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As filed with the Securities and Exchange Commission on February 25, 202021, 2023
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 20-F
(Mark one)
☐ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OFTHEOF THE SECURITIES EXCHANGE ACT OF 1934
OR
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHEOF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20192022
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
☐ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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 BCAmsterdam,, The Netherlands
(Address of principal executive offices)
Marnix van Ginneken,, Chief ESG & Legal Officer
+31 20592059 77232,, marnix.van.ginneken@philips.com,, Philips Center,, Amstelplein 2,, 1096 BCAmsterdam,, The Netherlands
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
| Title of each class | | 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.
None
(Title of class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
None
(Title of class)
Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report.
| Class | | Outstanding at December 31, 20192022 |
| KONINKLIJKE PHILIPS NV | | 890,973,790881,480,527 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 ☐ No
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. ☐ Yes ☒ No
Note - Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer,"accelerated "accelerated filer,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ Emerging growth company ☐
If an emerging growth company that prepares its financial 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 financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification 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. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive- based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
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 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).
Contents
1Introduction
This document contains information required for the Annual Report on Form 20-F for the year ended December 31, 20192022 of Koninklijke Philips N.V. (the 20192022 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 20192022 Form 20-F and is furnished to the Securities and Exchange Commission for information only.
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.
IFRS based information
The audited consolidated financial statements as of December 31, 20192022 and 2018,2021, and for each of the years in the three-year period ended December 31, 2019,2022, included in the 20192022 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 20192022 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.
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 20192022 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’ 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’ internet 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
2Forward-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 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: changesPhilips’ ability to gain leadership in industry or market circumstances; economichealth informatics in response to developments in the health technology industry; Philips’ ability to transform its business model to health technology solutions and political developments; Philips’ increasing focus on health technology; the realization of Philips’ growth ambitionsservices; macroeconomic and results in growth geographies; lack of control over certain joint ventures;geopolitical changes; integration of acquisitions;acquisitions and their delivery on business plans and value creation expectations; securing and maintaining Philips’ intellectual property rights, and unauthorized use of third-party intellectual property rights; compliance with quality standards, product safety laws and good manufacturing practices; exposure to IT security breaches, IT disruptions, system changes or failures; supply chain management; ability to create newmeet expectations with respect to ESG-related matters; failure of products and solutions;services to meet quality or security standards, adversely affecting patient safety and customer operations; breach of cybersecurity; challenges in connection with Philips’ strategy to improve execution and other business performance initiatives; the resilience of Philips' supply chain; attracting and retaining personnel; financial impacts from Brexit;COVID-19 and other pandemics; challenges to drive operational excellence and speed in bringing innovations to market; compliance with regulatory regimes,regulations and standards including data privacy requirements; governmental investigationsquality, product safety and legal proceedings(cyber) security; compliance with regard to possible anticompetitive market practices and other matters; business conduct rules and regulations;regulations including privacy and upcoming ESG disclosure and due diligence requirements; treasury risks and other financialfinancing risks; tax risks; costs of defined-benefit pension plans and other post-retirement plans; reliability of internal controls, financial reporting and management process.process; global inflation.
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.
4Message from the CEO
"Dear Stakeholder,
Philips continuesis a company with strong market leadership positions, an extensive customer base, strong innovation portfolio, talented employees, and a global purpose-driven brand. Yet, as our 2022 performance underlines, we are not extracting the full value of our businesses and have disappointed many stakeholders.
My priority as CEO is to address operational challenges, improve performance, and drive progressive value creation through a strategy of focused organic growth and an innovation model shift to increase the impact of patient- and people-centric innovation at scale. Execution will be the key value driver, with three clear priorities around improving patient safety and quality, creating more reliable and resilient supply chains, and simplifying the way we work, so we are more agile and competitive.
Addressing priority challenges – improved execution as key value driver
Our first priority is to rebuild Philips’ reputation around patient safety and quality. The recall of specific Respironics sleep therapy devices and ventilators let down the patients who depended on them, and the doctors caring for those patients. We apologize deeply for that and are working hard to restore trust with all stakeholders. By year-end, following the substantial ramp-up of capacity, Philips Respironics had completed around 90% of the production required for the delivery of replacement devices to patients.
In consultation with regulators around the world, we have also been conducting a comprehensive test and research program to better understand the potential health risks associated with the use of affected devices. I am very conscious that 18 months is long, but this work had to be done thoroughly. I am encouraged by the test results for the first-generation DreamStation devices, that account for over two thirds of the registered affected devices: the prevalence of visible foam degradation is low, and the emission of the detected volatile organic compounds and particulates are within the applicable safety limits and not expected to result in appreciable harm to health in patients.
We are fully committed to completing the Respironics recall and testing program in 2023. We will also implement all measures agreed with the US Food & Drug Administration (FDA) and US Department of Justice, including a consent decree, and rebuild ties with the FDA and other national regulators. We have put the leadership and end-to-end organization in place and have invested significantly in doing so. Across the company, we have assigned the highest priority to making the necessary step-up in patient safety and quality management and have elevated leadership of patient safety and quality to Executive Committee level.
An integral aspect of quality is the ability to deliver and install equipment on time and to the required specifications. To this end, we are taking decisive action to make progressour supply chain more reliable and predictable, by securing near-term supply, redesigning and pruning our portfolio, and moving from a ‘one size fits all’ supply chain structure to unlock its full potentiala more agile, tailored value chain model per business, with dedicated and upgraded domain expertise. This will secure more deliveries, drive faster order-book conversion and build down inventory.
We are also simplifying the way we work to drive accountability and agility, with the aim of unlocking significant productivity and margin gains. This simplification – with end-to-end businesses with single accountability and more focused targets, supported by a much leaner enterprise layer, strong regions and a reinvigorated culture of patient- and people-centricity, innovation impact and clear accountability – is a primary enabler to drive flawless execution.
The set of measures we have taken includes the very difficult, yet necessary decisions announced in October 2022 and January 2023 to reduce our workforce by 4,000 employees and then a further 6,000 respectively, as we drive a major step-up in productivity. We will strive to implement these reductions with due respect for every employee affected and in line with all local rules and regulations.
We believe that, together, these measures will help us establish the culture, capabilities and infrastructure needed to consistently execute and deliver as a leaderreliable patient- and people-centric health technology company.
Focused organic growth in health technology. Our innovations are driving better health outcomesDiagnosis & Treatment, Connected Care and increased healthcare productivity, while offering a better experience for consumers, patients and healthcare professionals."
Frans van Houten
CEO Royal Philips
Dear Stakeholder,
Personal HealthIn 2019, we continuedAs well as restoring our transformationreputation as a focusedresponsible patient- and people-centric innovation leader in health technology, pursuingwe urgently need to get back on course to create value with sustainable impact. To do this, we will drive organic growth through scale and leadership:
- Focusing investments to accelerate growth in Image Guided Therapy, Ultrasound and Monitoring, where we have strong #1 or #2 positions, and expand our
visionleadership position in Personal Health - Scaling our new Enterprise Informatics business
- Driving margin improvement in Diagnostic Imaging
- Restoring the Sleep & Respiratory Care business.
We will leverage our distinctive market positions, especially our strong presence in North America and many international markets, while further localizing to support our leadership position in China.
Patient- and people-centric innovation at scale
We will continue to invest significantly in innovation, but are making a number of important changes to increase the impact of our patient- and people-driven innovation. Focusing our resources on fewer, better-resourced and more impactful projects, we will concentrate a higher proportion of our R&D resources in the businesses to ensure that innovation is done closer to our customers. We will scale and accelerate innovations, driven by the business and supported by rightsized corporate research, with patient safety, quality and sustainability at the core of innovation design. The technological and business model innovation that Philips brings to healthcare across care settings – often as part of long-term partnerships – is critical, making care delivery more convenient and sustainable.
2022 performance
Looking back on last year, sales increased nominally to EUR 17.8 billion, while several factors weighed down on profitability. Performance was impacted by our efforts to mitigate supply chain and inflationary pressures and the revenue and cost consequences of the Philips Respironics sleep recall, whilst at the same time dealing with global challenges such as the COVID situation in China, volatile demand and supply, and the war in Ukraine. As we worked through the operational challenges, we progressed on our execution priorities in the fourth quarter and saw initial signs of improvement.
I find it greatly encouraging that, despite our recent difficulties, Philips’ purpose, strategy and solutions resonate strongly with customers, as evidenced by the around 100 long-term strategic partnerships we entered into with hospitals and health systems around the world healthierin 2022, and more sustainable through innovation. I am pleased withby the resiliencecontinued strength of our businesses asorder book.
Delivering on our ESG commitments
Environmental, Social & Governance (ESG) are three key dimensions defining our approach to doing business responsibly and sustainably. In 2022, we recorded 4.5% growth while addressing significant headwinds. reached 1.81 billion people with our products and services, including 202 million in underserved communities – taking us a step closer to our goal of improving 2 billion lives per year by 2025, including 300 million in underserved communities.
We made good progress againstcontinued to work hard to deliver on our strategic imperatives – driving customer centricityother key ESG commitments. For example, our updated carbon reduction targets were approved by the Science Based Targets initiative (SBTi), and operational excellence, focusing on quality, growing our core businesses, and pivoting to become a solutions company. Our purpose is clear, and so is our firm beliefwe were included in our potential to grow and create more value, while doing soCDP’s climate action ‘A-List’ for the 10th year in a row. We see increasing momentum within the healthcare industry and on the part of our customers to reduce their environmental impact, and we are well placed – with innovations such as our BlueSeal magnet for helium-free-for-life MR and our Circular portfolio – to support that trend and help create a sustainable manner. Reflectinginfrastructure for the future of healthcare.
Looking ahead
We remain cautious in light of the subdued economic outlook for the year, staffing and inflationary pressures facing our confidence incustomers, geopolitical risks, supply and demand volatility, and uncertainties around ongoing consent decree negotiations, litigation and Department of Justice investigations. Nevertheless, we expect that, by prioritizing patient safety and quality, tightening our focus on innovation and strengthening our category leadership areas, while at the road aheadsame time improving execution and taking a disciplined approach to capital, we will be able to progressively create value with sustainable impact. Against this background, and reflecting the importance we attach to dividend stability, we propose to maintain the dividend at EUR 0.85 per share.
Innovating with purpose
Time and again, customers tell us they like our strategy and the comprehensive view we take of healthcare along the health continuum – delivering innovations for consumer health, precision diagnosis, image-guided therapy, hospital and home care, leveraging informatics and artificial intelligence. They are keenshare, to engage with Philips for innovations that can help them deliver on the Quadruple Aim – better health outcomes, improved patient and staff experience, and lower cost of care. This is reflectedbe distributed in the sustained growth in the number of long-term strategic partnerships we have signed, e.g. with Inspira Health (USA) and Klinikum Stuttgart (Germany), with solutions and recurring revenues now accounting for over one third of total revenues. There is also substantial interest in how we can contribute to care outside the hospital setting – through solutions that support healthy living, prevention and home care.shares.
Aging populations and the growing incidence of chronic disease, coupled with resource constraints, are necessitating a shift from a volume-based approach towards value-based healthcare models, including care outsideOn behalf of the hospital.Executive Committee, I firmly believewould like to acknowledge, once again, that innovative health technology – a growing market with scope2022 has been very disappointing and we carry accountability for margin expansion, in whichthe plan to bring Philips has strong positions – will help address these challenges, providing better outcomes and productivity gains, as well as extending accessback to carewhere it belongs. I want to those in need.
Our goal of improving the lives of 3 billion people a year by 2030, including 400 million in underserved healthcare communities, infuses our innovation drive with true purpose, as we strive to make the world healthier and more sustainable, in line with UN Sustainable Development Goals 3 (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).
Innovating with purpose in mind helps us to create more value forthank our customers and societytheir patients for their understanding – by developing truly relevant solutions. Helping people to stay healthy and prevent disease. Giving clinicians the AI-assisted tools to make precision diagnoses and deliver personalized, minimally invasive treatment. Orchestrating and delivering care outside the hospital, in lower-cost care settings. Helping people to recover, or live with chronic disease, at home in the community. All supported by a seamless flow of data enabled by connected care and health informatics solutions.
Increasingly, AI will enhance the quality and efficiency of care, providing clinical decision support, helping clinical staff to spot emerging risks, and freeing up valuable time for healthcare professionals to focus on their patients. We work with clinical partners around the world to develop AI-enabled solutions, like our IntelliSpace AI Workflow Suite, that are secure, firmly grounded in scientific research, and rigorously validated in clinical practice.
In the consumer domain too, connected personal health solutions like our Philips Sonicare Teledentistry service help people to manage their health with actionable insights, coaching, and where needed, support from care professionals.
Determined to deliver the full benefits of data-enabled care, we have significantly stepped up our activities in informatics and data science in recent years. Today, around one in two Philips R&D professionals is active in these fields, and most of our acquisitions since 2015 have been designed to strengthen our informatics capabilities.
As a purpose-led innovation company, we have made sustainability a cornerstone of the way we do business, as recognized once again in the global 2019 Dow Jones Sustainability Indices (DJSI) list. Increasingly, our customers ask us to help them tackle their sustainability challenges; we believe that, more and more, this will become a competitive differentiator. In 2019, we took another step closer to becoming carbon-neutral in our own operations by the end of 2020, with both our US and Dutch facilities now 100%-powered by renewable energy. We also issued our first Green Innovation Bond under the Philips Green & Sustainability Innovation Bond Framework developed together with Rabobank; the proceeds will be used to help finance our expenditures on green innovation, the transition to the circular economy with zero waste to landfill, and becoming carbon-neutral in our operations.
How we performed in 2019
Our financial performance in 2019 was robust, despite a profitability improvement that was below our plan. Comparable sales growth*) was well within our target bandwidth, driven by innovative products and solutions across our businesses and strong revenue increases in our growth geographies. Profitability improved, though well short of the 100 basis points of the past three years, impacted by tariff headwinds, the underperformance of Connected Care, a decline in license income, and investments in growth. We ended the year with a comparable order intake*) that grew a further 3%, on the back of strong 10% growth in 2018, and delivered a free cash flow*) of over EUR 1 billion. Last but not least, our share price rose 41% in the course of 2019 to a 19-year high, outpacing many of our key peers and reflecting investor confidence in our strategy and portfolio of innovative health technology solutions.
Our Diagnosis & Treatment businesses performed well, with improved revenue and earnings, supported by a strong flow of innovations designed to help clinicians deliver a precision diagnosis and targeted therapies. In Diagnostic Imaging we finalized the revamp of our CT and MR portfolios, including the introduction of an industry-first ‘Tube for Life’ guarantee with our Incisive CT imaging platform. In Image-Guided Therapy, 2019 saw the landmark one-millionth procedure performed with our Azurion platform. And we continued to add depth and reach to the Azurion success story, with the launch of innovations like FlexArm, for optimal visualization across the whole patient, IntraSight for seamless integration of our smart catheters in the platform, and regulatory clearance to launch Azurion in China. We are particularly pleased by the continued strong performance of our smart catheter portfolio. We also have high expectations of innovations in the areas of precision diagnosis solutions and enterprise diagnostic informatics, the latter strengthened by the recent acquisition of Carestream Health’s Healthcare Information Systems business.
Our Connected Care businesses had a challenging year, even as we retained market share. The businesses posted modest growth, though profitability decreased. The fundamentals remain solid – our Connected Care businesses have leading market positions and good scope for margin expansion. We have taken decisive actions and expect these to gradually become visible in performance in the course of 2020. In January 2020, I appointed Roy Jakobs as the new leader of the Connected Care businesses to further drive the turnaround. Several new innovations – such as the next-generation IntelliVue MX750 and MX850 patient monitors, our expanded SmartSleep solutions, the latest iteration of our IntelliSpace Enterprise Edition healthcare informatics platform, and our HealthSuite digitalsuppliers and ecosystem partners for their support – will support accelerated growth, while stronger execution will help improve value creation.
Personal Health rebounded well from a slower 2018 with higher revenueover this past year. I appreciate our employees' hard work and earnings, driven largely by thewillingness to embrace change and drive performance of our Oral Healthcare and Personal Care businesses on the back of portfolio extension and increased market penetration. We are now reviewing options for future ownership of the Domestic Appliances business. Our Personal Health businesses that are focused on oral care, personal care and mother & child care will therefore continue to play an important role in our health continuum approach, through connected products and services that support people’s health and well-being.
Transforming to win
In the face of considerable geopolitical and macroeconomic uncertainty, with strong tariff headwinds, we continue to look first and foremost to improve operational excellence. We remain firmly focused on meeting our customers’ needs, while at the same time taking action to innovate compelling solutions, improve the supply chain and boost productivity.
As we step up our transformation, we continue to be guided by our three-pronged strategic roadmap: Better serve customers and improve quality; Boost growth in core business; Win with solutions along the health continuum. We are making steady progress on our commitment to quality and operational excellence, as demonstrated by improving quality indicators, customer Net Promoter Scores and lower waste. The standardization and digitalization of internal processes, levering the Philips Integrated IT landscape, is leading to higher productivity and agility. Our continued focus on boosting growth in the core has delivered market share expansion in the Diagnosis & Treatment segment in particular. Revenues from solutions, long-term contracts and service business models – including new business models, such as software-as-a-service, pay-per-user and technology managed services – now stand at over one third of sales.
Acquisitions have played an important role complementing our organic growth, and we are pleased with the performance of most of these, for example in the area of Image Guided Therapy, where we are now able to ‘innovate the procedure’ with solutions consisting of combinations of systems, smart devices, software and services, as opposed to being restricted to capital equipment only. With the planned divestiture of the Domestic Appliances business, we are completing the strategic pivot to a health technology-focused portfolio. Domestic Appliances is a strong business that has made a good contribution to Philips, but is not a strategic fit for our future as a health technology leader.
To get the best out of our people and make sure our organization is set up to deliver for our customers and realize our vision, we overhauled our operating model – the Philips Business System (PBS) – in 2019. The renewed PBS touches every aspect of our business and will make Philips a simpler, faster, customer-focused solutions company – a learning organization that aspires to the highest standards of quality in everything we do. Driving a customer-focused culture, where people take ownership and collaborate to deliver with quality, speed and agility, embracing Lean and continuous improvement, is an essential ingredient of the PBS.
Outlook 2020 and beyond
Looking ahead at 2020, we continue to see geopolitical and economic risks. We aim for 4-6% comparable sales growth*) and an Adjusted EBITA*) margin improvement of around 100 basis points, with a performance momentum that is expected to improve in the course of the year. During 2020 we will issue guidance for the next medium-term period, when we expect to continue to gradually step up growth and expand margins and cash generation as we execute our strategy.
In conclusion
improvement. And I wish to thank our customers, shareholders and other stakeholders for their continued support in these challenging times.
I am honored to have been tasked with leading our company and am heartened by the support they continue to give to Philips. I would also like to thankhave encountered from our employees for their engagement, perseverance and hard work overcustomers, investors and other stakeholders. I am realistic about the past year.
Energized by our purpose, I remain confidentchallenges we face, but have full confidence in our abilityplan of action and am firm in my resolve to perform while we transform – delivering innovative, sustainable solutionslead Philips back to a position of strength in a world that meet the needs of our customers and consumers, at the same time laying a rock-solid foundation for an even brighter future as a leader in health technology.meaningful innovation.
Frans van HoutenRoy Jakobs
Chief Executive Officer
5Board of Management and Executive Committee
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 Board of Management is entrusted with the management of the company. The other members of the Executive Committee have been appointed to support the Board of Management in the fulfilment of its managerial duties. Please also refer to Board of Management and Executive Committee within the chapter Corporate governance.
Members of the Board of Management
Frans van HoutenRoy Jakobs
Born 1960,1974, Dutch and German
Chief Executive Officer (CEO)
Chairman of the Board of Management and the Executive Committee since April 2011
For a full résumé, click hereOctober 2022
Roy Jakobs joined Philips in 2010 and has held various global leadership positions across the company, starting as Chief Marketing & Strategy Officer for Philips Lighting. In 2012, he became Market Leader for Philips Middle East & Turkey, leading the Healthcare, Consumer, and Lighting businesses out of Dubai. Subsequently, he became Business Leader of Domestic Appliances, based in Shanghai, in 2015. In 2018, Roy joined the Executive Committee as Chief Business Leader of the Personal Health businesses and in early 2020 he started as Chief Business Leader of Connected Care. Prior to his career at Philips, he held various management positions at Royal Dutch Shell and Reed Elsevier.
Sophie Bechu
Born 1960, French/American
Executive Vice President
Chief Operations Officer
For a full résumé, click here
Abhijit Bhattacharya
Member of the Board of Management since December 2015
Chief Financial Officer
For a full résumé, click here
Rob Cascella
Born 1954, American
Executive Vice President
Chief Business Leader Precision DiagnosisAbhijit Bhattacharya first joined Philips in 1987 and jointly responsible for Diagnosishas held multiple senior leadership positions across various businesses and functions in Europe, Asia Pacific and the US. Between 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 & Treatment
For a full résumé, click here
Marnix van Ginneken
Born 1973, Dutch/American
DutchExecutive Vice President
Member of the Board of Management since November 2017
Chief
ESG & Legal Officer
ForMarnix van Ginneken joined Philips in 2007 and became Head of Group Legal in 2010. In 2014, Marnix became Chief Legal Officer of Royal Philips and Member of the Executive Committee. He is responsible for ESG/Sustainability, Legal, Intellectual Property & Standards and Government & Public affairs. Since 2011, he is also Professor of International Corporate Governance at the Erasmus School of Law in Rotterdam. Before joining Philips, Marnix worked for Akzo Nobel and as an attorney in a full résumé, click hereprivate practice.
Other members of the Executive Committee
as of December 31, 2022
Andy Ho
Born 1961, Chinese
Executive Vice President
Chief Market Leader of Philips Greater China
For a full résumé, click here
Roy Jakobs
Born 1974, Dutch/German
Executive Vice President
Chief Business Leader Personal Health
For a full résumé, click here
Henk Siebren de JongWillem Appelo
Born 1964, Dutch
Executive Vice President
Chief Operations Officer
Chief of International Markets
For a full résumé, click hereCarla KriwetAndy Ho
Born 1971, German1961, Chinese/Canadian
Executive Vice President
Chief Market Leader of Philips Greater China
Deeptha Khanna
Born 1976, Singaporean
Executive Vice President
Chief Business Leader Connected Care
See below for 2020 Executive Committee changes
Personal Health
Bert van Meurs
Born 1961, Dutch
Executive Vice President
Chief Business Leader Image Guided Therapy and jointly responsible for Diagnosis & Treatment
Edwin Paalvast
Born 1963, Dutch
Executive Vice President
For a full résumé, click hereChief of International Markets
Shez Partovi
Born 1967, Canadian
Executive Vice President
Chief Innovation & Strategy Officer
Vitor Rocha
Born 1969, Brazilian/American
Executive Vice President
Chief Market Leader of Philips North America
For a full résumé, click here
Daniela Seabrook
Born 1973, Swiss
Executive Vice President
Chief Human Resources Officer
For a full résumé, click here
Jeroen TasKees Wesdorp
Born 1959,1976, 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 composition of the Executive Committee as per December 31, 2019.2022. As announced on December 8, 2022, Kees Wesdorp left the company on January 1, 2023, with Bert van Meurs (Chief Business Leader for the Image Guided Therapy businesses) temporarily expanding his role to include the leadership of the Precision Diagnosis businesses. As announced on January 28, 2020, Roy Jakobs was appointed30, 2023, Steve C. de Baca and Jeff DiLullo joined the Executive Committee, effective February 6, 2023, as the new Chief BusinessPatient Safety & Quality Officer and Chief Market Leader of Philips North America, respectively. As such, Mr DiLullo succeeds Vitor Rocha, who left the company effective as per the same date. Philips expects to announce new leaders for its Connected Care businesses (succeeding Carla Kriwet, who left(which was the company), with Frans van Houten leading the Personal Healthresponsibility of Roy Jakobs until his appointment as CEO) as well as for its Precision Diagnosis businesses, on an interim basis (with a successor to be announced in due course).2023. For a current overview of the Executive Committee members, see also https://www.philips.com/a-w/about/company/our-management/executive-committee.html
6Strategy and Businesses
6.1Innovating with purposeOur strategic focus
A strategy of focused organic growth, founded on clear choices in business and innovation, and improved execution
Over the past 10 years, Philips has undergone a transformation to reshape its portfolio and become a focused health technology company. As a company strivingresult, we are active in highly attractive segments that offer significant potential for leadershipgrowth and margin expansion.
These markets are attractive due to the underlying growth of demand for access to healthcare from an aging and growing population. This in turn fuels the need for meaningful innovation to address the rising healthcare spending and staff shortages and make healthcare more efficient and productive, while driving better outcomes.
At Philips, we view the provision and collection of data from patient monitors, imaging devices, and Electronic Medical Records as the foundation upon which Artificial Intelligence (AI) propositions can be built to turn clinical data into actionable insights for patients, providers, and consumers. In addition to providing clinical insights, the same system, informatics and service solutions also provide improved operational forecasting – something our customers have been requesting since COVID-19 to help them improve productivity.
When we perform all of the above for a particular health condition, such as cardiac disease, we establish domain expertise across various sites of care for that disease state. Our healthcare customers are asking for integrated innovations that enable them to care for patients both in the hospital and in outpatient settings. In parallel we continue to provide impactful consumer health propositions
Creating value with sustainable impact
2022 was a difficult year for Philips as its business and financial performance suffered due to challenges in execution, quality and supply, and a complex operating model. Going forward, Philips will address these operational challenges, improve performance, and drive progressive value creation through a strategy of a) focused organic growth, b) scalable patient- and people-centric innovation, and c) focus on reliable execution, prioritizing patient safety and quality, supply chain reliability, and a simplified operating model. All supported by a reinvigorated culture of accountability, empowerment and strengthened health technology talent and capabilities.
Focused organic growth
Having transformed to become a health technology company in recent years, we will now focus on extracting the full value of our strong portfolio with leading positions.
We will focus investments to accelerate growth and margin expansion in areas – Image Guided Therapy, Ultrasound, Monitoring, and Personal Health – where we have strong #1 or #2 positions. In 2022, approximately 70% of our sales were generated by businesses with such leadership positions in the hospital and the home. We will also scale our new Enterprise Informatics business, drive margin improvement in Diagnostic Imaging, and restore Sleep & Respiratory Care.
Scalable patient- and people-centric innovation
Philips’ 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 relevant than it is in these challenging times. As a leading health technology company, we believe that – viewed through the lens of customer needs – patient- and people-centric innovation can improve people'speople’s health and healthcare outcomes, as well as making care more accessibleconvenient and affordable. Atsustainable, both in the hospital and at home.
Given our global presence, strong enterprise informatics platforms, (ambulatory) monitoring and imaging data, as well as our capabilities to support care across settings, we believe Philips it is our goalwell positioned to improve the lives of 3 billion people a year by 2030, including 400 million in underserved healthcare communities. Guided by our vision of making the world healthierdo this, and more sustainable through innovation, it is our strategy to lead with innovative solutions in key markets along the health continuum – helping our customers deliver on the Quadruple Aim (better health outcomes, a better experience for patients and staff, lower cost of care) and helping people take better care of their health at every stage of life.
We seek to act responsibly and sustainably, leveraging our resources to maximize value creation for all stakeholders. Reflectingstrong clinical, consumer and Environmental, Social & Governance (ESG) franchise, and our commitment to UN Sustainable Development Goals 3 (Ensure healthy livesstrong brand – do it in a convenient 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), we continue to embed sustainability deeper inway.
In the way we do business, with specific focus on access to care, circular economy and climate action.
How we see healthcare
We visualize healthcare as a continuum, since it puts people at the center and builds on the notion of care pathways. Believing that healthcare should be seamless, efficient and effective, we ‘join up the dots’ for our customers and consumers, supporting the flow of data needed to care for people in real time, wherever they are. Data and informatics will play an ever-increasing role in helping people to live healthily and cope with disease, and in enabling care providers to meet people’s needs, deliver better outcomes and improve productivity.
We see significant value in integrated healthcare, applying the power of predictive data analytics and artificial intelligence at the point of care, while at the same time improving the delivery of care across the health continuum – optimizing workflows, enhancing capacity utilization and leveraging primary and secondary prevention and population health management programs.
Addressing our customers’ healthcare challenges
For consumers,consumer domain, we develop connectedinnovative solutions that support healthier lifestyles, prevent or treat disease, and help people to live well with chronic illness, also in the home and community settings. As well as leveraging retail trade models, we will increasingly deliver products and services direct to consumers, 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 – packaged combinations of systems, smart devices, software and services, as well as consumables – that help our customers to deliver on the Quadruple Aim of value-based care.
Moreimprove outcomes, patient and more, we are partnering with our customers in new business models, no longer selling products in a transactional manner but engaging in long-term strategic partnerships, where we take co-responsibility for our customers’ key performance indicators. The combination of compelling solutionsstaff experience and consultative partnership contracts, including services, drives above-group-average growth rates, as well as a higher proportion of recurring revenues.productivity. We are embedding AI and data science in our propositions – for instance, applying the power of predictive data analytics and artificial intelligence at the point of care – to unlockleverage the value of data in the clinical and operational domains, aiding clinical decision making and improving the quality and efficiency of healthcare services. Increasingly, we are working together with our health systems customers in novel business models, including outcome-oriented payment models, that align their interests and ours in long-term partnerships.
Going forward, we will focus our innovation on where we see customer needs evolving. To improve outcomes, we will support clinical aspectsworkflows in areas where we have domain leadership, e.g. cardiology and the ICU. To increase productivity in a system having to contend with high patient volumes, staff shortages and rising costs, we will enhance care pathways and operational workflows through integrated technology infrastructure, and we will leverage our (enterprise) informatics and hardware innovation to lower costs and reduce the burden on staff. To improve the delivery of care processes.outside the hospital, we will utilize our consumer/home experience and our strength in data and informatics to connect and support care for patients, with better outcomes, across settings.
In doing so, we will leverage leading technologies across our portfolio. To name just a handful, by way of example: our Ingenia Ambition MR system with BlueSeal magnet that offers helium-free-for-life operation; our Azurion suite of interventional cardiology solutions; our IntelliVue MX750 and MX850 patient monitors and MCOT ambulatory cardiac ePatch offering comprehensive monitoring capabilities across sites of care; and our multi-vendor, multi-modality, multi-site Radiology Operations Command Center virtualized imaging solution.
While we continue to invest significantly in innovation, we are making a number of important changes to increase the impact of our patient- and people-driven innovation and generate better returns. Moving forward, we will focus our resources on a smaller number of projects and products with greater potential for impact. We will scale and accelerate innovations, driven by the business and supported by rightsized Group research, with patient safety, quality and sustainability at the core of design. By bringing our central innovation activities into the heart of the businesses, we are bringing our system and software innovation closer to our customers.
Focus on improved execution
The key driver for our performance improvement is improved execution grounded in three decisive actions:
- patient safety and quality: putting this at the heart of (business) innovation, elevating the function to Executive Committee level, and embedding it in our culture, e.g. by giving all employees dedicated patient safety and quality objectives;
- supply chain reliability: moving from a centralized ‘one size fits all’ supply chain structure to a more agile, dedicated end-to-end set-up per business, and pruning and redesigning products;
- a simplified operating model: end-to-end businesses with single accountability working in a leaner, more agile way, guided by patient- and people-centricity and accountable leadership with empowered teams.
Our ambition
With our global reach, market leadership positions, deep clinical and technological insights, and innovative strength,customer-centric, patient- and people-focused innovation capability, we are uniquely positionedbelieve Philips is well placed to create further value in ‘the last yard’a changing health and care world.
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. This is one of the comprehensive set of commitments we have deployed across all the Environmental, Social and Governance (ESG) dimensions that help guide the execution of our strategy and support our contribution to UN Sustainable Development Goals 3 (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).
We strive to deliver superior, long-term value to patients, customers, consumers and care providers, delivering:
connected productsshareholders, while acting responsibly towards our planet and services supportingsociety, in partnership with our stakeholders. We believe that, executed with rigor, discipline and quality, the health and well-being of peopleintegrated modalities and clinical informatics to deliver precision diagnosisreal-time guidance and smart devices for minimally invasive interventionsconnected products and services for chronic care.
Underpinning these, and spanning the health continuum, our connected care solutions enable us to:
connect patients and providers for more effective, coordinated, personalized caremanage population health, leveraging real-time patient data and clinical analytics.
Our key strategic imperatives andoutlined above, in combination with a relentless focus on execution, will put us back on track for a future of progressive value creation objectives
Our transformation into a focused leader in health technology – shifting from products to solutions and building long-term relationships with our customers – is absolutely critical for Philips’ future. Our strategic roadmap is our guide on this multi-year journey.
Over the last four years, our strategic roadmap has proven itself through the customers we have gained and the significant value we have created.sustainable impact.
Looking ahead at 2020, we continue to see geopolitical and economic risks. We aim for 4-6% comparable sales growth*) and an Adjusted EBITA*) margin improvement of around 100 basis points, with a performance momentum that is expected to improve in the course of the year. During 2020 we will issue guidance for the next medium-term period, when we expect to continue to gradually step up growth and expand margins and cash generation as we execute our strategy.
We will continue to deliver meaningful employment and engagement in the communities where we operate, while doing business in a sustainable manner.
6.2How we create value with sustainable impact
Based on the International Integrated Reporting Council framework, and with the renewed Philips Business System at the heart of our endeavors, we use six forms of capitalvarious resources to create value with sustainable impact for our stakeholders in the short, medium and long term.stakeholders.
Philips Business System
In 2019 we updated our operating model, the Philips Business System (PBS). With its six interconnected elements, the PBS defines how we work together effectively to achieve our company objectives.
Our strategy defines our path to sustainable value creation for customers and shareholders.
Clear governance, roles and responsibilities empower people to collaborate and act fast.
Standard processes, systems and practices enable lean and agile ways of working.
We value and develop people and teams, rewarding them for sustainable results.
We live the Philips culture, which sets standards on behaviors, quality and integrity.
Through disciplined performance management and continuous improvement we achieve our goals.
And this is where the wheel gets going. The better we perform, the more we grow, the more we can re-invest in new business opportunities, and the more value we deliver to our customers, shareholders, and other stakeholders.
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 capital to Philips’ business activities and processes as shaped by the Philips Business System; all data refer to 2019
Human
- Employee Engagement Index
74%77% favorable - Sales per employee EUR
242,027230,817 - Safety
224172 Total Recordable Cases
Intellectual
- New patent filings
1,015920 - Royalties EUR
381419.0 million 148171 design awards
Financial
- Comparable sales growth*)
4.5% 67% Green Revenues(2.8)%- Adjusted EBITA*) as a % of sales
13.2%7.4% - Free cash flow*) EUR
1.1 billion(961) million
Manufacturing
- EUR
14.812.1 billion revenues from goods sold
Natural
13%71.7% Green/EcoDesigned Revenues- 18% revenues from circular propositions
- Net CO2 emissions from own operations down to
266zero kilotonnes 265,00062,000 tonnes (estimated) materials used to put products on the market- Waste
up to 26.4 kilotonnes,22,802 tonnes, of which 83% recycled 19 'zero waste to landfill' sites91% repurposed
Social
- Brand value USD
11.712.8 billion (Interbrand) - Partnerships with UNICEF, Red Cross, Amref and Ashoka
Societal impact
Impact
The societal impact of Philips though its supply chain, its operations, and its products and solutions; all data refer to 2019
Human
- Employee benefit expenses EUR
6,3076,952 million, all staff paid at least a Living Wage analysis completed - Appointed
74%71% of our senior positions from internal sources 24%30% of Leadership positions held by women
Intellectual
- Around
53%55% of revenues from new products and solutions introduced in the last three years Over 60%Approximately 70% of sales from leadership positions
Financial
- Market capitalization EUR
38.812 billion at year-end - Long-term credit rating A-
(Fitch)1, Baa1 (Moody's)2, BBB+ (Standard & Poor's)3**) - Dividend EUR
775741 million
Manufacturing
95%100% electricity from renewable sources
Natural
286,000Environmental impact of Philips operations up to EUR 128 million
- All 23/23 industrial sites 'Zero Waste to Landfill' at year-end 2022
- Updated CO2 reductions approved by the Science Based Targets initiative
Social
- 1.81 billion Lives Improved, of which 202 million in underserved communities (including 2.2 million via Philips Foundation)
- 459,000 employees impacted at suppliers participating in the 'Beyond Auditing' program
Natural
Environmental impact of Philips operations down to EUR 154 millionFirst health technology company to have its CO2 reductions assessed and approved by the Science Based Targets initiative
Social
1.64 billion Lives Improved, of which 194 million in underserved healthcare communities- Total tax contribution EUR
3.1 billion3,469 million (taxes paid)paid/withheld) - Income tax
expensebenefit EUR 337113 million; the effective income tax rate is 22%6.5%
**)1 Fitch, 2 Moody's, 3 Standards & Poor's
6.3Materiality analysis
We identify the Environmental, Social and Governance topics which we believe have the greatest impact on our business and the greatest level of concern to stakeholders along our value chain, for instance patient safety and quality. We do this through a multi-stakeholder process. Assessing these topics enables us to prioritize and focus upon the most material topics and effectively address these in our policies, programs and targets. We do this with reference to the GRI standard and identify and assess impacts on an ongoing basis, for example through discussions with our customers, suppliers, investors, employees, peer companies, social partners, regulators, NGOs, and academics. We also conduct a benchmark exercise, carry out trend analysis and run media searches to provide input for our materiality analysis. GRI has not yet published a sector standard for the healthcare industry. Philips’ impact on society at large is covered through our Lives Improved metric and the Environmental Profit & Loss account, as well as a number of other KPIs addressed in Environmental, Social and Governance.
Similar to 2021, we used an evidence-based approach to materiality analysis, powered by a third-party AI-based application. The application allows automated sifting and analysis of millions of data points from publicly available sources, including corporate reports, mandatory regulations and voluntary initiatives, as well as news. In our 2022 materiality analysis, we identified a list of topics that are material to our businesses. 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 on regulatory, strategic and reputational risks and opportunities. Topics were prioritized through a survey sent to a large and diverse set of internal and external stakeholders, combined with input from the application.
Public health risks emerged as a new material topic in 2020, as a result of the COVID-19 pandemic, and it was assessed as a material topic in 2022 as well.
Changes in 2022
On the external importance axis, the most significant increases compared to 2021 were Sustainable value creation, Geopolitical events, Responsible and Resilient Supply Chains, Talent & development, and Energy efficiency. On the internal importance axis, there were significant increases on Pollution, Governance, Access to (quality and affordable) care, Competition & market access, and Talent & development.
Double materiality
After completing the regular materiality analysis, we completed a preliminary 'double materiality' analysis, in preparation for the upcoming requirements of the EU Corporate Sustainability Reporting Directive (CSRD). The double materiality analysis addresses both financial materiality (the impact of society on Philips) as well as impact materiality (the impact of Philips on society): we only included the high and medium material topics listed above. The data sources used for the financial materiality include corporate reports, mandatory regulations with sanctions, voluntary initiatives by e.g. central banks, and Sustainability Accounting Standards Board (SASB) accounting metrics. For impact materiality, we included sustainability data from corporate reports or sustainability reports, coverage in the news and voluntary initiatives and regulation. The results of the double materiality analysis are depicted below.
From the financial materiality analysis, the topics that ranked highest were: (1) from the environmental topics, Circular economy, and Climate change; (2) from the social topics, Fair & inclusive workplace, Employee well-being, health & safety, and Responsible & resilient supply chains; and (3) from the governance topics, Business ethics & General Business Principles, Big data & privacy, and Product responsibility & safety.
From the impact materiality analysis, the topics that ranked the highest were: (1) from the environmental topics, Climate change, and Energy efficiency; (2) from the social topics, Public health risks and Employee well-being, health & safety, and Fair & inclusive workplace; and (3) from the governance topics, Big data & privacy and Innovation & research. These topics are all covered in more detail in the Annual Report 2022 and monitored regularly.
The outcome of the double materiality assessment did not result in any significant changes in the material topics identified.
The results of our materiality assessment have been reviewed and approved by the Philips ESG Committee and will be used to prepare for the upcoming EU legislation.
6.4Our businesses
Our reporting structure in 20192022
Koninklijke Philips N.V. (Royal Philips) is the parent company of the Philips Group. In 2019,2022, the reportable segments were Diagnosis & Treatment businesses, Connected Care businesses, and Personal Health businesses, each having been responsible for the management of its business worldwide. Additionally, Royal Philips identifies the segment Other.
Philips Group
Total sales by reportable segment
| 2022 |
|---|
| Diagnosis & Treatment | 51% |
| Connected Care | 25% |
| Personal Health | 20% |
| Other | 4% |
Our reporting structure in 2023 and beyond
As announced on January 30, 2023, Philips is changing its operating model to end-to-end businesses with single accountability. In 2023, the businesses will be as a %follows.
2019
6.3.16.4.1Diagnosis & Treatment businesses in 2022
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 diagnosis and image-guided therapies. Weminimally invasive treatment in therapeutic areas such as cardiology, peripheral vascular, neurology, surgery, and oncology. With these solutions, we enable our customers to realize the full potential of the Quadruple Aim – an improved patient experience, better health outcomes, an improved patient and staff experience, and lower cost of care.
Serving diagnostic enterprise imaging markets globally, we see significant opportunity to enable precision diagnosis while at the same time supporting adjacent needs for care orchestration across care pathways and increasing departmental productivity. We do this through smart diagnostic systems, connected workflow solutions, integrated diagnostics and pathway informatics, driving enterprise-wide operational efficiency and helping clinicians to provide an early and definitive diagnosis, enabling them to select tailored care pathways with predictable outcomes for every patient, both inside and outside the hospital.
We also provide integrated solutions combining imaging systems and diagnostic and therapeutic devices, which optimize interventional procedures to deliver more effective treatment, better outcomes and higher productivity. Building upon our leading-edge Image Guided Therapy System – Azurion, we continue to innovate, optimizing clinical and 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 intelligent, integrated solutions (AI-enabled suites of systems, smart devices, softwarealso innovating the way we engage with our customers, using new business models across different care settings, including out-of-hospital settings such as office-based labs and services) that help healthcare providers to meet their most pressingambulatory surgical centers, which offer clear clinical, financial and operational and financial goals. By integrating multiple sources of information across imaging, pathology and genomics to create a comprehensive single patient view, we support clinicians to realize a precision diagnosis for each patient: disease-specific, personalized, and predictive.benefits.
Informatics is central to everything we do. In 2019,2022, Philips expanded its Enterprise Diagnostic Informatics portfolio withcompleted the acquisition of Carestream Health’s Healthcare Information Systems business. AddingVesper Medical Inc. a state-of-the-art cloud-based informatics platform, our offering now includes advanced Vendor Neutral Archive solutions,US-based medical technology company that develops minimally-invasive peripheral vascular devices. Vesper Medical will further expand Philips’ portfolio of diagnostic and enterprise viewers, interactive multimedia reporting, AI-enabled clinical, operational and business analytics tools, as well as tele-radiology and diagnostic patient management services.
We continue to expandtherapeutic devices with an advanced venous stent portfolio for the applications for image-guided therapies and improve workflow and integration in the interventional suite. In 2019, less than three years on from its launch, the one-millionth procedure was carried out on Philips' Azurion image-guided therapy platform. In 2019 we also launched Azurion in China, following clearance from the country’s National Medical Products Administration.
Our Diagnosis & Treatment businesses’ value proposition to customers is based on combining our extensive clinical experience with our broad portfoliotreatment of technologies – making us uniquely capable to provide meaningful solutions that can ultimately improve the lives of the patients we serve while lowering the cost of care delivery for our customers.deep venous disease.
Through our various businesses, Diagnosis & Treatment is focused on growing market share and profitability by leveraging:
industry-leading clinical applications and excellent image quality to drive growth in the core subspecialties as well as attractive 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
In 2019,2022, 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 (CT), Advanced Molecular Imaging, Diagnostic X-Ray, as well as integrated clinical systems and software, including detector-based Spectral CT and 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 cardiovascular, 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,
and remote capabilities to enable tele-ultrasound operations and trainingEnterprise Diagnostic Informatics: a suite of integrated multivendor products and services that deliver a comprehensive platform designed to connect clinical capabilitiesdata 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.
lines- Image Guided Therapy: 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; interventional diagnostic and therapeutic devices to treat coronary artery and peripheral vascular disease
Diagnosis & Treatment
Total sales by business
as a %
2019
| 2022 |
|---|
| Diagnostic Imaging | 41% |
| Ultrasound | 18% |
| Enterprise Diagnostic Informatics | 8% |
| Image Guided Therapy | 33% |
In 2019, Digital & Computational Pathology was moved out of the segment Other into Diagnosis & Treatment to enable better access to downstream capabilities. 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.
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-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, third-party distributors and an online sales portal. This varies by product, market and price segment. Our sales organizations have an intimate knowledge of technologies and clinical applications, as well as the solutions necessary to solve problems for our 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 2019,2022, Diagnosis & Treatment had around 31,00033,000 employees worldwide.
20192022 business highlights
Philips received FDA clearance to market its new 7700 3.0T MR system, which features an enhanced gradient system for Philips’ highest image quality to support a precision diagnosis. Philips also received FDA clearance for its SmartSpeed MR acceleration software, adding AI data collection algorithms to Philips’ existing Compressed SENSE MR engine for higher image resolution with three times faster scan times and virtually no loss in image quality.
By combining the Spectral CT 7500 scanner with the Azurion with FlexArm image-guided therapy system, Philips has developed a fully integrated hybrid angio CT suite solution for single-room, single-session diagnosis and treatment in areas such as oncology, stroke, and trauma care.
In 2019,radiotherapy, the AI-enabled Philips continuedMR for Calculating Attenuation (MRCAT) Head and Neck radiotherapy application expands the range of MR-only workflows for cancer patients, advancing comprehensive and personalized cancer care through precision oncology solutions.
Philips expanded its leading ultrasound portfolio with the FDA market clearance for its new Ultrasound 5000 Compact system to renewdeliver cart-based premium image quality in compact form for point-of-care, cardiology, general imaging, and obstetrics and gynecology applications.
Building on Philips’ leading position in interventional cardiology solutions, the company launched the latest version of its Diagnostic Imaging portfolio. Its new Incisive CTEchoNavigator image-guidance tool, which integrates live ultrasound, interventional X-ray imaging platform includes an industry-first ‘Tube for Life’ guarantee. The platform integrates innovations in imaging, workflow, and lifecycle management, as well as DoseWise Portal, a web-based dose monitoring solution that collects, measures, analyzesadvanced 3D heart models to help interventional teams treat structural heart disease with greater ease and reports patient and staff radiation exposure, helping healthcare providers with smart clinical decision-making, increased efficiency and improved experienceefficiency.
To improve outcomes for patients undergoing endovascular treatment, physicians now have access to advanced new 3D image-guidance capabilities through Philips’ Zenition mobile C-arm system, which offers enhanced clinical accuracy and staff.efficiency.
We introduced IntraSight, which seamlessly integrates intravascular imagingPhilips is successfully expanding into interventional oncology with the installation of its innovative lung cancer diagnosis and physiology applicationstreatment solution Lung Suite in hospitals in Belgium, France, Israel, and the UK. Based on Philips Azurion, this solution enhances the accuracy of biopsy procedures and provides a therapy option for minimally invasive procedures. The scalable platform is based on Philips’ common software and hardware architecture. Following the acquisition of EPD Solutions in 2018, we launched the novel KODEX-EPD cardiac imaging and navigation system commercially and announced a collaboration with Medtronic to further advance the image-guidedimmediate treatment of atrial fibrillation.early-stage lung cancer patients.
Further expanding our offeringInferior Vena Cava (IVC) filters are used to treat patients with venous thromboembolism, in mobile image-guided therapy systems for conventional operating rooms (ORs), we launched Philips Zenition, our new mobile C-arm imaging platform. Zenition is easy to move between ORs and allows hospitals to maximize performance, enhance clinical capabilities, and improve staff experience.
Philips continues to set the standard in integrated solutions for image-guided therapy with the expansion of its Azurion platform with FlexArm and the seamless integration of its smart catheterswhich blood clots form in the platform. The successful launchdeep veins of Azurion in Chinathe leg and expansion of its smart catheter offering in Europegroin and Asia contributed to double-digit comparable sales growth*)can travel through the circulatory system, but research has shown that they may have long-term complications. In the United States, the first patients were successfully treated for the Image-Guided Therapy business in 2019.
Philips presented the three-year results from two major Stellarex clinical studies involving approximately 600 patients, demonstrating that its Stellarex drug-coated balloon (DCB) isInferior Vena Cava (IVC) filter removal using Philips' CavaClear solution – the only low-dose DCB with a significant treatment effectFDA-cleared solution for advanced IVC filter removal.
6.3.2
With clinical depth and discovery, Philips Connected Care businesses
Spanning the entire health continuum, the Connected Care businesses are tasked with improving patient outcomes, increasing efficiencytechnologies help to cultivate a more accurate and enhancing patient and caregiver satisfaction, thereby driving towards value-based care. Our solutions build on Philips’ strength in verticals (monitoring & analytics, sleep & respiratory care, and therapeutic care) and horizontals (population health management and connected care informatics) to improve clinical and economic outcomes in all care settings, within and outside the hospital.
Philips has a deep understandingcomplete view of clinical care and the patient experience that when coupled with ourdrives better health and care. The combination of advanced technological solutions and a consultative approach allows usPhilips to be an effective partner forto its customers in their digital transformation, both across the enterprise and at the level of the individual clinician. Philips deliversclinician, nurse and patient. The role of Connected Care is to collect, connect, analyze and communicate data to provide insights and clinical decision support that help to improve outcomes and drive productivity.
To help enable care delivery across the health continuum and help our customers embrace healthcare’s digital transformation, the Connected Care businesses continue to step up platform investments that span three key domains:
- Acute Patient Management: in-hospital continuous monitoring and workflow solutions fueled by advanced interoperability and patient data insights
- Ambulatory Patient Care Management: ambulatory and home-based monitoring and diagnosis solutions and services
that takesupporting the burden off hospital staff with optimized patient journey - Enterprise Informatics Management: turning data insights into decision support and
data flow, predictive analytics, improved workflow, customized training and improved accessibility across our application landscape.productivity tools.
This requires a secure common digital platform that connects and aligns consumers, patients, payers and healthcare providers. 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.(clinical) therapy solutions.
In January 2022, Philips delivers personalized insights by applying predictive analytics andcompleted the acquisition of Cardiologs, a France-based medical technology company focused on transforming cardiac diagnostics using artificial intelligence across our solutions. For example, we are able to support healthcare professionals caring for elderly patients living independently at home in making clinical decisions(AI) and alerting medical teams to potential issues. Our integratedcloud technology. Cardiologs is already further strengthening Philips’ cardiac monitoring and data-driven approach promotes seamless patient care, helps identify risksdiagnostics offering with innovative software technology, electrocardiogram (ECG) analysis and needs of different groups within a population, and provides clinical decision support.reporting services.
In 2019,2022, the Connected Care 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 intensive care unit (ICU), Hospital Patient Monitoring
& Analytics: Integratedsolutions enhance customers’ experience and improve patient outcomes with seamless patient data monitoring systems for all price levels, wearable biosensors, advanced intelligence platforms for real-timefrom admission to discharge, and by turning patient data into clinical informationinsights that are actionable at the patient’s bedside; patient analytics,right time and specific to targeted care settings. - Emergency Care: Emergency Care propositions play a critical role in connected acute care management, both inside and outside the hospital, including
diagnostic ECG cardiac resuscitation (e.g. AEDs) and emergency care solutions (devices, services, and digital/data management; maintenance, clinicalsolutions) for professional and IT services, as well as consumables.consumer applications. - Sleep & Respiratory Care:
Sleep offerings spanWorking closely with clinical partners and Durable/Home Medical Equipment providers, Philips Respironics provides sleep and respiratory solutions to customers, clinicians and patients. This extends from consumer sleepambulatory patient care solutions including those for disease-state sleep such as obstructive sleep apnea, to end-to-end solutions that encompass consumer engagement,encompassing diagnostics, people-centric therapy, cloud-based connected propositions and care management services. Respiratory offerings includeservices for patients with COPD care management with digital(Chronic Obstructive Pulmonary Disease) and connected solutions;respiratory conditions. Hospital Respiratory Care (HRC) provides invasive and non-invasive ventilators for acute and sub-acute hospital environments; Home Respiratory Care supports chronic care management in the home care environment.
Therapeutic Care: Emergency Care & Resuscitation (ECR) solutions for both inside and outside the hospital, including cardiac resuscitation and emergency care solutions (including devices, services, and digital/data solutions); consumables across the patient monitoring and therapeutic care businesses; customer service, including clinical, IT, technical and remote customer propositions.home.Population Health Management: Data, analytics and actionable workflow products are leveraged for 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.
- Connected Care
Informatics was created in 2019Informatics: Comprised of three core business units, this business focuses on clinical analytics solutions that provide actionable insights to drive cohesive informatics innovations across the health continuum. Connecting people, technology and processes, Connected Care Informatics’ capabilities include aoptimize patient data.
The fully integrated Electronic Medical Record (EMR)& Care Management business called Tasy. Connected Care Informatics also offers an advanced eICU/enables centralized management of clinical, organizational and operational processes, and virtual care delivery propositions, including remote patient management and real-time monitoring in acute care. The Tele-ICU program an informaticscontinues to play 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.
The Clinical Data Services business – formerly Capsule Technologies, acquired by Philips in early 2021 – offers medical device and data integration across the enterprise for continuous, vendor-neutral data capture from more than 1,000 device models supported by insightful clinical decision support and analysis.
Our Ambulatory Monitoring & Diagnostics business – comprised of BioTelemetry, which Philips acquired in 2021 – provides industry-leading patient care management in ambulatory and home care settings in North America and beyond through a suite of cardiac diagnostic and monitoring solutions business under the umbrellato identify heart rhythm disorders supported by AI algorithms that orchestrate workflows and services across care settings. The acquisition of IntelliSpace Enterprise Edition, Command Center solutionsCardiologs complements this capability with a vendor-neutral heart disorder screener and integration services (Enterprise Integrated Solutions/IntelliBridge Enterprise).ECG analysis applications, based on machine learning algorithms.
Connected Care
Total sales by business
as a %
2019
| 2022 |
|---|
| Hospital Patient Monitoring | 47% |
| Emergency Care | 5% |
| Sleep & Respiratory Care | 28% |
| Connected Care Informatics | 20% |
In 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,Care), revenue is generated both 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.
monitoring-as-a-service and software-as-a-service.
Sales at Philips’ Connected Care businesses are generally higher in the second half of the year, largely due to customer spending patterns. However, the Philips Respironics voluntary recall notification in the Sleep & Respiratory Care business in June 2021 had a negative impact on sales throughout 2022.
At year-end 2019, the2022, Connected Care businesses had around 15,00017,000 employees worldwide.
20192022 business highlights
Reinforcing its leadershipPhilips' offerings improving clinical workflow and alarm management in patient monitoring solutions, Philips introduced the next-generation IntelliVue MX750 and MX850 bedside patient monitor platforms in Europe. These feature an extensive range of measurements and analytics,critical care environments, as well as new cybersecurity capabilities. Moreover, Philips signed multi-year enterprise patient monitoring agreementsits contributions to a quieter healing environment in intensive care units, resonated well with the Kantonsspital Frauenfeld (Switzerland) and the University Clinic of Bonn (Germany) to improve workflow and clinical outcomes in these hospitals.
Philips teamed up with US insurance company Humana to improve care for at-risk, high-cost populations. The pilot program will support independent living for high-acuity patients with congestive heart failure by providing 24/7 access to care. Philips’ remote monitoring capabilities will allow care managers to deliver timely interventions for these patients.
Philips signed a 10-year agreement with Centre Hospitalier Régional Universitaire de Nancy in France to implement Philips’ IntelliSpace Enterprise Imaging Solution. The collaboration will enable the hospital, which provides 1.2 million consultation visits and inpatient stays each year, to streamline complex medical image data management across its departments.
Philips’ solutions to treat obstructive sleep apnea, a condition that affects more than 100 million patients globally, continue to garner healthy demand, supported by the continued strong reception for DreamStation GO’s expanded portable therapy options.
Expanding its range of successful patient-centric CPAP (continuous positive airway pressure) mask designs, Philips launched DreamWisp, the first-of-its-kind over-the-nose nasal mask that allows patients with sleep apnea to sleep in any position they want. With its robust nasal cushion and top-of-the-head tube design, DreamWisp delivers a new level of comfort and freedom of movement, providing patients with the therapy option that best suits their needs.
Demonstrating the success of Philips’ telehealth solutions for critical care, US-based Health First achieved significant results by using Philips’ acute telehealth platform. Powered by Philips’ eCareManager, Health First’s VitalWatch eICU achieved a 23% reduction in overall mortality, a 49% reduction in ICU length of stay, and a 35% reduction in length of stay across its four hospitals.customers.
Philips expanded its General Care solutionsAdvanced Life Support activities across international markets and Greater China.
In Greater China, Philips partnered to drive localization of its EMR Tasy offering in order to be locally relevant for the China market.
Philips continues to successfully expand into ambulatory care. Newly published research validated that Philips Mobile Cardiac Outpatient Telemetry (MCOT) is crucial in detecting arrhythmias and providing data that allows care teams to intervene quickly and decisively to provide the optimal patient treatment.
Underlining the clinical and economic value of remote cardiac patient monitoring, Philips announced new research demonstrating increased atrial fibrillation detection and significant cost savings using Philips’ mobile cardiac outpatient telemetry monitoring.
Philips expanded its remote cardiac monitoring portfolio with the launch of the EarlyVue VS30 in the US. This new vital signs monitor uses automated Early Warning Scoring (EWS)a patch-based, clinical-grade ECG to collect critical vital signsimprove patient recruitment, compliance and calculate risk-based alerts that allow clinicians to identify subtle signs of patient deterioration and facilitate communication between caregiversretention for timely intervention and patient care.
clinical trials.
6.3.36.4.3Personal Health businesses in 2022
Our Personal Health businesses play an important role onserving people's needs in the health continuum – in theareas of 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 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
In 2019, theThe Personal Health segment consistedconsists of the following areas of business:
- Oral Healthcare: power toothbrushes
includingfor 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;app with in-app coaching; brush heads/interdental/heads, which are also available as a subscription service; products for interdental cleaning and for teeth whitening - Mother & Child Care: products to support parents and babies in the first 1,000 days, including infant feeding (breast pumps, baby bottles and sterilizers), connected baby monitors and digital parental solutions (Pregnancy+ and Baby+ apps)
- Personal Care:
male grooming (shavers,and beauty products ranging from entry-level to premium. The grooming portfolio includes shavers, OneBlade, groomers, trimmers),trimmers and hair clippers, as well as premium solutions with SkinIQ technology, in-app coaching for a personalized shave, and blade subscriptions. The beauty (skinportfolio includes devices to support skin care, hair care and hair removal) Domestic Appliancesa): kitchen appliances (juicers, blenders, Airfryer, food processors), home care (vacuum cleaners, air purifiers), garment care (irons, steam generators), coffee (appliancesremoval, including Lumea premium IPL hair removal devices and accessories)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 %
2019
| 2022 |
|---|
| Oral Healthcare | 37% |
| Mother & Child Care | 11% |
| Personal Care | 52% |
Through our Personal Health businesses, we offer a broad range of solutions in various consumer price segments always aiming to support people in proactively managing their health and well-being. Depending on the market, we offer and realize premium value. We continue to rationalize ouran additional portfolio of locally relevant innovations and adjust our range to increase its accessibility, particularly in lower-tier cities in growth geographies. We are well positioned to capture further growth inaccessibility. A notable aspect of our commercial strategy is driving increased direct-to-consumer relationships and sales through our consumer communities and online store. About half of our Personal Health sales and continue to build our digital and e-commerce capabilities.worldwide 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 and healthcare professionals, with the goal of extending opportunities for people to live healthily and 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 in 2021 adopted a stronger resolution on oral healthcare as part of the drive towards universal health coverage. Good oral care is important for everyone. And since everyone is different, oral healthcare should also be personalized to each user to garner the best health outcome. Philips Sonicare, app acts aswhich celebrated its 30th anniversary in 2022, offers a ‘virtual hub’wide range of solutions for personalcomplete 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 thatto support babiesparents and parents-to-be for a more informed, more connected and healthier journey to parenthood. The Pregnancy+ app and Baby+ app offer parents on every step of their journey so that they can more fully enjoy those precious early moments. Philips Pregnancy+ is a pregnancy tracker app that allows moms to follow their baby’s development with 3D fetal imagery. The app offers moms customized informationsupportive content at every stage of their pregnancyfirst 1,000-day journey. Pregnancy+ also offers state-of-the-art, photo-realistic and enables theminteractive 3D fetal models to share their pregnancy journeymake the experience even more exciting, with familynew, personalized content for each day of the pregnancy. As of year-end 2022, the Pregnancy+ app and professionals.Baby+ app combined have more than 68 million downloads, more than 1.5 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 – 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 the end-user or wholesalers or distributors. As with the Directretailers and online platforms. We continue to Consumer transformation, we see good traction to further diversify theincrease revenue model withdiversity by expanding our new business models, (includingincluding direct-to-consumer, subscriptions, try-and-buy offerings and services).services.
The Personal Health businesses experience seasonality, with higher sales around key national and international events and holidays.
At year-end 2019,2022, Personal Health employed around 16,0009,000 people worldwide.
a)On January 28, 2020, Philips announced that it will review options for future ownership of the Domestic Appliances business, and start the process of creating a separate legal structure for this business.undefinedundefinedundefined
20192022 business highlights
The strong performance of the Oral Healthcare business was driven by its innovative portfolio, including the mid-range Philips Sonicare ProtectiveClean toothbrush, which features pressure sensor technology that alerts users when they are applying too much pressure and automatically reduces brushing intensity, for a brushing experience that delivers healthier gums and cleaner teeth.
Further broadening its product range in oral care, Philips has rolled out its connected Philips Sonicare ExpertClean globally. The new smart power toothbrush delivers superior oral care results with its sonic technology and deep clean brushing mode.
Building on the successsuccessful strengthening of Philips’ leading oral care solutions, the company rolled outcompany’s innovative power toothbrushes portfolio, ranging from entry-level to premium propositions, as well as targeted advertising and promotion campaigns, Philips Oral Healthcare recorded continued market share gains in North America.
Philips' locally developed China power interdental cleaning innovation launched in Q1 contributed to our leadership position in overall market share (source: GfK).
Building on its successful OneBlade platform, Philips introduced in Europe the BrushSmart programnew OneBlade 360, which leverages a new blade that adjusts to the curves of the face to enhance shaving comfort. The global roll-out is expected to start in collaboration2023.
Philips completed the global introduction of its new Philips Shaver S9000 with Delta DentalSkinIQ with its launch in Japan, resulting in accelerated sales growth for this category and a 4.9 (out of California,5) consumer rating and review score within the largest providerfirst month.
Philips continues the integration of dental benefits inSkinIQ technology by expanding into the US. The subscription-based program includesS5000-S7000 ranges, increasing access to Philips proprietary technology that senses pressure and movement to adapt and guides the users for a discounted Sonicare toothbrush, coaching and teledentistry, and connects brushing behaviors at home with professional dental care to better understand, motivate and drive improvements in oral health.
more efficient shave.
In China, Philips launched its new smart S7000 Shaver series globally. Designed to address skin irritation and discomfort from shaving,first premium portable shaver, which garnered 4.7-star ratings/reviews (source: Taobao) within the company’s first connected shaver comes with a personalized solution for sensitive skin and has received highly positive user reviews.
At the 2019 IFA trade show in Berlin, Philips highlighted a range of intelligent, adaptive and personalized consumer health solutions that seamlessly integrate into people’s lives and lifestyles, empowering them to make healthier choices and fulfilling their personal needs. These included the Philips Airfryer XXL featuring Smart Sensing technology, which automatically adjusts cooking time and temperature, and the Baby+ app, which provides parents with a dedicated tool to track their baby’s growth and receive ongoing advice specific to each stage of their baby’s development.month.
6.3.46.4.4Other
In our external reporting on Other we report on the items Innovation & Strategy, IP Royalties, Central costs, and other small items. At year-end 2019,2022, around 18,000 people worldwide were working in these areas.
About Other
Innovation & Strategy
The Innovation & Strategy organization includes, among others, the Chief Technology Office (CTO), Research, HealthSuite Platforms, the Chief Medical Office, Product Engineering, Experience Design, Strategy, and Sustainability. Our Innovation Hubs are in Eindhoven (Netherlands), Cambridge (USA), Bangalore (India) and Shanghai (China).
Innovation & Strategy, in collaboration with the operatingsupports all businesses and the markets is responsible for directing the company strategy,within Philips in line withdeveloping an innovation roadmap and strategies to deliver on our customers’ needs and achieve our growth and profitability ambitions.
The Innovation & Strategy function facilitatesWe innovate to help our customers and consumers overcome clinical challenges, and to improve healthcare. We help our businesses to enable and accelerate innovation from ‘idea’ to ‘market’ (I2M) as co-creatorby providing deeply specialized expertise. This starts with strategy and strategic partner for the Philips businesses, markets and partners. It does so throughentails cooperation between research, development, 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 beyondofferings.
We do so in 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.following ways:
Innovation & StrategyWe actively participatesparticipate in Open Innovationopen innovation through relationships with academic, clinical, industrial partners and start-ups, as well as via public-private partnerships. It doesWe do so in order to improveincrease innovation speed effectiveness and efficiency,improve 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 drivesWe 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 Platform Modularity & Re-use, Data Science, Artificial Intelligence (AI) and the Internet of Things (IoT).Things.
Chief Technology Office (CTO) and Philips Research
The Chief Technology Office orchestrates innovation strategy and choices, and drivesWe strive for breakthrough innovations that can help drive fundamental shift in the healthcare industry, thereby supporting businesses to focus on selected must-win battles.
