As filed with the Securities and Exchange Commission on February 23, 202121, 2023
(Mark one)
☐ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20202022
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 ___________________________
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 |
None
None
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, | |
KONINKLIJKE PHILIPS NV | ||
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
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Large Accelerated Filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ Emerging growth company ☐
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† 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.
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This document contains information required for the Annual Report on Form 20-F for the year ended December 31, 20202022 of Koninklijke Philips N.V. (the 20202022 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 20202022 Form 20-F and is furnished to the Securities and Exchange Commission for information only.
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.
The audited consolidated financial statements as of December 31, 20202022 and 2019,2021, and for each of the years in the three-year period ended December 31, 2020,2022, included in the 20202022 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 20202022 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.
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.
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 20202022 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 of information. Management's estimates of rankings are based on order intake or sales, depending on the business.
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
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; economic, political and societal changes; Philips’ increasing focus onhealth informatics in response to developments in the health technology industry; Philips’ ability to transform its business model to health technology solutions and solutions; the successful completionservices; macroeconomic and geopolitical changes; integration of divestments such as the disentanglementacquisitions and divestment of our Domestic Appliances businesses; the realization of Philips’ objectives in growth geographies;their delivery on business plans and integration of acquisitions;value creation expectations; securing and maintaining Philips’ intellectual property rights, and unauthorized use of third-party intellectual property rights; ability to meet expectations with respect to ESG-related matters; failure of products and 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; COVID-19 and other pandemics; breach of cybersecurity; IT system changes or failures; the effectiveness of our supply chain; challenges to drive operational excellence productivity and speed in bringing innovations to market; attracting and retaining personnel; future trade arrangements following Brexit; compliance with regulations and standards including quality, product safety and data privacy;(cyber) security; compliance with 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 Risk factors.
Only (i) the information in this document that is referenced in the Form 20-F cross reference table, (ii) the Introduction and the cautionary statements concerning forward-looking statements of this report on pages 5-6, and (iii) the Exhibits shall be deemed to be filed with the Securities and Exchange Commission for any purpose. The content of Philips’ websites and other websites referenced herein should not be considered to be a part of or incorporated into the 20202022 Form 20-F. Any additional information which is not referenced in the Form 20-F cross reference table or the Exhibits themselves shall not be deemed to be so incorporated by reference, shall not be part of the 20202022 Form 20-F and is furnished to the Securities and Exchange Commission for information only.
The table below sets out the location in this document of the information required by SEC Form 20-F. The exact location is included in the column ‘Location in this document’. The column “Page” refers to the starting page of the section for reference only (and is not intended to refer to the starting page of the specific subsection, if applicable).
In 2020, Philips again demonstrated its relevance in bringing meaningful innovation to improve people’s health and well-being, as we responded to the COVID-19 pandemic. Asis 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 continue to focus on delivering against our triple duty of care – meeting critical customer needs, safeguardingare not extracting the health and safetyfull value of our employees,businesses and ensuring business continuity.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.
Our employees displayed flexibilityfirst priority is to rebuild Philips’ reputation around patient safety and resourcefulness as we more than quadrupled outputquality. The recall of acute care equipmentspecific Respironics sleep therapy devices and solutions to help frontline healthcare workers diagnose, treat, monitorventilators let down the patients who depended on them, and manage COVID-19the doctors caring for those patients. We significantly increasedapologize 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 of critical care ventilators, provided ICU monitoring & analytics solutions, and rolled out telehealth solutions to relieve the pressure on scarce resources. And our field service engineers worked round the clock to support healthcare providers in their hour of need.
In parallel, we continued to support health systems withrequired for the delivery of regular care, entering into multiple long-term strategic partnerships – all featuring result-oriented business models –replacement devices to transform healthcarepatients.
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 enhancing patient care and improving productivity. We also found new ways to serve consumers seeking to live a healthy life, prevent disease and proactively manage their own health. In total, our products and solutions improved the lives of 1.75 billion people in 2020, including 207 million people in underserved communities.
Overall, our company performance proved resilient. While some of our businesses were affected by lower demand, others were able to significantly increase deliveries. I would like to express my admiration and gratitudetest results for the way in which the extended Philips family – our employees, our suppliers and partners, the Philips Foundation – pulled together with our customers to address the impactfirst-generation DreamStation devices, that account for over two thirds of the pandemic.
The developmentsvisible foam degradation is low, and the emission of the past year validate our strategydetected volatile organic compounds and particulates are within the applicable safety limits and not expected to innovateresult in appreciable harm to health in patients.
We are fully committed to completing the provisionRespironics recall and testing program in 2023. We will also implement all measures agreed with the US Food & Drug Administration (FDA) and US Department of care alongJustice, including a consent decree, and rebuild ties with the health continuum – puttingFDA and other national regulators. We have put the patient at the center, improving diagnosisleadership and treatment pathways, enabling the integration of care across care settings,end-to-end organization in place and increasing care provider productivity. At the same time, we help consumers to live healthier lifestyles and to cope with chronic disease. Increasingly, we are able to connect home and hospital care through telehealth platforms. This approach is resonating more strongly than ever.
Customers appreciate the comprehensive and strategic view we take of the future of health and healthcare. They want innovative solutions – smart combinations of systems, devices, informatics, data and services – that can help them deliver on the Quadruple Aim of better health outcomes, improved patient experience, improved staff experience, and lower cost of care. Given the learnings from COVID-19, they are especially keen to discover how we can support care outside the hospital.
In recent years, we have invested significantly in data science, informaticsdoing so. Across the company, we have assigned the highest priority to making the necessary step-up in patient safety and cloud technologyquality management and have elevated leadership of patient safety and quality to enableExecutive Committee level.
An integral aspect of quality is the deliveryability to deliver and install equipment on time and to the required specifications. To this end, we are taking decisive action to make our 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 a 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 integrated solutions acrossunlocking 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 health continuum,very difficult, yet necessary decisions announced in October 2022 and across care settings. These investments are now paying off,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 rapid increase in adoption of, for example, e-ICUreliable patient- and telehealth solutions that facilitate collaboration between health professionals and patient engagement.
Designed to address customer needs, ourpeople-centric health technology innovations – supporting personalcompany.
As well as restoring our reputation as a responsible patient- and people-centric innovation leader in health precision diagnosis, image-guided therapiestechnology, we urgently need to get back on course to create value with sustainable impact. To do this, we will drive organic growth through scale and connected care,leadership:
We will leverage our distinctive market positions, especially our strong presence in North America and informatics –many international markets, while further localizing to support our leadership position in China.
We will continue to generateinvest significantly in innovation, but are making a growing proportionnumber of solutions-based sales and recurring revenues, which now stand at around 37% of total sales.
In healthcareincrease the world over, we are seeing an increased focus on productivity and outcome-based models, as well as care outside the hospital. COVID-19 has accelerated the digitalization of care and the adoption of telehealth. This shift is being reinforced by global trends such as aging populations, the rise of chronic diseases, and resource constraints.
Innovative health technology can help health systems address these challenges, as well as extend access to care to those in need. The HealthTech market is a very attractive and sizable one, with considerable growth and margin potential, and Philips already holds strong leadership positions in over 65%impact of our portfolio.
Inspired bypatient- and people-driven innovation. Focusing our purpose to improve people’s healthresources on fewer, better-resourced and well-being,more impactful projects, we invest almost 10% of revenue in Research & Development to innovate solutions that makewill concentrate a difference to our customers and society at large. Helping people to stay healthy and prevent disease, for instance through our expanding teledentistry services. Giving clinicians AI-assisted tools like our new Radiology Workflow Suite that help them make precision diagnoses and select the best care pathway. Helping surgeons deliver personalized, minimally invasive treatment with solutions like our constantly evolving Azurion image-guided therapy platform. And outside the hospital – orchestrating and delivering care in lower-cost care settings, helping people to recover, or live with chronic disease, at home.
All of these require a seamless flow of data, which is enabled by our highly secure connected care solutions, such as our IntelliVue MX750/MX850 patient monitors for the ICU. To unlock the full benefits of data-enabled care, we continue to expand our capabilities in informatics and data science, with around halfhigher proportion of our R&D professionals workingresources in these areas.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.
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 in 2022, and by the continued strength of our order book.
Environmental, Social & Governance (ESG) are three key dimensions defining our approach to doing business responsibly and sustainably
sustainably. In 2020,2022, we underscoredreached 1.81 billion people with our determinationproducts and services, including 202 million in underserved communities – taking us a step closer to lead by example by renewing our purpose – to improve people’s health and well-being through meaningful innovation, with the aimgoal of improving 2 billion lives per year by 2025, including 300 million in underserved communities, risingcommunities.
We continued to 2.5 billion and 400 million respectively by 2030.
This is part of an enhanced, fully integrated approachwork hard to doing business responsibly and sustainably. Buildingdeliver on our strong heritageother key ESG commitments. For example, our updated carbon reduction targets were approved by the Science Based Targets initiative (SBTi), and we were included in environmental and social responsibility, this new framework comprises a comprehensive set of key commitments across the Environmental, Social and Governance (ESG) dimensions that guide our endeavors. I am convinced this is the best way for Philips to create superior, long-term value for our many stakeholders.
I am pleased that we have delivered on all the targets set out in our Healthy people, Sustainable planet 2016-2020 program. As a purpose-driven company, we are conscious of our responsibility towards society and of the need to continue to embed sustainability ever deeper in the way we do business. Having become carbon-neutral in our own operations in 2020, we are now extending our ambitions and working with our partners to ensure that emissions across our entire value chain are in line to limit global warming to the 1.5 °C scenario.
We received further recognition for our efforts in this area in 2020 – achieving a CDP ‘A List’ ratingCDP’s climate action ‘A-List’ for the eighth consecutive10th year for our actionin a row. We see increasing momentum within the healthcare industry and on climate change, and securing the second-highest place in both the global Dow Jones Sustainability Indices (DJSI) list and The Wall Street Journal’s new ranking, 100 Most Sustainably Managed Companies in the World.
COVID-19 impacted every part of our businesscustomers 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 infrastructure for the future of healthcare.
We remain cautious in 2020.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, despitewe expect that, by prioritizing patient safety and quality, tightening our focus on innovation and strengthening our category leadership areas, while at the challenging circumstances,same time improving execution and taking a disciplined approach to capital, we werewill be able to execute our plansprogressively create value with sustainable impact. Against this background, and return to growth in the second half of the year. For the full year we delivered 3% comparable sales growth*) and a strong free cash flow*) of EUR 1.9 billion. Comparable order intake**) increased 9% and we made market share gains in a number of our health systems businesses.
Our Diagnosis & Treatment businesses were impacted by the ongoing postponement of capital equipment installations and routine care, including elective procedures, yet continued to deliver a steady flow of innovations designed to help clinicians deliver a precision diagnosis leading to targeted therapies.
