consent decree and a EUR 36 million net release of provisions.
Adjusted EBITA*decreased by EUR 31 million and the margin decreased to 11.1% of sales, mainly due to lower growth and adverse currency impacts.
Income from operations in 2017 decreased to EUR 206 million compared to EUR 275 million in 2016. The year 2017 included EUR 44 million of amortization charges, compared to EUR 46 million in 2017. These charges mainly related to acquired intangible assets in Population Health Management. Restructuring and acquisition- related charges amounted to EUR 91 million compared to EUR 14 million in 2016. The year 2017 also included EUR 47 million of charges related to quality and regulatory actions, EUR 20 million of charges related to the consent decree focused on the defibrillator manufacturing in the US and a EUR 36 million net release of provisions.
Adjusted EBITA*improved by EUR 48 million or 150 basis points as a % of sales year-on-year, mainly due to higher volumes, procurement savings and other cost productivity.Consent Decree.
Personal Health businesses
Income from operations in 2018 decreased2021 increased to EUR 1,045585 million, or 14.5% of sales, compared to EUR 1,075356 million or 14.7%in 2020. This was mainly driven by sales growth and productivity measures, partly offset by higher investments in advertising & promotion. These factors also resulted in an increased Adjusted EBITA*), which was 17.6% of sales,sales.
Amortization charges in 2017, mainly due to a2021 were EUR 1815 million charge related to the conclusion of the European Commission investigation into retail pricing and higher restructuring and acquisition-related charges. The year 2018 included EUR 126 million ofinclude amortization charges compared to EUR 135 million in 2017. These charges mainly relaterelated to intangible assets in SleepMother & RespiratoryChild Care. Restructuring and acquisition-related2020 charges were EUR 2616 million compared withand included amortization charges related to intangible assets in Mother & Child Care.
Restructuring, acquisition-related and other charges in 2021 were not material. 2020 charges were EUR 1155 million in 2017.
Adjusted EBITA*decreased byand included restructuring charges of EUR 6 million, while the margin improved to 16.8%, mainly due to operational improvements offset by adverse currency impacts.31 million.
Income from operations in 2017 increased2020 decreased to EUR 1,075356 million, or 14.7% of sales compared to EUR 953589 million orin 2019. This was mainly due to a decline in sales, partly offset by cost savings. These factors also impacted Adjusted EBITA*, which was 13.4% of salessales.
Amortization charges in 2016. The year 20172020 were EUR 16 million and included EUR 135 million of amortization charges compared to EUR 139 million. These charges mainly relaterelated to intangible assets in Sleepthe Mother & Respiratory Care. Restructuring and acquisition-relatedChild Care business. 2019 charges were EUR 1118 million comparedand included amortization charges related to intangible assets in the Mother & Child Care business.
Restructuring, acquisition-related and other charges in 2020 were EUR 1655 million in 2016.
Adjusted EBITA*increased byand included restructuring charges of EUR 11331 million. 2019 charges were EUR 65 million or 110 basis points asand included restructuring charges of EUR 41 million and a %provision of sales comparedEUR 22 million related to 2016. The increase was attributable to higher volumes and procurement savings, partly offset by investments in advertising & promotion.legal matters.
Other
In Other we report on the items Innovation, IP Royalties, Central costs and Other.
In 2018, Income from operations totaledin 2021 was EUR (242) million, compared to EUR (300) million in 2020. Adjusted EBITA*) in 2021 was EUR (105) million, compared to EUR (252)(165) million in 2017. The year 2018 included:2020. Income from operations and Adjusted EBITA*) increased, mainly due to higher royalty income and lower charges related to environmental provisions, partly offset by investments, mainly in IT and Quality & Regulatory affairs.
Restructuring, acquisition-related and other charges in 2021 were EUR 131 million and include a loss of EUR 76 million related to a divestment and EUR 64 million of separation costs related to the Domestic Appliances business, partly offset by a benefit from the re-measurement of environmental liabilities of EUR 22 million. 2020 charges were EUR 118 million and included restructuring and acquisition-related charges of EUR 31 million; a gain37 million, EUR 42 million of separation costs related to divestments; a releasethe Domestic Appliances business, and EUR 21 million related to a legal provision; a gainpension liability de-risking in the US.
Income from operations in 2020 was EUR (300) million, compared to EUR (152) million in 2019. Adjusted EBITA* in 2020 was EUR (165) million, compared to EUR (100) million in 2019. Income from operations and Adjusted EBITA* were impacted mainly by lower royalty income and charges related to movements in environmental provisions. The year 2017 included:
Restructuring, acquisition-related and other charges in 2020 were EUR 118 million and included restructuring and acquisition-related charges of EUR 64 million; a37 million, EUR 59 million gain on the sale of real estate assets; EUR 3142 million of charges related to the separation of Philips Lighting; EUR 26 million of provisions related to the CRT litigation in the US; EUR 15 million of costs related to environmental provisions; EUR 14 million of stranded costs related to the combined LumiledsDomestic Appliances business, and Automotive businesses.
Adjusted EBITA*increased by EUR 12921 million comparedrelated to 2017, mainly due to higher IP royalty incomepension liability de-risking in the US. 2019 charges were EUR 43 million and revenue from innovation.
In 2016, Income from operations totaled EUR (310) million. The year 2016 included restructuring and acquisition-related charges of EUR 2854 million and a gain of EUR 2664 million impairment of real estate assets. The year-on-year decrease was mainly duerelated to lower royalty income, higher restructuring and acquisition-related charges and higher provision-related charges, partly offset by lower Central costs.
Adjusted EBITA*in 2017 decreased by EUR 15 million compared to 2016, mainly due to lower royalty income and higher provision-related charges in Other, partly offset by lower Central costs.a divestment.
Financial income and expenses
A breakdown of Financial income and expenses is presented in the following table.
Philips Group
Financial income and expenses
in millions of EUR
2016 - 2018
| | | | 2019 | 2020 | 2021 |
|---|
| | | | |
| Interest expense, net | | (171) | (160) | (141) |
| | | | 2 | - |
| | | | |
| Net change in fair value of financial assets at fair value through profit or loss | | 17 | 129 | 95 |
| | | | 34 | (15) | 6 |
Financial income and expenses | | | | (119) | (44) | (39) |
Net interestFinancial income and expenses resulted in an expense in 2018 wasof EUR 25 million lower than in 2017, mainly due to lower interest expenses on pensions and lower interest expenses on net debt*. Other financial expenses amounted to EUR 6239 million in 2018, and mainly included financial charges related2021, compared to the early redemption of USD bondsan expense of EUR 46 million. Other financial income of EUR 4644 million in 2017 included dividends from2020. 2021 includes gains on the combined businessesvalue of LumiledsPhilips' minority participations and Automotive.higher net interest income. For further information, refer to Financial income and expenses.
Net interest expense in 2017 wasFinancial income and expenses decreased by EUR 11775 million lower than in 2016, mainly driven by lower interest expenses on net debt*, as high cost debt was replaced with lower cost debt. Other financial income amounted to EUR 46 million in 2017,year-on-year, mainly due to a gain from the increase in value of our investments in limited-life funds, while 2019 included dividend income related to the retained interest in the combined businessesand fair value gains of Lumileds and Automotive.EUR 67 million. For further information, refer to Financial income and expenseexpenses.
Income taxes
Income taxes amounted to a benefit of EUR 193 million, compared to EUR 349 million in 2017.103 million. The effective income tax rate in 20182021 was 12.8%(20.0)%, compared to 25.3%17.6% in 2017. The decrease was2020, mainly due to one-time non-cashthe impact from the recognition of tax assets and other tax benefits from tax audit resolutions andas a result of a business integrations in 2018. Net impact oftransfer during the US Tax Cuts and Jobs Act was not material in 2018.year.
Income taxes amounted to EUR 349 million, compared to EUR 203212 million in 2016.2020. The effective income tax rate in 20172020 was 25.3%17.6%, compared to 19.9%20.8% in 2016. This increase was largely2019, mainly due to one-off non-cash benefits from a decrease in tax charge of EUR 72 million for a valuation adjustment of Philips’ US deferred tax assets following the enactment of the US Tax Cutsrate, and Jobs Act in December 2017.higher non-taxable results from participations, partially offset by lower non-cash benefits from business integration, compared to 2019.
Investment in associates
Results related to investments in associates improved from a loss of EUR 49 million in 20172020 to a loss of EUR 24 million in 2018, mainly due2021. The number of associates increased compared to 2020. Although gains were recorded in a EUR 4 million impairmentnumber of investments in 2017.associates, these were more than offset by losses in the remainder.
Results related to investments in associates decreased from a gain of EUR 111 million in 20162019 to a loss of EUR 49 million in 2017, mainly due to an impairment of EUR 4 million and lower share of income2020, as the majority of associates recorded a loss in 2017 compared to 2016.2020.
Discontinued operations
Philips Group
Discontinued operations, net of income taxes
in millions of EUR
2016 - 2018
| | | | 2019 | 2020 | 2021 |
|---|
Signify, formerly Philips Lighting | | | | |
The combined Lumileds and Automotive businesses | | | | |
| Domestic Appliances | | 202 | 206 | 2,698 |
| | | | (19) | (10) | 13 |
Net income of Discontinued operations | | | | 183 | 196 | 2,711 |
Discontinued operations mainly reflects dividends received of EUR 32 million and a EUR 218 million loss related to a value adjustmentconsist primarily of the remaining interest in Signify.Domestic Appliances business and certain other divestments that were reported as discontinued operations. In 2017, Discontinued operations included the operating results of Signify and the combined Lumileds and Automotive businesses of EUR 393 million and EUR 149 million respectively prior to their deconsolidation during the course of 2017. On June 30, 2017, Philips completed2021 the sale of an 80.1% interest in the combined Lumileds and Automotive businesses, whichDomestic Appliance business resulted in a lossan after-tax gain of EUR 72 million after tax in 2017, while 2018 included a EUR 8 million gain related to a final settlement on the sale. The year 2017 also included a EUR 599 million net gain following the deconsolidation of Signify, a EUR 104 million charge related to the market value of the retained interest in Signify, and a one-time non-cash tax charge of EUR 99 million due to the US Tax Cuts and Jobs Act.
Discontinued operations in 2017 results increased by EUR 183 million, mainly due to a EUR 599 million net gain from the deconsolidation of Philips Lighting, partly offset by a EUR 104 million charge related to the change in value of the retained interest in Philips Lighting, a tax charge of EUR 99 million due to the US Tax Cuts and Jobs Act, and the exclusion of the operational results of the combined businesses of Lumileds and Automotive from Discontinued operations following the divestment in Q2 2017. The year 2016 included the Funai arbitration award.2.5 billion.
For further information, refer to Discontinued operations and assets classified as held for sale.
Non-controlling interests
Net income attributable to non-controlling interests decreased from EUR 2148 million in 20172020 to EUR 74 million in 2018, mainly due to the deconsolidation of Philips Lighting as from the end of November 2017.2021.
Net income attributable to non-controlling interests increased from EUR 435 million in 20162019 to EUR 2148 million in 2017, mainly as a result of three sales transactions in Philips Lighting shares, which reduced the interest in this company from 71.23% as of December 31, 2016 to 29.01% as of December 31, 2017.2020.
7.1.2Restructuring and acquisition-related charges and goodwill impairment charges
Philips Group
Restructuring and related charges
in millions of EUR
2016 - 2018
| | | | |
|---|
| | | 2019 | 2020 | 2021 |
|---|
Restructuring and related charges per segment: | | | | |
| | | | 107 | 57 | 44 |
Connected Care & Health Informatics | | | | |
| Connected Care | | 38 | 76 | 42 |
| | | | 41 | 31 | (1) |
| | | | 54 | 37 | (5) |
| | | | 240 | 200 | 80 |
| | | | |
Cost breakdown of restructuring and related charges: | | | | |
| | | | |
| | | | |
Transfer to Assets held for sale | | | | |
| Provision for personnel lay-off costs | | 133 | 78 | 17 |
Restructuring-related asset impairment | | | | 44 | 58 | 30 |
Other restructuring-related costs | | | | 63 | 64 | 33 |
| | | | 240 | 200 | 80 |
In 2018,2021, the most significant restructuring projects impacted the Diagnosis & Treatment and Connected Care & Health Informatics and Other businessessegments and mainly took place in the Netherlands, GermanyUS and the US.Netherlands. The restructuring mainly comprised product portfolio rationalization and the reorganization of global support functions.
In 2017, Income from operations included net restructuring charges totaling EUR 211 million. The2020, the most significant restructuring projects impacted the Connected Care & Health Informatics businesses,and Diagnosis & Treatment businesses and Other,segments and mainly took place in the Netherlands, US and the US.Germany. The restructuring mainly comprised product portfolio rationalization and the reorganization of global support functions.
In 2016, Income from operations included net charges totaling EUR 58 million for restructuring. The2019, the most significant restructuring projects were mainly related to overhead cost reduction programs inimpacted Other and Diagnosis & Treatment and mainly took place in the Netherlands.Netherlands, US and Germany. The restructuring mainly comprised product portfolio rationalization and the reorganization of global support functions.
For further information on restructuring, refer to Provisions.
Philips Group
Acquisition-related charges
in millions of EUR
2016 - 2018
| | | | |
|---|
| | | 2019 | 2020 | 2021 |
|---|
| | | | 42 | (28) | (37) |
Connected Care & Health Informatics | | | | |
| Connected Care | | 26 | 22 | 51 |
| | | | 1 | - | - |
| | | | - | - | - |
| | | | 69 | (6) | 14 |
In 2018,2021, acquisition-related charges amounted to EUR 9914 million. The Connected Care segment recorded charges of EUR 51 million related to the acquisitions of BioTelemetry and Capsule Technologies. The Diagnosis & Treatment businesses recorded a gain of EUR 37 million, mainly related to a gain of EUR 85 million from the re-measurement of contingent consideration liabilities, partly offset by charges related to the acquisitions of Spectranetics and the Healthcare Information Systems business of Carestream Health.
In 2020, acquisition-related charges amounted to a gain of EUR 6 million. The Diagnosis & Treatment businesses recorded a gain of EUR 28 million, mainly related to a gain of EUR 101 million from the re-measurement of a contingent consideration liability, partly offset by charges related to the acquisitions of Spectranetics and the Healthcare Information Systems business of Carestream Health.
In 2019, acquisition-related charges amounted to EUR 69 million. The Diagnosis & Treatment businesses recorded EUR 6442 million of acquisition-related charges, mainly related to the acquisition of Spectranetics, a US-based global leader in vascular intervention and lead management solutions.
In 2017, acquisition-related charges amounted to EUR 106 million. The Diagnosis & Treatment businesses recorded EUR 88 million of acquisition-related charges, mainly related to the acquisition of Spectranetics. Acquisition-related charges relating to Volcano were also included as part of the Diagnosis & Treatment businesses’ acquisition-related charges.
The 2016 acquisition-related charges amounted to EUR 37 million. The Diagnosis & Treatment businesses recorded EUR 31 million of acquisition-related charges, mainly related to Volcano.
In addition to the annual goodwill-impairment tests for Philips, trigger-based impairment tests were performed during the years 2018, 20172021, 2020 and 2016, resulting2019. As a result of the tests, goodwill impairments were recorded of EUR 15 million in no2021, EUR 144 million in 2020, and EUR 97 million in 2019. The goodwill impairment anrecorded in 2021 was mainly due to EUR 13 million of impairment losses related to the divested Personal Emergency Response System CGU.
During 2021, EUR 15 million of goodwill impairment charges were recorded, mainly due to EUR 913 million of impairment losses related to the divested Personal Emergency Response Services (PERS) and an impairment of EUR 1 million for the respective years.Senior Living business.
For further information on the goodwill sensitivity analysis, please refer to Goodwill.
7.1.3Acquisitions and divestments
Acquisitions
In 2018,2021, Philips completed ninetwo acquisitions: BioTelemetry, which was completed on February 9, 2021, and Capsule Technologies, which was completed on March 4, 2021. The acquisitions with EPD Solutions Ltd. (EPD) beingof Vesper Medical and Cardiologs were closed at the most notable.beginning of 2022. Acquisitions in 20182021 and prior years led to acquisition and post-merger integration charges of EUR 6451 million in the Connected Care businesses.
In 2020, Philips completed three acquisitions, with Intact Vascular being the most notable. Acquisitions in 2020 and prior years led to acquisition and post-merger integration charges resulting in a gain of EUR 28 million in the Diagnosis & Treatment businesses and charges of EUR 2522 million in the Connected Care & Health Informatics businesses.
In 2017,2019, Philips completed severalthree acquisitions, with The Spectranetics Corporation (Spectranetics)the Healthcare Information Systems business of Carestream Health being the largest. Spectranetics is a US-based global leader in vascular intervention and lead management solutions and is present in 11 countries.most notable. Acquisitions in 20172019 and prior years led to acquisition and post-merger integration charges of EUR 8842 million in the Diagnosis & Treatment businesses and EUR 1026 million in the Connected Care & Health Informatics businesses.
Divestments
In 2021, Philips completed three divestments. On September 1, 2021, Philips sold its Domestic Appliances business to a global investment firm Hillhouse Investment, resulting in a EUR 2.5 billion gain after tax and transaction-related costs; reported in Discontinued Operations.
In 2016, addition, Philips completed the divestment of the Personal Emergency Response Services (PERS) and Senior Living business on June 30, 2021, and on September 17, 2021, completed the divestment of a small business in segment Other. As part of the PERS divestment, Philips acquired shares in the buyer, Connect America Investment Holdings, LLC, with a value of EUR 40 million. The investment is classified as a financial asset measured at Fair Value through Other Comprehensive Income (FVTOCI) and is reported as part of Other non-current financial assets. The divestment resulted in a loss of EUR 75 million, which is included in Other business expenses in our Statement of Income.
Philips did not complete any divestments in 2020.
Philips completed two acquisitions, the largest being Wellcentive, a leading US-based provider of population health management software solutions. Acquisitionsdivestments in 2016 and prior years led to acquisition and post-merger integration charges of EUR 31 million2019, which resulted in the Diagnosis & Treatment businesses and EUR 4 million in the Connected Care & Health Informatics businesses.
Divestments
Philips completed one divestment in 2018. The divestment involved an aggregated cash consideration of EUR 58122 million and resulted in a gain of EUR 4462 million.
Apart from The most notable divestment was the salePhotonics business in Germany.
In 2014, Philips announced its plan to sharpen its strategic focus by establishing two standalone companies focused on the HealthTech and Lighting opportunities respectively. After establishing a standalone structure for the lighting activities within the Philips Group, Philips Lighting (renamed Signify in 2018) was listed and started trading on Euronext in Amsterdam under the symbol ‘LIGHT’ on May 27, 2016. Through a series of Accelerated bookbuild offerings (in total five) and open market sales in the Combined Lumiledscourse of 2017, 2018 and Automotive businesses and the deconsolidation of Signify, Philips completed two divestments during 2017 at an aggregate cash consideration of EUR 54 million.2019, Philips’ shareholding was reduced to nil in September 2019.
For details, please refer to Acquisitions and divestments.
7.1.4Changes in cash and cash equivalents, including cash flows
The movements in cash and cash equivalents for the years ended December 31, 2016, 20172019, 2020 and 20182021 are presented and explained below:in the following table and text.
Philips Group
Condensed consolidated cash flows statements
in mullionsmillions of EUR
2016 - 2018
| | | | 2019 | 2020 | 2021 |
|---|
| | | | |
| Beginning cash and cash equivalents balance | | 1,688 | 1,425 | 3,226 |
Net cash flows from operating activities | | | | 1,813 | 2,511 | 1,629 |
| Net cash flows from investing activities | | | |
| | | | (891) | (876) | (729) |
| | | | |
Other cash flows from investing activities | | | | 378 | (391) | (2,943) |
| Net cash flows from financing activities | | | |
Treasury shares transactions | | | | (1,318) | (297) | (1,613) |
| | | | 114 | 783 | (251) |
Dividend paid to shareholders of the Company | | | | (453) | (1) | (482) |
Sale of shares of Signify (former Philips Lighting), net | | | | |
| | | | (4) | (57) | 62 |
Net cash flows discontinued operations | | | | 98 | 129 | 3,403 |
| | | | |
| Ending cash and cash equivalents balance | | 1,425 | 3,226 | 2,303 |
Net cash provided by (used for)flows from operating activities
Net cash flows provided byfrom operating activities amounted to EUR 1,7801,629 million in 2018,2021, compared to EUR 1,8702,511 million in 2017.2020. This decrease is mainly due to increased working capital and consumption of provisions, partly offset by lower income tax paid. Free cash flow*)amounted to EUR 984900 million which included a EUR 176 million outflow related to pension liability de-risking in the US and premium payments related to an early bond redemption,2021, compared to EUR 1,1851,635 million in 2017.2020.
NetIn 2020, net cash flows provided byfrom operating activities amounted to EUR 1,8702,511 million, compared to EUR 1,813 million in 2017, which was EUR 700 million higher than in 2016, mainly due2019. Free cash flow*) amounted to EUR 3791,635 million higher earnings in 20172020, compared to EUR 923 million in 2019.
In 2019, net cash flows from operating activities amounted to EUR 1,813 million, and the higher outflows recorded in 2016 relatedFree cash flow*) amounted to the Masimo agreements.EUR 923 million.
Net cash provided by (used for)flows from investing activities
Net cash flows from investing activities consist of net capital expenditures and other cash flows from investing activities.
In 2018,2021, other cash flows from investing activities amounted to a cash outflow of EUR 6902,943 million, mainly due to the acquisitions of businesses (including acquisition of investments in associates)BioTelemetry and Capsule Technologies amounting to EUR 628 million. EPD was the biggest acquisition in 2018, resulting in2.8 billion.
In 2020, other cash flows from investing activities amounted to a cash outflow of EUR 273391 million, includingmainly due to the subsequent payments. Netacquisition of Intact Vascular for EUR 241 million and investments in other non-current financial assets.
In 2019, other cash flows from investing activities amounted to a cash inflow of EUR 378 million, mainly due to proceeds from the sale of the remaining Signify shares of EUR 549 million and net cash proceeds from divestment of businesses amountedamounting to EUR 70146 million, and were received mainly from divested businesses held for sale. Other investing activities mainly included acquisition of businesses (including acquisition of investments in associates) amounting to EUR 177255 million and EUR 166 million net cash used for foreign exchange derivative contracts related to activities for funding and liquidity management.
In 2017, other cash flows from investing activities amounted to a cash outflow of EUR 2,514 million, mainly due to acquisitions of businesses (including acquisition of investments in associates) amounting to EUR 2,344 million, which included the acquisition of Spectranetics for EUR 1,908 million. Net cash proceeds from divestment of businesses amounted to EUR 64 million and were received mainly from divested businesses held for sale. Other investing activities mainly included EUR 295 million net cash used for foreign exchange derivative contracts related to activities for funding and liquidity management, partly offset by EUR 90 million received related to TPV Technology Limited loans.
In 2016, acquisitions of businesses (including acquisition of investments in associates) amounted to a cash outflow of EUR 197 million, which included the acquisition of Wellcentive. Other investing activities mainly included EUR 128 million net cash used for foreign exchange derivative contracts related to activities for funding andGroup liquidity management.
Net cash provided by (used for)flows from financing activities
TreasuryNet cash flows from financing activities consist of treasury shares transactions, changes in debt, dividend paid and other cash flow items.
In 2021, treasury shares transactions mainly includeincluded the share buy-backbuyback activities, which resulted in EUR 9481,613 million net cash outflow. Changes in debt mainly relates to short-term debt and lease repayments. Philips’ shareholders received a total dividend of EUR 773 million, including costs, of which the cash portion amounted to EUR 482 million.
In 2020, treasury shares transactions mainly included the share buyback activities, which resulted in EUR 297 million net cash outflow. Changes in debt included EUR 991 million cash inflow from the issuance of two new bonds under the EMTN program, partly offset by outflows related to lease payments. The 2019 dividend was distributed fully in shares in July 2020.
In 2019, treasury shares transactions mainly included the share buyback activities, which resulted in EUR 1,318 million net cash outflow. Changes in debt mainly included the net proceeds from the Green Innovation Bond issued of EUR 744 million, partly offset by outflows related to bond maturity of EUR 500 million and lease payments. Philips' shareholders were given EUR 738775 million including costs in the form of a dividend, of whichdividend; the cash portion of the dividend amounted to EUR 401 million. Changes in debt mainly reflected EUR 866 million cash outflow related to the bond redemption and EUR 990 million cash inflow from bonds issued.
In 2017, Philips’ shareholders were given EUR 742 million in the form of a dividend, of which the cash portion of the dividend amounted to EUR 384 million. Net cash proceeds from the sale of Signify shares amounted to EUR 1,060 million. Change in debt mainly reflected EUR 1.2 billion cash outflow related to the bond redemption and EUR 1 billion cash inflow from bonds issued. Additionally, net cash outflows for share buy-back and share delivery totaled EUR 414 million.
In 2016, Philips’ shareholders were given EUR 732 million in the form of a dividend, of which the cash portion of the dividend amounted to EUR 330 million. Net cash proceeds of EUR 825 million related to the sales of shares in Philips Lighting. Change in debt mainly reflected the repayment of a loan related to the Volcano acquisition of EUR 1,186 million. Additionally, net cash outflows for share buy-back and share delivery totaled EUR 526453 million.
Net cash provided by (used for) discontinued operations
Philips Group
Net cash provided by (used for) discontinued operations
in millions of EUR
2016 - 2018
| | | | 2019 | 2020 | 2021 |
|---|
Net cash provided by (used for) operating activities | | | | 111 | 129 | 85 |
Net cash provided by (used for) investing activities | | | | (14) | | 3,319 |
Net cash provided by (used for) financing activities | | | | |
Net cash provided by (used for) discontinued operations | | | | 98 | 129 | 3,403 |
In 2018,2021, net cash provided by (used for) discontinued operations amounted towas EUR 6473,403 million and mainly included a totalconsisted primarily of EUR 642 million in relation to the sale of Signify shares and the dividend received from Signify reported in investing activities.
In 2017, net cash provided by (used for) operating activities amounted to EUR 350 million and reflected the period prior to the divestment of the combined Lumileds and Automotive businesses (six months of cash flows) and prior to the deconsolidation of Philips Lighting (11 months of cash flows). In 2017, net cash provided by (used for) investing activities amounted to EUR 856 million and included the net cash outflow related to the deconsolidation of Philips Lightinginflow of EUR 1753,319 million (consisting of EUR 545 million proceeds from the sale of shares on November 28, 2017, offset by the deconsolidation of EUR 720 million of cash and cash equivalents), and proceeds of EUR 1.1 billion received from the sale of the combined Lumileds and Automotive businesses.
Domestic Appliances business on September 1, 2021.
In 2016,2020, net cash provided by (used for) investing activities included EUR 144 million cash inflowdiscontinued operations mainly related to the Funai arbitration andDomestic Appliances business, partly offset by advance income tax payments amounting to EUR 78 million.
In 2019, net cash provided by (used for) financing activities included new funding of EUR 1.2 billion attracteddiscontinued operations mainly related to the Domestic Appliances business, partly offset by Philips Lighting.a payment related to a divestment formerly reported as discontinued operations.
7.1.5Financing
Condensed consolidated balance sheets for the years 2016, 20172019, 2020 and 20182021 are presented below:in the following table:
Philips Group
Condensed consolidated balance sheets
in millions of EUR
2016 - 2018
| | | | 2019 | 2020 | 2021 |
|---|
| | | | 12,120 | 11,012 | 14,287 |
Property, plant and equipment | | | | 2,866 | 2,682 | 2,699 |
| | | | 2,773 | 2,993 | 3,450 |
| | | | 4,909 | 4,537 | 4,191 |
Assets classified as held for sale | | | | 13 | 173 | 71 |
| | | | 2,910 | 3,091 | 3,959 |
| | | | (3,820) | (3,854) | (3,784) |
| | | | (2,159) | (1,980) | (2,313) |
Liabilities directly associated with assets held for sale | | | | - | (30) | (1) |
| | | | (2,965) | (3,015) | (3,408) |
| | | | 16,647 | 15,609 | 19,151 |
| | | | |
Cash and cash equivalents | | | | 1,425 | 3,226 | 2,303 |
| | | | (5,447) | (6,934) | (6,980) |
| | | | |
| Net debt1) | | (4,022) | (3,708) | (4,676) |
Non-controlling interests | | | | (28) | (31) | (36) |
| | | | (12,597) | (11,870) | (14,438) |
| | | | (16,647) | (15,609) | (19,151) |
7.1.6Debt position
Total debt outstanding at the end of 20182021 was EUR 4,8216,980 million, compared with EUR 4,7156,934 million at the end of 2017.2020.
Philips Group
Balance sheet changes in debt
in millions of EUR
2016 - 2018
| | | |
|---|
Repayments (new borrowings) short-term debt | | | |
New borrowings long-term debt | | | |
| | | |
| | | |
Currency effects, consolidation changes and other | | | |
Transfer to liabilities directly associated with assets held for sale | | | |
Decrease (increase) in debt | | | |
| | 2019 | 2020 | 2021 |
|---|
| Additional leases under IFRS16 | 1,059 | 132 | 172 |
| New borrowings/repayments short-term debt | 23 | 16 | (25) |
| New borrowings long-term debt | 847 | 1,065 | 76 |
| Repayments long-term debt | (761) | (298) | (302) |
| Forward contracts | (706) | 793 | (48) |
| Currency effects, consolidation changes and other | 170 | (221) | 175 |
| Transfer to liabilities classified as held for sale | (6) | | (3) |
| Changes in debt | 626 | 1,487 | 46 |
In 2018,2021, total debt increased by EUR 10546 million compared to 2017. New borrowings of long-term debt of EUR 1,287 million were2020. The increase mainly due to the issuance of fixed-rate bonds, EUR 500 million due 2024comes from currency effects and EUR 500 million due 2028,consolidation changes, partly offset by net lease repayments and a new long-term loan of EUR 200 million.forward settlements. Repayments of long-term debt amounted to EUR 1,161 million, mainly due302 million. In February 2021, Philips entered into two bilateral loans amounting to the early redemption of all the 3.750% USD bonds due 2022 with an aggregate principal amount of USD 1.0 billion, the redemption of 6.875% USD bonds due 2038 with an aggregate principal amount of USD 72 million, and the repayment of a loantotal of EUR 178 million.500 million that were repaid in September 2021. In addition, Philips issued commercial paper of EUR 300 million in May 2021 and EUR 150 million in July 2021 that was repaid in September 2021. Changes in payment obligations from forward contracts are mainly related to the forward contracts entered into of EUR 731 million relating to the EUR 1.5 billion share buyback program announced on July 26, 2021, and EUR 90 million relating to the long-term incentive and employee stock purchase plans announced on May 19,2021. In addition, a total amount of EUR 745 million of forward contracts matured in 2021, which completed the settlement of the EUR 1.5 billion share buyback program announced on January 29, 2019, and a total amount of EUR 123 million of forward contracts matured in 2021 relating to the long-term incentive and employee stock purchase plans announced on October 22, 2018 and January 29, 2020. These payment obligations are recorded as financial liabilities under long-term debt. Other changes, mainly resulting from currency effects, led to an increase of EUR 175 million.
In 2020, total debt increased by EUR 1,487 million compared to 2019. New borrowings of long-term debt included the net proceeds of EUR 991 million from the issuance of two new bonds under the EMTN program in 2020. Repayments of long-term debt amounted to EUR 298 million, mainly due to the repayment of leases. Changes in payment obligations from forward contracts mainly related to the forward contracts entered into of EUR 745 million to complete the remainder of the EUR 1.5 billion share buyback program announced on January 29, 2019. In addition, Philips entered into forward contracts for a total amount of EUR 174 million in 2020 related to the long-term incentive and employee stock purchase plans announced on January 29, 2020, and a total amount of EUR 126 million of forward contracts matured relating to the company's long-term incentive and employee stock purchase plans announced on October 22, 2018. These payment obligations are recorded as financial liabilities under long-term debt. Other changes, mainly resulting from currency effects, led to a decrease of EUR 221 million.
In 2019, total debt increased by EUR 626 million compared to 2018. Total debt at December 31, 2019 included additional lease liabilities of EUR 1,059 million which were recorded following the adoption of IFRS 16 lease accounting in 2019; this did not have a cash impact. New borrowings of long-term debt included the net proceeds from the issuance of the Green Innovation Bond of EUR 744 million. Repayments of long-term debt amounted to EUR 761 million, mainly due to the repayment of a EUR 500 million bond at its scheduled maturity. Changes in payment obligations from forward contracts were mainly related to maturing forward contracts for the completed 2017 share buyback program and new forward contracts entered into for the extended share repurchase program for LTI and stock purchase plans announced in November 2018. These payment obligations arewere recorded as financial liabilities under long-term and short-term debt. Other changes, mainly resulting from new leases recognized and currency effects, led to an increase of EUR 70170 million.
In 2017, total debt decreased by EUR 891 million compared to 2016. New borrowings of long-term debt of EUR 1,115 million were mainly due to the issuance of EUR 500 million floating-rate bonds due 2019 and EUR 500 million fixed-rate bonds due 2023. Repayments of long-term debt amounted to EUR 1,332 million, mainly due to the early redemption of the 5.750% bonds due 2018 in the aggregate principal amount of USD 1,250 million. Payment obligations from forward contracts are mainly related to the EUR 1.5 billion share buyback program announced in June 2017. Other changes, mainly resulting from consolidation changes and currency effects, led to a decrease of EUR 347 million. EUR 1,342 million was transferred to Liabilities directly associated with assets held for sale, mainly Lighting debt.
At the end of 2018,2021, long-term debt as a proportion of the total debt stood at 71%92.7% with an average remaining term (including current portion) of 7.96.0 years, compared to 86%82.3% and 7.66.3 years respectively at the end of 2017.
Total debt outstanding at the end of 2017 was EUR 4,715 million, compared with EUR 5,606 million at the end of 2016, a decrease of EUR 891 million.
In 2016, total debt decreased by EUR 154 million compared to 2015. New borrowings of EUR 1,304 million were mainly due to new loan facilities for Philips Lighting of EUR 740 million and USD 500 million to replace intragroup financing from Royal Philips. Repayments amounted to EUR 1,681 million, mainly due to the repayment of a USD 1,300 million bridge loan used for the Volcano acquisition, as well as the early redemption of USD 285 million in the aggregate principal amount of USD bonds. Other changes, mainly resulting from consolidation and currency effects, led to an increase of EUR 223 million.2020.
At the end of 2017,2020, long-term debt as a proportion of the total debt stood at 86%82.3% with an average remaining term (including current portion) of 7.66.3 years, compared to 72%91% and 7.88.0 years respectively at the end of 2016.2019.
At the end of 2019, long-term debt as a proportion of the total debt stood at 91% with an average remaining term (including current portion) of 8.0 years, compared to 71% and 7.9 years respectively at the end of 2018.
For further information, please refer to Debt.
7.1.7Liquidity position
As of December 31, 2018,2021, including the cash position (cash and cash equivalents), as well as its EUR 1 billion committed revolving credit facility, the Philips Group had access to available liquidity of EUR 2,6883,303 million, versus gross debt (including short and long-term) of EUR 4,8216,980 million.
As of December 31, 2017,2020, including the cash position (cash and cash equivalents), as well as its EUR 1 billion committed revolving credit facility, the Philips Group had access to available liquidity of EUR 2,9394,226 million, versus gross debt (including short and long-term) of EUR 4,7156,934 million.
As of December 31, 2019, including the cash position (cash and cash equivalents), as well as its EUR 1 billion committed revolving credit facility, the Philips Group had access to available liquidity of EUR 2,425 million, versus gross debt (including short and long-term) of EUR 5,447 million.
Philips Group
Liquidity position
in millions of EUR
2016 - 2018
| | | | 2019 | 2020 | 2021 |
|---|
Cash and cash equivalents | | | | 1,425 | 3,226 | 2,303 |
Committed revolving credit facilities/CP program | | | | 1,000 | 1,000 |
| | | | 2,425 | 4,226 | 3,303 |
Listed equity investments at fair value | | | | 15 | 17 | 67 |
| | | | (508) | (1,229) | (506) |
| | | | (4,939) | (5,705) | (6,473) |
Net available liquidity resources | | | | (3,007) | (2,691) | (3,609) |
Royal Philips has a EUR 1 billion committed revolving credit facility which was signed in April 2017 and will expire in April 2023.2024. The facility can be used for general group purposes, such as a backstop of its Commercial Paper Program.
The Commercial Paper Program amounts to USD 2.5 billion, under which Philips can issue commercial paper up to 364 days in tenor, both in the US and in Europe, in any major freely convertible currency. As of December 31, 2018, Royal2021, Philips did not have any loans outstanding under these facilities.
During the year 2020, Philips established a Euro Medium Term Note (EMTN) program which facilitates the issuance of notes for a total amount of up to EUR 10.0 billion. In 2021, Philips did not issue any new notes under the program.
Additionally, atas of December 31, 2018 2021 Philips held EUR 47667 million of listed (level 1) equity investments at fair value mainly the remaining interest in Signify.common shares of companies in various industries. Refer to Other financial assets and Fair value of financial assets and liabilities.
Royal In terms of liquidity the company has a solid liquidity position and the company's liquidity risk management procedures have not changed significantly during 2021 because of COVID-19. No significant concentration risks have been identified as a result of COVID-19 and the access to existing lines of credit remains intact. These lines of credit, along with other financial risks to which Philips is exposed, are disclosed in Details of treasury and other financial risks. Further, with respect to Respironics field action, please refer Contingent assets and liabilities. The management continues to monitor the risks associated with such potential claims and its impact on liquidity position, if any.
Philips’ existing long-term debt is rated A- (with stable outlook) by Fitch, Baa1 (with stable outlook) by Moody’s, and BBB+ (with stable outlook) by Standard & Poor’s. As part of our capital allocation policy, our net debt*)position is managed with the intention of retaining a strongour current investment grade credit rating. Ratings are subject to change at any time and there is no assurance that Philips will be able to achieve this goal. The Group’sPhilips' aim when managing the net debt*)position is dividend stability and a pay-out ratio of 40% to 50% of adjusted income from continuing operations attributable to shareholders*). Royal Philips’ outstanding long-term debt and credit facilities do not contain financial covenants. Adverse changes in the Company’scompany’s ratings will not trigger automatic withdrawal of committed credit facilities noror any acceleration in the outstanding long-term debt (provided that the USD-denominated bonds issued by the CompanyPhilips in March 2008 and 2012 contain a ‘Change of Control Triggering Event’ and the EUR-denominated bonds contain a ‘Change of Control Put Event’). A description of Philips’ credit facilities can be found in Debt.
Philips pools cash from subsidiaries to the extent legally and economically feasible. Cash not pooled remains available for local operational needs or general purposes. The company faces cross-border foreign exchange controls and/or other legal restrictions in a few countries, which could limit its ability to make these balances available on short notice for general use by the group.
Philips believes its current liquidity and direct access to capital markets is sufficient to meet its present financing needs.
7.1.8Shareholders’ equity
In 2021, shareholders’ equity increased by EUR 2,568 million to EUR 14,438 million at year-end. The increase was mainly due to net income of EUR 3,323 million and currency translation gains of EUR 1,117 million, primarily due to the appreciation of the US dollar against the euro in 2021. This was partly offset by the dividend distributed (EUR 482 million), settlements of earlier concluded forward contracts (EUR 869 million) and the share repurchases made in the open market (EUR 758 million).
In 2020, shareholders’ equity decreased by EUR 727 million to EUR 11,870 million at year-end. The increase in the net income of EUR 1,195 million, as well as the impact of the accounting for share-based compensation plans, including the effect of related hedging transactions through share call options (in aggregate EUR 112 million), increased shareholders’ equity. This was largely offset by currency translation losses of EUR 1,037 million, primarily due to the depreciation of the US dollar against the euro in 2020, the purchase of forward contracts for the completion of the share buyback program (EUR 793 million), settlements of earlier concluded forward contracts (EUR 126 million) and the share repurchases made in the open market (EUR 130 million).
Shareholders’ equity increased by EUR 89509 million in 20182019 to EUR 12,08812,597 million at December 31, 2018.2019. The increase was mainly due to net results of EUR 1,0971,173 million, and the positive impact of currency translation differences of EUR 347 million. This was mainly offset by share repurchases made in the open market of EUR 514239 million, dividend payments to shareholders of Koninklijke Philips N.V. of EUR 400 million (including tax and service charges), anet fair value declineincreases of financial assets of EUR 14782 million and the impact of the accounting for share-based compensation plans, including the effect of related hedging transactions through forward contracts and share call options (in aggregate EUR 191112 million).
Shareholders’ equity decreased by EUR 547 million in 2017 to EUR 11,999 million at December 31, 2017. The decrease This was mainly due to the negative impactoffset by acquired shares because of currency translation differencessettlements of earlier concluded forward transactions of EUR 984706 million, share repurchases made in the open market over the course of the year, the purchase of forward contracts of EUR 1,079621 million (for capital reduction purposes and hedging of commitments under share-based compensation plans), and dividend payments to shareholders of Koninklijke Philips N.V. of EUR 384453 million (including tax and service charges). This was mainly offset by net results of EUR 1,870 million and the sale of Signify shares of EUR 327 million.
Shareholders’ equity increased by EUR 939 million in 2016 to EUR 12,546 million at December 31, 2016. The increase was mainly a result of EUR 1,491 million net income, partially offset by EUR 589 million related to the purchase of shares for the share buy-back program. The dividend payment to shareholders of Koninklijke Philips N.V. in 2016 reduced equity by EUR 330 million including tax and service charges, while the delivery of treasury shares increased equity by EUR 74 million.
Share capital structure
The number of outstandingissued common shares of Royal Philips at December 31, 20182021 was 914 million.883,898,696. At year-end 2021, the end of 2018, the Companycompany held 12.013.7 million shares in treasury. Of these shares, 7.95.7 million shares were held to cover obligations under long-term incentive plans, and 8.0 million shares were held for share capital reduction purposes. In 2016, Philips purchased call options on its own shares to hedge options granted to employees up to 2013, and on December 31, 2021, Philips’ outstanding options related to 0.4 million shares. In 2021 (and earlier years), the company entered into several forward contracts to acquire its own shares, and on December 31, 2021, the outstanding forward contracts related to 25,071,218 shares. See below for more information on the shares that were acquired in the course of 2021. Philips issued 6,345,968 shares in June 2021 (in order to distribute the 2020 dividend). The company cancelled 33.5 million shares in December 2021.
The number of issued common shares of Royal Philips at December 31, 2020 was 911,053,001. At year-end 2020, the company held 5.9 million shares in treasury. All of these shares were held in treasury to cover obligations under long-term incentive plans. In 2016, Philips purchased call options on its own shares to hedge options granted to employees up to 2013, and on December 31, 2020, Philips' outstanding options related to 0.9 million shares. In 2020 (and earlier years), the company entered into several forward contracts to acquire its own shares, and on December 31, 2020, the outstanding forward contracts related to 27 million shares. See below for more information on the shares that were acquired in the course of 2020. Philips issued 48,757 shares in May 2020 (in order to pay out the gross Annual Incentive over 2019 to the members of the Board of Management) and issued 18 million shares in July 2020 (in order to distribute the 2019 dividend). The company cancelled 3.8 million shares in June 2020.
The number of issued common shares of Royal Philips at December 31, 2019 was 896,733,721. At year-end 2019, the Company held 5.8 million shares in treasury. Of these shares, 5.3 million shares were held in treasury to cover obligations under its long-term incentive plans. After the cancellation of 24.2 million shares in November 2018, a remainder of 4.1plans, and 0.5 million shares were held to reducefor share capital.capital reduction purposes. Philips repurchased and acquired shares in the course of the year, and cancelled 30 million shares in June 2019 and 8.5 million shares in December 2019. In 2016, Philips purchased call options on Philips shares to hedge options granted to employees up to 2013. As of December 31, 2018,2019, Philips held 3.82.3 million of such options. In 2017 and 2018, Philips entered into several forward contracts in order to further cover obligations under its long-term incentive plans, as well as to reduce its share capital, Philips also entered into several forward contracts in 2017 and 2018.capital. As of December 31, 2018,2019, the outstanding forward contracts related to 28.66 million shares.
The number of outstanding common shares of Royal Philips at December 31, 2017 was 926 million. At the end of 2017, the Company held 14.7 million shares in treasury. Of these shares, 10.1 million shares were held in treasury to cover obligations under its long-term incentive plans. The remaining 4.6 million shares were held to reduce share capital. As of December 31, 2017, Philips held 6.2 million call options as a hedge of options granted to employees. As of December 31, 2017, the outstanding forward contracts related to 31.8. million shares.
The number of outstanding common shares of Royal Philips at December 31, 2016 was 922 million. At the end of 2016, the Company held 7.2 million shares in treasury to cover obligations under its long-term incentive plans. The Company did not hold shares for capital reduction purposes. Philips purchased call options on Philips shares to hedge options granted to employees up to 2013.
Share repurchase methods for long-term incentive plans and capital reduction purposes
Historically, Philips uses different methods to repurchase shares in its own capital: (i) share buyback repurchases in the open market via an intermediary; (ii) repurchase of shares via forward contracts for future delivery of shares; and (iii) the unwinding of call options on own shares. During 2021, Philips used methods (i) and (ii) to repurchase shares for capital reduction purposes and methods (ii) and (iii) to repurchase shares for share-based compensation plans.
The open market transactions via an intermediary allow for buybacks during both open and closed periods.
Philips Group
Impact of share repurchase on share count
in thousands of shares as of December 31
| | 2017 | 2018 | 2019 | 2020 | 2021 |
|---|
| Shares issued | 940,909 | 926,196 | 896,734 | 911,053 | 883,899 |
| Shares in treasury | 14,717 | 12,011 | 5,760 | 5,925 | 13,717 |
| Shares outstanding | 926,192 | 914,184 | 890,974 | 905,128 | 870,182 |
| Shares repurchased | 19,842 | 31,994 | 40,390 | 8,670 | 45,486 |
| Shares cancelled | | 24,247 | 38,541 | 3,810 | 33,500 |
Philips Group
Total number of shares repurchased
in thousands of shares unless otherwise stated
| | share repurchases related to shares acquired for capital reduction | average price paid per share in EUR | shares acquired for LTI's | average price paid per share in EUR | total number of shares purchased1) | average price paid per share in EUR | total number of shares purchased as part of publicly announced plans or programs2)3)4) | approximate value of shares that may yet be purchased under the plans or programs in thousands of EUR |
|---|
| January 2021 | | | | | | | | 981,793 |
| February 2021 | | | | | | | | 981,793 |
| March 2021 | | | 248 | 45.41 | 248 | 45.41 | | 981,793 |
| April 2021 | | | - | | | | | 981,793 |
| May 2021 | | | - | | | | | 1,071,497 |
| June 2021 | 2,500 | 33.64 | - | | 2,500 | 33.64 | 2,500 | 987,405 |
| July 2021 | - | | | | | | | 1,218,544 |
| August 2021 | - | | | | | | | 1,468,544 |
| September 2021 | 2,500 | 33.63 | | | 2,500 | 33.63 | 2,500 | 1,634,479 |
| October 2021 | 9,410 | 37.63 | 1,750 | 35.28 | 11,160 | 37.26 | 11,160 | 1,324,257 |
| November 2021 | 14,541 | 37.59 | 1,999 | 35.76 | 16,540 | 37.37 | 16,291 | 1,098,155 |
| December 2021 | 12,539 | 34.61 | | | 12,539 | 34.61 | 12,539 | 933,871 |
| Total | 41,490 | | 3,997 | | 45,486 | 36.21 | 44,990 | |
| of which5) | | | | | | | | |
| purchased in the open market | 21,014 | | | | 21,014 | | 21,014 | |
| acquired through exercise of call options/settlement of forward contracts | 20,476 | | 3,997 | | 24,473 | | 23,976 | |
| To be acquired through settlement of forward contracts after December 31, 2021 | | | | | | | | 933,871 |
1)All shares were purchased through publicly announced plans or programs, other than approximately 497,000 shares repurchased through the unwinding of call options on own shares.2)First, on October 22, 2018, RoyalPhilips announced a share repurchase program for an amount of up to EUR 174 million to cover its long-term incentive and employee stock purchase plans. On November 12, 2018, Philips announced to extend this program and entered into three forward contracts for an amount of EUR 319 million to repurchase further 10 million shares with settlement dates varying between October 2019 and November 2021. Second, on January 29, 2019, Philips announced a share buyback program for share cancellation purposes for an amount of up to EUR 1.5 billion. Philips started the program in the first quarter of 2019. On March 23, 2020, Philips announced that 50.3% of the program had been completed through repurchases by an intermediary to allow for purchases in the open market during both open and closed periods, and that the remainder of the program would be executed through one or more individual forward transactions. Consequently, in the first half of 2020 Philips entered into four forward contracts for an amount of EUR 745 million to acquire 20 million shares with settlement dates varying between June 2021 and December 2021. Third, on January 29, 2020, Philips announced that it would repurchase up to 6 million shares to cover certain of its obligations arising from its long-term incentive and employee stock purchase plans. Under this program, Philips entered into three forward contracts for an amount of EUR 174 million to acquire 5 million shares with settlement dates varying between October 2021 and November 2022. Fourth, on May 19, 2021, Philips announced that it will repurchase up to 2 million shares to cover certain of its obligations arising from its long-term incentive and employee stock purchase plans. Under this program, Philips entered into one forward contract for an amount of EUR 90 million to acquire 2 million shares with settlement dates in October and November 2023. Fifth, on July 26, 2021, Philips announced an additional share buyback program for share cancellation purposes for an amount of up to EUR 1.5 billion. Consequently, in the third quarter of 2021 Philips entered into three forward contracts for an amount of EUR 731 million to acquire 19.6 million shares with settlement dates in 2022, 2023 and 2024. Philips executed the remainder of the program through open market purchases by an intermediary in the fourth quarter of 2021 (acquiring 21 million shares) and January 2022 (acquiring 0.8 million shares). For further details on these publicly announced plans or programs refer to Equity.3)Philips cancelled 33.5 million shares on December 28, 2021.4)In 2021, Philips did not determine to terminate any publicly announced plans or programs prior to expiration, or determine that it intends not to make any further purchases under any publicly announced plans or programs. 5)As described above, Philips acquired shares for long-term incentive plans and capital reduction purposes via three different methods: (i) share buy-backbuyback repurchases in the open market via an intermediary, (ii) repurchase of shares via forward contracts for future delivery of shares, (iii) the unwinding of call options on own shares. In 2018, Royal Philips also used methods (i) and (ii) to acquire shares for capital reduction purposes.The open market transactions via an intermediary allow for buybacks during both open and closed periods.
Philips Group
Impact of share repurchase on share count
in thousands of shares as of December 31
2014-2018
Philips Group
Total number of shares repurchased
in thousands of shares unless otherwise stated
2018
| share repurchases related to shares acquired for capital reduction | average price paid per share in EUR | shares acquired for LTI's | average price paid per share in EUR |
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7.1.9Cash obligations
Contractual cash obligations
The following table below presents a summary of the Group’s fixed contractual cash obligations and commitments atas of December 31, 2018.2021. These amounts are an estimate of future payments, which could change as a result of various factors such as a change in interest rates, foreign exchange, contractual provisions, as well as changes in our business strategy and needs. Therefore, the actual payments made in future periods may differ from those presented in the table below:following table:
Philips Group
Contractual cash obligations12
in millions of EUR
2018
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Finance lease obligations | | | | | |
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Contractual cash obligations | | | | | |
| | | Payments due by period |
|---|
| | total | less than 1 year | 1-3 years | 3-5 years | after 5 years |
|---|
| Long-term debt1) | 7,233 | 246 | 1,995 | 1,924 | 3,068 |
| Lease obligations | 1,333 | 280 | 397 | 238 | 417 |
| Short-term debt | 47 | 47 | | | |
| Derivative liabilities | 208 | 87 | 121 | | |
| Purchase obligations2) | 654 | 237 | 305 | 99 | 12 |
| Trade and other payables | 1,872 | 1,872 | | | |
| Contractual cash obligations | 11,347 | 2,768 | 2,819 | 2,261 | 3,498 |
11)Amounts in this table are undiscounted
2This table excludes post-employment benefit plan contribution commitments and income tax liabilities in respect of tax risks because it is not possible to make a reasonably reliable estimate of the actual period of cash settlement
3Long-term debt includes short-terminterest and the current portion of long-term debt and excludes finance lease obligationsobligations.
42)Purchase obligations are agreements to purchase goods or services that are enforceable and legally binding for the Group. They specify all significant terms, including fixed or minimum quantities to be purchased, fixed, minimum or variable price provisions and the approximate timing of the transaction. They do not include open purchase orders or other commitments which do not specify all significant terms.
IFRS 16, Leases, is effective for the financial year commencing January 1, 2019. Upon adoption, the company expects to recognize a lease liability at the present value of its remaining operating lease commitments (excluding low-value leases). Refer to Significant accounting policies.
In January 2018, it was announced that the North American headquarters will move from Andover to Cambridge. Philips has entered into a new lease commitment commencing in 2020contracts with a terminvestment funds where it committed itself to make, under certain conditions, capital contributions to these funds of 15 years and resulting in an off-balance sheet commitmentaggregated remaining amount of EUR 218 million.104 million (2020: EUR 132 million). As of December 31, 2021, capital contributions already made to these investment funds are recorded as non-current financial assets.
Certain Philips offers voluntary supply chain finance programs with third parties, which provide participating suppliers with the opportunity to factor their trade receivables from Philips withat the sole discretion of both the suppliers and the third parties through supplier finance arrangements. At December 31, 2018 approximately EUR 275 million of the Philips accounts payable were known to have been sold onward under such arrangements whereby Philips confirms invoices.parties. Philips continues to recognize these liabilities as trade payables and will settlesettles them accordingly on the liabilities in line withinvoice maturity date based on the original payment terms and conditions of these arrangements. As of December 31, 2021, approximately EUR 139 million (2020: EUR 227 million) of the related invoices.Philips accounts payable were transferred under these arrangements.
Other cash commitments
The Companycompany and its subsidiaries sponsor post-employment benefit plans in many countries in accordance with legal requirements, customs and the local situation in the countries involved. For a discussion of the plans and expected cash outflows, please refer to Post-employment benefits.
The company had EUR 11466 million restructuring-related provisions by the end of 2018,2021, of which EUR 6858 million is expected to result in cash outflows in 2019.2022. Refer to Provisions for details of restructuring provisions.
A proposal will be submittedPlease refer to Dividend for information on the proposed dividend distribution.
In 2021, Philips entered into a total amount of EUR 731 million of forward contracts relating to the Annual General Meeting of Shareholders, to be held on May 9, 2019, to declare a dividend of EUR 0.85 per common share (an increase of 6%), in cash or shares at the option of the shareholder (up to EUR 777 million if all shareholders would elect cash), against the net income for 2018. Further details will be given in the agenda for the 2019 Annual General Meeting of Shareholders.
On January 29, 2019, Philips announced a new1.5 billion share buyback program for anannounced on July 26, 2021, with maturity dates in 2022, 2023 and 2024. A total amount of up toEUR 745 million of forward contracts matured in 2021, which completed the settlement of the EUR 1.5 billion which is expected to start in the first quarter of 2019 and to be completed within two years.share buyback program announced on January 29, 2019. As the program will bewas initiated for capital reduction purposes, Philips intends to cancel all of the shares acquired under the program.
Please refer to Equity for information on other Long-term incentive and employee stock purchase plans.
Guarantees
Philips’ policy is to provide guarantees and other letters of support only in writing. Philips does not provide other forms of support. The total fair value of guarantees recognized on the balance sheet amounts to EUR nil million for both 20172020 and 2018.2021. Remaining off-balance-sheet business and credit-relatedbusiness-related guarantees provided on behalf of third parties and associates decreased by EUR 314 million during 20182021 to EUR 402 million (December 31, 2017:2020: EUR 4416 million).
Sell-down Signify7.1.10Dividend
Dividend policy
Philips’ dividend policy is aimed at dividend stability and a pay-out ratio of 40% to 50% of adjusted income from continuing operations attributable to shareholders*).
Proposed distribution
A proposal will be submitted to the Annual General Meeting of Shareholders, to be held on May 10, 2022, to declare a distribution of EUR 0.85 per common share, in cash or shares (former Philips Lighting)at the option of the shareholder, against the net income of 2021.
If the above dividend proposal is adopted, the shares will be traded ex-dividend as of May 12, 2022 at the New York Stock Exchange and Euronext Amsterdam. In September 2014, Philips announced its plancompliance with the listing requirements of the New York Stock Exchange and Euronext Amsterdam, the dividend record date will be May 13, 2022.
Shareholders will be given the opportunity to sharpen its strategic focus by establishing two stand-alone companies focusedmake their choice between cash and shares between May 16 and June 3, 2022. If no choice is made during this election period, the dividend will be paid in cash. The number of share dividend rights entitled to one new common share will be determined based on the HealthTechvolume-weighted average price of all traded common shares Koninklijke Philips N.V. at Euronext Amsterdam on June 1, 2 and Lighting opportunities respectively. A stand-alone structure was established3, 2022. The company will calculate the number of share dividend rights entitled to one new common share (the ratio), such that the gross dividend in shares will be approximately equal to the gross dividend in cash. The ratio and the number of shares to be issued will be announced on June 7, 2022. Payment of the dividend (up to EUR 744 million) and delivery of new common shares, with settlement of fractions in cash, if required, will take place from June 8, 2022. The distribution of dividend in cash to holders of New York Registry shares will be made in USD at the USD/EUR rate as per WM/ Reuters FX Benchmark 2 PM CET fixing of June 6, 2022.
| ex-dividend date | record date | payment date |
| Euronext Amsterdam | May 12, 2022 | May 13, 2022 | June 8, 2022 |
| New York Stock Exchange | May 12, 2022 | May 13, 2022 | June 8, 2022 |
Further details will be given in the agenda for lighting activities within the Philips Group, effective February 1, 2016. On May 27, 2016, Philips Lighting (renamed Signify2022 Annual General Meeting of Shareholders. The proposed distribution and all dates mentioned remain provisional until then.
Dividend in 2018) was listedcash is in principle subject to 15% Dutch dividend withholding tax, which will be deducted from the dividend in cash paid to the shareholders. Dividend in shares paid out of net income and started tradingretained earnings is subject to 15% dividend withholding tax, but only in respect of the par value of the shares (EUR 0.20 per share). Shareholders are advised to consult their tax advisor on Euronext in Amsterdam under the symbol ‘LIGHT’. Followingapplicable situation with respect to taxes on the listing of Signify, Philips retained a 71.23% stake.dividend received.
In 2017,June 2021, Philips successfully completed three accelerated bookbuild offeringssettled a dividend of EUR 0.85 per common share, representing a total value of EUR 773 million including costs. Shareholders could elect for a cash dividend or a share dividend. Approximately 38% of the shareholders elected for a share dividend, resulting in the issuance of 6,345,968 new common shares, leading to institutional investorsa 0.7% dilution. The dilution caused by the newly issued dividend shares was more than offset by the cancellation of 65.3533.5 million shares in Signify, reducing Philips’ stake in the issued share capitalDecember 2021. For more information refer to 29.01% by the end of 2017.
Shareholders’ equity. The first two transactions in February and April 2017 involved 48.25 million shares. In April 2017, Philips concluded that a ''loss of control'' from an accounting perspective could occur due to the further sell downsettlement of the remaining shares within one year. Accordingly, from that datecash dividend involved an amount of EUR 482 million (including costs).
Dividends and distributions per common share
The following table sets forth in euros the lighting activities (substantially representing Signify shares) were presented as a discontinued operation.
In November 2017, by selling another 17.1 million shares, Philips lost control, resulting ingross dividends on the deconsolidation of Signify.
The position of 29.01% as of December 31, 2017 was a temporary position, which fitted in Philips' overall single coordinated plan to sell Signify in its entirety. Consequently, any future results related to the retained interest – like value adjustments, results upon disposal and dividends – were reflected in Discontinued operations. The Signify shares were presented as an Asset classified as held for sale.
In February 2018, Philips successfully completed a fourth accelerated bookbuild offering to institutional investors of 16.22 million shares in Signify. During that year, Philips sold Signifycommon shares in the open market, reducing its shareholdingfiscal years indicated (from prior-year profit distribution) and such amounts as converted into US dollars and paid to 16.5%holders of Signify's issued share capital as of December 31, 2018. As from that date, Philips no longer had board representation in the Supervisory Board of Signify. The remaining shares were reclassified to Other current financial assets, with fair value changes recognized through Other comprehensive income.
Procurement
For the third year in a row, Philips faced adverse market conditions in 2018, due to industry cycles and raw material price trends. Procurement performance was therefore, more than before, dependent on product concept re-engineering and sourcing strategies.
The combination of price erosion, market growth and inflationary pressures impacted Philips suppliers across the board as the anticipated risk of market headwinds became visible. Additionally, there was tightness in the electronic component markets. The trade tensions and US import tariffs implemented from April 2018 resulted in further direct and indirect financial headwinds. From the third quarter the impact of weaker global growth, exacerbated by a slowdown in China and uncertainty over the impact of Brexit, resulted in returned volatility in commodity and raw materials pricing.
Overcoming these headwinds, Philips delivered on its 2018 procurement performance ambition by optimizing design and costs via various programs, including DfX conventions and Total Cost of Ownership (TCO) programs.
The year 2017
In spite of a challenging market environment, Philips came through with the 2017 procurement performance commitment. These results were driven by optimizing costs via various programs, including many DfX events, Total Cost of Ownership (TCO) programs and negotiations to secure the best possible outcome and overcome market headwinds.
Global growth is strengthening but the longer-term challenges remain. Policy stimulus supported the upturn, but the private investment recovery was modest. Continued reliance on credit to fund growth is heightening the risk of an eventual adjustment in China. In addition, a further shift toward protectionist policies in the US and a growing trend in Europe is a distinct threat. The currency risk remains in 2018 as the euro appreciated strongly against the US dollar and Chinese renminbi in 2017. Geopolitical tensions, terrorism and the European challenge with refugees could also play a key role in the outlook in several economies.
The higher commodity market prices over the last year created a challenging environment for Philips. The situation in 2018 will remain the same or will be more challenging, judging by the continuation of the economic improvement, speculation on further pick-up in commodity demand, and actual material market price increases over 2017. The low price levels of raw materials and energy during the period 2015-2016 have led to reduced investment in future supply. This creates the risk of new headwinds once real consumption picks up significantly again and the supply-demand situation reverses.
New York Registry:
The year 2016
In the first quarter of the year, global economic growth was running at its weakest pace in three years. In June, an additional threat to future growth came in the shape of Brexit, high credit growth, debt exposures in emerging markets and volatile financial markets.Philips Group
Commodity prices continued to weaken at the start of 2016. Oil and metal prices fell to extreme lows on weaker global demand, especially due to the slowdown in manufacturing activity in China, but also because of increases in inventories and supply following the past (mining) investments. Market prices for steel, however, showed increases during 2016, driven by a steeper cost curve, a consolidated market as well as a more aggressive anti-dumping approach.
For commodities, the election of Donald Trump as US President spurred price gains as investors bet that demand for materials would pick up with a focus on infrastructure and further protectionism. However, actual consumption has not yet significantly increased for most materials and the influence of speculation is hard to determine.
Oil, copper, steel and other metals all surged by over 20% in the last few months of the year to the highest price levels since mid-2015, partly driven by additional Chinese fiscal stimulus in the form of public construction sector support and the acceleration of public-private partnership infrastructure projects.
6.2Critical accounting policies
The preparation of Philips’ financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities at the date of our financial statements. The policies that management considers both to be most important to the presentation of Philips’ financial condition and results of operations and to make the most significant demands on management’s judgments and estimates about matters that are inherently uncertain, are discussed below. Management cautions that future events often vary from forecasts and that estimates routinely require adjustment. A more detailed description of Philips’ accounting policies appears in Significant accounting policies
Accounting for income taxes
As part of the process of preparing consolidated financial statements, the Company is required to estimate income taxes in each of the jurisdictions in which it conducts business. This process involves estimating actual current tax expense and deferred tax. Temporary differences result in deferred tax assets and liabilities, which are included in the consolidated balance sheet. The Company regularly reviews the deferred tax assets for recoverability and will only recognize these if it is believed that sufficient future taxable profit is available, including income from forecasted operating earnings, the reversal of existing taxable temporary differences and established tax planning relating to the same taxation authority and the same taxable entity. For a discussion of the tax uncertainties, please refer to the information under the heading “Tax risks” in Income taxes.
Multi-element sales transactions
From time to time the Company is engaged in complex sales transactions relating to multi-element deliveries (for example a single sales transaction that combines the delivery of goods and rendering of services). The process of revenue recognition of such multi-element sales transactions involves the identification of the different performance obligations, the allocation of revenue to these performance obligations and the timing of revenue recognition as or when the performance obligation is satisfied. Each of these process steps can be complex and requires judgment. In order to identify whether the performance obligation in a single sales contract are distinct, the Company verifies if the customer can benefit from the good or service, either on its own, or with other readily available resources, and whether the promise to transfer a good or service separate from the other promised goods or services in the contract. Allocation of revenue to the different components is performed based on stand-alone selling prices of each performance obligation. The best evidence of a standalone selling price is the observable price of a good or service sold in similar circumstances and to similar customers. When a standalone selling price is not directly observable, it is estimated, based on either adjusted market assessment approach, expected cost plus margin approach or residual approach. Eventually, revenue for each performance obligation is recognized as or when the performance obligation is satisfied in accordance with IFRS 15.
Provisions and Contingent liabilities
The Company and certain of its group companies and former group companies are involved as a party in legal proceedings, including regulatory and other governmental proceedings, and discussions on potential remedial actions, relating to such matters as antitrust laws, competition issues, commercial transactions, product liabilities, participations and environmental pollution. Since the ultimate disposition of asserted claims and proceedings and investigations cannot be predicted with certainty, an adverse outcome could have a material adverse effectGross dividends on the Company’s consolidated financial statements.common shares
The Company recognizes a liability when it is probable that an outflow of resources embodying economic benefits will result from the settlement of a present obligation and the amount at which the outflow will take place can be measured reliably. If the likelihood of the outcome is less than probable and more than remote or a reliable estimate is not determinable, the matter is disclosed as a contingent liability if management concludes that it is material.
In determining the provision for the environmental remediation obligations, significant judgments are necessary. The Company utilizes experts in the estimation process. The Company provides for cost associated with environmental obligations when they are probable and can be estimated reliably. The provisions are adjusted as new information becomes available and they are remeasured at the end of each period using the current discount rate.
Provisions on restructuring represents estimated costs of initiated reorganizations, the most significant of which have been approved by the Executive Committee, and which generally involve the realignment of certain parts of the industrial and commercial organization. When such restructurings require discontinuance and/or closure of lines of activities, the anticipated costs of closure or discontinuance are included in restructuring provisions. A liability is recognized for those costs only when the Company has a detailed formal plan for the restructuring and has raised a valid expectation with those affected that it will carry out the restructuring by starting to implement that plan or announcing its main features to those affected by it. Before a provision is established, the Company recognized any impairment loss on the assets associated with the restructuring.
The Company provides for warranty costs based on historical trends in product return rates and the expected material and labor costs to provide warranty services. The provision is based on historical warranty data and a weighing of possible outcomes against their associated probabilities.
Impairment of non-financial assets
Goodwill is not amortized, but tested for impairment annually and whenever impairment indicators require so. The Company reviews non-financial assets, other than goodwill for impairment, when events or circumstances indicate that carrying amounts may not be recoverable.
In determining impairments of non-current assets like intangible assets, property, plant and equipment, investments in associates and goodwill, management must make significant judgments and estimates to determine whether the recoverable amount is lower than the carrying value. Changes in assumptions and estimates included within the impairment reviews and tests could result in significantly different results than those recorded in the consolidated financial statements.
In 2018 the Company performed and completed goodwill annual impairment tests in the fourth quarter, in line with 2017 and 2016.
Goodwill is allocated to the cash generating units. The basis of the recoverable amount used in the annual impairment test and trigger-based impairment tests is generally the value in use. Key assumptions used in the impairment tests were sales growth rates, EBITA*and the rates used for discounting the projected cash flows. These cash flow projections were determined using the Royal Philips management’s internal forecasts that cover an initial period from 2019 to 2021.
Projections were extrapolated with stable or declining growth rates for a period of 4 years, after which a terminal value was calculated for the first year. For terminal value calculation, growth rates were capped at a historical long-term average growth rate.
The sales growth rates and EBITA*used to estimate cash flows are based on past performance, external market growth assumptions and industry long-term growth averages. EBITA*in all units is expected to increase over the projection period as a result of volume growth and cost efficiencies. Please refer to Goodwill.
New Accounting Standards
For a description of the new pronouncements, please refer to the information under the heading “IFRS accounting standards adopted as from 2018” in Significant accounting policies.
Off-balance sheet arrangements
Please refer to the information under the heading “Guarantees” in Cash obligations and Contingent assets and liabilities.
| | 2017 | 2018 | 2019 | 2020 | 2021 |
|---|
| in EUR | 0.80 | 0.80 | 0.85 | 0.85 | 0.85 |
| in USD | 0.90 | 0.94 | 0.96 | 0.95 | 1.03 |
6.37.2Taxation
Dutch taxation
The statements below are only a general summary of certain material Dutch tax consequences for holders of common shares that are non-residents of the Netherlands based on present Dutch tax laws and the Tax Convention of December 18, 1992, as amended by the protocol that entered into force on December 28, 2004, between the United States of America and the Kingdom of the Netherlands (the US Tax Treaty) and are not to be read as extending by implication to matters not specifically referred to herein. As to individual tax consequences, investors in common shares should consult their own professional tax advisor.
With respect to a holder of common shares that is an individual who receives income or derives capital gains from common shares and this income received or capital gains derived are attributable to past, present or future employment activities of such holder, the income of which is taxable in the Netherlands, the Dutch tax position is not discussed in this summary.
Dividend withholding tax
In general, a distribution to shareholders by a company resident in the Netherlands (such as the Company) is subject to a withholding tax imposed by the Netherlands at a rate of 15%. Share dividends paid out of the Company’s paid-in share premium recognized for Dutch tax purposes are not subject to the abovementioned withholding tax. Share dividends paid out of the Company’s retained earnings are subject to dividend withholding tax on the nominal value of the shares issued.
Relief at source is available to certain qualifying corporate holders of common shares if such common shares are attributable to a business carried out in the Netherlands. Relief at source is available for dividend distributions to certain qualifying corporate holders of common shares resident in EU/EEA member states, and to certain qualifying corporate holders of common shares resident in non-EU/EEA states with which the Netherlands has concluded a tax treaty that includes a dividend article, unless such holder holds the common shares of the Company with the primary aim or one of the primary aims to avoid the levy of Dutch dividend withholding tax from another person and the shareholding is put in place without valid commercial reasons that reflect economic reality.
Upon request and under certain conditions, certain qualifying non-resident individual and corporate holders of common shares resident in EU/EEA member states or in a qualifying non-EU/EEA state may be eligible for a refund of Dutch dividend withholding tax to the extent that the withholding tax levied is higher than the personal and corporate income tax which would have been due if they were resident in the Netherlands.
Pursuant to the provisions of the US Tax Treaty, a reduced rate may be applicable in respect of dividends paid by the Company to a beneficial owner holding directly 10% or more of the voting power of the Company, if such owner is a company resident in the United States (as defined in the US Tax Treaty) and entitled to the benefits of the US Tax Treaty.
Pursuant to Dutch anti-dividend stripping legislation, a holder of common shares who is the recipient of dividends will generally not be considered the beneficial owner of the dividends if (i) as a consequence of a combination of transactions, a person other than the recipient benefits, in full or in part, directly or indirectly, from the dividends; (ii) whereby such other person retains, directly or indirectly, an interest similar to that in the common shares on which the dividends were paid; and (iii) that other person is entitled to a credit, reduction or refund of dividend withholding tax that is less than that of the recipient.
Dividends paid to qualifying exempt US pension trusts and qualifying exempt US organizations are, under certain conditions, exempt from Dutch withholding tax under the US Tax Treaty. Qualifying exempt US pension trusts normally remain subject to withholding at the rate of 15% and are required to file for a refund of the tax withheld. Only if certain conditions are fulfilled, such pension trusts may be eligible for relief at source upon payment of the dividend. However, for qualifying exempt US organizations no relief at source upon payment of the dividend is currently available; such exempt US organizations should apply for a refund of the 15% withholding tax withheld. Further, under certain circumstances, certain exempt organizations (e.g. pension funds) may be eligible for a refund of Dutch withholding tax upon their request pursuant to Dutch tax law. Under Dutch tax law (not yet entered into force), provided certain conditions are met, such (US) organizations may be eligible for relief at source upon request.
The Company may, with respect to certain dividends received from qualifying non-Dutch subsidiaries, credit taxes withheld from those dividends against the Dutch withholding tax imposed on certain qualifying dividends that are redistributed by the Company, up to a maximum of the lesser of:
- 3% of the amount of qualifying dividends redistributed by the Company; and
- 3% of the gross amount of certain qualifying dividends received by the Company.
The reduction is applied to the Dutch dividend withholding tax that the Company must pay to the Dutch tax authorities and not to the Dutch dividend withholding tax that the Company must withhold.
Income and capital gains
Income and capital gains derived from the common shares by a non-resident individual or non-resident corporate shareholder are generally not subject to Dutch income or corporation tax, unless (i) such income and gains are attributable to a (deemed) permanent establishment or (deemed) permanent representative of the shareholder in the Netherlands; or (ii) the shareholder is entitled to a share in the profits of an enterprise or (in the case of a non-resident corporate shareholder only) a coentitlementco-entitlement to the net worth of an enterprise that is effectively managed in the Netherlands (other than by way of securities) and to which enterprise the common shares are attributable; or (iii) such income and capital gains are derived from a direct, indirect or deemed substantial participation in the share capital of the company (such substantial participation not being a business asset), and, in the case of a non-resident corporate shareholder only, it is being held with the primary aim or one of the primary aims to avoid the levy of income tax from another person and is put in place without valid commercial reasons that reflect economic reality; or (iv) in the case of a non-resident corporate shareholder, such shareholder is a resident of Aruba, Curacao or Saint Martin with a permanent establishment or permanent representative in Bonaire, Eustatius or Saba to which the common shares are attributable and certain conditions are met; or (v) in the case of a non-resident individual, such individual derives income or capital gains from the common shares that are taxable as benefits from ‘miscellaneous activities’ in the Netherlands (resultaat uit overige werkzaamheden, as defined in the Dutch Income Tax Act 2001), which includes the performance of activities with respect to the common shares that exceed regular portfolio management.
In general, a holder of common shares has a substantial participation if he holds either directly or indirectly and either independently or jointly with his partner (as defined in the Dutch Income Tax Act 2001), the ownership of, or certain other rights over, at least 5% of the total issued share capital or total issued particular class of shares of the Company or rights to acquire direct or indirect shares, whether or not already issued, that represent at any time 5% or more of the total issued capital (or the total issued particular class of shares) or the ownership of certain profit participating certificates that relate to 5% or more of the annual profit or to 5% or more of the liquidation proceeds. A shareholder will also have a substantial participation in the Company if one or more of certain relatives of the shareholder hold a substantial participation in the Company. A deemed substantial participation amongst others exists if (part of) a substantial participation has been disposed of, or is deemed to have been disposed of, on a nonrecognition basis.
Estate and gift taxes
No estate, inheritance or gift taxes are imposed by the Netherlands on the transfer or deemed transfer of common shares by way of gift by or on the death of a shareholder if, at the time of the death of the shareholder or the gift of the common shares (as the case may be), such shareholder is not a (deemed) resident of the Netherlands.
Inheritance or gift taxes (as the case may be) are due, however, if such shareholder:
- has Dutch nationality and has been a resident of the Netherlands at any time during the ten years preceding the time of their death or gift; or
- does not have Dutch nationality but has been a resident of the Netherlands at any time during the twelve months preceding the time of the gift (for Netherlands gift taxes only).
United States Federal Taxation
This section describes the material United States federal income tax consequences to a US holder (as defined below) of owning common shares. It applies only if the common shares are held as capital assets for United States federal income tax purposes. This discussion addresses only United States federal income taxation and does not discuss all of the tax consequences that may be relevant to a US holder in light of its individual circumstances, including foreign, state or local tax consequences, estate and gift tax consequences, and tax consequences arising under the Medicare contribution tax on net investment income or the alternative minimum tax. This section does not apply to a member of a special class of holders subject to special rules, including:
- a dealer in securities,
- a trader in securities that elects to use a mark-to-market method of accounting for securities holdings,
- a tax-exempt organization,
- a life insurance company,
- a person that actually or constructively owns 10% or more of the combined voting power of our voting stock or of the total value of our stock,
- a person
whothat holds common shares as part of a straddle or a hedging or conversion transaction, - a person
whothat purchases or sells common shares as part of a wash sale for tax purposes, or - a person whose functional currency is not the US dollar.
This section is based on the Internal Revenue Code of 1986, as amended, its legislative history, existing and proposed regulations, published rulings and court decisions, all as currently in effect, as well as on the US Tax Treaty. These laws and regulationsauthorities are subject to change, possibly on a retroactive basis.
If an entity or arrangement that is treated as a partnership for United States federal income tax purposes holds the common shares, the United States federal income tax treatment of a partner will generally depend on the status of the partner and the tax treatment of the partnership. A partner in a partnership holding the common shares should consult its tax advisor with regard to the United States federal income tax treatment of an investment in the common shares.
A US holder is defined as a beneficial owner of common shares that is, for United States federal income tax purposes::
- a citizen or resident of the United States,
- a domestic corporation,
- an estate whose income is subject to United States federal income tax regardless of its source, or
- a trust if a United States court can exercise primary supervision over the trust’s administration and one or more United States persons are authorized to control all substantial decisions of the trust.
A US holder should consult its own tax advisor regarding the United States federal, state and local tax consequences of owning and disposing of common shares in its particular circumstances.
The tax treatment of common shares will depend in part on whether or not we are classified as a passive foreign investment company, or PFIC, for United States federal income tax purposes. Except as discussed below under “—PFIC Rules”, this discussion assumes that we are not classified as a PFIC for United States federal income tax purposes.
Taxation of Distributions
Under the United States federal income tax laws, the gross amount of any distribution paid in stock or cash out of our current or accumulated earnings and profits (as determined for United States federal income tax purposes), other than certain pro-rata distributions of our common shares, will be treated as a dividend that is subject to United States federal income taxation. For a non-corporate US holder, dividends paid that constitute qualified dividend income will be taxable at the preferential rates applicable to long-term capital gains, provided that the non-corporate US holder holds the common shares for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date and provided it meets other holding period requirements. Dividends paid with respect to the common shares generally will be qualified dividend income provided that, in the year in which the dividend is received, the common shares are readily tradable on an established securities market in the United States. Our common shares are listed on the New York Stock Exchange and we therefore expect that dividends will be qualified dividend income. A US holder must include any Dutch tax withheld from the dividend payment in this gross amount even though it does not in fact receive it. The dividend is taxable to a US holder when it receives the dividend, actually or constructively. The dividend will not be eligible for the dividends-received deduction generally allowed to United States corporations in respect of dividends received from other United States corporations. For dividend payments made in euro, the amount of the dividend distribution that a US holder must include in its income will be the US dollar value of the euro payments made, determined at the spot euro/US dollar rate on the date the dividend distribution can be included in its income,is distributed, regardless of whether the payment is in fact converted into US dollars. Generally, any gain or loss resulting from currency exchange fluctuations during the period from the date a US holder includes the dividend payment in incomeis distributed to the date a US holder converts the payment into US dollars will be treated as ordinary income or loss and will not be eligible for the special tax rate applicable to qualified dividend income. The gain or loss generally will be income or loss from sources within the United States for foreign tax credit limitation purposes. Distributions in excess of current and accumulated earnings and profits, as determined for United States federal income tax purposes, will be treated as a non-taxable return of capital to the extent of a US holder’s basis in the common shares and thereafter as capital gain. However, we do not expect to calculate earnings and profits in accordance with United States federal income tax principles. Accordingly, US holders should expect to generally treat distributions we make as dividends.
Subject to certain limitations, the Dutch tax withheld in accordance with the US Tax Treaty and paid over to the Netherlands will be creditable or deductible against a US holder’s United States federal income tax liability. However, Dutch withholding tax may not be creditable or deductible to the extent that we reduce (as described above under “Dutch taxation - Dividend withholding tax”) the amount of withholding tax paid over to the Netherlands by crediting taxes withheld from certain dividends received by us. Special rules apply in determining the foreign tax credit limitation with respect to dividends that are subject to the preferential tax rates. To the extent reduction or refund of the tax withheld is available under Dutch law, or under the US Tax Treaty, the amount of tax withheld that could have been reduced or that is refundable will not be eligible for credit against United States federal income tax liability. Dividends will generally be income from sources outside the United States, and will generally be either “passive” income for the purposes of computing the foreign tax credit allowable to the holder.
Taxation of Capital Gains
A US holder that sells or otherwise disposes of its common shares will recognize capital gain or loss for United States federal income tax purposes equal to the difference between the US dollar value of the amount that it realizes and its tax basis, determined in US dollars, in its common shares. Capital gain of a non-corporate US holder is generally taxed at preferential tax rates where the holder has a holding period greaterproperty is held more than one year. The gain or loss will generally be income or loss from sources within the United States for foreign tax credit limitation purposes.
PFICPassive Foreign Investment Company Rules
We believe that the common shares should currently not be treated as stock of a passive foreign investment company, or PFIC for United States federal income tax purposes, and we do not expect to become a PFIC in the foreseeable future. However, this conclusion is a factual determination that is made annually and thus may be subject to change. It is therefore possible that we could become a PFIC in a future taxable year. If we are treated as a PFIC, unless a US holder elects to be taxed annually on a mark-to-market basis with respect to the common shares, gain realized on the sale or other disposition of the common shares would in general not be treated as capital gain. Instead, unless a US holder elects to be taxed annually on a mark-to-market basis with respect to the common shares, a US holder would generally be treated as if it had realized such gain and certain “excess distributions” ratably over the holding period for the common shares and would be taxed at the highest tax rate in effect for each such year to which the gain was allocated, in addition to which an interest charge in respect of the tax attributable to each such year would apply. Any dividends received by a US holder will not be eligible for the special tax rates applicable to qualified dividend income if we are treated as a PFIC with respect to such US holder either in the taxable year of the distribution or the preceding taxable year, but instead will be taxable at rates applicable to ordinary income and subject to the excess distribution regime described above.
6.48Investor information
Dividend
Dividend policy
Philips’ dividend policy is aimed at dividend stabilityEnvironmental, Social and Governance
Environmental, Social & Governance (ESG) are the three key dimensions within which a pay-out ratio of 40%company’s approach to 50% of adjusted income from continuing operations attributabledoing business responsibly and sustainably, and its overall societal impact, are defined. They give expression to shareholders*.
For 2018, the key exclusionsan increasingly widely held view – that companies that hold themselves accountable to arrive at the adjusted income from continuing operations attributable to shareholders*are described in Net income, Income from operations (EBIT)their stakeholders and Adjusted EBITA*) of financial performance .
Proposed distribution
A proposalincrease transparency will be submitted to the Annual General Meeting of Shareholders, to be held on May 9, 2019, to declare a distribution of EUR 0.85 per common share, in cash or shares at the option of the shareholder (up to EUR 777 million if all shareholders would elect cash), against the net income for 2018.
If the above dividend proposal is adopted, the shares will be traded ex-dividend as of May 13, 2019 at the New York Stock Exchangemore viable, and Euronext Amsterdam. In compliance with the listing requirements of the New York Stock Exchange and the stock market of Euronext Amsterdam, the dividend record date will be May 14, 2019.
Shareholders will be given the opportunity to make their choice between cash and shares between May 15, 2019 and June 7, 2019. If no choice is made during this election period the dividend will be paid in cash. On June 7, 2019 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 N.V. at Euronext Amsterdam on June 5, 6 and 7, 2019. The Company will calculate the number of share dividend rights entitled to one new common share (the ratio), such that the gross dividend in shares will be approximately equal to the gross dividend in cash. The ratio and the number of shares to be issued will be announced on June 12, 2019. Payment of the dividend and delivery of new common shares, with settlement of fractions in cash, if required, will take place from June 13, 2019. The distribution of dividend in cash to holders of New York Registry shares will be made in USD at the USD/EUR rate as per WM/ Reuters FX Benchmark 2 PM CET fixing of June 11, 2019.
Further details will be givenvaluable, in the agenda for the 2019 Annual General Meeting of Shareholders. All dates mentioned remain provisional until then.long term.
Dividend in cash is in principle subject to 15% Dutch dividend withholding tax, which will be deducted from the dividend in cash paid to the shareholders. Dividend in shares paid out of net income and retained earnings is subject to 15% dividend withholding tax, but only in respect of the par value of the shares (EUR 0.20 per share). Shareholders are advised to consult their tax advisor on the applicable situation with respect to taxes on the dividend received.
In 2018, Philips settled a dividend of EUR 0.80 per common share, representing a total value of EUR 738 million including costs. Shareholders could elect for a cash dividend or a share dividend. Approximately 46% of the shareholders elected for a share dividend, resulting in the issuance of 9,533,223 new common shares, leading to a 1.0% dilution. The dilution caused by the newly issued dividend shares was more than offset by the cancellation of 24,246,711 shares in November 2018. The cash dividend involved an amount of EUR 400 million (including costs).
Dividends and distributions per common share
The following table sets forth in euros the gross dividends on the common shares in the fiscal years indicated (from prior-year profit distribution) and such amounts as converted into US dollars and paid to holders of shares of the New York Registry:
Philips Group
Gross dividends on the common shares
2014 - 2018
Financial calendar
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Annual General Meeting of Shareholders
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Record date Annual General Meeting of Shareholders
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Annual General Meeting of Shareholders
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First quarter results 2019
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Second quarter results 2019
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Third quarter results 2019
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Fourth quarter results 2019
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2019 Annual General Meeting of Shareholders
The Agenda and the explanatory notes to the Agenda for the Annual General Meeting of Shareholders on May 9, 2019, will be published on the company’s website.
For the 2019 Annual General Meeting of Shareholders, a record date of April 11, 2019 will apply. Those persons who, on that date, 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 contact
Shareholder services
Holders of shares listed on Euronext Amsterdam
Non-US shareholders and other non-US interested parties can make inquiries about the Annual Report 2018 to:
Royal Philips
Annual Report Office
Philips Center, HBT 12
P.O. Box 77900
1070 MX Amsterdam, The Netherlands
E-mail: annual.report@philips.com
Communications concerning share transfers, lost certificates, dividends and change of address should be directed to:
ABN AMRO Bank N.V.
Department Equity Capital Markets/Corporate Broking HQ7050
Gustav Mahlerlaan 10, 1082 PP Amsterdam
The Netherlands
Telephone: +31-20-34 42000
E-mail: corporate.broking@nl.abnamro.com
Holders of New York Registry shares
Holders of New York Registry shares and other interested parties in the US can make inquiries about the Annual Report 2018 to:
Deutsche Bank Trust Company Americas
C/O AST
6201 15th Avenue Brooklyn, NY 11219
Telephone (toll-free US): +1-866-706-8374
Telephone (outside of US): +1-718-921-8137
Website: www.astfinancial.com
E-mail: dbemails@astfinancial.com
Communications concerning share transfers, lost certificates, dividends and change of address should be directed to Deutsche Bank The Annual Report on Form 20-F 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 (listed at the New York Stock Exchange) and to reinvest cash dividends. Deutsche Bank (the registrar of Philips NY Registry shares) has been authorized to implement and administer both plans for registered shareholders of and new investors in Philips NY Registry shares. 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:
Deutsche Bank Global Direct Investor Services
Telephone (toll-free US): +1-866-706-8374
Telephone (outside of US): +1-718-921-8137
Monday through Friday 8:00 AM EST through 8:00 PM EST
Website www.astfinancial.com
E-mail: dbemails@astfinancial.com
or write to:
Deutsche Bank Trust Company Americas
IC/O AST
6201 15th Avenue Brooklyn, NY 11219
Analysts’ coverage
Philips is covered by approximately 20 analysts who frequently issue reports on the company. For a list of our current analysts, please refer to: www.philips.com/a-w/about/investor/stock-info/analyst-coverage.html
How to reach us
The registered office of Royal Philips is
High Tech Campus 5
5656 AE Eindhoven, The Netherlands
Switch board, telephone: +31-40-27 91111
Investor Relations contact
Royal Philips
Philips Center
P.O. Box 77900
1070 MX Amsterdam, The Netherlands
Telephone: +31-20-59 77222
Website: www.philips.com/investor
E-mail: investor.relations@philips.com
Pim Preesman
Head of Investor Relations
Telephone: +31-20-59 77222
Ksenija Gonciarenko
Investor Relations Manager
Telephone: +31-20-59 77055
Sustainability contact
Philips Group Sustainability
High Tech Campus 5
5656 AE Eindhoven, The Netherlands
Telephone: +31-40-27 83651
Website: www.philips.com/sustainability
E-mail: philips.sustainability@philips.com
Group Press Office contact
Royal Philips
Philips Center, HBT 19
Amstelplein 2
1096 BC Amsterdam, The Netherlands
E-mail: group.communications@philips.com
For media contacts please refer to:
www.philips.com/a-w/about/news/contacts.html
New York Registry Shares
Fees and Charges Payable by a Holder of New York Registry Shares
Deutsche Bank Trust Company Americas (“Deutsche Bank”), as the US registrar, transfer, dividend disbursement and shareholder servicing agent (“Agent”) under Philips’ New York Registry Share program (the “Program”), collects fees for the issuance, cancellation and/or transfer of New York Registry Shares directly from investors depositing ordinary shares or surrendering New York Registry Shares for the purpose of withdrawal or from intermediaries acting for them. The Agent collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of the distributable property to pay the fees.
The charges of the Agent payable by investors are as follows:
The New York Transfer Agent charges shareholders a fee of up to USD 5.00 per 100 shares for the exchange of New York Registry shares for ordinary shares and vice versa.
Fees and Payments made by the Agent to Philips
The Agent has agreed to reimburse certain expenses of Philips related to the Program and incurred by Philips in connection with the Program. The Agent has also agreed to waive certain fees for standard costs associated with the administration of the program.
The Agent has not made any reimbursement directly to Philips in the year ended December 31, 2018. The Agent paid a total amount of EUR 121,257 directly to third parties in the year ended December 31, 2018.
Category of Expense paid directly to third parties
in EUR
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Reimbursement of Proxy Process Expenses
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Reimbursement of Legal Fee expenses
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Expense paid directly to third parties
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Under certain circumstances, including removal of the Agent or termination of the Program by Philips, Philips is required to repay the Agent certain amounts reimbursed and/or expenses paid to or on behalf of Philips.
7Societal impact
We are a purpose-driven company aiming to improve the liveshealth and well-being of 32.5 billion people annually by 2025. Our people2030. We believe that private-sector companies like ours have a vital role to play in collaborating with other partners across our supply chain, and with private and public organizations in society, to address the major challenges the world is facing.
Taking a multi-stakeholder approach, we draw inspiration from the societal impact we achievecan have through our products and solutions, and through how we operate in the world. Our company is very conscious of our responsibility and our contribution to society and the environment.
We aim to be a front-runner in the area of ESG and have been recognized as leading the way in, for example, sustainability, corporate governance practices and tax transparency.
Our reporting is aligned with the comprehensive and integrated Environmental, Social & Governance (ESG) commitments we have adopted for the period 2020-2025.
We have excluded the data from Domestic Appliances from the ESG information wherever possible. In a limited number of cases, for example for road logistics emissions, we have used proxies. If Domestic Appliances information was not available for past years, and could therefore not be excluded, we have indicated this in the respective section. The EEI and GBP results have not been restated.
8.1ESG reporting framework
Building on bothour extensive experience of environmental and social impact measurement and of providing transparency on governance, Philips has taken an active role – in collaboration with, in particular, the International Financial Reporting Standards (IFRS) Foundation, the World Economic Forum (WEF) and the European Union – to help drive the evolution towards a standard ESG reporting framework.
In 2007, Philips signed up to the United Nations Global Compact, to advance ten universal principles in the areas of human rights, labor, the environment and anti-corruption. In 2017, at the WEF Annual Meeting in Davos, we signed the Compact for Responsive and Responsible Leadership – an initiative (initiated by WEF and Philips) to promote and align the long-term sustainability of corporations and the long-term goals of society, with an inclusive approach for all stakeholders. The WEF secured a commitment from over 140 CEOs to align their corporate values and strategies with the United Nations’ Sustainable Development Goals (SDGs).
In 2020, the WEF’s International Business Council (IBC) published its core set of Stakeholder Capitalism Metrics and disclosures. These can be used by companies to align their mainstream reporting on performance against environmental, social and environmental dimensions. governance (ESG) indicators and track their contributions towards the SDGs on a consistent basis. Thus far, 54 companies reported in line with this framework. Based where possible on existing standards, the full set is comprised as follows:
• Core metrics: A set of 21 more‑established or critically important metrics and disclosures that focus primarily on activities within an organization’s own boundaries.
• Expanded metrics: A set of 34 metrics and disclosures that tend to be less well‑established in existing practice and have a wider value chain scope or convey impact in a more sophisticated or tangible way, e.g. in monetary terms.
The recommended metrics are organized under four pillars that are aligned with the SDGs and principal ESG domains: Principles of Governance, Planet, People and Prosperity. There is no intention to replace industry- or company-specific metrics (like our Lives Improved metric). Companies are encouraged to report against as many of the core and expanded metrics as they find material and appropriate, on the basis of ‘disclose or explain’.
In thesection 5.6 of this Annual Report, 2017 and 2018 we quantifiedshow how Philips performed in 2021 on the environmental impactabove-mentioned 21 Core metrics, mapped to the three dimensions of our ESG commitments, as well as a number of additional Philips-specific metrics that we consider fundamental to the strategy and operation of our business.
Philips is also contributing to the IFRS Foundation’s endeavors to drive standardization of non-financial reporting as well as the development of sustainability standards by the European Union.
EU taxonomy framework
The aim of the European Taxonomy Regulation (EU 2020/852), including the delegated acts adopted thereunder, is to provide companies, investors and policymakers with appropriate criteria for determining which economic activities can be considered environmentally sustainable, and it requires companies to report on how and to what extent their activities are associated with such ‘taxonomy-eligible activities’. The Taxonomy Regulation is relatively new and there are still significant uncertainties around its phased implementation. It is expected, however, that it will be developed into a comprehensive and detailed framework over the coming years.
The Taxonomy Regulation provides certain conditions for taxonomy alignment. Among others, the relevant activity must substantially contribute to one or more of the following six environmental objectives (while not significantly harming any of the others):
- Climate change mitigation
- Climate change adaptation
- The sustainable use and protection of water and marine resources
- The transition to a circular economy
- Pollution prevention and control
- The protection and restoration of biodiversity and ecosystems
The delegated acts adopted under the Taxonomy Regulation will provide technical screening criteria which must also be met to constitute taxonomy alignment. On the date of this Annual Report 2021, only one relevant delegated act has been adopted, concerning activities significantly contributing to climate change mitigation and adaptation.
The taxonomy framework provisions effective on the date of this Annual Report 2021 require Philips to disclose the proportion of its taxonomy-eligible activities (described in any delegated act adopted to date) and non-eligible economic activities in its total turnover, capital and operational expenditure, as well as certain qualitative information. We used the delegated act ((EU) 2021/2139) to identify activities that are eligible. However, none of our revenue-generating activities were included as this delegated act only applies to sectors with very high CO2 emissions. In conclusion, Philips’ core activities are not within the scope of this delegated act and consequently none of Philips' revenues were eligible under this delegated act during 2021 (0%). All revenues were non-eligible (100%). We used delegated act (EU) 2021/2178 for the definition and calculation of the taxonomy-eligible percentages. Revenue is calculated based on ’Sales’ as per Consolidated statements of income. Philips expects to be eligible and report its taxonomy-eligible revenues under additional environmental objectives as further delegated acts with applicable technical screening criteria are adopted.
Some other (enabling) Philips activities are included in the delegated act ((EU) 2021/2139) and are eligible for capital expenditures for the objective of climate change mitigation. We therefore screened (EU) 2021/2139, assessed our capital expenditure and identified relevant activities mainly related to our real estate portfolio. For these activities, capital expenditures are determined based on the 2021 additions to property, plant and equipment, intangible assets, and additions to right-of-use assets, excluding any re-assessments (refer to Property, plant and equipment and Intangible assets excluding goodwill).
Reportable taxonomy-eligible capital expenditures in 2021 amounted to EUR 10 million, or 1% of total capital expenditure (non-eligible capital expenditures 99%), and mainly related to energy efficiency improvement measures in our buildings (installation, maintenance and repair of energy efficiency equipment), as well as onsite renewable electricity generation (installation, maintenance and repair of renewable energy technologies).
Similar to capital expenditures, we screened (EU) 2021/2139, assessed for relevant operational expenditures activities and have as a company in Environmental performance.not identified any eligible operational expenditure. Total operational expenditures are determined based on the 2021 non-capitalized costs that relate to research and development, building renovation, short-term lease, maintenance and repair, and any other direct expenditures relating to day-to day servicing of property, plant and equipment.
In 20182021, we applieddid not record reportable taxonomy-eligible operational expenditures (0%), as, for example, the True Value methodology to start quantifying our social impact. This includessourcing of renewable energy was not included in the social impactTaxonomy. Non-eligible operational expenditures were 100%.
We followed the same accounting principles as in our supply chain, training of our staff, and taxesfinancial statements.
Since the EU taxonomy is new, we pay. We included these impacts in How we create value. We have also started to quantify the most complex part, the social impact we have through our products and solutions. We will continue to calculatemonitor legislative developments and adapt our disclosures where needed.
7.28.3Environmental performance
In 2016 weWe launched our new five-year sustainability program, ‘Healthy people, Sustainable planet’, addressing both social and environmental challenges and including associatedESG commitments, with ambitious targets to be achieved by the end of 2025, in September 2020.
Besides our social impact, focusing on SDG 3, described in the next section, we have an environmental impact through our global operations (including our supply chain), but even more so through our products and solutions. This is our contributionwhere we contribute to SDG 12 (“to ensure(Ensure sustainable consumption and production patterns”patterns) and to SDG 13 ("take(Take urgent action to combat climate change and its impacts"impacts).
In this Environmental performance section an overview is given of the most important environmental parameters of the 'Healthy people, Sustainable planet' program. Details can be found in the Sustainability statements.
Environmental impact
Philips has been performing Life-Cycle Assessments (LCAs) since 1990. These assessmentsLCAs provide insight into the lifetime environmental impactsimpact of our products from cradle to grave. These insightsproducts. They are used to steer our EcoDesign efforts by reducing the environmental impact during the lifetime of our products and to grow our GreenGreen/EcoDesigned and Circular Solutions portfolio. As a logical next step, for the fifth year, we have measured our environmental impact on society at large via a so-called Environmental Profit & Loss (EP&L) account, which includes the hidden environmental costs associated with our activities and products. It supports the direction of our 'Healthy people, Sustainable planet' program by providingprovides insights into the main environmental hotspots and innovation areas to reduce the environmental impact of our products and solutions.
The EP&L account is based on LCA methodology, in which the environmental impacts are expressed in monetary terms using conversion factors developed by CE Delft. These conversion factors are subject to further refinement and are expected to change over time. We used expert opinions and estimates for some parts of the calculations. The figures reported are Philips’ best possible estimates. As we gain new insights and retrieve more and better data, we maywill enhance the methodology, use casesuse-cases and accuracy of results in the future. For more information we refer to our methodology report.document.
An important learning that we derived from the first EP&L is that, in addition to the conversion factors, also theThe definition of the use caseuse-case scenarios has a significant impact on the result, especially for consumer products. It is our aim to look intoproducts, which have large sales volumes, long lifetimes and frequently high energy consumption (e.g. haircare products). With the feasibilitydisentanglement of standardizingDomestic Appliances business, which manufactures energy consuming products like steam irons and AirFryers, the use cases and calculationenvironmental impact of Philips reduced significantly.
The following table shows the impact of the yearly energy consumption.
Domestic Appliances business disentanglement on the 2020 EP&L.
Philips Group
EP&L in billions of EUR (after exclusion of Domestic Appliances business)
| Original EP&L 2020 | 4.91 |
| Changes | Exclusion of Domestic Appliances business | (2.59) |
EP&L 2020 excluding Domestic Appliances
| 2.32 |
The current EP&L account only includes the hidden environmental costs. It does not yet include the benefits to society that Philips generates by improving people’s liveshealth and well-being through our products and solutions. We have a well-established methodology to calculate the number of lives we positively touch with our products and solutions. It is ourWe aim to look into valuing these societal benefits in monetary terms as well and include them in our future EP&L account. We started to work on the latter in 2018.
future.
Results 20182021
In 2018, Philips had an2021, Philips' environmental impact (loss) ofamounted to EUR 7.52.16 billion, which is a 4% increase compared to the impact reportedEUR 2.32 billion in 2017 (EUR 7.2 billion),2020 (excluding Domestic Appliances business). This reduction was mainly driven by comparable sales growth*of 5%.a change in product mix. The mainmost significant environmental impact, 87%81% of the total, is related to the usage of our products, which is due to electricity consumption. Particulate matter formation, and climate change, and acidification are the main environmental impacts, accounting for 43%, 27% and 28% respectively18% of the total impact.impact respectively. The environmental costs include the environmental impact of the full lifetime of the products that we put on the market in 2018,2021, e.g. 710 years in the case of a medical system or 4 years of usage in the case of a vacuum cleaner or 10 years in the case of a medical system.Sonicare toothbrush. As we growexpand our portfolio of Green Products and Solutions,EcoDesign activities, with a target to have all our products EcoDesigned by 2025, we expect the environmental impact to reduce.decrease.
In 2018, we included packaging materials in the EP&L, but this did not have a material impact (EUR 22 million). Of the total 20182021 impact, just EUR 175106 million (2%(5%) is directly caused by Philips’ own operations, mainly driven by outbound logistics.logistics, followed by business travel. Compared to EUR 205115 million in 2017,2020, this is a 15%an 8% reduction, mainly due to lower emissions from logistics and the shift to energy from renewable sources in line with our ambition to become carbon-neutral in our operations by 2020.
phasing-out of fossil fuels.
The environmental costs have been positively influenced by our EcoDesign efforts to increase the energy efficiency of our products. Our supply chain currently has an environmental impact of some EUR 792289 million, which is 11%13% of our total environmental impact. The main contributors are the electronic components, cables and steel used in our products. Through our Circular Economy and Supplier Sustainability programs we will continue to focus on reducing the environmental impact caused by the materials we source and apply in our products.
In order to deliver on our carbon neutrality commitment, we have set ambitious reduction targets. In 2018, ourwe were the first health technology company to have its 2020-2040 targets (including the use phaseuse-phase of our products) have been approved by the Science Based Targets initiative – a collaboration between the CDP (formerly Carbon Disclosure Project), the United Nations Global Compact (UNGC), the World Resources Institute (WRI) and the World Wide Fund for Nature (WWF) aimed at driving ambitious corporate climate action. The approvalApproval confirms that Philips’ long-term targets are in line with the level of decarbonization required to keep the global temperature increase below 2°C,2 °C. As a next step in our journey to reduce our environmental impact, and part of our ESG commitments launched in September 2020, we are pleasedhave committed to bereduce our full value chain emissions in line with a 1.5 °C global warming scenario.
For more information on our efforts to reduce emissions in the first health technology company to have obtained this approval.
8.3.1Green/EcoDesigned Innovation
Research from the Potsdam Institute for Climate Impact research shows that over 4% of non-IFRS information.
Greenglobal CO2 emissions are caused by the Healthcare sector. We see a growing demand from our customers to reduce their environmental impact. Our Green/EcoDesigned Innovation
Green Innovation is – the Research & Development spend related to the development of new generations of Green ProductsGreen/EcoDesigned products and Solutionssolutions and Green Technologies.technologies, addressing SDG 12 (Ensure sustainable consumption and production patterns) – is focused on addressing that impact.
Sustainable Innovation is the Research & Development spend related to the development of new generations of products and solutions that address the United Nations’ Sustainable Development Goals 3 (“to ensure(Ensure healthy lives and promote well-being for all at all ages”ages) or 12 (“to ensure sustainable consumption and production patterns”). With regard to Sustainable Innovation spend, Philips set a target of EUR 7.5 billion (cumulative) for the period 2016-2020 as part of the ‘Healthy people, Sustainable planet’ program.12.
In 2018,2021, Philips invested EUR 228197 million in GreenGreen/EcoDesigned Innovation, and somea significant reduction compared to 2020 due to the completion of a number of sizeable innovation projects in the course of 2021. We expect this spend to increase again in the years to come. In 2021, over EUR 1.41.5 billion was invested in Sustainable Innovation.
As the current EU Taxonomy delegated act only applies to sectors with highest CO2 emissions, Philips’ activities are not within the scope of this delegated act and consequently none of Philips' R&D investments were eligible under this taxonomy during 2021.
Philips Group
Green Innovation per segment
in millions of EUR
2016-2018
Diagnosis & Treatment businesses
Philips develops innovative diagnosis and treatment solutions that support precision diagnosis and effective, minimally invasive interventions and therapy, while respecting the boundarieslimits of natural resources. Investments in Green Innovation in 20182021 amounted to EUR 10196 million, broadlycompared to EUR 122 million in line with 2017. 2020.
All Philips EcoDesign/Green Focal Areas are taken into account as we aim to reduce environmental impact over the total lifecycle. Energy efficiency is an area of focus, especially for our large imaging systems such as MRI. Through circular-ready design, Philips also pays particular attention to enabling the upgrading and reuse pathways, so our customers can benefit from enhancements in workflow, dose management and imaging quality and availability of re-used service parts with the equipment they already own. Our Diagnosis & Treatment businesses actively support a voluntary industry initiative with European trade association COCIR to improve the energy efficiency and material efficiency of medical imaging equipment.equipment, as well as lowering its hazardous substances content. Moreover, we arecontinued to actively partneringpartner with multiple leading care providers to look together forinvestigate innovative ways to reduce the environmental impact of healthcare, for example by maximizing energy-efficient use of medical equipment and optimizing lifecycle value. Additionally, Philips aims to close the loop on all large medical equipment that becomes available to us by the end of 2020, and to extend circular practices to all medical equipment by 2025. To achieve this target, we will actively drive trade-ins in markets where de-install, trade-in and reverse logistics capabilities are in place, and build these capabilities in countries that do not yet have them.
Connected Care & Health Informatics businesses
Philips’ connected health IT solutions integrate, collect, combine and deliver quality data for actionable insights to help improve access to quality care, while respecting the boundarieslimits of natural resources. It is our belief that well-designed e-health solutions can reduce the travel-related carbon footprint of healthcare, increase efficiency in hospitals, and improve access to care and outcomes. InvestmentsThis has also become apparent during the COVID-19 crisis. Green/EcoDesigned Innovation investments in Green Innovation in 20182021 amounted to EUR 3632 million, compared to EUR 51 million in line with previous years. Some large2020. Green Innovation projects in 2021 will deliver the coming years, among other things, new greenEcoDesigned patient monitors and ventilators in 2019, with lower environmental footprints, reflecting all the Philips EcoDesign/Green Focal Areas. Energy efficiency, and material reduction and closing the loop activities are the main areas of focus.
Personal Health businesses
The continued high level of R&D investments at our Personal Health businesses is also reflected in the GreenGreen/EcoDesigned Innovation spend, which amounted to EUR 8665 million in 2018,2021, compared with EUR 9180 million in 2017. Green Innovation spend in 2017 included a sizeable project in Oral Healthcare, resulting in a series of new Green Products in 2018.2020. The Personal Health businesses continued their work on improving the energy efficiency of their products, closing the materials loop (e.g. by using recycled materials in products and packaging), and the voluntary phase-out of polyvinyl chloride (PVC), brominated flame retardants (BFR), Bisphenol A (BPA) and phthalates from, among others, food contact products. Mother & ChildMore specifically, as part of our Fit for Future Packaging program, we launched the first plastic free packaging solution in our Personal Care introduced a reusable sterilization boxportfolio for soothers, eliminating the need for separate packaging. In our OneBlade shaver range, further progress was made in transitioning our packaging to include recycled materials.an online One Blade shaver.
Other
The segment Other invested EUR 54 million in GreenGreen/EcoDesigned Innovation, spread over projects focused on global challenges relating to water, air, energy, food, Circular Economy,circular economy, and access to affordable healthcare. One example is the Contrast agent-free project, which is aimed at enhancing MRI imaging applications in oncology by eliminating the use of external Gadolinium-based contrast agent. This is expected to have large benefits in terms of patient management, safety, access, healthcare and environmental cost.
Circular Economy
economyFor a sustainable world, the transition from a linear to a circular economy is essential. A circular economy aims to decouple economic growth from the use of natural resources and ecosystems by using these resources more effectively. It is a driver of innovation in the areas of material, component and product re-use, as well as new business models such as system solutions and services. At Philips, we have set ambitious targets to guide this journey. ByIn 2020, as we want 15%announced our ESG commitments, we aimed, among other things, to generate 25% of our revenues to come from circular products and services, to extend our ‘closing the loop’ practices across all our medical products, and we want to further embed circular practices at our sites and send zero waste to landfill in our own operations. At the beginning of 2018, we added a pledge to take back and repurpose all the large medical systems equipment (e.g. MRI and CT scanners) that our customers are prepared to return to us, and to extend those practices across our professional portfolio by 2025. In 2018, after pilot projects in Italy and Greece, we successfully launched the roll-out of a global program to achieve our ambitious circular economy goal, together with metrics to monitor progress.
For more information on our Circular Economy activities and the progress towards targets in 2018, please refer to Circular Economy.
Green8.3.2Green/EcoDesigned Revenues
GreenGreen/EcoDesigned Revenues are generated through products and solutions whichthat offer a significant environmental improvement in one or more Green Focal Areas:Areas – Energy efficiency, Packaging, Hazardous substances, Weight, Circularity, and Lifetime reliability. Greenreliability – and thereby deliver a contribution to SDG 12 (Ensure sustainable consumption and production patterns). Green/EcoDesigned Revenues increasedamounted to EUR 11.512.1 billion in 2018,2021, or 63.7%70.5% of sales (60.2%(73.2% in 2017), thereby reaching a record level for Philips.2020). This decrease is mainly attributable to lower Green/EcoDesigned revenues in the Connected Care businesses, in particular in Sleep & Respiratory Care.
As the current EU Taxonomy delegated act only applies to sectors with highest CO2 emissions, Philips’ activities are not within the scope of this delegated act and consequently none of Philips' revenues were eligible under this taxonomy during 2021.
Philips Group
Green Revenues per segment
in millions of EUR unless otherwise stated
2016-2018
Through our EcoDesign process we aim to create products and solutions that have significantly less impact on the environment duringover their whole lifecycle. Overall, the most significant improvements have been realized in energy efficiency and lower weight (thus less resources), although thereincreased attention was also growing attention forgiven to hazardous substances, packaging and recyclability in all segments in 2018,2021, the latter driven by our Circular Economy initiatives.
Diagnosis & Treatment businesses
In 2018,2021, no new main platforms were launched in our Diagnosis & Treatment businesses, maintained their Green Productafter a significant expansion in 2020 with new Green/EcoDesigned Products – CT Incisive, Mobile X-Ray system Zenition 50 and Solutions portfolio70 – and with redesigns of various GreenGreen/EcoDesigned Products withoffering further environmental improvements. These products improve patient outcomes, provide better value,improvements, such as the MR Ambition and help secure accessElition systems. Specific attention was paid to high-quality care, while reducing environmental impact. A good example is BlueSeal magnet technology, which is designed to reduce lengthymaintaining the Green/EcoDesigned status of the systems and costly disruptions in MRI practice, and help healthcare facilities transition to more productive and sustainable helium-free operations. In 2018 we received third-party confirmation that the 2017 Philips portfolio of 1.5T MRI scanners leads the industry in terms of energy efficiency according to the COCIR SRI methodology.
on preparing for future EcoDesigned product launches.
Connected Care & Health Informatics businesses
OurAfter several launches of new Green/EcoDesigned products in 2020, no new launches took place in 2021. Last year, our Connected Care businesses launched the following Green/EcoDesigned Products – VS30 and MX850 patient monitors, EV300 and EVO ventilators and the Intrepid HeartStart monitor & Health Informatics businesses maintained their Green Product and Solutions portfoliodefibrillator. New EcoDesigned Products are expected in 2018.2022 with improvements on all EcoDesign focal areas.
Personal Health businesses
OurIn our Personal Health businesses, the focus is on GreenGreen/EcoDesigned Products and Solutions whichthat meet or exceed our minimum requirements in the areas of energy consumption, packaging, and substances of concern. Greenconcern, and application of recycled plastics. Green/EcoDesigned Revenues in 20182021 amounted to 62%84% of total sales, comparedcomparable to 58% in 2017. All our new consumer Green Products with rechargeable batteries (like toothbrushes, shavers, and grooming products) outperform the world’s most stringent energy efficiency norm set by the US Federal government. With the introduction of the new Philips Sonicare DiamondClean toothbrush the Green Revenue percentage in the Oral Healthcare portfolio increased significantly, to over 88%.2020. We continue to make steady progress in developing PVC/BFR-free products. More than 74%90% of our consumer product sales consist of PVC/BFR-free products, with the exception of the power cords, for which there are not yet economically viable alternatives available. In 2018our haircare portfolio we introduced the PVC- and BFR-free SpeedPro Max vacuum cleaner. In the remaining 26%launched a new energy-efficient hairdryer saving 15% of consumer product sales, PVC/BFR has already been phased outenergy consumption compared to a significant extent, though not yet entirely.
its predecessor.
8.3.3Sustainable Operations
Philips’ Sustainable Operations programs focus on the main contributors to climate change, recycling of waste, reduction of water consumption, and reduction of emissions. Full details can be found in Sustainability statements.
Carbon footprint and energy efficiency
At Philips, haswe see climate change as a serious threat. Therefore, we are taking action to rethink our business models and decouple economic growth from the impact we have on the environment. We believe large corporates should lead the transition to a low-carbon economy. This will not only benefit the environment, but will also positively impact social and economic aspects.
During the COP 21 United Nations Climate Conference in Paris in 2015, we committed to becoming 100%become carbon-neutral in our operations, and sourcingpursue all efforts to reduce our operational emissions, source all our electricity usage from 100% renewable sources, and offset all unavoidable emissions by year-end 2020. We are proud that, as of 2020, Philips is carbon-neutral in its operations. We delivered on this commitment as a result of a comprehensive program that included energy-efficiency improvements, on-site renewables, Power Purchase Agreements, but also business travel reduction and transport mode shifts to low-carbon emitting alternatives, and finally a carbon offset program.
We are proud that our commitment to SDG 13.
Philips reports its climate performance toefforts are acknowledged by the CDP (formerly known as the Carbon Disclosure Project), a global NGO that assesses the greenhouse gas (GHG) emission performance and management of reporting companies. ForIn 2021, we were ranked on the sixth year in a row we received theCDP Climate Leadership (A) scoreChange 'A' List for our continued climate performance in 2017. In order to deliver onand transparency for the ninth consecutive year.
Having achieved our 2020 carbon neutrality commitmenttarget, we have raised the bar and set ambitious emission reduction targets.targets to ensure we help limit the impact of global warming, not only in our operations, but throughout our value chain – collaborating with suppliers and customers to amplify our impact. That is why Philips has set new long-term emission reduction targets, which have been assessed and approved by the Science Based Targets initiative (SBTi) – locking down our commitment to drive climate action across the value chain and ensuring that we contribute to the decarbonization required to keep the global temperature increase below 1.5 °C. At COP 26, we announced our plan to step up our acclaimed supplier sustainability program with the goal of having at least 50% of our suppliers (based on spend) committing to science-based targets (SBTs) for CO₂ emissions reduction by 2025.
In 2018,2021, our greenhouse gas emissionsnet operational carbon footprint resulted in 766zero kilotonnes of carbon dioxide-equivalent (CO2-e), but becausemainly driven by continued use of our carbon neutrality program, some of our emissions have been compensated via carbon offsets, resulting100% electricity from renewable sources and a continuing reduction in air travel due to COVID-19, as well as a reduction in air freight. A total of 436519 kilotonnes carbon dioxide-equivalent (CO2-e).
were compensated via carbon offsets.
Philips reports all its emissions in line with the Greenhouse Gas Protocol (GHGP) as further described in Sustainability statements.
Philips Group
Net operational carbon footprint
in kilotonnes CO2 -equivalent
2014 - 2018
In 2018,2021, our operational carbon intensity (in tonnes CO2e/EUR million sales) improved by 11%, evenincreased slightly compared to 2020, as our company recorded 5% comparable sales growth*.we recovered from COVID-19 restrictions. This still excludesdoes not include the acquired carbon offsets. As part of
In our ‘Healthy people, Sustainable planet’ programsites, we are continuing our effortsmanaged to decouple economic growth from our environmental impact.
The significant reductions inreduce our scope 21 (indirect) emissions areby 12% compared to 2020, mainly driven by energy efficiency measures, our increased globalprogram to phase out fossil fuels, working from home, and mild winters. We continue to source 100% renewable electricity share from 79%for all our sites globally. We have multiple Power Purchase Agreements in 2017place to 90% in 2018.
All our US operations were powered bysecure long-term delivery of renewable electricity fromelectricity. For instance, the Los Mirasoles wind farm in 2018. In addition,the US and the Krammer and Bouwdokken wind farms in the Dutch province of Zeeland,Zeeland. We closed the latter agreements with whom we closed long-term contracts through our renewable electricity purchasing consortium with AkzoNobel,Nouryon, DSM and Google, started to deliver wind energy. The two Dutch wind farms will powerpowering all our operations in the Netherlands in 2019.Netherlands. Combined with the Los Mirasoles wind farm, this covers some 52%50% of our total electricity demand.
Moving forward, we aim to phase out fossil fuels from our sites. We already managed to increase our renewable energy share to 74% in 2021, from 72% in 2020. Combined with the achieved energy reductions, this led to a 56% carbon10% reduction in emissions from our electricityenergy consumption (scope 2)1 and scope 2 market-based) in 20182021 compared to 2017.2020.
In December 2020, Philips announced its next Power Purchase Agreement that will become operational in 2023, again in a purchasing consortium with Heineken, Nouryon and Signify, to power most of the remaining European sites with renewable electricity for the long term.
Our business travel emissions, covering emissions from air travel, lease cars and rental cars, increased by 2%3% compared to 2017,2020. This is mainly due to an increase in air travel over shorter distances (<4,000 km) where the CO2-e per kmfact that more of our employees are higherusing their lease cars again post-COVID-19. The remaining effects of COVID-19 also continued to keep these emissions low compared to long-haul air travel, combined with higher DEFRA emission factors for air travel. The emissions resulting frompre-COVID-19 levels. We continue to electrify our lease cars decreased by 6%fleet and the emissions from rental cars remained unchanged compared to 2017. Inpromote online collaboration post-COVID-19 in order to further decrease our business travel emissions we will continue to promote video conferencing and online collaboration as an alternative tolimit air travel, as well as promoting alternative modes ofmoving to rail transport and electrifying our lease fleet.
for shorter distances.
As a result of our airfreight reduction program,In 2021, we recorded a decrease of 9%1% increase in emissions in our overall logistics operations compared to 2017. Air2020. We reduced overall emissions from air freight by 4%. Emissions from ocean freight decreased with 9%. We implemented new carrier-trade-lane specific emission factors from the Clean Cargo Working Group (CCWG), allowing us to quantify our ocean freight emissions more accurately. This has been applied for 2020 and 2021. Emissions from parcel shipments increased by 54%, as we shipped more parcels and moved specific carrier shipments from road to parcel in 2021. That resulted in the emissions from road transport decreased by 19%14%, oceanmainly driven by the before mentioned move from road to parcel and reduced use of road freight increased by 32%, and roadin Asia Pacific in 2021 compared to 2020. We also continued to make transport remained unchanged.
mode shifts to low-carbon alternatives, mainly reducing the need for air freight.
In 2017, we kicked off ourAlthough reduction is key to achieving carbon neutrality, programunavoidable carbon emissions required offsetting in order to gradually drive down our emissions to zero by compensating 220 kilotonnes of carbon emissions.year-end 2021. We did this by financing projects in emerging regions that have a strong link with UN Sustainable Development Goals 3 (Ensure healthy lives and promote well-being for all at all ages) and 12 (Ensure sustainable consumption and production patterns). In 2018,2021, we increased thisdecreased offsets to 330516 kilotonnes, equivalent to the annual uptake of approximately 915 million medium-sized oak trees. This covers the total emissions of our direct emissions in ourentire operations, covering all sites, all our business travel emissions and all our ocean and parcel shipments within logistics.logistics flows. We do sothis by financing carbon reduction projects through long-term carbon offsets in emerging regions that have a strong link with SDG 3 and SDG 12.
We are investing in several carbon emission reduction projects to gradually drive down our emissions to zero by 2020. We have selected projects in emerging regions that, in addition to generating emission reductions, also drive social, economic and additional environmental progress for the local communities, in which they operate, such as:
Providing access to safe drinking water while reducing wood consumption
These carbon emissionThis carbon-emission reduction projectsproject will provide millions of liters of safe drinking water in Uganda and Ethiopia and will reduce the mortality risk from water-borne diseases. Additionally, less wood will be required for boiling water, leading to less indoor air pollution and slowing down the deforestation rate. To ensure quality, all offsets are verified under the Gold Standard.
Fighting againstReplanting degraded land while providing education on health matters
Planting trees will improve livelihoods and address issues such as deforestation, biodiversity loss, and adaptation to climate change and provide support and education including on HIV and malaria. To ensure quality, all offsets are verified under the VCS standard.
Protecting forests through sustainable production
Deforestation is reduced through promotion of sustainable businesses to protect the forest. Unsustainable harvest of fuelwood is reduced. The forest supports the supply of water to other parts of Ethiopia and neighbouring countries. It is also the habitat of diverse and, in some cases, rare species. To ensure quality, all offsets are verified under the VCS standard.
Increasing employment through provision of sustainable energy
The energy supply gap is reduced through providing access to clean energy and related employment through wind generation in India. This enables an improvement in livelihoods. To ensure quality, all offsets are verified under the VCS standard.
Improving respiratory diseaseshealth and reducing deforestation by meansthrough provision of clean cookstoves
By financing highly efficient cookstoves inThrough supporting a range of cookstove technologies across Ghana and Kenya, the projects improve respiratory health, reduce fuel costs and Uganda, less wood will be requiredreduce deforestation for cooking, leading to lowerfuel. This also enables more time for paid work thus improving prospects. To ensure quality, all offsets are verified under the Gold Standard.