We drive adoption of digital architecture and platforms, as well asmoving to cloud-based Software-as-a-Service for informatics offerings, and excellence in software, Data Science and AI, across Philips’ businesses and markets. Philips Research initiates game-changing innovations that disrupt and cross boundaries in health technology to address opportunities for better clinical and economic outcomes and support the associated transformation of Philips into a digital solutions company. CTO and Research encompass the following organizations:
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. The role of Research increasingly goes beyond early-stage proof-of-concept, including advanced development on the target product and digital platforms, and market-driven innovation with lead customers.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, Innovation Transformation and Performance Management and public funding programs.
The Chief Architect Office, responsible for defining, steering and ensuring compliance and uptake of the Philips HealthSuite architecture for configurable and interoperable digital propositions, as well as modular System Architecture with the right balance between functionality allocated to hardware and software.The Software and System Engineering Centers of Excellence, driving adoption of industrysoftware engineering. Industry best practices in writinginclude creating and maintaining application-level software, modular and configurable system design and model-based system engineering.The Data ScienceWe drive our HealthSuite Architecture to help unlock the power of data and AI Center of Excellence, definingenable healthcare professionals, patients and deploying strategies and best practices for dealing responsibly and in a compliant way with Data Science and AI, developing common tools to facilitate the development process and co-creation with clinical partners.
Product Engineering
The Product Engineering organization is accountable for building world-class Idea to Market (I2M) capabilities and for driving excellence in product engineering across Philips worldwide. The Product Engineering organization includes the following:
Philips Innovation Services provides hardware and embedded software development & engineering, technology consulting, and low-volume specialized manufacturing.I2M Excellence is a global program to improve and harmonize Philips capabilities, processes and tools.Technical Expert Group supports innovation and industrialization teams with technical competences and application experience in materials, physics and chemistry.Product Platforms build on existing engineering capabilities and best practices within Philips, covering the full life cycle from design, development and engineering to delivery, maintenance and ultimately end of service.
Philips HealthSuite
Philips HealthSuite constitutes our common digital framework that connects consumers, patients, healthcare providers, payers and partners in a hybrid cloud-based connected health ecosystem of solutions, products, systems, services and devices, positioning HealthSuite as the System of Engagement on top of hospital systems of record.
Philips HealthSuite is managed and orchestrated across Innovation & Strategy and all Philips businesses. The majority of professional and consumer-oriented digital propositions offered by Philips leverage HealthSuite. A growing number of third-party companies have also adopted HealthSuite.
Innovation Hubs
To drive innovation effectiveness and efficiency, and to enable locally relevant solution creation, we have established four main Innovation Hubs for the Philips Group: Eindhoven (Netherlands), Cambridge (USA), Bangalore (India) and Shanghai (China).
Philips Innovation Center Eindhoven is Philips’ largest cross-functional Innovation Hub worldwide, hosting the global headquarters of many of our innovation organizations as well as the management of collaboration partnerships. Manystart of the company’s core research programs are run from here.Philips Innovation Center Cambridge, MA is focused on applications of Data Science and AI in Radiology, Ultrasound, and Acute care. It is the hub for key partnerships in North America, with top engineering institutions like MIT as well as top clinical sites, and for participation in government-funded programs.Philips Innovation Center Bangalore hosts activities from most of our operating businesses, as well as Innovation & Strategy and IT.idea-to-market (I2M) process. This is our largest software-focused site, with over 3,500 engineers. The Center also functions as the hub for market-driven innovation in surrounding geographies in Asia Pacific, Africa,intended to ensure that patient safety and Middle East & Turkey.- quality aspects of Philips
Innovation Center Shanghai combines digital innovation, researchproducts and solutions development formatch the China market, participating in local digital ecosystems, while several of its locally relevant innovations are also finding their way globally.
Alongside the hubs, where mostexpectations and criteria of the central Innovation & Strategy organization is concentrated togetherend-users in the field. We engage with selected business R&Dprofessional medical societies during regular and market innovation teams,ad hoc advisory boards to help us understand the criteria on patient safety and quality related to medical devices. Together with the Regulatory function, we continuecontribute to have significant, more focused innovation capabilities integrated into key technology centers at our other global business sites.
Chief Medical Office
The Chief Medical Office is responsible for clinical innovationevaluation during pre-market risk assessments, post-market surveillance, and strategy, hospital economics, clinical evidence and market access, as well as medical thought leadership,support any health hazards evaluations 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 and care provider.expert advice.
LeveragingWe leverage the knowledge and expertise of theour community of medical professional community across Philips, the Chief Medical Office includes many healthcare professionals who practice in the world’s leading health systems. Supporting the company’s objectives across the health continuum, its activitiesprofessionals. 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.
Philips Experience Design
Philips Experience Design isWe deploy our engineering capabilities to realize innovations that deliver on our customers’ needs, advancing the Quadruple Aim of better health outcomes, improved patient and staff experience, and lower cost of care.
We drive innovation effectiveness and enable locally relevant solution creation at four established innovation hubs: Eindhoven (Netherlands), Cambridge (USA), Bangalore (India) and Shanghai (China). These four hubs form a global design function fornetwork, together with the company, ensuringother smaller innovation and research sites in their respective regions, to provide access to each other’s capabilities to serve businesses, markets, and customers globally.
We ensure that the user experiences of our innovations are inspiring, meaningful, people-focused, and locally relevant. Experience Design is also responsible for ensuring that the Philips brand experience is differentiating, consistently expressed, and drives customer preference.
Philips Experience Design partners with stakeholders across the organization to develop methodologies and enablers for defining value propositions, to implement data-enabled design tools and processes to create meaning from data, and to leverage Co-create methodologies. The latter facilitate exploration with customers and patients with the aim of creating solutions that are tailored specifically to the challenges facing them, as local circumstances and workflows are key ingredients 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 consistentan engaging and differentiating design language system (DLS) that applies tois embedded in software, hardware, and services across our operating businesses. In recognition of our continued excellence,2022, Philips received 148a total of 171 awards for design awardsexcellence.
During 2022, Innovation & Strategy started to refocus R&D to deliver a greater return on investments by being selective in 2019.our choice of innovations in which to invest. We stopped projects and reduced the workforce by 5%. As part of the strategy to create value with sustainable impact, resources will shift to the businesses to innovate closer to, and with, customers.
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 64,50056,000 patent rights, 39,00033,000 trademarks, 88,500114,000 design rights and 3,200 domain names. Philips filed 1,015920 new patents in 2019,2022, with a strong focus on the growth areas in health technology services and solutions.
Philips earns substantial annual income from license fees and royalties. These are mostly earned on the basis of usage or fixed fees, recognized over the term of the contract or at a point in time.
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 centralfunctional costs to the business segments.businesses. The remaining part is accounted for as central'central costs', and includes costs and includesrelated to the Executive Committee Brand Management and Sustainability, as well as functional servicesGroup functions such as ITStrategy, Legal and Real Estate.Audit fees.
Real estate
Philips is present in more than 7075 countries globally and has its groupcorporate 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 2019,2022, we relocated key offices in Budapest (Hungary), Carlsbad (USA) and Haifa (Israel), and manufacturing operations in Zhuhai (China). We invested in, three Global Business Services locationsamongst others, our R&D and manufacturing sites in the US, Poland and India. To attract R&D talent, we invested across the globe in prime innovation locations, such as Cambridge and PittsburghBangalore (India), Pune (India), Plymouth (USA), Tokyo, Eindhoven, BangalorePittsburg (USA), Shenzhen (China) and others.Suzhou (China) to create an engaging work environment that fosters the attraction and retention of 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 concepts to support hybrid working. We also announced that Philips' headquarters will be moving to a new location in Amsterdam in 2025.
The vast majorityIn line with our Environmental ESG commitments 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 to 25 kilotons in 2022. In addition, we reached 77% renewable energy in 2022, already exceeding our target of 75% by 2025. Anticipating the higher cost of energy for 2023, we redoubled our efforts on energy-saving measures. Combined with portfolio optimization, this resulted in a 5.3% reduction in 2022 total energy consumption compared to 2020 and 2021.
Over 75% of our locations consist ofare leased property,properties, and we manage thesevacancy closely to keep the overall vacancy rates of our property below 5% and to ensure the right level of space efficiency and flexibility to followsupport our business dynamic. The net book value of our land and buildings at December 31, 2019, represented EUR 1,510 million; construction in progress represented EUR 100 million. The increase compared with 2019 is mainly due to IFRS 16 implementation; for more information please refer to Significant accounting policies. Our current facilities are adequate to meet the requirements of our present and foreseeable future operations. As expected, occupancy rates in our offices continued to be low in the first half of 2022 in the aftermath of COVID-19. In the second half of 2022 we saw occupancy stabilizing and we are currently evaluating options to right-size our office footprint, to further adopt task-based working principles, and to cater for meaningful presence in inspiring layout and workplace solutions. The net book value of our land and buildings as of December 31, 2022, represented EUR 1,336 million; construction in progress represented EUR 23 million.
6.46.5Our geographies
6.4.16.5.1Our Markets
A Market consists of one or more countries operatingWe address North America, Western Europe and other mature geographies, as a single organization under a Market Leader. Our 17 Market organizations (inwell as Greater China and other growth geographies, via three market groups:groups – North America, Greater China and International Markets)Markets – which are active in more than 100 countries worldwide, working closely in an equal partnership with the various Businesses through Business-Market Combinations (BMCs).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, and to deliver orders and revenues and manage the market-oriented profit-and-loss account (P&L).orders. They act as the voice of the customer in the integrated value proposition process,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) – Image Guided Therapy Systems-North America, for example. The BMC makes agreements 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, quality & regulatory compliance and the collaborative P&L, while leveraging the functional excellence and shared services infrastructure of the company.
6.4.26.5.2Macro-economic landscape in 20192022
In 2019,2022, global economic activity slowed down compared to 2021, when the global economy rebounded strongly from a COVID-induced recession. Several factors were at play. Firstly, the re-opening of the economy for most of the world economic development slowed significantly fromin 2021 has disrupted global supply chains. Secondly, previous loose monetary policy, combined with supply chain issues, resulted in strong inflationary pressures commencing towards the level seenend of 2021. Thirdly, to combat high inflation, central banks around the globe have embarked on aggressive monetary policy tightening cycles. Consequently, global real GDP is estimated to have grown by 3.0% in 2018. According to2022, compared with the Economist Intelligence Unit (EIU) the aggregate6.0% estimated in 2021 for 2022. Looking ahead, Oxford Economics expects mild recessions for advanced economies in 2023, with full-year global real GDP growth rate of Philips’ geographies was expected to slow to an estimated 2.3% in 2019, from 3.0% in 2018, driven mainly by the trade tensions between the US and China. North America, Greater China and International Markets were all forecast to show slower GDP growth in 2019, with India, Turkey and Germany the main drivers of the slowdown in International Markets.at just 1.3%.
6.4.36.5.320192022 highlights from our Market Groups
North America
In 2019, Philips North America, accelerated its drive to deliver growth, customer preference, and innovative solutions across the United States and Canada. As Philips’ largest market, North America continuedPhilips continues to expand its scopeleadership in long-term strategic partnership, helping health systems like TriHealth, Prisma Health and scalethe University Health System of San Antonio to address interoperability challenges and standardize care across their networks. This includes entering into a 7-year agreement with a back-office services hubNorthwell Health, the largest healthcare provider in Nashville, upgraded innovation centers in Pittsburgh and Cleveland, and a new Philips Innovation Center and North America Headquarters in Cambridge (opened in January 2020).
Philips North America continuesthe state of New York, to expand consultative relationships with multiple leading health systems. At the Radiological Society of North America (RSNA) event in 2019, Philips announced a USD 50 million contract with Inspira Health tohelp standardize patient monitoring, drive interoperability, and drive innovation in diagnostic imaginglay the foundation for a future-proof, enterprise-wide platform. Moreover, Philips has signed multi-year agreements to continue to expand virtual monitoring and image-guided therapies in order to enhance patient care and improve clinical workflow performance. Philips also announced a strategic 5-year partnership agreement with the Regional Medical Center (RMC) in South Carolina to deliver innovative diagnostic imaging solutions for residents of four rural counties. The partnership will help RMC to standardize its imaging platforms and better integrate workflows and information.
To improve access to care, Philips works closely with the United StatesUS Department of Defense and Veterans Affairs, to advance AI technology for early detection of infectious disease, as well as advancing adoption of telehealth.Defense.
Philips and Walgreens have engagedcontinues to innovate in a joint effort to help consumers identify the root causes of their sleep issues by integrating the SmartSleep Analyzer tool into the Walgreens Find Care™ platform, and connecting them with Philips sleep solutions available for sale on Walgreens.com.
Inits personal health business and has started selling Philips maintains No. 1Avent breast pumps via Durable Medical Equipment (DME) providers to give parents the ability to receive breastfeeding equipment and supplies that may be covered by their health insurance. Celebrating 30 years in business in 2022, Philips Sonicare leads the electric rechargeable toothbrush market share in the US and Canada and is the most-recommended rechargeable toothbrush brand in the US. Philips Norelco remains the leading electric male grooming (electric)brand in the US and reusable baby bottles (Philips Avent)Canada, reaching the next generation of young men with our new OneBlade multi-purpose shaver.
Philips continues to be recognized for its Inclusion and Diversity efforts in North America, with Philips Sonicare the most-recommended brandincluding being recognized by US dental professionals.Forbes as one of their Best Employers for Diversity and Best Employers for Women.
Greater China
In China, Philips is benefitting from good growth,2022 we continued to provide innovative health technology solutions in support of China’s national health strategy, supplying national top talenthospitals, primary hospitals and speed of execution thanks to a strong local strategy.
Driven by Philips’ innovative portfolio of diagnostic imaging, image-guided therapy and patient monitoringprivate hospitals with tailor-made solutions the company continues to win large contracts in China. For example, Philips signed an agreement with the Xi’an International Medical Group to deliver solutions to addressfor their clinical and research needsneeds.
We partnered with national top hospitals Shanghai Ruijin Hospital and Sichuan Huaxi Hospital on clinical research that leverages our cutting-edge health technologies, and helped the 1st Affiliated Hospital of Guangzhou Medical University establish the largest sleep center in cardiology, radiation oncologySouth China by providing consulting services, key equipment and systems. We also provided Zhongshan-Jinshan Diabetic Foot Center with an integrated solution comprised of laser ablation and ultrasound screening technology, and supplied Hainan Dongfang People’s hospital with high-end patient monitors and defibrillators for use in acute and critical care. With the Chinese health technology market dominated by transactional vendor relationships, this long-term strategic partnership demonstrates the potentialAnd we provided Suzhou Kowloon Hospital with a radiology solution that included Ingenia Elition, Ingenia Ambition, Spectral CT and Azurion 7, and delivered a cardiology and smart hospital solution to shift from a transactional market dynamic also in China,Jiangxi Cihuai Cardiovascular and our willingness to team up to create more value in healthcare.
In July 2019, Philips completed the design direction for Xiamen Cardiovascular Hospital, and the design concept for the hospital's main lobby, emergency department, screening areas, cath labs, ICU, CCU and general ward. The result – achieved through an iterative co-creation process – is an exceptional patient experience and an efficient operational workflow.
Cerebrovascular Hospital.
In the consumer domain,space, in line with the consistent ‘Professional, Young and Premium’ positioning, we also deepened our cooperation with Alibabacontinue to accelerate local innovation to address the specific needs of local consumers. In 2022, locally initiated products generated 20% of revenue. In addition, Philips was recognized as a ‘gold brand’ (most favored brand of consumers) in 2019,the Personal Health category for the third consecutive year by China Business Weekly.
With the aim of better serving the Chinese market, we established three Philips Innovation Centers in China to forge a new consumer-centric business modelfocus on ‘local-for-local' innovation in systems, products and improve the way we leverage their digital ecosystem.software, and continue to drive ‘made in China’ fulfillment for professional medical equipment.
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 International Markets, Personal Health showed top-line resilience in 2022. Growth was strongest in the Middle East, Turkey & Africa, India and Japan, and overall our growth markets delivered double-digit growth. A major driver of growth in Middle East, Turkey & Africa came from activating GenZ consumers via social media and influencer marketing campaigns on TikTok and other markets around the world, platforms, focusing on relevant GenZ propositions such as OneBlade and Hair Care. In Japan, we successfully launched our latest Shaver series 9000 with SkinIQ technology via a cut-through advertising campaign in Hokkaido and Kanto prefectures. This campaign targeted younger audiences and succeeded in increasing market shares and distribution points.
Philips entered into many new customer partnerships, including the following:
Philips entered into partnerships with healthcare providers in the UK and Germany to deliver its vendor-neutral Radiology Operations Command Center, which enables remote collaboration between technologists, radiologists and imaging operations teams across multiple sites, to help increase productivity and expand access to MR- and CT-based diagnosis. In Germany, Philips signed a 10-year partnership agreement with the municipal hospital Städtisches Klinikum Braunschweig, one of the country’s largest care providers, to provide monitoring solutions and alarm management. In an interview with a German healthcare magazine, Dr. Andreas Goepfert, CEO Braunschweig Clinic, commented: “Quality of care is an important aspect that is safeguarded by such a partnership. Nowadays, it is difficult to imagine successful economic operation in the healthcare sector in the medium and long term without technology partners.” In the UK,Netherlands, Philips signed a long-term agreement with the Rijnstate hospital to deliver a wide range of advanced ultrasound devices for 17 different departments at multiple locations of the hospital. The agreement involves ultrasound devices and services for cardiological, vascular or radiological examinations, OB/GYN, as well as mobile devices for the emergency department.
In Spain, we entered intoprovided computed tomography, magnetic resonance and image-guided therapy solutions for several Spanish public hospitals as part of INVEAT, an impact initiative driving investment in high-technology equipment in the Spanish national health system. In Finland, Philips signed a 10-year agreement with Oulu University Hospital to deliver the latest Azurion image-guided therapy solutions, as well as maintenance, consultancy and financing services. In the SDA Imaging Center in Chelm, Poland, Philips installed an MR 5300 scanner with Ambient Experience technology, which combines images, sound and light to create an atmosphere that puts patients at ease and reduces the need to redo scans. In Romania, Philips is the trusted partner and supplier of medical equipment and solutions to Transylvania Hospital, a private medical initiative launched in September 2022. The medical technology we provided includes an Azurion 7 biplane angiograph, an Ingenia 3T MR system, and an Affiniti 50 Doppler ultrasound. In Turkey, as part of a project supported by the European Bank for Reconstruction and Development (EBRD), we installed 3,400 hospital patient monitors and 437 ultrasound systems across 250 different hospitals within a 4-month window. The Philips team also trained over 3,000 clinicians and monitored usage.
In Central Asia, we supplied equipment for Kazakhstan’s National Research Oncology Center and two multi-modality projects, while in Uzbekistan we won a project to equip Tashkent International Medical Clinic (TIMC) with advanced clinical technology solutions. In a 10-year partnership deal with the Cloud Nine hospital group in India, we connected 257 beds across 26 tele-ICU locations. In addition, some 2,000 Zenition C-arms and 500 Affiniti ultrasound systems were shipped from our manufacturing plant in Chakan.
In Japan, Philips signed a 10-year agreement with a large university hospital for the expansion of its eICU program for centralized, remote surveillance of high-risk ICU patients. Philips and Thanh Vu Medic Hospital Vietnam signed a 10-year strategic partnership agreement with Rutherford Diagnostics. This collaboration will utilize Philips’ innovative radiologyfor which Philips is providing state-of-the-art imaging technology, informatics connectivity, 10-year comprehensive service and Rutherford Diagnostics’ healthcare expertise5-year structured financing. In Fiji, Philips and Aspen Medical signed a 12-year strategic partnership agreement to deliversupply and integrate diagnostic imaging equipment and services for use in two public hospitals.
In Brazil, Philips´ joint venture to provide and operate advanced personalized diagnostic servicesimaging diagnostics in the state of Bahia via a Public-Private Partnership model continues to expand access to quality diagnostics and care for underserved populations, e.g. through a network of community diagnostic centers across England.
In Germany, we signed a comprehensive 10-year innovation partnership agreement with Klinikum Stuttgart. The agreement covers the replacement and procurement of state-of-the-art medical technology, including diagnostic imaging and intelligent informatics solutions, together with joint development of new workflows and connected care solutions.
In Denmark, we signed an agreement to deliver 10 advanced IQon CT systems to the hospitals of the Capital Region of Copenhagen, supporting the deliveryprovision of a precision diagnosisnew reporting center and 12 imaging units placed in 12 hospitals. Also in Brazil, a two-year Electronic Medical Record implementation at Fundação Hospitalar do Estado de Minas Gerais (FEHMIG) will integrate 23 public hospitals in the state of Minas Gerais. In Argentina, Philips successfully participated in a tender for each patient and enabling the transition to a value-based care model.
In Russia, Philips joined strategic initiatives of the Moscow city government aimed at modernizing Moscow’s healthcare system, which serves 12 million citizens. Philips’ focus is on improving the clinical experience and medical technology innovation. To this end, we are providing strategic design and technology planning consultancy, as well as an innovative approach to managing high-tech medical infrastructure. We are also delivering clinical decision support solutions for ICU and operating room environments.
In Vietnam, we announced a seven-year partnership agreement with Hong Duc General Hospital covering a comprehensive turnkey solution providing high-end imaging equipment for high-quality general healthcare services. Under this agreement,17 public hospitals. In Mexico, Philips willsecured a deal with Grupo Angeles to provide the newly built Hong Duc General Hospital II with the latest medical imaging, patient monitoringan extensive range of Diagnostic Imaging and healthcare IT solutions, as well as design, consulting and financing services.
In Indonesia, we announced the country’s first installation of the Philips IntelliSpace Critical Care and Anesthesia (ICCA) system at the Kasih Ibu Hospital in Denpasar, Bali. This represents a significant development in the digitization of patient treatment in Indonesia, with Philips’ interoperable digital technology, predictive trend analytics and smart algorithms helping to drive improved outcomes in acute care.Image Guided Therapy solutions.
6.56.6Supply chain and procurement
6.5.16.6.1Integrated Supply chainChain
In recent years, Philips has made the decision to regroup its multiple – business-specific – supply chains into theruns an Integrated Supply Chain under the leadership of the Chief Operations Officer. This(ISC), which encompasses supplier selection and management through procurement, manufacturing across all the industrial sites, logistics and warehousing operations, customer installation, as well as demand/supply orchestration across the businesses and markets. Striving for a balanced ‘regional vs global’ approach, the Integrated Supply Chain supports our business expansion, ensuring adequate capacity and speed while leveraging our global processes, standards and capabilities. In parallel, Philips has been optimizing its industrial footprint to become more efficient and effective.orchestration.
When selecting and evaluating partners, we consider not only business metrics such as cost, quality, and on-time delivery performance and cost, 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 Philips Supplier Quality Manual outlines Philips’ quality, regulatory, product, process and customer requirements. The standards outlined in this manual underpin agreements between suppliers and Philips, and guide compliance with Philips’ quality standards.
Addressing immediate challenges
2022 continued to test the resilience of supply chains globally. The Russia-Ukraine war continues to put severe pressure on the commodity landscape and supply chains, and has contributed to the sharp rise in energy and food prices and extreme inflation rates. This came on top of a pre-war environment of low inventories and long lead times, with the accompanying build-up of backlog orders. In addition, the Chinese government’s zero-COVID policy in 2022 again led to outages and supply chain issues. Furthermore, Philips has been hampered by an aging product portfolio with older technology (component designs) and a fragmented supplier landscape. As a result, our lead times to customers suffered, for which we are sorry and have defined corrective actions.
Under these market circumstances, the ISC function’s priority was to endeavor to safeguard continuity of supply, with dedicated Procurement 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. For example, we have placed non-cancellable semiconductor orders for a 12-month horizon to ensure our place in the queue. 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 supply for life-saving equipment.
In 2022, extremely high energy costs, especially in Europe, and increasing labor costs driven by inflation led to a significant rise in production/operational cost in our supply base. In the second half of the year, these same drivers led to a slowdown of demand, and spot prices for commodities and energy started to come off from their historical peaks in the second quarter. However, costs for production and materials remained at historical elevated levels. Specifically for electronic components, although the supply crunch has receded from its peaks, distributor data suggest that shortages will continue into 2023.
For information about the Philips Respironics recall and remediation effort, please refer to Quality & Regulatory and patient safety.
Driving end-to-end supply chain reliability and agility
Whereas Philips’ supply chain organization historically delivered efficiencies through a functional orientation, the above-mentioned factors required much greater agility for our businesses, each having their own specific requirements. We are moving to a business and customer-centric orientation to address end-to-end visibility and improve reliability and outcomes by implementing solutions that are tailored to specific business needs.
Much like the rest of the industry, we remain exposed to inflation and the continued geopolitical tensions around the world. 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, and to reduce our environmental footprint. 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 continue to make progress in transforming our warehousing and distribution operations into a more customer-centric and agile network. In 2022, we reduced our warehousing footprint by 31% compared to 2021, essentially through consolidation and servicing of multiple businesses from a single location.
On the logistics front, we have established long-term contracts with suppliers, with the aim of increasing reliability as well as secured costs and availability on contracted lanes. We continue to explore and implement solutions to diversify transportation options to increase reliability while reducing carbon emission and cost.
Philips Group
Supplier spend analysis per region
inin %
2019
6.5.2Procurement
The foremost factor in 2019 was the increasing trade tensions and US-China import tariffs, which caused direct and indirect financial headwinds. Procurement performance was therefore still highly dependent on product concept re-engineering and sourcing strategies.
During the year, economic growth slowed in advanced and emerging economies, and geopolitics increased uncertainties. This resulted in downward pressure on raw material and component market prices. Looking ahead, we are concerned about escalating trade restrictions, political tensions and the potential impact of Brexit. Mitigation actions are not always possible and in any case costly.
Throughout 2019, Philips focused on capturing market opportunities wherever possible, as well as on continuously optimizing design and costs via various programs, including Design for Excellence (DfX) conventions and Total Cost of Ownership (TCO) programs.
6.5.36.6.2Supplier sustainability
Philips’ missionpurpose 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 theycomponent suppliers or energy or logistics providers. Close cooperation with our suppliers not only helps us deliver health technology innovations, that improve people’s lives, it also supports new approaches that help us minimize our environmental impact and maximize the social and economic value we create.
Since 2003, we haveour sustainability strategy has included dedicated supplier sustainability programs as part of our sustainability strategy.programs. We have a direct (tier 1) business relationship with approximately 4,9005,300 product and component suppliers and 19,00017,100 service providers. In many cases, societalsocial 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 simplyjust managing compliance:compliance – it is about working togethercollaborating with our supply partners to havemake a positive and lasting impact. This is whyTherefore, the sustainability performance of our suppliers is fully embedded in our procurement organizationstrategy and strategy.way of working.
In 2022, we focused on further maximizing our positive impact deeper in the supply chain, strengthening our maturity-based approach to drive continuous improvement. Through the Supplier Sustainability Performance program, we improved the lives of approximately 459,000 workers in our supply chain (2021: 430,000). We also launched new ways to engage our suppliers, performing deep-dives at second-tier suppliers and actively supporting our strategic partners to become more effective in their own supply chain engagement approaches.
In addition, our improvement program has been adopted by the Responsible Business Alliance under the name Responsible Factory Initiative. This program enables other companies to work on continuously improving their suppliers’ sustainability performance through the same methodology as Philips.
Managing our large and complexdiverse 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. Insights gained through our 2019 stakeholder day were used as input to manage and fine-tune our supplier sustainability strategy. In 2019,2022, our programs focused specifically on improving suppliers’ sustainability performance, responsible sourcing of minerals, and reducing the environmental footprint of our supply base.
6.6Quality, Regulatory Compliance and Integrity
Our business success depends on the quality of our products, services and solutions, and compliance with many regulations and standards on a global basis. 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, involves increased levels of investment along with the demands 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
Responsibility for Quality & Regulatory Compliance rests with the Chief Quality & Regulatory Officer, who reports operationally to the Chief Operations Officer and – for regulatory matters – directly to the Chief Executive Officer.
Quality
Philips is committed to delivering the highest quality products, services and solutions compliant with all applicable laws and standards. We are investing substantially in embedding quality in our organizational culture. We will continue to raise the performance bar. Quality is an integral part of the evaluation of all levels of management. With consistency of purpose, top-down accountability, standardization, leveraging continuous improvement we aim to drive greater speed inbase by driving the adoption of a quality mindset throughout the enterprise.
Regulatory Compliance
Philips actively maintains Quality Systems globally that establish standards 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 are subject to compliance 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.
We have a growing portfolio of regulated products in our Personal Health and Sleep & Respiratory Care businesses. Through our growing Oral Healthcare, Mother & 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.
Often, 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 marketing of FDA regulated devices in the USA, and the CE Mark 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), 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 in 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 made a one-time EU MDR investment of around EUR 50 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.
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 the 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 provide consumables and the relevant accessories, to ensure uninterrupted availability of these 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.
Ethics & Integrity
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) – part of the Philips Business System – 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.
Science Based Targets.
7.1.1ResultsFactors impacting performance
In 2022, global economic activity slowed down compared to 2021, when the global economy rebounded strongly from a COVID-induced recession. Global real GDP is estimated to have grown by 3.0% in 2022, compared with the 6.0% estimated in 2021 for 2022.
The company’s business and results in 2022 were impacted by global and industry-wide challenges, including global supply chain constraints, COVID lockdown measures in China, inflationary pressures and the Russia-Ukraine war. Where relevant, the impact of these factors and the resulting uncertainties on the company’s results, balance sheet and cash flows have been considered and are reflected in amounts reported. Comparable sales*) declined by 3%, mainly due to operational and supply chain challenges, the COVID situation in China and the Russia-Ukraine war. We aim to offset the operational and supply challenges with specific programs to increase supply chain resilience, improve patient safety and quality, and simplify the organization to increase agility and structurally lower the cost base.
Global supply chain constraints
Limited availability and delays in the supply of certain components and products internationally – partly a consequence of COVID and the Russia-Ukraine war – impacted the company’s results in 2022. In addition, the supply chain constraints resulted in an increase in overall working capital balances, in particular inventories. Inventories increased compared to 2021, as work-in-process inventories could not be converted into finished goods available for sale due to the scarcity of certain components. Improved component supplies contributed to a comparable sales*) increase in the fourth quarter of 2022.
In response, we continue to drive significant actions to increase supply chain resilience and mitigate the impact of disruptions. We are: engaging with senior government officials, strategic suppliers and foundries to prioritize healthcare supplies; directly working on component issues across all tiers of suppliers; diversifying sourcing of high-risk components, with almost 400 alternate components certified to date. Lastly, we are also redesigning our printed circuit boards to qualify alternate sources of supply.
COVID situation in China
COVID continued to affect the company’s results, balance sheet and cash flows presented in these consolidated financial statements, in particular due to the lockdowns in China. Production in several of our factories, as well as those of our suppliers in China, was suspended periodically, which exacerbated the global supply chain and cost challenges. The China lockdowns impacted the results of operations due to lower sales and factory under-utilization.
COVID did not result in any material adjustments to the carrying amounts of assets and liabilities during 2022. In addition, there were no material changes to treasury and other financial risks directly related to the pandemic.
Cost inflation
Global inflation and cost headwinds, including higher energy prices, resulted in an increase in cost levels and negatively impacted gross margin in 2022.
In response, we have been raising pricing by low- to mid-single-digits since the beginning of 2022. In the Personal Health businesses, the higher sales prices contributed to a gross increase in sales of around 3% compared to 2021. In the Diagnosis & Treatment and Connected Care businesses, due to the longer equipment order book cycles, the price increases take longer to be fully realized in the profit and loss account.
Russia-Ukraine war
Since February 2022, Philips has realignedsubstantially reduced its activities in Russia. This includes stopping shipments of our consumer health products to the compositioncountry (except for certain child care products), the suspension of marketing activities, and winding down of R&D activities. We are focusing our remaining activities in Russia on the delivery of medical systems, devices, and spare parts to healthcare providers to the extent possible under export controls and sanctions. Philips' operations in Russia and Ukraine on a combined basis represented less than 2% of group sales in both 2021 and 2022. The asset value of the activities in Russia and Ukraine, mainly working capital, was less than 1% of the consolidated total assets as of December 31, 2021 and 2022. There have been no significant asset write-downs to date, but we continue to closely monitor developments in this regard. The Russia-Ukraine war continues to put severe pressure on the global commodity landscape and supply chains, and has contributed to the sharp rise in energy and food prices and high cost inflation, as further discussed above.
Climate-related matters
In preparing the consolidated financial statements, management has considered the impact of climate 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 judgments, estimates or assumptions. The financial impacts considered include specific climate mitigation measures, such as the use of lower carbon energy sources, the cost of developing more sustainable product offerings, and expenses incurred to mitigate against the impact of extreme weather conditions. To meet its long-term Science Based Targets and reduce its full value chain emissions in line with a 1.5 °C global warming scenario, Philips has entered into a number of power purchase agreements. Some of these contracts have a fixed price structure, which in 2022 helped to mitigate the impact of increased electricity prices.
Actions in response
In 2022, Philips took several actions to enhance performance and productivity in the supply chain (e.g. dual sourcing, supplier consolidation, warehouse footprint rationalization), R&D (e.g. shifting the focus to fewer, high-impact projects in the innovation pipeline) and quality (e.g. enhancing processes, increasing capabilities and product management). As a result, Philips recorded non-cash portfolio realignment impairments and charges of EUR 282 million in 2022, consisting of R&D project impairments of EUR 134 million, Connected Care portfolio realignment charges of EUR 109 million and asset impairments in Sleep & Respiratory Care of EUR 39 million.
As announced in October 2022, Philips has initiated general productivity actions, including simplifying the organization to streamline the way of working and reduce operating expenses. This includes an immediate reduction of around 4,000 positions globally across the organization, subject to consultation with the relevant workers councils and social partners, with severance and termination-related costs of EUR 80 million incurred in 2022 and an additional EUR 50 million expected in 2023.
On January 30, 2023, Philips announced plans to create value with sustainable impact, which is based on focused organic growth to deliver patient- and people-driven innovation at scale, with improved execution as a key value driver, prioritizing patient safety and quality, supply chain reliability and a simplified operating model. In addition to the reduction of its reporting segments effective asworkforce by 4,000 roles announced in October 2022, Philips plans to reduce its workforce by an additional 6,000 roles globally by 2025, of January 1, 2019,which 3,000 will be implemented in 2023, in line with relevant local regulations and processes. These reductions are focused on Corporate and Functions optimization and non-core activities, for further details please referwhich charges in 2023 are expected to Significant accounting policies.
Sales
The composition of sales growth in percentage terms in 2019, compared to 2018 and 2017, is presented in the table below.be approximately EUR 470 million.
Philips Group
Sales
in millions of EUR unless otherwise stated
2017 - 2019
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Diagnosis & Treatment businesses | | | |
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Comparable sales growth (%)1) | | | |
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Connected Care 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) | | | |
7.1.2Results of operations
Sales
Group sales amounted to EUR 19,482 million in 2019, 8% higher on a nominal basis. Adjusted for a 3.0% positive currency effect and consolidation impact, comparable sales*) were 4.5% above 2018. The positive currency effect is mainly driven by the appreciationcomposition of the US dollar against the Euro.
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. The negative currency effect is mainly driven by the depreciation of the US dollar against the Euro.
Diagnosis & Treatment businesses
In 2019, sales amounted to EUR 8,485 million, 10% higher than in 2018 on a nominal basis. Excluding a 4.3% positive currency effect and consolidation impact, comparable sales*) increased by 5%, with double-digit growth in Image-Guided Therapy, high-single-digit growthpercentage terms in Ultrasound and low-single-digit growth in Diagnostic Imaging. The positive currency effect is mainly driven by the appreciation of the US dollar against the Euro.
In 2018, sales amounted to EUR 7,726 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%, with double-digit growth in Image-Guided Therapy and Ultrasound and low-single-digit growth in Diagnostic Imaging. The negative currency effect is mainly driven by the depreciation of the US dollar against the Euro.
Connected Care businesses
In 2019, sales amounted to EUR 4,674 million, 8% higher on a nominal basis2022, compared to 2018. Excluding a 4.6% positive currency effect2021 and consolidation impact, comparable sales*) increased by 3%, with low-single-digit growth2020, is presented in Sleep & Respiratory Care and Monitoring & Analytics. The positive currency effect is mainly driven by the appreciation of the US dollar against the Euro.following table.
In 2018, sales amounted to EUR 4,341 million, compared to 2017 sales remained flat on a nominal basis. Excluding a 3% negative currency effect and consolidation impact, comparable sales*) increased by 3%, with mid-single-digit growth in Sleep & Respiratory Care while Monitoring & Analytics remained flat year-on-year. Connected Care includes a negative impact from the consent decree of a 135 basis points. The negative currency effect is mainly driven by the depreciation of the US dollar against the Euro.
Personal Health businesses
In 2019, sales amounted to EUR 5,854 million, 6% higher on a nominal basis compared to 2018. Excluding a 0.9% positive currency effect and consolidation impact, comparable sales*) were 5% higher year-on-year, driven by double-digit growth in Oral Healthcare.
In 2018, sales amounted to EUR 5,524 million, a nominal decrease of 3% compared to 2017. Excluding a 5% negative currency effect and consolidation impact, comparable sales*) were 2% higher year-on-year, with mid-single-digit growth in Oral Healthcare and low-single-digit growth in Personal Care and Domestic Appliances. The negative currency effect is mainly driven by the appreciation of the US dollar against the Euro.
Other
In 2019, sales amounted to EUR 469 million, compared to EUR 530 million in 2018. The decrease was mainly due to lower royalty income and the divestment of the Photonics business in Q1 2019.
In 2018, sales increased by EUR 130 million compared to 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.
Performance per geographic cluster
Philips Group
Sales by geographic area
in millions of EUR unless otherwise stated
2017 - 2019
| | | |
|---|
| | | |
| | | |
| | | |
| | | |
| | | |
Comparable sales growth (%)1) | | | |
| | | |
| | | |
Comparable sales growth (%)1) | | | |
| | | |
| | 2020 | 2021 | 2022 |
|---|
| Diagnosis & Treatment businesses | 8,175 | 8,635 | 9,168 |
| Nominal sales growth | (3.7)% | 5.6% | 6.2% |
| Comparable sales growth1) | (2.3)% | 8.1% | (0.7)% |
| | | | |
| Connected Care businesses | 5,543 | 4,573 | 4,403 |
| Nominal sales growth | 18.6% | (17.5)% | (3.7)% |
| Comparable sales growth1) | 21.6% | (22.6)% | (10.8)% |
| | | | |
| Personal Health businesses | 3,199 | 3,429 | 3,626 |
| Nominal sales growth | (9.0)% | 7.2% | 5.7% |
| Comparable sales growth1) | (6.2)% | 8.8% | 0.1% |
| | | | |
| Other | 396 | 519 | 629 |
| | | | |
| Philips Group | 17,313 | 17,156 | 17,827 |
| Nominal sales growth | 1.0% | (0.9)% | 3.9% |
| Comparable sales growth1) | 2.9% | (1.2)% | (2.8)% |
SalesGroup sales amounted to EUR 17,827 million in mature geographies in 2019 were EUR 769 million2022, 3.9% higher than in 2018, or 6% higher2021 on a nominal basisbasis. Considering a 6.7% positive effect from currency and 2% higher onconsolidation, comparable basissales*) decreased by 2.8%. SalesThis was driven by a positive currency effect, mainly due to appreciation of currencies against the euro, and affected all segments.
The order book at year-end 2022 was 10% higher than at the end of 2021, ensuring a higher coverage for sales in Western Europe were 4% higher year-on-year on a nominal basis and 2% higher on a comparable basis*), with mid-single-digit growth in the Personal Health businesses and low-single-digit growth in the Connected Care businesses, while2023. The increase mainly relates to the Diagnosis & Treatment businesses weredriven by Diagnostic Imaging. Comparable order intake decreased 3%, compared to 4% growth in line with 2018. Sales2021. In the fourth quarter of 2022, lower demand for COVID-19-related products compared to 2021 and company actions to improve the order book margin profile contributed to this decrease.
Group sales amounted to EUR 17,156 million in North America increased by EUR 613 million, or 10%2021, 0.9% lower than in 2020 on a nominal basis,basis. Considering a 0.3% positive effect from currency and increased 4% on aconsolidation, comparable basissales*), with mid-single-digit growth in 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.
Diagnosis & Treatment businesses
In 2022, sales amounted to EUR 9,168 million, 6.2% higher than in 2021 on a nominal basis. Considering a 6.9% positive currency effect and consolidation impact, comparable sales*) decreased by 0.7%. This was due to mid-single-digit growth in Image-Guided Therapy and low-single-digit growth in the Personal Health businessesEnterprise Diagnostic Informatics, which was more than offset by a decline in Ultrasound and Connected Care businesses. Sales in other mature geographies increased by 1%Diagnostic Imaging due to specific electronic component shortages.
In 2021, sales amounted to EUR 8,635 million, 5.6% higher than in 2020 on a nominal basisbasis. Considering a 2.5% negative currency effect and declined by 3% on aconsolidation impact, comparable basis*), as lower IP royalty income offset high-single-digit growth in the Personal Health businesses, mid-single-digit growth in the Connected Care businesses and low-single-digit growth in the Diagnosis & Treatment businesses.
Sales in mature geographies in 2018 were EUR 303 million higher than in 2017, or 2% higher on a nominal basis and 3% higher on 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 showed high-single-digit growth in the Connected Care 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 71 million, or 1% on a nominal basis, and increased 1% on a comparable basis*). Comparable sales*) in North America showed mid-single-digit growth in the Diagnosis & Treatment businesses, a low-single-digit decline in the Connected Care businesses, and a mid-single-digit decline in the Personal Health businesses. Sales in other mature geographies increased by 11% on a nominal basis and by 14% on a comparable basis*)8.1%. 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 businesses.
Sales in growth geographies in 2019 were EUR 591 million higher than in 2018, increased by 10% on both a nominal and a comparable basis*) with double-digit growth in the Diagnosis & Treatment businesses, high-single-digit growth in the Connected Care businesses and mid-single-digit growth in the Personal Health businesses. The increaseThis was driven by double-digit growth in China.
SalesImage-Guided Therapy and mid-single-digit growth in growth geographies in 2018 wereDiagnostic Imaging and Ultrasound, reflecting demand for Philips' portfolio and positive market conditions.
Connected Care businesses
In 2022, sales amounted to EUR 394,403 million, higher3.7% lower than in 2017, an increase of 1%2021 on a nominal basis. The increase onConsidering a 7.1% positive currency effect and consolidation impact, comparable basissales*) decreased by 10.8%. This was 8%mainly due to the consequences of the Respironics field action and the impact of supply chain headwinds.
In 2021, sales amounted to EUR 4,573 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.
Personal Health businesses
In 2022, sales amounted to EUR 3,626 million, 5.7% higher than in 2021 on a nominal basis. Considering a 5.6% positive currency effect and consolidation impact, comparable sales*) increased by 0.1%, consisting of a global increase of 2.5%, offset by a 2.4% decline in sales attributable to Russia due to the war with double-digit growth in the DiagnosisUkraine. Oral Healthcare and Mother & Treatment businesses and high-single-digit growth in the ConnectedChild Care businesses andrecorded mid-single-digit growth, which was offset by a mid-single-digit decline in Personal Care.
In 2021, sales amounted to EUR 3,429 million, 7.2% higher than in 2020 on a nominal basis. Considering a 1.6% negative currency effect and consolidation impact, comparable sales*) increased by 8.8%. This was driven by robust customer demand for new product introductions across the Personal Health businesses.world.
Other
In 2022, sales amounted to EUR 629 million, compared to EUR 519 million in 2021. The increase was mainly due to additional royalty income and supplies to the divested Domestic Appliances business.
In 2021, sales amounted to EUR 519 million, compared to EUR 396 million in 2020. The increase was mainly driven by double-digit growth in Latin Americasupplies to a divested business and mid-single-digit growth in China.higher royalty income.
Diagnosis & Treatment businesses
Performance by geographic area
Philips Group
Diagnosis & Treatment businesses salesSales by geographic area
in millions of EUR unless otherwise stated
2017 - 2019
| | | | 2020 | 2021 | 2022 |
|---|
| | | | 3,702 | 3,645 | 3,603 |
| | | | 6,884 | 6,781 | 7,588 |
| | | | 1,750 | 1,694 | 1,643 |
| | | | 12,336 | 12,120 | 12,833 |
| Nominal sales growth | | 2% | (2)% | 6% |
| Comparable sales growth1) | | 3% | (3)% | (1)% |
| | | | 4,977 | 5,036 | 4,993 |
| | | | |
| | | | |
Comparable sales growth (%)1) | | | | |
| Nominal sales growth | | (3)% | 1% | (1)% |
| Comparable sales growth1) | | 3% | (7)% |
| Philips Group | | 17,313 | 17,156 | 17,827 |
FromSales in mature geographies in 2022 were 6% higher than in 2021 on a geographic perspective, nominal basis and 1% lower on a comparable basis*). Sales in Western Europe were 1% 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, a low-single-digit decline in the Diagnosis & Treatment businesses, and flat growth in the Personal Health businesses. Sales in North America were 12% higher year-on-year on a nominal basis and were flat on a comparable basis*), as double-digit growth in the Personal Health businesses and low-single-digit growth in the Diagnosis & Treatment businesses were offset by a mid-single-digit decline in the Connected Care businesses, mainly due to the Sleep & Respiratory Care business. Sales in other mature geographies decreased by 3% on a nominal basis and 1% on a comparable basis*), with high-single-digit comparable sales growth*) in the Personal Health businesses more than offset by a high-single-digit decline in the Connected Care businesses and a low-single-digit decline in the Diagnosis & Treatment businesses.
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 low-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*). High-single-digit comparable sales growth*) in the Personal Health businesses and mid-single-digit comparable sales growth*) in the Diagnosis & Treatment businesses was partly offset by a double-digit decline in the Connected Care businesses.
Sales in growth geographies increasedin 2022 decreased by 14%1% on a nominal basis and 7% on a comparable basis*), with a double-digit decline in 2019, whilethe Connected Care and Personal Health businesses and a low-single-digit decline in the Diagnosis & Treatment businesses. The high-single-digit decline in comparable sales growth*) showedwas due to a double-digit decline in China and Russia & Central Asia, partly offset by double-digit growth in Middle East, Turkey & Africa.
Sales in growth geographies in 2021 increased by 1% on a nominal basis and 3% on a comparable basis*), with double-digit growth in the Personal Health businesses and high-single-digit growth in the Diagnosis & Treatment businesses, partly offset by a double-digit decline in the Connected Care businesses. The low-single-digit comparable sales growth*) was driven by double-digit growth in ChinaIndia, high-single-digit growth in Russia & Central Asia, and mid-single-digit growth in Central & Eastern Europe and Latin America. Sales in mature geographies increased by 8% on a nominal basis, while comparable sales*) showed low-single-digit growth, with mid-single-digit growth in North America and low-single-digit growth in other mature geographies, while Western Europe remained flat year-on-year.
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 5% on a nominal basis, while comparable sales*) showed mid-single-digit growth, with mid-single-digit growth in North America, Western Europe and other mature geographies.
Connected CareDiagnosis & Treatment businesses
Philips GroupDiagnosis & Treatment businesses
Connected care businesses salesSales by geographic area
in millions of EUR unless otherwise stated
2017 - 2019
| | | | 2020 | 2021 | 2022 |
|---|
| | | | 1,589 | 1,743 | 1,707 |
| | | | 2,931 | 3,088 | 3,514 |
| | | | 835 | 849 | 825 |
| | | | 5,355 | 5,681 | 6,046 |
| | | | 2,820 | 2,954 | 3,122 |
| | | | 8,175 | 8,635 | 9,168 |
| | | | |
Comparable sales growth (%)1) | | | | |
| Nominal sales growth | | (4)% | 6% | 6% |
| Comparable sales growth1) | | (2)% | 8% | (1)% |
From a geographic perspective, salesSales in growth geographies increased by 6% on a nominal basis in 2022, and on a comparable basis*) showed a low-single-digit decline, which was mainly due to China. Sales in mature geographies increased by 11%6% on a nominal basis and were flat year-on-year on a comparable basis*).
Sales in growth geographies increased by 5% on a nominal basis in 20192021, and on a comparable basis*) showed high-single-digit growth, with double-digit growth in China and mid-single-digit growth in Latin America. Sales in mature geographies decreaseddriven by 7% on a nominal basis and showed low-single-digit growth on a comparable basis*), with mid-single-digit growth in other mature geographies and low-single-digit growth in Western Europe and North America.
From a geographic perspective, sales on a nominal basis increased by 3% in growth geographies in 2018 and on a comparable basis*) showed high-single-digit growth, with double-digit growth in Latin America, India and Central & Eastern Europe and mid-single-digit growth in China. Sales in mature geographies remained flatincreased by 6% on a nominal basis and showed low-single-digithigh-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 and mid-single-digit growth in other mature geographies, offset by a low-single-digit decline in North America.Europe.
Personal HealthConnected Care businesses
Philips GroupConnected Care businesses
Personal Health businesses salesSales by geographic area
in millions of EUR unless otherwise stated
2017 - 2019
| | | | 2020 | 2021 | 2022 |
|---|
| | | | 1,106 | 764 | 646 |
| | | | 2,876 | 2,602 | 2,741 |
| | | | 722 | 605 | 544 |
| | | | 4,704 | 3,971 | 3,931 |
| | | | 839 | 602 | 472 |
| | | | 5,543 | 4,573 | 4,403 |
| | | | |
Comparable sales growth (%)1) | | | | |
| Nominal sales growth | | 19% | (17)% | (4)% |
| Comparable sales growth1) | | 22% | (23)% | (11)% |
Sales in growth geographies increased 6%decreased by 22% on a nominal basis in 20192022, and on a comparable basis*) showed a double-digit decline, with a double-digit decline across most regions, mainly due to the consequences of the Respironics field action and the COVID situation in China. Sales in mature geographies decreased by 1% on a nominal basis and showed a high-single-digit decline on a comparable basis*), with a double-digit decline in Western Europe and a mid-single-digit decline in North America.
Sales in growth geographies decreased 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.
Personal Health businesses
Personal Health businesses
Sales by geographic area
in millions of EUR unless otherwise stated
| | 2020 | 2021 | 2022 |
|---|
| Western Europe | 859 | 894 | 902 |
| North America | 937 | 939 | 1,209 |
| Other mature geographies | 190 | 198 | 211 |
| Total mature geographies | 1,986 | 2,032 | 2,322 |
| Growth geographies | 1,213 | 1,398 | 1,304 |
| Sales | 3,199 | 3,429 | 3,626 |
| Nominal sales growth | (9)% | 7% | 6% |
| Comparable sales growth1) | (6)% | 9% | 0% |
Sales in growth geographies decreased by 7% on a nominal basis in 2022, and on a comparable basis*) showed a double-digit decline, which was mainly attributable to China. Sales in mature geographies increased by 14% on a nominal basis, and on a comparable basis*) showed high-single-digit growth, driven by double-digit growth in North America.
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 6%by 2% on a nominal basis, and on a comparable basis*) showed mid-single-digit growth, with high-single-digit growth in other mature geographies,driven by mid-single-digit growth in Western Europe and low-single-digit growth in North America.
Cost of sales
Sales Philips Group
Cost of sales components
in growth geographies decreased 2% on a nominal basismillions of EUR unless otherwise stated
| | 2020 | as a % of sales | 2021 | as a % of sales | 2022 | as a % of sales |
|---|
| Costs of materials used | 4,221 | 24.4% | 4,142 | 24.1% | 4,320 | 24.2% |
| Salaries and wages | 2,316 | 13.4% | 2,245 | 13.1% | 2,462 | 13.8% |
| Depreciation and amortization | 591 | 3.4% | 479 | 2.8% | 535 | 3.0% |
| Other manufacturing costs | 2,364 | 13.7% | 3,123 | 18.2% | 3,316 | 18.6% |
| Cost of sales | 9,493 | 54.8% | 9,988 | 58.2% | 10,633 | 59.6% |
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 2018manufacturing, and on a comparable basis*) showed mid-single-digit growth,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 645 million to EUR 10,633 million in 2022, compared to EUR 9,988 million in 2021, mainly due to increased expenses of EUR 217 million in salaries and wages, driven by an unfavorable foreign currency impact and wage inflation, partly offset by productivity measures. Other key factors influencing cost of sales were as follows:
- Cost of materials used increased by EUR 178 million in 2022, mainly due to an unfavorable foreign currency impact and cost inflation, partly offset by the reduced field action provision and productivity measures.
- Depreciation and amortization increased by EUR 56 million in 2022, mainly due to an unfavorable foreign currency impact.
- Other manufacturing costs increased by EUR 193 million in 2022, mainly driven by an unfavorable foreign currency impact and cost inflation, partly offset by the lower field action provision and productivity measures.
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 double-digit growththe Philips Respironics voluntary recall notification in Centralthe Sleep & Eastern Europe, high-single-digit growth in Latin America, and low-single-digit growth in Middle East & Turkey. Sales in mature geographies decreased 4% on a nominal basis and on a comparable basis*) showed a low-single-digit decline, with high-single-digit growthRespiratory Care business reflected in other mature geographies, a low-single-digit declinemanufacturing costs. Other key factors influencing cost of sales were as follows:
- Costs of materials used decreased by EUR 79 million in
Western Europe2021, mainly driven by productivity savings and a mid-single-digit declinepositive foreign currency impact, partly offset by the impact of increases in North America.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.
Gross margin
In 2019,2022, Philips’ gross margin increased towas EUR 8,8757,194 million, or 40.4% of sales, compared to EUR 8,5547,168 million, in 2018, while the margin decreased to 45.6% of sales from 47.2%or 41.8% of sales, in 2018.2021. Gross margin was flat year-on-year due to cost inflation and a decrease in sales, which was offset by a favorable foreign currency impact, a decrease in restructuring, acquisition-related and other charges, and productivity and pricing measures.
In 2021, Philips’ gross margin was EUR 7,168 million, or 41.8% of sales, compared to EUR 7,822 million, or 45.2% of sales, in 2020. The year-on-year decrease in thegross margin was mainly driven by lower IP royalty income and tariffs. Gross margin in 2019 included EUR 191 million of restructuring, acquisition-related and other charges, whereas 2018 included EUR 107 million of restructuring, acquisition-related and other charges. 2019 also includes charges related to the Consent Decree focused on defibrillator manufacturing in the US of EUR 29 million and afield action provision of EUR 12719 million related to legal matters. 2018 also included EUR 28 million(representing 4.2% of charges related tosales) in connection with the Consent Decree.
In 2018, Philips’ gross margin increased to EUR 8,554 million, or 47.2% of sales, from EUR 8,181 million, or 46.0% of sales, in 2017. The year-on-year increase was mainly driven by improved operational performancePhilips Respironics voluntary recall notification in the DiagnosisSleep & Treatment businesses and, Personal Health businesses and higher IP royalty income. Gross margin in 2017 included EUR 116 million of restructuring, acquisition-related and other charges. 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.Respiratory Care business.
Selling expenses
Selling expenses amounted to EUR 4,6824,609 million, in 2019, or 24.0%25.9% of sales, in 2022, compared to EUR 4,5004,258 million, or 24.8% of sales, in 2018. Selling2021. The year-on-year increase in selling expenses in 2019 includedof EUR 158351 million ofwas mainly due to an unfavorable foreign currency impact and an increase in restructuring, acquisition-related and other charges, compared to EUR 121 million in 2018. 2019 includes charges related to the Consent Decree of EUR 10 million and a provision of EUR 10 million related to legal matters. 2018 also included a EUR 18 million charge related to the conclusion of the European Commission investigation into retail price maintenance, and EUR 16 million related to the Consent Decree.charges.
Selling expenses amounted to EUR 4,3984,258 million, or 24.7%24.8% of sales, in 2017.2021, compared to EUR 4,056 million, or 23.4% of sales, in 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 in 2017 included EUR 140 million ofinclude restructuring, acquisition-related and other charges which includedof EUR 9140 million relatedin 2021, compared to the separation of Signify (former Philips Lighting) and EUR 4133 million of charges related to the Consent Decree.in 2020.
General and administrative expenses
General and administrative expenses amounted to EUR 631671 million, or 3.2%3.8% of sales, in 2019,2022, compared to EUR 631599 million, or 3.5% of sales, in 2018. 2019 included2021. The year-on-year increase of EUR 2472 million ofwas mainly driven by higher restructuring, acquisition-related and other charges, compared to EUR 30 million in 2018.charges.
General and administrative expenses wereamounted to EUR 577599 million, or 3.2%3.5% of sales, in 2017. 2017 included2021, compared to EUR 41630 million, or 3.6% of sales, in 2020. The year-on-year decrease of EUR 31 million in general and administrative expenses was mainly driven by lower restructuring, acquisition-related and other charges, which included charges of EUR 21 million related to the separation of Signify (former Philips Lighting).charges.
Research and development expenses
Research and development costs were EUR 1,8842,103 million, or 9,7%11.8% of sales, in 2019,2022, compared to EUR 1,7591,806 million, or 9.7%10.5% of sales, in 2018. 2021. The year-on-year increase of EUR 297 million was mainly driven by higher restructuring, acquisition-related and other charges in relation to R&D project impairments and an unfavorable foreign currency impact.
Research and development costs were EUR 1,806 million, or 10.5% of sales, in 2019 included2021, compared to EUR 1511,822 million, or 10.5% of sales, in 2020. The year-on-year decrease of EUR 16 million was mainly driven by lower restructuring, acquisition-related and other charges. 2021 includes EUR 101 million of restructuring, acquisition-related and other charges, compared to EUR 76131 million in 2018. 2019 includes EUR 92 million related to a value adjustment of capitalized development costs. 2018 also included EUR 12 million of charges related to the Consent Decree.
Research and development costs amounted to EUR 1,764 million, or 9.9% of sales, in 2017. Research and development costs in 2017 included EUR 104 million of restructuring, acquisition-related and other charges.2020.
Philips Group
Research and development expenses
in millions of EUR unless otherwise stated
2017 - 2019
| | 2020 | 2021 | 2022 |
|---|
| Diagnosis & Treatment | 891 | 910 | 1,124 |
| Connected Care | 547 | 543 | 637 |
| Personal Health | 190 | 190 | 200 |
| Other | 194 | 163 | 142 |
| Philips Group | 1,822 | 1,806 | 2,103 |
| As a % of sales | 10.5% | 10.5% | 11.8% |
Impairment of goodwill
In addition to the annual goodwill-impairment tests for Philips, trigger-based impairment tests were performed during the years 2022, 2021 and 2020. As a result of the tests, goodwill impairments were recorded of EUR 1,357 million in 2022, EUR 15 million in 2021, and EUR 144 million in 2020. The goodwill impairment of EUR 1,331 million in 2022 was recorded in the Sleep & Respiratory Care business and was due to revisions to the expected future cash flows. In addition, a EUR 27 million goodwill impairment was recognized in the Precision Diagnosis Solutions business.
During 2022, EUR 1,331 million of goodwill impairment charges were recorded in the Sleep & Respiratory Care business, due to revisions to the expected future cash flows. In addition, a EUR 27 million goodwill impairment was recognized in the Precision Diagnosis Solutions business. For further information refer to Goodwill.
Net income, Income from operations (EBIT) and Adjusted EBITA*)
Net income amounted to a loss of EUR 1,605 million, a decrease of EUR 4.9 billion compared to 2021, mainly due to a charge of EUR 1.5 billion related to goodwill and R&D impairments in 2022 and a gain of EUR 2.5 billion on the sale of the Domestic Appliances business in 2021. 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 2019 segment classifications.by segment.
Philips Group
Income from operations and Adjusted EBITA1)1)
in millions of EUR unless otherwise stated
2017 - 2019
| | | | | Income from operations | as a % of sales | Adjusted EBITA1) | as a % of sales |
|---|
| | | |
| 2022 | | | | | |
| | | | | 404 | 4.4% | 774 | 8.4% |
| | | | | (2,246) | (51.0)% | 95 | 2.2% |
| | | | | 515 | 14.2% | 538 | 14.8% |
| | | | | (202) | | (89) | |
| | | | | (1,529) | (8.6)% | 1,318 | 7.4% |
| | | |
| 2021 | | | | | |
| | | | | 941 | 10.9% | 1,071 | 12.4% |
| | | | | (722) | (15.8)% | 497 | 10.9% |
| | | | | 576 | 16.8% | 590 | 17.2% |
| | | | | (242) | | (105) | |
| | | | | 553 | 3.2% | 2,054 | 12.0% |
| | | |
| 2020 | | | | | |
| | | | | 497 | 6.1% | 818 | 10.0% |
| | | | | 704 | 12.7% | 1,191 | 21.5% |
| | | | | 362 | 11.3% | 433 | 13.5% |
| | | | | (300) | | (165) | |
| | | | | 1,264 | 7.3% | 2,277 | 13.2% |
Net income increased byIncome from operations in 2022 amounted to a loss of EUR 761,529 million, or (8.6)% of sales, compared to 2018,EUR 553 million, or 3.2% of sales, in 2021, mainly impacted by a charge of EUR 1.5 billion related to goodwill and R&D impairments. Adjusted EBITA*) in 2022 was EUR 1,318 million and the margin amounted to 7.4%, compared to EUR 2,054 million and a margin of 12.0% in 2021, primarily due to improvements in operational performance, lower net financial expensesthe sales decline and lower charges related to discontinued operations,cost inflation, partly offset by higher income tax expensepricing and productivity measures.
Amortization and goodwill impairment charges in 2022 were EUR 1,720 million. This includes a charge of EUR 1,331 million related to an impairment of goodwill in the Sleep & Respiratory Care business, a EUR 27 million goodwill impairment in the Precision Diagnosis Solutions business, and amortization charges of EUR 9722 million related to an impairment of goodwill.
a technology asset. In 2019, Income from operations amounted to2021, amortization and goodwill impairment charges were EUR 1,644337 million or 8.4% of sales,and included a decreasecharge of EUR 7513 million year-on-year . related to an impairment of goodwill and amortization charges of EUR 55 million related to an impairment of a technology asset.
Restructuring, acquisition-related and other charges amounted toin 2022 were EUR 4711,127 million. This includes: restructuring charges of EUR 185 million; EUR 282 million compared toportfolio realignment impairments and charges; EUR 299250 million for the Respironics field-action provision; EUR 210 million Respironics field-action running remediation costs; a EUR 60 million provision for public investigations tender irregularities; and EUR 59 million for provisions for quality actions in Connected Care. 2021 charges were EUR 1,164 million and included: a field action provision of EUR 719 million in 2018. 2019 includesconnection with the Philips Respironics voluntary recall notification; provisions for quality actions of EUR 94 million and other matters of EUR 53 million in Connected Care; 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 a divestment, chargesrelease of a legal provision of EUR 9938 million, a gain of EUR 33 million related to a value adjustment of capitalized development costs, a charge related to a litigation provision, charges related to the Consent Decree of EUR 44 millionminority participation, and a provisionbenefit from the re-measurement of environmental liabilities of EUR 22 million related to legal matters. 2018 included a gain of EUR 43 million related to a divestment. 2018 also included: EUR 56 million of charges related to the Consent Decree; EUR 18 million of the total EUR 30 million provision related to the conclusion of the European Commission investigation into retail pricing, of which the other EUR 12 million was recognized in Discontinued operations.million.
Adjusted EBITA*) amounted to EUR 2,563 million, or 13.2% of sales, and improved by EUR 197 million, or 10 basis points as a percentage of sales, compared to 2018, mainly due to sales growth and productivity, partly offset by lower IP royalty income, tariffs and investments.
The 2019 performance resulted in a decrease in Income from continuing operations attributable to shareholders per common share (in EUR) - diluted, of 7% fromwas EUR 1.39(1.84) in 20182022, compared to EUR 1.300.67 in 2019.2021. Adjusted income from continuing operations attributable to shareholders per common share (in EUR) - diluted*) was EUR 0.96 in 2022, compared to EUR 1.65 in 2021.
Net income in 2021 increased by 15% from EUR 1.76 in 2018 to EUR 2.02 in 2019.
In 2018, net income decreased by EUR 773 million2.1 billion compared to 2017,2020, mainly due todriven by the deconsolidationgain on the sale of Signify.the Domestic Appliances business, partly offset by the EUR 719 million field action provision.
In 2018, Income from operations increased by EUR 202 million year-on-yearin 2021 amounted to EUR 1,719553 million, or 9.5%3.2% of sales. 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 13.2%, 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 amounted toin 2021 were EUR 3661,164 million. This includes a field action provision of EUR 719 million in 2017, which included:connection with the Philips Respironics voluntary recall notification, provisions for quality actions of EUR 4794 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 includes a release of a legal provision of EUR 38 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 relateddue to quality and regulatory actions;changes in ventilator demand, EUR 3142 million of chargesseparation costs related to the separation of the Lighting business;Domestic Appliances business, a EUR 2638 million of provisionsprovision related to the CRT (Cathode Ray Tube) litigationlegal matters, and EUR 21 million related to pension 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 percentage 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*) per common share increased by 14% fromwas EUR 1.541.65 in 20172021, compared to EUR 1.761.74 in 2018.
2020.
Diagnosis & Treatment businesses
Income from operations increasedin 2022 decreased to EUR 660404 million, compared to EUR 629941 million in 2018. The year 2019 included2021. This was mainly due to cost inflation, partly offset by productivity measures. These factors also resulted in a decrease in Adjusted EBITA*) to 8.4% of sales in 2022.
Amortization and goodwill impairment charges in 2022 were EUR 196170 million and include EUR 22 million of charges related to amortizationan impairment of a technology asset in Image-Guided Therapy and a goodwill impairment compared toof EUR 9827 million in Precision Diagnosis Solutions. 2021 charges were EUR 155 million and included EUR 55 million of amortization charges in 2018. 2019 includes a charge of EUR 19 million related to an impairment of goodwill; the amortization charges mainly relate to intangible assetsa technology asset in Image-Guided Therapy.
Restructuring, acquisition-related and other charges to improve productivityin 2022 were EUR 222201 million and include EUR 120 million portfolio realignment impairments and charges and a provision of EUR 60 million for public investigations tender irregularities. 2021 charges amounted to a gain of EUR 25 million and included: restructuring charges of EUR 44 million; acquisition-related charges of EUR 48 million offset by a EUR 85 million gain related to the re-measurement of contingent consideration liabilities; and the release of a legal provision of EUR 38 million.