Our Connected Care businesses posted exceptional growth, fueled by COVID-19-related demand for our hospital ventilation and monitoring & analytics solutions.
Our Personal Health businesses had to contend with a steep decrease in consumer demand brought about by the onset of COVID-19, yet rebounded strongly by accelerating online growth, increasing digital engagement, entering into partnerships with leading retailers, and scaling direct-to-consumer business models.
We initiated the process to create a separate legal structure for our Domestic Appliances business within the Philips Group, and we expect to complete this process by Q3 2021.
We made several acquisitions in 2020. For instance, we expanded our image-guided therapy devices portfolio, acquiring Intact Vascular to add an industry-first implantable device to treat peripheral artery disease. We also agreed to acquire BioTelemetry (completed on February 9, 2021) and Capsule Technologies to strengthen our Connected Care segment. These acquisitions will further broaden and scale our patient care management solutions for the hospital and the home, enhance patient outcomes, streamline clinical workflows and increase productivity.
Looking ahead, we continue to see uncertainty related to the impact of COVID-19 across the world. For 2021, Philips plans to deliver low-single-digit comparable sales growth*), driven by solid growth in Diagnosis & Treatment and Personal Health, partly offset by lower Connected Care sales, and an Adjusted EBITA margin*) improvement of 60-80 basis points.
Reflecting our confidence in the future course of the company andreflecting the importance we attach to dividend stability, we propose to maintain the dividend at EUR 0.85 per share.
As we continue our transformation into a customer-first solutions company, we are guided by our strategic roadmap, with its three key imperatives:
We aim to drive customer preference by getting even closer to our customers and consumers, making Philips easier to do business with, and further improving our quality, operational excellence and productivity. To do this, we are driving the digital transformation in every area of our business, leveraging our integrated IT landscape – from the way we connect and engage with our customers and consumers to seamlessly connecting our solutions, e.g. to enable remote servicing and upgrades.
In our core business we aim to drive growth through innovation by capturing geographic growth opportunities and by continuing the pivot to consultative customer partnerships and business models, which offer a deeper relationship, with recurring revenue streams.
We will also continue the shift towards integrated solutions with demonstrable clinical evidence and health economic benefits that help our customers achieve the Quadruple Aim. In doing so, we will leverage data science and AI at scale. Where appropriate, we will continue to make acquisitions and enter into partnerships to support our organic growth.
By working in accordance with the Philips Business System and executing on these imperatives with urgency and discipline, we will be able to create more value for our stakeholders – driving customer preference, sustained growth, margin expansion, increased cash flow and improved return on invested capital, while delivering on our ESG commitments.
Once again,Executive Committee, I would like to acknowledge, once again, that 2022 has been very disappointing and we carry accountability for the plan to bring Philips back to where it belongs. I want to thank our customers and their patients for their understanding – and our suppliers and ecosystem partners for working together with Philips in the fight against coronavirus.their support – over this past year. I also want to express my gratitude toappreciate our employees for their commitment, resourcefulness andemployees' hard work in difficult circumstances.and willingness to embrace change and drive performance improvement. And I wish to thank our shareholders and other stakeholders for the confidence they continuetheir continued support in these challenging times.
I am honored to show in Philips.
Our strategic focushave been tasked with leading our company and commitment to improvement remain undiminished. Energized by our purpose and buoyedam heartened by the resilience and agilitysupport I have seen over the past year,encountered from our employees and customers, investors and other stakeholders. I am confidentrealistic about the challenges we face, but have full confidence in Philips’ abilityour plan of action and am firm in my resolve to maintain our transformation momentum, truly impact global health challenges through innovation, and deliver sustained value for our many, diverse stakeholders.lead Philips back to a position of strength in a world that needs meaningful innovation.
Frans van HoutenRoy Jakobs
Chief Executive Officer
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.
Roy Jakobs joined Philips in 19862010 and has held multiplevarious global leadership positions across the company, on three continents, includingstarting as Chief Marketing & Strategy Officer for Philips Lighting. In 2012, he became Market Leader for Philips Middle East & Turkey, leading the roleHealthcare, Consumer, and Lighting businesses out of co-CEODubai. 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 Consumer Electronics division. Frans servedPersonal Health businesses and in early 2020 he started as Co-ChairChief Business Leader of Connected Care. Prior to his career at the World Economic Forum in Davos in 2017. He was one of the initiatorsPhilips, he held various management positions at Royal Dutch Shell and currently co-chair of the WEF Platform to Accelerate the Circular Economy. Frans is also a member of the European Round Table of Industrialists, an advocacy organization comprising the 50 largest European multinationals. He is co-founder and advocate of NL2025, a platform of Dutch influencers who support initiatives to create a better future for the Netherlands in the areas of education, sustainable growth and a vital society. Frans was appointed a member of the Board of Directors of Novartis in February, 2017.Reed Elsevier.
Born 1961, Indian
Executive Vice President
Member of the Board of Management since December 2015
Chief Financial Officer
Abhijit Bhattacharya first joined Philips in 1987 and has held multiple senior leadership positions across various businesses and functions in Europe, Asia Pacific and the U.S. ThroughUS. 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 & Quality at ST-Ericsson, the joint venture of ST Microelectronics and Ericsson, and he was CFO of NXP’s largest business group.
Born 1973, Dutch/AmericanDutch
Executive Vice President
Member of the Board of Management since November 2017
Chief ESG & Legal Officer
Marnix van Ginneken joined Philips in 2007 and became Head of Group Legal in 2010. In this role he was responsible for the various Group Legal departments, including Corporate & Financial Law, Legal Compliance and Legal M&A. In 2014, Marnix became Chief Legal Officer of Royal Philips and Member of the Executive Committee. Before joining Philips, Marnix workedHe is responsible for Akzo NobelESG/Sustainability, Legal, Intellectual Property & Standards and before that as an attorney in a private practice.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 private practice.
This page reflects the composition of the Executive Committee as per December 31, 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 30, 2023, Steve C. de Baca and Jeff DiLullo joined the Executive Committee, effective February 6, 2023, as Chief Patient 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 (which was the responsibility of Roy Jakobs until his appointment as CEO) as well as for its Precision Diagnosis businesses, in 2023. For a current overview of the Executive Committee members, see also https://www.philips.com/a-w/about/executive-committee.html
Over the past 10 years, Philips has undergone a transformation to reshape its portfolio and become a focused health technology company. As a result, we are active in highly attractive segments that offer significant potential for growth 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
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.
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.
Philips’ purpose – to improve people’s health and well-being through meaningful innovation – is at the heartcenter of everything we do. NeverThis core principle has this central tenetnever been more importantrelevant than it is now, 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. In concrete terms,sustainable, 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 aimbelieve Philips is well positioned to improve the lives of 2 billion people a year by 2025, including 300 million in underserved communities, rising to 2.5 billiondo this, and 400 million respectively by 2030.
Guided by this purpose, it is– leveraging our strategy to lead with innovative solutions that combine systems, smart devices, informaticsstrong clinical, consumer and services, and leverage big data – helping our customers deliver on the Quadruple Aim (better health outcomes, improved patient experience, improved staff experience, lower cost of care) and helping people to take better care of their health at every stage of life.
We strive to deliver superior, long-term value to our customers and shareholders, while acting responsibly towards our planet and society, in partnership with our stakeholders.
We aim to grow Philips responsibly and sustainably. To this end, we have deployed a comprehensive set of commitments across all the Environmental, Social and& Governance (ESG) dimensions that guide the execution offranchise, and our strategystrong brand – do it in a convenient 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). way.
Health technology is a large market, which is expected to grow by around 4% each year*). Besides the natural drivers of growth – aging populations, the rise of chronic diseases, increased spending on healthcare in emerging markets – we believe that health technology will be a major growth driver in the years to come.
At Philips, we see healthcare as a continuum, since it puts people’s health journeys front and center and builds upon the idea of integrated care pathways. Believing that healthcare should, and can, be seamless, efficient and effective, we strive to ‘connect the dots’ for our customers and consumers, supporting the flow of data needed to care for people in real time, wherever they are.
Going forward, the digitalization of healthcare and – accelerated by COVID-19 – the more widespread adoption of telehealth will play an increasing role in helping people to live healthily and cope with disease, and in enabling care providers to meet people’s health needs, deliver better outcomes and improve productivity.
In the consumer domain, we develop innovative solutions that support healthier lifestyles, prevent disease, and help people to live well with chronic illness, also in the home and community settings.
In addition to leveraging retail trade partnerships and new business models, we are accelerating growth through online channels, delivering products and services direct to consumers, and supporting longer-term relationships to maximize the benefit consumers can derive from our solutions.
In clinics and hospitals, we are teaming up with healthcare providers to innovate and transform the way care is delivered. We listen closely to our customers’ needs and together we co-create solutions that help our customers improve outcomes, patient and staff experience and productivity, and so deliver on the Quadruple Aim of value-based care.
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. The combination of compelling solutions and consultative partnership contracts, including a broad range of professional services, drives growth rates above the group average, as well as a higher proportion of recurring revenues.
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 leverage 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 workflows 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 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.
The key driver for our performance improvement is improved execution grounded in three decisive actions:
With our global reach, market leadership positions, deep clinical and technological insights, and customer-centric, patient- and people-focused innovation capability, we are stronglybelieve Philips is well placed to create further value in a changing healthcare world throughhealth 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 propositions in: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).
Delivering solutionsWe strive to deliver superior, long-term value to patients, customers, consumers and shareholders, while acting responsibly towards our planet and society, in partnership with our stakeholders. We believe that, enable healthier lifestyles, personal hygieneexecuted with rigor, discipline and living with chronic disease.
Driving better care management by seamlessly connecting patients and caregivers fromquality, the hospital to the home.
Our roadmap – with its three strategic imperatives – is our guide as we continue our transformation journey to attain HealthTech industry leadership and drive value creation.sustainable impact.
Underpinned by these strategic imperatives, and assuming the world economy will return to growth in 2021, Philips’ targets for accelerated growth, higher profitability and improved cash flow for the 2021–2025 period are:
The new targets exclude the Domestic Appliances business. As announced in January 2020, Philips is reviewing options for future ownership of its Domestic Appliances business. Philips has started the process of creating a separate legal structure for this business within the Philips Group, which is expected to be completed in the third quarter of 2021.
Based on the International Integrated Reporting Council framework, and with the Philips Business System at the heart of our endeavors, we use various resources to create value with sustainable impact for our stakeholders in the short, medium and long term.stakeholders.
As we drive our transformation to become a solutions provider to our customers and consumers, we have adopted a single standard operating model that defines how we work together effectively to achieve our company objectives – the Philips Business System (PBS). The PBS integrates key aspects of how we operate:
Having a single business system increases speed and agility, and enhances standardization, quality and productivity, while driving a better, more consistent experience for our customers.