Operational carbon emissions, a reduction in diseases caused by indoor air pollution, and a lower deforestation rate in these regions.Providing access to clean energy while improving health and educationfootprint
This project will reduce the demand-supply gap in the Dewas region in India and will provide renewable energy to more than 50,000 households. The project will also provide a mobile medical unit in 24 villages, giving diagnosis and medicines free of charge twice a month. Additional funding will be provided for educational programs and improved sanitation facilities in five local schools in order to maximize the social impact.
Philips Group
Operational carbon footprint by scope
in kilotonnes CO2-equivalent unless otherwise stated
2014-2018
| | | | | | 2017 | 2018 | 2019 | 2020 | 2021 |
|---|
| | | | | | 32 | 36 | 32 | 30 | 27 |
| | | | | | 66 | 26 | 14 | 3 | 3 |
| | | | | | 213 | 200 | 196 | 173 | 177 |
| | | | | | 757 | 687 | 622 | 485 | 489 |
Total (scope 1,2 (market-based), and 3) | | | | | | |
| Scope 3 - Transportation & Distribution | | 614 | 540 | 470 | 415 | 417 |
| Scope 3 - Business Travel | | 143 | 147 | 152 | 70 | 72 |
| Total (scope 1, 2 (market-based), and 3)1) | | 855 | 749 | 668 | 518 | 519 |
Emissions compensated by carbon offset projects | | | | 213 | 314 | 416 | 518 | 519 |
Net operational carbon emissions | | | | | | 642 | 435 | 252 | - | - |
| | | | |
| Operational CO2e efficiency in tonnes CO2e/mln EUR sales | | 55.3 | 47.2 | 39.0 | 29.9 | 30.3 |
During 2018, the applied emission factors used to calculate our1)Considered as operational carbon footprint have been updated with the latest DEFRA (UK Department for Environment, Food & Rural Affairs) 2018 emission factors. Philips reports all its emissions in line with the Greenhouse Gas Protocol (GHGP) as further described in Data definitions and scope.
Energy consumption
Philips Group
Ratios relatingEnergy consumption1)
in terajoules (TJ) unless otherwise stated
| | 2017 | 2018 | 2019 | 2020 | 2021 |
|---|
| Total electricity consumption | 1,493 | 1,517 | 1,454 | 1,374 | 1,398 |
| Fuel consumption | 508 | 555 | 495 | 490 | 442 |
| Purchased heat, steam and cooling | 55 | 62 | 64 | 45 | 52 |
| Total energy | 2,056 | 2,134 | 2,013 | 1,909 | 1,892 |
| | | | | | |
| Renewable electricity | 1,118 | 1,348 | 1,376 | 1,373 | 1,398 |
| Renewable electricity share | 75% | 89% | 95% | 100% | 100% |
| Renewable energy share | 54% | 63% | 68% | 72% | 74% |
| Sales in millions of EUR | 15,458 | 15,878 | 17,147 | 17,313 | 17,156 |
| Royal Philips revenues | | | | | |
| Operational energy efficiency in TJ/mln EUR sales | 0.13 | 0.13 | 0.12 | 0.11 | 0.11 |
1)This table reflects Philips energy consumption, excluding potential heat and transmission losses from electricity generation and transport
Water
Philips is not a water-intense company. However, a number of our manufacturing sites are located in water-stressed regions in, for example, USA (California), India and Israel. With the help of the WRI Aqueduct tool, the water withdrawn from areas with high baseline water stress were identified across all Philips industrial operations. It shows that around 16% of the industrial sites are located at Extremely High (>80%) baseline water stress areas. However, the impact from these operational sites is very limited, only amounting to carbon emissions and energy use4% of Philips' total water withdrawal.
2014-2018
| | | | | |
|---|
Operational CO2 emissions in kilotonnes CO2-equivalent | | | | | |
Operational CO2 efficiency in tonnes CO2-equivalent per million EUR sales | | | | | |
Operational energy use in terajoules | | | | | |
Operational energy efficiency in terajoules per million EUR sales | | | | | |
Water
Total water intakewithdrawal in 20182021 was 891,000703,104 m3, comparablea 13% increase compared to 2017. Personal Health,2020 and a 1% reduction compared to 2019. Water consumption in 2020 was impacted by the government-mandated lockdowns and the working-from-home protocol – resulting in a significant reduction in water intake at several sites.
Diagnosis & Treatment, which consumes 60%48% of total water usage, recorded a 7%18% increase, mainly caused by the higher production volume at several sites and the introduction of a new water-intense manufacturing process. Personal Health recorded a 12% increase. The increaseThis was mainly due to the increased production volume increases at twoa water-intensive manufacturing sitessite in Asia. Diagnosis & Treatment and Connected Care & Health Informatics showed a decreasean increase of 8% and 13% respectively.3%, due to changes in the organizational footprint.
Philips Group
Water intakewithdrawal
in thousands of m3
2014-2018
| | | | | | 2017 | 2018 | 2019 | 2020 | 2021 |
|---|
| Diagnosis & Treatment | | 312 | 288 | 295 | 286 | 337 |
| Connected Care | | 168 | 161 | 150 | 116 | 119 |
| | | | | | 224 | 238 | 265 | 221 | 247 |
| | | | | | |
Connected Care & Health Informatics | | | | | | |
| | | | | | 704 | 687 | 710 | 623 | 703 |
In 2018, 98%2021, 99.4% of water was purchased and 2%0.6% was extracted from groundwater wells.
Waste
In 2018,2021, our manufacturing sites generated 24.5 kilotonnes22,204 tonnes of waste, comparablea decrease of 29% compared to 2017. The Personal Health businesses contributed 61%2020, mainly driven by the reduced impact of total waste,our construction activities in different locations across the globe.
The Diagnosis & Treatment businesses 34%reduced waste by 49%, mainly driven by a strong decrease in construction-related waste, which was partially offset by the waste generated by the increased production and newly reported reused materials, now constituting 45% of total waste. The Connected Care &businesses reduced waste by 21% due to operational changes and a renovation project which was finished in 2020. Personal Health Informatics businesses 5%.
increased waste by 20% due to operational changes, increased production and reported reused materials, now constituting 43% of total waste.
Philips Group
Total waste
in kilotonnestonnes
2014 - 2018
| | | | | | 2017 | 2018 | 2019 | 2020 | 2021 |
|---|
| Diagnosis & Treatment | | 8,319 | 8,368 | 9,675 | 19,703 | 9,974 |
| Connected Care | | 3,861 | 3,962 | 4,095 | 3,475 | 2,753 |
| | | | | | 8,573 | 8,820 | 8,758 | 7,929 | 9,477 |
| | | | | | |
Connected Care & Health Informatics | | | | | |
| | | | | | 20,753 | 21,150 | 22,528 | 31,107 | 22,204 |
Total waste consistsconsisted of waste that is delivered for landfill, incineration, waste to energy or recycling (including re-use). until 2020. We extended the scope with materials sent for reuse and other recovery in 2021.
Materials delivered for reuse, other recovery or recycling via an external contractor amounted to 19,044 tonnes, which equals 86% of the total waste. Of the 14% remaining waste, 79% comprised non-hazardous waste and 21% hazardous waste. We recorded 1,525 tonnes of waste prevented in our own activities in 2021.
Philips Group
Total waste by destination in tonnes
| Waste generated | Hazardous waste | Non-hazardous waste |
|---|
| Reuse | 2,087 | 8 | 2,079 |
| Recycling | 16,836 | 1,712 | 15,124 |
| Other recovery | 121 | 0 | 121 |
| Waste diverted from disposal by recovery operation | 19,044 | 1,720 | 17,324 |
| Incineration (with energy recovery) | 2,214 | 166 | 2,048 |
| Incineration (without energy recovery) | 692 | 473 | 219 |
| Landfilling | 254 | 22 | 232 |
| Waste directed to disposal by disposal operation | 3,160 | 661 | 2,499 |
| Total waste generated | 22,204 | 2,381 | 19,823 |
Our sites are addressingaddressed both the recyclingCircular Material Management percentage as well as waste sent to landfill, as part of our ESG commitments.
The Circular Material Management percentage has replaced the ‘Healthy people, Sustainable planet’ program. Materials delivered for recycling via an external contractor amounted to 21 kilotonnes, which equals 84% of totalpercentage, and includes circular measures such as waste a significant increase compared to 2017 (80%). Of the 16% remaining waste, 79% comprised non-hazardous wasteprevented, reuse and 21% hazardous waste. other recovery. The Circular Material Management percentage was 87% in 2021.
Our Zero Waste to Landfill KPI excludes one-time-only waste and waste delivered to landfill due to regulatory requirements. According to this definition, in 20182021 we reported 1.7 kilotonnes19 tonnes of waste sent to landfill. 19 outlandfill, a significant reduction of 96% compared to 2020. During 2021, one of our 36 industrialswaste contractors informed us of an error in their administrative processes, as a result of which a small waste stream was incorrectly classified as recycled. In fact the waste stream was sent to landfill. This was remedied in the second half of 2021. As a result, all our 25 industrial sites achieved Zero Waste to Landfill status.status by the end of 2021.
Philips Group
IndustrialTotal waste deliveredby composition in tonnes
| Waste generated | Waste diverted from disposal | Waste directed to disposal |
|---|
| Paper/cardboard | 4,043 | 4,036 | 7 |
| Wood | 3,875 | 3,823 | 52 |
| Metal scrap | 3,529 | 3,499 | 30 |
| General waste | 2,781 | 1,243 | 1,538 |
| Chemical waste | 2,393 | 1,716 | 677 |
| Plastic waste | 2,387 | 1,935 | 452 |
| Demolition scrap | 1,772 | 1,658 | 114 |
| Other | 1,424 | 1,134 | 290 |
8.3.4Supplier indicators
Philips’ purpose to improve people’s health and well-being extends throughout our value chain. At Philips, we have a direct business relationship with approximately 5,800 product and component suppliers and 18,000 service providers. Our supply chain sustainability strategy is updated annually through a structured process, combined with dedicated multi-stakeholder dialogues. Our most recent supplier sustainability stakeholder dialogue took place in June 2019. From this, we have developed multiple programs aimed at driving sustainable improvement. These programs cover compliance with our policies, improvement of our suppliers’ sustainability performance, our approach towards responsible sourcing of minerals, and reducing the environmental impact of our supply base.
Supplier sustainability compliance
Two core policy documents form the basis of our supplier sustainability compliance approach: the Supplier Sustainability Declaration and the Regulated Substances List.
Supplier Sustainability Declaration (SSD)
The SSD sets out the standards and behaviors Philips requires from its suppliers. The SSD is based on the Responsible Business Alliance (RBA) Code of Conduct, in alignment with the UN Guiding Principles on Business and Human Rights and key international human rights standards, including the ILO Declaration on Fundamental Principles and Rights at Work and the UN Universal Declaration of Human Rights. It covers topics such as Labor, Health & Safety, Environment, Ethics, and Management Systems.
Regulated Substances List (RSL)
The RSL specifies the chemical substances regulated by legislation. Suppliers are required to follow all the requirements stated in the RSL. Substances are marked as restricted or declarable.
All suppliers are required to commit to the SSD and RSL. Through integration of a Sustainability Agreement in our General Purchase Agreement, suppliers declare compliance to both the SSD and RSL. Upon request, they provide additional information and evidence.
Supplier Sustainability Performance (SSP) - 'Beyond Auditing'
In 2016, Philips moved away from its traditional approach to audit suppliers, which it had been taking since 2004. Insights from data analysis showed this old approach was insufficient to drive sustainable improvements. Our SSP approach, first piloted in 2016, focuses on:
- a systematic approach to improve the sustainability of our supply chain
- continuous improvement against a set of recognized and global references
- collaboration, increased transparency, clear commitments, and ensuring suppliers meet the agreed targets
- encouraging our suppliers, industry peers and cross-industry peers to adopt our approach
This systematic approach is shown in the figure below and is a high-level representation of the SSP program.
First, a set of references, international standards, and Philips requirements are used to develop the Frame of Reference, which covers management systems, environment, health & safety, business ethics, and human rights. For each, the maturity level of suppliers is identified in the Program Execution Wheel, which assesses suppliers against the Plan–Do–Check–Act (PDCA) cycle. Suppliers are then categorized through the Supplier Classification model, which differentiates on the basis of supplier maturity, resulting in supplier-specific proposals for recycling
improvement. The SSP process is monitored and adjusted through continuous feedback loops. The outcome of the SSP assessment is a supplier sustainability score ranging from 0 to 100. This score is based on supplier performance in %environmental management, health & safety, business ethics, and human rights.
Supplier classification
2018
Philips included new reduction targetsSupplier selection for the substances that are most relevant for its businesses in its ‘Healthy people, Sustainable planet’ program. In order to provide comparable information at Group level, please find the summaryprogram is based on criticality. Criticality of suppliers is determined through an assessment of the emissionssupplier’s associated risks and opportunities, such as strategic importance of their components, annual spend, and substitutability. In 2021, 14% of our suppliers were considered critical. After this initial assessment, the engagement strategy is tailored based on the suppliers’ current performance in terms of sustainability.
There are four different engagement approaches: BiC (Best in Class), SSIP (Supplier Sustainability Improvement Plan), DIY (Do It Yourself) and PZT (Potential Zero Tolerance). The PZT status is a temporary status and requires immediate attention and action. Depending on the categorization, suppliers are engaged in different ways to improve their sustainability performance.
If a (Potential) Zero Tolerance is identified, immediate action is taken. If the requested additional information and evidence lead to the conclusion that there is no structural Zero Tolerance, the supplier’s status will be changed and the supplier will go back to the original track in the program. If the conclusion gives rise to a structural Zero Tolerance, the supplier is required to:
- propose a plan to mitigate and/or resolve the identified Zero Tolerance(s)
- commit to structurally resolving the Zero Tolerance
- provide regular updates and evidence
- avoid quick-fixing
Philips defines six Zero Tolerances:
- Fake or falsified records
- Child and/or forced labor
- Immediate threats to the environment
- Immediate threats to worker health and safety
- Failure to comply with regulatory and/or Philips requirements
- Workers’ monthly income (covering salary for regular hours and overtime, tax deductions, social insurance) failing to meet regulatory requirements
For more details on the SSP process, refer to the SSP brochure.
Our 2021 results
In 2021, four zero tolerances were found across the following categories: health and safety, labor, and environmental impact. Most cases related to fire safety risks at our suppliers. three of the formerly targeted substances below. Emissionsfour cases were successfully closed in 2021. The remaining zero tolerance is still pending closure, while having an active mitigation plan in place.
Philips measures the impact of restricted substances were again zero in 2018. The levelSSP engagements through the number of emissions of hazardous substances decreased from 5,243 kilos in 2017 to 3,363 kilos in 2018 (-36%), mainly driven by changeslives improved in the manufacturing process resultingsupply chain. This is derived from the improvements that suppliers make in lower Styrene emissions and changestheir performance. To determine improvements, we calculate the pro rata change in performance from one year to the product mix in the Personal Health businesses.
next.
Philips Group
RestrictedLives improved in the Supply Chain (thousands of Lives)
| 2019 | 2020 | 2021 |
|---|
| Lives improved in the Supply Chain | 286 | 302 | 430 |
In 2021, the overall year-on-year improvement in performance is 24% for suppliers that entered the program in 2020. The number of employees impacted at suppliers participating in the SSP program was approximately 430,000. For those workers, labor conditions improved, the risk of serious injury reduced, and hazardous substancesthe negative environmental impact of suppliers was brought down. This includes the workers at suppliers of the Domestic Appliances business, for which Philips continued the sustainability engagement. For a detailed break-down of percentage improvements realized in the past year, refer to the following table.
Philips Group
SSP 2021 performance: pro-rata improvements
in kilos%
2014-2018
| Topics | Policy | Procedures | Implementation | Management Responsibility | Communication | Risk control | Target Setting &Tracking | Corrective action approach | Supplier management |
|---|
| Environment | 8% | 6% | 8% | 8% | 10% | 11% | 11% | 19% | 16% |
| Health and Safety | 11% | 15% | 6% | 11% | 14% | 16% | 21% | 25% | 15% |
| Business Ethics | 10% | 19% | 21% | (4)% | 25% | 3% | 26% | 55% | 8% |
| Human Capital | 9% | 8% | (5)% | 24% | 9% | 9% | 10% | 6% | 8% |
ForCategories which showed the biggest improvement are:
- Corrective action approach to Business Ethics: improving the approach to follow-up investigations into raised concerns and continuous improvement of the supplier’s business ethics management system
- Management responsibility for Human Capital: improving management attention and structural periodic review of relevant key performance indicators
- Target setting and tracking of Business Ethics topics: improving periodic evaluations of grievance mechanisms, setting targets on complaints resolving, and progress reporting mechanisms
In 2021, 99 suppliers were added to the SSP program. Of the population of suppliers that entered the program in the years before 2021, 252 suppliers were still active in 2021. The combined group represents 43% of our critical suppliers who are in the program.
As part of the adoption of our new ESG commitments, we have set the target to improve the lives of 1 million workers in our supply chain by 2025. To achieve this, we started to ramp-up our engagement in 2021, adding a higher number of new suppliers due to changing risk profiles. We expect to roll out the program to additional manufacturing countries in the years to come.
Additional progress made in 2021
Apart from the inclusion of additional suppliers annually into the award-winning SSP program, Philips is actively applying the latest insights in data science and machine learning methods to make the SSP program more detailsefficient in determining the sustainability maturity of suppliers, while also increasing the effectiveness of our supplier improvement approach.
In 2021, a new study was launched that enables prediction of suppliers’ actual performance, based on emissionsa limited number of survey questions. Once these insights are translated into a workable tool, it can help to greatly reduce the time spent on assessments. This leaves more room for experts to support suppliers in their capability building, by sharing best practices and creating business cases that enable improvements.
In addition, we updated the assessment framework through which suppliers are graded. Also, we have started to perform topical deep-dives at suppliers, subject to their maturity.
Responsible sourcing of minerals
The supply chains for minerals are long and complex. Philips does not source minerals directly from substances, please refermines as there are typically 7+ tiers between end-user companies like Philips and the mines where the minerals are extracted. The extraction of minerals can take place in conflict-affected and high-risk regions, where mining is often informal and unregulated and carried out at artisanal small-scale mines (ASM). These ASMs are vulnerable to Sustainable Operationsexploitation by armed groups and local traders. Within this context, there is an increased risk of severe human rights violations (forced labor, child labor or widespread sexual violence), unsafe working conditions or environmental concerns.
Philips addresses the complexities of the minerals supply chains through a continuous due diligence process, combined with active participation in multi-stakeholder initiatives to promote the responsible sourcing of minerals.
Conflict minerals due diligence
Each year, Philips investigates its supply chain to identify smelters of tin, tantalum, tungsten and gold in its supply chain and we have committed to not purchasing raw materials, sub-assemblies, or supplies found to contain conflict minerals.
Philips applies collective cross-industry leverage through active engagement via the Responsible Minerals Initiative (RMI, formerly known as the Conflict Free Sourcing Initiative (CFSI)). RMI identifies smelters that can demonstrate, through an independent third-party audit, that the minerals they procure are conflict-free. In 2021, Philips continued to actively direct its supply chain towards these smelters.
The Philips Conflict Minerals Due Diligence framework, measures and outcomes are described in the Conflict Minerals Report that we file annually to the U.S. Securities and Exchange Commission (SEC). The conflict minerals report is also publicly available on Philips’ website.
Each year, we work with our suppliers on the quality of their due diligence reporting by setting minimum criteria for the Conflict Minerals Reporting Templates (CMRT). In addition, we strive to reduce the number of non-identified smelters. The quality of the CMRTs dropped one percentage point compared to the 2020 due diligence results. The number of non-listed smelters remained zero (2020: 0).
*Non-IFRS financial measure. ForPhilips Group
Conflict Minerals Due Diligence results
| Key performance indicator | 2019 | 2020 | 2021 |
|---|
| Response rate of suppliers | 100% | 99% | 99% |
| CMRTs that satisfied minimum acceptance criteria | 85% | 85% | 84% |
| Non-listed smelters in our supply chain | 3 | 0 | 0 |
Cobalt
In 2021, Philips extended the definitionscope of its due diligence program on cobalt. We use cobalt predominantly in lithium-ion batteries. As part of this initiative, we engaged suppliers that provide materials containing cobalt. In 2021, we again reached a 100% response rate (2020: 100%).
Case study: Establishing the Mthandazo Women Miners' Association
Conflict-related problems affect Mthandazo women gold miners in Zimbabwe. These impacts are caused by political instability in the country, institutional weaknesses in mining sector administration, and reconciliationviolence, abuse, and criminality in the local gold sector. Furthermore, the women miners often do not have adequate access to legal assistance on contracts and agreements signed with gold traders or on the application of responsible sourcing standards (e.g. OECD). The project to establish the Women Miners’ Association will be anchored by several activities, including legal training, expert training on responsible sourcing, registration of women miner groups, dispute resolution, and development of a due diligence and traceability system.
The Women Miners’ Association promotes women-led responsible, traceable, safe, and profitable gold mining in the artisanal small-scale mining sector in Zimbabwe through the application of OECD Due Diligence Guidance principles in high-risk or conflict affected areas. Through the association, women miners are empowered to establish a system to assess the impact of their gold mining, processing and marketing operations, as part of due diligence to eliminate any vulnerabilities and risks associated with human rights, working conditions, violent conflicts and environmental harm.
Case study: Fairmined gold in Honduras
Artisanal and small-scale mining (ASM) is an invisible sector in Honduras, as there is a lack of wider recognition of its current contributions and needs. The creation of the Unit for ASM in INHGEOMIN (the country’s mining authority) has had a positive effect on the ASM sector. However, staffing and technical knowledge are not yet sufficient to serve the entire ASM population and its demands. Also, the ASM sector is poorly recognized in the market, leading to a lack of formal market access.
Minas y Cuevas (the projects’ pioneering mining cooperative) has been compliant with CRAFT, a management system framework developed for small mines, since December 2019, guaranteeing that it can access formal markets, subject to evidence of continued improvement. The project seeks to build on this foundation and to encourage the adoption of best mining practices in the ASM sector in Honduras, so that it becomes a legitimate, responsible, and profitable sector that promotes inclusive and sustainable development in rural areas, improving the quality of life of miners and their communities. Market access will be facilitated through the sale of CRAFT and Fairmined (a label given by the Alliance for Responsible Mining) gold from Honduras and European downstream actors. Through this project, working conditions and the livelihoods of the miners are improved through responsible gold production.
Multi-stakeholder initiatives for responsible sourcing of minerals
We believe that multi-stakeholder collaboration in the responsible sourcing of minerals is the most viable approach for addressing the complexities of minerals value chains.
European Partnership for Responsible Minerals (EPRM)
Philips is a founding partner of EPRM and has been a strategic member since its inception in May 2016. EPRM is a multi-stakeholder partnership between governments, companies, and civil society actors working toward more sustainable minerals supply chains. The goal of EPRM is to create better social and economic conditions for mine workers and local mining communities by increasing the number of mines that adopt responsible mining practices in Conflict-Affected and High-Risk Areas (CAHRAs).
EPRM is an accompanying measure to the EU Conflict Minerals Regulation dedicated to making real change ‘on the ground’. Through EPRM, Philips financially supports activities to improve responsible mining practices in mining areas in CAHRAs and shares our knowledge and practice in conducting due diligence. Since 2018, Philips has actively participated in several working groups focused on strengthening the responsible production of minerals, as well as improving responsible sourcing practices.
IRBC Responsible Gold Agreement
In June 2017 Philips signed the Responsible Gold Agreement, joining a coalition to work on improving international responsible business conduct across the gold value chain. Signees include goldsmiths, jewelers, recyclers, NGOs, electronics companies, trade unions, and the Dutch government. This partnership intends to bring about cooperation between companies, government, trade unions, and NGOs to prevent abuses within production chains. From September 2019, Philips represents gold and precious metal, recycling, and electronic companies in the steering committee of the Responsible Gold Agreement. From this partnership, Philips co-developed a project with several other parties including civil society actors, to facilitate sourcing of responsible gold from Uganda. The project is aimed specifically at artisanal and small-scale mines (ASM) and works to establish a sustainable, traceable gold supply chain with improved working conditions for miners and free of child labor. The approach is designed to be scaled up and serves as a potential blueprint for mines in other regions. Since 2019, Philips is also an active member of the steering committee of the Responsible Gold Agreement.
Green supply chain program
Since 2003, Philips has looked at ways to improve the environmental performance of its suppliers. When it comes to climate change, we have adopted a multi-pronged approach: reducing the environmental impact of our products, committing to carbon neutrality in our own operations, and engaging with our supply chain to reduce their carbon footprint. Through our partnership with the CDP supply chain program, Philips motivates its suppliers to disclose emissions, embed board responsibility on climate change, and actively work on reduction activities.
In October 2021, during COP26, Philips announced its target to have at least 50% of its suppliers (based on spend) committed to science-based targets for carbon reduction by 2025.
Philips Group
% of suppliers committed to science-based targets
| 2021 |
|---|
| % of suppliers committed to science-based target | 28% |
We consider suppliers to have committed to science-based targets when this is communicated via their CDP disclosures, public websites and announcements, or the Science Based Targets Initiative website. Multiple activities have been deployed to support our achievement of this climate target.
CDP engagement: Since 2011 we have been partnering with CDP Supply Chain, through which we invite suppliers to disclose their environmental performance and carbon intensity. In 2021, there was a response rate of 87% (2020: 91%). Part of the reason for the lower response rate is an increase in the number of invited suppliers by 25% compared to 2020. We expect to further grow the number of suppliers that respond in the coming years, thereby enhancing our insights into the climate maturity of suppliers.
Of the group that responded, 61% engaged in emission-reduction initiatives (2020: 65%). In addition, 56% committed to carbon emission targets (2020: 64%). Our suppliers undertook projects in 2021 that resulted in savings on carbon emissions amounting to 452 million metric tonnes CO2.
Philips Group
Supplier response rate to CDP questionnaire
Data-driven insights: Through accurate data insights, Philips’ buyers are enabled to consider climate action in their supplier selection. In 2021, 28% of our purchases (in spend) were made at suppliers that have committed to science-based CO2 reduction targets.
Capability building: We support suppliers in advancing their company approach to climate action, offering (online) guidance that is tailored to their climate action maturity. In 2021, we provided tailored feedback and guidance for 61% of our suppliers to support their growth in capabilities and help improve their approach.
Opportunities for decarbonization: Through on-site assessments we identify energy efficiency opportunities that enable our suppliers to make cost-effective carbon reductions. Our team calculates for the supplier what the cost impact would be, and also the return. In 2021, 13 on-site assessments took place, which resulted in tailored plans for improvement.
8.4.1Improving people’s lives
The lack of access to affordable, quality care is one of the most directly comparable IFRS measure, referpressing issues of our time. Climate change is intensifying this situation and putting the lives of millions of people at risk. At Philips, we are conscious of our responsibilities towards society and the planet. It is our purpose to Reconciliationimprove people’s health and well-being through meaningful innovation. As such, we aim to improve the lives of non-IFRS2.5 billion people a year by 2030. To ensure we remain on track to achieve this goal, we have developed an integrated approach, that tells us how many lives have been improved by our products and solutions in a given year. We call this our Lives Improved model.
The Lives Improved model helps us to track our performance on a country-to-country basis in line with UN Sustainable Development Goal 3, allowing us to shape strategies to ensure healthy lives and promote well-being for all at all ages.
In 2021, Philips improved 1.67 billion lives, an increase of around 140 million compared to 2020. This increase was driven by steady growth of all segments and the inclusion of new businesses such as IGT-Devices, EMR & Care Management and Enterprise Diagnostic Informatics, as well as the added contributions of our Philips Foundation and CSR projects.
From a market perspective, we saw significant growth mainly in Latin America (resulting from the inclusion of the EMR & Care Management business), Greater China, the Indian Subcontinent and Africa (mainly driven by the inclusion of Philips Foundation).
We have additional commitments to improve the lives of 300 million people in underserved communities with our health-related products by 2025, rising to 400 million by 2030. This commitment allows us to increase our focus on those populations where we can make a positive impact by providing access to effective and affordable healthcare for those in greatest need. By combining the strengths of Philips, Philips Foundation and its partners, we can provide better healthcare and improve health outcomes for all. In 2021, our health-related solutions improved the lives of 167 million people in underserved markets (an increase of 40 million compared to 2020).
In the course of 2021 we changed the definition of ‘lives improved’ (effective January 2021) to align more closely with our purpose. The new definition includes only products or solutions that contribute to people’s health and well-being, and no longer includes the contribution from our Green Products and Solutions that support a healthy ecosystem. Additionally, as we discontinued our Domestic Appliances business, we have removed the impact of this business from the 2021 Lives Improved results. The combined impact of these changes resulted in an overall drop of 223 million lives improved.
Please click here for more information. on our Lives Improved methodology.
Lives Improved per market
The following table shows the number of Lives Improved per market.
Philips Group
Lives improved per market
| Market | Lives Improved (million)1) | Population (million)2) | Saturation rate (as % of population) |
|---|
| Africa | 27 | 1,324 | 2% |
| ASEAN & Pacific | 110 | 993 | 11% |
| Benelux | 25 | 29 | 85% |
| Central & Eastern Europe | 72 | 165 | 44% |
| Germany, Austria & Switzerland | 76 | 101 | 76% |
| France | 39 | 68 | 57% |
| Greater China | 492 | 1,436 | 34% |
| Iberia | 29 | 57 | 51% |
| Indian Subcontinent | 80 | 1,601 | 5% |
| Italy, Israel & Greece | 37 | 82 | 45% |
| Japan | 46 | 126 | 37% |
| Latin America | 122 | 649 | 19% |
| Middle East & Turkey | 59 | 379 | 16% |
| Nordics | 19 | 28 | 69% |
| North America | 358 | 368 | 97% |
| Russia & Central Asia | 44 | 251 | 18% |
| UK & Ireland | 35 | 73 | 48% |
1)Source: Philips, double counts eliminated2)Source: The World Bank, CIA Factbook & Wikipedia
88.4.2Risk management
Workforce of the FutureIn 2021, the Workforce of the Future remained a key pillar of our People strategy. In a fast-changing landscape – with a need for evolving capabilities in support of our business transformation, as well as a need to adapt to the changes in the nature of work accelerated by the pandemic – our focus on the Workforce of the Future helps us to attract, develop and retain a workforce that will deliver the strategic capabilities needed to win.
We staff our positions based on assessed behavior, potential and capabilities. In 2021, we filled 72% of our Director-level and more senior positions from within the company. For these internal hires, we ensure our candidates are high performers with strong potential. In 2021, 68% of all internal promotions to Director level and more senior positions were realized by appointing top performers. We supplement this internal growth with targeted external hiring, bringing in employees with the behaviors and capabilities we require for our Workforce of the Future.
Strategic Capability Building
We apply an enterprise-wide Strategic Workforce Planning approach, which all businesses and markets adopt as part of the strategic planning cycle, to identify and develop the capabilities needed to realize our ambitions as a health technology company. This approach recognizes that capabilities are complex, with people, processes and systems being developed holistically. In 2021 we continued our focus on strategic positions and top talent and used the lens of strategic enterprise capabilities to focus our talent attraction, onboarding and development initiatives.
Total Workforce Strategy
We continue our Total Workforce Strategy, which considers all sources of skill, capabilities, locations and changes in the labor market in order to deliver the Workforce of the Future.
Our Right Shoring & Sourcing methodology is used to implement this strategy. This methodology steers improvements in workforce composition towards the ‘right shore’ (onshore, nearshore and offshore) and the ‘right source’ (employees, contingent workers and outsourced). The cost savings delivered by the program increased by 55% year-on-year
We extended our Freelance Management System in 2021 to cover India, on top of the Netherlands, Germany and the USA. By advertising opportunities for freelancers on our own Careers site alongside employee jobs, we now source 48% of all our freelancer hires ourselves, without having to go through staffing agencies.
Our Philips-wide Graduate Development Program (GDP) continues to perform well attracting 40 participants in 2021 - and expected to grow to over 300 in 2022. The GDP lasts two years and includes three job rotations, as well as offering the graduates a comprehensive learning and development track and career centers to help guide future steps.
We continue to drive campus hiring, with a 23% year-on-year increase in campus hires compared to 2020 amounting to 1,173 campus hires in 2021 (952 in 2020). Philips also offered meaningful work experience to 17% more interns than in 2020, and they formed a critical source of our graduate hires - with 53% of all graduate hires having been an intern with us.
8.18.4.3OurInclusion & Diversity
Philips’ commitment towards Inclusion & Diversity is reflected in our General Business Principles and the company-wide Inclusion & Diversity Policy and Fair Employment Policy that were updated and published in 2021.
The company continues to put in place measures to enhance diversity and inclusion at all levels within the organization, and to ensure that the diversity at senior management levels reflects the diversity of our stakeholders, including consumers, our customers and their patients.
To this end, Philips made a new commitment of 35% gender diversity in senior leadership positions by the end of 2025, raising the ambition from the original target of 30%. As of year-end 2021, the figure stands at 28%.
1)Includes Domestic Appliances
With diversity being part of Philips’ purpose and one of the three strategic pillars of our global People strategy, long-term Inclusion & Diversity ambitions are embedded in our training, our approach to risk management
Visionnew ways of working including hybrid working, and objectives
our focus on health and well-being. Additionally, our leadership development programs, how we listen and respond to employee feedback, and the transparency required to hire and promote talent of underrepresented groups are also in focus.Taking risksExecution is an inherent part of entrepreneurial behavior,monitored through a diversity dashboard based on a global scorecard with specific goals. This drives accountability and well-structured risk management allowsfocus, and empowers leaders to customize goals, hear the stories behind the numbers, and intervene where appropriate.
During 2021, further work was done to bring together and grow global initiatives and amplify inclusion around unconscious bias, health, well-being and energy management, to take risksgrow awareness, stimulate learning and increase the resilience of our employees in the face of the pandemic. These initiatives are building on the holistic, long-term approach that sustainable success stems from an inclusive environment in which everyone can be and bring their best self to work (#youareyou). They include, but are not limited to:
Gender parity
- Building senior women mentoring programs to develop and retain senior female leaders across different levels, functions and markets
- Our Diversity Council continues to accelerate change and increase leadership involvement.
Broadening diversity
- Commitment to empower and increase the number of talents with a
controlled manner.different race/ethnicity in leadership, starting in North America
Health & Well-being
- Employee safety incidents (Total Recordable Cases) stood at 213, an increase versus 2020 but well below industry averages. COVID-19 continued to impact our associates, but no work-related deaths were recorded.
- Addressing mental health and well-being with the continued roll-out of the global Employee Assistance program for employees and close dependents
- Embedding and extending the Energy Management Program, helping employees to build resilience and address work/life rhythm
- Offering further company-wide Mindfulness sessions and, across four key markets, an employee Mental Health Champion program, upskilling employees to offer confidential peer-to-peer guidance to support mental well-being.
Learning & Development
- Continuing the deployment across the organization of tailor-made training to address unconscious bias
- Providing globally available masterclasses, led by our leaders and international speakers on topics like Allyship, Privilege, Resilience and Psychological Safety
Creating belonging – #youareyou
- The (virtual) global and local celebrations of International Women’s Day across 80 locations worldwide; World Health Day, Pride, and World Mental Health Day
- A new global governance for our valued Employee Resource Groups (ERG) was launched, including an ERG Resource Center: offering active support to employees in setting up their own diverse and inclusive bottom-up networks. These include women’s networks, the Black Employees Resource Group in North America, an Asian employees’ network, and revival of the LGBTQ+ community. In 2021 we added the Middle Eastern Employee Resource Group, Future Leaders in Philips
believes risk managementand Parents Club in the United States, a Benelux chapter of our Black Employee Resource Group, and a Global Care-givers Network, the latter as a direct response to the challenges experienced during the pandemic.
Recognition
- Achieving Best Place to Work for LGBTQ+ Equality status, receiving a score of 100% on the Human Rights Campaign 2021 Corporate Equality Index. Listed on Forbes Best Diversity Initiatives and Equal Opportunity Magazine’s Top 50 employers.
8.4.5Employee engagement
In an environment of constant, rapid change, it is vital to stay connected and engaged with our people by continually checking in with and listening to them. Employee engagement and improving the experience of our people are pivotal to the success of our strategy. In 2021, employee engagement remained high at 79%, exceeding the Fortune 500 benchmark, despite the pandemic. This was driven by our people feeling proud to work for Philips, inspired to do their best work, and believing that Philips is a great place to work. It was further fostered by a focus on health & well-being, and employees feeling that they can be themselves and have the flexibility needed to enable a healthy work-life rhythm while meeting their career goals.
Philips Group
Employee Engagement index
| | 2019 | 2020 | 2021 |
|---|
| Favorable | 74% | 79% | 79% |
| Neutral | 17% | 14% | 14% |
| Unfavorable | 9% | 7% | 7% |
Our quarterly employee surveys help to keep our finger on the pulse of employee sentiment toward the company. Philips’ riskWe act upon our employees’ ideas for improvement and show them that their feedback is valued.
At Philips, we believe we perform at our best when we feel connected, supported and psychologically safe. Amidst the ongoing pandemic in 2021, we listened actively to our employees to provide them with greater clarity of direction and increased autonomy and flexibility to deal with challenging personal and work situations. Moreover, we strengthened our Health & Well-being programs with a focus on mental well-being, which is designed to help our employees to build resilience through conscious energy management, approachadopt a healthier lifestyle, and achieve a better work/life balance.
8.4.6Employment
The total number of Philips Group employees was 78,189 at the end of 2021, compared to 75,001 at the end of 2020, an increase of 3,188 FTE.
Philips Group
Employees per segment
in FTEs at year-end
| | 2019 | 2020 | 2021 |
|---|
| Diagnosis & Treatment | 31,311 | 32,193 | 32,390 |
| Connected Care | 14,893 | 15,866 | 17,751 |
| Personal Health | 9,264 | 10,253 | 10,134 |
| Other | 17,844 | 16,689 | 17,913 |
| Philips Group | 73,311 | 75,001 | 78,189 |
| | 2019 | 2020 | 2021 |
|---|
| Balance as of January 1 | 73,691 | 73,311 | 75,001 |
| Consolidation changes: | | | |
| Acquisitions | 900 | 72 | 2,594 |
| Divestments | (286) | | (744) |
| Other changes | (994) | 1,618 | 1,338 |
| Balance as of December 31 | 73,311 | 75,001 | 78,189 |
Geographic footprint
Approximately 59% (2020: 61%) of the Philips workforce is embeddedlocated in mature geographies and 41% (2020: 39%) in growth geographies. In 2021, the number of employees in mature geographies decreased by 558. The number of employees in growth geographies increased by 2,629.
Philips Group
Employees per geographic cluster
in FTEs at year-end
| | 2019 | 2020 | 2021 |
|---|
| Western Europe | 20,531 | 19,925 | 19,775 |
| North America | 21,473 | 21,118 | 21,807 |
| Other mature geographies | 4,681 | 4,664 | 4,683 |
| Mature geographies | 46,685 | 45,707 | 46,265 |
| Growth geographies | 26,626 | 29,294 | 31,923 |
| Philips Group | 73,311 | 75,001 | 78,189 |
Employee turnover
In 2021, employee turnover amounted to 17.6%, of which 10.0% was voluntary, compared to 14.0% (7.3% voluntary) in 2020. External benchmarks show that our voluntary employee turnover remains in line with similar-sized companies, and that we are reasonably successful in retaining our employees.
| | Staff | Professionals | Management | Executives | Total |
|---|
| Female | 28.0% | 14.3% | 12.8% | 17.7% | 20.9% |
| Male | 20.6% | 13.0% | 12.2% | 13.6% | 15.5% |
| Philips Group | 24.3% | 13.4% | 12.3% | 14.6% | 17.6% |
| | Staff | Professionals | Management | Executives | Total |
|---|
| Female | 9.8% | 10.5% | 8.8% | 13.9% | 10.1% |
| Male | 11.9% | 9.2% | 7.1% | 6.2% | 9.9% |
| Philips Group | 10.9% | 9.6% | 7.6% | 8.1% | 10.0% |
8.4.7Equal opportunities and equal pay
Philips is committed to equal pay and will continue to investigate whether any deviations from this principle exist.
Many countries with a Philips presence – for example, Australia, the United Kingdom, Sweden, certain US states and India – have already undertaken pay equity reviews. In the US, Philips will be executing a Nationwide Pay Equity Project during 2022, building on work already completed at US state level.
In 2021, a study by EDGE (Economic Dividends for Gender Equality) of Philips in the systemsNetherlands was completed, with Philips being certified for Gender Equality. The study found no statistical evidence of unequal pay. We continue to study gender pay parity using the EDGE methodology and plan to scale this application to cover 80% of Philips’ global country presence by the end of 2022.
8.4.8Living wage
Philips can only achieve its aim to improve the lives of 2.5 billion people per year by 2030 if we usesupport and empower our people, so they can be their best and perform effectively. To this end, we conducted a living wage analysis for the third year in a row on the lowest salaries in every country in which we currently operate.
The living wage is a concept defined by Anker and Anker (2017) as “Remuneration received by a worker in a particular place sufficient to directafford a decent standard of living for the worker and controlher or his family. Elements of a decent standard of living include food, water, housing, education, health care, transport, clothing, and other essential needs, including provision for unexpected events”. To develop living wage standards that are complete and have a reliable geographical scope, we combined forces with Valuing Nature, several local NGOs, WageIndicator and other global corporates.
In 2019, we conducted our first analysis of salaries and benefits for employees globally with respect to the living wage. This analysis covered 78 countries and we identified 31 employees in one country for whom wages and benefits were slightly below the defined living wage. Based on these results, our local HR teams made relevant adjustments for the year 2020.
In 2020, we performed the same analysis with the updated living wage data from WageIndicator. This time, all wages and benefits were above the defined living wage levels in all 78 countries.
The living wage analysis conducted in 2021 showed again that all wages and benefits at Philips were above the defined living wage levels in all 76 countries surveyed.
8.4.9Health and Safety
In 2021, the COVID-19 global pandemic continued to significantly affect Philips’ global operations in many ways, including government-mandated lockdowns, travel restrictions, and most importantly ensuring employee health and safety whilst maintaining critical operational commitments. Philips continued to deliver on its triple duty of care: meeting critical customer needs, ensuring the health and safety of employees, and ensuring business continuity. A Group Crisis Operations Team and local Crisis Management Teams continued to provide a global integrated response. This enabled Philips to disseminate a centralized and consistent message for every employee, regardless of market, business or location. A COVID-19 intranet site with guidance and information was maintained and received over 44,000 hits in 2021.
Working as a team across all functions, Philips was able to maintain manufacturing operations and ensure support for our customers, including front-line hospitals, to minimize interruption to key service and support activities. During 2021, approximately 5,168 Philips employees voluntarily reported a COVID-19 infection. Whilst most infections were of mild severity, there were unfortunately some more severe outcomes, including a small number of fatalities. However, less than 1% of contamination cases and none of the fatalities resulted from infections acquired during workplace activities. Cumulatively in 2020 and 2021, Philips recorded 7,374 COVID-19 cases (5,168 in 2021), 19 fatalities (13 in 2021).
At Philips, we strive for an injury-free and illness-free work environment. Since 2016, the Total Recordable Cases (TRC) rate has been defined as a Key Performance Indicator (KPI). A TRC is a case where an injured employee is unable to work for one or more days, has medical treatment, or sustains an industrial illness. We set yearly TRC targets for the company, businesses and industrial sites.
We recorded 213 TRCs in 2021, a 20% increase compared to 178 in 2020. While our workforce continued to expand in 2021, the TRC rate decreased from 0.24 per hundred FTEs in 2020 to 0.29 in 2021.
In 2021 we recorded 114 Lost Workday Injury Cases (LWIC). These are occupational injury cases where an injured person is unable to work for one or more days after the injury. This represents a 25% increase compared with 91 in 2020. The LWIC rate increased to 0.16 per 100 FTEs in 2021, compared with 0.12 in 2020. The number of Lost Workdays caused by injuries increased by 1,672 days (65%) to 4,236 days in 2021.
8.4.10Philips Foundation
Stichting Philips Foundation, an independent foundation organized under Dutch law, is a registered charity established in 2014. In 2021, Royal Philips supported the Philips Foundation with a contribution of EUR 6.7 million, and provided the operating staff as well as the expert assistance of skilled employees in the execution of the Foundation’s programs.
The Philips Foundation’s mission is to reduce healthcare inequality by providing access to quality healthcare for underserved communities through meaningful innovation. It does this through the provision and application of Philips’ healthcare expertise, innovation power, talent and resources and by financial support. Together with key partners around the globe (including respected NGOs such as Red Cross organizations, UNICEF, Amref and Save the Children), the Philips Foundation seeks to identify challenges where a combination of Philips expertise and partner experience can be used to create meaningful solutions that have an impact on people’s lives.
8.4.11Working with stakeholders
In organizing ourselves around customers and markets, we conduct dialogues with our stakeholders in order to explore common ground for addressing societal challenges, building partnerships and jointly developing supporting ecosystems for our innovations around the world.
8.5Governance
8.5.1Corporate governance structure
Koninklijke Philips N.V. (Royal Philips), a company organized under Dutch law, is the parent company of the Philips group. Its shares have been listed on the Amsterdam stock exchange (Euronext Amsterdam) since 1912. Furthermore, its shares have been traded in the United States since 1962 and have been listed on the New York Stock Exchange since 1987.
Royal Philips has a two-tier board structure consisting of a Board of Management and a Supervisory Board, each of which is accountable to the General Meeting of Shareholders for the fulfillment of its respective duties.
The company is governed by Dutch corporate and securities laws, its Articles of Association, and the Rules of Procedure of the Board of Management and the Executive Committee and of the Supervisory Board respectively. Its corporate governance framework is also based on the Dutch Corporate Governance Code (dated December 8, 2016) and US laws and regulations applicable to Foreign Private Issuers. Additionally, the Philips Business System (PBS comprising Strategy, Operational Excellence and our Planning & Performance Cycle), Risk Appetite, the Enterprise RiskBoard of Management (ERM) framework, the Philips Business Control Framework andhas implemented the Philips General Business Principles (GBP) and underlying policies, as well as separate codes of ethics that apply to employees working in specific areas of our business, i.e. the Financial Code of Ethics and the Procurement Code of Ethics. Many of the documents referred to are published on the company’s website and more information can be found in Our approach to risk management.
Please also refer to Corporate governance where the main elements of the company’s corporate governance structure have been addressed.
8.5.2Philips Business System
As we drive our transformation to become a solutions provider to our customers and consumers, we have adopted a single standard operating model that defines exactly how we want to work – the Philips Business System (PBS).
The PBS integrates key aspects of how we operate – from our strategy, governance, organizational design, processes and systems, to our people and team practices, and our culture and performance management.
It is designed to make Philips a simpler, faster, customer-focused, learning organization, in order to fulfill our purpose of improving the health and well-being of billions of people. One that aspires to the highest standards of quality and integrity in everything we do. Building on standard work and best practices, with clear accountabilities and a culture of continuous improvement and compliance. Applying our creativity to make a competitive difference in serving our customers. Making Philips the best place to work.
For more information on the PBS, please refer to How we create value.
8.5.3Quality & Regulatory
Our business success depends on the quality of our products, services and solutions, and our compliance with many global regulations and standards. In 2021, we continued our transformation journey to accelerate our customer-focused global processes, procedures, standards, and patient safety & quality mindset, all with the goal of maintaining the highest possible level of quality for our customers and their patients.
As a business with a significant global footprint, ensuring compliance with evolving regulations and standards, including data privacy and cybersecurity, involves increased levels of investment to meet the demands of increased regulatory enforcement activity. Our business deals in the secure electronic transmission, storage and hosting of sensitive information, including personal information, protected health information, financial information, intellectual property, and other sensitive information related to our customers and workforce. For information on how Philips manages cybersecurity risk, please refer to Operational risks.
Quality
Philips is committed to delivering the highest quality products, services and solutions compliant with all applicable laws and standards. We continuously strive to raise our performance in ensuring quality, which is reflected in our continued substantial investment to embed quality through the standardization and adoption of industry best practices throughout our Quality Management System. Quality is an integral part of the leadership and culture of what we do at Philips. Through this quality system improvement program, our aim is to elevate and ensure consistency in how we work, collaborate and make decisions together as we aim to improve the lives of 2 billion people a year by 2025, including 300 million in underserved communities, rising to 2.5 billion and 400 million respectively by 2030.
Regulatory Compliance
Philips actively maintains Quality Management Systems that establish processes for its product design, manufacturing and distribution processes; these standards are in compliance with Food and Drug Administration (FDA)/International Organization for Standardization (ISO) requirements. Our businesses must comply with regulatory pre-marketing and quality system requirements in every market we serve, and to specific requirements of local and national regulatory authorities including the US FDA, the European Medicines Agency (EMA), the National Medical Products Administration (NMPA) in China and comparable agencies in other countries. We also must comply with the European Union’s Waste from Electrical and Electronic Equipment (WEEE), Restriction of Hazardous Substances (RoHS) and Registration, Evaluation, Authorization and Restriction of Chemicals (REACH), Energy-using Products (EuP) and Product Safety Regulations.
Often, new products that we introduce are subject to pre-market regulatory processes (e.g. pre-market approval (PMA) and pre-market notification (510(k)) for marketing of FDA-regulated devices in the USA, and CE Marking in the European Union). Failing to comply with the regulatory requirements can have significant legal and business consequences. The number and diversity of regulatory bodies in the various markets we operate in globally adds complexity and time to product introductions.
In the European Union (EU), the Medical Device Regulation (EU-MDR) passed its date of application (May 26, 2021). Through the comprehensive EU-MDR program which has been running since 2018 and with a joint effort across all of Philips, we have passed this major milestone successfully. For a part of our product portfolio we make use of the Grace Period*) for various reasons including stock depletion, notified body capacity limitations and resource balancing. To achieve this major milestone we made an annual EU MDR investment of around EUR 30 million in 2021 and expect to have additional compliance costs for the new regulations of around EUR 13 million in 2022 to conclude the transition. We believe the global regulatory environment will continue to evolve, which could impact the cost, the time needed to approve, and ultimately, our ability to maintain existing approvals or obtain future approvals for our products.
Consent Decree
In October 2017, Philips North America LLC reached agreement on a consent decree with the US Department of Justice, representing the Food and Drug Administration (FDA), related to compliance with current good manufacturing practice requirements arising from inspections conducted in 2015 and prior, focusing primarily on Philips’ Emergency Care & Resuscitation (ECR) business operations in Andover, Massachusetts, and Bothell, Washington.
Following a successful inspection in Bothell, Washington, in April 2020, the FDA determined that Philips had met the conditions for resuming manufacturing and distribution of defibrillators in the US. The consent decree remains in effect for several years, during which the Emergency Care (formerly ECR) business will be further elaboratedsubject to a series of annual assessments by an independent expert. Hospital Patient Monitoring (formerly Monitoring & Analytics), also named in the Consent Decree, is also under a heightened level of scrutiny over the same period.
Substantial progress continues to be made in our compliance efforts. In August 2021, the FDA inspected Emergency Care in Bothell again as a Consent Decree follow-up. Two observations (Form 483) were issued and subsequently remediated and reported to the FDA. The FDA later presented Emergency Care with four Establishment Inspection Reports dating back to 2015, signaling the closure of the four open inspections.
Even with these successes, however, we cannot predict the outcome of this matter, and the consent decree authorizes the FDA, in the event of any violations in the future, to order us to cease manufacturing and distributing Emergency Care or Hospital Patient Monitoring devices, recall products, pay liquidated damages, and take other actions. We also cannot currently predict whether additional monetary investment will be incurred to resolve this matter or the matter’s ultimate impact on our business.
Philips Respironics voluntary recall notification
On June 14, 2021, Philips’ subsidiary, Philips Respironics, initiated a voluntary recall notification in the United States and field safety notice outside the United States for certain sleep and respiratory care products to address identified potential health risks related to the polyester-based polyurethane (PE-PUR) sound abatement foam in these devices.
At the time of the June 2021 recall/field safety notice, Philips had received a limited number of reports of possible patient impact due to foam degradation, and no reports regarding patient impact related to chemical emissions. Philips continues to monitor complaints received following the recall/field safety notice via our Quality Management System, in accordance with the medical devices regulations and laws in the markets that we serve.
We are treating this matter with the highest possible seriousness, and are working to address this issue as efficiently and thoroughly as possible.
We are conducting a comprehensive test and research program and provided an update in December 2021 on the positive VOC test results related to the first-generation DreamStation devices.
The company has developed a comprehensive plan to replace the PE-PUR sound abatement foam used in earlier-generation devices with the new material used in the second-generation products such as DreamStation 2, which has been approved by the US FDA and regulatory authorities around the world, and has already begun this process. Philips Respironics has been working in close partnership with the US FDA, competent authorities, and other regulators around the world, as well as our customers, clinicians, and patients, to complete the needed repairs and replacements associated with this recall. In certain circumstances, the products in question may be replaced rather than repaired.
*)Where products, that were placed on the market under the predecessor of the EU-MDR, the EU-MDD, can continue to be placed on the market when meeting a subset of MDR requirements in addition to the MDD requirements.
8.5.4Remuneration policy
The objectives of the remuneration policy for members of the Board of Management, as adopted by the General Meeting of Shareholders in 2017, are in line with that for executives throughout the Philips Group. That is, to focus them on improving the performance of the company and enhancing the long-term value of the Philips Group, to motivate and retain them, and to be able to attract other highly qualified executives to enter into Philips’ services, when required.
In order to compete for talent in the health technology market, the Supervisory Board identified a new peer group*) for remuneration benchmarking purposes in 2017 to align the Board of Management’s remuneration levels closer to equivalent positions in this chapter.market. These peer companies are either business competitors, with an emphasis on companies in the healthcare, technology related or consumer products area, or companies we compete with for executive talent. These consist of predominantly Dutch and other European companies, plus a minority number (up to 25%) of US based global companies, of comparable size, complexity and international scope. Annual changes to the peer group can be made by the Supervisory Board, for example for reasons of changes in business or competitive nature of the companies involved. Such change will be disclosed if it has a substantial impact on peer group composition. No changes were made to the peer group during 2018.
To support the policy’s objectives, the remuneration package includes a significant variable part in the form of an annual cash bonus incentive and long-term incentive in the form of performance shares. The policy does not encourage inappropriate risk-taking.
The performance targets for the members of the Board of Management are determined annually at the beginning of the year. The Supervisory Board determines whether performance conditions have been met and can adjust the payout of the annual cash bonus incentive and the long-term incentive grant upward or downward if the predetermined performance criteria were to produce an inappropriate result in extraordinary circumstances. The authority for such adjustments exists on the basis of contractual ultimum-remedium and claw-back clauses. In addition, pursuant to Dutch legislation effective January 1, 2014, incentives may, under certain circumstances, be amended or clawed back pursuant to statutory powers. For more information please refer to Corporate governance. Further information on the performance targets is given in the chapters on the Annual Incentive (see 2021 Annual Incentive) and the Long-Term Incentive Plan (see 2019 Long-Term Incentive) respectively.
Key features of our Board of Management Compensation Program
The list below highlights Philips’ approach to remuneration, in particular taking into account Corporate Governance practices in the Netherlands.
What we do
- We pay for performance
- We conduct scenario analyses
- We have robust stock ownership guidelines
- We have claw-back policies incorporated into our incentive plans
- We have a simple and transparent remuneration structure in place
What we do not do
- We do not pay dividend equivalents on stock options, or restricted share units and performance share units that do not vest
- We do not offer executive contracts with longer than 12 months’ separation payments
- We do not have a remuneration policy in place that encourages our Board of Management to take any inappropriate risks or to act in their own interests
- We do not reward failing members of the Board of Management upon termination of contract
- We do not grant loans or give guarantees to members of the Board of Management
*)The remuneration benchmarking peer group currently consists of 25 companies, being: Ahold Delhaize, AkzoNobel, ASML, Atos, BAE Systems, Becton Dickinson, Boston Scientific, Capgemini, Danaher, Electrolux, Ericsson, Essilor International, Essity (formerly SCA, company split), Fresenius Medical Care, Heineken, Henkel & Co, Medtronic, Nokia, Reckitt Benckiser, Roche, Rolls-Royce, Safran, Siemens Healthineers, Smith & Nephew, and Thales. (Alcatel Lucent was excluded as it was acquired by Nokia). This peer group differs from the TSR peer group, see 2019 Long-Term Incentive. 8.5.5General Business Principles
While pursuing our business objectives, we aim to be a responsible partner in society, acting with integrity towards our employees, customers, business partners and shareholders, as well as the wider community in which we operate. Everyone at Philips is expected to always act with integrity, and Philips rigorously enforces compliance of its General Business Principles (GBP) throughout the company.
In the highly regulated world of healthcare, integrity requires in-depth knowledge of the applicable rules and regulations and a sensitivity to healthcare-specific issues. The GBP – part of the Philips Business System – incorporate and represent the fundamental principles by which all Philips businesses and employees around the globe must abide. They set the minimum standard for business conduct, both for individual employees and for the company and our subsidiaries. Our GBP also serve as a reference for the business conduct we expect from all our business partners.
Translations of the GBP text are available in 30 languages, allowing almost every employee to read the GBP in their native language. Detailed underlying policies, manuals, training, and tools are in place to give employees practical guidance on how to apply and uphold the GBP in their daily work environment. Details can be found at www.philips.com/gbp.
In 2021, a total of 610 concerns were reported via Philips Speak Up (Ethics Line) and through our network of GBP Compliance Officers. This represents an increase of 7% from the total of 571 concerns in the previous reporting period (2020).
While this is a continuation of the upward trend reported since 2014, the year in which Philips updated its General Business Principles and deployed a strengthened global communication campaign, the increase is flattening. Specifically in 2021, we focused on increasing awareness on Integrity and on the importance of speaking up, through and following up on the deployment of our biennial Business Integrity Survey. We still believe the upward trend in reporting remains in line with our multi-year efforts to encourage our employees to express their concerns, whilst realizing that the extraordinary business conditions in both 2020 and 2021 make it imprudent to draw any specific conclusions from these numbers.
More information on the Philips GBP can be found in Risk management.
8.5.6Risk management approach
Risk management and control forms an integral part of the Philips business planning and performance review cycle. The company’s risk management policy and framework are designed to provide reasonable assurance that ourits strategic and operational objectives are met, that legal requirements are complied with, and that the integrity of the company’s financial reporting and its related disclosures is safeguarded. Please refer to Risk management for a more detailed description of Philips’ approach to risk management focuses(including Internal Control over Financial Reporting), risk categories and factors, and certain specific risks that have been identified.
With respect to financial reporting, a structured self-assessment and monitoring process is used company-wide to assess, document, review and monitor compliance with Internal Control over Financial Reporting. On the basis of the outcome of this process, the Board of Management confirms that: (i) the management report (within the meaning of section 2:391 of the Dutch Civil Code) provides sufficient insights into any failings in the effectiveness of the internal risk management and control systems; (ii) such systems provide a reasonable level of assurance that the financial reporting does not contain any material inaccuracies; (iii) based on the current state of affairs, it is justified that the financial reporting is prepared on a going concern basis; and (iv) the management report states those material risks and uncertainties that are relevant to the expected continuity of the company for a period of 12 months after the preparation of the report. The financial statements fairly represent the financial condition and result of operations of the company and provide the required disclosures.
In view of the above, the Board of Management believes that it is in compliance with best practice provision 1.4.2 of the Dutch Corporate Governance Code. It should be noted that the above does not imply that the internal risk management and control systems provide certainty as to the realization of operational and financial business objectives, nor can they prevent all misstatements, inaccuracies, errors, fraud or non- compliances with rules and regulations. The above statement on internal control should not be construed as a statement in response to the requirements of section 404 of the US Sarbanes-Oxley Act. The statement as to compliance with section 404 is set forth in Management’s report on internal control
8.5.7Total tax contribution
To fulfil our company purpose, a responsible tax approach is required. We fully acknowledge our societal role when it comes to paying taxes in the geographies where value is created. We consider our tax payments as a contribution to the communities in which we operate, as part of our social value creation.
Our Approach to Tax sets the standard for our conduct, by which individual employees, the company and its subsidiaries must abide. We consider tax in the context of the broader society, inspired by our stakeholder dialogues, global initiatives of the Organization for Economic Cooperation and Development and United Nations, human rights, international tax laws and regulations and relevant codes of conduct.
Under the ultimate responsibility of the Board of Management, the Chief Financial Officer annually reviews, evaluates, approves and where necessary adjusts Philips’ approach to tax. Philips supports and participates in transparency initiatives such as the Dow Jones Sustainability Index (DJSI) and the Tax Transparency Benchmark of the Dutch Association of Investors for Sustainable Development (VBDO).
In 2021, Philips contributed to the communities where we operate through taxes paid (e.g. corporate income tax) and taxes collected (e.g. VAT). As part of its ESG commitments, Philips committed to provide transparency on its taxes paid and collected in the countries it operates in. Our Country Activity and Tax Report can be found on our website. Philips' total tax contribution in 2021, amounting to EUR 4,090 million, is presented by tax type in the following table.
Philips Group
Total Contribution 2021 per Tax Type
in millions of EUR
| | Corporate income tax paid | Customs duties | VAT1) | Payroll Tax | Other Taxes | Total |
|---|
| Western Europe | 583 | 13 | 320 | 906 | 84 | 1,904 |
| North America | 105 | 39 | 94 | 770 | 7 | 1,015 |
| Other mature geographies | 50 | 4 | 79 | 137 | 1 | 272 |
| Growth geographies | 79 | 113 | 329 | 320 | 57 | 897 |
| Philips Group | 818 | 169 | 821 | 2,133 | 149 | 4,090 |
1)Includes VAT, GST and sales tax.
8.6Philips' ESG performance at a glance
Below we show how Philips performed in 2021 on the 21 Core metrics of the WEF ESG reporting framework, mapped to the three dimensions of our ESG commitments, as well as a number of additional Philips-specific metrics that we consider fundamental to the strategy and operation of our business.
Environmental
- Green House Gas (GHG) emissions100% electricity from renewable sources0 kilotonnes CO2-equivalent (net operational carbon footprint)
- Taskforce on Climate-related Financial Disclosures (TCFD) implementationDeveloped 2 and 4 °C global warming scenarios and assessed their impact on our supply chain, Philips and customers (disclosed in separate report)
- Land use and ecological sensitivity19 tonnes waste sent to landfillAll 25/25 industrial sites 'Zero Waste to Landfill' at year-end
- Water consumption and withdrawal in water-stressed areas703,104 m3total water intake256,957 m3in water-stressed areas
- Circular revenues *)16%of revenues
- Closing the loop *)Closed the loop for over 3,000 systems returned to us
Social
- Lives Improved *)1.67 billion, of which 167 million in underserved communities
- Diversity & Inclusion28% gender diversity in senior leadership positions40% gender diversity in total workforce79%Employee Engagement Score *)
- Pay equalityEDGE-certified for Gender Equality in the NetherlandsUS Nationwide Pay Equity project scheduled for 2022
- Wage level6,246 million EUR employee benefit expensesPhilips pays all employees at least a living wage
- Risk for incidents of child, forced or compulsory laborAddressed in Philips GBP, Supplier Sustainability Declaration and Supplier Sustainability program
- Health & Safety0.29Total Recordable Case rate per 100 FTEs213Total Recordable Cases
- Training provided830,000training hours in Philips University835,000training completions
- Absolute number and rate of employment78,189employees18%turnover
- Supplier development program *)351companies430,000employees impacted
- Volunteering *)37 new projects in 2020 reaching 17.3 million people
Governance
- Setting purposePhilips’ purpose is to improve the health and well-being of people through meaningful innovation
- Governance body compositionPhilips has a Board of Management and an independent Supervisory Board
- Material issues impacting stakeholdersDetailed Materiality Analysis performed
- Anti-corruption71,000 employees completed General Business Principles training
- Protected ethics advice and reporting mechanismsWhistleblower mechanism in place
- Integrating risk
categories: Strategic, Operational, Compliance and opportunity in business processesIncluded in Risk Management section - Economic contribution17,156 million EUR revenues773 million EUR dividend declared6.7 million EUR contribution to Philips Foundation104 million EUR government grants
- Financial
risks. The main risks within these categoriesinvestment contribution2,699 million EUR total tangible assets802 million EUR capital expenditure - Total R&D expenses1.8 billion EUR invested in R&D (10.5% of revenues)
- Total tax contribution4,090 million EUR
*)Philips-specific metric
9Risk management
9.1Our approach to risk management
Vision and objectives
Philips approaches risk management as a value-creating activity that is integral to innovation and entrepreneurship. As such, it is part of the Philips Business System (PBS). Key elements are our Risk Management governance, Risk appetite, the Risk Management Process standard, the Philips Business Control Framework, and our General Business Principles (GBP), which are further described in Risk categories and factors.this chapter. There can be no absolute assurance that theour risk management policy and framework will in all cases avoid or mitigate all risks that Philips faces.
The risk overview may not, however, include all thematerial risks that may ultimately affect Philips. Some risks not yet known to Philips, or currently believed not to be material, could ultimately have a major impact on Philips’ businesses, objectives, revenues, income, assets, liquidity or capital resources. All forward-looking statements made on or after the date of this Annual Report and attributable to Philips are expressly qualified in their entirety by the factors described in the cautionary statement included in Forward-looking statements and in the overview of risk factors described in Risk categories and factors.
Risk management governance
The Executive Committee supported by the Risk Management Support Team, oversees, identifies and manages the risks associated with Philips’ strategy and activities, setsPhilips face in realizing its objectives. It defines the Risk Appetite, provides the risk management framework, and monitors the ERM framework.effectiveness thereof. The Risk Management Support Team, consisting of a number of functional experts covering theon various categories of enterprise risk, provides support by raising understandingsupports the Executive Committee through regular analysis of the enterprise risk profile and by improvingenhancement of the ERMrisk management framework. First-line managementManagement is primarily responsible for identifying critical business risks and for the implementation ofimplementing appropriate risk responses within their responsibility area in accordance withareas of responsibility. Various functions (such as Internal Control, Quality & Regulatory, and Group Security) support the ERM framework.management of specific risk areas.
The Internal Audit function independently monitorsassesses the quality of risk management and business controls through the execution of a risk-based audit plan, as approved by the Audit Committee of the Supervisory Board. Leadership at Board of Management andfrom our Executive Committee, level, Business Groups,Businesses, Markets and key Functional areasFunctions meet quarterly with Internal Audit in management Audit & Risk Committees to discuss strengths and weaknesses inof risk management and business controls – as reportedevaluated by internal and external auditors or as revealedand by self-assessmentmeans of management,other (self) assessments – and to take corrective action where necessary.
The Disclosure Committee oversees the company’s disclosure activities and assists the Board of Management in fulfilling its responsibilities in this respect. The Disclosure Committee’s purpose is to ensure that the company implements and maintains internal procedures for the timely collection, evaluation and disclosure, of information potentially subject to public disclosure under the legal, regulatory and stock exchange requirements to which the company is subject.
The Security Steering Committee (SSC) and the Group Security function manage security (including cybersecurity) risks at Philips. The SSC evaluates and sets the Group’s security strategy, issues security policies and evaluates progress and effectiveness. Dedicated security reports are shared with the Executive Committee, Supervisory Board and external auditors. On a quarterly basis, briefings on cybersecurity risks are provided to the IT Audit & Risk Committee.
The Environmental, Social and Governance (ESG) Committee initiates, drives and coordinates ESG strategy development, policy setting, disclosures and planning of programs and activities in relation to our ESG commitments. It administers ESG reporting, monitors progress, assesses risks in relation to Philips’ ESG strategy and makes recommendations to the Executive Committee on our ESG endeavors.
The Supervisory Board oversees Philips’ risk management. The Audit Committee and the Quality & Regulatory (Q&R) Committee of the Supervisory Board assist the full Supervisory Board in fulfilling its risk management oversight responsibilities. The Audit Committee reviews the quality of Philips’ system of risk management of business control,and controls, and the reported findings of internal and external audits are reported to and discussed with the Audit Committee of the Supervisory Board.audits. The Q&RQuality & Regulatory Committee’s role particularly relates in particular to the quality and regulatory compliance of the company’sCompany’s products (including software), services and systems and thethroughout their lifecycle of development, testing, manufacturing, marketing and servicing thereof, and compliance with regulatory requirements relating thereto. An in-depth descriptionservicing.
The Corporate governance chapter of Philips’this report addresses the main elements of the Company’s corporate governance structure, can be found in reports on how it applies the principles and best practices of the Dutch Corporate governance.Governance Code and provides certain other information relevant to risk management governance.
Risk appetite
The Executive Committee and management consider risk appetite when taking decisions and seek to manage risks consistently within the risk appetite. Risk appetite is set by the Executive Committee and captured in the Risk Management Policy. It is effectuated as an integrated partthrough our PBS, of our way of working. Thewhich various elements of– such as our governance system including (and not limited to) our Strategy, GBP, the PBS, Policies, Processes, Budgetsstrategy, Philips business principles and Authoritybehaviors, authority schedules, allpolicies, process standards and performance management systems – include risk takingor reflect risk-taking guidance.
Philips’sPhilips’ risk appetite is differentdiffers depending on the type of risk, ranging from an entrepreneurialaverse to a mitigatingseeking approach. We believe we must operate within the dynamics of the health technology industry and take the risks needed to ensure we continually revitalize our offerings and the way we work. At the same time, Philips attaches prime importance to integrity, sustainability, product quality and patient safety, including compliance with regulations and quality standards. Risk appetite for the four main risk categories is visualized below.
Philips does not classify these risk categories in order of importance.
Risk Managementmanagement process
In order to provide a comprehensive view of Philips’ risks, structured risk assessments take place according to the Philips risk management process standard, applying a top-down and bottom-up approach. Our process standard is designed based on the Enterprise Risk Management Framework: Integrating with Strategy and Performance (2017) from the committee of sponsoring organizations of the Treadway Commission (COSO) and on ISO 31000 - Risk Management. The process is supported by regular risk workshops with management at Group, Business, Market and Group Function levels. During 2018,2021, several risk management workshops were held.held to assess and respond to enterprise risks.
Key elements of the Philips risk management policyprocess are:
Annual risk assessment is performed for the Group, Business Groups,Management of Businesses, Markets and key Functions as part of the annual updateperform a risk assessment at least once a year, with updates of the strategic plan. Risksplan, to identify and prioritize risks, assign ownership, and implement appropriate risk responses. Risk workshops are assessedconducted across the company to facilitate these risk assessments.- Management discusses and
prioritized on the basis of their impact on objectives, likelihood of occurrence and effectiveness of controls. Management is accountable for the timely development of effective risk responses. Developments inmonitors the risk profile and management’s initiatives to improve risk responses are explicitly discussedresponse effectiveness at least quarterly in its performance reviews and monitored as part of the various quarterly managementduring Audit & Risk Committees, and in the Quarterly Performance Reviews.As an integral part of the strategy review, the Executive Committee annually assesses the enterprise risk profile, including appropriate risk scenarios and sensitivity analyses, and reviews the potential impact of the enterprise risk profile versus the Group’s risk appetite. This risk assessment is based on the results from risk assessments of the Group, Business Groups,which are held for all Businesses, Markets and keyselected Functions findings from Philips Internal Audit, Legal and Insurance, the materiality analysis as described in Sustainability statements, views from key stakeholders, external analysis, and risks reported in the annual certification statement on Risk Management and Business Controls.at Group level. - Developments in the enterprise risk profile and management’s initiatives to improve risk responses are discussed and monitored during the quarterly meeting of the Audit Committee of the Supervisory Board.
TheAs an integral part of the strategy review, each year the Executive Committee reviews at least annuallyassesses the enterprise risk profile and the potential risk impact versus Group risk appetite. This assessment considers various inputs such as risk assessments from Businesses, Markets and Functions, Philips risk appetiteInternal Audit findings, Legal and risk management approachInsurance matters, the materiality analysis, and improvesexternal research. The assessment also covers the effectiveness of the risk management framework as and when required.potential improvements thereto.- The Philips
risk appetite, risk profile and the risk management framework are discussed at least annuallyonce a year with the Audit Committee of the Supervisory Board and with the full Supervisory Board.
Examples of measures taken during 20182021 to further strengthen risk management, which have been discussed with the Audit Committee and the full Supervisory Board:management:
Continued execution of the Enterprise Risk Management (ERM) improvement roadmap;Implementation of an enterprise Governance, Risk and Compliance IT platform;- Continued development of our COVID-19 response program with the
Information Security Programaim of being better prepared to respond to potential future events; - Continued improvement and consolidation of our Quality Management Systems;
- Operating a Risk & Compliance (R&C) Center of Excellence to drive continuous improvement, knowledge sharing, capability building and risk transparency across various R&C areas;
- Further integration of standard risk management practices in
lightregular performance and strategy execution dialogues; - Continued improvement of our security (including cyber, product and supply chain) risk management capabilities;
- Various improvements to supply chain related risk, including supplier risk management and business continuity management;
- Further deployment of the
increasing exposure to cybercrime and information security requirements resultingrecommendations from digitalization and a focusthe Taskforce on the healthcare industry; Further development of risk managementClimate-related Financial Disclosures, particularly related to long-term service-based business models;Continued improvements of the comprehensive insurance program;climate adaptation and transition risks; and- Increased use of data analytics and automation in controls
monitoring; Acquisition playbooks to support accelerated acquisition integration;Revised plan for GBP deployment for the next three years;Strengthened Q&R frameworkmonitoring, and oversight, standardizationongoing development of Philips Quality Management System across the company,our enterprise governance, risk and more specific Product Quality targets in the strategic plans;Further de-risking of pension liabilities with deficit funding in the US defined-benefit plan; andContinuous improvement of risk dialogues and continuation of risk workshops to cover Business Groups, Markets and Functions.compliance IT platform.
Philips Business Control Framework
The Philips Business Control Framework (PBCF) sets the standard for Internal Control over Financial Reporting at Philips. The objective of the PBCF is to maintain integrated management control of the company’s operations in order to ensure the integrity of the financial reporting, as well as compliance with laws and regulations. Philips has designed its PBCF based on the COSO Internal Control-Integrated Framework (2013) established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Philips continuously evaluates and improves its PBCF to align with business dynamics and good practice.
As part of the PBCF, Philips has implemented a standard set of internal controls over financial reporting. ThisTogether with Philips’ established accounting procedures, this standard set of internal controls together with Philips’ established accounting procedures, is designed to provide reasonable assurance that assets are safeguarded, that the books and records properly reflect transactions necessary to permit preparation of financial statements, that policies and procedures are carried out by qualified personnel, and that published financial statements are properly prepared and do not contain any material misstatements. In each unit, management is responsible for customizing the controls set tofor their business, risk profile and operations. Ongoing monitoring of Internal Controls over Financial Reporting in the business and operations takes place as part of their daily supervision and management. In addition, periodic monitoring takes place via independent testing of SOx controls, internal control reviews and semi-annual self-assessment procedures. The findings that are identified through monitoring are reported quarterly to the Executive Committee and the Audit Committee of the Supervisory Board.
Annually,Each year, management’s accountability for internal controls for financial reporting is evidenced through the formal certification statement sign-off by Business Group, Market and Functional management to the Executive Committee.sign-off. Any deficiencies noted in the design and operating effectiveness of Internal Controls over Financial Reporting which were not completely remediated, are evaluated at year-end by the Board of Management. The Board of Management’s report, including its conclusions regarding the effectiveness of Internal Controls over Financial Reporting, can be found in Management’s report on internal control.
Philips General Business Principles (GBP)
In the highly regulated world of healthcare, integrity requires in-depth knowledgeAs part of the applicable rules and regulations and a sensitivity to healthcare-specific issues. Our GBPsPhilips Business System, our GBP set the standard for our business conduct. They incorporate and represent the fundamental principles by which individual employees, the company and its subsidiaries must abide.conduct as a health technology company. The GBP form an integral part of labor contracts in virtually every country in which Philips operates, and translations are available in 3230 languages. Employees yearlyEach year, employees reconfirm their commitment to the code of conduct after completing their GBP e-learning, while there is an additional annual sign-off for executives.Executives. A similar sign-off is in place for Finance and Procurement staff for their respective codes of conduct. Detailed underlying policies, manuals, training, and tools are in place to give employees practical guidance on how to apply and uphold the GBP in their daily work. In addition, there are separate Codes of Ethics that apply to employees working in specific areas of our business, i.e. the Procurement Code of Ethics and the Financial Code of Ethics. Details can be found at: www.philips.com/gbp.
The GBP Review Committee is ultimately responsible for the effective deployment of the GBP and for generally promoting a culture of compliance and ethics within the company. The Committee is chaired by the Chief Legal Officer, and its members include the Chief HRFinancial Officer, Chief Human Resources Officer and the Chief of International Markets and the Chief Financial Officer. In 2018,Markets. Furthermore, all of our 17key markets installedhave quarterly market compliance committees, which act as local satellites of the GBP Review Committee, dealing with GBP-related matters within the local context. They are also responsible for the design and execution of localized compliance plans that are tailored to their market-specific risks and organizational set-up, and regularly review the relevant compliance metrics for their respective market through dashboards delivered by the legal compliance monitoring team. The Secretariat of the GBP Review Committee, together with a worldwide network of GBP Compliance Officers, supports the organization with the implementation of GBP initiatives.
As part of our continuous effort to raise GBP awareness and foster dialogdialogue throughout the organization, each year a global GBP communications and training plan is deployed. In 2018, the biennial legal compliance face-to-face trainings were once again deployed, amongst thousands of our customer-facing employees. For our online workforce, the GBP e-learning was fully updated, aligning it with the company’s current risk profile. We also invested in new concepts forincluding our annual GBP Dialogue Initiative, in May and June.
Oneaimed at reinforcing a culture of thedialogue using ethical dilemma case studies that are relevant to our workforce. A key controlscontrol to measure implementation of our GBP is the GBP Self-Assessment, which is part of our Internal Control framework. WithIn addition, we continue to expand the input from our businesses and our internal control experts and in alignment with our auditors, we have thoroughly reviewed the design of this control to significantly enhance its effectiveness and reaffirm its importance for GBP compliance as a key internal control. The scheduled go-live date is the first half of 2019. In 2018 there was also a significant increase in the scopecapabilities of our dedicatedlegal compliance analyticsmonitoring team, serving both in terms of breadth – it is now active in the majority of our markets – and in terms of depth,business customers as well as compliance networks with the addition of new indicators to our dashboards. With these dashboards we are providing actionable compliance metrics todata, thus further improving our compliance community and business leaders.control framework.
The GBP are supported by established mechanisms that ensure standardized reporting and escalation of concerns where necessary. These mechanisms are based on the GBP Reporting Policy, which urgesenable both employees to report any concerns they may have regarding business conduct in relation to the GBP. They can do this either through a GBP Compliance Officer or through the Philips Ethics Line. The latter enables employees and also third parties to report a concern, either by telephone or online, in a variety of languages,escalate concerns 24/7, all year round.7. Concerns raised are registered consistently in a single database hosted outside of Philips servers to ensure confidentiality and security of identity and information. Encouraging people to submit a complaint whenspeak up through the available channels if they have exhausted all other means of recoursea concern will continue to be a cornerstone of our GBP communications and awareness campaigns. At least twice a year, the GBP Review Committee, as well as the Executive Committee and Audit Committee of the Supervisory Board, are informed on relevant GBP metrics, cases, trends and learnings.
Through the Audit Committee of the Supervisory Board, the company also has procedures in place for the receipt, retention and treatment of complaints specifically relating to accounting, internal accounting controls or auditing matters, which enable the confidential, anonymous submission of complaints regarding questionable accounting or auditing matters.
The GBP and underlying policies, including the Financial and Procurement Code of Ethics, are published on the company website, at www.philips.com/gbp.
8.29.2Risk categories and factors
In order to provide a comprehensive view of Philips’ enterprisePhilips believes the risks structured risk assessments take place in accordance withset out below are the Philips process standard to manage risk as described in Our approach to risk management. As a result of this process, amongst others, the following actions were performed during 2018:
The potentialmaterial risks that could impact of challenging global political and economic developments on our results were closely monitored, evaluated and addressed through implementing mitigating actions to the extent possible.Philips strengthened its (cyber) security governance with the objective of increasing the ability to detect, respond to and close (cyber) security incidents.
Philips continued making significant investments in its Quality Management System across the company. Changes in the company-wide quality leadership have been made and new standards and initiatives have been launched.Philips paid an additional contribution to further reduce the deficit in its US pension plan.In order to reduce its exposure to marketachieve our objectives. These risk Philips continued to sell portions of its ownership of Signify (formerly Philips Lighting). Until the completion of the sale of its entire ownership in Signify, Philips remains exposed to changes in the share price of Signify.
The risk overview highlights material risks known to Philips which could hinder it in achieving its objectives. The risk overviewfactors may not, however, include all the risks that ultimately may ultimately affect Philips. Some risks not yet known to Philips, or currently believed not to be material, couldmay ultimately have a major impact on Philips’ businesses, strategic objectives,business, revenues, income, assets, liquidity, capital resources, reputation and/or capital resources.ability to achieve its business and ESG objectives. Philips describesdefines risks in four main categories: Strategic, Operational, Compliance and Financial. Philips presents the risk factors within each risk category in order of its current view of their expected significance. Describing risk factors in their order of expected significance within each risk categoryThis does not mean that a lower listedlower-listed risk factor may not have a material and adverse impact on Philips’ business, strategic objectives, revenues, income, assets, liquidity, capital resources, reputation, and/or the achievement of Philips’ goals.
ability to achieve its business and ESG objectives. Furthermore, a risk factor listed below other risk factors not listed below may ultimately prove to have more significant adverse consequences than those otherlisted risk factors. Over time Philips may change its view as to the relative significance of each risk factor.
8.39.3Strategic risks
Philips may be unable to adapt swiftlygain leadership in health informatics.
Fundamental developments in the health technology industry, such as use of Artificial Intelligence (AI) and Machine Learning (ML), digital platforms delivering insights at scale, and the shift towards cloud-based Software as a Service (SaaS) business models, are dramatically changing our business environment. Our informatics businesses may fall behind ‘born digital’ competitors if Philips fails to changestimely develop and globally commercialize capabilities, adjust business models, introduce new products and services in industry or market circumstances,response to these changes. This could result in an inability to satisfy patient and customer needs, thereby missing out on revenue and margin growth opportunities, which couldmay have a material adverse impact on itsPhilips’ business, financial condition and operating results.
Fundamental shifts in the
Philips may be unable to transform its business model to health technology industry, like the transitionsolutions and services.
As Philips’ business profile has shifted focus towards digital, may drastically change the business environment. If Philips is unablehealth technology, we believe we need to recognize these changes in good time, is late in adjusting itsshift from transactional product-focused business models towards outcome-oriented, multi-year customer partnership business models enabled by solutions and value-added services. If this shift is made too slowly or if circumstances ariseis not successful, we may face a loss of customer relevance, inability to capture growth, and loss of market share. Given its health technology focus, Philips may have a reduced ability to offset such as pricing actionspotential negative impacts on its health technology business by competitors, then this couldother businesses through a more diversified portfolio. The transition to solutions and services business models also raises a longer-term risk of (among other things) stronger customer dependency and default. Any of these factors may have a material adverse effectimpact on Philips’ growth ambitions,business, financial condition and operating result.results.
As Philips’ business is global its operations are exposed to economicmacroeconomic and political developments in countries across the world that could adversely impact its financial condition and results.geopolitical changes.
Philips’ business environment is influencedcan be adversely impacted by politicalmacroeconomic and economicgeopolitical conditions in individual and global markets. There is general uncertainty with regard to macroeconomic factors, such as monetary and healthcare policies, regulatory change, public capital investments in healthcare ecosystems, consumer confidence and spending, pandemics, civil unrest and war amongst others. In particular, geopolitical tensions and protectionism have intensified and increasingly affect policies on trade, production, duties and taxation.
Mature economies are currently the main source of Philips’ revenues, and emergingwhile growth economies are an increasing source of revenues. Philips produces, sources and designs its products and services mainly from the US, the EU (primarily the Netherlands) and China, and the majority of Philips’ investments in tangible and intangible assets are located in these geographies.
Changes in the monetary, policy and trade and tax laws ofpolicies in the US, China and EU can have a significant adverse impact on other mature economies, emerging economies and international financial markets. Such changes, including competitive or nationalistic tariffs and sanctions, may trigger reactions and countermeasures leading to adverse impacts on global trade levelsby and flows, economic growth and political stability, all of which may have an adverse effectimpact on business growthother economies and stability on international financial markets.
It remains difficult to predict changes in, among others, US, Chinese Such measures may include tariffs, sanctions, local sourcing requirements, market access limitations, technology restrictions, data localization requirements and EU macro-economic outlook, foreign policy, monetary policy, healthcare budgets, and trade and tax laws, and the impact of such changes cannot be predicted. Philips may encounter difficulty in planning and managing operations due to the lack of adequate infrastructure, foreign currencydata transfer restrictions, import or export controls, increased healthcare regulation,mobility of talent, nationalization of assets, or restrictions on the repatriation of returns from foreign investments. EconomicThese may lead to adverse impacts on global trade levels and flows, economic growth, financial market and political uncertaintystability, all of which could adversely affect the demand for, and supply of, Philips' products and services. The factors described above, or other factors which may impact conditions relevant to Philips' business environment, are difficult to predict and may have a material adverse impact on Philips’ results of operations orbusiness, financial condition and operating results. They can also make it more difficult for Philips to budget and forecast accurately. Instability and volatility on internationalmake reliable financial marketsforecasts or could have a negative impact on the timing of, and revenues from, the sale of the remaining interest in Signify and on Philips'Philips’ access to funding. Uncertainty remains as
Acquisitions could fail to the levels of (public) capital expenditure in general, unemployment levels, and consumer and business confidence, which could adversely affect demand for products and services offered by Philips. Given that growth in emerging economies is correlated to US, Chinese and European economic growth and that such emerging economies are increasingly important todeliver on Philips’ business operations, the above-mentioned risks are also expected to growplans and could have a material adverse effect on Philips’ financial conditionvalue creation expectations, and results.
The general global political environment remains unfavorable for the businesses due to continued political conflicts and terrorism. Regional geo-political instability in the Middle East, Turkey, the Korean peninsula and other regions, as well as large-scale migration and social instability could continue to impact macroeconomic factors and the international financial markets.
The form of exit of the United Kingdom from the European Union (Brexit) remains uncertain, Philips is exposed to operational and financial risks related to Brexit which may have an adverse impact on its financial condition and operating results. Please refer to Operational risks for further details.
Philips’ overall risk profile is changing as a result of the focus on health technology.
The risk profile of Philips is expected to focus on one industry due to the dynamics of our changing products and services portfolio, acquisitions and partnerships resulting from the execution of our health technology strategy.
Philips’ overall performance in the coming years is expected to depend on the realization of its growth ambitions and results in growth geographies.
Growth geographies are becoming increasingly important in the global market. In addition, Asia is an important production, sourcing and design center for Philips. Philips faces strong competition to attract the best talent in tight labor markets, and intense competition from local companies as well as other global players for market share in growth geographies. Philips needs to maintain and grow its position in growth geographies, invest in data-driven services, invest in local talent, understand developments in end-user preferences, and localize its portfolio in order to stay competitive. If Philips fails to achieve these objectives, it could have a material adverse effect on Philips' growth ambitions, financial condition and operating result.
Philips' growth ambitions and related financial results may be adversely affected by the economic volatility inherent in growth geographies and by the impact of changes in macroeconomic circumstances on growth economies.
Philips does not control joint ventures or associated companies in which it holds interests or invests, which could limit the ability of Philips to identify and manage risks.
Philips holds interests and has invested, and may continue to hold interests and invest, in joint ventures and associated companies in which it has a non-controlling interest. In these cases, Philips has limited influence over, and limited or no control of, the governance, performance and cost of operations of joint ventures and associated companies. Some of these joint ventures and associated companies may represent significant investments and potentially also use the Philips brand. The joint ventures and associated companies that Philips does not control may make business, financial or investment decisions contrary to Philips’ interests or may make decisions different from those that Philips itself may have made. Additionally, Philips' partners or members of a joint venture or associated companywe may not be able to meet their financial or other obligations, which could expose Philipssuccessfully integrate acquired operations.
Selected acquisitions have been and are expected to additional financial or other obligations, as well as having a material adverse effect on the valueremain part of its investments in those entities or potentially subjecting Philips to additional claims. The combined Lumileds and Automotive businesses is an example of an investment in which PhilipsPhilips’ growth strategy. Acquisitions may continue to have a (residual) investment but does not have control.
Acquisitions could expose Philips to integration risks and challenge management in continuing to reduce the complexity of the company.
Philips’ acquisitions may expose Philips in the future to integrationother risks in areas such as sales and service, force integration, logistics, regulatory compliance, legal claims, information technology and finance.finance, and we may not be able to successfully or efficiently integrate new acquisitions with our existing operations, culture and systems. Integration difficulties and complexitychallenges may adversely impact the realization of an increased contributionexpected contributions from acquisitions. PhilipsThese transactions may incur significant acquisition, administrative and other costs, result in connection with these transactions, including costs related to the integration of acquired businesses. Acquisitionsunforeseen operating difficulties, may also divert management attention from other business priorities, and risks.
Furthermore, the organizational simplificationmay ultimately be unsuccessful. Cost savings expected to be implemented following anor other assumptions underlying the business plan relating to a particular acquisition may not be realized. If we are unable to accomplish any of our objectives at the independent operating subsidiaries we acquire, we may not realize the anticipated benefits of acquisitions and the resulting cost savingswe may be difficult to achieve.experience lower than anticipated profits, or even losses. Acquisitions may also lead to a substantial increase in long-lived assets, including goodwill. Write-downs of these assets duegoodwill, which may later be subject to write-down if an acquired business developmentsdoes not perform as expected, which may have a material adverse effect on Philips’ earnings (see also Goodwill).earnings.
Philips’ inabilityPhilips may be unable to secure and maintain intellectual property rights for its products whilst maintaining overall competitiveness, could have a material adverse effect on its results.and services or may infringe others’ intellectual property rights.
Philips is dependent on its ability to obtain and maintain licenses and other intellectual property (IP) rights covering its products and services and its design and manufacturing processes. The IP portfolio is the result of an extensive patentingIP generation process that could be influenced by a number of factors, including innovation.innovation and acquisitions. The value of the IP portfolio is dependent on the successful promotion and market acceptance of standards developed or co-developed by Philips. This is particularly applicable to Personal Health,the segment Other, where third-party licenses from Philips to third parties generate IP royalties and are important to Philips’ results of operations. The timing of licenses from Philips to third parties and aassociated revenues from IP royalties are uncertain and may vary significantly from period to period. A loss or impairment in connection with such licenses to third parties could have a material adverse impact on Philips’ financial condition and operating results.
8.4Operational risks
Failure to comply with quality standards, regulations and associated regulatory actions can trigger warranty and product liability claims against Philips and can lead to financial losses and adversely impact Philips’ reputation, market share and brand.
Philips is required to comply with the highest standards of quality in the manufacture of its medical devices and in the provision of related services. In this regard, Philips is subjectalso exposed to the supervision of various national regulatory authorities. For example,risk that a third party may claim to own IP rights to technology applied in the EU, a new Medical Device Regulation (EU MDR) was published in 2017, which will impose significant additional pre-market and post-market requirements. Conditions imposed by such national regulatory authorities could result in product recalls or a temporary ban on products and/or stoppages at production facilities, or increased implementation costs in the roll out ofPhilips’ products and services. If any such claims of infringement of these IP rights are successful, Philips may be required to pay damages to such third parties or may incur other costs or losses.
Philips may be unable to meet internal or external aims or expectations with respect to ESG-related matters.
Environmental, Social and Governance (ESG) factors may directly and indirectly impact the business environment in which Philips operates. Philips may from time to time disclose ESG-related initiatives or aims in connection with the conduct of its business and operations (for example with respect to reducing greenhouse gas emissions in its supply chain). However, there is no guarantee that Philips will be able to implement such initiatives or meet such aims within anticipated timeframes, or at all. In addition, quality issues and/or liability claims relatedthere is an increasing focus from Philips’ stakeholders – including customers, employees, regulators, and investors – on ESG matters, and those stakeholders may also have ESG-related expectations with respect to Philips’ business and operations. For example, customers may focus on ESG-related criteria in buying our products and servicesany inability by Philips to address concerns about ESG-related matters could affect Philips’ reputationnegatively impact sentiment towards Philips and its relationships with key customers (both customers for endour products and brands. There are an increasing number of regulatory and legislative initiatives to address ESG issues, such as the EU Taxonomy Regulation which aims to define common rules for determining whether economic activities contribute to sustainability objectives. These regulatory and legislative initiatives in turn could also affect how our products or business operations are perceived by customers that use Philips’or other stakeholders. If our products and services in theiror business processes). As a result, depending onoperations do not meet the product and manufacturing site concerned andcriteria for sustainability according to the severityEU Taxonomy Regulation (including the related delegated regulations) or any other similar regulations, this may negatively affect the views of our customers or other stakeholders. Philips may fail to fulfil internal or external ESG-related initiatives, aims or expectations, or may be perceived to do so, or we may fail adequately or accurately to report performance or developments with respect to such initiatives, aims or expectations. In addition, Philips could be criticized or held responsible for the quality and/scope of its initiatives or regulatory issue, this could lead to financial losses through lost revenue and the costgoals regarding ESG matters. Any of any required remedial actions, and couldthese factors may have furtheran adverse impact on Philips’ reputation and brand value or on Philips’ business, financial condition and operating results.
9.4Operational risks
Products and services may fail quality or security standards, which may adversely affect patient safety and customer operations.
Our products and services, either new and/or in field use by our customers, may fail to meet product quality or product security standards, cause (patient) harm, negatively impact customer operations and their ability to provide healthcare, provide unauthorized access to patient records and medical devices through cyber security incidents, or generally cause customer dissatisfaction. Given Philips’ focus on health technology, products and services often require regulatory approvals, including approval of quality and benefit/risk prior to market introduction. Philips may experience issues with the quality of our products and services as a result of various factors, including product design, production, suppliers, materials used, installation, or newly emerging and rapidly evolving cybersecurity threats. These (and other) issues could cause events that need to be actively addressed, which may lead to (amongst others) higher costs of design, market activation, stop use, field recalls and repairs, as well as financial claims and liabilities, damage to our brand reputation, competitive disadvantage, regulatory non-compliance (refer to the Compliance risk section), and loss of market access and market share, any of which may have a material adverse impact on Philips’ market valuation, revenue growth and brand. Please referoperating results. Many of our products also have multiple software components, which may be exposed to Compliance risks.
A breachsecurity threats, including in the securityevent of obsolescence or insufficient maintenance.
Notwithstanding the proliferation of technology and technology-based control systems to detect defects or other errors in our products before they are released, our business ultimately relies on people as our greatest resource, and, from time-to-time, they make mistakes or engage in violations of applicable policies, laws, rules or procedures that are not always caught immediately by our technological processes or by our controls and other procedures, which are intended to prevent and detect such errors or violations. In addition to human error, our quality controls are also subject to overriding, and resource or technical constraints. As such, these quality controls and preventative measures may not be effective in detecting all defects or errors in our products before they have been released into the marketplace. In such an event, the technological reliability and safety of our products could be below our standards and our reputation, brand and sales could be adversely affected. In addition, we could be required to, or may find it necessary to, offer a refund for the product or service, suspend the availability or sale of the product or service or expend significant resources to cure the defect or error. Any of these factors may have in a material adverse impact on Philips’ business, financial condition and operating results.
Philips may be unable to ensure an effective supply chain.
Most of Philips’ operations are conducted internationally, which exposes Philips to supply chain challenges. Philips produces and procures products and parts in various countries globally and in addition is partly dependent on the production and procurement of products and parts from Asian countries, and disruption to production in and shipping from Asian countries could have a disproportionate impact on our business compared to disruptions in other markets. The production and shipping of products and parts, whether from Philips or from third-parties, could be interrupted by various factors such as geopolitics (e.g. US-China relations and protectionist measures taken in various markets), regional conflicts, natural disasters or extreme weather events, (the effects of which may be exacerbated by climate change), container imbalances or port congestions. As a recent example, our sales were impacted unfavorably by the intensified global supply chain issues, primarily related to the shortage of electronic components, poor ocean freight schedule reliability, and COVID-19 affecting suppliers. Although difficult to predict, supply chain headwinds are expected to continue throughout 2022, with a significant disruptionimpact in the first quarter. There is currently scarcity in the availability of semi-conductors due to increased global demand: as a health technology company, Philips is dependent on the availability of semiconductors and continued scarcity may cause increased lead times and adversely impact our informationproduction capacity. Pandemics (e.g. resurgences of COVID-19 or mutations thereof) may disrupt supply chains due to rapid shifts in demand, need for production capacity adjustments and safety improvements in the environments for production, field service, installation and Research & Development in which our employees operate. Philips is also exposed to risks associated with delivery of products and services to customers (for example due to construction material or labor shortages), such as the issues with customer site readiness that Philips encountered in the fourth quarter of 2021, which resulted in (among other things) postponement of equipment installations in hospitals. Such delivery risks may be exacerbated by insufficient staffing levels or staffing disruptions at Philips, its customers or other third-party service providers, including as a result of COVID-19. If Philips is not able to respond swiftly to those various factors, this may result in an inability to deliver on customer needs, ultimately resulting in loss of revenue and margin.
A general shortage of materials (sub-) components or means of transportation drives the risk of fluctuations in price. Philips purchases raw materials, including rare-earth metals, copper, steel, aluminum, noble gases and oil-related products. Commodities have been subject to volatile markets, and such volatility is expected to continue and costs to increase, including as a result of stricter climate change related laws and regulations. Such legislation could require investments in technology systemsto reduce energy use, and greenhouse gas emissions, beyond what we expect in our existing plans or violationcould result in additional and increased carbon pricing. If Philips is not able to compensate for increased costs of data privacy laws(sub-) components, (raw) materials and transportation, reduce reliance thereon, or pass on increased costs to customers, then price increases could adversely affect our operating results,have a material adverse impact on Philips’ business, financial condition reputation and brand.operating results.
Philips is also continuing the process of creating a leaner supply base and is continuing its initiatives to replace internal capabilities with less costly outsourced products and services, which may result in increased dependency on a concentration of external suppliers. These processes also need to be balanced with local market requirements, including those relating to local manufacturing and data storage. Although Philips works closely with its suppliers to avoid supply-related problems, there can be no assurance that it will not encounter supply problems in the future, causing disruptions or unfavorable conditions.
Philips could be exposed to a significant enterprise cybersecurity breach.
Philips relies on information technology to operate and manage its businesses and store confidential data (relating to employees, customers, intellectual property, suppliers and other partners). Philips’ products, solutions and services increasingly contain sophisticated and complex information technologytechnology. We control and generateprocess confidential data related to customerspatients and patients. Potentialcustomers. The healthcare industry is subject to strict privacy, security and safety regulations with regard to a wide range of health information. At the same time geopolitical conflicts and criminal activity continue to drive increases in the number, severity and severitysophistication of cyber attackscyber-attacks globally. Considering the general increase in general. Like manycyber-crime, our customers and other stakeholders are becoming more demanding regarding the cybersecurity of our products and services. As a multinational companies,health technology company, Philips is therefore inherently and increasingly exposed to the risk of cyber attacks.cyber-attacks. Information systems may be damaged, disrupted (including the provision of services to customers) or shut down due to (cyber) attacks by hackers, computer viruses or other malware.cyber-attacks. In addition, breaches in the security of our systems (or the systems of our customers, suppliers or other business partners) could result in the misappropriation, destruction or unauthorized disclosure of confidential information (including intellectual property) or personal data belonging to us or to our employees, partners, customers, suppliers or suppliers. This isother partners. These risks are particularly significant with respect to patient medical records. Successful cyber attacksCyber-attacks may result in substantial costs and other negative consequences, which may include, but are not limited to, lost revenues, reputational damage, remediation and enhancement costs, and other liabilities to regulators, customers and other partners, and may involve incurrence of civil and/or criminal penalties. Furthermore, enhanced protection measures can involve significant costs.
To manage cyber security risks,While Philips has created a Group Security function, instituted a Security Steering Committee (SSC), and implemented security management processes and controls, as well as monitoring risk trends on material security topics, such as the risk of security breaches in our information systems and our products and services. Dedicated security reports are shareddeals with the Boardoperational threat of Management, Executive Committeecybercrime on a continuous basis and Supervisory Board and external auditors. On a quarterly basis, briefings on cyber security risks are providedhas so far been able to the IT Audit & Risk Committee, including an overview of risk responses and progress made. Risk workshops are held to calibrate cyber security risks and the appropriate risk appetite.
The SSC contains representation from several corporate functions, such as Group Security and Internal Audit, Business Groups and relevant Executive Committee members, e.g. the Chief Legal Officer, attend SSC meetings; the SSC is chaired by the Chief Financial Officer. The SSC evaluates and sets the Group’s security strategy and issues security policies. In addition to security strategy, the status of the action items defined during the risk management process are evaluated on progress and effectiveness. Additionally, foundational and risk-based security training has been provided throughout the organization. For Mergers & Acquisitions, specific attention is devoted to ensuring a sufficient level of security maturity before and during the M&A processes, including post-merger integration. However, these efforts may prove to be insufficient or unsuccessful.
Philips has experienced cyber attacks but to date has not incurred anyprevent significant damage as a result, or incurred significant monetary cost in taking corrective action. However,action, there can be no assurance that in the future Philipscyber-attacks will be as successful in avoiding damage from cyber attacks, which could lead to financial losses and other penalties and consequences described above. Additionally, the integration of new acquisitions and the successful outsourcing of business processes are highly dependent on secure and well-controlled IT systems.
Diversity in information technology (IT) couldnot result in ineffectivesignificant or inefficient business management. IT outsourcing and off-shoring strategies couldother consequences than as described above, which may result in complexitiesa material adverse impact on Philips’ business, financial condition and operating results.Philips is exposed to risks in service deliveryconnection with business transformation and contract management.IT system changes and continuity.
Philips expects to engage in multiple transformation programs to support the shift of our business and enable our IT landscape for our health technology strategy. If we do not effectively execute and deliver on those transformation programs, including any upgrades to the Philips IT architecture, this may result in us not realizing our business growth, operational excellence and solutions ambitions, which may have a material adverse impact on our business, financial condition and operating results.
Philips continuously seeks to create a more open, standardized and cost-effective IT landscape, includingfor instance through further outsourcing, off-shoring,offshoring, commoditization and ongoing reduction in the number of IT systems. These changes create third-party dependency risk with regard to the delivery of IT services, the availability of IT systems, and the scope and nature of the functionality offered by IT systems. Although Philips has strengthened thesought to strengthen security clauses in supplier contracts, increased the compliance reviews for those contracts (internallymeasures and externally), and instigated more reviews on key suppliers with regardquality controls relating to information security. Howeverthese systems, these measures may prove to be insufficient or unsuccessful.
If Philips is unableunsuccessful, which may lead to ensure effective supply chain management and is faced, for example, with an interruption to its supply chain, including the inability of third parties to deliver parts, components and services on time, and if it is subject to rising raw material prices, it may be unable to sustain its competitiveness in its markets.
Philips is continuing the process of creating a leaner supply base with fewer suppliers, while maintaining dual/multiple sourcing strategies where possible. This strategy very much requires close cooperation with suppliers to enhance, among other things, time to market and quality. In addition, Philips is continuing its initiatives to replace internal capabilities with less costly outsourced products and services. These processes may result in increased dependency on external suppliers and providers. Although Philips works closely with its suppliers to avoid supply-related problems, there can be no assurance that it will not encounter supply problems in the future or that it will be able to replace a supplier that is not able to meet demand sufficiently quickly to avoid disruptions.
Shortages or delays could materially harm Philips' business. Most of Philips’ activities are conducted outside of the Netherlands, and international operations bring challenges. For example, Philips depends partly on the production and procurement of products and parts from Asian countries, and this constitutes a risk that production and shipping of products and parts could be interrupted by regional conflicts, a natural disaster or extreme weather events resulting from climate change. A general shortage of materials, components or subcomponents as a result of natural disasters also poses the risk of unforeseeable fluctuations in prices and demand, which could have a material adverse effectimpact on Philips’ business, financial condition and operating results.
Philips purchases raw materials, including so-called rare earth metals, copper, steel, aluminum, noble gases and oil-related products, which exposes it to fluctuations in energy and raw material prices. In recent times, commodities have been subject to volatile markets, and such volatility is expected to continue. If
Philips is not abledependent on its people for leadership and specialized skills and may be unable to compensateattract and retain such personnel.
The attraction and retention of talented employees is critical to Philips’ success and the loss of employees with specialized skills could result in business interruptions. There is fierce competition to attract talent in key capability segments and the heightened expectation of attrition post-pandemic increases the risk of loss of talent and critical skills. COVID-19 may continue to present challenges to team interactions and the onboarding of new people. Philips is competing for the best talent and most sought-after skills, and there is no assurance of succeeding compared to other companies in attracting and retaining the highly qualified employees needed in the future. Wage inflation is increasing the competition for talent and the cost of labor. This may negatively impact our ability to deliver on our strategic imperatives and if we are unable to offset the increased costs or pass them on to customers, price increasesof labor through higher selling prices, then rising costs could also have a material adverse impact on Philips’ business, financial condition and operating results.
COVID-19 and other pandemics could have an adverse effect on Philips’ operations and employees.
COVID-19 continued to affect Philips’ operations and results in 2021 and Philips continues to see uncertainty and volatility related to the impact of COVID-19 across the world and in underserved communities in particular. This is driven by, among other things, the effectiveness of vaccination programs, mutations of COVID-19, and potentially new viruses which may cause new pandemics. COVID-19 may continue to impact delivery on our triple duty of care in various ways: the health and safety of our employees (in various working environments, such as production, supply, field service, Research & Development, and working from home); meeting critical customer needs (for example, our production capacity and our ability to deliver, install and provide service); and business continuity (for example, our functional operations, supply chain, and commercial processes). Responses to the risks of COVID-19 are expected to require effort and expense and may negatively affect Philips’ business, financial conditions and results of operations. In contrast,addition, Philips’ customers may not yet be fully focused on making new investments in times of falling commodity prices, medical equipment or may be facing liquidity issues caused by COVID-19, which may adversely impact Philips’ revenue and cash flow generation.
Philips may not fully benefit from such price decreases, since Philips attempts to reduce the risk of rising commodity prices by several means, including long-term contracting or physical and financial hedging.Failureface challenges to drive operational excellence and productivity in Philips’ solution and product creation process and/or increased speed in innovation-to-market could hamper Philips’ profitable growth ambitions.bringing innovations to market.
To realize Philips' ambitions for profitable growth,gain sustainable competitive advantage and to deliver on our purpose and the Quadruple Aim (better health outcomes, improved patient experience, improved staff experience and lower cost of care), it is important that Philips continues to innovate and delivers these innovations to the company makes further improvements in its solution and product creation process, ensuringmarket on a timely delivery of new solutions and products at lower cost, and in customer service levels, to gain sustainable competitive advantage.basis. The emergence of new low-cost competitors, particularly in Asia, further underlines the importance of improvements in the product creationinnovation process. The success of new solution and product creation, however,Success in launching innovations depends on a number of factors, including timelydefining the right value propositions, the right architecture and successful completion ofplatform creation, development, efforts, market acceptance, Philips’ ability to manage the risks associated with new productsproduction and productiondelivery ramp-up, potential quality issues the ability of Philips to attract and retain employees with the appropriate skills, the availability of products in the right quantities and at appropriate costs to meet anticipated demand, and the risk that new products and services may have quality or other defects in the early stages of introduction. This also depends on the ability to attract and retain skilled employees. Costs of developing new products and solutions may be reflected on Philips’ balance sheet and may be subject to write-down or impairment depending on the performance of such products or services and the significance and timing of such write-downs or impairments are uncertain. Accordingly, Philips cannot determine in advance the ultimate effect that new solutions and product creationsinnovations will have on its financial condition and operating results. If Philips fails to create and commercialize products, or fails to ensure that end-user insights are translated into solution and product creations that improve product mix and consequently contribution,its innovations, it may lose market share and competitiveness, which could have a material adverse effect on its financial condition and operating results.
Because Philips is dependent on its personnel for leadership and specialized skills, the loss of its ability to attract and retain such personnel would have an adverse effect on its business.
The attraction and retention of talented employees in sales and marketing, research and development, finance, and general management, as well as highly specialized technical personnel, especially in transferring technologies to low-cost countries, is critical to Philips’ success, particularly in times of economic recovery. The loss of specialized skills could also result in business interruptions. There can be no assurance that Philips will be successful in attracting and retaining highly qualified employees and the key personnel needed in the future.
Risk of unauthorized use of intellectual property rights.
Philips produces and sells products and services which incorporate technology protected by intellectual property rights. Philips develops and acquires intellectual property rights on a regular basis. Philips is exposed to the risk that a third party may claim to own the intellectual property rights to technology applied in Philips products and services, and that in the event that their claims of infringement of these intellectual property rights are successful, they may be entitled to damages and Philips could incur a fine.
Any damage to Philips’ reputation could have an adverse effect on its businesses and brand.
Philips is exposed to developments which could affect its reputation. Such developments could be of an environmental or social nature, connected to the behavior of individual employees or suppliers, or could relate to adherence to regulations related to labor, human rights, health and safety, environmental and chemical management. Reputational damage could materially impact Philips’ brand value, financial condition and operating results.
Brexit could have an adverse effect on the company's operations
Philips sells products and services and has manufacturing operations in the United Kingdom. Depending on expectations (in financial markets) and the actual mode of Brexit, which is currently uncertain, the potential financial impact ranges from adverse movements of the pound sterling versus the euro and the US dollar, supply chain disruptions due to the re-introduction of customs controls and to the imposition of new tariffs on imports or exports to and from the United Kingdom. Philips has been preparing and planning for the potential impact of Brexit and is taking precautionary measures, e.g. by building additional inventories to provide continuity of supplies and services to customers. However, in the event of a disruptive Brexit such precautionary measures may prove to be unsuccessful or insufficient.
8.59.5Compliance risks
Philips is exposed to non-compliance with product safety laws, good manufacturing practicesof its products and data privacy.
Philips’ brand image and reputation would be adversely impacted by non-complianceservices with various product safety laws, good manufacturing practicesregulations and data protection. In light of Philips’ digital strategy, data privacy laws are increasingly important. Also, the Diagnosis & Treatment businesses and Connected Care businesses are subject to various (patient) data protection and safety laws. In the Diagnosis & Treatment businesses and Connected Care businesses, privacy andstandards, including quality, product safety and security issues may arise, especially with respect to remote access or monitoring of patient data, or loss of data on our customers’ systems. Philips is exposed to the risk that its products, including components or materials procured from suppliers, may prove not to be compliant with safety laws, e.g. chemical safety regulations. Such non-compliance could result in a ban on the sale or use of these products.
security.Philips operates in a highly regulated health-technology product safety and quality environment. Philips’environment and its products and services, including parts or materials from suppliers, are subject to regulation (e.g. the new EU Medical Devices Regulation) by various government and regulatory agencies including the(e.g. FDA (US), EMA (Europe), NMPA (China), MHRA (UK), ASNM (France), BfArM (Germany), and comparableIGZ (the Netherlands)). In the European Union (EU), the Medical Device Regulation (EU MDR) became effective in May 2021 and imposes significant additional pre-market and post-market requirements. Examples of other product-related regulations are the EU’s Waste from Electrical and Electronic Equipment (WEEE), Restriction of Hazardous Substances (RoHS), Registration, Evaluation, Authorization and Restriction of Chemicals (REACH) and Energy-using Products (EuP) regulations. We are subject to various domestic, EU, US and foreign agencies (e.g. NMPA China, MHRA UK, ASNM France, BfArM Germany, IGZ Netherlands). Obtaining their approval is costlyenvironmental laws and time-consuming, but a prerequisite for introducing products in the market. A delay or inabilityregulations, which are continuing to obtain the necessary regulatory approvals for new productsdevelop. Any failure to comply with such environmental laws and regulations could expose us to lawsuits, administrative penalties and civil remedies, which may have a material adverse effectimpact on business. The risk exists thatPhilips’ business, financial condition and operating results.
Philips has observed an increase in security requirements in a variety of new and upcoming legislation dealing with market access of consumer goods, medical devices, information and communication technology (ICT) products, (cloud) services, and specific areas such as data protection, Artificial Intelligence and supply chain. Both regulators and customers require us to demonstrate legal compliance and adequate security management using national and international standards and associated certifications. Non-compliance with conditions imposed by regulatory authorities could result in product recalls, a temporary ban on products, stoppages at production facilities, remediation costs, fines, disgorgements of profits or claims for damages. Product safety incidents or user concerns as in the past, could trigger inspections by the FDA business reviewsor other regulatory agencies, which, if failed, could lead to business interruption, which in turntrigger the impacts described above as well as other consequences. These issues could adversely affectimpact Philips’ financial condition or operating result through lost revenue and operating results. For example, we may be obligated to pay more costs in the future because, among other things, the FDA may determine that we are not fully compliantcost of any required remedial actions, penalties or claims for damages and could also negatively impact Philips’ reputation, brand, relationship with the consent decreecustomers and therefore impose penalties under the consent decree, and/or we may be subject to future proceedings and litigation relating to the matters addressed in the consent decree. Please refer to Consent Decree.
Philips’ global presence exposes the company to regional and local regulatory rules, changes to which may affect the realization of business opportunities and investments in the countries in which Philips operates.
Philips has established subsidiaries in over 80 countries. These subsidiaries are exposed to changes in governmental regulations and unfavorable political developments, which may affect the realization of business opportunities or impair Philips’ local investments. Philips’ increased focus on the healthcare sector increases its exposure to highly regulated markets, where obtaining clearances or approvals for new products is of great importance, and where there is a dependency on the available funding for healthcare systems. In addition, changes in government reimbursement policies may affect spending on healthcare.market share.
Philips is exposed to governmental investigations and legal proceedings with regard to possible anti-competitive market practices.
European and various national authorities are focused on possible anti-competitive market practices. Philips’ financial position and results could be materially affected by an adverse final outcomethe risks of governmental investigations and litigation, as well as any potential related claims. In the past, Philips has been subject to such investigations, litigation and related claims. See also Contingent assets and liabilities.
Legal proceedings covering a range of matters are pending in various jurisdictions against Philips and its current and former group companies. Due to the uncertainty inherent in legal proceedings, it is difficult to predict the final outcome of pending or future proceedings.
Philips, including a certain number of its current and former group companies, is involved in legal proceedings relating to such matters as competition issues, commercial transactions, product liability, participations and environmental pollution. Since the ultimate outcome of asserted claims and proceedings, or the impact of any claims that may be asserted in the future, cannot be predicted with certainty, Philips’ financial position and results of operations could be affected materially by adverse outcomes.
Please refer to Contingent assets and liabilities for additional disclosure relating to specific legal proceedings.
Philips is exposed to non-compliance with business conduct rules and regulations.regulations, including anti-bribery, healthcare compliance and data privacy.
Philips’ attempts to realizeIn the execution of its growth ambitionsstrategy, Philips could expose itbe exposed to the risk of non-compliance with business conduct rules and regulations, such as anti-bribery provisions.regulations. This risk is heightened in growth geographies, as the legal and regulatory environment is less developed in growth geographies compared to mature geographies. Examples of compliance risk areas include commission payments to third parties, remuneration payments to agents, distributors, consultants and the like, andas well as the acceptance of gifts, which may be considered in some markets to be normal local business practice.
Defective internal controls would adversely affect our financial reporting The ongoing digitalization of Philips’ products and management process.
The reliabilityservices, including its holding of financial reporting is important in ensuring that management decisions for steeringpersonal health data and medical data, increases the businessesimportance of compliance with data privacy and managing both top-line and bottom-line growth are based on reliable data. Flaws in internal control systems, including internal controls to identify and manage cybersecuritysimilar laws. These risks could adversely affect Philips’ financial condition, reputation and brand and trigger the financial positionadditional risk of exposure to governmental investigations, inquiries and resultslegal proceedings and hamper expected growth.
Accurate disclosures provide investorsfines. For further details, please refer to the sub-section Legal proceedings within the Contingent assets and other market professionals with significant information for a better understanding of Philips’ businesses. Imperfections or lack of clarity in disclosures, including disclosures with respectliabilities note to cybersecurity risks and incidents, could create market uncertainty regarding the reliability of the data presented and could have a negative impact on the Philips share price.Group Financial Statements.
The reliability of revenue and expenditure data is key for steering the business and for managing top-line and bottom-line growth. The long lifecycle of healthcare sales, from order acceptance to accepted installation, together with the complexity of the accounting rules for when revenue can be recognized in the accounts, presents a challenge in terms of ensuring consistent and correct application of the accounting rules throughout Philips’ global business.
8.69.6Financial risks
Philips is exposed to a variety of treasury risks and other financialfinancing risks, including liquidity, risk, currency, risk, interest rate risk, commodity price risk, credit risk,and country risk and other insurable risk.
Negative developments impacting the liquidity of global capital markets could affect thePhilips’ ability of Philips to raise or re-finance debt in the capital markets or could lead to significant increases in the cost of such borrowing in the future. If the markets expect a downgrade or downgrades by the rating agencies, or if such a downgrade has actually taken place, this could increase the cost of borrowing, reduce our potential investor base and adversely affect our business.
Philips’ financing and liquidity position may also impact its ability to implement or complete any share buyback program or distribute any dividends in accordance with its dividend policy or at all. Any announced share buyback program or dividend policy may also be amended, suspended or terminated at any time, including at Philips’ discretion or as a result of applicable law, regulation or regulatory guidance, and any such amendment, suspension or termination could negatively affect the trading price of, increase trading price volatility of or reduce the market liquidity of Philips’ shares or other securities. Additionally, any share buyback program or distribution of dividend could diminish Philips’ cash or other reserves, which may impact its ability to finance future growth and to pursue possible future strategic opportunities. Any share buyback program or dividend payment will depend on factors such as availability of financing, liquidity position, business outlook, cash flow requirements and financial performance, the state of the market and the general economic climate (including the impact of the COVID-19 pandemic) and other factors, including tax and other regulatory considerations. Philips and its subsidiaries may also be subject to limitations on the distribution of shareholders’ equity under applicable law.
Philips operates in over 100 countries and its reported earnings and equity are therefore inevitably exposed to fluctuations in exchange rates of foreign currencies against the euro. Philips’ sales and net investments in its foreign subsidiaries are sensitive in particular to movements in the US dollar, Japanese yen, Chinese renminbi and a wide range of other currencies from developed and emerging economies. Philips’ sourcing and manufacturing spend is concentrated in the Eurozone,European Union, the United States and China. Income from operations is particularly sensitive to movements in currencies of countries where the GroupPhilips has no or very small scalesmall-scale manufacturing/local sourcing activities but significant sales of its products or services, such as Japan, Canada, Australia, and the United Kingdom, and in a range of emerging markets such as Russia, South Korea, Indonesia, India and Brazil.
The creditIn view of the long lifecycle of health technology solution sales and long-term strategic partnerships, the financial risk of financial and non-financial counterparties with outstanding payment obligations creates exposuresexposure risks for Philips, particularly in relation to accounts receivable withfrom customers, and liquid assets, and the fair valuesvalue of derivatives and insurance receivables contracts with financial counterparties. A default by counterparties in such transactions can have a material adverse effect on Philips’ financial condition and operating results.
Philips is exposed to interest rate risk, particularly in relation to its long-term debt position; this risk can take the form of either fair value or cash flow risk. Failure to effectively hedge this risk can impact Philips’ financial condition and operating results.
For further analysis, please refer to Details of treasury / other financial risks.
Philips is exposed to tax risks which could have a significant adverse financial impact.
Philips is exposed to tax risks which could result in double taxation, penalties and interest payments. The source of the risks could originate from local tax rules and regulations as well as in the international and EU regulatory frameworks. These include transfer pricing risks on internal cross-border deliveries of goods and services, as well as tax risks relating to changes in the transfer pricing model. Furthermore Philips is exposed to tax risks related to acquisitions and divestments, tax risks related to permanent establishments, tax risks relating to tax loss, interest and tax credits carried forward, and potential changes in tax law that could result in higher tax expenses and payments. The risks may have a significant impact on local financial tax results, which, in turn, could adversely affect Philips’ financial condition and operating results.
The value of the deferred tax assets, such as tax losses carried forward, is subject to the availability of sufficient taxable income within the tax loss-carry-forward period, but also to the availability of sufficient taxable income within the foreseeable future in the case of tax losses carried forward with an indefinite carry-forward period. The ultimate realization of the company'scompany’s deferred tax assets including tax losses and tax credits carried forward, depends on the generation of future taxable income in the countries where the temporary differences, unused tax losses and unused tax credits were incurred, and on periods during which the deferred tax assets become deductible. Additionally, in certain instances, realization of such deferred tax assets depends on the successful execution of tax planning strategies.is uncertain. Accordingly, there can be no absolute assurance that all deferred tax assets, such as (net) tax losses and credits carried forward, will be realized.
For further details, please refer to the tax risks paragraph
Flaws in Income taxes.Philips has defined-benefit pension plansinternal controls could adversely affect our financial reporting and management process.
Accurate disclosures provide investors and other post-retirement plansmarket professionals with significant information for a better understanding of Philips’ businesses. Failures in a numberinternal controls or other issues with respect to Philips’ public disclosures, including disclosures with respect to cybersecurity risks and incidents, could create market uncertainty regarding the reliability of countries. The funded statusthe information (including financial data) presented and the cost of maintaining these plans are influenced by movements in financial markets and demographic developments, creating volatility in Philips’ financials.
A significant proportion of (former) employees in Europe and North and Latin America is covered by defined-benefit pension plans and other post-retirement plans. The accounting for such plans requires management to make estimates on assumptions such as discount rates, inflation, longevity, expected cost of medical care and expected rates of compensation. Changes in these assumptions (e.g. due to movements in financial markets) cancould have a significantnegative impact on the Defined Benefit Obligationprice of Philips securities. In addition, the reliability of revenue and net interest cost. A negative performanceexpenditure data is key for steering the businesses and for managing top-line and bottom-line growth. The long lifecycle of the financial markets could have a material impact on cash funding requirementshealth technology solution sales, from order acceptance to accepted installation and net interest cost, and also affectservicing, together with the value of certain financial assets and liabilities of the company.
Philips is exposed to uncertainty on the timing and proceeds of a sale of Signify (formerly Philips Lighting)
Philips has sold a substantial part of its ownership in Signify since 2016. Philips’ overall objective is to fully divest its ownership of Signify. The nature or form, timing and level of proceeds from this divestment process are uncertain. The timing and level of proceeds will depend on general market conditions, investor appetite for companies of this size and nature, and the actual and expected future financial performance of Signify. Philips no longer has control over Signify and has deconsolidated the assets, liabilities and financial results of Signify.