Income from operations in 2021 increased to EUR 941 million, compared to EUR 146497 million in 2018. 2019 includes charges of EUR 99 million related to a value adjustment of capitalized development costs.
Adjusted EBITA*) increased by EUR 206 million to 12.7%, mainly2020. This was primarily due to sales growth and productivity partlymeasures. These factors also resulted in an increased Adjusted EBITA*), which was 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 investmentsa EUR 85 million gain related to the re-measurement of contingent consideration liabilities, and tariffs.
Income from operations in 2017 amounted toa release of a legal provision of EUR 51238 million. 2020 charges were EUR 112 million or 7.0% of sales. The year 2017and included EUR 57 million of amortization charges. Theserestructuring charges, mainly relate to intangible assets in Image-Guided Therapy. Restructuring,EUR 73 million of acquisition-related and other charges to improve productivity wereoffset by a EUR 178101 million in 2017, which also included the chargesgain related to the acquisitionre-measurement of Spectranetics, as well as charges ofa contingent consideration liability, EUR 2238 million related to portfolio rationalization measures.
In 2018 Adjusted EBITA*) increased bylegal matters, and a EUR 12531 million and the margin improved to 11.3%, mainly due to growth and operational improvements.impairment of capitalized development costs.
Connected Care businesses
Income from operations in 2019 amounted2022 decreased to EUR 267(2,246) million, compared to EUR 399(722) million in 2018. The year 2019 includes2021. This was mainly due to the EUR 2191.3 billion goodwill impairment, the sales decline, the consequences of the Respironics field action and cost inflation. Adjusted EBITA*) was 2.2% of sales in 2022 and was also impacted by the sales decline and cost inflation, partly offset by productivity measures.
Amortization and goodwill impairment charges in 2022 were EUR 1,530 million and include EUR 1,331 million impairment of chargesgoodwill related to amortization and a goodwill impairment, compared to EUR 140 million of amortization charges in 2018. 2019 includes a charge of EUR 78 million related to an impairment of goodwill; the amortization charges mainly relate to acquired intangible assets in Sleep & Respiratory Care business. 2021 charges were EUR 161 million and Population Health Management. included a EUR 13 million impairment of goodwill related to the divested Personal Emergency Response Services (PERS) and Senior Living business.
Restructuring, acquisition-related and other charges amountedin 2022 were EUR 811 million and include: EUR 250 million for the Respironics field action provision; EUR 210 million Respironics running remediation costs; EUR 160 million portfolio realignment impairments and charges; and EUR 59 million provisions for quality actions in Connected Care. 2021 charges were EUR 1,058 million and included: 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.
Income from operations in 2021 decreased to EUR 131(722) million, in 2019, compared to EUR 122704 million in 2018. 2019 included EUR 44 million of charges related2020. This was mainly due to the Consent Decree.
decline in sales and the impact of the Respironics recall on the Sleep & Respiratory Care business. These factors also impacted Adjusted EBITA*) decreased by EUR 44 million to 13.2%, mainly due to tariffs, an adverse currency impact, mix and higher material costs.
Income from operations amounted to EUR 424 million, or 9.8%which was 10.9% of sales in 2017. The year 20172021.
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 138144 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 amortization charges. These charges mainly related to acquired intangible assets in Sleep & Respiratory Care and Population Health Management. Restructuringrestructuring and acquisition-related charges, amounted toprovisions for quality actions of EUR 12294 million in 2017. The year 2018 includedand other matters of EUR 5653 million, and a gain of chargesEUR 33 million related to the Consent Decree. The year 2017a minority participation. 2020 charges were EUR 209 million and included restructuring charges of EUR 4776 million, ofacquisition-related 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.
In 2018 Adjusted EBITA*) decreased by EUR 22 million, and the margin decreased to 15.2%charges of sales, mainlyEUR 43 million due to lower growth and adverse currency impacts.changes in ventilator demand.
Personal Health businesses
Income from operations in 2019 increased2022 decreased to EUR 844515 million, compared to EUR 796576 million in 2018. The year 2019 included2021. This was mainly driven by cost inflation and an adverse foreign currency impact, partly offset by pricing and productivity measures. These factors also resulted in a decrease in Adjusted EBITA*) to 14.8% of sales.
Amortization charges in 2022 were EUR 2515 million ofand include amortization charges compared to EUR 31 million in 2018. These charges mainly relaterelated to intangible assets in Mother & Child CareCare. 2021 charges were EUR 15 million and Domestic Appliances . included amortization charges related to intangible assets in Mother & Child Care.
Restructuring, acquisition-related and other charges in 2022 and 2021 were EUR 73 million, compared to EUR 33 million in 2018. 2019 includes a provision of EUR 22 million related to legal matters.
Adjusted EBITA*) increased by EUR 83 million to 16.1%, mainly due to sales growth, a positive mix impact and productivity, partly offset by tariffs.not material.
Income from operations in 2018 decreased by EUR 38 million, mainly due to a EUR 18 million charge related to the conclusion of the European Commission investigation into retail pricing and higher restructuring and acquisition-related charges. Income from operations amounted2021 increased to EUR 834576 million, or 14.7%compared to EUR 362 million 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 17.2% of sales,sales.
Amortization charges in 2017. The year 2017 included2021 were EUR 3915 million ofand include amortization charges. These charges mainly relaterelated to intangible assets in Domestic Appliances and Mother & Child Care. 2020 charges were EUR 16 million and 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 655 million in 2017.
Adjusted EBITA*) decreased byand included restructuring charges of EUR 19 million, while the margin improved to 15.6%, mainly due to operational improvements offset by adverse currency impacts.31 million.
Other
In Other we report on the items Innovation, IP Royalties, Central costs and Other.
In 2019, Income from operations totaledin 2022 amounted to a loss of EUR (127)202 million, compared to a loss of EUR (105)242 million in 2018. 2021. Adjusted EBITA*) in 2022 amounted to a loss of EUR 89 million, compared to a loss of EUR 105 million in 2021. Adjusted EBITA*) increased, mainly due to higher royalty income, partly offset by an adverse currency impact and investment in Quality & Regulatory.
Restructuring, acquisition-related and other charges amounted toin 2022 were EUR 43107 million compared to EUR 2 million in 2018. 2019 includes a gainand include restructuring charges of EUR 6461 million and a EUR 21 million impairment of intangible assets. 2021 charges were EUR 131 million and included a loss of EUR 76 million related to a divestment and a chargeEUR 64 million of separation costs related to the Domestic Appliances business, partly offset by a litigation provision, while 2018 included a gainbenefit from the re-measurement of environmental liabilities of EUR 4322 million.
Income from operations in 2021 was EUR (242) million, relatedcompared to a divestment.
EUR (300) million in 2020. Adjusted EBITA*) decreased byin 2021 was EUR 48(105) million, mainly duecompared to charges related to movementsEUR (165) million in environmental provisions and other non-recurring items.
In 2017,2020. Income from operations totaled EUR (252) million. Restructuring, acquisition-related and other charges amounted to EUR 60 million, which included: a EUR 59 million gain on the sale of real estate assets; EUR 31 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 Lumileds and Automotive businesses.
Adjusted EBITA*) increased, by EUR 129 million compared to 2017, mainly due to higher IP royalty income and revenuelower 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 innovation.the re-measurement of environmental liabilities of EUR 22 million. 2020 charges were EUR 118 million and included restructuring charges of EUR 37 million, EUR 42 million of separation costs related to the Domestic Appliances business, and EUR 21 million related to pension liability de-risking in the US.
Financial income and expenses
A breakdown of Financialfinancial income and expenses is presented in the following table.
Philips Group
Financial income and expenses
in millions of EUR
2017 - 2019
| | | | 2020 | 2021 | 2022 |
|---|
| | | | |
| Interest expense, net | | (160) | (141) | (210) |
| | | | 2 | - | - |
| | | | |
| Net change in fair value of financial assets through profit or loss | | 129 | 95 | 9 |
| | | | (15) | 6 | 2 |
Financial income and expenses | | | | (44) | (39) | (200) |
Net financialFinancial income and expenses decreased byresulted in a net expense of EUR 96200 million, year-on-year, mainlycompared to a net expense of EUR 39 million in 2021. 2022 includes lower gains on the value of Philips' minority participations and higher interest expense, primarily due to dividend income from investments, while 2018 included financial charges related to early redemption of EUR 46 million relatedand USD bonds and issuance of new EUR bonds in April 2022, compared to bond redemptions.2021. For further information, refer to Financial income and expenses.
Net interestFinancial income and expenses resulted in a net 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 bondsa net expense of EUR 46 million. Other financial income of EUR 4644 million in 2017 included dividends from Luminescence.2020. 2021 includes gains on the value of Philips' minority participations and higher net interest income. For further information, refer to Financial income and expenses.
Income taxes
Income tax expense decreased by EUR 10 million year-on-year, mainly due to lower income, partly offset by a non-deductible goodwill impairment in the Sleep & Respiratory Care business in 2022 and a one-off benefit relating to the recognition of tax assets due to a business transfer in 2021.
Income taxes amounted to a benefit of EUR 337 million.103 million in 2021. The effective income tax rate in 20192021 was 22.1%(20.0)%, compared to 12.8%17.6% in 2018,2020, mainly due to lower non-cashthe impact from the recognition of tax assets and other tax benefits from tax audit resolutions andas a result of a business integration compared to 2018, partly offset by lower provisions for tax risks. For 2020, we expect our effective tax rate to be withintransfer during the 24%-26% range, depending on the geographical mix of taxable income.
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. The decrease was mainly due to one-time non-cash benefits from tax audit resolutions and business integrations in 2018. Net impact of the US Tax Cuts and Jobs Act was not material in 2018.year.
InvestmentInvestments in associates
Results related to investments in associates improved from a loss of EUR 2 million in 2018 to EUR 1 million in 2019.
Results related to investments in associates improved from a loss of EUR 4 million in 20172021 to a loss of EUR 2 million in 2018, mainly due2022. In 2022, Philips recorded an impairment of EUR 66 million in relation to its interest in Candid Care Co. As part of the acquisition of Affera, Inc. by Medtronic plc in August 2022, the company sold its investment in Affera to Medtronic and recorded a gain of EUR 84 million on the sale.
Results related to investments in associates improved from a loss of EUR 9 million in 2020 to a loss of EUR 4 million impairment in 2017.2021. The number of associates increased compared to 2020. Although gains were recorded in a number of investments in associates, these were more than offset by losses in the remainder.
Discontinued operations
Philips Group
Discontinued operations, net of income taxes
in millions of EUR
2017 - 2019
| | | | 2020 | 2021 | 2022 |
|---|
Signify, formerly Philips Lighting | | | | |
The combined Lumileds and Automotive businesses | | | | |
| Domestic Appliances | | 206 | 2,698 | 3 |
| | | | (10) | 13 | 10 |
Net income of Discontinued operations | | | | 196 | 2,711 | 13 |
In 2022, Discontinued operations in 2019 mainly include net costs related toconsisted primarily of the Domestic Appliances business and certain other divestments whichthat were previously reported as discontinued operations.
Discontinued operations in 2018 mainly include dividends received of EUR 32 million and a EUR 218 million loss related to a value adjustment of the remaining interest in Signify.
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.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 74 million in 20182021 to EUR 53 million in 2019.2022.
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.
7.1.3Restructuring and acquisition-related charges and goodwill impairment charges
Philips Group
Restructuring and related charges
in millions of EUR
2017 - 2019
| | | | 2020 | 2021 | 2022 |
|---|
Restructuring and related charges per segment: | | | |
| Restructuring charges per segment: | | | |
| | | | 57 | 44 | 69 |
| | | | 76 | 42 | 43 |
| | | | 31 | (1) | 11 |
| | | | 37 | (5) | 61 |
| | | | 200 | 80 | 185 |
| | | | |
Cost breakdown of restructuring and related charges: | | | |
| | | | |
| | | |
Transfer to Assets held for sale | | | | |
| Cost breakdown of restructuring charges: | | | |
| Provision for personnel lay-off costs | | 78 | 17 | 136 |
Restructuring-related asset impairment | | | | 58 | 30 | 31 |
Other restructuring-related costs | | | | 64 | 33 | 18 |
| | | | 200 | 80 | 185 |
In 2019,2022, Philips initiated general productivity actions aimed at simplifying the organization to streamline ways of working and reduce operating expenses. This included an immediate reduction of around 4,000 positions globally across the organization, for which a restructuring charge of EUR 80 million was recorded. In addition, restructuring projects were executed during the year, of which the most significant restructuring projects impacted Other andthe Diagnosis & Treatment and Connected Care segments and mainly took place in the Netherlands, US and Germany.Netherlands. The restructuring mainly comprised mainly product portfolio rationalization and the reorganization of global support functions.
In 2018,2021, the most significant restructuring projects impacted the Diagnosis & Treatment and Connected Care 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 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.
For further information on restructuring, refer to Provisions.
Philips Group
Acquisition-related charges
in millions of EUR
2017 - 2019
| | | | 2020 | 2021 | 2022 |
|---|
| | | | (28) | (37) | (48) |
| | | | 22 | 51 | 65 |
| | | | |
| | | | |
| | | | (6) | 14 | 17 |
In 2019,2022, acquisition-related charges amounted to EUR 6917 million. The Connected Care segment recorded charges of EUR 65 million related to the acquisitions of BioTelemetry and Capsule Technologies, due to post-acquisition integration costs. The Diagnosis & Treatment businesses recorded a net gain of EUR 48 million, mainly related to a gain of EUR 92 million from the re-measurement of contingent consideration liabilities, partly offset by charges related to the acquisition of Spectranetics.
In 2021, acquisition-related charges amounted to EUR 14 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 net 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 4228 million, of acquisition-related charges, mainly related to a gain of EUR 101 million from the acquisitionre-measurement of Spectranetics, a US-based global leader in vascular intervention and lead management solutions
In 2018, acquisition-relatedcontingent consideration liability, partly offset by charges amounted to EUR 99 million. The Diagnosis & Treatment businesses recorded EUR 72 million of acquisition-related charges, mainly related to the acquisitionacquisitions of Spectranetics.
In 2017, acquisition-related charges amounted to EUR 106 million. The Diagnosis & Treatment businesses recorded EUR 92 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.
In addition to the annual goodwill-impairment tests for Philips, trigger-based impairment tests were performed during the years 2019, 2018 and 2017, resulting in EUR 97 million goodwill impairment, no goodwill impairment and an impairment of EUR 9 million for the respective years. The goodwill impairment recorded in 2019 relates to a lower sales outlook in the former Wellcentive business within the Connected Care businessSpectranetics and the closureHealthcare Information Systems business of the Neuro business within the Diagnostic & Treatment business.
For further information on the goodwill sensitivity analysis, please refer to Goodwill.Carestream Health.
7.1.4Acquisitions and divestments
Acquisitions
In 2019,2022, Philips completed three acquisitions, with the Healthcare Information Systems businessacquisitions. The acquisition of Carestream Health beingVesper Medical Inc., completed on January 11, 2022, was the most notable. Acquisitions in 20192022 and prior years led to acquisition and post-merger integration charges of EUR 42 million in the Diagnosis & Treatment businesses and EUR 2665 million in the Connected Care businesses.
In 2018,2021, Philips completed nine acquisitions, with EPD Solutions Ltd. (EPD) being the most notable.two acquisitions: BioTelemetry, which was completed on February 9, 2021, and Capsule Technologies, which was completed on March 4, 2021. Acquisitions in 20182021 and prior years led to acquisition and post-merger integration charges of EUR 72 million in the Diagnosis & Treatment businesses and EUR 2651 million in the Connected Care businesses.
In 2017,2020, Philips completed severalthree acquisitions, with The Spectranetics Corporation (Spectranetics)Intact Vascular 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 20172020 and prior years led to acquisition and post-merger integration charges resulting in a gain of EUR 9228 million in the Diagnosis & Treatment businesses and charges of EUR 1322 million in the Connected Care businesses.
Divestments
Philips completed two divestments in 2019 which resulted in an aggregated cash consideration of EUR 122 million and a gain of EUR 62 million. The most notable divestment was the Photonics business in Germany.
In 2022, Philips completed one divestment, which was not material.
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 2018.a EUR 2.5 billion gain after tax and transaction-related costs; reported in Discontinued Operations.
In addition, Philips completed the divestment of the Personal Emergency Response Services (PERS) and Senior Living business on June 30, 2021, and September 17, 2021, respectively, as well as completing 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 involved an aggregated consideration of EUR 58 million and resulted in a gainloss of EUR 44 million.76 million, which is included in Other business expenses in our Consolidated statements of income.
Apart from the sale of the Combined Lumileds and Automotive businesses and the deconsolidation of Signify, Philips completed twodid not complete any divestments during 2017 at an aggregate cash consideration of EUR 54 million.
in 2020.
For details, please refer to Acquisitions and divestments.
7.1.5Changes in cash and cash equivalents, including cashCash flows
The movements in cash and cash equivalents balance for the years ended December 31, 2017, 20182020, 2021 and 20192022 are presented and explained below:in the following table.
Philips Group
Condensed consolidated cash flows statements
in millions of EUR
2017 - 2019
| | | | 2020 | 2021 | 2022 |
|---|
| | | | |
| Beginning cash and cash equivalents balance | | 1,425 | 3,226 | 2,303 |
Net cash flows from operating activities | | | | 2,511 | 1,629 | (173) |
| Net cash flows from investing activities | | | |
| | | | (876) | (729) | (788) |
| | | | |
Other cash flows from investing activities | | | | (391) | (2,943) | (698) |
| Net cash flows from financing activities | | | |
Treasury shares transactions | | | | (297) | (1,613) | (174) |
| | | | 783 | (251) | 1,092 |
Dividend paid to shareholders of the Company | | | | |
Sale of shares of Signify (former Philips Lighting), net | | | | |
| Dividend paid to shareholders of the company | | (1) | (482) | (412) |
| | | | (57) | 62 | 34 |
Net cash flows discontinued operations | | | | |
| | | | |
| Net cash flows from discontinued operations | | 129 | 3,403 | (12) |
| Ending cash and cash equivalents balance | | 3,226 | 2,303 | 1,172 |
Net cash provided by (used for)flows from operating activities
Net cash flows provided byfrom operating activities amountamounted to an outflow of EUR 2,031173 million in 2019,2022, compared to an inflow of EUR 1,7801,629 million in 2018.2021. This decrease is mainly due to lower cash earnings, increased working capital and cash costs related to the Philips Respironics field action. Free cash flow*) amountamounted to a cash outflow of EUR 1,053961 million in 2019,2022, compared to an inflow of EUR 984900 million in 2018.2021.
NetIn 2021, net cash flows provided byfrom operating activities amounted to EUR 1,7801,629 million, in 2018, 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 in 2018, 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.
In 2020, net cash flows from operating activities amounted to EUR 2,511 million, and Free cash flow*) amounted to EUR 1,635 million.
Net cash provided by (used for) investing activities
In 2019, cash flows from investing activities amount to a
Net cash inflow of EUR 376 million, mainly due to proceedsflows from the sale of the remaining Signify shares amounting to EUR 549 million and net cash proceeds from divestment of businesses amounting to EUR 146 million, received mainly from divested businesses held for sale. Other investing activities mainly include acquisitionconsist of businesses (including acquisition of investments in associates) of EUR 255 millionnet capital expenditures and EUR 166 million netother cash used for foreign exchange derivative contracts related to activities for funding and liquidity management.flows from investing activities.
In 2018,2022, other cash flows from investing activities amounted to a cash outflow of EUR 690698 million, mainly due to acquisitionacquisitions of businesses (including acquisition of investments in associates)Vesper Medical and Cardiologs amounting to EUR 628 million. EPD was the biggest acquisition in 2018, resulting in a cash outflow of EUR 273 million, including the subsequent payments. Net cash proceeds from divestment of businesses amounted to EUR 70414 million and were received mainly from divested businesses held for sale. Other investing activities mainly included EUR 177 million net cash used for foreign exchange derivative contracts related to activities for funding and liquidity management.
new minority investments.
In 2017,2021, other cash flows from investing activities amounted to a cash outflow of EUR 2,5142,943 million, mainly due to the acquisitions of businesses (including acquisition of investments in associates)BioTelemetry and Capsule Technologies amounting to EUR 2,3442.8 billion.
In 2020, other cash flows from investing activities amounted to a cash outflow of EUR 391 million, which includedmainly due to the acquisition of SpectraneticsIntact Vascular for EUR 1,908 million. Net cash proceeds from divestment of businesses amounted to EUR 64241 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.
investments in other non-current financial assets.
Net cash provided by (used for)flows from financing activities
In 2019,Net cash flows from financing activities consist of treasury shares transactions, mainly include the share buy-back activities, which result in EUR 1,318 million net cash outflow. Philips' shareholders were given EUR 775 million including costs in the form of a dividend, of which the cash portion of the dividend amounts to EUR 453 million. Changeschanges in debt, mainly includes the net proceeds from the Green Innovation Bond issued of EUR 744 million, partly offset by outflows related to bond maturity of EUR 500 milliondividend paid and lease payments.other cash flow items.
In 2018,2022, treasury shares transactions mainly included the share buy-backbuyback activities, which resulted in EUR 948174 million net cash outflow. Changes in debt mainly includes new bonds issued of EUR 2 billion and new term loan issued of EUR 500 million, partly offset by bond repayments of EUR 1.2 billion. Philips’ shareholders were givenreceived a total dividend of EUR 738741 million, in the form of a dividend,including costs, of which the cash portion of the dividend amounted to EUR 401412 million.
In 2021, treasury shares transactions mainly included the share buyback activities, which resulted in EUR 1,613 million net cash outflow. Changes in debt mainly includes EUR 866 million cash outflow relatedrelates to the bond redemptionshort-term debt and EUR 990 million cash inflow from bonds issued.
In 2017,lease repayments. Philips’ shareholders were givenreceived a total dividend of EUR 742773 million, in the form of a dividend,including costs, of which the cash portion of the dividend amounted to EUR 384482 million. Net
In 2020, treasury shares transactions mainly included the share buyback activities, which resulted in EUR 297 million net cash proceeds from the sale of Signify shares amounted to EUR 1,060 million. Changeoutflow. Changes in debt mainly includes aincluded EUR 1.2 billion cash outflow related to the bond redemption and EUR 1 billion991 million cash inflow from the issuance of two new bonds issued. Additionally, net cashunder the EMTN program, partly offset by outflows for share buy-back and share delivery totaled EUR 414 million.
related to lease payments. The 2019 dividend was distributed fully in shares in July 2020.
Net cash provided by (used for)flows from discontinued operations
Philips Group
Net cash provided by (used for) discontinued operations
in millions of EUR
2017 - 2019
| | | |
|---|
Net cash provided by (used for) operating activities | | | |
Net cash provided by (used for) investing activities | | | |
Net cash provided by (used for) financing activities | | | |
Net cash provided by (used for) discontinued operations | | | |
In 2019,2022, net cash used for discontinued operations consists primarily of a divestment formerly reported as discontinued operations.was EUR 12 million mainly related to previously disposed businesses.
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 includes 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 2020, net cash provided by discontinued operations mainly related to the Domestic Appliances business, partly offset by advance income tax payments amounting to EUR 78 million.
7.1.6Financing
Condensed consolidated balance sheets for the years 2017, 20182020, 2021 and 20192022 are presented below:in the following table:
Philips Group
Condensed consolidated balance sheets
in millions of EUR
2017 - 2019
| | | | 2020 | 2021 | 2022 |
|---|
| | | | 11,012 | 14,287 | 13,764 |
Property, plant and equipment | | | | 2,682 | 2,699 | 2,638 |
| Investments and financial assets | | 781 | 1,121 | 1,334 |
| Deferred tax assets | | 1,820 | 2,216 | 2,449 |
| | | | 2,993 | 3,450 | 4,049 |
| | | | 4,537 | 4,191 | 4,616 |
Assets classified as held for sale | | | | |
| | | | 663 | 693 | 665 |
| | | | (3,854) | (3,784) | (3,635) |
| | | | (1,980) | (2,313) | (2,115) |
Liabilities directly associated with assets held for sale | | | | |
| Contract liabilities | | (1,643) | (1,936) | (2,210) |
| | | | (1,402) | (1,473) | (1,244) |
| | | | 15,609 | 19,151 | 20,311 |
| | | | |
Cash and cash equivalents | | | | 3,226 | 2,303 | 1,172 |
| | | | (6,934) | (6,980) | (8,201) |
| | | | (3,708) | (4,676) | (7,028) |
Non-controlling interests | | | | (31) | (36) | (34) |
| | | | (11,870) | (14,438) | (13,249) |
| | | | (15,609) | (19,151) | (20,311) |
7.1.7Debt position
Total debt outstanding at the end of 20192022 was EUR 5,4478,201 million, compared with EUR 4,8216,980 million at the end of 2018.2021.
Philips Group
Balance sheet changes in debt
in millions of EUR
2017 - 2019
| | | |
|---|
Additional leases under IFRS16 | | | |
New borrowings/repayments short-term debt | | | |
New borrowings long-term debt | | | |
Repayments long-term debt | | | |
| | | |
Currency effects, consolidation changes and other | | | |
Transfer to liabilities classified as held for sale | | | |
| | | |
| | 2020 | 2021 | 2022 |
|---|
| New lease liabilities | 128 | 164 | 104 |
| New borrowings long-term debt | 1,065 | 76 | 2,516 |
| Repayments long-term debt incl. leases | (298) | (302) | (1,472) |
| New borrowings (repayments) short-term debt | 16 | (25) | 47 |
| Forward contracts entered (matured) | 793 | (48) | (76) |
| Currency effects, consolidation changes and other | (217) | 180 | 101 |
| Changes in debt | 1,487 | 46 | 1,221 |
In 2019,2022, total debt increased by EUR 6261,221 million compared to 2018. Total debt at December 31, 2019 includes additional lease liabilities of EUR 1,059 million which have been recorded following the adoption of IFRS 16 lease accounting in 2019; this did not have a cash impact. New borrowings of long-term debt include the net proceeds2021. The increase mainly comes from the issuance of EUR 2 billion Notes in April 2022, offset by the Green Innovation Bondearly redemption of approximately EUR 1.2 billion Notes originally due in 2023, 2024, 2025 and 2026 and by the utilization of EUR 744 million.500 million under the credit facility entered into in October 2022. Changes in payment obligations from forward contracts are related to the maturity in 2022 of EUR 83 million of share buyback forwards (as announced in July 2021) and EUR 57 million of forwards relating to long-term incentive and employee stock purchase plans (as announced in January 2020), partially offset by EUR 63 million of forwards entered into relating to long-term incentive and employee stock purchase plans (as announced in June 2022).
In April 2022, Philips announced a series of Liability Management transactions to optimize its debt maturity profile. The transactions included the issuance of three series of Notes under its EMTN program for a total of EUR 2 billion with maturities in 2027, 2029 and 2033. Part of the proceeds were used to tender certain of Philips’ outstanding US Dollar denominated bonds due 2025 and 2026 and Euro-denominated bonds due 2023, 2024 and 2025, as well as make-whole and fully redeem the Euro-denominated bonds due 2023 and 2024 that were not purchased as part of the Euro tender offer. Philips issued Commercial Paper of EUR 200 million in September 2022 and EUR 101 million in October 2022. These tranches were repaid throughout the fourth quarter of 2022. In addition, in October 2022 Philips entered into a EUR 1 billion credit facility that can be used for general corporate purposes. The credit facility matures in October 2023 and has a 12-month extension option at Philips discretion. Per year-end 2022, EUR 500 million was utilized and outstanding under the credit facility.
In 2021, total debt increased by EUR 46 million compared to 2020. The increase mainly comes from currency effects and consolidation changes, partly offset by net lease repayments and forward settlements. Repayments of long-term debt amounted to EUR 761 million, mainly due302 million. In February 2021, Philips entered into two bilateral loans amounting to the repaymenta total of a EUR 500 million bond at its scheduled maturity.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 maturingthe forward contracts forentered into of EUR 731 million relating to the completed 2017EUR 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 repurchasebuyback program announced on January 29, 2019, and a total amount of EUR 123 million of forward contracts matured in November 2018.2021 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 and short-term debt. Other changes, mainly resulting from currency effects, led to an increase of EUR 170175 million.
In 2018,2020, total debt increased by EUR 1051,487 million compared to 2017.2019. New borrowings of long-term debt included the net proceeds of EUR 1,287991 million were mainly due tofrom the issuance of fixed-ratetwo new bonds EUR 500 million due 2024 and EUR 500 million due 2028, and a new long-term loan of EUR 200 million.under the EMTN program in 2020. Repayments of long-term debt amounted to EUR 1,161298 million, mainly due 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 loan of EUR 178 million.leases. Changes in payment obligations from forward contracts are mainly related to maturing forward contracts for the 2017 share buyback program and new 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 extended share repurchase program for LTIlong-term incentive and employee stock purchase plans announced in Novemberon 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 new leases recognized and currency effects, led to an increasea decrease of EUR 70221 million.
At the end of 2019,2022, long-term debt as a proportion of the total debt stood at 91%88.6% with an average remaining term (including current portion) of 8.06.1 years, compared to 71%92.7% and 7.96.0 years respectively at the end of 2018.
Total debt outstanding at the end of 2018 was EUR 4,821 million, compared with EUR 4,715 million at the end of 2017, an increase of EUR 105 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.2021.
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 2017.2020.
At the end of 2020, long-term debt as a proportion of the total debt stood at 82.3% with an average remaining term (including current portion) of 6.3 years, compared to 91% and 8.0 years respectively at the end of 2019.
For further information, please refer to Debt.
7.1.8Liquidity position
As of December 31, 2019,2022, including the cash position (cash and cash equivalents), as well as its EUR 1 billion committed revolving credit facility and the EUR 500 million undrawn portion of the credit facility entered into in October 2022, the Philips Group had access to available liquidity of EUR 2,704 million, compared with gross debt (including short and long-term) of EUR 8,201 million.
As of December 31, 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 2,4253,370 million, versus grosscompared with debt (including short and long-term) of EUR 5,4476,980 million.
As of December 31, 2018,2020, 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 2,6884,243 million, versuscompared with gross debt (including short and long-term) of EUR 4,821 million.
As of December 31, 2017, 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 2,939 million, versus gross debt (including short and long-term) of EUR 4,7156,934 million.
Philips Group
Liquidity position
in millions of EUR
2017 - 2019
| | | | 2020 | 2021 | 2022 |
|---|
Cash and cash equivalents | | | | 3,226 | 2,303 | 1,172 |
Committed revolving credit facilities/CP program | | | |
| Listed equity investments at fair value1) | | 17 | 67 | 32 |
| Committed revolving credit facility | | 1,000 | 1,000 |
| Credit facility | | | 500 |
| | | | 4,243 | 3,370 | 2,704 |
Listed equity investments at fair value | | | | |
| | | | |
| | | | (1,229) | (506) | (931) |
| | | | (5,705) | (6,473) | (7,270) |
| Debt | | (6,934) | (6,980) | (8,201) |
| | | | |
Net available liquidity resources | | | | (2,691) | (3,609) | (5,497) |
1)Philips has a EUR 1 billion committed revolving credit facility which was signed in April 2017 and will expire in April 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. Philips issued and repaid commercial paper in 2019. As of December 31, 2019, Philips did not have any loans outstanding under these facilities.
Additionally, at December 31, 2019 Philips held EUR 15 million ofholds listed (level 1) equity investments at fair value (level 1) in common shares of companies in various industries. Refer to Other financial assets and Fair value of financial assets and liabilities.
Philips has a EUR 1 billion committed revolving credit facility which was signed in April 2017 and refinanced in March 2022, which will expire in March 2027. The facility can be used for general group purposes, such as a backstop of its Commercial Paper Program. In addition, Philips entered into a EUR 1 billion credit facility in October 2022 which can be used for general corporate purposes, of which EUR 500 million is undrawn by year-end 2022.
Royal Philips' Commercial Paper Program amounts to USD 2.5 billion, under which commercial paper can be issued up to 364 days in tenor, both in the US and in Europe, in any major freely convertible currency. As of December 31, 2022, Philips had no commercial paper outstanding. 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 2022 Philips issued three new tranches under the program for a total of EUR 2 billion, while also early redeeming its outstanding 2023 and 2024 Notes and completing a tender offer on the outstanding 2025 and 2026 Notes.
In terms of liquidity, the company has access to various sources. The company’s liquidity risk management procedures have not changed significantly during 2022. 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 the Respironics field action, please refer to Contingencies. 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 stablenegative outlook) by Moody’s, and BBB+ (with stablenegative outlook) by Standard & Poor’s. As part of our capital allocation policy, our net debt*) position is managed with the intention of retaining aour strong 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.
7.1.9Shareholders’ equity
Shareholders’In 2022, shareholders’ equity decreased by EUR 1,189 million to EUR 13,249 million at year-end. The decrease was mainly due to net loss of EUR 1,608 million, dividend distributed (EUR 412 million), and settlements of earlier concluded forward contracts (EUR 140 million). This was partly offset by currency translation gains of EUR 749 million, primarily due to the appreciation of the US dollar against the euro in 2022.
In 2021, shareholders’ equity increased by EUR 5092,568 million in 2019 to EUR 12,59714,438 million at December 31, 2019.year-end. The increase was mainly due to net resultsincome of EUR 1,1733,323 million the positive impact ofand currency translation differencesgains of EUR 2391,117 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 fair value increases of financial assetsincome of EUR 821,195 million, andas well as 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 112 million)., increased shareholder's equity. This was mainlylargely offset by acquired shares becausecurrency 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 739 million), settlements of earlier concluded forward transactions of EUR 706 million,contracts (EUR 126 million) and the share repurchases made in the open market of EUR 621 million and dividend payments to shareholders of Koninklijke Philips N.V. of EUR 453 million (including tax and service charges).
Shareholders’ equity increased by EUR 89 million in 2018 to EUR 12,088 million at December 31, 2018. The increase was mainly due to net results of EUR 1,097 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 514 million, dividend payments to shareholders of Koninklijke Philips N.V. of EUR 400 million (including tax and service charges), net fair value declines of financial assets of EUR 147 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 191(EUR 130 million).
Shareholders’ equity decreased by EUR 547 million in 2017 to EUR 11,999 million at December 31, 2017. The decrease was mainly due to the negative impact of currency translation differences of EUR 984 million, share repurchases made in the open market over the course of the year, the purchase of forward contracts of EUR 1,079 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 384 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.
Share capital structure
The number of issued common shares of Royal Philips as of December 31, 2022 was 889,315,082. At year-end 2022, the company held 7.8 million shares in treasury. Of these shares, 5.7 million shares were held to cover obligations under long-term incentive plans and 2.2 million shares were held for capital reduction purposes. In 2016, Philips purchased call options on its own shares to hedge options granted to employees up to 2013, and as of December 31, 2022, Philips’ outstanding options related to 26 thousand shares. In 2022 (and earlier years), the company entered into several forward contracts to acquire its own shares, and as of December 31, 2022, the outstanding forward contracts related to 24,531,609 shares. See below for more information on the shares that were acquired in the course of 2022. Philips issued 14,174,568 shares in June 2022 in order to distribute the 2021 dividend. The company cancelled 8.8 million shares in June 2022.
The number of issued common shares of Royal Philips atas of December 31, 20192021 was 896,733,721.883,898,969. At year-end 2019,2021, the Companycompany held 5.813.7 million shares in treasury. Of these shares, 5.35.7 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 as of 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 as of 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 as of 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, and 0.5 million shares were held for share 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.plans. In 2016, Philips purchased call options on Philipsits own shares to hedge options granted to employees up to 2013. As2013, and as of December 31, 2019, Philips held 2.32020, Philips' outstanding options related to 0.9 million of such options.shares. In 2017 and 2018, Philips2020 (and earlier years), the company entered into several forward contracts in order to cover obligations underacquire its long-term incentive plans,own shares, and as well as to reduce its share capital. As of December 31, 2019,2020, the outstanding forward contracts related to 627 million shares.
The number of issued common See below for more information on the shares of Royal Philips at December 31, 2018 was 926,195,539. At year-end 2018, the Company held 12.0 million shares in treasury. Of these shares, 7.9 million sharesthat were held in treasury to cover obligations under long-term incentive plans, and 4.1 million shares were held for share capital reduction purposes. Philips repurchased and acquired shares in the course of 2020. Philips issued 48,757 shares in May 2020 (in order to pay out the year,gross Annual Incentive over 2019 to the members of the Board of Management) and cancelled 24.2issued 18 million shares in November 2018. As of December 31, 2018, Philips heldJuly 2020 (in order to distribute the 2019 dividend). The company cancelled 3.8 million call options to hedge obligations under its long-term incentive plans. As of December 31, 2018, the outstanding forward contracts to cover obligations under its long-term incentive plans, as well as to reduce its share capital were 28.6 million shares.
The number of issued common shares of Royal Philips at December 31, 2017 was 940,909,027. At year-end 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 long-term incentive plans, and 4.6 million shares were held for share capital reduction purposes. Philips repurchased and acquired shares in the course of the year. As of December 31, 2017, Philips held 6.2 million call options to hedge obligations under its long-term incentive plans. As of December 31, 2017, the outstanding forward contracts to cover obligations under its long-term incentive plans, as well as to reduce its share capital were 31.8 million shares.
June 2020.
Share repurchase methods for long-term incentive plans and capital reduction purposes
During 2019, RoyalHistorically, Philips acquireduses 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 2019, RoyalDuring 2022, 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.
The open market transactions via an intermediary allow for buybacks during both open and closed periods.
For more information on share repurchase transactions entered into 2022, 2021, and 2020, please refer to Group Financial Statements Note 18 Equity, Forward share repurchase plans / contracts
Philips Group
Impact of share repurchaseacquisitions and cancellations on share count
in thousands of shares as of December 31
2015 - 2019
| | | | | | 2018 | 2019 | 2020 | 2021 | 2022 |
|---|
| | | | | | 926,196 | 896,734 | 911,053 | 883,899 | 889,315 |
| | | | | | 12,011 | 5,760 | 5,925 | 13,717 | 7,835 |
| | | | | | 914,184 | 890,974 | 905,128 | 870,182 | 881,481 |
| | | | | | |
| Shares acquired | | 31,994 | 40,390 | 8,670 | 45,486 | 5,081 |
| | | | | | 24,247 | 38,541 | 3,810 | 33,500 | 8,758 |
Philips Group
Total number of shares repurchased
in thousands of shares unless otherwise stated
2019
| 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 purchased as part of publicly announced plans or programs1)2)3) | approximate value of shares that may yet be purchased under the plans or programs in thousands of EUR |
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purchased in the open market | | | | | | |
acquired through exercise of call options/settlement of forward contracts | | | | | | |
| | 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 |
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| January 2022 | 769 | 31.52 | 149 | 29.36 | 918 | 31.17 | 769 | 933,871 |
| February 2022 | | | 240 | 29.48 | 240 | 29.48 | | 933,871 |
| March 2022 | | | | | | | | 933,871 |
| April 2022 | | | | | | | | 933,871 |
| May 2022 | | | | | | | | 933,871 |
| June 2022 | | | | | | | | 997,072 |
| July 2022 | | | | | | | | 997,072 |
| August 2022 | | | 3 | 20.18 | 3 | 20.18 | | 997,072 |
| September 2022 | | | | | | | | 997,072 |
| October 2022 | | | 1,750 | 32.30 | 1,750 | 32.30 | 1,750 | 941,676 |
| November 2022 | 2,170 | 38.41 | | | 2,170 | 38.41 | 2,170 | 858,343 |
| December 2022 | | | | | | | | 858,343 |
| Total | 2,938 | | 2,142 | | 5,081 | 34.56 | 4,688 | |
| of which5) | | | | | | | | |
| purchased in the open market | 769 | | | | 769 | | 769 | |
| acquired through exercise of call options/settlement of forward contracts | 2,170 | | 2,142 | | 4,312 | | 3,920 | |
| To be acquired through settlement of forward contracts after December 31, 2022 | | | | | | | | 858,343 |
1)All shares were purchased through publicly announced plans or programs, other than approximately 392,000 shares repurchased through the unwinding of call options on own shares.2)First, 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 to acquire 5 million shares for an amount of EUR 174 million with settlement dates varying between October 2021 and November 2022. On June 28, 2017,October 26, 2022, the original settlement date of two share tranches entered into under this program (in total 1.75 million shares) has been extended from November 23, 2022, to November 2023, and 2024, respectively. Second, 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. Third, on July 26, 2021, Philips announced a EUR 1.5 billion share buyback program for capital reduction purposes. Under that program, which was initiated in the third quarter of 2017, Philips repurchased shares in the open market and entered into a number of forward transactions, some of which were settled in Q2 2019 with program completion on June 19, 2020. As the program was initiated for capital reductionshare cancellation purposes Philips canceled all of the shares acquired under this program. On January 29, 2019, Philips announced a new share buyback program for an amount of up to EUR 1.5 billion. Consequently, in the third quarter of 2021 Philips startedentered 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 in the first quarter of 2019 and expects to complete it within two years. As the program was initiated for capital reduction purposes, Philips intends to cancel all shares acquired under the program. The program is executedthrough open market purchases by an intermediary to allow for purchases in the open market during both openfourth quarter of 2021 (acquiring 21 million shares) and closed periods.January 2022 (acquiring 0.8 million shares). Fourth, on June 13, 2022, Royal Philips has no otherannounced that it will repurchase up to 3.2 million shares to cover certain of its obligations arising from its long-term incentive and employee stock purchases plans. Under this program, Philips entered into one forward contract for an amount of EUR 63 million to acquire 3.2 million shares with settlement dates in November 2024 and December 2024. For further details on these publicly announced plans or programs refer to repurchase shares for cancellation purposes. Equity. 2)3)Philips cancelled 308.8 million shares on June 19, 2019 and 8.5 million shares on December 24, 2019 respectively. 30, 2022.
3)4)In 2019,2022, 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. It is noted that Philips entered into several forward share repurchase contracts to cover certain of its obligations arising from its share-based remuneration, as announced on January 29, 2020. Please refer to Equity for more information.4)5)As described above, Royal 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 2019, Royal Philips used method (i) to acquire shares for capital reduction purposes. The forward transactions that settled in Q2 2019, had been entered into in 2018 (method ii).
7.1.10Cash 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, 2019.2022. 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 obligations1)2)
in millions of EUR
2019
| | | | payments due by period |
|---|
| | | | | | total | less than 1 year | 1-3 years | 3-5 years | after 5 years |
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| Long-term debt | | 8,168 | 842 | 1,760 | 1,809 | 3,757 |
| | | | 89 | |
| Interest on debt | | 1,683 | 159 | 304 | 264 | 956 |
| | | | | | 210 | 208 | 2 | |
| | | | | | |
| Purchase obligations3) | | 782 | 336 | 412 | 21 | 12 |
| | | | 1,968 | |
Contractual cash obligations | | | | | | 12,901 | 3,603 | 2,478 | 2,094 | 4,725 |
1)Amounts in this table are undiscounted
2)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 settlementsettlement.
3)Long-term debt includes interest and the current portion of long-term debt and excludes lease obligations.
4)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 forIncluded in debt are remaining forward contracts of EUR 648 million related to the financial year commencing January 1, 2019. ReferEUR 1.5 billion share buyback program announced in July 2021 and EUR 211 million relating to Significant accounting policies.
the repurchase of shares to cover long-term incentive and employee stock purchase plans. In 2022, Philips has contracts with investment funds where it committed itself to make, under certain conditions, capital contributions to these funds of an aggregated remainingentered into a total amount of EUR 6163 million (2018:of forward contracts relating to the repurchase of up to 3.2 million shares to cover long-term incentive and employee stock purchase plans. In addition, in 2022 there were maturities of a total of EUR 86 million). As at December 31, 201983 million of forward contracts related to the EUR 1.5 billion share buyback program announced in July 2021, as well as maturities of a total of EUR 57 million of forward contracts to repurchase shares to cover long-term incentive and employee stock purchase plans. Philips intends to cancel all of the shares acquired under the share buyback program, as the program was initiated for capital contributions already madereduction purposes.
Philips offers voluntary supply chain finance programs with third parties, which provide participating suppliers with the opportunity to these investment funds are recorded as non-current financial assets.
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 transferred under such arrangements whereby Philips confirms invoices. In accordance with the terms and conditions of the arrangements,parties. Philips continues to recognize these liabilities as trade payables and settles them accordingly on the liabilities after a further 30 day period compared toinvoice maturity date based on the original invoices.terms and conditions of these arrangements. As of December 31, 2022, approximately EUR 151 million (2021: EUR 139 million) of the 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 156140 million restructuring-related provisions by the end of 2019,2022, of which EUR 125134 million is expected to result in cash outflows in 2020.2022. Refer to Provisions for details of restructuring provisions.
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 127 million (2021: EUR 116 million). Capital contributions already made to these investment funds are recorded as non-current financial assets.
Please refer to Dividend for information on the proposed dividend distribution.
As of December 31, 2019, Philips has completed 41.5% of its EUR 1.5 billion share buyback programPlease refer to Equity for capital reduction purposes that was announcedinformation on January 29, 2019. As the program was initiated for capital reduction purposes, Philips intends to cancel all of the shares acquired under the program.
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 20182021 and 2019.2022. Remaining off-balance-sheet business and credit-relatedbusiness-related guarantees provided on behalf of third parties and associates decreased by EUR 19 million during 2019amount to EUR 212 million as of December 31, 2022 (December 31, 2018:2021: EUR 402 million).
7.1.11Dividend
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*).
For 2019, the key exclusions to arrive at the adjusted income from continuing operations attributable to shareholders*) are described in Net income, Income from operations (EBIT) and Adjusted EBITA*) in chapter Financial performance.
Proposed distribution
A proposal will be submitted to the Annual General Meeting of Shareholders, to be held on April 30, 2020,May 9, 2023, to declare a distribution of EUR 0.85 per common share, in cash orcommon shares, at the option of the shareholder (up to EUR 761 million if all shareholders would elect cash), against the net income for 2019.retained earnings.
If the above dividend proposal is adopted, the shares will be traded ex-dividend as of May 5, 202011, 2023 at the New York Stock Exchange and Euronext Amsterdam. In compliance with the listing requirements of the New York Stock Exchange and Euronext Amsterdam, the dividend record date will be May 6, 2020.12, 2023.
Shareholders will be given the opportunity to make their choice between cash and shares between May 7 and 29, 2020. If no choice is made during this election period the dividend will be paid in cash. On May 29, 2020 after close of trading, theThe 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 May 27, 2811, 12 and 29, 2020.15, 2023. 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.EUR 0.85. The ratio and the number of shares to be issued will be announced on June 3, 2020. PaymentMay 17, 2023. Distribution of the dividend (up to EUR 751 million) and delivery of new common shares, with settlement of any fractions in cash, if required, will take place from June 4, 2020. 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 2, 2020.May 18, 2023.
| | | distribution from |
| 11, 2023 | 12, 2023 | May 18, 2023 |
| 11, 2023 | 12, 2023 | May 18, 2023 |
Further details will be given in the agenda for the 20202023 Annual General Meeting of Shareholders. AllThe proposed distribution and all dates mentioned remain provisional until then.
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 paiddistributed 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 2019,June 2022, Philips settled a dividend of EUR 0.85 per common share, representing a total value of EUR 775741 million including costs.(including costs). Shareholders could elect for a cash dividend or a share dividend. Approximately 42%45% of the shareholders elected for a share dividend, resulting in the issuance of 9,079,53814,174,568 new common shares, leading to a 1.0%1.6% dilution. The dilution caused by the newly issued dividend shares wasFor more than offset by the cancellation of 30,000,000 shares in June, and 8,541,356 shares in December 2019.information refer to Shareholders’ equity. The settlement of the cash dividend involved an amount of EUR 453411 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
2015 - 2019
| | | | | | 20181) | 20191) | 20202) | 20211) | 20222) |
|---|
| | | 0.80 | 0.85 | 0.85 |
| | | | | 0.94 | 0.96 | 0.95 | 1.03 | 0.90 |
1)In cash or shares at the election of shareholder.2)In shares only.
7.1.12Sell-down Signify shares (former Philips Lighting)Outlook
In 2014, Philips announced its plan to sharpen its strategicWe remain cautious in light of the subdued economic outlook for the year, staffing and inflationary pressures facing our customers, geopolitical risks, supply and demand volatility, and uncertainties around ongoing consent decree negotiations, litigation and Department of Justice investigations. Nevertheless, we expect that, by prioritizing patient safety and quality, tightening our focus by establishing two standalone companies focused on the HealthTechinnovation and Lighting opportunities respectively. After establishing a stand-alone structure for 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.
Following the listing of Signify, Philips retained a 71.23% stake. Through a series of Accelerated bookbuild offerings (in total four) and open market sales in the course of 2017 and 2018, Philips’ shareholding was reduced to 16.5% of Signify’s issued share capital as of December 31, 2018. From an accounting perspective, it is noted that Philips’ lighting activities (substantially representing Signify shares) were presented as a discontinued operation from April 2017, and that Signify was deconsolidated in November 2017 and presented as an Asset classified as held for sale until December 31, 2018. As from that date, the remaining Signify shares were reclassified to Other current financial assets, with fair value changes recognized through Other comprehensive income.
During 2019, Philips sold Signify shares in the open market, further reducing its shareholding to 10.7% of Signify’s issued share capital. Subsequently, in September 2019, Philips successfully completed a fifth Accelerated bookbuild offering, reducing its shareholding in Signify to nil.
7.2Critical accounting policies
The preparation of Philips’ financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, income and expensesstrengthening our category leadership areas, while at the date of our financial statements. The policies that management considers bothsame time improving execution and taking a disciplined approach to capital, we will be most importantable 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, orprogressively create value 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 effect on the Company’s consolidated financial statements.
The Company recognizes a liability when it is probable that an outflow of resources embodying economic benefits will result from the settlement of a present obligation and the amount at which the 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 2019 the Company performed and completed goodwill annual impairment tests in the fourth quarter, in line with 2018 and 2017.
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 2020 to 2022.
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 2019” 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.sustainable impact.
7.37.2Taxation
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, presently in force, 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)company) is subject to a withholding tax imposed by the Netherlands at a rate of 15%. Share dividends paid out of the Company’scompany’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’scompany’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 Companycompany 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. However, this refund is not applicable when, based on the US Tax Treaty, the Dutch dividend withholding tax can be fully credited in the United States by the US holder.
Pursuant to the provisions of the US Tax Treaty, a reduced rate may be applicable in respect of dividends paid by the Companycompany to a beneficial owner holding directly 10% or more of the voting power of the Company,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 Companycompany 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,company, up to a maximum of the lesser of:
- 3% of the amount of qualifying dividends redistributed by the
Company;company; and - 3% of the gross amount of certain qualifying dividends received by the
Company.company.
The reduction is applied to the Dutch dividend withholding tax that the Companycompany 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 Companycompany 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 Companycompany if one or more of certain relatives of the shareholder hold a substantial participation in the Company.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 (including, but not limited to, those described in this paragraph), 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, under recently finalized Treasury regulations, it is possible that the Dutch withholding tax may not be creditable unless a US holder is eligible for and elect to apply the benefits of the US Tax Treaty. Even in such case, the 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. SpecialIn addition, 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 “passive” income for purposes of computing the foreign tax credit allowable to the holder. In addition, to the extent an amount of Dutch tax withheld is contingent on the availability of a credit against the amount of income tax owed to another country, that amount of Dutch tax withheld will not be eligible for a credit against the US holder’s United States federal income tax liability.
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.
Passive Foreign Investment Company Rules
We believe that the common shares should currently not be treated as stock of a 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, 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.
8SocietalEnvironmental, Social and Governance
Environmental, Social & Governance (ESG) are three key dimensions within which a company’s approach to doing business responsibly and sustainably, and its overall societal impact, are defined. They give expression to an increasingly widely held view – that companies that hold themselves accountable to their stakeholders and increase transparency will be more viable, and valuable, in the long term.
We arePhilips is a purpose-driven company aiming to improve the liveshealth and well-being of 32.5 billion people annually by 2030. Our peopleWe 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 are also witnessing growing interest in ESG on both the socialpart of our customers, who are increasingly turning to technology companies for support in addressing their sustainability objectives and environmental dimensions. Inare including ESG-related considerations in their procurement policies and criteria.
We aim to be a front-runner in the Annual Report 2017, 2018area of ESG and 2019 we quantifiedhave been recognized as leading the environmental impact thatway 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 asadopted for the period 2020-2025.
We have excluded the data from Domestic Appliances from the ESG information wherever possible. In a companylimited 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 Environmental performance.
In 2018 we started to apply the True Value methodology to quantifyrespective section. The Employee Engagement Index (EEI) and General Business Principles (GBP) results have not been restated.
8.1ESG reporting framework
Building on our social impact. This includes theextensive experience of environmental and social impact in our supply chain, trainingmeasurement and of our staff, and taxes 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 calculate the impact of our products and solutionsproviding transparency on governance, Philips has taken an active role – in collaboration with, knowledge partnersin particular, the International Financial Reporting Standards (IFRS) Foundation, the World Economic Forum (WEF) and investors.
8.1Social performance
Our people strategy supportsthe European Union – to help drive the evolution towards a constantly evolving workforce, capablestandard ESG reporting framework.
In 2007, Philips signed up to the United Nations Global Compact, to advance ten universal principles in the areas of delivering strong businesshuman 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 executinggovernance (ESG) indicators and track their contributions towards the SDGs on a consistent basis. Thus far, 135 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 strategy. As such we focus on our WorkforceLives Improved metric). Companies are encouraged to report against as many of the Futurecore and expanded metrics as they find material and appropriate, on the basis of ‘disclose or explain’.
In section 5.6 of this Annual Report, we show how Philips performed in 2022 on the above-mentioned 21 Core metrics, mapped to the three dimensions of our deep commitmentESG commitments, as well as a number of additional Philips-specific metrics that we consider fundamental to Inclusion & Diversity, supportedthe 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 our culture.the European Union by EFRAG.
8.1.1Improving people’s livesEU taxonomy framework
At Philips, we striveThe aim of the European Taxonomy Regulation (EU 2020/852), including the delegated acts adopted thereunder, is to makeprovide 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 after the world healthier and more sustainable through innovation.first year of reporting (2021) still significant uncertainties around its phased implementation. It is our goalexpected, however, that the EU Taxonomy will develop 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 improveone or more of the livesfollowing six environmental objectives (while not significantly harming any of 3 billion peoplethe others):
- Climate change mitigation
- Climate change adaptation
- The sustainable use and protection of water and marine resources
- The transition to a
year by 2030.
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 2022, only one relevant delegated act has been adopted, concerning activities significantly contributing to climate change mitigation and adaptation.
To guide our effortsThe taxonomy framework provisions effective on the date of this Annual Report 2022 require Philips to disclose the proportion of its taxonomy-eligible activities (described in any delegated act adopted to date) and measure our progress, we take a two-dimensional approach – socialnon-eligible economic activities in its total turnover, capital and ecological –operational expenditure, as well as certain qualitative information. We used the delegated act ((EU) 2021/2139) to improving people’s lives. Products or solutions from our portfolioidentify activities that directly support the curative or preventive side of people’s health determine the contribution to the social dimension. This is also our contribution to UN Sustainable Development Goal 3 (Ensure healthy lives and promote well-being for all at all ages). As healthy ecosystems are also needed for people to live a healthy life, the contribution to the ecological dimension is determined by meanseligible. However, none of our steadily growing Green Productsrevenue-generating activities were included as this delegated act only applies to sectors with very high CO2 emissions. As a result, Philips’ core activities are not within the scope of this delegated act and Solutions portfolio, suchconsequently none of Philips' revenues were eligible under this delegated act during 2022 (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 the energy-efficient products in our Personal Health businesses. This is our contributionper Consolidated statements of income. Philips expects to Sustainable Development Goal 12 (Ensure sustainable consumptionbe eligible and production patterns) and SDG 13 (Take urgent action to combat climate change andreport its impacts).
Philips improved 1.64 billion lives in 2019, an increase of around 100 million compared to 2018, driven by all segments, mainly in China, the ASEAN countries, North America and the Middle East & Turkey. Through Philips products and solutions that support people’s health and well-being, we improved the lives of 1.54 billion people in 2019 (2018: 1.43 billion), mainly driven by Diagnosis & Treatment businesses and Connected Care businesses. Our Green Products and Solutions that support a healthy ecosystem contributed 1.07 billion lives (2018: 1.00 billion). After the elimination of double counts – people touched multiple times – we arrived at 1.64 billion lives.
In 2019, Philips extended its commitment to improve the lives of people in underserved healthcare communities to 400 million by 2030. Philips thereby recognized the often critical needs of women and children in many communities, but also the added burden arising from the increase in non-communicable diseases (NCDs) in communities already struggling without adequate access to healthcare. To monitor progress on this extended commitment, we track lives improved in underserved healthcare communities. In 2019 our health and well-being solutions improved the lives of 194 million people in underserved markets (an increase of 20 million compared to 2018).
Lives Improved per market
The following table shows the number of Lives Improved per market.
taxonomy-eligible revenues under additional environmental objectives as further delegated acts with applicable technical screening criteria are adopted.
Philips Group
Lives improved per marketProportion of turnover from products or services associated with Taxonomy aligned economic activities 2022
in millions of EUR unless otherwise stated
| Lives Improved (million)1) | | Saturation rate (as % of population) | |
|---|
| | | | |
| | | | |
| | | | |
| | | | |
Germany, Austria & Switzerland | | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Economic activities | Absolute Turnover | Proportion of turnover |
|---|
A. ELIGIBLE ACTIVITIES
| | |
| Turnover of eligible Taxonomy-aligned activities (A.1) | 0 | 0% |
| Turnover of eligible not Taxonomy-aligned activities (A.2) | 0 | 0% |
Total (A.1 + A.2)
| 0 | 0% |
B. Taxonomy-non-eligible activities
| | |
| Turnover of Taxonomy-non-eligible activities (B) | 17,827 | 100% |
| Total (A + B) | 17,827 | 100% |
Some other (enabling) Philips double counts eliminated
2)Source: The World Bank, CIA Factbook & Wikipedia
3)Source: IMF, CIA, Factbook & Wikipedia
8.1.2Workforceactivities are included in the delegated act ((EU) 2021/2139) and are eligible for capital expenditures for the objective of climate change mitigation and climate change adaptation. 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 Future
2022 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).The challenges presented by the fast-evolving industry landscape demand a networked organizationReportable taxonomy-eligible capital expenditures in which cross-functional teams actively draw on resources across the organization2022 amounted to EUR 8 million, or 1% of total capital expenditure (non-eligible capital expenditures 99%), and acrossmainly related to energy efficiency improvement measures in our buildings (installation, maintenance and repair of energy efficiency equipment), such as energy efficient heating, ventilation, and air conditioning (HVAC) in various locations around the world. Our WorkforceNext, we invested in onsite renewable electricity generation (installation, maintenance and repair of the Future program reflectsrenewable energy technologies) by installing PV panels in one of our commitment to meet the challenge of addressing our customers’ unmet needs and deliver the full benefits of data-enabled connected care – by attracting, developing and retaining a workforce that will deliver the strategic capabilities we need to win.factories in Asia.
By applying Strategic Workforce Planning, in close alignmentWe assessed compliance with the strategic planningcriteria set out in Article 3 of our businesses, we identify and develop the employee capabilities needed to realize our ambitions as a health technology company. In 2019 we implemented company-wide initiatives to retain and staff our most strategic positions with top performers. At the end of 2019 we retained 93% of these employees and staffed 52% of our strategic positions with employees who are considered to be top performers. Key drivers of this are our internal development focus, leadership programs and our focused talent search services.
We have also been addressing the challenge of the expanding workforce and our ability to tap into the gig economy and other less traditional work constructs. We continue to recognize the significant contribution contingent workers make to our company. Therefore, building on earlier initiatives, we have ensured that both our workforce demand management system and our talent acquisition processes include contingent and regular employee solutions in staffing proposals and decisions. Our Total Workforce strategy considers all sources of skills and capabilities we require in the Workforce of the Future, as well as location-related talent availability and labor market trends. We continued to devote additional attention to our campus, graduate and early-career hiring in 2019, which resulted in an increase in the number of campus hires compared to 2018. Our focus on the Workforce of the Future will continue in 2020, with further emphasis on strategic capabilities.
8.1.3Inclusion & Diversity
To be able to understand and meet customer and patient needs in a complex and continually changing environment, our workforce should reflect the society in which we operate, our customers,Regulation (EU) 2020/852 and the markets we serve. We believe that an inclusive culture allows our 120-plus nationalities to bringassociated technical screening criteria on a rich diversity of capabilities, opinions and perspectives to our decision-making processes, thus driving innovation, enabling faster, targeted responses to market changes, and supporting sustainable improvements in business performance.
Two years ago, we renewed our approach to Inclusion & Diversity. We set a goal of 25% gender diversity in senior leadership positions (a subset of Management and Executive positions) by the end of 2020 (compared with 19% at the end of 2017). In 2019, we again partnered with leading Inclusion & Diversity training providers to further roll out unconscious bias and inclusion trainings. With regard to appointment and promotion opportunities, we transparently share open positions and endeavor to attract candidates from a diverse range of backgrounds. Diverse interview panels are put in place for recruitment to leadership positions. In 2019, we increased the number of Senior Women’s Leadership Programs for the third consecutive year.project basis.
Philips Group
Gender diversityProportion of CapEx from products or services associated with Taxonomy aligned economic activities 2022
in %EUR unless otherwise stated
2017 - 2019
| | | | Substantial contribution criteria | | DNSH criteria ('Do No Significant Harm') | | | | |
|---|
Economic activities | Absolute CapEx | Proportion of CapEx | Climate change mitigation | Climate change adaption | Water and marine resources | Circular economy | Pollution | Biodiversity and ecosystems | | Climate change mitigation | Climate change adaption | Water and marine resources | Circular economy | Pollution | Biodiversity and ecosystems | Minimum safeguards | Taxonomy-aligned proportion of CapEx 2022 | Taxonomy-aligned proportion of CapEx 2021 | Category (enabling activity or transitional activity) |
|---|
| | | % | % | % | % | % | % | % | | Y/N | Y/N | Y/N | Y/N | Y/N | Y/N | Y/N | % | % | E/T |
| A. ELIGIBLE ACTIVITIES | | | | | | | | | | | | | | | | | | | |
| A.1 Eligible Taxonomy-aligned activities | | | | | | | | | | | | | | | | | | | |
| 4.16 Installation and operation of electric heat pumps | 234,000 | 0 | 100 | 0 | 0 | 0 | 0 | 0 | | | Y | Y | Y | Y | Y | Y | 0 | NA | E |
| 7.2 Renovation of existing buildings | 121,000 | 0 | 100 | 0 | 0 | 0 | 0 | 0 | | | Y | Y | Y | Y | Y | Y | 0 | NA | T |
| 7.3 Installation, maintenance and repair of energy efficient equipment | 7,720,000 | 1 | 100 | 0 | 0 | 0 | 0 | 0 | | | Y | Y | Y | Y | Y | Y | 1 | NA | E |
| 7.4 Installation, maintenance and repair of charging stations for electric vehicles | 61,000 | 0 | 100 | 0 | 0 | 0 | 0 | 0 | | | Y | Y | Y | Y | Y | Y | 0 | NA | E |
| 7.6 Installation, maintenance and repair of renewable energy technologies | 240,000 | 0 | 100 | 0 | 0 | 0 | 0 | 0 | | | Y | Y | Y | Y | Y | Y | 0 | NA | E |
| CapEx of eligible Taxonomy-aligned activities (A.1) | 8,376,000 | | | | | | | | | | | | | | | | | | |
| A.2. Eligible not Taxonomy aligned activities | | | | | | | | | | | | | | | | | | | |
| No eligible not Taxonomy aligned activiites identified | | | | | | | | | | | | | | | | | | | |
| CapEx of eligible not Taxonomy-aligned activities (A.2) | 0 | | | | | | | | | | | | | | | | | | |
| Total (A.1 + A.2) | 8,376,000 | 1 | 100 | 0 | 0 | 0 | 0 | 0 | | | Y | Y | Y | Y | Y | Y | 100 | NA | E |
| B. Taxonomy-non-eligible activities | | | | | | | | | | | | | | | | | | | |
| CapEx of Taxonomy-non-eligible activities (B) | 591,600,000 | 99 | | | | | | | | | | | | | | | | | |
| Total (A+B) | 600,000,000 | 100 | | | | | | | | | | | | | | | | | |
Overall gender diversity remained stable at 38% in 2019 whilst gender diversity among Executives increased from 19%Similar to 22% female executives. Measured against our 2020 goal of 25% gender diversity in leadership positions,capital expenditures, we increased from 21% in 2018 to 24% in 2019.
8.1.4Our culture
As we continue our transformation into a focused leader in health technology – shifting from products to solutionsscreened (EU) 2021/2139, assessed for relevant operational expenditures activities and building long-term relationships with our customers – wehave not identified any eligible operational expenditure. Total operational expenditures are fostering a culture within Philips that will help us achieve operational excellence and extend our solutions capability to address our customers’ unmet needs.
All Philips employees are expected to commit to living our behaviors – Customers first, Quality and integrity always, Team up to win, Take ownership to deliver fast, and Eager to improve and inspire – every step of the way.
Putting our customers first must be at the heart of everything we do. Only by engaging deeply with our customers can we understand their unmet needs and deliver superior value. We also need to be conscious at all times of the high-stakes environment in which we operate. This environment demands that we apply the highest quality and integrity standards – always. To deliver superior value to our customers and ensure quality and integrity, we need to improve how we team up and leverage the skills, capabilities and expertise right across Philips. At the same time, we all need to take personal ownership, enabling us to move with speed and agility, and deliver what we promise, on time. And by applying operational excellence and Lean ways of working, we will keep improving and inspiring each other through the work we do.
We staff our positionsdetermined based on assessed behavior, potentialthe 2022 non-capitalized costs that relate to research and capabilities. 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 2019,2022, we filled 74%did not record reportable taxonomy-eligible operational expenditures (0%), as, for example, the sourcing of our Director-level and more senior positions from withinrenewable energy was not included in the company. For these internal hires, we ensure our candidates are high performers with strong potential. In 2019, 79% of all internal promotions to Director level and more senior positionsTaxonomy. Non-eligible operational expenditures 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.