The resources and relationships that Philips draws upon for its business activities
The result of the application of the various resources to Philips’ business activities and processes as shaped by the Philips Business System
The societal impact of Philips through its supply chain, its operations, and its products and solutions
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.
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.
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.
Koninklijke Philips N.V. (Royal Philips) is the parent company of the Philips Group. In 2020,2022, 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
Diagnosis & Treatment | |
Connected Care | |
Personal Health | |
Other |
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 follows.
Our Diagnosis & Treatment businesses create value through their unique portfolio of innovative diagnostic and minimally invasive procedural solutions – suitesconsisting of systems, smart devices, software and services, powered by AI-enabled informatics.informatics – that support precision diagnosis and minimally invasive treatment in therapeutic areas such as cardiology, peripheral vascular, neurology, surgery, and oncology. With these integrated solutions, we enable our customers to realize the full potential of the Quadruple Aim – better health outcomes, improved patient experience, improvedand staff experience, and lower cost of care.
In Precision Diagnosis, servingServing diagnostic enterprise imaging markets globally, there iswe see significant opportunity to enable precise diagnosesprecision diagnosis while at the same time supporting adjacent needs for guidance intocare orchestration across care pathways and increasing departmental productivity. We do this through breakthrough innovations in our smart diagnostic systems, through dynamicconnected workflow solutions, that transform departmental operations, through integrated diagnostics insights from different departments, and throughpathway informatics, driving enterprise-wide operational efficiency and helping clinicians to provide an early and definitive diagnosis, enabling them to select tailored care pathway solutions that allow doctors to diagnosepathways with precisionpredictable outcomes for every patient, both inside and selectoutside the optimal treatment path for the individual patient. Over the period 2019-2020, 60% of our product portfolio in this area has been renewed through the discontinuance of former products, the roll-out of new-generation versions of our products, and the addition of new products.hospital.
In Image Guided Therapy, we have pivoted from a focus on imaging modalities toWe also provide integrated procedural solutions combining imaging systems and diagnostic and therapeutic devices, which can driveoptimize interventional procedures to deliver more effective treatment, better outcomes and higher productivity. Building upon our leading-edge Image Guided Therapy System – Azurion, platform, we continue to innovate, optimizing clinical and expand our applications for image-guided therapies and improveoperational lab performance through advances in workflow and integration infor routine procedures, and expanding the interventional suite.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 also expanding into adjacent therapeutic areas and innovating the way we engage with our customers, inusing new business models across different care settings, including out-of-hospital settings such as office-based labs and ambulatory surgical centers, which offer clear clinical, financial and operational benefits.
In 2020, the Diagnosis & Treatment businesses were impacted by the postponement of capital equipment installations and routine care, including elective procedures and exams, caused by the COVID-19 pandemic. Even so, we continued to make advances in innovation and in strengthening our portfolio. For example, we expanded our remote clinical collaboration and virtual training offerings across our portfolio with2022, Philips completed the acquisition of Innovative Imaging Technologies (IIT)Vesper Medical Inc. a US-based medical technology company that develops minimally-invasive peripheral vascular devices. Vesper Medical will further expand Philips’ portfolio of diagnostic and its Reacts collaborative platform. Leveraging innovative technologies, such as augmented realitytherapeutic devices with an advanced venous stent portfolio for remote virtual guidance, supervision and training, the platform provides unique interactive tools designed to meet the multi-faceted collaborative needstreatment of healthcare professionals and patients. We also launched the vendor-agnostic Radiology Workflow Suite of end-to-end solutions to drive operational and clinical efficiency through the digitalization, integration, and virtualization of radiology. And we further expanded our Interventional Devices portfolio, acquiring Intact Vascular to add an industry-first implantable device, the Tack Endovascular System, to treat peripheral arterydeep venous disease.
Through our various businesses, Diagnosis & Treatment is focused on growing market share and profitability by leveraging:
In 2020,2022, the Diagnosis & Treatment segment consisted of the following areas of business:
Diagnosis & Treatment
Total sales by business
Diagnostic Imaging | 41% |
Ultrasound | |
Enterprise Diagnostic Informatics | 8% |
Image Guided Therapy |
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.
Under normal circumstances, sales at Philips’ Diagnosis & Treatment businesses are generally higher in the second half of the year, largely due to the timing of customer spending patterns.
At year-end 20202022, Diagnosis & Treatment had around 32,00033,000 employees worldwide.
At the Radiological Society of North America event RSNA 2020, Philips introducedreceived FDA clearance to market its new 7700 3.0T MR system, which features an industry-first vendor-neutral Radiology Operations Command Center as part of the Radiology Workflow Suite of solutions. This multimodality virtual imaging command center enables real-time, remote collaboration to broaden expertise between technologists, radiologists and imaging operations teams across multiple sites via private, secure telepresence capabilities. Proprietary digital technology developed by Philips helps maintain business continuity, increase enterprise-wide radiology productivity, minimize issues withenhanced 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 expand access to advanced MR- and CT-based diagnosis.virtually no loss in image quality.
We introducedBy combining the next generation of our leading-edgeSpectral CT 7500 scanner with the Azurion image-guided therapy platform. An industry first, the Philips Azurion image-guided therapy platform now fully integrates IntraSight to control imaging, physiology, hemodynamic and informatics applications with one intuitive user control at the tableside. With this next-generation Azurion platform, Philips is also introducing a new 3D imaging solution, called SmartCT, to dramatically simplify the acquisition and use of 3D imaging. Next-generation Azurion comprises a new range of configurations – covering more price segments – to innovate procedures in a broad range of therapeutic areas.
We continue to see strong traction for our Ingenia Ambition 1.5T MR, which combines fully sealed BlueSeal magnet technology and workflow innovations for more productive, helium-free operations. As well as virtually eliminating dependency on a commodity with an unpredictable supply, the fully sealed system does not require a vent pipe, significantly reducing the typical MR installation challenges and lowering construction costs.
Philips signed a seven-year strategic partnership agreement with Mandaya Royal Hospital Puri in Indonesia. The turnkey solution includes the next-generation AzurionFlexArm image-guided therapy system, the Ingenia Ambition MR,Philips has developed a fully integrated hybrid angio CT suite solution for single-room, single-session diagnosis and the detector-based IQon Spectral CT,treatment in areas such as well as the latest innovations in connected careoncology, stroke, and informatics.
SimonMed Imaging – one of the largest outpatient medical imaging providers in the US – is partnering with Philips to deploy its most advanced 3T MRI technology, including software and services, at their outpatient practices to enhance diagnoses, from brain injuries, liver and cardiac disease, to orthopedic injuries. trauma care.
In Germany,radiotherapy, the AI-enabled Philips signed a 10-year strategic partnership with Marienhospital Stuttgart to deploy our digital healthcare solutions across multiple departments to improve patientMR 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 and efficiency. The project will include renewal and ongoing development of the hospital’s diagnostic imaging equipment and associated IT systems, digitization of its pathology department, and enhancement of the hospital’s emergency medicine capabilities.through precision oncology solutions.
Philips expanded its dedicated cardiovascularleading ultrasound offering by launching Affiniti CVx. Thisportfolio with the FDA market clearance for its new Ultrasound 5000 Compact system to deliver 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 EchoNavigator image-guidance tool, which integrates live ultrasound, interventional X-ray imaging and advanced 3D heart models to help interventional teams treat structural heart disease with greater ease and efficiency.
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 efficiency.
Philips is designedsuccessfully expanding into interventional oncology with the installation of its innovative lung cancer diagnosis and treatment 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 immediate treatment of early-stage lung cancer patients.
Inferior Vena Cava (IVC) filters are used to support cardiology departments in delivering better care to moretreat patients with increased efficiencyvenous thromboembolism, in which blood clots form in the deep veins of the leg and throughput.
Philips received an industry-first 510(k) clearance fromgroin and can travel through the FDA to market a wide range of its ultrasound solutions – including our CX50 general imagingcirculatory system, and our Lumify portable ultrasoundbut research has shown that they may have long-term complications. In the United States, the first patients were successfully treated for Inferior Vena Cava (IVC) filter removal using Philips' CavaClear solution – the only FDA-cleared solution for the management of COVID-19-related lung and cardiac complications. Portable ultrasound solutions in particular have become valuable tools for clinicians treating COVID-19 patients, due to their imaging capabilities, portability and ease of disinfection.
Philips continued to advance the capabilities of its KODEX-EPD cardiac imaging and mapping system for the treatment of heart rhythm disorders, improving image quality and workflow efficiency for Atrial Fibrillation procedures.
Philips announced a partnership with InSightec to expand access to MR-guided focused ultrasound for incisionless neurosurgery. By developing compatibility between Philips’ advanced MR systems and the Exablate Neuro platform from InSightec, the two companies will support expanded access to MR-guided focused ultrasound for the treatment of Essential Tremor and other neurological disorders.
Philips introduced OmniWire, the world’s first solid core pressure guide wire for physiology measurement in coronary artery interventional procedures; it has been extremely well received by our customers.
In January 2021, Philips announced the final, five-year results of two major randomized controlled trials (RCTs) that show no difference in all-cause mortality between patients treated with the Stellarex drug-coated balloon (DCB) and those treated with percutaneous angioplasty (PTA), the current standard of care. Moreover, the studies showed no difference in mortality between the Stellarex DCB and PTA at every 12-month endpoint over the course of the study.IVC filter removal.
Spanning the entire health continuum, theThe Connected Care businesses help broaden the reachaim to connect and deepen the impact of healthcare withelevate care for all. Philips connects patients and caregivers across care settings, delivering clinical, operational and therapeutic solutions that leverage and unite devices, informatics, data and people across networks of care, to enablehelp our customers to deliver onaddress the Quadruple Aim –of better health outcomes, improved patient experience, improvedand staff experience, and lower cost of care. After the years of the COVID pandemic, which has accelerated the digital transformation of healthcare, in 2022 the volatile global economic situation put additional pressure on customer budgets and worsened trends such as staff shortages, as well as increasing the need for solutions that enable more effective, sustainable and convenient care in hospital, clinics and the home.
In 2020,Philips’ Sleep & Respiratory Care business in particular faced multiple operational, regulatory and supply-chain challenges in 2022, but action has been taken to address these through the decision to establish Sleep & Respiratory Care as an organization with end-to-end accountability, spanning product creation through to customer fulfillment (pending the outcome of consultation with workers councils in a number of countries). There has been a reset to put patient safety front and center in everything we do, and we believe that the implementation of a new simplified organization, which began in 2022, will help to achieve this, as well as to improve productivity and increase agility. For information about the Philips Respironics recall and remediation effort, please refer to Quality & Regulatory and patient safety.