Philips is exposed to a number of financial reporting risks, i.e. the risk of material misstatements or errors in its financial reporting.
A risk rating is assigned for each financial reporting risk identified by Philips, based on the likelihood of occurrence and the potential impact of the risk on the financial statements and related disclosures. In determining the probability that a risk will result in a misstatement of a more than inconsequential amount or of a material nature, the following factors are considered to be critical: complexity of the associated accounting activity or transaction process, historyrules for when revenue can be recognized in the accounts, presents a challenge in terms of accountingensuring consistent and reporting errors, likelihood of significant (contingent) liabilities arising from activities, exposure to losses, existence of a related party transaction, volume of activity and homogeneitycorrect application of the individual transactions processed, andaccounting rules throughout Philips’ global business. Significant changes in accounting characteristicsthe way of working, such as working from home during a pandemic, may have an adverse impact on the control environment under which controls are executed, monitored, reviewed and tested. Any flaws in the prior period compared to the period before that.
For importantinternal controls, or regulatory or investor actions in connection with flaws in internal controls, could adversely affect Philips’ financial reporting risk areas identified within Philips, please refer to the 'Usecondition, results of estimates' section in Significant accounting policies, as the company has assessed that reporting risk is closely related to the use of estimatesoperation, reputation and the application of judgment.brand.
910Supervisory Board
The Supervisory Board supervises the policies of the Board of Management and Executive Committee and the general course of affairs of Koninklijke Philips N.V. and advises the executive management thereon. The Supervisory Board, inIn the two-tier corporate structure under Dutch law, the Supervisory Board is a separate body that is independent of the Board of Management and independent corporate body.
the company. The RulesSupervisory Board supervises the policies, management and general affairs of ProcedurePhilips, and assists the Board of Management and the Executive Committee with advice. Please also refer to Supervisory Board within the chapter Corporate governance.
Feike Sijbesma2)3)
Born 1959, Dutch
Chairman of the Supervisory Board
are published on the company’s website. For details on the activities of the Supervisory Board, see Supervisory Board report and Supervisory Board.Jeroen van der Veer23
Born 1947, Dutch
Chairman
since May 2021
Chairman of the Corporate Governance and Nomination & Selection Committee
Member of the Supervisory Board since 2009; third2020; first term expires in 20212024
Former Chief ExecutiveCEO and Non-executive Directormember of Royal Dutch Shell and currentlythe Managing Board of Koninklijke DSM NV. Currently Honorary Chairman of Koninklijke DSM NV, member of the Supervisory Board of Royal Boskalis Westminster N.V. Dutch Central Bank (DNB), non-executive Director of Unilever NV, Co-Chair of the Global Climate Adaptation Center and Member of the Board of Trustees of the World Economic Forum.
Chua Sock Koong1)
Born 1957, Singaporean
Member of the Supervisory Board since 2021; first term expires in 2025
Former Group CEO of Equinor ASA.Singapore Telecommunications Limited and currently member of the Board of Directors of Prudential plc, Bharti Airtel Limited, Bharti Telecom Limited and Cap Vista Pte Ltd. Member of the Council of Presidential Advisors of Singapore, Deputy Chairman of the Supervisory CouncilPublic Service Commission of Delft University of Technology. Chairman of Het Concertgebouw Fonds (foundation). Also a senior advisor at Mazarine Energy B.VSingapore.
Neelam Dhawan1)
Born 1959, Indian
Member of the Supervisory Board since 2012; secondthird term expires in 20202022
Head India Advisory Board, IBM. Non-Executive Board Member of ICICI Bank Limited, and Yatra Online Inc.Inc, Skylo Technologies Inc and Capita plc. Chair of the Board of Directors at Capillary Technologies Ltd. Former Vice President, Global Sales and Alliance - Asia Pacific & Japan, Hewlett Packard Enterprise.
Orit GadieshLiz Doherty1)
Born 1951, Israeli/American1957, British/Irish
Chairwoman of the Audit Committee
Member of the Supervisory Board since 2014; second2019; first term expires in 20222023
Currently ChairwomanFormer CFO and board member of Bain & CompanyReckitt Benckiser Group PLC, former CFO of Brambles Ltd, former non-executive director and audit committee member at Delhaize Group, Nokia Corp., SABMiller PLC and Dunelm Group PLC. Currently, member of the FoundationSupervisory Board and Chairwoman of the World Economic Forum (WEF)audit committee of Novartis AG and of Corbion N.V. Fellow of the Chartered Institute of Management Accountants. Former non-executive board member of the United States CouncilUK Ministry of Foreign Relations.Justice and of Her Majesty’s Courts and Tribunals Service (UK). Currently advisor to GBfoods SA and Affinity Petcare SA, subsidiaries of Agrolimen SA.
Marc Harrison4)
Born 1964, American
Member of the Supervisory Board since 2018; first term expires in 2022
Currently President and Chief Executive Officer of Intermountain Healthcare. Former Chief of International Business Development for Cleveland Clinic and Chief Executive Officer of Cleveland Clinic Abu Dhabi.
Christine Poon2Peter Löscher31)4)
Born 1952, American1957, Austrian
Vice-Chairwoman and Secretary
Chairwoman of the Quality & Regulatory Committee
Member of the Supervisory Board since 2009; third2020; first term expires in 20212024
Former Vice-ChairwomanPresident and CEO of JohnsonSiemens AG, President of Global Human Health and Member of the Executive Board of Merck & Johnson’sCo., President and CEO of GE Healthcare Bio-Sciences and member of GE’s Corporate Executive Council, CEO and Delegate of the Board of Directors and Worldwide Chairwomanof Renova Management AG. Currently Chairman of the PharmaceuticalsBoard of Directors of Sulzer AG, member of the Board of Directors of Telefónica S.A. and Chairman of the Supervisory Board of Telefónica Deutschland Holding AG, Non-Executive Director of Thyssen-Bornemisza Group AG and former deanDoha Venture Capital LLC and Senior Advisor at Bain Capital Private Equity.
Indra Nooyi3)
Born 1955, American
Member of Ohio State University’s Fisher Collegethe Supervisory Board since 2021; first term expires in 2025
Former CFO and Chairman and CEO of Business.PepsiCo. Currently member of the Board of Directors of Prudential, Regeneron and Sherwin Williams.
Heino von Prondzynski234
Born 1949, German/Swiss
ChairmanChair of the RemunerationAudit Committee
of Amazon, Inc. Member of the SupervisoryInternational Board since 2007; third term expires in 2019
Formerof Advisors of Temasek, member of the CorporateBoard of Trustees and Executive Committee of the F. Hofmann-La Roche Group and former CEOMassachusetts Institute of Roche Diagnostics. Currently Chairman of the Supervisory Board of Epigenomics AG and Quotient Ltd, and member of the Supervisory Board of The Binding Site Group Ltd.Technology.
David Pyott12)4)
Born 1953, British/American
Chairman of the Quality & Regulatory Committee
Member of the Supervisory Board since 2015;
first second term expires in 20192023
Former Chairman and Chief Executive Officer of Allergan, Inc. Currentlyand former Lead Director of Avery Dennison Corporation. MemberCurrently member of the Board of Directors of Alnylam Pharmaceuticals Inc., BioMarin Pharmaceutical Inc. and privately held Rani Therapeutics, and Chairman of BionizPliant Therapeutics. Also Deputy Chairman of the Governing Board of London Business School, member of the Board of Trustees of California Institute of Technology, President of the International Council of Ophthalmology Foundation and memberPresident of the Advisory Board of the Foundation of the American Academy of Ophthalmology.
Paul Stoffels2)3)
Born 1962, Belgian
Vice-Chairman and Secretary
Chairman of the Remuneration Committee
Member of the Supervisory Board since 2018; first term expires in 2022
CurrentlyWith effect from April 1, 2022, CEO of Galapagos NV. Until January 1, 2022, Vice Chair of the Executive Committee and Chief Scientific Officer at Johnson & Johnson. Previously, Worldwide Chair of Pharmaceuticals at Johnson & Johnson, CEO of Virco and Chairman of Tibotec.
Jackson Tai14
Born 1950, American
Chairman of Audit Committee
MemberFor a current overview of the Supervisory Board since 2011; second term expires in 2019
Former Vice-Chairman and CEO of DBS Group and DBS Bank Ltd and former Managing Director at J.P. Morgan & Co. Incorporated. Currently a member of the Boards of Directors of Eli Lilly and Company, HSBC Holdings PLC, and Mastercard. Also Non-Executive Director of Canada Pension Plan Investment Board.
members, see also https://www.philips.com/a-w/about/supervisory-board.html11)member of the Audit Committee22)member of the Remuneration Committee33)member of the Corporate Governance and Nomination & Selection Committee44)member of the Quality & Regulatory Committee
1011Supervisory Board report
Letter from the Chairman of the Supervisory Board
Dear Stakeholder,
2021 was a challenging, mixed year for Philips, succeededas the company saw strong performance across most of its core businesses offset by a number of significant headwinds – increasing supply chain pressures, the COVID-19-related postponement of equipment installations, and the consequences of the voluntary recall by Philips Respironics. However, in makingview of the strong customer demand and record-high order book, the company expects to resume its growth and margin expansion trajectory in the course of 2022, with a comparable sales decline at the start of the year followed by a recovery and strong second half of the year.
In June, Philips' subsidiary Respironics initiated a voluntary recall notification for certain sleep and respiratory care products, to address potential health risks related to the sound abatement foam in these devices. Following the substantial progressramp-up of production, service and repair capacity in 2018, despite increasing global geo-political and economic uncertainty. Aroundclose dialogue with regulators across the world, people need improved accessthe repair and more personalized healthcare; atreplacement program is well under way in the same time, we must better manageUnited States and several other markets. As a company wholly committed to patient safety, Philips fully understands the costimpact this issue has had on patients and care givers.
In September, Philips successfully completed the sale of the Domestic Appliances business, concluding its major divestments. We believe this will allow Philips to focus fully on continuing its transformation into a solutions company and extending its leadership in health technology.
Strategy and portfolio continue to resonate with customers
Health systems around the world are striving to transform the delivery of care, to society.
Philips has a compellingwith the aim of improving health outcomes, patient and staff experience, and productivity. Philips’ strategy to become a leading providerand portfolio of health technology alonginnovations across the health continuum and to help advance value-based care and population health. The company’s innovations have strong market positions– supporting personal health, precision diagnosis, image-guided therapies and chronic care, while enabling an effective, integrated connected care, continuum,and leveraging the power of data and informatics. Its focus on customers’ needs is being rewardedinformatics – continues to resonate very well with a growing numbercustomers.
In recent years, Philips has invested significantly in informatics and data science, as well as cloud technology, to enable the delivery of solutions across care settings. This drive continued in 2021 with the acquisitions of BioTelemetry and Capsule Technologies in particular, strengthening Philips’ leadership in patient care management solutions for the hospital and the home.
Customers’ appreciation for Philips’ strategy was underlined by the 80 long-term strategic partnerships.partnerships the company signed with hospitals and health systems around the world in the course of the year.
ESG commitments
As a purpose-driven company, Philips continueshas adopted a fully integrated approach to doing business responsibly and sustainably. In 2021, Philips continued to deliver on ambitious sustainabilitythe key commitments supporting improved accessset out in its Environmental, Social & Governance (ESG) framework – e.g. by remaining carbon-neutral in its own operations, by engaging with suppliers and customers to care for underserved communities, drivinghelp minimize environmental impact across the value chain, as well as by leading the transition to a circular economy business approach, and taking further stridesextending access to become carbon-neutralcare for underserved communities. In 2021, Philips also published its first Country Activity and Tax Report, providing transparency on taxes paid and collected in its operations by 2020.
With regard to financial performance, Philips was able to deliver on its medium-term roadmap of growing comparable sales*within the 4-6% bracket, while comparable order intake*growth was 10% and the Adjusted EBITA*margin increased by 100 basis points year-on-year. Capital allocation is balanced across dividends, share buybacks, organic R&D investments, and M&A transactions.countries where it operates.
Supervisory Board
The Supervisory Board spent several sessions in 20182021 reviewing, among other things, Philips’the Philips Respironics recall, quality, strategy, risk, business controls, financial and business performance, strategy, Board and Management succession,as well as its talent pipeline business controls, quality, regulatory compliance, and sustainabilitysuccession planning, and Environmental, Social & Governance (ESG) programs.
DuringAt the course ofAGM in May, the year theSupervisory Board was strengthened by the addition of two new members. Marc Harrison, currently PresidentIndra Nooyi and Chief Executive OfficerChua Sock Koong. Indra Nooyi is a proven business leader in the consumer sectors, with a strong track record of Intermountain Healthcare, hasdelivering sustained profitable growth, while doing business sustainably and responsibly. Chua Sock Koong brings in-depth knowledge of health systemsinformation technology and the overall healthcare industry in North America,growth of digital services businesses, as well as globally. Paul Stoffels, currently Chief Scientific Officer at Johnson & Johnson, has in-depth knowledge across medical device, pharmaceuticalextensive experience of business in Asia. Their strategic insights will be of great value to our Board and consumer segmentsto Philips, as the company strives to expand its leadership in health technology solutions.
We are also very pleased to propose Herna Verhagen and has led teamsSanjay Poonen as new members of the Supervisory Board to develop transformationalthe Annual General Meeting of Shareholders, which will be held on May 10, 2022. With her proven track record in driving a customer-first company culture and a background in e-commerce logistics, Herna Verhagen will bring valued and new medicinesperspectives to the Supervisory Board, while Sanjay Poonen’s extensive experience in enterprise IT and healthcare solutions. cloud-enabled business models will further strengthen the Supervisory Board’s digital competencies.
I am confident bothhonored to have taken over the role as Chairman of the Supervisory Board in May 2021. I would like to record the Supervisory Board’s gratitude to my predecessor, Jeroen van der Veer, for his many years of leadership. I also wish to thank Christine Poon and Orit Gadiesh, who stepped down from the Supervisory Board in 2021, and Neelam Dhawan, who will make a significant contribution tostep down at the workend of our Board.
the Annual General Meeting of Shareholders in 2022, for their long-term counsel and support. Together with my colleagues on thefellow Supervisory Board members, I look forward to providing furthercontinued oversight of Philips as it continuesacts on its exciting journey as a leader inpurpose of improving people’s health technology, improvingand well-being through meaningful innovation, and advising the livesBoard of billions of consumers, patients and healthcare professionals around the world.Management where applicable.
Jeroen van der Veer
Feike Sijbesma
Chairman of the Supervisory Board
Introduction Supervisory Board Report
The Supervisory Board supervises and advises the Board of Management and Executive Committee in performing their management tasks and setting the direction of the business of the Philips Group. The Supervisory Board acts, and we as individualAs members of the Supervisory Board, we act in the interests of KoninklijkeRoyal Philips, N.V., its businesses and all its stakeholders. This report includes a more specific description of the Supervisory Board’s activities during the financial year 20182021 and other relevant information on its functioning.
Activities of the Supervisory Board
The overview below indicates a number ofkey matters that we reviewed and/or discussed during meetings throughout 2018:in the course of 2021:
The annual reviewRegular assessments of the company’s strategy. Building on theoverall strategy of becomingto extend its leadership as a leader in health technology this year’scompany. These included reviews of the strategic priorities for each of the business clusters, the company’s informatics strategy review focusedand its strategy in key markets and the Philips Business System (the company’s standard operating model). An external expert provided the Supervisory Board with an external perspective on the progress madedigital health in the executioncoming five years and the challenges and opportunities this brings to the company;- Regular reviews of the
strategy by businesscompany’s acquisitions, divestments and market,partnerships funnel; - Selected acquisitions and divestments, including the
latest insightsacquisitions of BioTelemetry, Inc., Capsule Technologies, Inc., Cardiologs (closed on market needs, technology developmentsJanuary 7, 2022), and competitor moves. The Supervisory Board also reviewed future strategic scenarios alongVesper Medical Inc. (closed on January 11, 2022) and the health continuum, which were subsequently detailed out in strategy deep dives in the second halfdivestment of the year.Domestic Appliances business; - The (business) performance of the Philips Group and its underlying businesses,
andas well as the company’s flexibility under its capital structure and credit ratings to pay dividends and to fund capital investments, including share repurchases and other financial initiatives;initiatives and the EUR 1.5 billion share buyback program the company announced on July 26, 2021; - The (business) performance of companies previously acquired by the company;
- Oversight of the adequacy of financial and internal controls;
- Capital allocation, including the dividend policy and pay-out and the M&A framework;
- The performance of the Integrated Supply Chain and an update on the key transformation programs and the progress made;
- Geopolitical developments and their impact on Philips’ business;
- Philips’ annual management
commitment,commitments, including the 20192022 key performance indicators for the Executive Committee, the 2022 targets for such key performance indicators, and the annual operating plan for 2019;2022; - Quality
and regulatory& Regulatory compliance, systems and processes. TheIn view of the Philips Respironics voluntary recall notification related to the sound abatement foam in certain sleep and respiratory care products (announced on June 14, 2021), the Supervisory Board also reviewed the requirements of the European Union Medical Device Regulationregularly discussed this issue and the planprogress made with respect to meet these requirements.the repair and replacement program with Management. Furthermore, the Supervisory Board was regularly updated on the internal Accelerating Patient Safety and Quality program that was launched by the company in the course of 2021. Also refer to the description of the activities of the Quality & Regulatory Committee in the section Report of the Quality & Regulatory Committee of this Supervisory Board report; Capital allocation, includingThe company’s quality transformation journey, as embedded in the dividend policy, the progress made with the share buyback program announced on June 28, 2017 and the M&A framework;The potential scenarios for the envisaged sell-down of the remaining stake in Signify (formerly Philips Lighting);Significant acquisitions and divestments, including the announcement (in June 2018) of the acquisition of EPD Solutions;Philips’ industrial strategy, focusing on the supply chain and manufacturing footprint optimization;The performance and transformation program for Personal Health and Health System marketing;Business System;- Enterprise risk management,
which included an updateincluding updates on and improvements of the enterprise risk managementrelevant processes, the outcome of the annual risk assessment and discussiondialogue with the Executive Committee, an update of the keytop risks faced by the Philips the control measures andGroup, the possible impact of such risks. Risk domains covered includedrisks, and control and mitigation measures. Reference is made to the section Our approach to risk management; - The succession of Jeroen van der Veer as Chairman of the Supervisory Board by Feike Sijbesma and the changes in the composition of the committees of the Supervisory Board;
- The company’s People strategy,
operations, financereview of talent management, leadership and compliance; Talent management, covering strategic workforce capabilities,talent development, leadership culture, inclusion &and diversity, culture and succession planning for seniorexecutive management;- Evaluation of the Board of Management and the Executive Committee based on the achievement of specific group and individual targets approved by the Supervisory Board at the beginning of the year;
Oversight of adequacy of financial and internal controls;- Significant civil litigation claims against, and public investigations
against or into, Philips; - Philips’ Environmental, Social and
A review Governance (ESG) approach, comprising an update on the launch of, and progress made with respect to the 2025 ESG key programs and sustainability commitments and aims ( including circular revenues) and Philips’ five-year sustainability program, which was announcedaim to improve the health and well-being of 2.5 billion people per year by 2030 through meaningful innovation, as well as how ESG is embedded in 2016 and includes targets for Philips’ solutions, operations and supply chain.the Philips Business System.
The Supervisory Board also conducted “deep dives” on'deep dives' into a range of topics including:
Strategic roadmapsStrategy and education sessions on guided therapy, precision diagnostics, connected care, chronic careperformance trajectory, and consumer health.Artificial intelligence (AI)major innovations (including demonstrations of latest innovations) in the Personal Health, Diagnosis & Treatment and Philips’ vision on adaptive intelligence, covering Philips AI competencies, capabilities and key platform infrastructure.Connected Care segments;- The strategy and performance of Philips North America and
China,Philips International Markets, including market developments,trends, business performance and key strategic initiatives.and transformation initiatives and priorities.
The Supervisory Board also reviewed Philips’ annual and interim financial statements, including non- financialnon-financial information, prior to publication thereof.publication.
Supervisory Board meetings and attendance
In 2018,2021, the members of the Supervisory Board convened for seven regular meetings and onetwo extraordinary meeting.meetings. Moreover, we collectively and individually interacted with members of the Board of Management, the Executive Committee and with senior management outside the formal Supervisory Board meetings. The Chairman of the Supervisory Board and the CEO met regularly for bilateral discussions about the company’s progress of the company on a variety of matters. TheIndra Nooyi and Chua Sock Koong, appointed to the Supervisory Board also held bilateral meetings with several members of the Executive Committee to discuss various topics, including operational performance, quality, investor relations, innovation and financial and internal controls. The Supervisory Board members who were appointed in 2018effect from May 6, 2021, followed an induction program and interacted with the members of the Board of Management and various Executive Committee members for deep-divesdeep dives on strategy, finance and investor relations, governance and legal affairs, operations and human resource management.affairs.
The Supervisory Board meetings were well attended in 2018.2021. All Supervisory Board members were present during the Supervisory Board meetings in 2018. The Supervisory Board visited2021, with the Philips Stamford office in Connecticut, North America,exception of one member unable to attend the January 2021 meeting, one member unable to attend the February 2021 meeting, and reviewedone member unable to attend the strategy and performance of Philips North America. The Supervisory Board also visited the company’s manufacturing and research and development facilities in Suzhou, China, to meet with local and regional management and toured the site to view demonstrations of the latest innovations in the area of ultrasound, diagnostic imaging and image guided therapy. Furthermore, the Supervisory Board visited the company’s research facilities in Eindhoven, the Netherlands, and met with various executives from Philips Research and Design.October 2021 meeting. The committees of the Supervisory Board also convened regularly (see the separate reports of the committees below) and all of the committees reported back on their activities to the full Supervisory Board. In addition to the formal meetings of the Board and its committees, the Board members held private meetings. We, as members of the Supervisory Board, devoted sufficient time to engage (proactively if the circumstances so required) in our supervisory responsibilities.
Because of restrictions related to the COVID-19 pandemic, the meetings of the Supervisory Board and its committees were mostly held virtually and there have been limited local site visits by Supervisory Board members.
Composition, diversity and self-evaluation by the Supervisory Board
The Supervisory Board is a separate corporate body that is independent of the Board of Management (andand the Executive Committee).company. Its independent character is also reflected in the requirement that members of the Supervisory Board can be neither a member of the Board of Management nor an employee of the company. The Supervisory Board considers all its members to be independent pursuant tounder the Dutch Corporate Governance Code. Furthermore, the members of its Audit Committee are independent under the rules of the US Securities and Exchange Commission, applicable to the Audit Committee.
The Supervisory Board currently consists of nine members. In 2018,2021, there were a number of changes to the membershipcomposition of the Board. Paul StoffelsBoard, all effective as per (the end of) the Annual General Meeting of Shareholders held in 2021. Indra Nooyi and Marc HarrisonChua Sock Koong were each appointed as members of the Supervisory Board. Orit Gadiesh was re-appointed as a member of the Supervisory Board for an additionala term of four years. The term of appointment of Jeroen van der Veer and Christine Poon expired and Orit Gadiesh stepped down from the Supervisory Board. The Supervisory Board appointed Feike Sijbesma as Chair of the Supervisory Board, and Paul Stoffels as Vice-Chair and Secretary of the Supervisory Board.
The agenda for the upcoming 20192022 Annual General Meeting of Shareholders will include a proposalproposals to re-appoint David PyottPaul Stoffels and Marc Harrison as a membermembers of the Supervisory Board for an additional termand to appoint Herna Verhagen and Sanjay Poonen as new members of four years. The currentthe Supervisory Board. At the end of the 2022 Annual General Meeting of Shareholders, the term of appointment of Heino von ProndzynskiNeelam Dhawan will expire at the end of such meeting, after serving three consecutive terms on the Board. Jackson Tai, whose second term expires in May, 2019,expire. She will not be available for re-appointment as a member of the Supervisory Board. Due to other obligations and in alignment with Philips, Jackson Tai will effectively step down from the Supervisory Board after having served a decade on March 31, 2019.the Supervisory Board. We, wishas members of the Supervisory Board, would like to expresstake this opportunity to thank Neelam Dhawan for her contributions to our sincere appreciation to Heino and Jackwork and are grateful forvery pleased with the availability of the proposed new members (subject to their years of service, for their dedication andappointment at the wisdom that they have brought to Supervisory Board discussions and decisions.2022 AGM).
The Supervisory Board paysattaches great value to diversity in its composition and ithas adopted a Diversity Policy for the Supervisory Board, the Board of Management and the Executive Committee (see the Corporate Governance and Nomination and Selection Committee report for further details).Committee. As laid down in the Diversity Policy, the aim is that the Supervisory Board, (and the Board of Management and the Executive Committee)Committee comprise members with a European and a non-European background (nationality, working experience or otherwise) and overall at least four different nationalities, and that they comprise at least 30% male and at least 30% female members. The Supervisory Board’s composition furthermore follows the profile as included in the Rules of Procedure of the Supervisory Board, which aims for an appropriate combination of knowledge and experience among its members, encompassing marketing, manufacturing, technology and informatics, healthcare, financial, economic, social and legal aspects of international business and government and public administration in relation to the global and multiproduct character of Philips’ businesses. The aim is also to have one or more members with an executive or similar position in business or society no longer than 5five years ago. The composition of the Supervisory Board shall be in accordance with the best practice provisions on independence of the Dutch Corporate Governance Code, and each member of the Supervisory Board shall be capable of assessing the broad outline of the overall policy of the company. The size of the Supervisory Board may vary as consideredit considers appropriate to support its profile.
The Supervisory Board spent time in 2021 considering its composition, as well as the composition of the Executive Committee (including the Board of Management). Currently, the composition of the Supervisory Board meets the abovementionedabove-mentioned gender diversity goals, as 44% of the Supervisory Board members (4 out of 9) are female. Overall, 32% (7 out of 22) of the positions to which the Diversity Policy applies (Supervisory Board and nationality targets. We noteExecutive Committee/Board of Management) are held by women. Upon the proposed (re-)appointments at the upcoming 2022 Annual General Meeting of Shareholders, 40% of the Supervisory Board members (4 out of 10) will be female and 30% of the positions to which the Diversity Policy applies will be held by women. The proposed (re)appointments are in accordance with the mandatory gender quota imposed by Dutch law, effective 2022, requiring that at least one-third of the supervisory board members are women (and at least one-third are men).
As explained in the report of the Corporate Governance and Nomination and Selection Committee and the section Inclusion & Diversity of this Annual Report, the company continues its efforts to enhance inclusion and diversity in the entire organization. Philips’ company-wide commitment towards Inclusion & Diversity is reflected in the Inclusion & Diversity Policy, the General Business Principles and the Fair Employment Policy, which were all updated in 2021. The company continues to put in place measures to enhance diversity and inclusion at all levels within the organization. Philips has set a goal of 35% gender diversity in senior leadership positions (a subset of Management and Executive positions) by the end of 2025. The Supervisory Board expects these efforts to contribute to the achievement of the company’s gender (and other) diversity goals, although there may be various pragmatic reasons – such as other relevant selection criteria and the availability of suitable candidates – that could play a role inhave an impact on the achievement of our diversity targets.
goals. The Supervisory Board has spent time throughout 2018 considering its composition and it will continue to devote attention to this topic during 2019.in 2022.
In 2018,2021, each member of the Supervisory Board completed a questionnaire to verify compliance with the applicable corporate governance rules and its ownthe Rules of Procedure.Procedure of the Supervisory Board. The outcome of this survey was satisfactory.
Furthermore, anAn independent external party facilitated the 20182021 self-evaluation process for the Supervisory Board and its committees bycommittees. This included drafting theand submitting relevant questionnaires, interviewing members of the Supervisory Board as well as aggregating and reporting on the results. The questionnairequestionnaires covered topics such as the composition of the Supervisory Board and the required profile (in terms of skills and experience, geographical coverage and diversity) of future Supervisory Board members, stakeholder oversight, dynamicsstrategic oversight, the management and focus of Supervisory Boardthe meetings and relationship betweenof the Supervisory Board, and Management, access to information, the frequency and quality of the meetings, quality and timeliness of the meeting materials, the nature of the topics discussed during meetings and the functioningeffectiveness of the Supervisory Board’s committees. The questionnaires were designed in such a way that a comparison between two consecutive years could be made. The responsesoversight of various aspects of the company’s business (such as product and service quality), risk management, succession planning and human resources oversight, the engagement with Management and recommendations to improve the questionnaire were aggregated into a report, after which bilateral meetings were held in early 2019 betweenSupervisory Board’s functioning and ways of working going forward. Furthermore, the performance of the Chairman and of the Supervisory Board and each member. For the Chairman, the Vice-Chair met with the other Supervisory Board members before a bilateral meetingBoard’s committees was held between the Vice-Chair and the Chairman.evaluated separately.
The report on the results of the self-evaluation werewas shared and discussed in thea private meeting of the Supervisory Board and in the committees.Board. The responses provided by the Supervisory Board members indicated that the Supervisory Board continues to be a well-functioning team.team, is of an appropriate size and benefits from expertise, diversity and international representation. A number of suggestions were made to improvefurther strengthen the performanceSupervisory Board going forward, focusing among others on the following topics: knowledge of medical technology, the key regulatory regimes applicable to the company, the company’s approach to research and development, product design, manufacturing and suppliers (including in the context of quality and patient safety), the overall control structure and reporting lines in the company and succession planning. Early 2022, the Chairman of the Supervisory Board overdiscussed the coming period, such as increasingresults of the Board’s focus onself-evaluation with each of the company’s talent and succession pipeline, digital & data, and developments in the health technology market and at business competitors. The functioningindividual members of the Supervisory Board, committees was rated highly and specific feedback was addressed bythe evaluation of his own functioning with the Vice-Chairman. Finally, the Supervisory Board noted the smooth transition of the role of the Chairman of each committee with its members. in 2021.
The periodic use of an external facilitator to measure the functioning of the Supervisory Board will continue to be considered in the future.
Supervisory Board composition
| | | | | | | | | | Feike Sijbesma | Paul Stoffels | Chua Sock Koong1) | Neelam Dhawan | Liz Doherty | Marc Harrison | Peter Löscher | Indra Nooyi1) | David Pyott |
| | | | | | | | | | 1959 | 1962 | 1957 | 1959 | 1957 | 1964 | 1957 | 1955 | 1953 |
| | | | | Male | Male | Female | Female | Female | Male | Male | Female | Male |
| | | | | | | | | | Dutch | Belgian | Singaporean | Indian | British/Irish | American | Austrian | American | British/American |
| | | | | | | | | | 2020 | 2018 | 2021 | 2012 | 2019 | 2018 | 2020 | 2021 | 2015 |
Date of (last) (re-)appointment | | | | | | | | | | n/a | n/a | n/a | 2020 | n/a | n/a | n/a | n/a | 2019 |
| | | | | | | 2024 | 2022 | 2025 | 2022 | 2023 | 2022 | 2024 | 2025 | 2023 |
| | | yes | yes | yes | yes | yes | yes | yes | yes | yes |
| | | | | | | |
| Committee memberships2) | | RC3) & CGNSC | RC & CGNSC4) | AC5) | AC | AC | QRC | AR & QRC | CGNSC6) | AC7), RC8) & QRC |
Attendance at Supervisory Board meetings | | | | (9/9) | (8/9) | (7/7) | (9/9) | (9/9) | (9/9) | (9/9) | (7/7) | (9/9) |
Attendance at Committee meetings | | | RC (7/7) CGNSC (7/7) QRC (7/7) | | | | | RC (3/3) CGNS (5/5) | RC (4/4) CGNSC (2/2) | AC (3/3) | AC (5/6) | AC (6/6) | QRC (6/7) | AC (6/6) QRC (7/7) | CGNSC (2/2) | AC (2/2)
RC (3/3) QRC (7/7) |
| | | yes | yes | yes | yes | yes | yes | yes | yes | yes |
| | | | | | | yes | | yes | | | yes | yes | yes |
| | | | | yes | yes | | yes | yes | | yes | yes | |
| | | | | | | yes | yes | yes | yes | yes | yes | yes | yes | |
| | | | | yes | | | | yes | yes | | yes |
| | | | | | yes | yes | | yes | yes | yes | yes | yes |
11)Appointed as member of the Supervisory Board with effect from August 1, 2018May 6, 2021
22)Appointed as member of the Supervisory Board with effect from October 19, 2018
3CGNSC: Corporate Governance & Nomination and Selection Committee; AC: Audit Committee; RC: Remuneration Committee; QRC: Quality & Regulatory Committee
3)Feike Sijbesma joined the Remuneration Committee in the course of 20214)Paul Stoffels joined the Corporate Governance & Nomination and Selection Committee in the course of 20215)Chua Sock Koong joined the Audit Committee in the course of 20216)Indra Nooyi joined the Corporate Governance & Nomination and Selection Committee in the course of 20217)David Pyott stepped down from the Audit Committee in the course of 20218)David Pyott joined the Remuneration Committee in the course of 2021 Supervisory Board committees
TheWhile retaining overall responsibility, the Supervisory Board has assigned certain of its tasks to the three long-standing committees, also referred to in the Dutch Corporate Governance Code: the Corporate Governance and Nomination & Selection Committee, the Remuneration Committee and the Audit Committee. TheIn 2015, the Supervisory Board also established the Quality & Regulatory Committee. The separate reports of these committees are part of this Supervisory Board report and are published below.
The function of all of the Supervisory Board’s committees is to prepare the decision-making of the full Supervisory Board, and the committees currently have no independent or assigned powers. The full Supervisory Board retains overall responsibility for the activities of its committees.
Composition Board of Management
The agenda for the upcoming 2019 Annual General Meeting of Shareholders will include proposals to re-appoint Frans van Houten as President/CEO and member of the Board of Management, and Abhijit Bhattacharya as member of the Board of Management fulfilling the role of CFO. The Supervisory Board is very pleased that Frans van Houten and Abhijit Bhattacharya remain available as members of the Board of Management. Their re-appointment is recommended in view of the fundamental progress of Philips’ transformation into a solutions-driven health technology company with an improved growth and profitability profile. The Supervisory Board is impressed by their continuing drive to further unlock Philips’ potential to grow its market positions and expand margins, as the company aims to make the world healthier and more sustainable through innovation.
Financial Statements 20182021
The financial statements of the company for 2018,2021, as presented by the Board of Management, have been audited by Ernst & Young Accountants LLP, the independent external auditor appointed by the General Meeting of Shareholders. Its reports have been included in Independent auditor’s reportWe have approved these financial statements, and all individual members of the Supervisory Board (together withhave signed these documents (as did the members of the Board of Management) have signed these documents..
We recommend to shareholders that they adopt the 20182021 financial statements. We likewise recommend to shareholders that they adopt the proposal of the Board of Management to make a distribution of EUR 0.85 per common share, in cash or in shares at the option of the shareholder, (up to EUR 777 million if all shareholders would elect cash), against the net income for 2018.of 2021.
Finally, we would like to express our thanks to the members of the Board of Management, the Executive Committee and all other employees for their continued contribution during the year.throughout 2021.
February 26, 201922, 2022
The Supervisory Board
Jeroen van der Veer
Christine Poon
Feike Sijbesma
Paul Stoffels
Chua Sock Koong
Neelam Dhawan
Orit Gadiesh
Liz Doherty
Marc Harrison
Heino von Prondzynski
Peter Löscher
Indra Nooyi
David Pyott
Paul Stoffels
Jackson Tai
Further information
To gain a better understanding of the responsibilities of the Supervisory Board and the internal regulations and procedures governing its functioning and that of its committees, please refer to Corporate governance and to the following documents published on the company’s website:
- Articles of Association
- Rules of Procedure Supervisory Board, including the Charters of the Supervisory Board committees
- Diversity Policy for the Supervisory Board,
the Board of Management and the Executive Committee
Changes and re-appointments Supervisory Board and committees 2018
Paul Stoffels and Marc Harrison were appointed as members of the Supervisory Board.Orit Gadiesh was re-appointed as a member of the Supervisory Board.
Proposed re-appointments Supervisory Board 2019
It is proposed to re-appoint David Pyott as a member of the Supervisory Board.
10.111.1Report of the Corporate Governance and Nomination & Selection Committee
The Corporate Governance and Nomination & Selection Committee is chaired by Jeroen van der Veer and itsFeike Sijbesma. Its other members are Christine PoonPaul Stoffels (who joined in the course of 2021) and Heino von Prondzynski.Indra Nooyi (who joined after her appointment as member of the Supervisory Board at the 2021 Annual General Meeting of Shareholders). The Committee is responsible for the review of selection criteria and appointment procedures for the Board of Management, the Executive Committee, certain other key management positions, as well as the Supervisory Board.
In 2018, the Committee met seven times. All2021, Corporate Governance and Nomination & Selection Committee members were present duringheld five meetings and all Committee members attended these meetings.
The Committee devoted time onto the appointment or reappointment of candidates to fill current and future vacancies on the Supervisory Board, Board of Management and Executive Committee.
Board. Following those consultations, it prepared decisions and advised the Supervisory Board on candidates for appointment. This resulted in appointment of Indra Nooyi and Chua Sock Koong as members of the appointmentsSupervisory Board at the 2021 Annual General Meeting of Shareholders. This also resulted in the proposals to re-appoint Paul Stoffels and Marc Harrison and the re-appointment of Orit Gadiesh, as members of the Supervisory Board. This also resulted in the proposalBoard and to re-appoint David Pyottappoint Herna Verhagen and Sanjay Poonen as a membernew members of the Supervisory Board at the upcoming 20192022 Annual General Meeting of Shareholders.
Under its responsibility for the selection criteria and appointment procedures for Philips’ senior management, the Committee reviewed the functioning of the Board of Management and its individual members, the Executive Committee succession plans and emergency candidates for key roles in the company. The conclusions from these reviews were taken into account in the performance evaluation of the Board of Management and Executive Committee members and the selection of succession candidatescandidates. Reference is made to *2022 Annual Incentive., setting out the performance review of the Board of Management and the Executive Committee members by the Remuneration Committee.
In 2018,2021, the Committee devoted time onto the appointment or reappointment of candidates to fill current and future vacancies on the Board of Management and the Executive Committee. This resulted in the proposals to re-appoint Fransre-appointment of Marnix van HoutenGinneken as President/CEO anda member of the Board of Management and Abhijit Bhattacharya as member ofat the Board of Management fulfilling the role of CFO, at the2021 Annual General Meeting of ShareholdersShareholders. Furthermore, Shez Partovi was appointed as a member of the Executive Committee in 2019. This also resulted in the appointment of Vitor Rocha as CEO of Philips North America and Roy Jakobshis role as Chief Business Leader of Philips’ Personal Health businesses in JanuaryInnovation and October 2018,Strategy Officer, effective July 2021, succeeding Jeroen Tas who stepped down from the Executive Committee at the same time. Rob Cascella and Henk de Jong stepped down from the Executive Committee effective April 2021 and September 2021 respectively.
With respect to corporate governance matters, the Committee discussed relevant developments and legislative changes, including the introduction in Dutch Bill implementinglaw of a gender quota for supervisory boards, expected Dutch legislation on virtual-only general meetings of shareholders, and European developments in the EU Directive on Shareholder Rights.area of ESG reporting.
Diversity
In 2017, the Supervisory Board adopted a Diversity Policy for the Supervisory Board, the Board of Management and the Executive Committee, which is published on the company website. The Committee periodically assesses the Diversity Policy and the size and composition of the Supervisory Board and makes recommendations, if relevant, relating to the profile for the Supervisory Board.
The criteria in the Diversity Policy aim to ensure that the Supervisory Board, the Board of Management and the Executive Committee have a sufficient diversity of views and the expertise needed for a good understanding of current affairs and longer-term risks and opportunities related to the company’s business.business and sufficient diversity of views to provide appropriate challenge. The nature and complexity of the company’s business is taken into account when assessing optimal board diversity, as well as the social and environmental context in which the company operates.
As explained in its report, the full Supervisory Board spent time in 2021 considering its composition, as well as the composition of the Executive Committee (including the Board of Management). Pursuant to the Diversity Policy, the selection of candidates for appointment to the Supervisory Board, the Board of Management and the Executive Committee will be based on merit. It is also noted that the Executive Committee comprises of the members of the Board of Management and certain key officers from functions, businesses and markets. With due regard to the above, the company shall seek to fill vacancies by considering candidates that bring a diversity of (amongst others) age, gender and educational and professional backgrounds.
The Supervisory Board’s aim is that the Supervisory Board, the Board of Management and the Executive Committee comprise members with a European and a non-European background (nationality, working experience or otherwise) and overall at least four different nationalities, and that they comprise at least 30% male and at least 30% female members.
Currently, the Supervisory Board and Executive Committee/Board of Management comprise members with more than ten different nationalities. The composition
11.2Report of the Board of Management and ExecutiveRemuneration Committee does not yet meet
11.2.1Letter from the above mentioned gender diversity targets. Almost 25% (5 out of 21)Remuneration Committee Chair
Dear Stakeholder,
On behalf of the positionsRemuneration Committee, I am pleased to whichreport on the Diversity Policy applies (Supervisory BoardCommittee’s activities in 2021 and Executive Committee/Board of Management) are held by women. As indicated into present the Supervisory Board report, there may be a variety of pragmatic reasons – such as other relevant selection criteria and the availability of suitable candidates – that play a role in the achievement of our diversity targets. That being said, the company has put in place several measures to enhance diversity. In 2016, the company set a renewed intention for Inclusion and Diversity as we pivoted to become a health technology company. Over the course of 2018, Philips has put in place several measures and a more holistic approach to sustainably enhance diversity:
Inclusion and Diversity ambitions were embedded in the global HR strategy and connected to systems, processes and plans. Execution against this strategy is being monitored monthly based2021 Remuneration Report on a global scorecard, resulting in clarity, focus and accountability.Philips appointed a global lead for Inclusion and Diversity, which is part of the HR leadership team and is assigned to create an integrated approach towards building and fostering an inclusive work environment in which diversity can thrive. Part of this environment is being built around removing bias and barriers. In this context, programs such as unconscious bias and inclusion training have been developed. Different mentoring programs were deployed globally as well as various local Inclusion and Diversity initiatives to meet different cultural needs and opportunities.To achieve sustainable success, the company focused on strengthening the talent pipeline from attraction (with a targeted employer branding campaign for senior women) to promotion and retention. This resulted in a new milestone of having 21% of women at the most senior levels in the Philips organization.Growing into a networked organization, the company supported and encouraged the startup of various employee networks. Multiple women’s leadership programs were organized this year. In North America and Europe – where the majority of our senior female leaders reside – train the trainer sessions were organized to empower passionate employees to become certified facilitators.Measurement of Inclusion and Diversity through employee surveys. The results of more recent surveys showed positive trends, with both male and female employees becoming more optimistic across all grades about Philips’ encouragement towards diversity of backgrounds, talents, and perspectives.
Philips’ commitment towards Inclusion and Diversity is furthermore reflected in the company-wide Inclusion and Diversity Policy, the General Business Principles and the Fair Employment Policy.
The Committee continues to give appropriate weight to diversity in the nomination and appointment process for future vacancies, while taking into account the overall profile and selection criteria for the appointments of suitable candidates to the Supervisory Board, Board of Management and Executive Committee.
*Reference is made on 2018 Annual Incentive setting out the performance reviewbehalf of the Board of Management and the ExecutiveSupervisory Board.Looking back at the decisions made during the year
The Remuneration Committee members byhas taken a number of decisions and approaches in this past year.
We were pleased that Mr Marnix van Ginneken remained available to be a member of the Board of Management, and our shareholders re-appointed him at the 2021 Annual General Meeting of Shareholders. The Remuneration Committee.
10.2Committee prepared a new service agreement for him which was shared with our shareholders ahead of the shareholders meeting.
We have noted that a certain number of advisory votes were cast against our Remuneration Report 2020 at the 2021 Annual General Meeting of Shareholders. During our regular engagements with shareholders and institutional advisory organizations some of them raised concerns around our explanation of adjustments made to the adjusted Earnings Per Share (EPS) metric in the Long-Term Incentive Plan for the Board of Management. Whilst we consider our approach in line with our current Remuneration Policy (as adopted in 2020), we have enhanced the disclosure on adjusted EPS performance in this year’s Remuneration Report.
In line with our company-wide delay of salary increases, necessary for cost containment as per the company operating plans, the Supervisory Board followed the proposal of the Remuneration Committee
Introduction
to defer the base salary increases for Messrs Abhijit Bhattacharya and Marnix van Ginneken from April 1 to July 1, 2021. The base salary of Mr Van Houten remained unchanged.Company performance despite headwinds
Philips’ remuneration policy is designed to encourage its employees to deliver on the company’s purpose and strategy, create stakeholder value, and to provide motivation and retention. When assessing the Annual Incentive and Long-Term Incentive performance, the Remuneration Committee acknowledged Philips’ strong growth in its Diagnosis & Treatment and Personal Health business segments, contributing to the improvement of the health and well-being of 1.67 billion people globally. Moreover, the organic and inorganic portfolio extensions have made Philips’ products, services, and solutions portfolio more competitive than ever, resulting in 80 new long-term strategic partnerships, as well as an all-time-high order book. The company also delivered on focusing its portfolio by successfully divesting the Domestic Appliances business to Hillhouse Investment, realizing a significant financial gain.
At the same time, the Remuneration Committee considered the significant headwinds that Philips experienced in 2021, due to the unprecedented external supply chain constraints and the consequences of the voluntary Philips Respironics field action. The Annual Incentive and Long-Term Incentive pay-out was impacted significantly by these factors, reducing the realized Total Direct Compensation of the Chief Executive Officer for 2021 to less than half of such compensation for 2020 (taking into account the closing share price at the end of the relevant performance period).
No adjustments were made for the Philips Respironics field action, and the negative impact thereof is fully included in the Annual Incentive realization and the LTI Plan EPS achievement. However, the Remuneration Committee took into account that certain external supply chain constraints affected the Company’s results beyond its control, considering that Philips’ business portfolio is heavily exposed to the availability of specific electronic components. Consequently, we recommended to the Supervisory Board to partially adjust this impact for Annual Incentive and Long-Term Incentive calculation purposes, balancing financial performance over the year against the continued progress made on the company’s strategic roadmap, amidst the ongoing impact of COVID-19 on society and our employees. Furthermore, the Remuneration Committee excluded the financial gain derived from the sale of the Domestic Appliances business, while adding back the operational result of this business for the Long-Term Incentive to attain comparability versus target (which was set in 2019 and includes this business). The Remuneration Committee values to uphold the principle that the Annual Incentive and Long-Term Incentive adjustment methodology is applied uniformly and equitably across the Company at large including the members of the Board of Management.
Overall, this resulted in a realized below target Annual Incentive payout of 64% of target for Frans van Houten, 57% of target for Abhijit Bhattacharya, and 64% of target for Marnix van Ginneken. The 2019 Long-Term Incentive plan vested significantly below target, paying out at 38% of target, based on Company performance against the original targets set in 2019. The Remuneration Committee concluded that the reduced payout of the Annual Incentive and the significantly reduced vesting of the Long-Term Incentive appropriately reflected Company performance. At the same time, the Remuneration Committee considered that pay for performance was reflected by proportionally recognizing the significant progress on strategic and operational goals during 2021, while also being mindful of the engagement, motivation and retention of the wider talent group across the Company.
The composition of the Remuneration Committee and its activities
The Remuneration Committee is chaired by Heino von Prondzynski.Paul Stoffels. Its other members are Jeroen van der VeerDavid Pyott and Christine Poon.Feike Sijbesma. The Committee is responsible for preparing decisions of the Supervisory Board on the remuneration of individual members of the Board of Management and the Executive Committee.Committee, as well as the policies governing this remuneration. In performing its duties and responsibilities, the Remuneration Committee is assisted by an external consultant and an in-house remuneration expert acting on the basis ofexpert. For a protocol which ensures that they act on the instructionsfull overview of the Remuneration Committee. Currently, no memberresponsibilities of the Committee, please refer to the Charter of the Remuneration Committee, is a memberas outlined in Chapter 3 of the management boardRules of another listed company. In line with applicable statutory and other regulations, this report focusesProcedure of the Supervisory Board (which are published on the terms of engagementcompany’s website).
Our annual Remuneration Committee cycle enables us to have an effective decision-making process supporting the determination, review and remunerationimplementation of the members ofRemuneration Policy. The main (recurring) activities during the Board of Management. annual cycle are outlined in the following table:
| July to September: | October to December: | January to March: | April to June: |
|---|
- Review the Remuneration Policy in line with the business strategy and priorities and assess the need for changes
| - Engage in stakeholder dialogues regarding the Remuneration Policy and proposed changes for the next year (if any)
| - Evaluate business performance and achievement of Annual and Long-Term Incentive targets
| - Effectuate compensation level changes
|
- Review the Remuneration Committee Charter
| - Assess compensation levels against the median of the Quantum Peer Group for compensation benchmarking purposes
| - Rigorous target setting of the performance metrics for the upcoming year and multi-year LTI cycle
| - Prepare and hold the Annual General Meeting of Shareholders including a discussion on the implementation of the Remuneration Policy
|
| - Conduct scenario analyses
| - Set compensation levels for the upcoming year based on the assessment against the Quantum Peer Group
| |
| - Prepare Remuneration Report for the previous year
| | |
The Committee met sevenfive times in 2018.2021. All Committee members were present during these meetings.
At Philips, our purpose is to improve people’s health and well-being through meaningful innovation. The Remuneration Committee believes that the Remuneration Policy (and Long-Term Incentive Plan) for the Board of Management supports this purpose. Please refer to the Remuneration Report below, for the way the Remuneration Policy has been implemented in the year 2021.
Paul Stoffels
Chairman of the Remuneration Committee
11.2.2Remuneration policyreport 2021
The objectivesIn this Remuneration Report, the Supervisory Board provides a comprehensive overview, in accordance with article 2:135b of the Dutch Civil Code, of the remuneration policy forpaid and owed to the individual members of the Board of Management and the Supervisory Board respectively in the financial year 2021. The report will also be published as adopted bya stand-alone document on the company’s website after the 2022 Annual General Meeting of Shareholders, in 2017, are in line with thatthe agenda of which will include an advisory vote on this Remuneration Report.
Board of Management
Summary of Remuneration Policy
The Remuneration Policy and Long-Term Incentive Plan for executives throughout the Philips Group. That is,Board of Management have been adopted and approved respectively by the Annual General Meeting of Shareholders 2020, which took place on April 30, 2020.
The objectives of the Remuneration Policy for the Board of Management are: to focus them on delivering on our purpose and strategy, to motivate and retain them, and to create stakeholder value.
Thus, the Remuneration Policy:
Main elements of the health technology market, the Supervisory Board identifiedRemuneration Policy
Compensation element | Purpose and link to strategy | Operation | Policy Level |
|---|
Total Direct Compensation | To support the Remuneration Policy’s objectives, the Total Direct Compensation includes a significant variable part in the form of an Annual Incentive (cash bonus) and Long-Term Incentive in the form of performance shares. As a result, a significant proportion of pay is ‘at risk’. | The Supervisory Board ensures that a competitive remuneration package for Board-level executive talent is maintained and benchmarked. The positioning of Total Direct Compensation is reviewed against benchmark data on an annual basis and is recalibrated if and when required. To establish this benchmark, data research is carried out each year on the compensation levels in the Quantum Peer Group. | Total direct remuneration is aimed at or close to, the median of the Quantum Peer Group. |
Annual Base Compensation | Fixed cash payments intended to attract and retain executives of the highest caliber and to reflect their experience and scope of responsibilities. | Annual Base Compensation levels and any adjustments made by the Supervisory Board are based on factors including the median of Quantum Peer Group data and performance and experience of the individual member. The annual review date for the base salary is typically before April 1. | The individual salary levels are shown in this Remuneration Report. |
Annual Incentive | Variable cash bonus incentive of which achievement is tied to specific financial and non-financial targets derived from the company’s annual strategic plan. These targets are set at challenging levels and are partly linked to the results of the company (80% weighting) and partly to the contribution of the individual member (20% weighting). | The payout in any year relates to the achievements of the preceding year. Metrics are disclosed ex-ante in the Remuneration Report and there will be no retroactive changes to the selection of metrics used in any given year once approved by the Supervisory Board and disclosed. | President & CEO
On-target: 100% Maximum: 200% of Annual Base Compensation. Other BoM members
On-target: 80% Maximum: 160% of Annual Base Compensation. |
Long-Term Incentive | Our Long-Term Incentives form a substantial part of total remuneration, with payouts contingent on achievement of challenging EPS targets, relative TSR performance against a high performing peer group and sustainability objectives that are directly aligned with our purpose to make the world healthier and more sustainable through innovation. | The annual award size is set by reference to a multiple of base salary. The actual number of performance shares to be awarded is determined by reference to the average of the closing price of the Royal Philips share on the day of publication of the first quarterly results and the four subsequent trading days. Dependent upon the achievement of the performance conditions, cliff-vesting applies three years after the date of grant. During the vesting period, the value of dividends will be added to the performance shares in the form of shares. These dividend-equivalent shares will only be delivered to the extent that the award actually vests. | President & CEO
Annual grant size: 200% of Annual Base Compensation. Other BoM members
Annual grant size: 150% of Annual Base Compensation. Maximum vesting opportunity is 200% of the number of performance shares granted. |
Mandatory share ownership and holding requirement | To further align the interests of executives to those of stakeholders and to motivate the achievement of sustained performance. | The guideline for members of the Board of Management is to hold at least a minimum shareholding in the company. Until this level has been reached the members of the Board of Management are required to retain all after-tax shares derived from any Long-Term Incentive Plan. All Board of Management members have reached the required share ownership level. The shares granted under the Long-Term Incentive Plan shall be retained for a period of at least 5 years or until at least the end of their contract period if this period is shorter.
The guideline does not require members of the Board of Management to purchase shares in order to reach the required share ownership level. | The minimum shareholding requirement is 400% of annual base compensation for the CEO and 300% for other members of the Board of Management. |
Pension | Pension plan and pension contribution intended to result into an appropriate level at retirement. | - Defined Contribution plan with fixed contribution (applicable to all executives in the Netherlands – capped at EUR 112,189).
- Gross allowance of 25% of annual base compensation exceeding EUR 112,189.
- Temporary gross transition allowance offsetting historical plan changes.
|
Additional arrangements | To aid retention and remain competitive within the marketplace | Additional arrangements include expense and relocation allowances, medical insurance, accident insurance and company car arrangements, which are in line with other Philips executives in the Netherlands. The members of the Board of Management also benefit from coverage under the company’s Directors & Officers (D&O) liability insurance. The company does not grant personal loans to members of the Board of Management. |
Peer Groups
We use a new peer group*Quantum Peer Group for remuneration benchmarking purposes, in 2017and therefore we aim to align the Board of Management’s remuneration levels closer to equivalent positions in this market. These peer companies are eitherensure that it includes business competitors, with an emphasis on companies in the healthcare, technology relatedtechnology-related or consumer products area, orand other companies we compete with for executive talent. These consistThe Quantum Peer Group consists of predominantly Dutch and other European companies, plus a minority number (up to 25%) of US basedUS-based global companies, of comparable size, complexity and international scope. Annual
| European companies | Dutch companies | US companies |
|---|
| Atos | Nokia | Ahold Delhaize | Becton Dickinson |
| BAE Systems | Reckitt Benckiser | AkzoNobel | Boston Scientific |
| Capgemini | Roche | ASML | Danaher |
| Electrolux | Rolls-Royce | Heineken | Medtronic |
| Ericsson | Safran | | |
| Essity | Siemens Healthineers | | |
| Fresenius Medical Care | Smith & Nephew | | |
| Henkel & Co | Thales | | |
In addition, we use a TSR Performance Peer Group to benchmark our relative Total Shareholder Return performance for Long-Term Incentive purposes and against our business peers in the health technology market and other markets in which we compete. The companies we have selected for this peer group include predominantly US-based healthcare companies. Given that a substantial number of relevant competitors are US-headquartered, the weighting of US-based healthcare companies is more notable than for the Quantum Peer Group.
Philips Group
TSR Performance Peer Group
2021
| US companies | European companies | Japanese companies |
|---|
| Becton Dickinson | Alcon | Canon |
| Boston Scientific | Elekta | Terumo |
| Cerner | Fresenius Medical Care | |
| Danaher | Getinge | |
| General Electric | Siemens Healthineers | |
| Hologic | Smith & Nephew | |
| Johnson & Johnson | Reckitt Benckiser | |
| Medtronic | | |
| Resmed | | |
| Stryker | | |
The Remuneration Policy and the Long-Term Incentive Plan allow changes to the peer group cangroups to be made by the Supervisory Board for example for reasonswithout approval from the General Meeting of changesShareholders in respect of up to three companies on an annual basis (for instance: following a delisting of a company or, a merger of two peer companies), or six companies in total during the four years following adoption and approval of the Remuneration Policy and the Long-Term Incentive Plan respectively (or, if earlier, until the adoption or approval of a revised Remuneration Policy or revised Long-Term Incentive Plan). Following the divestment of the Domestic Appliances business, the Supervisory Board has decided to remove Groupe SEB and De'Longhi from the TSR Performance Peer Group and replace them with Alcon and Reckitt Benckiser. Furthermore, due to Hitachi's change in business or competitive nature ofportfolio, the companies involved. Such change will be disclosed if itSupervisory Board has a substantial impact ondecided to replace this TSR peer group composition.company with Canon. No changes were made to the peer groupQuantum Peer Group during 2018.
To support the policy’s objectives, the remuneration package includes a significant variable part in the form of an annual cash bonus incentive and long-term incentive in the form of performance shares. The policy does not encourage inappropriate risk-taking.
The performance targets for the members of the Board of Management are determined annually at the beginning of the year. The Supervisory Board determines whether performance conditions have been met and can adjust the payout of the annual cash bonus incentive and the long-term incentive grant upward or downward if the predetermined performance criteria were to produce an inappropriate result in extraordinary circumstances. The authority for such adjustments exists on the basis of contractual ultimum-remedium and claw-back clauses. In addition, pursuant to Dutch legislation effective January 1, 2014, incentives may, under certain circumstances, be amended or clawed back pursuant to statutory powers. For more information please refer to Corporate governance. Further information on the performance targets is given in the chapters on the Annual Incentive (see 2018 Annual Incentive) and the Long-Term Incentive Plan (see 2018 Long-Term Incentive Plan) respectively.
Key features of our Board of Management Compensation Program
The list below highlights Philips’ approach to remuneration, in particular taking into account Corporate Governance practices in the Netherlands.2021.
What we do
We pay for performanceWe conduct scenario analysesWe have robust stock ownership guidelinesWe have claw-back policies incorporated into our incentive plansWe have a simple and transparent remuneration structure in place
What we do not do
We do not pay dividend equivalents on stock options, or restricted share units and performance share units that do not vestWe do not offer executive contracts with longer than 12 months’ separation paymentsWe do not have a remuneration policy in place that encourages our Board of Management to take any inappropriate risks or to act in their own interestsWe do not reward failing members of the Board of Management upon termination of contractWe do not grant loans or give guarantees to members of the Board of Management
*The remuneration benchmarking peer group currently consists of 25 companies, being: Ahold Delhaize, AkzoNobel, ASML, Atos, BAE Systems, Becton Dickinson, Boston Scientific, Capgemini, Danaher, Electrolux, Ericsson, Essilor International, Essity (formerly SCA, company split), Fresenius Medical Care, Heineken, Henkel & Co, Medtronic, Nokia, Reckitt Benckiser, Roche, Rolls-Royce, Safran, Siemens Healthineers, Smith & Nephew, and Thales. (Alcatel Lucent was excluded as it was acquired by Nokia). This peer group differs from the TSR peer group, see 2018 Long-Term Incentive Plan.Services agreements
Below, the main elements of the services agreements (overeenkomst van opdracht) of the members of the Board of Management are included.
Term of appointment
The members of the Board of Management are engaged by means of a services agreement (overeenkomst van opdracht). Termination of the contract by either party is subject to six months’ notice period. The severance payment is set at a maximum of one year’s annual base compensation. No severance payment is due if the agreement is terminated early on behalf of the Board of Management member or in the case of urgent cause (dringende reden) as defined in article 7:678 and further in the Dutch Civil Code. The term of the services agreement is aligned with the term for which the relevant member has been appointed by the General Meeting of Shareholders (which is a maximum period of 4four years, it being understood that this period expires no later than at the end of the following AGM held in the fourth year after the year of appointment.appointment).
Philips Group
Contract terms for current members
2021
| |
| Frans van Houten | AGM 2023 |
| Abhijit Bhattacharya | AGM 2023 |
| Ginneken | |
| |
| 2025 |
Notice period
Termination of the contract for the provision of services is subject to six months’ notice for both parties.
Severance payment
The severance payment is set at a maximum of one year’s annual base compensation.
Share ownership
Simultaneously with the approval of the revised Long-Term Incentive (LTI) Plan in 2017, the guideline for members
11.2.3Remuneration of the Board of Management to hold a certain number of shares in 2021
The Supervisory Board has determined the Company was increased2021 pay-outs and awards to the level of at least 300% of annual base compensation (400% for the CEO). Until this level has been reached the members of the Board of Management, are required to retain all after-tax shares derived from any long-term incentive plan. Frans van Houtenupon the proposal of the Remuneration Committee, in accordance with the Remuneration Policy and Abhijit Bhattacharya have reachedLong-Term Incentive Plan as adopted and approved respectively by our shareholders during the required share ownership level. Marnix van Ginneken is at 92.9% of his target (i.e., 279% of annual base compensation).
Proposed re-appointments at 2019 AGM
As mentioned in the Supervisory Board report, the agenda for the upcoming 20192021 Annual General Meeting of Shareholders will include proposals to re-appoint Frans van Houten and Abhijit Bhattacharya. The main elements of their new services agreements will be made public no later than atShareholders. In addition, the time of issuanceSupervisory Board has determined the 2021 pay-out of the notice convening such meeting.2019 Long-Term Incentive Plan, of which the performance period ended on December 31, 2021. This was done in accordance with the Long-Term Incentive Plan as approved during the 2017 Annual General Meeting of Shareholders.
Scenario analysis
The Remuneration Committee annually conducts a scenario analysis annually.analysis. This includes the calculation of remuneration under different scenarios, whereby different Philips performance assumptions and corporate actions are examined. The Supervisory Board concluded that the current policy has proven to function well in terms of a relationship between the strategic objectives and the chosen performance criteria and believes thatfor the 2021 Annual andIncentive, as well as 2019 Long-Term Incentive Plans support this relationship.performance criteria, were adequate.
2018 Internal pay ratios
In line with the Dutch Corporate Governance Code, internal pay ratios are an important input for determining the Remuneration Policy for the Board of Management.
The ratio between the annual total compensation for the CEO*and the average annual total compensation for an employee**was 63:1 for the 2018 financial year. Both annual total compensation figures include pension benefits. The ratio increased from 56:1 in 2017.
**Based on Employee benefit expenses (EUR 5,827 million) divided by the average number of employees (67,649 FTE) as reported in the Income from operations. These results in an average annual total compensation cost of EUR 86,136.Remuneration costs
The following table gives an overview of the costs incurred by the Company in the financial year in relation to the remuneration of the Board of Management. Costs related to performance shares and restricted share right grants are taken by the Company over a number of years. As a consequence, the costs mentioned below in the performance shares and restricted share rights columns are the accounting cost of multi-year Long-Term Incentive grants to members of the Board of Management.
Philips Group
Remuneration Board of Management1
in EUR
2018
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| annual base compensation 2 | | realized annual incentive | | | | | |
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1Reference date for board membership is December 31, 2018.
2Annual base compensation as of April 1, 2018
For further details on the pension allowances and pension scheme costs see Pensions.
Annual base compensation
Base CompensationThe annual compensation of the members of the Board of Management has been reviewed in April 2018 as part of the regular remuneration review. TheIn the case of Frans van Houten, the annual compensation remained unchanged in 2021 compared to 2020 at EUR 1,325,000. As a result of the review, the annual compensation of Abhijit Bhattacharya and Marnix van Ginneken has been increased per AprilJuly 1, 2018,2021, from EUR 700,000785,000 to EUR 725,000795,000 and from EUR 550,000595,000 to EUR 560,000615,000 respectively. The increases wereThis increase was made to move the total compensation levelslevel closer to the market levels,median level, as well as to reflect internal relativities. Typically, any salary increase is implemented on April 1, however all merit and promotional salary increases for senior management globally were delayed from April 1, 2021 to July 1, 2021.
2021 Annual Incentive
The annual compensation ofAnnual Incentive performance has been assessed based on Company financial results as well as individual results. For Frans van Houten, remained unchanged at EUR 1,205,000.
2018 Annual Incentive
Each year, a variableAbhijit Bhattacharya and Marnix van Ginneken, payout of the Annual Incentive can be earned based onis significantly below target level at 64%, 57% and 64% (of target) respectively. Details are as follows:
Company financial results (80% weighting)
In line with the achievement of specificRemuneration Policy, the Company sets financial targets as determined by the Supervisory Board at the beginningin advance of the year. These targets are set at challenging levels and are partly linked to the results of the company (80% weighting) and partly to the contribution of the individual member (20% weighting). The latter includes, among others, targets as part of our sustainability program.
The on-target Annual Incentive percentage in 2018 is set at 100% of the annual base compensation for the CEO, at 80% of the annual base compensation for the CFO and at 60% of the annual base compensation for the other member of the Board of Management. The maximum Annual Incentive achievable is 200% of the annual base compensation for the CEO, 160% of the annual base compensation for the CFO and 120% of the annual base compensation for the other member of the Board of Management.
To support the performance culture, the financial targets we set are at Group levelyear for all members of the Board of Management. The 2018 payouts, shownFor the year 2021, the financial targets set at Group level cover Comparable Sales Growth*), EBITA*) and free cash flow*). As the Company did only partially reach its strategic and operational objectives, this resulted in a partial payout on comparable sales growth*), no payout on EBITA*) and a partial payout on free cash flow*).
To recognize the underlying progress, certain adjustments were included for restructuring and acquisition related costs as well as specific unexpected events that were outside of management’s control, to the extent they have not been reflected in the following table, reflectoriginal targets. Due to the above target performance on two outexternal supply chain constraints and component shortages, the Company experienced a significant delay in sales recognition, even though its order book stands at an all-time high. This was considered partially – i.e. 50% of three metrics (i.e.,the sales impact of EUR 498 million which corresponds to 1.5% of comparable sales growth*) – in the calculation of the comparable sales growth*)and corresponding impacts on EBITA*)metric) at Group level and free cash flow*) realization, based on a detailed analysis of the value of confirmed orders that applycould not be translated to Boardrevenue in 2021 as expected by customers and planned by the company. No adjustments were made for the sales loss and any costs associated with the Philips Respironics field action, and hence the negative impact of Management. The performance on the comparable cash flow based metric was below target.field action is fully included in the Annual Incentive realization.
| Financial performance criteria | Weighting as % of target Annual Incentive | Assessment of performance | Weighted pay-out as % of target Annual Incentive |
|---|
| threshold performance | target performance | maximum performance | realized performance | resulting payout as % of target |
|---|
| Comparable Sales Growth1) | 30% | 0.0% | 2.0% | 4.0% | 0.3% | 57.5% | 17% |
| EBITA1) | 30% | 9.3% | 11.3% | 13.3% | 5.1% | 0.0% | 0% |
| Free Cash Flow1) | 20% | 1,057 | 1,406 | 1,755 | 1,289 | 83.1% | 17% |
| Total | 80% | | | | | | 34% |
Individual targets based on area of responsibility (20% weighting)
Philips GroupTo determine the payout levels for the individual goals, the Supervisory Board applies a holistic assessment as to the performance against the set goals as well as the relative weighting of the goal categories. These relative weightings are not in all cases equal, but such that any goal category remains relevant and aligned with the strategic priorities for the year. Pay-outs are above target given the progress the Company has made on its roadmap, despite the headwinds faced in 2021.
| Board of Management Member | Individual Performance criteria | Assessment of performance | Weighted pay-out as% of target Annual Incentive |
|---|
| Frans van Houten | Strategy execution | - Strong management of M&A roadmap and realization of growth plans
- Very successful management of the spin-off of the Domestic Appliances business
- Sales % of total revenue coming from solutions to customers above target
- Strong progress in embedding digital and data science throughout the portfolio
| 30% |
| Quality & operational excellence | - Good progress with the realisation of transformation objectives to enable the customer solutions strategy
- Continuing to work on quality culture and measures
|
| People & organization | - Significant progress made in the deployment of the Philips Business System
- Employee engagement score at a level above the high-performance norms
|
| Environmental, Social & Governance / Sustainability | - Strengthened the ESG approach further and delivered commitments above plan
- Sustainability performance exceeding 2016-2021 objectives including a strong growth on Lives Improved, carbon neutral in own operations and growing circular revenues
|
| Customer results | - Significant improvement in customer satisfaction, order book and overall market share
|
| Abhijit Bhattacharya | Strategy execution | - Very successful management of the spin-off of the Domestic Appliances business
- Delivered on growth and profit improvement plans for India
| 23% |
| Quality & operational excellence | - Significant productivity results delivering margin improvement partly offset by higher material and shipping costs
- Pioneered sustaining engineering team in India
- Good progress with the realisation of transformation objectives to enable the customer solutions strategy and enterprise IT
- Need to further improve forecasting processes
|
| People & organization | - Employee engagement score above high-performance norms while further improved in the Finance Organization and improving gender balance
|
| Customer results | - Strong order growth
- Significant improvement on Customer NPS
|
| Marnix van Ginneken | Strategy execution | - Increased license income to a level exceeding defined targets
- Very successful management of the spin-off of the Domestic Appliances business
- Structural progress on company transformations, improved approach for Solutions business model, with solutions sales above target
| 31% |
| Quality & operational excellence | - Further progression of consolidation and simplification of legal manufacturers and quality management systems in line with plan
|
| People & organization | - Delivered on transforming the intellectual property & standards, government & public affairs and ESG organizations
- Employee engagement score at a level above the high-performance norms
|
| Environmental, Social & Governance / Sustainability | - Strengthened the ESG approach further and delivered commitments above plan
- Sustainability performance exceeding 2016-2021 objectives including a strong growth on Lives Improved, carbon neutral in own operations and growing circular revenues
|
Overall this leads to the following total Annual Incentive realization and payout (payout in 2022):
Annual Incentive realization 2021
in EUR unless otherwise stated
2018 (payout in 2019)
| realized annual incentive | as a % of base compensation (2018) |
|---|
| | |
| | |
| | |
| | Annual incentive opportunity | Realized annual incentive |
|---|
| | Target as a % of base compensation | Target Annual Incentive | Financial performance (weighted pay-out %) | Individual performance (weighted pay-out %) | Payout as % of target Annual Incentive1) | Realized annual incentive |
|---|
| Frans van Houten | 100% | 1,325,000 | 34% | 30% | 64% | 850,915 |
| Abhijit Bhattacharya | 80% | 636,000 | 34% | 23% | 57% | 360,103 |
| Marnix van Ginneken | 80% | 492,000 | 34% | 31% | 64% | 317,192 |
1)Note that figures may not add up due to rounding.
2018 Long-Term2022 Annual Incentive Plan
Since 2013,The Annual Incentive criteria consist of:
Financial criteria (80% weighting):
For the LTI Plan applicable toyear 2022, the membersfollowing financial indicators of the company’s results are selected to ensure alignment with the key (strategic) priorities in the year:
- Profit/margin
- Revenue/growth
- Cash flow
Confirmed orders for which installations were delayed from 2021 to 2022, were taken into account when setting target levels for 2022 (i.e. to avoid double counting).
Individual criteria (20% weighting):
The contribution of the individual member is assessed based on areas of responsibility, for which annually two to a maximum of five performance categories are selected for each Board of Management consists ofmember from the following list:
- Customer results
- Quality & operational excellence
- Strategy execution
- People & organization
- ESG/Sustainability
For the year 2022, the following performance shares only. The current long-term incentive plan was approved bycategories are selected to ensure alignment with the General Meeting of Shareholderskey (strategic) priorities in 2017.the year:
| Board of Management Member | Selected performance categories |
|---|
| Frans van Houten | - Customer Results
- Quality & operational excellence
- Strategy execution
- People & organization
|
| Abhijit Bhattacharya | - Quality & operational excellence
- Strategy execution
- People & organization
|
| Marnix van Ginneken | - Quality & operational excellence
- Strategy execution
- People & organization
- ESG/Sustainability
|
Grant size2019 Long-Term Incentive
The annual grant size is set by reference to a multiple of base compensation. For the CEO the annual grant size in 2018 is set at 200% of base compensation and for the other members3-year performance period of the Board of Management at 150% of base compensation.2019 performance share grant ended on December 31, 2021. The actual number of performance shares to be awarded is determined by reference to the average of the closing price of the Royal Philips share on the day of publication of the first quarterly results and the four subsequent trading days.
Vesting schedule
Dependent upon the achievement of the performance conditions, cliff-vesting applies three years after the date of grant. During the vesting period, the value of dividends will be added to the performance shares in the form of shares. These dividend-equivalent shares will only be delivered to the extent that the award actually vests.
Performance conditions
Vesting of the performance sharesrealization is based on two equally weighted performance conditions:
50% Adjusted Earnings per Share growth (''EPS'')TSR achievement and50% Relative Total Shareholder Return (“TSR”)
EPS
adjusted EPS growth, is calculated by applying the simple point-to-point method at year end. Earningsand significantly below target with a vesting level of 38% (of target). Details are the income from continued operations attributable to shareholders, as reported in the Annual Report. To eliminate the impact of any share buyback, stock dividend etcetera, the number of shares to be used for the purpose of the LTI Plan EPS realization will be the number of common shares outstanding (after deduction of treasury shares) on the day prior to the beginning of the performance period.follows:
Earnings are adjusted for changes in accounting principles during the performance period. The Supervisory Board has discretion to include other adjustments, for example, to account for events that were not planned when targets were set or were outside management’s control (e.g., impairments, restructuring activities, pension items, M&A transactions and costs and currency fluctuations).
The following performance-incentive zone applies for the LTI Plan EPS:
Philips Group
Performance-incentive zone for LTI Plan EPS
in %
The LTI Plan EPS targets are set annually by the Supervisory Board. Given that these targets are considered to be company sensitive, LTI Plan EPS targets and the achieved performance are published in the Annual Report after the relevant performance period. For realization of the 2016 grant, see the table on vesting 2016 awards at the end of this section.
TSR
(50% weighting)A ranking approach to TSR applies with Philips itself included in the peer group. The TSR peer group - as of 2017 - consists of 20 companies, including Philips.
The peer companies together reflect the business portfolio of Philips.Performance Peer Group. TSR scores are calculated based on a local currency approach and by taking ana 3-month averaging period prior to the start and end of the 3-year performance period. The performance incentive pay-out zone is outlined in the following table, which results in zero vesting for performance below the 40th percentile and 200% vesting for performance levels above the 75th percentile. The incentive zone range has been constructed such that the average pay-out over time is expected to be approximately 100%.
Philips Group
Performance-incentive zone for TSR
in %
| Position | 20-14 | 13 | 12 | 11 | 10 | 9 | 8 | 7 | 6 | 5-1 |
|---|
| Payout | 0 | 60 | 80 | 100 | 120 | 140 | 160 | 180 | 190 | 200 |
Under the LTI Plan the current members of the Board of Management were granted 124,195 performance shares in 2018.
The following table provides an overview at end December 2018 of performance share grants. The reference date for board membership is December 31, 2018.
| | number of performance shares originally granted | | | number of performance shares vested in 2018 | value at vesting date in 2018 |
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1Dividend performance shares not included
For more details of the LTI Plan see Share-based compensation.
Realization of 2016 performance share grant
The 3-year performance period of the 2016 performance share grant ended on December 31, 2018. The payout results are governed by the former 2013 LTI Plan and are explained below.
TSR (50% weighting)
Following Johnson Controls merger with Tyco International (completed September 2016), the Supervisory Board adopted the approach of recognizing Johnson Controls performance through the merger date. As a proxy for future performance, reinvestment in an index of the remaining 19 peer companies was assumed (effectively retaining a peer group of 20 companies).
The TSR achieved by Philips during the performance period was 51.61%.14.08%, using a start date of October 2018 and end date of December 2021. This resulted in Philips being positioned Philips between the 4th and 5th ranked companyat rank 16 in the TSR performance peer group shown in the following table, resulting in ana TSR achievement of 200%0%.
TSR results LTI Plan 20162019 grant: 51.61%14.08%
Total Shareholder Return ranking per December 31, 2018
Start date: December 2015
End date: December 2018
| total return | rank number |
|---|
| Getinge | 351.68% | 1 |
| Danaher | 207.27% | 2 |
| ResMed | 149.39% | 3 |
| Hitachi | 114.31% | 4 |
| Hologic | 79.20% | 5 |
| Siemens Healthineers | 77.30% | 6 |
| Stryker | 62.22% | 7 |
| Terumo | 58.28% | 8 |
| General Electric | 40.84% | 9 |
| De Longhi | 40.39% | 10 |
| Cerner | 34.93% | 11 |
| Medtronic | 32.19% | 12 |
| Johnson & Johnson | 27.14% | 13 |
| Groupe SEB | 19.26% | 14 |
| Boston Scientific | 15.86% | 15 |
| Philips | 14.08% | 16 |
| Becton Dickinson | 7.35% | 17 |
| Elekta | (0.64)% | 18 |
| Smith & Nephew | (2.33)% | 19 |
| Fresenius Medical | (14.8)% | 20 |
Adjusted EPS growth (50% weighting)
The LTI Plan EPS payouts and targets set at the beginning of the performance period were as follows:
LTI Plan EPS ispayouts
| | Below threshold | Threshold | Target | Maximum | Actual |
|---|
| EPS (euro) | <1.31 | 1.31 | 1.51 | 1.71 | 1.43 |
| Payout | 0% | 40% | 100% | 200% | 76% |
| EUR | Basic EPS1) | LTI Plan EPS2) |
|---|
| Net income attributable to shareholders | 3,319 | 3.67 | 3.63 |
| Discontinued operations, net of income taxes (primarily related to Domestic Appliances divestment) | (2,711) | (3) | (2.97) |
| Reconsolidation operational income Domestic Appliances | 305 | 0.34 | 0.33 |
| (Partial) Adjustment for external supply chain constraints | 247 | 0.27 | 0.27 |
| Other adjustment items3) | 151 | 0.16 | 0.16 |
| Adjusted net income from continuing operations | 1,311 | 1.45 | 1.43 |
1)Based on weighted average number of common shares outstanding (after deduction of treasury shares) during 20212)Based on number of common shares outstanding (after deduction of treasury shares) on the day prior to the beginning of the performance period3)Other adjustment items as referred to in the following text
The 2021 EPS based on the underlyingreported net income from continuing operations attributable to shareholders amounted to EUR 3.67. To eliminate the impact of any share buyback, stock dividend, etc., the number of common shares outstanding (after deduction of treasury shares) on the day prior to the beginning of the performance period is used, resulting in an EPS of EUR 3.63. This is adjusted with the extraordinary gain related to the divestiture of Domestic Appliances while adding back the operational result of the Domestic Appliances business for comparative purposes as included inper original targets. In accordance with our Remuneration Policy the Annual Report, adjusted for changes in accounting principles. Furthermore,LTI Plan EPS includes a number of adjustments that were deemed appropriate by the Supervisory Board has also deemed it appropriate to make adjustments relating to certain other items that were not contemplated when the targets were set in 2016.Board. These relate mainly to the profit and loss impact of acquisitions restructuring costs,and divestitures (positive adjustment), impact of foreign exchange variations versus plan (positive adjustment), profit and non-recurring tax impacts. The sum of these adjustments had a negativeloss impact of 16 centslegal cases (negative adjustment including a reversal of an adjustment made in 2020, as the legal matter it related to was resolved in favor of Philips) and a partial adjustment of the profit and loss impact of external supply chain constraints and component shortages (positive adjustment).
The resultingRemuneration Committee opted for a 75% adjustment (versus a 50% adjustment for AI purposes) of the net income impact, to reflect the disproportionate impact as the LTI plan EPS is measured based on the last year of the three-year performance period. No adjustments have been made for the impact of the Philips Respironics field action. Overall, this resulted in an LTI Plan EPS achievement was determined by the Supervisory Board as 88%.of EUR 1.43 based on adjusted net income from continuing operations, leading to a realization of 76% of target.
In view of the above, the following performance achievement and vesting levels have been determined by the Supervisory Board in respect of the 20162019 grant of performance shares:
Philips Group
Performance achievement and vesting levels
| | achievement | weighting | vesting level |
|---|
| TSR | 0% | 50% | 0% |
| EPS | 76% | 50% | 38% |
| Total | | | 38% |
Pensions
2022 Long-Term Incentive
Effective January 1, 2015 pension plans which allow pension accrualThe vesting of the 2022 Long-Term Incentive grant consisting of performance shares is subject to performance over a period of 3 years and based on a pensionable salary exceeding an amount in 2018 of EUR 105,075 are,two financial criteria and one non-financial criterion:
- 50% weighting: Relative Total Shareholder Return (‘TSR’)
- 40% weighting: Adjusted Earnings per Share growth (‘EPS’)
- 10% weighting: Sustainability objectives
Please refer to the Long-Term Incentive Plan published on the company’s website for fiscal purposes, considered to be non-qualifying schemes. For this reason the Executive more information.
Pension Plan in the Netherlands was terminated.
The following pension arrangement is in place for the current members of the Board of Management working under a Dutch contract:
- Flex ES Pension Plan in the Netherlands, which is a Collective Defined Contribution plan with a fixed contribution of (currently)
26.2% up to30.3% (including an own contribution of 2%) of the maximum pensionable salary of EUR 105,075112,189 (effective January 1, 2018).2021) minus the offset. The Flex ES Plan has a target retirement age of 6768 and a target accrual rate of 1.85%; - A gross Pension Allowance equal to 25% of the base compensation exceeding EUR
105,075;112,189; - A temporary gross Transition Allowance, for a maximum period of 8 years (first 5 years in full; year 6: 75%; year 7: 50%, year 8: 25%) for members of the Board of Management who were participants of the former Executive Pension Plan. The level of the allowance is based on the age and salary of the Board member on December 31, 2014.
For further details on the pension allowances and pension scheme costs, please refer to Pensions / section 4.1.2 of the Annual Report.
Total remuneration costs in 2021
The following table gives an overview of the costs incurred by the company in 2021 and 2020 in relation to the remuneration of the Board of Management. Costs related to performance shares and restricted share right grants are recognized by the company over a number of years. Therefore, the costs mentioned below in the performance shares column are the accounting cost of multi-year Long-Term Incentive grants to members of the Board of Management. Actual payout to the members of the Board of Management varies per year depending on company performance, please refer to section 2019 Long-Term Incentive for more details on the actual vesting of the performance shares.
Philips Group
Remuneration Board of Management1)
in EUR
| | | | Costs in the year |
|---|
| | reported year | annual base compensation2) | base compensation | realized annual incentive | performance shares3) | pension allowances4) | pension scheme costs | other compensation5) | total cost | Fixed-variable remuneration6) |
|---|
| F.A. van Houten | 2021 | 1,325,000 | 1,325,000 | 850,915 | 2,626,295 | 565,403 | 27,462 | 57,224 | 5,452,299 | 36%-64% |
| 2020 | 1,325,000 | 1,325,000 | 1,298,500 | 2,874,467 | 565,922 | 27,001 | 62,176 | 6,153,067 | 32%-68% |
| A. Bhattacharya | 2021 | 795,000 | 790,000 | 360,103 | 1,172,533 | 233,857 | 27,462 | 68,908 | 2,652,864 | 42%-58% |
| 2020 | 785,000 | 785,000 | 596,600 | 1,295,996 | 233,126 | 27,001 | 70,267 | 3,007,990 | 37%-63% |
| M.J. van Ginneken | 2021 | 615,000 | 605,000 | 317,192 | 886,035 | 150,755 | 27,462 | 42,610 | 2,029,054 | 41%-59% |
| 2020 | 595,000 | 580,000 | 437,920 | 952,453 | 158,800 | 27,001 | 46,986 | 2,203,160 | 37%-63% |
| Total | 2021 | | 2,720,000 | 1,528,211 | 4,684,863 | 950,014 | 82,387 | 168,742 | 10,134,217 | 39%-61% |
| 2020 | | 2,690,000 | 2,333,020 | 5,122,916 | 957,849 | 81,004 | 179,428 | 11,364,217 | 34%-66% |
1)Reference date for board membership is December 31, 2021.2)Annual base compensation as incurred in the year, base compensation increases are reflected proportionally.3)Costs of performance shares are based on accounting standards (IFRS) and do not reflect the value of stock options at the end of the lock up period and the value of performance shares at the vesting/release date .4)The Pension Transition Allowances were maintained at the current level for Messrs van Houten and Bhattacharya for the term of their services agreements. The total pension cost of the Company related to thisthe pension arrangement (including the temporary grossaforementioned Transition Allowance) is at a comparable level over a period of time to the pension costcosts under the former Executive Pension Plan.
Additional arrangements
In addition to the main conditions as stipulated in the services agreements, a number of additional arrangements apply5)The stated amounts mainly concern (share of) allowances to members of the Board of Management. These additional arrangements,Management that can be considered as remuneration. In a situation where such a share of an allowance can be considered as expense(indirect) remuneration (for example, private use of the company car), then the share is both valued and relocationaccounted for here. The method employed by the fiscal authorities is the starting point for the value stated.6)Fixed remuneration is determined as the sum of base compensation, pension allowances, medical insurance, accident insurancepension scheme costs and other compensation. Variable remuneration is determined as the sum of realized annual incentive and performance shares.
Historical LTI grants and holdings
Number of performance shares (holdings)
Under the LTI Plan the current members of the Board of Management were granted 100,457 performance shares in 2021.
The following table provides an overview at end December 2021 of performance share grants. The reference date for board membership is December 31, 2021.
Philips Group
Number of performance shares (holdings)
in number of shares unless otherwise stated
| | grant date | number of shares originally granted | value at grant date | vesting date | end of holding period | unvested opening balance at Jan. 1, 2021 | number of shares awarded in 2021 | (dividend) shares awarded | number of shares vested in 20211) | value at vesting date in 2021 | unvested closing balance at Dec. 31, 2021 |
|---|
| F.A. van Houten | 4/27/2018 | 69,005 | 2,410,000 | 4/27/2021 | 4/27/2023 | 73,729 | - | - | 92,162 | 4,383,202 | - |
| 5/6/2019 | 70,640 | 2,650,000 | 5/6/2022 | 5/6/2024 | 73,807 | - | 1,370 | - | - | 75,177 |
| 4/30/2020 | 66,431 | 2,650,000 | 4/30/2023 | 4/30/2025 | 67,780 | - | 1,258 | - | - | 69,037 |
| 4/30/2021 | 55,868 | 2,650,000 | 4/30/2024 | 4/30/2026 | - | 55,868 | 1,037 | - | - | 56,905 |
| A. Bhattacharya | 4/27/2018 | 31,138 | 1,087,500 | 4/27/2021 | 4/27/2023 | 33,270 | - | - | 41,587 | 1,977,888 | - |
| 5/6/2019 | 31,388 | 1,177,500 | 5/6/2022 | 5/6/2024 | 32,795 | - | 609 | - | - | 33,404 |
| 4/30/2020 | 29,518 | 1,177,500 | 4/30/2023 | 4/30/2025 | 30,117 | - | 559 | - | - | 30,676 |
| 4/30/2021 | 25,141 | 1,192,500 | 4/30/2024 | 4/30/2026 | - | 25,141 | 467 | - | - | 25,608 |
| M.J. van Ginneken | 4/27/2018 | 24,0522) | 840,000 | 4/27/2021 | 4/27/2023 | 25,699 | - | - | 32,123 | 1,527,785 | - |
| 5/6/2019 | 22,991 | 862,500 | 5/6/2022 | 5/6/2024 | 24,022 | - | 446 | - | - | 24,467 |
| 4/30/2020 | 22,373 | 892,500 | 4/30/2023 | 4/30/2025 | 22,827 | - | 424 | - | - | 23,251 |
| 4/30/2021 | 19,448 | 922,500 | 4/30/2024 | 4/30/2026 | - | 19,448 | 361 | - | - | 19,809 |
1)The shares vested in 2021 are subject to a 2-year holding2)Awarded before date of appointment as a member of the Board of Management
Number of stock options (holdings)
The tables below give an overview of the stock options held by the members of the Board of Management.
Philips Group
Stock options (holdings)
in number of shares unless otherwise stated
| | grant date | vesting date | exercise price (in EUR) | expiry date | opening balance at January 1, 2021 | number of stock options awarded in 2021 | number of stock options exercised in 2021 | share price on exercise date | number of stock options expired in 2021 | closing balance at December 31, 2021 |
|---|
| F.A. van Houten | 4/23/2012 | 4/23/2015 | 14.82 | 4/23/2022 | 75,000 | - | - | - | - | 75,000 |
| 1/29/2013 | 1/29/2014 | 22.43 | 1/29/2023 | 55,000 | - | - | - | - | 55,000 |
| A. Bhattacharya | 1/30/2012 | 1/30/2014 | 15.24 | 1/30/2022 | 20,000 | - | - | - | - | 20,000 |
| 4/23/2012 | 4/23/2015 | 14.82 | 4/23/2022 | 16,500 | - | - | - | - | 16,500 |
| M.J. van Ginneken | 4/18/2011 | 4/18/2014 | 20.90 | 4/18/2021 | 8,400 | - | 8,400 | 46.66 | - | 0 |
| 1/30/2012 | 1/30/2014 | 15.24 | 1/30/2022 | 10,000 | - | - | - | - | 10,000 |
| 4/23/2012 | 4/23/2015 | 14.82 | 4/23/2022 | 8,400 | - | - | - | - | 8,400 |
Share ownership guidelines
To further align the interests to those for Philips executives inof stakeholders and to motivate the Netherlands. Inachievement of sustained performance, the event of disablement, members of the Board of Management are entitledbound to benefits in line with those for other Philips executives ina minimum shareholding requirement. The table below shows the Netherlands.
Unless the law provides otherwise, the membersminimum shareholding requirement, annual base compensation, (vested) shares held and share ownership ratio of theeach Board of Management member as per December 31, 2021.
Philips Group
Share ownership Board of Management
| Minimum shareholding requirement1) | Annual Base Compensation | (Vested) shares held | Ownership ratio2) |
|---|
| F.A. van Houten | 4.0x | 1,325,000 | 525,761 | 13.0x |
| A. Bhattacharya | 3.0x | 795,000 | 148,365 | 6.1x |
| M.J. van Ginneken | 3.0x | 615,000 | 110,528 | 5.9x |
1)As ratio of Annual Base Compensation2)The Ownership ratio is calculated by multiplying the total shares held by the share price of EUR 32.77 (based on the closing share price of December 31, 2021) and dividing this by the base compensation.
Remuneration of the Supervisory Board shall be reimbursed by the Company for various costs and expenses, like reasonable costs of defending claims, as formalized in the Articles of Association. Under certain circumstances, described in the Articles of Association, such as an action or failure to act by a member2021
Summary of the BoardRemuneration Policy
Please find below a brief summary of Management or a member ofthe Remuneration Policy for the Supervisory Board, that can be characterized as intentional (“opzettelijk”), intentionally reckless (“bewust roekeloos”) or seriously culpable (“ernstig verwijtbaar”), there will be no entitlement toadopted at the Annual General Meeting of Shareholders 2020. The fee levels in this reimbursement. The Company has also taken out liability insurance (D&O - Directors & Officers) forRemuneration Policy are the persons concerned.
Remuneration ofsame as the Supervisory Board
The current remuneration structure for Supervisory Board members was approved fee levels as determined by our shareholders at the 2018 Extraordinary General Meeting of Shareholders.
The overarching objective of the 2020 Remuneration Policy for the Supervisory Board is to enable its members to fulfill their duties, acting independently: supervising the policies, management and the general affairs of Philips, and supporting the Board of Management and the Executive Committee with advice. Also, the members of the Supervisory Board are guided by the company’s long-term interests, with due observance of the company’s purpose and strategy, taking into account the interests of shareholders and all other stakeholders.
To support the objectives mentioned above, the 2020 Remuneration Policy is aimed at attracting and retaining international Supervisory Board members of the highest caliber and with experience and expertise relevant to our health technology businesses.
In compliance with the Dutch Corporate Governance Code, the 2020 Remuneration Policy provides that the remuneration for the members of the Supervisory Board is not dependent on the results of the company and does not include any shares (or rights to shares). Nevertheless, members of the Supervisory Board are encouraged to hold shares in the company for the purpose of long-term investment to reflect their confidence in the future course of the company. The company does not grant personal loans to members of the Supervisory Board.
The Supervisory Board reviews fee levels in principle every three years in order to monitor and take account of market developments and manage expectations of our key stakeholders. The levels are aimed at broadly median market levels (and around the 25th percentile market level for the Chairman) paid in the Quantum Peer Group (as used in the 2020 Remuneration Policy for the Board of Management).
The following table below provides an overview of the current remuneration structure. Prior to the 2017 Annual General Meeting of Shareholders, the Supervisory Board withdrew a proposal on the remuneration of the Supervisory Board based on consultations with shareholders that made it clear that further discussions were needed to attain a broader consensus on this topic. After this withdrawal, we continued our discussions with shareholders in multiple countries, including the Netherlands, the United Kingdom, France and North America (which constitute the largest part of our ownership base). In addition, we met with institutional advisory organizations. The positive feedback from these meetings resulted in the Supervisory Board submitting an updated proposal to the 2018 Extraordinary General Meeting of Shareholders, which approved the proposal.
The table below provides an overview of the current remuneration structure:
Philips Group
Remuneration Supervisory Board
in EUR
| | Chair | Vice Chair | Member |
|---|
| Supervisory Board | 155,000 | 115,000 | 100,000 |
| Audit Committee | 27,000 | n.a. | 18,000 |
| Remuneration Committee | 21,000 | n.a. | 14,000 |
| Corporate Governance and Nomination & Selection Committee | 21,000 | n.a. | 14,000 |
| Quality & Regulatory Committee | 21,000 | n.a. | 14,000 |
| Attendance fee per inter-European trip | 2,500 | 2,500 | 2,500 |
| Attendance fee per intercontinental trip | 5,000 | 5,000 | 5,000 |
| Entitlement to Philips product arrangement | 2,000 | 2,000 | 2,000 |
| Annual fixed net expense allowance | 11,345 | 2,269 | 2,269 |
| Other travel expenses | As reasonably incurred |
The members of the Supervisory Board benefit from coverage under the company’s Directors and Officers (D&O) liability insurance.
Remuneration of the Supervisory Board in 2021
The individual members of the Supervisory Board received, by virtue of the positions they held, the following remuneration in 2021:
Philips Group
Remuneration of the Supervisory Board1)
in EUR
2018
| | | |
|---|
| | | |
| | | |
| | | |
Corporate Governance and Nomination & Selection Committee | | | |
Quality & Regulatory Committee | | | |
Attendance fee per inter-European trip | | | |
Attendance fee per intercontinental trip | | | |
Entitlement to Philips product arrangement | | | |
| membership | committees | other compensation2) | total |
|---|
| F. Sijbesma | 141,301 | 27,808 | 8,237 | 177,346 |
| P.A.M. Stoffels | 109,863 | 27,808 | 4,769 | 142,440 |
| J. van der Veer | 53,507 | 12,082 | 3,916 | 69,505 |
| C.A. Poon | 39,699 | 16,915 | 783 | 57,397 |
| N. Dhawan | 100,000 | 18,000 | 2,269 | 120,269 |
| O. Gadiesh | 34,521 | 4,833 | 783 | 40,137 |
| D.E.I. Pyott | 100,000 | 36,370 | 2,269 | 138,639 |
| A.M. Harrison | 100,000 | 14,000 | 2,269 | 116,269 |
| M.E. Doherty | 100,000 | 27,000 | 4,769 | 131,769 |
| P. Löscher | 100,000 | 32,000 | 4,769 | 136,769 |
| I. Nooyi | 100,000 | 14,000 | 2,269 | 116,269 |
| S.K. Chua | 65,753 | 11,836 | 1,492 | 79,081 |
| Total | 1,044,644 | 242,652 | 38,595 | 1,325,891 |
11)For more details, see note 27, Information on remuneration
Year 2019
Annual IncentiveThe Supervisory Board of Management
In line withfee levels have been reviewed and updated as per 2015. After that they have been reviewed once in the new remuneration policy, metrics will be disclosed ex-ante. For 2019, these are comparable sales growth*, EBITA*,past 5 years, being in 2018, increasing the Chair fee from EUR 135,000 to EUR 155,000, the Vice Chair fee from EUR 90,000 to EUR 115,000 and cash flow based metrics measured at Group level (i.e., unchangedthe Member fee from 2018).EUR 80,000 to EUR 100,000. The targets associated with these metrics will not be disclosed as these are company sensitive.
In line withAudit Committee Chair fee was increased from EUR 22,500 to EUR 27,000 while the remuneration policy as adopted by the General Meeting of Shareholders in 2017, the 2019 on-target Annual Incentive percentage for Mr. van Ginneken isAudit Committee Member fee was increased from EUR 13,000 to 70% of annual base compensation (currently 60%). The maximum Annual Incentive achievable will remain to be 2 times the on-target levels.
*Non-IFRS financial measure.EUR 18,000. For the definitionRemuneration Committee and reconciliationthe Quality & Regulatory Committee, the Chair fee was increased from EUR 15,000 to EUR 21,000 and the Member fee was increased from EUR 10,000 to EUR 14,000. For the Corporate Governance and Nomination & Selection Committee, the Chair fee was increased from EUR 15,000 to EUR 21,000 and the Member fee was increased from EUR 7,500 to EUR 14,000.2)The amounts mentioned under other compensation relate to the fee for intercontinental travel, inter-European travel, the entitlement of EUR 2,000 under the most directly comparable IFRS measure, refer to Reconciliation of non-IFRS information.Philips product arrangement and the annual fixed net expense allowance.10.311.3Report of the Audit Committee
The Audit Committee is chaired by Jackson Tai, and itsLiz Doherty. Its other members are Neelam Dhawan, Orit GadieshPeter Löscher and David Pyott. Jeroen van der VeerChua Sock Koong (who joined in the course of 2021). Feike Sijbesma also regularly participated inattends Audit Committee meetings. The Committee assists the Supervisory Board in fulfilling its supervisory responsibilities for, among other things,including ensuring the integrity of the company’s financial statements, reviewing the company’s internal controls and overseeing the enterprise risk management.management process.
TheIn 2021, the Audit Committee metheld five times during 2018, convenedregular meetings (including an education sessions,session) and reported its findings to the plenary Supervisory Board. Allan additional education session which all Audit Committee members attended, with the exception of one member unable to attend the April 2021 meeting of the Audit Committee.
The CEO, CFO, Chief Legal Officer, Head of Internal Audit, Chief Accounting Officer and external auditor (Ernst & Young Accountants LLP) were present during theseinvited to and attended all regular meetings.
The CEO, the CFO,Committee, together with the Chief Legal Officer, also met separately with each of the CEO, CFO, Head of Internal Audit and external auditor after every meeting of the Committee. Prior to the Committee meetings, the Audit Committee chair met one-on-one with the Group Chief AccountantTreasurer as well as with each of the Management who regularly attend the Audit Committee meetings (as set out in the previous paragraph) and with the external auditor (Ernst & Young Accountants LLP) attended all regular meetings.
Furthermore, the Committee met separately with each of the CEO, the CFO, the Chief Legal Officer, the Head of Internal Audit and the external auditor. In addition, the Audit Committee chair met one-on-one with the above and also the Group Treasurer, the Group Chief Accountant, the Head of Legal Compliance, the Chief Information Security Officer and the Chief Information Officer prior to Committee meetings..
The following overview below indicateshighlights a number of matters that wewere reviewed and/or discussed during Committee meetings throughout 2018:in the course of 2021:
- The company’s
20182021 annual and interim financial statements, including the field action provision of EUR 719 million in connection with the Philips Respironics of the voluntary recall notification related to the sound abatement foam in certain sleep and respiratory care products (announced on June 14, 2021), and non-financial information prior to publication thereof. The Committee also assessed in its quarterly meetings the adequacy and appropriateness of internal control policies and internal audit programs and their findings.publication. - Matters relating to accounting policies, financial risks, reporting and compliance with accounting standards. Key accounting judgements were discussed in depth, and treatments were challenged, as were quality of earnings. Compliance with statutory and legal requirements and regulations, particularly in the financial domain, was also reviewed. Important findings, Philips’ top and emerging areas of risk (including the internal auditor’s reporting thereon, and the Chief Legal Officer’s review of litigation and other
claims)claims, and material investigations) and follow-up actions and appropriate measures were examined thoroughly. The Committee was updated on and engaged in a focused discussion about information and product security-related risks; - Each quarter, the Committee reviewed the company’s cash flow generation, liquidity and financing headroom, its ability under its capital structure and credit ratings to pay dividends and to fund capital investments, including share repurchases and other financial initiatives.
The Committee also monitored the ongoing goodwill impairment indicators (including in the Sleep & Respiratory Care business) and reviewed the goodwill impairment tests performed in the fourth quarter, risk management, information and cyber securitycybersecurity risks, legal compliance and developments in regulatory investigations, as well as legal proceedings including antitrust investigations and related provisions. The Committee also reviewed the Philips Respironics voluntary recall notification related to the sound abatement foam in certain sleep and respiratory care products (announced on June 14, 2021) and in particular the field action provision taken by the company in relation to this issue; - Specific finance topics included dividend policy, share repurchases, capital spending
pension de-risking and the company’s debt financing strategy. The Committee was also updated on the company’s foreign exchange risk strategy and policy; - The Committee
reviewed Philips’ Enterprise Risk Management, which included an annual risk assessmentengaged in a post-investment review of projects in the area of Information Technology, Research & Development, Real Estate, Operations and discussionother cash spend, and assessed the actual spend and timing of Philips’ topsuch projects against the original budget and emerging risks and mitigating actions.
The Committee reviewed the progress made with the implementation of an integrated, company-wide data and IT platform, the ERP kernel consolidation and the implementation timetable.timing;- With regard to
internal audit,Internal Audit, the Committee reviewed and if required, approved the internal auditrevised Internal Audit charter, annual audit plan, audit scope and its coverage in relation to the scope of the external audit, as well as the leadership succession, staffing, independence, performance and organizational structure of the internal audit function.Internal Audit function; - With regard to the external auditor, the Committee reviewed the performance of the external auditor in conducting the group and statutory audits as required by the Auditor Policy and the results of the 2020 EY service quality review program for Philips;
- With regard to the external audit, the Committee reviewed the proposed 2021 audit scope, including key audit areas, approach and fees,
the non- auditand non-audit services provided by the external auditor in conformity with the Philips Auditor Policy, as well as any changes to this policy. The Committee also reviewed the key audit matters, focusing on revenue recognition (multiple element sales contracts and sales promotion), valuation of goodwill, taxes (valuation and disclosure related to deferred tax assets), valuation and disclosure of accrual estimates for legal claims, litigations and contingencies and valuation of capitalized research and development cost (product development).Policy; - The Committee reviewed and challenged the independence as well as the professional fitness and good standing of the external auditor and its engagement partners. For information on the fees of the Group auditor, please refer to
‘Audit fees’Audit fees in the note Income from operations.; - The company’s policy on business controls, legal compliance and the General Business Principles (including
the deployment thereof)deployment). The Committee was informed on, andreviewed, discussed and monitored closely the company’s internal control certification processes, in particular compliance with section 404 of the US Sarbanes-Oxley Act and its requirements regarding assessment, review and monitoring of internal controls. It also discussed on a regular basis the developments in, and findings relating to, conduct resulting from investigations into alleged violations of the General Business Principles and, if required, any measures taken.taken;
The Committee convenedheld an education sessionssession on the current pensions footprint of the company and the key de-risking strategies deployed by the company since 2014, which have led to a significant reduction of the long-term employee benefit footprint since then. The Committee also held an education session on the company’s efforts and actions taken with respect to compliance with the General Business Principles and related policies, including the governance thereof, the internal intake process to ensure reported concerns are adequately followed-up under the EU General Data Protection Regulationall circumstances, as well as an update on current cases under discussion with regulatory and statutory requirements, and also a separate session on the new accounting standard IFRS 16 (leases)authorities globally and the implications for Philips.company’s internal compliance programs.
In February 2022, the Committee reviewed, together with the other members of the Supervisory Board, the key audit matters and the critical audit matters identified by the Auditor in relation to the 2021 financial statements included in the Annual Report 2021 and the Annual Report on Form 20-F respectively. In February 2022, the Committee also reviewed the draft of the company’s 2021 Country Activity and Tax Report.
During each Audit Committee meeting, the Committee reviewed the quarterly report from the external auditor, in which the auditor set forth its findings and attention points during the relevant period. Apart from the Audit Committee meetings, the external auditor also attended all private sessions with the Audit Committee, where their observations were, if necessary, further discussed. The annual audit letterAnnual Audit Letter was circulated to the full Supervisory Board, and planned actions to address the items raised were discussed with Management in the subsequent Audit Committee meetings and alsoas well as in private sessions with Management. The Committee assessed the overall performance of the external auditor, as required by the Auditor Policy. This assessment resulted in the proposal to re-appoint the Company’s current external auditor, Ernst & Young Accountants LLP, at the upcoming 2019 Annual General Meeting of Shareholders.
Finally, the Committee also reviewed its ownthe Audit Committee Charter and concluded that it was satisfactory.remains appropriate.
10.411.4Report of the Quality & Regulatory Committee
The Quality and& Regulatory Committee was established in view of the importance of patient safety and the quality of the company’s products, systems, services and software. The Committee provides broad oversight of compliance towith the regulatory requirements that govern the development, manufacturing, marketing and servicing of the company’s products.products, systems, services and software. The Q&RQuality & Regulatory Committee assists the Supervisory Board in fulfilling its oversight responsibilities in these areas. It is chaired by Christine PoonDavid Pyott and its members are Heino von Prondzynski, David PyottMarc Harrison and Jackson Tai.Peter Löscher.
The Q&RIn 2021, the Quality & Regulatory Committee metheld seven times in 2018. Allmeetings and all Committee members were present duringattended these meetings, with the exception of one member who was unable to attend the April Committee meeting. 2021 meeting of the Quality & Regulatory Committee.
The Chief Executive Officer, the Chief Legal Officer, the Chief Operations Officer and the Chief Quality & Regulatory Officer were present during these meetings.
The following overview below indicates some of the matters that were discussed during meetings throughout 2018:in the course of 2021:
- The company’s transformation strategy, focusing on patients and customers to ensure the safety and efficacy of the company’s products and solutions;
- Review of progress and next steps in the transformation of the structure and processes of the company’s Quality & Regulatory function, with the goal of building a best-in-class Quality & Regulatory organization, underpinned by investments in strategic-level executive Quality & Regulatory talent;
- Review of global initiatives around the transformation, standardization and
regulatory dashboards, which display key performance indicators for business groupssimplification of the company’s structure and markets, measuring performanceorganizational processes relating to Quality Management Systems, Management Systems and continuous improvement to enhance quality and compliance;regulated manufacturing sites (Legal Manufacturers); - The status and outcome of
qualityQuality & regulatoryRegulatory-related investigations and inspections by regulatory authorities and Notified Bodies across the organization. This particularly covered findings, related matters includingand follow-up actions taken by the company to address these findings. This includes the progress made in line with the terms of the consent decreeConsent Decree in place for parts of the company’s Emergency Care and Hospital Patient Monitoring businesses with the US Department of Justice, representing the US Food and Drug Administration (FDA), and the progress made with respect to closing the open warning letter from the FDA focusing primarilyin relation to the company’s Hospital Respiratory Care business; - The Philips Respironics voluntary recall notification related to the sound abatement foam in certain sleep and respiratory care products (announced on
Philips’ defibrillator manufacturingJune 14, 2021) in the US;company’s Sleep & Respiratory Care business. The Committee reviewed matters associated with this issue, such as interactions with regulatory authorities globally, engagement with patients, physicians, customers and durable medical equipment providers, testing, health hazard evaluations, and the status of the repair and remediation plan; - The
2018 quality transformation priorities, focusing on qualityinternal Accelerating Patient Safety and integrity, product quality, Philips Quality Management Systems and compliance; The culture of quality and measures taken to enhanceprogram that was launched by the quality culture and awarenesscompany in the company;Complaint handling and post market surveillance;Strategic supplier quality risk management processes and supplier quality dashboards.course of 2021;- Regulatory developments, including the company’s preparations, challenges, risks and mitigating actions to
implementdeploy the EU Medical Device Regulation and the potential impact of this regulation on capabilities and the product portfolio; and Review progress in development of talent and capabilitiesacross all relevant parts of the company’s quality and regulatory function.
Membersorganization, in view of the Q&R Committee also visitedDate of Application (May 26, 2021);
Quality & Regulatory deep-dives for the manufacturing facilities in Suzhou, China,Diagnosis & Treatment and met with local and regional management.Personal Health segments.1112Corporate governance
Corporate governance of the Philips Group - 12.1Introduction
Koninklijke Philips N.V. (Royal Philips), a company organized under Dutch law, is the parent company of the Philips Group. The Company, started as a limited partnership with the name Philips & Co in Eindhoven, the Netherlands, in 1891, and was converted into the company with limited liability N.V. Philips’ Gloeilampenfabrieken on September 11, 1912. The Company’s name was changed to Philips Electronics N.V. on May 6, 1994, to Koninklijke Philips Electronics N.V. on April 1, 1998, and to Koninklijke Philips N.V. on May 15, 2013.group. Its shares have been listed on the Amsterdam Stock Exchange, Euronext Amsterdam,stock exchange (Euronext Amsterdam) since 1912. TheFurthermore, its shares have been traded in the United States since 1962 and have been listed on the New York Stock Exchange since 1987.
In recent decades the CompanyRoyal Philips has pursued a consistent policy to improve its corporate governance in line with Dutch, UStwo-tier board structure consisting of a Board of Management and international best practices. The Company has worked to incorporate a fair disclosure practice in its investor relations policy, to strengthen the accountability of its executive management and the members of its Supervisory Board, (who are independenteach of the Company), and to respect and enhance the rights and powers of shareholders and to raise the level of communication with investors. The Companywhich is required to comply with, inter alia, Dutch corporate governance rules, the US Sarbanes-Oxley Act, and other US securities laws and related regulations (including applicable stock exchange rules), insofar as such US laws and regulations are applicable to the Company. A summary of the significant differences between the Company’s corporate governance practice and the New York Stock Exchange corporate governance standards applicable to US domestic issuers is published on the Company’s website (www.philips.com/investor).
In this report, the Company addresses its overall corporate governance structure and states to what extent and in what way it applies the principles and best practice provisions of the Dutch Corporate Governance Code (dated December 8, 2016). This report also includes the information which the Company is required to disclose pursuant to the Dutch governmental Decree on Article 10 Takeover Directive and the governmental Decree on Corporate Governance. When deemed necessary in the interests of the Company, deviations from aspects of the Company’s corporate governance structure are disclosed in this corporate governance report.
Substantial changes in the Company’s corporate governance structure and in the Company’s compliance with the Dutch Corporate Governance Code, if any, will be submittedaccountable to the General Meeting of Shareholders for discussion under a separate agenda item. The Supervisory Board and the Boardfulfillment of Management, which are responsible for the corporate governance structure of the Company, are of the opinion that the principles and best practice provisions of the Dutch Corporate Governance Code that are addressed to the Board of Management and the Supervisory Board are being applied.its respective duties.
11.1Board of Management and Executive Committee
Introduction
The Boardcompany is governed by Dutch corporate and securities laws, its Articles of Management is entrusted with the management of the Company. Certain key officers have been appointed to manage the Company together with the Board of Management, allowing functions, businessesAssociation, and markets to be represented at the highest levels in the company. The members of the Board of Management and these key officers together constitute the Executive Committee. For practical purposes, the Executive Committee has adopted a division of responsibilities that indicates the functional and business areas monitored and reviewed by the individual members. In this corporate governance report, wherever the Executive Committee is mentioned, this also includes the Board of Management, unless the context requires otherwise.
Under the chairmanship of the President/Chief Executive Officer (CEO), the members of the Executive Committee drive the Company’s management agenda and share responsibility for the continuity of the Philips Group, focusing on long-term value creation and taking into account the interests of shareholders and other stakeholders. For a description of the other responsibilities and tasks of the Executive Committee please refer to the Rules of Procedure of the Board of Management and the Executive Committee whichand of the Supervisory Board respectively. Its corporate governance framework is also based on the Dutch Corporate Governance Code (dated December 8, 2016) and US laws and regulations applicable to Foreign Private Issuers. Additionally, the Board of Management has implemented the Philips General Business Principles (GBP) and underlying policies, as well as separate codes of ethics that apply to employees working in specific areas of our business, i.e. the Financial Code of Ethics and the Procurement Code of Ethics. Many of the documents referred to are published on the Company’s website.company’s website and more information can be found in Our approach to risk management.
In this section of the Annual Report, the company addresses the main elements of its corporate governance structure, reports on how it applies the principles and best practices of the Dutch Corporate Governance Code and provides the information required by the Dutch governmental Decree on Corporate Governance (Besluit inhoud bestuursverslag) and governmental Decree on Article 10 Takeover Directive (Besluit artikel 10 overnamerichtlijn). When deemed necessary in the interests of the company, the company may deviate from aspects of the company’s corporate governance structure, and any such deviations will be disclosed in the company’s corporate governance report.
In compliance with the Dutch Corporate Governance Code, other parts of the management report (within the meaning of section 2:391 of the Dutch Civil Code) included in the Annual Report addressesaddress the strategy and culture of Philips aimed at long-term value creation. Philips' strategy is described in more detail in Strategy and Businesses. Here, reference is also made to the Philips Business System, a collectionan interdependent, collaborative operating model that covers all aspects of best practiceshow we operate – strategy, governance, processes, people, culture and global processes that provide a framework for continuous improvement and operational excellence, with the aim of delivering on the Company’s mission and vision and ensuring success is repeatable.performance management. As set out onin Social performance, Philips promotes a behavior and competency-driven growth and performance culture, which is anchored by the integrity norms described in the Philips General Business Principles (GBP).GBP. The Message from the CEO explains how the Company’scompany’s strategy was executed in 2018;2021; in this regard, please refer also to Financial performance.
12.2Board of Management and Executive Committee
Introduction
The Board of Management remainsis entrusted with the management of the company. Certain key officers have been appointed to support the Board of Management in the fulfilment of its managerial duties. The members of the Board of Management and these key officers together constitute the Executive Committee. In this Corporate Governance report, wherever the Executive Committee is mentioned, this also includes the members of the Board of Management, unless the context requires otherwise. Please refer to Board of Management and Executive Committee for an overview of the current members of the Board of Management and the Executive Committee.
Under the chairmanship of the President/Chief Executive Officer (CEO), and supported by the other members of the Executive Committee, the members of the Board of Management drive the company’s management agenda and share responsibility for the continuity of the Philips group, focusing on long-term value creation. Please refer to the Rules of Procedure of the Board of Management and the Executive Committee, which are published on the company’s website, for a description of further responsibilities and tasks, as well as procedures for meetings, resolutions and minutes.
In fulfilling their duties, the members of the Board of Management and Executive Committee shall be guided by the interests of the company and its affiliated enterprise, taking into account the interests of its stakeholders. The Board of Management and the Executive Committee have adopted a division of responsibilities based on the functional and business areas, each of which is monitored and reviewed by the individual members. The Board of Management is accountable for the actions and decisions of the Executive Committee and has ultimate responsibility for the Company’s management andcompany’s external reporting. It is also answerablereporting (including reporting to the Company's shareholders atof the Annual General Meetingcompany).
The Board of Shareholders.
All resolutions ofManagement and the Executive Committee are adoptedsupervised by majority vote comprising the majoritySupervisory Board. Members of the Board of Management and the Executive Committee will be present in the meetings of the Supervisory Board if so invited. In addition, the CEO and other members of the Board of Management present or represented, such majority comprising the vote of the CEO. The Board of Management retains the authority to, at all times and in all circumstances, adopt resolutions without the participation of(and if needed, the other members of the Executive Committee. In discharging its duties,Committee) meet on a regular basis with the Chairman and other members of the Supervisory Board. The Board of Management and the Executive Committee shall be guided by the interests of the Company and its affiliated enterprise, taking into consideration the interests of the Company’s stakeholders.
The Executive Committee is supervised byare required to keep the Supervisory Board informed of all facts and shall providedevelopments concerning Philips that the latter with all the information it needsSupervisory Board may need to fulfillbe aware of in order to function as required and to properly carry out its own responsibilities. Majorduties.
Certain important decisions of the Board of Management and Executive Committee require theSupervisory Board approval, of the Supervisory Board; these includeincluding decisions concerning (a) the operational and financial objectives of the Company, (b)company and the strategy designed to achieve these objectives, (c) if necessary, the parameters to be applied in relation to the strategyissue, repurchase or cancellation of shares, and (d) corporate social responsibility issues that are relevant to the Company.major acquisitions or divestments.
The Executive Committee follows the Rules of Procedure of the Board of Management
Appointment and Executive Committee, which set forth procedures for meetings, resolutions and minutes.(Term of) Appointment, composition and conflicts of interest
Members of the Board of Management, as well asincluding the CEO, are appointed by the General Meeting of Shareholders upon a binding recommendation drawn up by the Supervisory Board after consultation with the CEO. This binding recommendation may be overruled by a resolution of the General Meeting of Shareholders adopted by a simple majority of the votes cast and representing at least one-third of the issued share capital. If a simple majority of the votes cast is in favor of the resolution to overrule the binding recommendation, but such majority does not represent at least one-third of the issued share capital, a new meeting may be convened, at which the resolution may be passed by a simple majority of the votes cast, regardless of the portion of the issued share capital represented by such majority. In the event that a binding recommendation has been overruled, a new binding recommendation shall be submitted to the General Meeting of Shareholders. If such second binding recommendation has been overruled, the General Meeting of Shareholders shall be free to appoint a board member.
MembersThe CEO and the other members of the Board of Management and the CEO are appointed for a term of four years, it being understood that this term expires at the endclosing of the General Meeting of Shareholders to be held in the fourth calendar year after the year of their appointment or, if applicable, untilat a later retirement date or other contractual termination date in the fourth year, unless the General Meeting of Shareholders resolves otherwise. The same applies in the case of re-appointment, which is possible for consecutive terms of four years. A (re-)appointment schedule for the Board of Management is published on the company’s website.
Pursuant to Dutch law, the members of the Board of Management are engaged by means of a services agreement (overeenkomst van opdracht). The term of the services agreement is aligned with the term for which the relevant member has been appointed by the General Meeting of Shareholders. In case of termination of the services agreement by the company, severance payment is limited to a maximum of one year’s base salary. The services agreements provide no additional termination benefits.
Members of the Board of Management may be suspended by the Supervisory Board and by the General Meeting of Shareholders and dismissed by the latter. Individual data on the members of the Board of Management and Executive Committee are publishedmay be dismissed by the General Meeting of Shareholders (in each case in Boardaccordance with the Articles of Management and Executive CommitteeAssociation).
The other members of the Executive Committee are appointed, suspended and dismissed by the CEO, subject to approval by the Supervisory Board.
Candidates for appointment to the Board of Management and the Executive Committee are selected taking into account the Company’s Diversity Policy for the Supervisory Board, the Board of Management and the Executive Committee (effective December 31, 2017, and published on the Company’s website). As also addressed in the Diversity Policy, Dutch legislation on board diversity provides that the Company must pursue a policy of having at least 30% of the seats on the Board of Management held by men and at least 30% of these seats held by women. For more details on the Diversity Policy and board diversity please refer to Report of the Corporate Governance and Nomination & Selection Committee.
A member of the Board of Management requires the approval of the Supervisory Board before they can accept a position as a member of a supervisory board or a position as a non-executive director on a one-tier board (Non-Executive Directorship) at another company. The Supervisory Board must be notified of other important positions (to be) held by a member of the Board of Management. Dutch legislation provides for certain limitations on the number of Non-Executive Directorships a member of the Board of Management may hold. No such board member shall hold more than two Non-Executive Directorships at ‘large’ companies (naamloze vennootschappen or besloten vennootschappen) or ‘large’ foundations (stichtingen), as defined under Dutch law, and no member of the Board of Management shall hold the position of chairman of another one-tier board or the position of chairman of another supervisory board. In order for a company or foundation to be regarded as 'large', it must meet at least two of the following criteria: (i) the value of the assets according to the balance sheet with explanatory notes, considering the acquisition or manufacturing price, exceeds EUR 20 million; (ii) the net turnover exceeds EUR 40 million; or (iii) the average number of employees equals or exceeds 250. During the financial year 2018 all members of the Board of Management complied with the limitations described above in this paragraph.
Dutch legislation on conflicts of interest provides that a member of the Board of Management may not participate in the adoption of resolutions if he or she has a direct or indirect personal conflict of interest with the Company or related enterprise. If all members of the Board of Management have a conflict of interest, the resolution concerned will be considered by the Supervisory Board. The Company’s corporate governance includes rules to specify situations in which a potential or actual conflict may exist, to avoid such conflicts of interest as much as possible, and to deal with such conflicts should they arise. The Company's rules on conflicts of interest apply to the members of the Executive Committee.
Relevant matters relating to conflicts of interest, if any, must be disclosed in the Annual Report for the financial year in question. No such matters, however, have occurred during the financial year 2018.
Amount and composition of the remuneration of the Board of Management
The remuneration of the individual members of the Board of Management is determined by the Supervisory Board on the proposal of the Remuneration Committee of the Supervisory Board, taking into account the policy thereon as adopted by the General Meeting of Shareholders.
Pursuant to Dutch legislation, the implementation of the remuneration policy during the financial year must be included as a separate agenda item in the convening notice for a General Meeting of Shareholders and must be dealt with before the meeting can proceed to consider and adopt the Annual Accounts.
The current Remuneration Policy applicable to the Board of Management was adopted at the Annual General Meeting of Shareholders held in 2017 and is published on the Company’s website. Deviations from elements of the remuneration policy in extraordinary circumstances, when deemed necessary in the interests of the Company, will be disclosed in the Annual Report or, in the case of an appointment, in good time prior to the appointment of the person concerned.
A full and detailed description of the composition of the remuneration of the individual members of the Board of Management is included in Report of the Remuneration Committee.