8.1.5Employee engagement
High employee engagement is crucial to the success of our strategy. Our employee survey consistently reports high levels of employee engagement that exceed the high-performance norm of 70%100%. Our average engagement score for 2019 was 74%, in line with our engagement levels in 2018. We remain substantially above the high-performance norm, driven by our employees’ pride to work for Philips and the positive energy they get from their job.
Philips Group
Employee Engagement indexProportion of OpEx from products or services associated with Taxonomy aligned economic activities 2022
in %millions of EUR unless otherwise stated
2017 - 2019
| Economic activities | Absolute OpEx | Proportion of OpEx |
|---|
A. ELIGIBLE ACTIVITIES
| | |
| OpEx of eligible Taxonomy-aligned activities (A.1) | 0 | 0% |
| OpEx of eligible not Taxonomy-aligned activities (A.2) | 0 | 0% |
Total (A.1 + A.2)
| 0 | 0% |
B. Taxonomy-non-eligible activities
| | |
| OpEx of Taxonomy-non-eligible activities (B) | 2,276 | 100% |
| Total (A + B) | 2,276 | 100% |
We followed the same accounting principles as in our financial statements.
We will continue to monitor legislative developments and adapt our disclosures where needed.
Remuneration former CEO
Per October 15, 2022, Frans van Houten, the former CEO, was succeeded by Roy Jakobs as CEO of the company.
In view of a proper handover, and pursuant to the contractual obligations of his services agreement (published on the company’s website at the time of his re-appointment in 2019 and filed as Exhibit 4(e) hereto), the former CEO’s services agreement will terminate on April 30, 2023 in line with the applicable conditions as laid down in such services agreement. Until this time, the former CEO remains available for advisory services.
Up to the termination date of April 30, 2023, the former CEO will be receiving the base compensation, pension arrangement and other allowances following from the termination of his 2019 services agreement. For the period October 15, 2022 up and until December 31, 2022, the base compensation, pension expenditures and other compensation represent a value of EUR 283,151, EUR 126,695 and EUR 11,774 respectively. The former CEO did not waive the partial 2022 AI pay-out and partial vesting of the 2020 LTI grant, consequently the Company will comply with its contractual obligations in this regard. Therefore, the former CEO received an AI payment of EUR 265,000 for the year 2022 and his 2020 LTI grant vested at 18% of target in line with the 2020 LTI plan realization.
For the year 2023, the base compensation, pension expenditures and other compensation represent a value of EUR 435,616, EUR 194,986 and EUR 18,087 (expected) respectively. In respect of the remainder of his services agreement during 2023, the former CEO will be eligible for a prorated AI payment based on the actual 2023 financial performance and his individual performance at target according to the contractual obligations. At target this prorated AI represents a value of EUR 435,616. The former CEO will not receive an LTI grant for the year 2023. In accordance with the relevant provisions of his services agreement, the former CEO will receive a severance payment equal to one-year annual base compensation (amounting to EUR 1,325,000).
The former CEO’s LTI grants with a vesting date after April 30, 2023 (granted in 2021 and 2022) will continue to vest at their regular vesting dates (April 30, 2024, and April 29, 2025 respectively) subject to the predetermined performance conditions. The termination of the services agreement with the former CEO did not trigger a tax expense for the company based on Article 32bb of the Dutch Wage Tax Act.
Comparison of change in CEO and BoM versus average employee remuneration costs andcompared to company performance
In line withInternal pay ratios are a relevant input factor for determining the appropriateness of the implementation of the Remuneration Policy, as recognized in the Dutch Corporate Governance Code and Dutch law, internal pay ratios are an important input for determining the Remuneration Policy for the Board of Management.Code. For the 20192022 financial year, the ratio between the annual total compensation for the CEO and the average annual total compensation for an employee was 60:55:1. The ratio increased/decreased from 63:1 in 2018.2021. Further details on the development of these amounts and ratios over time can be found in the following table. The average employee remuneration costs and company financial performance have been adjusted retroactively such that the Domestic Appliances business is excluded from the figures. Please note that the amounts presented in the following table below.
reflect total remuneration costs to the company which differ from the actual payout to the members of the Board of Management.
| | 2018 | 2019 | 2020 | 2021 | 2022 |
| Remuneration | | | | | |
| CEO Total Remuneration Costs (A)1) | 5,391,265 | 5,260,111 | 6,153,067 | 5,452,299 | 5,133,659 |
| CFO Total Remuneration Costs | 2,595,688 | 2,602,606 | 3,007,990 | 2,652,864 | 1,896,081 |
| CLO Total Remuneration Costs | 1,861,200 | 1,856,426 | 2,203,160 | 2,029,054 | 1,416,837 |
| Average Employee (FTE) Total Remuneration Costs (B)2) | 89,843 | 92,645 | 91,455 | 86,853 | 93,373 |
| Ratio A versus B3) | 60:1 | 57:1 | 67:1 | 63:1 | 55:1 |
| Company performance | | | | | |
| Annual TSR4) | 1.2% | 25.6% | 6.2% | (14.5)% | (60.0)% |
| Comparable Sales Growth%5) | 4.9% | 4.5% | 2.9% | (1.2)% | (2.8)% |
| Adjusted EBITA%5) | 13.3% | 13.2% | 13.2% | 12.0% | 7.4% |
| Free Cash Flow5) | 990 | 923 | 1,635 | 900 | (961) |
1)Based on totalFor 2022, CEO compensation costs (EUR 5,260,111) as reported in section Total remuneration costs in 2019refers to Frans van Houten for the period up to October 15, 2022, and to Roy Jakobs for the period from October 15, 2022, onwards. For 2018 through 2021, CEO refers to Frans van Houten. 2)Year of appointment in which partial annual remuneration was received.
3)Year in which service ended and as such partial annual remuneration was received.
4)Based on Employee benefit expenses (EUR 6.37.0 billion) divided by the average number of employees (72,228(74,451 FTE) as reported in the Income from operations. This results in an average annual total compensation cost of EUR 87,32193,373 per employeeemployee.
5)3)A consideration when interpreting the ratios between CEO and average employee remuneration is that the remuneration of the CEO is more heavily dependent on variable compensation than the remuneration of the average employee at Philips. Furthermore, the costs of performance shares are based on accounting standards (IFRS) and the specific allocation of these costs to the year. As such, the total remuneration level ofand costs applicable to the CEO and associated costs will vary more with Philips' (financial)Philips’ financial performance than the remuneration level and costs ofapplicable to the average employee. As a consequence, the ratio will increase when financial performance is strong and conversely decrease when financial performance is not as strong.
6)4)Annual TSR was calculated in line with the method as used for the LTI plan (i.e. based on reinvested dividends and 3 month averaging)5)Non-IFRS financial measure. For the definition and reconciliation of the most directly comparable IFRS measure, refer to Reconciliation of non-IFRS information.Historical LTI grants and holdings
Number of performance shares (holdings)
Under the LTI Plan the current members of the Board of Management were granted 153,891 performance shares in 2022. The following table provides an overview at end December 2022 of performance share grants.
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, 2022 | number of shares awarded in 2022 | (dividend) shares awarded | number of shares vested in 20221) | value at vesting date in 2022 | unvested closing balance at Dec. 31, 2022 |
|---|
| R. Jakobs | 5/6/2019 | 21,5922) | 810,000 | 06/05/2022 | 06/05/2022 | 22,979 | - | - | 8,717 | 216,060 | - |
| 4/30/2020 | 17,7042) | 706,250 | 30/04/2023 | 30/04/2025 | 18,399 | - | 674 | - | - | 19,073 |
| 4/30/2021 | 15,8122) | 750,000 | 30/04/2024 | 30/04/2026 | 16,105 | - | 590 | - | - | 16,696 |
| 4/29/2022 | 37,6302) | 930,000 | 29/04/2025 | 29/04/2027 | - | 37,630 | 1,379 | - | - | 39,009 |
| 10/28/2022 | 24,279 | 314,137 | 28/10/2025 | 28/10/2027 | - | 24,279 | - | - | - | 24,279 |
| F.A. van Houten3) | 5/6/2019 | 70,640 | 2,650,000 | 06/05/2022 | 06/05/2024 | 75,177 | - | - | 28,567 | 708,078 | - |
| 4/30/2020 | 66,431 | 2,650,000 | 30/04/2023 | 30/04/2025 | 69,037 | - | 2,530 | - | - | 71,567 |
| 4/30/2021 | 55,868 | 2,650,000 | 30/04/2024 | 30/04/2026 | 56,905 | - | 2,086 | - | - | 58,991 |
| 4/29/2022 | 107,227 | 2,650,000 | 29/04/2025 | 29/04/2027 | - | 107,227 | 3,930 | - | - | 111,157 |
| A. Bhattacharya | 5/6/2019 | 31,388 | 1,177,500 | 06/05/2022 | 06/05/2024 | 33,404 | - | - | 12,693 | 314,626 | - |
| 4/30/2020 | 29,518 | 1,177,500 | 30/04/2023 | 30/04/2025 | 30,676 | - | 1,124 | - | - | 31,800 |
| 4/30/2021 | 25,141 | 1,192,500 | 30/04/2024 | 30/04/2026 | 25,608 | - | 939 | - | - | 26,547 |
| 4/29/2022 | 49,162 | 1,215,000 | 29/04/2025 | 29/04/2027 | - | 49,162 | 1,802 | - | - | 50,964 |
| M.J. van Ginneken | 5/6/2019 | 22,9912) | 862,500 | 06/05/2022 | 06/05/2024 | 24,467 | - | - | 9,298 | 230,456 | - |
| 4/30/2020 | 22,373 | 892,500 | 30/04/2023 | 30/04/2025 | 23,251 | - | 852 | - | - | 24,103 |
| 4/30/2021 | 19,448 | 922,500 | 30/04/2024 | 30/04/2026 | 19,809 | - | 726 | - | - | 20,535 |
| 4/29/2022 | 38,237 | 945,000 | 29/04/2025 | 29/04/2027 | - | 38,237 | 1,401 | - | - | 39,638 |
1)The shares vested in 2022 are subject to a 2-year holding2)Awarded before date of appointment as a member of the Board of Management3)Mr. Van Houten was not a member of the Board of Management on December 31, 2022. However for transparency purposes he is shown in this table
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, 2022 | 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, 2022 |
|---|
| F.A. van Houten1) | 23/04/2012 | 23/04/2015 | 14.82 | 23/04/2022 | 75,000 | - | - | - | - | - |
| 29/01/2013 | 29/01/2014 | 22.43 | 29/01/2023 | 55,000 | - | - | - | - | 55,000 |
| A. Bhattacharya | 30/01/2012 | 30/01/2014 | 15.24 | 30/01/2022 | 20,000 | - | - | - | - | - |
| 23/04/2012 | 23/04/2015 | 14.82 | 23/04/2022 | 16,500 | - | - | - | - | - |
| M.J. van Ginneken | 30/01/2012 | 30/01/2014 | 15.24 | 30/01/2022 | 10,000 | - | 10,000 | 28.35 | - | - |
| 23/04/2012 | 23/04/2015 | 14.82 | 23/04/2022 | 8,400 | - | - | - | - | - |
1)Mr. Van Houten was not a member of the Board of Management on December 31, 2022. However for transparency purposes he is shown in this table
Share ownership guidelines
To further align the interests to those of stakeholders and to motivate the achievement of sustained performance, the members of the Board of Management are bound to a minimum shareholding requirement. The table below shows the minimum shareholding requirement, annual base compensation, (vested) shares held and share ownership ratio of each Board of Management member as per December 31, 2022. Until the minimum shareholding requirement is reached, the members of the Board of Management are required to retain all after-tax performance shares that have vested, but they are not required to make additional share purchases.
Philips Group
Share ownership Board of Management
| Minimum shareholding requirement1) | Annual Base Compensation | (Vested) shares held | Ownership ratio2) |
|---|
| R. Jakobs | 4.0x | 1,200,000 | 109,423 | 1.3x |
| A. Bhattacharya | 3.0x | 810,000 | 169,517 | 2.9x |
| M.J. van Ginneken | 3.0x | 630,000 | 123,914 | 2.8x |
1)As ratio of Annual Base Compensation2)The Ownership ratio is calculated by multiplying the total shares held by the share price of EUR 14.00 (based on the closing share price of December 31, 2022) and dividing this by the base compensation.
Remuneration of the Supervisory Board in 20192022
Summary of the Remuneration Policy
The remuneration levelsPlease find below a brief summary of the Remuneration Policy for the Supervisory Board, wereas adopted at the Annual General Meeting of Shareholders 2020. The fee levels in this Remuneration Policy are the same as the Supervisory Board fee levels as determined by our shareholders duringat the 2018 Extraordinary General Meeting of Shareholders, uponShareholders.
The overarching objective of the proposal2020 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.
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.
TheTo 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 tied todependent on the performanceresults of the company inand does not include any way, which servesshares (or rights to shares). Nevertheless, members of the Supervisory Board are encouraged to hold shares in the company through guaranteeing independent supervision and isfor the purpose of long-term investment to reflect their confidence in line with the Dutch Corporate Governance Code.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:
Philips Group
Remuneration Supervisory Board
in EUR
2019
| | | | Chair | Vice Chair | Member |
|---|
| | | | 155,000 | 115,000 | 100,000 |
| | | | 27,000 | n.a. | 18,000 |
| | | | 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 2022
The individual members of the Supervisory Board received, by virtue of the positions they held, the following remuneration in 2019:
2022:
Philips Group
Remuneration of the Supervisory Board1)
inin EUR
2019
| membership | committees | other compensation1) | total |
|---|
| F. Sijbesma | 155,000 | 35,000 | 16,345 | 206,345 |
| P.A.M. Stoffels | 115,000 | 35,000 | 27,269 | 177,269 |
| N. Dhawan | 35,616 | 6,411 | 5,808 | 47,836 |
| D.E.I. Pyott | 100,000 | 35,000 | 17,269 | 152,269 |
| A.M. Harrison | 100,000 | 14,000 | 12,269 | 126,269 |
| M.E. Doherty | 100,000 | 27,000 | 24,769 | 151,769 |
| P. Löscher | 100,000 | 32,000 | 24,769 | 156,769 |
| I. Nooyi | 100,000 | 14,000 | 17,269 | 131,269 |
| S.K. Chua | 100,000 | 18,000 | 22,269 | 140,269 |
| H. Verhagen | 100,000 | 14,000 | 7,269 | 121,269 |
| S. Poonen | 100,000 | 18,000 | 17,269 | 135,269 |
| Total | 1,105,616 | 248,411 | 192,574 | 1,546,602 |
1)The Supervisory Board fee levels have been reviewed and updated as per 2015. After that they have been reviewed once in the 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 the Member fee from EUR 80,000 to EUR 100,000. The Audit Committee Chair fee was increased from EUR 22,500 to EUR 27,000 while the Audit Committee Member fee was increased from EUR 13,000 to EUR 18,000. For the Remuneration Committee and the 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, (effective 2015) and the entitlement of EUR 2,000 under the Philips product arrangement
3)As 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.
11.3Report of the Audit Committee
The Audit Committee is currently chaired by David Pyott, and itsLiz Doherty. Its other members are Neelam DhawanPeter Löscher, Chua Sock Koong and Liz Doherty. Jeroen van der VeerSanjay Poonen (who joined in the course of 2022). Feike Sijbesma also regularly participates 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 2022, the Audit Committee metheld five times during 2019regular meetings and reported its findings to the plenary Supervisory Board. Alltwo extraordinary meetings, which all Audit Committee members were present during these meetings.
attended.
The CEO, the CFO, the Chief ESG & Legal Officer, the Head of Internal Audit, Chief Accounting Officer and external auditor (Ernst & Young Accountants LLP) were invited to and attended all regular meetings.
The Committee, together with the Chief ESG & Legal Officer, also met separately in private sessions with the CEO, CFO, Head of Internal Audit and external auditor after every regular quarterly 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, together with the Chief Legal Officer, with each of the CEO, the CFO, the Head of Internal Audit and the external auditor. In addition, the Audit Committee chair met one-on-one with the above and also with the Group Treasurer and the Group Chief Accountant, prior to Committee meetings.
.
The following overview below indicates a number ofhighlights matters that were reviewed and/or discussed during Committee meetings throughout 2019:
in the course of, or in respect of, the financial year 2022:
- The company’s
20192022 annual and interim financial statements including non-financialand non-financial information, prior to publication. This review included the increase of EUR 165 million in the field action provision recorded in Q1 2022 in connection with the Philips Respironics voluntary recall notification related to the sound abatement foam in certain sleep and respiratory care products (announced on June 14, 2021), to cater for the higher expected volume of devices eligible for remediation, higher communication costs and potential higher cost of execution and to ensure the speed of the program in a volatile environment. The Committee also reviewed the increase of EUR 85 million in such provision recorded in Q4 2022, resulting from the increased proportion of new replacement devices in order to expedite the completion of the Philips Respironics voluntary recall. In itseach of the regular quarterly meetings of the Committee, also assessed the adequacy and appropriateness of internal control policies and execution, as well as internal audit programs and findings;
The re-alignmentCommittee reviewed the draft of the press release on the company’s reporting segments;
annual or interim financial statements.- Matters relating to accounting policies, financial risks, reporting and compliance with accounting standards. Key accounting judgments 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 ESG & Legal Officer’s review of litigation and other
claims)claims, as well as material investigations), and follow-up actions and appropriate measures were examined thoroughly;
thoroughly. Each quarter, the Committee reviewed theThe company’s cash flow generation, liquidity and financing headroom, and its ability under its capital structure and credit ratings to pay dividends and to fund capital investments, including share repurchases and other financialcorporate finance initiatives. The Committee also monitored ongoing goodwill impairment indicators, andin particular in the Sleep & Respiratory Care business, which resulted in a EUR 1.3 billion non-cash charge in Q3 2022 for the impairment of goodwill of this business. The non-cash charge of EUR 168 million that was recorded in Q3 2022 in connection with the initiative to enhance the productivity in Research & Development (among others, by discontinuing certain Research & Development projects) has also been reviewed by the Committee. Furthermore, the Committee reviewed the goodwill impairment tests performed in the fourth quarter, risk management, information and cybersecurity risks, legal compliance, and developments in regulatory investigations, as well as legal proceedings, including antitrust investigations and related provisions;
provisions.- The quarterly Internal Audit reports in which the Head of Internal Audit highlighted key findings of internal audits and fraud investigations by the Internal Audit Function in the previous quarter. The Committee discussed the adequacy of the remediation actions agreed with management and accountabilities for executing on these actions. In each meeting the Head of Internal Audit also presented the audit schedule for the upcoming quarter.
- Specific finance topics,
included dividend policy, share repurchases, and in particular the settlement of forward contracts entered into as part of the share repurchase program announced on July 26, 2021, (at the original settlement dates in 2023 and 2024, instead of in 2022 as earlier announced), capital spending and the company’s debt financing strategy;
strategy (including the EUR 1 billion credit facility the company entered into as announced on October 24, 2022). The Committee reviewed Philips’ Enterprise Risk Management, which included an annual risk assessment and discussion of Philips’ top and emerging risks and mitigating actions;
The Committee engaged in aA post-investment review of projects in the areaareas of Information Technology, Research & Development, Real Estate, Operations and Restructuring, and assessedassessment of the actual spend and timing of such projects against the original budget and timing;
timing.The Committee was updated on the company’s continuous effortsReview and major achievements in establishing a strong compliance culture in China;
With regard to Internal Audit, the Committee reviewed and approvedapproval of the revised Internal Audit charter, annual audit plan and budget, audit scope, and its coverage in relation to the scope of the external audit, as well as the staffing, independence, performance and organizational structure of the Internal Audit function;Function.With regard to the external auditor, the Committee reviewed theThe performance of the external auditor in conducting the group and statutory audits as required by the Auditor Policy and the results of the 2021 EY service quality review program for Philips. Taking into account this performance review, the Committee evaluated the proposal for re-appointment of Ernst & Young Accountants LLP. Subsequently, Ernst & Young Accountants LLP was re-appointed at the 2022 Annual General Meeting of Shareholders as external auditor for a term of three years,one year, starting on January 1, 2020, at2023.- Later in the
2019year, the Committee also evaluated the auditor tender process which resulted in the Committee’s recommendation to the Supervisory Board to submit to the 2023 Annual General Meeting of Shareholders;Shareholders proposals to re-appoint Ernst & Young Accountants LLP as the company’s external auditor for a term of one year, starting on January 1, 2024 and to appoint PricewaterhouseCoopers Accountants N.V. as the company’s new external auditor, starting on January 1, 2025 for a term of four years. With regard to theThe proposed 2022 external audit, the Committee reviewed the proposed audit scope, including key audit areas, approach and fees, theand non-audit services provided by the external auditor in conformity with the Philips Auditor Policy, as well as any changes to this policy;
Policy.The Committee reviewedReview and challenge of 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 deployment). The Committee
was informed on, andreviewed, discussed and monitored closely the company’s internal control certification processes, and in particular, compliance with section 404 of the US Sarbanes-Oxley Act and its requirements regarding assessment, review and monitoring of internal controls. The Committee also reviewed the status of previously reported significant deficiencies and progress made with respect to the remediation thereof. 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.
- The company’s structure and system on export controls and sanctions for compliance with the international sanctions and export controls.
Furthermore, the Committee received a report from the company’s Head of Tax, updating the Committee on several tax aspects, including the company’s effective tax rate, tax transparency and tax assets and liabilities.
In February 2020,2023, the Committee also reviewed, together with the other members of the Supervisory Board, the key audit matters and the critical audit matters identified by the Auditorauditor in relation to the 20192022 financial statements included in the Annual Report 20192022 and the Annual Report on Form 20-F respectively.
respectively as well as the draft of the Annual Report 2022. In February 2023, the Committee also reviewed the draft of the company’s 2022 Country Activity and Tax Report.
During each regular quarterly 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 Letter was circulated to the full Supervisory Board, and planned actions to address the items raised were discussed with Managementmanagement in the subsequent Audit Committee meetings and alsoas well as in private sessions with Management.
management.
Finally, the Committee also reviewed its ownthe Audit Committee Charter and concluded that it was satisfactory.
remains appropriate.
11.4Report of the Quality & Regulatory Committee
The Quality & Regulatory Committee was established in view of the importance of patient safety and the Qualityquality of the company’s products, systems, services and software.solutions. The Committee provides broad oversight of compliance with the regulatory requirements that govern the development, manufacturing, marketing and servicing of the company’s products.products, systems, services and solutions. The Quality & Regulatory Committee assists the Supervisory Board in fulfilling its oversight responsibilities in these areas. It is chaired by David Pyott and its members are Christine PoonMarc Harrison and Marc Harrison.
Peter Löscher.
TheIn 2022, the Quality & Regulatory Committee met eight times in 2019. Allheld six meetings and all Committee members were present duringattended these meetings, with the exception of one member, who was unable to attend the January and October Committee meetings and one member who was unable to attend the June and December Committee meeting.meetings. The Chief Executive Officer, the Chief ESG & 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 2019:
in the course of 2022:
AdherenceThe company’s Quality & Regulatory strategy, focusing on patients and customers to ensure the safety and efficacy of the company’s products and solutions and the status and progress of the company’s Accelerating Patient Safety and Quality program. For more information, please refer to Quality & Regulatory and patient safety.- The Philips Respironics voluntary recall notification related to the sound abatement foam in certain sleep and respiratory care products (announced on June 14, 2021) in the company’s Sleep & Respiratory Care business. Management regularly updated the Committee on the trend of the number of devices registered for remediation and on the progress of the repair and replace program for the affected devices, as well as actions taken to accelerate the remediation. The Committee reviewed aspects of this issue, such as the program governance to enable effective execution, ongoing engagements with the FDA and DOJ, among others, with respect to the 518(a) Notification order issued by the FDA on March 10, 2022, the investigation initiated by the DOJ to which Philips Respironics is subject, and the consent decree that is currently under discussion with the US Department of Justice (DOJ), acting on behalf of the FDA and engagements with other regulatory authorities globally. Furthermore, the Committee reviewed and discussed with management the engagement with and communication efforts to patients, physicians, customers and durable medical equipment providers, the testing program and its outcomes, and health hazard evaluations. The Committee also discussed the increases in the field action provision of EUR 165 million and EUR 85 million, respectively, as set out in more detail in the report of the Audit Committee above. Finally, management updated the Committee on two problems detected in corrected Trilogy 100/200 ventilators that had already been repaired, as announced by the company on November 21, 2022; the potential root causes of these issues were discussed between the Committee and management.
- Management updated the Committee regularly with respect to other quality issues (other than the Philips Respironics voluntary recall notification mentioned in the previous bullet) and the Committee reviewed the progress made with solving and closing such other issues, including but not limited to the quality issue with respect to the pads of the HeartStart 1 devices (for which the company issued a Field Safety Notice on February 21, 2022).
- Review of progress in the transformation of the company’s Quality
Management System, including& Regulatory function, aimed at further strengthening expertise and capabilities within the company’s Quality & Regulatory function. - Review of the progress made with global
transformation initiatives around customer-centric risk management, complaint handlingthe transformation, standardization and post-market surveillance monitoring of supplier quality performance, management of supplier performance, supply base enhancement and the product development lifecycle management process;
Quality and regulatory dashboards, which display key performance indicators for businesses and markets, measuring performance and continuous improvement to enhance quality and compliance;
The discretionary quality and regulatory multiplier applied to the 2018 Annual Incentive realizationsimplification of the Executive Committee members as well as the alignment of performancecompany’s structure and rewards throughout the organization;
organizational processes relating to Quality Management Systems, Management Systems and regulated manufacturing sites (Legal Manufacturers).- The status and outcome of
qualityQuality & regulatoryRegulatory-related investigations and inspections by regulatory authorities and Notified Bodies globally across the organization. This in particular covered findings, related matters includingand follow-up actions taken by the company to address these findings and includes the progress made with respect to closing the open warning letter from the FDA in line with the terms of the Consent Decree with the US Department of Justice, representing the Food and Drug Administration (FDA), focusing primarily on Philips’ defibrillator manufacturing in the US; Regulatory developments, includingrelation to the company’s preparationsHospital Respiratory Care business. Management also regularly provided the Committee with an overview of upcoming scheduled inspections across company sites by the FDA, other regulatory authorities and Notified Bodies, and the actions taken to implement the EU Medical Device Regulation;prepare such inspections.- Review of
progress in the development2022 dashboard of talent and capabilities in the company’s Quality & Regulatory function;
- key performance indicators, showing the trend of performance. The
budgeted 2020 human and financial resources forCommittee also reviewed the company’s Quality & Regulatory function.
key performance indicators for 2023.
12Corporate governance
12.1Introduction
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 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 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 sectionarticle 2:391 of the Dutch Civil Code) included in the Annual Report address the strategy and culture of Philips aimed at long-term value creation. Philips'Philips’ strategy is driven by our purpose to improve people’s health and well-being through meaningful innovation, as described in more detail in Strategy and Businesses. Here,The Message from the CEO explains how the company’s strategy was executed in 2022; in this regard, please refer also to Financial performance. Furthermore, reference is also made to the Philips Business System, an interdependent, collaborative operating model that covers all aspects of how we operate – strategy, governance, processes, people, culture and performance management. As set out in Social performanceOur culture, we set standards for behaviors, quality and integrity within Philips promotes a behaviorthat will help achieve operational excellence and competency-driven growth and performance culture, which is anchored by the integrity norms described in the GBP. The Message from the CEO explains how the company’s strategy was executed in 2019; in this regard, pleaseextend our solutions capability to address our customers’ unmet needs. Finally, refer also to Financial performanceEnvironmental, Social and Governance. for more information on our approach to doing business responsibly and sustainably and our overall societal impact.
12.2Board of Management and Executive Committee
Introduction
The Board of Management is 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 Governancegovernance 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 shareholders and otherits 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 external reporting (including reporting to the shareholders of the company).
The Board of Management and the Executive Committee are supervised by the Supervisory 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 (and if needed, the other members of the Executive Committee) meet on a regular basis with the Chairman and other members of the Supervisory Board. The Board of Management and the Executive Committee are 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.
Certain important decisions of the Board of Management require Supervisory Board approval, including decisions concerningconcerning: the operational and financial objectives of the company and the strategy designed to achieve these objectives,objectives; the issue, repurchase or cancellation of shares,shares; and major acquisitions or divestments.
Appointment and composition
Members of the Board of Management, including 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.
The CEO and the other members of the Board of Management are appointed for a term of four years, it being understood that this term expires at the closing of the General Meeting of Shareholders to be held in the fourth calendar year after the year of their appointment or, if applicable, at 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 members of the Board of Management may be dismissed by the General Meeting of Shareholders (in each case in accordance with the Articles of Association). The other members of the Executive Committee are appointed, suspended and dismissed by the CEO, subject to approval by the Supervisory Board.
12.3Supervisory Board
Introduction
The Supervisory Board supervises the policies, and management and the 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 interests of shareholders and otherits 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 and the 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 under 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 US rules.
to the Audit Committee.
The Supervisory Board must approve certain important decisions of the Board of Management, including decisions concerning the operational, business and financial objectives of the company 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 able to carry out its duties properly as a supervisory body.
Please refer to the Rules of Procedure of the Supervisory Board, 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 its report (included in the company’s Annual Report), the Supervisory Board describes the composition and functioning of the Supervisory Board and its committees, their activities in the financial year, the number of committee meetings held and the main items discussed. Please refer to Supervisory Board report. Please also refer to Supervisory Board for an overview of the current members of the Supervisory Board.
Appointment and composition
Members of the Supervisory Board are appointed by the General Meeting of Shareholders upon a binding recommendation drawn up by the Supervisory Board. 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 requiring 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.
A (re-)appointment schedule for the Supervisory Board is published on the company’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 company’s Diversity Policy, which is published on the company’s website. The Supervisory Board’s composition furthermore follows the profile included in the Rules of Procedure of the Supervisory Board, and the size of the board may vary as it considers appropriate to support its profile. Please refer to Composition, diversity and self-evaluationSupervisory Board report by the Supervisory Board.
Effective 2022, Dutch law provides a mandatory gender quota, requiring that least one-third of the Supervisory Board members are women and at least one-third men (for calculation purposes, a total number of board 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 new Supervisory Board members, and (ii) the re-appointment of acting board members after eight years following their initial appointment. Except in certain exceptional circumstances, any appointment or re-appointment resulting in a Supervisory Board composition which does not meet (or no longer meets) the quota, will be invalid (null and void).
Supervisory Board committees
The Supervisory Board, while retaining overall responsibility, has assigned certain tasks to four committees: the Corporate Governance and Nomination & Selection Committee, the AuditRemuneration Committee, the RemunerationAudit Committee, and the Quality & Regulatory Committee. Each committee reports to the full Supervisory Board. Please refer to the charters of the respective committees, which are published on the company’s website as part of the Rules of Procedure of the Supervisory Board, for a description of their responsibilities, composition, meetings and working procedures.
The Corporate Governance and Nomination & Selection Committee is responsible for preparing selection criteria and appointment procedures for members of the Supervisory Board, the Board of Management and the Executive 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, and the Diversity Policy, and supervises the policy of the Executive Committee on the selection criteria and appointment procedures for Philips executives. At least once 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 Committee prepares an annual remuneration report, which is included inpublished on the company’s website by the Supervisory Board ahead of the Annual Report.General Meeting of Shareholders. 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 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 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 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. 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 company is operating. In addition, David Pyott and ElizabethLiz Doherty are eachis 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 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’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 remuneration 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 policypolicies for the Board of Management was adopted in 2017 and is published on the company’s website; the current remuneration of the Supervisory Board was determined in 2018. A description of the composition of the remuneration of the individual members of the Board of Management and the Supervisory Board, is includedrespectively, were adopted in Report of2020 and are published on the Remuneration Committee.
company’s website. Pursuant to Dutch law, from 2020, the shareholders will beare entitled to vote on the adoption of the separate remuneration policies for each of the Board of Management and the Supervisory Board at the Annual General Meeting of Shareholders (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 allowprovide for a lower majority). In addition, shareholders
A description of the composition of the remuneration paid and owed to the individual members of the Board of Management and the Supervisory Board is included in the annual remuneration report (as prepared by the Remuneration Committee, adopted by the Supervisory Board and published on the company’s website). Shareholders have an advisory vote at theeach 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). The agenda for the Annual General Meeting of Shareholders 2020 will include certain agenda items to implement this new law.year.
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 2019.2022.
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 2019,2022, nor were any loans or guarantees outstanding as of December 31, 2019.2022.
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 NetherlandsDutch 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 & Officers) for the persons concerned.
Diversity
Candidates for appointment to the Supervisory Board, the Board of Management and the Executive Committee are 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 one-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 (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 and to Inclusion & Diversity.
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 much as possible, and procedures 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 financial year in question. No decisions to enter into material transactions in which there are conflicts of interest with members of the Board of Management or the Supervisory Board were taken during the financial year 2019.2022.
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 20192022 all members of the Board of Management and the Supervisory Board complied with the limitations described above in this paragraph.
12.5General Meeting of Shareholders
Meetings
The Annual General Meeting of Shareholders shall be held no later than six months after the end of the financial year. The agenda for the meeting typically includes: implementation ofan advisory vote on the remuneration policies for the Board of Management and the Supervisory Board;report; discussion of the Annual Report,Report; the adoption of the financial statements; policy on additions to reserves and dividends; any proposed dividends or other distributions; discharge of the members of the Board of Management and the Supervisory Board; any other matters proposed by the Supervisory Board, the Board of Management or shareholders in accordance with Dutch law and the Articles of Association.
Shareholders’ meetings are convened by public notice via the company’s website, and registered shareholders are notified by letter or by 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. 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 included in the notice convening the relevant meeting.
Pursuant to Dutch law, the record date for the exercise of voting rights and rights relating to shareholders’ meetings is set at the 28th day prior to the day of the relevant meeting. Shareholders registered on such date are entitled to attend the meeting and to exercise the other shareholder rights (at the relevant meeting) notwithstanding any subsequent sale of their shares after the record date.
In accordance with the Articles of Association and Dutch law, requests from shareholders for items to be included on the agenda will generally be honored, subject to the company’s rights to refuse to include the requested agenda item under Dutch law, provided that such requests are made in writing at least 60 days before a General Meeting of Shareholders to the Board of Management and the Supervisory Board by shareholders representing at least 1% of the company’s outstanding capital or, according to the official price list of Euronext Amsterdam, representing a value of at least EUR 50 million. Written requests may be submitted electronically and shall comply with the procedure stipulated by the Board of Management, which procedure is posted on the company’s website.
Pursuant to Dutch 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. The company has the obligation to publish such disclosures on its website.
Main powers of the General Meeting of Shareholders
The main powers of the General Meeting of Shareholders 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, to 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 any liability in respect of the performance of their respective duties for the previous financial year;
- to appoint the company’s external auditor;
- to adopt amendments to the Articles of Association and proposals to dissolve or liquidate the company;
- to issue shares or rights to shares;
- to restrict or exclude pre-emptive rights of shareholders and to repurchase or cancel outstanding shares; and
- in accordance 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 company or the business.
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. All issued and outstanding shares carry voting rights and each share confers the right to cast one vote in a shareholders’ meeting. Pursuant to Dutch law, no votes may be cast at a General Meeting of 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. Subject to certain exceptions provided by Dutch law and/or the Articles of Association, resolutions of the General Meeting of Shareholders are passed by an absolute majority of votes cast and do not require a quorum.
Share capital; issue and repurchase of (rights to) shares
The authorized share capital of the company amounts to EUR 800 million, divided into 2 billion common shares with a nominal value of 20 eurocents each and 2 billion preference shares also with a nominal value of 20 eurocents each. On December 31, 2019,2022, the issued share capital amounted to EUR 179,346,744.20,177,863,016.40 divided into 896,733,721889,315,082 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 Sectionarticle 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 New York Registry Shares may be exchanged for each other.
As per December 31, 2019,2022, approximately 93%89% of the common shares were held through the system of Euroclear Nederland (Euroclear shares) and approximately 7%11% of the common shares were represented by New York Registry Shares issued in the name of approximately 952843 holders of record, includingrecord. The latter include Cede & Co. Cede & Co which acts as nominee for The Depository Trust Company, holdingwhich holds 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 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 New York Registry Shares beneficially held by US residents.
At the 20192022 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 company as well as to restrict or exclude the pre-emption right accruing to shareholders up to and including November 8, 2020.9, 2023. This authorization is limited to a maximum of 10% of the number of shares issued as of May 9, 2019.10, 2022.
In addition, at the 20192022 Annual General Meeting of Shareholders, it was resolved to authorize the Board of Management, subject to the approval of the Supervisory Board, to acquire shares in the company within the limits of the Articles of Association and within a certain price range up to and including November 8, 2020.9, 2023. The maximum number of shares the company may hold will not exceed 10% of the issued share capital as of May 9, 2019.10, 2022. The number of shares may be increased by 10% of the issued capital as of that same date in connection with the execution of share repurchase programs for capital reduction programs.
12.6Risk 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 its 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 (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 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
12.7Annual 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.
The external auditor is appointed by the General Meeting of Shareholders in accordance with the Articles of Association. Philips’ current external auditor, Ernst & Young Accountants LLP, was appointed by the General Meeting of Shareholders held on May 7, 2015, for a term of four years starting January 1, 2016, and was re-appointed at the Annual General Meeting of Shareholders held on May 9, 2019 for a term of three years starting January 1, 2020.2020 and was re-appointed at the Annual General Meeting of Shareholders held on May 10, 2022 for a term of one year starting January 1, 2023.
European and Dutch law requires the separation of audit and certain non-audit services, meaning the company’sservices. The external auditor may only provide audit and audit-related services and is not allowed to provide non-auditprohibited from providing any other services. This is reflected in the Auditor Policy, which is published on the company’s website. The policy is also in line with (and in some ways stricter than) applicable US rules, under which the appointed external auditor must be independent from the company 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.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-approval is 12 months from the date of the pre-approval unless the Audit Committee states otherwise. During 2019,2022, there were no services provided to the Companycompany by the external auditor which were not pre-approved by the Audit Committee.
12.812.7Stichting Preferente Aandelen Philips
Stichting Preferente Aandelen Philips, a Foundation (stichting) organized under Dutch law, has been granted the right to 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 file a petition with the Enterprise Chamber of the Amsterdam Court of Appeal to commence an inquiry procedure within the meaning of sectionarticle 2:344 of the Dutch Civil Code.
The object of the Foundation is to represent the interests 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 company, 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. This object includes the protection of Philips against (an attempt at) an unsolicited takeover or other attempt to exert (de facto) control of the company. The arrangement will allow Philips to determine its position in relation to the relevant third party (or parties) and its (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 such 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 December 31, 2019.
2022.
The members of the self-electing Board of the Foundation are Messrs J.M. Hessels, F.J.G.M. CremersJ.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 above, the company does not have any measures which exclusively or almost exclusively have the purpose of defending 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 a ‘Change of Control Put Event’. Upon the occurrence of such events, the company might be required to offer to redeem or purchase any outstanding bonds at certain pre-determined prices. Please also refer to note 18 Debt.
12.9Investor Relations
Philips is continuously focused on maintaining strong and open relations with its shareholders. In addition to communication with its shareholders at shareholders’ meetings, the company may discuss its financial results during conference calls, which are broadly accessible. The company also publishes annual, semi-annual and quarterly reports and press releases, and informs investors via its website.
From time to time the company communicates with investors and analysts via roadshows, broker conferences and a Capital Markets Day, which are announced in advance on the company’s website. The purpose of these engagements is to further inform the market of the results, strategy and decisions made, as well as to receive feedback from shareholders. It is the company’s policy to post presentations to investors and analysts on its website. Philips applies recommendation 4.2.3 of the Dutch Corporate Governance Code, which it does not view (in line with market practice) as extending to less important analyst meetings and presentations.
Furthermore, Philips engages in bilateral communications with investors and analysts. These communications take place either at the initiative of the company or at the initiative of investors/analysts. The company is generally represented by its Investor Relations department during these interactions, however, on a limited number of occasions the Investor Relations department is accompanied by one or more members of the senior management. The subject matter of the bilateral communications ranges from individual queries from investors/analysts to more elaborate discussions following disclosures that the company has made, such as its annual and quarterly reports. Philips complies with applicable rules and regulations on fair and non-selective disclosure and equal treatment of shareholders.
12.1012.8Major shareholders
The Dutch Act on Financial Supervision imposes an obligation on persons holding certain interests to disclose (inter alia) percentage holdings in the capital and/or voting rights in the company when such holdings reach, exceed or fall below 3, 5, 10, 15, 20, 25, 30, 40, 50, 60, 75 and 95 percent (as a result of an acquisition or disposal by a person, or as a result of a change in the company’s total number of voting rights or capital issued). Certain 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 NetherlandsDutch Authority for the Financial Markets (AFM) without delay. The AFM then notifies the company 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 notifications of substantial holdings and/or voting rights at or above the 3% threshold: BlackRock, Inc.: substantial holding of 5.03%5.75% and 6.19%7.45% of the voting rights (January 5, 2017)(May 13, 2022); Wellington ManagementT. Rowe Price Group, LLP: 6.58 %Inc.: substantial holding of 4.98% and 4.96% of the voting rights (October 1, 2019)(February 2, 2023); Capital ResearchArtisan Investments GP LLC: substantial holding of 5.13% and Management Company / Capital Group International Inc.: 5.00 %5.13% of the voting rights (November 19, 2019)(May 5, 2022).
12.1112.9Corporate information
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 shares in 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"('Share Certificates'). A limited number of 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 relevant shares will bewere registered in the name of Royal Philips by operation of law 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 until 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 latest. As per January 2, 2026, entitlements attached to the Share Certificates not surrendered, will expire by operation of law. For more information, please contact the Investor Relations department by email (investor.relations@philips.com) or telephone (+31-20-59 77222).
The statutory seat of the company is Eindhoven, the Netherlands, and the statutory list of all subsidiaries and affiliated companies, prepared in accordance with the relevant legal requirements (Dutch Civil Code, Book 2, Sectionsarticles 379 and 414), forms part of the notes to the consolidated financial statements and is deposited at the office of the Commercial Register in Eindhoven, the Netherlands (file no. 17001910). The executive offices of the company are located at the Philips Center, Amstelplein 2, 1096 BC Amsterdam, the Netherlands, telephone +31-20-59 77777.
The Board of Management and the Supervisory Board are of the opinion that the principles and best practice provisions of the Dutch Corporate Governance Code that are addressed to the boards, are being applied. 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).
12.1212.10Additional information
Articles of association
Set forth below is a summary of certain provisions of the Articles of Association of the company, applicable Dutch law and related company policies. This summary does not constitute legal advice regarding those matters and should not be regarded as such.
Object and purpose
The objects of the company 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 company and the companies in which it directly or indirectly participates. The object and purposeThese objects can be found in Article 2 of the Articles of Association.
Share Capital
On December 31, 2019,2022, the issued share capital amounted to EUR 179,346,744.20,177,863,016.40 divided into 896,733,721889,315,082 common shares and no preference shares.
Voting rights
All issued and outstanding shares carry voting rights and each share confers the right to cast one vote in a shareholders’ meeting. Pursuant to Dutch law, no votes may be cast at a General Meeting of 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, 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 8, 2020.9, 2023. 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’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 company 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. 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 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 company 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. 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 company does not solicit proxies within the United States.
The Articles of Association of the company provide that there are no quorum requirements to hold a General Meeting of Shareholders. Subject to certain exceptions provided by Dutch law and/or the Articles of Association, resolutions of the General Meeting of Shareholders are passed by an absolute majority of votes cast and do 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 paid in euros on Dutch 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. 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 company 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.
Significant differences in corporate governance practices
The corporate governance rules established by the New York Stock Exchange (NYSE) allow Foreign Private Issuers, like 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. The 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.
Dutch corporate governance code
The company 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, are listed on the NYSE.
Board structure
The NYSE listing standards prescribe regularly scheduled executive sessions of non-executive directors. The company 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 onbest practices limiting the number of non-independent members of the Supervisory Board, and its committees. The Supervisory Board considers all its members to be independent under 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 also independent under the NYSE listing standards.
Committees of our Supervisory Board
The company has established four committees, consisting of members of the Supervisory Board only: the Audit Committee, the Remuneration Committee, the Corporate Governance and Nomination & Selection Committee and the 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. 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 such 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 company 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 company is appointed by the General Meeting of Shareholders on the proposal of the Supervisory Board, after the latter has been advised by the Audit Committee and the Board of Management.
Equity compensation plans
The company complies with Dutch legal requirements regarding shareholder approval of equity compensation plans.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 20192022 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 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 company 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 July 16, 2018, between the New York Transfer Agent and the company (such common shares, “New York Registry Shares”). As soon as practicable after receipt from the 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 company 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), (b) that each registered holder at the close of business on the record date set by the company 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 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'scompany’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’scompany’s common shares and Wellington Management Company LLP beneficially owned 6.80% (60,988,928 shares) of the Company’scompany’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.
On January 25, 2023, Blackrock Inc. filed a Schedule 13G with the SEC indicating that, as of December 31, 2022, it beneficially owned 8.8% (78,533,730 shares) of the company’s common shares.
Please also refer to Major shareholders.
Group financial statements contents
13Group financial statements
Introduction
Statutory financial statements
This section ‘Group financial statements’ and the section 'Company Financial Statements' together contain the statutory financial statements of the Annual Report contains the audited consolidated financialcompany. These 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 2019 have been endorsed by the EU, consequently, the accounting policies applied by Koninklijke Philips N.V. (Royal Philips) also comply with IFRS as issued by the IASB.
The Group financial statements (together with the Company financial statements, which are not included in the Annual Report on Form 20-F, containing its statutory statements) are subject to adoption by the company’s shareholders at the upcoming 20202023 Annual General Meeting of Shareholders.
Please refer to Forward-looking statements for more information about forward-looking statements, third-party market share data, fair value information,
Management report and revisions and reclassifications.
The Board of Management of Royal Philips hereby declares that, to the best of our knowledge, the Group financial statements and Company financial statements give a true and fair view of the assets, liabilities, financial position and profit or loss of the company and the undertakings included in the consolidation taken as a whole and that the management report referred to above gives a true and fair view concerning the position as per the balance sheet date, the development and performance of the business during the financial year of the company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks that they face.
Board of Management
Frans van Houten
Abhijit Bhattacharya
Marnix van Ginneken
February 25, 2020
13.1Management’s reportControls and Procedures
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 internal control
Management’sthat evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective as of December 31, 2022.
13.1.2Management's annual 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 13a1513a-15 (f) under the US Securities Exchange Act). Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting for external purposes in accordance with IFRS as issued by the IASB.
Internal control over financial reporting includes maintaining records that, in reasonable detail, accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of our financial statements; providing reasonable assurance that receipts and expenditures of company assets are made in accordance with management authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of company assets that could have a material effect on our financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected. Also, projections of any evaluation of the effectiveness of internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Board of Management conducted an assessment of 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, 2019,2022, it has concluded that, as of December 31, 2019,2022, Royal Philips' internal control over Group financial reporting is considered effective.
13.1.3Attestation report of the registered public accounting firm
The effectiveness of the Royal Philips'Philips’ internal control over financial reporting as of December 31, 2019,2022, 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 25, 2020
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, 2019.
13.1.213.1.4Changes in internal control over financial reporting
There were no changes in our internal control over financial reporting during 20192022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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, 2019,2022, 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)company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019,2022, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Companycompany as of December 31, 20192022 and 2018,2021, 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, 2019,2022, and the related notes and our report dated February 25, 202021, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’scompany’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 report on internal control’, of this Annual Report. Our responsibility is to express an opinion on the Company’scompany’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 Companycompany 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 25, 202021, 2023
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(Philips or the Company) as of December 31, 20192022 and 2018,2021, 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, 2019,2022, and the related notes (collectively referred to as the group financial statements). In our opinion, the group financial statements present fairly, in all material respects, the financial position of the Company at December 31, 20192022 and 2018,2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019,2022, 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), the Company's internal control over financial reporting as of December 31, 2019,2022, 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 25, 202021, 2023 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 included 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) relatesrelate 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.
Revenue recognition – sales contracts with separately identifiable performance obligations or sales promotions |
Description of the Matter | Sales contracts for certain transactions primarily entered into in the Diagnosis & Treatment businesses and the Connected Care businesses involve separately identifiable performance obligations. Revenue for each of those separately identifiable performance obligations, is recognized based on its relative stand-alone selling price when the performance obligation is satisfied. The Company applies the internally-determined Country Target Price (CTP), which is based on the selling prices of goods or services in separate transactions under similar conditions to similar customers, as a basis for determining the stand-alone selling price. Determining the stand-alone selling price and therefore the allocation of the consideration to the different performance obligations, which impacts timing of the related revenue recognition, is therefore complex and judgmental.
In addition, primarilyPrimarily in the Personal Health businesses, the Company has sales promotions-relatedpromotion-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 based on a combination of historical patterns and future expectations regarding which promotional targets are expected to be met by distributors and retailers. We identified a fraud risk related to the estimation of the sales related accruals through inappropriate estimations. Further reference is made to Note 6, Income from operations, section Sales composition and disaggregation, as included in the group financial statements.
Auditing the Company’s measurement of sales related accruals relating to rebates, promotional and marketing support is especially challengingcomplex because the calculation involves subjective management assumptions such as estimated customer sales andaround the extent to what extentwhich promotional or marketing targets are met.
Further reference is made to note 1, Significant accounting policies,will be met by distributors and note 6, Income from operations section Sales compositionretailers and disaggregation, to the group financial statements.related rebates that will be owed. |
How We Addressed the Matter in Our Audit | As part of our audit procedures, weWe 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 the measurement of revenues.for sales related accruals. This included testing controls among others, over the stand-alone selling price determination for separately identifiable performance obligations in sales contracts, as well asrelating to management’s verification that sales-relatedsales related accruals have been reviewed and underlying assumptions were based on management’s best estimate.
To assess the relative stand-alone selling price determination, we evaluated the basis on which the stand-alone selling price is determined and tested the accuracy of the allocation to the performance obligations. We compared the CTP applied by the Company in determining the relative stand-alone selling price to the prices that were charged for goods or services in a separate transaction under similar conditions to similar customers.
With respect to the sales-related accruals, we evaluated management’s assumptions (as described above) by performing, among others, a retrospective review of actual settlements toof prior period sales related accruals, confirmed the agreed upon terms and conditions for a sample of customer contracts and performed additional inquires with non-sales related employees.cut off testing through assessing the sales promotions obligations around year-end.
We also assessed the adequacy of the sales related accruals disclosures containedas included in note 1, Significant accounting policies, and note 6, Income from operations section Sales composition and disaggregation, to the group financial statements. |
| for Cash Generating Unit Sleep & Respiratory Care |
Description of the Matter | At December 31, 2019, the total carrying value of goodwill amounted to EUR 8,654 million, representing 32% 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 goodwilltests for impairment annually or more frequently if there is a triggering event for testing. During the year, management recorded anand whenever impairment charge of EUR 78 million related to the CGU Population Insights & Care/VitalHealth (PIC/VH).indicators require. Further reference is made to noteNote 11, Goodwill, toas included in the group financial statements.
In 2022, an impairment of EUR 1,331 million was recorded on the Goodwill of CGU Sleep & Respiratory Care (S&RC). Management revised the expected future cashflows of CGU S&RC to reflect assumptions related to the consent decree that is currently under discussion on the S&RC business in the upcoming years, along with updates to expected business performance, and changes to the pre-tax discount rate following macro-economic developments. As of December 31, 2022, the total carrying value of goodwill allocated to CGU S&RC amounted to EUR 731 million.
Auditing the calculation of the recoverable amount for the CGUs PIC/VH and Aging & Caregiving (ACG) as well as the new CGU Population Health Management (PHM), in which the CGUs PIC/VH and ACG were subsequently combined,S&RC is complex, given the significant judgment and estimation uncertainty related to assumptions and data in the model used to determine whether the carrying valuerecoverable amount of goodwillthe CGU S&RC is appropriate and the sensitivity to fluctuations in assumptions for these CGUs. Significantappropriate. The most significant assumptions used within the model to support the recoverable amount of goodwillthe CGU S&RC are sales growth rates, EBITA in the terminal value, pre-tax discount rate, EBITA and discount rates.the scope and duration of the consent decree that is currently under discussion.
|
How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’smanagement’s goodwill impairment review process includingrelated to the CGU S&RC. This includes controls over management’s review and approval of the significant assumptions.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 review and determination and review of the sales growth, EBITA, pre-tax discount rate, and the discount rate calculations.
As partscope and duration of our audit wethe consent decree that is currently under discussion. We assessed and tested the assumptions and data used by the Companymanagement in theirits valuation model for the respective CGUs, for example,CGU S&RC by comparing themthe assumptions to external data such as industryindustrial sales growth rates EBITAand discount rates, and we performed sensitivity analyses over these key assumptions. We were assisted in our evaluation of the discount rates.rate by EY valuation specialists. Further, we corroborated the assumptions of the consent decree that is currently under discussion, including the scope and duration to the underlying legal documentation. Additionally, to test the data used by management, we compared the cash flow projections used in the valuation model of the recoverable amount to the information controlled and 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 fluctuations in the assumptions. We involved in our team a valuation expert to assist us in these audit activities.
We also assessed the adequacy of the Company’smanagement’s disclosure around goodwill as included in note 11, Goodwill, to the group financial statements.
|
ValuationMeasurement of provisions and disclosure of accrual estimatesdisclosures for legal claims, litigations and contingencies
|
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 investigationsbeing investigated by authorities.governmental authorities for alleged non-compliance with laws and regulations. As more fully described in Note 19, Provisions, and Note 24, Contingencies, this includes legal claims and litigation related to the Respironics field action, and discussions with and information provided to the Securities and Exchange Commission (SEC) and Department of Justice (DOJ) regarding alleged tender irregularities in China, Bulgaria and Brazil. The Company recordsrecognizes provisions for legal claims and litigation provisions ifwhen 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.
We evaluatedaccountingamount cannot be reliably estimated, as well as certain possible obligations arising from past events.
Auditing the provisions for legal claims and litigation, and the disclosure for (contingent) legalprovisions 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 19, Provisions, and note 24, Contingent assets and liabilities, to the group financial statements.
|
How We Addressed the Matter in Our Audit | Our audit procedures included, among others, obtainingWe obtained an understanding, evaluatingevaluated the design and testingtested the effectiveness of the Company’s internal controls around the identification and evaluation of legal claims, proceedingslitigation and investigations, at different levels in the group, and the recording and continuous re-assessment of the related (contingent)provisions, contingent liabilities and disclosures.
To evaluate the allegations and test the Company’s estimate of provisions for legal claims and litigation and the disclosure for provisions and disclosures.
We inquiredcontingent liabilities, we discussed the allegations with both internal and external legal counsel as well asand requested confirmation letters from in-house legal counsel and external legal counsel involved in these matters. We also discussed the allegations with the Company’s financialfinance department, in respect of (ongoing) investigations, claims or proceedings, inspected relevant correspondence with authorities, and inspected the minutes of the meetings of the Audit Committee, Supervisory Board, Board of Management and Executive Committee, requested a confirmation letter from the Company’s in-house legal counsel and obtained external legal confirmation letters from a selection of external legal counsels.Committee. For claims settled during the year, we vouchedread the related settlement agreements and agreed the cash payments, as appropriate, and read the related settlement agreements.appropriate. Specifically related to ongoing compliance-related investigations into alleged non-compliance with laws and regulations, we were supported by fraud investigation experts from our firm. forensic specialists and legal specialists to assist us in in assessing certain technical aspects of the legal claims and litigation.
We also assessed the adequacy of the Company’s disclosure aroundfor provisions for legal claims litigations and contingencieslitigation, and contingent liabilities, as included in notethe group financial statements.
|
| Measurement and disclosure of the Respironics field action provision related to Sleep & Respiratory Care products |
| Description of the Matter | As more fully described in Note 19, Provisions, the Respironics field action provision amounted to EUR 390 million as of December 31, 2022. Determining the Respironics field action provision is complex and note 24, Contingent assetsrequires significant judgment by management. Significant assumptions used to determine the provision relate to the estimated total quantity of devices remaining and liabilities,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 and utilization. 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 completeness, the utilization and mathematical accuracy 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 Respironics field action provision. For example, we assessed the estimated quantities of the devices through obtaining third party confirmations for quantities already registered for remediation as of December 31, 2022, as well as corroborated the remaining quantity estimate by evaluating the trend analysis of registrations over time. We corroborated the reasonability of the replacement share and performed procedures over historical accuracy. In our assessment we considered the contracted repair capacity, the upgraded in-house production capacity, and management’s internal and external communication. 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 United States Food and Drug Administration. We have audited the utilization of the Respironics field action provision through a combination of analytical procedures and detailed testing procedures.
We further assessed the adequacy of the 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 25, 202021, 2023
13.5Consolidated statements of income
Philips Group
Consolidated statements of income
in millions of EUR
For the yearsyear ended December 31
| | | | 2020 | 2021 | 2022 |
|---|
| | | | 17,313 | 17,156 | 17,827 |
| | | | (9,493) | (9,988) | (10,633) |
| | | | 7,820 | 7,168 | 7,194 |
| | | | (4,054) | (4,258) | (4,609) |
General and administrative expenses | | | | (630) | (599) | (671) |
Research and development expenses | | | | (1,822) | (1,806) | (2,103) |
| Impairment of goodwill11 | | (144) | (15) | (1,357) |
| | | | 122 | 186 | 127 |
| | | | (29) | (123) | (109) |
| | | | 1,264 | 553 | (1,529) |
| | | | 158 | 149 | 58 |
| | | | (202) | (188) | (258) |
Investments in associates, net of income taxes | | | | (9) | (4) | (2) |
| | | | 1,211 | 509 | (1,731) |
| | | | |
| Income tax expenses8 | | (212) | 103 | 113 |
Income from continuing operations | | | | 999 | 612 | (1,618) |
Discontinued operations, net of income taxes3 | | | | 196 | 2,711 | 13 |
| | | | 1,195 | 3,323 | (1,605) |
| | | | |
Attribution of net income | | | |
Net income attributable to Koninklijke Philips N.V. shareholders | | | | |
| Attribution of net income: | | | |
| Net income attributable to shareholders of Koninklijke Philips N.V. | | 1,187 | 3,319 | (1,608) |
Net income attributable to non-controlling interests | | | | 8 | 4 | 3 |
Philips Group
Earnings per common share attributable to shareholders of Koninklijke Philips N.V. shareholders
in EUR unless otherwise stated
For the years ended December 31
| | | |
|---|
Basic earnings per common share in EUR | | | |
Income from continuing operations attributable to shareholders | | | |
Net income attributable to shareholders | | | |
| | | |
Diluted earnings per common share in EUR | | | |
Income from continuing operations attributable to shareholders | | | |
Net income attributable to shareholders | | | |
| | 2020 | 2021 | 2022 |
|---|
| Basic earnings per common share attributable to shareholders of Koninklijke Philips N.V. | | | |
| Income from continuing operations | 1.09 | 0.67 | (1.84) |
| Net income | 1.31 | 3.67 | (1.82) |
| | | | |
| Diluted earnings per common share attributable to shareholders of Koninklijke Philips N.V. | | | |
| Income from continuing operations | 1.08 | 0.67 | (1.84) |
| Net income | 1.29 | 3.65 | (1.82) |
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
forFor the year ended December 31
| | | | 2020 | 2021 | 2022 |
|---|
| | | | |
Net income for the period | | | | 1,195 | 3,323 | (1,605) |
| | | | |
Pensions and other-post employment plans:20 | | | | |
| | | | |
| Remeasurement, before tax | | 51 | 134 | 101 |
Income tax effect on remeasurements8 | | | | (12) | (21) | (20) |
| | | | |
Financial assets fair value through OCI: | | | | |
Net current-period change, before tax | | | | - | (39) | (32) |
Reclassification directly into retained earnings | | | | |
| Income tax effect on net current-period change | | - | 1 | 1 |
Total of items that will not be reclassified to Income Statement | | | | 39 | 74 | 49 |
| | | | |
Currency translation differences: | | | | |
Net current period change, before tax | | | | (1,040) | 1,078 | 748 |
Income tax effect on net current-period change8 | | | | 1 | (5) | 2 |
Reclassification adjustment for (gain) loss realized | | | | 36 | - |
Reclassification adjustment for (gain) loss realized, in discontinued operations | | | | | 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 | | | | 69 | (52) | (29) |
Income tax effect on net current-period change8 | | | | (17) | 18 | (10) |
Reclassification adjustment for loss (gain) realized | | | | |
| Reclassification adjustment for (gain) loss realized | | (6) | (14) | 63 |
Total of items that are or may be reclassified to Income Statement | | | | (992) | 1,129 | 774 |
| | | | |
Other comprehensive income for the period | | | | (953) | 1,203 | 823 |
| | | | |
Total comprehensive income for the period | | | | 242 | 4,527 | (782) |
| | | | |
Total comprehensive income attributable to: | | | | |
Shareholders of Koninklijke Philips N.V. | | | | 235 | 4,520 | (786) |
Non-controlling interests | | | | 6 | 7 | 4 |
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
| | | 2021 | 2022 |
|---|
| | | | |
|---|
| | | | |
Property, plant and equipment1)102 | | | |
| Property, plant and equipment 102 | | 2,699 | 2,638 |
| | | 10,637 | 10,238 |
Intangible assets excluding goodwill122 | | | 3,650 | 3,526 |
Non-current receivables16 | | | 224 | 279 |
Investments in associates5 | | | 426 | 537 |
Other non-current financial assets13 | | | 630 | 660 |
Non-current derivative financial assets28 | | | 2 | 4 |
| | | 2,216 | 2,449 |
Other non-current assets14 | | | 129 | 98 |
| | | 20,613 | 20,429 |
| | | | |
| | | | |
| | | 3,450 | 4,049 |
Other current financial assets13 | | | 2 | 11 |
| | | 493 | 490 |
Current derivative financial assets28 | | | 61 | 123 |
| | | |
| Income tax receivable | | 180 | 222 |
| | | 3,787 | 4,115 |
Assets classified as held for sale3 | | | 71 | 77 |
Cash and cash equivalents29 | | | 2,303 | 1,172 |
| | | 10,347 | 10,259 |
| | | 30,961 | 30,688 |
| | | | |
| | | | |
| | | |
| Shareholders' equity | | 14,438 | 13,249 |
| | | 177 | 178 |
| Capital in excess of par value | | 4,646 | 5,025 |
| | | 748 | 1,488 |
| | | 8,868 | 6,558 |
Non-controlling interests17 | | | 36 | 34 |
| | | 14,475 | 13,283 |
| | | | |
| | | | |
| | | |
| Long-term debt 18 | | 6,473 | 7,270 |
Non-current derivative financial liabilities28 | | | 119 | 4 |
| | | 1,315 | 1,097 |
Deferred tax liabilities8 | | | 83 | 91 |
Non-current contract liabilities22 | | | 446 | 515 |
Non-current tax liabilities2)8 | | | |
| Non-current tax liabilities 8 | | 544 | 435 |
Other non-current liabilities22 | | | 56 | 60 |
Total non-current liabilities | | | 9,037 | 9,471 |
| | | | |
| | | | |
| | | |
| Short-term debt 18 | | 506 | 931 |
Current derivative financial liabilities28 | | | 83 | 207 |
| | | |
| Income tax payable | | 128 | 40 |
| | | 1,872 | 1,968 |
| | | 1,784 | 1,626 |
Current contract liabilities22 | | | 1,491 | 1,696 |
Short-term provisions2019 | | | 998 | 1,018 |
Liabilities directly associated with assets held for sale3 | | | |
| Liabilities directly associated with assets held for sale | | 1 | - |
Other current liabilities22 | | | 587 | 448 |
Total current liabilities | | | 7,450 | 7,934 |
Total liabilities and group equity | | | 30,961 | 30,688 |
1)Includes the impact of IFRS 16 lease accounting following its adoption as of January 1, 2019. For more details refer to the Significant accounting policies. 2)Due to IFRIC 23 adoption, non-current tax liabilities are now shown as a separate caption on the balance sheet. For more details refer to the Significant accounting policies13.8Consolidated statements of cash flows
Amounts may not add up due to rounding.