With clinical depth and discovery, Philips Connected Care playedtechnologies help to cultivate a crucial role in fulfilling customer needs created by the COVID-19 global pandemic, from ramping up productionmore accurate and deliverycomplete view of our core systems such as ventilators and monitors, to supporting the urgent expansion of telehealth for the ICU, and driving safe, remote patient care.
Although no one was fully prepared for this crisis, Philips had the critical portfolio and the informatics investments in place to rapidly scale up, supporting care in the hospital and the home, even as healthcare delivery models were changing fast.
Philips increased ventilator production multifold to meet the high COVID-19-related demand, and shipped ventilators across the world using a fair and ethical approach to allocate supply to acute patient demands based on COVID-19 data and the available critical care capacity.
This past year showed the value of strong leadership positions and close ties with our customers. Building on Philips’ trusted brand, deep clinical insights and large installed base allowed us to drive impact. Philips combined the right monitoring equipment, respiratory devices, consumables and services to innovate solutions to help tackle COVID-19.
Also critical during COVID-19: the expertise and informatics to help scale and manage scarce resources in the health system. The capabilities in Connected Care are built around Philips’ strength in verticals (monitoring & analytics, sleep & respiratory care, and therapeutic care) and horizontals (connected care informatics and population health) to improve clinical and economic outcomes in all care settings, both inside and outside the hospital.
Philips has a deep understanding of clinical care and the patient experience. When coupled with ourthat drives better health and care. The combination of advanced technological solutions and a consultative approach this 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. Theseclinician, 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:
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 precision diagnosespatient engagement, diagnostics, (ambulatory) patient monitoring and treatment.(clinical) therapy solutions.
In 2020,January 2022, Philips completed the acquisition of Cardiologs, a France-based medical technology company focused on transforming cardiac diagnostics using artificial intelligence (AI) and cloud technology. Cardiologs is already further strengthening Philips’ cardiac monitoring and diagnostics offering with innovative software technology, electrocardiogram (ECG) analysis and reporting services.
In 2022, the Connected Care segment consisted of the following areas of business:
Connected Care
Total sales by business
Hospital Patient Monitoring | |
Emergency Care | 5% |
Sleep & Respiratory Care | |
Connected Care Informatics |
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. In 2020 this pattern shifted due toHowever, the outbreak ofPhilips Respironics voluntary recall notification in the COVID-19 pandemic.Sleep & Respiratory Care business in June 2021 had a negative impact on sales throughout 2022.
At year-end 2020, the2022, Connected Care businesses had around 16,00017,000 employees worldwide.
Philips' offerings improving clinical workflow and Caregiving portion of the Population Health Management business was splitalarm management in anticipation of its future divestment. The remaining Population Health Management business has been combined with the Connected Care Informatics business for presentational purposes, and from January 1, 2021, the Connected Care Informatics business and the remaining portion of the Population Health Management business have been combined for reporting purposes.
In the face of the global shortage of ventilators and patient monitors upon the outbreak of the COVID-19 pandemic, we worked intensively, together with our supply chain partners around the world, to drive a massive ramp-up in production, increasing ventilator manufacturing eightfold and monitor production fivefold.
Philips introduced Rapid Equipment Deployment Kits for ICU ramp-ups, allowing doctors, nurses, technicians and hospital staff to quickly support critical care patients. The kit combines Philips’ advanced patient monitoring technology with predictive, patient-centric algorithms for scale-up within hours.
Philips launched several new monitoring solutions for the Intensive Care Unit (ICU), the general ward and the home that feature remote monitoring capabilities and advanced analytics. These include Philips’ IntelliVue Patient Monitors MX750/MX850 for the ICU, Philips’ Biosensor BX100 for early patient deterioration detection in the general ward, and in collaboration with BioIntelliSense, the BioSticker medical device to help monitor at-risk patients from the hospital to the home, to help avoid hospital re-admissions and to support chronic care management.
Philips introduced several dedicated telehealth solutions to help relieve the tremendous pressure placed on scarce resources by the growing number of COVID-19 patients. Based on its proven Patient Reported Outcomes Management solution, which is being used by more than 100 healthcare institutions globally, Philips enabled Dutch hospitals and GPs to remotely screen and monitor patients with COVID-19.
In December 2020, Philips announced the intended acquisition of BioTelemetry Inc., a leading remote cardiac diagnostics and monitoring company in the US, with solutions comprised of wearable connected heart monitors, AI-based data analytics and a services platform. The transaction was completed on February 9, 2021. The combination of Philips’ leading patient monitoring position in the hospital with BioTelemetry’s leading cardiac diagnostics and monitoring position outside the hospital is expected to result in a global leader in patient care management solutions for the hospital and the home for cardiac and other patients.
In January 2021, Philips announced that it has signed an agreement to acquire Capsule Technologies, Inc., a leading provider of medical device integration and data technologies for hospitals and healthcare organizations. The combination of Philips’ industry-leading portfolio with Capsule’s leading Medical Device Information Platform, connected through Philips’ secure vendor-neutral cloud-based HealthSuite digital platform, will enrich and scale Philips’ patient care management solutions for all care settings in the hospital,environments, as well as remote patient care. The transaction is expectedits contributions to a quieter healing environment in intensive care units, resonated well with customers.
Philips expanded its Advanced 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 completedlocally 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 the first quarter of 2021.
Highlighting its strength in strategic partnershipsdetecting arrhythmias and providing data that allows care teams to enhance patient careintervene quickly and improve care provider productivity, Philips signed multiple new agreements. For example, Philips and the US Department of Veterans Affairs entered a 10-year agreement to expand their tele-critical care program, creating the world’s largest systemdecisively to provide veterans withthe optimal patient treatment.
Underlining the clinical and economic value of remote access to intensive care expertise, regardless of their location.cardiac patient monitoring, Philips announced new research demonstrating increased atrial fibrillation detection and significant cost savings using Philips’ mobile cardiac outpatient telemetry monitoring.
University of Kentucky HealthCare teamed up with Philips to implement the company’s tele-ICU technology to enhance patient care and improve utilization and patient flows across 160 ICU beds at the academic medical center’s two hospitals. Leveraging Philips’ acute telehealth platform, eCareManager, UK HealthCare is implementing the state’s first centralized virtual care model to help nurses detect risk of patient deterioration, so they can intervene earlier and help improve care outcomes.
Supporting the increased demand for flexible ICU capacity, Philips introducedexpanded its new mobile ICUs in India. The ICUs can be furnishedremote cardiac monitoring portfolio with a range of medical equipment, including ventilators, defibrillators,patch-based, clinical-grade ECG to improve patient recruitment, compliance and patient monitoring.retention for clinical trials.
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 and connected solutions.
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.
We aim to drive profitable growth through a relentless focus on innovation across three key areas:
In 2020, theThe Personal Health segment consistedconsists of the following areas of business:
Personal Health
Total sales by business
Oral Healthcare | |
Mother & Child Care | |
Personal Care | |
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.accessibility. A notable aspect of our commercial strategy is driving increased direct-to-consumer relationships and sales through our consumer communities and online store. We believe we are well positioned to capture further growth in onlineAbout 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. In our drive to innovate oral healthcare, we are partnering with leading insurance companies, which are moving to more preventative models of care. To that end, they need to encourage consumers to brush twice per day, for two minutes at a time, as that leads to better health outcomes and lower cost of care. The first results from the pilot program are extremely promising. Solutions and services like this offer a win-win for consumers and insurers: for consumers, because they get better oral care, and for insurance companies, because they have less cost per patient.
We also offer mobile solutions to support parents and parents-to-be for a more informed, more connected and healthier journey to parenthood. Powered by personalized AI and deep analytics, theThe Pregnancy+ app and Baby+ app offer parents supportive content at every stage of their first 1,000-day journey. Pregnancy+ also offers state-of-the-art, photo-realistic and interactive 3D fetal models to make the experience even more exciting. In 2020, to help expectant mothers navigate pregnancy in timesexciting, with new, personalized content for each day of the pandemic, we introduced an in-app COVID-19 guide.pregnancy. As of year-end 2020,2022, the Pregnancy+ app and Baby+ app combined have almost 2more than 68 million downloads, more than 1.5 million daily active users, and are available in over 50 countries.22 languages.
The company’s wide portfolio of connected consumer health platforms leverages Philips HealthSuite Platform, a cloud-enabled connected health ecosystem of devices, apps and digital tools that enablesupport personalized health and continuous care.
The revenue model is mainly based on product sale at the point in time the products are delivered to retailers and online platforms. We are increasingly diversifying thecontinue to increase revenue model withdiversity by expanding our new business models, including direct-to-consumer, subscriptions, try-and-buy offerings and services.
The Personal Health businesses experience seasonality, with higher sales around key national and international events and holidays.
At year-end 2020,2022, Personal Health employed around 17,0009,000 people worldwide.
Building on the successful strengthening of the company’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 January 2020,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 is reviewing options for future ownershipintroduced in Europe the new OneBlade 360, which leverages a new blade that adjusts to the curves of its Domestic Appliances business. Philips has started the process of creating a separate legal structure for this business within the Philips Group, whichface to enhance shaving comfort. The global roll-out is expected to bestart in 2023.
Philips completed the global introduction of its new Philips Shaver S9000 with SkinIQ with its launch in Japan, resulting in accelerated sales growth for this category and a 4.9 (out of 5) consumer rating and review score within the third quarterfirst month.
Philips continues the integration of 2021.
Broadening its leading portfolio of power toothbrushes,SkinIQ technology by expanding into the company launchedS5000-S7000 ranges, increasing access to Philips proprietary technology that senses pressure and movement to adapt and guides the Philips One by Sonicare. An entry-level proposition to expand into new consumer segments, Philips One is a battery-operated power toothbrush developed as a step up from manual brushing. Users of this toothbrush can opt into a subscription service for brush head and battery replacements.
A new teledentistry platform for dental professionals – announced together with dental technology company Toothpic – provides a tool to build direct patient engagement, acquisition and retention while improving office efficiency, in-chair time and remote care.
To support parents in their breastfeeding journey, Philips Avent launched a new Electric Breast Pump. This unique expression solution uses Natural Motion Technology to mimic a baby’s suckling, while also adapting to the size and shape of a mother’s nippleusers for a comfortable and quicker milk flow. more efficient shave.
In China, Philips has introduced a series of shavers featuring SkinIQ technology,launched its first premium portable shaver, which senses, guides and adapts to men’s skin and facial hair for a close and comfortable shave. The shaver’s inbuilt Motion Control sensor checks for effective circular motions and provides real-time feedback throughgarnered 4.7-star ratings/reviews (source: Taobao) within the Philips GroomTribe app, allowing men to achieve a more effective and comfortable technique, with fewer passes.
The Philips Lumea hair removal device with Intense Pulsed Light technology continued to grow in 2020 thanks to superior product quality and the coaching app – both well-received with high consumer ratings – and through faster access to product via the new Try & Buy business model.