All members of the Board of Management are engaged by means of a services agreement (overeenkomst van opdracht), as Dutch legislation prohibits a member of the Board of Management from being employed by means of a contract of employment. In the event of the appointment or re-appointment of a member of the Board of Management, the main elements of the services agreement - including the amount of the fixed base compensation, the structure and amount of the variable compensation component, any severance plan, pension arrangements and the general performance criteria - shall be made public no later than at the time of issuance of the notice convening the General Meeting of Shareholders in which a proposal for (re-) appointment of that member of the Board of Management has been placed on the agenda. In compliance with the Dutch Corporate Governance Code, the term of the services agreement of the members of the Board of Management is set at four years and, in the event of termination, severance payment is limited to a maximum of one year’s base compensation. From 2003 until 2013, Philips maintained a Long-Term Incentive Plan (LTI Plan) consisting of a mix of restricted share rights and stock options for members of the Board of Management, Philips executives and other key employees. Since the full revision in 2013 of the LTI Plan applicable to members of the Board of Management, the plan consists of performance shares only, with cliff-vesting three years after the date of grant, dependent upon the achievement of certain performance conditions. For more details please refer to Report of the Remuneration Committee .
Pursuant to Dutch legislation, the Supervisory Board is authorized to change unpaid bonuses awarded to members of the Board of Management if payment or delivery of the bonus would be unacceptable according to the principles of reasonableness and fairness. The Company, which in this respect may also be represented by the Supervisory Board or a special representative appointed for this purpose by the General Meeting of Shareholders, may also claim repayment of bonuses paid or delivered insofar as these have been granted on the basis of incorrect information on the fulfillment of the relevant performance criteria or other conditions. Bonuses are broadly defined as ‘non-fixed’ remuneration - either in cash or in the form of share-based compensation - that is conditional in whole or in part on the achievement of certain targets or the occurrence of certain circumstances. The explanatory notes to the balance sheet shall report on any moderation and/or claim for repayment of board remuneration. No such moderation or claim for repayment has occurred during the financial year 2018.
Members of the Board of Management hold shares in the Company for the purpose of long-term investment and are required to refrain from short-term transactions in Philips securities. According to the Philips Rules of Conduct with respect to Trading in Royal Philips Securities, members of the Board of Management are only allowed to trade in Philips securities (including the exercise of stock options) during ‘windows’ of twenty business days following the publication of annual and quarterly results (provided the person involved has no ‘inside information’ regarding Philips at that time, unless an exemption is available). Furthermore, the Rules of Procedure of the Board of Management and Executive Committee contain provisions concerning ownership of and transactions in non-Philips securities by members of the Board of Management. Members of the Board of Management are prohibited from trading, directly or indirectly, in securities of any of the companies belonging to the peer group, during one week preceding the disclosure of Philips’ annual or quarterly results. The rules referred to above apply to all members of the Executive Committee. Transactions in shares in the Company carried out by members of the Board of Management and members of the Supervisory Board are reported to the Netherlands Authority for the Financial Markets (AFM) in accordance with the European Market Abuse Regulation and, if necessary, to other relevant authorities.
Indemnification of members of the Board of Management and Supervisory Board
Unless the law provides otherwise, the members of the Board of Management and of the Supervisory Board shall be reimbursed by the Company for various costs and expenses, such as the reasonable costs of defending claims, as formalized in the Articles of Association. Under certain circumstances, described in the Articles of Association, such as an act or failure to act by a member of the Board of Management or a member of the Supervisory Board that can be characterized as intentional (opzettelijk), intentionally reckless (bewust roekeloos) or seriously culpable (ernstig verwijtbaar), there will be no entitlement to this reimbursement unless the law or the principles of reasonableness and fairness require otherwise. The Company has also taken out liability insurance (D&O - Directors & Officers) for the persons concerned.
In line with regulatory requirements, the Company’s policy forbids personal loans to and guarantees on behalf of members of the Board of Management or the Supervisory Board. No such loans were granted and no such guarantees were issued in 2018, nor were any loans or guarantees outstanding as of December 31, 2018.
The aggregate share ownership of the members of the Board of Management and the Supervisory Board represents less than 1% of the outstanding ordinary shares in the Company.
Risk management approach
Risk management and control forms an integral part of the Philips business planning and performance review cycle. The Company’s risk and control policy is designed to provide reasonable assurance that objectives are met by integrating risk assessment in the strategic planning process, integrating management control into the daily operations, ensuring compliance with legal requirements and safeguarding the integrity of the Company’s financial reporting and its related disclosures. The Executive Committee identifies risks and determines the risk appetite and appropriate risk responses related to the achievement of business objectives and critical business processes. The Executive Committee reports on and accounts for internal risk management and control systems to the Supervisory Board and its Audit Committee. Risk factors and the risk management approach, as well as the sensitivity of the Company’s results to external factors and variables, are described in more detail in Risk management. Significant changes and improvements in the Company’s risk management and internal control system have been discussed with the Supervisory Board’s Audit Committee and the external auditor and are also disclosed in Risk management.
With respect to financial reporting, a structured self- assessment and monitoring process is used company-wide to assess, document, review and monitor compliance with Internal Controls over Financial Reporting. Any deficiencies noted in the design and operating effectiveness of Internal Controls over Financial Reporting which were not completely remediated are evaluated at year-end by the Board of Management. On the basis thereof, the Board of Management confirms that: (i) the management report (within the meaning of section 2:391 of the Dutch Civil Code) provides sufficient insights into any failings in the effectiveness of the internal risk management and control systems; (ii) such systems provide a reasonable level of assurance that the financial reporting does not contain any material inaccuracies; (iii) based on the current state of affairs, it is justified that the financial reporting is prepared on a going concern basis; and (iv) the management report states those material risks and uncertainties that are relevant to the expected continuity of the company for a period of twelve months after the preparation of the report. The financial statements fairly represent the financial condition and result of operations of the Company and provide the required disclosures.
It should be noted that the above does not imply that the internal risk management and control systems provide certainty as to the realization of operational and financial business objectives, nor can they prevent all misstatements, inaccuracies, errors, fraud or non-compliances with rules and regulations.
In view of the above, the Board of Management believes that it is in compliance with the requirements of recommendation 1.4.2 of the Dutch Corporate Governance Code. The above statement on internal controls should not be construed as a statement in response to the requirements of section 404 of the US Sarbanes-Oxley Act. The statement as to compliance with section 404 is set forth on Management’s report on internal control.
In addition to the Philips General Business Principles (GBP), the Company has a Financial Code of Ethics which additionally applies to designated senior executives, including the CEO and the CFO, and to the senior management in the Philips Finance Leadership Team who head the Finance departments of the Company. The GBP and the Financial Code of Ethics are published on the Company’s website.
The Company, through the Supervisory Board’s Audit Committee, also has appropriate procedures in place for the receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls or auditing matters and the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters. The Company’s whistleblower mechanisms furthermore allow employees and, since May 2015, external parties to confidentially and anonymously report grievances to the Company, also on topics other than questionable accounting or auditing matters. The Company does not tolerate retaliation against internal whistleblowers who report a concern in good faith. More information on GBP governance and our whistleblower procedures can be found on Sustainability statements and Risk management.
In view of the requirements under the US Securities Exchange Act, procedures are in place to enable the CEO and the CFO to provide certifications with respect to the Annual Report on Form 20-F.
There is a Disclosure Committee that advises the Board of Management and various officers and departments involved on the timely review, publication and filing of periodic and current financial and non-financial reports. In addition to the certification by the CEO and the CFO under US law, under Dutch law each individual member of the Board of Management and the Supervisory Board must sign the Group and Company financial statements being disclosed and submitted to the General Meeting of Shareholders for adoption. If one or more of their signatures is missing, this shall be stated, and the reasons for this given. The members of the Board of Management issue the responsibility statement referred to in Group financial statements, as required by Dutch company law and securities law.
11.212.3Supervisory Board
Introduction
The Supervisory Board supervises the policies, management and general affairs of Philips, and assists the Board of Management and the Executive Committee with advice on general policies related to the activities of the company. In fulfilling their duties, the members of the Supervisory Board shall be guided by the interests of the company and its affiliated enterprise, taking into account the general courseinterests of business of Philips, and advises the executive management thereon. its stakeholders.
In the two-tier corporate structure under Dutch law, the Supervisory Board is a separate body that is independent of the Board of Management.Management and the company. Its independent character is also reflectedreflected in the requirement that members of the Supervisory Board can be neither a member of the Board of Management nor an employee of the company. The Supervisory Board considers all its members to be independent under the Dutch Corporate Governance Code and, in respect ofCode. Furthermore, the members of its Audit Committee are independent under the applicable US rules.
Acting in the interests of both the Company and the Group and taking into account the relevant interestsrules of the Company’s stakeholders,US Securities and Exchange Commission, applicable to the Audit Committee.
The Supervisory Board supervises and advisesmust approve certain important decisions of the Board of Management, and Executive Committee in performing their management tasks and settingincluding decisions concerning the direction of the Group’soperational, business including (a) the Group’s performance, (b) the Group’s view on long-term value creation, (c) the Group’s culture aimed at long-term value creation, (d) the Group’s general strategy aimed at long-term value creation and the risks connected to its business activities, (e) the operational and financial objectives (f)of the parameterscompany and the strategy designed to achieve these objectives, the issue, repurchase or cancellation of shares and major acquisitions or divestments. The Supervisory Board and its individual members each have a responsibility to request from the Board of Management, the Executive Committee and the external auditor all information that the Supervisory Board needs in order to be approved in relationable to carry out its duties properly as a supervisory body.
Please refer to the strategy, (g) corporate social responsibility issues, (h) the structure and managementRules of the systems of internal business controls and risk management, (i) the financial reporting process, (j) the compliance with applicable laws and regulations, also including the internal reporting systems on such compliance and the adequate follow-up thereof, (k) the Company/shareholder relationship, (l) the corporate governance structure of the Company and (m) senior management staffing, including succession planning. The Group’s strategy and major management decisions are discussed with and approved by the Supervisory Board. For a description of the other responsibilities and tasksProcedure of the Supervisory Board, please refer to the Supervisory Board’s Rules of Procedurewhich are published on the Company’s website.
company’s website, for a description of further responsibilities and tasks, as well as procedures for meetings, resolutions and minutes.
In its report (included in the Supervisory Board report,company’s Annual Report), the Supervisory Board describes the composition and functioning of the Supervisory Board and its committees, thetheir activities of the board and its committees in the financial year, 2018, the number of committee meetings held and the main items discussed. Please refer to Supervisory Board report.
The Rules Please also refer to Supervisory Board for an overview of Procedurethe current members of the Supervisory Board.
Appointment and composition
Members of the Supervisory Board are published on the Company’s website. These rules set forth the Supervisory Board’s governance rules governing meetings, items to be discussed, resolutions, appointment and re-election, committees, conflicts of interest, trading in securities, and the profile of the Supervisory Board. The Rules of Procedure also include the charters of the Board’s committees, to which the plenary Supervisory Board, while retaining overall responsibility, has assigned certain tasks: the Corporate Governance and Nomination & Selection Committee, the Audit Committee, the Remuneration Committee and the Quality & Regulatory Committee. Each committee reports to, and submits its minutes for information to the Supervisory Board.
(Term of) Appointment, composition and conflicts of interest
The Supervisory Board consists of at least five members (currently nine), including a Chairman, and a Vice- Chairman and Secretary. The Dutch ‘large company regime’ does not apply to the Company itself. Members are currently appointed by the General Meeting of Shareholders for fixed terms of four years, upon a binding recommendation fromdrawn up by the Supervisory Board.
According to the Company’s Articles of Association, this This binding recommendation may be overruled by a resolution of the General Meeting of Shareholders adopted by a simple majority of the votes cast and representing at least one-third of the issued share capital. If a simple majority of the votes cast is in favor of the resolution to overrule the binding recommendation, but such majority does not represent at least one-third of the issued share capital, a new meeting may be convened. At this new meeting the resolution may be passed by a simple majority of the votes cast, regardless of the portion of the issued share capital represented by such majority. In the event that a binding recommendation has been overruled, a new binding recommendation shall be submitted to the General Meeting of Shareholders. If such second binding recommendation has been overruled, the General Meeting of Shareholders shall be free to appoint a board member.
The term of appointment of members of the Supervisory Board expires at the closing of the General Meeting of Shareholders to be held after a period of four years following their appointment. There is no age limit applicable. Membersrequiring the retirement of board members.
In line with the Dutch Corporate Governance Code, members of the Supervisory Board are eligible for re-appointment for a fixed term of four years once, and may subsequently be re-appointed for a period of two years, which appointment may be extended by at most two years. The report of the Supervisory Board must state the reasons for any re-appointment beyond an eight-year period. The dates on which
A (re-)appointment schedule for the Supervisory Board members have been (re-)appointed areis published on the Company’scompany’s website.
Members of the Supervisory Board may be suspended or dismissed by the General Meeting of Shareholders in accordance with the Articles of Association.
Candidates for appointment to the Supervisory Board are selected taking into account the Diversity Policy. As also addressed in thecompany’s Diversity Policy, Dutch legislation on board diversity provides that the Company must pursue a policy of having at least 30% of the seatswhich is published on the Supervisory Board held by men and at least 30% by women.company’s website. The Supervisory Board’s composition furthermore follows the profile included in the Rules of Procedure of the Supervisory Board. For more details onBoard, and the Diversity Policy andsize of the board diversity pleasemay vary as it considers appropriate to support its profile. Please refer to Composition, diversity and self-evaluation by the Supervisory Board report.
The ChairmanEffective 2022, Dutch law provides a mandatory gender quota, requiring that least one-third of the Supervisory Board is independent, as determined in accordance with the Dutch Corporate Governance Code. Furthermore, the Dutch Corporate Governance Code sets forth certain limitations on themembers are women and at least one-third men (for calculation purposes, a total number of non-independentboard members that cannot be divided by three, must be rounded up to the next number that can be divided by three). The quota is applicable to (i) the appointment of thenew Supervisory Board members, and its committees. As mentioned(ii) the re-appointment of acting board members after eight years following their initial appointment. Except in the introduction to this section, the Supervisory Board considers all its members to be independent under the Dutch Corporate Governance Code and,certain exceptional circumstances, any appointment or re-appointment resulting in respect of the members of its Audit Committee under the applicable US rules.
The Supervisory Board is assisted by the secretary within the meaning of best practice provision 2.3.10 of the Dutch Corporate Governance Code (the “Secretary”). The Secretary ensures that correct procedures are followed and that the Supervisory Board acts in accordance with its statutory obligations and its obligations under the Articles of Association. Furthermore, the Secretary assists the Chairman of the Supervisory Board in the actual organization of the affairs of the Supervisory Board (information, agenda, evaluation, introductory program) and is the contact person for interested parties who want to make concerns known to the Supervisory Board. The Secretary shall be appointed by, and may be dismissed by the Board of Management, subject to the approval of the Supervisory Board.
Individual data on the members of the Supervisory Board are published in the Annual Report, and updated on the Company’s website. Members may be suspended and dismissed by the General Meeting of Shareholders. In the event of inadequate performance, structural incompatibility of interests, and in other instances in which resignation is deemed necessary in the opinion of the Supervisory Board, the Supervisory Board shall submit to the General Meeting of Shareholders a proposal to dismiss the respective member of the Supervisory Board.
After their appointment, all members of the Supervisory Board follow an introductory program, which covers general financial and legal affairs, financial reporting by the Company, any specific aspects that are unique to the Company, its business activities and its culture, and the responsibilities of a Supervisory Board member. Any need for further training or education of memberscomposition which does not meet (or no longer meets) the quota, will be reviewed annually, also on the basis of an annual evaluation survey.invalid (null and void).
Dutch legislation provides that no member of the
Supervisory Board shall hold more than five Non- Executive Directorships at ‘large’ companies or foundations as defined under Dutch law (see Board of Management and Executive Committee), with a position as chairman counting for two. During the financial year 2018 all members of the Supervisory Board complied with the limitations on Non-Executive Directorships described above.
Dutch legislation on conflicts of interest provides that a member of the Supervisory Board may not participate in the adoption of resolutions if he or she has a direct or indirect personal conflict of interest with the Company or a related enterprise. If all members of the Supervisory Board have a conflict of interest, the resolution concerned must be considered by the General Meeting of Shareholders. The Company’s corporate governance includes rules to specify situations in which a (potential) conflict may exist, to avoid (potential) conflicts of interest as much as possible, and to deal with such conflicts should they arise.
Relevant matters relating to conflicts of interest, if any, must be mentioned in the Annual Report for the financial year in question. No decisions to enter into material transactions in which there are conflicts of interest with members of the Supervisory Board were taken during the financial year 2018.
Meetings of the Supervisory Boardcommittees
The Supervisory Board, meets at least six times per year, including a meeting on strategy. Onwhile retaining overall responsibility, has assigned certain tasks to four committees: the advice of itsCorporate Governance and Nomination & Selection Committee, the Audit Committee, the Supervisory Board, also discusses, at least once a year, the main risks facing the business, the result of the assessment of the structure and operation of the internal risk management and control systems, as well as any significant changes thereto. The members of the Executive Committee attend the meetings of the Supervisory Board, except those meetings relating to matters such as the desired profile, composition and competence of the Supervisory Board and the Executive Committee, as well as the remuneration and performance of individual members of the ExecutiveRemuneration Committee, and the conclusionsQuality & Regulatory Committee. Each committee reports to be drawn on the basis thereof. In additionfull Supervisory Board. Please refer to these items, the Supervisory Board, being responsible for the quality of its own performance, discusses, at least once a year on its own, without the memberscharters of the Executive Committee being present: (i) both its own functioning and that of the individual members, and the conclusions to be drawn on the basis thereof, as well as (ii) both the functioning of the Board of Management and that of the individual members, and the conclusions to be drawn on the basis thereof. The CEO and other members of the Executive Committee meet on a regular basis with the Chairman and other members of the Supervisory Board. The Executive Committee is required to keep the Supervisory Board informed of all facts and developments concerning Philips that the Supervisory Board may need to be aware of in order to function as required and to properly carry out its duties. The Executive Committee is also required to consult the Supervisory Board on important matters and to submit certain important decisions to it for its prior approval. The Supervisory Board and its individual members each have a responsibility to request from the Executive Committee and the external auditor all information that the Supervisory Board needs in order to be able to carry out its duties properly as a supervisory body. If the Supervisory Board considers it necessary, it may obtain information from officers and external advisers of the Company. The Company provides the necessary means for this purpose. The Supervisory Board may also require that certain officers and external advisers attend its meetings.
The Chairman of the Supervisory Board
The responsibilities of the Supervisory Board’s Chairman include those recommended in the Dutch Corporate Governance Code. Amongst others, the Chairman will ensure that: (a) the Supervisory Board has proper contact with the Board of Management, (b) there is sufficient time for deliberation and decision-making by the Supervisory Board, (c) the members of the Supervisory Board receive all information that is necessary for the proper performance of their duties in a timely fashion, (d) the Supervisory Board and itsrespective committees, function properly, (e) the functioning of individual members of the Board of Management and of the Supervisory Board is assessed at least annually, (f) any material misconduct and irregularities (or suspicion thereof) are reported to the Supervisory Board without delay, (g) the shareholder meetings proceed in an orderly and efficient manner, and (h) effective communication with shareholders is assured.
The Vice-Chairman of the Supervisory Board shall deputize for the Chairman when the occasion arises. The Vice-Chairman shall act as the point of contact for individual members of the Supervisory Board or the Board of Management concerning the functioning of the Chairman of the Supervisory Board.
Remuneration of the Supervisory Board and share ownership
The remuneration of the individual members of the Supervisory Board, as well as the additional remuneration of its Chairman and the members of its committees, is determined by the General Meeting of Shareholders. The remuneration of a Supervisory Board member is not dependent on the results of the Company. Further detailswhich are published on Remunerationthe company’s website as part of the Supervisory Board
Shares or rights to shares shall not be granted to a Supervisory Board member. In accordance with the Rules of Procedure of the Supervisory Board, any shares in the Company held byfor a Supervisory Board member are long-term investments. description of their responsibilities, composition, meetings and working procedures.
The Supervisory Board has adopted a policy on ownership of and transactions in non-Philips securities by members of the Supervisory Board. This policy is included in the Rules of Procedure of the Supervisory Board.
The Corporate Governance and Nomination & Selection Committee
The Corporate Governance and Nomination & Selection Committee consists of at least the Chairman and Vice-Chairman of the Supervisory Board. The Committee reviews the corporate governance principles applicable to the Company at least once a year, and advises the Supervisory Board on any changes to these principles that it deems appropriate. It also (a) draws up is responsible for preparing selection criteria and appointment procedures for members of the Supervisory Board, the Board of Management and the Executive Committee; (b)Committee. The Committee makes proposals to the Supervisory Board for the (re)appointment of such members, and periodically assesses their functioning. The Committee also periodically assesses the Executive Committee succession planning, Diversity Policy, for the Supervisory Board, the Board of Management and the Executive Committee, the size and composition of the Supervisory Board, the Board of Management and the Executive Committee, and makes proposals for a composition profile of the Supervisory Board, if appropriate; (c) periodically assesses the functioning of individual members of the Supervisory Board, the Board of Management and the Executive Committee, and reports on this to the Supervisory Board. The Committee also consults with the CEO and the Executive Committee on candidates to fill vacancies on the Supervisory Board, the Board of Management and the Executive Committee, and advises the Supervisory Board on the candidates for appointment. It further supervises the policy of the Executive Committee on the selection criteria and appointment procedures for Philips Executives.
The Remuneration Committee
The Remuneration Committee meets atexecutives. At least twiceonce a year, the Committee reviews the corporate governance principles applicable to the company, and advises the Supervisory Board on any changes to these principles that it deems appropriate.
The Remuneration Committee is responsible for preparing decisions of the Supervisory Board on the remuneration of individual members of the Board of Management and the Executive Committee.
The Remuneration Committee prepares an annual remuneration report. The remuneration report, contains an account of the manner in which the remuneration policy has been implementedis included in the past financial year, as well as an overview of the implementation of the remuneration policy planned by the Supervisory Board for the next year(s). The Supervisory Board aims to have appropriate experience available within the Remuneration Committee. No more than one member of the Remuneration Committee shall be an executive board member of another Dutch listed company.
Annual Report. In performing its duties and responsibilities, the Remuneration Committee is assisted by an external consultant and an in-house remuneration expert acting on the basis of a protocol to ensure that the expert acts on the instructions of the Remuneration Committee and on an independent basis in which conflicts of interest are avoided.expert.
The Audit CommitteeThe Audit Committee, which currently consists of four members of
assists the Supervisory Board meets at least four times a year, beforein fulfilling its oversight responsibilities for: the publicationintegrity of the company’s financial statements; the financial reporting process; the effectiveness (also in respect of the financial reporting process) of the system of internal controls and risk management; the internal and external audit process; the internal and external auditor’s qualifications, independence and performance; as well as the company’s process for monitoring compliance with laws and regulations and the GBP (including related manuals, training and tools). It reviews the company’s annual semi-annual and quarterly results. interim financial statements, including non-financial information, prior to publication and advises the Supervisory Board on the adequacy and appropriateness of internal control policies and internal audit programs and their findings. The Committee furthermore supervises the internal audit function, maintains contact with and supervises the external auditor and prepares the nomination of the external auditor for appointment by the General Meeting of Shareholders.
The composition of the Audit Committee meets the relevant requirements under Dutch law and the applicable US rules. All of the members are considered to be independent and financially literate and the Audit Committee as a whole has the competence relevant to the sector in which the Companycompany is operating. In addition, Jackson Tai and David Pyott are eachLiz Doherty is designated as an Audit Committee financial expert, as defined under the regulations of the US Securities and Exchange Commission. The Supervisory Board considers the expertise and experience available in the Audit Committee, in conjunction with the possibility to take advice from internal and external experts and advisors, to be sufficient for the fulfillment of the tasks and responsibilities of the Audit Committee. The Audit Committee may not be chaired by the Chairman of the Supervisory Board or by a (former) member of the Board of Management.
The tasks and functions of the Audit Committee are described in the committee’s charter, which is published on the Company’s website as part of the Rules of Procedure of the Supervisory Board. These tasks and functions include the duties recommended in the Dutch Corporate Governance Code, as well as the duties imposed by applicable US regulations. More specifically, the Audit Committee assists the Supervisory Board in fulfilling its oversight responsibilities for the integrity of the Company’s financial statements, the financial reporting process, the effectiveness (also in respect of the financial reporting process) of the system of internal business controls and risk management, the internal and external audit process, the internal and external auditor’s qualifications, independence and performance, as well as the Company’s process for monitoring compliance with laws and regulations and the General Business Principles (GBP). The Audit Committee reports its findings to the Supervisory Board, and submits recommendations to ensure the integrity of the financial reporting process.
The Audit Committee reviews the Company’s annual and interim financial statements, including non- financial information, prior to publication and advises the Supervisory Board on the adequacy and appropriateness of internal control policies and internal audit programs and their findings. It also reports to the Supervisory Board the most important points of discussion between the external auditor and the Board of Management on the draft management letter and the draft annual report.
In reviewing the Company’s annual and interim statements, including non-financial information, and advising the Supervisory Board on internal control policies and internal audit programs, the Audit Committee reviews matters relating to accounting policies, compliance with accounting standards and compliance with statutory and legal requirements and regulations, particularly in the financial domain.
Important findings and identified risks are examined thoroughly by the Audit Committee in order to allow appropriate measures to be taken. With regard to the internal audit, the Audit Committee, in cooperation with the external auditor, reviews the internal audit charter, audit plan, audit scope and its coverage in relation to the scope of the external audit, staffing, independence and the organizational structure of the internal audit function. Decisions by the Board of Management regarding the appointment and removal of the internal auditor are subject to the approval of the Audit Committee.
With regard to the external audit, the Audit Committee (among other responsibilities) reviews the proposed audit scope (including the main risks of the reporting process), approach and fees, the independence of the external auditor, its performance and its (re-) appointment (or dismissal), audit and permitted non-audit services provided by the external auditor in conformity with the Philips Policy on Auditor Independence, as well as any changes to this policy. The Audit Committee also considers the report of the external auditor with respect to the annual financial statements and the auditor's report on internal control. The Audit Committee acts as the principal contact for the external auditor if the auditor discovers irregularities in the content of the financial reports. It also advises on the Supervisory Board’s statement to shareholders in the annual accounts. The Audit Committee periodically discusses the Company’s policy on business controls, the GBP and the deployment thereof, overviews on tax, IT and IT security, litigation and legal proceedings, environmental exposures, financial exposures in the area of treasury, real estate, pensions, and the Group’s major areas of risk. In general, the Company’s external auditor attends the Audit Committee meetings.
The Quality & Regulatory Committee
The Quality & Regulatory Committee has been established by the Supervisory Board in view of the central importance of the quality and (patient) safety of the Company’scompany’s products, systems, services and software as well as the development, testing, manufacturing, marketing and servicing thereof, and the regulatory requirements relating thereto. The Quality & Regulatory Committee assists the Supervisory Board in fulfilling its oversight responsibilities in this area, whilst recognizing that the Audit Committee assists the Supervisory Board in its oversight of other areas of regulatory, compliance and legal matters.
12.4Other Board-related matters
Remuneration and share ownership
The Qualityremuneration of the individual members of the Board of Management is determined by the Supervisory Board, taking into account the remuneration policy adopted by the General Meeting of Shareholders. The remuneration of the individual members of the Supervisory Board is determined by the General Meeting of Shareholders, also on the basis of a remuneration policy.
The current remuneration policies for the Board of Management and the Supervisory Board, respectively, were adopted in 2020 and are published on the company’s website. A description of the composition of the remuneration of the individual members of the Board of Management and the Supervisory Board is included in Report of the Remuneration Committee.
Pursuant to Dutch law, the shareholders are entitled to vote on the adoption of the remuneration policies for each of the Board of Management and the Supervisory Board at the Annual General Meeting (at least) every four years. The adoption of a remuneration policy will require a special majority of three-quarters of the votes cast (as the Articles of Association do not provide for a lower majority). In addition, shareholders have an advisory vote at each Annual General Meeting of Shareholders on the remuneration report relating to the preceding financial year (as prepared by the Remuneration Committee and included in the Annual Report).
Pursuant to Dutch law, the Supervisory Board is authorized to reduce or eliminate unpaid bonuses awarded to members of the Board of Management if payment or delivery of the bonus would be unacceptable according to the principles of reasonableness and fairness. The company, which in this respect may also be represented by the Supervisory Board or a special representative appointed for this purpose by the General Meeting of Shareholders, may also request return of bonuses already paid or delivered insofar as these have been granted on the basis of incorrect information on the fulfillment of the relevant performance criteria or other conditions. Bonuses are broadly defined as ‘non-fixed’ (variable) remuneration – either in cash or in the form of share-based compensation – that is conditional in whole or in part on the achievement of certain targets or the occurrence of certain circumstances. The explanatory notes to the balance sheet shall report on any moderation and/or claim for repayment of Board of Management remuneration. No such reduction of unpaid bonuses or requests for repayment occurred during the financial year 2021.
In compliance with the Dutch Corporate Governance Code, the company does not grant personal loans to and guarantees on behalf of members of the Board of Management or the Supervisory Board. No such loans were granted and no such guarantees were issued in 2021, nor were any loans or guarantees outstanding as of December 31, 2021.
Also in compliance with the Dutch Corporate Governance Code, the Articles of Association provide that shares or rights to shares shall not be granted to members of the Supervisory Board.
Members of the Board of Management and the Supervisory Board may only hold shares in the company for the purpose of long-term investment and must refrain from short-term transactions in Philips securities. According to Philips’ internal rules of conduct with respect to inside information, members of the Board of Management and the Supervisory Board are only allowed to trade in Philips securities (including the exercise of stock options) during ‘windows’ of 20 business days following the publication of annual and quarterly results (provided further the person involved has no inside information regarding Philips at that time, unless an exemption is available). Furthermore, members of the Board of Management and the Supervisory Board are prohibited from trading, directly or indirectly, in securities of any of the companies belonging to Philips’ peer group (as determined by the Supervisory Board) during one week preceding the disclosure of Philips’ annual or quarterly results.
Transactions in Philips shares carried out by members of the Board of Management and the Supervisory Board are reported to the Netherlands Authority for the Financial Markets (AFM) in accordance with the EU Market Abuse Regulation and, if necessary, to other relevant authorities.
Indemnification
Unless Dutch law provides otherwise, the members of the Board of Management and of the Supervisory Board shall be reimbursed by the company for various costs and expenses, such as the reasonable costs of defending claims, as formalized in the Articles of Association. Under certain circumstances, described in the Articles of Association, such as an act or failure to act by a member of the Board of Management or a member of the Supervisory Board that can be characterized as intentional (opzettelijk), intentionally reckless (bewust roekeloos) or seriously culpable (ernstig verwijtbaar), there will be no entitlement to this reimbursement unless the law or the principles of reasonableness and fairness require otherwise. The company has also taken out liability insurance (D&O – Directors & RegulatoryOfficers) for the persons concerned.
Diversity
Candidates for appointment to the Supervisory Board, the Board of Management and the Executive Committee consistsare selected taking into account the company’s Diversity Policy, which is published on the company’s website. Effective 2022, Dutch law provides that (re-)appointments of members of the Supervisory Board must be in accordance with a mandatory gender quota, requiring that at least twoone-third of the supervisory board members are women (and at least one-third are men). There are certain exceptions where the gender quota does not apply, such as the re-appointments within eight years of the initial appointment and meets(re-)appointments made in exceptional circumstances.
For more details on the Diversity Policy and board diversity, please refer to Report of the Corporate Governance and Nomination & Selection Committee. For more details on the Diversity Policy, the profile of the Supervisory Board and board diversity please refer to Supervisory Board report and to Report of the Corporate Governance and Nomination & Selection Committee
Conflicts of interest
Dutch law on conflicts of interest provides that a member of the Board of Management or Supervisory Board may not participate in the adoption of resolutions if he or she has a direct or indirect personal conflict of interest with the company or related enterprise. If all members of the Board of Management have a conflict of interest, the resolution concerned will be considered by the Supervisory Board. If all members of the Supervisory Board have a conflict of interest, the resolution concerned must be considered by the General Meeting of Shareholders.
In compliance with the Dutch Corporate Governance Code, the company’s corporate governance includes rules to specify situations in which a potential or actual conflict may exist, procedures to avoid such conflicts of interest as oftenmuch as is necessary or desirablepossible, and to deal with such conflicts should they arise. Relevant matters relating to conflicts of interest, if any, must be mentioned in the Annual Report (specifically the management report) for the performancefinancial year in question. No decisions to enter into material transactions in which there are conflicts of its duties.interest with members of the Board of Management or the Supervisory Board were taken during the financial year 2021.
Outside directorships
In compliance with the Dutch Corporate Governance Code, members of the Board of Management require the approval of the Supervisory Board before they can accept a position as a member of a supervisory board or a position as a non-executive director on a one-tier board (Non-Executive Directorship) at another company. The Supervisory Board must be notified of other important positions (to be) held by a member of the Board of Management.
Dutch law provides for certain limitations on the number of Non-Executive Directorships a member of the Board of Management or Supervisory Board may hold. No member of the Board of Management shall hold more than two Non-Executive Directorships at ‘large’ companies (naamloze vennootschappen or besloten vennootschappen) or ‘large’ foundations (stichtingen), as defined under Dutch law, and no member of the Board of Management shall hold the position of chairman of another one-tier board or the position of chairman of another supervisory board. No member of the Supervisory Board shall hold more than five Non-Executive Directorships at such companies or foundations, with a position as chairman counting for two. During the financial year 2021 all members of the Board of Management and the Supervisory Board complied with the limitations described above in this paragraph.
11.312.5General Meeting of Shareholders
IntroductionMeetings
The Annual General Meeting of Shareholders isshall be held every year to discussno later than six months after the end of the financial year. The agenda for the meeting typically includes: an advisory vote on the remuneration report; discussion of the Annual Report, including the reportadoption of the Board of Management, the annual financial statements with explanatory notes theretostatements; policy on additions to reserves and additional information required by law, as well as the Supervisory Board report,dividends; any proposal concerningproposed dividends or other distributions,distributions; discharge of the (re-)appointment of members of the Board of Management and the Supervisory Board (if any), important management decisions as required by Dutch law, andBoard; any other matters proposed by the Supervisory Board, the Board of Management or shareholders in accordance with Dutch law and the provisions of the Company’s Articles of Association. The Annual Report, the financial statements and other regulated information such as is defined in the Dutch Act on Financial Supervision (Wet op het financieel toezicht), will solely be published in English. As a separate agenda item and in accordance with Dutch law, the General Meeting of Shareholders discusses the discharge of the members of the Board of Management and the Supervisory Board from responsibility for the performance of their respective duties in the preceding financial year. However, this discharge only covers matters that are known to the Company and the General Meeting of Shareholders when the resolution is adopted. General Meetings of Shareholders are held in Eindhoven, Amsterdam, Rotterdam, The Hague, Utrecht or Haarlemmermeer (including Schiphol Airport). The Annual General Meeting of Shareholders is held no later than six months after the end of the financial year.
MeetingsShareholders’ meetings are convened by public notice via the Company’scompany’s website, or other electronic means of communication, and registered shareholders are notified by letter or by the use of electronic means of communication at least 42 days prior to the day of the relevant meeting. Shareholders who wish to exercise the rights attached to their shares in respect of a shareholders’ meeting are required to register for such meeting. Extraordinary General Meetings of Shareholders may attend a meeting in person, vote by proxy (via an independent third party) or grant a power of attorney to a third party to attend the meeting and vote on their behalf. Details on registration for meetings, attendance and proxy voting will be convened byincluded in the Supervisory Board ornotice convening the Boardrelevant meeting.
Pursuant to Dutch law, the record date for the exercise of Management if deemed necessaryvoting rights and must be held if shareholders jointly representingrights relating to shareholders’ meetings is set at least 10%the 28th day prior to the day of the outstanding share capital make a written requestrelevant meeting. Shareholders registered on such date are entitled to that effectattend the meeting and to exercise the Supervisory Board andother shareholder rights (at the Boardrelevant meeting) notwithstanding any subsequent sale of Management, specifying in detailtheir shares after the business to be dealt with. The agenda of a meeting shall contain such business as may be placed thereon by the Board of Management or the Supervisory Board, and agenda items will be explained in writing where necessary. The agenda shall list which items are for discussion and which items are to be voted upon.record date.
Material amendments to the Articles of Association and resolutions for the appointment of members of the Board of Management and Supervisory Board shall be submitted separately to the General Meeting of Shareholders, it being understood that amendments and other proposals that are connected in the context of a proposed (part of the) governance structure may be submitted as one proposal. In accordance with the Articles of Association and Dutch law, requests from shareholders for items to be included on the agenda will generally be honored, subject to the Company’scompany’s rights to refuse to include the requested agenda item under Dutch law, provided that such requests are made in writing at least 60 days before a General Meeting of Shareholders to the Board of Management and the Supervisory Board by shareholders representing at least 1% of the Company’scompany’s outstanding capital or, according to the officialofficial price list of Euronext Amsterdam, representing a value of at least EUR 50 million. Written requests may be submitted electronically and shall comply with the procedure stipulated by the Board of Management, which procedure is posted on the Company’scompany’s website.
Pursuant to Dutch legislation,law, shareholders requesting an item to be included on the agenda of a meeting have an obligation to disclose their full economic interest (i.e. long position and short position) to the Company.company. The Companycompany has the obligation to publish such disclosures on its website.
Main powers of the General Meeting of Shareholders
All outstanding shares carry voting rights. The main powers of the General Meeting of Shareholders are are:
- to appoint, suspend and dismiss members of the Board of Management and the Supervisory Board;
- to adopt remuneration policies for the Board of Management and the Supervisory Board, determine the remuneration of the individual members of the Supervisory Board and to approve long-term incentive (equity-based) plans for the Board of Management;
- to adopt the annual accounts, to declare dividends and to discharge the Board of Management and the Supervisory Board from
responsibility forany liability in respect of the performance of their respective duties for the previous financial year, financial year; - to appoint the company’s external
auditor as required by Dutch law, auditor; - to adopt amendments to the Articles of Association and proposals to dissolve or liquidate the
Company, company; - to issue shares or rights to
shares, shares; - to restrict or exclude pre-emptive rights of shareholders and to repurchase or cancel outstanding
shares. Following common corporate practice shares; and - in
the Netherlands, each year the Company requests limited authorization to issue (rights to) shares, to restrict or exclude pre-emptive rights and to repurchase shares. In complianceaccordance with Dutch law, to approve decisions of the Board of Management that are so far-reaching that they would greatly change the identity or nature of the Companycompany or the business require the approval of the General Meeting of Shareholders. This includes resolutions to: (a) transfer the business of the Company, or almost the entire business of the Company, to a third party; (b) enter into or discontinue long-term cooperation by the Company or a subsidiary with another legal entity orbusiness.
The company or as a fully liable partner in a limited partnership or ordinary partnership, if this cooperation or its discontinuation is of material significance to the Company; or (c) acquire or dispose of (at the level of the Company or one of its subsidiaries) a participating interest in the capital of a company to the value of at least one-third of the amount of the assets according to the consolidated balance sheet and notes thereto as published in the last adopted annual accounts of the Company. Thus the Company applies principle 4.1 of the Dutch Corporate Governance Code within the framework of the Articles of Association and Dutch law and in the manner described in this corporate governance report.
The Board of Management All issued and Supervisory Board are also accountable, atoutstanding shares carry voting rights and each share confers the Annual General Meeting of Shareholders, for the policy on the additionsright to reserves and dividends (the level and purpose of the additionscast one vote in a shareholders’ meeting. Pursuant to reserves, the amount of the dividend and the type of dividend). This subject is dealt with and explained as a separate agenda item at the Annual General Meeting of Shareholders. A resolution to pay a dividend is dealt with as a separate agenda item at the General Meeting of Shareholders.
The Board of Management and the Supervisory Board are required to provide the General Meeting of Shareholders with all requested information, unless this wouldDutch law, no votes may be prejudicial to an overriding interest of the Company. If the Board of Management and the Supervisory Board invoke an overriding interest in refusing to provide information, the reasons for this must be given. If a serious private bid is made for a business unit or a participating interest and the value of the bid exceeds a certain threshold (currently one-third of the amount of the assets according to the consolidated balance sheet and notes thereto as published in the last adopted annual accounts of the Company), and such bid is made public, the Board of Management shall, at its earliest convenience, make public its position on the bid and the reasons for this position.
A resolution to dissolve the Company or change its Articles of Association can be adoptedcast at a General Meeting of Shareholders in respect of shares which are held by at least three-quartersthe company. There are no special statutory rights attached to the shares of the votes cast,company and no restrictions on condition that more than halfthe voting rights of the issued share capital is represented at this meeting. Ifcompany’s shares exist. Subject to certain exceptions provided by Dutch law and/or the requisite share capital is not represented, a further meeting to which no quorum requirement applies shall be convened and held within eight weeksArticles of Association, resolutions of the first meeting. Furthermore, the resolution requires the approvalGeneral Meeting of the Supervisory Board. If the resolution is proposedShareholders are passed by the Board of Management, an absolute majority of votes is required in order for the resolution to be adoptedcast and no quorum requirement applies to the meeting.do not require a quorum.
RepurchaseShare capital; issue and issuerepurchase of (rights to) shares
At the 2018 Annual General Meeting of Shareholders it was resolved to authorize the Board of Management, subject to the approvalThe authorized share capital of the Supervisory Board,company amounts to acquireEUR 800 million, divided into 2 billion common shares inwith a nominal value of 20 eurocents each and 2 billion preference shares also with a nominal value of 20 eurocents each. On December 31, 2021, the Company within the limits ofissued share capital amounted to EUR 176,779,793.80 divided into 883,898,696 common shares and no preference shares. All shares are fully paid-up. There are currently no limitations, either under Dutch law or the Articles of Association, to the transfer of the common shares.
Only Euroclear shares are traded on Euronext Amsterdam. Only New York Registry Shares are traded on the New York Stock Exchange. Pursuant to Section 10:138(2) of the Dutch Civil Code, the laws of the State of New York are applicable to the proprietary regime with respect to the New York Registry Shares, which proprietary regime includes the requirements for a transfer of, or the creation of an in rem right in, such New York Registry Shares. Euroclear shares and within aNew York Registry Shares may be exchanged for each other.
As per December 31, 2021, approximately 91% of the common shares were held through the system of Euroclear Nederland (Euroclear shares) and approximately 9% of the common shares were represented by New York Registry Shares issued in the name of approximately 866 holders of record, including Cede & Co. Cede & Co which acts as nominee for The Depository Trust Company holding the shares (indirectly) for individual investors as beneficiaries. Deutsche Bank Trust Company Americas is Philips’ New York transfer agent, registrar and dividend disbursing agent. Since certain price range up toshares are held by brokers and including November 2, 2019. The maximumother nominees, these numbers may not be representative of the actual number of sharesUnited States beneficial holders or the company may hold will not exceed 10% of the issued share capital as of May 3, 2018. The number of shares may be increasedNew York Registry Shares beneficially held by 10% ofUS residents.
At the issued capital as of that same date in connection with the execution of share repurchase programs for capital reduction programs.
In addition, at the 20182021 Annual General Meeting of Shareholders, it was resolved to authorize the Board of Management, subject to the approval of the Supervisory Board, to issue shares or to grant rights to acquire shares in the Companycompany as well as to restrict or exclude the pre-emption right accruing to shareholders up to and including November 2, 2019.5, 2022. This authorization is limited to a maximum of 10% of the number of shares issued as of May 3, 2018.6, 2021.
11.4Meeting logistics and other information
Introduction
Pursuant to Dutch law,In addition, at the record date for the exercise of voting rights and rights relating to General Meetings of Shareholders is set as the 28th day prior to the day of the meeting. Shareholders registered on such date are entitled to attend the meeting and to exercise the other shareholder rights (in the meeting in question) notwithstanding subsequent sale of their shares thereafter. This date will be published in advance of every General Meeting of Shareholders.
Information which is required to be published or deposited pursuant to the provisions of company law and securities law applicable to the Company and which is relevant to the shareholders, is placed and updated on the Company’s website, or hyperlinks are established. The Board of Management and Supervisory Board shall ensure that the2021 Annual General Meeting of Shareholders, is informed of facts and circumstances relevantit was resolved to proposed resolutions in explanatory notes to the agenda and, if deemed appropriate, by means of a ‘shareholders' circular’ published on the Company’s website.
Resolutions adopted by the General Meeting of Shareholders shall be recorded by a civil law notary and co-signed by the chairman of the relevant meeting; such resolutions shall also be published on the Company’s website within 15 days after the meeting. Upon request, a draft summary of the discussions during a General Meeting of Shareholders, in the language of the meeting, is made available to shareholders no later than three months after the meeting. Shareholders shall have the opportunity to respond to this summary for three months, after which a final summary is adopted by the chairman of the meeting in question. Such final summary shall be made available on the Company’s website.
Registration, attending meetings and proxy voting
Holders of common shares who wish to exercise the rights attached to their shares in respect of a General Meeting of Shareholders are required to register for such meeting. Shareholders may attend a meeting in person, or may grant a power of attorney to a third party to attend the meeting and to vote on their behalf. Holders of common shares in bearer form will also be able to give voting instructions via the internet (assuming the agenda for such meeting includes voting items). In addition, the Company will distribute a voting instruction form for a General Meeting of Shareholders. By giving voting instructions via the internet or by returning the form, shareholders grant power to an independent proxy holder who will vote according to the instructions expressly given on the voting instruction form. Other persons entitled to vote shall also be given the possibility to give voting proxies or instructions to an independent third party prior to the meeting. Details on registration for meetings, attendance and proxy voting will be included in the notice convening a General Meeting of Shareholders.
Preference shares and the Stichting Preferente Aandelen Philips
As a means to protect the Company and its stakeholders against an unsolicited attempt to obtain (de facto) control of the Company, in 1989 the General Meeting of Shareholders adopted amendments to the Company’s Articles of Association that allowauthorize the Board of Management, andsubject to the approval of the Supervisory Board, to issue (rights to) preference shares to a third party. As a result, Stichting Preferente Aandelen Philips (the Foundation) was created, which was granted the right to acquire preference shares in the Company. The mere notification that the Foundation wishes to exercise its rights, should a third party ever seem likely in the judgment of the Foundation to obtain (de facto) control of the Company, will result in the preference shares being effectively issued. The Foundation may exercise this right for as many preference shares as there are ordinary shares in the Company outstanding at that time. No preference shares have been issued as of December 31, 2018. In addition, the Foundation has the right to file a petition with the Enterprise Chamber of the Amsterdam Court of Appeal to commence an inquiry procedurecompany within the meaninglimits of section 2:344 Dutch Civil Code.
The object of the Foundation is to represent the interests of the Company, the enterprises maintained by the Company and its affiliated companies within the Group, in such a way that the interests of Philips, these enterprises and all parties involved with them are safeguarded as effectively as possible, and that they are afforded maximum protection against influences which, in conflict with those interests, may undermine the autonomy and identity of Philips and those enterprises, and also to do anything related to the above ends or conducive to them. In the event of (an attempt at) a hostile takeover or other attempt to obtain (de facto) control of the Company, this arrangement will allow the Company and its Board of Management and Supervisory Board to determine its position in relation to the third party and its plans, to seek alternatives and to defend Philips’ interests and those of its stakeholders from a position of strength. The members of the self- electing Board of the Foundation are Messrs J.M. Hessels, F.J.G.M. Cremers and P.N. Wakkie. No Philips Supervisory Board or Board of Management members or Philips officers are represented on the board of the Foundation.
The Company does not have any other anti-takeover measures in the sense of other measures which exclusively or almost exclusively have the purpose of frustrating future public bids for the shares in the capital of the Company in case no agreement is reached with the Board of Management on such public bid.
Furthermore, the Company does not have measures which specifically have the purpose of preventing a bidder who has acquired 75% of the shares in the capital of the Company from appointing or dismissing members of the Board of Management and subsequently amending the Articles of Association and within a certain price range up to and including November 5, 2022. The maximum number of shares the company may hold will not exceed 10% of the Company. It shouldissued share capital as of May 6, 2021. The number of shares may be noted that also in the event of (an attempt at) a hostile takeover or other attempt to obtain (de facto) controlincreased by 10% of the Company,issued capital as of that same date in connection with the Boardexecution of Management and the Supervisory Board are authorized to exercise in the interests of Philips all powers vested in them.share repurchase programs for capital reduction programs.
12.6Annual financial statements and external audit
The annual financial statements are prepared by the Board of Management and reviewed by the Supervisory Board upon the advice of its Audit Committee, taking into account the report of the external auditor. Upon approval by the Supervisory Board, the accounts are signed by all members of both the Board of Management and the Supervisory Board and are published together with the opinion of the external auditor. The Board of Management is responsible, under the supervision of the Supervisory Board, for the quality and completeness of such publicly disclosed financial reports. The annual financial statements are presented for discussion and adoption at the Annual General Meeting of Shareholders, to be convened subsequently. Under US securities regulations, the Company files its Annual Report separately on Form 20-F, incorporating major parts of the Annual Report as prepared under the requirements of Dutch law.
Internal controls and disclosure policies
Comprehensive internal procedures, compliance with which is supervised by the Supervisory Board, are in place for the preparation and publication of the Annual Report, the annual accounts, the quarterly figures and ad hoc financial information. Monitoring of Internal Controls over Financial Reporting takes place via annual independent testing (by anThe external service provider) of the internal controls over financial reporting and disclosure controls and procedures required under applicable US law, quarterly internal control reviews and bi-annual self-assessment procedures. In addition, ongoing monitoring by business and finance management takes place as part of their daily supervision and management.
As part of these procedures, a Disclosure Committee has been appointed by the Board of Management to oversee the Company’s disclosure activities and to assist the Board of Management in fulfilling its responsibilities in this respect. The Committee’s purpose is to ensure that the Company implements and maintains internal procedures for the timely collection, evaluation and disclosure, as appropriate, of information potentially subject to public disclosure under the legal, regulatory and stock exchange requirements to which the Company is subject. Such procedures are designed to capture information that is relevant to an assessment of the need to disclose developments and risks that pertain to the Company’s various businesses. The effectiveness of these procedures for this purpose will be reviewed periodically.
Auditor information
In accordance with the procedures laid down in the Philips Auditor Policy and as mandatorily required by Dutch law, the external auditor of the Company is appointed by the General Meeting of Shareholders onin accordance with the proposalArticles of the Supervisory Board, after the latter has been advisedAssociation. Philips’ current external auditor, Ernst & Young Accountants LLP, was appointed by the Audit Committee and the Board of Management. Under this Auditor Policy, the Supervisory Board and the Audit Committee assess the functioning of the external auditor. The main conclusions of this assessment are communicated to the General Meeting of Shareholders for the purpose of assessing the nomination for the appointment of the external auditor.
The current auditor of the Company, Ernst & Young Accountants LLP (EY), was appointed at theheld on May 7, 2015, Annual General Meeting of Shareholders, for a term of four years starting January 1, 2016. Mrs. S.D.J. Overbeek-Goeseije is2016 and was re-appointed at the current partner of EY in charge of the audit duties for Philips. The agenda for the upcoming 2019 Annual General Meeting of Shareholders will includeheld on May 9, 2019 for a proposal to re-appoint EY as external auditorterm of the Company.three years starting January 1, 2020.
In general, the external auditor attends the meetings of the Audit Committee. The findings of the external auditor, the audit approach and the risk analysis are also discussed at these meetings. The external auditor attends the meeting of the Supervisory Board at which the external auditor’s report on the audit of the annual accounts is discussed, and at which the annual accounts are approved. In its audit report on the annual accounts to the Board of Management and the Supervisory Board, the external auditor refers to the financial reporting risks and issues that were identified during the audit, internal control matters, and any other matters, as appropriate, that it is required to communicate in accordance with the auditing standards generally accepted in the Netherlands and the US.
The partner of the external auditor in charge of the audit duties for Philips will attend the Annual General Meeting of Shareholders. Questions may be put to him/her at the meeting about his/her report. The Board of Management and the Audit Committee of the Supervisory Board are required to report to the Supervisory Board on their dealings with the external auditor on an annual basis, particularly with regard to the auditor’s independence. The Supervisory Board shall take this into account when deciding upon its nomination for the appointment of an external auditor.
Auditor policy
Dutch law requires the separation of audit and non-audit services, meaning the Company’sservices. The external auditor may only provide audit and audit-related services and is not allowedprohibited to provide non-auditany other services. This is reflected in the Auditor Policy, which is published on the Company’scompany’s website. The policy is also in line with (and in some ways stricter than) applicable US Securities and Exchange Commission rules, under which the appointed external auditor must be independent offrom the Companycompany both in fact and appearance.
The Auditor Policy specifies certain audit services and audit-related services (also known as assurance services) that will or may be provided by the external auditor, and includes rules for the pre-approval by the Audit Committee of such services. Audit services must be pre-approved on the basis of the annual audit services engagement agreed with the External Auditor. Proposed audit-related services may be pre-approved at the beginning of the year by the Audit Committee (annual pre-approval) or may be pre-approved during the year by the Audit Committee in respect of a particular engagement (specific pre-approval). The annual pre-approval is based on a detailed, itemized list of services to be provided, which is designed to ensure that there is no management discretion in determining whether a service has been approved, and to ensure that the Audit Committee is informed of each of the services it is pre-approving. Unless pre-approval with respect to a specific service has been given at the beginning of the year, each proposed service requires specific pre-approval during the year. Any annually pre-approved services where the fee for the engagement is expected to exceed pre-approved cost levels or budgeted amounts will also require specific pre-approval. The term of any annual pre- approvalpre-approval is 12 months from the date of the pre-approval unless the Audit Committee states otherwise. During 2018,2021, there were no services provided to the Company by the external auditor which were not pre-approved by the Audit Committee.
11.512.7Investor RelationsStichting Preferente Aandelen Philips
Introduction
The Company is continually strivingStichting Preferente Aandelen Philips, a Foundation (stichting) organized under Dutch law, has been granted the right to improve relations with its shareholders.acquire preference shares in the capital of Royal Philips, as stated in the company’s Articles of Association. In addition, the Foundation has the right to communicationfile a petition with its shareholders at a General Meetingthe Enterprise Chamber of Shareholders, Philips elaborates upon its financial results during conference calls, which are broadly accessible. It publishes informative annual, semi-annual and quarterly reports and press releases, and informs investors via its extensive website. the Amsterdam Court of Appeal to commence an inquiry procedure within the meaning of section 2:344 Dutch Civil Code.
The Company is strict in its compliance with applicable rules and regulations on fair and non-selective disclosure and equal treatmentobject of shareholders.
From time to time the Company communicates with investors via road shows, broker conferences and a Capital Markets Day, which are announced in advance on the Company’s website. The purpose of these engagementsFoundation is to further informrepresent the marketinterests of Royal Philips, the enterprises maintained by the company and its affiliated companies within the company’s group, in such a way that the interests of the results, strategycompany, these enterprises and decisions made,all parties involved with them are safeguarded as welleffectively as possible, and that they are afforded maximum protection against influences which, in conflict with those interests, may undermine the autonomy and identity of Philips and those enterprises, and also to receive feedback from shareholders. Shareholders can followdo anything related to the meetings and presentations organized byabove ends or conducive to them. This object includes the Company in real time, by meansprotection of webcastingPhilips against (an attempt at) an unsolicited takeover or telephone lines. Thus the Company applies recommendation 4.2.3other attempt to exert (de facto) control of the Dutch Corporate Governance Code, whichcompany. The arrangement will allow Philips to determine its position in relation to the relevant third party (or parties) and its perception(their) plans, to seek alternatives and to defend the company’s interests and those of its stakeholders.
The mere notification that the Foundation exercises its right to acquire preference shares will result in viewsuch shares being effectively issued. The Foundation may exercise this right for as many preference shares as there are common shares in the company outstanding at that time. No preference shares have been issued as of market practice does not extend to less important analyst meetings and presentations. It is Philips’ policy to post presentations to analysts and shareholders on the Company’s website. These meetings and presentations will not take place shortly before the publication of annual, semi-annual and quarterly financial information.December 31, 2021.
Furthermore, the Company engages in bilateral communications with investors. These take place either at the initiative of the Company or at the initiative of investors. The Company is generally represented by its Investor Relations department during these interactions, however, on a limited number of occasions the Investor Relations department is accompanied by one or more members of the senior management. The subject matterself-electing Board of the bilateral communications ranges from individual queries from investorsFoundation are Messrs J.P. de Kreij, J.V. Timmermans, J. van der Veer and P.N. Wakkie. No Philips Supervisory Board or Board of Management members or Philips officers are represented on the board of the Foundation.
Other than the arrangements made with the Foundation referred to more elaborate discussions following disclosures thatabove, the Company has made, such as its annual and quarterly reports. Also here, the Company is strict in its compliance with applicable rules and regulations on fair and non-selective disclosure and equal treatment of shareholders.
The Company shallcompany does not in advance, assess, comment uponhave any measures which exclusively or correct, other than factually, any analyst’s reports or valuations. No fee will be paid by the Company to any party for carrying out research foralmost exclusively have the purpose of analysts’ reportsdefending against unsolicited public offers for shares in the capital of the company. It should be noted that the Board of Management and the Supervisory Board remain under all circumstances authorized to exercise all powers vested in them to promote the interests of Philips.
The company has issued certain corporate bonds, the provisions of which contain a ‘Change of Control Triggering Event’ or fora ‘Change of Control Put Event’. Upon the productionoccurrence of such events, the company might be required to offer to redeem or publication of analysts’ reports, with the exception of credit-rating agencies.purchase any outstanding bonds at certain pre-determined prices. Please also refer to Debt.
12.8Major shareholders and other information for shareholders
The Dutch Act on Financial Supervision imposes an obligation on persons holding certain interests to disclose (inter alia)(inter alia) percentage holdings in the capital and/or voting rights in the Companycompany when such holdings reach, exceed or fall below 3, 5, 10, 15, 20, 25, 30, 40, 50, 60, 75 and 95 percent (as a result of an acquisition or disposal by a person, or as a result of a change in the company’s total number of voting rights or capital issued). Certain derivatives (settled in kind or in cash) are also taken into account when calculating the capital interest. The statutory obligation to disclose capital interest relates not only to gross long positions, but also to gross short positions. Required disclosures must be made to the Netherlands Authority for the Financial Markets (AFM) without delay. The AFM then notifiesnotifes the Companycompany of such disclosures and includes them in a register, which is published on the AFM’s website. Furthermore, an obligation to disclose (net) short positions is set out in the EU Regulation on Short Selling.
The AFM register shows the following notificationnotifications of substantial holdings and/or voting rights at or above the 3% threshold: BlackRock, Inc.: substantial holding of 5.03%5.19% and 6.19%6.31% of the voting rights (December 27, 2021); T. Rowe Price Group, Inc.: substantial holding of 3.04% and 3.02% of the voting rights (January 5, 2017)19, 2022); Capital ResearchUBS Group AG: substantial holding of 3.64% and Management Company / Capital Group International Inc.: 3.03 %3.64% of the voting rights (November 30, 2018)(February 9, 2022). The AFM register also shows a notification by Philips of a substantial holding of 4.14%4.08% in its own share capital (noand no voting rights)rights (December 28, 2021).
12.9Corporate information
As per December 31, 2018, approximately 93%The company began as a limited partnership with the name Philips & Co in Eindhoven, the Netherlands, in 1891, and was converted into the company with limited liability N.V.Philips’ Gloeilampenfabrieken on September 11, 1912. The company���s name was changed to Philips Electronics N.V. on May 6, 1994, to Koninklijke Philips Electronics N.V. on April 1, 1998, and to Koninklijke Philips N.V. on May 15, 2013.
The majority of the common shares werein Royal Philips are held through the system maintained by the Dutch Central Securities Depository (Euroclear Nederland). In the past, Philips has also issued (physical) bearer share certificates ("Share Certificates"). A limited number of Euroclear (Euroclear shares) and approximately 7%Share Certificates have not been surrendered yet, although the holders of Share Certificates are still entitled to a corresponding number of shares in Royal Philips. It is noted that, as a result of Dutch legislation that became effective per July 2019, the commonrelevant shares were represented by New York Registry Shares issuedregistered in the name of approximately 1,034 holdersRoyal Philips by operation of record, including Cede & Co. Cede & Co acts as nominee for The Depository Trust Company holdinglaw per January 1, 2021. Owners of Share Certificates will continue to be entitled to a corresponding number of shares, but may not exercise the rights attached to such shares (indirectly) for individual investors as beneficiaries. Deutsche Bank Trust Company Americas isuntil they surrender their Share Certificates. Owners of Share Certificates may come forward to do so and to receive a corresponding number of shares until January 1, 2026 at the New York transfer agent, registrar and dividend disbursing agent.
Only Euroclear shares are traded on the stock market of Euronext Amsterdam. Only New York Registry Shares are traded on the New York Stock Exchange. Pursuant to Section 10:138(2) of the Dutch Civil Code, the laws of the State of New York are applicablelatest. As per January 2, 2026, entitlements attached to the proprietary regime with respect toShare Certificates not surrendered, will expire by operation of law. For more information, please contact the New York Registry Shares, which proprietary regime includes the requirements for a transfer of,Investor Relations department by email (investor.relations@philips.com) or the creation of an in rem right in, such New York Registry Shares. Euroclear shares and New York Registry Shares may be exchanged for each other. Since certain shares are held by brokers and other nominees, these numbers may not be representative of the actual number of United States beneficial holders or the number of Shares of New York Registry beneficially held by US residents.telephone (+31-20-59 77222).
The provisions applicable to all USD denominated corporate bonds issued by the Company in March 2008 and March 2012 (due 2022, 2038 and 2042) contain a ‘Change of Control Triggering Event’. If the Company were to experience such an event with respect to a series of corporate bonds, the Company might be required to offer to purchase the bonds that are still outstanding at a purchase price equal to 101% of their principal amount, plus accrued and unpaid interest, if any.
Furthermore, the conditions applicable to the EUR denominated corporate bonds issued in 2017 (due 2019 and 2023) and 2018 (due 2024 and 2028) contain a similar provision (‘Change of Control Put Event’). Upon the occurrence of such an event, the Company might be required to redeem or purchase any of such bonds at their principal amount together with interest accrued.
Corporate seat and head office
The statutory seat of the Companycompany is Eindhoven, the Netherlands, and the statutory list of all subsidiaries and affiliatedaffiliated companies, prepared in accordance with the relevant legal requirements (Dutch Civil Code, Book 2, Sections 379 and 414), forms part of the notes to the consolidated financialfinancial statements and is deposited at the officeoffice of the Commercial Register in Eindhoven, the Netherlands (file(file no. 17001910).
The executive officesoffices of the Companycompany are located at the Philips Center, Amstelplein 2, 1096 BC Amsterdam, the Netherlands, telephone +31-20-59 77 777.
Compliance with the Dutch Corporate Governance Code
In accordance with the governmental Decree of August 29, 2017, the Company fully complies with the Dutch Corporate Governance Code and applies all its principles and best practice provisions that are addressed to the Board of Management or the Supervisory Board. The full text of the Dutch Corporate Governance Code can be found on the website of the Monitoring Commission Corporate Governance Code (www.commissiecorporategovernance.nl).77777.
11.612.10Additional information
Articles of association
Set forth below is a summary of certain provisions of the Articles of Association of the Company,company, applicable Dutch law and related Companycompany policies. This summary does not constitute legal advice regarding those matters and should not be regarded as such.
Articles of association
Object and purpose
The objects of the Companycompany are to establish, participate in, administer and finance legal entities, companies and other legal forms for the purpose of the manufacture and trading of electrical, electronic, mechanical or chemical products, the development and exploitation of technical and other expertise, including software, or for the purpose of other activities, and to do everything pertaining thereto or connected therewith, including the provision of security in particular for commitments of business undertakings which belong to its group, all this in the widest sense, as may also be conducive to the proper continuity of the collectivity of business undertakings, in the Netherlands and abroad, which are carried on by the Companycompany and the companies in which it directly or indirectly participates. The object and purposeThese objects can be found onin Article 2 of the Articles of Association.
Share Capital
As ofOn December 31, 2018,2021, the issued share capital
consists only of amounted to EUR 176,779,793.80 divided into 883,898,696 common shares;shares and no preference shares have been issued.shares.
Voting rights
Each common shareAll issued and outstanding shares carry voting rights and each preference share is entitledconfers the right to cast one vote. All common shares vote together on all voting matters presentedin a shareholders’ meeting. Pursuant to Dutch law, no votes may be cast at a General Meeting of Shareholders.Shareholders in respect of shares which are held by the company. There are no special statutory rights attached to the shares of the company and no restrictions on the voting rights of the company’s shares exist. Major shareholders do not have different voting rights than other shareholders.
Dividends
A dividend will first be declared on preference shares out of net income. The Board of Management has 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. The remainder of the net income, after reservations made, shall be available for distribution to holders of common shares subject to shareholder approval after year-end.
Liquidation rights
In the event of the dissolution and liquidation of the Company,company, the assets remaining after payment of all debts and liquidation expenses are to be distributed in the following order of priority: to the holders of preference shares, the amount paid thereon; and the remainder to the holders of the common shares.
Preemptive rights
Shareholders have a pro rata preferential right of subscription to any common share issuance unless the right is restricted or excluded. If designated by the General Meeting of Shareholders, the Board of Management has the power to restrict or exclude the preferential subscription rights. A designation of the Board of Management will be effective for a specified period of up to five years and may be renewed. Currently, the Board of Management has been granted the power to restrict or exclude the preferential right of subscription up to and including November 2, 2019.5, 2022. If the Board of Management has not been designated, the General Meeting of Shareholders has the power to restrict or exclude such rights, upon the proposal of the Board of Management, which proposal must be approved by the Supervisory Board. Resolutions by the General Meeting of Shareholders referred to in this paragraph require approval of at least two-thirds of the votes cast if less than half of the issued share capital is represented at the meeting.
The foregoing provisions also apply to the issuance of rights to subscribe for shares.
General Meeting of Shareholders
The Annual General Meeting of Shareholders shall be held each year not later than the thirtieth day of June and, at the Board of Management’s option, in Eindhoven, Amsterdam, The Hague, Rotterdam, Utrecht or Haarlemmermeer (including Schiphol airport); the notice convening the meeting shall inform the shareholders accordingly.
Without prejudice to applicable laws and regulations, the Board of Management may resolve to give notice to holders of its listed and traded via a stock exchange shares via the Company’scompany’s website and/or by other electronic means representing a public announcement, which announcement remains directly and permanently accessible until the General Meeting of Shareholders. Holders of registered shares shall be notified by letter, unless the Board of Management resolves to give notice to holders of registered shares by electronic means of communication by sending a legible and reproducible message to the address indicated by the shareholder to the Companycompany for such purpose provided the relevant shareholder has agreed hereto.
In principle, all shareholders are entitled to attend a General Meeting of Shareholders, to address the meeting and to vote, except for shares held in treasury by the Company.company. They may exercise the aforementioned rights at a meeting only for the common shares which on the record date are registered in their name. The record date is published in the above announcement.announcement and is, pursuant to Dutch law, set as the 28th day prior to the day of the relevant meeting. Holders of registered shares must advise the Companycompany in writing of their intention to attend the General Meeting of Shareholders. Holders of shares listed and traded via a stock exchange who either in person or by proxy wish to attend the General Meeting of Shareholders, should notify ABN AMRO Bank N.V., which is acting as agent for the Company.company. They must submit a confirmation by a participating institution, in which administration they are registered as holders of the shares, that such shares are registered and will remain registered in its administration up to and including the record date, whereupon the holder will receive an admission ticket for the General Meeting of Shareholders. Holders of shares who wish to attend by proxy have to submit the proxy at the same time. A participating institution is a bank or broker which, according to the Dutch Securities Depository Act (Wet giraal effectenverkeer), is an intermediary (intermediair) of the Dutch Central Securities Depository (Euroclear Nederland).
In connection with the General Meeting of Shareholders, the Companycompany does not solicit proxies within the United States.
The Articles of Association of the Companycompany provide that there are no quorum requirements to hold a General Meeting of Shareholders and, unless specified otherwise inShareholders. Subject to certain exceptions provided by Dutch law and/or the articlesArticles of association of the Company,Association, resolutions of the General Meeting of Shareholders shall be adoptedare passed by a simplean absolute majority of votes. Certain shareholder actionsvotes cast and certain resolutions maydo not require a quorum.
Limitations on right to hold or vote Common Shares
There are no limitations imposed by Dutch law or by the Articles of Association on the right of non-resident owners to hold or vote the Common Shares.
Exchange controls
Cash dividends payablepaid in Euroseuros on NetherlandsDutch registered shares and bearer shares may be officially transferred from the Netherlands and converted into any other currency without Dutch legal restrictions, except that for statistical purposes such payments and transactions must be reported to the Dutch Central Bank, and furthermore,Bank. Furthermore, no payments, including dividend payments, may be made to jurisdictions subject to sanctions adopted by the government of the Netherlands and implementing resolutions of the Security Council of the United Nations.
The Articles of Association of the Companycompany provide that cash distributions on New York Registry Shares shall be paid in US dollars, converted at the rate of exchange on the stock market of Euronext Amsterdam at the close of business on the day fixed and announced for that purpose by the Board of Management.
CorporateSignificant differences in corporate governance practices
The corporate governance rules established by the New York Stock Exchange (NYSE) allow foreign private issuers,Foreign Private Issuers, like the Company,Royal Philips, to follow home country practices on most corporate governance matters instead of those that apply to US domestic issuers, provided that they disclose any significant ways in which their corporate governance practices differ from those applying to listed US domestic issuers under the NYSE listing standards. A summary ofThe following paragraphs summarize what we believe to be the significant differences between certain Dutch practices on corporate governance matters and the corporate governance provisions applicable to US domestic issuers under the NYSE listing standards appears below.standards.
Dutch corporate governance code
The Companycompany is a company organized under Dutch law, with its Common Shares listed on Euronext Amsterdam, and is subject to the Dutch Corporate Governance Code of December 8, 2016 (the Dutch Corporate Governance Code). Philips’ New York Registry Shares, representing Common Shares of the Company,company, are listed on the NYSE.
Board structure
The NYSE listing standards prescribe regularly scheduled executive sessions of non-executive directors. The Companycompany has a two-tier corporate structure consisting of a Board of Management consisting of executive directors under the supervision of a Supervisory Board consisting exclusively of non-executive directors. Members of the Board of Management and other officers and employees cannot simultaneously act as member of the Supervisory Board. The Supervisory Board must approve specified decisions of the Board of Management.
Independence of members of our Supervisory Board
The Dutch Corporate Governance Code sets forth certain limitations on the number of non-independent members of the Supervisory Board, and its committees. The present members of our Supervisory Board areconsiders all its members to be independent within the meaning ofunder the Dutch Corporate Governance Code. The definitions of independence under the Dutch Corporate Governance Code, however, differ in their details from the definitions of independence under the NYSE listing standards. In some cases the Dutch requirements are stricter than the NYSE listing standards, and in other cases the NYSE listing standards are the stricter of the two. The members of the Audit Committee of the Supervisory Board are independent under the NYSE listing standards.
Committees of our Supervisory Board
The Companycompany has established anfour committees, consisting of members of the Supervisory Board only: the Audit Committee, athe Remuneration Committee, and athe Corporate Governance and Nomination & Selection Committee consisting of members ofand the Supervisory Board only.Quality & Regulatory Committee. The roles, responsibilities and composition of these committees reflect the requirements of the Dutch Corporate Governance Code, the company’s Articles of Association and Dutch law, which differ from the NYSE listing standards in these respects. In 2015, the Supervisory Board additionally established the Separation Committee and Quality & Regulatory Committee. The role of each committee is to advise the Supervisory Board and to prepare the decision-making of the Supervisory Board. In principle, the entire Supervisory Board remains responsible for its decisions even if theysuch decisions were prepared by one of the Supervisory Board’s committees.
The NYSE requires that, when an audit committee member of a listed US domestic issuer serves on four or more audit committees of public companies, the listed company should disclose (either on its website or in its Annual Report on Form 10-K) that the board of directors has determined that this simultaneous service would not impair the director’s service to the listed company. Dutch law does not require the Companycompany to make such a determination.
In accordance with the procedures laid down in the Philips Auditor Policy and as mandatorily required by Dutch law, the external auditor of the Companycompany is appointed by the General Meeting of Shareholders on the proposal of the Supervisory Board, after the latter has been advised by the Audit Committee and the Board of Management.
Equity compensation plans
The company complies with Dutch legal requirements regarding shareholder approval of equity compensation plans for the members of the Board of Management. Dutch law does not require shareholder approval of certain equity compensation plans for which the NYSE listing standards would require such approval. The company is subject to a Dutch requirement to seek shareholder approval for equity compensation plans for its members of the Board of Management.
Code of business conduct
The listing standards of the NYSE prescribe certain parameters for listed company codes of business conduct and ethics. The company has implemented the Philips General Business Principles, which are applicable to all employees, and a Financial Code of Ethics, which is applicable to all employees performing an accounting or financial function. Waivers granted to Senior (Financial) Officers (as defined in our Financial Code of Ethics) must be disclosed. In 2021 the company did not grant any waivers of the Financial Code of Ethics.
Related party transactions
The NYSE listing standards require certain transactions with related parties to be reviewed by a company’s audit committee or another independent body of the board of directors for potential conflicts of interest, and for the audit committee or other independent body to prohibit such a transaction if it determines it to be inconsistent with the interests of the company and its shareholders. However, foreign private issuers can rely on home country practice with respect to review and approval of related party transactions. Philips has internal procedures in place to confirm that related party transactions are entered into are at arm’s length and, if and to the extent required under Dutch law, to enable the Supervisory Board to assess the terms of significant related party transactions.
New York Registry Shares
Certain common shares of the Companycompany are registered in the register maintained by Deutsche Bank Trust Company Americas, as the New York transfer agent, registrar and dividend disbursing agent (the “New York Transfer Agent”), pursuant to a Transfer Agent Agreement, dated as of July 16, 2018, between the New York Transfer Agent and the Companycompany (such common shares, “New York Registry Shares”). As soon as practicable after receipt from the Company,company, the New York Transfer Agent will provide holders of New York Registry Shares with a notice of any meeting or solicitation of consents or proxies with a notice prepared by the Companycompany stating (a) such information as is contained in such notice of meeting and any solicitation materials (or a summary thereof in English provided by the Company)company), (b) that each registered holder at the close of business on the record date set by the Companycompany therefor will be entitled, subject to any applicable provisions of Dutch law and the Articles of Association, to exercise the voting rights pertaining to the New York Registry Shares, and (c) the manner in which such voting rights may be exercised. The New York Transfer Agent may, to the extent not prohibited by applicable law or by the requirements of the New York Stock Exchange, in lieu of distribution of the materials provided to it in connection with any meeting of, or solicitation of consents or proxies from, holders of common shares, distribute to the registered holders of New York Registry Shares a notice that provides such holders with, or otherwise publicizes to such holders, instructions on how to retrieve such materials or receive such materials upon request (i.e., by reference to a website containing the materials for retrieval or a contact for requesting copies of the materials).
Major shareholders as filed with SEC
On January 25, 2017, BlackRock Inc. filed a Schedule 13G with the SEC indicating that it beneficially owned 6.3% (58,752,370 shares) of the Company’s common shares. On January 30, 2018, BlackRock Inc. filed a Schedule 13G with the SEC indicating that it beneficially owned 9.2% (87,011,431 shares) of the Company’s common shares. On November 9, 2018, BlackRock Inc. filed a Schedule 13G with the SEC indicating that it beneficially owned 10.3% (96,621,253 shares) of the Company’s common shares. On February 6, 2019, BlackRock Inc. filed a Schedule 13G with the SEC indicating that, as of December 31, 2018, it beneficially owned 9.9% (92,130,367 shares) of the Company’s common shares. On February 11, 2019, BlackRock Inc. filed a Schedule 13G with the SEC indicating that, as of January 31, 2019, it beneficially owned 10.1% (93,159,954 shares) of the Company’s common shares. On February 12, 2019, Wellington Management Group LLP, Wellington Group Holdings LLP, Wellington Investment Advisors Holdings LLP and Wellington Management Company LLP jointly filed a Schedule 13G with the SEC indicating that Wellington Management Group LLP, Wellington Group Holdings LLP and Wellington Investment Advisors Holdings LLP each beneficially owned 7.05% (65,286,127 shares) of the Company’s common shares and Wellington Management Company LLP beneficially owned 6.55% (60,708,945 shares) of the Company’s common shares.
On February 5, 2020, BlackRock Inc. filed a Schedule 13G with the SEC indicating that, as of December 31, 2019, it beneficially owned 9.2% (82,571,656 shares) of the Company’s common shares. On January 27, 2020, Wellington Management Group LLP, Wellington Group Holdings LLP, Wellington Investment Advisors Holdings LLP and Wellington Management Company LLP jointly filed a Schedule 13G with the SEC indicating that, as of December 31, 2019, Wellington Management Group LLP, Wellington Group Holdings LLP and Wellington Investment Advisors Holdings LLP each beneficially owned 7.17% (64,327,165 shares) of the Company’s common shares and Wellington Management Company LLP beneficially owned 6.80% (60,988,928 shares) of the Company’s common shares.
On January 29, 2021, BlackRock Inc. filed a Schedule 13G with the SEC indicating that, as of December 31, 2020, it beneficially owned 8.5% (77,552,149 shares) of the Company’s common shares. On February 3, 2021, Wellington Management Group LLP, Wellington Group Holdings LLP, and Wellington Investment Advisors Holdings LLP jointly filed a Schedule 13G with the SEC indicating that, as of December 31, 2020, Wellington Management Group LLP, Wellington Group Holdings LLP and Wellington Investment Advisors Holdings LLP each beneficially owned 1.85% (16,883,298 shares) of the Company’s common shares.
On January 28, 2022, Blackrock Inc. filed a Schedule 13G with the SEC indicating that, as of December 31, 2021, it beneficially owned 7.2% (63,499,693 shares) of the Company’s common shares.
Please also refer to ‘MajorMajor shareholders and other information for shareholders’ in Investor Relations.
Equity compensation plans
The Company complies with Dutch legal requirements regarding shareholder approval of equity compensation plans. Dutch law does not require shareholder approval of certain equity compensation plans for which the NYSE listing standards would require such approval. The Company is subject to a Dutch requirement to seek shareholder approval for equity compensation-plans for its members of the Board of Management.
Code of business conduct
The listing standards of the NYSE prescribe certain parameters for listed company codes of business conduct and ethics. The Company has implemented the Philips General Business Principles, which are applicable to all employees and a Financial Code of Ethics, which is applicable to all employees performing an accounting or financial function. Waivers granted to Senior (Financial) Officers (as defined in our Financial Code of Ethics) must be disclosed. In 2018 the Company did not grant any waivers of the Financial Code of Ethics.
12Other information
12.1Reconciliation of non-IFRS information
In this Annual Report Philips presents certain financial measures when discussing Philips’ performance that are not measures of financial performance or liquidity under IFRS (‘non-IFRS’). These non-IFRS measures (also known as non-GAAP or alternative performance measures) are presented because management considers them important supplemental measures of Philips’ performance and believes that they are widely used in the industry in which Philips operates as a means of evaluating a company’s operating performance and liquidity. Philips believes that an understanding of its sales performance, profitability, financial strength and funding requirements is enhanced by reporting the following non-IFRS measures:
Comparable sales growth;Adjusted EBITA;Adjusted income from continuing operations attributable to shareholders;Adjusted income from continuing operations attributable to shareholders per common share (in EUR) - diluted;Adjusted EBITDA;Free cash flow;Net debt : group equity ratio; andComparable order intake.
Non-IFRS measures do not have standardized meanings under IFRS and not all companies calculate non-IFRS measures in the same manner or on a consistent basis. As a result, these measures may not be comparable to measures used by other companies that have the same or similar names. Accordingly, undue reliance should not be placed on the non-IFRS measures contained in this Annual Report and they should not be considered as substitutes for sales, net income, net cash provided by operating activities or other financial measures computed in accordance with IFRS.
This chapter contains the definitions of the non-IFRS measures used in this Annual Report as well as reconciliations from the most directly comparable IFRS measures. The non-IFRS measures discussed in this Annual Report are cross referenced to this chapter. These non-IFRS measures should not be viewed in isolation or as alternatives to equivalent IFRS measures and should be used in conjunction with the most directly comparable IFRS measures.
The non-IFRS financial measures presented are not measures of financial performance or liquidity under IFRS, but measures used by management to monitor the underlying performance of Philips’ business and operations and, accordingly, they have not been audited or reviewed by Philips’ external auditors. Furthermore, they may not be indicative of Philips’ future results and should not be construed as an indication that Philips’ future results will be unaffected by exceptional or non-recurring items.
Comparable sales growth
Comparable sales growth represents the period-on-period growth in sales excluding the effects of currency movements and changes in consolidation. As indicated in Significant accounting policies, foreign currency sales and costs are translated into Philips’ presentation currency, the euro, at the exchange rates prevailing at the respective transaction dates. As a result of significant foreign currency sales and currency movements during the periods presented, the effects of translating foreign currency sales amounts into euros could have a material impact on the comparability of sales between periods. Therefore, these impacts are excluded when presenting comparable sales in euros by translating the foreign currency sales of the previous period and the current period into euros at the same average exchange rates. In addition, the years presented were affected by a number of acquisitions and divestments, as a result of which various activities were consolidated or deconsolidated. The effect of consolidation changes has also been excluded in arriving at the comparable sales. For the purpose of calculating comparable sales, when a previously consolidated entity is sold or control is lost, relevant sales for that entity of the corresponding prior year period are excluded. Similarly, when an entity is acquired and consolidated, relevant sales for that entity of the current year period are excluded.
Comparable sales growth is presented for the Philips Group, operating segments and geographic clusters. Philips’ believes that the presentation of comparable sales growth is meaningful for investors to evaluate the performance of Philips’ business activities over time. Comparable sales growth may be subject to limitations as an analytical tool for investors, because comparable sales growth figures are not adjusted for other effects, such as increases or decreases in prices or quantity/volume. In addition, interaction effects between currency movements and changes in consolidation are not taken into account.
Philips Group
Sales growth composition per segment in %
2016 - 2018
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Connected Care & Health Informatics | | | | |
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Connected Care & Health Informatics | | | | |
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Connected Care & Health Informatics | | | | |
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Philips Group
Sales growth composition per geographic cluster
in %
2016 - 2018
Adjusted EBITA
The term Adjusted EBITA is used to evaluate the performance of Philips and its segments. EBITA represents Income from operations excluding amortization and impairment of acquired intangible assets and impairment of goodwill. Adjusted EBITA represents EBITA excluding gains or losses from restructuring costs, acquisition-related charges and other items.
Restructuring costs are defined as the estimated costs of initiated reorganizations, the most significant of which have been approved by the Executive Committee, and which generally involve the realignment of certain parts of the industrial and commercial organization.
Acquisition-related charges are defined as costs that are directly triggered by the acquisition of a company, such as transaction costs, purchase accounting related costs and integration-related expenses.
Other items are defined as any individual item with an income statement impact (loss or gain) that is deemed by management to be both significant and incidental to normal business activity. Other items may extend over several quarters and are not limited to the same financial year.
Philips considers the use of Adjusted EBITA appropriate as Philips uses it as a measure of segment performance and as one of its strategic drivers to increase profitability through re-allocation of its resources towards opportunities offering more consistent and higher returns. This is done with the aim of making the underlying performance of the businesses more transparent.
Philips believes Adjusted EBITA is useful to evaluate financial performance on a comparable basis over time by factoring out restructuring costs, acquisition-related charges and other incidental items which are not directly related to the operational performance of Philips Group or its segments.
Adjusted EBITA may be subject to limitations as an analytical tool for investors, as it excludes restructuring costs, acquisition-related charges and other incidental items and therefore does not reflect the expense associated with such items, which may be significant and have a significant effect on Philips’ net income.
Adjusted EBITA margin refers to Adjusted EBITA divided by sales expressed as a percentage.
Adjusted EBITA is not a recognized measure of financial performance under IFRS. The reconciliation of Adjusted EBITA to the most directly comparable IFRS measure, Net income, for the years indicated is included in the table below. Net income is not allocated to segments as certain income and expense line items are monitored on a centralized basis, resulting in them being shown on a Philips Group level only.
Philips Group
Reconciliation of Net income to Adjusted EBITA
in millions of EUR unless otherwise stated2016 - 2018
| | | Connected Care & Health Informatics | | |
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Discontinued operations, net of income taxes | | | | | |
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Investments in associates, net of income taxes | | | | | |
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Amortization of intangible assets | | | | | |
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Restructuring and acquisition-related charges | | | | | |
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Discontinued operations, net of income taxes | | | | | |
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Investments in associates, net of income taxes | | | | | |
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Amortization of intangible assets | | | | | |
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Restructuring and acquisition-related charges | | | | | |
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Discontinued operations, net of income taxes | | | | | |
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Investments in associates, net of income taxes | | | | | |
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Amortization of intangible assets | | | | | |
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Restructuring and acquisition-related charges | | | | | |
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Adjusted income from continuing operations attributable to shareholders
The term Adjusted income from continuing operations attributable to shareholders represents income from continuing operations less continuing operations non-controlling interests, amortization and impairment of acquired intangible assets, impairment of goodwill, excluding gains or losses from restructuring costs and acquisition-related charges, other items, adjustments to net finance expenses, adjustments to investments in associates and the tax impact of the adjusted items. Shareholders refers to shareholders of Koninklijke Philips N.V.
Restructuring costs, acquisition-related charges and other items are all defined in the Adjusted EBITA section above.
Net finance expenses are defined as either the financial income or expense component of an individual item already identified to be excluded as part of the Adjusted income from continuing operations, or a financial income or expense component with an income statement impact (gain or loss) that is deemed by management to be both significant and incidental to normal business activity.
The Tax impact of the adjusted items is calculated using the Weighted Average Statutory Tax Rate plus any recurring tax costs or benefits.
Philips considers the use of Adjusted income from continuing operations attributable to shareholders appropriate as Philips uses it as the basis for the Adjusted income from continuing operations attributable to shareholders per common share (in EUR) - diluted, a non-IFRS measure.
Adjusted income from continuing operations attributable to shareholders may be subject to limitations as an analytical tool for investors, as it excludes certain items and therefore does not reflect the expense associated with such items, which may be significant and have a significant effect on Philips’ net income. Net income, for the years indicated is included in the table below. Net income is not allocated to segments as certain income and expense line items are monitored on a centralized basis, resulting in them being shown on a Philips Group level only.
Adjusted income from continuing operations attributable to shareholders is not a recognized measure of financial performance under IFRS. The reconciliation of Adjusted income from continuing operations attributable to shareholders to the most directly comparable IFRS measure, Net income, for the years indicated is included in the table below.
Adjusted income from continuing operations attributable to shareholders per common share (in EUR) - diluted
Adjusted income from continuing operations attributable to shareholders per common share (in EUR) - diluted is calculated by dividing the Adjusted income from continuing operations attributable to shareholders by the diluted weighted average number of shares (after deduction of treasury shares) outstanding during the period, as defined in Significant accounting policies, earnings per share section.
Philips considers the use of Adjusted income from continuing operations attributable to shareholders per common share (in EUR) - diluted appropriate as it is a measure that is useful when comparing its performance to other companies in the HealthTech industry. However, it may be subject to limitations as an analytical tool for investors, as it uses Adjusted income from continuing operations attributable to shareholders which has certain items excluded.
Adjusted income from continuing operations attributable to shareholders per common share (in EUR) - diluted is not a recognized measure of financial performance under IFRS. The most directly comparable IFRS measure, income from continuing operations attributable to shareholders per common share (in EUR) - diluted for the years indicated, is included in the table below.
Philips Group
Adjusted income from continuing operations attributable to shareholders1
in millions of EUR unless otherwise stated
2016-2018
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Less: Discontinued operations, net of income taxes | | | |
Income from continuing operations | | | |
Less: Continuing operations Non-controlling interest | | | |
Income from continuing operations attributable to shareholders | | | |
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Amortization of acquired intangible assets | | | |
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Restructuring costs and acquisition-related charges | | | |
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Tax impact of adjusted items | | | |
Adjusted Income from continuing operations attributable to shareholders 2 | | | |
Earnings per common share: | | | |
Income from continuing operations attributable to shareholders per common share - diluted | | | |
Adjusted income from continuing operations attributable to shareholders 1 per common share - diluted | | | |
1Shareholders refers to shareholders of Koninklijke Philips N.V.
Adjusted EBITDA
Adjusted EBITDA is defined as Income from operations excluding amortization and impairment of intangible assets, impairment of goodwill, depreciation and impairment of property, plant and equipment, restructuring costs, acquisition-related charges and other items.
Philips understands that Adjusted EBITDA is broadly used by analysts, rating agencies and investors in their evaluation of different companies because it excludes certain items that can vary widely across different industries or among companies within the same industry. Philips considers Adjusted EBITDA useful when comparing its performance to other companies in the HealthTech industry. However, Adjusted EBITDA may be subject to limitations as an analytical tool because of the range of items excluded and their significance in a given reporting period. Furthermore, comparisons with other companies may be complicated due to the absence of a standardized meaning and calculation framework. Our management compensates for the limitations of using Adjusted EBITDA by using this measure to supplement IFRS results to provide a more complete understanding of the factors and trends affecting the business rather than IFRS results alone. In addition to the limitations noted above, Adjusted EBITDA excludes items that may be recurring in nature and should not be disregarded in the evaluation of performance. However, we believe it is useful to exclude such items to provide a supplemental analysis of current results and trends compared to other periods. This is because certain excluded items can vary significantly depending on specific underlying transactions or events. Also, the variability of such items may not relate specifically to ongoing operating results or trends and certain excluded items, while potentially recurring in future periods and may not be indicative of future results. A reconciliation from net income to Adjusted EBITDA is provided below. Net income, for the years indicated is included in the table below. Net income is not allocated to segments as certain income and expense line items are monitored on a centralized basis, resulting in them being shown on a Philips Group level only.
Philips Group
Reconciliation of Net income to Adjusted EBITDA
in millions of EUR
2016 - 2018
| | | Connected Care & Health Informatics | | |
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Discontinued operations, net of income taxes | | | | | |
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Investments in associates, net of income taxes | | | | | |
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Depreciation, amortization and impairment of assets | | | | | |
Restructuring and acquisition-related charges | | | | | |
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Adding back impairment of fixed assets included in restructuring and acquisition-related changes and other items | | | | | |
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Discontinued operations, net of income taxes | | | | | |
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Investments in associates, net of income taxes | | | | | |
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Depreciation, amortization and impairment of assets | | | | | |
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Restructuring and acquisition-related charges | | | | | |
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Adding back impairment of fixed assets included in restructuring and acquisition-related changes and other items | | | | | |
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Discontinued operations, net of income taxes | | | | | |
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Investments in associates, net of income taxes | | | | | |
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Depreciation, amortization and impairment of assets | | | | | |
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Restructuring and acquisition-related charges | | | | | |
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Adding back impairment of fixed assets included in restructuring and acquisition-related changes and other items | | | | | |
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Free cash flow
Free cash flow is defined as net cash flows from operating activities minus net capital expenditures. Net capital expenditures are comprised of the purchase of intangible assets, expenditures on development assets, capital expenditures on property, plant and equipment and proceeds from sales of property, plant and equipment.
Philips discloses free cash flow as a supplemental non-IFRS financial measure, as Philips believes it is a meaningful measure to evaluate the performance of its business activities over time. Philips understands that free cash flow is broadly used by analysts, rating agencies and investors in assessing its performance. Philips also believes that the presentation of free cash flow provides useful information to investors regarding the cash generated by the Philips operations after deducting cash outflows for purchases of intangible assets, capitalization of product development, expenditures on development assets, capital expenditures on property, plant and equipment and proceeds from disposal of property, plant and equipment. Therefore, the measure gives an indication of the long-term cash generating ability of the business. In addition, because free cash flow is not impacted by purchases or sales of businesses and investments, it is generally less volatile than the total of net cash provided by (used for) operating activities and net cash provided by (used for) investing activities.
Free cash flow may be subject to limitations as an analytical tool for investors, as free cash flow is not a measure of cash generated by operations available exclusively for discretionary expenditures and Philips requires funds in addition to those required for capital expenditures for a wide variety of non-discretionary expenditures, such as payments on outstanding debt, dividend payments or other investing and financing activities. In addition, free cash flow does not reflect cash payments that may be required in future for costs already incurred, such as restructuring costs.
Philips Group
Composition of free cash flow
in millions of EUR
2016 - 2018
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Net cash flows from operating activities | | | |
Net capital expenditures: | | | |
Purchase of intangible assets | | | |
Expenditures on development assets | | | |
Capital expenditures on property, plant and equipment | | | |
Proceeds from disposals of property, plant and equipment | | | |
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Net debt : group equity ratio
Net debt : group equity ratio is presented to express the financial strength of Philips. Net debt is defined as the sum of long- and short-term debt minus cash and cash equivalents. Group equity is defined as the sum of shareholders’ equity and non-controlling interests. This measure is used by Philips Treasury management and investment analysts to evaluate financial strength and funding requirements. This measure may be subject to limitations because cash and cash equivalents are used for various purposes, not only debt repayment. The net debt calculation deducts all cash and cash equivalents whereas these items are not necessarily available exclusively for debt repayment at any given time.
Philips Group
Composition of net debt to group equity
in millions of EUR unless otherwise stated
2016 - 2018
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Cash and cash equivalents | | | |
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Non-controlling interests | | | |
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Net debt to group equity ratio | | | |
Comparable order intake
Comparable order intake is reported for equipment and software and is defined as the total contractually committed amount to be delivered within a specified timeframe excluding the effects of currency movements and changes in consolidation. Comparable order intake does not derive from the financial statements and thus a quantitative reconciliation is not provided.
Philips uses comparable order intake as an indicator of business activity and performance. Comparable order intake is not an alternative to revenue and may be subject to limitations as an analytical tool due to differences in amount and timing between booking orders and revenue recognition. Due to divergence in practice, other companies may calculate this or a similar measure (such as order backlog) differently and therefore comparisons between companies may be complicated.
12.2Five-year overview (condensed)
Due to factors such as acquisitions and divestments, the amounts, percentages and ratios are not directly comparable.
Philips Group
Selected financial data
in millions of EUR unless otherwise stated
2014-2018
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Financial income and expenses - net | | | | | |
Income (loss) from continuing operations | | | | | |
Income (loss) from continuing operations attributable to shareholders | | | | | |
Income (loss) from discontinued operations | | | | | |
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Net income (loss) attributable to shareholders | | | | | |
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Non-controlling interests | | | | | |
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Weighted average shares outstanding: | | | | | |
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Amount of common shares outstanding at year-end | | | | | |
Basic earnings per common share: | | | | | |
Income (loss) from continuing operations attributable to shareholders 1 | | | | | |
Net income (loss) attributable to shareholders | | | | | |
Diluted earnings per common share: | | | | | |
Income (loss) from continuing operations attributable to shareholders 1 | | | | | |
Net income (loss) attributable to shareholders | | | | | |
Dividend distributed per common share | | | | | |
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Total employees at year-end (FTEs) | | | | | |
1During 2018, an error was identified in certain non-controlling interests and EPS calculations for 2016 and 2017 respectively. Reference is made to the Significant accounting policies.12.3Definitions and abbreviations
Brominated flame retardants (BFR)
Brominated flame retardants are a group of chemicals that have an inhibitory effect on the ignition of combustible organic materials. Of the commercialized chemical flame retardants, the brominated variety are most widely used.
CO2-equivalent
CO2-equivalent or carbon dioxide equivalent is a quantity that describes, for a given mixture and amount of greenhouse gas, the amount of CO2 that would have the same global warming potential (GWP), when measured over a specified timescale (generally 100 years).
Circular economy
A circular economy aims to decouple economic growth from the use of natural resources and ecosystems by using those resources more effectively. By definition it is a driver for innovation in the areas of material, component and product reuse, as well as new business models such as solutions and services. In a Circular Economy, the more effective use of materials makes it possible to create more value, both by cost savings and by developing new markets or growing existing ones.
Circular Revenues
Circular Revenues are defined by revenues generated through products and solutions that meet specific Circular Economy requirements. These include performance and access-based business models, refurbished, reconditioned and remanufactured products and systems, refurbished, reconditioned and remanufactured components, upgrades or refurbishment on site or remote, and products containing at least 30% recycled plastics.
Dividend yield
The dividend yield is the annual dividend payment divided by Philips’ market capitalization. All references to dividend yield are as of December 31 of the previous year.
Employee Engagement Index (EEI)
The Employee Engagement Index (EEI) is the single measure of the overall level of employee engagement at Philips. It is a combination of perceptions and attitudes related to employee satisfaction, commitment and advocacy.
Energy-using Products (EuP)
An energy-using product is a product that uses, generates, transfers or measures energy (electricity, gas, fossil fuel). Examples include boilers, computers, televisions, transformers, industrial fans and industrial furnaces.
Full-time equivalent employee (FTE)
Full-time equivalent is a way to measure a worker’s involvement in a project. An FTE of 1.0 means that the person is equivalent to a full-time worker, while an FTE of 0.5 signals that the worker works half-time.
Global Reporting Initiative (GRI)
The Global Reporting Initiative (GRI) is a network-based organization that pioneered the world’s most widely used sustainability reporting framework. GRI is committed to the framework’s continuous improvement and application worldwide. GRI’s core goals include the mainstreaming of disclosure on environmental, social and governance performance.
Green Innovation
Green Innovation comprises all R&D activities directly contributing to the development of Green Products or Green Technologies.
Green Products
Green Products offer a significant environmental improvement in one or more Green Focal Areas: Energy efficiency, Packaging, Hazardous substances, Weight, Circularity, and Lifetime reliability. The life cycle approach is used to determine a product’s overall environmental improvement. It calculates the environmental impact of a product over its total life cycle (raw materials, manufacturing, product use and disposal).
Green Products need to prove leadership in at least one Green Focal Area compared to industry standards, which is defined by a segment-specific peer group. This is done either by outperforming reference products (which can be a competitor or predecessor product in the particular product family) by at least 10%, by outperforming product-specific eco-requirements or by being awarded with a recognized eco-performance label. Because of different product portfolios, business segments have specified additional criteria for Green Products, including product specific minimum requirements where relevant.
Green Revenues
Green Revenues are generated through products and solutions which offer a significant environmental improvement in one or more of the Green Focal Areas: Energy efficiency, Packaging, Hazardous substances, Weight, Circularity, and Lifetime reliability. Green Revenues are determined by classifying the environmental impact of the product or solution over its total life cycle.
Philips uses Green Revenues as a measure of social and economic performance in addition to its environmental results. The use of this measure may be subject to limitations as it does not have a standardized meaning and similar measures could be determined differently by other companies.
Growth geographies
Growth geographies are the developing geographies comprising of Asia Pacific (excluding Japan, South Korea, Australia and New Zealand), Latin America, Central & Eastern Europe, Middle East & Turkey (excluding Israel) and Africa.
Hazardous substances
Hazardous substances are generally defined as substances posing imminent and substantial danger to public health and welfare or the environment.
Income from operations (EBIT)
Income from operations as reported on the IFRS consolidated statement of income. The term EBIT (earnings before interest and tax) has the same meaning as Income from operations.
Income from continuing operations
Income from continuing operations as reported on the IFRS consolidated statement of income, which is net income from continuing operations, or net income excluding discontinued operations
Lean
The basic insight of Lean thinking is that if every person is trained to identify wasted time and effort in their own job and to better work together to improve processes by eliminating such waste, the resulting enterprise will deliver more value at less expense.
Lives improved by Philips
To calculate how many lives we are improving, market intelligence and statistical data on the number of people touched by the products contributing to the social or ecological dimension over the lifetime of a product are multiplied by the number of those products delivered in a year. After elimination of double counts – multiple different product touches per individual are only counted once – the number of lives improved by our innovative solutions is calculated. We established our 2012 baseline at 1.6 billion a year.
Mature geographies
Mature geographies are the highly developed markets comprising of Western Europe, North America, Japan, South Korea, Israel, Australia and New Zealand.
Operational carbon footprint
A carbon footprint is the total set of greenhouse gas emissions caused by an organization, event, product or person; usually expressed in kilotonnes CO2-equivalent. Philips' operational carbon footprint is calculated on a half-year basis and includes industrial sites (manufacturing and assembly sites), non-industrial sites (offices, warehouses, IT centers and R&D facilities), business travel (lease and rental cars and airplane travel) and logistics (air, sea and road transport).
Polyvinyl chloride (PVC)
Polyvinyl chloride, better known as PVC or vinyl, is an inexpensive plastic so versatile it has become completely pervasive in modern society.
REACH
Registration, Evaluation, Authorization and Restriction of Chemicals (REACH) is a European Union regulation that addresses the production and use of chemical substances, and their potential impact on both human health and the environment.
Responsible Business Alliance (RBA)
The Responsible Business Alliance (formerly known as The Electronic Industry Citizenship Coalition (EICC)) was established in 2004 to promote a common code of conduct for the electronics and information and communications technology (ICT) industry. EICC now includes more than 100 global companies and their suppliers.
Restriction on Hazardous Substances (RoHS)
The RoHS Directive prohibits all new electrical and electronic equipment placed on the market in the European Economic Area from containing lead, mercury, cadmium, hexavalent chromium, poly-brominated biphenyls (PBB) or polybrominated diphenyl ethers (PBDE), except in certain specific applications, in concentrations greater than the values decided by the European Commission. These values have been established as 0.01% by weight per homogeneous material for cadmium and 0.1% for the other five substances.
Sustainable Development Goals
The Sustainable Development Goals (SDGs) are a collection of 17 global goals set by the United Nations. The broad goals are interrelated though each has its own targets. The SDGs cover a broad range of social and economic development issues. These include poverty, hunger, health, education, climate change, water, sanitation, energy, environment and social justice.
Sustainable Innovation
Sustainable Innovation is the Research & Development spend related to the development of new generations of products and solutions that address the United Nations Sustainable Development Goals 3 (“to ensure healthy lives and promote well-being for all at all ages”) or 12 (“to ensure sustainable consumption and production patterns”). This includes all Diagnosis & Treatment and Connected Care & Health Informatics innovation spend. In addition, innovation spend that contributes to Green Products and healthy living at Personal Health is included. Finally, innovation spend at Other that addresses the SDGs 3 and 1 is included.
VOC
Volatile organic compounds (VOCs) are organic chemicals that have a high vapor pressure at ordinary room temperature. Their high vapor pressure results from a low boiling point, which causes large numbers of molecules to evaporate or sublimate from the liquid or solid form of the compound and enter the surrounding air, a trait known as volatility.
Voluntary turnover
Voluntary turnover covers all employees who resigned of their own volition.
Waste Electrical and Electronic Equipment (WEEE)
The Waste Electrical and Electronic Equipment Directive (WEEE Directive) is the European Community directive on waste electrical and electronic equipment setting collection, recycling and recovery targets for all types of electrical goods. The directive imposes the responsibility for the disposal of waste electrical and electronic equipment on the manufacturers of such equipment.
Weighted Average Statutory Tax Rate (WASTR)
The reconciliation of the effective tax rate is based on the applicable statutory tax rate, which is a weighted average of all applicable jurisdictions. This weighted average statutory tax rate (WASTR) is the aggregation of the result before tax multiplied by the applicable statutory tax rate without adjustment for losses, divided by the group result before tax.
13Statements
13.1Group financial statementsIntroduction
Introduction
This section of the Annual Report contains the audited consolidated financial statements including the notes thereon that have been prepared in accordance with International Financial Reporting Standards (IFRS) as endorsed by the European Union (EU) and with the statutory provisions of Part 9, Book 2 of the Dutch Civil Code.
All standards and interpretations issued by the International Accounting Standards Board (IASB) and the IFRS Interpretations Committee effective 20182021 have been endorsed by the EU, consequently, the accounting policies applied by Koninklijke Philips N.V. (hereafter the 'company' or 'Philips'(Royal Philips) also comply with IFRS as issued by the IASB. Comparative results have been restated to reflect the treatment of the Domestic Appliances business as a discontinued operation (for more information, please refer to Discontinued operations and assets classified as held for sale).
TogetherThe Group financial statements (together with the section Company financial statements, this section contains the statutory financial statements of the Company.
The following sections and chapters:
form the Management report within the meaning of section 2:391 of the Dutch Civil Code (and related Decrees).
The sections Group performance and Segment performance provide an extensive analysis of the developments during the financial year 2018 and the results. These sections also provide information on the business outlook, investments, financing, personnel and research and development activities.
For ‘Additional information’ within the meaning of section 2:392 of the Dutch Civil Code, please refer to Independent auditor’s report.
Please refer to Forward-looking statements for more information about forward-looking statements, third-party market share data, fair value information, and revisions and reclassifications.
The Board of Management of the Company hereby declares that, to the best of our knowledge, the Group financial statements and Company financial statements give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakingswhich are not included in the consolidation taken as a whole and thatAnnual Report on Form 20-F, containing its statutory statements) are subject to adoption by the management report referred to above gives a true and fair view concerningcompany’s shareholders at the position as per the balance sheet date, the development and performanceupcoming 2022 Annual General Meeting of the business during the financial year of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks that they face.
Board of Management
Frans van Houten
Abhijit Bhattacharya
Marnix van Ginneken
February 26, 2019Shareholders.
13.1Management’s report on internal control
Management’s report on internal control over financial reporting pursuant to section 404 of the US Sarbanes-Oxley Act
The Board of Management of Koninklijke Philips N.V. (Royal Philips) is responsible for establishing and maintaining an adequate system of internal control over financial reporting (as such term is defined in Rule 13a15 (f) under the US Securities Exchange Act). Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting for external purposes in accordance with IFRS as issued by the IASB.
Internal control over financial reporting includes maintaining records that, in reasonable detail, accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of our financial statements; providing reasonable assurance that receipts and expenditures of company assets are made in accordance with management authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of company assets that could have a material effect on our financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected. Also, projections of any evaluation of the effectiveness of internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Board of Management conducted an assessment of Royal Philips' internal control over financial reporting based on the “Internal Control Integrated Framework (2013)” established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on the Board of Management’s assessment of the effectiveness of Royal Philips' internal control over financial reporting as of December 31, 2018,2021, it has concluded that, as of December 31, 2018,2021, Royal Philips' internal control over Group financial reporting is considered effective.
The effectiveness of the Royal Philips' internal control over financial reporting as of December 31, 2018,2021, as included in this section Group financial statements, has been audited by Ernst & Young Accountants LLP, an independent registered public accounting firm, as stated in their report which follows hereafter.
Board of Management
Frans van Houten
Abhijit Bhattacharya
Marnix van Ginneken
February 26, 2019
13.1.1Disclosure controls and procedures
The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a15(e) and 15d15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by the Annual Report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective as of December 31, 2018.2021.
13.1.2Changes in internal control over financial reporting
During fiscal year 2018, Royal Philips implemented internal controls to ensure we have adequately evaluated our contracts and properly assessed the impact of the new accounting standards related to leases in our financial statements to facilitate their adoption on January 1, 2019.
Other than as explained above, thereThere were no other changes in our internal control over financial reporting during 20182021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
13.2Report of the independent auditors
auditorManagement’s report on internal control over financial reporting is set out on Management’s report on internal control. The report set out on Independent auditor’s report on internal control over financial reporting, is provided in compliance with standards of the Public Company Accounting Oversight Board in the US and includes an opinion on the effectiveness of internal control over financial reporting as at December 31, 2018.2021, based on COSO criteria.
Ernst & Young Accountants LLP (PCAOB ID: 1396) has also issued a report on the consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board in the US, which is set out on Independent auditor’s report on the consolidated financial statements.
Ernst & Young Accountants LLP has also issued a report on the consolidated financial statements and the Company financial statements, in accordance with Dutch law, including the Dutch standards on auditing, of Koninklijke Philips N.V., which is set out on Independent auditor’s report.
13.3Independent auditor’s report on internal control over financial reporting
Report of Independent Registered Public Accounting Firm
To: The Supervisory Board and Shareholders of Koninklijke Philips N.V.
Opinion on Internal Control over Financial Reporting
We have audited Koninklijke Philips N.V.’s internal control over financial reporting as of December 31, 2018,2021, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Koninklijke Philips N.V. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018,2021, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ('PCAOB')(PCAOB), the consolidated balance sheets of the Company as of December 31, 20182021 and 2017,2020, the related consolidated statements of income, comprehensive income, cash flows and changes in equity for each of the three years in the period ended December 31, 2018,2021, and the related notes and our report dated February 26, 201922, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying section 'Management’s‘Management’s report on internal control'control’, of this Annual Report. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young Accountants LLP
Amsterdam, the Netherlands
February 26, 201922, 2022
13.4Independent auditor’s report on the consolidated financial statements
Report of Independent Registered Public Accounting Firm
To: The Supervisory Board and Shareholders of Koninklijke Philips N.V.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Koninklijke Philips N.V. (the Company) as of December 31, 20182021 and 2017,2020, the related consolidated statements of income, comprehensive income, cash flows and changes in equity for each of the three years in the period ended December 31, 2018,2021, and the related notes (collectively referred to as the “consolidatedgroup financial statements“)statements). In our opinion, the consolidatedgroup financial statements present fairly, in all material respects, the financial position of the Company at December 31, 20182021 and 2017,2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018,2021, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.
We have also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ('PCAOB')(PCAOB), the Company's internal control over financial reporting as of December 31, 2018,2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 26, 201922, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
These group financial statements are the responsibility of the Company‘s management. Our responsibility is to express an opinion on the Company‘s group financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the US federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the group financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the group financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures includeincluded examining, on a test basis, evidence regarding the amounts and disclosures in the group financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the group financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matters
The critical audit matters communicated below are matters arising from the current period audit of the group financial statements that were communicated or required to be communicated to the Audit Committee of the Supervisory Board and that: (1) relate to accounts or disclosures that are material to the group financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the group financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
| Measurement and disclosure of the Field Action provision related to Sleep & Respiratory Care products |
| Description of the Matter | As more fully described in Note 20 Provisions, following the identification of potential health risks related to certain Sleep & Respiratory Care products, the Company recorded a Field Action provision amounting to EUR 719 million.
Determining the Field Action provision is complex and requires significant judgment by management. Significant assumptions made relate to the estimated total quantity of devices and the replacement share. |
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of the Company’s controls relating to the Field Action provision calculation. This included testing controls relating to management’s review of the provision, including the determination of significant assumptions. Further, we tested the controls over the mathematical accuracy and completeness of the provision.
Our audit procedures included, among others, the assessment of the significant assumptions and data used by management in its calculation model for the Field Action provision. For example, we assessed the estimated quantities through obtaining third party confirmations for quantities already registered for remediation as of December 31, 2021, as well as corroborating the remaining quantity estimate by reperforming the trend analysis of registrations over time. We considered audit evidence to corroborate the reasonability of the replacement share based on the contracted repair capacity as well as the upgraded inhouse production capacity. We also performed an analysis of the significant assumptions to evaluate the sensitivity of the provision. In addition, we inspected the communication with regulatory authorities regarding the identified quality issues and held discussions with management on the recall process, capacity considerations as well as the ongoing cooperation with the Food and Drug Administration.
We further assessed the adequacy of the disclosures in Note 20 Provisions, as included in the group financial statements. |
| Measurement of provisions and disclosures for legal claims, litigations and contingent liabilities |
| Description of the Matter | The Company and certain of its group companies and former group companies are involved as a party in legal proceedings, including regulatory and other governmental proceedings, as well as being investigated by governmental authorities for alleged non-compliance with laws and regulations. As more fully described in Note 25 Contingent assets and liabilities this includes the discussions with and information provided to the SEC and DOJ regarding alleged tender irregularities in China, Bulgaria and Brazil, and legal claims and litigation related to the Field Action for Sleep & Respiratory Care products. The Company records provisions for legal claims and litigation when it has a present obligation, it is probable that an outflow of economic benefits will be required to settle the obligation and the amount can be estimated reliably. When an outflow of economic benefits cannot be reliably estimated or is possible but not probable, the Company discloses this in the contingent liabilities note.
We evaluated the accounting of provisions for legal claims and litigation, and the disclosure for provisions and contingent liabilities, which is complex and judgmental due to the difficulty in predicting the outcome of the matters and estimating the potential impact if the outcomes are unfavorable and the amounts involved are, or can be, material to the financial statements as a whole.
Further reference is made to Note 1 Significant accounting policies, Note 20 Provisions, and Note 25 Contingent assets and liabilities, as included in the group financial statements. |
| How We Addressed the Matter in Our Audit | Our audit procedures included, among others, obtaining an understanding, evaluating the design and testing the effectiveness of the Company’s internal controls around the identification and evaluation of legal claims, litigation and investigations at different levels in the group, and the recording and continuous re-assessment of the related provisions, contingent liabilities and disclosures.
To confirm our understanding of the allegations and test the Company’s accounting of provisions for legal claims and litigation and the disclosure for provisions and contingent liabilities, we discussed the allegations with both internal and external legal counsel, as well as with the Company’s finance department, inspected relevant correspondence with authorities, inspected the minutes of the meetings of the Audit Committee, Supervisory Board and Executive Committee, requested a confirmation letter from the Company’s in-house legal counsel and obtained external legal confirmation letters from external legal counsel involved in these matters. For claims settled during the year, we vouched the cash payments, as appropriate, and read the related settlement agreements. Specifically related to ongoing investigations into alleged non-compliance with laws and regulations, we were supported by EY forensic and other specialists. We also assessed the adequacy of the Company’s disclosure for provisions for legal claims and litigation, and contingent liabilities, as included in the group financial statements. |
| Valuation of Goodwill for Cash Generating Unit Sleep & Respiratory Care |
| Description of the Matter | At December 31, 2021, the total carrying value of goodwill amounted to EUR 10,637 million (of which EUR 1.915 million is allocated to Cash Generating Unit (CGU) Sleep & Respiratory Care (S&RC) amounted to EUR 2,031 million. Goodwill is allocated to CGUs for which management is required to test the carrying value of goodwill for impairment annually or more frequently if there is a triggering event for testing. Further reference is made to Note 1 Significant accounting policies, and Note 12 Goodwill, as included in the group financial statements.
Auditing the calculation of the recoverable amount for the CGU S&RC is complex, given the significant judgment and estimation related to assumptions and data in the model used to determine whether the carrying value of goodwill is appropriate. The most significant assumptions used within the model to support the recoverable amount of goodwill are sales growth rate, EBITA, and discount rates. |
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over management’s goodwill impairment review process related to the CGU S&RC. This includes controls over management’s review and approval of the significant assumptions, controls over the mathematical accuracy of the calculation and the appropriateness of the valuation models used. For example, we tested controls over management’s determination and review of the sales growth, EBITA and the discount rate assumptions.
As part of our audit we assessed and tested the assumptions and data used by management in its valuation model for the CGU S&RC. As part of these procedures we reconciled the expected restart of sales for the Sleep products with audit evidence obtained as part of the audit of the Field Action provision, and we compared the assumptions to external data such as industrial sales growth rates and discount rates. We were assisted in our evaluation of the discount rate by EY valuation specialists. Additionally, we compared the cash flow projections used in the valuation of the recoverable amount to the information approved by the Executive Committee and have evaluated the historical accuracy of management’s estimates that drive the assessment, such as business plans and expected growth rates. We gained an understanding of the developments of the performance and corroborated if they are in line with forecasted figures.
We also performed an analysis of the significant assumptions to evaluate the sensitivity of the recoverable amount to changes in the assumptions.
We also assessed the adequacy of management’s disclosure around goodwill as included in the group financial statements. |
| Revenue recognition – Sales related accruals |
| Description of the Matter | Primarily in the Personal Health businesses, the Company has sales promotions-related agreements with distributors and retailers whereby discounts and rebates are provided according to the quantity of goods sold and promotional and marketing activities performed by the distributors and retailers. The estimation of the sales related accruals involve subjective management assumptions about the extent to which promotional marketing targets will be met by the distributors and retailers. There is a risk related to management override of controls over the estimation of the sales related accruals through inappropriate estimations.
Auditing the Company’s measurement of sales related accruals is especially complex because the calculation involves subjective management assumptions around the extent to which promotional or marketing targets will be met by Philips’ customers and the related rebates will be owed.
Further reference is made to Note 1 Significant accounting policies, and Note 7 Income from operations section Sales composition and disaggregation, as included in the group financial statements. |
| How We Addressed the Matter in Our Audit | As part of our audit procedures, we obtained an understanding, evaluated the design and tested the operating effectiveness of the Company’s controls that address the risks of material misstatement relating to measurement for sales related accruals. This included testing controls relating to management’s verification that sales related accruals have been reviewed and underlying assumptions were based on management’s best estimate.
We evaluated management’s assumptions (as described above) by performing, among other procedures, a retrospective review of actual settlements of prior period sales related accruals, confirmed the agreed upon terms and conditions for a sample of customer contracts and performed cut off testing through assessing the sales promotions obligations around year-end.
We also assessed the adequacy of the revenue disclosures as included in the group financial statements. |
/s/ Ernst & Young Accountants LLP
We have served as the Company‘s auditor since 2016.
Amsterdam, the Netherlands
February 26, 201922, 2022
13.5Consolidated statements of income
Philips Group
Consolidated statements of income
in millions of EUR unless otherwise stated
For the yearsyear ended December 31
| | | | 2019 | 2020 | 2021 |
|---|
| | | |
| | | | |
| Sales7 | | 17,147 | 17,313 | 17,156 |
| | | | (9,249) | (9,493) | (9,988) |
| | | |
| | | | 7,899 | 7,820 | 7,168 |
| | | |
| | | | (4,125) | (4,054) | (4,258) |
General and administrative expenses | | | | (586) | (630) | (599) |
Research and development expenses | | | | (1,790) | (1,822) | (1,806) |
| | | | |
| | | | |
| | | |
| | | | |
| | | |
| | | | |
| | | | |
| Other business income7 | | 154 | 122 | 186 |
| Other business expenses7 | | (186) | (173) | (138) |
| Income from operations7 | | 1,366 | 1,264 | 553 |
| Financial income8 | | 114 | 158 | 149 |
| Financial expenses8 | | (233) | (202) | (188) |
Investments in associates, net of income taxes | | | | 1 | (9) | (4) |
| | | |
| | | | 1,248 | 1,211 | 509 |
| | | |
| | | | |
| | | |
| Income tax expense9 | | (258) | (212) | 103 |
Income from continuing operations | | | | 990 | 999 | 612 |
| | | |
Discontinued operations, net of income taxes3 | | | | |
| | | |
| Discontinued operations, net of income taxes4 | | 183 | 196 | 2,711 |
| | | | 1,173 | 1,195 | 3,323 |
| | | | |
Attribution of net income | | | | |
Net income attributable to Koninklijke Philips N.V. shareholders | | | | 1,167 | 1,187 | 3,319 |
Net income attributable to non-controlling interests | | | | 5 | 8 | 4 |
Philips Group
Earnings per common share attributable to Koninklijke Philips N.V. shareholders
in EUR unless otherwise stated
For the years ended December 31
| | | | |
|---|
| | | 2019 | 2020 | 2021 |
|---|
Basic earnings per common share in EUR | | | | | |
Income from continuing operations attributable to shareholders 1 | | | | |
| Income from continuing operations attributable to shareholders | | 1.07 | 1.09 | 0.67 |
Net income attributable to shareholders | | | | 1.27 | 1.31 | 3.67 |
| | | | | |
Diluted earnings per common share in EUR | | | | | |
Income from continuing operations attributable to shareholders 1 | | | | |
| Income from continuing operations attributable to shareholders | | 1.06 | 1.08 | 0.67 |
Net income attributable to shareholders | | | | 1.25 | 1.29 | 3.65 |
1During 2018, an error was identified in certain non-controlling interests and EPS calculations for 2016 and 2017 respectively. Reference is made to the Significant accounting policies.Amounts may not add up due to rounding.
13.6Consolidated statements of comprehensive income
Philips Group
Consolidated statements of comprehensive income
in millions of EUR
for the year ended December 31
| | | | 2019 | 2020 | 2021 |
|---|
| | | | |
Net income for the period | | | | 1,173 | 1,195 | 3,323 |
| | | | |
Pensions and other-post employment plans:20 | | | |
| Pensions and other-post employment plans:21 | | | |
| | | | 30 | 51 | 134 |
Income tax effect on remeasurements8 | | | | |
| | | |
Release revaluation reserve | | | | |
Reclassification directly into retained earnings | | | | |
| Income tax effect on remeasurements9 | | 3 | (12) | (21) |
| | | | |
Financial assets fair value through OCI: | | | | |
Net current-period change, before tax | | | 82 | - | (39) |
Reclassification directly into retained earnings | | | |
| Income tax effect on net current-period change | | | 1 |
Total of items that will not be reclassified to Income Statement | | | | 114 | 39 | 74 |
| | | | |
Currency translation differences: | | | | |
Net current period change, before tax | | | | 218 | (1,040) | 1,078 |
Income tax effect on net current-period change8 | | | | |
| Income tax effect on net current-period change9 | | - | 1 | (5) |
| Reclassification adjustment for (gain) loss realized | | 4 | | 36 |
Reclassification adjustment for (gain) loss realized, in discontinued operations | | | | 16 | | 69 |
Available-for-sale financial assets:13 | | | |
Net current period change, before tax | | | | |
Income tax effect on net current-period change8 | | | | |
Reclassification adjustment for loss (gain) realized | | | | |
| | | | |
Net current-period change, before tax | | | | (53) | 69 | (52) |
Income tax effect on net current-period change8 | | | | |
Reclassification adjustment for loss (gain) realized | | | | |
| Income tax effect on net current-period change9 | | 6 | (17) | 18 |
| Reclassification adjustment for (gain) loss realized | | 33 | (6) | (14) |
Total of items that are or may be reclassified to Income Statement | | | | 225 | (992) | 1,129 |
| | | | |
Other comprehensive income for the period | | | | 340 | (953) | 1,203 |
| | | | |
Total comprehensive income for the period | | | | 1,512 | 242 | 4,527 |
| | | | |
Total comprehensive income attributable to: | | | | |
Shareholders of Koninklijke Philips N.V. | | | | 1,507 | 235 | 4,520 |
Non-controlling interests | | | | 5 | 6 | 7 |
Amounts may not add up due to rounding.
13.7Consolidated balance sheets
Amounts may not add up due to rounding.