Philips Group
Consolidated statements of cash flows1)
in millions of EUR
For the yearsyear ended December 31
| | | | 2020 | 2021 | 2022 |
|---|
Cash flows from operating activities | | | | |
| | | | 1,195 | 3,323 | (1,605) |
Results of discontinued operations, net of income tax | | | | (196) | (2,711) | (13) |
Adjustments to reconcile net income to net cash provided by (used for) operating activities: | | | | |
Depreciation, amortization, and impairment of fixed assets | | | | |
Impairment of goodwill and other non-current financial assets | | | | |
| Depreciation, amortization, and impairment of assets | | 1,462 | 1,323 | 1,602 |
| Impairment of goodwill | | 144 | 15 | 1,357 |
| | | | 112 | 108 | 95 |
Net gain on sale of assets | | | | |
| Net loss (gain) on sale of assets | | (1) | 55 | (115) |
| | | | (13) | (18) | (25) |
Interest expense on debt, borrowings, and other liabilities | | | | 159 | 152 | 226 |
| Investments in associates, net of income taxes | | 9 | 4 | 112 |
| | | | 212 | (103) | (113) |
Investments in associates, net of income taxes | | | | |
Decrease (increase) in working capital | | | | (98) | (401) | (862) |
Decrease (increase) in receivables and other current assets | | | | 92 | (39) | (342) |
Decrease (Increase) in inventories | | | | (578) | (581) | (572) |
Increase (decrease) in accounts payable, accrued and other current liabilities | | | | 387 | 219 | 52 |
Decrease (increase) in non-current receivables, other assets and other liabilities | | | | |
| Decrease (increase) in non-current receivables and other assets | | (9) | (46) | 1 |
| Increase (decrease) in other liabilities | | 50 | 33 | (84) |
Increase (decrease) in provisions19 | | | | (91) | 427 | (199) |
| | | | 96 | (164) | (39) |
| Interest received | | 13 | 17 | 15 |
| | | | (148) | (151) | (205) |
| | | | |
Dividends received from investments in associates | | | | 4 | 14 | 12 |
| | | | (390) | (249) | (333) |
Net cash provided by (used for) operating activities | | | | 2,511 | 1,629 | (173) |
Cash flows from investing activities | | | | |
| | | | (876) | (729) | (788) |
Purchase of intangible assets | | | | (114) | (107) | (105) |
Expenditures on development assets | | | | (296) | (259) | (257) |
Capital expenditures on property, plant and equipment | | | | (485) | (397) | (444) |
Proceeds from sales of property, plant and equipment3 | | | | |
| Proceeds from sales of property, plant and equipment | | 19 | 33 | 18 |
Net proceeds from (cash used for) derivatives and current financial assets23 | | | | (13) | 48 | (72) |
Purchase of other non-current financial assets23 | | | | (131) | (124) | (116) |
Proceeds from other non-current financial assets23 | | | | 65 | 124 | 78 |
Purchase of businesses, net of cash acquired4 | | | | |
Net proceeds from sale of interests in businesses, net of cash disposed of3 | | | | |
| Purchase of businesses, net of cash acquired45 | | (317) | (3,098) | (712) |
| Net proceeds from sale of interests in businesses, net of cash disposed | | 4 | 107 | 124 |
Net cash provided by (used for) for investing activities | | | | (1,267) | (3,672) | (1,487) |
Cash flows from financing activities | | | | |
Proceeds from issuance (payments on) short-term debt18 | | | | 16 | (25) | 47 |
Principal payments on short-term portion of long-term debt18 | | | | |
| Principal payments on current portion of long-term debt18 | | (298) | (302) | (1,472) |
Proceeds from issuance of long-term debt18 | | | | 1,065 | 76 | 2,516 |
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 | | | | |
| Re-issuance of treasury shares | | 46 | 23 | 12 |
| Purchase of treasury shares | | (343) | (1,636) | (187) |
| Dividends paid to shareholders of Koninklijke Philips N.V. | | (1) | (482) | (412) |
Dividends paid to shareholders of non-controlling interests | | | | (2) | (6) |
Net cash provided by (used for) financing activities | | | | 483 | (2,347) | 500 |
Net cash provided by (used for) continuing operations | | | | 1,727 | (4,390) | (1,160) |
Net cash provided by (used for) discontinued operations3 | | | | 129 | 3,403 | (12) |
Net cash provided by (used for) continuing and discontinued operations | | | | 1,856 | (986) | (1,172) |
Effect of changes in exchange rates on cash and cash equivalents | | | | (55) | 65 | 41 |
Cash and cash equivalents at the beginning of the year | | | | |
| Cash and cash equivalents at the beginning of the period | | 1,425 | 3,226 | 2,303 |
Cash and cash equivalents at the end of the period | | | | 3,226 | 2,303 | 1,172 |
1)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
13.9Consolidated statements of changes in equity
Philips Group
Consolidated statements of changes in equity
in millions of EUR
For the year ended December 31
| | Currency translation differences1) | | | Capital in excess of par value | | | Total shareholders' equity | Non-controlling interests | | | Capital in excess of par value | | | Currency translation differences | | | | | Total shareholders' equity | Non-controlling interests | |
|---|
| | | | | | Reserves | | Other | | | | |
| | | | | | | | | | | | | |
Balance as of Jan. 1, 2017 | | | | | | | | | | | |
Total comprehensive income (loss) | | | | | | | | | | | |
| | | | | | | | | |
Sale of shares of Philips Lighting (now Signify) | | | | | | | | | |
Deconsolidation Philips Lighting (now Signify) | | | | | | | | |
Purchase of treasury shares | | | | | |
Re-issuance of treasury shares | | | | | | | | |
| | | | | | | |
| | | | | | | |
Share-based compensation plans | | | | | | | |
Income tax share-based compensation plans | | | | | | | |
Balance as of Dec. 31, 2017 | | | | | | | | | | | |
| | | | | | | | | |
Balance as of Jan. 1, 2018 | | | | | | | | | | | |
Total comprehensive income (loss) | | | | | | | | | | | |
| | | | | | | | | |
Purchase of treasury shares | | | | | |
Re-issuance of treasury shares | | | | | | | | |
| | | | | | | |
| | | | | | | |
Cancellation of treasury shares | | | | | | | |
Share-based compensation plans | | | | | | | |
Income tax share-based compensation plans | | | | | | | |
Balance as of Dec. 31, 2018 | | | | | | | | | | | |
| | | | | | | |
Balance as of Jan. 1, 2019 | | | | | | | | | | | |
| Balance as of January 1, 2020 | | 179 | 3,671 | (303) | (24) | 978 | | 8,296 | (201) | | 12,597 | 28 | 12,625 |
Total comprehensive income (loss) | | | | | | | | | | | | | - | 46 | (1,036) | | 1,225 | | | 235 | 6 | 242 |
| | | | | | | | | 4 | 754 | | | | (782) | | | (25) | (2) | (26) |
| | | | | | | | | | | | | | | (1) | (1) |
Transfer of gain on disposal of equity investments at FVTOCI to retained earnings | | | | | | | | | (2) | | | 2 | | | - | | - |
Purchase of treasury shares | | | | | | | | | | - | (130) | | (130) | | (130) |
Re-issuance of treasury shares | | | | | | | | - | (146) | | | | 7 | 161 | | 23 | | 23 |
| | | | | | | | | | | (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, 2019 | | | | | | | | | | | |
| Balance as of December 31, 2020 | | 182 | 4,400 | (305) | 23 | (58) | | 7,828 | (199) | | 11,870 | 31 | 11,901 |
| Total comprehensive income (loss) | | | | (39) | (48) | 1,175 | | 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 December 31, 2021 | | 177 | 4,646 | (344) | (25) | 1,117 | | 9,344 | (476) | | 14,438 | 36 | 14,475 |
| Total comprehensive income (loss) | | | | (32) | 23 | 749 | | (1,527) | | | (786) | 4 | (782) |
| Dividend distributed | | 3 | 326 | | | | (741) | | | (412) | (6) | (418) |
| Transfer of gain on disposal of equity investments at FVTOCI to retained earnings | | | | (1) | | | 1 | | | - | | - |
| Purchase of treasury shares | | | | | | | - | (24) | | (24) | | (24) |
| Re-issuance of treasury shares | | | (43) | | | | (28) | 77 | | 7 | | 7 |
| Forward contracts | | | | | | | 76 | (140) | | (64) | | (64) |
| Share call options | | | | | | | 5 | (12) | | (6) | | (6) |
| Cancellation of treasury shares | | (2) | | | | | (298) | 299 | | | | |
| Share-based compensation plans | | | 95 | | | | | | | 95 | | 95 |
| Income tax share-based compensation plans | | | 1 | | | | | | | 1 | | 1 |
| Balance as of December 31, 2022 | | 178 | 5,025 | (376) | (2) | 1,866 | | 6,832 | (275) | | 13,249 | 34 | 13,283 |
1)Cumulative translation adjustments related to investments in associates were EUR 44 million at December 31, 2019 (2018: EUR 45 million, 2017: EUR 46 million).
2)Previously available-for-sale financial assets.
Amounts may not add up due to rounding.
13.10Notes
Notes to the Consolidated financial statements of the Philips Group
1Significant accounting policiesGeneral information to the Consolidated financial statements
Reporting entity and its operations
Koninklijke Philips N.V. (‘Royal Philips’), incorporated and domiciled in the Netherlands, is a public limited liability company organized under Dutch Law. Philips is headquartered in Amsterdam, the Netherlands and has its registered address at High Tech Campus 52, 5656 AG Eindhoven, the Netherlands. The consolidated financial statements of Royal Philips as of December 31, 2022 comprise Royal Philips and its subsidiaries (together referred to as the 'company’ or ‘Philips’ or the 'Group’). Philips is a leading health technology company primarily involved in diagnostic imaging, image-guided therapy, patient monitoring and health informatics, as well as in consumer health and home care.
Basis of preparation
The Consolidated financial statements in the Group financial statements section have been are:
- prepared in accordance with International Financial Reporting Standards (IFRS) as
endorsedadopted by the European Union (EU) and comply 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 20192022 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 entities;
- authorized for issue by the Board of Management of Royal Philips on February 21, 2023;
- prepared under the historical cost convention, unless otherwise
indicated.The Consolidated financial statements are indicated;
- prepared on a going concern basis;
- presented in
euros,euro, which is the presentation currency. Duecurrency; - rounded to the nearest million euro unless stated otherwise;
- subject to rounding, whereby amounts may not add up precisely to the totals provided.
Use ofAccounting estimates
and judgmentsThe preparation of the Consolidated financial statements in conformity with IFRS requires management to make judgments,a number of estimates and assumptionsjudgments 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 torevenues and expenses, and the disclosure of contingent liabilities atassets and liabilities. Amounts recognized are based on factors that are by default associated with uncertainty. Actual results may therefore differ from estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revision to estimates are recognized prospectively. Where applicable, 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 basisof specific financial statement items are described in the respective note to the consolidated financial statements.
The areas involving a higher degree of judgment and bases the estimates on historical experience, currentcomplexity in applying accounting principles 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 reflectedfor which changes in the assumptions if and when they occur. Theestimates could result in significantly different results than those recorded in the consolidated financial statements are the following:
- Assessment of
these estimates formcontrol (below paragraph Basis of consolidation and Interests in entities) - Revenue recognition (Income from operations)
- For acquisitions, the
basis for making judgments about the carrying valueidentification and valuation of acquired assets and liabilities as well as identifyingincluding contingent considerations provisions (Acquisitions 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.The areas where the most significant judgments and estimates are made are goodwill,divestments
, Provisions) - Determination of deferred tax
asset recoverability, impairments, classificationassets for losses carried forward and measurementuncertain tax positions (Income taxes) - Assumptions used for impairment testing (Property, plant and equipment, Goodwill, Intangible assets excluding goodwill)
- Assessments of exposure to credit risk 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(Note Other financial assets, Receivables, Debt, Fair value of financial assets and liabilities, Details of treasury 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 occurredrisks
) - Assumptions used to determine
whether the carryingnet realizable value exceeds the recoverable amount. These analyses are generally based on estimates of discounted future cash flows. Furthermore, the company applies judgment when actuarialinventories (Inventories) - Actuarial assumptions
are established to anticipateof future events that are used in calculating post-employment benefit expenses and liabilities.liabilities (Post-employment benefits) - Estimating the likelihood of a potential outflow of resources, as well as the ability to make a reliable estimate of the obligation relating to provisions and contingent liabilities (Provisions, Contingencies)
The company regularly updates its significant assumptions and estimates to support the reported amounts of assets, liabilities, income and expenses. In relation to areas of judgment and estimates as disclosed in the accounting policies, those which are primarily impacted by the macroeconomic environment include impairment testing, valuation of inventories, valuation of deferred tax balances, measurement of financial instruments and the determination of fair values (for example fair values of acquired identifiable intangible assets, contingent considerations and certain investments).
In preparing the consolidated financial statements management has considered the impact of climate 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 factorsconsiderations did not have a material impact on the financial reporting judgments, estimates or assumptions. The specific financial impacts considered include, assumptionsfor example: specific climate mitigation measures, such as the use of lower carbon energy sources, the costs of developing more sustainable product offerings and expenses incurred to mitigate against the impact of extreme weather conditions.
Accounting policies
The general accounting policies as applied throughout the financial statements are described below. Accounting policies relating to specific financial statement items are included in the respective notes to the financial statements.
Basis of consolidation
The Consolidated financial statements comprise the financial statements of Koninklijke Philips N.V. and all subsidiaries that the company controls on a consolidated basis. Control exists when the company is exposed or has rights to variable returns from its involvement with respectthe investee and the company 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.
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 consolidated financial statements. Foreign currency transactions are converted into the functional currency using the exchange rates prevailing at transaction date or the valuation date in cases where items are remeasured. Gains and losses resulting from the settlement of foreign currency transactions and those resulting from the conversion of foreign currency denominated monetary assets and liabilities at period-end exchange rates are recognized in the Consolidated statements of income, except for qualifying cash flow hedges, qualifying net investment hedges and equity investments measured at fair value through OCI which are recognized in other comprehensive income.
All foreign exchange differences are presented as part of Cost of sales, apart from 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 not a wholly-owned subsidiary, the 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 rates, ratesin a subsidiary that includes a foreign operation while retaining control, the respective proportion of increasethe cumulative amount is reattributed to Non-controlling interests. When the company disposes of only part of its investment in healthcare costs, ratesan associate or joint venture that includes a foreign operation while retaining significant influence or joint control, the relevant proportion of future compensation increases, turnover ratesthe cumulative amount is reclassified to the Consolidated statements of income.
Philips operates in two economies that are considered hyperinflationary, Argentina and life expectancy.Turkey. The impact of the application of IAS 29, Financial Reporting in Hyperinflationary Economies, is not material for the consolidated financial statements.
New accounting policies effective in 2022
No new IFRS accounting standards or amendments to existing standards, effective in 2022, had a significant impact on the consolidated financial statements. The company has not early adopted any standards or amendments to existing standards.
New accounting policies effective after 2022
The IASB has issued several IFRS accounting standards, or amendments to standards, with an effective date after 2022. The company does not anticipate that the application of these standards, or amendments to standards, will have a significant effect on the consolidated financial statements upon adoption.
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 items mentioned below and the impact of the adoption of IFRS 16 Leases, for which reference is made to the section New standards and interpretations of this note. In addition, certainstatements. Certain prior-year amounts have been reclassified to conform to the current year presentation.
Change in Segment reporting
From January 1, 2019, Philips realigned the composition of its reporting segments. The most notable changes are the shifts of the Sleep & Respiratory Care business from the Personal Health segmentpresentation due to the renamed Connected Care segment and most of the Healthcare Informatics business from the renamed Connected Care segment to the Diagnosis & Treatment segment. The new segment structure had no significant impact on the headroom or lead to goodwill impairment as disclosed in Goodwill.immaterial organizational changes.
Consequential changes to comparative segment disclosures have been processed in Receivables and Provisions. The 2018 and 2017 segment results have been reclassified according to the revised reporting structure. Segment information can be found in
2Information by segment and main country
Accounting policies
Segment accounting policies are the same as the accounting policies applied by the company. 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 businesses and Personal Health businesses. Additionally, besides these reportable segments, segment Other contains the items Innovation & Strategy, IP Royalties, Central costs, and other small items.
The Philips operating segments are Diagnosis & Treatment businesses, Connected Care businesses and Personal Health businesses, each being responsible for the management of its business worldwide. As of the first quarter of 2021 the Domestic Appliances business was presented as a discontinued operation and therefore no longer part of the Personal Health segment. The comparative results prior to that were restated to reflect the treatment of the Domestic Appliances business as a discontinued operation. Refer to Discontinued operations and assets classified as held for sale.
Change in presentation of non-current portion of income tax payable due to IFRIC 23
FollowingPhilips focuses on improving people’s lives through meaningful innovation. The Diagnosis & Treatment segment unites the adoption of IFRIC 23 Uncertainty over Income Tax Treatments, the company has changed the presentation of uncertain tax positions in the Consolidated balance sheets. The Other tax liability included in the line Other non-current liabilities is reclassifiedbusinesses related to the new Non-current tax liabilities line itemgoal of precision diagnosis and disease pathway selection, and the businesses related to image-guided, minimally invasive treatment. The Connected Care segment focuses on patient care solutions, advanced informatics and analytics, and patient and workflow optimization inside and outside the facehospital, and aims to unlock synergies from integrating and optimizing patient care pathways, and leveraging provider-payer-patient business models. The Personal Health segment focuses on healthy living and preventative care.
The Executive Committee of Philips is deemed to be the chief operating decision maker (CODM) for segment reporting purposes pursuant to IFRS 8 'Operating Segments'. The key segmental performance measure is Adjusted EBITA, which Management believes is the most relevant measure to evaluate the results of the Consolidated balance sheets. For the comparative figures per December 31, 2018 an amountsegments.
Philips Group
Information on income statements
in millions of EUR 181 million is reclassified from Other non-current liabilities
| | sales | sales including intercompany | depreciation and amortization1) | Adjusted EBITA |
|---|
| 2022 | | | | |
| Diagnosis & Treatment | 9,168 | 9,471 | (559) | 774 |
| Connected Care | 4,403 | 4,441 | (514) | 95 |
| Personal Health | 3,626 | 3,684 | (132) | 538 |
| Other | 629 | 596 | (397) | (89) |
| Inter-segment eliminations | | (366) | | |
| Philips Group | 17,827 | 17,827 | (1,602) | 1,318 |
| | | | | |
| 2021 | | | | |
| Diagnosis & Treatment | 8,635 | 8,846 | (459) | 1,071 |
| Connected Care | 4,573 | 4,617 | (382) | 497 |
| Personal Health | 3,429 | 3,462 | (131) | 590 |
| Other | 519 | 531 | (350) | (105) |
| Inter-segment eliminations | | (299) | | |
| Philips Group | 17,156 | 17,156 | (1,323) | 2,054 |
| | | | | |
| 2020 | | | | |
| Diagnosis & Treatment | 8,175 | 8,289 | (536) | 818 |
| Connected Care | 5,543 | 5,620 | (414) | 1,191 |
| Personal Health | 3,199 | 3,198 | (145) | 433 |
| Other | 396 | 481 | (368) | (165) |
| Inter-segment eliminations | | (275) | | |
| Philips Group | 17,313 | 17,313 | (1,462) | 2,277 |
1)Includes impairments (excluding goodwill impairment); for impairment values please refer to Income tax payable (under non-current liabilities). Further reference is made to Income taxes. 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.
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. Presented 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 EBITA
In millions of EUR
| | Philips Group | Diagnosis & Treatment | Connected Care | Personal Health | Other |
|---|
| 2022 | | | | | |
| Net Income | (1,605) | | | | |
| Discontinued operations, net of income taxes | (13) | | | | |
| Income tax expense | (113) | | | | |
| Investments in associates, net of income taxes | 2 | | | | |
| Financial expenses | 258 | | | | |
| Financial income | (58) | | | | |
| Income from operations | (1,529) | 404 | (2,246) | 515 | (202) |
| Amortization and impairment of acquired intangible assets | 363 | 143 | 199 | 15 | 7 |
| Impairment of goodwill | 1,357 | 27 | 1,331 | | |
| EBITA | 192 | 573 | (716) | 531 | (196) |
| Restructuring and acquisition-related charges | 202 | 21 | 108 | 11 | 61 |
| Other items: | 925 | 180 | 703 | (4) | 46 |
| Respironics field-action provision | 250 | | 250 | | |
| Respironics field-action running remediation costs | 210 | | 210 | | |
| R&D project impairments | 134 | 120 | 12 | 3 | |
| Portfolio realignment charges | 109 | | 109 | | |
| Impairment of assets in S&RC | 39 | | 39 | | |
| Provision for public investigations tender irregularities | 60 | 60 | | | |
| Provisions for quality actions in Connected Care | 59 | | 59 | | |
| Remaining items | 63 | - | 24 | (6) | 46 |
| Adjusted EBITA | 1,318 | 774 | 95 | 538 | (89) |
Employee benefit accounting
IFRS does not specify how an entity should present its service costsPhilips Group
Reconciliation from 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 | (722) | 576 | (242) |
| Amortization and impairment of acquired intangible assets | 322 | 153 | 148 | 15 | 6 |
| Impairment of goodwill | 15 | 2 | 13 | | |
| EBITA | 890 | 1,097 | (562) | 591 | (236) |
| Restructuring and acquisition-related charges | 95 | 7 | 93 | (1) | (5) |
| Other items: | 1,069 | (32) | 965 | - | 136 |
| Respironics field-action provision | 719 | - | 719 | | - |
| Respironics field-action running remediation costs | 94 | | 94 | | |
| Provisions for quality actions in Connected Care | 94 | | 94 | | |
| Loss on divestment of business | 76 | | | | 76 |
| Remaining items | 87 | (32) | 58 | - | 61 |
| Adjusted EBITA | 2,054 | 1,071 | 497 | 590 | (105) |
Philips Group
Reconciliation from net income to Adjusted EBITA
In millions of EUR
| | Philips Group | Diagnosis & Treatment | Connected Care | Personal Health | Other |
|---|
| 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 | 704 | 362 | (300) |
| Amortization and impairment of intangible assets | 377 | 209 | 134 | 16 | 18 |
| Impairment of goodwill | 144 | - | 144 | | |
| EBITA | 1,784 | 706 | 982 | 378 | (282) |
| Restructuring and acquisition-related charges | 195 | 29 | 97 | 31 | 37 |
| Other items | 299 | 83 | 112 | 24 | 81 |
| Adjusted EBITA | 2,277 | 818 | 1,191 | 433 | (165) |
Transactions between the segments are mainly related to pensionscomponents and net interestparts 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
| | sales1) | tangible and intangible assets2) |
|---|
| 2022 | | |
| Netherlands | 540 | 1,746 |
| United States | 7,246 | 12,087 |
| China | 2,193 | 290 |
| Japan | 1,077 | 436 |
| Germany | 821 | 323 |
| United Kingdom | 463 | 527 |
| France | 400 | 249 |
| Other countries | 5,085 | 744 |
| Total main countries | 17,827 | 16,402 |
| | | |
| 2021 | | |
| Netherlands | 570 | 1,934 |
| United States | 6,420 | 12,615 |
| China | 2,335 | 283 |
| Japan | 1,073 | 480 |
| Germany | 839 | 305 |
| United Kingdom | 481 | 567 |
| France | 397 | 49 |
| Other countries | 5,040 | 753 |
| Total main countries | 17,156 | 16,986 |
| | | |
| 2020 | | |
| Netherlands | 404 | 1,926 |
| United States | 6,580 | 9,080 |
| China | 2,319 | 313 |
| Japan | 1,113 | 511 |
| Germany | 980 | 302 |
| United Kingdom | 509 | 545 |
| Italy | 383 | 111 |
| Other countries | 5,024 | 906 |
| Total main countries | 17,313 | 13,694 |
1)The sales are reported based on country of destination.2)Consists of Property plant and equipment, Intangible assets excluding goodwill and Goodwill
3Discontinued operations and assets classified as held for sale
Accounting policies
Assets classified as held-for-sale
Non-current assets (or disposal groups) are classified as held-for-sale if their carrying amounts are expected be recovered through a sale transaction rather than through continuing use. Non-current assets (or disposal groups) classified as held-for-sale are measured at the net defined-benefit liability (asset)lower of their carrying amount or the fair value less costs of disposal. Depreciation or amortization of an asset ceases when it is classified as held-for-sale. When non-current assets (or disposal groups) are classified as held-for-sale, comparative balances prior to such date are not represented in the Consolidated balance sheets.
Discontinued operations
A discontinued operation is a component of the company 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. Any gain or loss from disposal, together with the results of these operations until the date of disposal, are reported separately as discontinued operations in the Consolidated statements of income. With regards
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 are re-presented for presentation of discontinued operations in the Consolidated statements of income and Consolidated statements of cash flows.
Accounting estimates and judgments
The determination of the fair value less costs of disposal involves the use of estimates and assumptions that tend to be uncertain. Circumstances to which these elements,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, presents service costs in Income from operations and the net interest expensessettlement of employee benefit plan obligations provided that the settlement is directly related to defined-benefit plansthe disposal transaction.
In 2020, 2021 and 2022 Discontinued operations consist primarily of the Domestic Appliances business. The following table summarizes the results of discontinued operations, net of income taxes, reported in Financial expense.the consolidated statements of income.
Philips Group
Discontinued operations, net of income taxes
in millions of EUR
| | 2020 | 2021 | 2022 |
|---|
| Domestic Appliances | 206 | 2,698 | 3 |
| Other | (10) | 13 | 10 |
| Discontinued operations, net of income taxes | 196 | 2,711 | 13 |
Discontinued operations: Domestic Appliances
In 2022, net results from discontinued operations for Domestic Appliances was EUR 3 million.
On 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 the Personal Health segment.
The following table summarizes the results of Domestic Appliances included in the Consolidated statements of income as a discontinued operation.
Philips Group
Results of Domestic Appliances
in millions of EUR
| | 2020 | 2021 | 2022 |
|---|
| Sales | 2,222 | 1,516 | 6 |
| Costs and expenses | (1,944) | (1,322) | (2) |
| Income from operations | 279 | 194 | 4 |
| Result on the sale of discontinued operations | | 3,241 | 1 |
| Income before tax | 279 | 3,435 | 5 |
| Income tax expense1) | (72) | 6 | (2) |
| Income tax related the sale of discontinued operations | | (743) | |
| Results from discontinued operations | 206 | 2,698 | 3 |
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.
Costs 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.
On September 1, 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 working capital and net 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 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 gain of EUR 10 million in 2022, a net gain of EUR 13 million in 2021 and a net loss of EUR 10 million in 2020.
Discontinued operations cash flows
The following table presents the net cash provided by (used for) discontinued operations reported in the Consolidated statements of cash flows.
Net cash provided by (used for) discontinued operations
in millions of EUR
| | 2020 | 2021 | 2022 |
|---|
| Net cash provided by (used for) operating activities | 129 | 85 | (27) |
| Net cash provided by (used for) investing activities | | 3,319 | 15 |
| Net cash provided by (used for) discontinued operations | 129 | 3,403 | (12) |
In 2022, net cash used for discontinued operations was EUR (12) million and consisted primarily of cash flows related to the tax claims from the previously divested business.
In 2021, net cash provided for 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 for 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
Assets classified as held for sale
As of December 31, 2022, assets held for sale consists of property, plant and equipment mainly related to the APAC Center Singapore building. The sale was finalized in January 2023.
As of December 31, 2021, assets held for sale consists of property, plant and equipment mainly related to the APAC Center Singapore building.
4Acquisitions and divestments
Accounting policies
Acquisitions
The company accounts for business combinations using the acquisition method when control is transferred to the group. The consideration transferred in the acquisition is generally measured at fair value, as are the identifiable net assets acquired and the liabilities assumed. Transaction costs are expensed as incurred. Any contingent consideration is measured at fair value at the acquisition date and is initially 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 in the fair value of the contingent consideration are recognized in the Consolidated statements of income.
Changes to the initial fair value of the acquired assets and liabilities, based on new information about the circumstances at the acquisition date, can be made up to twelve months after the acquisition date.
Divestments
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 employee benefit accountingloss of control can be found in Post-employment benefitsDiscontinued operations and assets classified as held for sale.
Cash flow statements
Accounting estimates and judgments
Under IFRS, an entity shall reportIntangible assets acquired in a business acquisition and the financial liability related to non-controlling interest are measured at fair value at the date of the acquisition.
To determine the fair value of intangible assets at the acquisition date, estimates and assumptions are required. The valuation of the identifiable intangible assets involves estimates of expected sales, earnings and/or future cash flows from operating activities using eitherand require use of key assumptions such as discount rate, royalty rate and growth rates.
Estimates are also applied when determining the direct method (whereby major classesfair value of gross cash receiptslegal cases 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 goodstax positions in the normal course of business is recognized at a point in time when the performance obligation is satisfied and itacquired entity. The fair value is based on estimates of the likelihood, the expected timing and the amount of the potential cash outflow. Provisions for legal cases and non-income tax positions are recognized at fair value even if it is not probable that an outflow will be required to settle the obligation. After initial recognition and until the liability is settled, cancelled or expired, the liability is measured at the higher of the amount that would be recognized in accordance with IAS 37 'Provisions, contingent liabilities and contingent assets' and the initial liability amount. For income tax positions, the company applies IAS 12 'Income Taxes', which requires recognition of provisions only when the likelihood of cash outflow is considered probable.
2022
Acquisitions
In 2022 Philips completed three acquisitions. The acquisitions involved aggregated net cash outflow of EUR 359 million and contingent consideration of EUR 96 million measured at fair value. Upon acquisition, the company recognized aggregated Goodwill of EUR 307 million, Other intangible assets of EUR 179 million, Deferred tax assets of EUR 20 million and Deferred tax liabilities generated from the intangible assets of EUR 43 million.
Vesper Medical Inc. (Vesper) was the most notable acquisition and is discussed below. The remaining two acquisitions involved aggregated net cash outflow of EUR 139 million and contingent consideration of EUR 61 million measured at fair value. The two acquisitions resulted in aggregated Goodwill of EUR 130 million, Other intangible assets of EUR 95 million and Deferred tax liabilities of EUR 23 million.
The opening balance sheet positions reflect the preliminary determination of the fair value of identifiable assets acquired and liabilities assumed with the acquisitions. The final determination of the fair values will be completed in 2023. As of December 31, 2022, the valuation studies necessary to determine the fair value of the intangible assets and the valuation of goodwill are preliminary.
Since the respective acquisition dates through December 31, 2022, the contribution to sales to third parties and net income of the three acquired entities was not material. The sales and net income of the combined entities would not differ materially from these amounts if the acquisition date had been January 1, 2022. Acquisition-related costs were not material.
Vesper
On January 11, 2022, Philips acquired all shares of Vesper for an amount of EUR 227 million in cash and EUR 34 million contingent consideration at fair value. Vesper, headquartered in Wayne, Pennsylvania, US, is a medical technology company that develops minimally-invasive peripheral vascular devices. The company is developing the Vesper DUO Venous Stent System®, commercialization of which is estimated to start after approval by the US Food and Drug Administration (FDA), expected in 2024. The Vesper DUO Venous Stent System® consists of venous stents intended to treat deep venous obstruction. It provides physicians with a modular portfolio to customize therapy, restore venous flow, and resolve the painful symptoms of deep venous disease for the broad range of patients suffering from chronic venous insufficiency. As of the acquisition date, Vesper forms part of the Image-Guided Therapy business portfolio of the Diagnosis & Treatment segment.
The condensed opening balance sheet of Vesper was as follows:
Philips Group
Opening balance sheet
in millions of EUR
| At acquisition date |
|---|
| Vesper Medical Inc, |
| Assets | |
| Intangible assets excluding goodwill | 84 |
| Deferred tax assets | 15 |
| Cash | 7 |
| Total Assets | 106 |
| |
| Liabilities | |
| Accounts payable and other payables | (1) |
| Deferred tax liabilities | (20) |
| Total Liabilities | (21) |
| |
| Total identifiable net assets at fair value | 85 |
| Goodwill arising on acquisition | 177 |
| Total purchase consideration | 262 |
| Of which: | |
| Purchase consideration transferred | 227 |
| Contingent consideration | 34 |
Goodwill recognized in the amount of EUR 177 million mainly represents revenue synergies expected from the combination of Philips’ peripheral vascular portfolio and Vesper's venous stenting solution to address the root cause of chronic deep venous disease (DVD). Strong clinical synergies between Vesper’s innovative stenting solution and Philips' existing peripheral vascular offering will help to better support clinicians to decide, guide, treat and confirm during the procedure, thereby enhancing patient care. Vesper Goodwill is not tax-deductible.
The majority of the Intangible assets balance relates to capitalized development costs, 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 capitalized development costs 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%. Capitalized development costs are tested for impairment on an annual basis until FDA approval is obtained and the asset is reclassified to an intangible asset that is depreciated over its economical useful life.
The contingent consideration arrangement requires Philips to pay the former owners of Vesper up to a maximum undiscounted amount of EUR 44 million contingent upon FDA approval of the Vesper DUO Venous Stent System. The fair value of the contingent consideration arrangement of EUR 34 million has been estimated by calculating the present value of the future expected cash flows. The estimate is based on a discount rate of 12% and assumed probability adjusted likelihood of FDA approval at a certain point in time.
Divestments
During 2022 Philips completed two divestments that were not material.
2021
Acquisitions
In 2021 Philips completed two acquisitions, BioTelemetry, Inc. and Capsule Technologies, Inc., that involved aggregated net cash outflow of EUR 2,824 million. Including final purchase price adjustment processed in the course of 2022, the company recognized aggregated Goodwill of EUR 2,113 million, Other intangible assets of EUR 840 million and related Deferred tax liabilities of EUR 206 million.
The condensed opening balance sheets of BioTelemetry and Capsule Technologies were as follows:
Opening balance sheet
in millions of EUR
| | 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 | 77 | 17 |
| Inventories | 11 | 11 |
| Receivables and other current assets | 75 | 97 |
| Cash | 205 | 19 |
| Total Assets | 1,082 | 371 |
| | | |
| Liabilities | | |
| Accounts payable and other payables | (278) | (98) |
| Deferred tax liabilities | (160) | (46) |
| Long-term liabilities | (82) | (11) |
| Acquired provision for contingent considerations | (16) | |
| Total Liabilities | (536) | (155) |
| | | |
| Total identifiable net assets at fair value | 547 | 217 |
| Goodwill arising on acquisition | 1,790 | 322 |
| Purchase consideration transferred | 2,337 | 539 |
BioTelemetry
On February 9, 2021, Philips successfully completed a tender offer to acquire all issued and outstanding shares of BioTelemetry, Inc. for USD 72 per share. As a result, BioTelemetry shares were delisted from NASDAQ. The total equity purchase price and the settlement of stock option rights, including BioTelemetry’s cash and debt, 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 1,790 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 520 million in cash. Capsule Technologies, headquartered in Andover, Massachusetts, is a leading provider of medical device integration and data technologies for hospitals and healthcare organizations. Capsule Technologies offers a leading vendor-neutral Medical Device Information Platform with a software-as-a-service business model. The acquisition of Capsule Technologies is a strong fit with Philips’ strategy to transform the delivery of care along the health continuum with integrated solutions. Capsule Technologies, forms part of the Connected Care segment.
Goodwill recognized in the amount of EUR 322 million mainly represents revenue synergies expected from the combination of Philips’ industry-leading portfolio of real-time patient monitoring, therapeutic devices, telehealth, informatics and interoperability 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, price thatrefer to note Discontinued operations and assets classified as held for sale.
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. 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 the Statement of Income.
5Interests in entities
Accounting policies
Associates are all entities over which the company has significant influence, but not control or joint control. Significant influence is presumed with a shareholding of between 20% and 50% of the voting rights.
Investments in associates are accounted for using the equity method of accounting and are initially recognized at cost. The carrying amount of an investment in associate 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 associates 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. 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. Impairment losses and gains or losses on sale of investments are recorded in the Consolidated statements of income, more specifically on the line item ’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 is reduced to zero and recognition of further losses is discontinued except to the extent that the company has an obligation or made payments on behalf of the associate.
The 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 obligation.are discussed below.
Group companies
Below is a list of material subsidiaries as of December 31, 2022 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 financial statements.
Philips Group
Interests in group companies
in alphabetical order by country
2022
| Legal entity name | Principal country of business |
| Philips (China) Investment Company, Ltd. | China |
| Philips Medizin Systeme Böblingen GmbH | Germany1) |
| Philips Japan, Ltd. | Japan |
| Philips Consumer Lifestyle B.V. | Netherlands |
| Philips Oral Healthcare B.V. | Netherlands |
| Philips Ultrasound LLC | United States |
| Philips North America LLC | United States |
| Philips USA Export Corporation | United States |
1)Application of Sec. 264 (3) and Sec. 264b HGB (German Commercial Code) for fully consolidated legal entities: Philips GmbH, Hamburg; Philips Medical Systems DMC GmbH, Hamburg; Respironics Deutschland GmbH & Co. KG, München; Philips Medizin Systeme Hofheim-Wallau GmbH, Hamburg; Philips Medizin Systeme Böblingen GmbH, Böblingen; TomTec Imaging Systems GmbH, Unterschleißheim; Forecare GmbH, Ratingen.
Information related to non-controlling interests
As of December 31, 2022, four consolidated subsidiaries are not wholly owned by Philips (December 31, 2021: four). In 2022, Sales to third parties and Net income for these subsidiaries in aggregate are EUR 472 million (December 31, 2021: EUR 522 million) and EUR 28 million (December 31, 2021: EUR 39 million), respectively.
Investments in associates
Philips has investments in a number of associates. During 2022, Philips purchased eight investments in associates for a total amount of EUR 256 million. The transaction pricemost notable investment was a EUR 172 million investment in B-SOFT Co, Ltd, a China-based IT supplier for the medical and health sectors, listed on the stock exchange in Shenzhen. Philips acquired only a 10% interest, but determined that it is able to exercise significant influence amongst others due to its representation on B-SOFT’s Board of Directors. None of these investments are regarded as individually material from the point of view of the consolidated financial statements.
In 2022, Philips recorded an impairment of EUR 66 million in relation to its interest in Candid Care Co. As part of the acquisition of Affera, Inc. by Medtronic plc in August 2022, the company sold its investment in Affera to Medtronic and recorded a gain of EUR 84 million on the sale.
Cumulative translation adjustments related to investments in associates were EUR 22 million as of December 31, 2022 (2021: EUR 32 million).
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.
As of December 31, 2022, Philips’ shareholding in Philips Medical Capital, LLC had a carrying value of EUR 29 million (December 31, 2021: EUR 27 million).
The company does not have any material exposures to losses from interests in unconsolidated structured entities other than the invested amounts.
6Income from operations
Accounting policies
Revenue recognition
The company recognizes revenue when it transfers control over a good or service to a customer, in an amount ofthat reflects the consideration (i.e., transaction price) to which the company expects to be entitled to in exchange for transferring the promised goods to the customer.good or service. 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 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, which within the company is mainly the Country Target Price (CTP).customers. The transaction price is determined (taking into account(considering variable considerations) isand allocated to performance obligations based on their relative stand-alone selling prices. These transactions mainly occur in the segments Diagnosis & Treatment businesses and Connected Care businesses 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 variableVariable consideration is recognizedincluded in the transaction price to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertaintyonce associated with the variable consideration is subsequentlyuncertainties are 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
Sale of internal movementsgoods
Revenues are recognized at a point in time when control of the 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 billedpasses to the customer, thenbuyer, based on the related expenses are recorded as costallocation 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 incrementalthe transaction price to the contractsperformance obligation.
Revenue from services
Revenues are recognized immediately in the Consolidated statements of income as selling expenses as a practical expedient under IFRS 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.
Income from royalties
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 incomeand from intellectual property rights, such as technology licenses or patents, is recognized based on a right-to-usean accrual basis in accordance with the license, which in practice means at a point in time based on the contractual terms and substance of the relevant agreement withagreement.
Shipping and handling
Expenses incurred for shipping and handling are mainly recorded as cost of sales. When shipping and handling are part of a licensee. However, revenueproject and billed to the customer, then the related expenses are recorded as cost of sales. Shipping and handling related to intellectualsales to third parties are partly recorded as selling expenses. When shipping and handling billed to customers are considered a distinct and separate performance obligation, the fees are recognized as revenue and costs included in cost of sales.
Other business income (expenses)
Other business income (expenses) includes gains and losses on the sale of property, contractsplant and equipment, gains and losses on the sale of businesses as well as other gains and losses not related to the company’s operating activities.
Government grants
Grants from governments are recognized at their fair value when there is a reasonable assurance that the grant will be received and the company will comply with variable consideration where a constraintthe conditions. Grants related to costs are deferred in the estimation is identified, isconsolidated balance sheet and recognized overin the contract periodconsolidated statement of income as a reduction of the related costs that they are intended to compensate. Grants related to assets are deducted from the cost of the asset and is based on actual or reliably estimated sales made by a licensee.presented net in the consolidated balance sheets.
Accounting estimates and judgments
Sales-related accruals
The company receives payments from customershas sales promotions-related agreements with distributors and retailers designed to promote the sale of products. Among the programs are arrangements under which rebates and discounts can be earned by the distributors and retailers by attaining agreed upon sales levels, or for participating in specific marketing programs. Management estimates the sales-related accruals associated with these arrangements based on a billing schedule or credit period, as established in our contracts. Credit periodscombination of historical patterns and future expectations regarding which promotional targets are determined based on standard terms, which vary accordingexpected to local market conditions. Amounts posted in deferred revenue for which the goods or services have not yet been transferred to thebe met by distributors and retailers. Accrued customer and amounts that have either been received or are due,rebates are presented as Contractother current liabilities, unless there is a right to offset against the respective accounts receivable.
A breakdown by nature of the income (loss) from operations is as follows:
Philips Group
Sales and costs by nature
in millions of EUR
| | 2020 | 2021 | 2022 |
|---|
| Sales | 17,313 | 17,156 | 17,827 |
| Costs of materials used | (4,221) | (4,142) | (4,320) |
| Employee benefit expenses | (6,289) | (6,246) | (6,952) |
| Depreciation and amortization1) | (1,462) | (1,323) | (1,602) |
| Impairment of goodwill | (144) | (15) | (1,357) |
| Shipping and handling | (554) | (645) | (756) |
| Advertising and promotion | (696) | (752) | (739) |
| Lease expenses | (34) | (19) | (39) |
| Other operational costs | (2,741) | (3,524) | (3,609) |
| Other business income (expenses) | 92 | 63 | 18 |
| Income from operations | 1,264 | 553 | (1,529) |
Sales composition and disaggregation
For information related to sales on a segment and geographical basis, refer to Information by segment and main country.
Philips Group
Sales composition
in millions of EUR
| | 2020 | 2021 | 2022 |
|---|
| Goods | 12,491 | 11,981 | 12,139 |
| Services | 4,058 | 4,374 | 4,878 |
| Royalties | 301 | 383 | 419 |
| Total sales from contracts with customers | 16,851 | 16,738 | 17,435 |
| Sales from other sources | 462 | 418 | 391 |
| Total sales | 17,313 | 17,156 | 17,827 |
Total sales from other sources mainly relates to leases, including sublease income from right-of-use assets and related services of EUR 258 million (2021: EUR 293 million 2020: EUR 325 million). Sales represent revenue from external customers.
As of December 31, 2022, the aggregate amount of the transaction price allocated to remaining performance obligations from a sale of goods and services was EUR 16.57 million. The company expects to recognize approximately 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.
Sales over time represent services and Other also includes royalties over time (2022: EUR 292 million 2021: EUR 220 million 2020: EUR 211 million).
Philips Group
Disaggregation of Sales per segment
in millions of EUR
| | 2022 |
|---|
| | Sales at a
point in time | Sales
over time | Total sales from
contracts with customers | Sales from
other sources | Total
sales |
|---|
| Diagnosis & Treatment | 5,565 | 3,547 | 9,112 | 56 | 9,168 |
| Connected Care | 2,803 | 1,266 | 4,068 | 335 | 4,403 |
| Personal Health | 3,615 | 11 | 3,626 | | 3,626 |
| Other | 279 | 348 | 629 | - | 629 |
| Philips Group | 12,263 | 5,172 | 17,435 | 391 | 17,827 |
Philips Group
Disaggregation of Sales per segment
in millions of EUR
| | 2021 |
|---|
| | Sales at a
point in time | Sales
over time | Total sales from
contracts with customers | Sales from
other sources | Total
sales |
|---|
| Diagnosis & Treatment | 5,408 | 3,177 | 8,583 | 52 | 8,635 |
| Connected Care | 3,116 | 1,090 | 4,207 | 366 | 4,573 |
| Personal Health | 3,423 | 6 | 3,429 | | 3,429 |
| Other | 194 | 323 | 518 | - | 519 |
| Philips Group | 12,142 | 4,596 | 16,738 | 418 | 17,156 |
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 sources | Total
sales |
|---|
| Diagnosis & Treatment | 5,133 | 2,997 | 8,129 | 46 | 8,175 |
| Connected Care | 4,183 | 943 | 5,126 | 417 | 5,543 |
| Personal Health | 3,195 | 4 | 3,199 | | 3,199 |
| Other | 69 | 327 | 396 | - | 396 |
| Philips Group | 12,580 | 4,271 | 16,851 | 462 | 17,313 |
Philips Group
Disaggregation of Sales per geographical cluster
in millions of EUR
| | 2022 |
|---|
| | Sales at a
point in time | Sales
over time | Total sales from
contracts with customers | Sales from
other sources | Total
sales |
|---|
| Western Europe | 2,387 | 1,183 | 3,572 | 31 | 3,603 |
| North America | 4,889 | 2,612 | 7,502 | 86 | 7,588 |
| Other mature geographies | 972 | 399 | 1,369 | 274 | 1,643 |
| Total mature geographies | 8,248 | 4,194 | 12,443 | 390 | 12,833 |
| Growth geographies | 4,015 | 978 | 4,992 | 1 | 4,993 |
| Sales | 12,263 | 5,172 | 17,435 | 391 | 17,827 |
Philips Group
Disaggregation of Sales per geographical cluster
in millions of EUR
| | 2021 |
|---|
| | Sales at a
point in time | Sales
over time | Total sales from
contracts with customers | Sales from
other sources | Total
sales |
|---|
| Western Europe | 2,537 | 1,087 | 3,624 | 21 | 3,645 |
| North America | 4,427 | 2,268 | 6,695 | 86 | 6,781 |
| Other mature geographies | 1,000 | 386 | 1,386 | 309 | 1,694 |
| Total mature geographies | 7,964 | 3,741 | 11,705 | 415 | 12,120 |
| Growth geographies | 4,178 | 856 | 5,033 | 3 | 5,036 |
| Sales | 12,142 | 4,596 | 16,738 | 418 | 17,156 |
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 sources | Total
sales |
|---|
| 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 | 4,271 | 16,851 | 462 | 17,313 |
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
| | 2020 | 2021 | 2022 |
|---|
| Salaries and wages excluding share-based compensation | 5,085 | 5,014 | 5,594 |
| Share-based compensation | 119 | 115 | 104 |
| Post-employment benefit costs | 418 | 396 | 439 |
| Other social security and similar charges: | | | |
| Required by law | 556 | 529 | 590 |
| Voluntary | 111 | 192 | 225 |
| Employee benefit expenses | 6,289 | 6,246 | 6,952 |
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, refer to Post-employment benefits.
For details on the remuneration of the members of the Board of Management and the Supervisory Board, refer to Information on remuneration.
Employees
The average number (full-time equivalents, or FTEs) of employees by category is summarized as follows:
Philips Group
Employees by category
in FTEs
| | 2020 | 2021 | 2022 |
|---|
| Production | 35,482 | 38,618 | 39,742 |
| Research & development | 10,812 | 10,751 | 11,690 |
| Other | 22,474 | 22,543 | 23,019 |
| Employees | 68,769 | 71,912 | 74,451 |
| Third party workers | 4,998 | 4,533 | 4,086 |
| Philips Group | 73,767 | 76,445 | 78,538 |
Employees consist of those persons working on the payroll of Philips and whose costs are reflected in employee benefit expenses. Other consists of employees in commercial, general and administrative functions. Third party workers consist of personnel hired on a per-period basis, via external companies.
Philips Group
Employees by geographical location
in FTEs
| | 2020 | 2021 | 2022 |
|---|
| Netherlands | 11,146 | 11,142 | 11,180 |
| Other countries | 62,621 | 65,303 | 67,357 |
| Philips Group | 73,767 | 76,445 | 78,538 |
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
| | 2020 | 2021 | 2022 |
|---|
| Depreciation of property, plant and equipment | 691 | 630 | 711 |
| Amortization of software | 76 | 88 | 117 |
| Amortization of other intangible assets | 377 | 322 | 363 |
| Amortization of development costs | 319 | 284 | 411 |
| Depreciation and amortization | 1,462 | 1,323 | 1,602 |
Depreciation of property, plant and equipment is mainly included in cost of sales. Amortization of software is mainly included in general and administration expenses. Amortization of other intangible assets is included in selling expenses for brand names and customer relationships and is included in cost of sales for technology based and other intangible assets. Amortization of development costs is included in research and development expenses.
Impairment of goodwill
During 2022, EUR 1,331 million of goodwill impairment charges were recorded in the Sleep & Respiratory Care business, due to revisions to the expected future cash flows. In addition, a EUR 27 million goodwill impairment was recognized in the Precision Diagnosis Solutions business. For further information refer to note Goodwill.
Shipping and handling
Shipping and handling costs are included in cost of sales and selling expenses in the Consolidated balance sheets.statements of income.
Advertising and promotion
Advertising and promotion costs are included in selling expenses in the Consolidated statements of income.
Lease expense
Lease expense relates to short-term and low value leases.
Other operational costs
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 Information Technology and Human Resources, third party workers, consultants, warranty, patents, costs for travelling and external legal service. Government grants of EUR 103 million were recognized as cost reduction in 2022 (2021: EUR 104 million 2020: EUR 98 million). The grants mainly relate to research and development activities and business development. The increase in other operational costs 2021 versus 2020 is mainly due to the Respironics field action provision. For more details refer to Provisions .
Audit and audit-related fees
The following table shows the fees attributable to the fiscal years 2020, 2021 and 2022 for services rendered by the external auditors.
Philips Group
Audit and audit-related fees
in millions of EUR
| | 2020 | 2021 | 2022 |
|---|
| | EY NL1) | EY Network | Total | EY NL1) | EY Network | Total | EY NL1) | EY Network | Total |
|---|
| Audit fees | 9.0 | 5.6 | 14.6 | 10.3 | 5.4 | 15.7 | 8.9 | 5.5 | 14.4 |
| consolidated financial statements | 9.0 | 2.9 | 11.9 | 10.3 | 2.7 | 13.0 | 8.9 | 3.0 | 11.9 |
| statutory financial statements | | 2.7 | 2.7 | | 2.7 | 2.7 | | 2.5 | 2.5 |
| | | | | | | | | | |
| Audit-related fees2) | 2.2 | 0.5 | 2.7 | 0.6 | 0.3 | 0.9 | 0.7 | 0.2 | 0.9 |
| divestment | 1.5 | 0.2 | 1.7 | | | | | | |
| sustainability assurance | 0.5 | | 0.5 | 0.5 | | 0.5 | 0.6 | | 0.6 |
| other | 0.2 | 0.3 | 0.5 | 0.1 | 0.3 | 0.4 | 0.1 | 0.2 | 0.3 |
| Tax fees | | | | | | | | | |
| All other fees | | | | | | | | | |
| Fees | 11.2 | 6.1 | 17.3 | 10.9 | 5.7 | 16.6 | 9.6 | 5.7 | 15.3 |
1)Ernst & Young Accountants LLP2)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
| | 2020 | 2021 | 2022 |
|---|
| Result on disposal of businesses: | | | |
| income | - | - | 4 |
| expenses | - | (75) | - |
| Result on disposal of fixed assets: | | | |
| income | 2 | 24 | 3 |
| expenses | - | (5) | (1) |
| Result on other remaining businesses: | | | |
| income | 120 | 161 | 121 |
| expenses | (30) | (43) | (109) |
| Other business income (expenses) | 92 | 63 | 18 |
| Total other business income | 122 | 186 | 127 |
| Total other business expenses | (29) | (123) | (109) |
The result on disposal of businesses mainly relates to divestment of non-strategic businesses. For more information refer to Acquisitions and divestments.
The result on disposal of fixed assets mainly relates to the sale of real estate assets.
The result on other remaining businesses mainly relates to the revaluation of contingent consideration and various legal matters. For information on contingent consideration, refer to Provisions.
7Financial income and expenses
Accounting policies
Financial income and expenses are recognized on the accrual basis in the consolidated statements of income. Interest income and expense are measured 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.
Philips Group
Financial income and expenses
in millions of EUR
| | 2020 | 2021 | 2022 |
|---|
| Interest income | 13 | 18 | 25 |
| Interest income from loans and receivables | 8 | 7 | 7 |
| Interest income from cash and cash equivalents | 5 | 11 | 18 |
| Dividend income from financial assets | 3 | 2 | 3 |
| Net gains from disposal of financial assets | 2 | - | - |
| Net change in fair value of financial assets through profit or loss | 129 | 95 | 9 |
| Other financial income | 12 | 33 | 20 |
| Financial income | 158 | 149 | 58 |
| Interest expense | (173) | (159) | (235) |
| Interest expense on debt and borrowings | (130) | (126) | (200) |
| Finance charges under lease contract | (29) | (25) | (25) |
| Interest expense on pensions | (13) | (8) | (10) |
| Provision-related accretion expenses | (10) | (5) | (9) |
| Net foreign exchange gains (losses) | 4 | - | 9 |
| Other financial expenses | (23) | (24) | (24) |
| Financial expenses | (202) | (188) | (258) |
| Financial income and expenses | (44) | (39) | (200) |
In 2022, Financial income and expenses increased by EUR 161 million year-on-year, mainly due to higher interest expense and lower fair value gains. The lower fair value gains are mainly from investments in limited-life funds (mainly Gilde Healthcare) and other investments recognized at fair value through profit or loss compared with in 2021. Net interest expense in 2022 was EUR 69 million higher than in 2021, mainly due to the financial charges related to early redemption of EUR and USD bonds and issuance of new EUR bonds issued in 2022. The decrease in other financial income is mainly due to higher interest income on tax in 2021.
In 2021, Financial income and expenses decreased by EUR 5 million year-on-year, mainly due to higher other financial income and lower interest expense, offset by lower fair value gain. Fair value gains of EUR 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 2021 was EUR 19 million lower than in 2020, mainly due to lower interest expense on borrowings and provisions, and interest expense on pensions. The increase in other financial income is mainly due to higher interest income on tax.
8Income taxes
Accounting policies
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 consolidated 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.
Accounting estimates and judgments
Deferred tax recoverability
Further information on incomeDeferred tax assets are recognized to the extent that it is probable that there will be future taxable profits against which these can be foundutilized. Significant judgment is involved in Income taxes.determining whether such profits are probable. Management determines this on the basis of expected taxable profits arising from the reversal of recognized deferred tax liabilities, appropriate tax planning opportunities to support business goals and on the basis of forecasts.
Provisions
Uncertain tax positions
ProvisionsUncertain tax positions are recognized as liabilities if as a result of a past event,and to the company has a present legal or constructive obligation,extent it is probable that additional tax will be due and the amount can be estimated reliably measured. Significant judgment is involved in determining these positions.
The income tax benefit of continuing operations amounts to EUR 113 million (2021: EUR 103 million tax benefit, 2020: EUR 212 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
| | 2020 | 2021 | 2022 |
|---|
| Income before taxes | 1,211 | 509 | (1,731) |
| Investments in associates, net of income taxes | (9) | (4) | (2) |
| Income before taxes and Investment in associates | 1,220 | 513 | (1,729) |
| | | | |
| Current tax (expense) benefit | (380) | (298) | (97) |
| Deferred tax (expense) benefit | 167 | 401 | 210 |
| Income tax (expense) of continuing operations | (212) | 103 | 113 |
Income tax benefit of continuing operations excludes the tax benefit of the discontinued operations of EUR 18 million (2021: EUR 737 million expense, 2020: EUR 81 million expense), mainly related to the release of provisions.
The components of income tax expense of continuing operations are as follows:
Philips Group
Current income tax expense
in millions of EUR
| | 2020 | 2021 | 2022 |
|---|
| Current year tax (expense) benefit | (390) | (291) | (111) |
| Prior year tax (expense) benefit | 10 | (7) | 14 |
| Current tax (expense) benefit | (380) | (298) | (97) |
Philips Group
Deferred income tax expense
In millions of EUR
| | | 2020 | 2021 | 2022 |
|---|
| Recognition of previously unrecognized tax loss and credit carryforwards | | 6 | 138 | 2 |
| Unrecognized tax loss and credit carryforwards | | | (10) | (13) |
| Changes to recognition of temporary differences | | 19 | (1) | (4) |
| Prior year tax (expense) benefit | | (8) | 20 | (1) |
| Tax rate changes | | 12 | 10 | (18) |
| Origination and reversal of temporary differences, tax losses and tax credits | | 137 | 245 | 244 |
| Deferred tax (expense) benefit | | 167 | 401 | 210 |
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 25.8% (2021: 25.0% 2020: 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 %
| | 2020 | 2021 | 2022 |
|---|
| Weighted average statutory income tax rate in % | 25.2 | 22.7 | 23.6 |
| Recognition of previously unrecognized tax loss and credit carryforwards | (0.5) | (26.9) | 0.1 |
| Unrecognized tax loss and credit carryforwards | 0.0 | 1.9 | (0.7) |
| Changes to recognition of temporary differences | (1.6) | 0.3 | (0.2) |
| Non-taxable income and tax incentives | (12.9) | (40.6) | 5.8 |
| Non-deductible expenses | 7.0 | 19.3 | (22.9) |
| Withholding and other taxes | 0.6 | 7.2 | (1.4) |
| Tax rate changes | (1.0) | (1.9) | (1.0) |
| Prior year tax | (0.2) | (2.4) | 0.7 |
| Tax expense (benefit) due to change in uncertain tax treatments | 1.2 | 4.4 | 2.8 |
| Others, net | (0.2) | (4.0) | (0.2) |
| Effective income tax rate | 17.6 | (20.0) | 6.5 |
The effective income tax rate is lower than the weighted average statutory income tax rate in 2022 mainly due to a non-deductible goodwill impairment in the Sleep & Respiratory Care business and other non-deductible expenses such as share based compensation expenses, partly offset by recurring favorable tax incentives related to R&D investments, the innovation box regime in the Netherlands and export activities.
Due to the loss position in 2022, items such as non-deductible expense lead to a decrease of the effective income tax rate and items such as tax incentives lead to an increase in the effective income tax rate.
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 2022 and 2021 respectively are presented in the following tables.
The net deferred tax assets of EUR 2,358 million (2021: EUR 2,134 million) consist of deferred tax assets of EUR 2,449 million (2021: EUR 2,216 million) and deferred tax liabilities of EUR 91 million (2021: EUR 83 million). Of the total deferred tax assets of EUR 2,449 million as of December 31, 2022 (2021: EUR 2,216 million), EUR 1,453 million (2021: EUR 12 million) is recognized in respect of entities in various countries where there have been tax losses in the current or preceding period. The increase is mainly related to the United States where there has been a tax loss in 2022, among others due to the consequences of the Respironics field action. Management's projections support the assumption that it is probable that an outflowthe results of economic benefitsfuture operations will generate sufficient taxable income to utilize the tax losses as well the deductible temporary differences. The projections include forward-looking assumptions whereby the most recent available information was used to determine the expected period of recovery of the deferred tax assets. Relevant developments potentially impacting the period and probability of recovery will be requiredmonitored closely.
As of December 31, 2022 the temporary differences associated with investments, including potential income tax consequences on dividends, for which no deferred tax liabilities are recognized, aggregate to settleEUR 355 million (2021: EUR 298 million).
Philips Group
Deferred tax assets and liabilities
in millions of EUR
| | Balance as of January 1, 2022 | recognized in income statement | other1) | Balance as of December 31, 2022 | Assets | Liabilities |
|---|
| Intangible assets | 587 | 63 | (20) | 630 | 783 | (152) |
| Property, plant and equipment | 29 | (33) | 2 | (2) | 49 | (52) |
| Inventories | 372 | 75 | 17 | 464 | 473 | (8) |
| Other assets | 68 | (16) | (8) | 44 | 98 | (55) |
| Pensions and other employee benefits | 180 | 6 | (32) | 153 | 175 | (22) |
| Other liabilities | 499 | (34) | 17 | 483 | 560 | (77) |
| Deferred tax assets on tax loss carryforwards | 398 | 149 | 38 | 586 | 586 | |
| Set-off deferred tax positions | | | | | (275) | 275 |
| Net deferred tax assets | 2,134 | 210 | 14 | 2,358 | 2,449 | (91) |
1)Other includes the obligation. Provisionsmovements 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
| | Balance as of January 1, 2021 | recognized in income statement | other1) | Balance as of December 31, 2021 | Assets | Liabilities |
|---|
| Intangible assets | 240 | 535 | (188) | 587 | 716 | (130) |
| Property, plant and equipment | 32 | 13 | (16) | 29 | 55 | (26) |
| Inventories | 313 | 31 | 28 | 372 | 381 | (9) |
| Other assets | 97 | (30) | 1 | 68 | 112 | (43) |
| Pensions and other employee benefits | 245 | (45) | (21) | 180 | 182 | (2) |
| Other liabilities | 384 | 91 | 25 | 499 | 584 | (84) |
| Deferred tax assets on tax loss carryforwards | 449 | (194) | 143 | 398 | 398 | |
| Set-off deferred tax positions | | | | | (211) | 211 |
| Net deferred tax assets | 1,761 | 401 | (28) | 2,134 | 2,216 | (83) |
1)Other includes the movements of assets and liabilities recognized in equity and OCI, which includes foreign currency translation differences, acquisitions and 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, 2021 | Unrecognized balance as of December 31, 2021 | Total Balance as of December 31, 2022 | Unrecognized balance as of December 31, 2022 |
|---|
| Within 1 year | 1,593 | 1,592 | 4 | 3 |
| 1 to 2 years | 6 | - | 10 | 5 |
| 2 to 3 years | 9 | - | 9 | 3 |
| 3 to 4 years | 7 | - | 13 | 4 |
| 4 to 5 years | 18 | - | 38 | 3 |
| Later | 751 | 21 | 812 | 93 |
| Unlimited | 1,567 | 934 | 2,301 | 920 |
| Total | 3,951 | 2,547 | 3,187 | 1,032 |
As of December 31, 2022, the amount of deductible temporary differences for which no deferred tax asset has been recognized in the balance sheet was EUR 45 million (2021: EUR 33 million). The unrecognized balance as of December 31, 2021 (expiring within 1 year, EUR 1,592 million) which were partly utilized and the remainder expired unutilized.
Tax risks
Philips is exposed to tax risks and uncertainty over tax treatments. For particular tax treatments that are not expected to be accepted by tax authorities, Philips either recognizes a liability or reflects the uncertainty in the recognition and measurement of its current and deferred tax assets and tax attributes. For the measurement of the uncertainty, Philips uses the most likely amount or the expected value of the tax treatment. The expected liabilities resulting from the uncertain tax treatments are included in non-current tax liabilities (2022: EUR 435 million, 2021: EUR 544 million, decrease due to release of liabilities, in combination with higher tax losses or similar tax carryforwards that can be used if uncertain tax treatments were settled for the presumed amount at balance sheet date). The positions include, among others, the 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.
9Earnings per share
Accounting policies
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 (after deduction of treasury shares) during the period. Diluted EPS is determined by adjusting the Net income (loss) attributable to shareholders and the weighted average number of common shares outstanding (after deduction of treasury shares) during the period, for the effects of all dilutive potential common shares, which comprise performance shares, restricted shares and share options granted under share-based compensation plans as well as forward contracts to repurchase shares.
Philips Group
Earnings per share
in millions of EUR unless otherwise stated1)
| | 2020 | 2021 | 2022 |
|---|
| Income from continuing operations | 999 | 612 | (1,618) |
| Income from continuing operations attributable to shareholders | 991 | 608 | (1,622) |
| Income from continuing operations attributable to non-controlling interests | 8 | 4 | 3 |
| Income from discontinued operations | 196 | 2,711 | 13 |
| Income from discontinued operations attributable to shareholders | 196 | 2,711 | 13 |
| Net income | 1,195 | 3,323 | (1,605) |
| Net income attributable to shareholders | 1,187 | 3,319 | (1,608) |
| Net income attributable to non-controlling interests | 8 | 4 | 3 |
| | | | |
| Weighted average number of common shares outstanding (after deduction of treasury shares) during the period | 907,721,150 | 904,271,675 | 881,615,862 |
| Plus incremental shares from assumed conversions of: | | | |
| Share options | 757,622 | 387,125 | 25,506 |
| Performance shares | 5,561,501 | 2,548,891 | 1,147,790 |
| Restricted shares | 2,584,728 | 2,376,736 | 1,986,538 |
| Forward contracts to repurchase shares | | 70,329 | 17,611,920 |
| Dilutive potential common shares2) | 8,903,851 | 5,383,080 | 20,771,753 |
| Diluted weighted average number of shares outstanding (after deduction of treasury shares) during the period | 916,625,001 | 909,654,754 | 881,615,862 |
| Basic earnings per common share in EUR | | | |
| Income from continuing operations attributable to shareholders | 1.09 | 0.67 | (1.84) |
| Income from discontinued operations attributable to shareholders | 0.22 | 3.00 | 0.02 |
| Net income attributable to shareholders | 1.31 | 3.67 | (1.82) |
| Diluted earnings per common share in EUR2) | | | |
| Income from continuing operations attributable to shareholders | 1.08 | 0.67 | (1.84) |
| Income from discontinued operations attributable to shareholders | 0.21 | 2.98 | 0.02 |
| Net income attributable to shareholders | 1.29 | 3.65 | (1.82) |
| | | | |
| Dividend distributed per common share in EUR | 0.85 | 0.85 | 0.85 |
1)Shareholders in this table refers to shareholders of Koninklijke Philips N.V.2)The dilutive potential common shares are not taken into account in the periods for which there is a loss, as the effect would be antidilutive
10Property, plant and equipment
Accounting policies
Owned assets
The cost 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. Land and assets under construction are not depreciated. When assets under construction are ready for their intended use, they are transferred to the relevant asset category and depreciation starts. All other property, plant and equipment items are depreciated over their estimated useful lives to their estimated residual values.
The estimated useful lives of property, plant and equipment are as follows:
Philips Group
Useful lives of property, plant and equipment
| |
|---|
| Buildings | from 5 to 50 years |
| Machinery and installations | from 3 to 20 years |
| Other equipment | from 1 to 10 years |
Property, plant and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the book value of the assets concerned may not be recoverable. An impairment loss is recognized for the amount by which the asset's book value exceeds their recoverable amount. Impairments are reversed if and to the extent that the impairment no longer exists. The recoverable amount is defined as the higher of the asset’s fair value less costs of disposal and its value in use.
Gains and losses on the sale of property, plant and equipment are included in other business income. Costs related to repair and maintenance activities are expensed in the period in which they are incurred unless they extend the asset's original lifetime or capacity.
Right-of-use assets
The company leases various items of real estate, vehicles and other equipment. The company determines whether an arrangement constitutes or contains a lease based on the substance of the arrangement at the lease inception. 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
The company recognizes right-of-use assets and lease liabilities for leases with a term of more than twelve months if the underlying asset is not of low value. Payments for short-term and low-value leases are expensed over the lease term. Extension options are included in the lease term if their exercise is reasonably certain. Right-of-use assets are measured at cost less accumulated depreciation and impairment losses, adjusted for any remeasurements. Right-of-use assets are depreciated using the straight-line method over the shorter of the lease term and the useful life of the underlying assets.
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 does not transfer substantially all the risks and rewards incidental to ownership of an asset are classified as operating leases. The company recognizes lease payments received under operating leases as income on a straight-line basis over the lease term in the Consolidated statement of income.