Philips set an environmental milestone with the launch of the Viva Café Eco coffee machine, our first product to have all visible plastic parts and non-food-contact parts made from recycled materials.month.
In our external reporting on Other we report on the items Innovation & Strategy, IP Royalties, Central costs, and other small items. At year-end 2020,2022, around 17,00018,000 people worldwide were working in these areas.
The Innovation & Strategy organization includes the Chief Technology Office (CTO), Research, HealthSuite Platforms, the Chief Medical Office, Product Engineering, Experience Design, Strategy, and Sustainability. Our four largest 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, manages the 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). Centers of Excellence – knowledge hubs built around critical capabilities and technology – play a key roleThings.
We strive for breakthrough innovations that can help drive fundamental shift in maximizing the impact of innovations for Philips.healthcare industry, thereby supporting businesses to focus on selected must-win battles.
The Chief Technology Office orchestrates innovation strategy and portfolio management, drivesWe 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:
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.
Philips HealthSuite is at the core of Philips’ digital transformation. It consists of a highly secured,consumers. Its modular set of re-usable digital capabilities that can liberate, integrate and integrateenable actionable insights on data from disparate systems and accelerate the development and deployment of digital propositions across the health continuum inwithin a secure cloud environment, connecting consumerenvironment.
We help secure patient safety and quality by participating in stage gate reviews from the start of the idea-to-market (I2M) process. This is intended to ensure that patient safety and quality aspects of Philips products and solutions match the expectations and criteria of the end-users in the field. We engage with professional medical IoT devices safelysocieties during regular and reliably,ad hoc advisory boards to help us understand the criteria on patient safety and providing sophisticated care management applicationsquality related to medical devices. Together with the Regulatory function, we contribute to clinical evaluation during pre-market risk assessments, post-market surveillance, and support care teamsany health hazards evaluations with expert advice.
We leverage the knowledge and patients alike.expertise of our community of medical professionals. Activities include strategic guidance built on clinical and scientific knowledge, building and nurturing customer partnerships and growth opportunities, fostering peer-to-peer relationships in relevant medical communities, driving co-innovation with customers, liaising with medical regulatory bodies, and supporting clinical and economic evidence development.
ToWe 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 efficiency, and to enable locally relevant solution creation we haveat four established four Innovation Hubs for the Philips Group:innovation hubs: Eindhoven (Netherlands), Cambridge (USA), Bangalore (India) and Shanghai (China). TheThese four hubs form a global network, together with the other smaller innovation and research sites in their respective regions, to provide access to each other’s capabilities to serve businesses, markets, and customers globally.
Alongside the hubs, where most of the central Innovation & Strategy organization is concentrated together with selected business R&D and market innovation teams, we continue to have significant, more focused innovation capabilities integrated into key technology centers at our other global business sites.
The Chief Medical Office is responsible for clinical innovation and strategy, healthcare economics, clinical evidence and market access, clinical education, as well as medical thought leadership, with a focus on healthcare governance and organization, the Quadruple Aim and value-based care. This includes engaging with stakeholders across the health continuum to extend Philips’ leadership in health technology and acting on new value-based reimbursement models that benefit the patient, health professional and care provider.
Leveraging the knowledge and expertise of the medical professional community across Philips, the Chief Medical Office includes many healthcare professionals who practice(d) in the world’s leading health systems. Its activities include strategic guidance built on clinical and scientific knowledge, building customer partnerships and growth opportunities, fostering peer-to-peer relationships in relevant medical communities, liaising with medical regulatory bodies, and supporting clinical and marketing evidence development.
Philips Experience Design is the global design function for the company, ensuringWe ensure that the user experiences of our innovations are inspiring, meaningful, people-focused, and locally relevant. It is also responsible for ensuring that the Philips brand experience is distinctive, consistently expressed across all customer touchpoints, and drives customer preference. 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 businesses. In 2022, Philips Experience Design partners with stakeholders across the organization to develop methodologies and enablers for defining value propositions, as well as to implement data-enabled design tools and processes to create meaning from data. Philips Experience Design received 151a total of 171 awards for design excellenceexcellence.
During 2022, Innovation & Strategy started to refocus R&D to deliver a greater return on investments by being selective in 2020.
In partnershipour 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 Philips Experience Design, Philips Healthcare Transformation Services (HTS) leverages Co-create methodologies with the aim of creating solutions that are tailored specificallysustainable impact, resources will shift to the challenges facing our customers, as local circumstancesbusinesses to innovate closer to, and workflows are key ingredients in the successful implementation of solutions. HTS is a team of healthcare transformation practitioners with, consulting skills and a portfolio of methods and tools in operational and clinical excellence, environmental and experience design, and technology transformation and analytics.customers.
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 62,00056,000 patent rights, 37,00033,000 trademarks, 104,000114,000 design rights and 3,200 domain names. Philips filed 876920 new patents in 2020,2022, 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.
We recharge the directly attributable part of the centralfunctional costs to the business segments.businesses. The remaining part is accounted for as central costs,'central costs', and includes costs related to the Executive Committee and Group functions such as Strategy, Legal and Audit fees.
Philips is present in more than 75 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 2020,2022, we opened prime locationsrelocated key offices in Cambridge and PittsburghBudapest (Hungary), Carlsbad (USA) and substantiallyHaifa (Israel), and manufacturing operations in Zhuhai (China). We invested in, amongst others, our campusR&D and manufacturing sites in Eindhoven-North (Netherlands)Bangalore (India), Pune (India), Plymouth (USA), Pittsburg (USA), Shenzhen (China) and Suzhou (China) to create an engaging workplacework environment that will help attractfosters the attraction and retainretention of the best talent. We have drivencontinued to drive productivity by optimizing our footprint globally and reducedreducing the number of sites through post-acquisition integration programs.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.
In line with our Environmental ESG commitmentcommitments towards 2025, as well as our commitmentwe continue to the UN Sustainable Development Goals, we are actively optimizingoptimize our real estate portfolio. Since 2018, our site-related CO2 emissions related to fossil fuel consumption have been reduced by over 10%, and we haveHaving met our goal of bringing those CO2our site-related CO₂ emissions under 35 kilotonneskilotons per year.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.
The vast majorityOver 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. Occupancy rates in Philips office locations were reduced during 2020 as a result of COVID-19 and this trend is expected to continue in 2021. The net book value of our land and buildings at December 31, 2020, represented EUR 1,374 million; construction in progress represented EUR 65 million. 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.
We operateaddress North America, Western Europe and other mature geographies, as well as Greater China and other growth geographies, via three market groups – North America, Greater China and International Markets (consisting of seven regions) – which are active in more than 100 countries worldwide.
The Markets’ core objective is to understand local market/customer needs, to create and activate the local marketing plans, to develop and manage the relationship with existing and new customers, and to deliver orders. As such, the market organizations are also responsible for the market-oriented profit-and-loss account (P&L) and balance sheet. They translateact as the voice of the customer intoin the innovation 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-DACH (Germany, Austria & Switzerland), 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 infrastructure of the company.
In 2020,2022, 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 economy experienced a sharp recession, owing toin 2021 has disrupted global supply chains. Secondly, previous loose monetary policy, combined with supply chain issues, resulted in strong inflationary pressures commencing towards the lockdown measures takenend of 2021. Thirdly, to combat high inflation, central banks around the coronavirus outbreaks. According to Oxford Economics,globe have embarked on aggressive monetary policy tightening cycles. Consequently, global real GDP is estimated to have contractedgrown by 3.9%3.0% in 2020,2022, compared with the 2.5% growth6.0% estimated in 20192021 for 2020. Across Philips’ markets, only Greater China is estimated to have shown growth in 2020, while the rest of the markets all suffered full-year recessions to various degrees.2022. Looking ahead, Oxford Economics expects mild recessions for advanced economies in 2023, with full-year global real GDP growth to reach 5.0% in 2021.expected at just 1.3%.
In a year shaped by the pandemic,North America, Philips helped customers roll out more than 8,000 ICU beds for COVID-19 patients. We quickly introduced the Rapid Equipment Deployment Kit, a self-service 20-bed ICU that can be deployedcontinues to expand its leadership in hours thanks to remote clinical training, installation, and set-up. We also developed ultrasound solutions for COVID-19 detection at the point of care.
Philips increased ventilator production multifold to meet the high COVID-19-related demand, and shipped ventilators across the world using a fair and ethical approach to allocate supply to acute patient demands based on COVID-19 datalong-term strategic partnership, helping health systems like TriHealth, Prisma Health and the available criticalUniversity Health System of San Antonio to address interoperability challenges and standardize care capacity. Following Philips’ deliveryacross their networks. This includes entering into a 7-year agreement with Northwell Health, the largest healthcare provider in the state of 12,300 bundled EV300 ventilator configurationsNew York, to help standardize patient monitoring, drive interoperability, and lay the US Strategic National Stockpile in linefoundation for a future-proof, enterprise-wide platform. Moreover, Philips has signed multi-year agreements to continue to expand virtual monitoring and care with the contract signed in April 2020, the US Department of HealthDefense.
Philips continues to innovate in its personal health business and Human Services cancelledhas started selling Philips Avent breast pumps via Durable Medical Equipment (DME) providers to give parents the deliveryability 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 in the US and Canada and is the most-recommended rechargeable toothbrush brand in the US. Philips Norelco remains the leading electric male grooming brand in the US and Canada, reaching the next generation of the remaining 30,700 ventilators.young men with our new OneBlade multi-purpose shaver.
Our commitmentPhilips continues to improving lives through meaningful innovation continuedbe recognized for its Inclusion and Diversity efforts in our partnership with the U.S. Department of Defense and Veterans Affairs (VA), where we are working to advance AI technology for early detection of COVID-19 and tele-critical care technologies and services. VA signed a 10-year contract, which enables it to invest up to USD 100 million with Philips to create the world’s largest tele-ICU system and extend access to intensive care expertise for veterans, regardlessNorth America, including being recognized by Forbes as one of their location.
We expanded our strategic relationships with local health systems, including Steward Health Care, which signed a nine-year, multi-vendor services contract with Philips, making us their strategic partner of choice. The University of Kentucky's UK HealthCare worked with Philips to power the state’s only eICU Clinical Command Center, which will help them in care provisioningBest Employers for COVID-19 patients. In addition, Tampa General signed a seven-year strategic partnership with Philips to provide the hospital with new patient monitoring solutions, imaging equipment, healthcare informatics, workflow solutionsDiversity and consulting.
Philips Sonicare is the sonic toothbrush brand most recommended by US dental professionals, and our Professional Teledentistry program has made it easierBest Employers for consumers to maintain wellness from home through the pandemic. Philips maintains a No. 1 market share in male grooming (electric). We are also one of the leading brands in reusable baby bottles and our Pregnancy+ apps are amongst the fastest-growing for new parents.Women.