Philips Group
Consolidated balance sheets
in millions of EUR unless otherwise stated
As of December 31
| | |
|---|
| | |
Property, plant and equipment10 2 | | |
| | |
Intangible assets excluding goodwill12 2 | | |
Non-current receivables16 | | |
Investments in associates5 | | |
Other non-current financial assets13 | | |
Non-current derivative financial assets28 | | |
| | |
Other non-current assets14 | | |
| | |
| | |
| | |
| | |
Current financial assets13 | | |
| | |
Current derivative financial assets28 | | |
| | |
| | |
Assets classified as held for sale3 | | |
Cash and cash equivalents29 | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
Non-controlling interests17 | | |
| | |
| | |
| | |
| | |
Non-current derivative financial liabilities28 | | |
Long-term provisions20 19 | | |
Deferred tax liabilities8 | | |
Non-current contract liabilities22 1 | | |
Other non-current liabilities22 1 | | |
Total non-current liabilities | | |
| | |
| | |
| | |
Current derivative financial liabilities28 | | |
| | |
| | |
| | |
Current contract liabilities22 1 | | |
Short-term provisions20 19 | | |
Liabilities directly associated with assets held for sale3 | | |
Other current liabilities22 1 | | |
Total current liabilities | | |
Total liabilities and group equity | | |
| | 2020 | 2021 |
|---|
| Non-current assets | | |
| Property, plant and equipment 113 | 2,682 | 2,699 |
| Goodwill123 | 8,014 | 10,637 |
| Intangible assets excluding goodwill133 | 2,997 | 3,650 |
| Non-current receivables17 | 230 | 224 |
| Investments in associates6 | 240 | 426 |
| Other non-current financial assets14 | 430 | 630 |
| Non-current derivative financial assets29 | 6 | 2 |
| Deferred tax assets9 | 1,820 | 2,216 |
| Other non-current assets15 | 66 | 129 |
| Total non-current assets | 16,486 | 20,613 |
| | | |
| Current assets | | |
| Inventories16 | 2,993 | 3,450 |
| Other current financial assets14 | - | 2 |
| Other current assets15 | 424 | 493 |
| Current derivative financial assets29 | 105 | 61 |
| Income tax receivable9 | 150 | 180 |
| Current receivables2617 | 4,156 | 3,787 |
| Assets classified as held for sale4 | 173 | 71 |
| Cash and cash equivalents30 | 3,226 | 2,303 |
| Total current assets | 11,227 | 10,347 |
| Total assets | 27,713 | 30,961 |
| | | |
| Equity18 | | |
| Equity | 11,870 | 14,438 |
| Common shares | 182 | 177 |
| Reserves | (340) | 748 |
| Other | 12,028 | 13,514 |
| Non-controlling interests18 | 31 | 36 |
| Group equity | 11,901 | 14,475 |
| | | |
| Non-current liabilities | | |
| Long-term debt 19 | 5,705 | 6,473 |
| Non-current derivative financial liabilities29 | 86 | 119 |
| Long-term provisions2120 | 1,458 | 1,315 |
| Deferred tax liabilities9 | 59 | 83 |
| Non-current contract liabilities23 | 403 | 446 |
| Non-current tax liabilities 9 | 291 | 544 |
| Other non-current liabilities23 | 74 | 56 |
| Total non-current liabilities | 8,077 | 9,037 |
| | | |
| Current liabilities | | |
| Short-term debt 19 | 1,229 | 506 |
| Current derivative financial liabilities29 | 77 | 83 |
| Income tax payable9 | 57 | 128 |
| Accounts payable26 | 2,119 | 1,872 |
| Accrued liabilities22 | 1,678 | 1,784 |
| Current contract liabilities23 | 1,239 | 1,491 |
| Short-term provisions2120 | 522 | 998 |
| Liabilities directly associated with assets held for sale4 | 30 | 1 |
| Other current liabilities23 | 785 | 587 |
| Total current liabilities | 7,735 | 7,450 |
| Total liabilities and group equity | 27,713 | 30,961 |
1Due to IFRS 15 adoption, contractual liabilities are shown as separate captions on the balance sheet as13.8Consolidated statements of 2018. For more details refer to the Significant accounting policies.
Amounts may not add up due to rounding.
Consolidated statements of cash flows
Philips Group
Consolidated statements of cash flows1)
in millions of EUR
For the yearsyear ended December 31
| | | | 2019 | 2020 | 2021 |
|---|
Cash flows from operating activities | | | | |
| | | | |
Results of discontinued operations, net of income taxes | | | | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | |
| Net income (loss) | | 1,173 | 1,195 | 3,323 |
| Results of discontinued operations, net of income tax | | (183) | (196) | (2,711) |
| Adjustments to reconcile net income to net cash provided by (used for) operating activities: | | | |
Depreciation, amortization, and impairment of fixed assets | | | | 1,343 | 1,462 | 1,323 |
Impairment of goodwill and other non-current financial assets | | | | 97 | 144 | 15 |
Net gain on sale of assets | | | | |
| Share-based compensation | | 96 | 112 | 108 |
| Net loss (gain) on sale of assets | | (78) | (1) | 55 |
| | | | (25) | (13) | (18) |
Interest expense on debt, borrowings, and other liabilities | | | | 174 | 159 | 152 |
| | | | 258 | 212 | (103) |
Investments in associates, net of income taxes | | | | 6 | 8 | 4 |
Decrease (increase) in working capital | | | | (791) | (98) | (401) |
Decrease (increase) in receivables and other current assets | | | | (234) | 92 | (39) |
Decrease (Increase) in inventories | | | | (202) | (578) | (581) |
Increase (decrease) in accounts payable, accrued and other current liabilities | | | | (354) | 387 | 219 |
Decrease (increase) in non-current receivables, other assets and other liabilities | | | | 124 | 41 | (13) |
Increase (decrease) in provisions19 | | | | |
| Increase (decrease) in provisions20 | | 29 | (91) | 427 |
| | | | 77 | 96 | (164) |
| | | | (171) | (148) | (151) |
| | | | 25 | 13 | 17 |
Dividends received from investments in associates | | | | 12 | 4 | 14 |
| | | | (354) | (390) | (249) |
Net cash provided by (used for) operating activities | | | | 1,813 | 2,511 | 1,629 |
| | | |
Cash flows from investing activities | | | | |
| | | | (891) | (876) | (729) |
Purchase of intangible assets | | | | (138) | (114) | (107) |
Expenditures on development assets | | | | (327) | (296) | (259) |
Capital expenditures on property, plant and equipment | | | | (486) | (485) | (397) |
Proceeds from sales of property, plant and equipment3 | | | | |
Net proceeds from (cash used for) derivatives and current financial assets23 | | | | |
Purchase of other non-current financial assets23 | | | | |
Proceeds from other non-current financial assets23 | | | | |
Purchase of businesses, net of cash acquired4 | | | | |
Net proceeds from sale of interests in businesses, net of cash disposed of3 | | | | |
| Proceeds from sales of property, plant and equipment4 | | 60 | 19 | 33 |
| Net proceeds from (cash used for) derivatives and current financial assets24 | | 385 | (13) | 48 |
| Purchase of other non-current financial assets24 | | (63) | (131) | (124) |
| Proceeds from other non-current financial assets24 | | 162 | 65 | 124 |
| Purchase of businesses, net of cash acquired5 | | (252) | (317) | (3,098) |
| Net proceeds from sale of interests in businesses, net of cash disposed of4 | | 146 | 4 | 107 |
Net cash provided by (used for) for investing activities | | | | (512) | (1,267) | (3,672) |
| | | |
Cash flows from financing activities | | | | |
Proceeds from issuance (payments) of short-term debt18 | | | | |
Principal payments on short-term portion of long-term debt18 | | | | |
Proceeds from issuance of long-term debt18 | | | | |
Re-issuance of treasury shares17 | | | | |
Purchase of treasury shares17 | | | | |
Proceeds from sale of Signify (Philips Lighting) shares5 | | | | |
Transaction costs paid for sale of Signify (Philips Lighting) shares5 | | | | |
Dividends paid to shareholders of Koninklijke Philips N.V.17 | | | | |
Dividends paid to non-controlling interests | | | |
| Proceeds from issuance (payments on) short-term debt19 | | 23 | 16 | (25) |
| Principal payments on short-term portion of long-term debt19 | | (756) | (298) | (302) |
| Proceeds from issuance of long-term debt19 | | 847 | 1,065 | 76 |
| Re-issuance of treasury shares | | 58 | 46 | 23 |
| Purchase of treasury shares | | (1,376) | (343) | (1,636) |
| Dividends paid to shareholders of Koninklijke Philips N.V. | | (453) | (1) | (482) |
| Dividends paid to shareholders of non-controlling interests | | (2) | (2) | (2) |
Net cash provided by (used for) financing activities | | | | (1,660) | 483 | (2,347) |
| | | |
Net cash provided by (used for) continuing operations | | | | (359) | 1,727 | (4,390) |
Net cash provided by (used for) discontinued operations3 | | | | |
| | | |
| Net cash provided by (used for) discontinued operations4 | | 98 | 129 | 3,403 |
Net cash provided by (used for) continuing and discontinued operations | | | | (262) | 1,856 | (986) |
| | | |
Effect of changes in exchange rates on cash and cash equivalents | | | | (2) | (55) | 65 |
Cash and cash equivalents at the beginning of the year | | | | 1,688 | 1,425 | 3,226 |
Cash and cash equivalents at the end of the period | | | | 1,425 | 3,226 | 2,303 |
11)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 in the accompanying notes of the consolidated financial statements.
Amounts may not add up due to rounding.
13.9Consolidated statements of changes in equity
Philips Group
Consolidated statements of changes in equity
in millions of EUR unless otherwise stated
For the year ended December 31
| | | Currency translation differences 1 | | | Capital in excess of par value | | | Total shareholders' equity | Non-controlling interests | | | Currency translation differences1) | | | | Capital in excess of par value | | | Total shareholders' equity | Non-controlling interests | |
|---|
| | | | | | | reserves | | other | | |
| | | | | | | |
Balance as of Jan. 1, 2016 | | | | | | | | | | | | |
| | | |
| Balance as of Jan. 1, 2019 | | 185 | 739 | (181) | (10) | | 3,487 | 8,232 | (399) | 12,055 | 29 | 12,084 |
Total comprehensive income (loss) | | | | | | | | | | | | | 239 | 82 | (13) | | | 1,200 | | 1,507 | 5 | 1,512 |
| | | | | | | | | 2 | | | 319 | (775) | | (453) | (2) | (456) |
IPO Philips Lighting (now Signify) | | | | | | | | | | | |
Cancellation of treasury shares | | | | | | | |
Purchase of treasury shares | | | | | |
Re-issuance of treasury shares | | | | | | | | |
| | | | (13) | | | |
Share-based compensation plans | | | | | | | |
Income tax share-based compensation plans | | | | | | | |
| | | |
Balance as of Dec. 31, 2016 | | | | | | | | | | | | |
| | | |
Total comprehensive income (loss) | | | | | | | | | | | |
| | | | | | | | | |
Sale of shares of Philips Lighting (now Signify) | | | | | | | | | |
Deconsolidation Philips Lighting (now Signify) | | | | | | | | |
| Minority Buy-out | | | | | | (3) | | (3) | (6) |
| Transfer of gain on disposal of equity investments at FVTOCI to retained earnings | | | | (204) | | | | 204 | | |
Purchase of treasury shares | | | | | | | | | | (621) | | (621) |
Re-issuance of treasury shares | | | | | | | | | | | (246) | 11 | 266 | 31 | | 31 |
| | | | | | | | | | | 706 | (706) | | | |
| | | | | | | | | | | 28 | (58) | (30) | | (30) |
| Cancellation of treasury shares | | (8) | | | | (1,308) | 1,316 | | | |
Share-based compensation plans | | | | | | | | | | 101 | | 101 | | 101 |
Income tax share-based compensation plans | | | | | | | | | | 10 | | 10 | | 10 |
| | | |
Balance as of Dec. 31, 2017 | | | | | | | | | | | | |
IFRS 9 and 15 adjustment 3 | | | | | | | | | |
Balance as of Jan. 1, 2018 | | | | | | | | | | | | |
| | | |
| Balance as of Dec. 31, 2019 | | 179 | 978 | (303) | (24) | | 3,671 | 8,296 | (201) | 12,597 | 28 | 12,625 |
Total comprehensive income (loss) | | | | | | | | | | | | (1,036) | - | 46 | | | 1,225 | | 235 | 6 | 242 |
| | | | | | | | | 4 | | | 754 | (782) | | (25) | (2) | (26) |
| Minority Buy-out | | | | | | | | | (1) | (1) |
| Transfer of gain on disposal of equity investments at FVTOCI to retained earnings | | | | (2) | | | | 2 | | - | | - |
Purchase of treasury shares | | | | | | | | | - | (130) | | (130) |
Re-issuance of treasury shares | | | | | | | | - | | | (146) | 7 | 161 | 23 | | 23 |
| | | | | | | |
| Forward contracts | | | | | | (793) | (126) | (920) | | (920) |
| | | | | | | | | | | 24 | (55) | (31) | | (31) |
Cancellation of treasury shares | | | | | | | (1) | | | | (151) | 152 | | | |
Share-based compensation plans | | | | | | | | | | 116 | | 116 | | 116 |
Income tax share-based compensation plans | | | | | | | | | | 4 | | 4 | | 4 |
| Balance as of Dec. 31, 2020 | | 182 | (58) | (305) | 23 | | 4,400 | 7,828 | (199) | 11,870 | 31 | 11,901 |
| Total comprehensive income (loss) | | | 1,175 | (39) | (48) | | | 3,432 | | 4,520 | 7 | 4,527 |
| Dividend distributed | | 1 | | | 290 | (773) | | (482) | (2) | (484) |
| Minority Buy-out | | | | | | | | | - | - |
| Transfer of gain on disposal of equity investments at FVTOCI to retained earnings | | | | | | | | - | | - | | - |
| Purchase of treasury shares | | | | | | - | (758) | (757) | | (757) |
| Re-issuance of treasury shares | | | | | (150) | 18 | 143 | 11 | | 11 |
| Forward contracts | | | | | | 48 | (869) | (821) | | (821) |
| Share call options | | | | | | 12 | (21) | (9) | | (9) |
| Cancellation of treasury shares | | (7) | | | | (1,221) | 1,228 | | | |
| Share-based compensation plans | | | | | 110 | | 110 | | 110 |
| Income tax share-based compensation plans | | | | | (4) | | (4) | | (4) |
| Balance as of Dec. 31, 2021 | | 177 | 1,117 | (344) | (25) | | 4,646 | 9,344 | (476) | 14,438 | 36 | 14,475 |
| | | | | | | |
Balance as of Dec. 31, 2018 | | | | | | | | | | | | |
| | | | | | | |
11)Cumulative translation adjustments related to investments in associates were EUR 4532 million at December 31,2018 (2017:31, 2021 (2020: EUR 4648 million, 2016:2019: EUR 4044 million).
2Previously available-for-sale financial assets.
Amounts may not add up due to rounding.
13.10Notes
Notes
Notes to the Consolidated financial statements of the Philips Group
1Significant accounting policies
The Consolidated financial statements in the Group financial statements section have been prepared in accordance with International Financial Reporting Standards (IFRS) as endorsed by the European Union (EU) and with the statutory provisions of Part 9, Book 2 of the Dutch Civil Code.
All standards and interpretations issued by the International Accounting Standards Board (IASB) and the IFRS Interpretations Committee effective 20182021 have been endorsed by the EU; consequently, the accounting policies applied by Philips also comply with IFRS as issued by the IASB. These accounting policies have been applied by group entities.
The Consolidated financial statements have been prepared on a going concern basis.
The Consolidated financial statements have been prepared under the historical cost convention, unless otherwise indicated.
The Consolidated financial statements are presented in euros, which is the presentation currency. Due to rounding, amounts may not add up precisely to the totals provided.
On February 25, 2019, the Board of Management authorized the Consolidated financial statements for issue. The Consolidated financial statements as presented in this report are subject to adoption by the Annual General Meeting of Shareholders, to be held on May 9, 2019.
Use of estimates
The preparation of the Consolidated financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. These estimates inherently contain a degree of uncertainty. Actual results may differ from these estimates under different assumptions or conditions.
In the process of applying the accounting policies, management has made estimates and assumptions concerning the future and other key sources of estimation uncertainty at the reporting date that have a significant risk of causing a material adjustment to the reported amounts of assets and liabilities within the next financial year, as well as to the disclosure of contingent liabilities at the date of the Consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. The company evaluates these estimates and judgments on an ongoing basis and bases the estimates on historical experience, current and expected future outcomes, third-party evaluations and various other assumptions that Philips believes are reasonable under the circumstances. Existing circumstances and assumptions about future developments may change due to circumstances beyond the company’s control and are reflected in the assumptions if and when they occur. The results of these estimates form the basis for making judgments about the carrying value of assets and liabilities as well as identifying and assessing the accounting treatment with respect to commitments and contingencies. The company revises material estimates if changes occur in the circumstances or if there is new information or experience on which an estimate was or can be based. See note COVID-19 which includes further details on the impact of the pandemic on these significant judgments and estimates.
The areas where the most significant judgments and estimates are made are goodwill, deferred tax asset recoverability, recognition and measurement of provisions, valuation of inventories, impairments, classification and measurement of financial instruments, the accounting for an arrangement containing a lease, the assessment whether a lease option to extend or cancel a lease in which the company is a lessee is reasonably certain to be exercised or not, revenue recognition, tax risks and other contingencies, assessment of control, classification of assets and liabilities held for sale and the presentation of items of profit and loss and cash flows as continuing or discontinued, as well as when determining the fair values of acquired identifiable intangible assets, contingent considerations and investments based on an assessment of future cash flows (e.g. earn out arrangements as part of acquisitions). For further discussion of these significant judgements and estimates, reference is made to the respective accounting policies and notes within these Consolidated financial statements that relate to the above topics.
Further judgment is applied when analyzing impairments of goodwill and intangible assets not yet ready for use that are performed annually and whenever a triggering event has occurred to determine whether the carrying value exceeds the recoverable amount. These analyses are generally based on estimates of discounted future cash flows. Furthermore, the company applies judgment when actuarial assumptions are established to anticipate future events that are used in calculating post-employment benefit expenses and liabilities. These factors include assumptions with respect to interest rates, rates of increase in healthcare costs, rates of future compensation increases, turnover rates and life expectancy.
Correction
Climate-related matters
In preparing the Consolidated Financial Statements management has considered the impact of errors in accountingclimate change, specifically the financial impact of Philips meeting its internal and external climate related aims, the potential impact of climate related risks and the costs incurred to pro-actively manage such risks. These considerations did not have a material impact on the financial reporting judgements, estimates or assumptions. The specific financial impacts considered include, for Earnings Per Share
During 2018, Philips determined thatexample: specific climate mitigation measures, such as the basicuse of lower carbon energy sources, the costs of developing more sustainable product offerings and diluted earnings per common share amounts for income from continuing operations attributableexpenses incurred to shareholders, presented inmitigate against the 2017 consolidated financial statementsimpact of the Group, were understated for both 2017 and 2016. The understatement was a result of an error, solely impacting certain EPS calculations and disclosures, in the allocation of income attributable to non-controlling interests, between continuing and discontinued operations. The correction of this error resulted in basic earnings per common share for income from continuing operations attributable to shareholders for 2017, being restated upwards from EUR 0.88 to EUR 1.10 (2016: EUR 0.86 to EUR 0.90). Similarly, diluted earnings per common share for income from continuing operations attributable to shareholders for 2017 was restated upwards from EUR 0.86 to EUR 1.08 (2016: EUR 0.85 to EUR 0.89). Basic and diluted earnings per common share for income from discontinued operations has been restated downwards in an equal amount.extreme weather conditions.
The basic and diluted net income attributable to shareholders earnings per common share in either year were not impacted.
Changes in presentation from the prior year
Accounting policies have been applied consistently for all periods presented in these consolidated financial statements, except for the itemsitem mentioned below. In addition, certain prior-year amounts have been reclassified to conform to the current year presentation.
Change in Consolidated balance sheets presentation
Domestic Appliances
Following the adoption of IFRS 15, the company has changed the presentation of certain amounts in the Consolidated balance sheets to reflect the terminology of IFRS 15. Further reference is made to the section New standards and interpretations of this note.
Change in Segment reporting
Due to the divestment and deconsolidation of businesses in 2017, Philips changed the way it allocates resources and analyzes its performance based on the revised segment structure. Accordingly, from 2018 onwards the operational reportable segmentsPrior-period financial statements have been restated for the purposetreatment of the disclosures required by IFRS 8 Operating Segments were Diagnosis & Treatment businesses, Connected Care & Health Informatics businessesDomestic Appliances business as a discontinued operation, see further information in Discontinued operations and Personal Health businesses. Each being responsibleassets classified as held for the management of its business worldwide. Additionally, HealthTech Othersale and Legacy Items were combined into Other. The new segment structure had no impact on the cash-generating units disclosed in Goodwill.
Consequential changes to comparative segment disclosures have been processed in Other assets, Receivables,Acquisitions and Provisions. The 2017 and 2016 segment results have been reclassified according to the revised reporting structure. Segment information can be found in Information by segment and main countrydivestments.
Specific choices within IFRS
In certain instances, IFRS allows alternative accounting treatments for measurement and/or disclosure. Philips has adopted one of the treatments as appropriate to the circumstances of the company. The most important of these alternative treatments are mentioned below.
Tangible and intangible fixed assets
Under IFRS, an entity shall choose either the cost model or the revaluation model as its accounting model for tangible and intangible fixed assets. In this respect, items of property, plant and equipment are measured at cost less accumulated depreciation and accumulated impairment losses. The useful lives and residual values are evaluated annually. Furthermore, the company chose to apply the cost model, meaning that costs relating to product development, the development and purchase of software for internal use and other intangible assets are capitalized and subsequently amortized over the estimated useful life. Further information on Tangible and Intangible fixed assets can be found in Property, plant and equipment and in Intangible assets excluding goodwill, respectively.
Employee benefit accounting
IFRS does not specify how an entity should present its service costs related to pensions and net interest on the net defined-benefit liability (asset) in the Consolidated statements of income. With regards to these elements, the company presents service costs in Income from operations and the net interest expenses related to defined-benefit plans in Financial expense.
Furthermore, when accounting for the settlement of defined-benefit plans, the company made the accounting policy choice to adjust the amount of the plan assets transferred for the effect of the asset ceiling.
Further information on employee benefit accounting can be found in Post-employment benefits.
Cash flow statements
Under IFRS, an entity shall report cash flows from operating activities using either the direct method (whereby major classes of gross cash receipts and gross cash payments are disclosed) or the indirect method (whereby profit or loss is adjusted for the effects of transactions of a non-cash nature, any deferrals or accruals of past or future operating cash receipts or payments, and items of income or expense associated with investing or financing cash flows). In this respect, the company chose to prepare the cash flow statements using the indirect method.
Furthermore, interest cash flows are presented in cash flows from operating activities rather than in cash flows from financing or investing activities, because they enter into the determination of profit or loss. The company chose to present dividends paid to shareholders of Koninklijke Philips N.V. as a component of cash flows from financing activities, rather than to present such dividends as cash flows from operating activities, which is an allowed alternative under IFRS.
Consolidated statements of cash flows can be found in Consolidated statements of cash flows.
Policies that are more critical in nature
Revenue recognition
Revenue from the sale of goods in the normal course of business is recognized at a point in time when the performance obligation is satisfied and it is based on the amount of the transaction price that is allocated to the performance obligation. The transaction price is the amount of the consideration to which the company expects to be entitled in exchange for transferring the promised goods to the customer. The consideration expected by the company may include fixed and/or variable amounts which can be impacted by sales returns, trade discounts and volume rebates. The company adjusts the consideration for the time value of money for the contracts where no explicit interest rate is mentioned if the period between the transfer of the promised goods or services to the customer and payment by the customer exceeds six months. Revenue for the sale of goods is recognized when control of the asset is transferred to the buyer and only when it is highly probable that a significant reversal of revenue will not occur when uncertainties related to a variable consideration are resolved.
Transfer of control varies depending on the individual terms of the contract of sale. For consumer-type products in the segment of Personal Health businesses, control is transferred when the product is shipped and delivered to the customer and title and risk have passed to the customer (depending on the delivery conditions) and acceptance of the product has been obtained. Examples of delivery conditions are ‘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 control is transferred to the customer.
Revenues from transactions relating to distinct goods or services are accounted for separately based on their relative stand-alone selling prices. The stand-alone selling price is defined as the price that would be charged for the goods or service in a separate transaction under similar conditions to similar customers, (adjusted market assessment approach or expected costs plus margin approach), which within the company is mainly the Country Target Price (CTP). The transaction price determined (taking into account variable considerations) is allocated to performance obligations based on relative stand-alone selling prices. These transactions mainly occur in the segments Diagnosis & Treatment businesses and Connected Care & Health Informaticsbusinesses and include arrangements that require subsequent installation and training activities in order to make distinct goods operable for the customer. As such, the related installation and training activities are part of equipment sales rather than separate performance obligations. Revenue is recognized when the performance obligation is satisfied, i.e. when the installation has been completed and the equipment is ready to be used by the customer in the way contractually agreed.
Revenues are recorded net of sales taxes. A variable consideration is recognized to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. Such assessment is performed on each reporting date to check whether it is constrained. 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.
A provision is recognized for assurance-type product warranty 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 sold. For certain products, the customer has the option to purchase the warranty separately, which is considered a separate performance obligation on top of the assurance-type product warranty. For such warranties which provide distinct service, revenue recognition occurs on a straight-line basis over the extended warranty contract period.
In the case of loss under a sales agreement, the loss is recognized immediately.
Expenses incurred for shipping and handling of internal movements of goods are recorded as cost of sales. Shipping and handling related to sales to third parties are recorded as selling expenses. When shipping and handling are part of a project and billed to the customer, then the related expenses are recorded as cost of sales. Shipping and handling billed to customers are distinct and separate performance obligations and recognized as revenues. Expenses incurred for sales commissions that are considered incremental to the contracts are recognized immediately in the Consolidated statements of income as selling expenses as a practical expedient under IFRS 15.15 Revenue from Contracts with Customers.
Revenue from services is recognized over a period of time as the company transfers control of the services to the customer which is demonstrated by the customer simultaneously receiving and consuming the benefits provided by the company. The amount of revenues is measured by reference to the progress made towards complete satisfaction of the performance obligation, which in general is evenly over time. Service revenue related to repair and maintenance activities for goods sold is recognized ratably over the service period or as services are rendered.
Royalty income from brand license arrangements is recognized based on a right to access the license, which in practice means over the contract period based on a fixed amount or reliable estimate of sales made by a licensee.
Royalty income from intellectual property rights such as technology licenses or patents is recognized based on a right to useright-to-use the license, which in practice means at a point in time based on the contractual terms and substance of the relevant agreement with a licensee. However, revenue related to intellectual property contracts with variable consideration where a constraint in the estimation is identified, is recognized over the contract period and is based on actual or reliably estimated sales made by a licensee.
The company receives payments from customers based on a billing schedule or credit period, as established in our contracts. Credit periods are determined based on standard terms, which vary according to local market conditions. Amounts posted in deferred revenue for which the goods or services have not yet been transferred to the customer and amounts that have either been received or are due, are presented as Contract liabilities in the Consolidated balance sheets.
Income taxes
Income taxes comprise current, non-current and deferred tax. Income tax is recognized in the Consolidated statements of income except to the extent that it relates to items recognized directly within equity or in other comprehensive income. Current tax is the expected taxes payable on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years.
Tax liabilities are recognized whenIn cases where it is consideredconcluded it is not probable that theretax authorities will beaccept a future outflowtax treatment, the effect of funds tothe uncertainty is reflected in the recognition and measurement of tax assets and liabilities or, alternatively, a taxing authority. In such cases, provision is made for the amount that is expected to be settled, where this can be reasonably estimated. This assessment relies on estimates and assumptions and may involve a series of judgments about future events. New information may become available that causes the company to change its judgment regarding the adequacy of existing tax assets and liabilities. Such changes to tax assets and liabilities will impact the income tax expense in the period during which such a determination is made.
Deferred tax assets and liabilities are recognized, using the Consolidatedconsolidated balance sheets 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, joint ventures and associates where the reversal of the respective temporary difference can be controlled by the company and it is probable that it will not reverse in the foreseeable future. Deferred taxes are measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or 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 taxable entities, but the company intends to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously.
A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences to the extent that it is probable that there will be future taxable profits against which they can be utilized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in the countries where the deferred tax assets originated and during the periods when the deferred tax assets become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment.
Deferred tax liabilities for withholding taxes are recognized for subsidiaries in situations where the income is to be paid out as dividend in the foreseeable future and for undistributed earnings of unconsolidated companies to the extent that these withholding taxes are not expected to be refundable or deductible. Changes in tax rates and tax laws are reflected in the period when the change was enacted or substantively enacted by the reporting date.
Any subsequent adjustment to a tax asset or liability that originated in discontinued operations and for which no specific arrangements were made at the time of divestment, due to a change in the tax base or its measurement, is allocated to discontinued operations (i.e. backwards tracing). Examples are a tax rate change or change in retained assets or liabilities directly relating to the discontinued operation. Any subsequent change to the recognition of deferred tax assets is allocated to the component in which the taxable gain is or will be recognized. The above principles are applied to the extent the ‘discontinued operations’ are sufficiently separable from continuing operations.
Further information on income tax can be found in Income taxes.
Provisions
Provisions are recognized if, as a result of a past event, the company has a present legal or constructive obligation, the amount can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation.obligation and , the amount can be estimated reliably. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax discount rate that reflects current market assessments of the time value of money. The increase in the provision due to passage of time is recognized as interest expense. The accounting and presentation for some of the company’s provisions is as follows:
- Field action provision –This provision relates to the Philips Respironics voluntary recall notification in the United States and field safety notice outside the United States for certain sleep and respiratory care products related to the polyester-based polyurethane (PE-PUR) sound abatement foam in these devices
- Product warranty –
A provisionThe provisions for assurance-type product warranty reflect the estimated costs of replacement and free-of-charge services that will be incurred by the company with respect to products sold, and include costs to execute field change orders. The field action provision in connection with the Philips Respironics voluntary recall notification 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.shown separately above. - Environmental provisions – The environmental provisions relate to cost of environmental remediation in various countries. Measurement of liabilities associated with environmental obligations is based on current legal and constructive requirements. Liabilities and expected insurance recoveries, if any, are recorded separately. The carrying amount of environmental liabilities is regularly reviewed and adjusted for new facts and changes in law.
- Restructuring-related provisions – The provision for restructuring mainly relates to the estimated costs of initiated restructurings, the most significant of which have been approved by the Executive Committee, and which generally involve the realignment of certain parts of the industrial and commercial organization. When such restructurings require discontinuance and/or closure of lines of activities, the anticipated costs of closure or discontinuance are included in restructuring provisions. A liability is recognized for those costs only when the company has a detailed formal plan for the restructuring and has raised a valid expectation with those affected that it will carry out the restructuring by starting to implement that plan or announcing its main features to those affected by it. Before a provision is established, the company recognizes any impairment loss on the assets associated with the restructuring.
LitigationLegal provisions – Legal provisions relate to legal proceedings, including regulatory and other governmental proceedings. In relation to legal claim provisions and settlements, the relevant balances are transferred to Other liabilities at the point when the amount and timing of cash outflows are no longer uncertain. Settlements which are agreed for amounts in excess of existing provisions are reflected as increases in Other liabilities.
Further information on provisions can be found in Provisions.
Goodwill
The measurement of goodwill at initial recognition is described in the Basis of consolidation note. Goodwill is subsequently measured at cost less accumulated impairment losses. Further information on goodwill can also be found in Goodwill.
Intangible assets other than goodwill
Acquired finite-lived intangible assets are amortized using the straight-line method over their estimated useful life. The useful lives are evaluated annually. Intangible assets are initially capitalized at cost, with the exception of intangible assets acquired as part of a business combination, which 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, the company has sufficient resources and the intention to complete development and can measure the attributable expenditure reliably.
The capitalized development expenditure comprises of all directly attributable costs (including the cost of materials and direct labor). Other development expenditures and expenditures on research activities are recognized in the Consolidated statements of income. Capitalized development expenditure is stated at cost less accumulated amortization and impairment losses. Amortization of capitalized development expenditure is charged to the Consolidated statements of income on a straight-line basis over the estimated useful lives of the intangible assets.
Further information on intangible assets other than goodwill can be found in Intangible assets excluding goodwill.
Discontinued operations and non-current assets held for sale
Non-current assets and 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.
Non-current assets classified as held for sale and the assets of a disposal group classified as held for sale are presented separately from the other assets in the Consolidated balance sheets. The liabilities of a disposal group classified as held for sale are presented separately from other liabilities in the Consolidated balance sheets.
A discontinued operation is a component of an entity that has either been disposed of or is classified as held for sale, and represents a separate major line of business or geographical area of operations; or is a part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations; or is a subsidiary acquired exclusively with a view to sell.
If a discontinued operation is sold in stages as part of a single coordinated plan until it is completely sold, then the Investment in associate that is recognized upon sale of a portion that results in Philips having significant influence in the operation (rather than control) is continued to be treated as discontinued operation provided that the held for sale criteria are met.
Non-current assets held for sale and discontinued operations are carried at the lower of carrying amount or fair value less cost of disposal. Any gain or loss from disposal, together with the results of these operations until the date of disposal, is reported separately as discontinued operations. The financial information of discontinued operations is excluded from the respective captions in the Consolidated financial statements and related notes for all periods presented. Comparatives in the Consolidated balance sheets are not represented when a non-current asset or disposal group is classified as held for sale. Comparatives are represented for presentation of discontinued operations in the Consolidated statements of cash flows and Consolidated statements of income.
Adjustments in the current period to amounts previously presented in discontinued operations that are directly related to the disposal of a discontinued operation in a prior period, and for which no specific arrangements were made at the time of divestment, are classified separately in discontinued operations. Circumstances to which these adjustments may relate include resolution of uncertainties that arise from the terms of the disposal transaction, such as the resolution of purchase price adjustments and indemnifications, resolution of uncertainties that arise from and are directly related to the operations of the component before its disposal, such as environmental and assurance-type product warranty obligations retained by the company, and the settlement of employee benefit plan obligations provided that the settlement is directly related to the disposal transaction.
Further information on discontinued operations and non-current assets held for sale can be found in Discontinued operations and assets classified as held for sale.
Impairment
Impairment of goodwill and intangible assets not yet ready for use
Goodwill and intangible assets not yet ready for use are not amortized but are tested for impairment annually and whenever impairment indicators require. In case of goodwill and intangible assets not yet ready for use, either internal or external sources of information are considered indicators that an asset or a CGU may be impaired. In most cases the company identified its cash-generating units for goodwill at one level below that of an operating segment. Cash flows at this level are substantially independent from other cash flows and this is the lowest level at which goodwill is monitored by the Executive Committee. An impairment loss is recognized in the Consolidated statements of income whenever and to the extent that the carrying amount of a cash-generating unit exceeds the unit’s recoverable amount, whichever is the greater, its value in use or its fair value less cost of disposal. Value in use is measured as the present value of future cash flows expected to be generated by the asset. Fair value less cost of disposal is measured as the amount obtained from the sale of an asset in an arm’s length transaction, less costs of disposal.
Further information on impairment of goodwill and intangible assets not yet ready for use can be found in Goodwill and Intangible assets excluding goodwill respectively.
Impairment of non-financial assets other than goodwill, intangible assets not yet ready for use, inventories and deferred tax assets
Non-financial assets other than goodwill, intangible assets not yet ready for use, inventories and deferred tax assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is assessed by a comparison of the carrying amount of an asset with the greater of its value in use and fair value less cost of disposal. Value in use is measured as the present value of future cash flows expected to be generated by the asset. Fair value less cost of disposal is measured as the amount obtained from a sale of an asset in an arm’s length transaction, less costs of disposal. If the carrying amount of an asset is deemed not recoverable, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the recoverable amount. The review for impairment is carried out at the level where cash flows occur that are independent of other cash flows.
Impairment losses recognized in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if and to the extent that 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 Consolidated statements of income.
Impairment of financial assets
The company recognizes an allowance for expected credit losses (ECLs) for trade receivables, contract assets, lease receivables, debt investments carried at FVTOCIfair value through Other comprehensive income (FVTOCI) and amortized cost. ECLs are based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the company expects to receive, discounted at an approximation of the original effective interest rate.
ECLs are recognized in two stages. For credit risk exposures for which there has not been a significant increase in credit risk since initial recognition, ECLs are provided for credit losses that result from default events that are possible within the next 12 months (12-month ECLs). The company considers a financial asset to be in default when the counterparty is unlikely to pay its credit obligations to the company in full or when the financial asset is past due. For those credit exposures for which there has been a significant increase in credit risk since initial recognition, a loss allowance is required for credit losses expected over the remaining life of the exposure, irrespective of the timing of the default (lifetime ECLs). When determining whether the credit risk of a financial asset has increased significantly since initial recognition, the company considers reasonable and supportable information that is relevant and available without undue cost or effort. This includes both quantitative and qualitative information and analysis, based on the company's historical experience and informed credit assessment and including forward-looking information, such as forecast economic conditions that affect the ability of the customers to settle the receivables.
For all trade receivables, contract assets and lease receivables, the company applies the IFRS 9 simplified approach to measuring ECLs, which uses the lifetime ECL allowance. To measure the ECLs on trade receivables, and contract assets and lease receivables, the company takes into account credit-risk concentration, collective debt risk based on average historical losses, specific circumstances such as serious adverse economic conditions in a specific country or region, and other forward-looking information. Trade receivables, contract assets and lease receivables are written off when there is no reasonable expectation of recovery of the asset, for example because of bankruptcy or other forms of receivership.
Further information on financial assets can be found in Other financial assets.
Other policies
Basis of consolidation
The Consolidated financial statements comprise the financial statements of Koninklijke Philips N.V. and all subsidiaries that the company controls, i.e. when it is exposed or has rights to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Generally, there is a presumption that a majority of voting rights results in control. To support this presumption and in cases where Philips has less than a majority of the voting or similar rights of an investee, Philips considers all relevant facts and circumstances in assessing whether it has power over an investee, including the contractual arrangement(s) with the other vote holders of the investee, rights arising from other contractual arrangements and the company’s voting rights and potential voting rights. 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.
Loss of control
Upon 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 from the loss of control is recognized in the Consolidated statements of income. If the company retains any interest in the previous subsidiary, such interest is measured at fair value at the date the control is lost. Subsequently it is accounted for as either an equity-accounted investee (associate) or as a financial asset, depending on the level of influence retained. Further information on loss of control can be found in Discontinued operations and assets classified as held for sale.
Business combinations
Business combinations are accounted for using the acquisition method. Under the acquisition method, the identifiable assets acquired, liabilities assumed and any non-controlling interest in the acquiree are recognized at the acquisition date, which is the date on which control is transferred to the company.
The company measures goodwill at the acquisition date as:
- the fair value of the consideration transferred; plus
- the recognized amount of any non-controlling interest in the acquiree; plus
- if the business combination is achieved in stages, the fair value of the existing equity interest in the acquiree; less
- the net recognized amount (generally fair value) of the identifiable assets acquired and liabilities assumed.
Costs related to the acquisition, other than those associated with the issue of debt or equity securities, that the company incurs are expensed as incurred.
Any contingent consideration payable is recognized at fair value at the acquisition date and initially is presented in Long-term provisions. When the timing and amount of the consideration become more certain, it is reclassified to Accrued liabilities. If the contingent consideration that meets the definition of a financial instrument is classified as equity, it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent changes to the fair value of the contingent consideration are recognized in the Consolidated statements of income.
Non-controlling interests are measured on the basis of their proportionate share of the acquiree’s identifiable net assets at the date of acquisition.
Further information on business combinations can be found in Acquisitions and divestments.
Acquisitions of and adjustments to non-controlling interests
Acquisitions of non-controlling interests are accounted for as transactions with owners in their capacity as owners and therefore no goodwill is recognized. Adjustments to non-controlling interests arising from transactions that do not involve the loss of control are based on a proportionate amount of the net assets of the subsidiary.
Investments in associates (equity-accounted investees)
Associates are all entities over which the company has significant influence, but no control. Significant influence is presumed with a shareholding of between 20% and 50% of the voting rights.rights or when the company has board representation through which it is able to exercise significant influence. Investments in associates are accounted for using the equity method of accounting and are initially recognized at cost. The carrying amount of an investment includes the carrying amount of goodwill identified on acquisition. An impairment loss on such investment is allocated to the investment as a whole.
The company’s share of the net income of these companies is included in Investments in associates, net of income taxes, in the Consolidated statements of income, after adjustments to align the accounting policies with those of the company, from the date that significant influence commences until the date that significant influence ceases. Dilution gains and losses arising from investments in associates are recognized in the Consolidated statements of income as part of Investments in associates, net of income taxes. When the company’s share of losses exceeds its interest in an associate, the carrying amount of that interest (including any long-term loans) is reduced to zero and recognition of further losses is discontinued except to the extent that the company has incurred legal or constructive obligations or made payments on behalf of the associate. Unrealized gains on transactions between the company and its associates are eliminated to the extent of the company’s interest in the associates. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Remeasurement differences of an equity stake resulting from gaining control over an investee that was previously recorded as an associate are recorded under Investments in associates.
Further information on investments in associates can be found in Interests in entities.
Foreign currencies
Foreign currency transactions
The financial statements of all group entities are measured using the currency of the primary economic environment in which the entity operates (functional currency). The euro (EUR) is the functional currency of the company and the presentation currency of the Group financial statements. Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or the valuation in cases 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 Consolidated statements of income, except when deferred in Other comprehensive income as qualifying cash flow hedges and qualifying net investment hedges.
Foreign currency differences arising from translations are recognized in the Consolidated statements of income, except for equity investments measured at fair value through OCI which are recognized in Other comprehensive income. If there is an impairment which results in foreign currency differences being recognized, these differences are reclassified from Other comprehensive income to the Consolidated statements of income.
All foreign exchange difference itemsdifferences are presented as part of Cost of sales, with the exception of tax items and financial income and expense, which are recognized in the same line item as they relate to in the Consolidated statements of income.
Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency using the exchange rate at the date the fair value was determined. Non-monetary items in a foreign currency that are measured based on historical cost are translated using the exchange rate at the transaction date.
Foreign operations
The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated to euros at the exchange rates prevailing at the reporting date. The income and expenses of foreign operations are translated to euros at the exchange rates prevailing at the dates of the transactions.
Foreign currency differences arising upon translation of foreign operations into euros are recognized in Other comprehensive income, and presented as part of Currency translation differences in Equity. However, if the operation is a non-wholly-owned subsidiary, the relevant proportionate share of the translation difference is allocated to Non-controlling interests.
When a foreign operation is disposed of such that control, significant influence or joint control is lost, the cumulative amount in the Currency translation differences related to the foreign operation is reclassified to the Consolidated 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 respective proportion of the cumulative amount is reattributed to Non-controlling interests. When the company disposes of only part of its investment in an associate or joint venture that includes a foreign operation while retaining significant influence or joint control, the relevant proportion of the cumulative amount is reclassified to the Consolidated statements of income.
Financial instruments
Non-derivative financial assets
Recognition and initial measurement
Non-derivative financial assets are recognized when the company becomes a party to the contractual provisions of the instrument. Purchases and sales of financial assets in the normal course of business are accounted for at the trade date. Dividend and interest income are recognized when earned. Gains or losses, if any, are recorded in Financial income and expense. Non-derivative financial assets are derecognized when the rights to receive cash flows from the asset have expired or the company has transferred its rights to receive cash flows from the asset.
At initial recognition, the company measures a financial asset at its fair value plus, in the case of a financial asset not measured at FVTPL,fair value through profit or loss (FVTPL), transaction costs that are directly attributable to the acquisition of the financial asset. Transaction costs of financial assets carried at FVTPL are expensed in the Consolidated statements of income.
Classification and subsequent measurement
The company classifies its non-derivative financial assets in the following measurement categories:
- those that are measured subsequently at fair value (either through OCI (FVTOCI) or profit or loss (FVTPL)
); - those that are measured at amortized cost.
In assessing the classification, the company considers the business model for managing the financial assets and the contractual terms of the cash flows.
For assets measured at fair value, gains and losses will be recorded in either the Consolidated statements of income or in Other comprehensive income (OCI). For investments in equity instruments that are not held for trading, this will depend on whether the company has made an irrevocable election at the time of initial recognition to account for the equity investment at FVTOCI. For investments in these equity instruments, the company does not subsequently reclassify between FVTOCI and FVTPL. For debt investments, assets are reclassified between FVTOCI, FVTPL and amortized cost only when its business model for managing those assets changes.
Non-derivative financial assets comprise cash and cash equivalents, receivables and other financial assets.
Cash and cash equivalents
Cash and cash equivalents include all cash balances, certain money market funds and short-term highly liquid investments with an original maturity of three months or less that are readily convertible into known amounts of cash. Further information on cash and cash equivalents can be found in Cash flow statement supplementary information.
Receivables
Receivable balances that are held to collect are subsequently measured at amortized cost and are subject to impairment as explained in the impairment section of this note. Receivables that are held to collect and sell are subsequently measured at FVTOCI and are also subject to impairment. The company derecognizes receivables on entering into factoring transactions if the company has transferred substantially all risks and rewards or if the company does not retain control over those receivables. Further information on receivables can be found in Receivables.
Other (non-)current financial assets
Other (non-)current financial assets include both debt instruments and equity instruments.
Debt instruments include those subsequently carried at amortized cost, those carried at FVTPL and those carried at FVTOCI. Classification depends on the company’s business model for managing the asset and the cash flow characteristics of the asset.
Debt instruments that are held for collection of contractual cash flows, where those cash flows represent solely payments of principal and interest, are measured at amortized cost and are subject to impairment. Interest income from these financial assets is included in Financial income using the effective interest rate method. Financial assets with embedded derivatives are considered in their entirety when determining whether their cash flows are solely payment of principal and interest.
Debt instruments that are held for collection of contractual cash flows and for selling the financial assets, where the assets’ cash flows represent solely payments of principal and interest, are measured at FVTOCI and are subject to impairment. Movements in the carrying amounts are taken through OCI, except for the recognition of impairment gains or losses, interest revenue and foreign exchange gains and losses, which are recognized in the Consolidated statements of income. When the financial asset is derecognized, the cumulative gain or loss previously recognized in OCI is reclassified from equity to the Consolidated statements of income. Interest income from these financial assets is included in Financial income using the effective interest rate method.
Debt instruments that do not meet the criteria for amortized cost or FVTOCI are measured at FVTPL. A gain or loss on a debt investment that is subsequently measured at FVTPL is recognized in the Consolidated statements of income in the period in which it arises.
Equity investments are subsequently measured at fair value. Equity instruments that are held for trading are measured at FVTPL. For equity instruments that are not held for trading, the company makes an irrevocable election at the time of initial recognition whether to account for the equity investment at FVTPL or FVTOCI. Where management has elected to present fair value gains and losses on equity investments in OCI, there is no subsequent reclassification of fair value gains and losses to the Consolidated statements of income following the derecognition of the investment. Dividends from such investments continue to be recognized in the Consolidated statements of income when the company’s right to receive payments is established.
Further information on other (non-)current financial assets can be found in Other financial assets
Debt and other financial liabilities
Debt and other financial liabilities, excluding derivative financial liabilities and provisions, are initially measured at fair value and, in the case of debt and payables, net of directly attributable transaction costs. Debt and other financial liabilities are subsequently measured at amortized cost using the effective interest rate. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the effective interest rate.
Debt and other financial liabilities are derecognized when the obligation under the liability is discharged, cancelled or has expired.
Further information on debt and other financial liabilities can be found in Debt.
Equity
Common shares are classified as equity. Incremental costs directly attributable to the issuance of shares are recognized as a deduction from equity. Where the company purchases the company’s equity share capital (treasury shares), the consideration paid, including any directly attributable incremental transaction costs (net of income taxes), is deducted from equity attributable to the company’s equity holders until the shares are cancelled or reissued. Where such ordinary shares are subsequently reissued, any consideration received, net of any directly attributable incremental transaction costs and the related income tax effects, is included in equity attributable to the company’s equity holders.
Call options on own shares are treated as equity instruments.
Dividends are recognized as a liability in the period in which they are declared and approved by shareholders. The income tax consequences of dividends are recognized when a liability to pay the dividend is recognized.
Further information on equity can be found in Equity.
Derivative financial instruments, including hedge accounting
The company uses derivative financial instruments principally to manage its foreign currency risks and, to a more limited extent, interest rate and commodity price risks. All derivative financial instruments are accounted for at the trade date and classified as current or non-current assets or liabilities based on the maturity date or the early termination date. The company measures all derivative financial instruments at fair value that is derived from the market prices of the instruments, calculated on the basis of the present value of the estimated future cash flows based on observable interest yield curves, basis spread, credit spreads and foreign exchange rates, or derived from option pricing models, as appropriate. Gains or losses arising from changes in fair value of derivatives are recognized in the Consolidated statements 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 foreign exchange forward contracts attributable to forward points and changes in the time value of the option contracts are deferred in the cash flow hedges reserve within equity. The deferred amounts are recognized in the Consolidated statements of income against the related hedged transaction when it occurs.
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 OCI until the Consolidated statements of income are 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 Consolidated statements 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 Consolidated balance sheets at its fair value, and gains and losses that were accumulated in OCI are recognized immediately in the same line item as they relate to in the Consolidated statements of income.
Foreign currency differences arising upon retranslation of financial instruments designated as a hedge of a net investment in a foreign operation are recognized directly in the currency translation differences reserve through OCI, to the extent that the hedge is effective. To the extent that the hedge is ineffective, such differences are recognized in the Consolidated statements of income.
Offsetting and master netting agreements
The company presents financial assets and financial liabilities on a gross basis as separate line items in the Consolidated balance sheets.
Master netting agreements may be entered into when the company undertakes a number of financial instrument transactions with a single counterparty.
Such an agreement provides for a net settlement of all financial instruments covered by the agreement in the event of default or certain termination events associated with any of the transactions. A master netting agreement may create a right to offset that becomes enforceable and affects the realization or settlement of individual financial assets and financial liabilities only following a specified termination event. However, if this contractual right is subject to certain limitations then it does not necessarily provide a basis for offsetting, unless both of the offsetting criteria are met, i.e. there is a legally enforceable right and an intention to settle net or simultaneously.
Property, plant and equipment
The costs of property, plant and equipment comprise all directly attributable costs (including the cost of material and direct labor).
Depreciation is generally calculated using the straight-line method over the useful life of the asset. Gains and losses on the sale of property, plant and equipment are included in Other Business Income.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 leaseholdLeasehold 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 in Other Business Income, in the Consolidated statements of income.
Further information on property, plant and equipment can be found in Property, plant and equipment.
Leases
The company determines whether an arrangement constitutes or contains a lease at inception, which is based on the substance of the arrangement at the inception of the lease. The arrangement constitutes or contains a lease if fulfillment is dependent on the use of a specific asset and the arrangement conveys a right to use the asset, even if that asset is not explicitly specified in the arrangement.
Company as a lessee
Leases inare recognized as a right-of-use asset and a corresponding liability at the date at which the companyleased asset is available for use by the lessee and has substantially allcompany. The right-of-use asset is depreciated over the risks and rewards of ownership are classified as finance leases. Finance leases are capitalized at the commencementshorter of the asset's useful life and the lease atterm on a straight-line basis.
Assets and liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the lower of the fair value of the leased assets or thenet present value of the minimumfollowing lease payments. payments:
- fixed payments (including in-substance fixed payments) less any lease incentives receivable;
- variable lease payments that are based on an index or a rate;
- amounts expected to be payable by the lessee under residual value guarantees;
- the exercise price of a purchase option if the lessee is reasonably certain to exercise that option;
- payments of penalties for terminating the lease, if the lease term reflects the lessee exercising that option.
The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be determined, the lessee’s incremental borrowing rate at the lease commencement date is used, which is based on an assessment of interest rates the company would have to pay to borrow funds, including the consideration of factors such as the nature of the asset and location, collateral, market terms and conditions, as applicable. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made.
Each lease payment is allocated between the liability and finance charges. The interest element of the finance cost is charged to the Consolidated statements 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. In addition, the carrying amount of lease liabilities is remeasured if there is a modification, a change in the lease term, a change in the in-substance fixed lease payments or a change in the assessment to purchase the underlying asset.
Right-of-use assets are measured at cost comprising the following:
- the amount of the initial measurement of lease liability;
- any lease payments made at or before the commencement date less any lease incentives received;
- any initial direct costs;
- restoration costs.
The corresponding rental obligations, netright-of-use assets are subsequently accounted for using principles for property, plant and equipment. Payments associated with short-term leases and leases of finance charges,low-value assets are includedrecognized on a straight-line basis as an expense in other short-termthe Consolidated statements of income. Short-term leases are leases with a lease term of 12 months or less. Low-value assets comprise IT-equipment and small items of office furniture considered to be of low value (i.e. less than EUR 5,000).
The company determines the lease term as the non-cancellable term of the lease, together with any periods covered by an option to extend the lease if it is reasonably certain to be exercised, or any periods covered by an option to terminate the lease, if it is reasonably certain not to be exercised. The company applies judgement in evaluating whether it is reasonably certain to exercise the option to renew. That is, it considers all relevant factors that create an economic incentive for it to exercise the renewal.
The company leases various items of real estate, vehicles and other non-current liabilities.equipment. Rental contracts are typically made for fixed periods but may have extension or termination options.
The related year end disclosures pertaining to leases as lessee have been disclosed in respective notes according to the nature of the reported item. Below are the references with respect to IFRS 16 year-end disclosures as lessee:
Company as a lessor
When the company acts as a lessor, it determines at lease inception whether a lease is a finance lease or an operating lease. Leases in which the company is the lessee and in whichdoes not transfer substantially all the risks and rewards incidental to ownership of ownership are retained by the lessoran asset are classified as operating leases. Payments madeThe company recognizes lease payments received under operating leases (net of any incentives received from the lessor) are recognized in the Consolidated statements ofas income on a straight-line basis over the termlease terms in the Statement of income.
The related year end disclosures pertaining to leases as lessor have been disclosed in respective notes according to the nature of the lease.reported item. Below are the references with respect to IFRS 16 year-end disclosures as lessor:
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 sales in the recent past and/or expected future demand.
Further information on inventories can be found in Inventories.
Employee benefit accounting
A defined-contribution plan is a post-employment benefit plan under which an entity pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined-contribution pension plans are recognized as an employee benefit expense in the Consolidated statements of income in the periods during which services are rendered by employees.
A defined-benefit plan is a post-employment benefit plan other than a defined-contribution plan. Plans for which the company has no legal or constructive obligation to pay further amounts, but to which it does pay non-fixed contributions, are also treated as a defined-benefit plan. The net pension asset or liability recognized in the Consolidated balance sheets in respect of defined-benefit post-employment plans is the fair value of plan assets less the present value of the projected defined-benefit obligation at the Consolidated balance sheets date. The defined-benefit obligation is calculated annually by qualified actuaries using the projected unit credit method. Recognized assets are limited to the present value of any reductions in future contributions or any future refunds. The net pension liability is presented as a long-term provision; no distinction is made for the short-term portion.
For the company’s major plans, a full discount rate curve of high-quality corporate bonds is used to determine the defined-benefit obligation.defined benefit obligation, where available. The curves are based on Willis Towers Watson’s ratethe Mercer Yield Curve methodology, which uses data of corporate bonds rated AA or equivalent. For the other plans a single-point discount rate isthe Mercer Yield Curve/Mercer Methodology has also been used based on corporate bonds for whichtaking into account the cash flows as much as possible in case there is a deep market and on the plan’s maturity. Plansin corporate bonds. For plans in countries without a deep corporate bond market, use athe discount rate is based on the local sovereign curvegovernment bonds and the plan’s maturity.
Pension costs in respect of defined-benefit post-employment plans primarily represent the increase of the actuarial present value of the obligation for post-employment benefits based on employee service during the year and the interest on the net recognized asset or liability in respect of employee service in previous years.
Remeasurements of the net defined-benefit asset or liability comprise actuarial gains and losses, the return on plan assets (excluding interest) and the effect of the asset ceiling (excluding interest). The company recognizes all remeasurements in Other comprehensive income.
The company recognizes gains and losses on the settlement of a defined-benefit plan when the settlement occurs. The gain or loss on settlement is the difference between the present value of the defined-benefit obligation being settled, as determined on the date of settlement, and the settlement price, including any plan assets transferred and any payments made directly by the company in connection with the settlement. In this respect, the amount of the plan assets transferred is adjusted for the effect of the asset ceiling. Past service costs arising from the introduction of a change to the benefit payable under a plan or a significant reduction of the number of employees covered by a plan (curtailment) are recognized in full in the Consolidated statements of income.
Further information on post-employment benefit accounting can be found in Post-employment benefits.
Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. The company recognizes a liability and an expense for bonuses and incentives based on a formula that takes into consideration the profit attributable to the company’s shareholders after certain adjustments.
The company’s net obligation in respect of long-term employee benefits is the amount of future benefit that employees have earned in return for their service in the current and prior periods, such as jubilee entitlements. That benefit is discounted to determine its present value. Remeasurements are recognized in the Consolidated statements of income in the period in which they arise.
Further information on other employee benefits can be found in Provisions in the Other provisions section.
Share-based payment
Equity-settled transactions
The cost of equity-settled transactions is determined by the fair value at the date when the grant is made using an appropriate valuation model, further details of which are given in Share-based compensation.
The grant-date fair value of equity-settled share-based payment awards granted to employees is recognized as personnel expense, with a corresponding increase in equity, over the vesting period of the award. The cumulative expense recognized for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the company’s best estimate of the number of equity instruments that will ultimately vest. The expense or credit in the statement of profit or lossincome for a period represents the movement in cumulative expense recognized at the beginning and end of that period.
Service and non-market performance conditions are not taken into account when determining the grant-date fair value of awards, but the likelihood of the conditions being met is assessed as part of the company’s best estimate of the number of equity instruments that will ultimately vest. Market performance conditions are reflected within the grant-date fair value. No expense is recognized for awards that do not ultimately vest because non-market performance and/or service conditions have not been met.
When an award is cancelled by the entity or by the counterparty, any remaining element of the fair value of the award is expensed immediately through profit or loss. The dilutive effect of outstanding options and shares is reflected as additional share dilution in the computation of diluted earnings per share (further details are given in Earnings per share).
Financial income and expenses
Financial income comprises interest income on funds invested (including financial assets), dividend income, net gains on the disposal of financial assets, net fair value gains on financial assets at fair value through profit or loss,FVTPL, net gains on the remeasurement to fair value of any pre-existing interest in an acquiree, and net gains on foreign exchange impacts that are recognized in the Consolidated statements of income.
Interest income is recognized on an accrual basis in the Consolidated statements of income, using the effective interest method. Dividend income is recognized in the Consolidated statements of income on the date that the company’s right to receive payment is established, which in the case of quoted securities is normally the ex-dividend date.
Financial expenses comprise interest expenses on borrowings, unwinding of the discount on provisions and contingent consideration, losses on disposal of financial assets, net fair value losses on financial assets at fair value through profit or loss,FVTPL, impairment losses recognized on financial assets (other than trade receivables), net interest expenses related to defined-benefit plans, interest on lease liabilities and net losses on foreign exchange impacts that are recognized in the Consolidated statements of income.
Further information on financial income and expenses can be found in Financial income and expenses.
Government grants
Grants from governments 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 Consolidated statements of income as a reduction of the related costs over the period necessary to match them with the costs that they are intended to compensate. Grants related to assets are deducted from the cost of the asset and presented net in the Consolidated balance sheets.
Financial guarantees
The company recognizes a liability at the fair value of the obligation at the inception of a financial guarantee contract if it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation.contract. The guarantee is subsequently measured at the higher of the best estimate of the obligation or the amount initially recognized less, when appropriate, cumulative amortization.
Cash flow statements
Cash flows arising from transactions in a foreign currency are translated into the company’s functional currency using the exchange rate at the date of the cash flow. Cash flows from derivative instruments that are accounted for as cash flow hedges are classified in the same category as the cash flows from the hedged items. Cash flows from other derivative instruments are classified as investing cash flows.
Segment information
Operating segments are components of the company’s business activities about which separate financial information is available that is evaluated regularly by the chief operating decision maker (the Executive Committee of the company). The Executive Committee decides how to allocate resources and assesses performance. Reportable segments comprise the operating segments Diagnosis & Treatment businesses, Connected Care & Health Informatics businesses and Personal Health businesses and Other.businesses. Additionally, besides these reportable segments, segment Other exists. Segment accounting policies are the same as the accounting policies applied by the company.
Earnings per Share
The company presents basic and diluted earnings per share (EPS) data for its common shares. Basic EPS is calculated by dividing the Net income (loss) attributable to shareholders by the weighted average number of common shares outstanding during the period, adjusted for own shares held. Diluted EPS is determined by adjusting the Net income (loss) attributable to shareholders and the weighted average number of common shares outstanding during the period, adjusted for own shares held, for the effects of all dilutive potential common shares, which comprises forward purchase contracts, restricted shares, performance shares and share options granted to employees.
Further information on earnings per share can be found in Earnings per share.
New standards and interpretations
IFRS accounting standards adopted as from 2018
2021The company applies, for the first time, certain standards and amendments, which are effective for annual periods beginning on or after January 1, 2021.
2020-8 Amendments to IFRS 15 Revenue from Contracts with Customers9, IAS 39, IFRS 7, IFRS 4 and IFRS 9 Financial instruments. 16 - Interest Rate Benchmark Reform – Phase 2
The impactamendments provide temporary reliefs which address the financial reporting effects when an interbank offered rate (IBOR) is replaced with an alternative nearly risk-free interest rate (RFR). The amendments include the following practical expedients:
- A practical expedient to require contractual changes, or changes to cash flows that are directly required by the reform, to be treated as changes to a floating interest rate, equivalent to a movement in a market rate of interest
- Permit changes required by IBOR reform to be made to hedge designations and hedge documentation without the
adoptionhedging relationship being discontinued - Provide temporary relief to entities from having to meet the separately identifiable requirement when an RFR instrument is designated as a hedge of
these new standards is disclosed below. Othera risk component
These amendments and interpretations applied for the first time in 2018, but did not have ahad no material impact on the consolidated financial statements of the company. The status of the IBOR transition project and the exposure to IBOR have been disclosed in Details of treasury and other financial risks.
Impact2021-3 Amendments to IFRS 16 Leases – Covid-19 related rent concessions beyond June 30, 2021
On May 28, 2020, the IASB issued Covid-19-Related Rent Concessions - amendment to IFRS 16 Leases The amendments provide relief to lessees from applying IFRS 16 guidance on lease modification accounting for rent concessions arising as a direct consequence of the financial statements
As explained below, IFRS 15 was adopted using the modified retrospective approach and IFRS 9 was adopted retrospectively with the exception of certain aspects of hedge accounting.Covid-19 pandemic. As a result,practical expedient, a lessee may elect not to assess whether a Covid-19 related rent concession from a lessor is a lease modification. A lessee that makes this election accounts for IFRS 15 the reclassifications and adjustments arisingany change in lease payments resulting from the changes inCovid-19 related rent concession the company’s accounting policies are not reflected in a restated Consolidated balance sheets as at December 31, 2017, but are recognized insame way it would account for the opening Consolidated balance sheets on January 1, 2018. Forchange under IFRS 9,16, if the company has taken an exemption not to restate comparative information for prior periods with respect to classification and measurement requirements. Accordingly, the information presented for 2017 does not generally reflect the requirements of IFRS 9 but rather those of IAS 39.
The following tables show the adjustments recognized for each individual Consolidated balance sheets caption. Consolidated balance sheets captions thatchange were not affected bya lease modification. The amendment was intended to apply until June 30, 2021, but as the changes have not been included. The adjustments, by standard, are explained in more detail below.
Balance sheet presentation impact of IFRS 15 adoption
in millionsthe Covid-19 pandemic is continuing, on March 31, 2021, the IASB extended the period of EUR
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1The amounts in relation to the IFRS 15 presentation change have been reclassified to conform to the 31 December 2018 Consolidated balance sheets classification.
2Opening balance sheet after IFRS 15 presentation change.
Balance sheet impact of IFRS 9 and IFRS 15 adoption
in millions of EUR
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1Opening balance sheet after IFRS 15 presentation change, before other IFRS 15 and IFRS 9 adjustments.
The impact on Retained earnings is as follows:
Retained earnings impact of IFRS 9 and IFRS 15 adoption
in millions of EUR
Retained earnings as of December 31, 2017
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Cost of obtaining a contract
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Royalty income - deferred revenue
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Investments in associates
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Transfer from financial assets fair value through OCI reserve
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Opening balance Retained earnings as of January 1, 2018
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The above adjustments are based on the company’s finalized assessments, which do not materially differ from the amounts disclosed in the Annual Report 2017.
IFRS 9 Financial Instruments - impact of adoption
IFRS 9 Financial Instruments brings together the classification and measurement, impairment and hedge accounting phasesapplication of the IASB’s projectpractical expedient to replace IAS 39 Financial Instruments: Recognition and Measurement. With the exception of certain aspects of hedge accounting, which the company applied prospectively, the company has applied IFRS 9 retrospectively, with the initial application date of JanuaryJune 30, 2022.The amendment applies to annual reporting periods beginning on or after April 1, 2018, and with the practical expedients permitted under the standard. In accordance with the transitional provisions included in IFRS 9, comparatives have not been restated.
As a result of the adoption of IFRS 9, certain financial assets amounting to EUR 77 million were reclassified from measurement at fair value through other comprehensive income (FVTOCI) to fair value through profit or loss (FVTPL). The related fair value gains of EUR 4 million were transferred from the fair value through OCI reserve to retained earnings as per January 1, 2018. In addition, EUR 47 million of factored trade receivables were transferred from measurement at amortized cost to measurement at FVTOCI. The adoption of IFRS 9 did not result in any further2021. This amendment had no material impact on the Consolidated balance sheets, Consolidatedconsolidated financial statements of income, Consolidated statements of comprehensive income or the basic and diluted EPS. The effect of the adoption of IFRS 9 on the Consolidated balance sheets and retained earnings is disclosed above.company.
Classification and measurement
As per January 1, 2018, the company assessed which business models apply to the financial assets held by the company and has classified its financial instruments into the appropriate IFRS 9 categories. The main effects resulting from this reclassification on the company’s other non-current financial assets are as follows:
Impact of IFRS 9 on other non-current financial assets
in millions of EUR
Other non-current financial assets | | | Held-to-maturity investments | | |
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Closing balance as of December 31, 2017 - IAS 39 | | | | | |
Reclassify investments from available-for-sale to FVTPL | | | | | |
Reclassify held-to-maturity investments to amortized cost | | | | | |
Opening balance as of January 1, 2018 - IFRS 9 | | | | | |
1Previously reported as available-for-sale financial assets
2Previously reported as loans and receivables.
Certain investments previously accounted for as available-for-sale financial assets (FVTOCI) do not meet the IFRS 9 criteria for classification at FVTOCI or amortized cost, because their cash flows do not represent solely payments of principal and interest, and are therefore measured at FVTPL under IFRS 9. Related fair value gains of EUR 4 million were transferred from the fair value through OCI reserve to retained earnings on January 1, 2018. During 2018, net fair value losses of EUR 3 million relating to these investments were recognized in the Consolidated statements of income.
The investments previously accounted for as held-to-maturity financial assets continue to be measured at amortized cost under IFRS 9.
In addition to the impact on the classification of Other non-current financial assets, IFRS 9 impacted the classification of certain trade receivables which are part of Current receivables. The business model for factored trade receivables, amounting to EUR 47 million, is to collect and sell, and hence under IFRS 9 these financial assets were reclassified from assets measured at amortized cost to assets measured at FVTOCI.
Hedge accounting
The company completed updates to its internal documentation and monitoring processes and concluded that all existing hedge relationships previously designated as effective hedging relationships continued to qualify for hedge accounting under IFRS 9. The impact of changes in fair value of foreign exchange forward contracts attributable to forward points and changes in the time value of the option contracts, which under IFRS 9 are deferred in the cash flow hedges reserve within equity, is not material. As at December 31, 2018, a loss of EUR 6 million was included in the cash flow hedges reserve in relation to these changes in fair value of foreign exchange forward contracts attributable to forward points and changes in the time value of the option contracts.
Impairment of financial assets
The company revised its impairment methodology under IFRS 9 for each of its classes of assets that are subject to the IFRS 9 expected credit loss model.
Trade receivables, contract assets and lease receivables
The company applies the IFRS 9 simplified approach in measuring expected credit losses, which uses a lifetime expected loss allowance for all trade receivables, contract assets and lease receivables. The company did not identify a material increase in the loss allowance for trade receivables, contract assets and lease receivables as a result of the adoption.
Debt investments
All of the company’s other debt investments at amortized cost and FVTOCI are considered to have low credit risk, and the loss allowance recognized during the period was therefore limited to 12 months expected losses. The company considers ‘low credit risk’ for listed bonds to be an investment-grade credit rating with at least one major rating agency. Other instruments are considered to be low credit risk when they have a low risk of default and the issuer has a strong capacity to meet its contractual cash flow obligations in the near term. The restatement of the loss allowance for debt investments at amortized cost and FVTOCI on transition to IFRS 9 as a result of applying the expected credit risk model was immaterial.
While Cash and cash equivalents are also subject to the impairment requirements of IFRS 9, the identified impairment loss was immaterial.
IFRS 15 Revenue from Contracts with Customers - impact of adoption
The company has adopted IFRS 15 Revenue from Contracts with Customers from January 1, 2018, using the modified retrospective approach and has adjusted the cumulative impact of adoption in opening retained earnings as of January 1, 2018. Accordingly, comparatives have not been restated. The standard has only been applied to contracts that were not completed by January 1, 2018. The effect of adoption of IFRS 15 on the Consolidated balance sheets and retained earnings is disclosed above.
During 2018, EUR 18,121 million of revenues were recognized under IFRS 15. If IAS 18 had been applied during this period, revenues would have amounted to EUR 18,070 million. The difference relates to the timing of revenue recognition on IP Royalties, as explained below. The impact of the accounting on the costs of obtaining a contract, as also explained below, did not materially affect 2018 results under IFRS 15 compared to IAS 18.
Costs of obtaining a contract
Under IFRS 15, the incremental costs of obtaining a contract with a customer are recognized as an asset if the entity expects to recover them. The company identified that certain sales commissions paid to third parties and internal employees that are typical of transactions in the segments Diagnosis & Treatment and Connected Care & Health Informatics qualify as incremental costs of obtaining a contract. These costs were mostly paid and capitalized as prepayment upon issuance of sales orders and recognition of revenue related to the sale of goods or rendering of services. Such costs were commonly expensed in line with the revenue recognition pattern of the related goods or services. Due to these sales commissions being largely amortized within a year, the company decided to adopt the practical expedient of expensing sales commissions when incurred.
An impact of EUR 75 million was recorded as a retained earnings decrease in equity originating from the asset derecognition upon transition, and a net deferred tax benefit of EUR 17 million was recorded through retained earnings as a consequence. The net impact in equity was EUR 57 million.
Royalty income
In prior years, the company recognized revenue from intellectual property (IP) royalties, which is normally generated based on a percentage of sales or a fixed amount per product sold, on an accrual basis based on actual or reliably estimated sales made by the licensees. Revenue generated from an agreement with lump-sum consideration was recognized over time based on the contractual terms and substance of the relevant agreement with a licensee. In 2018, under IFRS 15, revenues from the licensing of intellectual property were recognized based on a right to access the intellectual property or a right to use the intellectual property. Under the first option, revenue is recognized over time while under the second option revenue is recognized at a point in time. As a result, this had an impact on revenues originating from the company’s IP royalties with lump-sum considerations that are right-to-use licenses since under IFRS 15 such revenues are recognized in the Consolidated statements of income at an earlier point in time rather than over time, as under the previous methodology.
As a result, an amount of EUR 25 million of deferred revenue was recorded as an increase in retained earnings upon transition. Additionally, IP royalties related to an associate had a similar accounting impact; hence an amount of EUR 7 million was recorded as an increase in retained earnings upon transition. A total deferred tax asset of EUR 7 million was released as a consequence. The net impact in equity was EUR 27 million.
Presentation
The company has changed the presentation of certain amounts in the Consolidated balance sheets to reflect the terminology of IFRS 15. Contract liabilities are presented separately on the Consolidated balance sheets for its current and non-current portion and represent amounts posted in deferred revenue for which the goods or services have not yet been transferred to the customer and amounts have either been received or are due. They were part of Accrued liabilities and Other non-current liabilities as of December 31, 2017.
IFRS accounting standards to be adopted from 20192022 onwards
A number of new standards, amendments to existing standards and interpretations have been publishedissued and are mandatory for the company beginning on or after January 1, 2019,2022, or later periods, and the company has not early-adopted them. Those which may be the most relevantThe changes to the company are set out below. Changes to otherthose standards arising from amendments, interpretations and the annual improvement cycles, are not expected to have a material impact on the company’s financial statements.
IFRS 16 Leases
2COVID-19
IFRS 16 was issuedIn 2021 the pandemic continued to affect the global economy and there remains uncertainty and volatility related to the impact of COVID-19, including global supply chain challenges. Where relevant, the impact of the COVID-19 pandemic and resulting uncertainties on the company’s results, balance sheet and cash flows have been considered and are reflected in January 2016amounts reported.
The impact of the pandemic on significant accounting matters is disclosed below. Other areas have also been affected, but did not have a significant impact and is endorsed by the EU. It will supersede IAS 17 Leases and a number of lease-related interpretations and willare therefore not separately disclosed. COVID-19 did not result in almost all leases being recognizedany other material adjustments to the carrying amounts of assets and liabilities during the year-ended December 31, 2021, other than the impacts on the Consolidated balance sheets,EPD business as the distinction between operatingdisclosed in Intangible assets excluding goodwill and finance leases is removed for lessees. Under the new standard, both an asset (the right to use the leased item)Provisions.
Estimates and a financial liability to pay rentals are recognized. The only exceptions are short-term and low-value leases. The accounting for lessors will not change significantly for the company.
uncertainties
As ata result of the reporting date,uncertainties associated with the nature of the COVID-19 pandemic, and in line with existing accounting policies, the company has identified non-cancellable operating lease commitmentsregularly updates its significant assumptions and estimates to support the reported amounts of approximately EUR 870 million (undiscounted)assets, liabilities, income and expenses. In relation to areas of judgment and estimates as disclosed in our Significant accounting policies, those which are relevantprimarily impacted by COVID-19 include impairment testing, valuation of inventories, measurement of financial instruments and the determination of fair values (for example fair values of acquired identifiable intangible assets, contingent considerations and certain investments). These significant judgments and estimates are further discussed below.
Impairment testing
Impairment testing of goodwill and intangible assets not ready for IFRS 16 adoption. The company expectsuse
Goodwill and intangible assets not yet ready for use are not amortized but are tested for impairment annually and whenever impairment indicators require such testing. In addition, for all goodwill and intangible assets not yet ready for use an annual impairment test was performed during 2021. In determining the recoverable amounts, consideration was given to recognize right-of-usethe uncertainties embedded in the discounted cash flow projections and the appropriateness of key assumptions used in light of the pandemic, which included increased uncertainties around forecasted revenues, costs and other factors. Further details on these impairment procedures and the results thereof are disclosed in Goodwill and Intangible assets excluding goodwill.
Impairment testing of approximately EUR 760 million from the identified operating lease commitments, a discounted lease liability of approximately EUR 800 millionnon-financial assets other than goodwill, intangible assets not yet ready for use, inventories and deferred tax assets
Non-financial assets other than goodwill, intangible assets not yet ready for use, inventories and deferred tax assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of approximately EUR 5 millionan asset may not be recoverable. Where such an instance was identified, the impact of the pandemic and resulting uncertainties have been taken into account when assessing the recoverable amount. Further details on January 1, 2019.the results of these impairment procedures are disclosed in Intangible assets excluding goodwill.
Impairment testing of financial assets
The company recognizes an allowance for expected credit losses (ECLs) for trade receivables, contract assets, lease receivables and debt investments carried at fair value through Other comprehensive income (FVTOCI) and amortized cost. In line with the accounting policy disclosed in the Significant accounting policies, for all financial assets to which the company applies the simplified approach, updated assessments on the lifetime ECL allowance are made regularly, taking into the account uncertainties resulting from the pandemic. In addition, for those assets to which the existing finance leasecompany does not apply the simplified approach to measuring ECLs, assessments were made regularly to assess whether a significant increase in credit risk was observed as a result of COVID-19. In those instances, the allowance was updated to also reflect lifetime ECLs.
In making these assessments, all reasonable and supportable information was considered. Examples of indicators identified included counterparties breaching their agreed payment terms and counterparties requesting extended payment terms or (partial) waivers. In addition, forward looking elements were taken into consideration such as a deterioration of the credit rating of a counterparty or changes in risks associated with specific countries or regions due to COVID-19. Albeit the methodology applied is consistent with prior periods, certain of these factors triggered by the pandemic required updated assessments of the ECLs. Relevant financial assets were individually assessed and additional ECL allowances were accounted for in those cases where deemed necessary. The overall impact of the increase in the level of ECLs did not have a material impact on the company’s financial assets. The company further concluded that none of the agreed changes with counterparties resulted in a substantial modification of such instruments under IFRS 9 Financial instruments.
Fair values
Certain of the company’s financial instruments and other assets and liabilities determined as per IAS 17 with a carrying value of approximately EUR 330 million each asare carried at December 31, 2018 will be reclassifiedfair value. The fair values included in these Consolidated financial statements reflect market participant views and addedmarket data at the measurement date under current market conditions. This implies that due to the right-of-use assetincreased volatility and lease liability determined as per IFRS 16 on January 1, 2019.
Ifuncertainty in the lease portfolio and other parameters remain similar during the year 2019 comparedfinancial markets due to the status per January 1, 2019, then the impact of IFRS 16 on Income from operations is not expectedpandemic, these fair values are subject to be material as the increasesignificant estimates, in depreciationparticular for assets and financial expense would be largely offset by the decrease in operating lease expense. Similarly, in 2019 operating cash flows are expected to increase and financing cash flows decrease by approximately EUR 150 million as repayment of the principal portion of the lease liabilities will be classified as cash flows from financing activities, while previously the operating lease payments were classified as cash flows from operating activities.
The company will adopt the standard as of January 1, 2019. Philips will apply the modified retrospective approach. Therefore, the cumulative effect of adopting IFRS 16 of approximately EUR 35 million will be recognized as an adjustment to the opening balance of retained earnings on January 1, 2019, with no restatement of comparative information. The company will elect to apply the standard to contracts that were previously identified as leases applying IAS 17 and IFRIC 4. The company will therefore not apply the new standard to contracts that were not previously identified as containing a lease applying IAS 17 and IFRIC 4. The company will elect to use the exemptions proposed by the standard on lease contracts for which the lease terms ends within 12 monthsfair value is based on unobservable inputs (sometimes referred to as Level 3 measurements). Expectations around future cash flows, discount rates and other significant valuation inputs related to the asset or liability as of December 31, 2021 have become subject to a greater level of uncertainty. The fair values determined taking into account these revised input parameters have been reflected in the dateconsolidated balance sheet as of initial applicationDecember 31, 2021. Other than the impacts on the EPD business as disclosed in Intangible assets excluding goodwill, starting on page 186 and leaseProvisions, there was no significant impact as a result of the pandemic on any individual assets or liabilities carried at fair value. For further information, refer to Fair value of financial assets and liabilities.
Employee benefit accounting
COVID-19 also had an impact on the company’s long-term employee benefits, including defined-benefit plans. Volatility in the financial markets following the COVID-19 outbreak resulted in increased judgment being required in setting key parameters used in determining these benefits, including discount rates, mortality rates, retention rates and other assumptions supporting the actuarial calculations. In those situations, we established the most appropriate parameters with the help of actuaries and taking into consideration relevant economic conditions. For our funded defined-benefit plans, increased fluctuations in the fair values of the plan assets during the financial year ended December 31, 2021 also caused further volatility in the net obligation. Neither of these impacts were significant for the balances as of December 31, 2021.
Provisions other than employee benefits
As described in the Significant accounting policies, the accounting for provisions requires significant judgment around the amount and timing of the outflow of economic benefits required to settle the obligation. As a result of the pandemic, volatility increased in our supplier commitments and customer demand for many of our businesses, requiring the company to assess its related contracts for onerous elements. In doing so, the company applied assumptions and estimates in relation to future demand forecasts, expected costs of termination and the likely outcomes of ongoing negotiations with suppliers. No other provisions were materially impacted by COVID-19.
Inventories
The company’s inventories are stated at the lower of cost or net realizable value. In determining the appropriate level of provision for obsolescence, changes in the aging of inventory items in certain businesses and markets due to COVID-19 were considered throughout the year. In addition, current and potential excess stock levels were analyzed, incorporating the impact COVID-19 had on demand in 2021 as well as revised expectations of future demand for these items. No material change in the provision for obsolescence was identified as a result of these procedures.
Taxes
In response to COVID-19, many governments have changed tax regulations aimed at deferring tax filings and payments, providing tax relief and offering financial assistance. Apart from applied payment deferrals on social contribution payments, the company has no material payment deferrals. In determining the recoverability of deferred tax assets, the company took into account the uncertainties caused by the COVID-19 pandemic in its projections on the results of future operations that will generate taxable income, which did not result in a significant impact.
Treasury and other financial risks
In terms of liquidity the underlying assetcompany has a solid liquidity position and the company’s liquidity risk management procedures have not changed significantly during 2021 because of COVID-19. No significant concentration risks have been identified as a result of COVID-19 and the company continues to have access to its existing lines of credit. These lines of credits, along with other financial risks to which Philips is exposed, are disclosed in Details of low value. The company will relytreasury and other financial risks, starting on its assessment of whether leases are onerous applying IAS 37 Provisions, Contingent Liabilities and Contingent Assets and accordingly adjust its right-of-use asset.
page 219. In 2021, COVID-19 did not have a significant impact on other financial risks, including how we manage those.
3Information by segment and main country
Philips Group
Information on income statements
in millions of EUR unless otherwise stated
2016 - 2018
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| | | |
| | | | | |
Connected Care & Health Informatics | | | | | |
| 2021 | | |
| Diagnosis & Treatment4) | | 8,635 | 8,846 | (459) | 1,071 |
| Connected Care | | 4,593 | 4,638 | (384) | 488 |
| | | | | 3,410 | 3,441 | (130) | 599 |
| | | | | 519 | 610 | (350) | (105) |
Inter-segment eliminations | | | | | | (379) | |
| | | | 17,156 | (1,323) | 2,054 |
| | | |
| | | |
| 2020 | | |
| | | | | 8,175 | 8,289 | (536) | 818 |
Connected Care & Health Informatics | | | | | |
| Connected Care | | 5,568 | 5,644 | (415) | 1,198 |
| | | | | 3,173 | 3,172 | (144) | 426 |
| | | | | 396 | 479 | (368) | (165) |
Inter-segment eliminations | | | | | | (272) | |
| | | | 17,313 | (1,462) | 2,277 |
| | | |
| | | |
| 2019 | | |
| | | | | 8,485 | 8,576 | (564) | 1,078 |
Connected Care & Health Informatics | | | | | |
| Connected Care | | 4,674 | 4,705 | (326) | 620 |
| | | | | 3,516 | 3,511 | (140) | 672 |
| | | | | 472 | 556 | (313) | (100) |
Inter-segment eliminations | | | | | | (201) | |
| | | | 17,147 | (1,343) | 2,270 |
| | | |
22)Non-IFRS financial measure. For the definition and reconciliation of the most directly comparable IFRS measure, refer to Reconciliation of non-IFRS information.3)For reconciliation Adjusted EBITA, refer to the table below.following table.As required by IFRS 8 Operating Segments, Philips operating segments are Diagnosis & Treatment businesses, Connected Care & Health Informatics businesses and Personal Health businesses, each being responsible for the management of its business worldwide. Due toAs of the divestmentfirst quarter of 2021 the Domestic Appliances business is presented as discontinued operation and deconsolidation of businesses in 2017, Legacy Itemstherefore no longer require separate disclosure. Therefore, as from January 1, 2018, HealthTech Other and Legacy Items are combined into Other. Prior-period comparativespart of the Operating Segment Personal Health. The comparative results have been adjustedrestated to conform with current presentation. From 2017, Signify is reportedreflect the treatment of the Domestic Appliances business as part of Discontinued Operations (refer to note 3, Discontinued operations and assets classified as held for sale).a discontinued operation.
Philips focuses on improving people’s lives through meaningful innovation across the health continuum – from healthy living and prevention to diagnosis, treatment and home care. The Diagnosis & Treatment unites the businesses deliverrelated to the promise of precision medicinediagnosis and least-invasive treatmentdisease pathway selection, and therapythe businesses related to improve outcomes, lower the cost of care delivery and enhance the patient experience.image-guided, minimally invasive treatments. The Connected Care & Health Informatics businesses deliver digitalfocuses on patient care solutions, that facilitate value-basedadvanced analytics and patient and workflow optimization inside and outside the hospital, and aims to unlock synergies from integrating and optimizing patient care through consumer technology, patient monitoringpathways, and clinical informatics.leveraging provider-payer-patient business models. The Personal Health businesses deliver integrated, connected solutions that support healthier lifestylesfocuses on healthy living and those living with chronic disease.preventative care.
The Executive Committee of Philips is deemed to be the chief operating decision maker (CODM) for IFRS 8 segment reporting purposes. The key segmental performance measure is Adjusted EBITA*), which Management believes is the most relevant measure to evaluate the results of the segments.
The term Adjusted EBITA*) is used to evaluate the performance of Philips and its segments. EBITA*) represents Income from operations excluding amortization and impairment of acquired intangible assets and impairment of goodwill. Adjusted EBITA*) represents EBITA *)excluding gains or losses from restructuring costs, acquisition-related charges and other items.
Adjusted EBITA*) is not a recognized measure of financial performance under IFRS. BelowPresented in the following table is a reconciliation of Adjusted EBITA*) to the most directly comparable IFRS measure, Net income, for the years indicated. Net income is not allocated to segments as certain income and expense line items are monitored on a centralized basis, resulting in them being shown on a Philips Group level only.
Philips Group
Reconciliation from net income to Adjusted EBITA1)
In millions of EUR unless otherwise stated
2016 - 2018
| | | Connected Care & Health Informatics | | | Philips Group | Diagnosis & Treatment | Connected Care | Personal Health | Other |
|---|
| | | |
| 2021 | | | |
| | | | 3,323 | | |
Discontinued operations, net of income taxes | | | | (2,711) | | |
| | | | (103) | | |
Investments in associates, net of income taxes | | | | 4 | | |
| | | | 188 | | |
| | | | (149) | | |
| | | | | | 553 | 941 | (732) | 585 | (242) |
Amortization of intangible assets | | | | | | |
| Amortization and impairment of intangible assets | | 322 | 153 | 148 | 15 | 6 |
| | | | 15 | 2 | 13 | |
| | | | | | |
| EBITA1) | | 890 | 1,097 | (571) | 600 | (236) |
Restructuring and acquisition-related charges | | | | | | 95 | 7 | 93 | (1) | (5) |
| | | | | | 1,069 | (32) | 965 | - | 136 |
| | | | | | |
| Adjusted EBITA1) | | 2,054 | 1,071 | 488 | 599 | (105) |
| | | |
| | | |
| 2020 | | |
| | | | 1,195 | |
Discontinued operations, net of income taxes | | | | (196) | |
| | | | 212 | |
Investments in associates, net of income taxes | | | | 9 | |
| | | | 202 | |
| | | | (158) | |
| | | | | | 1,264 | 497 | 711 | 356 | (300) |
Amortization of intangible assets | | | | | | |
| Amortization and impairment of intangible assets | | 377 | 209 | 134 | 16 | 18 |
| | | | 144 | - | 144 | | |
| | | | | | |
| EBITA1) | | 1,784 | 706 | 989 | 371 | (282) |
Restructuring and acquisition-related charges | | | | | | 195 | 29 | 97 | 31 | 37 |
| | | | | | 299 | 83 | 112 | 24 | 81 |
| | | | | | |
| Adjusted EBITA1) | | 2,277 | 818 | 1,198 | 426 | (165) |
| | | |
| | | |
| 2019 | | |
| | | | 1,173 | |
Discontinued operations, net of income taxes | | | | (183) | |
| | | | 258 | |
Investments in associates, net of income taxes | | | | (1) | |
| | | | 233 | |
| | | | (114) | |
| | | | | | 1,366 | 660 | 269 | 589 | (152) |
Amortization of intangible assets | | | | | | |
| Amortization and impairment of intangible assets | | 344 | 177 | 141 | 18 | 8 |
| | | | | | 97 | 19 | 78 | |
| | | | | | |
| EBITA1) | | 1,807 | 856 | 488 | 607 | (144) |
Restructuring and acquisition-related charges | | | | | | 310 | 149 | 64 | 42 | 54 |
| | | | | | 153 | 73 | 67 | 23 | (11) |
| | | | | | |
| Adjusted EBITA1) | | 2,270 | 1,078 | 620 | 672 | (100) |
Transactions between the segments are mainly related to components and parts included in the product portfolio of the other segments. The pricing of such transactions was at cost or determined on an arm’s length basis. Philips has no single external customer that represents 10% or more of sales.
Philips Group
Main countries
in millions of EUR
2016 - 2018
| | tangible and intangible assets 2 | sales1) | tangible and intangible assets2) |
|---|
| | | |
| | | |
| 2021 | | |
| | | 570 | 1,934 |
| | | 6,420 | 12,615 |
| | | 2,335 | 283 |
| | | 1,073 | 480 |
| | | 839 | 305 |
| United Kingdom | | 481 | 567 |
| | | 397 | 49 |
| | | |
| | | 5,040 | 753 |
| | | 17,156 | 16,986 |
| | | |
| | | |
| 2020 | | |
| | | 404 | 1,926 |
| | | 6,580 | 9,080 |
| | | 2,319 | 313 |
| | | 1,113 | 511 |
| | | 980 | 302 |
| | | |
| | | |
| United Kingdom | | 509 | 545 |
| Italy | | 383 | 111 |
| | | 5,024 | 906 |
| | | 17,313 | 13,694 |
| | | |
| | | |
| 2019 | | |
| | | 391 | 2,148 |
| | | 6,626 | 9,864 |
| | | 2,427 | 340 |
| | | 1,185 | 550 |
| | | 805 | 308 |
| United Kingdom | | 436 | 611 |
| | | 380 | 46 |
| | | |
| | | 4,898 | 1,119 |
| | | 17,147 | 14,986 |
11)The sales are reported based on country of destination.
22)Consists of Property plant and equipment, Intangible assets excluding goodwill and Goodwill
4Discontinued operations and assets classified as held for sale
In 2021, 2020 and 2019 Discontinued operations consist primarily of our retained shareholding in Signify (formerly Philips Lighting), the combined Lumileds and Automotive businesses and certain other divestments formerly reported as discontinued operations.Domestic Appliances business. The belowfollowing table summarizes the results of discontinued operations, net of income taxes, results reported in the consolidated statements of income.
Philips Group
Discontinued operations, net of income taxes
in millions of EUR
2016 - 2018
| | | | 2019 | 2020 | 2021 |
|---|
| | | | |
The combined Lumileds and Automotive businesses | | | | |
| Domestic Appliances | | 202 | 206 | 2,698 |
| | | | (19) | (10) | 13 |
Discontinued operations, net of income taxes | | | | 183 | 196 | 2,711 |
Signify
Discontinued operations: Domestic Appliances
AsOn March 25, 2021, Philips signed an agreement to sell its Domestic Appliances business to global investment firm Hillhouse Investment. Since the first quarter of 2021, the Domestic Appliances business is presented as a discontinued operation, and comparative results have been restated to reflect the treatment of the Domestic Appliances business as a discontinued operation, because the sale of the Domestic Appliances business constitutes the discontinuance of a major line of business from December 31, 2018, Philips is no longer able to exercise significant influence with respect to Signify. The results related to Philips' retained interest in Signify until the moment the company lost significant influence are recognized in discontinued operations. These results relate to an overall EUR 198 million loss, which reflects dividends received of EUR 32 million and a loss due to value adjustments of EUR 218 million.
As of December 31, 2018 the remaining shareholding in Signify is part of continued operations. For further details, please refer to Interest in entities.Personal Health segment.
The following table summarizes the results of SignifyDomestic Appliances included in the Consolidated statements of income as a discontinued operations.
Results of Signify
in millions of EUR
2016 - 2018
| | | |
|---|
| | | |
| | | |
Result on the deconsolidation of discontinued operations | | | |
Fair value adjustment retained interest | | | |
| | | |
| | | |
| | | |
Income tax on the deconsolidation of discontinued operations | | | |
| | | |
Results from discontinued operations | | | |
Discontinued operations: Combined Lumileds and Automotive businesses
On June 30, 2017, Philips completed the sale of an 80.1% interest in the combined Lumileds and Automotive businesses to certain funds managed by affiliates of Apollo Global Management, LLC. In the first quarter of 2018 we reached a final settlement resulting in a gain of EUR 8 million.
The combined businesses of Lumileds and Automotive were reported as discontinued operations as from the end of November 2014.
For details on the retained interest in the combined Lumileds and Automotive businesses we refer to Other financial assets.
The following table summarizes the results of the combined businesses of Lumileds and Automotive in the Consolidated statements of income as discontinued operations.operation.
Philips Group
Results of combined Lumileds and Automotive businesses
Domestic Appliances in millions of EUR
| | January to December |
|---|
| | 2019 | 2020 | 2021 |
| Sales | 2,335 | 2,222 | 1,516 |
| Costs and expenses | (2,054) | (1,944) | (1,322) |
| Income from operations | 280 | 279 | 194 |
| Result on the sale of discontinued operations | | | 3,241 |
| Income before tax | 280 | 279 | 3,435 |
| Income tax expense1) | (79) | (72) | 6 |
| Income tax related the sale of discontinued operations | | | (743) |
| Results from discontinued operations | 202 | 206 | 2,698 |
1)The income tax expense from discontinued operations is calculated based on the separate return method, as if Domestic Appliances was filing its own separate tax returns.
2016 - 2018Costs of EUR 64 million incurred in relation to the separation of the Domestic Appliances business in 2021 have been accounted for in continuing operations, because these costs reflect expenses incurred by Royal Philips in the divestment process and are not considered representative of the core business results of the Domestic Appliances business.
| | | |
|---|
| | | |
| | | |
| | | |
Result on the sale of discontinued operations | | | |
| | | |
| | | |
Income tax on the sale of discontinued operations | | | |
US Tax Cuts and Jobs Act 1 | | | |
Results from discontinued operations | | | |
On September 1,
For further details 2021, the Company completed the sale of the Domestic Appliances business and recognized a transaction gain before tax of EUR 3,241 million. Philips received consideration of EUR 4,041 million, which is based on an enterprise value of EUR 3,850 million, increased by an amount of EUR 191 million for closing adjustments related to US Tax Cutsworking capital and Jobs Act please refernet indebtedness. The transaction gain before tax is the net effect of (i) the EUR 4,041 million consideration (ii) less the derecognition of net assets employed of EUR 715 million (iii) less transaction related costs of EUR 16 million, (iv) less the release of cumulative translation losses of EUR 69 million included in Other comprehensive income. The income tax charges related to Income Taxes.the divestment process was EUR 743 million, resulting in an after-tax transaction gain of EUR 2,499 million. The income tax charge represents the consolidated tax expense resulting from asset transactions completed as part of the disentanglement of the business in anticipation of its sale, a significant portion of which relates to taxes payable in the Netherlands. In addition, Philips and the buyer entered into a 15-year brand license agreement with future annual payments that represents an estimated net present value of approximately EUR 0.7 billion, which will be received and recognized over time.Discontinued operations: Other
Certain costs related to other divestments, which were previously reported as discontinued operations, resulted in a net lossgain of EUR 2713 million in 2018 (2017:2021 (2020: a net loss of EUR 24 million; 2016:10 million, 2019: a net gainloss of EUR 13419 million).
The main result in 2016 related to the court decision in favor of Philips in an arbitration case against Funai Electric Co., Ltd. Philips started the arbitration after it terminated the agreement to transfer the Audio, Video, Media & Accessories business to Funai following a breach of contract by Funai. As a consequence the court ordered Funai to pay EUR 144 million, which includes disbursements and interest, as compensation for damages. The amount was received in the second quarter of 2016.
Discontinued operations cash flows
The following table presents the net cash flows of operating, investing and financing activitiesprovided by (used for) discontinued operations reported in the Consolidated statements of cash flow statementsflows.
Net cash provided by (used for) Discontinued operations in millions of EUR
| | 2019 | 2020 | 2021 |
|---|
| Net cash provided by (used for) operating activities | 111 | 129 | 85 |
| Net cash provided by (used for) investing activities | (14) | | 3,319 |
| Net cash provided by (used for) discontinued operations | 98 | 129 | 3,403 |
In 2021, net cash provided by discontinued operations was EUR 3,403 million and consisted primarily of the net cash inflow of EUR 3,319 million from the sale of the Domestic Appliances business on September 1, 2021.
In 2020, net cash provided by discontinued operations was EUR 129 million and consisted primarily of cash flows provided by operating activities of the Domestic Appliances business, partly offset by advance income tax payments amounting to EUR 78 million
In 2019, net cash provided by discontinued operations was EUR 98 million and consisted primarily of cash flows provided by operating activities of the Domestic Appliances business, partly offset by a payment related to a divestment formerly reported as discontinued operations.
Assets classified as held for sale
As of December 31, 2021 assets held for sale consists of property, plant and equipment mainly related to the APAC Center Singapore building.
As of December 31, 2020, assets held for sale mainly consisted of the Personal Emergency Response Services (PERS) and Senior Living business (previously named the Aging and Caregiving (ACG) business) which was divested on June 30, 2021. For further information, refer to Acquisitions and divestments.
5Acquisitions and divestments
2021
Acquisitions
In 2021 Philips completed two acquisitions, BioTelemetry, Inc. and Capsule Technologies, Inc., that involved an aggregate net cash outflow of EUR 2,824 million. Upon acquisition, the company recognized aggregated Goodwill of EUR 2,102 million, Other intangible assets of EUR 840 million and related Deferred tax liabilities of EUR 206 million.
The preliminary condensed opening balance sheets of BioTelemetry and Capsule Technologies were as follows:
Discontinued operations cash flowsOpening balance sheet
in millions of EUR
2016 -2018
| | | |
|---|
Cash flows from operating activities | | | |
Cash flows from investing activities | | | |
Cash flows from financing activities | | | |
Total discontinued operations cash flows | | | |
| | At acquisition date |
| | BioTelemetry | Capsule Technologies |
| Assets | | |
| Intangible assets excluding goodwill | 623 | 217 |
| Property, plant and equipment | 42 | 11 |
| Other non-current assets | 48 | - |
| Deferred tax assets | 78 | 14 |
| Inventories | 11 | 11 |
| Receivables and other current assets | 75 | 97 |
| Cash | 205 | 19 |
| Total Assets | 1,083 | 368 |
| | | |
| Liabilities | | |
| Accounts payable and other payables | (278) | (98) |
| Deferred tax liabilities | (160) | (46) |
| Long-term liabilities | (69) | (11) |
| Acquired provision for contingent considerations | (16) | |
| Total Liabilities | (523) | (155) |
| | | |
| Total identifiable net assets at fair value | 560 | 214 |
| Goodwill arising on acquisition | 1,776 | 325 |
| Purchase consideration transferred | 2,337 | 539 |
In 2018, discontinued operations cash flows mainly include EUR 642 million related to the sale of Signify shares and dividend received from Signify reported in investing activities. The sale of Signify shares in 2017 (prior to losing control) are included in cash flows from financing activities of continuing operations.
In 2017, cash flows from operating activitiesopening balance sheet positions reflect the period prior to the divestmentpreliminary determination of the combined Lumiledsfair value of identifiable assets acquired and Automotive businesses (six months of cash flows) and prior toliabilities assumed with the deconsolidation of Signify (eleven months of cash flows). In 2017, cash flows from investing activities includes the net cash outflow related to the deconsolidation of Signify of EUR 175 million, consisting of EUR 545 million proceeds from the sale of shares on November 28, 2017, offset by the deconsolidation of EUR 720 million of cash and cash equivalents, and proceeds of EUR 1,067 million received from the saleacquisitions. The final determination of the combined Lumileds and Automotive businesses.
Assets classified as held for sale
fair values will be completed in 2022. As of December 31, 2018,2021, the valuation studies necessary to determine the fair value of the intangible assets heldand the valuation of goodwill are preliminary.
BioTelemetry
On February 9, 2021, Philips successfully completed a tender offer to acquire all issued and outstanding shares of BioTelemetry, Inc. for sale consistedUSD 72.00 per share. As a result, BioTelemetry shares were delisted from NASDAQ. The total equity purchase price and the settlement of property, plantstock option rights, including BioTelemetry’s cash and equipmentdebt, involved an amount of EUR 2,132 million and EUR 172 million equity awards consideration paid to employees after the acquisition day.
BioTelemetry, headquartered in Malvern, Pennsylvania, is a leading US-based provider of remote cardiac diagnostics and monitoring solutions. BioTelemetry offers a complete range of clinically validated ambulatory cardiac diagnostics and monitoring services: Short term Holter monitoring services, Long-term Holter monitoring services, Event recorder services, and Mobile Cardiac Outpatient Telemetry (MCOT) services. The acquisition of BioTelemetry is a strong fit with Philips’ cardiac care portfolio, and its strategy to transform the delivery of care along the health continuum with integrated solutions. BioTelemetry, forms part of the Connected Care segment.
Goodwill recognized in the amount of EUR 1,776 million mainly represents revenue synergies expected from the combination of Philips’ cardiac care portfolio and its strategy to transform the delivery of care along the health continuum with integrated solutions, and BioTelemetry complete range of clinically validated ambulatory cardiac diagnostics and monitoring services. BioTelemetry Goodwill is not tax-deductible.
The majority of the Intangible assets balance relates to the Customer relationships asset, the fair value of which is determined using the multi-period excess earnings method, which is a valuation technique that estimates the fair value of an asset based on market participants’ expectations of the cash flows associated with that asset over its remaining useful life. The fair value of the Customer relationships asset is based on an estimate of positive future cash flows associated with incremental profits related to excess earnings, discounted at a rate of 10.0%. The amortization period of the Customer relationships asset is 14 years. Receivables and other current assets reflect the best estimate at the acquisition date of the contractual cash flows expected to be received.
Since the acquisition date through December 31, 2021, the contribution to sales to third parties and net income of BioTelemetry was EUR 387 million and EUR 32 million loss, respectively. The sales and net income would not differ materially from these amounts if the acquisition date had been on January 1, 2021.
In 2021, acquisition-related costs of EUR 40 million were mainly recognized in General and administrative expenses.
Capsule Technologies
On March 4, 2021, Philips acquired all shares of Capsule Technologies, Inc. for an amount of EUR 23520 million in cash. Capsule Technologies, headquartered in Andover, Massachusetts, is a leading provider of medical device integration and assetsdata technologies for hospitals and liabilities directly associatedhealthcare organizations. Capsule Technologies offers a leading vendor-neutral Medical Device Information Platform with assets-held-for-sale businessesa software-as-a-service business model. The acquisition of EUR 52 million.
AsCapsule Technologies is a strong fit with Philips’ strategy to transform the delivery of December 31, 2017, assets held for sale consistedcare along the health continuum with integrated solutions. Capsule Technologies, forms part of the retained interestConnected Care segment.
Goodwill recognized in Signify for anthe amount of EUR 1,264325 million property, plantmainly represents revenue synergies expected from the combination of Philips’ industry-leading portfolio of real-time patient monitoring, therapeutic devices, telehealth, informatics and equipmentinteroperability solutions and Capsule’s leading Medical Device Information Platform, connected through Philips’ secure vendor-neutral cloud-based HealthSuite digital platform. Capsule Technologies Goodwill is not tax-deductible.
The majority of the Intangible assets balance relates to the Customer relationships asset, the fair value of which is determined using the multi-period excess earnings method, which is a valuation technique that estimates the fair value of an asset based on market participants’ expectations of the cash flows associated with that asset over its remaining useful life. The fair value of the Customer relationships asset is based on an estimate of positive future cash flows associated with incremental profits related to excess earnings, discounted at a rate of 12.0%. The amortization period of the Customer relationships asset is 17 years.
Receivables and other current assets reflect the best estimate at the acquisition date of the contractual cash flows expected to be received.
Since the acquisition date through December 31, 2021, the contribution to sales to third parties and net income of Capsule was EUR 75 million and EUR 10 million loss, respectively. The sales and net income would not differ materially from these amounts if the acquisition date had been on January 1, 2021.
In 2021, acquisition-related costs of EUR 11 million were mainly recognized in General and administrative expenses.
Divestments
During 2021 Philips completed three divestments. On September 1, 2021, Philips sold its Domestic Appliances business to global investment firm Hillhouse Investment. For further details on this transaction, refer to note Discontinued operations and assets classified as held for an amountsale.
In addition, the company completed the divestment of the PERS business on June 30, 2021 and completed the divestment of a small business of segment Other on September 17, 2021. As part of PERS divestment, Philips acquired shares in the buyer Connect America Investment Holdings, LLC with a value of EUR 40 million,million. The investment is classified as a financial asset measured at Fair Value through Other Comprehensive Income (FVTOCI) and assets and liabilities directly associated with assets held for sale businessesis reported as part of Other non-current financial assets. The divestment resulted in a loss of EUR 44 million.75 million, which is included in Other Business Expenses in our Statement of Income.
Acquisitions and divestments2020
2018Acquisitions
Philips completed ninethree acquisitions in 2018.2020. The acquisitions involved an aggregated net cash outflow of EUR 476259 million and a contingent consideration of EUR 36670 million at fair value. TheIncluding final purchase price adjustment processed in the course of 2021, the aggregated impact on Goodwill andof EUR 168 million, Other intangible assets wasof EUR 430184 million and Deferred tax liabilities generated from the Intangible assets of EUR 443 million respectively.45 million.
EPD Solutions Ltd. (EPD)Intact Vascular, Inc. (Intact Vascular) was the most notable acquisition and is discussed below. The remaining eighttwo acquisitions involved an aggregated net cash outflow of EUR 22829 million. Including final purchase price adjustments, the two acquisitions resulted in an increase in Goodwill of EUR 20 million. Other intangible assets and the related Deferred tax liabilities increased by EUR 15 million and EUR 2 million respectively.
Intact Vascular
On September 4, 2020, Philips acquired all shares of Intact Vascular, headquartered in Wayne, Pennsylvania. Intact Vascular is a developer of medical devices for minimally invasive peripheral vascular surgery. Philips acquired Intact Vascular to expand its portfolio of minimally invasive therapy options for Peripheral Artery Disease with the Tack Endovascular System, an implant that restores blood flow in small limb vessels, promotes healing and preserves limbs. The Company has purchased shares for an amount of EUR 241 million cash and a contingent consideration of EUR 127 million at fair value. Separately,70 million.
As of the net cash outflow ranged fromacquisition date, Intact Vascular forms part of the Image-guided therapy business portfolio of the Diagnosis & Treatment segment.
In 2020, acquisition-related costs of EUR 2 million to EUR 90 million. These remaining acquisitions had an aggregated impact on Goodwillwere recognized in General and Other intangible assetsadministrative expenses.
The condensed opening balance sheet of Intact Vascular was as follows:
Intact Vascular
Opening Balance sheet
in millions of EUR 168 million and EUR 216 million respectively.
EPD
| at acquisition date |
| Assets | |
| Intangible assets excluding goodwill | 169 |
| Deferred tax assets | 24 |
| Inventories | 2 |
| Receivables and other current assets | 1 |
| Cash | 10 |
| Total Assets | 207 |
| |
| Liabilities | |
| Accounts payable and other payables | (2) |
| Deferred tax liabilities | (42) |
| Total Liabilities | (44) |
| |
| Total identifiable net assets at fair value | 163 |
| Goodwill arising on acquisition | 148 |
| Total purchase on acquisition | 311 |
| Of which: | |
| Purchase consideration transferred | (241) |
| Provision for contingent consideration | (70) |
On July 9, 2018 Philips acquired 100% ofGoodwill recognized in the outstanding shares of EPD for an upfront cash considerationamount of EUR 250148 million mainly represents revenue synergies expected from the combination of Philips’ interventional imaging platform and adiagnostic and therapeutic devices with Intact Vascular’s unique, specialized implantable device to optimize the treatment of patients with Peripheral Artery Disease (PAD). Intact Vascular Goodwill is not tax deductible.
The provision for contingent consideration which may be due between December 31, 2018 and December 31, 2030. In connection with the contingent consideration, the company recognizedrepresents a Long-term provision of EUR 23970 million, at closingdue in 2022 and 2023. The contingent consideration is based on a specified percentage of forecast revenue share, for which the transaction.maximum amount is unlimited. The estimated fair value of the contingent consideration is re-measured at each reporting period. Therefore, any changes in the fair value impacts reported earnings in each reporting period, thereby resulting in variability in earnings. For more details about the fair value measurements, please refer to Fair value of financial assets and liabilities.
The overall cash position of EPD on the transaction date was EUR 2 million.
EPD is an innovator in image-guided procedures for cardiac arrhythmias (heart rhythm disorders). Asmajority of the date of acquisition, EPD is part of the Diagnosis & Treatment segment.
Acquisition-related costs of EUR 6 million were recognized in General and administrative expenses.
The condensed opening balance sheet of EPD as of July 9, 2018 was as follows:
EPD
Opening Balance sheet
in millions of EUR
2018
| |
|---|
| |
| |
Intangible assets excluding goodwill
| |
Property, plant and equipment
| |
| |
| |
Receivables and other current assets
| |
| |
Accounts payable and other payables
| |
| |
Provision for contingent consideration
| |
Total assets and liabilities
| |
| |
Opening balance positions are subject to final purchase price adjustments, which are expected to be processed in the second quarter of 2019. Main pending final purchase price adjustments concerns Other Intangible assets (Technology).
Goodwill recognized inbalance relates to Technology, the amount of EUR 262 million, mainly represents expected revenue synergies leveraging the complementarity between EPD’s cardiac imaging and navigation system solutions and Philips' interventional imaging systems.
Other intangible assets comprised of EUR 227 million of Technology, amortized over 10 years.
The fair value of Technologywhich is determined using the multi-period excess earnings method, which is a valuation technique that estimates the fair value of an asset based on market participants' expectations of the cash flows associated with that asset over its remaining useful life. The fair value of Technology is based on an estimate of positive future cash flows associated with incremental profits related to excess earnings, until 2032, discounted at a rate of 14.4%15.0%. The amortization period of Technology is 14 years.
Intact Vascular is an early stage revenue acquisition. As fromof the acquisition date, theIntact Vascular contribution of EPD to revenuesales and net income in 2018 was not material. The same applies to the combined entity for the reporting period as though the acquisition date had been as of the beginning of the reporting period.
Divestments
Philips completed twodid not complete any divestments in 2018. The divestments involved an aggregated cash consideration of EUR 68 million.
2017
Philips completed ten acquisitions in 2017. The acquisitions involved an aggregated net cash outflow of EUR 2,333 million. Including 2018 purchase price adjustments, these acquisitions had an aggregated impact on Goodwill and Other intangible assets of EUR 1,584 million and EUR 898 million respectively.
The Spectranetics Corporation (Spectranetics) was the most notable acquisition and is discussed below. The remaining nine acquisitions involved an aggregated net cash outflow of EUR 425 million. Separately, the net cash outflow ranged from EUR 3 million to EUR 117 million. Including 2018 purchase price adjustments, these remaining acquisitions had an aggregated impact on Goodwill and Other intangible assets of EUR 317 million and EUR 228 million respectively.
On August 9, 2017 Philips completed the acquisition of Spectranetics, by acquiring all of the issued and outstanding shares of Spectranetics for USD 38.50 per share, paid in cash at completion. As of the date of acquisition, Spectranetics became a wholly owned subsidiary of Philips and was consolidated within Philips Image-Guided Therapy business as part of the Diagnosis & Treatment businesses segment. Spectranetics is a US-based global leader in vascular intervention and lead management solutions, present in 11 countries and employs over 900 employees.
The acquisition involved a net cash outflow of EUR 1,908 million. This amount comprised the purchase price of shares (EUR 1,441 million), the settlement of share-based compensation plans (EUR 94 million), the redemption of debt (EUR 378 million) and the settlement of various other items (EUR 48 million). The overall cash position of Spectranetics on the transaction date was EUR 53 million.
The condensed opening balance sheet of Spectranetics, including minor final purchase price adjustments which were processed in the course of 2018, was as follows:
Spectranetics
Opening Balance sheet as of acquisition date
in millions of EUR
| |
|---|
| |
Intangible assets excluding goodwill
| |
Property, plant and equipment
| |
| |
| |
Receivables and other current assets
| |
| |
Accounts payable and other payables
| |
| |
Total assets and liabilities
| |
| |
The purchase price adjustments recognized in 2018 for all other acquisitions on Goodwill and Other intangible assets was EUR 24 million increase and EUR 24 million reduction respectively.
Divestments
Apart from the sale of the combined Lumileds and Automotive businesses and the deconsolidation of Signify, Philips completed two divestments during 2017 at an aggregate cash consideration of EUR 54 million.2020.
6Interests in entities
In this section we discuss theThe nature of the company’s interests in its consolidated entities and associates, and the effects of those interests on the company’s financial position and financial performance.performance are discussed below.
Transactions in Signify shares
In 2018, Philips completed various transactions in Signify shares (formerly Philips Lighting) which reduced the interest in this company from 29.01% as of December 31, 2017 to 16.5% as of December 31, 2018.
In February 2018, Philips sold 16.22 million shares through an accelerated bookbuild offering to institutional investors. Subsequently, during the fourth quarter of 2018, Philips sold a total of 4.04 million shares.
Given Philips’ shareholding in Signify of 16.5%, with Philips’ CFO stepping down from the Supervisory Board of Signify as of December 31, 2018, the remaining stake was reclassified from Assets classified as held-for-sale to Current financial assets, with fair value changes recognized through OCI.
Group companies
Set out belowBelow is a list of material subsidiaries as perof December 31, 20182021 representing greater than 5% of either the consolidated group Sales, Income from operations or Income from continuing operations (before any intra-group eliminations) of Group legal entities. All of the entities are fully consolidated in the group accounts of the company.financial statements.
Philips Group
Interests in group companies
in alphabetical order by country
20182021
| Principal country of business |
Philips (China) Investment Company, Ltd. | |
| Germany |
| Philips Medizin Systeme Böblingen GmbH | |
| Medical Systems Technologies Ltd. | Israel |
| India |
| Philips Japan, Ltd. | Japan |
| Philips Consumer Lifestyle B.V. | |
Philips Medical Systems Nederland B.V. | |
| ATL International LLC | |
| United States |
| Discus Holdings LLC | United States |
| Philips Healthcare Informatics Inc. | United States |
| Philips North America LLC | United States |
| Philips Oral Healthcare LLC | |
Philips North America LLC
| |
| Spectranetics LLC | |
Information related to Non-controllingnon-controlling interests
As of December 31, 2018, six2021, 4 consolidated subsidiaries are not wholly owned by Philips (December 31, 2017: four)2020: 6). In 2018,2021, Sales to third parties and Net income for these subsidiaries in aggregate are EUR 627522 million (December 31, 2020: EUR 468 million) and EUR 2739 million (December 31, 2020: EUR 6 million) respectively.
Investments in associates
Philips has investments in a number of associates. During 2021, Philips purchased six investments in associates for a total amount of EUR 232 million. The most notable investment was a EUR 125 million investment in Candid Care Co. None of themthe investments are regarded as individually material. During 2018,material from the point of view of the consolidated financial statements.
Due to loss of significant influence in American Well Co. during 2021, Philips purchased ten investments in associates, which involved an aggregated amountreclassified the investment to Other non-current financial asset at FVTOCI (Level 1). On reclassification, Philips recorded a gain of EUR 107 million.33 million in Other operating income. For more information about Other-non current financial assets at FVTOCI, refer to Other financial assets and Fair value of financial assets and liabilities.
Involvement with unconsolidated structured entities
Philips founded three Philips Medical Capital (PMC) entities, in the United States, France and Germany, in which Philips holds a minority interest. Philips Medical Capital, LLC in the United States is the most significant entity. PMC entities provide healthcare equipment financing and leasing services to Philips customers for diagnostic imaging equipment, patient monitoring equipment, and clinical IT systems.
The company concluded that it does not control, and therefore should not consolidate the PMC entities. In the United States, PMC operates as a subsidiary of De Lage Landen Financial Services, Inc. The same structure and treatment is applied to the PMC entities in the other countries, with other majority shareholders. Operating agreements are in place for all PMC entities, whereby acceptance of sales and financing transactions resides with the respective majority shareholder. After acceptance of a transaction by PMC, Philips transfers control and does not retain any obligations towards PMC or its customers, from the sales contracts.
AtAs of December 31, 2018,2021, Philips’ stakeshareholding in Philips Medical Capital, LLC had a carrying value of EUR 2427 million (December 31, 2017:2020: EUR 2926 million).
The company does not have any material exposures to losses from interests in unconsolidated structured entities other than the invested amounts.
7Income from operations
For information related to Sales on a segment and geographical basis, seerefer to Information by segment and main country.
Philips Group
Sales and costs by nature
in millions of EUR
2016 - 2018
| | | | 2019 | 2020 | 2021 |
|---|
| | | | 17,147 | 17,313 | 17,156 |
| | | | (4,197) | (4,221) | (4,142) |
Employee benefit expenses | | | | (6,097) | (6,289) | (6,246) |
Depreciation and amortization | | | | |
| Depreciation and amortization1) | | (1,343) | (1,462) | (1,323) |
| | | | (509) | (554) | (645) |
Advertising and promotion | | | | (741) | (696) | (752) |
| | | | |
Other operational costs 2 | | | | |
| Lease expense2) | | (50) | (34) | (19) |
| Other operational costs3)4) | | (2,811) | (2,741) | (3,524) |
Other business income (expenses) | | | | (33) | (51) | 48 |
| | | | 1,366 | 1,264 | 553 |
11)Includes impairments; for impairment values please refer to Property, plant and equipment and Intangible assets excluding goodwill2)Lease expense includes EUR 32 million (2017: EUR 38 million, 2016: EUR 30 million) of other costs, such as fuelrelates to short-term and electricity, and taxes to be paid and reimbursed to the lessorlow value leases.23)Other operational costs contain items which are dissimilar in nature and individually insignificant in amount to disclose separately. These costs contain among others expenses for outsourcing services, mainly in IT and HR, 3rd party workers, consultants, warranty, patents, costs for travelling, external legal services and EUR 81104 million government grants recognized in 2018 (2017:2021 (2020: EUR 9098 million 2016:2019: EUR 7987 million). The grants mainly relate to research and development activities and business development.4)The significant increase in other operational costs 2021 versus 2020 is mainly due to the field action provision. For more details on the field action provision, please refer to Provisions.Sales composition and disaggregation
Philips Group
Sales composition
in millions of EUR
2016 - 2018
| | | | 2019 | 2020 | 2021 |
|---|
| | | | 12,476 | 12,491 | 11,981 |
| | | | 3,811 | 4,058 | 4,374 |
| | | | 381 | 301 | 383 |
Total sales from contracts with customers | | | 16,668 | 16,851 | 16,738 |
| | | |
| Other sources1) | | 479 | 462 | 418 |
| | | | 17,147 | 17,313 | 17,156 |
11)Other sources mainly includesrelates to leases, including sublease income from right-of-use assets and related services of EUR 293 million (2020: EUR 325 million 2019: EUR 307 million)
At December 31, December 2018,2021, the aggregate amount of the transaction price allocated to remaining performance obligations from a sale of goods and services was EUR 10,63714,305 million. The company expects to recognize approximately 47%50% of the remaining performance obligations within 1 year. Revenue expected to be recognized beyond 1 year is mostly related to longer term customer service and software contracts.
Philips Group
Disaggregation of SaleSales per segment
in millions of EUR
2016 - 2018
| | | | 2021 |
|---|
| | | | Total sales from contracts with customers | Sales from other sources 1 | | Sales at a point in time | Sales over time | Total sales from contracts with customers | Sales from other sources1) | Total sales2) |
|---|
| | | | | | | | 5,407 | 3,177 | 8,583 | 52 | 8,635 |
Connected Care & Health Informatics | | | | | | | | |
| Connected Care | | 3,135 | 1,090 | 4,227 | 366 | 4,593 |
| | | | | | | | 3,403 | 6 | 3,410 | | 3,410 |
| | | | | | | | 195 | 323 | 518 | - | 519 |
| | | | | | | | 12,142 | 4,596 | 16,738 | 418 | 17,156 |
11)Sales from otherOther sources mainly includesrelates to leases, including sublease income from right-of-use assets and related services of EUR 293 million
22)Represents revenue from external customers as required by IFRS 8 Operating Segments.
Philips Group
Disaggregation of Sales per segment
in millions of EUR
| | 2020 |
|---|
| | Sales at a point in time | Sales over time | Total sales from contracts with customers | Sales from other sources1) | Total sales2) |
|---|
| Diagnosis & Treatment | 5,132 | 2,998 | 8,129 | 46 | 8,175 |
| Connected Care | 4,208 | 943 | 5,152 | 417 | 5,568 |
| Personal Health | 3,170 | 4 | 3,173 | | 3,173 |
| Other | 69 | 327 | 396 | - | 396 |
| Philips Group | 12,580 | 4,272 | 16,851 | 462 | 17,313 |
1)Other sources mainly relates to leases, including sublease income from right-of-use assets and related services of EUR 325 million2)Represents revenue from external customers as required by IFRS 8 Operating Segments.
Philips Group
Disaggregation of Sales per segment
in millions of EUR
| | 2019 |
|---|
| | Sales at a point in time | Sales over time | Total sales from contracts with customers | Sales from other sources1) | Total sales2) |
|---|
| Diagnosis & Treatment | 5,428 | 2,989 | 8,417 | 68 | 8,485 |
| Connected Care | 3,545 | 718 | 4,263 | 411 | 4,674 |
| Personal Health | 3,513 | 3 | 3,516 | | 3,516 |
| Other | 168 | 303 | 472 | - | 472 |
| Philips Group | 12,655 | 4,013 | 16,668 | 479 | 17,147 |
1)Other sources mainly relates to leases, including sublease income from right-of-use assets and related services of EUR 307 million2)Represents revenue from external customers as required by IFRS 8 Operating Segments.
Philips Group
Disaggregation of Sales per geographical cluster
in millions of EUR
2016 - 2018
| | | | 2021 |
|---|
| | | | Total sales from contracts with customers | Sales from other sources 1 | | Sales at a point in time | Sales over time | Total sales from contracts with customers | Sales from other sources1) | Total sales2) |
|---|
| | | | | | | | 2,537 | 1,087 | 3,624 | 21 | 3,645 |
| | | | | | | | 4,427 | 2,268 | 6,695 | 86 | 6,781 |
| | | | | | | | 1,000 | 386 | 1,386 | 309 | 1,694 |
| | | | | | | | 7,964 | 3,741 | 11,705 | 415 | 12,120 |
| | | | | | | | 4,178 | 856 | 5,033 | 3 | 5,036 |
| | | | | | | | 12,142 | 4,596 | 16,738 | 418 | 17,156 |
11)Sales from otherOther sources mainly includesrelates to leases, including sublease income from right-of-use assets and related services of EUR 293 million
22)Represents revenue from external customers as required by IFRS 8 Operating Segments.