Accounting estimates and judgments
Impairment of owned and right-of-use assets
Judgments are required, not only to determine whether there is an indication that an asset may be impaired, but also whether indications exist that impairment losses previously recognized may no longer exist or may have decreased (impairment reversal). After indications of impairment have been identified, estimates and assumptions are used in the determination of the recoverable amount of a fixed asset. These involve estimates of expected future cash flows (based on future growth rates and remaining useful life) and residual value assumptions, as well as discount rates to calculate the present value of the expenditures expected to befuture cash flows.
Owned assets
Estimates are required to settledetermine the obligation using a pre-tax discount rate that reflects current market assessments(remaining) useful lives of fixed assets. Useful lives are determined based on an asset's age, the frequency of its use, repair and maintenance policy, technology changes in production and expected restructuring. The company estimates the expected residual value per asset item. The residual value is the higher of the time valueasset's expected sales price (based on recent market transactions of money.similar sold items) and its material scrap value.
Right-of-use assets
Significant judgment is required to determine the lease term. The increase inassessment of whether the provision duecompany is reasonably certain to passage of time is recognized as interest expense. The accounting and presentation for some ofexercise extension options impacts the company’s provisions is as follows:
Product warranty – A provision for assurance-type product warranty is recognized whenlease term, which could affect the underlying products or services are sold. The provision is based on historical warranty data and a weighing of possible outcomes against their associated probabilities.Environmental provisions – Measurement of liabilities associated with environmental obligations is based on current legal and constructive requirements. Liabilities and expected insurance recoveries, if any, are recorded separately. The carrying amount of environmentallease liabilities is regularly reviewed and adjustedright-of-use assets recognized.
Property, plant and equipment are fixed assets that are owned or right-of-use assets under a lease agreement.
Owned and right-of-use assets are held for new factsuse in Philips' operating activities.
Philips Group
Property, plant and changes equipment
in law.millions of EUR
| | 2021 | 2022 |
|---|
| Owned assets | 1,641 | 1,718 |
| Right-of-use assets | 1,058 | 919 |
| Total | 2,699 | 2,638 |
Philips Group
Property, plant and equipment - owned assets
in millions of EUR
| | Land and
buildings | Machinery and installations | Other
equipment | Assets under construction | Total |
|---|
| Balance as of January 1, 2022 | | | | | |
| Cost | 1,097 | 1,585 | 1,382 | 208 | 4,273 |
| Accumulated depreciation | (591) | (1,074) | (967) | | (2,632) |
Book value
| 506 | 511 | 415 | 208 | 1,641 |
| Additions | 1 | 102 | 77 | 314 | 494 |
| Assets available for use | 34 | 69 | 111 | (220) | (6) |
| Depreciation | (56) | (215) | (176) | - | (447) |
| Impairments | (3) | (20) | (18) | (1) | (42) |
| Transfer (to) from AHFS | (3) | | - | | (3) |
| Reclassifications | 18 | 14 | (5) | 2 | 29 |
| Translation differences and other | 16 | 26 | 2 | 5 | 50 |
Total change
| 8 | (23) | (8) | 100 | 78 |
| Balance as of December 31, 2022 | | | | | |
| Cost | 1,135 | 1,779 | 1,454 | 309 | 4,676 |
| Accumulated depreciation | (621) | (1,291) | (1,046) | | (2,958) |
| Book value | 514 | 488 | 408 | 309 | 1,718 |
Philips Group
Property, plant and equipment - right-of-use assets
in millions of EUR
| | Land and
buildings | Machinery and installations | Other
equipment | Total |
|---|
| Balance as of January 1, 2022 | | | | |
| Cost | 1,332 | 176 | 216 | 1,724 |
| Accumulated depreciation | (418) | (139) | (109) | (666) |
Book value
| 914 | 37 | 107 | 1,058 |
| Additions | 52 | - | 54 | 106 |
| Assets available for use | 5 | | 1 | 6 |
| Depreciation | (155) | (2) | (58) | (214) |
| Impairments | (8) | - | - | (9) |
| Transfer (to) from AHFS | 3 | | | 3 |
| Reclassifications | (19) | (13) | - | (32) |
| Translation differences and other | 31 | (23) | (6) | 1 |
Total change
| (92) | (37) | (9) | (139) |
| Balance as of December 31, 2022 | | | | |
| Cost | 1,365 | - | 206 | 1,571 |
| Accumulated depreciation | (543) | | (108) | (651) |
| Book value | 822 | - | 98 | 919 |
Philips Group
Property, plant and equipment - owned assets
in millions of EUR
| | Land and
buildings | Machinery and installations | Other
equipment | Assets under construction | Total |
|---|
| Balance as of January 1, 2021 | | | | | |
| Cost | 1,076 | 1,506 | 1,572 | 261 | 4,415 |
| Accumulated depreciation | (539) | (1,028) | (1,185) | | (2,752) |
Book value
| 537 | 478 | 387 | 261 | 1,663 |
| Additions | 9 | 62 | 77 | 261 | 409 |
| Assets available for use | 72 | 110 | 117 | (305) | (5) |
| Acquisitions | - | 9 | 43 | | 53 |
| Depreciation | (53) | (144) | (158) | | (355) |
| Impairments | (1) | (6) | (11) | - | (18) |
| Transfer (to) from AHFS | (87) | (16) | (46) | (20) | (170) |
| Reclassifications | 6 | 2 | (10) | 1 | - |
| Translation differences and other | 23 | 14 | 16 | 10 | 65 |
Total change
| (31) | 33 | 29 | (53) | (22) |
| Balance as of December 31, 2021 | | | | | |
| Cost | 1,097 | 1,585 | 1,382 | 208 | 4,273 |
| Accumulated depreciation | (591) | (1,074) | (967) | | (2,632) |
| Book value | 506 | 511 | 415 | 208 | 1,641 |
Philips Group
Property, plant and equipment - right-of-use assets
in millions of EUR
| | Land and
buildings | Machinery and installations | Other
equipment | Assets under construction | Total |
|---|
| Balance as of January 1, 2021 | | | | | |
| Cost | 1,147 | 199 | 213 | 1 | 1,560 |
| Accumulated depreciation | (310) | (144) | (86) | | (540) |
Book value
| 837 | 55 | 126 | 1 | 1,020 |
| Additions | 150 | 21 | 44 | | 215 |
| Assets available for use | 2 | | 3 | | 5 |
| Acquisitions | 43 | | | | 43 |
| Depreciation | (157) | (32) | (63) | | (252) |
| Impairments | 1 | (5) | - | | (4) |
| Transfer (to) from AHFS | (7) | | (1) | | (8) |
| Reclassifications | | | 2 | (1) | 1 |
| Translation differences and other | 44 | (2) | (4) | | 39 |
Total change
| 77 | (18) | (20) | (1) | 38 |
| Balance as of December 31, 2021 | | | | | |
| Cost | 1,332 | 176 | 216 | | 1,724 |
| Accumulated depreciation | (418) | (139) | (109) | | (666) |
| Book value | 914 | 37 | 107 | | 1,058 |
Lease related notes
Below are the references with respect to year-end disclosures as lessee:
- Short-term and low-value leases, are disclosed in Income from operations;
Restructuring-related provisions – The provision for restructuring mainly relatesDisclosures regarding interest expenses on lease liabilities, are disclosed in Financial income and expenses;- For disclosure on leasing related cash outflow and the split between interest and principal payments, refer to Cash flow statement supplementary information;
- For disclosure on sale and leaseback transactions, refer to Details of treasury and other financial risks;
- For disclosure on lease liabilities and maturity analysis, refer to Debt;
Other qualitative and quantitative disclosures regarding the estimated costsnature of initiated restructurings, the most significant of which have been approved by the Executive Committee,lessee’s leasing activities 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 startingfuture lease obligations, refer to implement that plan or announcing its main features to those affected by it. Before a provision is established, the company recognizes any impairment loss on the assets associated with the restructuring.
Litigation provisions – In relation to legal claim provisions and settlements, the relevant balances are transferred to Other liabilities at the point 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.Debt.
Further informationBelow are the references with respect to year-end disclosures as lessor:
11Goodwill
Accounting policies
The measurement of goodwill at initial recognition is described in the Basis of consolidationAcquisitions and divestments note. Goodwill is subsequently measured at cost less accumulated impairment losses. Further
Goodwill is not amortized but tested for impairment annually and whenever impairment indicators require. Internal or external sources of information
are considered to assess if there are indicators that an asset or a CGU may be impaired. In most cases the company identifies 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.Accounting estimates and judgments
The cash flow projections used in the value in use calculations for goodwill impairment testing contain various judgments and estimations as described in the key assumptions sections below.
The changes in 2021 and 2022 were as follows:
Philips Group
Goodwill
in millions of EUR
| | 2021 | 2022 |
|---|
| Balance as of January 1 | | |
| Cost | 9,094 | 11,793 |
| Impairments | (1,080) | (1,156) |
| Book value | 8,014 | 10,637 |
| | | |
| Acquisitions | 2,095 | 317 |
| Impairments | (15) | (1,357) |
| Divestments and transfers to assets classified as held for sale | (189) | |
| Translation differences and other | 732 | 641 |
Total change
| 2,622 | (399) |
| Balance as of December 31 | | |
| Cost | 11,793 | 12,747 |
| Impairments | (1,156) | (2,509) |
| Book value | 10,637 | 10,238 |
In 2022, goodwill decreased by EUR 399 million, primarily as a result of goodwill impairments of EUR 1,357 million partially offset by translation differences of EUR 641 million and acquisitions of EUR 317 million (which includes changes in the provisional opening balance sheet position for certain 2021 acquisitions, refer to Acquisitions and divestments).
In 2021, goodwill increased by EUR 2,622 million, primarily as a result of provisional goodwill recognized on new acquisitions of BioTelemetry (EUR 1,776 million) and Capsule Technologies of (EUR 325 million), and translation differences of EUR 732 million. This was partially offset by EUR 15 million of impairment losses primarily related to the PERS CGU and EUR 189 million divested in the period, mostly relating to the Domestic Appliances business. For details on the impact of new acquisitions and the divestment of the Domestic Appliances business, refer to Acquisitions and divestments.
Goodwill reallocations in 2022 and 2021
In 2022 and 2021 there were changes to the CGU structure following internal reorganizations. These 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 addition 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 2022 goodwill impairment charges of EUR 1,357 million were recognized. This relates to the third quarter impairment charge of EUR 1,331 million in the Sleep & Respiratory Care (S&RC) CGU of the Connected Care segment. In addition, as a result of the annual impairment testing a goodwill impairment charge of EUR 27 million was recognized in relation to the Precision Diagnosis Solutions (PDS) CGU which is part of the Diagnosis & Treatment segment. The value in use methodology was used to estimate the recoverable amount for the PDS CGU.
During 2021 an impairment charge 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. The PERS CGU was divested as of June 30, 2021. 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.
Interim goodwill impairment testing
As explained in the accounting policy above, goodwill is tested for impairment annually and whenever impairment indicators require. In the third quarter of 2022, an impairment indicator was noted in relation to the S&RC CGU as a consequence of revisions to the expected future cashflows of the CGU. The drivers of the revised forecast (which form the basis for the future cashflow assumptions) were current assumptions regarding the estimated impact of a consent decree that is currently under discussion with the US Department of Justice (DoJ), acting on behalf of the FDA, along with updates to expected business performance and changes to the pre-tax discount rate. An impairment test was performed in order to determine if the carrying amount of the cash-generating unit exceeded the unit’s recoverable amount, which was determined on a value in use basis. As a result of this test a goodwill impairment charge of EUR 1,331 million was recognized. Following the impairment charge, the estimated recoverable amount, based on the CGU’s value in use, for the S&RC CGU was EUR 1,001 million and equal to its carrying value.
The assumptions used to determine the recoverable amount of the CGU at the interim testing date are presented below:
Philips Group
- Interim impairment testing
| | compound sales growth rate1) | |
|---|
| | initial forecast period | extrapolation period2) | used to calculate terminal value3) | pre-tax discount rates |
|---|
| Sleep & Respiratory Care | 1.5% | 4.3% | 2.5% | 9.5% |
1)Compound sales growth rate is the annualized steady nominal growth rate over the forecast period 2)Also referred to later in the text as compound long-term sales growth rate3)The historical long-term growth rate is only applied to the first year after the extrapolation period, after which no further growth is assumed for the terminal value calculation
In addition to the above assumptions, assumptions were made regarding the estimated impact of a consent decree on the business. These assumptions included the expected financial impact of the scope and duration of a consent decree, as well as expected additional costs. These assumptions were determined by management based on discussions held in relation to the consent decree and other available sources of information.
Annual goodwill impairment testing
For impairment testing, goodwill is allocated to cash 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 generating units Ambulatory Monitoring & Diagnostics, Hospital Patient Monitoring and Image-Guided Therapy is considered to be significant in comparison to the total book value of goodwill for the Group as of December 31, 2022. The amounts associated as of December 31, 2022 are presented in the following table:
Philips Group
Goodwill allocated to the cash-generating units
in millions of EUR
| | 2021 | 2022 |
|---|
| Ambulatory Monitoring & Diagnostics | 1,897 | 2,215 |
| Hospital Patient Monitoring | 1,663 | 1,806 |
| Image-Guided Therapy | 2,802 | 3,154 |
| Sleep & Respiratory Care | 2,031 | 731 |
| Other (units carrying a non-significant goodwill balance) | 2,245 | 2,332 |
| Book value | 10,637 | 10,238 |
Unless 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. The fair value less cost of disposal methodology was used as a basis for the recoverable amount in the annual impairment test when greater than the value-in-use test. Refer to the ‘key assumptions- general’ section for further detail on the methodology.
Key assumptions - general
Key assumptions used in the value-in-use impairment tests for the units were sales growth rates, EBITA*) in the terminal value and the rates used for discounting the projected cash flows. These cash flow projections were determined using Royal Philips managements’ internal forecasts that cover an initial forecast period from 2023 to 2025. Projections were extrapolated with stable or declining growth rates for an extrapolation period of 4 years (2026-2029), after which a terminal value was calculated per 2030. For the terminal value calculation, growth rates were capped at a historical long-term average growth rate. In the case of the Ambulatory Monitoring & Diagnostics CGU management's internal forecasts were used in the value in use test for a period of 5 years (2023-2027).
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 2022 there continued to be uncertainty and volatility related to global, industry-wide macroeconomic challenges including global supply chain constraints, COVID lockdown measures in China, inflationary pressures and the Russia-Ukraine war. Where relevant, and to the extent possible, the estimated impact of these factors and the resulting uncertainties have been reflected in the forecasts used for the value-in-use calculations. As was the case in 2021, 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.
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 alsodiffer per business. Different businesses have different geographical footprints, resulting in business-specific inputs for variables like country risk. Philips performs the value in use calculation using post-tax cashflows and discount rate, the implicit pre-tax rate discount rate is derived from an iterative calculation for disclosure purposes.
In 2022 the pre-tax discount rates increased for all CGUs primarily due to the impact on the WACC of higher interest rates. As explained above, for S&RC this increased pre-tax discount rate contributed to the impairment charge recognized in the third quarter of 2022.
Key assumptions and sensitivity analysis relating to cash-generating units to which a significant amount of goodwill is allocated
In 2022 cash flow projections of Ambulatory Monitoring & Diagnostics, Hospital Patient Monitoring, Image-Guided Therapy and Sleep & Respiratory Care are based on the key assumptions included in the following table, which were used in the annual impairment test performed in the fourth quarter.
| | compound sales growth rate1) | |
|---|
| | initial forecast period | extrapolation period2) | used to calculate terminal value3) | pre-tax discount rates |
|---|
| Ambulatory Monitoring & Diagnostics | 15.4% | 9.5% | 2.5% | 8.5% |
| Hospital Patient Monitoring | 4.8% | 3.4% | 2.5% | 8.5% |
| Image-Guided Therapy | 8.7% | 5.0% | 2.5% | 10.6% |
| Sleep & Respiratory Care | 10.0% | 5.0% | 2.5% | 9.9% |
1)Compound sales growth rate is the annualized steady nominal growth rate over the forecast period 2)Also referred to later in the text as compound long-term sales growth rate3)The historical long-term growth rate is only applied to the first year after the extrapolation period, after which no further growth is assumed for the terminal value calculation
The assumptions used for the 2021 cash flow projections were as follows:
| | compound sales growth rate1) | |
|---|
| | 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 Monitoring | 5.4% | 3.4% | 2.5% | 7.8% |
| Image-Guided Therapy | 10.2% | 5.4% | 2.5% | 8.9% |
| Sleep & Respiratory Care | 9.2% | 5.0% | 2.5% | 9.2% |
1)Compound sales growth rate is the annualized steady nominal growth rate over the forecast period 2)Also referred to later in the text as compound long-term sales growth rate3)The historical long-term growth rate is only applied to the first year after the extrapolation period, after which no further growth is assumed for the terminal value calculation
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.
In performing the value-in-use test for the S&RC CGU it was necessary for management to make assumptions regarding the estimated impact of a consent decree on the business. These assumptions included the expected financial impact of the scope and duration of a consent decree, as well as expected additional costs. These assumptions were determined by management based on discussions held in relation to the consent decree and other available sources of information. There have been no significant changes to these assumptions since the interim goodwill testing in the third quarter of 2022 (see Interim Goodwill impairment testing section above).
For the Sleep & Respiratory Care CGU, based on the annual goodwill impairment testing performed by management during the fourth quarter of 2022 in accordance with the methodology discussed above, no additional impairment charge was warranted. However, following the interim impairment charge, the annual impairment test indicates that the value in use of the CGU remains sensitive to the assumptions set out above. This means that there is a higher risk that deviations in the mentioned key assumptions could cause the recoverable amount to fall below the level of its carrying value. There continues to be foundsignificant 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, the associated legal matters and the outcome of a consent decree. The legal matters are described in further detail in GoodwillContingencies.
Based on the annual impairment test of Sleep & Respiratory Care, it was noted that an increase of 40 basis points in the pre-tax discount rate, a 160 basis points decline in the compound long-term sales growth rate or a 7% decrease in terminal value would, individually, cause its recoverable amount to fall to the level of its carrying value. Additionally, any significant adverse changes to the assumptions related to the expected financial impact of a consent decree could cause the recoverable amount of the CGU to fall below its carrying value, resulting in impairment.
The results of the annual impairment tests of the Ambulatory Monitoring & Diagnostics CGU 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 deviations in the mentioned key assumptions could cause the recoverable amount to fall below the level of its carrying value. Based on the annual impairment test of Ambulatory Monitoring & Diagnostics, it was noted that an increase of 40 basis points in the pre-tax discount rate, a 210 basis points decline in the compound long-term sales growth rate or a 8% 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 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
The results of the annual impairment tests of the Emergency Care CGU indicate that the value in use of the CGU is sensitive to the assumptions set out above. This means that there is a higher risk that deviations in the mentioned key assumptions could cause the recoverable amount to fall below the level of its carrying value. Based on the annual impairment test of Emergency Care, it was noted that an increase of 190 basis points in the pre-tax discount rate, a 900 basis points decline in the compound long-term sales growth rate or a 26% decrease in terminal value would, individually, cause its recoverable amount to fall to the level of its carrying value.
With the exception of those described above, for the cash 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.
12Intangible assets other thanexcluding goodwill
Accounting policies
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 onThe expected useful lives of the intangible assets other thanexcluding goodwill can be found in Intangibleare as follows:
Philips Group
Expected useful lives of intangible assets excluding goodwill.
in years
| |
|---|
| Brand names | 2-20 |
| Customer relationships | 2-25 |
| Technology | 3-20 |
| Other | 1-10 |
| Software | 1-10 |
| Product development | 3-10 |
Discontinued operations
The weighted average expected remaining life of brand names, customer relationships, technology and non-currentother intangible 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 classifiedis 9.4 years 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.December 31, 2022 (2021: 9.6 years).
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 intangibleIntangible assets not yet ready for use are not amortized but are tested for impairment annually and whenever impairment indicators require. In the case of goodwill and intangible assets not yet ready for use, either internal or external sources of information are considered to assess if there are 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 for Intangible assets other than goodwill 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 assetsAccounting estimates and judgments
The
company recognizes an allowance for expected credit losses (ECLs) for trade receivables, contract assets, lease receivables, debt investments carried at fair 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, 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 eliminatedflow projections used in the Consolidated financial statements. Unrealized lossesvalue in use calculations for intangible assets excluding goodwill contain various judgments and estimations. For intangible assets excluding goodwill, estimates are eliminated required to determine the (remaining) useful lives.
Philips Group
Intangible assets excluding goodwill
in the same way as unrealized gains, but onlymillions of EUR
| | brand names | customer relationships | technology | product development | product development construction in progress | software | other | total |
|---|
| Balance as of January 1, 2022 | | | | | | | | |
| Cost | 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) |
| Book value | 162 | 1,143 | 1,000 | 599 | 414 | 287 | 44 | 3,650 |
| | | | | | | | | |
| Additions | (3) | - | 51 | - | 257 | 109 | 1 | 416 |
| Assets available for use | | | | 118 | (118) | | | |
| Acquisitions | 1 | 3 | 177 | - | | - | | 180 |
| Amortization | (24) | (141) | (140) | (206) | (1) | (100) | (3) | (614) |
| Impairments | - | (6) | (46) | (123) | (81) | (17) | (2) | (276) |
| Translation differences and other | 4 | 71 | 59 | 5 | 31 | 1 | (2) | 0 |
| Total change | (22) | (74) | 102 | (206) | 88 | (7) | (6) | (125) |
| | | | | | | | | |
| Balance as of December 31, 2022 | | | | | | | | |
| Cost | 647 | 2,735 | 2,947 | 2,605 | 648 | 869 | 152 | 10,602 |
| Amortization / impairments | (507) | (1,665) | (1,845) | (2,212) | (146) | (589) | (113) | (7,077) |
| Book Value | 140 | 1,070 | 1,102 | 393 | 502 | 280 | 39 | 3,526 |
Philips Group
Intangible assets excluding goodwill
in millions of EUR
| | brand names | customer relationships | technology | product development | product development construction in progress | software | other | total |
|---|
| Balance as of January 1, 2021 | | | | | | | | |
| Cost | 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) |
| Book value | 120 | 651 | 869 | 622 | 398 | 295 | 44 | 2,997 |
| | | | | | | | | |
| Additions | | | 9 | 1 | 261 | 117 | 2 | 392 |
| Assets available for use | | | | 247 | (247) | - | - | - |
| Acquisitions | 62 | 544 | 235 | | | - | - | 841 |
| Amortization | (21) | (126) | (114) | (219) | - | (85) | (3) | (568) |
| Impairments | | (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 |
| Total change | 42 | 492 | 131 | (22) | 17 | (8) | 1 | 653 |
| | | | | | | | | |
| Balance as of December 31, 2021 | | | | | | | | |
| Cost | 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) |
| Book Value | 162 | 1,143 | 1,000 | 599 | 414 | 287 | 44 | 3,650 |
Acquisitions in 2022 involved Intangible assets of EUR 180 million in aggregate (2021: EUR 841 million). For more information, refer 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; plusthe recognized amount of any non-controlling interest in the acquiree; plusif the business combination is achieved in stages, the fair value of the existing equity interest in the acquiree; lessthe 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
Impairments in 2022 were EUR 276 million (2021: EUR 126 million) and mainly relate to technology (EUR 46 million) and product development (EUR 204 million), including product development construction in progress. In the third quarter of and adjustments2022 an initiative was undertaken to non-controlling interests
Acquisitionsenhance productivity in R&D, specifically to shift the focus to fewer, high-impact projects in the innovation pipeline. As a result of non-controlling interests are accounted for as transactions with ownersthis initiative EUR 132 million of product development (including product development construction in their capacity as owners and therefore no goodwill isprogress) asset impairments were 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 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 includedmost notable impairments 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 are2022, 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 differences 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. Whenabove productivity initiative, were in the Diagnosis & Treatment segment, for product development assets in Precision Diagnosis (PD) of EUR 36 million and Image Guided Therapy-Systems (IGT Systems) of EUR 41 million (EUR 16 million of which was product development construction in progress). The basis of the recoverable amount used in these tests was the value-in-use. After the impairment charge the recoverable amount of the related intangible assets is EUR 0 million.
In 2022 there continued to be uncertainty and volatility related to by global, industry-wide macroeconomic challenges including global supply chain constraints, COVID lockdown measures in China, inflationary pressures and the Russia-Ukraine war. Where relevant, and to the extent possible, the estimated impact of these factors and the resulting uncertainties have been reflected in the forecasts used for the VIU calculations. As was the case in 2021, the company disposesuses 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
The amortization of only partintangible assets is specified in Income from operations.
The most notable intangible assets as 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 reclassifiedDecember 31, 2022 relate to the Consolidated statementsBioTelemetry customer relationships and technology with a carrying value of income.
Financial instruments
Non-derivative financialEUR 385 million and EUR 150 million and a remaining amortization period of 14 years and 10 years, respectively and Spectranetics customer relationships and technology with a carrying value of EUR 291 million and EUR 203 million and a remaining amortization period of 15 years and 10 years, respectively. The most notable intangible assets
Recognition and initial measurement
Non-derivative financial assets are recognized when the company becomes a party as of December 31, 2021 relate to the contractual provisionsBioTelemetry customer relationships and technology with value of the instrument. PurchasesEUR 391 million and salesEUR 162 million and a remaining amortization period of 15 years and 11 years, respectively and Spectranetics customer relationships and technology with a carrying value of EUR 292 million and EUR 210 million and a remaining amortization period of 16 years and 11 years, respectively.
13Other financial assets
Accounting policies
Classification and measurement of financial assets
The classification 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 depends on the financial asset’s contractual cash flow characteristics and the company’s business model for managing them.
The company initially measures a financial asset at its fair value plus, in the case of a financial asset not measured at fair value through profit or loss, (FVTPL), transaction costs thatcosts.
For the purposes of subsequent measurement, financial assets are directly attributable to the acquisitionclassified into four categories:
- Financial assets at amortized cost (debt instruments).
- Financial assets at fair value through other comprehensive income (OCI) with recycling of
the financial asset. Transaction costscumulative gains and losses (debt instruments). - Financial assets designated at fair value through OCI with no recycling of cumulative gains and losses upon derecognition (equity instruments).
- Financial assets at fair value through profit or loss (debt instruments and equity instruments).
Impairment of financial assets carried at FVTPL are expensed in the Consolidated statements of income.Classification and subsequent measurement
The company classifies its non-derivative financialrecognizes a loss allowance for expected credit losses for trade receivables, contract 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. Forlease receivables, 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 measuredcarried at amortized cost and fair value through other comprehensive income (FVTOCI).
At each balance sheet date, the company assesses whether there is objective evidence that a financial asset or a group of financial assets is impaired and recognizes a loss allowance for expected credit losses for financial assets measured at either amortized costs or at fair value through other comprehensive income. If, at the reporting date, the credit risk on a financial instrument has not increased significantly since initial recognition, the company measures the loss allowance for the financial instrument at an amount equal to 12 months of expected credit losses. If, at the reporting date, the credit risk on a financial instrument has increased significantly since initial recognition, the company measures the loss allowance for the financial instrument at an amount equal to the lifetime-expected credit losses. For all trade receivables, contract assets and lease receivables the company measures the loss allowance at an amount equal to lifetime-expected credit losses.
Accounting estimates and judgments
The determination of fair value is subject to estimates for investments that are not publicly traded. Refer to Fair value of financial assets and liabilities
Financial assets classified at amortized cost and at fair value through OCI are subject to impairment as explained in the impairment sectionassessment. The calculation 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 ifexpected credit losses requires the company has transferred substantially all risksto apply significant judgment and rewards or ifmake estimates and assumptions that involve significant uncertainty at the company does not retain control over those receivables. Further information on receivablestime they are made. Changes to these estimates and assumptions can result in significant changes to the timing and amount of expected credit losses to be found in Receivables.recognized.
Other (non-)current financial assets
In 2022, Other (non-)current financial assets include both debt instrumentsincreased from EUR 2 million to EUR 11 million (2021: increased from EUR nil million to EUR 2 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 2022 and 2021 were as follows:
Philips Group
Other non-current financial assets
in millions of EUR
| | 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, 2022 | 283 | 300 | 47 | 630 |
| Changes: | | | | |
| Acquisitions/additions | 114 | 18 | 18 | 150 |
| Sales/redemptions/reductions | (75) | (3) | (8) | (86) |
| Impairments | (3) | | (1) | (5) |
| Value adjustment through OCI | - | (35) | | (35) |
| Value adjustment through P&L | 5 | | - | 5 |
| Translation differences and other | (2) | 5 | (1) | 2 |
| Reclassifications | 1 | (2) | (1) | (2) |
| Balance as of December 31, 2022 | 322 | 284 | 54 | 660 |
Philips Group
Other non-current financial assets
in millions of EUR
| | 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, 2021 | 248 | 146 | 37 | 430 |
| Changes: | | | | |
| Acquisitions/additions | 54 | 59 | 10 | 123 |
| Sales/redemptions/reductions | (122) | - | (3) | (126) |
| Value adjustment through OCI | | (43) | - | (43) |
| Value adjustment through P&L | 95 | | - | 95 |
| Translation differences and other | 8 | 19 | 2 | 29 |
| Reclassifications | (1) | 120 | 2 | 122 |
| Balance as of December 31, 2021 | 283 | 300 | 47 | 630 |
As of December 31, 2022, equity instruments.
Debt instruments include those subsequently carried at amortized cost, those carried at FVTPL and those carried at FVTOCI. Classification dependsinvestments of EUR 259 million (2021: EUR 273 million) are accounted under the FVTOCI category based on the company’s business modelcompany's election at initial recognition mainly because such investments are neither held for managing the assettrading purposes nor primarily for their increase in value and the cash flow characteristicselected presentation is considered to reflect the nature and purpose of the asset.investment.
14Other assets
Accounting policies
The company recognizes contract assets for revenue earned from installation services because the receipt of consideration is conditional on successful completion of the installation. Upon completion of the installation and acceptance by the customer, the amount recognized as contract assets is reclassified to trade receivables.
Debt instruments that are held for collection of contractual cash flows, where those cash flows represent solely payments of principal and interest,Other assets are measured at amortized cost and are subject to impairment. Interest income from these financialminus any impairment losses.
Other non-current 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 pricesas 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 derivativesDecember 31, 2022 were EUR 98 million (2021: EUR 129 million). These 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. Costsmainly related to repair and maintenance activities are expensed in the period in which they are incurred unless leading to an extensionprepaid expenses.
Other current assets
Other current assets as of the original lifetime or capacity.
Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or the estimated useful life of the asset.
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
Until the financial year ended December 31, 2018, leases2022 of property, plantEUR 490 million (2021: EUR 493 million) included contract assets of EUR 292 million (2021: EUR 290 million), accrued income of EUR 24 million (2021: EUR 31 million) and equipment were classified as either finance or operating leases. Payments made under operating leases (netprepaid expenses of any incentives received from the lessor) were chargedEUR 174 million (2021: EUR 172 million) mainly related to profit or loss on a straight-line basis over the period of the lease.
From January 1, 2019, leases are recognized as a right-of-use assetDiagnosis & Treatment businesses and a corresponding liability at the date at which the leased asset is available for use by the company. The right-of-use asset is depreciated over the shorter of the asset's useful life and the lease term on a straight-line basis.
Connected Care businesses.
Assets and liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of the following lease 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 right-of-use assets are subsequently accounted for using principles for property, plant and equipment. Payments associated with short-term leases and leases of low-value assets are recognized on a straight-line basis as an expense in the 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 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 under the new standard IFRS 16 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 does not transfer substantially all the risks and rewards incidental to ownership of an asset are classified as operating leases. The company recognizes lease payments received under operating leases as income on a straight-line basis over the lease terms in the Statement of income.
The related year end disclosures pertaining to leases as lessor under the new standard IFRS 16 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 lessor:
15Inventories
Accounting policies
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 accountconsidering 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.
Accounting estimates and judgments
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. The curves are based on Willis Towers Watson’s rate methodology which uses data of corporate bonds rated AA or equivalent. For the other plans a single-point discount rate is used based on corporate bonds for which there is a deep market and on the plan’s maturity. Plans in countries without a deep corporate bond market use a discount rate based on the local sovereign curve and the plan’s maturity.
Pension costs in respect of defined-benefit 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. 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 income 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 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 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. 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 businesses and Personal Health 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 2019
The company applies, for the first time, IFRS 16 Leases. The impact of the adoption of this new standard and the new accounting policy is disclosed below. Other amendments and interpretations applied for the first time in 2019 did not have a material impact on the consolidated financial statements of the company.
Impact on the financial statements
IFRS 16 supersedes IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC-15 Operating Leases-Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. The standard sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases under a single on-balance-sheet model.
Lessor accounting under IFRS 16 is substantially unchanged compared to IAS 17. Lessors will continue to classify leases as either operating or finance leases using similar principles as in IAS 17. Therefore, IFRS 16 did not have an impact for leases where the company is the lessor.
The company adopted IFRS 16 using the modified retrospective method of adoption with the date of initial application of January 1, 2019. The company did not restate prior-year financial statements or notes.
Nature of the effect of adoption of IFRS 16
The company has lease contracts for various items of real estate, vehicles and other equipment. Before the adoption of IFRS 16, the company classified each of its leases (as lessee) at the inception date as either a finance lease or an operating lease. A lease was classified as a finance lease if it transferred substantially all of the risks and rewards incidental to ownership of the leased asset to the company otherwise it was classified as an operating lease. Finance leases were capitalized at the commencement of the lease at the inception date fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments were apportioned between interest (recognized as financial expenses) and reduction of the lease liability. In an operating lease, the leased item was not capitalized and the lease payments were recognized as rent expense in the Consolidated statement of income on a straight-line basis over the lease term. Any prepaid rent and accrued rent were recognized under Other current assets and Accrued liabilities respectively. Upon adoption of IFRS 16, the company applied a single recognition and measurement approach for all leases, except for short-term leases and leases of low-value assets. The standard provides specific transition requirements and practical expedients which have been applied by the company.
Leases previously classified as finance leases
The company did not change the initial carrying amounts of recognized assets and liabilities at the date of initial application for leases previously classified as finance leases (i.e. the right-of-use assets and lease liabilities equal the lease assets and liabilities recognized under IAS 17). The requirements of IFRS 16 have been applied to these leases from January 1, 2019.
Leases previously accounted for as operating leases
The company recognized right-of-use assets and lease liabilities for those leases previously classified as operating leases, except for short-term leases and leases of low-value assets. The right-of-use assets for most leases were recognized based on the amount equal to the lease liabilities, adjusted for any related prepaid and accrued lease payments previously recognized. For certain property leases, the right-of- use assets were recognized based on the carrying amount as if the standard had always been applied, apart from the use of incremental borrowing rate at the date of initial application. Lease liabilities were recognized based on the present value of the remaining lease payments, discounted using the incremental borrowing rate at the date of initial application.
Practical expedients applied
In applying IFRS 16 for the first time, the company has used the following practical expedients permitted by the standard:
Reliance on previous assessments on whether leases are onerous;Accounting for operating leases with an original lease term or remaining lease term of less than 12 months as at January 1, 2019 as short-term leases;Exclusion of initial direct costs for the measurement of the right-of-use asset at the date of initial application;Use of hindsight in determining the lease term where the contract contains options to extend or terminate the lease;Exclusion of low-value leases (i.e. individually less than EUR 5,000);Not separating lease from non-lease components for car leases.
The company has also elected not to reassess whether a contract is, or contains, a lease at the date of initial application. Instead, for contracts entered into before the transition date, the company relied on its assessment made applying IAS 17 and IFRIC 4 Determining whether an Arrangement contains a Lease.
Adjustments recognized on adoption of IFRS 16
On adoption of IFRS 16, the company recognized lease liabilities in relation to leases which had previously been classified as operating leases under the principles of IAS 17 Leases. These liabilities were measured at the present value of the remaining lease payments, discounted using the lessee’s incremental borrowing rate as of January 1, 2019. The weighted average incremental borrowing rate applied to the lease liabilities on January 1, 2019 was 2.4%.
In addition, the existing finance lease assets and liabilities, determined as per IAS 17 with a carrying value of approximately EUR 330 million each as at December 31, 2018, have been reclassified and added to the right-of-use asset and lease liability determined as per IFRS 16 on January 1, 2019.
The change in accounting policy affected the following items on the balance sheet on January 1, 2019:
Balance sheet impact of IFRS 16 adoption
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Property, plant and equipment | | | |
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The lease liabilities as of January 1, 2019 are reconciled to the operating lease commitments as of December 31, 2018 as follows:
Reconciliation of operating lease commitments to lease liabilities
in millions of EUR
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Operating lease commitments disclosed as of December 31, 2018
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Discounted using the lessee’s incremental borrowing rate at the date of initial application
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Add: finance lease liabilities recognized as at December 31, 2018
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(Less): short-term leases recognized on a straight-line basis as expense
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Add: lease extensions considered reasonably certain
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Lease liability recognized as of January 1, 2019
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Current lease liabilities
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Non-current lease liabilities
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The impact on opening retained earnings as of January 1, 2019 due to IFRS 16 adoption is as follows:
Retained earnings impact of IFRS 16 adoption
in millions of EUR
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Retained earnings as of December 31, 2018
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IFRS 16 adjustments due to modified retrospective approach
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Asset retrospective calculation
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Deferred tax asset impact
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Opening balance Retained earnings as of January 1, 2019
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The costs incurred during the financial year following the IFRS 16 adoption consisted of depreciation amounting to EUR 166 million, interest charges amounting to EUR 20 million and EUR 52 million for short-term and low value leases, compared to EUR 225 million of operating lease expenses booked in financial year 2018. In 2019, operating cash flows increased and financing cash flows decreased by EUR 171 million compared to the previous year as the repayment of the principal portion of the lease liabilities is now classified as cash flows from financing activities, while previously the operating lease payments were classified as cash flows from operating activities.
There is no material impact on basic and diluted EPS.
IFRS accounting standards to be adopted from 2020 onwards
A number of amendments to existing standards have been published and are mandatory for the company beginning on or after January 1, 2020, or later periods, and the company has not early-adopted them. The changes to those standards are not expected to have a material impact on the company’s financial statements.
2Information by segment and main country
Philips Group
Information on income statements
in millions of EUR
2017 - 2019
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Inter-segment eliminations | | | | |
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3)For reconciliation Adjusted EBITA, refer to the table below.
4)In 2019 Philips’ Emerging Businesses were moved out of segment Other into segment Diagnosis & Treatment to enable these businesses with better access to downstream capabilities. While these businesses remain in (semi-)incubator phase, in 2019 they received a corporate funding out of segment Other of EUR 54 million to support them during their emerging idea-to-market business phase.
As required by IFRS 8 Operating Segments, Philips operating segments are Diagnosis & Treatment businesses, Connected Care businesses and Personal Health businesses, each being responsible for the management of its business worldwide. From January 1, 2019, Philips realigned the composition of its reporting segments. The most notable changes are the shifts of the Sleep & Respiratory Care business from the Personal Health segment to the renamed Connected Care segment and most of the Healthcare Informatics business from the renamed Connected Care segment to the Diagnosis & Treatment segment. The 2018 and 2017 segment results have been reclassified according to the revised reporting structure.
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 related to the promise of precision diagnosis and disease pathway selection, and the businesses related to image-guided, minimally invasive treatments. The Connected Care businesses 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. The Personal Health businesses focuses on healthy living and 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. Below 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
2017 - 2019
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Restructuring and acquisition-related charges | | | | | |
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Discontinued operations, net of income taxes | | | | | |
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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
2017 - 2019
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1)The sales are reported based on country of destination.
2)Consists of Property plant and equipment, Intangible assets excluding goodwill and Goodwill
3Discontinued operations and assets classified as held for sale
In 2019, Discontinued operations consist primarily of certain other divestments formerly reported as discontinued operations. The below table summarizes the 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
2017 - 2019
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The combined Lumileds and Automotive businesses | | | |
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Discontinued operations, net of income taxes | | | |
As explained below, in 2019, there were no results from discontinued operations for Signify and combined Lumileds and Automotive businesses.
Signify
As from December 31, 2018, Philips was 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 were recognized in discontinued operations. These results related to an overall EUR 198 million loss, which reflected 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 was part of continued operations. For further details, please refer to Other financial assets.
The following table summarizes the results of Signify included in the Consolidated statements of income as discontinued operations.
Results of Signify
in millions of EUR
2017 - 2018
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Result on the deconsolidation of discontinued operations | | |
Fair value adjustment retained interest | | |
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Income tax on the deconsolidation of discontinued operations | | |
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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.
Philips Group
Results of combined Lumileds and Automotive businesses
in millions of EUR
2017 - 2018
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Result on the sale of discontinued operations | | |
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Income tax on the sale of discontinued operations | | |
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Results from discontinued operations | | |
Discontinued operations: Other
Certain costs related to other divestments, which were previously reported as discontinued operations, resulted in a net loss of EUR 19 million in 2019 (2018: a net loss of EUR 27 million; 2017: a net loss of EUR 24 million) .
Discontinued operations cash flows
The following table presents the net cash flows of operating, investing and financing activities reported in the Consolidated cash flow statements related to discontinued operations.
Discontinued operations cash flows
in millions of EUR
2017 - 2019
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Cash flows from operating activities | | | |
Cash flows from investing activities | | | |
Cash flows from financing activities | | | |
Total discontinued operations cash flows | | | |
In 2019, net cash used for discontinued operations consists primarily of settlements related to divestment formerly reported as discontinued operations.
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 activities reflect the period prior to the divestment of the combined Lumileds and Automotive businesses (six months of cash flows) and prior to 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 sale of the combined Lumileds and Automotive businesses.
Assets classified as held for sale
As of December 31, 2019, assets held for sale consisted of property, plant and equipment for an amount of EUR 13 million.
As of December 31, 2018, assets held for sale consisted of property, plant and equipment for an amount of EUR 23 million, and assets and liabilities directly associated with assets-held-for-sale businesses of EUR 52 million.
As of December 31, 2017, assets held for sale consisted of the retained interest in Signify for an amount of EUR 1,264 million, property, plant and equipment for an amount of EUR 40 million, and assets and liabilities directly associated with assets held for sale businesses of EUR 44 million.
4Acquisitions and divestments
2019
Acquisitions
Philips completed three acquisitions in 2019, with the Healthcare Information Systems business of Carestream Health being the most notable. The acquisitions involved an aggregated net cash outflow of EUR 199 million and a contingent consideration of EUR 11 million at fair value, the latter recognized as a Long-term provision. The aggregated impact on Goodwill and Other intangible assets was EUR 69 million and EUR 105 million respectively.
Opening balance positions are provisional and subject to final purchase price adjustments, which are expected to be finalized in the third quarter of 2020. The primary provisional accounts subject to change are related to acquired intangible assets and goodwill.
Divestments
Philips completed two divestments in 2019 which resulted in an aggregated cash consideration of EUR 122 million and a gain of EUR 62 million. The most notable was the sale of Photonics business in Germany.
2018
Philips completed nine acquisitions in 2018. The acquisitions involved an aggregated net cash outflow of EUR 476 million and a contingent consideration (including 2019 purchase price adjustments) of EUR 361 million at fair value. Including 2019 purchase price adjustments, these acquisitions had an aggregated impact on Goodwill and Other intangible assets of EUR 444 million and EUR 416 million respectively.
EPD Solutions Ltd. (EPD) was the most notable acquisition and is discussed below.
The remaining eight acquisitions involved an aggregated net cash outflow of EUR 228 million and a contingent consideration (including 2019 purchase price adjustments) of EUR 116 million at fair value. Separately, the net cash outflow ranged from EUR 2 million to EUR 90 million. Including 2019 purchase price adjustments, these remaining acquisitions had an aggregated impact on Goodwill and Other intangible assets of EUR 173 million and EUR 189 million respectively. The purchase price adjustments for the other acquisitions in aggregate recognized in 2019, resulted in an increase of EUR 5 million Goodwill, a decrease of EUR 27 million Other intangible assets, a decrease of EUR 11 million contingent consideration and an increase of EUR 11 million related to various other assets and liabilities.
EPD
On July 9, 2018 Philips acquired 100% of the outstanding shares of EPD for an upfront cash consideration of EUR 250 million and a contingent consideration, due between December 31, 2018 and December 31, 2030. In connection with the contingent consideration, the company recognized a Long-term provision of EUR 239 million at closing of the transaction, which was increased to EUR 245 million due to purchase price adjustments processed in the course of 2019. 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). As of the date of acquisition, EPD is part of the Diagnosis & Treatment segment.
In 2018, acquisition-related costs of EUR 6 million were recognized in General and administrative expenses.
The condensed opening balance sheet of EPD, including final purchase price adjustments processed in the course of 2019, was as follows:
EPD
Opening Balance sheet as of acquisition date
in millions of EUR
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Intangible assets excluding goodwill
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Accounts payable and other payables
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Provision for contingent consideration
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Total assets and liabilities
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The purchase price adjustments to Goodwill, contingent consideration and Deferred tax liabilities recognized in 2019 resulted in an increase of respectively EUR 9 million, EUR 6 million and EUR 3 million.
Goodwill recognized in the amount of EUR 271 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 Technology 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%.
As from acquisition date, the contribution of EPD to revenue and net income in 2018 was not material.
Divestments
Philips completed two divestments in 2018. The divestments involved an aggregated cash consideration of EUR 68 million.
5Interests in entities
In this section we discuss the 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.
Group companies
Below is a list of material subsidiaries as per December 31, 2019 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.
Philips Group
Interests in group companies
in alphabetical order
2019
| Principal country of business
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Philips (China) Investment Company, Ltd.
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Philips Medizin Systeme Böblingen GmbH
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Philips Electronics Nederland B.V.
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Philips Consumer Lifestyle B.V.
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Philips Oral Healthcare, LLC
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Philips North America LLC
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Information related to Non-controlling interests
As of December 31, 2019, 6 consolidated subsidiaries are not wholly owned by Philips (December 31, 2018: 6). In 2019, Sales to third parties and Net income for these subsidiaries in aggregate are EUR 581 million (December 31, 2018: EUR 627 million) and EUR 9 million (December 31, 2018: EUR 27 million) respectively.
Investments in associates
Philips has investments in a number of associates. None of them are regarded as individually material. During 2019, Philips purchased three investments in associates, which involved an aggregate amount of EUR 1 million.
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 are 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.
At December 31, 2019, Philips’ stake in Philips Medical Capital, LLC had a carrying value of EUR 25 million (December 31, 2018: EUR 24 million).
The company does not have any material exposures to losses from interests in unconsolidated structured entities other than the invested amounts.
6Income from operations
For information related to Sales on a segment and geographical basis, see Information by segment and main country.
Philips Group
Sales and costs by nature
in millions of EUR
2017 - 2019
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Employee benefit expenses | | | |
Depreciation and amortization1)2) | | | |
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Advertising and promotion | | | |
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Other operational costs5) | | | |
Other business income (expenses) | | | |
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3)For 2019 Lease expense relating to short-term and low value leases amounts to EUR 52 million.
4)Lease expense includes other costs, such as fuel and electricity, and taxes to be paid and reimbursed to the lessor for 2018: EUR 32 million and for 2017: EUR 38 million; for 2019 please refer to footnote 3
5)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 94 million government grants recognized in 2019 (2018: EUR 81 million, 2017: EUR 90 million). The grants mainly relate to research and development activities and business development.
Sales composition and disaggregation
Philips Group
Sales composition
in millions of EUR
2017 - 2019
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Total sales from contracts with customers | | | |
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1)Other sources mainly relates to leases, including sublease income from right-of-use assets and related services of EUR 307 million (2018: EUR 273 million)
At December 31, 2019, the aggregate amount of the transaction price allocated to remaining performance obligations from a sale of goods and services was EUR 11,692 million. The company expects to recognize approximately 49% 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 Sale per segment
in millions of EUR
2019
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| | | Total sales from contracts with customers | Sales from other sources1) | |
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1)Other sources mainly relates to leases, including sublease income from right-of-use assets and related services of EUR 307 million
2)Represents revenue from external customers as required by IFRS 8 Operating Segments.
Philips Group
Disaggregation of Sale per segment
in millions of EUR
2017-2018
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| | | | Total sales from contracts with customers | Sales from other sources1) | |
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1)Other sources mainly relates to leases, including sublease income from right-of-use assets and related services of EUR 273 million
2)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
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| | | Total sales from contracts with customers | Sales from other sources1) | |
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1)Other sources mainly relates to leases, including sublease income from right-of-use assets and related services of EUR 307 million
2)Represents revenue from external customers as required by IFRS 8 Operating Segments.
Philips Group
Disaggregation of Sales per geographical cluster
in millions of EUR
2017 - 2018
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| | | | Total sales from contracts with customers | Sales from other sources1) | |
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1)Other sources mainly relates to leases, including sublease income from right-of-use assets and related services of EUR 273 million
2)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
2017 - 2019
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Post-employment benefits costs | | | |
Other social security and similar charges: | | | |
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Employee benefit expenses | | | |
1)Salaries and wages includes EUR 105 million (2018: EUR 102 million, 2017: EUR 122 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, see Post-employment benefits.
For details on the remuneration of the members of the Board of Management and the Supervisory Board, see Information on remuneration.
Employees
The average number of employees by category is summarized as follows:
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
2017 - 2019
Depreciation and amortization
Depreciation of property, plant and equipment and amortization of intangible assets, including impairments, are as follows:
Philips Group
Depreciation and amortization1)2)
in millions of EUR
2017 - 2019
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Depreciation of property, plant and equipment | | | |
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Amortization of other intangible assets | | | |
Amortization of development costs | | | |
Depreciation and amortization | | | |
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 table below shows the fees attributable to the fiscal years 2017, 2018 and 2019 for services rendered by the respective Group auditors.
Philips Group
Agreed fees
in millions of EUR2017 - 2019
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-consolidated financial statements | | | | | | | | | |
-statutory financial statements | | | | | | | | | |
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-Sustainability assurance | | | | | | | | | |
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1)Ernst & Young Accountants LLP
2)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
2017 - 2019
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Result on disposal of businesses: | | | |
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Result on disposal of fixed assets: | | | |
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Result on other remaining businesses: | | | |
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Other business income (expense) | | | |
Total other business income | | | |
Total other business expense | | | |
1)Further information on goodwill movement can be found in GoodwillThe result on disposal of businesses was mainly due to divestment of non-strategic businesses.
The result on disposal of fixed assets was mainly due to 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.
For more information, please refer to Acquisitions and divestments.
7Financial income and expenses
Philips Group
Financial income and expenses
in millions of EUR
2017 - 2019
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Interest income from loans and receivables1) | | | |
Interest income from cash and cash equivalents | | | |
Dividend income from financial assets | | | |
Net gains from disposal of financial assets | | | |
Net change in fair value of financial assets at fair value through profit or loss | | | |
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Interest on debt and borrowings | | | |
Finance charges under lease contract | | | |
Interest expenses - pensions | | | |
Provision-related accretion and interest | | | |
Net foreign exchange losses | | | |
Impairment loss of financial assets | | | |
Net change in fair value of financial assets at fair value through profit or loss | | | |
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Financial income and expenses | | | |
1)Interest income from net investments in finance leases amounts to EUR 4 million in 2019.
In 2019, net financial expenses decreased by EUR 96 million year-on-year, mainly due to dividend income from investments, while 2018 included financial charges of EUR 46 million related to bonds redemptions. Net interest expense in 2019 was EUR 12 million higher than in 2018, mainly due to interest expense of EUR 20 million on lease liabilities recorded in 2019 following the adoption of IFRS 16.
In 2018, net financial expenses were EUR 213 million, which was EUR 76 million higher than in 2017. Other financial expenses included financial charges related to the early redemption of USD bonds of EUR 46 million. Net interest expense in 2018 was EUR 25 million lower than in 2017, mainly due to lower interest expenses on pensions and lower interest expenses on net debt*). The definition of this non-IFRS measure and a reconciliation to the IFRS measure is included in Equity.
8Income taxes
The income tax expense of continuing operations amounted to EUR 337 million (2018: EUR 193 million, 2017 EUR 349 million).
The components of income before taxes and income tax expense are as follows:
Philips Group
Income tax expense
in millions of EUR
2017 - 2019
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Income before taxes of continuing operations1) | | | |
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Current tax (expense) benefit | | | |
Deferred tax (expense) benefit | | | |
Total tax (expense) benefit of continuing operations (Netherlands) | | | |
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Current tax (expense) benefit | | | |
Deferred tax (expense) benefit | | | |
Total tax (expense) benefit of continuing operations (foreign) | | | |
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Income tax expense of continuing operations | | | |
1)Income before tax excludes the result of investments in associates.
Income tax expense of continuing operations excludes the tax benefit of the discontinued operations of EUR 9 million (2018: EUR 14 million tax benefit, 2017: EUR 182 million tax expense), further detailed in section Discontinued operations and assets classified as held for sale.
The components of income tax expense of continuing operations are as follows:
Philips Group
Current income tax expense
in millions of EUR
2017 - 2019
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Current year tax (expense) benefit | | | |
Prior year tax (expense) benefit | | | |
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Philips Group
Deferred income tax expense
In millions of EUR
2017 - 2019
| | | |
|---|
Changes to recognition of tax loss and credit carry forwards | | | |
Changes to recognition of temporary differences | | | |
Prior year tax (expense) benefit | | | |
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Origination and reversal of temporary differences, tax losses and tax credits | | | |
Deferred tax (expense) benefit | | | |
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% (2018: 25.0% 2017: 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 %
2017 - 2019
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Weighted average statutory income tax rate in % | | | |
Recognition of previously unrecognized tax loss and credit carryforwards | | | |
Unrecognized tax loss and credit carryforwards | | | |
Changes to recognition of temporary differences | | | |
Non-taxable income and tax incentives | | | |
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Withholding and other taxes | | | |
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Tax expenses (benefit) due to other tax liabilities | | | |
| | | |
Effective income tax rate | | | |
The effective income tax rate is lower than the weighted average statutory income tax rate in 2019 mainly due to recurring favorable tax incentives relating to R&D investments and export activities. In addition, business integration in 2019 resulted in one-off non-cash tax benefits which are mainly due to recognition of previously unrecognized tax loss carryforwards and higher tax incentives on export activities, partly offset by tax costs presented in changes to recognition of temporary differences.
The increase in effective income tax rate compared to 2018 is mainly due to lower non-cash benefits from tax audit resolutions and business integration, partly offset by lower provisions for tax risks.
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 2019 and 2018 respectively are presented in the tables below.
The net deferred tax assets of EUR 1,721 million (2018: EUR 1,676 million) consist of deferred tax assets of EUR 1,865 million (2018:EUR 1,828 million) and deferred tax liabilities of EUR 143 million (2018: EUR 152 million). Of the total deferred tax assets of EUR 1,865 million at December 31, 2019 (2018: EUR 1,828 million), EUR 239 million (2018: EUR 203 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, 2019 the temporary differences associated with investments, including potential income tax consequences on dividends, for which no deferred tax liabilities are recognized, aggregate to EUR 327 million (2018: EUR 186 million).
Philips Group
Deferred tax assets and liabilities
in millions of EUR
2019
| Balance as of January 1, 2019 | recognized in income statement | | Balance as of December 31, 2019 | | |
|---|
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Property, plant and equipment | | | | | | |
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Pensions and other employee benefits | | | | | | |
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Deferred tax assets on tax loss carryforwards | | | | | | |
Set-off deferred tax positions | | | | | | |
| | | | | | |
1)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
2018
| Balance as of January 1, 2018 | recognized in income statement | | Balance as of December 31, 2018 | | |
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Property, plant and equipment | | | | | | |
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Pensions and other employee benefits | | | | | | |
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Deferred tax assets on tax loss carryforwards | | | | | | |
Set-off deferred tax positions | | | | | | |
| | | | | | |
1)Other includes the movements of assets and liabilities recognized in equity and OCI, which includes foreign currency translation differences, acquisitions and 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, 2018 | Unrecognized balance as of December 31, 2018 | Total Balance as of December 31, 2019 | Unrecognized balance as of December 31, 2019 |
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At December 31, 2019, the amount of deductible temporary differences for which no deferred tax asset has been recognized in the balance sheet was EUR 31 million (2018: EUR 37 million).
Tax risks
Philips is exposed to tax risks. With regard to these tax risks a liability is recognized if, as a result 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. Following the presentation change in 2019, refer to Note 1 “Significant accounting policies”, these uncertain positions are included in non-current tax liabilities (2019: EUR 186 million, 2018: EUR 181 million). The positions include, among others, the 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.
9Earnings per share
Philips Group
Earnings per share
in millions of EUR unless otherwise stated1)
2017 - 2019
| | | |
|---|
Income from continuing operations | | | | | | |
Income (loss) attributable to non-controlling interest, from continuing operations | | | | | | |
Income from continuing operations attributable to shareholders | | | | | | |
Income from Discontinued operations | | | | | | |
Income (loss) attributable to non-controlling interest, from Discontinued operations | | | | | | |
Income from Discontinued operations attributable to shareholders | | | | | | |
| | | | | | |
Net income attributable to shareholders | | | | | | |
| | | | | | |
Weighted average number of common shares outstanding (after deduction of treasury shares) during the year | | | | | | |
Plus incremental shares from assumed conversions of: | | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Dilutive potential common shares | | | | | | |
Diluted weighted average number of shares (after deduction of treasury shares) during the year | | | | | | |
| | | | | | |
Basic earnings per common share in EUR | | | | | | |
Income from continuing operations attributable to shareholders | | | | | | |
Income from Discontinued operations attributable to shareholders | | | | | | |
Net income attributable to shareholders | | | | | | |
| | | | | | |
Diluted earnings per common share in EUR2) | | | | | | |
Income from continuing operations attributable to shareholders | | | | | | |
Income from Discontinued operations attributable to shareholders | | | | | | |
Net income attributable to shareholders | | | | | | |
| | | | | | |
Dividend distributed per common share in euros | | | | | | |
1)Shareholders in this table refers to shareholders of Koninklijke Philips N.V.
2)The dilutive potential common shares are not taken into account in the periods for which there is a loss, as the effect would be antidilutive
10Property, plant and equipment
Philips Group
Property, plant and equipment
in millions of EUR
2019
| | machinery and installations | | prepayments and construction in progress | |
|---|
| | | | | | | | | | |
Balance as of December 31, 2018 | | | | | | | | | | |
| | | | | | | | | | |
Balance as of January 1, 2019 | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Capital expenditures/additions | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Translations differences and other | | | | | | | | | | |
| | | | | | | | | | |
Balance as of December 31, 2019 | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Philips Group
Property, plant and equipment
in millions of EUR
2018
| | machinery and installations | | prepayments and construction in progress | |
|---|
Balance as of January 1, 2018 | | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Translations differences and other | | | | | |
| | | | | |
Balance as of December 31, 2018 | | | | | |
| | | | | |
| | | | | |
| | | | | |
Land with a book value of EUR 51 million (2018: EUR 56 million) is not depreciated. The increase in Property, plant and equipment mainly relates to the implementation of IFRS 16. The right-of-use assets recognized on the balance sheet is EUR 760 million as of January 1, 2019.
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
| |
| |
11Goodwill
The changes in 2018 and 2019 were as follows:
| | |
|---|
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
Divestments and transfers to assets classified as held for sale | | |
Translation differences and other | | |
| | |
Balance as of December 31: | | |
| | |
| | |
| | |
Goodwill increased by EUR 83 million in 2019 primarily as a result of several acquisitions of which none were individually material (refer to Acquisitions and divestments) as well as changes in the provisional opening balance sheet position for certain 2018 acquisitions. The further increase of EUR 165 million is mainly due to translation differences which impacted the goodwill denominated in USD. These increases are offset by goodwill impairments identified in the second half of 2019 totaling EUR 97 million in the Population Insights & Care/Vital Health (PIC/VH) and Neuro cash generating units (CGUs), which are explained in more detail below.
In 2018, goodwill increased by EUR 465 million, mainly from the acquisition of EPD Solutions for an amount of EUR 262 million and other acquisitions for an amount of EUR 203 million. The further increase of EUR 310 million is mainly due to translation differences which impacted the goodwill denominated in USD.
Goodwill reallocations in 2019 and 2018
In 2019 there were several changes to the CGU structure following the reorganization announced in January 2019 in order to align business with customer needs (refer to Significant accounting policies). This resulted in goodwill reallocations across CGUs, none of which had a significant impact on headroom or lead to goodwill impairments.
In addition, there were also certain CGU movements and/or combinations within Business Groups (BGs) that did not result in a reallocation of goodwill, but resulted in changes to the BG structure. This did not have a significant impact on headroom or lead to goodwill impairments. In Q4 2019 CGU PIC/VH and Aging & Caregiving combined into one Population Health Management (PHM) CGU. Unrelated to this combination, prior to this in Q3 the then PIC/VH CGU recognized a goodwill impairment which is further explained below.
In 2018, the activities of Patient Care & Monitoring Solutions in the segment Connected Care & Health Informatics were split over two new cash-generating units: Monitoring & Analytics and Therapeutic Care. As a result 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.
Impairments in 2019
During the third quarter of 2019, it was determined that the PIC/VH CGU within the segment Connected Care would miss its forecast mainly due to a deterioration in EBITA*) driven by a lower sales outlook in the former Wellcentive business within the CGU. The business offers services and solutions leveraging data, analytics and actionable workflow products for solutions to improve clinical and financial results. The value of the CGU, determined based on the value in use methodology, presented a recoverable amount of EUR 158 million based on the revised downward forecast, while the carrying amount totaled EUR 236 million as of September 30, 2019. The results of that impairment test indicated that the recoverable amount was lower than the carrying value, resulting in a EUR 78 million impairment charge in the third quarter of 2019, which was booked in the line Other business expenses in the statement of income. The value in use test used a pre-tax discount rate of 10.1%, which is based on the PIC/VH WACC rate for Q3 as calculated and published by Group Treasury.
During December 2019, it was determined that the Neuro CGU within the segment D&T would be shut down. The Neuro business provided 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. The value of the CGU based on the value in use test presented a recoverable amount of nil, while the carrying amount of goodwill totaled EUR 19 million at the time of impairment. This resulted in a write-off of the full goodwill balance and a EUR 19 million impairment charge, which was booked in the line Other business expenses in the statement of income.
Goodwill impairment testing
For impairment testing, goodwill is allocated to cash generating units (typically one level below segment level, i.e. at the BG level), which represent the lowest level at which the goodwill is monitored internally for management purposes.
Goodwill allocated to the cash generating units Image-Guided Therapy, Monitoring & Analytics and Sleep & Respiratory Care is considered to be significant in comparison to the total book value of goodwill for the Group at December 31, 2019. The amounts associated as of December 31, 2019 are presented below:
Philips Group
Goodwill allocated to the cash-generating units
in millions of EUR
2018 - 2019
| | |
|---|
| | |
| | |
| | |
Other (units carrying a non-significant goodwill balance) | | |
| | |
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. In the annual impairment test performed in the fourth quarter of 2019, the estimated recoverable amounts of the CGUs tested equaled or exceeded the carrying value of the units, therefore no impairment loss was recognized.
Key assumptions - general
Key assumptions used in the impairment tests for the units 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 managements’ internal forecasts that cover an initial period from 2020 to 2022. Projections were extrapolated with stable or declining growth rates (or with an increasing rate in case that could be justified) for a period of 4 years (2023-2026), after which a terminal value was calculated per 2027. 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 mentioned in this note is expected to increase over the projection period as a result of volume growth and cost efficiencies.
The rates used for discounting the projected cash flows in goodwill impairment testing is based on a BG weighted cost of capital (WACC), which in turn is based on BG-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 BG. As such, the beta factor is determined based on a selection of peer companies, which can differ per BG. Different BGs have different geographical footprints, resulting in BG-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
Cash flow projections of Image-Guided Therapy, Monitoring & Analytics and Sleep & Respiratory Care are based on the key assumptions included in the table below, which were used in the annual impairment test performed in the fourth quarter:
| compound sales growth rate1) | |
|---|
| | | used to calculate terminal value3) | |
|---|
| | | | |
| | | | |
| | | | |
1)Compound sales growth rate is the annualized steady nominal growth rate over the forecast period
2)Also referred to later in the text as compound long-term sales growth rate
3)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
The assumptions used for the 2018 cash flow projections were as follows:
| compound sales growth rate1) | |
|---|
| | | used to calculate terminal value3) | |
|---|
| | | | |
Patient Care & Monitoring Solutions | | | | |
| | | | |
| | | | |
1)Compound sales growth rate is the annualized steady nominal growth rate over the forecast period
2)Also referred to later in the text as compound long-term sales growth rate
3)The historical long-term growth rate is only applied to the first year after the 5 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, 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, the PHM CGU is sensitive to fluctuations in the assumptions as set out above.
The most recent PHM goodwill impairment test used compound sales growth rates of 11.5% (initial forecast period) and 10.4% (extrapolation period), which is above past performance and market growth given the start-up nature of this business. A pre-tax discount rate of 10.1% was applied. Further to the test, it was noted that an increase of 50 basis points in the pre-tax discount rate, a 180 basis points decline in the compound long-term sales growth rate or a 9% decrease in terminal value would, individually, cause its recoverable amount to fall to the level of its carrying value. The goodwill allocated to PHM at December 31, 2019 amounts to EUR 176 million.
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. Any downward deviation in the mentioned key assumptions for the PHM CGU is likely to cause the recoverable amount to fall below the level of its carrying value.
For the other cash 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.
12Intangible assets excluding goodwill
The changes were as follows:
Philips Group
Intangible assets excluding goodwill
in millions of EUR
2019
| | | | | product development construction in progress | | | |
|---|
Balance as of January 1, 2019 | | | | | | | | |
| | | | | | | | |
Amortization/ impairments | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Translation differences and other | | | | | | | | |
| | | | | | | | |
Balance as of December 31, 2019 | | | | | | | | |
| | | | | | | | |
Amortization/ impairments | | | | | | | | |
| | | | | | | | |
Philips
Intangible assets excluding goodwill
in millions of EUR
2018
| | | | | product development construction in progress | | | |
|---|
Balance as of January 1, 2018 | | | | | | | | |
| | | | | | | | |
Amortization/ impairments | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Balance as of December 31, 2018 | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Acquisitions in 2019 involved Intangible assets of EUR 77 million in aggregate (2018: EUR 415 million ). For more information, please refer to Acquisitions and divestments. Impairments in 2019 were EUR 171 million. The most notable impairments are mainly in the Diagnosis & Treatment segment, which include product development in business Diagnostic Imaging of EUR 56 million, product development in business Enterprise Diagnostic Informatics of EUR 34 million and the CardioProlific technology of EUR 50 million. These impairments are the result of a revision of strategies in the respective businesses. 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 8.2 years as of December 31, 2019 (2018: 9.3 years).