In 20202022 we continued our efforts to provide innovative health technology solutions in support of China'sChina’s national health strategy, Healthy China 2030 – the action program designed to promote the health of China's 1.4 billion people.supplying national top hospitals, primary hospitals and private hospitals with tailor-made solutions for their clinical and research needs.
We signed a multi-year contractpartnered with national top hospitals Shanghai Ruijin Hospital and Sichuan Huaxi Hospital on clinical research that leverages our cutting-edge health technologies, and helped the First1st Affiliated Hospital of ZhejiangGuangzhou Medical University one of China's leading hospitals, to support its expansionestablish the largest sleep center in South China by providing consulting services, key equipment and upgrading. Combining clinical, research and education, this deal includes Ultrasound, Image Guided Therapy and Monitoring Analytics & Therapeutic Care solutions.
Philips helped Beijing Ditan Hospital, a top 3A hospital specially designated for COVID-19 care, to upgrade its ICU facility and capability with IntelliSpace Critical Care and Anaesthesia solutions supporting 41 ICU beds.
Philips provided cardiology solutions, including MR, Digital Subtraction Angiography and customer services, to Hong Kong Asia Heart Center, a private medical group dedicated to the treatment, rehabilitation and prevention of heart disease.
For consumers, we introduced our new SkinIQ range shaver, powered by the breakthrough Philips skin technology SkinIQ, recording record-breaking sales of 30,000 units sold on launch day on Tmall (S5000) and increasing total Male Grooming sell-out by 39% on JD (S7000).systems. We also collaboratedprovided Zhongshan-Jinshan Diabetic Foot Center with Tmall Innovation Centeran 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. And 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 launch Philips’ first C2B (ConsumerJiangxi Cihuai Cardiovascular and Cerebrovascular Hospital.
In the consumer space, in line with the consistent ‘Professional, Young and Premium’ positioning, we continue to Business) shaver, with 160,000 pieces selling out inaccelerate 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 month – a new benchmark‘gold brand’ (most favored brand of consumers) in the industry.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 focus on ‘local-for-local' innovation in systems, products and software, and continue to drive ‘made in China’ fulfillment for professional medical equipment.
In our internationalInternational 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 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:
InPhilips entered into partnerships with healthcare providers in the United Kingdom, Philips was awarded a 7-year strategic partnership with South Tees Hospitals NHS Foundation Trust, with a workforce of around 9,000 providing a range of specialist regional servicesUK and Germany to 1.5 million people. Thisdeliver its vendor-neutral Radiology Operations Command Center, which enables remote collaboration will utilize Philips’ innovative Vue PACS (Picture Archivingbetween technologists, radiologists and Communication System) technology and VNA (Vendor-Neutral Archiving) capability to support the Trust in connecting and integrating imaging facilitiesoperations teams across multiple regional locationssites, to provide seamless image sharing. Following the outbreak of COVID-19, Philips rapidly arranged for delivery of vital health technology equipmenthelp increase productivity and provided remote simulation-based training sessions that enabled life-saving techniques without putting healthcare professionals at further risk.
expand access to MR- and CT-based diagnosis. In Germany, Philips entered into an 8-year strategic partnership Paracelsus Clinics, offering solutions that maximize the availability of imaging systems and leverage digitalization and process optimization to realize quality and efficiency improvements. And we signed a 10-year strategic partnership agreement with Marienhospital Stuttgartthe municipal hospital Städtisches Klinikum Braunschweig, one of the country’s largest care providers, to deploy our digitalprovide monitoring solutions and alarm management. In an interview with a German healthcare solutions acrossmagazine, 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 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 departments to improve patient carelocations of the hospital. The agreement involves ultrasound devices and efficiency.services for cardiological, vascular or radiological examinations, OB/GYN, as well as mobile devices for the emergency department.
In Spain, we provided 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 Benelux,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 FlevoThanh Vu Medic Hospital Vietnam signed a 10-year strategic partnership agreement for which Philips is providing state-of-the-art imaging technology, informatics connectivity, 10-year comprehensive service and 5-year structured financing. In Fiji, Philips and Aspen Medical signed a 12-year strategic partnership agreement to support precision diagnosissupply and optimize workflowsintegrate diagnostic imaging equipment and patient pathways, while driving efficiencies and cost optimization. We also renewed our long-term partnership with Alrijne Hospitalservices for use in Leiderdorp and agreed a 5-year partnership with the Franciscus Gasthuis and Vlietland hospital in Rotterdam. We worked together with Erasmus University Medical Centre, Jeroen Bosch Hospital and the Ministry of Health, Welfare and Sport to launch the COVID-19 portal – a solution to enable hospitals to digitally exchange patient data and images, when COVID-19 patients are relocated betweentwo public hospitals. Some 95% of Dutch hospitals are connected to the portal.
In France,Brazil, Philips´ joint venture to provide and operate imaging diagnostics in the strategic partnership signedstate of Bahia via a Public-Private Partnership model continues to expand access to quality diagnostics and care for underserved populations, e.g. through the provision of a new reporting center and 12 imaging units placed in 2015 with Hospices Civils12 hospitals. Also in Brazil, a two-year Electronic Medical Record implementation at Fundação Hospitalar do Estado de Lyon (HCL) has once again proven to be productive and fruitful. DuringMinas Gerais (FEHMIG) will integrate 23 public hospitals in the first wavestate of the COVID-19 pandemic, we teamed up to develop an AI-based CT lung assessment tool, the full version of which was launched at the Radiological Society of North America event RSNA 2020.
Minas Gerais. In Spain, Philips and the Hospital San Joan de Déu in Barcelona signed an agreement to renew the pediatric surgical block, incorporating the most advanced technology for minimally invasive procedures. In this way, surgeons at the Hospital will have high-resolution images, and even augmented reality in real time, of the area on which they are operating.
In Italy,Argentina, Philips successfully participated in public tenders to supply hospitals fighting the COVID-19 emergency with ICU equipment – including over 3.000 monitors in the first half of the year alone – as well as Ultrasound and Therapeutic Care devices.
In Denmark, Philips’ Clinical Collaboration Platform supports telehealth and other connectivity initiatives to increase collaboration across hospitals, empowering medical image accessa tender for over 5,000 clinicians in the Region of Southern Denmark. The Region now has a single system for storing, retrieving, and viewing clinical images across all the locations and specialties in its extensive healthcare system, serving approximately 300 radiologists and nuclear medicine specialists performing 1.5 million exams yearly.
Supporting the Swedish National Board of Health and Welfare, we sped up delivery of IntelliVue X3 monitors to meet the increased care capacity needs of Swedish hospitals in the face of COVID-19.
In Indonesia, Philips signed a seven-year strategic partnership agreement with Mandaya Royal Hospital Puri, providing a turnkey solution combining the latest innovations in enterprise diagnosticproviding high-end imaging connected care and informatics, as well as service, maintenance and financing.
equipment for 17 public hospitals. In South Korea,Mexico, Philips secured a deal with Sejong Chungnam National University Hospital (CNUH)Grupo Angeles to provide an extensive range of Diagnostic Imaging and Image Guided Therapy solutions.
In Japan, we launched our Philips Lumify with Reacts handheld tele-ultrasound solution – with a novel subscription model – to enable powerful diagnostics at the bedside.
In Colombia, we signed our first deal for the implementation of EMR (Electronic Medical Record) and interoperability solutions with Santa Fe de Bogota Foundation. The agreement covers the replacement of its central information system with a comprehensive healthcare informatics solution with interoperable digital technology that improves its operational and administrative infrastructure, and overall patient experience.
In Turkey, Philips is a solutions partner of Basaksehir City Hospital. To help fight the pandemic, we installed more than 2,200 clinical and imaging devices across all modalities within three weeks, two months earlier than planned. We also signed a partnership agreement with one of the country's largest dental hospital chains, Dent Group.
In Saudi Arabia, Philips won a strategic deal to supply almost 3,000 patient monitors to help in the fight against COVID-19.
Supporting the increased demand for flexible ICU capacity, Philips introduced its new mobile ICUs in India. The ICUs can be furnished with a range of medical equipment, including ventilators, defibrillators, and patient monitoring.
Philips runs an Integrated Supply Chain (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.
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 aligned with our industrial footprint strategy to become more efficient and effective.
In order to improve demand forecasting accuracy and manage inventories more efficiently, we piloted the application of artificial intelligence and machine learning in our North American operations in the Personal Health business. We achieved an improved forecast accuracy of more than 20% and better fill rates, leading to increased customer satisfaction. We are now in the process of rolling this out to the rest of the world.
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.
Since 2017,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.
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 consolidatinghampered 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.
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,serve. We do this for enhanced scale, efficiency and customer proximity. Asproximity, and to reduce our environmental footprint. While our site count has continued to decrease, the number of the end of 2020, 25 sites have been closed or divested. Duringlocations equipped to make the same period,product is increasing. Philips has acquired 10 sites. is using its multi-modality sites, in combination with contract manufacturing partners, to regionally ‘multi-source’ many of its products. This will increase the resilience of our supply chain to manage future, unplanned disruptions and ensure access to public healthcare investment where ‘local’ requirements exist in our largest markets.
We have also startedcontinue to transformmake progress in transforming our warehousing and distribution operations into a more customer-centric and agile network that is more responsive to market volatility.network. In the last two years,2022, we have reduced our warehousing footprint by 28%31% compared to 2021, essentially through among other things, consolidation and servicing of multiple businesses from a single location.
The COVID-19 pandemic has testedOn the resilience and ingenuitylogistics front, we have established long-term contracts with suppliers, with the aim of our people and partners in every part of our integrated supply chain, as we adjusted production capacity to the fluctuations in market demand. We teamed up with partners such as KLM to establish air corridors to enable us to supply essential healthcare equipment and solutions during the lockdown periods. We worked closely with our manufacturing sitesincreasing reliability as well our suppliersas secured costs and availability on contracted lanes. We continue to deal with local (partial) lockdownsexplore and safeguard a reliable supply of componentsimplement solutions to diversify transportation options to increase reliability while reducing carbon emission and parts, prioritizing delivery of critical equipment to those in need.cost.
Philips Group
Supplier spend analysis per region
in %
Western Europe | |
North America | 36% |
Other mature geographies | 6% |
Total mature geographies | |
Growth geographies | |
Philips Group | 100% |
In 2020, the COVID-19 pandemic resulted in significant disruption to demand and international trade flows. Under these circumstances, the Procurement function was focused on managing uninterrupted supplies to enable Philips to provide critical life-saving healthcare equipment and solutions to our customers all over the world. For example, we had to make a steep ramp-up in the production of ventilators from 1,000 per week to 4,000 per week within a short period of 5 months. This necessitated significant investments in our own plants, as well as close cooperation with our contract manufacturers and parts suppliers, to ensure the availability of the significantly increased capacity. In certain cases, we needed to shift the supplier locations to countries where the impact of the pandemic was low.