Philips Group
Disaggregation of Sales per geographical cluster
in millions of EUR
| | 2020 |
|---|
| | Sales at a point in time | Sales over time | Total sales from contracts with customers | Sales from other sources1) | Total sales2) |
|---|
| Western Europe | 2,747 | 936 | 3,682 | 19 | 3,702 |
| North America | 4,654 | 2,135 | 6,789 | 95 | 6,884 |
| Other mature geographies | 1,035 | 373 | 1,408 | 342 | 1,750 |
| Total mature geographies | 8,435 | 3,444 | 11,879 | 457 | 12,336 |
| Growth geographies | 4,145 | 828 | 4,972 | 5 | 4,977 |
| Sales | 12,580 | 4,272 | 16,851 | 462 | 17,313 |
1)Other sources mainly relates to leases, including sublease income from right-of-use assets and related services of EUR 325 million2)Represents revenue from external customers as required by IFRS 8 Operating Segments.
Philips Group
Disaggregation of Sales per geographical cluster
in millions of EUR
| | 2019 |
|---|
| | Sales at a point in time | Sales over time | Total sales from contracts with customers | Sales from other sources1) | Total sales2) |
|---|
| Western Europe | 2,359 | 931 | 3,290 | 38 | 3,328 |
| North America | 4,901 | 1,889 | 6,789 | 114 | 6,904 |
| Other mature geographies | 1,125 | 357 | 1,482 | 322 | 1,804 |
| Total mature geographies | 8,385 | 3,176 | 11,561 | 474 | 12,036 |
| Growth geographies | 4,270 | 837 | 5,107 | 5 | 5,112 |
| Sales | 12,655 | 4,013 | 16,668 | 479 | 17,147 |
1)Other sources mainly relates to leases, including sublease income from right-of-use assets and related services of EUR 307 million2)Represents revenue from external customers as required by IFRS 8 Operating Segments.
Costs of materials used
Cost of materials used represents the inventory recognized in cost of sales.
Employee benefit expenses
Philips Group
Employee benefit expenses
in millions of EUR
2016 - 2018
| | | | 2019 | 2020 | 2021 |
|---|
| | | | |
| Salaries and wages1) | | 5,080 | 5,204 | 5,129 |
Post-employment benefits costs | | | | 370 | 418 | 396 |
Other social security and similar charges: | | | | |
| | | | |
| | | |
| Required by law | | 537 | 556 | 529 |
| Voluntary | | 111 | 192 |
Employee benefit expenses | | | | 6,097 | 6,289 | 6,246 |
11)Salaries and wages includes EUR 102115 million (2017:(2020: EUR 122119 million, 2016:2019: EUR 95103 million) of share-based compensation expenses.
The employee benefit expenses relate to employees who are working on the payroll of Philips, both with permanent and temporary contracts.
For further information on post-employment benefit costs, seerefer to Post-employment benefits.
For details on the remuneration of the members of the Board of Management and the Supervisory Board, seerefer to Information on remuneration.
Employees
The average number of employees by category is summarized as follows:
| | | | |
|---|
| | | 2019 | 2020 | 2021 |
|---|
| | | | 31,222 | 35,482 | 38,618 |
| | | | 11,669 | 10,812 | 10,751 |
| | | | 22,924 | 22,474 | 22,543 |
| | | | 65,815 | 68,769 | 71,912 |
| | | | 5,614 | 4,998 | 4,533 |
| | | | |
| | | | |
| | | | 71,429 | 73,767 | 76,445 |
Employees consist of those persons working on the payroll of Philips and whose costs are reflected in the Employee benefit expenses table. 3rd party workers consist of personnel hired on a per-period basis, via external companies.
Philips Group
Employees per geographical location
in FTEs
2016 - 2018
| | | | |
|---|
| | | 2019 | 2020 | 2021 |
|---|
| | | | 11,252 | 11,146 | 11,142 |
| | | | 60,177 | 62,621 | 65,303 |
| | | | |
| | | | |
| | | | 71,429 | 73,767 | 76,445 |
Depreciation and amortization
Depreciation of property, plant and equipment and amortization of intangible assets, including impairments, are as follows:
Philips Group
Depreciation and amortization1)
in millions of EUR
2016 - 2018
| | | | |
|---|
| | | 2019 | 2020 | 2021 |
|---|
Depreciation of property, plant and equipment | | | | 611 | 691 | 630 |
| | | | 66 | 76 | 88 |
Amortization of other intangible assets | | | | 344 | 377 | 322 |
Amortization of development costs | | | | 323 | 319 | 284 |
Depreciation and amortization | | | | 1,343 | 1,462 | 1,323 |
Depreciation of property, plant and equipment is primarily included in cost of sales. Amortization of the categories of other intangible assets are reported in selling expenses for brand names and customer relationships and are reported in cost of sales for technology based and other intangible assets. Amortization of development cost is included in research and development expenses.
Shipping and handling
Shipping and handling costs are included in cost of sales and selling expenses in Consolidated statements of income. Further information on when costs are to be reported to cost of sales or selling expenses can be found in Significant accounting policies.
Advertising and promotion
Advertising and promotion costs are included in selling expenses in Consolidated statements of income.
Audit fees
The following table below shows the fees attributable to the fiscal years 2016, 20172019, 2020 and 20182021 for services rendered by the respective Group auditors.
Philips Group
Agreed fees
in millions of EUR
2016 - 2018
| | | |
|---|
| | | | | | | | | |
|---|
| | | | | | | | | |
-consolidated financial statements | | | | | | | | | |
-statutory financial statements | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
-Acquisitions and divestments | | | | | | | | | |
-Sustainability assurance | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | 2019 | 2020 | 2021 |
|---|
| | EY NL1) | EY Network | Total | EY NL1) | EY Network | Total | EY NL1) | EY Network | Total |
|---|
| Audit fees | 8.4 | 6.2 | 14.6 | 9.0 | 5.6 | 14.6 | 9.7 | 5.3 | 15.0 |
| consolidated financial statements | 8.4 | 3.4 | 11.8 | 9.0 | 2.9 | 11.9 | 9.7 | 2.7 | 12.4 |
| statutory financial statements | | 2.8 | 2.8 | | 2.7 | 2.7 | | 2.6 | 2.6 |
| | | | | | | | | | |
| Audit-related fees2) | 0.5 | 0.3 | 0.8 | 2.2 | 0.5 | 2.7 | 0.6 | 0.2 | 0.8 |
| divestment | | | | 1.5 | 0.2 | 1.7 | | | |
| sustainability assurance | 0.4 | | 0.4 | 0.5 | | 0.5 | 0.5 | | 0.5 |
| other | 0.1 | 0.3 | 0.4 | 0.2 | 0.3 | 0.5 | 0.1 | 0.2 | 0.3 |
| Tax fees | | | | | | | | | |
| All other fees | | | | | | | | | |
| Fees | 8.9 | 6.5 | 15.4 | 11.2 | 6.1 | 17.3 | 10.3 | 5.5 | 15.8 |
11)Ernst & Young Accountants LLP
22)Also known as Assurance fees
Other business income (expenses)
Other business income (expenses) consists of the following:
Philips Group
Other business income (expenses)
in millions of EUR
2016 - 2018
| | | |
|---|
| | | |
Result on disposal of businesses: | | | |
| | | |
| | | |
Result on disposal of fixed assets: | | | |
| | | |
| | | |
Result on other remaining businesses: | | | |
| | | |
| | | |
| | | |
Other business income (expense) | | | |
Total other business income | | | |
Total other business expense | | | |
| | 2019 | 2020 | 2021 |
|---|
| Result on disposal of businesses: | | | |
| income | 69 | - | - |
| expense | (1) | - | (75) |
| Result on disposal of fixed assets: | | | |
| income | 4 | 2 | 24 |
| expense | - | - | (5) |
| Result on other remaining businesses: | | | |
| income | 81 | 120 | 161 |
| expense | (88) | (30) | (43) |
| Impairment of goodwill | (97) | (144) | (15) |
| Other business income (expense) | (33) | (51) | 48 |
| Total other business income | 154 | 122 | 186 |
| Total other business expense | (186) | (173) | (138) |
1Further information on goodwill movement can be found in GoodwillThe result on disposal of businesses was mainly due to divestment of non-strategic businesses. For more information refer to Acquisitions and divestments.
The result on disposal of fixed assets was mainly due to the sale of real estate assets.
The result on other remaining businesses mainly relates to revaluation of contingent consideration, non-core revenue and various legal matters.
In 2021 revisions to EPD's forecast resulted in a EUR 67 million decrease in the fair value of the respective contingent consideration liability, comprised of EUR 41 million due to more severe short-term impacts of COVID-19 and the competitive environment and EUR 26 million due to delays in achievement of certain milestones, and is reflected in Other business income. In 2020 revisions to EPD's forecast due to delays in commercialization caused by the need to do more work on the maturity of the technology resulted in a EUR 101 million decrease in the fair value of the respective contingent consideration liability and is reflected in Other business income. For information on contingent consideration, refer to Provisions.
In 2021 a gain of EUR 33 million related to a minority participation was recognized in Other business income. For information refer to Interests in entities.
For information on impairment of goodwill, refer to Goodwill.
8Financial income and expenses
Philips Group
Financial income and expenses
in millions of EUR
2016 - 2018
| | | | |
|---|
| | | 2019 | 2020 | 2021 |
|---|
| | | | 25 | 13 | 18 |
Interest income from loans and receivables | | | | 10 | 8 | 7 |
Interest income from cash and cash equivalents | | | 15 | 5 | 11 |
Dividend income from financial assets | | | | 52 | 3 | 2 |
Net gains from disposal of financial assets | | | | 2 | 2 | - |
Net change in fair value of financial assets at fair value through profit or loss | | | | 17 | 129 | 95 |
| | | | 17 | 12 | 33 |
| | | | 114 | 158 | 149 |
| | | |
| | | | (196) | (173) | (159) |
Interest on debt and borrowings | | | | (167) | (154) | (147) |
Finance charges under finance lease contract | | | | |
| Finance charges under lease contract | | (6) | (6) | (5) |
Interest expenses - pensions | | | | (22) | (13) | (8) |
Provision-related accretion and interest | | | | (23) | (22) | (14) |
Net foreign exchange losses | | | | (2) | 4 | - |
Impairment loss of financial assets | | | | |
Net change in fair value of financial assets at fair value through profit or loss | | | | |
Net change in fair value of financial liabilities at fair value through profit or loss | | | |
| | | | (12) | (11) | (15) |
| | | | (233) | (202) | (188) |
| | | |
Financial income and expenses | | | | (119) | (44) | (39) |
NetIn 2021, Financial income and expenses decreased by EUR 5 million year-on-year, mainly due to higher other financial income and expense showed a EUR 213 million expense in 2018, which was EUR 76 million higher than in 2017. Other financialdecreased interest expenses, included financial charges related to the early redemption of USD bondsoffset by lower fair value gain. Fair value gains of EUR 46 million.95 million are from investments in limited life funds (mainly Gilde Healthcare) and other investments recognized at fair value through profit or loss. Net interest expense in 20182021 was EUR 2519 million lower than in 2017,2020, mainly due to lower interest expenses on pensionsborrowings and lowerprovisions, and interest expenses on net debt.
Netpensions. The increase in other financial income is mainly due to higher interest income on tax.
In 2020, Financial income and expense showed aexpenses decreased by EUR 13775 million year-on-year, mainly due to fair value gains of EUR 133 million from investments in limited life funds (mainly Gilde Healthcare) and other investments recognized at fair value through profit or loss. The fair value gain from investments in limited life funds is caused by IPO’s by certain of the investments held by the limited life funds. Net interest expense in 2017, which2020 was EUR 30511 million lower than in 2016. Net interest expense in 2017 was EUR 117 million lower than in 2016,2019, mainly due to lower interest expenses on net debt following the bond redemptions in October 2016 and January 2017. Higher dividend income was mainly related to the retained interest in the combined businesses of Lumileds and Automotive. Impairment charges in 2016 amounted to EUR 24 million mainly due to Corindus Vascular Robotics. Lower provision-related accretionborrowings and interest in 2016 is primarily due to the release of accrued interest as a result of the settlement of the Masimo litigation. Otherexpenses on pensions. Dividend income from financial expenses included financial charges related to the early redemption of USD bonds ofassets decreased by EUR 153 million.49 million versus 2019.
9Income taxes
The income tax expensebenefit of continuing operations amounted to EUR 193103 million (2017:(2020: EUR 349212 million 2016:tax expense, 2019: EUR 203 million)258 million tax expense).
The components of income before taxes and income tax expense are as follows:
Philips Group
Income tax expense
in millions of EUR
2016 - 2018
| | | |
|---|
| | | |
| | | |
| | | |
Income before taxes of continuing operations 1 | | | |
| | | |
| | | |
Current tax (expense) benefit | | | |
Deferred tax (expense) benefit | | | |
Total tax (expense) benefit of continuing operations (Netherlands) | | | |
| | | |
| | | |
Current tax (expense) benefit | | | |
Deferred tax (expense) benefit | | | |
Total tax (expense) benefit of continuing operations (foreign) | | | |
| | | |
Income tax expense of continuing operations | | | |
| | 2019 | 2020 | 2021 |
|---|
| Income before taxes of continuing operations1) | 1,247 | 1,220 | 513 |
| Current tax (expense) benefit | (251) | (380) | (298) |
| Deferred tax (expense) benefit | (8) | 167 | 401 |
| Income tax expense of continuing operations | (258) | (212) | 103 |
11)Income before tax excludes the result of investments in associates.
Income tax expense of continuing operations excludes the tax benefitexpense of the discontinued operations of EUR 14737 million (2017:(2020: EUR 18281 million, tax expense, 2016:2019: EUR 181 million tax expense), further detailed in section Discontinued operations and assets classified as held for sale70 million).
The components of income tax expense of continuing operations are as follows:
Philips Group
Current income tax expense
in millions of EUR
2016 - 2018
| | | | |
|---|
| | | 2019 | 2020 | 2021 |
|---|
Current year tax (expense) benefit | | | | (248) | (390) | (291) |
Prior year tax (expense) benefit | | | | (3) | 10 | (7) |
| | | | (251) | (380) | (298) |
Philips Group
Deferred income tax expense
In millions of EUR
2016 - 2018
| | | | |
|---|
| | | 2019 | 2020 | 2021 |
|---|
Changes to recognition of tax loss and credit carry forwards | | | | 56 | 6 | 129 |
Changes to recognition of temporary differences | | | | (32) | 19 | (1) |
| | | | |
| Prior year tax (expense) benefit | | (9) | (8) | 20 |
| | | | 4 | 12 | 10 |
Origination and reversal of temporary differences, tax losses and tax credits | | | | (27) | 138 | 245 |
Deferred tax (expense) benefit | | | | (8) | 167 | 401 |
Philips’ operations are subject to income taxes in various foreign jurisdictions. The statutory income tax rate varies per country, which results in a difference between the weighted average statutory income tax rate and the Netherlands’ statutory income tax rate of 25.0% (2017:(2020: 25.0%; 2016: 2019: 25.0%).
A reconciliation of the weighted average statutory income tax rate to the effective income tax rate of continuing operations is as follows:
Philips Group
Effective income tax rate
in %
2016 - 2018
| | | | |
|---|
| | | 2019 | 2020 | 2021 |
|---|
Weighted average statutory income tax rate in % | | | | 25.3 | 25.2 | 22.7 |
Recognition of previously unrecognized tax loss and credit carryforwards | | | | (4.9) | (0.5) | (26.9) |
Unrecognized tax loss and credit carryforwards | | | | 0.1 | 0.0 | 1.9 |
Changes to recognition of temporary differences | | | | 2.6 | (1.6) | 0.3 |
Non-taxable income and tax incentives | | | | (11.2) | (12.9) | (40.6) |
| | | | 6.1 | 7.0 | 19.3 |
Withholding and other taxes | | | | 4.1 | 0.6 | 7.2 |
| | | | (0.2) | (1.0) | (1.9) |
| | | | 0.7 | (0.2) | (2.4) |
Tax expenses (benefit) due to other tax liabilities | | | | |
| Tax expense (benefit) due to change in uncertain tax treatments | | (2.0) | 1.2 | 4.4 |
| | | | 0.2 | (0.2) | (4.0) |
Effective income tax rate | | | | 20.8 | 17.6 | (20.0) |
The effective income tax rate is lower than the weighted average statutory income tax rate in 2018,2021 mainly due to one-time non-cash benefits from the recognition of deferred tax audit resolutionsassets on loss carryforwards and business integration. Theserecurring favorable tax audit resolutionsincentives related to R&D investments and export activities, partially offset with various non-deductible items. The effective income tax rate for 2021 is further impacted by the lower income before tax in multiple jurisdictions, partly offset by provisions relating2021, as compared to 2020 and 2019, whereas Withholding and other taxes had a lower impact on the 2020 effective income tax risks, are reflected in the ‘Tax expense (benefit)rate, due to othera one-off benefit from a decrease in tax liabilities’ line.rate. The impactrecognition of deferred tax assets on loss carryforwards is the result from an intra-group business integrationtransfer and is included in the ‘Non-taxable incomepresented under Recognition of previously unrecognized tax loss and tax incentives’ line.credit carryforwards.
Deferred tax assets and liabilities
Deferred tax assets are recognized for temporary differences, unused tax losses, and unused tax credits to the extent that realization of the related tax benefits is probable. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in the countries where the deferred tax assets originated and during the periods when the deferred tax assets become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.
Net deferred tax assets relate to the following underlying assets and liabilities and tax loss carryforwards (including tax credit carryforwards) and their movements during the years 20182021 and 20172020 respectively are presented in the tables below.following tables.
The net deferred tax assets of EUR 1,6762,134 million (2017:(2020: EUR 1,5651,761 million) consist of deferred tax assets of EUR 1,8282,216 million (2017: (2020:EUR 1,5981,820 million) and deferred tax liabilities of EUR 15283 million (2017:(2020: EUR 3359 million). Of the total deferred tax assets of EUR 1,8282,216 million at December 31, 2018 (2017:2021 (2020: EUR 1,5981,820 million), EUR 20312 million (2017:(2020: EUR 16135 million) is recognized in respect of entities in various countries where there have been tax 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, 20182021 the temporary differences associated with investments, including potential income tax consequences on dividends, for which no deferred tax liabilities are recognized, aggregate to EUR 186298 million (2017:(2020: EUR 290275 million). The increase in the deferred tax assets on intangible assets mainly comprises the recognition of deferred tax assets on temporary differences resulting from an intra-group business transfer.
Philips Group
Deferred tax assets and liabilities
in millions of EUR
2018
| Balance as of January 1, 2018 | recognized in income statement | | Balance as of December 31, 2018 | | | |
|---|
| | | Balance as of January 1, 2021 | recognized in income statement | other1) | Balance as of December 31, 2021 | Assets | Liabilities |
|---|
| | | | | | | 240 | 535 | (188) | 587 | 716 | (130) |
Property, plant and equipment | | | | | | | 32 | 13 | (16) | 29 | 55 | (26) |
| | | | | | | 313 | 31 | 28 | 372 | 381 | (9) |
| | | | | | | 97 | (30) | 1 | 68 | 112 | (43) |
Pensions and other employee benefits | | | | | | | 245 | (45) | (21) | 180 | 182 | (2) |
| | | | | | | 384 | 91 | 25 | 499 | 584 | (84) |
Deferred tax assets on tax loss carryforwards | | | | | | 449 | (194) | 143 | 398 | |
Set-off deferred tax positions | | | | | (211) | 211 |
| | | | | | | 1,761 | 401 | (28) | 2,134 | 2,216 | (83) |
11)Other includes the movements of assets and liabilities recognized in equity and OCI, which includes foreign currency translation differences, acquisitions and divestments.
Philips Group
Deferred tax assets and liabilities
in millions of EUR
2017
| Balance as of January 1, 2017 | recognized in income statement | Transfer to assets held for sale | | Balance as of December 31, 2017 | | | |
|---|
| | | Balance as of January 1, 2020 | recognized in income statement | other1) | Balance as of December 31, 2020 | Assets | Liabilities |
|---|
| | | | | | | | 132 | 147 | (39) | 240 | 379 | (140) |
Property, plant and equipment | | | | | | | | 58 | (22) | (4) | 32 | 65 | (32) |
| | | | | | | | 252 | 77 | (16) | 313 | 317 | (4) |
| | | | | | | | 56 | 37 | 4 | 97 | 135 | (38) |
Pensions and other employee benefits | | | | | | | 269 | 4 | (27) | 245 | 251 | (6) |
| | | | | | | | 334 | 81 | (30) | 384 | 436 | (52) |
Deferred tax assets on tax loss carryforwards | | | | | | | 620 | (133) | (38) | 449 | |
Set-off deferred tax positions | | | | | (212) | 212 |
| | | | | | | | 1,721 | 190 | (151) | 1,761 | 1,820 | (59) |
11)Other includes the movements of assets and liabilities recognized in equity and OCI, which includes foreign currency translation differences, acquisitions and acquisitions, as well as the effects of US Tax Cuts and Jobs Act.divestments.
The company has available tax loss and credit carryforwards, which expire as follows:
Philips Group
Expiry years of net operating loss and credit carryforwards
in millions of EUR
| Total Balance as of December 31, 2017 | Unrecognized balance as of December 31, 2017 | Total Balance as of December 31, 2018 | Unrecognized balance as of December 31, 2018 | Total Balance as of December 31, 2020 | Unrecognized balance as of December 31, 2020 | Total Balance as of December 31, 2021 | Unrecognized balance as of December 31, 2021 |
|---|
| | | | 5 | 1 | 1,593 | 1,592 |
| | | | | 1,546 | 1,541 | 6 | - |
| | | | | 13 | 3 | 9 | - |
| | | | | 235 | - | 7 | - |
| | | | | 23 | - | 18 | - |
| | | | | 1,026 | 24 | 751 | 21 |
| | | | | 1,428 | 951 | 1,567 | 934 |
| | | | | 4,276 | 2,520 | 3,951 | 2,547 |
At December 31, 2018,2021, the amount of deductible temporary differences for which no deferred tax asset has been recognized in the balance sheet was EUR 3733 million (2017:(2020: EUR 4233 million).
Tax risks
Philips is exposed to tax risks. With regardrisks and uncertainty over tax treatments. For particular tax treatments that are not expected to thesebe accepted by tax risksauthorities, Philips either recognizes a liability is recognized if, as a resultor reflects the uncertainty in the recognition and measurement of a past event, Philips has an obligation that can be estimated reliably and it is probable that an outflow of economic benefits will be required to settle the obligation. These uncertain positions are presented as Other tax liabilities in Other liabilities and include, among others, the following:
US Tax Cuts and Jobs Act
Philips assessed the impact of the material aspects of the US Tax Cuts and Jobs Act on its current and deferred tax assets and liabilities. These reported amounts may be subject to estimation uncertainty andtax attributes. For the measurement adjustments may need to be made in subsequent reporting periods as Philips will get more accurate information on the impact of the Act anduncertainty, Philips uses the modalitiesmost likely amount or the expected value of its application.the tax treatment. The main uncertainties relateexpected liabilities resulting from the uncertain tax treatments are included in non-current tax liabilities (2021: EUR 544 million, 2020: EUR 291 million, increase due to lower tax losses or similar tax carryforwards that can be used if uncertain tax treatments were settled for the availability of net interest expense carryforwards andpresumed amount at balance sheet date). The positions include, among others, the amount of tax earnings and profits subject to tax under the mandatory deemed repatriation provisions.following:
Transfer pricing risks
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. In order to reduce the transfer pricing uncertainties, monitoring procedures are carried out by Group Tax to safeguard the correct implementation of the transfer pricing directives. However, tax disputes can arise due to inconsistent transfer pricing regimes and different views on "at arm's length" pricing.
Tax risks on general and specific service agreements and licensing agreements
Due to the centralization of certain activities (such as research and development, IT and group functions), costs are also centralized. As a consequence, these costs and/or revenues must be allocated to the beneficiaries, i.e. the various Philips entities. For that purpose, service contracts such as intra-group service agreements and licensing agreements are signed with a large number of group entities. Tax authorities review these intra-group service and licensing agreements, and may reject the implemented intra-group charges. Furthermore, buy in/out situations in the case of (de)mergers could affect the cost allocation resulting from the intragroup service agreements between countries. The same applies to the specific service agreements.
Tax risks due to disentanglements and acquisitions
When a subsidiary of Philips is disentangled, or a new company is acquired, tax risks may arise. Philips creates merger and acquisition (M&A) teams for these disentanglements or acquisitions. In addition to representatives from the involved business, these teams consist of specialists from various group functions and are formed, among other things, to identify tax risks and to reduce potential tax claims.
Tax risks due to permanent establishments
A permanent establishment may arise when a Philips entity has activities in another country, tax claims could arise in both countries on the same income.
10Earnings per share
Philips Group
Earnings per share
in millions of EUR unless otherwise stated1)
2016 - 2018
| | | | |
|---|
| | | | 2019 | 2020 | 2021 |
|---|
Income from continuing operations | | | | | | | 990 | 999 | 612 |
Income (loss) attributable to non-controlling interest, from continuing operations | | | | | | | 5 | 8 | 4 |
Income from continuing operations attributable to shareholders | | | | | | | 985 | 991 | 608 |
Income from Discontinued operations | | | | | | | 183 | 196 | 2,711 |
Income (loss) attributable to non-controlling interest, from Discontinued operations | | | | | | | |
Income from Discontinued operations attributable to shareholders | | | | | | | 183 | 196 | 2,711 |
| | | | |
Net income attributable to shareholders | | | | | | | 1,167 | 1,187 | 3,319 |
| | | | | |
Weighted average number of common shares outstanding (after deduction of treasury shares) during the year | | | | | | | 921,062,109 | 907,721,150 | 904,271,675 |
Plus incremental shares from assumed conversions of: | | | | | |
| | | | | | | 1,288,001 | 757,622 | 387,125 |
| | | | | | | 5,896,049 | 5,561,501 | 2,548,891 |
| | | | | | | 2,524,606 | 2,584,728 | 2,376,736 |
| | | | | | | 70,329 |
Dilutive potential common shares | | | | | | | 9,708,656 | 8,903,851 | 5,383,080 |
Diluted weighted average number of shares (after deduction of treasury shares) during the year | | | | | | | 930,770,765 | 916,625,001 | 909,654,754 |
| | | | |
Basic earnings per common share in EUR | | | | | |
Income from continuing operations attributable to shareholders | | | | | | | 1.07 | 1.09 | 0.67 |
Income from Discontinued operations attributable to shareholders | | | | | | | 0.20 | 0.22 | 3.00 |
Net income attributable to shareholders | | | | | | | 1.27 | 1.31 | 3.67 |
| | | | |
Diluted earnings per common share in EUR 3 4 | | | | |
| Diluted earnings per common share in EUR2) | | | |
Income from continuing operations attributable to shareholders | | | | | | | 1.06 | 1.08 | 0.67 |
Income from Discontinued operations attributable to shareholders | | | | | | | 0.20 | 0.21 | 2.98 |
Net income attributable to shareholders | | | | | | | 1.25 | 1.29 | 3.65 |
| | | | | |
Dividend distributed per common share in euros | | | | | | | 0.85 | 0.85 |
11)Shareholders in this table refers to shareholders of Koninklijke Philips N.V.
22)During 2018, an error was identified in certain non-controlling interests and EPS calculations for 2016 and 2017 respectively. Reference is made to the Significant accounting policies.3In 2016, 9 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.
4The dilutive potential common shares are not taken into account in the periods for which there is a loss, as the effect would be antidilutive
11Property, plant and equipment
Philips Group
Property, plant and equipment
in millions of EUR
2018
| | machinery and installations | | prepayments and construction in progress | | land and buildings | machinery and installations | other equipment | prepayments and construction in progress | total |
|---|
| | | owned | right-of-use | owned | right-of-use | owned | right-of-use | owned | right-of-use | owned | right-of-use |
Balance as of January 1, 2018 | | | |
| Balance as of January 1, 2021 | | | | | | | | | | | |
| | | | | | 1,076 | 1,147 | 1,506 | 199 | 1,572 | 213 | 261 | 1 | 4,415 | 1,560 |
| | | | | | (539) | (310) | (1,028) | (144) | (1,185) | (86) | | | (2,752) | (540) |
| | | | | | 537 | 837 | 478 | 55 | 387 | 126 | 261 | 1 | 1,663 | 1,020 |
| | | | | | | | | | | | |
| | | | | | 9 | 150 | 62 | 21 | 77 | 44 | 261 | | 409 | 215 |
| | | | | | 72 | 2 | 110 | | 117 | 3 | (305) | | (5) | 5 |
| | | | | | - | 43 | 9 | | 43 | | | | 53 | 43 |
| | | | | | (53) | (157) | (144) | (32) | (158) | (63) | | | (355) | (252) |
| | | | | | (1) | 1 | (6) | (5) | (11) | - | - | | (18) | (4) |
| Transfer (to) from AHFS | | (87) | (7) | (16) | | (46) | (1) | (20) | | (170) | (8) |
| Reclassifications | | 6 | - | 2 | | (10) | 2 | 1 | (1) | - | 1 |
Translations differences and other | | | | | | 23 | 44 | 14 | (2) | 16 | (4) | 10 | - | 65 | 39 |
| | | | | | (31) | 77 | 33 | (18) | 29 | (20) | (53) | (1) | (22) | 38 |
Balance as of December 31, 2018 | | | |
| Balance as of December 31, 2021 | | | | | | | | | | | |
| | | | | | 1,097 | 1,332 | 1,585 | 176 | 1,382 | 216 | 208 | | 4,273 | 1,724 |
| | | | | | (591) | (418) | (1,074) | (139) | (967) | (109) | | | (2,632) | (666) |
| | | | | | 506 | 914 | 511 | 37 | 415 | 107 | 208 | | 1,641 | 1,058 |
Philips Group
Property, plant and equipment
in millions of EUR
2017
| | machinery and installations | | prepayments and construction in progress | | land and buildings | machinery and installations | other equipment | prepayments and construction in progress | total |
|---|
| | | owned | right-of-use | owned | right-of-use | owned | right-of-use | owned | right-of-use | owned | right-of-use |
Balance as of January 1, 2017 | | | |
| Balance as of January 1, 2020 | | | | | | | | | | | |
| | | | | | 876 | 1,355 | 1,531 | 251 | 1,549 | 232 | 323 | 1 | 4,279 | 1,839 |
| | | | | | (395) | (326) | (1,055) | (188) | (1,184) | (105) | | | (2,634) | (618) |
| | | | | | 481 | 1,029 | 476 | 63 | 365 | 127 | 323 | 1 | 1,645 | 1,221 |
| | | | | | | | | | | | |
| | | | | | 28 | 80 | 60 | 53 | 84 | 97 | 399 | 2 | 571 | 231 |
| | | | | | 117 | 2 | 162 | | 160 | 3 | (441) | (2) | (2) | 2 |
| | | | | | |
| | | | | | (47) | (161) | (167) | (55) | (180) | (73) | | | (394) | (289) |
| | | | | | (3) | (5) | (13) | (4) | (16) | | - | - | (32) | (10) |
| | | | | | | (64) | (7) | (7) | (1) | (21) | (3) | | (11) | (91) |
Transfer (to) from assets classified as held for sale | | | | | | |
Translations differences and other | | | | | | (39) | (43) | (33) | 5 | (25) | (6) | (17) | - | (114) | (44) |
| | | | | | 56 | (192) | 2 | (8) | 22 | (1) | (62) | | 17 | (201) |
Balance as of December 31, 2017 | | | |
| Balance as of December 31, 2020 | | | | | | | | | | | |
| | | | | | 1,076 | 1,147 | 1,506 | 199 | 1,572 | 213 | 261 | 1 | 4,415 | 1,560 |
| | | | | | (539) | (310) | (1,028) | (144) | (1,185) | (86) | | | (2,752) | (540) |
| | | | | | 537 | 837 | 478 | 55 | 387 | 126 | 261 | 1 | 1,663 | 1,020 |
Land with a book value of EUR 5639 million at December 31, 2018 (2017:(2020: EUR 5047 million) is not depreciated. Property, plant and equipment includes financial lease assets with a book value of EUR 334 million at December 31, 2018 (2017: EUR 281 million).
The expected useful lives of property, plant and equipment are as follows:
Philips Group
Useful lives of property, plant and equipment
in years
| |
|---|
| |
Machinery and installations | |
| |
12Goodwill
The changes in 20172020 and 20182021 were as follows:
| | | |
|---|
| | | 2020 | 2021 |
|---|
| | | | |
| | | 10,182 | 9,094 |
| | | (1,528) | (1,080) |
| | | 8,654 | 8,014 |
| | | |
| | | | |
| | | 189 | 2,095 |
| Impairments | | (144) | (15) |
Divestments and transfers to assets classified as held for sale | | | (12) | (189) |
Translation differences and other | | | (673) | 732 |
| | | |
Balance as of December 31: | | | | |
| | | 9,094 | 11,793 |
| | | (1,080) | (1,156) |
| | | 8,014 | 10,637 |
GoodwillIn 2021, goodwill increased by EUR 4652,623 million, in 2018, mainly from the acquisitionprimarily as a result of EPD Solutions for an amountgoodwill recognized on new acquisitions of BioTelemetry (EUR 1,776 million) and Capsule Technologies of (EUR 325 million), and translation differences of EUR 262732 million. This was partially offset by EUR 15 million of impairment losses primarily related to the PERS CGU and otherEUR 189 million divested in the period, mostly relating to the Domestic Appliances business. For details on the impact of new acquisitions for an amountand the divestment of the Domestic Appliances business, refer to Acquisitions and divestments.
In 2020, goodwill decreased by EUR 203 million. The further increase of EUR 310640 million, is mainly due to translation differences which impacted the goodwill denominated in USD.
In 2017,USD and impairments totaling EUR 144 million related to Population Health Management (PHM). The decrease was partially offset by goodwill increases from the increaseacquisition of goodwill for the amount of EUR 1,548 million relates to SpectraneticsIntact Vascular for an amount of EUR 1,255155 million and other acquisitions as well as changes in the provisional opening balance sheet position for certain 2019 acquisitions (refer to Acquisitions and divestments).
Goodwill reallocations in 2021 and 2020
In 2021 there was a change to the CGU structure following an internal reorganization (effective Q1 2021). This resulted in a goodwill reallocation across certain CGUs, none of which had a significant impact on headroom or led to goodwill impairments. These reallocations were performed using a relative value approach.
In Q4 2020, the PHM CGU was split, resulting in a separate CGU for the Personal Emergency Response Services (PERS) and Senior Living business (previously named the Aging and Caregiving (ACG) business) in anticipation of its future divestment. The remaining PHM goodwill was allocated to the PERS CGU and remaining PHM CGU based on relative fair value. The goodwill allocated to the remaining PHM CGU was immaterial. An additional CGU change in 2020 resulted in a goodwill reallocation across certain CGUs, none of which had a significant impact on headroom or led to goodwill impairments.
In addition in 2021 and 2020, there were also certain CGU movements and/or combinations within businesses that did not result in a reallocation of goodwill, but resulted in changes to the business structure. This did not have a significant impact on headroom or lead to goodwill impairments.
Impairments
During 2021 a total impairment of EUR 15 million was recognized. The majority of this related to the PERS CGU which was classified as an asset held for sale as of Q4 2020. At June 30, 2021 the PERS CGU was divested. Prior to the divestment a goodwill impairment of EUR 13 million was recorded to reflect a decrease in the recoverable amount of the CGU, this reduced the goodwill balance of the CGU to zero. The fair value less cost of disposal methodology was used to estimate the recoverable amount for the PERS CGU, this was based on Level 3 inputs. Key assumptions and inputs used in the calculation included the signed purchase agreement for the PERS divestment. The impairment of EUR 13 million was recorded in the Connected Care segment and in Other business expenses in the Statement of Income. For further information refer to Acquisitions and divestments .
In the fourth quarter of 2020, the PHM CGU was split, resulting in a separate CGU for the PERS business in anticipation of its future divestment. The impairment test indicated that the pre-split PHM’s carrying balance of EUR 303 million exceeded the recoverable amount of EUR 293 million. Divestments195 million, resulting in a EUR 108 million goodwill impairment charge. After the PHM impairment, further described below, remaining goodwill in the amount of EUR 1,87863 million primarily relatewas allocated to the divestment of Signify. InformationPERS CGU and remaining PHM CGU based on their relative fair value. Upon reallocation, standalone impairment tests were completed for PERS and the divestment of Signify can be found in Discontinued operations and assets classified as held for sale. The decreaseremaining PHM business. This second impairment test indicated that the PERS carrying balance of EUR 836186 million is mainly due to translation differences which impactedexceeded the goodwill denominatedrecoverable amount of EUR 150 million resulting in USD.
a EUR 36 million impairment charge. In 2018,total, EUR 144 million of impairment charges were recorded within the activities of PatientConnected Care & Monitoring Solutionssegment, in the segment Connected Care & Health Informatics were split over two new cash-generating units: Monitoring & Analytics and Therapeutic Care. As a resultline Other business expenses in the statement of the change, the goodwill associated with Patient Care & Monitoring Solutions was allocated over these two new units based on the estimated fair value of Monitoring & Analytics and Therapeutic Care relative to the Q4 2017 Patient Care & Monitoring Solutions value in use calculation. The Therapeutic Care goodwill is considered not to be significant in comparison to the total book value of goodwill.income.
Goodwill impairment testing
For impairment testing, goodwill is allocated to (groups of) cash-generatingcash generating units (typically one level below segment level, i.e. at the business level), which represent the lowest level at which the goodwill is monitored internally for management purposes.
Goodwill allocated to the cash-generatingcash generating units Image-Guided Therapy,Ambulatory Monitoring & AnalyticsDiagnostics, Image-Guided Therapy and Sleep & Respiratory Care is considered to be significant in comparison to the total book value of goodwill for the Group at December 31, 2018.2021. The amounts associated as of December 31, 20182021 are presented below:in the following table:
Philips Group
Goodwill allocated to the cash-generating units
in millions of EUR
2017 - 2018
| | | 2020 | 2021 |
|---|
| | | |
| Ambulatory Monitoring & Diagnostics1) | | | 1,897 |
| Hospital Patient Monitoring2) | | 1,246 | 1,663 |
| | | 2,610 | 2,802 |
Patient Care & Monitoring Solutions | | | |
| | | |
| | | 1,915 | 2,031 |
Other (units carrying a non-significant goodwill balance) | | | 2,244 | 2,245 |
| | | 8,014 | 10,637 |
TheUnless otherwise noted, the basis of the recoverable amount used in the annual impairment tests for the units disclosed further in this note is the value in use. InThe fair value less cost to dispose methodology was used as a basis for the recoverable amount in the annual impairment test performed inwhen greater than the fourth quarter of 2018,value-in-use test. Refer to the estimated recoverable amounts of‘key assumptions- general’ section for further detail on the cash-generating units tested approximated or exceeded the carrying value of the units, therefore no impairment loss was recognized.methodology.
Key assumptions - general
Key assumptions used in the value-in-use impairment tests for the units were sales growth rates, EBITAEBITA%*)and the rates used for discounting the projected cash flows. These cash flow projections were determined using the Royal Philips managements’ internal forecasts that cover an initial forecast period from 20192022 to 2021.2024. Projections were extrapolated with stable or declining growth rates for aan extrapolation period of 4 years (2025-2028), after which a terminal value was calculated.calculated per 2029. In the case of acquisitions made during 2021, the acquisition business case is used as management’s forecast for the initial forecast and extrapolation period. For the terminal value calculation, growth rates were capped at a historical long-term average growth rate. The mentionedIn the 2020 value-in-use tests the initial forecast period was 4 years is linked to managements' newand the extrapolation period 3 years, this reflected the internal forecasts of 2022-2025forecasting process at that will be concluded in 2019, and was updated from 5 years as applied in 2017 to be aligned with the current Philips forecasting process.time.
The sales growth rates and EBITA*)used to estimate cash flows are based on past performance, external market growth assumptions and industry long-term growth averages. EBITA*)in all units mentioned in this note is expected to increase over the projection period as a result of volume growth and cost efficiencies.
In 2021 the impact of COVID-19 has gradually reduced, however there continues to be uncertainty and volatility related to the impact of the pandemic, including global supply chain challenges. Where relevant, and to the extent possible, the estimated impact of the COVID-19 pandemic, supply chain challenges and resulting uncertainties have been reflected in the forecasts used for the VIU calculations. As was the case in 2020, the company uses scenarios in the business forecasting process and the most reasonable and supportable assumptions which represent management’s best estimate are used as the basis for the value-in-use tests. These scenarios take into account the expected impact of COVID-19, amongst other factors. In 2020 the forecasted sales growth rates were impacted by the COVID-19 consequences and uncertainties. In general these uncertainties have reduced throughout 2021, meaning that the current year assumptions are impacted to a lesser extent.
The rates used for discounting the projected cash flows in goodwill impairment testing is based on a business weighted cost of capital (WACC), which in turn is based on business-specific inputs along with other inputs as mentioned below. The WACC is based on post-tax cost of equity and cost of debt, and is further calculated based on market data and inputs to accurately capture changes to the time value of money, such as the risk-free interest rate, the beta factor and country risk premium. In order to properly reflect the different risk-profiles of different businesses, a WACC is determined for each business. As such, the beta factor is determined based on a selection of peer companies, which can differ per business. Different businesses have different geographical footprints, resulting in business-specific inputs for variables like country risk.
Key assumptions and sensitivity analysis relating to cash-generating units to which a significant amount of goodwill is allocated
CashIn 2021 cash flow projections of Image-Guided Therapy,Ambulatory Monitoring & AnalyticsDiagnostics, Image-Guided Therapy and Sleep & Respiratory Care are based on the key assumptions included in the following table, below, which were used in the annual impairment test performed in the fourth quarter:quarter.
| compound sales growth rate 1 | | compound sales growth rate1) | |
|---|
| | | used to calculate terminal value 3 | | initial forecast period | extrapolation period2) | used to calculate terminal value3) | pre-tax discount rates |
|---|
| | | |
| Ambulatory Monitoring & Diagnostics | | 24.5% | 11.9% | 2.5% | 7.3% |
| Hospital Patient Monitoring4) | | 5.4% | 3.4% | 2.5% | 7.8% |
| | | | | 10.2% | 5.4% | 2.5% | 8.9% |
| | | | | |
| | | | | 9.2% | 5.0% | 2.5% | 9.2% |
11)Compound sales growth rate is the annualized steady nominal growth rate over the forecast period
22)Also referred to later in the text as compound long-term sales growth rate
33)The historical long-term growth rate is only applied to the first year after the 4 year extrapolation period, after which no further growth is assumed for the terminal value calculation
4)Previously named Monitoring & Analytics.The assumptions used for the 20172020 cash flow projections were as follows:
| compound sales growth rate 1 | | compound sales growth rate1) | |
|---|
| | | used to calculate terminal value 3 | | initial forecast period | extrapolation period2) | used to calculate terminal value3) | pre-tax discount rates |
|---|
| | | |
| Hospital Patient Monitoring4) | | (0.3)% | 3.3% | 2.5% | 9.4% |
| | | | | 8.6% | 4.9% | 2.5% | 9.0% |
Patient Care & Monitoring Solutions | | | | | |
| | | | | (1.2)% | 4.4% | 2.5% | 9.7% |
| | | |
11)Compound sales growth rate is the annualized steady nominal growth rate over the forecast period
22)Also referred to later in the text as compound long-term sales growth rate
33)The historical long-term growth rate is only applied to the first year after the 54 year extrapolation period, after which no further growth is assumed for the terminal value calculation
The results of the annual impairment test of Image-Guided Therapy,4)Previously named Monitoring & Analytics and Sleep & Respiratory Care indicate that a reasonably possible change in key assumptions would not cause the value in use to fall to the level of the carrying value.
Additional information relating to cash-generating units to which a non-significant amount relative to the total goodwill is allocated
In addition to the significant goodwill recorded at the units mentioned above, Aging & Caregiving (formerly Home Monitoring) and Population Insights & Care (formerly Population Health Management) are sensitive to fluctuations in the assumptions as set out above.
Based on the most recent impairment test of the cash-generating unit Aging & Caregiving, it was noted that an increase of 300 points in the pre-tax discount rate, a 730 basis points decline in the compound long-term sales growth rate or a 39% decrease in terminal value would, individually, cause its recoverable amount to fall to the level of its carrying value. The goodwill allocated to Aging & Caregiving at December 31, 2018 amounts to EUR 43 million.
Based on the annual impairment test of the cash-generating unit Population Insights & Care, it was noted that an increase of 10 points in the pre-tax discount rate, a 30 basis points decline in the compound long-term sales growth rate or a 3% decrease in terminal value would, individually, cause its recoverable amount to fall to the level of its carrying value. The goodwill allocated to Population Insights & Care at December 31, 2018 amounts to EUR 207 million.
Analytics.Impairment tests are performed based on forward looking assumptions, using the most recent available information. By their nature, these assumptions 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 the plans, goals and expectations set forth in these assumptions. For
The results of the two cash-generating units Agingannual impairment tests of Sleep & Caregiving and Population Insights &Respiratory Care indicate that the value in use of the CGUs is sensitive to the assumptions set out above. This means that there is a higher risk that those deviations mightin the mentioned key assumptions could cause the recoverable amount to fall below the level of its carrying value. This is due to the uncertainty associated with the initiated voluntary recall notification in the United States and field safety notice outside the United States for certain sleep and respiratory care products, and the associated legal matters. For further details refer to Provisions and Contingent assets and liabilities. Based on the annual impairment test of Sleep & Respiratory Care, it was noted that an increase of 200 basis points in the pre-tax discount rate, a 840 basis points decline in the compound long-term sales growth rate or a 29% decrease in terminal value would, individually, cause its recoverable amount to fall to the level of its carrying value.
The results of the annual impairment test of Ambulatory Monitoring & Diagnostics, Hospital Patient Monitoring and Image-Guided Therapy indicate that a reasonably possible change in key assumptions would not cause the value in use to fall to the level of the carrying value.
Additional information relating to cash-generating units to which a non-significant amount relative to the total goodwill is allocated
For the other cash-generatingcash generating units to which a non-significant amount relative to the total goodwill is allocated, any reasonable change in assumptions would not cause the value in use to fall to the level of the carrying value.
13Intangible assets excluding goodwill
The changes were as follows:
Philips Group
Intangible assets excluding goodwill
in millions of EUR
2018
| | | | | product development construction in progress | | | | brand names | customer relationships | technology | product development | product development construction in progress | software | other | total |
|---|
Balance as of January 1, 2018 | | | |
| Balance as of January 1, 2021 | | | | | | | | |
| | | | | | | | | 556 | 2,036 | 2,434 | 2,519 | 480 | 723 | 135 | 8,883 |
Amortization/ impairments | | | | | | | | | (437) | (1,385) | (1,565) | (1,897) | (83) | (427) | (91) | (5,886) |
| | | | | | | | | 120 | 651 | 869 | 622 | 398 | 295 | 44 | 2,997 |
| | | | | | | | | |
| | | |
| | | | | | | | |
Internally generated assets | | | | | |
| Additions | | | | 9 | 1 | 261 | 117 | 2 | 392 |
| | | | | | | | | 247 | (247) | - | - |
| | | | | | | | 62 | 544 | 235 | | | - | - | 841 |
| | | | | | | | | (21) | (126) | (114) | (219) | - | (85) | (3) | (568) |
| | | | | | | | | | (3) | (57) | (51) | (15) | - | - | (126) |
| Transfers to assets classified as held for sale | | (10) | (3) | (11) | (17) | (6) | (34) | | (82) |
Translation differences and other | | | | | | | | | 12 | 80 | 69 | 17 | 23 | (7) | 1 | 195 |
| | | | | | | | | 42 | 492 | 131 | (22) | 17 | (8) | 1 | 653 |
Balance as of December 31, 2018 | | | |
| Balance as of December 31, 2021 | | | | | | | | |
| | | | | | | | | 644 | 2,590 | 2,605 | 2,701 | 505 | 754 | 146 | 9,944 |
Amortization/ impairments | | | | | | | | | (481) | (1,447) | (1,605) | (2,102) | (91) | (467) | (101) | (6,294) |
| | | | | | | | | 162 | 1,143 | 1,000 | 599 | 414 | 287 | 44 | 3,650 |
Philips Group
Intangible assets excluding goodwill
in millions of EUR
2017
| | | | | product development construction in progress | | | | brand names | customer relationships | technology | product development | product development construction in progress | software | other | total |
|---|
Balance as of January 1, 2017 | | | |
| Balance as of January 1, 2020 | | | | | | | | | |
| | | | | | | | | 709 | 2,476 | 2,491 | 2,387 | 578 | 784 | 154 | 9,579 |
Amortization/ impairments | | | | | | | | | (524) | (1,587) | (1,530) | (1,795) | (56) | (527) | (94) | (6,113) |
| | | | | | | | | 184 | 890 | 961 | 592 | 523 | 257 | 59 | 3,466 |
| | | | | | | | | | |
| | | | | | | | | | |
| | | |
| | | | | | | | | |
Internally generated assets | | | | | |
| Additions | | | 1 | 12 | - | 305 | 127 | 2 | 449 |
| | | | | | | | | 373 | (374) | | - | - |
| | | | | | | | 8 | 1 | 175 | - | | | - | 185 |
| | | | | | | | | (26) | (121) | (103) | (221) | - | (84) | (4) | (560) |
| | | | | | | | - | (1) | (118) | (62) | (44) | (2) | (8) | (235) |
Divestments and transfers to assets classified as held for sale | | | | | | | | | |
| | | | | | | | | |
| Transfers to assets classified as held for sale | | (33) | (55) | (1) | (8) | (2) | (3) | | (102) |
| Translation differences and other | | (13) | (64) | (58) | (53) | (10) | - | (6) | (204) |
| | | | | | | | | (65) | (239) | (92) | 30 | (125) | 38 | (15) | (468) |
Balance as of December 31, 2017 | | | |
| Balance as of December 31, 2020 | | | | | | | | | |
| | | | | | | | | 556 | 2,036 | 2,434 | 2,519 | 480 | 723 | 135 | 8,883 |
| | | | | | | | | |
| Amortization/ impairments | | (437) | (1,385) | (1,565) | (1,897) | (83) | (427) | (91) | (5,886) |
| | | | | | | | | 120 | 651 | 869 | 622 | 398 | 295 | 44 | 2,997 |
The acquisitions through business combinationsAcquisitions in 2018 mainly consist of the acquired intangible2021 involved Intangible assets of EPD Solutions Ltd.EUR 841 million in aggregate (2020: EUR 185 million). For more information, please refer to Acquisitions and divestments.
Impairments in 2021 were EUR 126 million (2020: EUR 235 million) and mainly relate to technology (EUR 57 million) and product development (EUR 51 million). The most notable impairment in 2021 is in the Diagnosis & Treatment segment, for technology assets in Image Guided Therapy-Systems (IGT Systems) of EUR 55 million. This impairment charge is based on a trigger-based test on the CGU EPD, a business category and an innovator in image-guided procedures for cardiac arrhythmias (heart rhythm disorders). The impairment charge is a result of more severe short-term impacts of COVID-19 and the competitive environment. The basis of the recoverable amount used in this test is the value in use, and an after-tax discount rate of 6.5% is applied. After the impairment charge the recoverable amount of the related intangible assets is EUR 29 million.
Other notable impairments in 2021 were in the Connected Care segment, for product development in the Sleep & Respiratory Care (S&RC) business of EUR 35 million. The impairment in the S&RC business is due to delays in commercialization as a result of product improvements needed in combination with resource constraints as a result of the Respironics voluntary recall notification.
In 2021 the impact of COVID-19 has gradually reduced, however there continues to be uncertainty and volatility related to the impact of the pandemic, including global supply chain challenges. Where relevant, and to the extent possible, the estimated impact of the COVID-19 pandemic, supply chain challenges and resulting uncertainties have been taken into account when assessing the valuation of intangible assets excluding goodwill. As was the case in 2020, the company uses scenarios in the business forecasting process and the most reasonable and supportable assumptions which represent management’s best estimate are used as the basis for the value-in-use tests. These scenarios take into account the expected impact of COVID-19, amongst other factors.
The amortization of intangible assets is specified in Income from operations.
The expected useful lives of the intangible assets excluding goodwill are as follows:
Philips Group
Expected useful lives of intangible assets excluding goodwill
in years
The weighted average expected remaining life of brand names, customer relationships, technology and other intangible assets is 9.39.6 years as of December 31, 2018 (2017: 9.62021 (2020: 9.1 years).
AtThe most notable intangible assets as of December 31, 20182021 relate to the carrying amount ofBioTelemetry customer relationships and technology with a carrying value of Sleep & Respiratory Care was EUR 278391 million withand EUR 162 million and a remaining amortization period of 515 years (2017:and 11 years, respectively and Spectranetics customer relationships and technology with a carrying value of EUR 315 million; 6 years). For the intangibles relating292 million and EUR 210 million and a remaining amortization period of 16 years and 11 years, respectively. The most notable intangible assets as of December 31, 2020 relate to the acquisitionSpectranetics customer relationships and technology with a carrying value of Spectranetics refer to AcquisitionsEUR 287 million and divestments.EUR 212 million and a remaining amortization period of 17 years and 12 years, respectively.
14Other financial assets
Other current financial assets
In 20182021, Other current financial assets increased by EUR 434 million from EUR 20 million in 2017 to EUR 4362 million.
In 2020, Other current financial assets decreased from EUR 1 million in 2018, reflecting mainly the remaining interest in Signify (formerly Philips Lighting) of 16.5% as of December 31, 2018 (please refer to Interests in entities). EUR 0 million.
Other non-current financial assets
The company’s investments in Other non-current financial assets mainly consist of investments in common shares of companies in various industries and investments in limited life funds. The changes during 20182021 and 2020 were as follows:
Philips Group
Other non-current financial assets
in millions of EUR
2018
| Non-current financial assets at FVTP&L | Non-current financial assets at FVTOCI | Non-current financial assets at Amortized cost | | Non-current financial assets at FVTP&L | Non-current financial assets at FVTOCI | Non-current financial assets at Amortized cost | Total |
|---|
| | | |
Balance as of January 1, 2018 1 | | | | | |
| Balance as of January 1, 2021 | | 248 | 146 | 37 | 430 |
| | | |
| | | | | 54 | 59 | 10 | 123 |
Sales/redemptions/reductions | | | | | (122) | 0 | (3) | (126) |
Value adjustment through OCI | | | | | - | (43) | - | (43) |
Value adjustment through P&L | | | | | 95 | - | 95 |
Translation differences and other | | | | | 8 | 19 | 2 | 29 |
| | | | | (1) | 120 | 2 | 122 |
Balance as of December 31, 2018 | | | | | |
| Balance as of December 31, 2021 | | 283 | 300 | 47 | 630 |
1Refer to IFRS 9 disclosure in Significant accounting policies note for the impact of IFRS 9 on 2018 opening balance.
Philips Group
Other non-current financial assets
in millions of EUR
2017
| available-for-sale financial assets | | held-to-maturity investments | financial assets at fair value through profit or loss | |
|---|
| | | | | |
Balance as of January 1, 2017 | | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Translation differences and other | | | | | |
Balance as of December 31, 2017 | | | | | |
| | Non-current financial assets at FVTP&L | Non-current financial assets at FVTOCI | Non-current financial assets at Amortized cost | Total |
|---|
| Balance as of January 1, 2020 | 136 | 72 | 40 | 248 |
| Changes: | | | | |
| Acquisitions/additions | 44 | 82 | 4 | 131 |
| Sales/redemptions/reductions | (59) | (3) | (2) | (65) |
| Value adjustment through OCI | - | 3 | - | 3 |
| Value adjustment through P&L | 133 | - | - | 133 |
| Translation differences and other | (6) | (5) | (6) | (17) |
| Reclassifications | - | (3) | - | (3) |
| Balance as of December 31, 2020 | 248 | 146 | 37 | 430 |
The company’sAt December 31, 2021, equity investments of EUR 273 million (2020: EUR 119 million) are accounted under the FVTOCI category based on the company's election at initial recognition mainly because such investments are neither held for trading purposes nor primarily for their increase in value and the elected presentation is considered to reflect the nature and purpose of the investment.
In 2021, reclassifications refer to previous investments in non-current financial assets mainly consist of investments in common shares of companies in various industries. In 2018, the main movements inassociates that were reclassified to Other non-current financial assets at FVTOCI can be explained by value adjustmentsfollowing the loss of significant influence. The main movement in Other non-current financial assets at FVTPL is related to the retained investment in the combined Lumileds and Automotive businesses (please refer to Fair value of financial assets and liabilities)
The retained investment in the combined businesses of Lumileds and Automotiveadjustments through P&L of EUR 11295 million, (December 31, 2017: EUR 243 million)which is classified as a financial asset recognized atmainly due to fair value through OCI.gains from investments in limited life funds.
15Other assets
Other non-current assets
Other non-current assets in 20182021 were EUR 129 million (2020: EUR 66 million). These mainly related to prepaid expenses of EUR 47 million (2017: EUR 74 million).expenses.
Other current assets
Other current assets includeof EUR 276493 million (2017:(2020: EUR 186424 million) included contract assets EUR 290 million (2020: EUR 229 million), EUR 31 million (2020: EUR 26 million) accrued income and EUR 193172 million (2017:(2020: EUR 206169 million) for prepaid expense mainly related to Diagnosis & Treatment businesses and Connected Care & Health Informatics businesses.
16Inventories
Inventories are summarized as follows:
Philips Group
Inventories
in millions of EUR
2017 - 2018
| | | |
|---|
| | | 2020 | 2021 |
|---|
Raw materials and supplies | | | 992 | 1,143 |
| | | 537 | 646 |
| | | 1,464 | 1,660 |
| | | 2,993 | 3,450 |
The write-down of inventories to net realizable value was EUR 159177 million in 2018 (2017:2021 (2020: EUR 150180 million). The write-down is included in cost of sales.
17Receivables
Receivables
Non-current receivables
Non-current receivables are associated mainly with customer financing in the Diagnosis & Treatment businesses amounting to EUR 44 million (2017:(2020: EUR 4729 million), for Signify indemnification amounting to EUR 5946 million (2020: EUR 55 million), advance income tax payments amounting to EUR 78 million for which Philips expects to get a refund (2020: EUR 78 million) and insurance receivables in Other in the US amounting to EUR 4137 million (2017:(2020: EUR 4738 million).
Current receivables
Current receivables of EUR 3,787 million (2020: EUR 4,156 million) at December 31, 20182021 included trade accounts receivable net(net of allowance) of EUR 3,8053,559 million (2020: EUR 3,928 million), accounts receivable other of EUR 203188 million (2020: EUR 191 million) and accounts receivable from investments in associates of EUR 27 million.40 million (2020: EUR 37 million).
The accounts receivable, net, per segment are as follows:
Philips Group
Accounts receivables-net
in millions of EUR
2017 - 2018
| | | 2020 | 2021 |
|---|
| | | 1,653 | 1,759 |
Connected Care & Health Informatics | | | |
| Connected Care | | 1,124 | 980 |
| | | 1,017 | 575 |
| | | 133 | 245 |
| | | 3,928 | 3,559 |
The aging analysis of accounts receivable, net, is set out below:
Philips Group
Aging analysis
in millions of EUR
2017 - 2018
| | | |
|---|
| | | 2020 | 2021 |
|---|
| | | 3,413 | 3,075 |
| | | 189 | 160 |
| | | 224 | 245 |
| | | 102 | 79 |
| | | 3,928 | 3,559 |
The above net accounts receivable represent current and overdue but not fully impaired receivables.
The changes in the allowance for doubtful accounts receivable are as follows:
Philips Group
Allowance for accounts receivable
in millions of EUR
2016 - 2018
| | | | |
|---|
| | | 2020 | 2021 |
|---|
| | | | 211 | 195 |
Additions charged to expense | | | | 19 | 4 |
Deductions from allowance 1 | | | | |
| Deductions from allowance1) | | (17) | (17) |
Transfer to assets held for sale | | | | (1) | (8) |
| | | | (16) | 16 |
Balance as of December 31 | | | | 195 | 190 |
11)Write-offs for which an allowance was previously provided.
The allowance for doubtful accounts receivable has been primarily established for receivables that are past due.
Included in the above balances as per December 31, 20182021 are allowances for individually impaired receivables of EUR 181188 million (2017:(2020: EUR 197 million; 2016: EUR 289186 million). .
Contract assets
Current contract assets were EUR 232 million per December 31, 2018 (2017: EUR 171 million).
The contract assets increased with EUR 61 million. The year-on-year change is mainly driven by timing differences between billing terms and services provided.
18Equity
Equity
Common shares
As of December 31, 2018,2021, authorized common shares consist of 2 billion shares (December 31, 2017:2020: 2 billion; December 31, 2016:2019: 2 billion) and the issued and fully paid share capital consists of 926,195,539883,898,696 common shares, each share having a par value of EUR 0.20 (December 31, 2017: 940,909,027;2020: 911,053,001; December 31, 2016: 929,644,864)2019: 896,733,721).
Preference shares
As a means to protect the Company and its stakeholders against (an attempt at) an unsolicited takeover or other attempt to obtainexert (de facto) control of the Company,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. The ‘Stichting Preferente Aandelen Philips’ has been granted the right to acquire preference shares in the Company. Such right has not been exercised asAs of December 31, 20182021, no such right has been exercised and no preference shares have been issued. Authorized preference shares consist of 2 billion shares as of December 31, 20182021 (December 31, 2017:2020: 2 billion; December 31, 2016:2019: 2 billion).
Options, restricted and performance shares
TheUnder its share-based compensation plans, the Company has granted stock options on its common shares up to 2013 and other rights to receive common shares in the future (see(refer to Share-based compensation).
Treasury shares
In connection with the Company’s share repurchase programs, (see next paragraph: Share repurchase methods for share-based compensation plans and capital reduction purposes), shares which have been repurchased and are held in Treasury for the purpose of (i) delivery upon exercise of options, restricted and performance share programs, and (ii) capital reduction, are accounted for as a reduction of shareholders’ equity. Treasury shares are recorded at cost, representing the market price on the acquisition date. When issued, shares are removed from treasury shares on a first-in, first-out (FIFO) basis.
When treasury shares are reissued underdelivered by the Company’s option plans,Company upon exercise of options (granted to employees up to 2013), the difference between the cost and the cash received is recorded in retained earnings. When treasury shares are reissueddelivered by the Company upon vesting of restricted shares or performance shares (granted under the Company’s share plans,share-based compensation plans), the difference between the market price of the shares issued and the cost is recorded in retained earnings, and the market price is recorded in capital in excess of par value.
The following table shows the movements in the outstanding number of shares over the last three years:
Philips Group
Outstanding number of shares
in number of shares
2016 - 2018
| | | | |
|---|
| | | 2019 | 2020 | 2021 |
|---|
| | | | 914,184,087 | 890,973,790 | 905,128,293 |
| | | | 9,079,538 | 18,080,198 | 6,345,968 |
Purchase of treasury shares | | | | (40,390,495) | (8,669,622) | (45,486,392) |
Re-issuance of treasury shares | | | | |
| Delivery of treasury shares | | 8,100,660 | 4,695,170 | 4,194,577 |
| Issuance of new shares | | | 48,757 | |
Balance as of December 31 | | | | 890,973,790 | 905,128,293 | 870,182,445 |
The following transactions took place resulting from employee optionformer and sharecurrent share-based remuneration plans:
Philips Group
Employee option and share plan transactions
2016 - 2018
| | | | |
|---|
| | | 2019 | 2020 | 2021 |
|---|
| | | | 5,497,675 | 5,351,411 | 3,996,576 |
| | | | EUR 34.25 | EUR 33.81 | EUR 36.15 |
| | | | EUR 188 million | EUR 181 million | EUR 144 million |
| | | | 8,100,660 | 4,695,170 | 4,194,577 |
| | | | EUR 32.87 | EUR 34.35 | EUR 34.14 |
| | | | EUR 266 million | EUR 161 million | EUR 143 million |
Total shares in treasury at year-end | | | | 5,268,467 | 5,924,708 | 5,726,708 |
| | | | EUR 180 million | EUR 199 million | EUR 201 million |
In order to reduce share capital, theThe following transactions took place:place for capital reduction purposes:
Philips Group
Share capital transactions
2016 - 2018
| | | | |
|---|
| | | 2019 | 2020 | 2021 |
|---|
| | | | 34,892,820 | 3,318,211 | 41,489,816 |
| | | | EUR 34.29 | EUR 39.21 | EUR 36.22 |
| | | | EUR 1,196 million | EUR 130 million | EUR 1,503 million |
Cancellation of treasury shares (shares) | | | | 38,541,356 | 3,809,675 | 33,500,000 |
Cancellation of treasury shares (EUR) | | | | EUR 1,316 million | EUR 152 million | EUR 1,216 million |
Total shares in treasury at year-end | | | | 491,464 | | 7,989,816 |
| | | | EUR 22 million | | EUR 287 million |
Share purchase transactions related to employee option and share plans, as well as transactions related to the reduction of share capital, involved a cash outflow of EUR 1,0421,636 million. A cash inflow of EUR 9423 million from treasury shares mainly includes settlements of share-based compensationremuneration plans.
Share repurchase methods for share-based compensationremuneration plans and capital reduction purposes
During 2018, Royal Philips repurchaseduses different methods to repurchase shares for share-based compensation plans and capital reduction purposes via three different methods:in its own capital: (i) share buy-backbuyback repurchases in the open market via an intermediaryintermediary; (ii) repurchase of shares via forward contracts for future delivery of sharesshares; and (iii) the unwinding of call options on own shares. In 2018, RoyalDuring 2021, Philips also used methods (i) and (ii) to repurchase shares for capital reduction purposes.purposes and methods (ii) and (iii) to repurchase shares for share-based compensation plans.
Forward share repurchase plans / contracts
In order
Forward contracts to hedge commitments underrepurchase shares for share-based compensation plans
On May 19, 2021, Royal Philips announced that it will repurchase up to 2 million shares to cover certain of its obligations arising from its long-term incentive and employee stock purchase plans. Under this program, Philips entered into threeone forward contracts in the last quarter of 2018, involving 10 million shares. This resulted in a reduction of Retained earningscontract for an amount of EUR 31990 million against Short-term and Long-term liabilities. Additionally, in the first quarter of 2018 the remaining forward contracts under the forward share buy-back contract of 2017 were exercised at a forward price of EUR 27.03, resulting in a EUR 20to acquire 2 million increase in Retained earnings against Treasury shares. As of December 31, 2018, 10 million forward contracts connected to share based compensation plans were outstanding.
In order to reduce its share capital, Royal Philips also entered into six forward contracts in 2017. The forward contacts involved 31,020,000 shares with a settlement datedates varying between October 20182023 and June 2019November 2023 and a weighted average forward price of EUR 32.22. In 2018, 12,420,00044.85.
On January 29, 2020, Philips announced that it will repurchase up to 6 million shares to cover certain of its obligations arising from its long-term incentive and employee stock purchase plans. Under this program, Philips entered into three forward contracts for an amount of EUR 174 million to acquire 5 million shares with settlement dates varying between October 2021 and November 2022 and a weighted average forward price of EUR 34.85. As of December 31, 2021, a total of 1.5 million shares under this program were exercised resultingacquired (all were settled in the fourth quarter of 2021). This resulted in EUR 61 million increase in retained earnings against treasury shares.
On October 22, 2018, Philips announced and started a share repurchase program for an amount of up to EUR 174 million to cover its long-term incentive and employee stock purchase plans, after which it repurchased shares via an intermediary to allow for buybacks in the open market during both open and closed periods. On November 12, 2018, Philips announced to extend this program and entered into three forward contracts for an amount of EUR 319 million to repurchase 10 million shares with settlement dates varying between October 2019 and November 2021 and a weighted average forward price of EUR 31.89. As of December 31, 2021, a total of 10 million shares under this program had been acquired (4 million shares in the fourth quarter of 2019, 4 million shares in the fourth quarter of 2020 and 2 million shares in the fourth quarter of 2021). This resulted in EUR 319 million increase in retained earnings against treasury shares (EUR 130 million, EUR 126 million and EUR 62 million pertaining to 2019, 2020 and 2021, respectively).
As of December 31, 2021, the remaining forward contracts to cover obligations under share-based remuneration plans related to 5.5 million shares and amounted to EUR 203 million.
Forward contracts to repurchase shares for capital reduction purposes
On July 26, 2021, Philips announced a share buyback program for share cancellation purposes for an amount of up to EUR 1.5 billion. Consequently, in the third quarter of 2021 Philips entered into three forward contracts for an amount of EUR 731 million to acquire 20 million shares with settlement dates in 2022, 2023 and 2024 and a weighted average forward price of 37.36. Philips executed the remainder of the program through open market purchases by an intermediary in the fourth quarter of 2021 (acquiring 21 million shares) and January 2022 (acquiring 0.8 million shares). This resulted in a EUR 423781 million increase in Retainedretained earnings against Treasurytreasury shares. As of December 31, 2018, 18,600,0002021, all of these forward contracts connected to share capital reductions were outstanding. For further information on
On January 29, 2019, Philips announced a share buyback program for an amount of up to EUR 1.5 billion. Philips started the program in the first quarter of 2019. On March 23, 2020, Philips announced that 50.3% of the program had been completed through repurchases by an intermediary to allow for purchases in the open market during both open and closed periods, and that the remainder of the program would be executed through one or more individual forward transactions. Consequently, in the first half of 2020 Philips entered into four forward contracts please referfor an amount of EUR 745 million to Debt.acquire 20 million shares with settlement dates varying between June 2021 and December 2021 and a weighted average forward price of EUR 36.40. As of December 31, 2021, all shares under this program were acquired (of which 2.5 million shares in the second quarter of 2021, 2.5 million shares in the third quarter of 2021 and 15.5 million shares in the fourth quarter of 2021). This resulted in EUR 745 million increase in retained earnings against treasury shares.
Share call options
DuringIn 2016 Philips bought EURpurchased EUR-denominated and USD-denominated call options on its own shares to hedge options granted under share-based compensation plans beforeto employees up to 2013.
In 2018,2021, the Companycompany unwound 1,263,486374,826 EUR-denominated and 1,204,126121,750 USD-denominated call options against the transfer of the same number of Royal Philipsits own shares (2,467,612(496,576 shares) and an additional EUR 519 million cash payment to the buyer of the call options.
The numberAs of outstanding EUR denominated options were 2,023,639December 31, 2021, the remaining EUR-denominated and USD-denominated call options related to 295,630 and 152,565 shares, respectively.
Shares cancellation
In December 2021 Philips completed the cancellation of 33.5 million of its common shares (with a cost price of EUR 1,228 million). The cancelled shares were 1,770,218,acquired as part of December 2018.the Philips’ EUR 1.5 billion share repurchase programs announced on January 29, 2019 and EUR 1.5 billion share repurchase programs announced on July 26, 2021, respectively.
Dividend distribution
2021
2018
In June 2018,2021, Philips settleddistributed a dividend of EUR 0.800.85 per common share, representing a total value of EUR 738773 million including costs.(including costs). Shareholders could elect for a cash dividend or a share dividend. Approximately 46% 38%of the shareholders elected for a share dividend, resulting in the issuance of 9,533,2336,345,968 new common shares. The settlement of the cash dividend involved an amount of EUR 400482 million (including costs).
A proposal will be submitted to the 20192022 Annual General Meeting of Shareholders to pay a dividend of EUR 0.85 per common share, in cash or shares at the option of the shareholders,shareholder, against the net income of the Companycompany for 2018.2021.
2017
2020
In June 2017,July 2020, Philips settleddistributed a dividend of EUR 0.800.85 per common share, representing a total value of EUR 742758 million including costs.(including costs). The dividend was distributed in the form of shares only resulting in the issuance of 18,080,198 new common shares.
2019
In June 2019, Philips settled a dividend of EUR 0.85 per common share, representing a total value of EUR 775 million (including costs). Shareholders could elect for a cash dividend or a share dividend. Approximately 48%42% of the shareholders elected for a share dividend, resulting in the issuance of 11,264,1639,079,538 new common shares. The settlement of the cash dividend involved an amount of EUR 384 million (including costs)
2016
In June 2016, Philips settled a dividend of EUR 0.80 per common share, representing a total value of EUR 732 million including costs. Shareholders could elect for a cash dividend or a share dividend. Approximately 55% of the shareholders elected for a share dividend, resulting in the issuance of 17,344,462 new common shares. The settlement of the cash dividend involved an amount of EUR 330453 million (including costs).
Limitations in the distribution of shareholders’ equity
As atof December 31, 2018,2021, pursuant to Dutch law, certain limitations exist relating to the distribution of shareholders’ equity of EUR 1,5581,947 million. Such limitations relate to common shares of EUR 185177 million, as well as to legal reserves required by Dutch law included under retained earnings of EUR 634654 million and unrealized currency translation differences of EUR 7391,117 million. The unrealized lossesloss related to cash flow hedges of EUR 25 million and unrealized loss related to fair value through OCI financial assets of EUR 181 million and unrealized losses related to cash flow hedges of EUR 10344 million qualify as revaluation reserves and reduce the distributable amount due to the fact that these reserves are negative.
The legal reservereserves required by Dutch law of EUR 634654 million included under retained earnings relates to any legal or economic restrictions on the ability of affiliated companies to transfer funds to the parent company in the form of dividends.
As atof December 31, 2017,2020, these limitations in distributable amounts were EUR 1,283831 million and related to common shares of EUR 188182 million, as well as to legal reserves required by Dutch law included under retained earnings of EUR 703626 million and unrealized currency translation differences of EUR 39258 million. The unrealized losses related to fair value through OCI financial assets of EUR 30305 million and unrealized gain related to cash flow hedges of EUR 23 million qualify as a revaluation reserve and reduce the distributable amount due to the fact that this reserve is negative.
Non-controlling interests
Non-controlling interests relate to minority stakes held by third parties in consolidated group companies, for further details reference is made to Interest in entities.companies.
Capital management
Philips manages capital based upon the IFRS measures, net cash provided by operating activities and net cash used for investing activities as well as the non-IFRS measure net debt.debt*). The definition of this non-IFRS measure and a reconciliation to the IFRS measure is included below.
Net debt*) is defined as the sum of long and short-term debt minus cash and cash equivalents. Group equity is defined as the sum of shareholders’ equity and non-controlling interests. This measure is used by Philips Treasury management and investment analysts to evaluate financial strength and funding requirements. The Philips net debt*) position is managed with the intention of retaining aour current strong investment grade credit rating. Furthermore, Philips’ aim when managing the net debt*) position is dividend stability and a pay-out ratio of 40% to 50% of Adjusted income from continuing operations attributable to shareholders*) (reconciliation to the most directly comparable IFRS measure, Net income, is provided at the end of this note).
Philips Group
Composition of net debt and group equity1)
in millions of EUR unless otherwise stated
2016 - 2018
| | | | 2019 | 2020 | 2021 |
|---|
| | | | 4,939 | 5,705 | 6,473 |
| | | | 508 | 1,229 | 506 |
| | | | 5,447 | 6,934 | 6,980 |
Cash and cash equivalents | | | | 1,425 | 3,226 | 2,303 |
| | | | |
| Net debt1) | | 4,022 | 3,708 | 4,676 |
| | | | 12,597 | 11,870 | 14,438 |
Non-controlling interests | | | | 28 | 31 | 36 |
| | | | 12,625 | 11,901 | 14,475 |
Net debt and group equity ratio | | | | |
| Net debt and group equity ratio1) | | 24:76 | 24:76 |
Adjusted income from continuing operations attributable to shareholders*) is not a recognized measure of financial performance under IFRS. The reconciliation of Adjusted income from continuing operations attributable to shareholders*) to the most directly comparable IFRS measure, Net income for 20182021 is included in the table below.
following table.
Philips Group
Adjusted income from continuing operations attributable to shareholders1)
12)in millions of EUR
2018
| |
|---|
| |
Less: Discontinued operations, net of income taxes
| |
Income from continuing operations
| |
Continuing operations non-controlling interests
| |
Income from continuing operations attributable to shareholders
| |
| |
Amortization of acquired intangible assets
| |
Restructuring costs and acquisition-related charges
| |
| |
| |
Tax impact of adjusted items
| |
| |
1Shareholders in this table refers to shareholders of Koninklijke Philips N.V.
19Debt
Philips has a USD 2.5 billion Commercial Paper ProgrammeProgram and a EUR 1 billion committed standby revolving credit facility that can be used for general group purposes, such as a backstop of its Commercial Paper Programme. AsProgram. Philips issued commercial paper of December 31, 2018, Philips did not have any loans outstanding under either facility. In April 2018, Philips successfully exercised, with existing termsEUR 300 million in May 2021 and conditions, the first of two 1-year extension options of its EUR 1 billion committed standby revolving credit facility, extending the maturity date to April 21, 2023.150 million in July 2021, that was repaid in September 2021. The facility does not have a material adverse change clause, has no financial covenants and no credit-rating-related acceleration possibilities. As of December 31, 2021, Philips did not have any loans outstanding under either facility. As per 9 March 2020, Philips established a Euro Medium-Term Note (EMTN) program, a framework that facilitates the issuance of notes for a total amount up to EUR 10 billion. In 2021 Philips did not issue any new notes under the program.
The provisions applicable to all USD-denominated corporate bonds issued by the company in March 2008 and March 2012 (due 2038 and 2042) 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 might be required to offer to purchase the bonds that are still outstanding at a purchase price equal to 101% of their principal amount, plus accrued and unpaid interest, if any.
Furthermore, the conditions applicable to the EUR denominatedEUR-denominated corporate bonds issued in 2017, 2018, 2019 and 20182020 (due 2019, 2023, 2024, 2025, 2026, 2028 and 2028)2030) contain a similar provision (‘Change of Control Put Event’). Upon the occurrence of such an event, the company might be required to redeem or purchase any of such bonds at their principal amount together with interest accrued. Philips’ outstanding long-term debt do not contain financial covenants.
In March 2018,February 2021, Philips refinancedentered into two new bilateral loans amounting to a loantotal of EUR 178500 million (EUR 250 million each) with a new long-term loantenor of EUR 200 million.up to one year, that were repaid in September 2021. In April 2018,2021, Philips completed the early redemption of all the 3.750% USD bonds due 2022 with an aggregate principal amount of USD 1 billion, resulting in financial charges of EUR 24 million. For the purpose of the redemption, a EUR 900 million loan wasalso entered into which was repaid in May 2018 through the issuance of fixed-rate EUR bonds with an aggregate principala total amount of EUR 1 billion (EUR 500 million 0.750% due 2024 and EUR 500 million 1.375% due 2028). 6.875% USD bonds due 2038 with an aggregate principal amount of USD 56 million and USD 16 million were redeemed in May and June 2018 respectively, resulting in financial charges of EUR 21 million. In Q4 2018, a nominal amount of EUR 423731 million of forward contracts relatedrelating to the EUR 1.5 billion share buyback program announced on June 28, 2017 matured.July 26, 2021, with maturity dates in 2022, 2023 and 2024. A total amount of EUR 745 million of forward contracts matured in 2021, which completed the settlement of the EUR 1.5 billion share buyback program announced on January 29, 2019. In addition, in Q4 2018, Philips entered into three tranches of forward purchases totaling 10 million shares for a nominaltotal amount of EUR 31990 million maturing throughof forward contracts in 2021 relating to cover itsthe long-term incentive and employee stock purchase plans.plans announced on May 19, 2021, with maturity dates in 2023, and a total amount of EUR 123 million of forward contracts matured in 2021 relating to the company's long-term incentive and employee stock purchase plans announced on October 22, 2018 and January 29, 2020.
In March 2020, Philips issued a EUR 500 million fixed-rate sustainability innovation bond due in 2025 with a coupon rate of 1.375%, and a EUR 500 million fixed-rate bond due in 2030 with a coupon rate of 2.000% under the EMTN program. In 2020, Philips entered into a total amount of EUR 745 million of forward contracts to complete the remainder of the EUR 1.5 billion share buyback program announced on January 29, 2019, with maturity dates in 2021. In addition, Philips entered into a total amount of EUR 174 million of forward contracts in 2020 related to the long-term incentive and employee stock purchase plans announced on January 29, 2020, and a total amount of EUR 126 million of forward contracts matured relating to the company's long-term incentive and employee stock purchase plans announced on October 22, 2018.
Long-term debt
The belowfollowing tables present information about the long-term debt outstanding, its maturity and average interest rates in 20172021 and 2018.2020.
Philips Group
Long-term debt
in millions of EUR unless otherwise stated
2018
| amount outstanding in 2018 | | | | | average remaining term (in years) | | |
|---|
| | | amount outstanding in 2021 | Current portion | Non-current portion | Between 1 and 5 years | amount due after 5 years | average remaining term (in years) | average rate of interest |
|---|
| | | | | | | | 1,313 | | 1,313 | 255 | 1,058 | 15.1 | 6.3% |
| | | | | | | | 3,233 | | 3,233 | 2,242 | 991 | 4.4 | 1.0% |
| | | | | | | 934 | 196 | 738 | 738 | | 1.6 | |
| | | | | | | | |
| Lease liability | | 1,220 | 257 | 963 | 580 | 383 | 4.2 | 2.1% |
| | | | | | | | 203 | 1 | 202 | 202 | | 3.2 | 0.1% |
| | | | | 30 | 5 | 26 | 18 | 8 | 8.6 | 3.5% |
| | | | | | | | 6,933 | 459 | 6,473 | 4,034 | 2,439 | 6.0 | 2.1% |
Philips Group
Long-term debt
in millions of EUR unless otherwise stated
2017
| amount outstanding in 2017 | | | | | average remaining term (in years) | | amount outstanding in 2020 | Current portion | Non-current portion | Between 1 and 5 years | amount due after 5 years | average remaining term (in years) | average rate of interest |
|---|
| | | | | | | | 1,210 | | 1,210 | 122 | 1,088 | 16.1 | 6.3% |
| | | | | | | | 3,229 | | 3,229 | 1,494 | 1,735 | 5.4 | 1.0% |
| | | | | | | 982 | 869 | 113 | 113 | | 0.9 | |
| | | | | | | | |
| Lease liability | | 1,216 | 267 | 948 | 596 | 352 | 3.9 | 2.1% |
| | | | | | | 205 | 1 | 203 | 3 | 200 | 4.1 | 0.2% |
| | | | | | | 16 | 15 | | | | 1.0 | 0.0% |
| | | | | | | | 6,857 | 1,153 | 5,705 | 2,329 | 3,376 | 6.3 | 2.0% |
Bonds
The belowfollowing table disclosespresents the amount outstanding and effective rate of bonds in 2017 and 2018.bonds.
Philips Group
Unsecured Bonds
in millions of EUR unless otherwise stated
2017 - 2018
| | | |
|---|
| | | |
| | | |
Due 9/06/2019; 3M Euribor +20bps | | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | effective rate | 2020 | 2021 |
|---|
| Unsecured EUR Bonds | | | |
| Due 9/06/2023; 1/2% | 0.634% | 500 | 500 |
| Due 5/02/2024; 3/4% | 0.861% | 500 | 500 |
| Due 22/05/2026; 1/2% | 0.608% | 750 | 750 |
| Due 5/02/2028; 1 3/8% | 1.523% | 500 | 500 |
| Due 30/03/2025; 1 3/8% | 1.509% | 500 | 500 |
| Due 30/03/2030; 2% | 2.128% | 500 | 500 |
| Unsecured USD Bonds | | | |
| Due 5/15/2025; 7 3/4% | 7.429% | 51 | 56 |
| Due 6/01/2026; 7 1/5% | 6.885% | 111 | 120 |
| Due 5/15/2025; 7 1/8% | 6.794% | 68 | 74 |
| Due 11/03/2038; 6 7/8% | 7.210% | 591 | 641 |
| Due 3/15/2042; 5% | 5.273% | 407 | 441 |
| Adjustments1) | | (39) | (37) |
| Unsecured Bonds | | 4,439 | 4,545 |
| | | | |
11)In April 2018, Philips completed the early redemption of all the 3.750% USD bonds due 2022 with an aggregate principal amount of USD 1 billion.
2Adjustments related to both EUR and USD bonds and concern bond discounts, premium and premium, transaction costs and fair value adjustments for interest rate derivatives.costs.
Finance lease liabilities
Leases
The belowfollowing table discloses thepresents a reconciliation between the total of future minimum lease payments and their present value.
For further information regarding the adoption of IFRS 16, please refer to Significant accounting policies.
Philips Group
Finance leaseLease liabilities
in millions of EUR
2017 - 2018
| | | 2020 | 2021 |
|---|
| future minimum lease payments | | present value of minimum lease payments | future minimum lease payments | | present value of minimum lease payments | future minimum lease payments | interest | present value of minimum lease payments | future minimum lease payments | interest | present value of minimum lease payments |
|---|
| | | | | | | 290 | 23 | 267 | 280 | 22 | 257 |
Between one and five years | | | | | | | 651 | 55 | 596 | 636 | 56 | 580 |
| | | | | | | 384 | 31 | 352 | 417 | 34 | 383 |
| | | | | | | |
| Lease liability | | 1,325 | 109 | 1,216 | 1,333 | 113 | 1,220 |
Short-term debt
Philips Group
Short-term debt
in millions of EUR
2017 - 2018
| | | |
|---|
| | | 2020 | 2021 |
|---|
Short-term bank borrowings | | | 76 | 47 |
| | | |
| | | |
Current portion of long-term debt | | | 1,153 | 459 |
| | | 1,229 | 506 |
During 2018,2021, the weighted average interest rate on the bank borrowings was 15.0% (2017: 3.3%1.2% (2020: 5.9%). The increaseThis decrease was mainly driven by a higher relative amount of borrowingsthe term loan and commercial paper that were issued in high2021 with attractive market interest rate countries. In addition, there was an increase in interest rates in these countries during 2018.rates.
20Provisions
Philips Group
Provisions
in millions of EUR
| | 2020 | 2021 |
|---|
| | long-term | short-term | total | long-term | short-term | total |
|---|
| Post-employment benefit1) | 751 | | 751 | 659 | | 659 |
| Respironics field action provision | | | | 52 | 525 | 577 |
| Product warranty | 28 | 139 | 167 | 32 | 207 | 238 |
| Environmental provisions | 162 | 21 | 183 | 99 | 26 | 124 |
| Restructuring-related provisions | 17 | 100 | 117 | 8 | 58 | 66 |
| Legal provisions | 19 | 53 | 72 | 53 | 39 | 91 |
| Contingent consideration provisions | 203 | 114 | 318 | 156 | 52 | 208 |
| Other provisions | 279 | 93 | 372 | 257 | 92 | 349 |
| Provisions | 1,458 | 522 | 1,980 | 1,315 | 998 | 2,313 |
Respironics field action provision
2017 - 2018On June 14, 2021, Philips’ subsidiary, Philips Respironics initiated a voluntary recall notification in the United States and field safety notice outside the United States for certain sleep and respiratory care products related to the polyester-based polyurethane (PE-PUR) sound abatement foam in these devices.
On December 23, 2021, Philips reported that test results to date for the first-generation DreamStation devices indicated that the volatile organic compound (VOC) concentrations are within the limits of safe exposure specified in the applicable safety standard (ISO 18562). Comprehensive particulate testing and analyses are expected to be completed in the second quarter of 2022.
Following the substantial ramp-up of production, service and repair capacity, the repair and replacement program in the US and several other markets is under way. Because of prioritization of the repair and replace program, Philips is currently not taking new orders for sleep therapy systems, while masks and other consumables continue to be sold. As of January 2022, Philips Respironics has shipped a total of approximately 750,000 repair kits and replacement devices to customers and aims to complete the repair and replacement program in the fourth quarter of 2022.
Philips has recognized a provision based on Philips' best estimate of the costs to repair or replace devices subject to the Respironics field action as follows:
Philips Group
Field action provision
in millions of EUR
| | |
|---|
| | | | | | |
|---|
| | | | | | |
Post-employment benefit (see note 20) | | | | | | |
| | | | | | |
| | | | | | |
Restructuring-related provisions | | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| 2021 |
|---|
| Additions | 719 |
| Utilizations | (175) |
| Translation differences | 33 |
| Balance as of December 31 | 577 |
Assurance-type product
The future developments are subject to significant uncertainties, which require management to make estimates and assumptions about items such as quantities and the portion to be replaced or repaired. As of December 31, 2021, the impact of changes in these main assumptions and estimates, holding other assumptions constant, on the field action provision are as follows:
Philips Group
Main assumptions
in millions of EUR unless otherwise stated
| | | Increase (decrease) in provision |
|---|
| Assumption | Estimate | Increase individual assumption by 10% | Decrease individual assumption by 10% |
| Total quantity of devices | 5.2 million | 63 | (63) |
| Replacement share | 46% | 44 | (44) |
Actual outcomes in future periods may differ from these estimates and affect the company's results of operations, financial position and cash flows.
Philips Respironics continues to engage with the US Food and Drug Administration (FDA) and other relevant competent authorities. In addition, other charges related to the remediation, such as testing, external advisory and regulatory response, that are expensed as incurred amounted to EUR 94 million for the year ended December 31, 2021. Furthermore, Philips is a defendant in a number of consumer class action lawsuits from users of the affected devices and a number of individual personal injury and other compensation claims. For legal matters including claims refer to Contingent assets and liabilities. As of December 31, 2021, no provisions have been recognized for such remediation costs or legal matters.
Product warranty
The provisions for assurance-type product warranty reflect the estimated costs of replacement and free-of-charge services that will be incurred by the company with respect to products sold.sold, and include costs to execute field change orders. The field action provision in connection with the Philips Respironics voluntary recall notification is shown separately above.
The company expects the provisions to be utilized mainly within the next year. Additions in 2021 include quality actions of EUR 94 million in the Connected Care segment.
Philips Group
Provisions for assurance-type product warranty
in millions of EUR
2016 - 2018
| | | | |
|---|
| | | 2020 | 2021 |
|---|
| | | | 210 | 167 |
| | | |
| | | | 239 | 364 |
| | | | (270) | (265) |
Transfer to liabilities directly associated with assets held for sale | | | | |
| Transfer to liabilities associated with assets held for sale | | | (37) |
Translation differences and other | | | | (12) | 10 |
Balance as of December 31 | | | | 167 | 238 |
Environmental provisions
The environmental provisions include accrued costs recorded with respect to environmental remediation in various countries. In the United States, subsidiaries of the company have been named as potentially responsible parties in state and federal proceedings for the clean-up of certain sites.
Provisions for environmental remediation can change significantly due to the emergence of additional information regarding the extent or nature of the contamination, the need to utilize alternative technologies, actions by regulatory authorities as well as changes in judgments and discount rates.
Approximately EUR 7071 million of the long termlong-term provision is expected to be utilized after one to five years, with the remainder after five years. For more details on the environmental remediation reference is maderefer to Contingent assets and liabilities.
Philips Group
Environmental provisions
in millions of EUR
2016 - 2018
| | | | |
|---|
| | | 2020 | 2021 |
|---|
| | | | 170 | 183 |
| | | |
| | | 9 | 18 |
| | | | (16) | (15) |
| | | | 0 | (64) |
| | | 37 | (10) |
| | | | 3 | 3 |
Translation differences and other | | | | (19) | 9 |
Transfer to liabilities directly associated with assets held for sale | | | | |
Balance as of December 31 | | | | 183 | 124 |
The additions and the releases of the provisions originate from additional insights in relation to factors like the estimated cost of remediation, changes in regulatory requirements and efficiencies in completion of various site work phases.
Based on the progressive insight with respect to site remediation experience, technological progress and risk-based clean-up strategies, the estimated remaining duration of remediation activities for environmental liabilities for infinite environmental sites was revised in 2021 from 60 years to 30 years. The resulting release was EUR 55 million of which EUR 33 million is recorded in continuing operations and EUR 22 million in discontinued operations.
Restructuring-related provisions
Philips Group
Restructuring-related provisions
in millions of EUR
2018
| | | | | | Jan. 1, 2021 | additions | utilizations | releases | other changes | Dec. 31, 2021 |
|---|
| | | | | | 33 | 23 | (19) | (13) | 1 | 26 |
Connected Care & Health Informatics | | | | | | |
| Connected Care | | 17 | 16 | (12) | (4) | - | 17 |
| | | | | | 28 | 6 | (21) | (6) | 2 | 9 |
| | | | | | 38 | 10 | (21) | (16) | 4 | 14 |
| | | | | | 117 | 55 | (73) | (39) | 6 | 66 |
In 2018,2021, the most significant restructuring projects impacted DiagnosisDiagnostic & Treatment and Connected Care & Health Informatics and Other businesses and mainly took place in the Netherlands Germany and the US. The restructuring comprised mainly product portfolio rationalization and the reorganization of global support functions.
The company expects the provisions to be utilized mainly within the next year.
2017
2020
In 2017,2020, the most significant restructuring projects impacted DiagnosisDiagnostic & Treatment and Other businesses and mainly took place in the Netherlands, US and the US.Germany.
The movements in the provisions for restructuring in 20172020 are presented by segment as follows:
Philips Group
Restructuring-related provision
in millions of EUR
2017
| | | | | | | Jan. 1, 2020 | additions | utilizations | releases | other changes | Dec. 31, 2020 |
|---|
| | | | | | | 61 | 36 | (47) | (16) | (1) | 33 |
Connected Care & Health Informatics | | | | | | | |
| Connected Care | | 28 | 17 | (21) | (5) | (3) | 17 |
| | | | | | | 25 | 30 | (22) | (3) | (1) | 28 |
| | | | | | | 41 | 35 | (31) | (7) | - | 38 |
| | | | | | | |
| | | | | | | 156 | 118 | (122) | (32) | (4) | 117 |
1Other changes primarily relate to translation differences and reclassification to liabilities directly associated with assets held for sale.
2016
In 2016, the most significant restructuring projects mainly impacted Other and mainly took place in the Netherlands.
Legal provisions
The movements in the provisions for restructuring in 2016 are presented by segment as follows:
Philips Group
Restructuring-related provisions
in millions of EUR
2016
| | | | | | |
|---|
| | | | | | |
Connected Care & Health Informatics | | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
1Other changes primarily relate to translation differences and transfers between segments
Litigation provisions
The Companycompany and certain of its group companies and former group companies are involved as a party in legal proceedings, including regulatory and other governmental proceedings.
Philips Group
LitigationLegal provisions
in millions of EUR
2016 - 2018
| | | | |
|---|
| | | 2020 | 2021 |
|---|
| | | | 55 | 72 |
| | | |
| | | | 72 | 43 |
| | | | |
| Acquisitions | | | 38 |
| Utilizations | | (45) | (17) |
| | | | (6) | (48) |
| | | | |
| | | | |
| | | | 1 | 1 |
Transfer to liabilities directly associated with assets held for sale | | | | |
Translation differences and other | | | | (5) | 3 |
Balance as of December 31 | | | | 72 | 91 |
1The presentation of prior-year information has been reclassified to conform to the current-year presentation.
The most significant proceedings
The majority of the movements in the above schedule are: additions in part related to investigations in the Cathode Ray Tube (CRT) antitrust litigationSleep & Respiratory Care business (unrelated to the Philips Respironics voluntary recall notification), provisions recognized for certain pending investigations inherited with the acquisition of BioTelemetry, Inc. and Masimo Corporation (Masimo) patent litigation.
Cathode Ray Tube (CRT) antitrust litigation
In 2016, 2017 and 2018a release following the majoritypositive outcome of the movements in relation toinvestigation of the CRT antitrust litigation were utilizations due to the transfer to other liabilitiesItalian Competition Authority (ICA) for which the companya provision was able to reach a settlement. These settlements were subsequently paid outrecorded in the respective followingprior year.
For more details reference is madeof other legal matters, including regulatory and other governmental proceedings, refer to Contingent assets and liabilities.
Masimo Corporation (Masimo) patent litigation
On October 1, 2014, a jury awarded USD 467 million to Masimo Corporation (Masimo) in a trial held before the United States District Court for the District of Delaware. The decision by the jury completed an initial phase of a three-phase trial regarding a first lawsuit started by Masimo against the company in 2009. A second lawsuit was started by Masimo against the company in 2016. Between the two lawsuits, claims were raised by the parties against each other relating to patent infringement and antitrust violations in the field of pulse oximetry.
On November 5, 2016, the company and Masimo entered into a wide-ranging, multi-year business partnership involving both companies’ innovations in patient monitoring and therapy solutions, ending all pending lawsuits between the two companies, including releasing the company from paying the USD 467 million jury verdict.
The company and Masimo also agreed to:
a USD 300 million cash payment by Philips to Masimo;a one-time donation to the Masimo Foundation of USD 5 million to support the Masimo Foundation’s project on patient safety and better outcomes;commitments of the company with respect to sales targets, marketing and product integration over the coming years of about USD 136 million.
Entering into the agreements resulted in a payment of USD 305 million (EUR 280 million) in November 2016, a release of litigation provisions of USD 86 million (EUR 79 million) and a liability reclassification from litigation provisions to other provisions of USD 136 million (EUR 125 million).
The utilizations and reclassifications in 2016 mainly related to Masimo. Reclassifications include reclassification from litigation provisions to other provisions.
Other
In 2018 the translation differences in the schedule above are mainly explained by the movements in the BRL/EUR rate which impacted the litigation provisions denominated in BRL. In 2017 the translation differences are mainly explained by the movements in the USD/EUR rate which impacted the litigation provisions denominated in USD.
The company expects the provisions to be utilized mainly within the next three years.
Contingent consideration provisions
Philips Group
Contingent consideration provisions
in millions of EUR
| | 2020 | 2021 |
|---|
| Balance as of January 1 | 354 | 318 |
| Acquisitions | 70 | 16 |
| Utilizations | (14) | (48) |
| Fair value changes | (93) | (78) |
| Balance as of December 31 | 318 | 208 |
The provision for contingent consideration reflects the fair value of the expected payment to former shareholders of an acquiree for the exchange of control if specified future events occur or conditions are met, such as the achievement of certain regulatory milestones or the achievement of certain commercial milestones. The provision for contingent consideration can change significantly due to changes in the estimated achievement of milestones and changes in discount rates. Changes in fair value of the contingent consideration liability are reflected in other business income.
EPD
In 2020 and 2021, the fair value changes mainly related to EPD. In 2021, the decrease of EUR 67 million in the fair value of the contingent consideration comprised of EUR 41 million due to the revisions to EPD’s forecast due to more severe short-term impacts of COVID-19 and the competitive environment, and EUR 26 million due to delays in achievement of certain milestones. In 2020, revisions to EPD’s forecast due to delays in commercialization caused by the need to do more work on the maturity of the technology, resulted in a EUR 101 million decrease in the respective fair value of the contingent consideration. For more details of the EPD contingent consideration refer to Fair value of financial assets and liabilities.
The company expects the provisions to be utilized mainly within the next three years.
Other provisions
Philips Group
Other provisions
in millions of EUR
2016 - 2018
| | | |
|---|
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
Transferred to liabilities directly associated with assets held for sale | | | |
Translation differences and other | | | |
Balance as of December 31 | | | |
| | 2020 | 2021 |
|---|
| Balance as of January 1 | 392 | 372 |
| Additions | 161 | 89 |
| Utilizations | (109) | (87) |
| Releases | (49) | (29) |
| Accretion | (1) | (5) |
| Translation differences and other | (21) | 9 |
| Balance as of December 31 | 372 | 349 |
1The presentation of prior-year information has been reclassified to conform to the current-year presentation.
In 2018 the acquisitions through business combinations mainly consists of a provision for contingent consideration of EUR 239 million relating to the acquisition of EPD. For more details reference is made to Acquisitions and divestments
The main elements of other provisions are:
provisions for possible taxes/social security of EUR 6537 million (2017:(2020: EUR 9739 million);
onerous contract provisions for unfavorable supplyonerous contracts as part of divestment transactions, onerous (sub)lease contracts and expected lossesEUR 12 million (2020: EUR 24 million), reflecting non-cancellable commitments on existing projects /orders totaling EUR 18 million (2017: EUR 31 million);
supplies for which no future demand or alternative usage has been identified, primarily caused by volatility in demand due to COVID-19. For more details refer to COVID-19.provisions for employee jubilee funds EUR 7394 million (2017:(2020: EUR 5792 million);
self-insurance provisions of EUR 43 million (2020: EUR 45 million (2017: EUR 48 million);
provisions for decommissioning costs of EUR 3233 million (2017:(2020: EUR 3230 million);
provisions for rights of return of EUR 3540 million (2017:(2020: EUR 3736 million);
provisions for other employee benefitsthe releases in 2020 and obligatory severance payments of EUR 13 million (2017: EUR 24 million);
provisions for contingent considerations of EUR 409 million (2017: EUR 66 million);
the release in 2017 of EUR 88 million is2021 are due to the reassessment of ourthe positions in other provisions.
provisions throughout the year;- the remaining provisions relate to a variety of positions, for example provision for disability of employees and provision for royalty obligations.
The company expects the provisions to be utilized mainly within the next five years, except for:
provisions for employee jubilee funds of which over a half is expected to be utilized after five years;
provisions for decommissioning costs of which over half is expected to be utilized after five years;
provisions for rights of return to be utilized mainly within the next year.
21Post-employment benefits
Employee post-employment benefit plans have been established in many countries in accordance with the legal requirements, customs and the local practice in the countries involved. The larger part of post-employment benefits are company pension plans, of which some are funded and some are unfunded. All funded post-employment benefit plans are considered to be related parties.
Most employees that take part in a company pension plan are covered by defined contribution (DC) pension plans. The main DC plans are in the Netherlands and the United States. The company also sponsors a number of defined benefit (DB) pension plans. The benefits provided by these plans are based on employees’ years of service and compensation levels.
The company also sponsors a limited number of DB retiree medical plans. The benefits provided by these plans typically cover a part of the healthcare costs after retirement. None of these plans are individually significant to the company and are therefore not further separately disclosed.
The larger funded DB and DC plans are governed by independent Trustees who have a legal obligation to protect the interests of all plan members and operate under the local regulatory framework.
The average durationDB plans in Germany and the United States make up most of the defined benefit obligation (DBO) ofand the DB plans is 11 years (2017: 12 years).
net position. The largestcompany also has DB plans in 2018the rest of the world; however these are individually not significant to the company and do not have a significantly different risk profile that would warrant separate disclosure.
The adjacent table provides a break-down of the present value of the funded and unfunded DBO, the fair value of plan assets and the net position in Germany, the United States and Germany. These plans account for approximately 88%in Other Countries.
Philips Group
Post-employment benefits
in millions of EUR
| | Germany | United States | Other Countries | Total |
|---|
| | 2020 | 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | 2021 |
|---|
| Present value of funded DBO | (649) | (606) | (568) | (558) | (304) | (206) | (1,521) | (1,370) |
| Present value of unfunded DBO | (344) | (316) | (141) | (149) | (147) | (135) | (633) | (600) |
| Total present value of DBO | (993) | (921) | (709) | (708) | (451) | (341) | (2,153) | (1,970) |
| Fair value of plan assets | 543 | 572 | 613 | 623 | 247 | 185 | 1,403 | 1,380 |
| Net position | (450) | (349) | (95) | (84) | (205) | (157) | (750) | (590) |
The classification of the total DBO.net position is as follows:
The United States
The US DB pension plans are closed plans without future pension accrual. For the fundingPhilips Group
Classification net position
in millions of any deficit in the US plan the Group adheres to the minimum funding requirements of the US Pension Protection Act.EUR
The assets of the US funded pension plans are in Trusts governed by Trustees. The excess pension plans that covered accrual above the maximum salary of the funded plan are unfunded.
The company’s qualified pension commitments in the United States are covered via the Pension Benefit Guaranty Corporation (PBGC) which charges a fee to US companies providing DB pension plans. The fee is also dependent on the amount of unfunded liabilities.
In 2018, the company paid an additional de-risking contribution into the US plan of EUR 130 million (USD 150 million).
| | Germany | United States | Other Countries | Total |
|---|
| | 2020 | 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | 2021 |
|---|
| Total asset for plans in a surplus | | 3 | 46 | 65 | | 1 | 46 | 69 |
| Total liability for plans in a deficit | (450) | (352) | (141) | (149) | (205) | (157) | (797) | (659) |
| Provisions for post-employment benefit plans under AHFS | | | | | | - | | - |
| Net position | (450) | (349) | (95) | (84) | (205) | (157) | (750) | (590) |
Germany
The company has several DB plans in Germany which for the largest part are unfunded, meaning that after retirement the company is responsible for the benefit payments to retirees.
Due to the relatively high level of social security in Germany, the company’s pension plans mainly provide benefits for the higher earners andearners. The plans are open for future pension accrual. Indexation is mandatory due to legal requirements. Some of the German plans have a DC design, but are accounted for as DB plans due to a legal minimum return requirement.
Company pension commitments in Germany are partly protected against employer bankruptcy via the “Pensions Sicherungs Verein”“Pensions-Sicherungs-Verein” which charges a fee to all German companies providing pension promises.
Philips is one of the sponsors of Philips Pensionskasse VVaG in Germany, which is a multi-employer plan. The plan is classified and accounted for as a DC plan.
The United States
The US DB pension plans are closed plans without future pension accrual. For the funding of any deficit in the US plan the Group adheres to the minimum funding requirements of the US Pension Protection Act.
The assets of the US funded pension plans are in Trusts governed by fiduciaries. The non-qualified pension plans that cover accrual above the maximum salary of the funded qualified plan are unfunded.
The company’s qualified pension commitments in the United States are covered via the Pension Benefit Guaranty Corporation which charges a fee to US companies providing DB pension plans. The fee is also dependent on the amount of unfunded vested liabilities.
Risks related to DB plans
DB plans expose the company to various demographic and economic risks such as longevity risk, investment risks, currency and interest rate risk and in some cases inflation risk. The latter plays a role in the assumed wage increase but more importantly in some countries where indexation of pensions is mandatory. Pension fund Trustees are responsible for and have full discretion over the investment strategy of the plan assets. In general Trustees manage pension fund risks by diversifying the investments of plan assets and by (partially) matching interest rate risk of liabilities.
The company has an active de-risking strategy in which it constantly looks for opportunities to reduce the risks associated with its DB plans. Liability-driven investment strategies, lump sum cash-out options, buy-ins, buy-outs and a change to DC are examples of the strategy.
Investment policy in our largest pension plans
ThePension fund trustees of the Philips pension plans are responsible for and have full discretion over the investment strategy of the plan assets.
The plan assets of the Philips pension plans are invested in well diversified portfolios. The interest rate sensitivity of the fixed income portfolio is closely aligned to that of the plan’s pension liabilities.liabilities for most of the plans. Any contributions from the sponsoring company are used to further increase the fixed income part of the assets. As part of the investment strategy, any additional investment returns ofimprovement in the return portfolio arefunded ratio over time is used to further decrease the interest rate mismatch between the plan assets and the pension liabilities.
Summary of pre-tax costs for post-employment benefits and reconciliations
The adjacent table contains the total of current and past service costs, administration costs and settlement results as included in Income from operations and the interest cost as included in Financial expenses.
Philips Group
Pre-tax costs for post-employment benefits
in millions of EUR
2016 - 2018
| | | | 2019 | 2020 | 2021 |
|---|
| | | | 56 | 74 | 36 |
- included in income from operations | | | | 32 | 59 | 28 |
- included in financial expense | | | | 22 | 13 | 8 |
- included in Discontinued operations | | | | 1 | 1 |
Defined-contribution plans | | | | 346 | 366 | 375 |
- included in income from operations | | | | 338 | 358 | 368 |
- included in Discontinued operations | | | | 8 | 7 |
Post-employment benefits costs | | | | 401 | 440 | 411 |
1The net income mainly relates to the settlement of the pension related legal claim in the UK
Summary of the net defined benefit liability and reconciliations
The adjacent tables contain the total net defined benefit liability and the reconciliations for the DBO and plan assets.
assetsThe negative past service cost in 2018 relates to plan amendments in Brazil and Switzerland.
Reconciliationsadjacent tables contain the reconciliations for the DBO and plan assets for DB plans:assets.
Philips Group
Defined-benefit obligations
in millions of EUR
2017 - 2018
| | | |
|---|
| | | 2020 | 2021 |
|---|
| | | 3,350 | 2,153 |
| | | 39 | 36 |
| | | 71 | 33 |
| | | 15 | 7 |
Actuarial (gains) / losses | | | | |
– demographic assumptions | | | |
| | | |
| | | |
| - demographic assumptions | | 16 | 3 |
| - financial assumptions | | 163 | (86) |
| - experience adjustment | | 39 | (6) |
(Negative) past service cost | | | 2 | (5) |
| | | (1,185) | (90) |
| | | (221) | (95) |
Benefits paid directly by employer | | | (35) | (33) |
Transfer to Liabilities directly associated with assets held for sale 1 | | | |
Translation differences and other | | | (100) | 52 |
Balance as of December 31 | | | 2,153 | 1,970 |
| | | |
Present value of funded obligations at end of year | | | |
Present value of unfunded obligations at end of year | | | |
1The amount presented under 'Transfer to Liabilities directly associated with assets held for sale' in 2017 relates to Signify (former Philips Lighting)
Philips Group
Plan assets
in millions of EUR
| | 2020 | 2021 |
|---|
| Balance as of January 1 | 2,526 | 1,403 |
| Interest income on plan assets | 58 | 25 |
| Admin expenses paid | (1) | (1) |
| Return on plan assets excluding interest income | 268 | 44 |
| Employee contributions | 15 | 7 |
| Employer contributions | 34 | 33 |
| Settlements | (1,205) | (86) |
| Benefits paid from plan | (221) | (96) |
| Translation differences and other | (71) | 50 |
| Balance as of December 31 | 1,403 | 1,380 |
2017 - 2018
| | |
|---|
| | |
| | |
Interest income on plan assets | | |
| | |
Return on plan assets excluding interest income | | |
| | |
| | |
| | |
| | |
Transfer to Assets classified as held for sale 1 | | |
Translation differences and other | | |
Balance as of December 31 | | |
| | |
| | |
| | |
Net balance sheet position | | |
1The amountsettlement amounts mainly relate to the execution of a lump-sum window and annuity purchase program during 2020 regarding the US funded pension plan (2020) and to the transfer of the provident fund plan into the government provident fund in India (2021).
The net impact of the transfer of the divestment of the Domestic Appliances business on the post-employment benefit liability amounts to EUR 12 million and is presented under 'Transfer to Liabilities directly associated with assets held for sale''Translation differences and other' in 2017 relates to Signify (former Philips Lighting)
Reconciliation for the effect of the asset ceiling:2021.
Philips Group
Changes in the effect of the asset ceiling
in millions of EUR
2017
| |
|---|
| |
Interest on unrecognized assets
| |
| |
| |
Balance as of December 31
| |
Due to the settlement of the Brazil pension plan in 2017 there is no effect of the asset ceiling remaining as of 31 December 2017 onwards.
Plan assets allocation
The asset allocation in the company’s DB plans at December 31 was as follows:
Philips Group
Plan assets allocation
in millions of EUR
2017 - 2018
| | | 2020 | 2021 |
|---|
Assets quoted in active markets | | | | |
| | | 782 | 790 |
| | | | |
| | | 175 | 195 |
| | | | |
Assets not quoted in active markets | | | | |
| | | 7 | 1 |
| | | 133 | 122 |
| | | 307 | 272 |
| | | 1,403 | 1,380 |
The plan assets in 20182021 contain 33% (2017: 37%29% (2020: 32%) unquoted plan assets. Plan assets in 20182021 do not include property occupied by or financial instruments issued by the company.
Assumptions
The mortality tables used for the company’s largest DB plans are:
Germany: Heubeck-Richttafeln 2018 Generational, assuming 93% of mortality rates for male retirees between age 60 and 85
US: RP2014PRI-2012 Generational with MP2018 improvement scale for qualified and retiree medical plan; RP2006 with MP2018MP2021 improvement scale + white collar adjustment for the unfunded excess plans
Germany: Heubeck-Richttafeln 2018 Generational
The weighted averages of the assumptions used to calculate the DBO as of December 31 were as follows:
Philips Group
Assumptions used for defined-benefit obligations in Germany, the United States and the rest of the world
in %
2017- 2018
| | | Germany | United States | Other Countries | Total |
|---|
| | | 2020 | 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | 2021 |
|---|
| | | 0.6% | 1.1% | 2.3% | 2.6% | 2.2% | 2.1% | 1.5% | 1.8% |
| | | 1.6% | 1.8% | 2.0% | 2.2% | 1.7% | 2.0% | 1.7% | 2.0% |
| | | 2.5% | 2.5% | 0.0% | 0.0% | 2.7% | 2.9% | 2.5% | 2.6% |
The company changed the methodology for setting discount rates in 2021. As of December 31, 2021, Philips uses the Mercer yield curve methodology for setting the discount rate. The change of discount rate methodology is treated as a change in accounting estimate. The impact on the DBO amounts to a decrease of EUR 11 million and the impact on the current service cost amounts to a decrease lower than EUR 1 million. The impact of the change in accounting estimate has been estimated as of December 31, 2021.
Sensitivity analysis
The tables belowfollowing table illustrates the approximate impact on the DBO from movements in key assumptions. The DBO was recalculated using a change in the assumptions of 1% which overall is considered a reasonably possible change. The impact on the DBO because of changes in discount rate is normally accompanied by offsetting movements in plan assets, especially when using matching strategies.
The average duration of the DBO of the DB plans is 11 years (Germany: 11, United States: 12, and Other countries: 11) as of December 31, 2021 (2020: 12 years).
Philips Group
Sensitivity of key assumptions
in millions of EUR
2018
| Defined benefit obligation
|
|---|
| |
| |
Discount rate (1% movement)
| |
Inflation rate (1% movement)
| |
Salary increase (1% movement)
| |
Longevity 1| | 2020 | 2021 |
|---|
| Increase | | | | Discount rate (1% movement) | (226) | (196) | | Inflation rate (1% movement) | 86 | 99 | | Salary increase (1% movement) | 16 | 19 | | Longevity1) | 51 | 48 | | Decrease | | | | Discount rate (1% movement) | 265 | 241 | | Inflation rate (1% movement) | (78) | (83) | | Salary increase (1% movement) | (19) | (18) |
1)
| |
| |
Discount rate (1% movement)
| |
Inflation rate (1% movement)
| |
Salary increase (1% movement)
| |
1The mortality table (i.e. longevity) also impacts the DBO. The above sensitivity table illustrates the impact on the DBO of a further 10% decrease in the assumed rates of mortality for the company’s major schemes.plans. A 10% decrease in assumed mortality rates equals improvement of life expectancy by 0.5 - 1 year.
Philips Group
Sensitivity of key assumptions
in millions of EUR
2017
| Defined benefit obligation
|
|---|
| |
| |
Discount rate (1% movement)
| |
Inflation rate (1% movement)
| |
Salary increase (1% movement)
| |
| |
| |
Discount rate (1% movement)
| |
Inflation rate (1% movement)
| |
Salary increase (1% movement)
| |
1The mortality table (i.e. longevity) also impacts the DBO. The above sensitivity table illustrates the impact on the DBO of a further 10% decrease in the assumed rates of mortality for the company’s major schemes. A 10% decrease in assumed mortality rates equals improvement of life expectancy by 0.5 - 1 year.
Cash flows and costs in 2019
2022The company expects considerable cash outflows in relation to post-employment benefits which are estimated to amount to EUR 402457 million in 2019,2022, consisting of:
EUR 2023 million employer contributions to funded DB plans (US:(Germany: EUR 13 million, United States: EUR 0 million, DE:Other Countries: EUR 13 million, Other: 10 million);
- EUR
7 million); EUR 4240 million cash outflows in relation to unfunded DB plans (US:(Germany: EUR 19 million, United States: EUR 10 million, DE:Other Countries: EUR 19 million, Other: EUR 1311 million); and
EUR 340394 million employer contributions to DC plans (NL:(Netherlands: EUR 168194 million, US:United States: EUR 118139 million, Other:Other Countries: EUR 5461 million).
The service and administration cost for 20192022 is expected to amount to EUR 3134 million for DB plans. The net interest cost for 20192022 for the DB plans is expected to amount to EUR 229 million. The cost for DC pension plans in 20192022 is equal to the expected DC cash flow.
22Accrued liabilities
Accrued liabilities are summarized as follows:
Philips Group
Accrued liabilities
in millions of EUR
2017 - 2018
| | | |
|---|
| | | 2020 | 2021 |
|---|
| | | | |
| | | 614 | 566 |
- Accrued holiday entitlements | | | 124 | 127 |
- Other personnel-related costs | | | 78 | 108 |
Fixed-asset-related costs: | | | | |
- Gas, water, electricity, rent and other | | | 21 | 33 |
Communication and IT costs | | | 64 | 82 |
| | | 93 | 122 |
| | | | |
| | | 10 | 7 |
- Advertising and marketing-related costs | | | 197 | 175 |
- Other sales-related costs | | | 20 | 20 |
| | | 103 | 130 |
Interest-related accruals | | | 52 | 52 |
| | | |
Other accrued liabilities | | | 302 | 362 |
| | | 1,678 | 1,784 |
1Due to implementation of IFRS 15 balances included in deferred income are now presented as contract liabilities.
23Other liabilities
Other non-current liabilities
Other non-currentNon-current liabilities were EUR 56 million as of December 31, 2021 (December 31, 2020: EUR 74 million).
Non-current liabilities are summarized as follows:
Philips Group
Otherassociated mainly with indemnification and non-current liabilitiesaccruals.
in millions of EUR
2017 - 2018
| | |
|---|
| | |
| | |
| | |
| | |
| | |
Other non-current liabilities | | |
1Due to implementation of IFRS 15 balances included in deferred income are now presented as contract liabilities.
The other non-current liabilities decreased with EUR 221 million. This increase is mainly driven by the change of presentation of balances included in deferred income.
For further details on tax related liabilities refer to Income taxes.
Other current liabilities
Other current liabilities are summarized as follows:
Philips Group
Other current liabilities
in millions of EUR
2017 - 2018
| | | |
|---|
| | | 2020 | 2021 |
|---|
Accrued customer rebates that cannot be offset with accounts receivables for those customers | | | 412 | 280 |
Advances received from customers on orders not covered by work in process 1 | | | |
Other taxes including social security premiums | | | 253 | 190 |
| | | 119 | 116 |
Other current liabilities | | | 785 | 587 |
1Due to implementation of IFRS 15 balances included in advances received from customers on orders not covered by work in progress are now presented as contract liabilities.
The other current liabilities decreased with EUR 389 million. This decrease is mainly driven by the change of presentation of balances included in advances received from customers on orders not covered by work in process.
The other liabilities per December 31, 2017 and 2018 include reclassifications from litigation provisions to liabilities due to settlements reached. For more details reference is made to Litigation provisions in Provisions and to Legal proceedings in Contingent assets and liabilities.
Contract liabilities
Non-current contract liabilities were EUR 226446 million atas of December 31, 2018 (2017:2021 (December 31, 2020: EUR 249403 million) and current contract liabilities were EUR 1,3031,491 million atas of December 31, 2018 (2017:2021 (December 31, 2020: EUR 1,1631,239 million).
The current contract liabilities increased with EUR 140251 million. The year-on-year change is mainly driven by an increase in contractual billings.deferred balance for customer service contracts.
The current contract liabilities as perof December 31, 20172020 resulted in revenue recognized of EUR 1,1631,239 million in 2018.2021.
Contingent assets and liabilities
Contingent assets
As per December 31, 2018,2021, the company had no material contingent assets.
Contingent liabilities
Guarantees
Guarantees
Philips’ policy is to provide guarantees and other letters of support only in writing. Philips does not stand by other forms of support. The total fair value of guarantees recognized on the balance sheet amounts to EUR nil million for both 20172021 and 2018.2020. Remaining off-balance-sheet business and credit-relatedrelated guarantees provided on behalf of third parties and associates decreased by EUR 314 million during 20182021 to EUR 402 million (December 31, 2017:2020: EUR 4416 million).
Environmental remediation
The Companycompany and its subsidiaries are subject to environmental laws and regulations. Under these laws, the Companycompany and/or its subsidiaries may be required to remediate the effects of certain manufacturing activities on the environment.
Legal proceedings
The Companycompany and certain of its group companies and former group companies are involved as a party in legal proceedings, regulatory and other governmental proceedings, including discussions on potential remedial actions, relating to such matters as competition issues, commercial transactions, product liability, participations, and environmental pollution.
While it is not feasible to predict or determine the ultimate outcome of all pending or threatened legal proceedings, regulatory and governmental proceedings, the Companycompany is of the opinion that the cases described below may have, or have had in the recent past, a significant impact on the Company’scompany’s consolidated financial position, results of operations and cash flows.
Cathode Ray Tubes (CRT)
Starting in 2007, competition law authorities in several jurisdictions had commencedFollowing the public investigations into possiblealleged anticompetitive activities in the Cathode Ray Tubes or CRT industry. On December 5, 2012, this lead to a European Commission decision imposing fines on (former) CRT manufacturers including the company. The European Commission imposed a fine of EUR 313 million on the company and a fine of EUR 392 million jointly and severally on the company and LG Electronics, Inc (LGE). In total a payable of EUR 509 million was recognized in 2012 and the fine was paid in the first quarter of 2013. The company appealed the decision of the European Commission with the General Court and later with European Court of Justice. These appeals were denied on September 9, 2015 and September 15, 2017 respectively. No further appeals are pending. Please refer to Subsequent events for a recent claim filed in connection with the CRT matter.
United States and Canada
Subsequent to the public announcement of these investigationsindustry that began in 2007, certain Philips Group companies were named as defendants in class action antitrust complaints by direct and indirect purchasers of CRTs filed in various federal district courts in the United States. These actions alleged anticompetitive conduct by manufacturers of CRTs and sought treble damages on a joint and several liability basis. In addition, sixteen individual plaintiffs, principally large retailers of CRT products who opted out of the direct purchaser class, filed separate complaints against the company and other defendants based on the same substantive allegations. All these actions were consolidated for pre-trial proceedingsnumerous (class action) lawsuits in the United States, District Court forCanada, Germany, the Northern DistrictNetherlands, Denmark, the United Kingdom, Turkey, and Israel. Plaintiffs in these cases varied from classes of California. In addition, theindirect and direct purchasers, state attorneys general, electronics retailers and television and monitor manufacturers.
By the end of California, Florida, Illinois, Oregon and Washington filed actions against the company and other defendants seeking to recover damages on behalf of the states and, acting as parens patriae, their consumers.
All actions2021, resolutions have been settledreached in most of these cases. Litigation is still pending or otherwise resolved. Thethreatened in relation to: (i) potential claims that may be filed by certain objectors to the original US indirect purchaser class settlement that was finally approved in 2021 (ii) a claim filed by the United States District Courtstate attorney general for the Northern District of California in 2016, is now again pending before the District Court after it had been remanded to the District CourtPuerto Rico, (iii) a claim filed by the Ninth Circuit Court of Appeals in February 2019.