The most notable intangible asset as of December 31, 2019 relates to the Spectranetics customer relationships and technology with a carrying value of EUR 333 million and EUR 252 million and a remaining amortization period of 18 years and 13 years respectively. The most notable intangible asset of December 31, 2018 relates to Sleep & Respiratory Care customer relationships with a carrying value of EUR 278 million and a remaining amortization period of 5 years.
13Other financial assets
Other current financial assets
In 2019, Other current financial assets decreased by EUR 435 million from EUR 436 million in 2018 to EUR 1 million in 2019. In 2019, according to Philips' overall objective to fully divest its ownership of Signify, Philips sold all of its remaining shares in Signify for total proceeds of EUR 549 million. A cumulative gain of EUR 114 million was recognized in other comprehensive income and reclassified to retained earnings upon disposal.
In 2018, Other current financial assets increased by EUR 434 million from EUR 2 million in 2017 to EUR 436 million in 2018, reflecting mainly the interest in Signify of 16.5% as of December 31, 2018 (refer to Interests in entities).
Other non-current financial assets
The changes during 2019 were as follows:
Philips Group
Other non-current financial assets
in millions of EUR
2019
| Non-current financial assets at FVTP&L | Non-current financial assets at FVTOCI | Non-current financial assets at Amortized cost | |
|---|
Balance as of January 1, 2019 | | | | |
| | | | |
| | | | |
Sales/redemptions/reductions | | | | |
Value adjustment through OCI | | | | |
Value adjustment through P&L | | | | |
Translation differences and other | | | | |
| | | | |
Balance as of December 31, 2019 | | | | |
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 | |
|---|
Balance as of January 1, 2018 | | | | |
| | | | |
| | | | |
Sales/redemptions/reductions | | | | |
Value adjustment through OCI | | | | |
Value adjustment through P&L | | | | |
Translation differences and other | | | | |
| | | | |
Balance as of December 31, 2018 | | | | |
The company’s investments in Other non-current financial assets mainly consist of investments in common shares of companies in various industries. At December 31, 2019, equity investments of EUR 45 million (2018: EUR 172 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 2019, the main movements in Other non-current financial assets at FVTOCI related to the sale of the company's investment in Corindus Vascular Robotics for total proceeds of EUR 102 million. A cumulative gain of EUR 84 million was recognized in other comprehensive income and reclassified to retained earnings upon disposal. Value adjustments through OCI in 2019 mainly related to Luminescence and Corindus (refer to Fair value of financial assets and liabilities). Value adjustments through OCI in 2018 mainly related to Luminescence.
In 2019, a cumulative gain of EUR 204 million (2018: 0 million) was realized upon disposal of investments at FVOCI and reclassified from OCI to retained earnings.
14Other assets
Other non-current assets
Other non-current assets in 2019 were EUR 47 million(2018: EUR 47 million). These mainly related to prepaid expenses.
Other current assets
Other current assets include EUR 288 million (2018: EUR 276 million) accrued income and EUR 188 million (2018: EUR 193 million) for prepaid expense mainly related to Diagnosis & Treatment businesses and Connected Care businesses.
15Inventories
Inventories are summarized as follows:
Philips Group
Inventories
in millions of EUR
2018 - 2019
| | | 2021 | 2022 |
|---|
Raw materials and supplies | | | 1,143 | 1,541 |
| | | 646 | 648 |
| | | 1,660 | 1,860 |
| | | 3,450 | 4,049 |
The write-down of inventories to net realizable value was EUR 138215 million in 2019 (2018:2022 (2021: EUR 159177 million). The write-down is included in cost of sales.
In 2022, the limited availability and delays in the supply of certain components and products internationally, resulted in an increase in inventories compared to December 31, 2021, as work in process inventories could not be translated to finished goods available for sale due to the scarcity of certain components. While there was an increase in inventories, this has not resulted in a significant write-down of inventories, as the expectation is that such components will become available in the near future.
16Receivables
Accounting policies
Receivables are held by the company to collect the related cash flows. These receivables are measured at fair value and subsequently measured at amortized cost minus any impairment losses.
Receivables are derecognized when the company has transferred substantially all risks and rewards, which includes transactions in which the company enters into factoring transactions, or if the company does not retain control over the receivables.
Accounting estimates
Receivables are subject to impairment assessment, which involves estimating expected credit losses. Refer to Other financial assets for accounting policies on impairment of financial assets.
Non-current receivables
Non-current receivables are associated mainly with customer financing in the Diagnosis & Treatment businesses amounting to EUR 3170 million (2018:(2021: EUR 44 million), for Signify indemnification amounting to EUR 7626 million (2021: EUR 46 million), an income tax receivable amounting to EUR 126 million (which includes an interest receivable of EUR 10 million) for which Philips expects to get a refund (2021: EUR 78 million) and insurance receivables in Other in the US amounting to EUR 4130 million (2018:(2021: EUR 4137 million).
Current receivables
Current receivables of EUR 4,5544,115 million (2018:(2021: EUR 4,0353,787 million) atas of December 31, 20192022 included trade accounts receivable (net of allowance) of EUR 4,2803,832 million (2018:(2021: EUR 3,8053,559 million), accounts receivable other of EUR 242228 million (2018:(2021: EUR 203188 million) and accounts receivable from investments in associates of EUR 3255 million (2018:(2021: EUR 2740 million).
The trade accounts receivable, net, per segment are as follows:
Philips Group
Accounts receivables-netTrade accounts receivable, net
in millions of EUR
2018 - 2019
| | | 2021 | 2022 |
|---|
| | | 1,759 | 2,013 |
| | | 980 | 1,114 |
| | | 575 | 479 |
| | | 245 | 226 |
| | | |
| Trade accounts receivable, net | | 3,559 | 3,832 |
The aging analysis of trade accounts receivable, net, representing current and overdue but not fully impaired receivables, is set out below:as follows:
Philips Group
Aging analysis
in millions of EUR
2018 - 2019
| | 2021 | 2022 |
|---|
| Current | 3,075 | 3,280 |
| Overdue 1-30 days | 160 | 169 |
| Overdue 31-180 days | 245 | 282 |
| Overdue more than 180 days | 79 | 101 |
| Trade accounts receivable, net | 3,559 | 3,832 |
The above net accounts receivable represent current and overdue but not fully impaired receivables. The overdue balances have been netted off against the credit notes amounting to EUR 50 million.
The changes in the allowance for doubtful accounts receivable are as follows:
Philips Group
Allowance for accounts receivable
in millions of EUR
2018 - 2019
| | | 2021 | 2022 |
|---|
| | | 195 | 190 |
Additions charged to expense | | | 4 | 66 |
Deductions from allowance1) | | | (17) | (51) |
Transfer to assets held for sale | | | (8) | |
| | | 16 | 21 |
Balance as of December 31 | | | 190 | 226 |
1)Write-offs for which an allowance was previously provided.
The allowance for doubtful accounts receivable has been primarily established for receivables that are past due.
Included in the above balances as perof December 31, 20192022 are allowances for individually impaired receivables of EUR 200222 million (2018:(2021: EUR 181188 million) .
Contract assets
Current contract assets were EUR 247 million per December 31, 2019 (2018: EUR 232 million).
The contract assets increased with EUR 15 million. The year-on-year change is mainly driven by timing differences between billing terms and services provided.
17Equity
Accounting policies
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 repurchases 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 shareholders’ equity until such treasury shares are cancelled or reissued.
Where such treasury shares are subsequently reissued, any consideration received, net of any directly attributable incremental transaction costs and the related income tax effects, is included in shareholders’ equity.
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.
Common shares
As of December 31, 2019,2022, authorized common shares consist of 2 billion shares (December 31, 2018:2021: 2 billion; December 31, 2017:2020: 2 billion) and the issued and fully paid share capital consists of 896,733,721889,315,082 common shares, each share having a par value of EUR 0.20 (December 31, 2018: 926,195,539;2021: 883,898,969; December 31, 2017: 940,909,027)2020: 911,053,001).
Preference shares
As a means to protect the Company and its stakeholderscompany 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 ascompany. As of December 31, 20192022, 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, 20192022 (December 31, 2018:2021: 2 billion; December 31, 2017:2020: 2 billion).
Options, restricted and performance shares
The Company hasUnder its share-based compensation plans, the company granted stock options on its common shares up to 2013 and other conditional rights to receive common shares in the future (seesuch as restricted shares and performance shares (refer to Share-based compensation).
Treasury shares
In connection with the Company’scompany’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 under share-based compensation plans upon exercise of options, or vesting of restricted andor performance share programs,shares, 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,treasury shares are delivered by the company under its share-based compensation plans, such 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,company’s 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
| | 2020 | 2021 | 2022 |
|---|
| Balance as of January 1 | 890,973,790 | 905,128,293 | 870,182,445 |
| Dividend distributed | 18,080,198 | 6,345,968 | 14,174,568 |
| Purchase of treasury shares | (8,669,622) | (45,486,392) | (5,080,693) |
| Delivery of treasury shares | 4,695,170 | 4,194,577 | 2,204,207 |
| Issuance of new shares | 48,757 | | |
| Balance as of December 31 | 905,128,293 | 870,182,445 | 881,480,527 |
The following table reflects transactions that took place in relation to former and current share-based compensation plans:
Philips Group
Transactions related to share-based compensation plans
2017 - 2019
| | | |
|---|
| | | |
| | | |
Purchase of treasury shares | | | |
Re-issuance of treasury shares | | | |
Balance as of December 31 | | | |
| | 2020 | 2021 | 2022 |
|---|
| Shares acquired | 5,351,411 | 3,996,576 | 2,142,445 |
| Average market price | EUR 33.81 | EUR 36.15 | EUR 31.76 |
| Amount paid | EUR 181 million | EUR 144 million | EUR 68 million |
| Shares delivered | 4,695,170 | 4,194,577 | 2,204,207 |
| Average price (FIFO) | EUR 34.35 | EUR 34.14 | EUR 35.16 |
| Cost of delivered shares | EUR 161 million | EUR 143 million | EUR 77 million |
| Total shares in treasury at year-end | 5,924,708 | 5,726,708 | 5,664,946 |
| Total cost | EUR 199 million | EUR 201 million | EUR 191 million |
The following transactions took place resulting from employee option and share plans:for capital reduction purposes:
Philips Group
Employee option and share plan transactions
Transactions related to capital reduction
2017 - 2019
| | | |
|---|
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
Total shares in treasury at year-end | | | |
| | | |
In order to reduce share capital, the following transactions took place:
Philips Group
Share capital transactions
2017 - 2019
| | | | 2020 | 2021 | 2022 |
|---|
| | | | 3,318,211 | 41,489,816 | 2,938,248 |
| | | | EUR 39.21 | EUR 36.22 | EUR 36.61 |
| | | | EUR 130 million | EUR 1,503 million | EUR 108 million |
Cancellation of treasury shares (shares) | | | | 3,809,675 | 33,500,000 | 8,758,455 |
Cancellation of treasury shares (EUR) | | | | EUR 152 million | EUR 1,216 million | EUR 299 million |
Total shares in treasury at year-end | | | | | 7,989,816 | 2,169,609 |
| | | | | EUR 287 million | EUR 83 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 1,376187 million. A cash inflow of EUR 5812 million from treasury shares mainly includes settlementsrelates to the exercise of share-based compensation plans.employee stock options (granted until 2013).
Share repurchase methods for share-based compensationremuneration plans and capital reduction purposes
During 2019, 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 2019, RoyalDuring 2022, 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 sharecontracts to repurchase contractsshares
In order to hedge commitments under
For share-based compensation plans
On June 13, 2022, Royal Philips announced that it will repurchase up to 3.2 million shares to cover certain of its obligations arising from its long-term incentive and employee stock purchases plans. Under this program, Philips entered into threeone forward contracts in the last quartercontract for an amount of 2018, involving 10,000,000EUR 63 million to acquire 3.2 million shares with a settlement date varying between October 2019dates in November 2024 and November 2021December 2024 and a weighted average forward price of EUR 31.89. A19.75.
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 one forward contract for an amount of EUR 90 million to acquire 2 million shares with settlement dates in October 2023 and November 2023 and a weighted average forward price of EUR 44.85.
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 to acquire in total 5 million for an amount of EUR 174 million to acquire with settlement dates varying between October 2021 and November 2022 and a weighted average forward price of EUR 34.85. On October 26, 2022, the original settlement date of two tranches entered into under this program (in total 1.75 million shares) has been extended from November 23, 2022 to November 2023, and November 2024, respectively. As of December 31, 2022, a total of 4,000,0003.3 million shares (December 31, 2021: 1.5 million) under this program were acquired through forward contracts that were settled(settled in the fourth quarter of 2019, which2021 and 2022, respectively). This resulted in a EUR 13057 million (December 31, 2021: EUR 61 million) increase in retained earnings against treasury shares.
As of December 31, 2022, the remaining forward contracts to cover obligations under share-based remuneration plans related to 7.0 million shares (December 31, 2021: 5.5 million) and amounted to EUR 211 million (December 31, 2021: EUR 203 million).
For capital reduction
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 EUR 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 781 million increase in retained earnings against treasury shares. As of December 31, 2019, 6,000,000 forward contracts connected to share-based compensation plans2022, a total of 2.2 million shares under this program were outstanding.
In order to reduce its share capital, Royal Philips also entered into six forward contractsacquired (in the fourth quarter of 2022). This resulted 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 2019, 18,600,000 forward contracts were exercised resulting in a EUR 57683 million increase in Retainedretained earnings against Treasurytreasury shares. As of December 31, 2018, 18,600,000 were outstanding.
As of December 31, 2019, there were no2022, the remaining forward contracts connectedentered into for capital reduction purposes relate to share capital reductions outstanding. For further information on the forward contracts please refer17.4 million shares (December 31, 2021: 19.6 million) and amounted to DebtEUR 648 million (December 31, 2021: EUR 731 million).
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 2019,2022, the company unwound 855,039239,880 EUR-denominated and 642,636152,565 USD-denominated call options against the transfer of the same number of Royal Philipsits own shares (1,497,675(392,445 shares) and an additional EUR 306 million cash payment to the buyer of the call options.
The number of outstanding EUR denominated options were 1,168,600 and USD-denominated options were 1,127,582, asAs of December 31, 2019.2022, the remaining EUR-denominated call options related to 55,750 shares while there are no remaining USD-denominated call options.
Shares cancellation
In June 2022, Philips completed the cancellation of 8.8 million of its common shares (with a cost price of EUR 299 million). The cancelled shares were acquired as part of the Philips’ EUR 1.5 billion share repurchase programs announced on July 26, 2021.
Dividend distribution
20192022
In June 2019,May 2022, Philips settleddistributed a dividend of EUR 0.85 per common share, representing a total value of EUR 775741 million including costs.(including costs). Shareholders could elect for a cash dividend or a share dividend. Approximately 42%45% of the shareholders elected for a share dividend, resulting in the issuance of 9,079,53814,174,568 new common shares. The settlement of the cash dividend involved an amount of EUR 453411 million (including costs).
A proposal will be submitted to the 20202023 Annual General Meeting of Shareholders to pay a dividend of EUR 0.85 per common share, in cash orcommon shares at the option of the shareholders,only, against the net income of the Companyretained earnings for 2019.
2022.
20182021
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).
20172020
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. Shareholders could elect for a cash(including costs). The dividend or a share dividend. Approximately 48%was distributed in the form of the shareholders elected for a share dividend,shares only resulting in the issuance of 11,264,16318,080,198 new common shares. The settlement of the cash dividend involved an amount of EUR 384 million (including costs)
Limitations in the distribution of shareholders’ equity
As atof December 31, 2019,2022, pursuant to Dutch law, certain limitations exist relating to the distribution of shareholders’ equity of EUR 1,8703,054 million. Such limitations relate to common shares of EUR 179178 million, as well as to legal reserves required by Dutch law included under retained earnings of EUR 7131,010 million and unrealized currency translation differences of EUR 9781,866 million. The unrealized lossesloss related to cash flow hedges of EUR 2 million and unrealized loss related to fair value through OCI financial assets of EUR 303 million and unrealized losses related to cash flow hedges of EUR 24376 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 7131,010 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, 2018,2021, these limitations in distributable amounts were EUR 1,5581,947 million and related 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 losses related to fair value through OCI financial assets of EUR 181344 million and unrealized lossesloss related to cash flow hedges of EUR 1025 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.
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 athe 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
2017 - 2019
| | | | 2020 | 2021 | 2022 |
|---|
| | | | 5,705 | 6,473 | 7,270 |
| | | | 1,229 | 506 | 931 |
| | | | 6,934 | 6,980 | 8,201 |
Cash and cash equivalents | | | | 3,226 | 2,303 | 1,172 |
| | | | |
| Net debt | | 3,708 | 4,676 | 7,028 |
| | | | 11,870 | 14,438 | 13,249 |
Non-controlling interests | | | | 31 | 36 | 34 |
| | | | 11,901 | 14,475 | 13,283 |
Net debt and group equity ratio1) | | | | |
| Net debt and group equity ratio | | 24:76 | 35:65 |
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 20192022 is included in the table below.
following table.
Philips Group
Adjusted income from continuing operations attributable to shareholders1)
21) in millions of EUR
2018-2019
| | |
|---|
| | |
Discontinued operations, net of income taxes | | |
Income from continuing operations | | |
Continuing operations non-controlling interests | | |
Income from continuing operations attributable to shareholders1)2) | | |
| | |
Amortization of acquired intangible assets | | |
| | |
Restructuring costs and acquisition-related charges | | |
| | |
| | |
Tax impact of adjusted items | | |
Adjusted Income from continuing operations attributable to shareholders1)2) | | |
| | 2020 | 2021 | 2022 |
|---|
| Net income | 1,195 | 3,323 | (1,605) |
| Discontinued operations, net of income taxes | (196) | (2,711) | (13) |
| Income from continuing operations | 999 | 612 | (1,618) |
| Income from continuing operations attributable to non-controlling interests | (8) | (4) | (3) |
| Income from continuing operations attributable to shareholders1) | 991 | 608 | (1,622) |
| Adjustments for: | | | |
| Amortization and impairment of acquired intangible assets | 377 | 322 | 363 |
| Impairment of goodwill | 144 | 15 | 1,357 |
| Restructuring costs and acquisition-related charges | 195 | 95 | 202 |
| Other items: | 299 | 1,069 | 925 |
| Respironics field-action provision | | 719 | 250 |
| Respironics field-action running remediation cost | | 94 | 210 |
| R&D project impairments | | | 134 |
| Portfolio realignment charges | | | 109 |
| Impairment of assets in S&RC | | | 39 |
| Provision for public investigations tender irregularities | | | 60 |
| Provisions for quality actions in Connected Care | | 94 | 59 |
| Loss on divestment of business | | 76 | |
| Remaining items | 299 | 87 | 63 |
| Net finance income/expenses | (125) | (84) | (4) |
| Tax impact of adjusted items and tax only adjusting items | (285) | (527) | (376) |
| Adjusted Income from continuing operations attributable to shareholders1) | 1,594 | 1,497 | 845 |
2)Shareholders in this table refers to shareholders of Koninklijke Philips N.V.
18Debt
Accounting policies
Debt
Debt is initially measured at fair value net of directly attributable transaction costs. Subsequently, debt is measured at amortized cost using the effective interest rate method. 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 is derecognized when the obligation under the liability is discharged, cancelled or has expired.
Lease liabilities
Lease liabilities are measured at the present value of the lease payments due over the lease term, generally discounted using the incremental borrowing rate. Lease liabilities are subsequently measured at amortized cost using the effective interest method. Lease liabilities are remeasured in case of modifications or reassessments of the lease.
Philips has a USD 2.5 billion Commercial Paper Program 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 Program. Philips issued and repaid commercial paper in 2019. As of December 31, 2019,2022, Philips did not have any loans outstanding under either facility. These facilities do not have a material adverse change clause, have no financial covenants and no credit-rating-related acceleration possibilities. Philips issued commercial paper of EUR 200 million in September 2022 and EUR 101 million in October 2022, that was repaid throughout the fourth quarter of 2022. In February 2019,addition, Philips successfully exercised, with existing terms and conditions, the second of two 1-year extension options of itssecured a EUR 1 billion committed standby revolving credit facility extendingin the maturity date to April 21, 2024.fourth quarter of 2022 that can be used for general corporate purposes. As of December 31, 2022, Philips had EUR 500 million outstanding under the credit facility. The facility does not have a material adverse change clause, has no financial covenants and no credit-rating-related acceleration possibilities. As per March 9, 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 2022 Philips issued three new tranches under the program for a total of EUR 2 billion, while also redeeming its outstanding 2023 and 2024 Notes and issuing a tender offer on the outstanding 2025 and 2026 Notes.
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-denominated corporate bonds issued in 2017, 2018, 2019, 2020 and 20192022 (due 2023, 2024,2025, 2026, 2027, 2028, 2029, 2030 and 2028)2033) 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.
AsIn April 2022, Philips announced a series of January 1, 2019 lease liabilitiesLiability Management transactions to optimize its debt maturity profile. The transactions included the issuance of three series of Notes under its EMTN program for a total of EUR 803 million2 billion with maturities in 2027, 2029 and 2033. Part of the proceeds were recognized uponused to tender certain of Philips’ outstanding US Dollar denominated bonds due 2025 and 2026 and Euro-denominated bonds due 2023, 2024 and 2025, as well as make-whole and fully redeem the adoptionEuro-denominated bonds due 2023 and 2024 that were not purchased as part of IFRS 16 and additional lease liabilitiesthe Euro tender offer. Philips issued Commercial Paper of EUR 256200 million in September 2022 and EUR 101 million in October 2022. These tranches were recognized through December 31, 2019. For further details please refer to Significant accounting policies.repaid throughout the fourth quarter of 2022. In May 2019,addition, in October 2022 Philips issuedentered into a fixed-rate Green Innovation Bond with an aggregate principalEUR 1 billion credit facility that can be used for general corporate purposes. The credit facility matures in October 2023 and has a 12-month extension option at Philips discretion. Per year-end 2022, EUR 500 million was utilized and outstanding under the credit facility. In 2022, Philips entered into a total amount of EUR 75063 million (0.500%, due 2026). forward contracts relating to the company’s long-term incentive and employee stock purchase plans. A total of EUR 57 million forward contracts relating to the long-term incentive and employee stock purchase plans as announced in 2020 and EUR 83 million of forwards related to the share buyback program announced in 2021 matured throughout 2022.
In September 2019, EUR bondsFebruary 2021, Philips entered into two new bilateral loans amounting to a total of EUR 500 million (EUR 250 million each) with a tenor of up to one year, that were repaid upon their scheduled maturity.in September 2021. In 2019,2021, Philips also entered into a total nominal amount of EUR 576731 million of forward contracts matured relating to the EUR 1.5 billion share buyback program announced on June 28. 2017. In addition, aJuly 26, 2021, with maturity dates in 2022, 2023 and 2024. A total nominal amount of EUR 130745 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, Philips entered into a total amount of EUR 90 million of forward contracts in 2021 relating to the long-term incentive and employee stock purchase 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.
In March 2018, Philips refinanced a loan of EUR 178 million with a new long-term loan of EUR 200 million bearing interest based on 6-month Euribor. 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, resulting in financial charges of EUR 24 million. For the purpose of the redemption, a EUR 900 million loan was entered into, which was repaid in May 2018 through the issuance of fixed-rate EUR bonds with an aggregate principal amount of EUR 1 billion (EUR 500 million0.750% due 2024 and EUR 500 million1.375% 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 423 million of forward contracts related to the EUR 1.5 billion share buyback programplans announced on June 28, 2017 matured. In addition, in Q4October 22, 2018 Philips entered into 3 tranches of forward purchases totaling 10 million shares for a nominal amount of EUR 319 million maturing through 2021 to cover its long-term incentive and employee stock purchase plans.January 29, 2020.
Long-term debt
The belowfollowing tables present information about the long-term debt outstanding, its maturity and average interest rates in 20192022 and 2018.2021.
Philips Group
Long-term debt
in millions of EUR unless otherwise stated
2019
| | | 2022 |
|---|
| amount outstanding in 2019 | | | | | average remaining term (in years) | | amount outstanding | Current portion | Non-current portion | Between 1 and 5 years | amount due after 5 years | average remaining term (in years) | average rate of interest |
|---|
| | | | | | | | 1,378 | | 1,378 | 250 | 1,128 | 14.3 | 6.3% |
| | | | | | | | 4,061 | | 4,061 | 1,836 | 2,225 | 5.7 | 1.7% |
| | | | | | | 858 | 606 | 252 | 252 | | 1.0 | |
| | | | | | | | |
| Lease liabilities | | 1,082 | 230 | 852 | 504 | 348 | 3.9 | 2.4% |
| | | | | | | | 705 | 2 | 702 | 702 | | 1.9 | 1.7% |
| | | | | 28 | 4 | 24 | 17 | 6 | 8.9 | 2.9% |
| | | | | | | | 8,111 | 842 | 7,270 | 3,562 | 3,706 | 6.1 | 2.4% |
Philips Group
Long-term debt
in millions of EUR unless otherwise stated
2018
| | | 2021 |
|---|
| amount outstanding in 2018 | | | | | average remaining term (in years) | | amount outstanding | 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 liabilities | | 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% |
Bonds
The belowfollowing table disclosespresents the amount outstanding and effective rate of bonds.
Philips Group
Unsecured Bonds
in millions of EUR unless otherwise stated
2018 - 2019
| | | |
|---|
| | | |
| | | |
Due 9/06/2019; 3M Euribor +20bps | | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | effective rate | 2021 | 2022 |
|---|
| Unsecured EUR Bonds | | | |
| Due 06/09/2023; 1/2% | 0.634% | 500 | |
| Due 02/05/2024; 3/4% | 0.861% | 500 | |
| Due 22/05/2026; 1/2% | 0.608% | 750 | 750 |
| Due 02/05/2028; 1 3/8% | 1.523% | 500 | 500 |
| Due 30/03/2025; 1 3/8% | 1.509% | 500 | 346 |
| Due 30/03/2030; 2% | 2.128% | 500 | 500 |
| Due 05/05/2027; 1 7/8% | 2.049% | | 750 |
| Due 05/11/2029; 2 1/8% | 2.441% | | 650 |
| Due 05/05/2033; 2 5/8% | 2.710% | | 600 |
| Unsecured USD Bonds | | | |
| Due 15/05/2025; 7 3/4% | 7.429% | 56 | 51 |
| Due 01/06/2026; 7 1/5% | 6.885% | 120 | 119 |
| Due 15/05/2025; 7 1/8% | 6.794% | 74 | 78 |
| Due 11/03/2038; 6 7/8% | 7.210% | 641 | 683 |
| Due 15/03/2042; 5% | 5.273% | 441 | 470 |
| Adjustments1) | | (37) | (57) |
| Unsecured Bonds | | 4,545 | 5,439 |
1)Adjustments related to both EUR and USD bonds and concern bond discounts, premium and transaction costs.
Leases
The following table below 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
Lease liabilities
in millions of EUR
2018 - 2019
| | | 2021 | 2022 |
|---|
| 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 |
|---|
| | | | | | | 280 | 22 | 257 | 251 | 21 | 230 |
Between one and five years | | | | | | | 636 | 56 | 580 | 554 | 49 | 505 |
| | | | | | | 417 | 34 | 383 | 376 | 28 | 348 |
| | | | | | | |
| Lease liabilities | | 1,333 | 113 | 1,220 | 1,180 | 98 | 1,082 |
Short-term debt
Philips Group
Short-term debt
in millions of EUR
2018 - 2019
| | | 2021 | 2022 |
|---|
Short-term bank borrowings | | | 47 | 89 |
| | | |
Current portion of long-term debt | | | 459 | 842 |
| | | 506 | 931 |
During 2019,2022, the weighted average interest rate on the bank borrowings was 14.2% (2018: 15.0%5.7% (2021: 1.2%), reflecting a higher relative amount of borrowings in high interest rate countries.. This increase was mainly driven by financial market conditions across various countries globally.
19Provisions
Accounting policies
A provision is a liability of uncertain timing or amount. Provisions are recognized if, as a result of a past event, the company has a present legal or constructive obligation, it is probable that an outflow of economic benefits will be required to settle the 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 (accretion) is recognized as interest expense.
Restructuring-related provisions
Provisions for severance and termination benefits are 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.
Accounting estimates and judgments
By their nature, the recognition of provisions require estimates and assumptions regarding the timing and the amount of outflow of resources. The main estimates include:
- Respironics field-action provision – the provision requires management to make estimates and assumptions about items such as quantities and the portion of products to be remediated through replacement or repair.
- Product warranty provisions – 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 and include costs to execute field change orders.
- Environmental provisions – 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.
- Legal provisions – provisions for legal claims and investigations reflect the best estimate of the outflow of resources, supported by internal and external legal counsel, when it is probable that such outflow of resources will be required to settle an obligation.
- Contingent consideration provisions – the provision for contingent consideration reflects the fair value of the expected payment to former shareholders of an acquired company 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 (expenses).
Philips Group
Provisions
in millions of EUR
| | 2021 | 2022 |
|---|
| | long-term | short-term | total | long-term | short-term | total |
|---|
| Post-employment benefits1) | 659 | | 659 | 546 | | 546 |
| Respironics field-action provision | 52 | 525 | 577 | 23 | 366 | 390 |
| Product warranty provisions | 32 | 207 | 238 | 57 | 287 | 344 |
| Environmental provisions | 99 | 26 | 124 | 83 | 20 | 104 |
| Restructuring-related provisions | 8 | 58 | 66 | 6 | 134 | 140 |
| Legal provisions | 53 | 39 | 91 | 14 | 74 | 89 |
| Contingent consideration provisions | 156 | 52 | 208 | 89 | 23 | 113 |
| Other provisions | 257 | 92 | 349 | 279 | 112 | 390 |
| Provisions | 1,315 | 998 | 2,313 | 1,097 | 1,018 | 2,115 |
Respironics field action provision
2018 - 2019On 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.
The repair and replacement program is under way globally. Because of the 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 December 31, 2022, approximately 90% of the production required for the delivery of replacement devices to patients has been completed. The time to complete the program is impacted by the dependency on supply of materials, including from China, and global logistics capacity. Philips Respironics is also conducting a test and research program with independent laboratories.
Philips has recognized a provision based on Philips' best estimate of the costs to repair or replace devices subject to the Respironics field action. The provision is related to the cost to repair and/or replace affected devices and includes, amongst others, the costs for the remaining production, the cost of intensified communication with physicians and patients, material costs, labor cost and logistics. The provision does not include any product liability costs or other claims. Movements during the year were as follows:
Philips Group
Respironics field-action provision
in millions of EUR
| | |
|---|
| | | | | | |
|---|
Post-employment benefit (see note 20) | | | | | | |
| | | | | | |
| | | | | | |
Restructuring-related provisions | | | | | | |
| | | | | | |
Contingent consideration provisions | | | | | | |
| | | | | | |
| | | | | | |
| | 2021 | 2022 |
|---|
| Balance as of January 1 | - | 577 |
| Additions | 719 | 250 |
| Utilizations | (175) | (486) |
| Translation differences | 33 | 49 |
| Balance as of December 31 | 577 | 390 |
Additions for the year reflect updated expectations in relation to the volume of devices eligible for remediation as well as additional costs related to the acceleration of the program. As of December 31, 2022, Philips Respironics expects to remediate a total of around 5.6 million devices (specific CPAP, BiPAP and mechanical ventilator devices) globally, excluding certain end-of-life devices that are expected to be retired. In 2022, following Philips Respironics’ comprehensive patient and customer communication outreach and based on current insights, the total expected units to be remediated have increased by approximately 0.4 million, primarily in the US. Furthermore, efforts to accelerate the program resulted in a shift towards replacement, which increased the replacement share to 60% (compared to 46% as of December 31, 2021) and as a result further reduced repair quantities. Utilizations for the year reflect the costs incurred in executing the repair and replace program during the year.
The completion of the field action continues to be 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, 2022, 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 | Increase individual assumption by 10% | Decrease individual assumption by 10% |
| Total quantity of devices remaining | 26 | (26) |
| Replacement share | 12 | (12) |
Actual outcomes in future periods may differ from these estimates and affect the company's results of operations, financial position and cash flows.
In addition, running remediation costs of EUR 210 million (2021: EUR 94 million) related to the remediation, such as testing, external advisory and regulatory response and additional right-of-return and warranty provisions have been incurred.
Following the FDA’s inspection of certain of Philips Respironics’ facilities in the US in 2021 and the subsequent inspectional observations, the US Department of Justice, acting on behalf of the FDA, in July 2022 started discussions with Philips regarding the terms of a consent decree to resolve the identified issues. At the end of December 2022, the discussions are ongoing. 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. To date no provisions have been recorded for the litigation and investigations associated with the Respironics field action. For legal matters including claims refer to Contingencies.
Assurance-type productProduct warranty provisions
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.
Philips Group
Provisions for assurance-type product warranty
in millions of EUR
2017 - 2019
| | | | 2021 | 2022 |
|---|
| | | | 167 | 238 |
| | | |
| | | | 364 | 320 |
| | | | (265) | (224) |
Transfer to liabilities directly associated with assets held for sale | | | | |
| Transfer to liabilities associated with assets held for sale | | (37) | |
Translation differences and other | | | | 10 | 9 |
Balance as of December 31 | | | | 238 | 344 |
Additions in 2022 include quality actions of EUR 108 million in the Connected Care segment, mainly for the following matters:
Pads Cartridges
In February 2022, Philips issued a field safety notice notifying customers of a potential issue with the Adult SMART Pads Cartridge (M5071A) and the Infant/Child SMART Pads Cartridge (M5072A) for use specifically with the HeartStart HS1 Automated External Defibrillator (AED) devices. Philips has identified that for affected pads the HS1 AED could deliver less effective or ineffective therapy. Philips is actively working on replacing these pads and has commenced the replacement program in 2022.
V60 35V
In March 2022, Philips Respironics issued a voluntary recall notification/field safety notice to customers of its V60, V60 Plus and V680 ventilators, regarding a potential issue that could affect the main electrical circuit (“35V Rail”) powering the ventilator and alarm. This notification was updated in April 2022 with additional customer instructions. In June 2022, Philips issued a further update to this notification, regarding the projected correction for this matter. To address the issue with the 35V Rail, Philips Respironics has commenced the remediation program in 2022.
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 8573 million of the long-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 liabilitiesContingencies.
Philips Group
Environmental provisions
in millions of EUR
2017 - 2019
| | | | 2021 | 2022 |
|---|
| | | | 183 | 124 |
| | | |
| | | | 18 | 15 |
| | | | (15) | (17) |
| | | | (64) | (2) |
| | | | (10) | (27) |
| | | | 3 | 4 |
Transfer to liabilities directly associated with assets held for sale | | | | |
Translation differences and other | | | | 9 | 7 |
Balance as of December 31 | | | | 124 | 104 |
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
2019
| | | | | | | January 1, 2022 | additions | utilizations | releases | other changes | December 31, 2022 |
|---|
| | | | | | | 26 | 58 | (27) | (8) | 0 | 49 |
| | | | | | | 17 | 34 | (13) | (3) | (1) | 34 |
| | | | | | | 9 | (7) | (2) | 0 | 10 |
| | | | | | | 14 | 52 | (14) | (5) | 0 | 47 |
| | | | | | | 66 | 154 | (61) | (18) | (1) | 140 |
In 2019,2022, Philips initiated general productivity actions aimed at simplifying the organization to streamline the way of working and reduce operating expenses. This includes an immediate reduction of around 4,000 positions globally across the organization, subject to consultation with the relevant workers councils and social partners, with severance and termination-related costs expected to be approximately EUR 130 million in aggregate, of which EUR 80 million was recorded in 2022.
In addition, restructuring projects were executed during the year, of which the most significant restructuring projects impacted DiagnosticDiagnosis & Treatment and Other businesses and mainly took place in the Netherlands, US and Germany.Netherlands. The restructuring mainly 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.
20182021
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 movements in the provisions for restructuring in 2018 are presented by segment as follows:
Philips Group
Restructuring-related provision
in millions of EUR
2018
2017
In 2017, the most significant restructuring projects impacted Diagnosis & Treatment and Other businesses and mainly took place in the Netherlands and the US.
The movements in the provisions for restructuring in 20172021 are presented by segment as follows:
Philips Group
Restructuring-related provisions
in millions of EUR
2017
| | | | | | | January 1, 2021 | additions | utilizations | releases | other changes | December 31, 2021 |
|---|
| | | | | | | 33 | 23 | (19) | (13) | 1 | 26 |
| | | | | | | 17 | 16 | (12) | (4) | - | 17 |
| | | | | | | 28 | 6 | (21) | (6) | 2 | 9 |
| | | | | | | 38 | 10 | (21) | (16) | 4 | 14 |
| | | | | | | |
| | | | | | | 117 | 55 | (73) | (39) | 6 | 66 |
1)Other changes primarily relate to translation differences and transfers between segments
LitigationLegal provisions
The company and certain of its group companies and former group companies are involved as a party in legal proceedings, including regulatory and other governmental proceedings.
Philips Group
LitigationLegal provisions
in millions of EUR
2017 - 2019
| | | | 2021 | 2022 |
|---|
| | | | 72 | 91 |
| | | |
| | | | 43 | 89 |
| Acquisitions | | 38 | 4 |
| | | | (17) | (100) |
| | | (48) | (3) |
| | | | 1 | - |
Transfer to liabilities directly associated with assets held for sale | | | | |
Translation differences and other | | | | 3 | 7 |
Balance as of December 31 | | | | 91 | 89 |
The most significant proceedings
The majority of the movements in the above schedule relatedare: Additions mainly relate to a provision recognized for alleged tender irregularities as disclosed in note Contingencies and provisions recognized for CRT matters. Utilizations mainly relate to the Cathode Ray Tube (CRT) antitrust litigation.
Cathode Ray Tube (CRT) antitrust litigation
In 2019settlement of investigations in the majority of the movements in relationConnected Care businesses (unrelated to the CRT antitrust litigation related to additions. In 2017 and 2018 the majority of the movements were utilizations due to the transfer to other liabilities for which the company was able to reach a settlement. These settlements were subsequently paid out in the respective following year.Philips Respironics voluntary recall notification).
For more details reference is madeof other legal matters, including regulatory and other governmental proceedings, refer to Contingent assets and liabilitiesContingencies.
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
2017-2019
| | | |
|---|
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
Translation differences and other | | | |
Balance as of December 31 | | | |
| | 2021 | 2022 |
|---|
| Balance as of January 1 | 318 | 208 |
| Acquisitions | 16 | 96 |
| Utilizations | (48) | (105) |
| Fair value changes | (78) | (86) |
| Balance as of December 31 | 208 | 113 |
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.
In 20182021 and 2022, the acquisitions through business combinationsfair value changes mainly consistsrelated to EPD. In 2022, the decrease of a provision forEUR 61 million in the fair value of the contingent consideration comprised of EUR 23930 million relatingdue to the acquisitionrevisions to EPD’s forecast due to more severe short-term impacts of EPD. For more details onCOVID-19 and the EPDcompetitive environment, and EUR 31 million due to delays in achievement of certain milestones. In 2021, the decrease of EUR 45 million in the fair value of the contingent consideration refercomprised of EUR 14 million due to Fair valuethe revisions to EPD’s forecast due to more severe short-term impacts of financial assetsCOVID-19 and liabilities.the competitive environment, and EUR 31 million due to delays in achievement of certain milestones.
The company expects the provisions to be utilized mainly within the next fivethree years.
Other provisions
Philips Group
Other provisions
in millions of EUR
2017 - 2019
| | | | 2021 | 2022 |
|---|
Closing balance as of December 31 | | | | |
| | | |
Opening balance as of January 1 | | | | |
| | | |
| Balance as of January 1 | | 372 | 349 |
| | | | 89 | 160 |
| | | | (87) | (95) |
| | | | (29) | (35) |
| | | | (5) | (3) |
Transferred to liabilities directly associated with assets held for sale | | | | |
Translation differences and other | | | | 9 | 14 |
Balance as of December 31 | | | | 349 | 390 |
The main elements of other provisions are:
provisions for possibleemployee jubilee funds EUR 83 million (2021: EUR 94 million);
- self-insurance provisions of EUR 57 million (2021: EUR 43 million);
- provisions for non-income taxes/social security of EUR 46 million
(2018:(2021: EUR 6537 million); provisions for employee jubilee funds EUR 82 million (2018: EUR 73 million);
self-insurance provisionsrights of return of EUR 4736 million (2018:(2021: EUR 4540 million);
provisions for decommissioning costs of EUR 33 million (2018:(2021: EUR 3233 million);
provisions for rights of returnonerous contracts of EUR 4038 million (2018:(2021: EUR 3512 million);
the releases, reflecting non-cancellable commitments on supplies for which no future demand or alternative usage has been identified, primarily caused by volatility in 2017, 2018 and 2019 aredemand due to the reassessment of our positions in other provisions;
COVID-19.the remaining provisions relate to a variety of positions, for example provision for disability of employees and provision for royalty obligations.
- the releases in 2021 and 2022 are due to the reassessment of the positions in other provisions throughout the year.
The company expects the provisions to be utilized mainly within the next five years, except for:
provisions for employee jubilee funds of which half is expected to be utilized after five years;
provisions for decommissioning costs of which half is expected to be utilized after five years;
provisions for rights of return to be utilized mainly within the next year.
20Post-employment benefits
Accounting policies
Defined contribution plans
A defined contribution plan is a post-employment benefit plan for which the company 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.
Defined Benefit plans
A defined benefit plan is a post-employment benefit plan that is not a defined contribution plan. Defined benefit plans define an amount of pension benefit that an employee will receive after retirement. That pension benefit typically depends on several factors such as years of service, age and salary.
The net pension asset or liability recognized in the Consolidated balance sheets in respect of defined benefit 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, where available. The curves are based on the Mercer Yield Curve methodology, which uses data of corporate bonds rated AA or equivalent. For the other plans the Mercer Yield Curve/Mercer Methodology has also been used taking into account the cash flows as much as possible in case there is a deep market in corporate bonds. For plans in countries without a deep corporate bond market, the discount rate is based on government bonds and the plan’s maturity.
Pension costs in respect of defined benefit 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.
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.
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 other 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.
Accounting estimates and judgments
To make the actuarial calculations for the valuation of defined benefit obligations, assumptions are needed for interest rates, healthcare cost increases, future pension increases, life expectancy and employee turnover rates. The actuarial calculations are made by external actuaries based on inputs from observable market data, such as corporate bond returns and yield curves to determine the discount rates to apply, mortality tables to determine life expectancy and inflation rates to determine future salary and pension growth assumptions.
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 DB plans in Germany and the United States (US) and Germany (DE) make up most of the defined benefit obligation (DBO) and the net balance sheet position. The company also has DB plans in the rest of the world (Other);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 balance sheet position in Germany, the US, DEUnited States and Other.
in Other Countries. The table also provides the value of reimbursement rights.
Philips Group
Post-employment benefits
in millions of EUR
2018-2019
| | | | |
| | | | | | | | |
Present value of funded DBO | | | | | | | | |
Present value of unfunded DBO | | | | | | | | |
Total present value of DBO | | | | | | | | |
Fair value of plan assets | | | | | | | | |
Net balance sheet position | | | | | | | | |
| | Germany | United States | Other Countries | Total |
|---|
| | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 |
|---|
| Present value of funded DBO | (606) | (489) | (558) | (440) | (206) | (179) | (1,370) | (1,108) |
| Present value of unfunded DBO | (316) | (249) | (149) | (128) | (135) | (136) | (600) | (513) |
| Total present value of DBO | (921) | (738) | (708) | (568) | (341) | (315) | (1,970) | (1,621) |
| Fair value of plan assets | 572 | 477 | 623 | 474 | 185 | 171 | 1,380 | 1,122 |
| Net position | (349) | (261) | (84) | (94) | (157) | (144) | (590) | (499) |
| | | | | | | | | |
| Value of reimbursement rights | | | | | | 6 | | 6 |
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 requirementsclassification of the US Pension Protection Act.net position is as follows:
Philips Group
Classification net position
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 (PBGC) which charges a fee to US companies providing DB pension plans. The fee is also dependent on the amount of unfunded vested liabilities.
In 2018, the company paid an additional de-risking contribution into the US planmillions of EUR 130 million (USD 150 million). The company did not pay any additional de-risking contributions into the US plan in 2019.
| | Germany | United States | Other Countries | Total |
|---|
| | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 |
|---|
| Total asset for plans in a surplus | 3 | 9 | 65 | 34 | 1 | 4 | 69 | 46 |
| Total liability for plans in a deficit | (352) | (270) | (149) | (128) | (157) | (148) | (659) | (546) |
| Provisions for post-employment benefit plans under AHFS | | | | | | | | |
| Net position | (349) | (261) | (84) | (94) | (157) | (144) | (590) | (499) |
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. 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.
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. During 2019, no material de-risking activities have taken place.
Investment policy in ourthe largest pension plans
Pension fund trustees 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 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 improvement in the funded 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
2017 - 2019
| | | | 2020 | 2021 | 2022 |
|---|
| | | | |
| Defined benefit plans | | 74 | 36 | 50 |
- included in income from operations | | | | 59 | 28 | 39 |
- included in financial expense | | | | 13 | 8 | 10 |
- included in Discontinued operations | | | | 1 | |
Defined-contribution plans | | | | |
| Defined contribution plans | | 366 | 375 | 400 |
- included in income from operations | | | | 358 | 368 | 400 |
- included in Discontinued operations | | | | 8 | 7 | |
Post-employment benefits costs | | | | 440 | 411 | 449 |
Summary of the reconciliations for the DBO and plan assets
The adjacent tables contain the reconciliations for the DBO and plan assets.
Philips Group
Defined-benefitDefined benefit obligations
in millions of EUR
2018 - 2019
| | | 2021 | 2022 |
|---|
| | | 2,153 | 1,970 |
| | | 36 | 32 |
| | | 33 | 36 |
| | | 7 | 4 |
Actuarial (gains) / losses | | | | |
– demographic assumptions | | | |
| | | |
| | | |
| - demographic assumptions | | 3 | 2 |
| - financial assumptions | | (86) | (366) |
| - experience adjustment | | (6) | 12 |
(Negative) past service cost | | | (5) | 16 |
| | | (90) | |
| | | (95) | (95) |
Benefits paid directly by employer | | | (33) | (41) |
Translation differences and other | | | 52 | 52 |
Balance as of December 31 | | | 1,970 | 1,621 |
Philips Group
Plan assets
in millions of EUR
2018 - 2019
| | | 2021 | 2022 |
|---|
| | | 1,403 | 1,380 |
Interest income on plan assets | | | 25 | 26 |
| | | (1) | (1) |
Return on plan assets excluding interest income | | | 44 | (254) |
| | | 7 | 4 |
| | | 33 | 17 |
| | | (86) | 0 |
| | | (96) | (95) |
Translation differences and other | | | 50 | 45 |
Balance as of December 31 | | | 1,380 | 1,122 |
The past service cost in 2022 mainly relates to the retiree medical plans in Brazil. The settlement amounts of 2021 mainly relate to the transfer of the provident fund plan into the government provident fund in India.
Plan assets allocation
The asset allocation in the company’s DB plans atas of December 31 was as follows:
Philips Group
Plan assets allocation
in millions of EUR
2018 - 2019
| | | 2021 | 2022 |
|---|
Assets quoted in active markets | | | | |
| | | 790 | 560 |
| | | | |
| | | 195 | 203 |
| | | | |
Assets not quoted in active markets | | | | |
| | | 1 | |
| | | 122 | 101 |
| | | 272 | 258 |
| | | 1,380 | 1,122 |
The plan assets in 20192022 contain 33% (2018: 33%32% (2021: 29%) unquoted plan assets. Plan assets in 20192022 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: PRI-2012 Generational with MP2019 improvement scale for qualified and retiree medical plan; PRI-2012 with MP2019MP2021 improvement scale + white collar adjustment for the unfunded non-qualified pension plan
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-benefitdefined benefit obligations in Germany, the United States Germany and the rest of the world
in %
2018-2019
| | Germany | United States | Other Countries | Total |
|---|
| | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 |
|---|
| Discount rate | 1.1% | 4.1% | 2.6% | 5.2% | 2.1% | 4.9% | 1.8% | 4.7% |
| Inflation rate | 1.8% | 2.0% | 2.2% | 2.3% | 2.0% | 2.6% | 2.0% | 2.2% |
| Salary increase | 2.5% | 2.8% | 0.0% | 0.0% | 2.9% | 3.3% | 2.6% | 2.9% |
Sensitivity analysis
The following table below 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 118 years (US: 11, DE: 13(Germany: 9, United States: 8, and Other: 11)Other countries: 8) as perof December 31, December 2019 (2018:2022 (2021: 11 years).
Philips Group
Sensitivity of key assumptions
in millions of EUR
2018-2019
| | | 2021 | 2022 |
|---|
| | | | |
Discount rate (1% movement) | | | (196) | (122) |
Inflation rate (1% movement) | | | |
| Pension increase (1% movement) | | 99 | 57 |
Salary increase (1% movement) | | | 19 | 12 |
| | | 48 | 32 |
| | | | |
Discount rate (1% movement) | | | 241 | 145 |
Inflation rate (1% movement) | | | |
| Pension increase (1% movement) | | (83) | (49) |
Salary increase (1% movement) | | | (18) | (11) |
1)The 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 plans. A 10% decrease in assumed mortality rates equals improvement of life expectancy by 0.5 - 1 year.
Cash flows and costs in 20202023
The company expects considerable cashCash outflows in relation to post-employment benefits which are estimated to amount to EUR 424464 million in 2020,2023, consisting of:
EUR 3019 million employer contributions to funded DB plans (US:(Germany: EUR 7 million, United States: EUR 0 million, DE:Other Countries: EUR 15 million, Other: 12 million);
- EUR
15 million);
EUR 4043 million cash outflows in relation to unfunded DB plans (US:(Germany: EUR 1020 million, DE: EUR 19 million, Other:United States: EUR 11 million, Other Countries: EUR 12 million); and
EUR 354402 million employer contributions to DC plans (NL:(Netherlands: EUR 173186 million, US:United States: EUR 127153 million, Other:Other Countries: EUR 5463 million).
The service and administration cost for 20202023 is expected to amount to EUR 4129 million for DB plans. The net interest cost for 20202023 for the DB plans is expected to amount to EUR 1321 million. The cost for DC pension plans in 20202023 is equal to the expected DC cash flow.
21Accrued liabilities
Accounting policies
Accrued liabilities are initially measured at fair value and subsequently at amortized cost and are derecognized when the obligation under the liability is discharged, cancelled or has expired.
Accrued liabilities are summarized as follows:
Philips Group
Accrued liabilities
in millions of EUR
2018 - 2019
| | | 2021 | 2022 |
|---|
| | | | |
| | | 566 | 490 |
- Accrued holiday entitlements | | | 127 | 97 |
- Other personnel-related costs | | | 108 | 101 |
Fixed-asset-related costs: | | | | |
- Gas, water, electricity, rent and other | | | 33 | 46 |
Communication and IT costs | | | 82 | 64 |
| | | 122 | 110 |
| | | | |
| | | 7 | 8 |
- Advertising and marketing-related costs | | | 175 | 127 |
- Other sales-related costs | | | 20 | 20 |
| | | 130 | 132 |
Interest-related accruals | | | 52 | 71 |
Other accrued liabilities | | | 362 | 361 |
| | | 1,784 | 1,626 |
22Other liabilities
Accounting policies
Other liabilities are initially measured at fair value and subsequently at amortized cost and are derecognized when the obligation under the liability is discharged, cancelled or has expired.
The company recognizes contract liabilities if a payment is received or a payment is due (whichever is earlier) from a customer before the company transfers the related goods or services. Contract liabilities are recognized as revenue when the company performs under the contract (i.e., transfers control of the related goods or services to the customer).
Other non-current liabilities
Non-current liabilities were EUR 7160 million atas of December 31, 20192022 (December 31, 2018:2021: EUR 7256 million). Due to the implementation of IFRIC 23, as explained in the Significant accounting policies, the Other tax liability is reclassified to the new Non-current tax liabilities line in the Consolidated balance sheets.
Non-current liabilities are associated mainly with indemnification and non-current accruals.
Other current liabilities
Other current liabilities are summarized as follows:
Philips Group
Other current liabilities
in millions of EUR
2018 - 2019
| | | 2021 | 2022 |
|---|
Accrued customer rebates that cannot be offset with accounts receivables for those customers | | | |
| Accrued customer rebates | | 280 | 213 |
Other taxes including social security premiums | | | 190 | 115 |
| | | 116 | 120 |
Other current liabilities | | | 587 | 448 |
The other liabilities per December 31, 2018 and 2019 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 348515 million atas of December 31, 20192022 (December 31, 2018:2021: EUR 226446 million) and current contract liabilities were EUR 1,1701,696 million atas of December 31, 20192022 (December 31, 2018:2021: EUR 1,3031,491 million).
The current contract liabilities decreased withincreased by EUR 133 million. The year-on-year change205 million, which is mainly driven by decreasean increase in deferred balancebalances for customer service contracts.
The current contract liabilities as perof December 31, 20182021 resulted in revenue recognized of EUR 1,3031,491 million in 2019.2022.
24Contingencies
Accounting policies
Contingent assetsliabilities
A contingent liability is a liability of uncertain timing and liabilities
Contingent assets
As per December 31, 2019,amount. Contingencies are not recognized in the balance sheet because they are dependent on the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the company had no material contingent assets.
or because the risk of loss is estimated to be possible but not probable or because the amount cannot be measured reliably. Pursuant to IAS 37, Provisions, Contingent liabilities
Guarantees
Liabilities and Contingent Assets, certain information is not disclosed for legal proceedings for which the company concludes that disclosure can be expected to seriously prejudice the outcome of the matter.Financial 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 company recognizes a liability at the fair value of the obligation at the inception of a financial guarantee contract. The guarantee is subsequently measured at the higher of the best estimate of the obligation or the amount initially recognized less, when appropriate, cumulative amortization.
Accounting estimates and judgments
Significant judgment is required to determine the likelihood of a potential outflow of resources. In addition, judgment is involved in determining whether the amount of an obligation can be measured with sufficient reliability. Contingencies involve inherent uncertainties including, but not limited to, court rulings, negotiations between affected parties, governmental actions, tax and environmental remediation.
Contingent assets
As of December 31, 2022, the company had no material contingent assets.
Guarantees
The total fair value of guarantees recognized on the balance sheet amounts to EUR nil million for both 20182022 and 2019.2021. Remaining off-balance-sheet business and credit-relatedrelated guarantees provided on behalf of third parties and associates decreased by EUR 19 million during 2019 to EUR 212 million in 2022 (December 31, 2018:2021: EUR 402 million).
Environmental remediation
The company and its subsidiaries are subject to environmental laws and regulations. Under these laws, the company and/or its subsidiaries may be required to remediate the effects of certain manufacturing activities on the environment.
Legal proceedings
The company and certain of its group companies and former group companies are involved as a party in legal proceedings, regulatory and other governmental proceedings, including discussions on potential remedial actions, relating to such matters as competition issues, commercial transactions, product liability, participations, and environmental pollution.
While it is not feasible to predict or determine the outcome of all pending or threatened legal proceedings, regulatory and governmental proceedings, the company is of the opinion that the cases described below may have, or have had in the recent past, a significant impact on the company’s consolidated financial position, results of operations and cash flows.
Civil Litigation
Cathode Ray Tubes (CRT)
Following the public investigations into alleged anticompetitive activities in the Cathode Ray Tubes industry that began in 2007 which resulted in a EUR 509 million fine against the company from the European Commission in December 2012, 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 proceedings in the United States District Court for the Northern District of California. In addition, the state attorneys general of California, Florida, Illinois, Oregon, Washington and Puerto Rico filed actions against the company and other defendants seeking to recover damages on behalf of the states and their consumers. In succeeding years, all these actions, except for the case brought by Puerto Rico, have been settled or otherwise resolved, with the approval of one matter outstanding as described below.
In 2016, the United States District Court for the Northern District of California initially approved the indirect purchaser settlement. However, following objections raised by representatives of certain states for which the original settlement did not allocate any funds, the United States Court of Appeals for the Ninth Circuit did not affirm approval of the settlement and remanded the settlement approval to the District Court in February 2019 for further consideration. A revised settlement with the indirect purchaser class is now pending before the District Court that excludes the objecting states and provides for a partial refund to defendants. The cases brought by these excluded states are expected to be resubmitted to the court.
In 2007, certain Philips Group companies became defendants in proposed class proceedings in Ontario, Quebec and British Columbia, Canada, along with numerous other participants in the industry. In 2017, a settlement was reached for all three proposed class actions, which was approved by the courts in 2018.
Starting in 2014, certain Philips Group companies became defendants in various cases brought by plaintiffs outside North America. These cases include consumer actions in Israel and the Netherlands, five cases in Germany involving German retailers and manufacturers, a case brought in the Netherlands by three Brazilian manufacturers and a case brought in the Netherlands, with parallel proceedings in Turkey, by a Turkish manufacturer, a case in Denmark involving a Danish manufacturer and three cases filed in the United Kingdom by a Turkish manufacturer, an Asian and UK reseller that purchased OEM monitors that included CRT’s.
In 2018, the company settled the case in Denmark and three cases in Germany. In 2019, the company settled the case brought by the Turkish manufacturer in the Netherlands (with parallel proceedings in Turkey) as well as the case brought by the Asian company in the United Kingdom. These settlements had no material impact on the company’s results in 2018 and 2019. The remaining cases are still pending.
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 some of the matters that are still pending.
In 2019, the company was served with a claim filed by LG Electronics (LGE) in the Seoul Central District Court. LGE claims restitution of EUR 64.6 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 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 proportionally more than it currently has.
Public Investigations
In April 2017, the company received a Civil Investigative Demand (CID) out of the US Attorney’s Office in Northern District of Iowa. The CID relates to an evaluation of the appropriateness of certain equipment financing programs available for the company’s sleep and respiratory care products. In addition, in late 2017, the company received an information request from the Department of Justice regarding the relationship between Philips Sleep & Respiratory Care business and sleep centers that use Philips products. The company is engaged in discussions with, and has not been advised that the US government will assert any claim in connection with these matters and it continuesprovided information to, cooperate fully in both inquiries.
In February 2018, the Italian Competition Authority (ICA) started an antitrust investigation to verify whether the company and certain other healthcare companies violated antitrust laws in the maintenance services aftermarket for medical diagnostic imaging devices. Following various interactions with the ICA during 2018 and 2019, the company concluded that it will be unable to resolve its differences with the ICA and therefore expects the ICA to take enforcement actions.
The public prosecution service in Rio de Janeiro and representatives from the Brazilian antitrust authority CADE are conducting an investigation into tender irregularities in the medical device industry in Brazil. Philips is one of a number of companies involved in the investigation, and in July 2018 the Brazilian authorities visited the Philips site in Sao Paulo to obtain documentation in connection with the investigation. The company has been conducting an internal investigation into the matter and is discussing the results with the public prosecution service with a view to come to a resolution. In connection with this matter, the company also received inquiries from the US Securities and Exchange Commission (SEC) and US Department of Justice (DoJ). In responding to these inquiries regarding the investigation in Brazil, the company also provided the SEC and DoJ with information about similar compliance efforts in relation to tendersalleged tender irregularities in the medical device industry in other jurisdictions includingcertain jurisdictions. These interactions are primarily focused on a number of compliance findings that the company is addressing in China. DiscussionsBrazil, China and Bulgaria. In connection with these discussions and their status, the SEC and DoJ focusing on Brazil and China are ongoing.
company recorded a provision in the amount of EUR 60 million.
Given the uncertainsignificant uncertainty regarding the nature of the relevant events and liabilities, itobligations, Philips is not practicablecurrently able to provide information onreliably estimate the estimate of thefull financial effect if any, or timing.of a range of possible outcomes in connection with the abovementioned discussions with the SEC and DoJ beyond the recorded provision. The outcomeoutcomes of the uncertain eventsthese matters could have a material impact on the company’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 CPAP, Bi-Level PAP, and mechanical ventilator devices (the “Recalled Devices”).
Consent decree
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. In July 2022, Philips started discussions with the DoJ acting on behalf of the FDA on a consent decree that would address compliance requirements for future sales, the resolution of the inspectional findings and the completion of the recall. At the end of December 2022, the discussions are ongoing.
DoJ investigation
On April 8, 2022, Philips Respironics and certain of Philips’ subsidiaries in the US received a subpoena from the US DoJ to provide information related to events leading to the Respironics recall. The relevant subsidiaries are cooperating with the investigation. The criminal and civil investigation is being conducted by the US DoJ’s Consumer Protection Branch and Civil Fraud Section, and the US Attorney’s Office for the Eastern District of Pennsylvania. Given the early stages of the investigation, the company is not able to reliably estimate the financial impact, if any.
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, consumer and commercial class action lawsuits have been filed alleging economic loss and medical monitoring claims. Individual personal injury lawsuits have also been filed. 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. As of December 31, 2022, plaintiffs have filed a consolidated economic loss class action complaint on behalf of device users, hospitals, and insurers and other third-party payers, a consolidated medical monitoring class action complaint on behalf of device users, and over 300 individual personal injury complaints. The company anticipates that the number of individual personal injury complaints will increase in 2023.
In September 2022, the MDL court established a voluntary, court-approved census registry, and associated tolling, for potential claimants who have not filed claims, but may file claims in the future, relating to the Recalled Devices. The census registry replaces the private tolling agreement that had been in effect before the establishment of the census registry. At the time of termination, approximately 60,000 individuals had entered into the private tolling agreement. In the event these individuals wish to pursue or preserve their claims, they will need to file a lawsuit or register on the census registry. By December 31, 2022, approximately 13,500 individuals had joined the census registry. The company anticipates that the number of individuals on the census registry will increase in 2023.
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. In the course of 2022, the plaintiff in the case has sought leave of the court to discontinue the class action citing that there is insufficient evidence to warrant the continuation of the class action and that since the issue of proceedings, Philips Respironics has been repairing, replacing, or refunding the devices which are the subject of the recall, meaning that any compensation relating to financial loss would be relatively confined. It is expected that the case will be discontinued in the first half of 2023.
Philips Respironics and certain of its affiliates (including the company) are also defendants in consumer class action lawsuits in Canada and Israel and collective actions in Chile, France and the Netherlands 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 lawsuits and the cost to resolve them cannot currently be determined due to a number of variables, including uncertainty regarding the ultimate number of claimants and their allegations. Moreover, Philips Respironics has not yet completed its test and research program for all of the categories of the Recalled Devices.
For the United States specifically, the relative early stage of the census registry, and lack of clarity around the nature of the specific injury each claimant is claiming, contribute to the uncertainty. In addition, the MDL court has not yet decided several significant motions, including motions to dismiss all of the complaints, and plaintiffs have not yet filed their motions for class certification in the economic loss and medical monitoring actions. Further, discovery is still in its early stages, and expert discovery has not yet begun. Moreover, Philips Respironics has not yet completed its test and research program for all of the categories of the Recalled Devices. 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 claims
On August 16, 2021, a securities class action complaint was filed against the company, its former 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. Following the filing and briefing of the company’s motion to dismiss in the first half of 2022, plaintiff filed a second amended complaint on November 30, 2022, in which the alleged damage period was expanded to include certain share price declines that were allegedly based on disclosures made in 2022. The second amended complaint now focuses on share price declines that allegedly occurred as a result of various disclosures starting on April 26, 2021 through October 2022. The company’s motion to dismiss the second amended complaint is due in the first quarter of 2023.
On September 11, 2022, the company received a letter from shareholders representative organization European Investors-VEB ("VEB"). The VEB holds Philips and its (former) managing and supervisory directors liable for – inter alia – allegedly failing to timely disclose price-sensitive information to shareholders regarding indications of potential (severe) health risks from the use of Recalled Devices, failing to exercise proper oversight over Philips Respironics and implement and ensure a proper information and risk management structure; providing incorrect or incomplete information in the company’s financial disclosures.
It is the company’s assessment that it is possible but not probable that these cases could lead to a certain outflow of economic resources. The company is not able to reliably estimate the financial impact, if any. An adverse outcome of these cases 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. Philips believes that the claim is without merit and will vigorously defend itself. Motions to dismiss the case were filed in November and December 2022.
In addition, some of Philips Respironics’ business partners such as distributors and durable medical equipment providers have filed or threatened to file claims alleging economic losses suffered as a consequence of the voluntary recall. In particular, Philips Respironics is engaging with certain of its business partners on the level of compensation they allege to be entitled to under Philips Respironics’ replacement program of the Recalled Devices.
It is the company’s assessment that it is possible but not probable that these cases could lead to a certain outflow of economic resources. The company is not able to reliably estimate the financial impact, if any. 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 and investigations associated with the Respironics field action.
Miscellaneous
For details on other contractual obligations, please refer to liquidity risk in Details of treasury /and other financial risks.
26Share-based compensation
Accounting policies
Philips share-based compensation is an equity-settled plan comprising restricted and performance shares. The restricted shares are subject to a three-year service condition and the performance shares include both market and non-market-based performance conditions, in addition to a three-year vesting period. These shares are awarded to the Executive Committee and Senior Management.
The grant date fair value of market-based performance shares is determined through a Monte Carlo valuation model. The grant date fair value of non-market-based performance shares and restricted shares is determined as the share price at the grant date as participants are eligible to receive dividends throughout the vesting period. The costs of share-based compensation plans are revised for expected performance (non-market-based performance shares) and forfeiture and are spread evenly over the service period.
Share-based compensation is recognized over the vesting period as personnel expense in the consolidated statement of income, with a corresponding increase to equity.
Accounting estimates and judgments
The use of a valuation model to determine market-based performance share fair value requires estimates for the expected volatility of the Philips share price and correlation among input variables.