For many components, lead times increased significantly, leading to shortages. Market prices for raw materials showed extreme volatility, falling in the first half of the year and recovering from their lows from June onwards, led by a return to manufacturing growth in China. In general, in the second half of the year the economy continued its path to recovery, with manufacturing output and new orders both rising.
Philips’ purpose to improve people’s lives applies throughout our value chain. An important area of focus for the Integrated Supply Chain is sustainability, and we are actively working on this together with our partners, whether these be theycomponent suppliers or energy or logistics providers. Close cooperation with our suppliers not only helps us deliver health technology innovations, it also supports new approaches that help us minimize our environmental impact and maximize the social and economic value we create.
Since 2003, 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 3,3005,300 product and component suppliers and 16,00017,100 service providers. In many cases, social issues deeper in our supply chain require us to intervene beyond tier 1 of the chain.
We want to make a difference through sustainable supply management and responsible sourcing. This is more than simplyjust managing compliance – it is about working togethercollaborating with our supply partners to havemake a positive and lasting impact. Therefore, the sustainability performance of our suppliers is fully embedded in our procurement organizationstrategy and strategy.way of working.
In 2020, our focus was2022, we focused on further maximizing our positive impact ondeeper in the supply chain.chain, strengthening our maturity-based approach to drive continuous improvement. Through the Supplier Sustainability Performance program, we improved the lives of 302,000approximately 459,000 workers in our supply chain.chain (2021: 430,000). We also exploredlaunched new ways to leverageengage 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 power of data in our sustainability engagements. Through new use-cases, we are utilizing insights from machine learningResponsible Business Alliance under the name Responsible Factory Initiative. This program enables other companies to strengthen the efficacy and effectiveness ofwork on continuously improving their suppliers’ sustainability performance at our suppliers.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. In 2020,2022, our programs focused specifically on improving suppliers’ sustainability performance, responsible sourcing of minerals, and reducing the environmental footprint of our supply base.base by driving the adoption of Science Based Targets.
In 2020, COVID-19 affected the global economy and the company’s results. In the Diagnosis & Treatment businesses, comparable sales*) declined due to the postponement of installations and elective procedures resulting from the impact of COVID-19. In the Personal Health businesses, COVID-19 led to a decline in comparable sales*) due to lockdowns in several countries. The Connected Care businesses recorded comparable sales growth*), as our innovations in both Monitoring & Analytics and Sleep & Respiratory Care were able to help our customers combat the pandemic.
Philips Group
Key data
in millions of EUR unless otherwise stated
2018 | 2019 | 2020 | 2020 | 2021 | 2022 | |
---|---|---|---|---|---|---|
Sales | 18,121 | 19,482 | 19,535 | 17,313 | 17,156 | 17,827 |
Nominal sales growth | 1.9% | 7.5% | 0.3% | 1.0% | (0.9)% | 3.9% |
Comparable sales growth1) | 4.7% | 4.5% | 2.5% | 2.9% | (1.2)% | (2.8)% |
Impairment of goodwill | (144) | (15) | (1,357) | |||
Income from operations | 1,719 | 1,644 | 1,542 | 1,264 | 553 | (1,529) |
as a % of sales | 9.5% | 8.4% | 7.9% | 7.3% | 3.2% | (8.6)% |
Financial expenses, net | (213) | (117) | (44) | (44) | (39) | (200) |
Investments in associates, net of income taxes | (2) | 1 | (9) | (9) | (4) | (2) |
Income tax expense | (193) | (337) | (284) | (212) | 103 | 113 |
Income from continuing operations | 1,310 | 1,192 | 1,205 | 999 | 612 | (1,618) |
Discontinued operations, net of income taxes | (213) | (19) | (10) | 196 | 2,711 | 13 |
Net income | 1,097 | 1,173 | 1,195 | 1,195 | 3,323 | (1,605) |
Adjusted EBITA1) | 2,366 | 2,563 | 2,570 | 2,277 | 2,054 | 1,318 |
as a % of sales | 13.1% | 13.2% | 13.2% | 13.2% | 12.0% | 7.4% |
Income from continuing operations attributable to shareholders2) per common share (in EUR) - diluted3) | 1.37 | 1.27 | 1.31 | |||
Adjusted income from continuing operations attributable to shareholders2) per common share (in EUR) - diluted1)3)4) | 1.72 | 1.98 | 1.98 | |||
Income from continuing operations attributable to shareholders2) per common share (in EUR) - diluted | 1.08 | 0.67 | (1.84) | |||
Adjusted income from continuing operations attributable to shareholders2) per common share (in EUR) - diluted1) | 1.74 | 1.65 | 0.96 |
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.
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 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.
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.
Since February 2022, Philips has substantially reduced its activities in Russia. This includes stopping shipments of our consumer health products to the country (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.
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.
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 workforce by 4,000 roles announced in October 2022, Philips plans to reduce its workforce by an additional 6,000 roles globally by 2025, of 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 which charges in 2023 are expected to be approximately EUR 470 million.
The composition of sales growth in percentage terms in 2020,2022, compared to 20192021 and 2018,2020, is presented in the following table.
Philips Group
Sales
in millions of EUR unless otherwise stated
2018 | 2019 | 2020 | 2020 | 2021 | 2022 | |
---|---|---|---|---|---|---|
Diagnosis & Treatment businesses | 7,726 | 8,485 | 8,175 | 8,175 | 8,635 | 9,168 |
Nominal sales growth | 4.9% | 9.8% | (3.7)% | (3.7)% | 5.6% | 6.2% |
Comparable sales growth1) | 6.6% | 5.5% | (2.3)% | (2.3)% | 8.1% | (0.7)% |
Connected Care businesses | 4,341 | 4,674 | 5,564 | 5,543 | 4,573 | 4,403 |
Nominal sales growth | 0.2% | 7.7% | 19.1% | 18.6% | (17.5)% | (3.7)% |
Comparable sales growth1) | 2.7% | 3.1% | 22.0% | 21.6% | (22.6)% | (10.8)% |
Personal Health businesses | 5,524 | 5,854 | 5,407 | 3,199 | 3,429 | 3,626 |
Nominal sales growth | (2.8)% | 6.0% | (7.6)% | (9.0)% | 7.2% | 5.7% |
Comparable sales growth1) | 2.3% | 5.0% | (4.2)% | (6.2)% | 8.8% | 0.1% |
Other | 530 | 469 | 389 | 396 | 519 | 629 |
Philips Group | 18,121 | 19,482 | 19,535 | 17,313 | 17,156 | 17,827 |
Nominal sales growth | 1.9% | 7.5% | 0.3% | 1.0% | (0.9)% | 3.9% |
Comparable sales growth1) | 4.7% | 4.5% | 2.5% | 2.9% | (1.2)% | (2.8)% |
Group sales amounted to EUR 19,53517,827 million in 2020,2022, 3.9% higher than in line with 20192021 on a nominal basis. AdjustedConsidering a 6.7% positive effect from currency and consolidation, comparable sales*) decreased by 2.8%. This 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 2023. The increase mainly relates to the Diagnosis & Treatment businesses driven by Diagnostic Imaging. Comparable order intake decreased 3%, compared to 4% growth in 2021. 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 2021, 0.9% lower than in 2020 on a 2.2%nominal basis. Considering a 0.3% positive effect from currency and consolidation, comparable sales*) decreased by 1.2%. While the currency effect was negative, mainly due to depreciation of currencies against the euro, and affected all business segments, this was more than offset by a positive consolidation impact from new acquisitions.
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 Enterprise Diagnostic Informatics, which was more than offset by a decline in Ultrasound and in 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 basis. Considering a 2.5% negative currency effect and consolidation impact, comparable sales*) increased by 3%8.1%. The negative currency effectThis was mainly due to depreciation of currencies against the eurodriven by double-digit growth in Image-Guided Therapy and affected all business segments.mid-single-digit growth in Diagnostic Imaging and Ultrasound, reflecting demand for Philips' portfolio and positive market conditions.
GroupIn 2022, sales amounted to EUR 19,4824,403 million, 3.7% lower than in 2019, 8% higher2021 on a nominal basis. Adjusted forConsidering a 3.0%7.1% positive currency effect and consolidation impact, comparable sales*) were 4.5% above 2018. The positive currency effect is mainly driven by the appreciation of the US dollar against the euro.
In 2020, sales amounted to EUR 8,175 million, 4% lower than in 2019 on a nominal basis. Excluding a 1.4% negative currency effect and consolidation impact, comparable sales*) decreased by 2%, as low-single-digit growth in Diagnostic Imaging,10.8%. This was more than offset by a high-single-digit decline in Image-Guided Therapy and Ultrasoundmainly due to the postponementconsequences of installationsthe Respironics field action and elective procedures resulting from the impact of COVID-19. supply chain headwinds.
In 2019,2021, sales amounted to EUR 8,4854,573 million, 10% higher17.5% lower than in 20182020 on a nominal basis. ExcludingConsidering a 4.3%5.1% positive currency effect and consolidation impact, comparable sales*) decreased by 22.6%, following the high COVID-19-generated demand in 2020 and the impact of the Respironics recall in 2021.
In 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 5%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-digitUkraine. Oral Healthcare and Mother & Child Care recorded mid-single-digit growth, which was offset by a mid-single-digit decline in Image-Guided Therapy, high-single-digit growth 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.Personal Care.
In 2020,2021, sales amounted to EUR 5,5643,429 million, 19%7.2% higher than in 20192020 on a nominal basis. ExcludingConsidering a 2.9%1.6% negative currency effect and consolidation impact, comparable sales*) increased by 22%, with double-digit growth in both Monitoring & Analytics and Sleep & Respiratory Care, as our innovations in these therapeutic areas were able to help our customers combat8.8%. This was driven by robust customer demand for new product introductions across the pandemic.world.
In 2019,2022, sales amounted to EUR 4,674629 million, 8% higher on a nominal basis compared to 2018. Excluding a 4.6% positive currency effectEUR 519 million in 2021. The increase was mainly due to additional royalty income and consolidation impact, comparable sales*) increased by 3%, with low-single-digit growth in Sleep & Respiratory Care and Monitoring & Analytics. The positive currency effect is mainly driven bysupplies to the appreciation of the US dollar against the euro.divested Domestic Appliances business.
In 2020,2021, sales amounted to EUR 5,407 million, 8% lower than in 2019 on a nominal basis. Excluding a 3.4% negative currency effect and consolidation impact, comparable sales*) decreased by 4%, driven by a mid-single-digit decline in Personal Care, and a high-single-digit decline in Oral Healthcare, mainly caused by lockdowns in several countries.