In 2007, certain Philips Group companies were also being named as defendants in proposed class proceedings in Ontario, Quebec and British Columbia, Canada, along with numerous other participantsa monitor manufacturer in the industry. In 2017, a settlement has been reached for all three proposed class actions which was approved by the courts in 2018.
Other jurisdictions
In 2014, the company was named as a defendant inUK, (iv) a consumer class action lawsuit filed in Israel in which damages are claimed against several defendants based on alleged anticompetitive activitiesand (v) a consumer action in the CRT industry. In addition, an electronics manufacturer filed a claim against the company and several co-defendants with a court in the Netherlands and Turkey, also seeking compensation for the alleged damage sustained as a result from the alleged anticompetitive activities in the CRT industry. In 2015 and 2016, the company became involved in further civil CRT antitrust litigation with previous CRT customers based in the United Kingdom, Germany, Brazil and Denmark. In 2018 a case in Germany and in Denmark were settled while two new cases were brought in the United Kingdom.Netherlands.
Currently two cases are pending before the Dutch courts (one of which is also subject to parallel proceedings in Turkey), one case pending before the Israeli court, two cases are pending before the German courts and three cases have been filed in the United Kingdom. Except for the case in Israel where the plaintiffs are a purported class of consumers, all plaintiffs are television or monitor manufacturers who acquired either CRT’s to be integrated in their finished products or OEM monitors containing CRT’s. In all cases, the same substantive allegations about anticompetitive activities in the CRT industry are made and damages are sought. Despite prior settlements, the company has concluded that due to the specific circumstances in the cases that settled, and the particularities and considerable uncertainty associated with the remaining matters, based on current knowledge, potential losses cannot be reliably estimated with respect to these matters.
Connected Care & Health Informatics
On July 4, 2018 the Public Prosecution Servicematters that are still pending.
In 2019, the company was served with a claim filed by LG Electronics (LGE) in Rio de Janeirothe Seoul Central District Court. LGE claimed restitution of approximately EUR 210 million, representing a portion of the fine that LGE paid to the European Commission relating to the joint venture LG. Philips Displays for which LGE and representatives from the Brazilian antitrust authority CADE inspectedCompany were jointly and severally liable. LGE alleges that based on the offices ofmanner in which the fine was calculated, the company should have paid proportionally more than 30 companies, including Philips,it currently has. In November 2020, the Seoul Central District Court dismissed LGE’s case which decision was confirmed by the Seoul High Court on December 23, 2021.
Public Investigations
The company is engaged in São Paulo. The Brazilian authorities are conducting an investigation intodiscussions with, and has provided information to, the United States Securities & Exchange Commission (SEC) and Department of Justice (DoJ) regarding alleged tender irregularities in the medical device industry. The company has also received inquiries fromindustry in certain US authorities in respectjurisdictions. These interactions are primarily focused on a number of this matter.
Personal Health
In April 2017,potential compliance findings that the company receivedis addressing in China and Bulgaria.
In 2020, the company entered into a Civil Investigative Demand (CID) outleniency agreement with the Brazilian public prosecution service for historic transactions involving tender irregularities in Brazil. An investigation by CADE, the Brazilian competition authority, focused on these transactions remains ongoing. The Brazilian matters are part of the US Attorney’s Office in Northern District of Iowa. The CID relates to an evaluation ofdiscussions with the appropriateness of certain sleepSEC and respiratory care equipment financing programs available for Respironics’ products. In addition, in late 2017, the company received an information request from the Department of Justice regarding the relationship between Respironics’ business and certain sleep centers that use Respironics’ products. In 2018 the company has provided the requested information to the US government and is awaiting next steps. The company has not been advised that any claim has been asserted by the US government in connection with these matters and it continues to cooperate fully in both inquiries.DoJ.
Given the uncertainsignificant uncertainty regarding the nature of the relevant events and liabilities, itobligations, Philips is not practicablecurrently able to provide information on thereliably estimate of the financial effect if any, or timing.of a range of possible outcomes in connection with these matters. The outcomeoutcomes of the uncertain eventsthese matters could have a material impact on the Company’scompany’s consolidated financial position, results of operations and cash flows.
Respironics field action
On June 14, 2021, Philips’ subsidiary Philips RS North America LLC (Philips Respironics) issued a voluntary recall notification in the United States and field safety notice outside the United States for specific Philips Respironics Bi-Level PAP, CPAP, and mechanical ventilator devices.
FDA inspection
On August 26, 2021, the US Food and Drug Administration (FDA) commenced an inspection of the Philips Respironics manufacturing facility in Murrysville, Pennsylvania and provided Philips Respironics with its preliminary inspectional observations on November 9, 2021. Philips Respironics responded to the FDA’s inspectional observations in December 2021, which described the actions already taken by the company, as well as additional planned actions. Philips Respironics is also providing periodic updates to the FDA on its progress for the planned actions. Should the FDA decide that Philips Respironics’ written response and/or actions are not timely or sufficient to address the FDA’s inspectional observations, the FDA may take additional enforcement action, which may include monetary penalties.
Product liability claims
Following the voluntary recall notification, a number of civil complaints have been filed in several jurisdictions against Philips Respironics and certain of its affiliates (including the company) generally alleging economic loss, personal injury and/or the potential for personal injury allegedly caused by devices subject to the recall.
In the United States, as of December 31, 2021, approximately 100 consumer class action lawsuits and 1 commercial class action lawsuit had been filed alleging economic loss and/or medical monitoring claims. In addition, as of December 31, 2021, approximately 120 personal injury lawsuits had been filed in the United States. On October 8, 2021, a Multi-District Litigation (MDL) in the US District Court for the Western District of Pennsylvania was formed, and most of these class action and personal injury lawsuits have been consolidated in the MDL for pre-trial proceedings.
In Australia, a consumer class action lawsuit alleging personal injury was filed against the company’s subsidiary Philips Electronics Australia Ltd on October 4, 2021. Philips Respironics and certain of its affiliates (including the company) are also defendants in consumer class action lawsuits in Canada and Israel alleging economic loss and/or personal injury.
While the company believes it is probable that these lawsuits will in the aggregate lead to an outflow of economic resources for Philips Respironics or other Philips entities, given the significant uncertainty regarding the nature of the relevant events and potential obligations, the company is not currently able to reliably estimate the amount of the obligation associated with these various lawsuits. The final outcome of the individual lawsuits and the cost to resolve them cannot currently be determined due to a number of variables, including claimant-specific information that is not yet available. In addition, the company cannot reasonably predict the number of claims that may be asserted in the future in relation to this matter. An adverse outcome with respect to any or all of these lawsuits and/or any future claims could have a material impact on the company’s consolidated financial position, results of operations and cash flows.
Securities class action
On August 16, 2021, a securities class action complaint was filed against the company, its CEO and its CFO in the United States District Court for the Eastern District of New York alleging violations of the Securities Exchange Act of 1934 causing damage to investors. On January 3, 2022, the lead plaintiff in the case filed its amended complaint seeking to represent individuals that purchased Philips shares between February 23, 2016, through November 12, 2021. The amended complaint focuses on share price declines that allegedly occurred as a result of disclosures included in the Q1 2021 earnings release on April 26, 2021, the voluntary recall notification on June 14, 2021, the Q2 2021 earnings release on July 26, 2021, and the publication of the form 483 observations by the FDA on November 12, 2021. The Company’s motion to dismiss is currently due in the first quarter of 2022.
It is the company’s assessment that it is possible but not probable that the case could lead to a certain outflow of economic resources. An adverse outcome of this case could have a material impact on the company’s consolidated financial position, results of operations and cash flows.
Other claims
On October 12, 2021, SoClean, a company offering ozone-based cleaning products for sleep devices, filed a lawsuit against the company and certain of its affiliates alleging that the defendants’ statements about the potential adverse effect ozone cleaning may have on the recalled devices has significantly damaged its business. The company believes that the claim is without merit and will vigorously defend itself.
It is possible that additional related claims, including from customers or business partners regarding alleged economic losses suffered as a consequence of the voluntary recall, may be filed against Philips Respironics or other Philips entities in the future. In particular, Philips Respironics is engaging with certain customers on the level of compensation they allege to be entitled to under Philips Respironics’ repair and replacement program.
In the event of an adverse outcome, these matters could have a material impact on the company’s consolidated financial position, results of operations and cash flows.
To date no provisions have been recorded for the litigation associated with the Respironics field action.
Miscellaneous
For details on other contractual obligations, please refer to liquidity risk in Details of Treasury risk /treasury and other financial riskrisks.
26Related-party transactions
In the normal course of business, Philips purchases and sells goods and services from/to various related parties in which Philips typically holds between 20% and 50% equity interest and has significant influence. These transactions are generally conducted with terms comparable to transactions with third parties.
From November 28, 2017, Philips lost control over Signify but still had significant influence. This has resulted in Signify becoming a non-consolidated related party which is reported in the table below for the time period January 1, 2018 to December 31, 2018. Philips and Signify have several agreements in place which impact the related party balances disclosed. There is a Transitional Service Level Agreement, based on which Philips provides Signify with services such as IT, real estate and human resources among others. Additionally, a Trademark License Agreement was signed in which Signify uses the Philips brand name. From December 31, 2018 Philips has no longer significant influence over Signify and therefore Signify ceased to be a related party. As a result, receivables from and payables to related parties in relation Signify are not included in the table below.
For details of these parties in which Philips typically holds between 20% and 50% equity interest, refer to the Investments in associates section of Interests in entities. For details on the Philips ownership changes in Signify, refer to Discontinued operations and assets classified as held for sale.
Philips Group
Related-party transactions
in millions of EUR
2016 - 2018
| | | | |
|---|
| | | 2019 | 2020 | 2021 |
|---|
Sales of goods and services | | | | 158 | 204 | 116 |
Purchases of goods and services | | | | 53 | 57 | 41 |
| | | |
Receivables from related parties | | | | 32 | 37 | 40 |
Payables to related parties | | | | 2 | 1 | 2 |
In the previous table, sales transactions between Philips and PMC are included amounting to EUR 106 million in 2021 (2020: EUR 191 million; 2019: EUR 150 million), under which PMC has leased the equipment to the ultimate customer. In addition to the table above,that, as part of its S&RC operations in the US, Philips sold non-recourse third-party receivables to PMC US amountingMedical Capital LLC funded durable medical equipment (DMEs) providers, through loans and leases. PMC-funded transactions these DMEs entered into with Philips amount to EUR 244162 million in 2018 (2017:2021 (2020: EUR 151242 million; 2016:2019: EUR 139235 million). The associated costs of these funding transactions are borne by the ultimate customer and settled directly with Philips Medical Capital LLC.
Philips Medical Capital LLC, a Pennsylvania limited liability company, is owned 60% by De Lage Landen Financial Services, Inc. (DLL) and 40% by Philips Electronics North America Corporation (Philips).
In light of the composition of the Executive Committee, the Companycompany considers the members of the Executive Committee and the Supervisory Board to be the key management personnel as defined in IAS 24 ‘Related parties’.Related Party Disclosures.
For remuneration details of the Executive Committee, the Board of Management and the Supervisory Board see Information on remuneration.
For Post-employment benefit plans see Post-employment benefits.
27Share-based compensation
The purpose of the share-based compensation plans is to align the interests of management with those of shareholders by providing incentives to improve the company’s performance on a long-term basis, thereby increasing shareholder value.
The Companycompany has the following plans:
- performance shares: rights to receive common shares in the future based on performance and service conditions;
- restricted shares: rights to receive common shares in the future based on a service condition; and
- options on its common shares, including the 2012 and 2013 Accelerate! grant.
Since 2013 the Board of Management and other members of the Executive Committee are only granted performance shares. Restrictedshares*). Performance shares areas well as restricted shares can be granted to executives, certain selected employees and new employees. Prior to 2013 options were also granted.
Under the terms of employee stock purchase plans established by the Companycompany in various countries, employees are eligible to purchase a limited number of Philips shares at discounted prices through payroll withholdings.
Share-based compensation costs were EUR 102116 million (2017:(2020: EUR 122121 million; 2016:2019: EUR 95105 million). This includes the employee stock purchase plan of EUR 57 million, which is not a share-based compensation that affects equity.equity . In the Consolidated statements of changes in equity EUR 107110 million is recognized in 20182021 and represent the costs of the share-based compensation plans, including EUR 10 million of costs of former Philips employees which are now employed with Signify.plans. The amount recognized as an expense is adjusted for forfeiture. USD-denominated performance shares, restricted shares and options are granted to employees in the United States only.
Performance shares
The performance is measured over a three-year performance period. The performance shares granted in 2019 have two performance conditions, relative Total Shareholders’ Return ('TSR') compared to a peer group of 20 companies including Philips (2017:(2020: 20 companies, 2016: 212019; 20 companies) and adjusted Earnings Per Share growth. growth ('EPS'). For performance shares granted in 2020 onwards, an additional non-financial criterion was added around sustainability. The introduction of the sustainability criterion reflects a further alignment of the remuneration package for the Board of Management with Philips‘ mission, vision and aim to act as a responsible member of society. The criterion is based on three Sustainable Development Goals ('SDG') as defined by the United Nations that are included in Philips’ strategy on sustainability (refer to Environment, Social and Governance).
The performance shares vest three years after the grant date. The number of performance shares that will vest is dependent on achieving the two performance conditions which are equally weighted, and provided that the grantee is still employed with the company. For the performance shares with a grant date in 2019 the two financial conditions, TSR and EPS, are equally weighted, while for the performance shares with a grant date in 2020 and 2021 the TSR is weighted 50%, EPS 40% and SDG 10%.
The amount recognized as an expense is adjusted for actual performance of adjusted Earnings Per ShareEPS growth and the actual realization of the SDGs since this is athese are non-market performance condition.conditions. It is not adjusted for non-vesting or extra vesting of performance shares due to a relative Total Shareholders’ ReturnTSR performance that differs from the performance anticipated at the grant date, since this is a market-based performance condition.
The fair value of the performance shares is measured based on Monte-Carlo simulation, which takes into account dividend payments between the grant date and the vesting date by including reinvested dividends as well as the market conditions expected to impact relative Total Shareholders’ Return performance in relation to selected peers. The following weighted-average assumptions were used for the 20182021 grants:
The assumptions were used for these calculations only and do not necessarily represent an indication of Management’s expectation of future developments for other purposes. The company has based its volatility assumptions on historical experience measured over a ten-year period.
A summary of the status of the company’s performance share plans as of December 31, 20182021 and changes during the year are presented below:in the following table:
| | weighted average grant-date fair value | |
|---|
| | | shares | weighted average grant-date fair value |
|---|
| | | |
Outstanding at January 1, 2018 1 | | | |
| Outstanding at January 1, 2021 | | 3,545,312 | 41.31 |
| | | 1,121,001 | 50.73 |
| | | |
| Notional dividends1) | | 62,872 | 45.22 |
| | | 1,466,223 | 39.18 |
| | | 272,873 | 45.90 |
| | | |
Outstanding at December 31, 2018 | | | |
| Adjusted quantity2) | | 107,624 | 37.67 |
| Outstanding at December 31, 2021 | | 3,097,713 | 45.28 |
| | | |
| | | |
Outstanding at January 1, 2018 1 | | | |
| Outstanding at January 1, 2021 | | 2,412,767 | 47.10 |
| | | 693,918 | 61.32 |
| | | |
| Notional dividends1) | | 41,324 | 51.42 |
| | | 947,772 | 47.48 |
| | | 268,500 | 51.29 |
| | | |
Outstanding at December 31, 2018 | | | |
| Adjusted quantity2) | | 73,264 | 50.06 |
| Outstanding at December 31, 2021 | | 2,005,000 | 51.48 |
11)The outstanding number of performance shares as per January 1, 2018 was updated to reflect the dividend declared on outstanding shares between grant date and vesting date that will be issued in shares.
2Dividend declared in 20182021 on outstanding shares.
32)Adjusted quantity includes the adjustments made to performancePerformance shares outstanding due to updates on the actual and expected EPS.
AtAs of December 31, 2018,2021, a total of EUR 111110 million of unrecognized compensation costs relate to non-vested performance shares.shares (as of December 31, 2020 EUR 116 million; as of December 31, 2019 EUR 106 million). These costs are expected to be recognized over a weighted-average period of 1.851.89 years.
Restricted shares
The fair value of restricted shares is equal to the share price at grant date. The Company issues restricted shares that, in general, have a 3 year cliff-vesting period.period provided that the grantee is still employed with the company.
A summary of the status of the Company’s restricted shares as of December 31, 20182021 and changes during the year are presented below:in the following table:
| | weighted average grant-date fair value | |
|---|
| | | shares | weighted average grant-date fair value |
|---|
| | | |
Outstanding at January 1, 2018 1 | | | |
| Outstanding at January 1, 2021 | | 1,813,385 | 36.20 |
| | | 631,347 | 44.41 |
| | | |
| Notional dividends1) | | 33,430 | 39.69 |
| | | 671,703 | 33.96 |
| | | 187,648 | 40.19 |
Outstanding at December 31, 2018 | | | |
| Cancelled | | 323 | 35.72 |
| Outstanding at December 31, 2021 | | 1,618,488 | 39.93 |
| | | |
| | | |
Outstanding at January 1, 2018 1 | | | |
| Outstanding at January 1, 2021 | | 1,649,847 | 41.14 |
| | | 721,469 | 53.42 |
| | | |
| Notional dividends1) | | 30,551 | 44.99 |
| | | 584,833 | 40.64 |
| | | 206,013 | 46.09 |
Outstanding at December 31, 2018 | | | |
| Outstanding at December 31, 2021 | | 1,611,021 | 46.26 |
11)Excludes premium shares on Restricted shares granted before 2013. (20% additional (premium) shares that may be received if shares delivered under the plan are not sold for three-year period).
2Dividend declared in 20182021 on outstanding shares.
At December 31, 2018,2021, a total of EUR 5966 million of unrecognized compensation costs relate to non-vested restricted shares.shares (at December 31, 2020 EUR 62 million; at December 31, 2019 EUR 59 million). These costs are expected to be recognized over a weighted-average period of 1.831.8 years.
Option plans
The Company granted options that expire after ten years. These options vest after three years, provided that the grantee is still employed with the company. All outstanding options have vested as of December 31, 2018.2021.
The following tables summarize information about the Company’s options as of December 31, 20182021 and changes during the year:
Philips Group
Options on EUR-denominated listed share
2018
| | weighted average exercise price |
|---|
| | |
Outstanding at January 1, 2018 | | |
| | |
| | |
| | |
Outstanding at December 31, 2018 | | |
| | |
Exercisable at December 31, 2018 | | |
| | options | weighted average exercise price |
|---|
| Outstanding at January 1, 2021 | 491,914 | 17.10 |
| Exercised | 233,265 | 19.03 |
| Expired | 19,572 | 20.48 |
| Outstanding at December 31, 2021 | 239,077 | 14.93 |
| | | |
| Exercisable at December 31, 2021 | 239,077 | 14.93 |
The exercise prices range from EUR 12.6314.82 to EUR 24.90.23.23. The weighted average remaining contractual term for options outstanding and options exercisable at December 31, 2018,2021, was 2.30.3 years. The aggregate intrinsic value of the options outstanding and options exercisable at December 31, 2018,2021, was EUR 204 million.
The total intrinsic value of options exercised during 20182021 was EUR 156 million (2017:(2020: EUR 299 million, 2016:2019: EUR 2013 million).
Philips Group
Options on USD-denominated listed share
2018
| | weighted average exercise price |
|---|
| | |
Outstanding at January 1, 2018 | | |
| | |
| | |
| | |
Outstanding at December 31, 2018 | | |
| | |
Exercisable at December 31, 2018 | | |
| | options | weighted average exercise price |
|---|
| Outstanding at January 1, 2021 | 387,177 | 23.72 |
| Exercised | 220,662 | 26.12 |
| Expired | 16,350 | 27.83 |
| Outstanding at December 31, 2021 | 150,165 | 19.75 |
| | | |
| Exercisable at December 31, 2021 | 150,165 | 19.75 |
The exercise prices range from USD 16.7619.50 to USD 36.63.30.27. The weighted average remaining contractual term for options outstanding and options exercisable atas of December 31, 2018,2021, was 2.30.3 years. The aggregate intrinsic value of the options outstanding and options exercisable atas of December 31, 2018,2021, was USD 153 million.
The total intrinsic value of options exercised during 20182021 was USD7 million (2020; USD 1611 million, (2017:2019: USD 22 million, 2016: USD 611 million).
At December 31, 20182021 there were no unrecognized compensation costs related to outstanding options. Cash received from exercises under the Company’s option plans amounted to EUR 579 million in 2018 (2017:2021 (2020: EUR 12821 million, 2016:2019: EUR 6528 million)., The actual tax deductions realized as a result of USD option exercises totaled approximately 1 million in 2021 (2020: EUR 3 million, in 2018 (2017: EUR 5 million, 2016:2019: EUR 2 million).
The outstanding options as of December 31, 20182021 are categorized in exercise price ranges as follows:
Philips Group
Outstanding options
in millions of EUR unless otherwise stated
2018
| | intrinsic value in millions | weighted average remaining contractual term | options | intrinsic value in millions | weighted average remaining contractual term |
|---|
| | | |
| | | | 229,660 | 4.1 | 0.3 |
| | | | 8,100 | 0.1 | 0.5 |
| | | | 1,317 | | 1.0 |
| | | | 239,077 | 4.3 | 0.3 |
| | | |
| | | |
| | | | 143,415 | 2.5 | 0.3 |
| | | | 3,600 | 0.1 | 0.4 |
| | | | |
| | | | 3,150 | | 0.9 |
| | | | 150,165 | 2.6 | 0.3 |
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 20182021 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, 2018.2021.
The following table summarizes information about the Company’s Accelerate! options as of December 31, 20182021 and changes during the year:
| | weighted average exercise price |
|---|
| | |
| | |
Outstanding at January 1, 2018 | | |
| | |
| | |
Outstanding at December 31, 2018 | | |
| | |
Exercisable at December 31, 2018 | | |
| | |
| | |
Outstanding at January 1, 2018 | | |
| | |
| | |
Outstanding at December 31, 2018 | | |
| | |
Exercisable at December 31, 2018 | | |
| | options | weighted average exercise price |
|---|
| EUR-denominated | | |
| Outstanding at January 1, 2021 | 163,200 | 17.66 |
| Exercised | 26,225 | 15.24 |
| Outstanding at December 31, 2021 | 136,975 | 18.13 |
| | | |
| Exercisable at December 31, 2021 | 136,975 | 18.13 |
| | | |
| USD-denominated | | |
| Outstanding at January 1, 2021 | 37,800 | 20.02 |
| Exercised | 20,300 | 20.02 |
| Expired | | |
| Outstanding at December 31, 2021 | 17,500 | 20.02 |
| | | |
| Exercisable at December 31, 2021 | 17,500 | 20.02 |
The exercise prices of the Accelerate! options are EUR 15.24 and EUR 22.43 for EUR-denominated options and is USD 20.02 for USD-denominated options. The weighted average remaining contractual term for EUR-denominated Accelerate! options outstanding and exercisable at December 31, 20182021 was 3.30.5 years. The weighted average remaining contractual term for USD-Accelerate! options outstanding and exercisable at December 31, 20182021 was 3.10.1 years. The aggregate intrinsic value of the EUR-denominated Accelerate! options outstanding and exercisable at December 31, 2018,2021, was EUR 4.32 million. The aggregate intrinsic value of the USD-denominated Accelerate! options outstanding and exercisable at December 31, 20182021 was USD 1.90.30 million.
The total intrinsic value of Accelerate! options exercised during 20182021 was EUR 40.7 million for EUR-denominated options (2017:(2020: EUR 61.6 million, 2019: EUR 2 million) and USD 10.7 million for USD-denominated options (2017:(2020: USD 0.9 million, 2019: USD 1 million).
Cash received from exercises for EUR-denominated and USD-denominated Accelerate! options amounted to EUR 40.7 million in 2018 (2017:2021 (2020: EUR 81.4 million, 2019: EUR 2 million). The actual tax deductions realized as a result of Accelerate! USD options exercises totaled approximately EUR 0.20.1 million in 2018 (2017:2021 (2020: EUR 0.30.1 million, 2019: EUR 0.2 million).
*)Executive Committee members can receive restricted share rights as a sign-on LTI awards upon hiring.
28Information on remuneration
Remuneration of the Executive Committee
In 2018,2021, the total remuneration costs relating to the members of the Executive Committee (consisting of 1316 members throughout the year, including the members of the Board of Management) amounted to EUR 26,755,003 (2017:33.4 million (2020: EUR 25,848,741; 2016:33.2 million; 2019: EUR 22,433,827)30.0 million) consisting of the elements in the following table.
Philips Group
Remuneration costs of the Executive Committee1)
in EUR
2016-2018
| | | |
|---|
Base salary/Base compensation | | | |
| | | |
| | | |
| | | |
Restricted share rights 3 | | | |
| | | |
| | | |
| | | |
| | 2019 | 2020 | 2021 |
|---|
| Base salary/Base compensation | 9,241,364 | 9,299,794 | 9,598,588 |
| Annual incentive2) | 5,566,763 | 6,726,768 | 5,250,408 |
| Performance shares3)4) | 11,143,320 | 13,153,975 | 12,610,073 |
| Restricted share rights3) | 168,404 | 288,372 | 1,380,644 |
| Pension allowances5) | 2,076,834 | 2,054,570 | 2,107,953 |
| Pension scheme costs | 440,003 | 382,513 | 306,694 |
| Other compensation6) | 1,331,990 | 1,264,908 | 2,104,044 |
| Total | 29,968,678 | 33,170,901 | 33,358,405 |
11)The Executive Committee consisted of 13 members as per December 31, 2018 (2017: 122021 (2020: 15 members; 2016: 122019: 14 members)
22)The annual incentives are related to the performance in the year reported which are paid out in the subsequent year.
33)Costs of performance shares stock options and restricted share rights are based on accounting standards (IFRS) and do not reflect the value of stock options at the end of the lock up period and the value of performance shares and restricted share rights at the vesting/release date
44)For 2018,2021, a release of EUR 1,740,520 (2017:0 (2020: EUR 2,469,670; 2016:554,437; 2019: EUR 0) is included due to non-vesting of performance shares
55)Pension allowances are gross taxable allowances paid to the Executive Committee members in the Netherlands. These allowances are part of the pension arrangement6)The stated amounts mainly concern (share of) allowances to members of the Executive Committee that can be considered as remuneration. In a situation where such a share of an allowance can be considered as (indirect) remuneration (for example, private use of the company car), then the share is both valued and accounted for here. The method employed by the fiscal authorities is the starting point for the value stated
At December 31, 2021, the members of the Executive Committee (including the members of the Board of Management) held 184,900 (2020: 193,300; 2019: 291,520) stock options at a weighted average exercise price of EUR 17.15 (2020: EUR 17.31; 2019: EUR 18.61).
Remuneration of the Board of Management
In 2021, the total remuneration costs relating to the members of the Board of Management amounted to EUR 10.3 million (2020: EUR 11.4 million; 2019: EUR 9.7 million), see the following table.
Philips Group
Remuneration costs of individual members of the Board of Management
in EUR
| | base compensation/salary | annual incentive1) | performance shares2) | restricted share rights2) | pension allowances3) | pension scheme costs | other compensation | total costs |
|---|
| 2021 | | | | | | | | |
| F.A. van Houten | 1,325,000 | 850,915 | 2,626,295 | - | 565,403 | 27,462 | 57,224 | 5,452,299 |
| A. Bhattacharya | 790,000 | 360,103 | 1,172,533 | - | 233,857 | 27,462 | 68,908 | 2,652,864 |
| M.J. van Ginneken | 605,000 | 317,192 | 886,035 | - | 150,755 | 27,462 | 42,610 | 2,029,054 |
| | 2,720,000 | 1,528,211 | 4,684,863 | - | 950,014 | 82,387 | 168,742 | 10,134,217 |
| | | | | | | | | |
| 2020 | | | | | | | | |
| F.A. van Houten | 1,325,000 | 1,298,500 | 2,874,467 | - | 565,922 | 27,001 | 62,176 | 6,153,067 |
| A. Bhattacharya | 785,000 | 596,600 | 1,295,996 | - | 233,126 | 27,001 | 70,267 | 3,007,990 |
| M.J. van Ginneken | 580,000 | 437,920 | 952,453 | - | 158,800 | 27,001 | 46,986 | 2,203,160 |
| | 2,690,000 | 2,333,020 | 5,122,916 | - | 957,849 | 81,004 | 179,428 | 11,364,217 |
| 2019 | | | | | | | | |
| F.A. van Houten | 1,295,000 | 1,091,800 | 2,235,166 | - | 559,052 | 26,380 | 52,713 | 5,260,111 |
| A. Bhattacharya | 770,000 | 517,472 | 995,483 | - | 230,006 | 26,380 | 63,265 | 2,602,606 |
| M.J. van Ginneken | 571,250 | 335,685 | 713,815 | - | 171,018 | 26,380 | 38,278 | 1,856,426 |
| | 2,636,250 | 1,944,957 | 3,944,464 | - | 960,076 | 79,140 | 154,256 | 9,719,143 |
61)The annual incentives are related to the performance in the year reported which are paid out in the subsequent year.2)Costs of performance shares and restricted share rights are based on accounting standards (IFRS) and do not reflect the value of performance shares at the vesting/release date3)The stated amounts mainly concern (share of) allowances to members of the Board of Management that can be considered as remuneration. In a situation where such a share of an allowance can be considered as (indirect) remuneration (for example, private use of the company car), then the share is both valued and accounted for here. The method employed by the fiscal authorities is the starting point for the value statedstated.
At December 31, 2018, the members of the Executive Committee (including the members of the Board of Management) held 333,670 (2017: 541,400; 2016: 750,631) stock options at a weighted average exercise price of EUR 18.99 (2017: EUR 19.82; 2016: EUR 21.17).
Remuneration of the Board of Management
In 2018, the total remuneration costs relating to the members of the Board of Management amounted to EUR 9,848,153 (2017: EUR 7,808,117; 2016: EUR 8,904,859), see table below.
Philips Group
Remuneration costs of individual members of the Board of Management
in EUR2016-2018
| base compensation/salary | | | | restricted share rights 2 | | | | |
|---|
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1The annual incentives are related to the performance in the year reported which are paid out in the subsequent year. For more details on the annual incentives refer to 2018 Annual Incentive2Costs of performance shares, stock options and restricted share rights are based on accounting standards (IFRS) and do not reflect the value of stock options at the end of the lock up period and the value of performance shares and restricted share rights at the vesting/release date
3The stated amounts mainly concern (share of) allowances to members of the Executive Committee that can be considered as remuneration. In a situation where such a share of an allowance can be considered as (indirect) remuneration (for example, private use of the company car), then the share is both valued and accounted for here. The method employed by the fiscal authorities is the starting point for the value stated.
For further information on remuneration costs, see Remuneration costs.
The tables below give an overview of the performance share plans and the stock option plans of the Company, held by the members of the Board of Management:
Philips Group
Number of performance shares (holdings)
in number of shares
2018
| | | awarded dividend shares 2018 | | | |
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1Awarded before date of appointment as a member of the Board of Management
At December 31, 2018, the members of the Board of Management held 333,670 stock options (2017: 333,670; 2016: 476,200) at a weighted average exercise price of EUR 18.99 (2017: EUR 18.99; 2016: EUR 19.47).
Philips Group
Stock options (holdings)
number of shares
2018
| | | | | | | share (closing) price on exercise date | |
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See Notes for further information on performance shares and stock options as well 2018 Long-Term Incentive Plan.
The accumulated annual pension entitlements and the pension costs of individual members of the Board of Management are as follows (in EUR):follows:
Philips Group
Accumulated annual pension entitlements and pension-related costs
in EUR unless otherwise stated
2018
| | accumulated annual pension as of December 31, 2018 | total pension related costs | age at December 31, 2021 | accumulated annual pension as of December 31, 2021 | total pension related costs |
|---|
| | | | 61 | 331,208 | 592,865 |
| | | | 60 | 35,102 | 261,319 |
| | | | 48 | 48,015 | 178,217 |
| | | | 1,032,402 |
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 2018,2021, no (additional) pension benefits were granted to former members of the Board of Management.
Remuneration of the Supervisory Board
The remuneration of the members of the Supervisory Board amounted to EUR 1,088,375 (2017:1.3 million (2020: EUR 950,500; 2016: EUR 1,037,209)1.3 million; 2019: 1.2 million). Former members received no remuneration.
AtThe members of the Supervisory Board do not receive any share-based remuneration. Therefore, at December 31, 20182021 the members of the Supervisory Board held no stock options, performance shares or restricted shares.
The individual members of the Supervisory Board received, by virtue of the positions they held, the following remuneration (in EUR):remuneration:
Philips Group
Remuneration of the Supervisory Board
in EUR
2016-2018
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C.J.A. van Lede (Jan.-May) | | | | |
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| membership | committees | other compensation1) | total |
|---|
| 2021 | | | | |
| F. Sijbesma | 141,301 | 27,808 | 8,237 | 177,346 |
| P.A.M. Stoffels | 109,863 | 27,808 | 4,769 | 142,440 |
| J. van der Veer | 53,507 | 12,082 | 3,916 | 69,505 |
| C.A. Poon | 39,699 | 16,915 | 783 | 57,397 |
| N. Dhawan | 100,000 | 18,000 | 2,269 | 120,269 |
| O. Gadiesh | 34,521 | 4,833 | 783 | 40,137 |
| D.E.I. Pyott | 100,000 | 36,370 | 2,269 | 138,639 |
| A.M. Harrison | 100,000 | 14,000 | 2,269 | 116,269 |
| M.E. Doherty | 100,000 | 27,000 | 4,769 | 131,769 |
| P. Löscher | 100,000 | 32,000 | 4,769 | 136,769 |
| I. Nooyi | 100,000 | 14,000 | 2,269 | 116,269 |
| S.K. Chua | 65,753 | 11,836 | 1,492 | 79,081 |
| 1,044,644 | 242,652 | 38,595 | 1,325,891 |
| 2020 | | | | |
| J. van der Veer | 155,000 | 35,000 | 11,345 | 201,345 |
| C.A. Poon | 115,000 | 49,000 | 7,269 | 171,269 |
| N. Dhawan | 100,000 | 18,000 | 7,269 | 125,269 |
| O. Gadiesh | 100,000 | 14,000 | 2,269 | 116,269 |
| D.E.I. Pyott | 100,000 | 42,000 | 12,269 | 154,269 |
| P.A.M. Stoffels | 100,000 | 9,333 | 9,769 | 119,102 |
| A.M. Harrison | 100,000 | 14,000 | 2,269 | 116,269 |
| M.E. Doherty | 100,000 | 24,000 | 9,769 | 133,769 |
| P. Löscher | 66,667 | 21,333 | 1,513 | 89,513 |
| F. Sijbesma | 76,667 | 9,333 | 1,513 | 87,513 |
| 1,013,333 | 236,000 | 65,254 | 1,314,587 |
| 2019 | | | | |
| J. van der Veer | 155,000 | 35,000 | 7,000 | 197,000 |
| C.A. Poon | 115,000 | 50,167 | 22,000 | 187,167 |
| H.N.F.M. von Prondzynski | 33,333 | 16,333 | 5,667 | 55,333 |
| J.P. Tai | 25,000 | 10,250 | 5,500 | 40,750 |
| N. Dhawan | 100,000 | 18,000 | 27,000 | 145,000 |
| O. Gadiesh | 100,000 | 19,833 | 12,000 | 131,833 |
| D.E.I. Pyott | 100,000 | 41,500 | 17,000 | 158,500 |
| P.A.M. Stoffels | 100,000 | - | 14,500 | 114,500 |
| A.M. Harrison | 100,000 | 9,333 | 12,000 | 121,333 |
| M.E. Doherty | 41,667 | 1,500 | 8,333 | 51,500 |
| 870,000 | 201,916 | 131,000 | 1,202,916 |
11)The amounts mentioned under other compensation relate to the fee for intercontinental travel, inter-European travel, (effective 2015) and the entitlement of EUR 2,000 under the Philips product arrangement
2As of 2013, part of and the remuneration of members of the Supervisory Board living in the Netherlands is subject to VAT. The amounts mentioned in this table are excluding VATannual fixed net expense allowance.
Supervisory Board members’ and Board of Management members’ interests in Philips shares
Members of the Supervisory Board and of the Executive CommitteeBoard of Management are prohibited from writing call and put options or similar derivatives of Philips securities.
Philips Group
Shares held by Board members1)2)
in number of shares
2018
| | | December 31, 2020 | December 31, 2021 |
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| | | 424,029 | 525,761 |
| | | 123,077 | 148,365 |
| | | 88,996 | 110,528 |
11)Reference date for board membership is December 31, 2018.2021.2)The total shares held by the members of the Board of Management is less than 1% of the company's issued share capital.
29Fair 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.
The following tables show the carrying amounts and fair values of financial assets and financial liabilities, including their levels in the fair value hierarchy. Fair value information for financial assets and financial liabilities not carried at fair value is not included if the carrying amount is a reasonable approximation of fair value. As reflected in the following table, equity instruments carried at FVTOCI were designated as such upon the adoption of IFRS 9 and upon initial measurement of new equity instruments. Remaining financial assets are mandatorily classified as FVTPL or FVTOCI.
Philips Group
Fair value of financial assets and liabilities
in millions of EUR
2021
| | carrying amount | estimated fair value1) | Level 1 | Level 2 | Level 3 |
|---|
| Financial assets | | | | | |
| Carried at fair value: | | | | | |
| Debt instruments | 233 | 233 | | | 233 |
| Equity instruments | 4 | 4 | 4 | | |
| Other financial assets | 46 | 46 | | 34 | 12 |
| Financial assets carried at FVTPL | 283 | 283 | 4 | 34 | 245 |
| Debt instruments | 27 | 27 | | 27 | |
| Equity instruments | 273 | 273 | 63 | | 210 |
| Current financial assets | - | - | | | |
| Receivables - current | 68 | 68 | | | 68 |
| Financial assets carried at FVTOCI | 368 | 368 | 63 | 27 | 278 |
| Derivative financial instruments | 63 | 63 | | 63 | |
| Financial assets carried at fair value | 714 | 714 | 67 | 124 | 523 |
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| Carried at (amortized) cost: | | | | | |
| Cash and cash equivalents | 2,303 | | | | |
| Loans and receivables: | | | | | |
| Current loans receivables | 2 | | | | |
| Other non-current loans and receivables | 47 | | | | |
| Receivables - current | 3,720 | | | | |
| Receivables - non-current | 224 | | | | |
| Financial assets carried at (amortized) cost | 6,296 | | | | |
| Total financial assets | 7,010 | | | | |
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| Financial liabilities | | | | | |
| Carried at fair value: | | | | | |
| Contingent consideration | (208) | (208) | | | (208) |
| Financial liabilities carried at FVTP&L | (208) | (208) | | | (208) |
| Derivative financial instruments | (202) | (202) | | (202) | |
| Financial liabilities carried at fair value | (410) | (410) | | (202) | (208) |
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| Carried at (amortized) cost: | | | | | |
| Accounts payable | (1,872) | | | | |
| Interest accrual | (52) | | | | |
| Debt (Corporate bonds and leases) | (5,765) | (6,396) | (5,177) | (1,220) | |
| Debt (excluding corporate bonds and leases) | (1,214) | | | | |
| Financial liabilities carried at (amortized) cost | (8,904) | | | | |
| Total financial liabilities | (9,314) | | | | |
1)For Cash and cash equivalents, Loans and receivables, Accounts payable, interest accrual and Debt (excluding corporate bonds and leases), the carrying amounts approximate fair value because of the nature of these instruments (including maturity and interest conditions) and therefore fair value information is not included in the table above.
Philips Group
Fair value of financial assets and liabilities
in millions of EUR
2020
| | carrying amount | estimated fair value1) | Level 1 | Level 2 | Level 3 |
|---|
| Financial assets | | | | | |
| Carried at fair value: | | | | | |
| Debt instruments | 207 | 207 | | | 207 |
| Equity instruments | 5 | 5 | 5 | | |
| Other financial assets | 36 | 36 | | 30 | 5 |
| Financial assets carried at FVTPL | 248 | 248 | 5 | 30 | 212 |
| Debt instruments | 27 | 27 | | 27 | - |
| Equity instruments | 119 | 119 | 12 | | 107 |
| Current financial assets | - | - | | | |
| Receivables - current | 91 | 91 | | | 91 |
| Financial assets carried at FVTOCI | 237 | 237 | 12 | 27 | 198 |
| Derivative financial instruments | 111 | 111 | | 111 | |
| Financial assets carried at fair value | 596 | 596 | 17 | 168 | 411 |
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| Carried at (amortized) cost: | | | | | |
| Cash and cash equivalents | 3,226 | | | | |
| Loans and receivables: | | | | | |
| Current loans receivables | - | | | | |
| Other non-current loans and receivables | 37 | | | | |
| Receivables - current | 4,065 | | | | |
| Receivables - non-current | 230 | | | | |
| Financial assets carried at (amortized) cost | 7,558 | | | | |
| Total financial assets | 8,154 | | | | |
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| Financial liabilities | | | | | |
| Carried at fair value: | | | | | |
| Contingent consideration | (318) | (318) | | | (318) |
| Financial liabilities carried at FVTP&L | (318) | (318) | | | (318) |
| Derivative financial instruments | (163) | (163) | | (163) | |
| Financial liabilities carried at fair value | (481) | (481) | | (163) | (318) |
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| Carried at (amortized) cost: | | | | | |
| Accounts payable | (2,119) | | | | |
| Interest accrual | (52) | | | | |
| Debt (Corporate bonds and leases) | (5,655) | (6,431) | (5,216) | (1,216) | |
| Debt (excluding corporate bonds and leases) | (1,279) | | | | |
| Financial liabilities carried at (amortized) cost | (9,104) | | | | |
| Total financial liabilities | (9,585) | | | | |
1)For Cash and cash equivalents, Loans and receivables, Accounts payable, interest accrual and Debt (excluding corporate bonds and leases), the carrying amounts approximate fair value because of the nature of these instruments (including maturity and interest conditions) and therefore fair value information is not included in the table above.
The fair value of Philips’ debt is estimated on the basis of the quoted market prices for certain issues,issuances, or on the basis of discounted cash flow analysis based upon market rates plus Philips’ spread for the particular tenors of the borrowing arrangement. Accrued interest is not included within the carrying amount or estimated fair value of debt.
The following table shows the carrying amounts and fair values of financial assets and financial liabilities, including their levels in the fair value hierarchy. It does not include fair value information for financial assets and financial liabilities not carried at fair value if the carrying amount is a reasonable approximation of fair value. As reflected in the table below, equity instruments carried at FVTOCI were designated as such upon the adoption of IFRS 9. The remaining equity investment in Signify (current financial assets) was designated as FVTOCI upon initial recognition as of December 31, 2018. Remaining financial assets are mandatorily classified as FVTPL or FVTOCI.
Philips Group
Fair value of financial assets and liabilities
in millions of EUR
2018
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Financial assets carried at FVTPL | | | | | |
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Current financial assets 2 | | | | | |
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Financial assets carried at FVTOCI | | | | | |
Derivative financial instruments | | | | | |
Financial assets carried at fair value | | | | | |
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Carried at (amortized) cost: | | | | | |
Cash and cash equivalents | | | | | |
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Current loans receivables | | | | | |
Other non-current loans and receivables | | | | | |
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Receivables - non-current | | | | | |
Financial assets carried at (amortized) cost | | | | | |
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Financial liabilities carried at FVTP&L | | | | | |
Derivative financial instruments | | | | | |
Financial liabilities carried at fair value | | | | | |
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Carried at (amortized) cost: | | | | | |
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Debt (Corporate bonds and finance leases) | | | | | |
Debt (excluding corporate bonds and finance leases) | | | | | |
Financial liabilities carried at (amortized) cost | | | | | |
Total financial liabilities | | | | | |
1For Cash and cash equivalents, Loans and receivables, Accounts payable, interest accrual and Debt (excluding corporate bonds and finance leases), the carrying amounts approximate fair value because of the short maturity and the nature of these instruments, and therefore fair value information is not included in the table above.
2The majority of the balance reflects the remaining stake in Signify (formerly Philips Lighting), which relates to equity instruments.
Philips Group
Fair value of financial assets and liabilities
in millions of EUR
2017
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Available-for-sale financial assets | | | | | |
Securities classified as assets held for sale | | | | | |
Fair value through profit and loss | | | | | |
Derivative Financial Instruments | | | | | |
Financial assets carried at fair value | | | | | |
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Carried at (amortized) cost: | | | | | |
Cash and cash equivalents | | | | | |
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Other non-current loans and receivables | | | | | |
| | | | | |
Receivables - non-current | | | | | |
Held-to-maturity investments | | | | | |
Financial assets carried at (amortized) costs | | | | | |
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Derivative Financial Instruments | | | | | |
Financial liabilities carried at fair value | | | | | |
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Carried at amortized cost: | | | | | |
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Debt (Corporate bond and finance lease) | | | | | |
Debt (other bank loans, overdrafts, forward contacts etc.) | | | | | |
Financial liabilities carried at (amortized) costs | | | | | |
Total financial liabilities | | | | | |
1For Cash and cash equivalents, Loans and receivables, Accounts payable, interest accrual and Debt (excluding corporate bonds and finance leases), the carrying amounts approximate fair value because of the short maturity and the nature of these instruments, and therefore fair value information is not included in the table above.
The tables above represents categorization of measurement of the estimated fair values of financial assets and liabilities. 2017 comparatives have not been restated for the adoption of IFRS 9.
Specific valuation techniques used to value financial instruments include:
Level 1
Instruments included in level 1 are comprised primarily of listed equity investments classified as financial assets carried at fair value through profit or loss or carried at fair value through other comprehensive income. The fair value of financial instruments traded in active markets is based on quoted market prices at the balance sheet date. A market is regarded as active if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service, or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis.
Level 2
The fair value of financial instruments that are not traded in an active market (for example, over-the-counter derivatives or convertible bond instruments) is determined by using valuation techniques. These valuation techniques maximize the use of observable market data where it is available and rely as little as possible on entity-specific estimates. If all significant inputs required to fair value an instrument are based on observable market data, the instrument is included in level 2. The fair value of derivatives is calculated as the present value of the estimated future cash flows based on observable interest yield curves, basis spread and foreign exchange rates. The valuation of convertible bond instruments uses observable market quoted data for the options and present value calculations using observable yield curves for the fair value of the bonds.
Level 3
If one or more of the significant inputs are not based on observable market data, such as third-party pricing information without adjustments, the instrument is included in level 3.
Philips recognizes transfers between levels of the fair value hierarchy at the end of the reporting period during which the change has occurred.
The retained investment in the combined businesses of Lumileds and Automotive of EUR 112 million (December 31, 2017: EUR 243 million) is classified as a financial asset recognized at fair value through OCI, based on a valuation model with inputs, including earnings, multiples and discount rates, which are market-corroborated to the extent possible, and hence classified as Level 3 in the fair value hierarchy. The value decrease in 2018 was mainly attributable to a lower earnings assumption.
A sensitivity analysis of the investment in the combined Lumileds and Automotive businesses at December 31, 2018 shows that if the earnings assumption were to increase instantaneously by 10%, with all other variables (including foreign exchange rates) held constant, the fair value of the investment would increase by approximately 60%. Similarly, a decrease of 10% in the earnings assumption would reduce the fair value by approximately 47%. If the valuation multiples were to increase instantaneously by 10% from the assumption at December 31, 2018, with all other variables (including foreign exchange rates) held constant, the fair value of the investment would increase by approximately 34%, while a decrease of 10% in valuation multiples would reduce the fair value by approximately 30%.
As part of the EPD acquisition (refer to Acquisitions and Divestments) Philips may be required to pay additional consideration to former shareholders if specified future events occur or conditions are met, such as the achievement of certain regulatory milestones or the achievement of certain commercial milestones. The fair value of this contingent consideration liabilityprovision was determined using a probability-weighted and a risk-adjusted approach to estimate the achievement of future regulatory and commercial milestones, and discount rates ranging from 3 to 4 percent.respectively. The discount rates used in the risk-adjusted approach are ranging from 8 to 9 percent and reflect the inherent risk related to achieving the respectivecommercial milestones. Both regulatory and commercial milestones are discounted for the time value of money at risk-free rates. The fair value measurementsmeasurement is based on management’s estimates and assumptions and hence classified as Level 3 in the fair value hierarchy. For further information on this and other contingent consideration provisions, refer to Provisions.
A sensitivity analysis of the EPD contingent consideration liabilityprovision at December 31, 20182021 shows that if the probabilities of success for every milestoneregulatory milestones are increased by 10 percentage points, with all other variables (including foreign exchange rates) held constant, the fair value of the liabilityprovision would increase by approximately 3%11%. Similarly, a decrease in the probabilities of success for every milestoneregulatory milestones by 10 percentage points would reduce the fair value by approximately 4%11%. If the discount rates for commercial milestones were to increase instantaneously by 100 basis points from the assumption at December 31, 2018,2021, with all other variables (including foreign exchange rates) held constant, the fair value of the liabilityprovision would decrease by approximately 3%4%, while a decrease in the discount rates of 100 basis points would increase the fair value by approximately 3%4%.
In 2021 the impact of COVID-19 has gradually reduced, however there continues to be uncertainty and volatility related to the impact of the pandemic, including global supply chain challenges. Where relevant, the estimated impact of the COVID-19 pandemic, supply chain challenges and resulting uncertainties have been reflected in the forecasts used as a basis for the fair value of contingent consideration.
The following table below shows the reconciliation from the beginning balance to the end balance for Level 3 fair value measurements.
Philips Group
Reconciliation of theLevel 3 fair value hierarchymeasurements
in millions of EUR
2018
| | |
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Balance as of December 31, 2017 | | |
| | |
Balance at January 1, 2018 | | |
Assumed in a business combination | | |
| | |
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Recognized in profit and loss: | | |
| | |
- financial income and expenses | | |
Recognized in other comprehensive income 2 | | |
Receivables held to collect and sell | | |
Balance at December 31, 2018 | | |
| | Financial assets | Financial liabilities |
|---|
| Balance as of January 1, 2021 | 411 | 318 |
| Acquisitions | | 16 |
| Purchase | 113 | |
| Sales | (122) | |
| Utilizations | | (48) |
| Recognized in profit and loss: | | |
| other business income | | (87) |
| financial income and expenses1) | 98 | 1 |
| Recognized in other comprehensive income2) | 12 | 9 |
| Receivables held to collect and sell | (25) | |
| Reclassification from associates | 36 | |
| Balance as of December 31, 2021 | 523 | 208 |
11)IFRS 9 adjustments relatesRefer to Receivables-current carried at FVTOCI. For further information refer to Significant accounting policies note.Financial income and expenses for details. 22)Includes translation differences
Philips Group
Reconciliation of Level 3 fair value measurements
in millions of EUR
| | Financial assets | Financial liabilities |
|---|
| Balance as of January 1, 2020 | 212 | 354 |
| Acquisitions | | 70 |
| Purchase | 127 | |
| Sales | (60) | |
| Utilizations | | (15) |
| Recognized in profit and loss: | | |
| other business income | | (93) |
| financial income and expenses | 129 | 6 |
| Recognized in other comprehensive income1) | (8) | (6) |
| Receivables held to collect and sell | 11 | |
| Balance as of December 31, 2020 | 411 | 318 |
1)Includes translation differences
The following section below elaborates on transactions in derivatives. Transactions in derivatives are subject to master netting and set-off agreements. In the case of certain termination events, under the terms of the master agreement, Philips can terminate the outstanding transactions and aggregate their positive and negative values to arrive at a single net termination sum (or close-out amount). This contractual right is subject to the following:
- The right may be limited by local law if the counterparty is subject to bankruptcy proceedings;
- The right applies on a bilateral basis.
Philips Group
Financial assets subject to offsetting, enforceable master netting arrangements or similar agreements
in millions of EUR
2017 - 2018
| | | |
|---|
| | | 2020 | 2021 |
|---|
| | | | |
Gross amounts of recognized financial assets | | | 111 | 63 |
Gross amounts of recognized financial liabilities offset in the balance sheet | | | | |
Net amounts of financial assets presented in the balance sheet | | | 111 | 63 |
| | | | |
Related amounts not offset in the balance sheet | | | | |
| | | (55) | (47) |
| | | | |
| | | |
| | | 57 | 17 |
Philips Group
Financial liabilities subject to offsetting, enforceable master netting arrangements or similar agreements
in millions of EUR
2017 - 2018
| | | |
|---|
| | | 2020 | 2021 |
|---|
| | | | |
Gross amounts of recognized financial liabilities | | | (163) | (202) |
Gross amounts of recognized financial assets offset in the balance sheet | | | | |
Net amounts of financial liabilities presented in the balance sheet | | | (163) | (202) |
| | | | |
Related amounts not offset in the balance sheet | | | | |
| | | 55 | 47 |
| | | | |
| | | |
| | | (109) | (155) |
30Details of treasury /and other financial risks
Philips is exposed to several types of financial risks. This note further analyzes financial risks. Philips does not purchase or hold derivative financial instruments for speculative purposes. Information regarding financial instruments is included in Fair value of financial assets and liabilities.
Liquidity risk
Liquidity risk is the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities.
Liquidity risk for the group is monitored through the Treasury liquidity committee, which tracks the development of the actual cash flow position for the group and uses input from a number of sources in order to forecast the overall liquidity position on both a short and longer term basis. Philips invests surplus cash in money marketshort-term deposits with appropriate maturities to ensure sufficient liquidity is available to meet liabilities when due and in money market funds.
The rating of the company’s debt by major rating agencies may improve or deteriorate. As a result, Philips’ future borrowing capacity may be influenced and its financing costs may fluctuate. Philips has various sources to mitigate the liquidity risk for the group. At December 31, 2018,2021, Philips had EUR 1,6882,303 million in cash and cash equivalents (2017:(2020: EUR 1,9393,226 million), within which short-term deposits of EUR 1,1741,357 million (2017:(2020: EUR 1,3021,983 million). Cash and cash equivalents include all cash balances, money market funds and short-term highly liquid investments with an original maturity of three months or less that are readily convertible into known amounts of cash. Philips pools cash from subsidiaries to the extent legally and economically feasible; cash not pooled remains available for the company’s operational or investment needs.
Philips faces cross-border foreign exchange controls and/or other legal restrictions in a few countries that could limit its ability to make these balances available on short notice for general use by the group.
Furthermore, Royal Philips has a USD 2.5 billion Commercial Paper ProgrammeProgram and a EUR 11.0 billion committed standby revolving credit facility that can be used for general group purposes, such as a backstop for its Commercial Paper Programme.Program. Philips issued commercial paper of EUR 300 million in May and EUR 150 million in July, that was repaid in September 2021. The facility does not have a material adverse change clause, has no financial covenants and no credit-rating-related acceleration possibilities. As of December 31, 2018, Royal2021, Philips did not have any amountsloans outstanding under either facility. As per 9 March 2020, Philips has established a Euro Medium-Term Note (EMTN) program, a framework that facilitates the issuance of notes for a total amount up to EUR 10 billion. In 2021, Philips did not issue any of these facilities. Anew notes under the program. For a description of Philips’ credit facilities, can be found inrefer to Debt.
In addition to cash and cash equivalents, at December 31, 2021, Philips also held EUR 4267 million of level 1listed (level 1) equity investments inat fair value (classified as other non-current financial assets (fair value at December 31, 2018)assets). Furthermore, Philips is also a shareholder in Signify (EUR 434 million at year-end 2018) which is publicly listed and classified as other current financial asset.
The following table below presents a summary of the Group’s fixed contractual cash obligations and commitments atas of December 31, 2018.2021. These amounts are an estimate of future payments which could change as a result of various factors such as a change in interest rates, foreign exchange, contractual provisions, as well as changes in our business strategy and needs. Therefore, the actual payments made in future periods may vary from those presented in the following table:
Philips Group
Contractual cash obligationobligations1)2)
in millions of EUR
2018
| | |
|---|
| | | | | |
|---|
| | | | | |
| | | | | |
Finance lease obligations | | | | | |
| | | | | |
Operating leases obligations | | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Contractual cash obligations | | | | | |
| | | payments due by period |
|---|
| | total | less than 1 year | 1-3 years | 3-5 years | after 5 years |
|---|
| Long-term debt3) | 7,233 | 246 | 1,995 | 1,924 | 3,068 |
| Lease obligations | 1,333 | 280 | 397 | 238 | 417 |
| Short-term debt | 47 | 47 | | | |
| Derivative liabilities | 208 | 87 | 121 | | |
| Purchase obligations4) | 654 | 237 | 305 | 99 | 12 |
| Trade and other payables | 1,872 | 1,872 | | | |
| Contractual cash obligations | 11,347 | 2,768 | 2,819 | 2,261 | 3,498 |
31)Amounts in this table are undiscounted2)This table excludes post-employment benefit plan contribution commitments and income tax liabilities in respect of tax risks because it is not possible to make a reasonably reliable estimate of the actual period of cash settlement.3)Long-term debt includes short-terminterest and the current portion of long-term debt and excludes finance lease obligationsobligations.
44)Purchase obligations are agreements to purchase goods or services that are enforceable and legally binding for the Group. They specify all significant terms, including fixed or minimum quantities to be purchased, fixed, minimum or variable price provisions and the approximate timing of the transaction. They do not include open purchase orders or other commitments which do not specify all significant terms.
2This table excludes post-employment benefit plan contribution commitments and income tax liabilities in respect of tax risks because it is not possible to make a reasonably reliable estimate of the actual period of cash settlement
1Amounts in this table are undiscounted
Philips has contracts with investment funds where it committed itself to make, under certain conditions, capital contributions to these funds of an aggregated remaining amount of EUR 86104 million (2017:(2020: EUR 83132 million). As at December 31, 20182021 capital contributions already made to these investment funds are recorded as non-current financial assets.
In January 2018, it was announced thatPhilips offers voluntary supply chain finance programs with third parties which provide participating suppliers the North American headquarters will move from Andoveropportunity to Cambridge. Philips has entered into a new lease commitment commencing in 2020 with a term of 15 years and resulting in an off-balance sheet commitment of EUR 218 million.
Certain Philips suppliers factor their trade receivables from Philips withat the sole discretion of both the suppliers and the third parties through supplier finance arrangements. At December 31, 2018 approximately EUR 275 million of the Philips accounts payable were known to have been sold onward under such arrangements whereby Philips confirms invoices.parties. Philips continues to recognize these liabilities as trade payables and will settlesettles them accordingly on the invoice maturity date based on the terms and conditions these arrangements . At December 31, 2021 approximately EUR 139 million (2020: EUR 227 million)of the Philips account payable were transferred under these arrangements.
With respect to the Respironics field action, please refer to Contingent assets and liabilities. The management continues to monitor the risks associated with such potential claims and its impact on liquidity position, if any.
Leasing activities
The company leases various items of real estate, vehicles and other equipment where it acts as a lessee. The company has multiple extension and termination options in line with the original paymenta number of lease contracts. These are used to maximize operational flexibility in terms of managing the related invoices.assets used in the company's operations. The options considered reasonably certain are part of lease liabilities. However, the options not considered reasonably certain are not part of lease liability, which exposes the company to potential future cash outflows amounting to EUR 381 million. In addition, the company is committed to leases not yet commenced to EUR 91 million. The company's lease contracts do not contain financial covenants.
The operatingcompany enters into sale and lease obligationsback transactions primarily for its Sleep & Respiratory Care businesses. These transactions are mainly related to the rental of buildings. A number ofaccounted for at market value. The payments for these leases originateare considered in determining lease liabilities. Principal repayments are part of cash flows used for financing activities and interest payments are part of cash flows used for operating activities. The cash inflows arising from sale-and-leaseback arrangements. Operating leasethe sales transactions, are part of cash flows provided by financing activities. Lease payments under sale-and-leaseback arrangements for 2018 totaled2021 were EUR 3185 million (2017:(2020: EUR 31112 million).
The remaining minimum payment under sales-and-leaseback arrangements included in operating lease obligations above are as follows:
Philips Group
Operating leaseLease - minimum payments under sale-and-leaseback arrangements
in millions of EUR
2018
Philips has leasing activities where it acts as lessor. In such arrangements, Philips provides the customer with a right to use of medical equipment in exchange for a series of payments. Residual values of assets under lease form an insignificant part of the carrying amount of those assets. Residual values are influenced by asset market prices and are therefore subject to management estimation. Residual values are at least reassessed on an annual basis, or more often when necessary. Reassessments are based on a combination of realization of assets sold, expert knowledge and judgment of local markets. For lease receivables, the value of unguaranteed residual values on December 31, 2021 was EUR 0.2 million (2020: EUR 0.2 million). In order to reduce residual value risk exposures there may be residual value guarantees or purchase options embedded in the customer contract. Credit risk for lease receivables is reviewed regularly and mitigated, for example, by retaining a security interest in the leased asset.
Currency risk
Currency risk is the risk that reported financial performance or the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. Philips operates in many countries and currencies and therefore currency fluctuations may impact Philips’ financial results. Philips is exposed to currency risk in the following areas:
- Transaction exposures, related to anticipated sales and purchases and on-balance-sheet receivables/payables resulting from such transactions
- Translation exposure of foreign-currency intercompany and external debt and deposits
- Translation exposure of net income in foreign entities
- Translation exposure of foreign-currency-denominated equity invested in consolidated companies
- Translation exposure to equity interests in non-functional-currency investments in associates and other non-current financial assets.
It is Philips’ policy to reduce the potential year-on-year volatility caused by foreign-currency movements on its net earnings by hedging the anticipated net exposure of foreign currencies resulting from foreign-currency sales and purchases. In general, net anticipated exposures for the Group are hedged during a period of 15 months in layers of 20% up to a maximum hedge of 80%, using forwards and currency options.. Philips’ policy requires significant committed foreign currency exposures to be fully hedged, generally using forwards. However, not every foreign currency can or shall be hedged as there may be regulatory barriers or prohibitive hedging cost preventing Philips from effectively and/or efficiently hedging its currency exposures. As a result, hedging activities cannot and will not eliminate all currency risks for anticipated and committed transaction exposures.
The following table outlines the estimated nominal value in millions of EUR for committed and anticipated transaction exposure and related hedges for Philips’ most significant currency exposures consolidated as of December 31, 2018:2021:
Philips Group
Estimated transaction exposure and related hedges
in millions of EUR
2018
| | | Sales/Receivables | Purchases/Payable |
|---|
| | | | | exposure | hedges | exposure | hedges |
|---|
Balance as of December 31, 2018 | | | |
| Balance as of December 31, 2021 | | |
| | | |
| | | |
| | | | | 2,168 | (1,614) | (1,030) | 958 |
| | | | | 665 | (306) | (11) | 10 |
| | | | | |
| | | | | 338 | (179) | (11) | 11 |
| | | | | 624 | (433) | (83) | 71 |
| CAD | | 338 | (173) | |
| PLN | | 70 | (31) | |
| | | | | 240 | (122) | |
| | | | | 124 | (57) | (2) | 2 |
| | | | | |
| CZK | | 63 | (29) | |
| | | | | 71 | (30) | (1) | 1 |
| | | | | |
| | | | | 125 | (113) | (2) | 2 |
| | | | | 306 | (275) | (419) | 267 |
| | | | | |
| | | | | |
| Total 2021 | | 5,131 | (3,363) | (1,559) | 1,322 |
| Total 2020 | | 4,707 | (3,150) | (1,488) | 1,267 |
| | | |
| | | |
Philips uses foreign exchange spot and forward contracts, as well as zero cost collars in hedging the exposure. The derivatives related to transactions are, for hedge accounting purposes, split into hedges of on-balance-sheet accounts receivable/payable and forecasted sales and purchases. Changes in the value of on-balance-sheet foreign-currency accounts receivable/payable, as well as the changes in the fair value of the hedges related to these exposures, are reported in the income statement under costs of sales. Hedges related to forecasted transactions, where hedge accounting is applied, are accounted for as cash flow hedges. The results from such hedges are deferred in other comprehensive income within equity to the extent that the hedge is effective. As of December 31, 2018,2021, a loss of EUR 1025 million was deferred in equity as a result of these hedges (2017:(2020: EUR 23 million gain). The result deferred in equity will be released to earnings mostly during 20192022 at the time when the related hedged transactions affect the income statement. During 2018, a net gain of2021, EUR 0.04nil million (2017:(2020: EUR 0.1nil million net gain) was recorded in the consolidated statement of income as a result of ineffectiveness on certain anticipated cash flow hedges. Ineffectiveness arises when anticipated exposures are no longer expected to be highly probable. Philips has completed updates to its internal documentation and monitoring processes and concluded that all existing hedge relationships that are currently designated as effective hedging relationships will continue to qualify for hedge accounting under IFRS 9. As at December 31, 2018,During 2021, a lossgain of EUR 630 million was included in the cash flow hedges reserve relatedin equity pertaining to changes in fair value of foreign exchange forward contracts attributable to forward points and changes in the time value of option contracts which under IFRS 9 are deferred in the cash flow hedges reserve within equity.was released to income statement.
The total net fair value of hedges related to transaction exposure as of December 31, 2018,2021, was an unrealized liability of EUR 727 million. AnThe estimated impact of a 10% increase of value of the EUR is estimated to be EUR 137 million. The following table contains an overview of the instantaneous 10% increase in the value of the EUR against all currencies would lead to anmajor currencies.
Philips Group
Estimated impact of 10% increase of EUR 113 million in the value of the derivatives; including a EUR 75 million increase related to foreign exchange transactionson the fair value of the USD against thehedges
in millions of EUR a EUR 15 million increase related to foreign exchange transactions of the JPY against the EUR, a EUR 7 million increase related to foreign exchange transactions of the GBP against the EUR, a EUR 6 million increase related to foreign exchange transactions of the RUB against the EUR, a EUR 5 million increase related to foreign exchange transactions of the PLN against the EUR and a EUR 5 million increase related to foreign exchange transactions of the CHF against the EUR.
| | 2020 | 2021 |
|---|
| USD | 71 | 78 |
| JPY | 17 | 13 |
| GBP | 15 | 14 |
| CHF | 6 | 5 |
| PLN | 8 | 3 |
| RUB | 8 | 10 |
The EUR 113137 million increase includes a gain of EUR 1417 million that would impact the income statement, which would largely offset the opposite revaluation effect on the underlying accounts receivable and payable, and the remaining gain of EUR 99119 million would be recognized in equity to the extent that the cash flow hedges were effective.
The total net fair value of hedges related to transaction exposure as of December 31, 2017, was an unrealized asset of EUR 21 million. An instantaneous 10% increase in the value of the EUR against all currencies would lead to an increase of EUR 102 million in the value of the derivatives; including a EUR 53 million increase related to foreign exchange transactions of the USD against the EUR, a EUR 17 million increase related to foreign exchange transactions of the JPY against the EUR, a EUR 10 million increase related to foreign exchange transactions of the GBP against the EUR, a EUR 6 million increase related to foreign exchange transactions of the PLN against the EUR and a EUR 5 million increase related to foreign exchange transactions of the CHF against the EUR.
Foreign exchange exposure also arises as a result of inter-company loans and deposits. Where the company enters into such arrangements, the financing is generally provided in the functional currency of the subsidiary entity. The currency of the company’s external funding and liquid assets is matched with the required financing of subsidiaries, either directly through external foreign currency loans and deposits, or synthetically by using foreign exchange derivatives, including cross currency interest rate swaps and foreign exchange forward contracts. In certain cases where group companies may also have external foreign currency debt or liquid assets, these exposures are also hedged through the use of foreign exchange derivatives. Changes in the fair value of hedges related to this exposure are recognized within financial income and expenses in the statements of income. When such loans would be considered part of the net investment in the subsidiary, net investment hedging would be applied.
Translation exposure of foreign-currency equity invested in consolidated entities may beis generally not hedged. If a hedge is entered into, it is accounted for as a net investment hedge. Net current-period change, before tax, of the currency translation reserve of EUR 3831,078 million relates mainly to the positive impact of the weaker EUR against the foreign currencies of countries in which Philips’ operations are located. The change in currency translation reserve was mostly relatedrelates to the development of the USD.USD versus the EUR. At December 31, 2021, a weakening of USD by 10% versus the EUR would result in a decrease in the currency translation reserve in equity of approximately EUR 1,132 million, while a strengthening of USD by 10% versus the EUR would result in an increase in the currency translation reserve in equity of approximately EUR 1,383 million. Refer to the country risk paragraph for countries with significant foreign currency denominated equity invested.
As of December 31, 2018,2021, cross-currency interest rate swaps for a nominal value of USD 1,100500 million (liability at fair value: EUR 246116 million) and external bond funding for a nominal value of USD 1,473 million (liability at book value: EUR 1,2901,313 million) were designated as net investment hedges of our financing investments in foreign operations for an equal amount. During 20182021 a total lossgain of EUR 1.1 million was recognized in the income statement as ineffectiveness on net investment hedges, arising from counterparty and own credit risk.
The total net fair value of financing derivatives as of December 31, 2021, was a liability of EUR 116 million. An instantaneous 10% increase in the value of the EUR against all currencies would lead to an increase of EUR 40 million in the value of the derivatives, including a EUR 40 million increase related to the USD.
As of December 31, 2020, cross-currency interest rate swaps for a nominal value of USD 500 million (liability at fair value: EUR 83 million) and external bond funding for a nominal value of USD 1,473 million (liability at book value: EUR 1,210 million) were designated as net investment hedges of our financing investments in foreign operations for an equal amount. During 2020 a total gain of EUR 0.2 million was recognized in the income statement as ineffectiveness on net investment hedges, arising from counterparty and own credit risk.
The total net fair value of financing derivatives as of December 31, 2018,2020, was a liability of EUR 24683 million. An instantaneous 10% increase in the value of the EUR against all currencies would lead to an increase of EUR 6353 million in the value of the derivatives, including a EUR 79 million increase related to the USD.
As of December 31, 2017, cross-currency interest rate swaps with a fair value liability of EUR 330 million and external bond funding for a nominal value of USD 2,535 million were designated as net investment hedges of our financing investments in foreign operations. During 2017 a total gain of EUR 1.4 million was recognized in the income statement as ineffectiveness on net investment hedges.
The total net fair value of financing derivatives as of December 31, 2017, was a liability of EUR 326 million. An instantaneous 10% increase in the value of the EUR against all currencies would lead to an increase of EUR 213 million in the value of the derivatives, including a EUR 20886 million increase related to the USD.
Philips does not currently hedge the foreign exchange exposure arising from equity interests in non-functional-currency investments in associates and other non-current 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, at year-end, outstanding debt of EUR 4,8216,980 million (2017:(2020: EUR 4,7156,934 million), which constitutes an inherent interest rate risk with potential negative impact on financial results. At year-end, Philips held EUR 1,6882,303 million in cash and cash equivalents (2017:(2020: EUR 1,9393,226 million), and had total long-term debt of EUR 3,4276,473 million (2017:(2020: EUR 4,0445,705 million) and total short-term debt of EUR 1,394506 million (2017:(2020: EUR 6721,229 million). At December 31, 2018,2021, Philips had a ratio of fixed-rate long-term debt to total outstanding debt of approximately 67%,90% compared to 72%79% one year earlier. Philips debt has a long maturity profile with an average tenor of long-term debt of 6.0 years with maturities up to 2042.
AThe following table provides the impact of a 1% increase/decrease of interest rates on the fair value of the debt and the annualized net interest expenses.
Philips Group
Net debt1) and interest rate sensitivity
in millions of EUR
| | 2020 | 2021 |
|---|
| Impact 1% interest increase on the fair value of the fixed-rate long-term debt2)3) | (345) | (297) |
| Impact 1% interest decrease on the fair value of the fixed-rate long-term debt2)3) | 346 | 298 |
| Impact 1% interest increase on the annualized net interest expense4) | 28 | 20 |
1)The definition of this non-IFRS measure and a reconciliation to the IFRS measure is included in Equity2)The sensitivity analysis conducted shows that if long-term interest rates were to increase/decrease instantaneously by 1% from their level of December 31, 2018,2021, with all other variables (including foreign exchange rates) held constant, the fair value of the fixed-rateconstant.3)Fixed-rate long-term debt (excludingis excluding forward contracts) would increase by approximately EUR 275 million. If there was an increase of 1% in long-term interest rates, this would reduce the market value of the fixed-rate long-term debt (excluding forward contracts) by approximately EUR 276 million.If interest rates were to increase instantaneously by 1% from their level of December 31, 2018, with all other variables held constant, the annualized net interest expense would decrease by approximately EUR 9 million. Thiscontracts.
4)The impact wasis based on the outstanding net cash position (after excluding fixed-rate debt) at December 31, 2018.2021. A sensitivity analysis conducted shows that if long-termGlobal regulators and central banks have been driving international efforts to reform key benchmark interest rates were(Interbank Offered Rate or IBOR rates). The market has transitioned to decrease instantaneouslyalternative risk-free reference rates (RFRs) that are transaction-based. LIBOR has been discontinued for most currencies and maturities after December 31, 2021, except for the US-dollar for which certain maturities are expected to be phased out in 2023. The company has evaluated the implications of such a phase out. The Company has no interest rate hedging relationships which get affected by 1%the reform and do not expect any significant impact on existing contracts due to change in the interest rates. The Company implemented new alternative risk free rates from their levelJanuary 1, 2022 and the impact due to such change in interest rates based on outstanding positions as of December 31, 2017, with all other variables (including foreign exchange rates) held constant,2021 is booked in income statement during the fair value of the long-term debt would increase by approximatelyyear 2022 amounting to EUR 271 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 271 million.1 million loss approximately.
If interest rates were to increase instantaneously by 1% from their level of December 31, 2017, with all other variables held constant, the annualized net interest expense would decrease by approximately EUR 12 million. This impact was based on the outstanding net cash position (after excluding fixed-rate debt) at December 31, 2017.
Equity price risk
Equity price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in equity prices.
Philips is a shareholder in some publicly listed companies including Signify and Corindus Vascular Robotics. Asas a result Philips is exposed to potential financial loss through movements in their share prices. The aggregate equity price exposure in such financial assets amounted to approximately EUR 47667 million at year-end 2018 (2017:December 31, 2021 (2020: EUR 1,31317 million). Philips does not hold derivatives in the above-mentioned listed companies. Philips also has shareholdings in several privately-owned companies amounting to EUR 150210 million, mainly consisting of the combined businessesminority stakes in Lumileds and Automotive.companies in various industries. As a result, Philips is exposed to potential value adjustments.
Commodity price risk
Commodity price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in commodity prices.
Philips is a purchaser of certain base metals, precious metals and energy. Philips may hedge certain commodity price risks using derivative instruments to minimize significant, unanticipated earnings fluctuations caused by commodity price volatility. The commodity price derivatives that Philips may enter into are accounted for as cash flow hedges to offset forecasted purchases. As of December 31, 20182021 and 2017,2020, respectively, Philips did not have any materialsignificant outstanding financial commodity derivatives.
Credit risk
Credit risk represents the loss that would be recognized at the reporting date, if counterparties failed completely to perform their payment obligations as contracted. Credit risk is present within Philips trade receivables and contract assets. To have better insights into the credit exposures, Philips performs ongoing evaluations of the financial and non-financial condition of its customers and adjusts credit limits when appropriate. In instances where the creditworthiness of a customer is determined not to be sufficient to grant the credit limit required, there are a number of mitigation tools that can be utilized to close the gap, including reducing payment terms, cash on delivery, pre-payments and pledges on assets.
Philips invests available cash and cash equivalents with various financial institutions and is exposed to credit risk with these counterparties. Philips is also exposed to credit risks in the event of non-performance by financial institutions with respect to financial derivative instruments. Philips actively manages concentration risk and on a daily basis measures the potential loss under certain stress scenarios, should a financial institution default. These worst-case scenario losses are monitored and limited by the company.
The company does not enter into any financial derivative instruments to protect against default by financial institutions. However, where possible the company requires all financial institutions with which 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 Fitch and Standard & Poor’s Investor Services.rating. 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.
The following table below shows the number of financial institutions with credit rating A- and above with which Philips has cash at hand and short-term deposits above EUR 10 million as of December 31, 2018.2021.
Philips Group
Credit risk with number of counterparties
for deposits above EUR 10 million
2018
| | | | |
|---|
| | | 10-100 million | 100-500 million | 500 million and above |
|---|
AA- rated bank counterparties | | | 1 | |
A+ rated bank counterparties | | | 1 | 4 | |
A rated bank counterparties | | | | 1 | |
A- rated bank counterparties | | | | 1 | 2 | |
| | | | 4 | 7 | |
For an overview of the overall maximum credit exposure related to debt instruments, derivatives and loans and receivables, please refer to Fair value of financial assets and liabilities.
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, 2018,2021, the company had country risk exposure of EUR 10.913.8 billion in the United States, EUR 1.9 billion in the Netherlands and EUR 1.91.3 billion in China (including Hong Kong). Other countries higher than EUR 500 million are Japan (EUR 714 million), the United Kingdom (EUR 643 million)EUR 799 million, Japan EUR 664 million, The Netherlands EUR 595 million, and Germany (EUR 551 million)EUR 569 million. Other country which have significant exposure is India exceeded EUR 300 million but was less than EUR 500305 million. 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.
The impact of hyperinflation is also routinely assessed and was not material for the periods presented.
Other insurable risks
Philips is covered for a broad range of losses by global insurance policies in the areas of property damage/ business interruption, general and product liability, transport, directors’ and officers’ liability, employment practice liability, crime and cyber security.cybersecurity. The counterparty risk related to the insurance companies participating in the above-mentioned global insurance policies is actively managed. As a rule, Philips only selects insurance companies with an S&P credit ratinga financial strength of at least A-. Throughout the year the counterparty risk is monitored on a regular basis.
To lower exposures and to avoid potential losses, Philips has a global Risk Engineering program in place. The main focus of this program is on property damage and business interruption risks including company interdependencies. Regular on-site assessments take place at Philips locations and business-critical suppliers by risk engineers of the insurer in order to provide an accurate assessment of the potential loss and its impact. The results of these assessments are shared across the company’s stakeholders. On-site assessments are carried out against the predefined Risk Engineering standards, which are agreed between Philips and the insurers. Recommendations are made in a Risk Improvement report and are monitored centrally. This is the basis for decision-making by the local management of the business as to which recommendations will be implemented.
For all policies, deductibles are in place, which vary from EUR 0.250.3 million to EUR 5 million per occurrence and this variance is designed to differentiate between the existing risk categories within Philips. Above a first layer of working deductibles, Philips operates its own re-insurance captive, which during 20182021 retained EUR 5 million per claim and EUR 10 million in the annual aggregate for general, product and professional liability claims.
New contracts were signed effective December 31, 2018,2021, for the coming year, whereby the re-insurance captive retentions remained unchanged.
31Subsequent events
Vesper Medical
New share buyback program
On January 29, 2019,11, 2022 Philips announcedcompleted the acquisition of Vesper Medical Inc, a new share buyback programUS-based medical technology company that develops minimally-invasive peripheral vascular devices. The acquisition is part of Philips’ Image Guide Therapy segment and expand Philips’ portfolio of diagnostic and therapeutic devices with an advanced venous stent portfolio for the treatment of deep venous disease. The upfront purchase price paid involved an amount of upEUR 227 million. Due to EUR 1.5 billion. At the current share price,recent closing date, additional IFRS disclosures cannot be made until the program representsinitial accounting for the business combination, including contingent consideration, has been completed.
Cardiologs
On January 7, 2022 Philips completed the acquisition of Cardiologs Technologies SAS, a totalFrance-based medical technology company focused on transforming cardiac diagnostics using artificial intelligence (AI) and cloud technology. The acquisition is part of approximately 46 million shares.the Connected Care segment. The acquisition is regarded as not material for disclosure purposes.
14Other information
14.1Reconciliation of non-IFRS information
In this Annual Report Philips expects to start the programpresents certain financial measures when discussing Philips’ performance that are not measures of financial performance or liquidity under IFRS (‘non-IFRS’). These non-IFRS measures (also known as non-GAAP or alternative performance measures) are presented because management considers them important supplemental measures of Philips’ performance and believes that they are widely used in the first quarterindustry in which Philips operates as a means of 2019evaluating a company’s operating performance and liquidity. Philips believes that an understanding of its sales performance, profitability, financial strength and funding requirements is enhanced by reporting the following non-IFRS measures:
- Comparable sales growth;
- EBITA;
- Adjusted EBITA;
- Adjusted income from continuing operations attributable to
complete it within two years. As the program will be initiated for capital reduction purposes, Philips intendsshareholders; - Adjusted income from continuing operations attributable to
cancelshareholders per common share (in EUR) - diluted (Adjusted EPS); - Adjusted EBITDA;
- Free cash flow;
- Net debt : group equity ratio; and
- Organic Return on Invested Capital (ROIC)
Non-IFRS measures do not have standardized meanings under IFRS and not all of the shares acquired under the program. The program will be executed by an intermediary to allow for purchasescompanies calculate non-IFRS measures in the open market during both opensame manner or on a consistent basis. As a result, these measures may not be comparable to measures used by other companies that have the same or similar names. Accordingly, undue reliance should not be placed on the non-IFRS measures contained in this Annual Report and closed periods,they should not be considered as substitutes for sales, net income, net cash provided by operating activities or other financial measures computed in accordance with IFRS.
This chapter contains the EU Market Abuse Regulation.
Claim LG Electronics, Inc (LGE)
In connectiondefinitions of the non-IFRS measures used in this Annual Report as well as reconciliations from the most directly comparable IFRS measures. The non-IFRS measures discussed in this Annual Report are cross referenced to this chapter. These non-IFRS measures should not be viewed in isolation or as alternatives to equivalent IFRS measures and should be used in conjunction with the CRT mattermost directly comparable IFRS measures.
The non-IFRS financial measures presented are not measures of financial performance or liquidity under IFRS, but measures used by management to monitor the underlying performance of Philips’ business and operations and, accordingly, they have not been audited or reviewed by Philips’ external auditors.
Additionally, Philips provides forward-looking targets for comparable sales growth, adjusted EBITA margin improvement, free cash flow and organic ROIC, which are non-IFRS financial measures. Philips has not provided a quantitative reconciliation of these targets to the most directly comparable IFRS measures because certain information needed to reconcile these non-IFRS financial measures to the most comparable IFRS financial measures are dependent on specific items or impacts which are not yet determined, are subject to uncertainty and variability in timing and amount due to their nature, are outside of Philips’ control, or cannot be predicted, including items and impacts such as referenced in Contingentcurrency exchange rates, acquisitions and disposals, legal and tax gains and losses and pension settlements, charges and costs such as impairments, restructuring and acquisition-related charges, amortization of intangible assets and liabilities,net capital expenditures. Accordingly, reconciliations of these non-IFRS forward looking financial measures to the Company was served with a claim filed by LGE inmost directly comparable IFRS financial measures are not available without unreasonable effort. Such unavailable reconciling items could significantly impact our results of operations and financial condition.
Comparative results have been restated to reflect the Seoul Central District Court on January 29, 2019. LGE claims restitution of EUR 64.6 million, representing a portiontreatment of the fine that LGE paidDomestic Appliances business as a discontinued operation (for more information, please refer to Discontinued operations and assets classified as held for sale).
Comparable sales growth
Comparable sales growth represents the European Commission relating toperiod-on-period growth in sales excluding the joint venture LG.Philips Displays for which LGEeffects of currency movements and the Company were jointly and severally liable. LGE alleges that based on the mannerchanges in which the fine was calculated, the Company should have paid proportionately more than it currently has.
13.2Company financial statements
Introduction
Statutory financial statements
The sections Group financial statements and Company financial statements contain the statutory financial statements of Koninklijke Philips N.V.
A description of the company’s activities and group structure is included in the Group financial statements.
Accounting policies applied
The financial statements of the Company included in this section are prepared in accordance with Part 9 of Book 2 of the Dutch Civil Code. Section 2:362 (8) of the Dutch Civil Code, allows companies that apply IFRS as endorsed by the European Union in their consolidated financial statements to use the same measurement principles in their Company financial statements. The Company has prepared these Company financial statements using this provision.
The accounting policies are describedconsolidation. As indicated in Significant accounting policies, foreign currency sales and costs are translated into Philips’ presentation currency, the euro, at the exchange rates prevailing at the respective transaction dates. As a result of significant foreign currency sales and currency movements during the Group financial Statements and are deemed incorporated and repeated herein by reference.
The investments in group companies and associates areperiods presented, as financial fixed assets in the balance sheet using the equity method, with the exceptioneffects of the retained interest in Signify (formerly Philips Lighting) for which the accounting treatment is explained below. Goodwill paid upon acquisition of investments in group companies or associates is included in the net equity value of the investment and is not shown separately on the face of the balance sheet. Loans provided to group companies are stated at amortized cost, less impairment. The Company makes use of the option to eliminate intercompany expected credit losses against the book value of loans and receivables to group companies, instead of elimination against the investments in group companies.
Investments in associates represent minority investments in various companies. Until December 31, 2018, Signify was the most notable investment. The valuation basis for Signify was the lower of the carrying value as per November 28, 2017 based on the closing share price of EUR 32.975 (the date of initial recognition of an investment in associate in the Company balance sheets) or the value based on the stock price, less cost to sell, at reporting date. As per December 31, 2018, Philips is no longer able to exercise significant influence with respect to Signify. Because of that, the remaining interest in Signify was reclassified to Other current financial assets, with fair value changes recognized through OCI.
New standards and interpretations
The Company applies, for the first time, IFRS 15 Revenue from Contracts with Customers and IFRS 9 Financial instruments. The impact of adoption of IFRS 9 on the Company is disclosed below. The adoption of IFRS 15, and any other amendments and interpretations applied for the first time in 2018, did nottranslating foreign currency sales amounts into euros could have a material impact on the Company financial statements.
Ascomparability of sales between periods. Therefore, these impacts are excluded when presenting comparable sales in euros by translating the foreign currency sales of the previous period and the current period into euros at the same average exchange rates. In addition, the years presented were affected by a number of acquisitions and divestments, as a result of which various activities were consolidated or deconsolidated. The effect of consolidation changes has also been excluded in arriving at the adoptioncomparable sales. For the purpose of calculating comparable sales, when a previously consolidated entity is sold or control is lost, relevant sales for that entity of the corresponding prior year period are excluded. Similarly, when an entity is acquired and consolidated, relevant sales for that entity of the current year period are excluded.
Comparable sales growth is presented for the Philips Group, operating segments and geographic clusters. Philips’ believes that the presentation of comparable sales growth is meaningful for investors to evaluate the performance of Philips’ business activities over time. Comparable sales growth may be subject to limitations as an analytical tool for investors, because comparable sales growth figures are not adjusted for other effects, such as increases or decreases in prices or quantity/volume. In addition, interaction effects between currency movements and changes in consolidation are not taken into account.
Philips Group
Sales growth composition per segment
in %
| | nominal growth | consolidation changes | currency effects | comparable growth |
|---|
| 2021 versus 2020 | | | | |
| Diagnosis & Treatment | 5.6 | 0.0 | 2.5 | 8.1 |
| Connected Care | (17.5) | (7.2) | 2.2 | (22.6) |
| Personal Health | 7.4 | 0.0 | 1.6 | 9.0 |
| Philips Group | (0.9) | (2.5) | 2.2 | (1.2) |
2020 versus 2019 | | | | |
| Diagnosis & Treatment | (3.7) | (1.0) | 2.3 | (2.3) |
| Connected Care | 19.1 | 0.7 | 2.3 | 22.1 |
| Personal Health | (9.8) | 0.0 | 2.8 | (6.9) |
| Philips Group | 1.0 | (0.5) | 2.4 | 2.9 |
2019 versus 2018 | | | | |
| Diagnosis & Treatment | 9.8 | (1.2) | (3.2) | 5.5 |
| Connected Care | 7.7 | (0.4) | (4.2) | 3.0 |
| Personal Health | 7.2 | 0.0 | (1.8) | 5.4 |
| Philips Group | 8.0 | (0.4) | (3.1) | 4.5 |
Philips Group
Sales growth composition per geographic cluster
in %
| | nominal growth | consolidation changes | currency effects | comparable growth |
|---|
| 2021 versus 2020 | | | | |
| Western Europe | (1.5) | (1.3) | (0.4) | (3.2) |
| North America | (1.5) | (5.5) | 3.6 | (3.4) |
| Other mature geographies | (3.2) | (0.1) | 3.6 | 0.3 |
| Total mature geographies | (1.8) | (3.5) | 2.4 | (2.8) |
| Growth geographies | 1.2 | - | 1.8 | 3.0 |
| Philips Group | (0.9) | (2.5) | 2.2 | (1.2) |
2020 versus 2019 | | | | |
| Western Europe | 11.2 | (1.1) | 0.1 | 10.2 |
| North America | (0.3) | (0.3) | 1.9 | 1.3 |
| Other mature geographies | (3.0) | (0.5) | 0.4 | (3.1) |
| Total mature geographies | 2.5 | (0.6) | 1.1 | 3.0 |
| Growth geographies | (2.6) | (0.2) | 5.4 | 2.6 |
| Philips Group | 1.0 | (0.5) | 2.4 | 2.9 |
2019 versus 2018 | | | | |
| Western Europe | 2.3 | (1.2) | (0.2) | 0.8 |
| North America | 10.0 | (0.6) | (5.6) | 3.8 |
| Other mature geographies | 0.6 | (0.4) | (4.0) | (3.7) |
| Total mature geographies | 6.3 | (0.8) | (3.8) | 1.8 |
| Growth geographies | 12.2 | 0.5 | (1.2) | 11.4 |
| Philips Group | 8.0 | (0.4) | (3.1) | 4.5 |
EBITA and Adjusted EBITA
The term Adjusted EBITA is used to evaluate the performance of Philips and its segments. EBITA represents Income from operations excluding amortization and impairment of acquired intangible assets and impairment of goodwill. Adjusted EBITA represents EBITA excluding gains or losses from restructuring costs, acquisition-related charges and other items.
Restructuring costs are defined as the estimated costs of initiated reorganizations, the most significant of which have been approved by the Executive Committee, and which generally involve the realignment of certain parts of the industrial and commercial organization.
Acquisition-related charges are defined as costs that are directly triggered by the acquisition of a company, such as transaction costs, purchase accounting related costs and integration-related expenses.
Other items are defined as any individual item with an income statement impact (loss or gain) that is deemed by management to be both significant and incidental to normal business activity. Other items may extend over several quarters and are not limited to the same financial year.
Philips considers the use of Adjusted EBITA appropriate as Philips uses it as a measure of segment performance and as one of its strategic drivers to increase profitability through re-allocation of its resources towards opportunities offering more consistent and higher returns. This is done with the aim of making the underlying performance of the businesses more transparent.
EBITA excludes amortization and impairment of acquired intangible assets (and impairment of goodwill), which primarily relates to brand names, customer relationships and technology, as Philips believes that such amounts are inconsistent in amount and frequency, are significantly impacted by the timing and/or size of acquisitions and do not factor into its decisions on allocation of its resources across segments. Although we exclude amortization and impairment of acquired intangible assets from our Adjusted EBITA measure, Philips believes that it is important for investors to understand that these acquired intangible assets contribute to revenue generation.
Philips believes Adjusted EBITA is useful to evaluate financial performance on a comparable basis over time by factoring out restructuring costs, acquisition-related charges and other incidental items which are not directly related to the operational performance of Philips Group or its segments.
Adjusted EBITA may be subject to limitations as an analytical tool for investors, as it excludes restructuring costs, acquisition-related charges and other incidental items and therefore does not reflect the expense associated with such items, which may be significant and have a significant effect on Philips’ net income.
Adjusted EBITA margin refers to Adjusted EBITA divided by sales expressed as a percentage.
Adjusted EBITA is not a recognized measure of financial performance under IFRS. The reconciliation of Adjusted EBITA to the most directly comparable IFRS 9,measure, Net income, for the years indicated is included in the following table. Net income is not allocated to segments as certain income and expense line items are monitored on a centralized basis, resulting in them being shown on a Philips Group level only.
Philips Group
Reconciliation of Net income to Adjusted EBITA
in millions of EUR
| | Philips Group | Diagnosis & Treatment | Connected Care | Personal Health | Other |
|---|
| 2021 | | | | | |
| Net Income | 3,323 | | | | |
| Discontinued operations, net of income taxes | (2,711) | | | | |
| Income tax expense | (103) | | | | |
| Investments in associates, net of income taxes | 4 | | | | |
| Financial expenses | 188 | | | | |
| Financial income | (149) | | | | |
| Income from operations | 553 | 941 | (732) | 585 | (242) |
| Amortization and impairment of acquired intangible assets | 322 | 153 | 148 | 15 | 6 |
| Impairment of goodwill | 15 | 2 | 13 | | |
| EBITA | 890 | 1,097 | (571) | 600 | (236) |
| Restructuring and acquisition-related charges | 95 | 7 | 93 | (1) | (5) |
| Other items | 1,069 | (32) | 965 | - | 136 |
| Adjusted EBITA | 2,054 | 1,071 | 488 | 599 | (105) |
| | | | | | |
| 2020 | | | | | |
| Net Income | 1,195 | | | | |
| Discontinued operations, net of income taxes | (196) | | | | |
| Income tax expense | 212 | | | | |
| Investments in associates, net of income taxes | 9 | | | | |
| Financial expenses | 202 | | | | |
| Financial income | (158) | | | | |
| Income from operations | 1,264 | 497 | 711 | 356 | (300) |
| Amortization and impairment of acquired intangible assets | 377 | 209 | 134 | 16 | 18 |
| Impairment of goodwill | 144 | - | 144 | | |
| EBITA | 1,784 | 706 | 989 | 371 | (282) |
| Restructuring and acquisition-related charges | 195 | 29 | 97 | 31 | 37 |
| Other items | 299 | 83 | 112 | 24 | 81 |
| Adjusted EBITA | 2,277 | 818 | 1,198 | 426 | (165) |
| | | | | | |
| 2019 | | | | | |
| Net Income | 1,173 | | | | |
| Discontinued operations, net of income taxes | (183) | | | | |
| Income tax expense | 258 | | | | |
| Investments in associates, net of income taxes | (1) | | | | |
| Financial expenses | 233 | | | | |
| Financial income | (114) | | | | |
| Income from operations | 1,366 | 660 | 269 | 589 | (152) |
| Amortization and impairment of acquired intangible assets | 344 | 177 | 141 | 18 | 8 |
| Impairment of goodwill | 97 | 19 | 78 | | |
| EBITA | 1,807 | 856 | 488 | 607 | (144) |
| Restructuring and acquisition-related charges | 310 | 149 | 64 | 42 | 54 |
| Other items | 153 | 73 | 67 | 23 | (11) |
| Adjusted EBITA | 2,270 | 1,078 | 620 | 672 | (100) |
Adjusted income from continuing operations attributable to shareholders
The term Adjusted income from continuing operations attributable to shareholders represents income from continuing operations less continuing operations non-controlling interests, amortization and impairment of acquired intangible assets, impairment of goodwill, excluding gains or losses from restructuring costs and acquisition-related charges, other items, adjustments to net finance expenses, adjustments to investments in associates and adjustments to tax expense. Shareholders refers to shareholders of Koninklijke Philips N.V.
Restructuring costs, acquisition-related charges and other items are all defined in the EBITA and Adjusted EBITA section above.
Net finance expenses are defined as either the financial assets amountingincome or expense component of an individual item already identified to EUR 71 million were reclassifiedbe excluded as part of the Adjusted income from measurement atcontinuing operations, fair value through other comprehensive income (FVTOCI) tomovements of equity investments in limited life funds recognized at fair value through profit or loss (FVTPL). The related fair value gains of EUR 4 million were transferred from the fair value through OCI reserve to retained earnings as per January 1, 2018. The adoption of IFRS 9 did not result in any further material impact on the Company balance sheets before appropriation of results, Company Statements ofor a financial income or Company Statement of changes in equity.
expense component with an income statement impact (gain or loss) that is deemed by management to be both significant and incidental to normal business activity.
Presentation of Company financial statements
The structureadjustments to tax expense include the tax impact of the Company balance sheetsadjustments to income from continuing operations as well as tax only adjusting items, and Company statementsuses the Weighted Average Statutory Tax Rate plus any recurring tax costs or benefits.
Philips considers the use of Adjusted income from continuing operations attributable to shareholders appropriate as Philips uses it as the basis for the Adjusted income from continuing operations attributable to shareholders per common share (in EUR) - diluted, a non-IFRS measure.
Adjusted income from continuing operations attributable to shareholders may be subject to limitations as an analytical tool for investors, as it excludes certain items and therefore does not reflect the expense associated with such items, which may be significant and have a significant effect on Philips’ net income. Net income, for the years indicated is included in the following table. Net income is not allocated to segments as certain income and expense line items are aligned as much as possible with the Consolidated statementsmonitored on a centralized basis, resulting in orderthem being shown on a Philips Group level only.
Adjusted income from continuing operations attributable to achieve optimal transparency between the Groupshareholders is not a recognized measure of financial statements and the Company financial statements. Consequently, the presentationperformance under IFRS. The reconciliation of the Company statements deviatesAdjusted income from Dutch regulations.
The Company balance sheet has been prepared before the appropriation of result.
Additional information
For “Additional information” within the meaning of Section 2:392 of the Dutch Civil Code, please refercontinuing operations attributable to Independent auditor’s report and Appropriation of profits and profit distributions
Statements of income
Koninklijke Philips N.V.
Statements of income
in millions of EUR
For the year ended December 31
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General and administrative expenses | | |
Other business income (expense)B | | |
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Results relating to investments in associatesH | | |
Net income (loss) from group companies | | |
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Amounts may not add up due to rounding.
Balance sheets before appropriation of results
Koninklijke Philips N.V.
Balance sheets
in millions of EUR
As of December 31
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Property, plant and equipment | | |
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Other non-current financial assetsI | | |
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Current financial assetsI | | |
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Cash and cash equivalentsK | | |
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Capital in excess of par value | | |
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Other non-current liabilities | | |
Total non-current liabilities | | |
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Other current liabilitiesN | | |
Total current liabilities | | |
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Total liabilities and shareholders' equity | | |
Amounts may not add up due to rounding.
Statement of changes in equity
Koninklijke Philips N.V.
Statement of changes in equity
in millions of EUR
For the year ended December 31
| | Capital in excess of par value | | | | Currency translation differences | | | | |
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Balance as of December 31, 2017 | | | | | | | | | | |
IFRS 9 and 15 adjustment 1 | | | | | | | | | | |
Balance as of January 1, 2018 | | | | | | | | | | |
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Appropriation of prior year result | | | | | | | | | | |
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Release revaluation reserve | | | | | | | | | | |
Net current period change | | | | | | | | | | |
Income tax on net current period change | | | | | | | | | | |
Reclassification into income | | | | | | | | | | |
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Cancellation of treasury shares | | | | | | | | | | |
Purchase of treasury shares | | | | | | | | | | |
Re-issuance of treasury shares | | | | | | | | | | |
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Share-based compensation plans | | | | | | | | | | |
Income tax on share-based compensation plans | | | | | | | | | | |
Balance as of December 31, 2018 | | | | | | | | | | |
1Impact of IFRS 9 and 15 adoption. Reference is made shareholders to the most directly comparable IFRS measure, Net income, for the years indicated is included in the following table.Adjusted income from continuing operations attributable to shareholders per common share (in EUR) - diluted (Adjusted EPS)
Adjusted income from continuing operations attributable to shareholders per common share (in EUR) - diluted is calculated by dividing the Adjusted income from continuing operations attributable to shareholders by the diluted weighted average number of shares (after deduction of treasury shares) outstanding during the period, as defined in Significant accounting policies
Amounts may not add up due to rounding.
Notes
Notes toPhilips considers the Company financial statements
Sales
Sales relate to external sales and mainly comprise licenseuse of Adjusted income from intellectual property rights owned by the Company.
Other business income
Koninklijke Philips N.V.
Other Business Income in millions of EUR
2017 - 2018
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Other business income (expense) from deconsolidation of Philips Lighting | | |
Other business income (expense) from sale of Lumileds | | |
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Other business income includes subsequent results relatedcontinuing operations attributable to the deconsolidation of Philips Lighting (now Signify) and the sale of the combined Lumileds and Automotive businesses in June 2017 and November 2017, respectively.
Other includes income and expense from transactions with group companies regarding overhead services and brand license agreements.
Sales and costs by nature
Koninklijke Philips N.V.
Sales and costs by nature
in millions of EUR
2017 - 2018
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Employee benefit expenses | | |
Depreciation and amortization | | |
Advertising and promotion | | |
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Other business income (expenses) | | |
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Depreciation and amortization includes EUR 12 million impairment charges related to intangible assets in 2017. Other operational costs in 2018 include EUR 30 million charges related to the European Commission's investigation into retail pricing.
For a summary of the audit fees related to the Philips Group, please refer to the Group Financial statements Income from operations, which is deemed incorporated and repeated herein by reference.
Financial income and expense
Financial income mainly consists of income from intercompany financing transactions. Interest received on these transactions EUR 273 million (2017: EUR 355 million) decreased due to the change in capitalization of the US as described in note Financial fixed assets. Interest received from third parties was EUR 6 million (2017: EUR 9 million). Financial income in 2017 includes EUR 259 million positive exchange differences compared to EUR 12 million in 2018.
Financial expense relates to interest paid on external financing transactions of EUR 137 million (2017: EUR 160 million) and intercompany financing transactions of EUR 6 million (2017: EUR 6 million). Financial expense in 2017 includes EUR 258 million negative exchange differences compared to EUR 12 million in 2018.
Income tax
Koninklijke Philips N.V. is head of the fiscal unity that exists for Dutch corporate income tax purposes.
The income tax expense of EUR 2 million represents the consolidated amount of current and deferred tax expense for the members of the fiscal unity. The effective tax rate in 2018 deviates compared to the Dutch statutory tax rate of 25%, mainly due to results relating to participations and a one-off benefit from a release of tax provisions.
At December 31, 2018, net operating loss and tax credit carry forwards for which no deferred tax assets have been recognized in the balance sheet amount to EUR 20 million.
Employees
The number of persons having a contract with the Company at the year-end 2018 was 9 (2017: 8):
3 of them had a services contract;6 of them had a contract of employment.
They were all posted in the Netherlands.
For the remuneration of past and present members of both the Board of Management and the Supervisory Board, please refer to Information on remuneration, which is deemed incorporated and repeated herein by reference.
Intangible assets
Intangible assets include mainly licenses and patents. The changes during 2018 are as follows;
Koninklijke Philips N.V.
Intangible assets
in millions of EUR
2018
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Balance as of January 1, 2018
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Amortization/ impairments
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Balance as of December 31, 2018
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Amortization/ impairments
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Financial fixed assets
The changes during 2018 were as follows:
Koninklijke Philips N.V.
Financial fixed assets
in millions of EUR
2018
| Investments in group companies | Investments in associates | | |
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Balance as of December 31, 2017 | | | | |
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Balance as of January 1, 2018 | | | | |
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Net income from affiliated companies | | | | |
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Balance as of December 31, 2018 | | | | |
Investments in group companies
Investments in group companies increased by EUR 3,619 million. The increase is mainly due to additions and acquisitions of EUR 2,950 million out of which EUR 2,676 million relates to capital injections to US subsidiaries. The remaining increase relates to capital injections to other group companies and new acquisitions.
The capitalization of the US was done to align the US financing with its business profile by increasing equity financing, reducing long-term intercompany debt and settling in-house bank positions.
The line Dividends received represents interim dividends paid by group companies to Koninklijke Philips N.V.
EUR 258 million of positive translation adjustments reflect value adjustments of net invested capital in foreign group companies denominated in other currencies than EUR. The value increase is mainly related to a stronger USD versus the EUR.
EUR 222 million reduction on the line of Other reflects local other equity movements of group companies.
Investments in associates
The most notable movement of Investments in associates relates to Signify. During 2018, the carrying value reduced by EUR 620 million due to the sale of 20.26 million shares and EUR 209 million value adjustments.
The remaining stake of EUR 434 million was reclassified to Current financial assets.
Loans
Loans to group companies reduced primarily due to the repayment of EUR 1,566 million by a US subsidiary, which was a part of the change in capitalization of US subsidiaries as described above.
The EUR 175 million translation differences mainly reflects currency impact on USD denominated loans.
List of investments in group companies
A list of investments in group companies, prepared in accordance with the relevant legal requirements (Dutch Civil Code, Book 2, Sections 379 and 414), is deposited at the Chamber of Commerce in Eindhoven, Netherlands.
Other financial assets
Other non-current financial assets
The changes during 2018 were as follows:
Koninklijke Philips N.V.
Other financial assets
in millions of EUR
2018
| Non-current financial assets at FVTOCI | Non-current financial assets at FVTP&L | Non-current financial assets at Amortized cost | |
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Balance as of January 1, 2018 1 | | | | |
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Sales/redemptions/reductions | | | | |
Value adjustments through OCI | | | | |
Value adjustments through P&L | | | | |
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Balance as of December 31, 2018 | | | | |
1Refer to IFRS 9 disclosure in Significant accounting policies note for the impact of IFRS 9 on 2018 opening balance.
The Company’s investments in non-current financial assets mainly consist of investments in common shares of companies in various industries. Acquisitions/additions mainly relate to new investments and capital calls for certain investment funds. Sales/redemptions/reductions relate to distribution notes from those investment funds.
Current financial assets
In 2018, Current financial assets increased by EUR 434 million, mainly reflecting the reclassification of Signify shares. As of December 2018, the remaining interest of 16.5% in Signify was reclassified from Investments in associates to Current financial assets, with fair value changes recognized in OCI.
Receivables
Koninklijke Philips N.V.
Receivables
in millions of EUR
2017 - 2018
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Trade accounts receivable | | |
Receivables from group companies | | |
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Advances and prepaid expenses | | |
Derivative instruments - assets | | |
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Receivables from group companies mainly relate to in-house bank contracts. These positions decreased due to the change in capitalization of US subsidiaries as described in Financial fixed assets.
Cash and cash equivalents
Cash and cash equivalents are all freely available.
Shareholders’ equity
Common shares
As of December 31, 2018, authorized common shares consist of 2 billion shares (December 31, 2017: 2 billion) and the issued and fully paid share capital consists of 926,195,539 common shares, each share having a par value of EUR 0.20 (December 31, 2017: 940,909,027).
The following table shows the movements in the outstanding number of shares:
Koninklijke Philips N.V.
Outstanding number of shares in number of shares
2017 - 2018
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Purchase of treasury shares | | |
Re-issuance of treasury shares | | |
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Balance as of December 31 | | |
Preference shares
As a means to protect the company and its stakeholders against an unsolicited attempt to obtain (de facto) control of the Company, the General Meeting of Shareholders in 1989 adopted amendments to the Company’s articles of association that allow the Board of Management and the Supervisory Board to issue (rights to acquire) preference shares to a third party. The ‘Stichting Preferente Aandelen Philips’ has been granted the right to acquire preference shares in the Company. Such right has not been exercised as of December 31, 2018 and no preference shares have been issued. Authorized preference shares consist of 2 billion shares as of December 31, 2018 (December 31, 2017: 2 billion).
Options, restricted and performance shares
The Company has granted stock options on its common shares and rights to receive common shares in the future. Please refer to Share-based compensation, which is deemed incorporated and repeated herein by reference.
Treasury shares
In connection with the Company’s share repurchase programs (see next paragraph for Share repurchase methods for share-based compensation plans and capital reduction purposes) shares which have been repurchased and are held in Treasury for the purpose of (i) delivery upon exercise of options, restricted and performance share programs, and (ii) capital reduction, are accounted for as a reduction of shareholders’ equity. Treasury shares are recorded at cost, representing the market price on the acquisition date. When issued, shares are removed from treasury shares on a first-in, first-out (FIFO) basis.
When treasury shares are reissued under the Company’s option plans, the difference between the cost and the cash received is recorded in retained earnings. When treasury shares are reissued under the Company’s share plans, the difference between the market price of the shares issued and the cost is recorded in retained earnings, the market price is recorded in capital in excess of par value.
The following transactions took place resulting from employee option and share plans:
Koninklijke Philips N.V.
Employee option and share plan transactions
2017- 2018
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In order to reduce share capital, the following transactions took place:
Koninklijke Philips N.V.
Share capital transactions
2017- 2018
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Share purchase transactions related to employee option and share plans, as well as transactions related to the reduction of share capital, involved a cash outflow of EUR 1,042 million. A cash inflow of EUR 94 million from treasury shares mainly includes settlements of share-based compensation plans.
Share repurchase methods for share-based compensation plans and capital reduction purposes
During 2018, Royal Philips repurchased shares for share-based compensation plans and capital reduction purposes via three different methods: (i) share buy-back repurchases in the open market via an intermediary (ii) repurchase of shares via forward contracts for future delivery of shares (iii) the unwinding of call options on own shares. In 2018, Royal Philips also used methods (i) and (ii) to repurchase shares for capital reduction purposes.
Forward share repurchase contracts
In order to hedge commitments under share-based compensation plans, Philips entered into three forward contracts in the last quarter of 2018, involving 10 million shares. This resulted in a reduction of Retained earnings of EUR 319 million against Short-term and Long-term liabilities. Additionally, in the first quarter of 2018 the remaining forward contracts under the forward share buy-back contract of 2017 were exercised at a forward price of EUR 27.03, resulting in a EUR 20 million increase in Retained earnings against Treasury shares. As of December 31, 2018, 10 million forward contracts connected to share based compensation plans were outstanding.
In order to reduce its share capital, Royal Philips also entered into six forward contracts in 2017. The forward contacts involved 31,020,000 shares with a settlement date varying between October 2018 and June 2019 and a weighted average forward price of EUR 32.22. In 2018, 12,420,000 forward contracts were exercised resulting in a EUR 423 million increase in Retained earnings against Treasury shares. As of December 31, 2018, 18,600,000 forward contracts connected to share capital reductions were outstanding. For further information on the forward contracts please refer to Debt.
Share call options
During 2016, Philips bought EUR and USD-denominated call options to hedge options granted under share-based compensation plans before 2013.
In 2018, the Company unwound 1,263,486 EUR-denominated and 1,204,126 USD-denominated call options against the transfer of the same number of Royal Philips shares (2,467,612 shares) and an additional EUR 51 million cash payment to the buyer of the call options.
The number of outstanding EUR denominated options were 2,023,639 and USD-denominated options were 1,770,218, as of December 2018.
Dividend distribution
2018
In June 2018, Philips settled a dividend of EUR 0.80shareholders per common share representing(in EUR) - diluted appropriate as it is a total value of EUR 738 million including costs. Shareholders could elect for a cash dividend or a share dividend. Approximately 46% of the shareholders elected for a share dividend, resultingmeasure that is useful when comparing its performance to other companies in the issuance of 9,533,233 new common shares. The settlement of the cash dividend involvedHealthTech industry. However, it may be subject to limitations as an amount of EUR 400 million (including costs).
analytical tool for investors, as it uses Adjusted income from continuing operations attributable to shareholders which has certain items excluded.
A proposal will be submittedAdjusted income from continuing operations attributable to the 2019 Annual General Meeting of Shareholders to pay a dividend of EUR 0.85shareholders per common share in cash or shares at the option(in EUR) - diluted is not a recognized measure of thefinancial performance under IFRS. The most directly comparable IFRS measure, income from continuing operations attributable to shareholders against the net income of the Company for 2018.
2017
In June 2017, Philips settled a dividend of EUR 0.80 per common share representing a total value of EUR 742 million including costs. Shareholders could elect(in EUR) - diluted for a cash dividend or a share dividend. Approximately 48% of the shareholders elected for a share dividend, resultingyears indicated, is included in the issuance of 11,264,163 new common shares. The settlement of the cash dividend involved an amount of EUR 384 million (including costs).
Revaluation and Other Legal Reserves
As of December 31, 2018, revaluation reserves relate to unrealized losses on fair value through OCI financial assets of EUR 181 million (2017: EUR 30 million unrealized gains) and unrealized losses on cash flow hedges of EUR 10 million (2017: EUR 23 million unrealized gains). Legal reserves relate to ‘affiliated companies’ of EUR 634 million (2017: EUR 703 million) and unrealized currency translation gains of EUR 739 million (2017: EUR 393 million unrealized gains).
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
As at December, 2018, pursuant to Dutch law, certain limitations exist relating to the distribution of shareholders’ equity of EUR 1,558 million. Such limitations relate to common shares of EUR 185 million, as well as to unrealized currency translation gains of EUR 739 million and ‘affiliated companies’ of EUR 634 million. The unrealized losses related to fair value through OCI financial assets of EUR 181 million and unrealized losses related to cash flow hedges of EUR 10 million qualify as revaluation reserves and reduce the distributable amount due to the fact that these reserves are negative.
As at December 31, 2017, pursuant to Dutch law, limitations existed relating to the distribution of shareholders’ equity of EUR 1,283 million. Such limitations related to common shares of EUR 188 million, unrealized currency translation gains of EUR 392 million and ‘affiliated companies’ of EUR 703 million. The unrealized losses related to fair value through OCI financial assets of EUR 30 million qualify as a revaluation reserve and reduce the distributable amount due to the fact that this reserve is negative.
Debt
Long-term debt
The tables below disclose information on the long-term debt outstanding, its maturity and average interest rates in 2017 and 2018.
following table.
Koninklijke Philips N.V.
Long-term debt in millions of EUR, unless otherwise stated
2018
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Koninklijke Philips N.V.Group
Long-term debtAdjusted income from continuing operations attributable to shareholders1)
in millions of EUR unless otherwise stated
2017
| amount outstanding in 2017 | | | | | Average remaining term (in years) | |
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| | 2019 | 2020 | 2021 |
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| Net income | 1,173 | 1,195 | 3,323 |
| Discontinued operations, net of income taxes | (183) | (196) | (2,711) |
| Income from continuing operations | 990 | 999 | 612 |
| Continuing operations non-controlling interests | (5) | (8) | (4) |
| Income from continuing operations attributable to shareholders1) | 985 | 991 | 608 |
| Adjustments for: | | | |
| Amortization and impairment of acquired intangible assets | 344 | 377 | 322 |
| Impairment of goodwill | 97 | 144 | 15 |
| Restructuring costs and acquisition-related charges | 310 | 195 | 95 |
| Other items | 153 | 299 | 1,069 |
| Net finance income/expenses | 13 | (125) | (84) |
| Tax impact of adjusted items and tax only adjusting items | (280) | (285) | (527) |
| Adjusted Income from continuing operations attributable to shareholders1) | 1,622 | 1,594 | 1,497 |
| Earnings per common share: | | | |
| Income from continuing operations attributable to shareholders1) per common share (in EUR) - diluted | 1.06 | 1.08 | 0.67 |
| Adjusted income from continuing operations attributable to shareholders1) per common share (in EUR) - diluted | 1.74 | 1.74 | 1.65 |
1)Shareholders refers to shareholders of Koninklijke Philips N.V.
Short-term debt
Adjusted EBITDA
Short-term debt mainly relatesAdjusted EBITDA is defined as Income from operations excluding amortization and impairment of intangible assets, impairment of goodwill, depreciation and impairment of property, plant and equipment, restructuring costs, acquisition-related charges and other items.
Philips understands that Adjusted EBITDA is broadly used by analysts, rating agencies and investors in their evaluation of different companies because it excludes certain items that can vary widely across different industries or among companies within the same industry. Philips considers Adjusted EBITDA useful when comparing its performance to other companies in the current portionHealthTech industry. However, Adjusted EBITDA may be subject to limitations as an analytical tool because of outstanding externalthe range of items excluded and intercompany long-term debt of EUR 1,541 million (2017: EUR 575 million),their significance in a given reporting period. Furthermore, comparisons with other debt to group companies totaling EUR 8,934 million (2017: EUR 15,378 million) and short-term bank borrowings of EUR 10 million (2017: rounded nil). Debt to group companies mainly relates to in-house bank contracts. These positions decreasedmay be complicated due to the changeabsence of a standardized meaning and calculation framework. Our management compensates for the limitations of using Adjusted EBITDA by using this measure to supplement IFRS results to provide a more complete understanding of the factors and trends affecting the business rather than IFRS results alone. In addition to the limitations noted above, Adjusted EBITDA excludes items that may be recurring in capitalizationnature and should not be disregarded in the evaluation of US subsidiariesperformance. However, we believe it is useful to exclude such items to provide a supplemental analysis of current results and trends compared to other periods. This is because certain excluded items can vary significantly depending on specific underlying transactions or events. Also, the variability of such items may not relate specifically to ongoing operating results or trends and certain excluded items, while potentially recurring in future periods and may not be indicative of future results. A reconciliation from net income to Adjusted EBITDA is provided in the following table. Net income, for the years indicated is included in the following table. Net income is not allocated to segments as describedcertain income and expense line items are monitored on a centralized basis, resulting in Financial fixed assets.them being shown on a Philips Group level only.
Other current liabilities
Koninklijke Philips N.V.Group
Other current liabilitiesReconciliation of Net income to Adjusted EBITDA
in millions of EUR
| | Philips Group | Diagnosis & Treatment | Connected Care | Personal Health | Other |
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| 2021 | | �� | | | |
| Net Income | 3,323 | | | | |
| Discontinued operations, net of income taxes | (2,711) | | | | |
| Income tax expense | (103) | | | | |
| Investments in associates, net of income taxes | 4 | | | | |
| Financial expenses | 188 | | | | |
| Financial income | (149) | | | | |
| Income from operations | 553 | 941 | (732) | 585 | (242) |
| Depreciation, amortization and impairment of fixed assets | 1,323 | 459 | 384 | 130 | 350 |
| Impairment of goodwill | 15 | 2 | 13 | | |
| Restructuring and acquisition-related charges | 95 | 7 | 93 | (1) | (5) |
| Other items | 1,069 | (32) | 965 | - | 136 |
| Adding back impairment of fixed assets included in Restructuring and acquisition-related changes and Other items | (70) | (21) | (51) | | 2 |
| Adjusted EBITDA | 2,985 | 1,358 | 672 | 714 | 241 |
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| 2020 | | | | | |
| Net Income | 1,195 | | | | |
| Discontinued operations, net of income taxes | (196) | | | | |
| Income tax expense | 212 | | | | |
| Investments in associates, net of income taxes | 9 | | | | |
| Financial expenses | 202 | | | | |
| Financial income | (158) | | | | |
| Income from operations | 1,264 | 497 | 711 | 356 | (300) |
| Depreciation, amortization and impairment of fixed assets | 1,462 | 536 | 415 | 144 | 368 |
| Impairment of goodwill | 144 | - | 144 | | |
| Restructuring and acquisition-related charges | 195 | 29 | 97 | 31 | 37 |
| Other items | 299 | 83 | 112 | 24 | 81 |
| Adding back impairment of fixed assets included in Restructuring and acquisition-related changes and Other items | (102) | (35) | (64) | 1 | (4) |
| Adjusted EBITDA | 3,262 | 1,111 | 1,415 | 556 | 180 |
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| 2019 | | | | | |
| Net Income | 1,173 | | | | |
| Discontinued operations, net of income taxes | (183) | | | | |
| Income tax expense | 258 | | | | |
| Investments in associates, net of income taxes | (1) | | | | |
| Financial expenses | 233 | | | | |
| Financial income | (114) | | | | |
| Income from operations | 1,366 | 660 | 269 | 589 | (152) |
| Depreciation, amortization and impairment of fixed assets | 1,343 | 564 | 326 | 140 | 313 |
| Impairment of goodwill | 97 | 19 | 78 | | |
| Restructuring and acquisition-related charges | 310 | 149 | 64 | 42 | 54 |
| Other items | 153 | 73 | 67 | 23 | (11) |
| Adding back impairment of fixed assets included in Restructuring and acquisition-related changes and Other items | (111) | (109) | (2) | - | (1) |
| Adjusted EBITDA | 3,159 | 1,357 | 804 | 794 | 204 |
Free cash flow
2017 - 2018Free cash flow is defined as net cash flows from operating activities minus net capital expenditures. Net capital expenditures are comprised of the purchase of intangible assets, expenditures on development assets, capital expenditures on property, plant and equipment and proceeds from sales of property, plant and equipment.
Philips discloses free cash flow as a supplemental non-IFRS financial measure, as Philips believes it is a meaningful measure to evaluate the performance of its business activities over time. Philips understands that free cash flow is broadly used by analysts, rating agencies and investors in assessing its performance. Philips also believes that the presentation of free cash flow provides useful information to investors regarding the cash generated by the Philips operations after deducting cash outflows for purchases of intangible assets, capitalization of product development, expenditures on development assets, capital expenditures on property, plant and equipment and proceeds from disposal of property, plant and equipment. Therefore, the measure gives an indication of the long-term cash generating ability of the business. In addition, because free cash flow is not impacted by purchases or sales of businesses and investments, it is generally less volatile than the total of net cash provided by (used for) operating activities and net cash provided by (used for) investing activities.
Free cash flow may be subject to limitations as an analytical tool for investors, as free cash flow is not a measure of cash generated by operations available exclusively for discretionary expenditures and Philips requires funds in addition to those required for capital expenditures for a wide variety of non-discretionary expenditures, such as payments on outstanding debt, dividend payments or other investing and financing activities. In addition, free cash flow does not reflect cash payments that may be required in future for costs already incurred, such as restructuring costs.
Philips Group
Composition of free cash flow
in millions of EUR
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| | 2019 | 2020 | 2021 |
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| Net cash flows provided by operating activities | 1,813 | 2,511 | 1,629 |
| Net capital expenditures: | (891) | (876) | (729) |
| Purchase of intangible assets | (138) | (114) | (107) |
| Expenditures on development assets | (327) | (296) | (259) |
| Capital expenditures on property, plant and equipment | (486) | (485) | (397) |
| Proceeds from disposals of property, plant and equipment | 60 | 19 | 33 |
| Free cash flow | 923 | 1,635 | 900 |
Net debt : group equity ratio
Net debt : group equity ratio is presented to express the financial strength of Philips. Net debt is defined as the sum of long- and short-term debt minus cash and cash equivalents. Group equity is defined as the sum of shareholders’ equity and non-controlling interests. This measure is used by Philips Treasury management and investment analysts to evaluate financial strength and funding requirements. This measure may be subject to limitations because cash and cash equivalents are used for various purposes, not only debt repayment. The net debt calculation deducts all cash and cash equivalents whereas these items are not necessarily available exclusively for debt repayment at any given time.