At each reporting date, Philips calculates the expected realization the of non-market-based performance targets and revises the expected share-based compensation expense. The cumulative effect is recorded in the consolidated statement of income with a corresponding adjustment in equity.
No expense is recognized for awards that do not ultimately vest because non-market performance and/or service conditions have not been met.
The purpose of the share-based compensation plans is to align the interests of management with those of shareholders by providing incentives to improve the company’s performance on a long-term basis, thereby increasing shareholder value.
The company has the following plans:
- performance shares: rights to receive common shares in the future based on performance and service conditions;
- restricted shares: rights to receive common shares in the future based on a service condition; 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.shares*). Performance shares as 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 company in various countries, employees are eligible to purchase a limited number of Philips shares at discounted prices through payroll withholdings.
Share-based compensation costs were EUR 105104 million (2018:(2021: EUR 102115 million; 2017:2020: EUR 122119 million). This includes the employee stock purchase plan of EUR 79 million, which is not a share-based compensation that affects equity.equity . In the Consolidated statements of changes in equity EUR 10195 million is recognized in 20192022 and represent the costs of the share-based compensation plans, including EUR 3 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 (2018:(2021: 20 companies; 2020: 20 companies, 2017;2019; 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, 2021, and 2022 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 20192022 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, 20192022 and changes during the year are presented below:in the following table:
| | | 2021 | 2022 |
|---|
| | weighted average grant-date fair value | shares | weighted average grant-date fair value | shares | weighted average grant-date fair value |
|---|
| | | | | | |
Outstanding at January 1, 2019 | | | |
| Outstanding as of January 1 | | 3,545,312 | 41.31 | 3,097,713 | 45.28 |
| | | 1,121,001 | 50.73 | 2,323,435 | 20.55 |
| | | 62,872 | 45.22 | 155,067 | 33.91 |
| | | (1,466,223) | 39.18 | (434,329) | 40.90 |
| | | (272,873) | 45.90 | (233,556) | 38.67 |
| | | 107,624 | 37.67 | (522,493) | 40.48 |
Outstanding at December 31, 2019 | | | |
| Outstanding as of December 31 | | 3,097,713 | 45.28 | 4,385,837 | 33.13 |
| | | | | | |
| | | | | | |
Outstanding at January 1, 2019 | | | |
| Outstanding as of January 1 | | 2,412,767 | 47.10 | 2,005,000 | 51.48 |
| | | 693,918 | 61.32 | 1,530,585 | 21.93 |
| | | 41,324 | 51.42 | 98,883 | 37.15 |
| | | (947,772) | 47.48 | (248,848) | 45.23 |
| | | (268,500) | 51.29 | (309,570) | 44.04 |
| | | 73,264 | 50.06 | (326,066) | 45.26 |
Outstanding at December 31, 2019 | | | |
| Outstanding as of December 31 | | 2,005,000 | 51.48 | 2,749,983 | 36.66 |
1)Dividend declared in 20192022 on outstanding shares.
2)Adjusted quantity includes the adjustments made to performancePerformance shares outstanding due to updates on the actual TSR and expected EPS.
AtAs of December 31, 2019,2022, a total of EUR 106103 million of unrecognized compensation costs relate to non-vested performance shares (at(as of December 31, 20182021 EUR 111110 million; atas of December 31, 20172020 EUR 103116 million). These costs are expected to be recognized over a weighted-average period of 1.871.83 years.
Restricted shares
The fair value of restricted shares is equal to the share price at grant date. The Companycompany 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’scompany’s restricted shares as of December 31, 20192022 and changes during the year are presented below:in the following table:
| | | 2021 | 2022 |
|---|
| | weighted average grant-date fair value | shares | weighted average grant-date fair value | shares | weighted average grant-date fair value |
|---|
| | | | | | |
Outstanding at January 1, 20191) | | | |
| Outstanding as of January 1 | | 1,813,385 | 36.20 | 1,618,488 | 39.93 |
| | | 631,347 | 44.41 | 1,349,003 | 22.03 |
| | | |
| Notional dividends1) | | 33,430 | 39.69 | 81,500 | 35.67 |
| | | (671,703) | 33.96 | (540,930) | 35.82 |
| | | (187,648) | 40.19 | (186,811) | 35.06 |
Outstanding at December 31, 2019 | | | |
| Cancelled | | (323) | 35.72 | | |
| Outstanding as of December 31 | | 1,618,488 | 39.93 | 2,321,250 | 30.73 |
| | | | | | |
| | | | | | |
Outstanding at January 1, 20191) | | | |
| Outstanding as of January 1 | | 1,649,847 | 41.14 | 1,611,021 | 46.26 |
| | | 721,469 | 53.42 | 1,463,855 | 23.60 |
| | | |
| Notional dividends1) | | 30,551 | 44.99 | 83,151 | 39.37 |
| | | (584,833) | 40.64 | (541,336) | 41.48 |
| | | (206,013) | 46.09 | (271,427) | 38.51 |
Outstanding at December 31, 2019 | | | |
| Outstanding as of December 31 | | 1,611,021 | 46.26 | 2,345,263 | 33.87 |
1)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).
2)Dividend declared in 20192022 on outstanding shares.
AtAs of December 31, 2019,2022, a total of EUR 5972 million of unrecognized compensation costs relate to non-vested restricted shares (at(as of December 31, 20182021 EUR 5966 million; atas of December 31, 20172020 EUR 4062 million). These costs are expected to be recognized over a weighted-average period of 1.821.84 years.
Option plans
The Companycompany 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, 2019.2022.
The following tables summarize information about the Company’scompany’s options as of December 31, 20192022 and changes during the year:
Philips Group
Options on EUR-denominated listed share
2019
| | weighted average exercise price |
|---|
Outstanding at January 1, 2019 | | |
| | |
| | |
Outstanding at December 31, 2019 | | |
| | |
Exercisable at December 31, 2019 | | |
| | options | weighted average exercise price |
|---|
| Outstanding as of January 1, 2022 | 239,077 | 14.93 |
| Exercised | (226,177) | 14.91 |
| Expired | (12,150) | 14.82 |
| Outstanding as of December 31, 2022 | 750 | 22.43 |
| | | |
| Exercisable as of December 31, 2022 | 750 | 22.43 |
The exercise prices range from EUR 12.6314.82 to EUR 24.90.22.43. The weighted average remaining contractual term for options outstanding and options exercisable atas of December 31, 2019,2022, was 1.50.1 years. The aggregate intrinsic value of the options outstanding and options exercisable atas of December 31, 2019,2022, was EUR 230 million.
The total intrinsic value of options exercised during 20192022 was EUR 133 million (2018:(2021: EUR 156 million, 2017:2020: EUR 299 million),.
Philips Group
Options on USD-denominated listed share
2019
| | weighted average exercise price |
|---|
Outstanding at January 1, 2019 | | |
| | |
| | |
Outstanding at December 31, 2019 | | |
| | |
Exercisable at December 31, 2019 | | |
| | options | weighted average exercise price |
|---|
| Outstanding as of January 1, 2022 | 150,165 | 19.75 |
| Exercised | (136,665) | 19.53 |
| Expired | (11,550) | 20.62 |
| Outstanding as of December 31, 2022 | 1,950 | 30.27 |
| | | |
| Exercisable as of December 31, 2022 | 1,950 | 30.27 |
The exercise prices range from USD 16.7619.50 to USD 33.51.30.27. The weighted average remaining contractual term for options outstanding and options exercisable atas of December 31, 2019,2022, was 1.50.1 years. The aggregate intrinsic value of the options outstanding and options exercisable atas of December 31, 2019,2022, was USD 210 million.
The total intrinsic value of options exercised during 20192022 was USD2 million (2021; USD 7 million, 2020: USD 11 million (2018; USD 16 million, 2017: USD 22 million).
AtAs of December 31, 20192022 there were no unrecognized compensation costs related to outstanding options. Cash received from exercises under the Company’scompany’s option plans amounted to EUR 286 million in 2019 (2018:2022 (2021: EUR 579 million, 2017:2020: EUR 12821 million), The actual tax deductions realized as a result of USD option exercises totaled approximately EUR 20.6 million in 2019 (2018:2022 (2021: EUR 31 million, 2017:2020: EUR 53 million).
The outstanding options as of December 31, 20192022 are categorized in exercise price ranges as follows:
Philips Group
Outstanding options
in millions of EUR unless otherwise stated
2019
| | intrinsic value in millions | weighted average remaining contractual term | options | intrinsic value in millions | weighted average remaining contractual term |
|---|
| | | |
| | | | |
| | | | |
| | | | 750 | | 0.1 |
| | | | 750 | | 0.1 |
| | | |
| | | |
| | | | |
| | | | |
| | | | |
| | | | 1,950 | | 0.1 |
| | | | 1,950 | | 0.1 |
The aggregate intrinsic value in the tables and text above represents the total pre-tax intrinsic value (the difference between the Company’scompany’s closing share price on the last trading day of 20192022 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, 2019.2022.
The following table summarizes information about the Company’scompany’s Accelerate! options as of December 31, 20192022 and changes during the year:
| | weighted average exercise price |
|---|
| | |
Outstanding at January 1, 2019 | | |
| | |
Outstanding at December 31, 2019 | | |
| | |
Exercisable at December 31, 2019 | | |
| | |
| | |
Outstanding at January 1, 2019 | | |
| | |
| | |
Outstanding at December 31, 2019 | | |
| | |
Exercisable at December 31, 2019 | | |
| | options | weighted average exercise price |
|---|
| EUR-denominated | | |
| Outstanding as of January 1, 2022 | 136,975 | 18.13 |
| Exercised | (81,975) | 15.24 |
| Outstanding as of December 31, 2022 | 55,000 | 22.43 |
| | | |
| Exercisable as of December 31, 2022 | 55,000 | 22.43 |
| | | |
| USD-denominated | | |
| Outstanding as of January 1, 2022 | 17,500 | 20.02 |
| Exercised | (17,500) | 20.02 |
| Outstanding as of December 31, 2022 | | |
| | | |
| Exercisable as of December 31, 2022 | | |
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 atas of December 31, 20192022 was 2.30.1 years. The weighted average remaining contractual term for USD-Accelerate! options outstanding and exercisable atas of December 31, 20192022 was 2.10 years. The aggregate intrinsic value of the EUR-denominated Accelerate! options outstanding and exercisable atas of December 31, 2019,2022, was EUR 5.80 million. The aggregate intrinsic value of the USD-denominated Accelerate! options outstanding and exercisable atas of December 31, 20192022 was USD 2.20 million.
The total intrinsic value of Accelerate! options exercised during 20192022 was EUR 21.1 million for EUR-denominated options (2018:(2021: EUR 40.7 million, 2020: EUR 1.6 million) and USD 10.3 million for USD-denominated options (2018:(2021: USD 10.7 million, 2020: USD 0.9 million).
Cash received from exercises for EUR-denominated and USD-denominated Accelerate! options amounted to EUR 21.6 million in 2019 (2018:2022 (2021: EUR 40.7 million, 2020: EUR 1.4 million). The actual tax deductions realized as a result of Accelerate! USD options exercises totaled approximately EUR 0.20.1 million in 2019 (2018:2022 (2021: EUR 0.20.1 million, 2020: EUR 0.1 million).
*)Executive Committee members can receive restricted share rights as a sign-on LTI awards upon hiring.
**)The definition of this non-IFRS measure and a reconciliation to the IFRS measure is included in Equity For further information on remuneration costs, see Total remuneration costs in 2019.
The accumulated annual pension entitlements and the pension costs of individual members of the Board of Management are as follows:
Philips Group
Accumulated annual pension entitlements and pension-related costs
in EUR unless otherwise stated
2019
| | accumulated annual pension as of December 31, 2019 | total pension related costs | age at December 31, 2022 | accumulated annual pension as of December 31, 2022 | total pension related costs |
|---|
| | | | |
| R. Jakobs | | 48 | 53,175 | 63,985 |
| | | | 61 | 37,446 | 265,383 |
| | | | 49 | 50,614 | 169,755 |
| | | | 965,294 |
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 2019,2022, 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 1.21.5 million (2018:(2021: EUR 1.11.3 million; 2017: EUR 951 thousand.2020: 1.3 million). Former members received no remuneration.
The members of the Supervisory Board do not receive any share-based remuneration. Therefore, atas of December 31, 20192022 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:
Philips Group
Remuneration of the Supervisory Board
in EUR
2017 - 2019
| | | | | membership | committees | other compensation1) | total |
|---|
| | | |
| 2022 | | | | | |
| F. Sijbesma | | 155,000 | 35,000 | 16,345 | 206,345 |
| P.A.M. Stoffels | | 115,000 | 35,000 | 27,269 | 177,269 |
| N. Dhawan | | 35,616 | 6,411 | 5,808 | 47,836 |
| D.E.I. Pyott | | 100,000 | 35,000 | 17,269 | 152,269 |
| A.M. Harrison | | 100,000 | 14,000 | 12,269 | 126,269 |
| M.E. Doherty | | 100,000 | 27,000 | 24,769 | 151,769 |
| P. Löscher | | 100,000 | 32,000 | 24,769 | 156,769 |
| I. Nooyi | | 100,000 | 14,000 | 17,269 | 131,269 |
| S.K. Chua | | 100,000 | 18,000 | 22,269 | 140,269 |
| H. Verhagen | | 100,000 | 14,000 | 7,269 | 121,269 |
| S. Poonen | | 100,000 | 18,000 | 17,269 | 135,269 |
| | 1,105,616 | 248,411 | 192,574 | 1,546,602 |
| 2021 | | | | | |
| | | | | 53,507 | 12,082 | 3,916 | 69,505 |
| | | | | 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 |
| P.A.M. Stoffels | | 109,863 | 27,808 | 4,769 | 142,440 |
| 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 |
| F. Sijbesma | | 141,301 | 27,808 | 8,237 | 177,346 |
| 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 |
| P. Löscher | | 66,667 | 21,333 | 1,513 | 89,513 |
| F. Sijbesma | | 76,667 | 9,333 | 1,513 | 87,513 |
| | | | | 100,000 | 18,000 | 7,269 | 125,269 |
| | | | | 100,000 | 14,000 | 2,269 | 116,269 |
| | | | | 100,000 | 42,000 | 12,269 | 154,269 |
| | | | | 100,000 | 9,333 | 9,769 | 119,102 |
| | | | | 100,000 | 14,000 | 2,269 | 116,269 |
| | | | | 100,000 | 24,000 | 9,769 | 133,769 |
| | | | | 1,013,333 | 236,000 | 65,254 | 1,314,587 |
| | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
1)The amounts mentioned under other compensation relate to the fee for intercontinental travel, inter-European travel, (effective 2015) and the entitlement of EUR 2,000 under the Philips product arrangement
2)As of 2013, part of 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
2019
| | | December 31, 2021 | December 31, 2022 |
|---|
| | | |
| R. Jakobs | | 101,156 | 109,422 |
| | | 525,761 | 578,840 |
| | | 148,365 | 169,517 |
| | | 110,528 | 123,914 |
| P. Stoffels | | - | 17,000 |
| S. Poonen | | - | 3,000 |
| I. Nooyi | | - | 3,100 |
| D. Pyott | | - | 19,000 |
| S.K. Chua | | - | 2,000 |
| F. Sijbesma | | - | 12,500 |
| M. Harrison | | - | 1,500 |
| P. Löscher | | - | 20,732 |
1)Reference date for board membership is December 31, 2019.2022.
2)The total shares held by the members of the Board of Management is less than 1% of the company's issued share capital.28Fair value of financial assets and liabilities
Accounting policies
Fair value hierarchy
For financial reporting purposes, financial instruments are categorized into Level 1, 2 or 3, based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety, which are as follows:
- Level 1 – inputs are quoted prices (unadjusted) for identical assets or liabilities in active markets that the company can access at the measurement date.
- Level 2 – all significant inputs (other than quoted prices included within Level 1) are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices).
- Level 3 – one or more of the significant inputs are not based on observable market data, such as third-party pricing information without adjustments, for the asset or liability.
Transfers between levels of the fair value hierarchy are recognized at the end of the reporting period during which the change has occurred.
Offsetting and master netting agreements
Financial assets and liabilities are offset and the net amount is reported in the balance sheet when, and only when, the company has currently a legally enforceable right to set-off the amounts and the group intends either to settle them on a net basis or to realize the asset and settle the liability simultaneously.
Accounting estimates and judgments
Determining the fair value of financial instruments requires the use of estimates according to the method applied for each type of financial asset of liability. 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 table below, 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
2019
| | | | | |
|---|
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Financial assets carried at FVTPL | | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Financial assets carried at FVTOCI | | | | | |
Derivative financial instruments | | | | | |
Financial assets carried at fair value | | | | | |
| | | | | |
Carried at (amortized) cost: | | | | | |
Cash and cash equivalents | | | | | |
| | | | | |
Current loans receivables | | | | | |
Other non-current loans and receivables | | | | | |
| | | | | |
Receivables - non-current | | | | | |
Financial assets carried at (amortized) cost | | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Financial liabilities carried at FVTP&L | | | | | |
Derivative financial instruments | | | | | |
Financial liabilities carried at fair value | | | | | |
| | | | | |
Carried at (amortized) cost: | | | | | |
| | | | | |
| | | | | |
Debt (Corporate bonds and leases) | | | | | |
Debt (excluding corporate bonds and leases) | | | | | |
Financial liabilities carried at (amortized) cost | | | | | |
Total financial liabilities | | | | | |
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
2018
| | | | | |
|---|
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Financial assets carried at FVTPL | | | | | |
| | | | | |
| | | | | |
Current financial assets2) | | | | | |
| | | | | |
Financial assets carried at FVTOCI | | | | | |
Derivative financial instruments | | | | | |
Financial assets carried at fair value | | | | | |
| | | | | |
Carried at (amortized) cost: | | | | | |
Cash and cash equivalents | | | | | |
| | | | | |
Current loans receivables | | | | | |
Other non-current loans and receivables | | | | | |
| | | | | |
Receivables - non-current | | | | | |
Financial assets carried at (amortized) cost | | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Financial liabilities carried at FVTP&L | | | | | |
Derivative financial instruments | | | | | |
Financial liabilities carried at fair value | | | | | |
| | | | | |
Carried at (amortized) cost: | | | | | |
| | | | | |
| | | | | |
Debt (Corporate bonds and finance leases) | | | | | |
Debt (excluding corporate bonds and finance leases) | | | | | |
Financial liabilities carried at (amortized) cost | | | | | |
Total financial liabilities | | | | | |
1)For 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 nature of these instruments (including maturity and interest conditions) and therefore fair value information is not included in the table above.
2)The majority of the balance reflects the remaining stake in Signify (formerly Philips Lighting), which relates to equity instruments.
The fair value of Philips’ debt is estimated on the basis of the quoted market prices for certain 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.
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 levelsThe fair value of debt is estimated on the basis of the quoted market prices for certain issuances, or on the basis of discounted cash flow analysis using 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 hierarchy atof debt.
The fair value of contingent consideration is dependent on the endterms of the reporting period during which the change has occurred.
The investment in Luminescence 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. At December 31, 2019 the value was EUR 0 million (December 31, 2018: EUR 112 million). The value decrease in 2018 and 2019 was mainly attributable to a lower earnings assumption.
As part of the EPDrespective acquisition (refer to Acquisitions and divestments)agreement that may require 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 thisthe contingent consideration provision wasis generally 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 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 measurement is based on management’s estimates and assumptions and hence classified as Level 3 in the fair value hierarchy. For further information on this
The following tables show the carrying amounts and other contingent consideration provisions refer to Provisions
A sensitivity analysisfair values of the EPD contingent consideration provision at December 31, 2019 shows that if the probabilities of success for every milestone increased by 10 percentage points, with all other variables (including foreign exchange rates) held constant,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.
Philips Group
Fair value of financial assets and liabilities
in millions of EUR
| | carrying amount | estimated fair value1) | Level 1 | Level 2 | Level 3 |
|---|
| December 31, 2022 | | | | | |
| | | | | | |
| Financial assets | | | | | |
| Carried at fair value: | | | | | |
| Debt instruments | 232 | 232 | | | 232 |
| Equity instruments | 4 | 4 | 1 | | 2 |
| Other financial assets | 86 | 86 | | 35 | 51 |
| Financial assets carried at FVTP&L | 322 | 322 | 1 | 35 | 285 |
| Debt instruments | 25 | 25 | | 25 | |
| Equity instruments | 259 | 259 | 30 | | 229 |
| Current financial assets | 9 | 9 | | | 9 |
| Receivables - current | 26 | 26 | | | 26 |
| Financial assets carried at FVTOCI | 319 | 319 | 30 | 25 | 264 |
| Derivative financial instruments | 127 | 127 | | 127 | |
| Financial assets carried at fair value | 768 | 768 | 32 | 187 | 549 |
| | | | | | |
| Carried at (amortized) cost: | | | | | |
| Cash and cash equivalents | 1,172 | | | | |
| Loans and receivables: | | | | | |
| Current loans receivables | 2 | | | | |
| Other non-current loans and receivables | 54 | | | | |
| Receivables - current | 4,088 | | | | |
| Receivables - non-current | 279 | | | | |
| Financial assets carried at (amortized) cost | 5,596 | | | | |
| Total financial assets | 6,364 | | | | |
| | | | | | |
| Financial liabilities | | | | | |
| Carried at fair value: | | | | | |
| Contingent consideration | (113) | (113) | | | (113) |
| Financial liabilities carried at FVTP&L | (113) | (113) | | | (113) |
| Derivative financial instruments | (211) | (211) | | (211) | |
| Financial liabilities carried at fair value | (324) | (324) | | (211) | (113) |
| | | | | | |
| Carried at (amortized) cost: | | | | | |
| Accounts payable | (1,968) | | | | |
| Interest accrual | (71) | | | | |
| Debt (Corporate bonds and leases) | (6,520) | (6,083) | (5,001) | (1,082) | |
| Debt (excluding corporate bonds and leases) | (1,680) | | | | |
| Financial liabilities carried at (amortized) cost | (10,240) | | | | |
| Total financial liabilities | (10,564) | | | | |
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 provision would increase by approximately 3%. Similarly, a decreasenature of these instruments (including maturity and interest conditions) and therefore fair value information is not included in the probabilitiestable above.
Philips Group
Fair value of success for every milestone by 10 percentage points would reducefinancial assets and liabilities
in millions of EUR
| | carrying amount | estimated fair value1) | Level 1 | Level 2 | Level 3 |
|---|
| December 31, 2021 | | | | | |
| | | | | | |
| 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 FVTP&L | 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 |
| | | | | | |
| 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 | | | | |
| | | | | | |
| 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) |
| | | | | | |
| 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 by approximately 4%. Ifbecause of the discount rates were to increase instantaneously by 100 basis points from the assumption at December 31, 2019, with all other variablesnature of these instruments (including foreign exchange rates) held constant, thematurity and interest conditions) and therefore fair value of the provision would decrease by approximately 3%, while a decreaseinformation is not included in the discount rates of 100 basis points would increase the fair value by approximately 3%.table above.
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 Level 3 fair value measurements
in millions of EUR
2019
| | | Financial assets | Financial liabilities |
|---|
Balance at January 1, 2019 | | | |
| Balance as of January 1, 2022 | | 523 | 208 |
| | | | 96 |
| | | 131 | |
| | | (76) | |
| | | | (105) |
Recognized in profit and loss: | | | |
| | | |
- financial income and expenses | | | |
Recognized in other comprehensive income1) | | | |
| other business income | | | (85) |
| financial income and expenses1) | | 7 | (8) |
| Recognized in other comprehensive income2) | | | 8 |
Receivables held to collect and sell | | | (41) | |
Balance at December 31, 2019 | | | |
| Reclassification | | 5 | |
| Balance as of December 31, 2022 | | 549 | 113 |
Philips Group
Reconciliation of theLevel 3 fair value hierarchymeasurements
in millions of EUR
2018
| | |
|---|
Balance as of December 31, 2017 | | |
| | |
Balance at January 1, 2018 | | |
Assumed in a business combination | | |
| | |
| | |
| | |
Recognized in profit and loss: | | |
| | |
- financial income and expenses | | |
Recognized in other comprehensive income2) | | |
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 expenses | 98 | 1 |
| Recognized in other comprehensive income1) | 12 | 9 |
| Receivables held to collect and sell | (25) | |
| Reclassification from associates | 36 | |
| Balance as of December 31, 2021 | 523 | 208 |
1)IFRS 9 adjustments relates to Receivables-current carried at FVTOCI. For further information refer to Significant accounting policies note.
2)Includes translation differences
Offsetting and master netting agreements
The 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;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
2018 - 2019
| | | 2021 | 2022 |
|---|
| | | | |
Gross amounts of recognized financial assets | | | 63 | 127 |
Gross amounts of recognized financial liabilities offset in the balance sheet | | | | |
Net amounts of financial assets presented in the balance sheet | | | 63 | 127 |
| | | | |
Related amounts not offset in the balance sheet | | | | |
| | | (47) | (54) |
| | | |
| | | |
| | | 17 | 73 |
Philips Group
Financial liabilities subject to offsetting, enforceable master netting arrangements or similar agreements
in millions of EUR
2018 - 2019
| | | 2021 | 2022 |
|---|
| | | | |
Gross amounts of recognized financial liabilities | | | (202) | (211) |
Gross amounts of recognized financial assets offset in the balance sheet | | | | |
Net amounts of financial liabilities presented in the balance sheet | | | (202) | (211) |
| | | | |
Related amounts not offset in the balance sheet | | | | |
| | | 47 | 54 |
| | | |
| | | |
| | | (155) | (157) |
29Details of treasury and other financial risks
Accounting policies
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.
Accounting estimates and judgments
Financial assets are subject to impairment assessment, which involves estimating expected credit losses. Refer to Other financial assets for accounting policies on impairment of financial assets.
Philips is exposed to several types of financial risks. This noterisks which are further analyzes financial risks.analyzed below. 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 short-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. AtAs of December 31, 2019,2022, Philips had EUR 1,4251,172 million in cash and cash equivalents (2018:(2021: EUR 1,6882,303 million), within which short-term deposits of EUR 884482 million (2018:(2021: EUR 1,1741,357 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, Philips has a USD 2.5 billion Commercial Paper ProgrammeProgram and a EUR 1.01 billion committed standby revolving credit facility that can be used for general group purposes, such as a backstop for its Commercial Paper Programme. Philips issued and repaid commercial paper in 2019.Program. As of December 31, 2019,2022, Philips did not have any amountsloans outstanding under anyeither facility. These facilities do not have a material adverse change clause, have no financial covenants and no credit-rating-related acceleration possibilities. Philips issued commercial paper of these facilities. AEUR 200 million in September 2022 and EUR 101 million in October 2022, that was repaid throughout the fourth quarter of 2022. In addition, Philips secured a EUR 1 billion credit facility in the fourth quarter of 2022 that can be used for general corporate purposes. As of December 31, 2022, Philips had EUR 500 million outstanding under the credit facility. The facility does not have a material adverse change clause, has no financial covenants and no credit-rating-related acceleration possibilities. As per March 9, 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 2022, Philips issued three new tranches under the program for a total of EUR 2 billion, while also redeeming its outstanding 2023 and 2024 Notes and issuing a tender offer on the outstanding 2025 and 2026 Notes. For a description of Philips’ credit facilities, can be found inrefer to Debt.
In addition to cash and cash equivalents, atas of December 31, 2019,2022, Philips also held EUR 1532 million of listed (level 1) equity investments at fair value (classified as other non-current financial assets). Furthermore, Philips was a shareholder in Signify (EUR 435 million classified as other current financial asset as of December 31, 2018) and sold its entire stake in 2019.
The following table below presents a summary of the Group’s fixed contractual cash obligations and commitments atas of December 31, 2019.2022. 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 obligations1)2)
in millions of EUR
2019
| | | | payments due by period |
|---|
| | | | | | total | less than 1 year | 1-3 years | 3-5 years | after 5 years |
|---|
| | | | | | |
| | | | | | |
| Long-term debt | | 8,168 | 842 | 1,760 | 1,809 | 3,757 |
| | | | 89 | |
| Interest on debt | | 1,683 | 159 | 304 | 264 | 956 |
| | | | | | 210 | 208 | 2 | |
| | | | | | |
| Purchase obligations3) | | 782 | 336 | 412 | 21 | 12 |
| | | | 1,968 | |
Contractual cash obligations | | | | | | 12,901 | 3,603 | 2,478 | 2,094 | 4,725 |
1)Amounts in this table are undiscounted
2)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 settlementsettlement.
3)Long-term debt includes interest and the current portion of long-term debt and excludes lease obligations.
4)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.
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 61127 million (2018:(2021: EUR 86116 million). As atof December 31, 20192022 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 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, 2019 approximately EUR 212 million of the Philips accounts payable were transferred under such arrangements whereby Philips confirms invoices. In accordance with the terms and conditions of the arrangements,parties. Philips continues to recognize these liabilities as trade payables and settles them accordingly on the liabilities after a further 30 day period comparedinvoice maturity date based on the terms and conditions these arrangements. As of December 31, 2022 approximately EUR 151 million (2021: EUR 139 million)of the Philips account payable were transferred under these arrangements.
With respect to the original invoicesRespironics field action, please refer to Contingencies. 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 a number of lease contracts. These are used to maximize operational flexibility in terms of managing the 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 50400 million. In addition, the company is committed to leases not yet commenced to EUR 9993 million. The company's lease contracts do not contain financial covenants.
The company enters into sale and lease backsale-and-leaseback transactions primarily for its Sleep & Respiratory Care businesses. These transactions are accounted for at market value. The payments for these leases are 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 the sales transactions are part of cash flows provided by operatingfinancing activities. Lease payments under sale-and-leaseback arrangements for 20192022 were EUR 10872 million (2018:(2021: EUR 11085 million). The remaining minimum payment under sales-and-leasebacksale-and-leaseback arrangements included in lease obligations above are as follows:
Philips Group
Lease -Remaining minimum payments under sale-and-leaseback arrangements
in millions of EUR
2019
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 onas of December 31, 20192022 was EUR 0.70.6 million (2018:(2021: EUR 0.70.2 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%. 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, 2019:2022:
Philips Group
Estimated transaction exposure and related hedges
in millions of EUR
2019
| | | Sales/Receivables | Purchases/Payable |
|---|
| | | | | exposure | hedges | exposure | hedges |
|---|
Balance as of December 31, 2019 | | | |
| Balance as of December 31, 2022 | | |
| | | |
| | | |
| | | | | 1,754 | (1,530) | (979) | 936 |
| | | | | 479 | (289) | (9) | 9 |
| | | | | 303 | (188) | (7) | 7 |
| | | | | 346 | (259) | (80) | 79 |
| | | | | 203 | (138) | |
| | | | | 65 | (62) | |
| | | | | 139 | (92) | (1) | 1 |
| | | | | 132 | (56) | (3) | 2 |
| | | | | 48 | (50) | |
| | | | | 55 | (17) | (1) | 1 |
| | | | | 192 | (192) | (129) | 129 |
| | | | | 64 | (46) | (259) | 162 |
| | | | | |
| | | | | |
| Total 2022 | | 3,779 | (2,920) | (1,468) | 1,326 |
| Total 2021 | | 5,131 | (3,363) | (1,559) | 1,322 |
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. The RUB as shown in the table above was hedged for part of the year till Q2 2022. 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, 2019,2022, a loss of EUR 242 million was deferred in equity as a result of these hedges (2018:(2021: EUR 1025 million loss). The result deferred in equity will be released to earnings mostly during 20202023 at the time when the related hedged transactions affect the income statement. During 2019, a net gain of (0.8)2022, EUR 1 million (2018:(2021: EUR 0.0nil 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. As at December 31, 2019,During 2022, a loss of EUR 1942 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 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, 2019,2022, was an unrealized liabilitygain of EUR 266 million. The estimated impact of a 10% increase of value of the EUR is estimated to be EUR 154114 million. The following table contains an overview of the instantaneous 10% increase in the value of EUR against major currencies.
Philips Group
Estimated impact of 10% increase of value of the EUR on the fair value of hedges
in millions of EUR
| | | 2021 | 2022 |
|---|
| | | 78 | 68 |
| | | 13 | 15 |
| | | 14 | 16 |
| | | 5 | 4 |
| | | 3 | 2 |
| | | 10 | 0 |
The EUR 154114 million increase includes a gain of EUR 1241 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 14273 million would be recognized in equity to the extent that the cash flow hedges were effective.
Foreign exchange exposure also arises as a result of 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 218748 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. As of December 31, 2022, 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 1,384 million. Refer to the country risk paragraph for countries with significant foreign currency denominated equity invested.
As of December 31, 2019,2022, cross-currency interest rate swaps for a nominal value of USD 500 million (liability at fair value: EUR 123147 million) and external bond funding for a nominal value of USD 1,4731,490 million (liability at book value: EUR 1,3281,378 million) were designated as net investment hedges of our financing investments in foreign operations for an equal amount. During 20192022 a total loss of EUR 0.01.1 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, 2019,2022, was a liability of EUR 123147 million. An instantaneous 10% increase in the value of the EUR against all currencies would lead to an increase of EUR 7192 million in the value of the derivatives, including a EUR 53191 million increase related to the USD.
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 0.21.1 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, 2018,2021, was a liability of EUR 246116 million. An instantaneous 10% increase in the value of the EUR against all currencies would lead to an increase of EUR 6340 million in the value of the derivatives, including a EUR 7940 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. As of December 31, 2022, Philips had at year-end, outstanding debt of EUR 5,4478,201 million (2018:(2021: EUR 4,8216,980 million), which constitutes an inherent interest rate risk with potential negative impact on financial results. At year-end, Philips held EUR 1,4251,172 million in cash and cash equivalents (2018:(2021: EUR 1,6882,303 million), and had total long-term debt of EUR 4,9397,270 million (2018:(2021: EUR 3,4276,473 million) and total short-term debt of EUR 508931 million (2018:(2021: EUR 1,394506 million) At. As of December 31, 2019,2022, Philips had a ratio of fixed-rate long-term debt to total outstanding debt of approximately 87%80% compared to 67%90% one year earlier. Philips debt has a long maturity profile with an average tenor of long-term debt of 8.06.1 years with maturities up to 2042.
The following table below 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
| | | 2021 | 2022 |
|---|
Impact 1% interest increase on the fair value of the fixed-rate long-term debt2)3) | | | (297) | (274) |
Impact 1% interest decrease on the fair value of the fixed-rate long-term debt2)3) | | | 298 | 274 |
Impact 1% interest increase on the annualized net interest expense4) | | | 20 | 4 |
1)The definition of this non-IFRS measure and a reconciliation to the IFRS measure is included in Equity 2)The sensitivity analysis conducted shows that if long-term interest rates were to increase/decrease instantaneously by 1% from their level of December 31st, 2019,31, 2022, with all other variables (including foreign exchange rates) held constant.
3)Fixed-rate long-term debt is excluding forward contracts.
4)The impact is based on the outstanding net cash position (after excluding fixed-rate debt) atas of December 31, 2019.2022.
Global regulators and central banks have been driving international efforts to reform key benchmark interest rates (Interbank Offered Rate or IBOR rates). The market is therefore in transitionhas transitioned to alternative risk-free reference rates (RFRs) that are transaction-based. LIBOR discontinuationhas been discontinued for most currencies and maturities after December 31, December 2021, is widelyexcept for the US-dollar for which certain maturities are expected by market participants.to be phased out in 2023. The company ishas no interest rate hedging relationships which get affected by the reform and does not expect any significant impact on existing contracts due to change in the process of evaluating the implications of such a phase out.interest rates. The company will continue to monitor market developments.
implemented new alternative risk-free rates from January 1, 2022 and the impact upon transition was EUR 1 million financial expense.
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 and as a result 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 1532 million atas of December 31, 2019 (2018:2022 (2021: EUR 47667 million), and was largely reduced during 2019 with the sale of investments in Signify and Corindus.. Philips does not hold derivatives in the above-mentioned listed companies. Philips also has shareholdings in several privately-owned companies amounting to EUR 37229 million, mainly consisting of minority stakes in 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. As of December 31, 20192022 and 2018,2021, 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. 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, 2019.2022.
Philips Group
Credit risk with number of counterparties
for deposits above EUR 10 million
2019
| | | | 10-100 million | 100-500 million | 500 million and above |
|---|
AA- rated bank counterparties | | | | 1 | 0 |
A+ rated bank counterparties | | | | 3 | 1 | 0 |
A rated bank counterparties | | | | 0 | 1 | 0 |
A- rated bank counterparties | | | 1 | 0 |
| | | | 5 | 3 | 0 |
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, 2019,2022, the company had country risk exposure of EUR 11.414.0 billion in the United States, EUR 1.7 billion in the Netherlands and EUR 1.41.3 billion in China (including Hong Kong). Other countries higher than EUR 500 million are Japan (EUR 690 million) and theGermany EUR 808 million, United Kingdom (EUR 681 million). GermanyEUR 766 million, and India exceededJapan EUR 300 million but was less than639 million. Other country which have significant exposure is Singapore EUR 500206 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 coveredinsured 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 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 a 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 0.3 million to EUR 510 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 20192022 retained EUR 525 million per claim and EUR 1050 million in the annual aggregate for general, product, and professional liability, and marine cargo claims.
New contracts were signed effective December 31, 2019,2022, for the coming year, whereby the re-insurance captive retentions remained unchanged.the same.
30Subsequent events
Future ownership of Domestic Appliances business
On January 28, 2020,30, 2023, Philips announced that it will review options for future ownershipplans to create value with sustainable impact, which is based on focused organic growth to deliver patient- and people-driven innovation at scale with improved execution as key value driver, prioritizing patient safety and quality, supply chain reliability and a simplified operating model. In addition to the reduction of its Domestic Appliances business belongingworkforce by 4,000 roles announced in October 2022, Philips plans to Personal Health. Philipsreduce its workforce by an additional 6,000 roles globally by 2025, of which 3,000 will startbe implemented in 2023 in line with the process of creating a separate legal structurerelevant local regulations and processes. These reductions are focused on Corporate and Functions optimization and non-core activities, for this business within the Philips Group, which ischarges in 2023 are expected to be completed in the course of 2021.
The Domestic Appliances business had EUR 2.3 billion sales in 2019. Following the disentanglement of the Domestic Appliances business, the retained Personal Health businesses will continue to play an important role in the company’s integrated health continuum approach through connected products and solutions to support the health and well-being of people.
Repurchase of shares to cover certain obligations under the stock-based compensation plans
In addition to its EUR 1.5 billion share repurchase program, which was announced on January 29, 2019, Philips announced on January 27, 2020 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. At the current share price, the shares represent an amount of up to approximately EUR 265470 million.
The repurchases will be executed through one or more individual forward transactions, to be entered into in the course of the first half of 2020, in accordance with the Market Abuse Regulation and within the limits of the authorization granted by the company’s General Meeting of Shareholders on May 9, 2019.
14OtherFurther information
14.1Reconciliation 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’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;
- EBITA;
- 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 EPS);
- Adjusted EBITDA;
- Free cash flow;
- Net debt : group equity ratio; and
Comparable order intake.Organic Return on Invested Capital (ROIC)
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.
Additionally, Philips provides forward-looking targets for comparable sales growth, adjusted EBITA margin improvement, and 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 currency 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 net capital expenditures. Accordingly, reconciliations of these non-IFRS forward looking financial measures to the most directly comparable IFRS financial measures are not available without unreasonable effort. Such unavailable reconciling items could significantly impact ourthe results of operations and financial condition.
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 policiesGeneral information to the Consolidated financial statements , 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.area. 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 perby segment
in %
2017 - 2019
| | | | | nominal growth | consolidation changes | currency effects | comparable growth |
|---|
| | | |
| 2022 versus 2021 | | |
| | | | | 6.2 | 0.0 | (6.8) | (0.7) |
| | | | | (3.7) | (0.1) | (7.0) | (10.8) |
| | | | | 5.7 | 0.0 | (5.7) | 0.1 |
| | | | | 3.9 | (0.2) | (6.5) | (2.8) |
| | | |
2021 versus 2020 | | |
| | | | | 5.6 | 0.0 | 2.5 | 8.1 |
| | | | | (17.5) | (7.2) | 2.2 | (22.6) |
| | | | | 7.2 | 0.0 | 1.6 | 8.8 |
| | | | | (0.9) | (2.5) | 2.2 | (1.2) |
| | | |
2020 versus 2019 | | |
| | | | | (3.7) | (1.0) | 2.3 | (2.3) |
| | | | | 18.6 | 0.7 | 2.3 | 21.6 |
| | | | | (9.0) | 0.0 | 2.8 | (6.2) |
| | | | | 1.0 | (0.5) | 2.4 | 2.9 |
Philips Group
Sales growth composition perby geographic clusterarea
in %
2017 - 2019
| | | | | nominal growth | consolidation changes | currency effects | comparable growth |
|---|
| | | |
| 2022 versus 2021 | | |
| | | | | (1.2) | (1.3) | (0.4) | (2.8) |
| | | | | 11.9 | 0.2 | (12.4) | (0.3) |
| | | | | (3.0) | 0.0 | 2.5 | (0.5) |
| | | | | 5.9 | (0.3) | (6.7) | (1.1) |
| | | | | (0.8) | - | (6.0) | (6.9) |
| | | | | 3.9 | (0.2) | (6.5) | (2.8) |
| | | |
2021 versus 2020 | | |
| | | | | (1.5) | (1.3) | (0.4) | (3.2) |
| | | | | (1.5) | (5.5) | 3.6 | (3.4) |
| | | | | (3.2) | (0.1) | 3.6 | 0.3 |
| | | | | (1.8) | (3.5) | 2.4 | (2.8) |
| | | | | 1.2 | - | 1.8 | 3.0 |
| | | | | (0.9) | (2.5) | 2.2 | (1.2) |
| | | |
2020 versus 2019 | | |
| | | | | 11.2 | (1.1) | 0.1 | 10.2 |
| | | | | (0.3) | 1.9 | 1.3 |
| | | | | (3.0) | (0.5) | 0.4 | (3.1) |
| | | | | 2.5 | (0.6) | 1.1 | 3.0 |
| | | | | (2.6) | (0.2) | 5.4 | 2.6 |
| | | | | 1.0 | (0.5) | 2.4 | 2.9 |
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. OtherThis includes the following: litigation costs and settlements in favor of (or against) the company, gains (or losses) on sale of businesses or assets, remediation costs, impairment of assets, portfolio realignment charges, environmental charges and other items may extend over several quarterswhich are individually above an amount of EUR 20 million in a quarter, or an individual item which is above EUR 40 million across multiple quarters. Refer to Net income, Income from operations (EBIT) and are not limited toAdjusted EBITA within the same financial year.Results of operations section of Financial performance.
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 ourthe 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 measure, Net income, for the years indicated is includedpresented in the table below.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 |
|---|
| 2022 | | | | | |
| Net Income | (1,605) | | | | |
| Discontinued operations, net of income taxes | (13) | | | | |
| Income tax expense | (113) | | | | |
| Investments in associates, net of income taxes | 2 | | | | |
| Financial expenses | 258 | | | | |
| Financial income | (58) | | | | |
| Income from operations | (1,529) | 404 | (2,246) | 515 | (202) |
| Amortization and impairment of acquired intangible assets | 363 | 143 | 199 | 15 | 7 |
| Impairment of goodwill | 1,357 | 27 | 1,331 | | |
| EBITA | 192 | 573 | (716) | 531 | (196) |
| Restructuring and acquisition-related charges | 202 | 21 | 108 | 11 | 61 |
| Other items: | 925 | 180 | 703 | (4) | 46 |
| Respironics field-action provision | 250 | | 250 | | |
| Respironics field-action running remediation costs | 210 | | 210 | | |
| R&D project impairments | 134 | 120 | 12 | 3 | |
| Portfolio realignment charges | 109 | | 109 | | |
| Impairment of assets in S&RC | 39 | | 39 | | |
| Provision for public investigations tender irregularities | 60 | 60 | | | |
| Provisions for quality actions in Connected Care | 59 | | 59 | | |
| Remaining items | 63 | - | 24 | (6) | 46 |
| Adjusted EBITA | 1,318 | 774 | 95 | 538 | (89) |
2017 - 2019Philips Group
Reconciliation of Net income to Adjusted EBITA
in millions of EUR
| | | | | |
|---|
| | | | | |
| | | | | |
Discontinued operations, net of income taxes | | | | | |
| | | | | |
Investments in associates, net of income taxes | | | | | |
| | | | | |
| | | | | |
| | | | | |
Amortization of acquired intangible assets | | | | | |
| | | | | |
| | | | | |
Restructuring and acquisition-related charges | | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Discontinued operations, net of income taxes | | | | | |
| | | | | |
Investments in associates, net of income taxes | | | | | |
| | | | | |
| | | | | |
| | | | | |
Amortization of acquired intangible assets | | | | | |
| | | | | |
Restructuring and acquisition-related charges | | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Discontinued operations, net of income taxes | | | | | |
| | | | | |
Investments in associates, net of income taxes | | | | | |
| | | | | |
| | | | | |
| | | | | |
Amortization of acquired intangible assets | | | | | |
| | | | | |
| | | | | |
Restructuring and acquisition-related charges | | | | | |
| | | | | |
| | | | | |
| | 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 | (722) | 576 | (242) |
| Amortization and impairment of acquired intangible assets | 322 | 153 | 148 | 15 | 6 |
| Impairment of goodwill | 15 | 2 | 13 | | |
| EBITA | 890 | 1,097 | (562) | 591 | (236) |
| Restructuring and acquisition-related charges | 95 | 7 | 93 | (1) | (5) |
| Other items: | 1,069 | (32) | 965 | - | 136 |
| Respironics field-action provision | 719 | - | 719 | | - |
| Respironics field-action running remediation costs | 94 | | 94 | | |
| Provisions for quality actions in Connected Care | 94 | | 94 | | |
| Loss on divestment of business | 76 | | | | 76 |
| Remaining items | 87 | (32) | 58 | - | 61 |
| Adjusted EBITA | 2,054 | 1,071 | 497 | 590 | (105) |
Philips Group
Reconciliation of Net income to Adjusted EBITA
in millions of EUR
| | Philips Group | Diagnosis & Treatment | Connected Care | Personal Health | Other |
|---|
| 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 | 704 | 362 | (300) |
| Amortization and impairment of acquired intangible assets | 377 | 209 | 134 | 16 | 18 |
| Impairment of goodwill | 144 | - | 144 | | |
| EBITA | 1,784 | 706 | 982 | 378 | (282) |
| Restructuring and acquisition-related charges | 195 | 29 | 97 | 31 | 37 |
| Other items | 299 | 83 | 112 | 24 | 81 |
| Adjusted EBITA | 2,277 | 818 | 1,191 | 433 | (165) |
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 theadjustments to tax impact of the adjusted items.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 income or expense component of an individual item already identified to be excluded as part of the Adjusted income from continuing operations, fair value movements of equity investments in limited life funds recognized at fair value through profit or loss 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 Taxadjustments to tax expense include the tax impact of the adjustedadjustments to income from continuing operations as well as tax only adjusting items, is calculated usingand uses 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.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.
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.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 policiesGeneral information to the Consolidated financial statements , 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.following table.
Philips Group
Adjusted income from continuing operations attributable to shareholders1)
in millions of EUR unless otherwise stated
2017 - 2019
| | | | 2020 | 2021 | 2022 |
|---|
| | | | 1,195 | 3,323 | (1,605) |
Discontinued operations, net of income taxes | | | | (196) | (2,711) | (13) |
Income from continuing operations | | | | 999 | 612 | (1,618) |
Continuing operations non-controlling interests | | | | |
| Income from continuing operations attributable to non-controlling interests | | (8) | (4) | (3) |
Income from continuing operations attributable to shareholders1) | | | | 991 | 608 | (1,622) |
| | | | | |
Amortization of acquired intangible assets | | | | |
| Amortization and impairment of acquired intangible assets | | 377 | 322 | 363 |
| | | | 144 | 15 | 1,357 |
Restructuring costs and acquisition-related charges | | | | 195 | 95 | 202 |
| | | | |
| | | | |
Tax impact of adjusted items | | | | |
| Other items: | | 299 | 1,069 | 925 |
| Respironics field-action provision | | | 719 | 250 |
| Respironics field-action running remediation costs | | | 94 | 210 |
| R&D project impairments | | | | 134 |
| Portfolio realignment charges | | | | 109 |
| Impairment of assets in S&RC | | | | 39 |
| Provision for public investigations tender irregularities | | | | 60 |
| Provisions for quality actions in Connected Care | | | 94 | 59 |
| Loss on divestment of business | | | 76 | |
| Remaining items | | 299 | 87 | 63 |
| Net finance income/expenses | | (125) | (84) | (4) |
| Tax impact of adjusted items and tax only adjusting items | | (285) | (527) | (376) |
Adjusted Income from continuing operations attributable to shareholders1) | | | | 1,594 | 1,497 | 845 |
Earnings per common share: | | | | | |
Income from continuing operations attributable to shareholders1) per common share (in EUR) - diluted | | | | 1.08 | 0.67 | (1.84) |
Adjusted income from continuing operations attributable to shareholders1) per common share (in EUR) - diluted | | | | 1.74 | 1.65 | 0.96 |
1)Shareholders 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. OurPhilips 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.in the following table. Net income, for the years indicated is included in the table below.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 EBITDA
in millions of EUR
| | Philips Group | Diagnosis & Treatment | Connected Care | Personal Health | Other |
|---|
| 2022 | | | | | |
| Net Income | (1,605) | | | | |
| Discontinued operations, net of income taxes | (13) | | | | |
| Income tax expense | (113) | | | | |
| Investments in associates, net of income taxes | 2 | | | | |
| Financial expenses | 258 | | | | |
| Financial income | (58) | | | | |
| Income from operations | (1,529) | 404 | (2,246) | 515 | (202) |
| Depreciation, amortization and impairment of fixed assets | 1,602 | 559 | 514 | 132 | 397 |
| Impairment of goodwill | 1,357 | 27 | 1,331 | | |
| Restructuring and acquisition-related charges | 202 | 21 | 108 | 11 | 61 |
| Other items: | 925 | 180 | 703 | (4) | 46 |
| Respironics field-action provision | 250 | | 250 | | |
| Respironics field-action running remediation costs | 210 | | 210 | | |
| R&D project impairments | 134 | 120 | 12 | 3 | |
| Portfolio realignment charges | 109 | | 109 | | |
| Impairment of assets in S&RC | 39 | | 39 | | |
| Provision for public investigations tender irregularities | 60 | 60 | | | |
| Provisions for quality actions in Connected Care | 59 | | 59 | | |
| Remaining items | 63 | - | 24 | (6) | 46 |
| Adding back impairment of fixed assets included in Restructuring and acquisition-related changes and Other items | (252) | (135) | (84) | (3) | (30) |
| Adjusted EBITDA | 2,305 | 1,055 | 326 | 652 | 272 |
2017 - 2019Philips Group
Reconciliation of Net income to Adjusted EBITDA
in millions of EUR
| | | | | |
|---|
| | | | | |
| | | | | |
Discontinued operations, net of income taxes | | | | | |
| | | | | |
Investments in associates, net of income taxes | | | | | |
| | | | | |
| | | | | |
| | | | | |
Depreciation, amortization and impairment of fixed assets | | | | | |
| | | | | |
Restructuring and acquisition-related charges | | | | | |
| | | | | |
Adding back impairment of fixed assets included in Restructuring and acquisition-related changes and Other items | | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Discontinued operations, net of income taxes | | | | | |
| | | | | |
Investments in associates, net of income taxes | | | | | |
| | | | | |
| | | | | |
| | | | | |
Depreciation, amortization and impairment of fixed assets | | | | | |
Restructuring and acquisition-related charges | | | | | |
| | | | | |
Adding back impairment of fixed assets included in Restructuring and acquisition-related changes and Other items | | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Discontinued operations, net of income taxes | | | | | |
| | | | | |
Investments in associates, net of income taxes | | | | | |
| | | | | |
| | | | | |
| | | | | |
Depreciation, amortization and impairment of fixed assets | | | | | |
| | | | | |
Restructuring and acquisition-related charges | | | | | |
| | | | | |
Adding back impairment of fixed assets included in Restructuring and acquisition-related changes and Other items | | | | | |
| | | | | |
| | 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 | (722) | 576 | (242) |
| Depreciation, amortization and impairment of fixed assets | 1,323 | 459 | 382 | 131 | 350 |
| Impairment of goodwill | 15 | 2 | 13 | | |
| Restructuring and acquisition-related charges | 95 | 7 | 93 | (1) | (5) |
| Other items: | 1,069 | (32) | 965 | - | 136 |
| Respironics field-action provision | 719 | - | 719 | | - |
| Respironics field-action running remediation costs | 94 | | 94 | | |
| Provisions for quality actions in Connected Care | 94 | | 94 | | |
| Loss on divestment of business | 76 | | | | 76 |
| Remaining items | 87 | (32) | 58 | - | 61 |
| 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 | 680 | 706 | 241 |
Philips Group
Reconciliation of Net income to Adjusted EBITDA
in millions of EUR
| | Philips Group | Diagnosis & Treatment | Connected Care | Personal Health | Other |
|---|
| 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 | 704 | 362 | (300) |
| Depreciation, amortization and impairment of fixed assets | 1,462 | 536 | 414 | 145 | 368 |
| Impairment of goodwill | 144 | 0 | 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 | 1,407 | 563 | 180 |
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 adopted IFRS 16 on January 1, 2019. As a result, Philips calculation of Free cash flow for the year ended December 31, 2019 includes the impact of IFRS 16. Please refer to note Significant accounting policies. Free cash flow calculations for prior periods have not been restated for this impact.
Philips Group
Composition of free cash flow
in millions of EUR
2017 - 2019
| | | | 2020 | 2021 | 2022 |
|---|
Net cash flows provided by operating activities | | | | 2,511 | 1,629 | (173) |
Net capital expenditures: | | | | (876) | (729) | (788) |
Purchase of intangible assets | | | | (114) | (107) | (105) |
Expenditures on development assets | | | | (296) | (259) | (257) |
Capital expenditures on property, plant and equipment | | | | (485) | (397) | (444) |
Proceeds from disposals of property, plant and equipment | | | | 19 | 33 | 18 |
| | | | 1,635 | 900 | (961) |
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
2017 - 2019
| | | | 2020 | 2021 | 2022 |
|---|
| | | | 5,705 | 6,473 | 7,270 |
| | | | 1,229 | 506 | 931 |
| | | | 6,934 | 6,980 | 8,201 |
Cash and cash equivalents | | | | 3,226 | 2,303 | 1,172 |
| | | | 3,708 | 4,676 | 7,028 |
| | | | 11,870 | 14,438 | 13,249 |
Non-controlling interests | | | | 31 | 36 | 34 |
| | | | 11,901 | 14,475 | 13,283 |
Net debt : group equity ratio | | | | 24:76 | 35:65 |
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 adjusted to exclude assets and liabilities of businesses acquired in the five year period prior to the relevant measurement date, and adjustments determined by management to be necessary for comparability.
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 2020-2022 these other items included legal provisions, pension settlements, results of divestments, remediation costs, impairment of assets and portfolio realignment charges. Refer to Net income, Income from operations (EBIT) and Adjusted EBITA within the Results of operations section of Financial performance. Organic ROIC is calculated after taxes.
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, 2020, 2021 and 2022 is included in the following table.
Philips Group
Return on total assets
in millions of EUR unless otherwise stated
| | 2020 | 2021 | 2022 |
|---|
| Income from operations | 1,264 | 553 | (1,529) |
| Total assets | 27,713 | 30,961 | 30,688 |
| Return on total assets (%) | 4.6% | 1.8% | (5.0)% |
The reconciliation of Average Net operating capital and the reconciliation of Net income to Organic ROIC for the years ended December 31, 2020, 2021 and 2022 are included in the following tables.
Philips Group
Reconciliation of Average Net operating capital1)
in millions of EUR
| | 2020 | 2021 | 2022 |
|---|
| Tangible fixed assets | 2,799 | 2,716 | 2,715 |
| Intangible assets (including goodwill) | 11,789 | 13,454 | 14,684 |
| Inventories | 3,056 | 3,248 | 3,999 |
| Receivable balances2) | 5,010 | 4,648 | 5,043 |
| Payable balances3) | (6,520) | (6,627) | (7,129) |
| Provisions4) | (2,066) | (2,178) | (2,313) |
| Group Average Net operating capital | 14,068 | 15,261 | 16,999 |
| Net operating capital of businesses acquired | (3,176) | (5,511) | (5,739) |
| Average Net operating capital | 10,892 | 9,750 | 11,260 |
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
| | 2020 | 2021 | 2022 |
|---|
| Net Income | 1,195 | 3,323 | (1,605) |
| Discontinued operations, net of income taxes | (196) | (2,711) | (13) |
| Income tax expense | 212 | (103) | (113) |
| Investments in associates, net of income taxes | 9 | 4 | 2 |
| Financial expenses | 202 | 188 | 258 |
| Financial income | (158) | (149) | (58) |
| Income from operations | 1,264 | 553 | (1,529) |
| Loss from operations of businesses acquired | 265 | 124 | 178 |
| Tax gains and losses | (22) | (197) | (169) |
| Goodwill impairment | 144 | 15 | 1,357 |
| Other items: | 59 | 872 | 802 |
| Respironics field-action provision | | 719 | 250 |
| Respironics field-action running remediation costs | | 94 | 210 |
| R&D project impairments | | | 134 |
| Portfolio realignment charges | | | 109 |
| Impairment of assets in S&RC | | | 39 |
| Loss on divestment of business | | 76 | |
| Provision for specified legal matters | 38 | (17) | 60 |
| Pension liability derisking | 21 | | |
| Income tax expense | (212) | 103 | 113 |
| Tax effects of other adjustments | 30 | (33) | (45) |
| Organic return | 1,528 | 1,437 | 707 |
| Average Net operating capital | 10,892 | 9,750 | 11,260 |
| Organic ROIC (%) | 14.0% | 14.7% | 6.3% |
14.2Other Key Performance Indicators
In addition to monitoring the IFRS and non-IFRS financial measures discussed under Financial performance, Philips’ management also uses the following other key performance indicators to monitor the performance of the business and to manage the business. 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).
Philips Group
Other Key Performance Indicators
| | 2020 | 2021 | 2022 |
|---|
| Lives improved, in billions | 1.53 | 1.67 | 1.81 |
| Operational carbon footprint, in kilotonnes CO2-equivalent | 518 | 519 | 438 |
| Circular revenues | 15% | 16% | 18% |
| Waste to landfill | 2.6% | 0.1% | 0.0% |
| Closing the Loop1) | N/A | 34% | 35% |
| Comparable order intake | 9% | 4% | (3)% |
1)We expanded the definition of our Closing the Loop practices to include all professional medical equipment in 2021. Complete figures are not available for 2020.
Lives Improved
The purpose of Philips is to improve people’s health and well-being through meaningful innovation and 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. We use Lives Improved as a measurement of our 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 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.
Operational Carbon Footprint
We aim to minimize our environmental impact and we use the Operational Carbon Footprint as one of the measurements of our 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 (%) multiplied by 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 business. In addition, these other key performance indicators are also used for management compensation purposes. Members of the Board of Management are eligible for grants of performance shares under the Long-Term Incentive (LTI) Plan, and the vesting of the 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 five 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 company. See Remuneration of the Board of Management in 2022 for more information on the Philips’ Long-Term Incentive (LTI) Plan.
Comparable 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 delivered 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.
Philips has simplified its order intake policy by aligning horizons for all modalities to 18 months to revenue. Order intake for software contracts corresponds to the same 18 months to revenue horizon, meaning that only the next 18 months conversion to revenue under the contract is recognized. Philips believes this policy eliminates major variances in order intake growth and better reflects expected revenue in the short term from order intake booked in the reporting period.
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 | |
| 11, 2023 |
| May 9, 2023 |
| 1) | |
First quarter results 2020 | 24, 2023 |
Second quarter results 2020 | 24, 2023 |
Third quarter results 2020 | 23, 2023 |
Fourth quarter results 2020 | 29, 2024 |
1)Subject to updates of the financial calendar as published on the company's website
20202023 Annual General Meeting of Shareholders
The Agenda and the explanatory notes to the Agenda for the Annual General Meeting of Shareholders on April 30, 2020,May 9, 2023, will be published on the company’s website.
For the 20202023 Annual General Meeting of Shareholders, a record date of April 2, 202011, 2023 will apply. Those persons who, on that date, hold shares in the Company,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.
14.3.3Investor contact
Shareholder services
Shareholders and other interested parties can make inquiries about the Annual Report 20192022 to:
Royal Philips
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 US 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 and Issuer Services HQ7212
Gustav Mahlerlaan 10,
1082 PP Amsterdam,
Telephone: +31-20-34 42000
+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
Royal 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: db@astfinancial.com
or write to:
Deutsche Bank Trust Company Americas
IC/O AST
6201 15th Avenue Brooklyn, NY 11219
Analysts’ coverage
Royal Philips is covered by approximately 2520 analysts. 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
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
Dorin Danu
Investor Relations Director
Telephone: +31-20-59 77222
Global Sustainability contact
Royal Philips
High Tech Campus 551, 1st floor
5656 AEAG 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/content/corporate/en_AA/a-w/about/news/contacts.html/contacts.html
Registered address
High Tech Campus 52, 5656 AG Eindhoven, The Netherlands
14.3.4New 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 chargesmay charge 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.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 distribution fee of USD 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 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 reimbursed EUR 598,011651,311 directly to Philips in the year ended December 31, 2019.2022. The Agent paid a total amount of EUR 120,027213,651 directly to third parties in the year ended December 31, 2019.2022.
Category of Expense paid directly to third parties
in EUR
| amount in the year ended December 31, 2019 |
|---|
| |
Reimbursement of Proxy Process Expenses | 128,989 |
Reimbursement of Legal Fee expenses | |
| 84,662 |
Expense paid directly to third parties | 213,651 |
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.
14.4Definitions 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 Material Management
Circular Material Management has replaced the recycling percentage at Philips, as we endeavor to reduce total material use. The Circular Material Management percentage includes circular measures such as waste prevented, reuse and other recovery, but excludes waste delivered to landfill and incineration (with and without energy recovery) due to regulatory requirements.
Circular RevenuesCircular 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 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 dividend yield are as of December 31 of the previous year.
EcoHeroes
Philips’ ‘EcoHeroes’ concept aims to drive innovation beyond our EcoDesign requirements, delivering solutions that are demonstrably setting the pace in terms of environmental impact. EcoHeroes outperform the relevant benchmark in at least one of the focal areas; any comparative sustainability claim is underpinned by a quantitative analysis. Our target is to have 25% of total hardware revenue coming from EcoHeroes by 2025.
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.
GreenGreen/EcoDesigned Innovation
GreenGreen/EcoDesigned Innovation comprises all R&D activities directly contributing to the intended development of GreenGreen/EcoDesigned Products or GreenGreen/EcoDesigned Technologies. Innovation projects are characterized as GreenGreen/EcoDesigned based on the innovation brief; this designation is not revised during the project lifetime.
GreenGreen/EcoDesigned Products
GreenGreen/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 life cycle (raw materials, manufacturing, product use and disposal).
Green 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 segmentsbusinesses have specified additional criteria for GreenGreen/EcoDesigned Products, including product specific minimum requirements where relevant.
GreenGreen/EcoDesigned Revenues
GreenGreen/EcoDesigned 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. GreenGreen/EcoDesigned Revenues are determined by classifying the environmental impact of the product or solution over its total life cycle.
Philips uses GreenGreen/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 GreenGreen/EcoDesigned Revenues will continue to do so until it is decommissioned.
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 operationsoperations.
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'.
LeanThe 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
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 answer 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 percentage of Promoters yields the 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 footprintA 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-yearmonthly 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).
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.
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 care.
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.
Solution
A combination of Philips (and 3rd-party) systems, devices, software, consumables and services, configured and delivered in a way to solve customer (segment)-specific needs and challenges.
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 (Ensure healthy lives and promote well-being for all at all ages) or 12 (Ensure sustainable consumption and production patterns). This includes all Diagnosis & Treatment and Connected Care 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.
15Exhibits
Index of exhibits
| English translation of the Articles of Association of the Companycompany (incorporated by reference to Exhibit 1 to the Annual Report on Form 20-F (File No. 001-05146-01) filed with the Securities and Exchange Commission on February 27, 2019
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| 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 Companycompany 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 Companycompany and F.A. van HoutenR.W.O. Jakobs |
| Services contract between the Companycompany and A. Bhattacharya (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 25, 2020) |
| Services contract between the Companycompany and M.J. van Ginneken
(Incorporated by reference to Exhibit 4 (c) to the Annual Report on Form
20-F (File No. 001-05146-01) filed with the Securities and Exchange Commission on February 20, 2018).22, 2022) |
| Global Philips Performance Share Plan applicable to the Board of Management of Koninklijke Philips N.V. (incorporated
(Incorporated by reference to Exhibit 4.44(d) to the Post-Effective Amendment No. 1 to the Registration StatementAnnual Report on Form S-820-F (File No. 333-186849)001-05146-01) filed with the Securities and Exchange Commission on February 27, 2019)
23, 2021) |
| Global Philips Performance Share Plan applicable toServices contract between the Executive Committee (excluding Board of Management) of Koninklijke Philips N.V. (incorporatedcompany and F.A. van Houten (Incorporated by reference to Exhibit 4.54 (a) to the Post-Effective Amendment No. 1 to the Registration StatementAnnual Report on Form S-820-F (File No. 333-186849)001-05146-01) filed with the Securities and Exchange Commission on February 27, 2019)
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| Global Philips Restricted Share Rights Plan applicable to the Executive Committee (excluding Board of Management) of Koninklijke Philips N.V. (incorporated by reference to Exhibit 4.7 to the Post-Effective Amendment No. 1 to the Registration Statement on Form S-8 (File No. 333-186849) filed with the Securities and Exchange Commission on February 27, 2019)
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| Certification of F.A. van HoutenR.W.O. Jakobs 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 HoutenR.W.O. Jakobs 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. |
| 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 R.W.O. Jakobs
R.W.O. Jakobs
(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 25, 202021, 2023 |