Philips Group
Composition of net debt to group equity
in millions of EUR unless otherwise stated
| | 2019 | 2020 | 2021 |
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| Long-term debt | 4,939 | 5,705 | 6,473 |
| Short-term debt | 508 | 1,229 | 506 |
| Total debt | 5,447 | 6,934 | 6,980 |
| Cash and cash equivalents | 1,425 | 3,226 | 2,303 |
| Net debt | 4,022 | 3,708 | 4,676 |
| Shareholders' equity | 12,597 | 11,870 | 14,438 |
| Non-controlling interests | 28 | 31 | 36 |
| Group equity | 12,625 | 11,901 | 14,475 |
| Net debt : group equity ratio | 24:76 | 24:76 | 24:76 |
Organic Return on Invested Capital
Organic Return on Invested Capital (ROIC) is defined as organic return which includes income from operations for the year excluding the impact of: Income or Loss from operations of businesses acquired in the five year period prior to the measurement date; certain tax gains and losses determined by management to be material in nature and require separate disclosure and; certain other items; and tax effects of the other adjustments (calculated at group effective tax rate) divided by average of the Net operating capital at the end of each of the five quarters ending on the relevant measurement date excluding the average net operating capital at the end of each of the five quarters ending on the relevant measurement date of the businesses acquired in the five year period prior to the measurement date, expressed as a percentage.
Net operating capital is defined as tangible fixed assets, intangible fixed assets, including goodwill, inventories and receivable balances, minus payable balances and provisions, all as further defined below. Net operating capital is also adjusted to exclude assets and liabilities of businesses acquired in the five year period prior to the relevant measurement date. Organic ROIC is calculated after taxes.
Other items are defined as material in nature and require separate disclosure and have the same nature as the items excluded from Adjusted EBITA. In the years 2019-2021 these other items included legal provisions, pension settlements and results of divestments. Refer to Net income, Income from operations (EBIT) and Adjusted EBITA within Results of operations section of Financial performance.
The term Organic Return on Invested Capital (ROIC) is used by management to evaluate Philips’ efficiency at allocating the capital under its control to profitable investments and how well the company uses capital to generate returns. Philips believes that Organic ROIC provides useful information to investors because it excludes the impact of recently acquired businesses, giving a more accurate representation of how the Philips Business System is leveraged to drive operational excellence and removes irregularity caused by various operating models of recently acquired businesses. Philips also believes that excluding certain items determined by management to be material in nature and requiring separate disclosure enhances comparability across several periods. Organic ROIC may be subject to limitations as an analytical tool for investors, as it excludes Income or Loss from operations of acquired businesses and tax gains and losses and certain other items, which may have a significant effect on ROIC. Organic ROIC is not a recognized measure of financial performance under IFRS.
The most comparable IFRS measure to Organic ROIC is Return on total assets, calculated as Income from operations for the year divided by total assets as of the end of the year. Return on total assets as of the balance sheet date for the years ended December 31, 2019, 2020 and 2021 is included in the following table.
Philips Group
Return on total assets
in millions of EUR unless otherwise stated
| | 2019 | 2020 | 2021 |
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| Income from operations | 1,366 | 1,264 | 553 |
| Total assets | 27,016 | 27,713 | 30,961 |
| Return on total assets (%) | 5.1% | 4.6% | 1.8% |
The reconciliation of Average Net operating capital and the reconciliation of Net income to Organic ROIC for the years ended December 31, 2019, 2020 and 2021 are included in the following tables.
Philips Group
Reconciliation of Average Net operating capital1)
in millions of EUR unless otherwise stated
| | 2019 | 2020 | 2021 |
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| Tangible fixed assets | 2,412 | 2,799 | 2,716 |
| Intangible assets (including goodwill) | 12,242 | 11,789 | 13,454 |
| Inventories | 2,918 | 3,056 | 3,248 |
| Receivable balances2) | 4,955 | 5,010 | 4,648 |
| Payable balances3) | (6,461) | (6,520) | (6,627) |
| Provisions4) | (2,183) | (2,066) | (2,178) |
| Group Average Net operating capital | 13,882 | 14,068 | 15,261 |
| Net operating capital of businesses acquired | (4,176) | (3,176) | (5,511) |
| Average Net operating capital | 9,706 | 10,892 | 9,750 |
1)All line items represent the average of each of the five quarters ending before the relevant measurement date.2)Receivable balances consists of (Non-)Current receivables, Other (non-)current assets, (Non-)Current derivative financial assets and Income tax receivable.3)Payable balances consist of Accounts payable, Accrued liabilities, (Non-)Current contract liabilities, Other (Non-)current liabilities, (Non-) current derivative financial liabilities and (Non-)Current tax liabilities.4)Provisions consist of Long-term and Short-term provisions.
Philips Group
Reconciliation of Net Income to Organic ROIC
in millions of EUR unless otherwise stated
| | 2019 | 2020 | 2021 |
|---|
| Net Income | 1,173 | 1,195 | 3,323 |
| Discontinued operations, net of income taxes | (183) | (196) | (2,711) |
| Income tax expense | 258 | 212 | (103) |
| Investments in associates, net of income taxes | (1) | 9 | 4 |
| Financial expenses | 233 | 202 | 188 |
| Financial Income | (114) | (158) | (149) |
| Income from operations | 1,366 | 1,264 | 553 |
| (Income) Loss from operations of businesses acquired | 301 | 265 | 124 |
| Tax gains and losses | | (22) | (197) |
| Other items | (18) | 59 | 887 |
| Income tax expense | (258) | (212) | 103 |
| Tax effects of other adjustments | (61) | 30 | (33) |
| Organic return | 1,330 | 1,384 | 1,437 |
| Average Net operating capital | 9,706 | 10,892 | 9,750 |
| Organic ROIC (%) | 13.7% | 12.7% | 14.7% |
Appropriation2025, including 300 million in underserved communities, rising to 2.5 billion and 400 million respectively by 2030. We use Lives Improved as a measurement of profitsour societal impact. In the course of 2021 we changed the definition of ‘lives improved’ (effective January 2021) to align more closely with our purpose. The new definition includes only products or solutions that contribute to people’s health and profit distributions
well-being, and no longer includes the contribution from our Green Products and Solutions that support a healthy ecosystem. Additionally, as we discontinued our Domestic Appliances business, we have removed the impact of this business from the Lives Improved results. The combined impact of these changes resulted in an overall drop of 223 million lives improved in 2021. We calculate Lives Improved as the number of individual interactions for each product sold (based on market intelligence and statistical data) and multiply by the number of those products delivered in a year (eliminating double counting for multiple different product touches per individual). See Improving people’s lives for more information on Lives Improved.PursuantOperational Carbon Footprint
We aim to article 34minimize our environmental impact and we use the Operational Carbon Footprint as one of the articlesmeasurements of associationour impact. We define Operational Carbon Footprint as the total greenhouse gas emissions caused by an organization, event, product or person; expressed in kilotonnes CO2-equivalent. We calculate our Operational Carbon Footprint on a monthly basis and include industrial sites (manufacturing and assembly sites), non-industrial sites (offices, warehouses, IT centers and R&D facilities), business travel (lease and rental cars and airplane travel) and logistics (air, sea and road transport) See Sustainable Operations for more information on our Operational Carbon Footprint.
Circular Revenues
As a company committed to the transition to a circular economy, we aim to decouple economic growth from the use of natural resources and ecosystems by using those resources more effectively. We define Circular Revenues as revenues generated through products and solutions that meet specific Circular Economy requirements (including performance and access-based business models, refurbished, reconditioned and remanufactured products and systems, refurbished, reconditioned and remanufactured components, upgrades or refurbishment on site or remote, and products with a recycled plastics content of >25% post-consumer recycled plastics or >30% post-industrial/postconsumer recycled plastics by total weight of eligible plastics). We calculate Circular Revenues as annual revenues attributable to products and solutions that meet the Circular Economy requirements.
Waste to Landfill
At Philips, as a responsible company, we strive to reduce our environmental impact. We define Waste to Landfill as total waste that is delivered for landfill and exclude one-time-only waste and waste delivered to landfill due to regulatory requirements. We calculate Waste to Landfill in kilotonnes per year. See Sustainable Operations for more information on Waste to Landfill.
Closing the Loop
At Philips, we are committed to offer a trade-in on all our professional medical equipment and to take care of responsible repurposing of such trade-in systems. We call this “Closing the Loop”. We calculate Closing the Loop as Process Adherence (%) * Reclaim (%). Process adherence (%) is defined as the % of won Replacement Philips deals which are associated with a trade in request in our CRM system. Reclaim (%) is defined as the % of won Replacement Philips deals with a customer accepted trade in request in our CRM system and a repurposing strategy that fulfills our reclaim requirements.
Philips believes that the five other key performance indicators described above (Lives Improved, Operational Carbon Footprint, Circular Revenues, Waste to Landfill and Closing the Loop) provide important information to investors and are important to understanding the long-term performance and prospects of the Company, a dividend will first be declared on preference shares outbusiness. In addition, these other key performance indicators are also used for management compensation purposes. Members of net income. The remainder of the net income, after any retention by way of reserve 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, 2018, the issued share capital consists only of common shares. No preference shares have been issued. Article 33 of the articles of association of the Company gives the Board of Management are eligible for grants of performance shares under the power to determine what portionLong-Term Incentive (LTI) Plan, and the vesting of the net income shall be retained by way of reserve,performance shares is subject to performance over a period of 3 years and based on certain criteria, including a 10% weighting for Sustainability Objectives, which Philips defines as the approvalfive other key performance indicators described above: Lives Improved, Carbon Footprint, Circular Revenues, Waste to Landfill and Closing the Loop. Philips believes that including these other key performance indicators in our remuneration policy encourages management to act responsibly and sustainably, supporting the company’s overall performance and enhancing the long-term value of the Supervisory Board.company. See Remuneration of the Board of Management in 2021 for more information on the Philips’ Long-Term Incentive (LTI) Plan.
A proposal willComparable order intake
Comparable order intake represents the period-on-period growth, expressed as a percentage, in order intake excluding the effects of currency movements and changes in consolidation. Comparable order intake is reported for equipment and software in the Diagnoses & Treatment and Connected Care businesses, and is defined as the total contractually committed value of equipment and software to be submitteddelivered within a specified timeframe, and is an approximation of expected future revenue growth in the respective businesses. Comparable order intake does not derive from the financial statements and a quantitative reconciliation is thus not provided.
Effective 2020, Philips has simplified its order intake policy by aligning horizons for all modalities to 18 months to revenue, compared to previously used delivery horizons of 6 months for Ultrasound, 12 months for Connected Care and 15 months for Diagnosis & Treatment. At the time, Philips has aligned order intake for software contracts to the 2019same 18 months to revenue horizon, meaning that only the next 18 months conversion to revenue under the contract is recognized, compared to the full contract values recognized previously. This change eliminates major variances in order intake growth and better reflects expected revenue in the short term from order intake booked in the reporting period. Prior-year comparable order intake amounts have been restated accordingly. This realignment has not resulted in any material additional order intake recognition.
Philips uses comparable order intake as an indicator of business activity and performance. Comparable order intake is not an alternative to revenue and may be subject to limitations as an analytical tool due to differences in amount and timing between booking orders and revenue recognition. Due to divergence in practice, other companies may calculate this or a similar measure (such as order backlog) differently and therefore comparisons between companies may be complicated.
14.3Investor information
14.3.2Financial calendar
| Annual General Meeting of Shareholders | |
| Record date 2022 AGM | April 12, 2022 |
| 2022 AGM | May 10, 2022 |
| Quarterly reports1) | |
| First quarter results 2022 | April 25, 2022 |
| Second quarter results 2022 | July 25, 2022 |
| Third quarter results 2022 | October 24, 2022 |
| Fourth quarter results 2022 | January 30, 2023 |
1)Subject to updates of the financial calendar as published on the company's website
2022 Annual General Meeting of Shareholders to pay a dividend of EUR 0.85 per common share, in cash or shares at
The Agenda and the option of the shareholders, against the net income of the company for 2018.
Subsequent events
New share buyback program
On January 29, 2019, Philips announced a new share buyback program for an amount of up to EUR 1.5 billion. At the current share price, the program represents a total of approximately 46 million shares. Philips expects to start the program in the first quarter of 2019 and to complete it within two years. As the program will be initiated for capital reduction purposes, Philips intends to cancel all of the shares acquired under the program. The program will be executed by an intermediary to allow for purchases in the open market during both open and closed periods, in accordance with the EU Market Abuse Regulation.
Claim LG Electronics, Inc (LGE)
In connection with the CRT matter as referenced in Contingent assets and liabilities, which is deemed incorporated and repeated herein by reference, the Company was served with a claim filed by LGE in the Seoul Central District Court on January 29, 2019. LGE claims restitution of EUR 64.6 million, representing a portion of the fine that LGE paidexplanatory notes to the European Commission relating to the joint venture LG.Philips DisplaysAgenda for which LGE and the Company were jointly and severally liable. LGE alleges that based on the manner in which the fine was calculated, the Company should have paid proportionately more than it currently has.
Independent auditor's report
To: The Supervisory Board and Shareholders of Koninklijke Philips N.V.
Report on the audit of the financial statements 2018 included in the annual report
Our opinion
We have audited the financial statements 2018 of Koninklijke Philips N.V. (the Company), based in Eindhoven, the Netherlands. The financial statements include the group financial statements and the company financial statements.
In our opinion:
The accompanying group financial statements give a true and fair view of the financial position of Koninklijke Philips N.V. as at December 31, 2018, and of its result and its cash flows for 2018 in accordance with International Financial Reporting Standards as adopted by the European Union (EU-IFRS) and with Part 9 of Book 2 of the Dutch Civil CodeThe accompanying company financial statements give a true and fair view of the financial position of Koninklijke Philips N.V. as at December 31, 2018, and of its result for 2018 in accordance with Part 9 of Book 2 of the Dutch Civil Code
The group financial statements comprise:
The consolidated balance sheet as at December 31, 2018
The following statements for 2018: the consolidated statements of income, comprehensive income, cash flows and changes in equity
The notes comprising a summary of the significant accounting policies and other explanatory information
The company financial statements comprise:
The company balance sheet as at December 31, 2018
The company statements of income and changes in equity for 2018
The notes comprising a summary of the accounting policies and other explanatory information
Basis for our opinion
We conducted our audit in accordance with Dutch law, including the Dutch Standards on Auditing. Our responsibilities under those standards are further described in the “Our responsibilities for the audit of the financial statements” section of our report.
We are independent of Koninklijke Philips N.V. in accordance with the EU Regulation on specific requirements regarding statutory audit of public-interest entities, the “Wet toezicht accountantsorganisaties” (Wta, Audit firms supervision act), the “Verordening inzake de onafhankelijkheid van accountants bij assurance-opdrachten” (ViO, Code of Ethics for Professional Accountants, a regulation with respect to independence) and other relevant independence regulations in the Netherlands. Furthermore, we have complied with the “Verordening gedrags- en beroepsregels accountants” (VGBA, Dutch Code of Ethics).
We believe the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Materiality
| |
|---|
| 5% of income before taxes
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| Based on our professional judgment we consider an earnings-based measure as the most appropriate basis to determine materiality. Based on the actual benchmark result, we continued to apply a materiality of EUR 75 million. The applied benchmark is in line with the 2017 audit. Due to a higher income before taxes, materiality increased compared to prior year (2017: EUR 60 million)
|
We have also taken into account misstatements and/or possible misstatements that in our opinion are material for the users of the financial statements for qualitative reasons.
We agreed with the Supervisory Board that misstatements in excess of EUR 3.75 million, which are identified during the audit, would be reported to them, as well as smaller misstatements that in our view must be reported on qualitative grounds.
Scope of the group audit
Koninklijke Philips N.V. is the head of a group of entities. The consolidated statements of Koninklijke Philips N.V. represent the financial information of this group.
Following our assessment of the risk of material misstatement to Koninklijke Philips N.V.’s group financial statements, we have selected 8 components which required an audit of the complete financial information (Full Scope Components) and 42 components requiring audit procedures on specific account balances or specified audit procedures that we considered had the potential for the greatest impact on the significant accounts in the financial statements, either because of the size of these accounts or their risk profile (Specific- or Specified Scope Components). The Central Audit team performed audit procedures on certain accounting areas managed centrally, such as capitalized research & development costs, health systems revenue (non US) and goodwill. In addition, the Central Audit team, next to the procedures performed by the component teams, had additional involvement in the areas of tax and legal claims, litigation and contingencies.
As a result of our scoping of the complete financial information, specific account balances and the performance of audit procedures at different levels in the organization, our actual coverage varies per account balance and the depth of our audit procedures per account balance varies depending on our risk assessment.
Of the remaining components, we performed selected other procedures, including analytical review and detailed testing to respond to potential risks of material misstatements to the financial statements that we identified.
Accordingly, our audit coverage, for selected account balances included in the key audit matters stated below, are summarized as follows:
Legal claims, litigation and contingencies
in %
Involvement with component teams
Component materiality was determined using judgment, based on the relative size of the component and our risk assessment. Component materiality did not exceed EUR 37.5 million and the majority of our component auditors applied a component materiality that is significantly less than this threshold.
Component auditors visited the Netherlands in 2018 to attend our global audit planning conference to discuss the Group audit, risks, audit approach and instructions. In addition, we sent detailed instructions to all component auditors, covering the significant areas and the information required to be reported to us. Based on our risk assessment, we visited component locations in the U.S.A., China, the Netherlands, Panama, Germany, India, France, UK, Italy, Poland and Israel. These visits encompassed some, or all, of the following activities: co-developing the significant risk area audit approach, reviewing key local working papers and conclusions, meeting with local and regional leadership teams, obtaining an understanding of key control processes including centralized entity level controls processes and attending closing meetings. We interacted regularly with the component teams during various stages of the audit and were responsible for the scope and direction of the audit process. Where deemed appropriate we attended in person or via conference call, Full Scope Component and certain Specific Scope Component closing meetings and reviewed key working papers.
By performing the procedures mentioned above at components, together with additional procedures at group level, we have been able to obtain sufficient and appropriate audit evidence about the group’s financial information to provide an opinion on the group financial statements.
Our key audit matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements. We have communicated the key audit matters to the Supervisory Board. The key audit matters are not a comprehensive reflection of all matters discussed.
These matters were addressed in the context of our audit of the financial statements as a whole and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
Revenue recognition – multiple element sales contracts and sales promotions
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| Sales contracts for certain transactions primarily entered into in the Diagnosis & Treatment businesses and the Connected Care & Health Informatics businesses involve multiple elements. Those multiple elements, or separately identifiable performance obligations, are recognized based on their relative stand-alone selling price when the performance obligation is satisfied. This gives rise to the risk that sales could be misstated due to the incorrect determination of the relative stand-alone selling price and its allocation to the performance obligations and therefore timing of the related revenue recognition.
In addition, primarily in the Personal Health businesses the Company has sales promotions related agreements with distributors and retailers whereby discounts and rebates are provided according to the quantity of goods sold and promotional and marketing activity performed. In particular, the promotional and marketing agreements include a number of characteristics that require judgment to be applied in determining the appropriate accounting treatment based on the terms of the respective agreements. Management must estimate the expected consideration which can include fixed and/or variable amounts which can be impacted by trade discounts and volume rebates. Sales related accruals (rebates, marketing and promotional support, coupon and stock protection) are assessed at the balance sheet date based on forecast information over the term of the promotion. There may also be incentives to change the timing of when sales related accruals within the Personal Health businesses are recognized.
Further reference is made to note 1, Significant accounting policies and note 6, Income from operations section Sales composition and disaggregation.
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| Our audit procedures included, among others, assessing the appropriateness of the Company’s revenue recognition accounting policies, including the impact of the new revenue recognition accounting standard (IFRS 15) which has been adopted as of January 1, 2018 and related disclosures as included in note 1, Significant accounting policies.
We verified the relative stand-alone selling price determination by auditing the basis on which the stand-alone selling price is determined and tested the accuracy of the allocation to the performance obligations. Further we have performed data analytics, inspected selected sales contracts, obtained Terms & Condition confirmations, inspected the installation hours reported after recognition of revenue and inspected hand over certificates received from the customers.
With respect to the sales related accruals, our procedures included:
• challenging management’s assumptions used in determining the sales related accruals
• sampling recorded amounts to contractual evidence
• performing retrospective review of actual settlements verifying there were no significant differences to prior period sales related accruals
• testing cut-off through assessing the sales promotion obligations around year-end
As part of our audit procedures we tested the effectiveness of the Company’s controls over the stand-alone selling price determination of multi element sales contracts as well as the completeness and accuracy of the sales related accruals to assess the correct value and timing of revenue recognition.
We also assessed the adequacy of the sales disclosures contained in note 6, Income from operations section Sales composition and disaggregation.
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| We confirm that the Company’s revenue recognition accounting policies were appropriately applied and that the impact of the new revenue recognition accounting standard (IFRS 15) is appropriately disclosed in note 1, Significant accounting policies.
Furthermore, we have assessed that management’s assumptions are within the acceptable range. In addition, we assessed that the disclosures in note 6, Income from operations section Sales composition and disaggregation are reasonable.
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|
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| At December 31, 2018, the total carrying value of goodwill amounted to EUR 8,503 million, representing 33% of the group’s total assets. Goodwill is allocated to Cash Generating Units (CGUs) for which management is required to test the carrying value of goodwill for impairment annually or more frequently if there is a triggering event for testing. We focused on this area given the significant judgment and complexity of valuation methodologies used to determine whether the carrying value of goodwill is appropriate, which includes the assumptions used within models to support the recoverable amount of goodwill. Further reference is made to note 11, Goodwill.
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| As part of our audit we assessed and tested the assumptions, methodologies and data used by the Company in their valuation model, by comparing them to external data such as expected inflation rates, discount rates and implied growth rates. Additionally, we validated that the cash flow projections used in the valuation are consistent with the information approved by the Executive Committee and have evaluated the historical accuracy of management’s estimates that drive the assessment, such as business plans and expected growth rates. We challenged if the identified CGUs are in line with how management monitors the entity’s operations. Furthermore we reconciled the market value of the Company to the sum of the carrying values of the CGUs.
We included in our team a valuation expert to assist us in these audit activities.
Our main focus was on the CGUs Aging & Caregiving and Population Insights & Care (both within the Connected Care & Health Informatics segment) as these represent CGUs with limited headroom. We gained a more in-depth understanding of the developments of the performance of these CGUs and corroborated if they are in line with forecasted figures.
For these CGUs, we performed sensitivity analysis by stress testing key assumptions (sales growth, EBITA and discount rate) in the model to consider the degree to which these assumptions would need to change before an impairment charge would have to be recognized.
We have also tested the effectiveness of the Company’s internal controls around the goodwill accounting including their prospective financial information. We also assessed the adequacy of the Company’s disclosure around goodwill as included in note 11, Goodwill.
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| We consider management’s assumptions to be within a reasonable range.
We note that the Company concluded from its impairment tests that headroom for the CGUs Aging & Caregiving and Population Insights & Care is relatively limited and thus sensitive to changes in the assumptions.
We agree with management’s conclusion that no impairment of goodwill is required in 2018.
We assessed that the disclosures in note 11, Goodwill are reasonable.
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Valuation and disclosure related to deferred tax assets
|
|---|
| The Company has a significant amount of deferred tax assets, mainly resulting from net operating losses. The accounting for deferred tax assets is significant to our audit since the Company makes judgments and estimates of forecasted taxable income in relation to the realization of deferred tax assets.
At December 31, 2018, the deferred tax assets are valued at EUR 1,828 million, representing 7% of the group’s total assets. Further reference is made to note 8, Income taxes.
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| With the involvement of our tax experts we evaluated the tax accounting in various jurisdictions in which the Company operates, taking into account the impact of the local tax jurisdiction and changes in the respective tax legislation.
We tested management’s assumptions used to determine the probability that deferred tax assets recognized in the balance sheet will be recovered. This is based upon forecasted taxable income in the countries where the deferred tax assets originated and the periods when the deferred tax assets can be utilized. The forecasts (based on the Company’s budget and strategic plan) were evaluated by us and we assessed the historical accuracy of management’s assumptions.
We have also tested the effectiveness of the Company��s internal controls around the valuation of deferred tax assets. Substantive audit procedures comprised comparing information provided by management to corroborative or contradictory information where possible, such as previous history in certain countries. We also assessed the adequacy of the Company’s disclosures included in note 8, Income taxes.
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| We consider the Company’s accounting policies acceptable and management’s assumptions and estimates to be within the reasonable range.
We assessed that the disclosures in note 8, Income taxes are reasonable.
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Valuation and disclosure of accrual estimates for legal claims, litigations and contingencies
|
|---|
| The Company and certain of its group companies and former group companies are involved as a party in legal proceedings, including regulatory and other governmental proceedings, as well as investigations by authorities.
We focused on this area in our audit, since the accounting and disclosure for (contingent) legal liabilities is complex and judgmental (due to the difficulty in predicting the outcome of the matter and estimating the potential impact if the outcome is unfavorable), and the amounts involved are, or can be, material to the financial statements as a whole. Further reference is made to note 19, Provisions and note 24, Contingent assets and liabilities.
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| Our audit procedures included, among others, testing the effectiveness of the Company’s internal controls around the identification and evaluation of claims, proceedings and investigations at different levels in the group, and the recording and continuous re-assessment of the related (contingent) liabilities and provisions and disclosures. We inquired with both internal and external legal counsel as well as with the Company’s financial department in respect of (ongoing) investigations, claims or proceedings, inspected relevant correspondence, inspected the minutes of the meetings of the Audit Committee, Supervisory Board and Executive Committee, requested a confirmation letter from the group’s in-house legal counsel and obtained external legal confirmation letters from a selection of external legal counsels. For claims settled during the year, we vouched the cash payments, as appropriate, and read the related settlement agreements in order to verify whether the settlements were properly accounted for.
Specifically related to ongoing compliance related investigations, we were supported by a fraud investigation expert from our firm.
We also assessed the adequacy of the Company’s disclosure around legal claims, litigations and contingencies as included in note 19, Provisions and note 24, Contingent assets and liabilities.
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| We consider management’s conclusion on the predicted outcome and estimation of potential impact reasonable and we assessed that the disclosures in note 19, Provisions and note 24, Contingent assets and liabilities are reasonable.
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Valuation of capitalized research and development cost (product development)
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|---|
| At December 31, 2018, the total carrying value of the product development amounted to EUR 1,102 million (representing 4% of the group’s total assets) of which EUR 481 million is related to product development construction in progress.
For the product development construction in progress, management is required to test the carrying value of such amounts for impairment annually or more frequently if there is a triggering event. We focused on this area as these products do not yet generate sales and therefore there is a higher level of judgment involved in setting the significant assumptions in determining the value in use to support the carrying value. Further reference is made to note 12, Intangible assets excluding goodwill.
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| As part of our audit we assessed and tested the assumptions, methodology (discounted cash flow model) and data used by the Company in calculating the value in use of the individual product development construction in progress. Our audit procedures included, among others, performing a sensitivity analysis by stress testing key assumptions (discount rate) in the model to consider the degree to which these assumptions would need to change before an impairment charge would have to be recognized.
Based on these sensitivity analyses, our main focus was on the product development construction in progress items with limited headroom. We gained a more in-depth understanding of the development status of these projects as well as the projected financial information used in management’s assessment of whether the value in use of these items exceeds the carrying value. We assessed and tested the key assumptions, with our main focus on discount rate, growth rate, market size and share and expected project costs by comparing to historical or external information.
We have also tested the effectiveness of the Company’s internal controls around the valuation of product development construction in progress, including their prospective financial information. We also assessed the adequacy of the Company’s disclosure around product development construction in progress, as included in note 12, Intangible assets excluding goodwill.
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| We consider management’s assumptions to be within a reasonable range.
We agree with management’s conclusion that the carrying value of the capitalized research and development costs related to product development construction in progress is reasonable.
We assessed that the disclosures in note 12, Intangible assets excluding goodwill are reasonable.
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In the previous year’s auditor’s report ‘Acquisitions’ and ‘Disposals and discontinued operations accounting treatment’ were also identified as key audit matters. Although the Company acquired nine new entities during 2018, the aggregated cash flow, goodwill and other intangibles amounts were significantly less in comparison to the 2017 acquisitions. As a result ‘Acquisitions’ is not identified as key audit matter for our 2018 audit. In our 2017 audit, following the sale of the majority interest in the combined Lumileds and Automotive businesses and the further sell-down of Signify shares, the control assessment and the accounting of discontinued operations was an attention area. At December 31, 2018, Koninklijke Philips N.V. no longer has significant influence in Signify and therefore the control assessment and asset held for sale accounting was no longer relevant and as a result this is not a key audit matter for our 2018 audit.
Report on other information included in the annual report
In addition to the financial statements and our auditor’s report thereon, the annual report contains other information that consists of:
The management reportOther information pursuant to Part 9 of Book 2 of the Dutch Civil CodeSustainability statementsFive year key financial and sustainability informationInvestor relations information
Based on the following procedures performed, we conclude that the other information:
Is consistent with the financial statements and does not contain material misstatementsContains the information as required by Part 9 of Book 2 of the Dutch Civil Code
We have read the other information. Based on our knowledge and understanding obtained through our audit of the financial statements or otherwise, we have considered whether the other information contains material misstatements. By performing these procedures, we comply with the requirements of Part 9 of Book 2 of the Dutch Civil Code and the Dutch Standard 720. The scope of the procedures performed is substantially less than the scope of those performed in our audit of the financial statements.
Management is responsible for the preparation of the other information, including the management report in accordance with Part 9 of Book 2 of the Dutch Civil Code and other information as required by Part 9 of Book 2 of the Dutch Civil Code.
Report on other legal and regulatory requirements
Engagement
Following the appointment by the Annual General Meeting of Shareholders on May 7, 2015, we were engaged by10, 2022, will be published on the Supervisory Boardcompany’s website.
For the 2022 Annual General Meeting of Shareholders, a record date of April 12, 2022 will apply. Those persons who, on that date, hold shares in the Company, and are registered as auditor of Koninklijke Philips N.V. on October 22, 2015 assuch in one of the audit for the year 2016 and have operated as statutory auditor since that date.
No prohibited non-audit services
We have not provided prohibited non-audit services as referred to in Article 5(1) of the EU Regulation on specific requirements regarding statutory audit of public-interest entities.
Description of responsibilities for the financial statements
Responsibilities ofregisters designated by the Board of Management and the Supervisory Board for the financial statements
The BoardAnnual General Meeting of Management is responsible forShareholders, will be entitled to participate in, and vote at, the preparation and fair presentation of the financial statements in accordance with EU-IFRS and Part 9 of Book 2 of the Dutch Civil Code. Furthermore, the Board of Management is responsible for such internal control as the Board of Management determines is necessary to enable the preparation of the financial statements that are free from material misstatement, whether due to fraud or error.meeting.
14.3.3Investor contact
Shareholder services
As part of the preparation of the financial statements, the Board of Management is responsible for assessing the Company’s ability to continue as a going concern. Based on the financial reporting frameworks mentioned, the Board of Management should prepare the financial statements using the going concern basis of accounting unless the Board of Management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so. The Board of Management should disclose events and circumstances that may cast significant doubt on the Company’s ability to continue as a going concern in the financial statements.
The Supervisory Board is responsible for overseeing the Company’s financial reporting process.
Our responsibilities for the audit of the financial statements
Our objective is to plan and perform the audit engagement in a manner that allows us to obtain sufficient and appropriate audit evidence for our opinion.
Our audit has been performed with a high, but not absolute, level of assurance, which means we may not detect all material errors and fraud during our audit.
Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. The materiality affects the nature, timing and extent of our audit procedures and the evaluation of the effect of identified misstatements on our opinion.
We have exercised professional judgment and have maintained professional skepticism throughout the audit, in accordance with Dutch Standards on Auditing, ethical requirements and independence requirements. Our audit included among others:
Identifying and assessing the risks of material misstatement of the financial statements, whether due to fraud or error, designing and performing audit procedures responsive to those risks, and obtaining audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal controlObtaining an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstancesEvaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by managementConcluding on the appropriateness of management’s use of the going concern basis of accounting, and based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause a company to cease to continue as a going concernEvaluating the overall presentation, structure and content of the financial statements, including the disclosuresEvaluating whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation
Because we are ultimately responsible for the opinion, we are also responsible for directing, supervising and performing the group audit. In this respect we have determined the nature and extent of the audit procedures to be carried out for group entities. Decisive were the size and/or the risk profile of the group entities or operations. On this basis, we selected group entities for which an audit or review had to be carried out on the complete set of financial information or specific items.
We communicate with the Supervisory Board regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant findings in internal control that we identify during our audit. In this respect we also submit an additional report to the Audit Committee in accordance with Article 11 of the EU Regulation on specific requirements regarding statutory audit of public-interest entities. The information included in this additional report is consistent with our audit opinion in this auditor’s report.
We provide the Supervisory Board with a statement that we have complied with relevant ethical requirements regarding independence, and communicate with them all relationshipsShareholders and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.
From the matters communicated with the Supervisory Board, we determine the key audit matters: those matters that were of most significance in the audit of the financial statements. We describe these matters in our auditor’s report unless law or regulation precludes public disclosureinterested parties can make inquiries about the matter or when, in extremely rare circumstances, not communicating the matter is in the public interest.
Amsterdam, the Netherlands
February 26, 2019
Ernst & Young Accountants LLP
Signed by S.D.J. Overbeek - Goeseije
/s/ S.D.J. Overbeek - Goeseije
13.3Sustainability statements
Approach to sustainability reporting
Philips has a long tradition of sustainability reporting, beginning with our first environmental Annual Report published in 1999. This was expanded in 2003, with the launch of our first sustainability Annual Report, which provided details of our social and economic performance in addition to our environmental results. As a next step, in 2008, we decided to publish an integrated financial, social and environmental report. This is our 11th annual integrated financial, social and environmental report. For more information, please refer to the company’s website.2021 to:
Royal Philips publishes its integrated
Annual Report Office
Philips Center
P.O. Box 77900
1070 MX Amsterdam, The Netherlands
E-mail: annual.report@philips.com
The Annual Report on Form 20-F is filed electronically with the highest (reasonable) assurance levelUS Securities and Exchange Commission.
Holders of shares listed on Euronext Amsterdam
Communications concerning share transfers, share certificates, dividends and change of address should be directed to:
ABN AMRO Bank N.V.
Department Equity Capital Markets/Corporate Broking HQ7212
Gustav Mahlerlaan 10, 1082 PP Amsterdam
The Netherlands
Telephone: +31-20-628-6070
E-mail: corporate.broking@nl.abnamro.com
Holders of New York Registry shares
Communications concerning share transfers, share certificates, dividends and change of address should be directed to:
Deutsche Bank Trust Company Americas
C/O AST
6201 15th Avenue Brooklyn, NY 11219
Telephone (toll-free US): +1-866-706-8374
Telephone (outside of US): +1-718-921-8137
Website: www.astfinancial.com
E-mail: db@astfinancial.com
International direct investment program
Philips offers a Dividend Reinvestment and Direct Stock Purchase Plan designed for the financial, socialUS market. This program provides existing shareholders and environmental performance. With that overall reasonable assurance level, interested investors with an economical and convenient way to purchase and sell Philips New York Registry shares (listed at the New York Stock Exchange) and to reinvest cash dividends. Deutsche Bank (the registrar of Philips NY Registry shares) has been authorized to implement and administer both plans for registered shareholders of and new investors in Philips NY Registry shares. 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:
Deutsche Bank Global Direct Investor Services
Telephone (toll-free US): +1-866-706-8374
Telephone (outside of US): +1-718-921-8137
Monday through Friday 8:00 AM EST through 8:00 PM EST
Website www.astfinancial.com
E-mail: db@astfinancial.com
or write to:
Deutsche Bank Trust Company Americas
IC/O AST
6201 15th Avenue Brooklyn, NY 11219
Analysts’ coverage
Philips is covered by approximately 25 analysts. For a frontrunner in our industry.
Tracking trends
We follow external trends continuously to determine the issues most relevant for our company and where we can make a positive contribution to society at large. In addition to our own research, we make use of a variety of sources, including the United Nations Environmental Programme (UNEP), World Bank, World Economic Forum, World Health Organization, and the World Business Council for Sustainable Development (WBCSD). Our work also involves tracking topics of concern to governments, non-governmental organizations (NGO), regulatory bodies, academia, and following the resulting media coverage.
Stakeholders
We derive significant value from our diverse stakeholders across all our activities and engage with, listen to and learn from them. Working in partnerships is crucial to delivering on our vision to make the world healthier and more sustainable through innovation. We incorporate their feedback on specific areaslist of our business into our planningcurrent analysts, please refer to: www.philips.com/a-w/about/investor/stock-info/analyst-coverage.html
How to reach us
The registered office of Royal Philips is:
High Tech Campus 5, 5656 AE Eindhoven, The Netherlands
Investor Relations contact
Royal Philips
Philips Center
P.O. Box 77900
1070 MX Amsterdam, The Netherlands
Telephone: +31-20-59 77222
Website: www.philips.com/investor
E-mail: investor.relations@philips.com
Leandro Mazzoni
Head of Investor Relations
Telephone: +31-20-59 77222
Derya Guzel
Investor Relations Director
Telephone: +31-20-59 77222
Global Sustainability contact
Royal Philips
High Tech Campus 51, 1st floor
5656 AG Eindhoven, The Netherlands
Telephone: +31-40-27 83651
Website: www.philips.com/sustainability
E-mail: philips.sustainability@philips.com
Global Press Office contact
Royal Philips
Philips Center
Amstelplein 2
1096 BC Amsterdam, The Netherlands
E-mail: group.communications@philips.com
For media contacts please refer to:
https://www.philips.com/a-w/about/news/contacts.html
14.3.4New York Registry Shares
Fees and actions. In addition, we participate in meetingsCharges Payable by a Holder of New York Registry Shares
Deutsche Bank Trust Company Americas (“Deutsche Bank”), as the US registrar, transfer, dividend disbursement and task forces asshareholder servicing agent (“Agent”) under Philips’ New York Registry Share program (the “Program”), collects fees for the issuance, cancellation and/or transfer of New York Registry Shares directly from investors depositing ordinary shares or surrendering New York Registry Shares for the purpose of withdrawal or from intermediaries acting for them. The Agent collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a member of organizations including the World Economic Forum, WBCSD, Responsible Business Alliance (RBA), Dutch Sustainable Growth Coalition, the Ellen MacArthur Foundation, and the European Partnership for Responsible Minerals.
Furthermore, we engage with the leading Dutch labor union (FNV) and a number of NGOs, including Enough, GoodElectronics, the Chinese Institute of Public and Environmental Affairs, UNICEF, Amnesty International, Greenpeace and Friendsportion of the Earth,distributable property to pay the fees.
The Agent may charge shareholders a fee of up to USD 5.00 per 100 shares for the exchange of New York Registry shares for shares and vice versa, for certain free distributions of shares and for shares issued upon exercise of rights, as well as for certain taxes, fees and expenses incurred in connection with issuances and cancellations. The Agent is also permitted to charge a varietydistribution fee of investorsUSD 0.05 per share to holders of New York Registry Shares in connection with a corporate action or event unless certain fees are otherwise charged to Philips.
Fees and analysts.
Our sustainability e-mail account (philips.sustainability@philips.com) enables stakeholdersPayments made by the Agent to share their issues, commentsPhilips
The Agent has agreed to reimburse certain expenses of Philips related to the Program and questions, also about this Annual Report,incurred by Philips in connection with the sustainability team.Program. The table below provides an overviewAgent has also agreed to waive certain fees for standard costs associated with the administration of the different stakeholder groups, examplesprogram.
The Agent has reimbursed EUR 391,885 directly to Philips in the year ended December 31, 2021. The Agent paid a total amount of those stakeholders andEUR 89,114 directly to third parties in the topics discussed, used for our materiality analysis.year ended December 31, 2021.
Category of Expense paid directly to third parties
in EUR
| amount in the year ended December 31, 2021 |
|---|
Stakeholder overview (non-exhaustive)
| |
| Reimbursement of Proxy Process Expenses | | 58,723 |
| Reimbursement of Scrip Dividend Expenses | European Works CouncilLocal Works CouncilsIndividual employees
| Regular meetings, quarterly Employee Survey, employee development process, quarterly update webinars. For more information refer to Social performance
Regular mail updates, team meetings, webinars
|
| NYSE Listing Fee | HospitalsRetailersConsumers
| Joint (research) projects, business development, Lean value chain projects, strategic partnerships, consumer panels, Net Promoter Scores, Philips Customer Care centers, Training centers, social media
|
| Expense paid directly to third parties | Chinese suppliers in the Supplier Development programRandstad, HP
| Supplier development activities (including topical training sessions), supplier forums, supplier website, participation in industry working groups like COCIR and RBA. For more information refer to Supplier indicators .
|
Governments, municipalities, etc.
| European UnionAuthorities in Indonesia, Singapore
| Topical meetings, research projects, policy and legislative developments, business development
Topical meetings, (multi-stakeholder) projects
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| UNICEF, International Red CrossFriends of the Earth, Greenpeace
| Topical meetings, (multi-stakeholder) projects, joint (research) projects, innovation challenges, renewables projects, social investment program and Philips Foundation
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| Mainstream investorsESG investors
| Webinars, roadshows, capital markets day, Investor relations and Sustainability accounts
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Reporting standards
We have prepared this integrated annual report in line with the International Integrated Reporting Council (IIRC) Integrated Reporting framework and the EU Non Financial Reporting decree (2014/95/EU). We have also included a visualization of our value creation process.
For the sustainability information included in this integrated annual report we followed the Global Reporting Initiative (GRI) Standards-Option Comprehensive. A detailed overviewUnder certain circumstances, including removal of the GRI Comprehensive indicators can be found inAgent or termination of the GRI content indexProgram by Philips, Philips is required to repay the Agent certain amounts reimbursed and/or expenses paid to or on our sustainability website. Next, we developed additional company-specific indicatorsbehalf of Philips.
14.4Definitions and startedabbreviations
Brominated flame retardants (BFR)
Brominated flame retardants are a group of chemicals that have an inhibitory effect on the ignition of combustible organic materials. Of the commercialized chemical flame retardants, the brominated variety are most widely used.
CO2-equivalent
CO2-equivalent or carbon dioxide equivalent is a quantity that describes, for a given mixture and amount of greenhouse gas, the amount of CO2 that would have the same global warming potential (GWP), when measured over a specified timescale (generally 100 years).
Circular economy
A circular economy aims to measuredecouple economic growth from the impact we are having on society. The information onuse of natural resources and ecosystems by using those resources more effectively. By definition scope and measurement can be found in this chapter.
We signed up to the United Nations Global Compact in March 2007 to advance 10 universal principlesit is a driver for innovation in the areas of human rights, labor, the environmentmaterial, component and anti-corruption. Our General Business Principles, Human Rights, Sustainability and Environmental Policies, and our Supplier Sustainability Declaration are the cornerstones that enable us to live up to the standards set by the Global Compact. This is closely monitored and reported, as illustrated throughout this report, which is also our annual Communication on Progress (COP) submitted to the UN Global Compact Office.
At the World Economic Forum in January 2017 Philips signed the Compact for Responsive and Responsible Leadership. The Compact is an initiative to promote and align the long-term sustainability of corporations and the long-term goals of society, with an inclusive approach for all stakeholders.
We also use this report to communicate on our progress towards the relevant Sustainable Development Goals (SDGs), in particular SDG 3 (“Ensure healthy lives and promote well-being for all at all ages”), SDG 12 (“Ensure sustainable consumption and production patterns”) and SDG 13 ("Take urgent action to combat climate change and its impacts"). Please refer to Stakeholder engagement for more details.
Material topics and our focus
We identify the environmental, social, and governance topics which have the greatest impact on our business and the greatest level of concern to stakeholders along our value chain. Assessing these topics enables us to prioritize and focus upon the most material topics and effectively address these in our policies and programs.
Our materiality assessment is based on an ongoing trend analysis, media search, and stakeholder input. This year’s materiality matrix, developed during Q4 2018, has been built using an evidence-based approach to materiality analysis powered by Datamaran. By applying Datamaran’s automated sifting and analysis of millions of data points from publicly available sources, including, corporate reports, mandatory regulations and voluntary initiatives,product reuse, as well as newsnew business models such as solutions and social media, we identifiedservices. In a listCircular Economy, the more effective use of topics thatmaterials makes it possible to create more value, both by cost savings and by developing new markets or growing existing ones.
Circular Revenues
Circular Revenues are material to our business. With this data-driven approach to materiality analysis we have incorporated a wider range of data and stakeholders than was ever possible before and managed to get an evidence-based perspective into regulatory, strategic and reputational risks and opportunities.
The business impact scores are based on Philips’ assessment. Our materiality assessment has been conducted in the context of the GRI Sustainable Reporting Standards and the results have been reviewed and approveddefined by the Philips Sustainability Board. As macro-economic uncertainty increased, and attention for climate change increased, we noted a number of aspects that changed in terms of materiality in the table below (compared to 2017),
Key material topics
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| | Supply chain, operations, use phase
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| | Supply chain, operations, use phase
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| | Supply chain, operations, use phase
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| | Supply chain, operations, use phase. disposal
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| | Supply chain, operations, disposal
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Access to (quality & affordable) care
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Social inclusion and engagement
| | Supply chain, operations, use phase
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Employee wellbeing, Health & Safety
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Human Rights and Responsible Supply Chains
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Fair and Inclusive workplace
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Business ethics and General Business Principles
| | Supply chain, operations, use phase
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Product responsibility and safety
| | Supply chain, operations, use phase
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Competition and market access
| | Supply chain, operations, use phase
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| | |
| | Supply chain, operations, use phase
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| Strategy and Businesses
Strategic risks
| Supply chain, operations, use phase, disposal
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Sustainable value creation
| Message from the CEO
Strategy and Businesses
Strategic risks
| Supply chain, operations, use phase
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Programs and targets
Philips Group
Sustainability commitments
2018
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Lives Improved (including Signify) | | | |
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| | | |
Net operational carbon footprint | | | |
Operational waste recycling | | | |
Hazardous substances emissions | | | |
Total Recordable Case (TRC) rate | | | |
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| New development program tested | 300 companies in development program | 213 companies in development program |
With the 5-year ‘Healthy people, Sustainable planet’ program, new sustainability commitments were introduced; more detailed targets can be found in the respective sections.
All of our programs are guided by the Philips General Business Principles, which provide the framework for all of our business decisions and actions.
Boundaries of sustainability reporting
Our sustainability performance reporting encompasses the consolidated Philips Group activities in the Social and Environmental Performance sections, following the consolidation criteria detailed in this section. As a result of impact assessments of our value chain we have identified the material topics, determined their relative impact in the value chain (supply chain, our own operations, and use phase of our products) and reported for each topic on the relevant parts of the value chain. More details are provided in the relevant sections in the Sustainability Statements.
The consolidated selected financial information in this Sustainability statements section has been derived from the Group Financial Statements, which are based on IFRS.
Comparability and completeness
We used expert opinions and estimates for some parts of the Key Performance Indicator calculations. There is therefore an inherent uncertainty in our calculations, e.g. Lives Improved, Environmental Profit and Loss account and Social Impact calculations. The figures reported are Philips’ best estimate. As our insight increases, we may enhance the methodology in the future.
Until 2016, Philips reported on Green Product sales. Due to the change in our businesses, we changed this in 2016 to Green Revenues, which includesrevenues generated through products and solutions (referthat meet specific Circular Economy requirements. These include performance and access-based business models, refurbished, reconditioned and remanufactured products and systems, refurbished, reconditioned and remanufactured components, upgrades or refurbishment on site or remote, and products with a recycled plastics content of >25% post-consumer recycled plastics or >30% post-industrial/post-consumer recycled plastics by total weight of eligible plastics.
Dividend yield
The dividend yield is the annual dividend payment divided by Philips’ market capitalization. All references to the definition in 12.1.8). Revenues for 2014 and 2015 have been restated to reflect this change.
In 2018 the emission factor set for consumed electricity was updated to the International Energy Agency (IEA) 2018 v1.00 publications. For our market-based scope 2 calculations in Europe and the US, IEA and eGrid residual-mix emission factors were useddividend yield are as prescribed in the Greenhouse Gas
The emissions of substances data is based on measurements and estimates at manufacturing site level. The figures reported are Philips’ best estimate.
The integration of newly acquired activities is scheduled according to a defined integration timetable (in principle, the first full reporting year after the year of acquisition) and subject to the integration agenda. Data for activities that are divested during the reporting year are not included in full-year reporting. Environmental data are reported for manufacturing sites with more than 50 industrial employees.
We have excluded Signify data from the consolidated sustainability data, except for Lives Improved.
Scope
Lives improved and materials
The Key Performance Indicators on ‘lives improved’ and ‘materials’ and the scope are defined in the respective methodology documents that can be found at Methodology for calculating Lives Improved. We used opinions from Philips experts and estimates for some partsDecember 31 of the Lives Improved calculations.previous year.
Health and safety
Health and safety data is reported by sites with over 50 FTEs (full-time equivalents) and is voluntary for smaller locations. Health and safety data are reported and validated each month via an online centralized IT tool. The Total Recordable Cases (TRC) rate is defined as a KPI for work-related cases where the injured employee is unable to work one or more days, or had medical treatment or sustained an industrial illness. We also provide the Lost Workday Injury Cases (LWIC) rate, which measures work-related injuries and illnesses that predominantly occur in manufacturing operations and Field Services Organizations where the incident leads to at least one lost workday. Fatalities are reported for staff, contractors and visitors. The TRC and LWIC KPIs refer to all reported cases.
General Business Principles
Alleged GBP violations are registered in our intranet-based reporting and validation tool.
Environmental data
All environmental data from manufacturing operations, except process chemicals, are reported on a quarterly basis in our sustainability reporting and validation tool, according to company guidelines that include definitions, procedures and calculation methods. Process chemicals are reported on a half-yearly basis. In 2018, the environmental data of Spectranetics was not included.
Internal validation processes have been implemented and peer audits performed to ensure consistent data quality and to assess the robustness of data reporting systems.
These environmental data from manufacturing are tracked and reported to measure progress against our Sustainable Operations targets.
Reporting on ISO 14001 certification is based on manufacturing units reporting in the sustainability reporting system.
Environmental Profit & Loss account
The Philips Environmental Profit & Loss (EP&L) account measures our environmental impact on society at large. The EP&L account is based on Life Cycle Analysis methodology in which the environmental impacts are expressed in monetary terms using specific conversion factors. For more information we refer to our methodology report .
Operational carbon footprint
Philips reports in line with the Greenhouse Gas Protocol (GHGP). The GHGP distinguishes three scopes, as described below. The GHGP requires businesses to report on the first two scopes to comply with the GHGP reporting standards. As per the updated GHGP Scope 2 reporting guidance, from 2015 onward our scope 2 emissions reporting includes both the market-based method and the location-based method. The market-based method of reporting will serve as our reference for calculating our total operational carbon footprint.
Scope 1 – direct CO2e emissions – is reported on in full, with details of direct emissions from our industrial and non-industrial sites. Emissions from industrial sites, which consist of direct emissions resulting from processes and fossil fuel combustion on site, are reported in the sustainability reporting system. Energy use and CO2e emissions from non-industrial sites are based on actual data where available. If this is not the case, they are estimated based on average energy usage per square meter, taking the geographical location and building type of the site into account.Scope 2 – indirect CO2e emissions – is reported on in full, with details of indirect emissions from our industrial and non-industrial sites. CO2e emissions resulting from purchased electricity, steam, heat and other indirect sources are reported in the sustainability reporting system. The indirect emissions of sites not yet reporting are calculated in the same manner as described in Scope 1.The location-based method of scope 2 reporting reflects the average emissions intensity of grids on which energy consumption occurs (using mostly grid-average emission factor data). For this method our emission factors derive from the International Energy Agency (IEA) 2016 and are based on grid averages.The market-based method of scope 2 reporting allows use of an emission factor that is specific to the energy purchased. The emissions intensity of consumed energy can differ according to the contractual instruments used. For example, so-called ‘green electricity contracts’ guarantee the purchaser will be supplied with electricity from renewable sources, which typically lowers emissions per energy unit generated. In the market-based method Philips will account for renewable electricity with an emission factor of 0 grams CO2e per kWh. All renewable electricity claimed by Philips is sourced from the same energy market where the electricity-consuming operations are located, and is tracked and redeemed, retired, or cancelled solely on behalf of Philips. All certificates were obtained through procurement of Green-e certified Renewable Energy Certificates (RECs) in the United States and European Guarantees of Origin (GOs) from the Association of Issuing Bodies (AIB) of the European Energy Certificate System (EECS). To ensure the additionality, all certificates were produced in 2018 and a maximum of 6 months prior in the country of consumption and are retired on behalf Royal Philips.
Scope 3 – other CO2e emissions related to activities not owned or controlled by Royal Philips – is reported on for our business travel and distribution activities.
The Philips operational carbon footprint (Scope 1, 2 and 3) is calculated on a quarterly basis and includes the emissions from our:
industrial sites – manufacturing and assembly sitesnon-industrial sites – offices, warehouses, IT centers and R&D facilitiesbusiness travel – lease and rental cars and airplane travellogistics – air, ocean and road transport
All emission factors used to transform input data (for example, amount of tonne-kilometers transported) into CO2 emissions have been updated to the DEFRA (UK Department for Environment, Food & Rural Affairs) 2017 and the IEA emission factor set 2016. The total CO2 emission resulting from these calculations serves as input for scope 1, 2 and 3.
Commuting by our employees, upstream distribution (before suppliers ship to us), outsourced activities and emissions resulting from product use by our customers are not included in our operational carbon footprint. The calculations for business travel by lease car are based on actual fuel usage, and for travel by rental car the emissions are based on the actual mileage. Taxis and chauffeur-driven cars used for business travel are not included in the calculations. Emissions from business travel by airplane are calculated by the supplier based on mileage flown and emission factors from DEFRA, distinguishing between short, medium and long-haul flights. Furthermore, emissions from air freight for distribution are calculated based on the amount of tonne-kilometers transported between airports (distinguishing between short, medium and long-haul flights), including an estimate (based on actual data of the lanes with the largest volumes) for trucking from sites and distribution centers to airports and vice versa. Express shipments are generally a mix of road and air transport, depending on the distance.
It is therefore assumed that shipments across less than 600 km are transported by road and the rest by air (those emissions by air are calculated in the same way as air freight). For sea transport, only data on transported volume were available, so an estimate had to be made about the average weight of a container. Transportation to and from ports is not registered. This fore and aft part of sea transport was estimated to be around 3% of the total distance (based on actual data of the lanes with the largest volumes), consisting of a mix of modalities, and was added to the total emissions accordingly. CO2e emissions from road transport were also calculated based on tonne-kilometers. Return travel of vehicles is not included in the data for sea and road distribution.
Employee Engagement Index (EEI)
The Employee Engagement Index (EEI) is the single measure of the overall level of employee engagement at Philips. It is a combination of perceptions and attitudes related to employee satisfaction, commitment and advocacy.
Energy-using Products (EuP)
An energy-using product is a product that uses, generates, transfers or measures energy (electricity, gas, fossil fuel). Examples include boilers, computers, televisions, transformers, industrial fans and industrial furnaces.
Full-time equivalent employee (FTE)
Full-time equivalent is a way to measure a worker’s involvement in a project. An FTE of 1.0 means that the person is equivalent to a full-time worker, while an FTE of 0.5 signals that the worker works half-time.
Global Reporting Initiative (GRI)
The reported figuresGlobal Reporting Initiative (GRI) is a network-based organization that pioneered the world’s most widely used sustainability reporting framework. GRI is committed to the framework’s continuous improvement and application worldwide. GRI’s core goals include the mainstreaming of disclosure on environmental, social and governance performance.
Green/EcoDesigned Innovation
Green/EcoDesigned Innovation comprises all R&D activities directly contributing to the intended development of Green/EcoDesigned Products or Green/EcoDesigned Technologies. Innovation projects are characterized as Green/EcoDesigned based on the Employee Survey.innovation brief; this designation is not revised during the project lifetime.
Green/EcoDesigned Products
Green/EcoDesigned Products offer a significant environmental improvement in one or more Green Focal Areas: Energy efficiency, Packaging, Hazardous substances, Weight, Circularity, and Lifetime reliability. The life cycle approach is used to determine a product’s overall environmental improvement. It calculates the environmental impact of a product over its total scorelife cycle (raw materials, manufacturing, product use and disposal). Green/EcoDesigned Products need to prove leadership in at least one Green Focal Area compared to industry standards, which is defined by a segment-specific peer group. This is done either by outperforming reference products (which can be a competitor or predecessor product in the particular product family) by at least 10%, by outperforming product-specific eco-requirements or by being awarded with a recognized eco-performance label. Because of different product portfolios, business segments have specified additional criteria for Green/EcoDesigned Products, including product specific minimum requirements where relevant.
Green/EcoDesigned Revenues
Green/EcoDesigned Revenues are generated through products and solutions which offer a significant environmental improvement in one or more of the employee engagement is an averageGreen Focal Areas: Energy efficiency, Packaging, Hazardous substances, Weight, Circularity, and Lifetime reliability. Green/EcoDesigned Revenues are determined by classifying the environmental impact of the quarterly resultsproduct or solution over its total life cycle. Philips uses Green/EcoDesigned Revenues as a measure of social and economic performance in addition to its environmental results. The use of this measure may be subject to limitations as it does not have a standardized meaning and similar measures could be determined differently by other companies. A product or solution that has been determined to contribute to Green/EcoDesigned Revenues will continue to do so until it is decommissioned.
Growth geographies
Growth geographies are the survey.developing geographies comprising of Asia Pacific (excluding Japan, South Korea, Australia and New Zealand), Latin America, Central & Eastern Europe, Middle East & Turkey (excluding Israel) and Africa.
Hazardous substances
Hazardous substances are generally defined as substances posing imminent and substantial danger to public health and welfare or the environment.
Income from operations (EBIT)
Income from operations as reported on the IFRS consolidated statement of income. The resultsterm EBIT (earnings before interest and tax) has the same meaning as Income from operations.
Income from continuing operations
Income from continuing operations as reported on the IFRS consolidated statement of income, which is net income from continuing operations, or net income excluding discontinued operations.
Large medical equipment
MRI systems, CT scanners, NM systems, DXR equipment, and IGT Fixed systems. This includes all Main Article Groups (MAGs) in the portfolio of these business units, except for the MAGs that represent non-life-extending upgrades: 'T82', 'Q72', 'I66', 'X19', 'Q71', 'W62', 'P10', 'S08', 'S14', 'Q74', 'S47', 'S33', 'Z44', 'S66', 'Q76', 'BI9'.
Lean
The basic insight of Lean thinking is that if every person is trained to identify wasted time and effort in their own job and to better work together to improve processes by eliminating such waste, the resulting enterprise will deliver more value at less expense.
Lives improved by Philips
To calculate how many lives we are improving, market intelligence and statistical data on the number of people touched by the products contributing to the social or ecological dimension over the lifetime of a product are multiplied by the number of those products delivered in a year. After elimination of double counts – multiple different product touches per individual are only counted once – the number of lives improved by our innovative solutions is calculated.
Long-term strategic partnership
Multi-year contractual agreement that represents a partnership to enable long-term collaboration.
Market/Market Group
A Market consists of one or more countries operating as a single organization under a Market Leader. Our 17 Market organizations are organized in three market groups: North America, Greater China and International Markets.
Mature geographies
Mature geographies are the highly developed markets comprising of Western Europe, North America, Japan, South Korea, Israel, Australia and New Zealand.
Net Promoter Score
Net Promoter Score®, or NPS®, measures customer experience and predicts business growth. NPS is calculated by taking the averageanswer to a key question on a 0-10 scale: How likely is it that you would recommend [brand] to a friend or colleague?
Respondents are grouped as follows:
• Promoters (score 9-10) are loyal enthusiasts who will keep buying and refer others, fueling growth.
• Passives (score 7-8) are satisfied but unenthusiastic customers who are vulnerable to competitive offerings.
• Detractors (score 0-6) are unhappy customers who can damage the brand and impede growth through negative word-of-mouth.
Subtracting the percentage of Detractors from the answered questionspercentage of Promoters yields the surveys.Net Promoter Score, which can range from a low of -100 (if every customer is a Detractor) to a high of 100 (if every customer is a Promoter).
Operational carbon footprint
Sustainability governance
Sustainability is strongly embedded in our core business processes, like innovation (EcoDesign), sourcing (Supplier Sustainability Program), manufacturing (Sustainable Operations), logistics (Green Logistics) and projects like the Circular Economy initiative.
In Royal Philips, the Sustainability BoardA carbon footprint is the highest governing sustainability body andtotal set of greenhouse gas emissions caused by an organization, event, product or person; usually expressed in kilotonnes CO2-equivalent. Philips' operational carbon footprint is chaired by the Chief Strategy & Innovation Officer, who is a member of the Executive Committee. Three other Executive Committee members, our Chief Operating Officer, our Chief Legal Officer and our Chief Human Resources Officer, sit on the Sustainability Board together with segment and functional executives. The Sustainability Board convenes four times per year, defines Philips’ sustainability strategy, programs and policies, monitors progress and takes corrective action where needed.
Progress on Sustainability is communicated internally and externally (www.results.philips.com)calculated on a quarterlyhalf-year basis and at least annually in the Executive Committeeincludes industrial sites (manufacturing and Supervisory Board.assembly sites), non-industrial sites (offices, warehouses, IT centers and R&D facilities), business travel (lease and rental cars and airplane travel) and logistics (air, sea and road transport).
Philips Lighting/Signify
Economic indicators
This section provides summarized information on contributions made on an accruals basis to the most important economic stakeholders as a basis for driving economic growth. For a full understanding of each of these indicators, see the specific financial statements and notes'Signify' in this report.
Philips Group
Distribution of direct economic benefits
in millions of EUR
2016 - 2018
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Suppliers: goods and services | | | |
Employees: salaries and wages | | | |
Shareholders: distribution from retained earnings | | | |
Government: corporate income taxes | | | |
Capital providers: net interest | | | |
Total purchased goods and servicesAnnual Report relate to Philips' former Lighting segment (prior to deconsolidation as included in cost of sales amounted to EUR 9.6 billion, representing 53% of total revenues of the Philips Group. Of this amount, approximately 53% was spent with global suppliers, the remainder with local suppliers.
In 2018, salaries and wages totaled EUR 4.8 billion, comparable to 2017. See Income from operations for more information.
Philips’ shareholders were given EUR 738 million in the form of a dividend, the cash portion of which amounted to EUR 401 million.
Income taxes amounted to EUR 193 million, compared to EUR 349 million in 2017. The effective income tax rate in 2018 was 12.8%, compared to 25.3% in 2017. This decrease was mainly due to one-time non-cash benefits from tax audit resolutions and business integrations. For more information, see Income taxes.
Philips supports global initiatives of the OECD (Organization for Economic Cooperation and Development) and UN (United Nations) to promote tax transparency and responsible tax management, taking into account the interests of various stakeholders, such as governments, shareholders, customers and the communities in which Philips operates. For more information, please refer to Philips’ Tax Principles.
Social statements
In 2016, Royal Philips launched its next 5-year sustainability program, 'Healthy people, Sustainable planet'. This section provides additional information on (some of) the Social performance parameters reported in Social performance
People development
Philips is on a multi-year journey to focus on experience-based career development, giving our people the opportunity to identify and gain the experiences necessary to support our health technology strategy and strengthen their employability. In 2018 we continued taking experimental learning to a new level across our 70:20:10 approach.
At the end of 2018November 2017 and when reported as discontinued operations), Philips Lighting N.V. (before or after such deconsolidation) or Signify N.V. (after its renaming in May 2018), as the numbercontext requires.
Polyvinyl chloride (PVC)
Polyvinyl chloride, better known as PVC or vinyl, is an inexpensive plastic so versatile it has become completely pervasive in modern society.
Quadruple Aim
At Philips, we make value-based care principles actionable by addressing the Quadruple Aim – better health outcomes, improved patient experience, improved staff experience, and lower cost of active trainings had increasedcare.
REACH
Registration, Evaluation, Authorization and Restriction of Chemicals (REACH) is a European Union regulation that addresses the production and use of chemical substances, and their potential impact on both human health and the environment.
Responsible Business Alliance (RBA)
The Responsible Business Alliance (formerly known as The Electronic Industry Citizenship Coalition (EICC)) was established in 2004 to 3,612,promote a common code of conduct for the electronics and 1,248information and communications technology (ICT) industry. EICC now includes more than 100 global companies and their suppliers.
Restriction on Hazardous Substances (RoHS)
The RoHS Directive prohibits all new courses were made availableelectrical and electronic equipment placed on the market in the European Economic Area from containing lead, mercury, cadmium, hexavalent chromium, poly-brominated biphenyls (PBB) or polybrominated diphenyl ethers (PBDE), except in certain specific applications, in concentrations greater than the values decided by the European Commission. These values have been established as 0.01% by weight per homogeneous material for cadmium and 0.1% for the other five substances.
Solution
A combination of Philips University. By year-end, some 73,807 active users had enrolled for courses with Philips University. In total, some 700,000 hours were spent on training through Philips University(and 3rd-party) systems, devices, software, consumables and services, configured and delivered in 2018, with 549,959 training completions.
70% Critical career experiences
We support our people in navigating their own careera way to solve customer (segment)-specific needs and stimulate and educate our managers to have meaningful career dialogues with their people. To that end, we continue to fine-tune our Experience Maps, which describe the experiences people can gain to prepare for, or develop in, strategic roles. These mapschallenges.
Sustainable Development Goals
The Sustainable Development Goals (SDGs) are a tool for employeescollection of 17 global goals set by the United Nations. The broad goals are interrelated though each has its own targets. The SDGs cover a broad range of social and managerseconomic development issues. These include poverty, hunger, health, education, climate change, water, sanitation, energy, environment and social justice.
Sustainable Innovation
Sustainable Innovation is the Research & Development spend related to use duringthe development dialoguesof new generations of products and for employees to explore when thinking about career steps, to help them understand how to gain the experiences required to be ready for their next career step. By identifying the roles and experiences critical to our business strategy, we clarify development areas and transferable skills in support of cross-functional, lateral, traditional, as well as non-traditional career opportunities.
We have integrated the Experience Maps into our talent development approach, helping our people to plan and manage their careers. We also build awareness of experience-based careers through communications, prioritizing strategic roles and capabilities that directly support our health technology strategy.
We continue to stimulate cross-moves (across businesses, between markets or functions) to promote collaboration and give people challenging learning experiences.
20% Coaching and mentoring
In 2018, all leadership programs in Philips University included a coaching and/or mentoring element. In Shifting Gears (Executive Leadership Program) participants are coached by an executive coach and mentored by an Executive Committee member as part of their application projects. In Leading Adaptively (Senior Leadership Program) participants are coached by an executive coach, as well as a peer coaching group and an accountability partner.
Two other Senior Leadership Programs, Leading Teams and License to Lead, have built coaching and mentoring capability through leaders learning how to do this most effectively and practicing with each other and their teams. In 2019 we will drive the coaching and mentoring culture of our leaders through the following leadership programs:
Leading TeamsLeading PeopleLeading AdaptivelyShifting Gears
The Women in Action program will also be introduced, with female leaders becoming and seeking out coaches and mentors within the organization.
10% Learning programs
In 2018, Philips University implemented the envisioned organizational design. By further optimizing the set-up of the organization and the way learning is created and offered at Philips, Philips University continued to deliver upon its mission of a lifetime of learning in Philips. By mirroring learning requests to company-wide strategic priorities and introducing smarter ways of working and supporting processes, we commit to deliver learning solutions that truly impact our people and Philips as a whole. In 2018 we invested in preparing an improved customer experience via a new design of our Learning Management system that will be launched in 2019. We also implemented a full metrics dashboard to enable us to measure the development cost of our learning.
Talent attraction
In 2018 we made over 14,450 new hires, with 23% of those roles filled by internal candidates. Our transformation-driven shift to align focused delivery models and strategies to the hardest-to-fill talent segments generated positive results. For example, we successfully hired over 1,500 R&D and Software Engineering professionals from the external labor market, with 20% identified as coming from ‘High Value Target’ companies – those known to be best-in-class for the particular skill set.
Continuing the trend from previous years, we continued to strengthen our in-house talent acquisition capabilities at Executive level, delivering a cost saving of EUR 4.4 million in 2018.
We continued to invest in strategic Employer Brand and Recruitment Marketing initiatives, as an enabler of our organizational People strategy and commitment to winning top talent in challenging labor market conditions. In addition to ongoing critical segment marketing campaigns and always-on brand management across key career-related channels, the following initiatives supported enterprise-level progress in 2018:
Attraction of female leaders: A targeted Employer Value Proposition (EVP) and global campaign, Lead Your Way, was launched in five major geographies, supporting our commitment to reach 25% female representation in leadership roles by 2020. The campaign generated over 16,000 career web page views, and advanced over 1,000 senior women profiles into our talent pipelines.Workforce of the Future: This year we expanded our passive talent attraction focus into the contingent/freelancer segment to help manage workforce demand in today’s ‘gig economy’. We developed and activated an Assignment Value Proposition (AVP) across target sourcing channels for this population. As a result, Philips’ Freelance platform database, an on-demand talent source for project work, grew by 98%.
Candidate experience: Continuously listening to the market and improving the experience we deliver to recruitment candidates remains a priority, as market conditions remain in favor of talent and our brand value continues to be a strategic focus. In 2018 we delivered mandatory ‘candidate experience’ training for all recruiters, executed a new candidate-centric content marketing strategy, and launched 24 Artificial Intelligence (AI)-driven career websites globally. More than 1.6 million unique talent profiles enjoyed a more personalized Philips career website experience in 2018.
Philips was recognized for its innovative talent practices in winning awards through programs led by Employer Brand Management Association (EBMA), Intermediair Research, In-House Recruitment Awards, Glassdoor.com, Tokyo Labor Bureau, and Randstad.
Employee volunteering
Our mission to improve lives through meaningful innovation is a key attractor for people to join Philips, and we connect our employee efforts directly to our brand promise as a leading health technology company to #Makelifebetter.
In 2018, Philips Foundation and Royal Philips collaborated to launch an employee team-volunteering program to leverage the capabilities of over 74,000 employees towards one global access-to-care goal per year. The Volunteering Program allows Philips employees to spend one paid day per year on volunteer work and to use their time and expertise to create impact.
To give just a few examples:
Over 5,000 employees participated in American Heart Association Heart Walks, CPR programs and heart health initiatives.
On October 18 every Philips office in Africa (Egypt, Morocco, Ghana, Nigeria, Kenya and South Africa) dedicated their time to give back and connect with local communities around childhood pneumonia, visiting hospitals, educating parents, screening children with the CHARM device and training community health workers.
Nearly 500 employees in the Benelux dedicated their time to successful volunteering initiatives named ‘Hartwarmers December’ and ‘Pro Bono Lab Communication’.
A total of EUR 150,000 was donated to five NGO impact projects, helping improve over 260,000 lives in vulnerable communities around the world.
In 2019 the Volunteering program will continue employee volunteering and fundraising efforts around the theme of childhood pneumonia, to create measurable and sustainable impact. Childhood pneumonia is the number one cause of childhood mortality globally. Every minute, two children under the age of 5 die from pneumonia. However, pneumonia is a communicable disease that can be easily prevented, diagnosed and treated with the appropriate and affordable commodities.
Building employability
At Philips, our vision to offer the best place to work for people who share our passion is not limited to our employees. In a number of our geographies, we support social initiatives to increase employability. This year we are highlighting a UK example, where we have been working with 'the halow project', which nurtures the independence of individuals with learning disabilities.
The Philips Foundation
Philips Foundation is a registered charity established in 2014. The Foundation supportsaddress the United Nations Sustainable Development Goals 3 ("(Ensure healthy lives and promote well-being for all at all ages"ages) and 17 ("Revitalize the global partnership foror 12 (Ensure sustainable development"). In 2018, Royal Philips supported Philips Foundation with a contribution of EUR 6.7 million, and provided the operating staff as well as the expert assistance of skilled employees in the execution of the Foundation’s programs.
Philips Foundation’s mission is to reduce healthcare inequality by providing access to quality healthcare for disadvantaged communities. It does this through the provision and application of Philips’ healthcare expertise, innovation power, talent and resources and by financial support. Together with key partners around the globe (including respected NGOs such as UNICEF, Amref and ICRC), Philips Foundation seeks to identify challenges where a combination of Philips expertise and partner experience can be used to create meaningful solutions that have an impact on people’s lives.
By the end of 2018, over 150 Philips Foundation projects were in progress or completed throughout the world, engaging employees and connecting with patients and underserved communities on healthcare. A total of 31 new projects were approved in 2018 in local markets worldwide, spanning many phases of the health continuum: from education on healthy living and prevention to diagnosis and treatment. Philips Foundation supported projects with local non-governmental organizations, across 23 countries, working with Philips employees to improve healthcare access and availability for vulnerable communities.
For more information about Philips Foundation, its purpose and scope, as well as its latest annual report, visit the website.
General Business Principles
In 2018, a total of 438 concerns were reported via the Philips Ethics Line and through our network of GBP Compliance Officers, an increase of 14% year-on-year (2017: 382 concerns).
This is a continuation of the upward trend reported since 2014, the year when Philips updated its General Business Principles and deployed a strengthened global communication campaign. We believe this trend remains in line with our multi-year efforts to encourage our employees to speak up, in combination with a growing number of employees.
When looking at absolute numbers, the increase in reports is reflected in all four regions. North America accounts for 45% of the total number of complaints (2017: 49%), while the concerns reported in Latin America increased to 14% of the total number, compared with 10% in 2017. The number of reports in the Asia-Pacific region (APAC region) and in Europe, Middle East & Africa (EMEA region) remained stable, accounting for 21% and 20% of the total number of complaints respectively in 2018 (2017: 20% and 21%).
Philips Group
Breakdown of reported GBP concerns
in number of reports
2015 - 2018
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Most common types of concerns reported
Treatment of employees
As in previous years, the type of concern most commonly reported related to the category ‘Treatment of employees’. In 2018 there were 254 reports in this category, compared to 211 in 2017. This represents 58% of the total number of concerns, which is again a slight increase on 2017 (55%).
The majority of the concerns reported in the ‘Treatment of employees’ category relate to ‘Respectful treatment’ and ‘Equal and fair treatment’ (41% and 25% respectively). The ‘Respectful treatment’ sub-category generally relates to concerns about verbal abuse, (sexual) harassment, and hostile work environments. ‘Equal and fair treatment’ primarily relates to concerns about favoritism, discrimination and unfair treatment in the workplace. In the ‘Treatment of employees’ category, 56% of cases originated from North America, which is less than in 2017 (64%).
Business integrity
The second most-reported type of concern relates to ‘Business Integrity’, which accounted for 22% of total cases reported in 2018, down from 27% in 2017. These concerns originated primarily from the APAC region (47%), followed by EMEA (24%), North America (18%) and Latin America (11%).
Philips Group
Classification of the new concerns investigated
in number of reports
2016 - 2018
Substantiated/unsubstantiated concerns
Of the 438 cases reported in 2018, 126 are still pending closure, the majority being those that were filed in the last quarter of the year. The table above gives an overview of the number of reported concerns that were substantiated (i.e. were found to constitute a breach of our General Business Principles) by the subsequent investigation.
Of the 312 reports closed in 2018 (288 in 2017), 105 were substantiated, which represents 34% of the total number reported and closed (32% in 2017). This is also shown in the table above. In 2018, 28% of the ‘Treatment of employees’ cases were substantiated, compared to 26% in 2017 (2016: 31%, 2015: 42%). In addition, 45% of the ‘Business Integrity’ reports were closed as substantiated in 2017, compared with 42% in 2017 (2016: 30%, 2015: 18%).
In addition to the above, 107 concerns that were still open at the end of 2017 were closed during the course of 2018. A total of 28 (26%) of these concerns were substantiated after investigation.
Of the 133 closed concerns that were substantiated, 82 were followed up with disciplinary measures ranging from termination of employment and written warnings to training and coaching. In other cases, corrective action was taken, which varied from strengthening the business processes to increasing awareness of the expected standard of business conduct.
Health and Safety performance
In 2018, we focused on six main areas of Health and Safety (H&S):
Policy, Procedures and Management Systems: Under the Philips H&S policy, 50 Philips Corporate Safety Standards (PCSS) were completed and deployed by December 2018. These standards provide guidance in a simple, consistent Management System format and specify the minimum H&S performance standards to be upheld wherever Philips operates. In 2018, Philips set itself the goal of certifying 36 manufacturing sites to the new ISO 45001 standard by mid-2019. By December 2018 two sites had been certified and plans were in place to certify the remaining sites.
Compliance: Philips consolidated its compliance tracking process by partnering with external provider ENHESA. This will enable the entire compliance requirements of all Philips H&S activities to be tracked in one tool and it will also allow local stand-alone versions to be retired.
Training: Philips consolidated its H&S training requirements into one tool provided by Underwriters Ltd (UL) that is hosted by the Philips University. This enabled over 450 training packages in 10 different languages to be delivered both online and face to face. These training requirements are linked to the PCSS standards and approved by Philips H&S. This capability will allow local stand-alone versions to be retired.
Structure and Responsibility: The H&S structure to support the operational sites and the Field Service organizations continued to be improved, with additional focus on providing support to the evolving manufacturing footprint. Additional support was provided to several Markets including North America, Latin America, France, Italy, Israel and Greece. As part of this, a program to upskill H&S professionals was implemented to provide better internal development opportunities.
Internal Health and Safety Audit: Philips completed six audits in 2018. Detailed, evidence-based audits are driving greater verification to ensure that robust H&S programs are in place. We have put in place a process to train H&S leaders to become H&S auditors through a program based on external certification and gaining internal experience. This is linked to personal development goals for H&S professionals.
Cultural Change: We continued to focus our efforts on a proactive cultural transformation through Behavior-Based Safety (BBS). BBS requires a fundamental shift in how we think about and act on Health and Safety before an injury occurs. In 2018 the Philips BBS program was deployed to a further six factories in China, Europe and the USA, giving a total of 14 sites in 2018 (up from 8 sites in 2017). We increased the number of Behavioral Observations to 1,820, representing a 63% increase on 2017. We believe this program will continue to drive down our workplace injuries and will serve as a key pillar for reaching our goal of a 25% reduction in total injuries by 2020.
Metrics: In 2018 we continued to deploy proactive metrics to support the more traditional reactive metrics (TRC and LWIC) and we completed over 15,314 Safety Gemba Walks and 30,540 Safety Kaizen activities. This approach was also designed to support cultural change and drive safety in routine management activities.
In 2018, we recorded 198 TRCs (234 in 2017), i.e. cases where the injured employee is unable to work for one or more days, received medical treatment or sustained an industrial illness.
Philips Group
Total recordable cases per 100 FTE
2016-2018
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Additionally, we recorded 91 Lost Workday Injury Cases (LWICs), i.e. occupational injury cases where the injured person is unable to work for one or more days after the injury. This represents a decrease compared with 113 in 2017. The LWIC rate decreased to 0.13 per 100 FTEs, compared with 0.17 in 2017. The number of Lost Workdays caused by injury increased by 480 days (12%) to 4,650 days in 2018.
Philips Group
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2014 - 2018
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Personal Health businesses
The Personal Health businesses segment showed an improvement in performance in Health and Safety, with 16 LWICs in 2018, compared to 24 in 2017. The LWIC rate decreased from 0.17 in 2017 to 0.11 in 2018. In the Personal Health businesses segment there were 29 recordable cases in 2018 (38 in 2017). This decrease was mainly due to fewer cases in our factories in Asia.
Diagnosis & Treatment businesses
In the Diagnosis & Treatment businesses segment, Health and Safety showed a mixed result in 2018, with 26 LWICs compared to 33 in 2017. The LWIC rate decreased to 0.20 compared to 0.27 in 2017. The total number of recordable cases for the Diagnosis & Treatment businesses segment was 72 (70 in 2017).
Connected Care & Health Informatics businesses
Health and Safety performance in the Connected Care & Health Informatics businesses segment remained fairly stable in 2018: 6 LWICs (5 in 2017). Correspondingly, the LWIC rate increased from 0.15 to 0.16 in 2018. The total number of recordable cases for the Connected Care & Health Informatics businesses segment decreased to 11 in 2018 (20 in 2017), mainly driven by our factories in North America.
Stakeholder engagement
Our engagement with various partners and stakeholders is essential to our vision of making the world healthier and sustainable through innovation. Some of our partnership engagements are described below.
Global partnerships
World Economic Forum
Philips is proud to continue as a strategic partner of the World Economic Forum (WEF), the International Organization for Public-Private Cooperation committed to improving the state of the world. The Forum engages political, business and other leaders to help shape global, regional and industry agendas. In 2018, Philips was an active contributor to WEF programs on value-based care, non-communicable diseases, Universal Health Coverage and digital identity.
We also supported the acceleration of the Compact for Responsive and Responsible Leadership, by co-hosting the International Conference on the Dynamics of Inclusive Prosperity with WEF and Erasmus University Rotterdam. This event brought together leaders from the worlds of business, government, NGOs and academia to discuss the transition towards more responsive and responsible leadership.
In addition, our CEO, Frans van Houten, co-chairs the WEF Platform for Accelerating the Circular Economy (PACE) – a collaborative effort between the public and private sectors to scale up the adoption and implementation of circular business models. Philips remains committed to take back all large medical systems equipment that becomes available to us by 2020, and to extend circular practices to all medical equipment by 2025.
Future Health Index
Now in its fourth year, the Future Health Index (FHI) – Philips’ flagship research-based platform – continues to explore how countries can overcome global health challenges and build sustainable, fit-for-purpose national health systems. In 2016, the FHI measured perceptions to produce a snapshot of how healthcare is experienced on both sides of the patient-professional divide, while in 2017 it compared these perceptions to the reality of healthcare delivery systems in each country researched.
The 2018 Future health Index builds on the increasing consensus that value-based care is the best model for addressing global healthcare challenges, and explores the main barriers to the large-scale adoption of value-based care to support healthcare system transformation. With the support of key healthcare opinion leaders, three FHI reports were released over the course of the year, addressing how value can be best measured and assessed in a national health system; how data collection and analysis can drive better healthcare outcomes; and how telehealth technologies can enable better health experiences for patients and healthcare professionals.
Working on global issues
Sustainable Development Goals
Our work is aligned with three of the United Nations’ Sustainable Development Goals (SDGs) – Health and well-being for all (SDG 3), Sustainable consumption and production (SDG 12), and Climate action (SDG 13), and we have committed to having 95% of our revenue linked to the UN SDGs by 2020. In 2018 we supported a number of important SDG programs including Non-Communicable Diseases, Universal Health Coverage, Sustainable Consumption and Production, and Climate Change.
SDG3
Universal Health Coverage – We published a special report, ‘Taking Action’, which pulls in key recommendations for the private sector in helping to advance Universal Health Coverage (UHC). During the World Bank Spring Meetings in Washington DC we hosted a gathering of ministers and key opinion leaders in healthcare to discuss how to transform health systems in emerging markets, scaling successful business models to achieve UHC.
In September, we signed a memorandum of understanding with the United Nations Population Fund (UNFPA) to jointly develop programs aimed at improving the lives of 50 million women and girls by 2025 in countries where health challenges are most acute. As a first step in the cooperation, developed in close collaboration with the Republic of Congo’s Ministry of Health and all relevant stakeholders, Philips intends to implement a large-scale program in the Republic of Congo, aimed at improving the delivery of maternal and newborn healthcare at all levels.
Our CEO, Frans van Houten, co-signed an open letter on the need for investment in human capital – the knowledge, skills, and health that people accumulate throughout their lives. This coincided with the launch of the World Bank Group’s Human Capital Index – a simple but effective metric for human capital outcomes such as child survival, student learning, and adult health.
Non-Communicable Diseases (NCDs)
The 73rd United Nations General Assembly in September 2018 staged the third High-level Meeting on the prevention and control of NCDs, which reviewed global and national progress in putting measures in place that protect people from dying too young from heart and lung diseases, cancers and diabetes.
We partnered with DEVEX, the Asian Development Band, the NCD Alliance, Novartis and NovoNordisk in starting an online conversation to analyze the impact of NCDs in low- and middle-income countries. We discussed with a dozen key opinion leaders and polled feedback from more than 1,200 health professionals to gain insights on early detection and diagnosis as a critical link for effective NCD management. The research recommendations include strengthening capacity in primary care systems, educating and empowering community-level health workers, and designing and implementing efficient policies and solutions. We discussed the findings of the research as well as how NCDs affect the global agenda to achieve universal health coverage in a high-level panel discussion in collaboration with DEVEX and the World Economic Forum as a side event to the Sustainable Development Impact Summit.
Health & Healthcare in Europe
With the European Commission’s Communication on Artificial Intelligence and the political declaration of willingness for a coordinated AI plan for Europe, Philips and POLITICO organized an expert panel discussion covering the views of the European Commission, hospitals, think tanks and start-ups on the potential of AI to support the digital transformation of healthcare. Additionally, Philips and POLITICO hosted a debate on The Future of Health in Europe with Members of the European Parliament, European policy-makers, medical professionals, patients, and health innovators.
SDG 12
PACE
Our CEO, Frans van Houten, co-chairs the WEF Platform for Accelerating the Circular Economy (PACE) – a collaborative effort between the public and private sectors to scale up the adoption and implementation of circular business models.
SDG 13
Philips has committed to become carbon-neutral in its operations by 2020 and made good progress on this in 2018. The company’s Sustainability program and targets were evaluated and approved by the Science Based Targets initiative, making Philips the first health technology company to achieve this.
Improving access to care
Philips continued on its journey towards improving access to care in developing countries, especially in Africa. We have extended our pledge to improve the lives of 300 million people a year in underserved healthcare communities by 2025, with a specific focus on women and children. The needs of women and children are critical and at the heart of the need to achieve Universal Health Coverage.
The modular Community Life Center (CLC) solution for radical improvement of primary care was further optimized and prepared for large-scale deployment. In the course of 2017, CLCs were inaugurated in Kenya, South Africa and the Democratic Republic of Congo. A further two CLCs were opened in South Africa in 2018.
Philips was the first private sector company to provide support to the Sustainable Development Goals 3 window of the newly created SDG Partnership Platform Kenya, an initiative of the UN, the Government of Kenya and the private sector. The SDG 3 window of the platform aims to ‘Demonstrate the power of public-private collaboration to transform primary healthcare, and attain Universal Health Coverage by 2021, in support of the broader attainment of the Sustainable Development Goals (SDGs), improving health & well-being of 46 million Kenyans’. Through co-creations with county governments, Philips will engage in large-scale public private partnerships for improving primary care.
Philips and global healthcare leaders develop innovative resuscitation device to help reduce neonatal mortality
We successfully developed the Augmented Infant Resuscitator (AIR) to help caregivers effectively resuscitate asphyxiated newborn babies. Developed in collaboration with the Consortium for Affordable Medical Technologies (CAMTech) at Massachusetts General Hospital Global Health, the Philips Augmented Infant Resuscitator aims to reduce neonatal mortality, especially in parts of the world that are underserved in terms of healthcare. It is expected to be available in limited volume in selected markets prior to scaling up availability in low- and middle-income countries.
Supplier indicators
Philips’ mission to improve people’s lives extends throughout our value chain. At Philips, we have a direct business relationship with approximately 4,900 product and component suppliers and 19,000 service providers. Our supply chain sustainability strategy is updated annually through a structured process, combined with dedicated biennial multi-stakeholder dialogs. From this, we have developed multiple programs aimed at driving sustainable improvement. These programs cover compliance with our policies, improvement of our suppliers’ sustainability performance, our approach towards responsible sourcing of minerals, and our circular procurement practices.
Supplier sustainability compliance
Two core policy documents form the basis of our supplier sustainability compliance approach: the Supplier Sustainability Declaration and the Regulated Substances List.
Supplier Sustainability Declaration (SSD)
The SSD sets out the standards and behaviors Philips requires from its suppliers. The SSD is based on the Responsible Business Alliance (RBA) Code of Conduct, in alignment with the UN Guiding Principles on Business and Human Rights and key international human rights standards including the ILO Declaration on Fundamental Principles and Rights at Work and the UN Universal Declaration of Human Rights. It covers topics such as Labor, Health & Safety, Environment, Ethics, and Management Systems.
Regulated Substances List (RSL)
The RSL specifies the chemical substances regulated by legislation. Suppliers are required to follow all the requirements stated in the RSL. Substances are marked as restricted or declarable.
All suppliers are required to commit to the SSD and RSL. Through integration of a Sustainability Agreement (SA) in our General Purchase Agreement, suppliers declare compliance to both the SSD and RSL. Upon request, they provide additional information and evidence.
Supplier Sustainability Performance (SSP) - 'Beyond Auditing'
In 2016, Philips moved away from its traditional approach to audit suppliers, which it had implemented since 2004. Insights from data analysis showed this old approach was insufficient to drive sustainable improvements. Our SSP approach, first piloted in 2016, focuses on:
a systematic approach to improve the sustainability of our supply chain
continuous improvement against a set of recognized and global references
collaboration, increased transparency, clear commitments, and ensuring suppliers meet the agreed targets
encouraging our suppliers, industry peers and cross-industry peers to adopt our approach
This systematic approach is shown in the figure below and is a high-level representation of the SSP program.
First, a set of references, international standards, and Philips requirements are used to develop the Frame of Reference, which covers management systems, environment, health & safety, business ethics and human capital. For each, the maturity level of suppliers is identified in the Program Execution Wheel, which assesses suppliers against the Plan–Do–Check–Act (PDCA) cycle. Suppliers are then categorized using a Supplier Classification model, which differentiates on the basis of supplier maturity, resulting in supplier-specific proposals for improvement. The SSP process is monitored and adjusted through continuous feedback loops. The outcome of the SSP assessment is a supplier sustainability score ranging from 0 to 100. This score is based on supplier performance in environmental management, health & safety, business ethics, and human capital.
Supplier classification
Four different categories are used to assign those suppliers that are in scope after validation of the SAQ. These four categories are BiC (Best in Class), SSIP (Supplier Sustainability Improvement Plan), DIY (Do It Yourself) and PZT (Potential Zero Tolerance). The PZT status is a temporary status and requires immediate attention and action. Depending on the categorization, suppliers are engaged in different ways to improve their sustainability performance.
If a (Potential) Zero Tolerance is identified, immediate action is taken. If the requested additional information and evidence lead to the conclusion that there is no structural Zero Tolerance, the supplier’s status will be changed and the supplier will go back to the original track in the program. If the conclusion gives rise to a structural Zero Tolerance, the supplier is required to:
propose a plan to mitigate and/or resolve the identified Zero Tolerance(s)
commit to structurally resolving the Zero Tolerance
provide regular updates and evidence
avoid quick-fixing
Consistent with previous years, multiple Zero Tolerances have been identified. Based on the results, we concluded that our structural approach, open communication, and focus on collaboration has resulted in increased transparency. Consequently, these Zero Tolerances were also mitigated in a structural manner.
Philips defines six Zero Tolerances:
Fake or falsified recordsChild and/or forced labor
Immediate threats to the environmentImmediate threats to worker health and safetyFailure to comply with regulatory and/or Philips requirementsWorkers’ monthly income (covering salary for regular hours and overtime, tax deductions, social insurance) failing to meet regulatory requirements.
For more details on the SSP process, refer to the SSP brochure.
The impact of the SSP program on supplier performance
Philips measures the impact of the SSP engagement through an improvement metric, which represents the pro rata change in performance from one year to the next. In 2018, the average year-on-year improvement is 25% for suppliers that entered the program in 2016 and 2017. The number of employees impacted at suppliers participating in the SSP program was approximately 240,000.
In 2018, 52 suppliers were added to the SSP program. Out of the population of suppliers that entered the program in 2016 and 2017, 161 suppliers were still active in 2018.
Recognition by the Dutch Crystal Prize
In 2018, Philips received the Dutch ‘Crystal Prize’, which focused this year on ‘Chain Transparency’. Organized by the Dutch Ministry of Economic Affairs in conjunction with the Netherlands Institute of Chartered Accountants (NBA), the award recognizes Philips for openness about its supply chain responsibility, transparency regarding its own impact, its cooperation with other stakeholders, and evidence of supply chain responsibility in its strategy and sustainability programs. ‘Philips’ approach to Sustainable Supply Chain Management is an inspiring example for others’
Monika Milz, chair of the jury
Recognition by the Sustainable Purchasing Leadership Council (SPLC)
The SPLC presented the ‘Leadership Award for Supplier Engagement’ to Philips. The SPLC convenes buyers, suppliers, and public interest advocates to develop programs that simplify and standardize sustainable purchasing efforts by large organizations. Every year, the SPLC recognizes global organizations for their leadership in sustainable purchasing. In 2018, it recognized Philips’ Supplier Sustainability Performance program has driven exceptional improvements in sustainable performance across the company’s value chain. ‘The SSP approach focuses on holistic sustainability performance improvement and provides resources and training on setting goals and providing honest and accurate information’
~ Sustainable Purchasing Leadership Council
Additional progress made in 2018
Apart from the inclusion of additional suppliers annually into the award-winning SSP program, Philips is actively working to make the program more efficient and effective by forming a research consortium, together with Eindhoven University of Technology and the Jheronimus Academy of Data Science. The focus of this consortium is on applying the latest insights in data science and machine learning methods in order to make the SSP program more efficient in determining the sustainability maturity of suppliers, while also increasing the effectiveness of our supplier improvement approach.
In addition, Philips has ramped up its cross-industry engagement, advocating further adoption of the SSP approach. The program design enables various codes of conduct to be included. Through public speaking engagements and 1-on-1 conversations with cross-industry peers, Philips is making the methodology available to other companies that want to make a sustainable impact in their supply chain.
Responsible Sourcing of Minerals
The supply chains for minerals are long and complex. Philips does not source minerals directly from mines as there are typically 7+ tiers between end-user companies like Philips and the mines where the minerals are extracted. The extraction of minerals can take place in conflict-affected and high-risk regions, where mining is often informal and unregulated and carried out at artisanal small-scale mines (ASM). These ASMs are vulnerable to exploitation by armed groups and local traders. Within this context, there is an increased risk of severe human rights violations (forced labor, child labor or widespread sexual violence), unsafe working conditions or environmental concerns.
Philips addresses the complexities of the minerals supply chains through a continuous due diligence process combined with multi-stakeholder initiatives to promote the responsible sourcing of minerals.
Conflict minerals due diligence
Each year, Philips investigates its supply chain to identify smelters of tin, tantalum, tungsten and gold in its supply chain and we have committed to not purchasing raw materials, subassemblies, or supplies found to contain conflict minerals.
Philips applies collective cross-industry leverage through active engagement via the Responsible Minerals Initiative (RMI, formerly known as the Conflict Free Sourcing Initiative (CFSI)patterns). RMI identifies smelters that can demonstrate through an independent third-party audit that the minerals they procure are conflict-free. In 2018, Philips continued to actively direct its supply chain towards these smelters.
The Philips Conflict Minerals due diligence framework, measures and outcomes are described in the Conflict Minerals Report that we file annually to the U.S. Securities and Exchange Commission (SEC). Philips has this report voluntarily audited by an independent third party. The conflict minerals report is also publicly available on Philips’ website.
Multi-stakeholder initiatives for responsible sourcing of minerals
We believe that a multi-stakeholder collaboration in the responsible sourcing of minerals is the most viable approach for addressing the complexities of minerals value chains.
European Partnership for Responsible Minerals (EPRM)
Philips is a founding partner of EPRM and has been a strategic member since its inception in May 2016. EPRM is a multi-stakeholder partnership between governments, companies, and civil society actors working toward more sustainable minerals supply chains. The goal of EPRM is to create better social and economic conditions for mine workers and local mining communities by increasing the number of mines that adopt responsible mining practices in Conflict and High Risk Areas (CAHRAs).
EPRM is an accompanying measure to the EU Conflict Minerals Regulation dedicated to making real change ‘on the ground’. In 2018, Philips actively participated in a working group that focused on making the on-the-ground projects financially and strategically effective. From here, the call for new proposals was developed, decisions on co-funding were made and criteria for scale-up potential were created. From January 2019 onwards, Philips is also an active board member in EPRM, representing the industrials pillar and serving to advance the organization further.
IRBC Responsible Gold Agreement
In June 2017 Royal Philips signed the Responsible Gold Agreement, joining a coalition to work on improving international responsible business conduct across the gold value chain. Signees include goldsmiths, jewelers, recyclers, NGOs, electronics companies, trade unions, and the Dutch government. This partnership intends to bring about cooperation between companies, government, trade unions, and NGOs to prevent abuses within production chains.
From this partnership, Philips co-developed a project with several other parties including civil society actors, to facilitate sourcing of responsible gold from Uganda. The project is aimed specifically at artisanal and small-scale mines (ASM) and works to establish a sustainable, traceable gold supply chain with improved working conditions for miners. The approach is designed to be scaled up and serves as a potential blueprint for mines in other regions.
Responsible Mica Initiative
Mica is commonly used in pearlescent pigments for coatings and cosmetics. In the electronics sector, Mica is also used as an electrical insulator. Mica extraction is characterized by unsafe working conditions and is typically carried out by miners on a low income with a basic level of education. In order to support improvement of the labor conditions at Mica mines, Philips became an associate member of the Responsible Mica Initiative (RMI) in 2016, a cross-sector association that facilitates close collaboration between various stakeholder groups.
In addition, Philips initiated a multi-year program together with Terre des Hommes and several other organizations, aiming to drive systemic change at several Mica mines in India. The program entails a multi-pronged approach to improve the living conditions of Mica miners and their families. The aim of this project is to deliver on-the-ground education and empowerment, while enabling fairer prices and access to the market.
Circular Procurement
At Philips, we consider the transition from a linear to a circular economy to be a necessary condition for a sustainable world. Consequently, our 2020 target is to generate 15% of revenues from circular products that are optimized for parts harvesting, refurbishment, and technical and economic lifetime extension. In our operations, we effectively reduce, recycle and re-use waste as much as possible, and we aim to send zero waste to landfill by 2020.
Procurement plays a leading role in Philips’ transition towards a circular economy as it enables our circular design choices to be realized. In addition, it enables buy-back of parts with a high residual value for suppliers. Internally, Philips’ office environments increasingly incorporate circularity, facilitating circular business models for suppliers. Examples range from recycled plastics in carpets to pay-per-print copy machines, incentivizing manufacturers to increase ink efficiency and the uptime of their machines.
For more information on our Circular Economy initiatives, please refer to sub-section 13.4.1, Circular Economy, of this Annual Report.
Carbon emissions in our supply chain
Since 2003, Philips has looked at ways to improve the environmental performance of its suppliers. When it comes to climate change, we have adopted a multi-pronged approach: reducing the environmental impacts of our products, committing to carbon neutrality in our own operations, and engaging with our supply chain to reduce their carbon footprint. Through our partnership with the CDP supply chain program, Philips motivates its suppliers to disclose emissions, embed board responsibility on climate change, and actively work on reduction activities.
In 2011 we partnered with the CDP Supply Chain, through which we invite suppliers to disclose their environmental performance and carbon intensity. This year, there was a response rate of 77% (2017: 69%). From this group, 64% committed to carbon emission targets and 80% indicated there is board-level governance in place for climate change (2017: 58%). Our suppliers undertook projects in 2018 that resulted in savings on carbon emissions amounting to 40 million metric tonnes CO2, of which 4% was attributed specifically to our engagement.
Environmental Footprint China
Philips proactively supports its Chinese suppliers in reducing their environmental footprint whilst at the same time contributing to Philips’ sustainability strategy.
Achievements in 2018
Philips’ Supplier Sustainability team provided eight training sessions on the Environment as well as on Health and Safety, which were attended by 177 suppliers
Through our SSP engagement program, multiple suppliers improved their environmental performance on hazardous waste handling, waste water and air-treatment facilities, and fire-prevention initiatives. On average, the environmental performance of suppliers in the program showed a year-on-year improvement of 17%.
Philips' Supplier Sustainability team monitored the environmental performance of its 2nd tier suppliers through a database from the Institute of Public & Environmental Affairs (IPE)
Philips was ranked 19th among 306 brands (20th in 2017, 25th in 2016) on the annual IPE list
Environmental statements
This section provides additional information on (some of) the environmental performance parameters reported in Environmental performance.
Circular Economy
The transition from a linear to a circular economy is essential to create a sustainable world. A circular economy aims to decouple economic growth from the use of natural resources and ecosystems by using these resources more effectively.
Circular Economy program
The Circular Economy program at Philips ran for the sixth year in 2018. It consists of five strategic pillars:
Close loops with current products through take-back, refurbishment, and recyclingEmbed circular economy principles in product design and business models
Collaborate with stakeholders outside Philips
Activate and train internal employees
Measure and monitor with proof points and metrics
Philips leverages partnerships with the Ellen MacArthur Foundation, Circle Economy Netherlands and the World Economic Forum. For example, through the leadership of our CEO and supported by the Circular Economy program, Philips teamed up with the World Economic Forum to establish a public-private platform to accelerate the circular economy (PACE), launched in Davos in January 2017. This platform gained further momentum throughout 2018 and supported projects covering diverse topics such as plastics, electronics, food and bio-economy, as well as new market models.
At Philips we see huge opportunities for businesses to provide greater value to customers through innovative service models, smart upgrade paths, or product take-back and remanufacturing programs. Philips made a commitment in January 2018 at the World Economic Forum in Davos to fully close the loop onincludes all large medical systems equipment that becomes available to us by 2020, and we will continue to expand these practices until we have covered all professional equipment. By 'closing the loop' we mean that we will actively pursue the trade-in of equipment such as MRI, CT and Cardiovascular systems and we will take full control to ensure that all traded-in materials are repurposed in a responsible way. Philips has spearheaded the Capital Equipment Coalition, a group of nine front-running large equipment manufacturers with similar ambitions.
Circular Revenues
In 2018 the Circular Revenues KPI deployed the year before was further embedded in the internal target-setting. The Circular Revenues percentage reflects our revenues from validated circular products, services and solutions as a % of total Philips revenues. The validation is based on the following Philips circularity requirements, which might be further refined in the future:
1. Performance and Access-based models
Revenues from contracts that include the condition that Philips has individual end-of-life responsibility for the product.
2. Refurbished, Reconditioned & Remanufactured products/systems
Revenues from selling refurbished, reconditioned or remanufactured products/systems with re-used components >30% by total weight of product/system.
3. Refurbished, Reconditioned & Remanufactured components
Revenue from harvested components that have either been refurbished, reconditioned or remanufactured. The harvested component must contain >30% re-used parts or materials by total component weight. The component can either be a stand-alone component or part of a new product/system. The commercial value of the component is considered irrespective of whether it is part of a service, warranty or sale.
4. Upgrades/refurbishment on site or remote
Revenue from upgrades of existing hardware and software either on site or remotely.
5. Products with recycled plastics content
Revenues from products with a recycled plastics content of >25% by total weight of eligible plastics.
We have the ambition to generate a total of 15% of our revenues from circular propositions by 2020. This is double the rate of 7% baseline achieved in 2015. The result for 2018 is 12%. The main contributing revenue streams are as follows:
Personal Health businesses
Revenues from our B2C products that contain a large amount of recycled plastics, such as our coffeemakers and domestic appliances. Revenues from providing our home sleep and respiratory equipment as a rental option in some markets.
Diagnosis & Treatment businesses
Our Diamond Select offer of refurbished imaging systems for sale, system upgrades at customer premises to enhance performance and extend lifetime, repair and reuse of spare parts.
Connected Care & Health Informatics businesses
A number of Philips businesses based on subscription models, such as the Philips Lifeline business and others.
Closing material loops
In addition to tracking circular revenue, we are also working to achieve transparency on the material flows connected with the Philips businesses. In 2018 Philips put a total of some 257,000 tonnes of products on the market. This assessment is based on sales data combined with product-specific weights. 85% of the total product weight was delivered through our B2C businesses in Personal Health and 15% through our B2B businesses (Diagnosis & Treatment businesses and Connected Care & Health Informatics businesses).
We can account for some 20,000 tonnes or approximately 8% of these products being collected, re-used or recycled globally. Europe has advanced collection systems in place. In these countries we have an average return rate of around 40-50%. National legislation is required to create the level playing field needed to set up efficient recycling systems beyond the EU. The main pathways and quantities for material re-use in 2018 were:
Trade-in and return for resale as refurbished products and for spare parts harvesting (Diagnosis & Treatment and Connected Care & Health Informatics) some 2,130 tonnes, a decrease compared to 2,400 tonnes in 2017.Collective collection and recycling schemes in accordance with the EU Waste Electrical and Electronic Equipment (WEEE) collection schemes. These products are broken down into the main material fractions and provided to the market via our recycling partners800 tonnes from Diagnosis & Treatment and Connected Care & Health Informatics field returns, following the WEEE category 8 classification, indicating a slight decrease comparedinnovation spend. In addition, innovation spend that contributes to the previous year (900 tonnes)16,000 tonnes fromGreen Products and healthy living at Personal Health followingis included. Finally, innovation spend at Other that addresses the WEEE category 2 classification
SDGs 3 and 1 is included.VOC
OnVolatile organic compounds (VOCs) are organic chemicals that have a high vapor pressure at ordinary room temperature. Their high vapor pressure results from a low boiling point, which causes large numbers of molecules to evaporate or sublimate from the demand side,liquid or solid form of the Personal Health businesses re-integrated significantly more recycled plastics in new products thancompound and enter the previous year, closingsurrounding air, a trait known as volatility.
Voluntary turnover
Voluntary turnover covers all employees who resigned of their own volition.
Waste Electrical and Electronic Equipment (WEEE)
The Waste Electrical and Electronic Equipment Directive (WEEE Directive) is the material loopEuropean Community directive on waste electrical and electronic equipment setting collection, recycling and recovery targets for some 1,840 tonnes (1,850 tonnes in 2017)all types of plastics due to regulatory headwindselectrical goods. The directive imposes the responsibility for the disposal of waste electrical and electronic equipment on the importmanufacturers of recycled materials.
More information can be found on the circular economy website.such equipment.
Weighted Average Statutory Tax Rate (WASTR)
Biodiversity
Philips recognizes the importance of healthy ecosystems and a rich biodiversity for our company, our employees, and society as a whole. We aim to minimize any negative impacts and actively promote ecosystem restoration activities.
The Philips Biodiversity policy was issued in 2014 and progress has been made on biodiversity management, on sites (e.g. impact measurement), on natural capital valuation, and at management level. Most initiatives were led by the environmental coordinators at our sites, for example at our Best and Drachten sites in The Netherlands, which serve as role models on the topic of biodiversity.
After Philips participated in the developmentreconciliation of the Natural Capital Protocol in 2015 and volunteered as a pilot company, we developed our first Environmental Profit and Loss account (EP&L) in 2017. We have updated the EP&L for 2018: please refer to Environmental performance. As can be derived from the EP&L, the environmental impact of the Philips sites is limited as they are not very energy-intensive and do not emit large quantities of high-impact substances. With our drive to become carbon-neutral in our operations, the impact of our sites will only become less. The impact of our supply chain, however, is significantly higher than our own impact. For this reason, we used the identified hot-spots in our supply chain as input for our CDP Supply Chain program. More information on this program can be found in Supplier indicators. Furthermore, our focus on Circular Economy will reduce the environmental impact of our supply chain. This impact is most significant during the use-phase of our products, which underlines the importance of our continued focus on energy efficiency improvements in our products and our lobbying efforts for more demanding industry standards, for example via COCIR. We are pleased that our 2020-2040 targets have been approved by the Science Based Targets initiative, confirming that these are in line with the 2 degrees scenario as per the Paris agreement.
Sustainable Operations
Our Sustainable Operations programs relate to improving the environmental performance of our manufacturing facilities and focus on most of the contributors to climate change, but also address water, recycling of waste and chemical substances.
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Energy use in manufacturing
Total energy usage in manufacturing amounted to 3,060 terajoules in 2018, of which Personal Health accounted for about 49% and Diagnosis & Treatment 40%. Energy consumption at Philips level was comparable to 2017. Personal Health energy consumption increased by 3%, mainly driven by increased production volumes at several sites, partly offset by changes in the organization. Diagnosis & Treatment energy consumption decreased by 5% due to organizational changes, and Connected Care & Health Informatics reported 2% higher energy consumption.
Philips Group
Total energy consumption in manufacturing
in terajoules
2014 - 2018
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Operational carbon footprint and energy efficiency - 2018 details
Becoming carbon-neutral in our operations by 2020 is one of the key targets, and we have already reduced our operational carbon footprint very significantly during the past years (39% decrease in CO2 emissions in 2018 compared to our 2007 base year). Our carbon footprint decreased by 10% compared to 2017, resulting in a total of 766 kilotonnes CO2.
Philips Group
Operational carbon footprint
in kilotonnes CO2-equivalent
2014 - 2018
The 2018 results can be attributed to several factors:
Accounting for 3% of our total footprint, total CO2 emissions from manufacturing decreased by 53% due to a significantly higher share of electricity from renewable sources (now at 99.8% in our manufacturing sites).CO2 emissions from non-industrial operations (offices, warehouses, etc.), representing 5% of total emissions, decreased by 2% in 2018 due to implemented energy efficiency projects and a higher share of electricity from renewable sources.Total CO2 emissions related to business travel, accounting for 18% of our carbon footprint, showed an increase of 2% compared to 2017, due to an increase in shorter-distance air travel (<4,000 km), where the emissions per km are higher compared to long-haul air travel (>4,000 km). Combined with increased DEFRA emissions factors for air travel, this led to an overall increase in business travel-related emissions of 2%.Overall CO2 emissions from logistics, representing 73% of the total, decreased by 9% compared to 2017. This was partly driven by a strong decrease in air freight as a result of the air freight reduction program started in 2018. Various measures have been introduced to drive down emissions from air freight, such as multi-modal shipments, a transition from air to ocean freight, a stricter air freight policy, and optimization of our warehouse locations.
Philips Group
Operational carbon footprint for logistics
2014 - 2018
Carbon emissions in manufacturing
Greenhouse gas emissions from our manufacturing operations totaled 26 kilotonnes CO2-equivalent in 2018, 53% lower than in 2017. Indirect CO2 emissions represented 8% of the total, which decreased by 94% due to the increased use of electricity generated from renewable sources. Direct CO2 emissions were comparable with the previous years. Emissions from other greenhouse gases increased by 2 kilotonnes.
Philips Group
Total carbon emissions in manufacturing
in kilotonnes CO2-equivalent
2014 - 2018
Philips Group
Total carbon emissions in manufacturing per segment
in kilotonnes CO2-equivalent
2014 - 2018
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CO2 emissions in 2018 were 29 kilotonnes CO2-equivalent lower than in 2017. This was driven by the increased use of electricity generated from renewable sources in all businesses in various regions. At Personal Health, CO2 emissions decreased due to an increase in the use of electricity generated by renewable sources, but this was partially offset by operational changes. Diagnosis & Treatment decreased its CO2 emissions due to an increase in use of electricity generated by renewable sources and lower energy consumption. Connected Care & Health Informatics reported comparable CO2 emissions. In 2018, all our US operations were powered by wind energy. Additionally, our operations in the Netherlands started to receive electricity from the Bouwdokken and Krammer wind farms, clear steps towards our ambition to become carbon-neutral in our operations by 2020.
Taskforce on Climate-related Financial Disclosures (TCFD)
Our 2018 integrated financial, social and environmental report aims to follow the recommendations of the TCFD. More detailed information can be found on the Sustainability website.
Hazardous substances emissions
In the ‘Healthy people, Sustainable planet’ program, new chemical-reduction targets have been defined for the most relevant categories of substances for Philips, i.e. hazardous substance emissions and VOC (Volatile Organic Compounds) emissions. As part of the deployment of the new program, reduction targets at our industrial sites have been agreed.
Philips Group
Hazardous substances emissions
2015 - 2018
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In 2018, emissions of hazardous substances decreased by 23%, mainly due to the phasing-out of harmful chemicals and process optimizations at a Diagnosis & Treatment site and a Personal Health site. Changes to manufacturing processes and increased production at multiple sites also had an impact on emissions. Connected Care & Health Informatics sites reduced their emissions.
VOC emissions
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VOC emissions decreased by 10% in 2018 to 128 tonnes. VOC emissions in the Personal Health businesses segment (representing 65% of total VOC emissions) decreased 10% compared to 2017, mainly driven by a newly installed chemicals emissions treatment system in China and changes to the lacquering process. These reductions were mitigated by changes in the product mix and higher volumes. VOC emissions in the Diagnosis & Treatment businesses segment decreased significantly due to changes in the organization mitigated by increased production volumes.
ISO 14001 certification
Most of the Philips manufacturing sites are certified under the umbrella certificates of the businesses. In 2018, 83% of reporting manufacturing sites were certified.
Philips Group
ISO 14001 certifications
as a % of all reporting organizations
2014 - 2018
Environmental incidents
In 2018, two environmental incidents were reported at two Diagnosis & Treatment sites. These incidents related to leakage or minor spills and were reported to the authorities where required by local legislation. Immediate actions were taken to remediate the effect. Three non-compliances were reported. In Personal Health, one was caused by exceeding the legal noise limits in the surrounding area, while another related to exceeding the limit on metal concentration in discharged wastewater. No fine was issued after the site responded and corrective action was taken. At one Diagnosis & Treatment site, one non-compliance was reported relating to waste water, resulting in a fine of EUR 1,500.
To find out about our health and safety, waste, water and emissions metrics at global, regional and market level, go to https://www.results.philips.com/#!/interactive-worldmap
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1Includes manufacturing and non-manufacturing sites
Assurance report of the independent auditor
To: The Supervisory Board and Shareholders of Koninklijke Philips N.V.
Our opinion
We have audited the sustainability information in the accompanying annual report for the year 2018 of Koninklijke Philips N.V. (the Company) based in Eindhoven, the Netherlands. An audit is aimed at obtaining a reasonable level of assurance.
In our opinion, the sustainability information presents, in all material respects, a reliable and adequate view of:
The policy and business operations with regard to sustainability
The thereto related events and achievements for the year 2018
in accordance with the Sustainability Reporting Standards (option Comprehensive) of the Global Reporting Initiative (GRI) and applied supplemental reporting criteria as included in section 'Approach to sustainability reporting' of the annual report.
The sustainability information consists of 'Societal impact' and section 'Sustainability statements', of the annual report.
Basis for our opinion
We have performed our audit on the sustainability information in accordance with Dutch law, including Dutch Standard 3810N, “Assurance-opdrachten inzake maatschappelijke verslagen” (Assurance engagements relating to sustainability reports), which is a specific Dutch Standard thateffective tax rate is based on the International Standard on Assurance Engagements (ISAE) 3000, “Assurance Engagements other than Audits or Reviewsapplicable statutory tax rate, which is a weighted average of Historical Financial Information”. Our responsibilities under this standard are further described inall applicable jurisdictions. This weighted average statutory tax rate (WASTR) is the Our responsibilities for the auditaggregation of the sustainability information section of our report.
We are independent of Koninklijke Philips N.V. in accordance with the EU Regulation on specific requirements regarding statutory audit of public-interest entities, the Wet toezicht accountantsorganisaties (Wta, Audit firms supervision act), the Verordening inzake de onafhankelijkheid van accountants bij assurance-opdrachten (ViO, Code of Ethics for Professional Accountants, a regulation with respect to independence) and other relevant independence requirements in the Netherlands. This includes that we do not perform any activities that could result in a conflict of interest with our independent assurance engagement. Furthermore we have complied with the Verordening gedrags- en beroepsregels accountants (VGBA, Dutch Code of Ethics).
We believe the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Reporting criteria
The sustainability information needs to be read and understood together with the reporting criteria. Koninklijke Philips N.V. is solely responsible for selecting and applying these reporting criteria, taking into account applicable law and regulations related to reporting.
The reporting criteria used for the preparation of the sustainability information are the Sustainability Reporting Standards of the GRI and the applied supplemental reporting criteria as disclosed in section 'Approach to sustainability reporting' of the annual report.
Materiality
Based on our professional judgment we determined materiality levels for each relevant part of the sustainability information and for the sustainability information as a whole. When evaluating our materiality levels, we have taken into account quantitative and qualitative considerations as well as the relevance of information for both stakeholders and the Company.
Limitations to the scope of our audit
The sustainability information includes prospective information such as ambitions, strategy, plans, expectations and estimates. Inherent to prospective information, the actual future results are uncertain. We do not provide any assurance on the assumptions and achievability of prospective information in the sustainability information.
The references to external sources or websites in the sustainability information, excluding “Methodology for calculating Lives Improved”, “Methodology for calculating Environmental Profit & Loss Account”, and “GRI content index”, are not part of the sustainability information as audited by us. We therefore do not provide assurance on this information.
Responsibilities of the Board of Management and the Supervisory Board for the sustainability information
The Board of Management is responsible for the preparation of the sustainability information in accordance with the reporting criteria as included in the section Reporting criteria, including the identification of stakeholders and the definition of material matters. The choices madebefore tax multiplied by the Board of Management regarding the scope of the sustainability information and the reporting policy are summarized in section 'Approach to sustainability reporting' of the annual report.
The Board of Management is also responsibleapplicable statutory tax rate without adjustment for such internal control as the Board of Management determines is necessary to enable the preparation of the sustainability information that are free from material misstatement, whether due to fraud or errors.
The Supervisory Board is responsible for overseeing the Company’s reporting process.
Our responsibilities for the audit of the sustainability information
Our responsibility is to plan and perform the audit in a manner that allows us to obtain sufficient and appropriate audit evidence for our opinion.
Our audit has been performed with a high, but not absolute, level of assurance, which means we may not have detected all material errors and fraud.
We apply the Nadere voorschriften kwaliteitssystemen (NVKS, Regulations for Quality management systems) and accordingly maintain a comprehensive system of quality control including documented policies and procedures regarding compliance with ethical requirements, professional standards and other relevant legal and regulatory requirements.
We have exercised professional judgment and have maintained professional skepticism throughout the audit, performed by a multi-disciplinary team, in accordance with the Dutch assurance standards, ethical requirements and independence requirements.
Our audit included amongst others:
Performing an analysis of the external environment and obtaining an understanding of relevant social themes and issues, and the characteristics of the Company
Evaluating the appropriateness of the reporting criteria used, their consistent application and related disclosures in the sustainability information. This includes the evaluation of the results of the stakeholders’ dialogue and the reasonableness of estimates madelosses, divided by the Board of Management
Obtaining an understanding of the systems and processes for collecting, reporting and consolidating the sustainability information, including obtaining an understanding of internal control relevant to our audit, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control
Identifying and assessing the risks that the sustainability information is misleading or unbalanced, or contains material misstatements, whether due to fraud or errors. Designing and performing further audit procedures responsive to those risks, and obtaining audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk that the sustainability information is misleading or unbalanced, or the risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from errors. Fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. These further audit procedures consisted amongst others of:Interviewing management and relevant staff at corporate and local level responsible for the sustainability strategy, policy and results
Interviewing relevant staff responsible for providing the information for, carrying out internal control procedures on, and consolidating the data in the sustainability information
Visits to production sites in China (Suzhou) and Brazil (Varginha) aimed at, on a local level, validating source data and evaluating the design, implementation of controls and validation procedures
Obtaining assurance information that the sustainability information reconciles with underlying records of the Company
Evaluating relevant internal and external documentation, on a test basis, to determine the reliability of the information in the sustainability information
Evaluating the suitability and plausibility of the external sources used in the calculations on which the reported Lives improved and Environmental Profit & Loss Account are based
Evaluating whether the assumptions used in the calculations, on which the reported Lives improved and Environmental Profit & Loss Account are based, are reasonable
Performing an analytical review of the data and trends in the information submitted for consolidation at corporate level
Reconciling the relevant financial information with the financial statements
Evaluating the consistency of the sustainability information with the information in the annual report which is not included in the scope of our audit
Evaluating the overall presentation, structure and content of the sustainability information
Considering whether the sustainability information as a whole, including the disclosures, reflects the purpose of the reporting criteria used
We communicate with the Supervisory Board regarding, among other matters, the planned scope and timing of the audit and significant findings, including any significant findings in internal control that we identify during our audit.group result before tax.
Amsterdam, the Netherlands
February 26, 2019
Ernst & Young Accountants LLP
/s/ J. Niewold
15Exhibits
Index of exhibits
| English translation of the Articles of Association of the Company. |
| Description of securities registered under Section 12 of the Exchange Act (Incorporated by reference to Exhibit 2 to the Annual Report on Form 20-F (File No. 001-05146-01) filed with the Securities and Exchange Commission on February 25, 2020)
The total amount of long-term debt securities of the Company and its subsidiaries authorized under any instrument does not exceed 10% of the total assets of Philips and its subsidiaries on a consolidated basis. Philips agrees to furnish copies of any or all such instruments to the Securities and Exchange Commission upon request. |
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| Services contract between the Company and F.A. van Houten (Incorporated (Incorporated by reference to Exhibit 4 (a) to the Annual Report on Form 20-F (File No. 001-05146-01) filed with the Securities and Exchange Commission on February 23, 2016).25, 2020) |
| Services contract between the Company and A. Bhattacharya (Incorporated (Incorporated by reference to Exhibit 4 (b) to the Annual Report on Form 20-F (File No. 001-05146-01) filed with the Securities and Exchange Commission on February 23, 2016).25, 2020) |
| Services contract between the Company and M.J. van Ginneken |
| Exhibit 4 (d) | Global Philips Performance Share Plan applicable to the Board of Management of Koninklijke Philips N.V.
(Incorporated by reference to Exhibit 4 (c)4(d) to the Annual Report on Form 20-F (File No. 001-05146-01) filed with the Securities and Exchange Commission on February 20, 2018).23, 2021) |
| Agreement and Plan of Merger, by and among The Spectranetics Corporation, Philips Holding USA Inc. and Healthtech Merger Sub, Inc., dated as of June 27, 2017 (Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K (File No. 000-19711; Film No. 17940062) filed by The Spectranetics Corporation with the Securities and Exchange Commission on June 30, 2017).
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| Certification of F.A. van Houten filed pursuant to 17 CFR 240. 13a-14(a). |
| Certification of A. Bhattacharya filed pursuant to 17 CFR 240. 13a-14(a). |
| Certification of F.A. van Houten furnished pursuant to 17 CFR 240. 13a-14(b). |
| Certification of A. Bhattacharya furnished pursuant to 17 CFR 240. 13a-14(b). |
| EY Consent of independent registered public accounting firm. |
| 101.INS | Description of industry terms.
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| XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
| XBRL Taxonomy Extension Schema Document. |
| XBRL Taxonomy Extension Calculation Linkbase Document. |
| XBRL Taxonomy Extension Definition Linkbase Document. |
| XBRL Taxonomy Extension Label Linkbase Document. |
| XBRL Taxonomy Extension Presentation Linkbase Document. |
Signatures
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this Annual Report on its behalf.
KONINKLIJKE PHILIPS N.V. (Registrant)
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/s/F.A. van Houten
F.A. van Houten
(Chief Executive Officer, Chairman of the Board of Management and the Executive Committee) | /s/A. Bhattacharya
A. Bhattacharya
(Chief Financial Officer, Member of the Board of Management and the Executive Committee) |
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Date: February 26, 201922, 2022 |