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 2020, sales amounted to EUR 389519 million, compared to EUR 469396 million in 2019.2020. The decreaseincrease was mainly duedriven by supplies to lowera divested business and higher royalty income.
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.
Philips Group
Sales by geographic area
in millions of EUR unless otherwise stated
2018 | 2019 | 2020 | 2020 | 2021 | 2022 | |
---|---|---|---|---|---|---|
Western Europe | 3,990 | 4,134 | 4,613 | 3,702 | 3,645 | 3,603 |
North America | 6,338 | 6,951 | 6,949 | 6,884 | 6,781 | 7,588 |
Other mature geographies | 1,892 | 1,905 | 1,860 | 1,750 | 1,694 | 1,643 |
Total mature geographies | 12,221 | 12,990 | 13,422 | 12,336 | 12,120 | 12,833 |
Nominal sales growth | 2.5% | 6.3% | 3.3% | 2% | (2)% | 6% |
Comparable sales growth1) | 3.3% | 2.1% | 3.9% | 3% | (3)% | (1)% |
Growth geographies | 5,901 | 6,492 | 6,113 | 4,977 | 5,036 | 4,993 |
Nominal sales growth | 0.7% | 10.0% | (5.8)% | (3)% | 1% | (1)% |
Comparable sales growth1) | 7.6% | 9.6% | (0.3)% | 3% | (7)% | |
Philips Group | 18,121 | 19,482 | 19,535 | 17,313 | 17,156 | 17,827 |
Sales in mature geographies in 20202022 were 3%6% higher than in 20192021 on a nominal basis and 4% higher1% lower on a comparable basis*). Sales in Western Europe were 12% higher1% lower year-on-year on a nominal basis and 11% higher3% lower on a comparable basis*), with a double-digit growthdecline in the Connected Care businesses, and Personal Health businesses, partly offset by a low-single-digit decline in the Diagnosis & Treatment businesses, and flat growth in the Personal Health businesses. Sales in North America were in line with 201912% higher year-on-year on a nominal basis and increased 2%were flat on a comparable basis*), as double-digit growth in the Connected CarePersonal Health businesses and low-single-digit growth in the Personal HealthDiagnosis & Treatment businesses were largely offset by a high-single-digitmid-single-digit decline in the DiagnosisConnected Care businesses, mainly due to the Sleep & Treatment businesses.Respiratory Care business. Sales in other mature geographies decreased by 2%3% on both a nominal basis and 1% on a comparable basis*). Double-digit, with high-single-digit comparable sales growth*) in the Connected CarePersonal Health businesses was more than offset by a double-digithigh-single-digit decline in the Personal HealthConnected Care businesses and a low-single-digit decline in the Diagnosis & Treatment businesses.
Sales in mature geographies in 20192021 were EUR 769 million higher2% lower than in 2018, or 6% higher2020 on a nominal basis and 2% higher3% lower on a comparable basis*). Sales in Western Europe were 4% higher2% lower year-on-year on a nominal basis and 2% higher3% 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 and low-single-digit growth in the Connected Care businesses, while the Diagnosis & Treatment businesses were in line with 2018.businesses. Sales in North America increased by EUR 613 million, or 10%were 1% lower year-on-year on a nominal basis and increased 4%decreased 3% on a comparable basis*), with mid-single-digitas double-digit growth in the Diagnosis & Treatment businesses and low-single-digit growth in the Personal Health businesses andwere 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 in 2022 decreased by 1% on a nominal basis and 7% on a comparable basis*), with a double-digit decline in the 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*) was 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 declined by 3% on a 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 growth geographies in 2020 decreased by 6% on a nominal basis, mainly due to depreciation of their currencies against the euro, but were in line with 2019 on a comparable basis*), with double-digit growth in the Connected CarePersonal Health businesses and mid-single-digithigh-single-digit growth in the Diagnosis & Treatment businesses, partly offset by a double-digit decline in the Personal HealthConnected Care businesses. The flat year-on-yearlow-single-digit comparable sales growth*) was driven by double-digit growth in India, high-single-digit growth in Russia & Central Asia, and mid-single-digit growth in Central & Eastern Europe and Russia & Central Asia and high-single-digit growth in Latin America, offset by a high-single-digit decline in China.
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 increase was driven by double-digit growth in China.America.
Philips Group
Diagnosis & Treatment businesses sales
Sales by geographic area
in millions of EUR unless otherwise stated
2018 | 2019 | 2020 | 2020 | 2021 | 2022 | |
---|---|---|---|---|---|---|
Western Europe | 1,557 | 1,586 | 1,589 | 1,589 | 1,743 | 1,707 |
North America | 2,879 | 3,214 | 2,931 | 2,931 | 3,088 | 3,514 |
Other mature geographies | 797 | 851 | 835 | 835 | 849 | 825 |
Total mature geographies | 5,232 | 5,651 | 5,355 | 5,355 | 5,681 | 6,046 |
Growth geographies | 2,494 | 2,834 | 2,820 | 2,820 | 2,954 | 3,122 |
Sales | 7,726 | 8,485 | 8,175 | 8,175 | 8,635 | 9,168 |
Nominal sales growth | 5% | 10% | (4)% | (4)% | 6% | 6% |
Comparable sales growth1) | 7% | 5% | (2)% | (2)% | 8% | (1)% |
From a geographic perspective, nominal salesSales in growth geographies wereincreased by 6% on a nominal basis in line with 2019, while2022, and on a comparable salesbasis*) showed mid-single-digita low-single-digit decline, which was mainly due to China. Sales in mature geographies increased by 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 2021, and on a comparable basis*) showed high-single-digit growth, driven by double-digit growth in China, Russia & Central AsiaLatin America, India and Central & Eastern Europe partly offset by India and Middle East & Turkey.mid-single-digit growth in China. Sales in mature geographies showed a mid-single-digit decreaseincreased by 6% on a nominal basis and showed high-single-digit growth on a comparable basis*). Comparable sales*) declined,increased, with a low-single-digit decline in Western Europe and a high-single-digit decline in North America.
From a geographic perspective, nominal sales in growth geographies increased by 14% in 2019, while comparable sales*) showed double-digit growth, driven by double-digit growth in China 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-digithigh-single-digit growth in other mature geographies, while Western Europe remained flat year-on-year.Europe.
Philips GroupConnected Care businesses
Connected care businesses salesSales by geographic area
in millions of EUR unless otherwise stated
2018 | 2019 | 2020 | |
---|---|---|---|
Western Europe | 751 | 782 | 1,118 |
North America | 2,448 | 2,624 | 2,882 |
Other mature geographies | 580 | 646 | 723 |
Total mature geographies | 3,779 | 4,052 | 4,724 |
Growth geographies | 562 | 622 | 840 |
Sales | 4,341 | 4,674 | 5,564 |
Nominal sales growth | 0% | 8% | 19% |
Comparable sales growth1) | 3% | 3% | 22% |
From a geographic perspective, sales on a nominal basis increased by 35% in growth geographies in 2020 and on a comparable basis*) showed double-digit growth, with double-digit growth across all regions. Sales in mature geographies increased by 17% on a nominal basis and showed double-digit growth on a comparable basis*), with double-digit growth across all regions.
From a geographic perspective, sales on a nominal basis increased by 11% in growth geographies in 2019, 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 decreased 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.
Philips Group
Personal Health businesses sales
in millions of EUR unless otherwise stated
2018 | 2019 | 2020 | 2020 | 2021 | 2022 | |
---|---|---|---|---|---|---|
Western Europe | 1,516 | 1,604 | 1,758 | 1,106 | 764 | 646 |
North America | 945 | 1,003 | 996 | 2,876 | 2,602 | 2,741 |
Other mature geographies | 334 | 367 | 299 | 722 | 605 | 544 |
Total mature geographies | 2,795 | 2,974 | 3,052 | 4,704 | 3,971 | 3,931 |
Growth geographies | 2,730 | 2,880 | 2,355 | 839 | 602 | 472 |
Sales | 5,524 | 5,854 | 5,407 | 5,543 | 4,573 | 4,403 |
Nominal sales growth | (3)% | 6% | (8)% | 19% | (17)% | (4)% |
Comparable sales growth1) | 2% | 5% | (4)% | 22% | (23)% | (11)% |
Sales in growth geographies decreased 18%by 22% on a nominal basis in 2020,2022, 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
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 3%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 by 2% on a nominal basis, and on a comparable basis*) showed mid-single-digit growth, driven by double-digit growth in Western Europe, partly offset by other mature geographies.
Sales in growth geographies increased 6% on a nominal basis in 2019 and on a comparable basis*) showed mid-single-digit growth, with double-digit growth in Central & Eastern Europe and mid-single-digit growth in China. Sales in mature geographies increased 6% on a nominal basis and on a comparable basis*) showed mid-single-digit growth, with high-single-digit growth in other mature geographies, mid-single-digit growth in Western Europe and low-single-digit growth in North America.
Philips Group
Cost of sales components
in millions of EUR unless otherwise stated
2018 | as a % of sales | 2019 | as a % of sales | 2020 | as a % of sales | 2020 | as a % of sales | 2021 | as a % of sales | 2022 | as a % of sales | |
---|---|---|---|---|---|---|---|---|---|---|---|---|
Costs of materials used | 4,826 | 26.6% | 5,321 | 27.3% | 5,240 | 26.8% | 4,221 | 24.4% | 4,142 | 24.1% | 4,320 | 24.2% |
Salaries and wages | 2,132 | 11.8% | 2,311 | 11.9% | 2,362 | 12.1% | 2,316 | 13.4% | 2,245 | 13.1% | 2,462 | 13.8% |
Depreciation and amortization | 447 | 2.5% | 572 | 2.9% | 622 | 3.2% | 591 | 3.4% | 479 | 2.8% | 535 | 3.0% |
Other manufacturing costs | 2,162 | 11.9% | 2,403 | 12.3% | 2,530 | 12.9% | 2,364 | 13.7% | 3,123 | 18.2% | 3,316 | 18.6% |
Cost of sales | 9,568 | 52.8% | 10,607 | 54.4% | 10,754 | 55.0% | 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 manufacturing, and other manufacturing costs (such as repair and maintenance costs related to production, expenses incurred for shipping and handling of internal movements of goods, and other expenses related to manufacturing).
Philips’ cost of sales increased by EUR 147645 million to EUR 10,75410,633 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:
Philips’ cost of sales increased by EUR 495 million to EUR 9,988 million in 2021, compared to EUR 9,493 million in 2020, comparedmainly due to the field action provision of EUR 10,607719 million in 2019. Expressed as a percentageconnection with the Philips Respironics voluntary recall notification in the Sleep & Respiratory Care business reflected in other manufacturing costs. Other key factors influencing cost of sales this represented an increase to 55.0% of sales in 2020 from 54.4% of sales in 2019.were as follows:
the impact of increases in procurement and supply chain costs.
acquisitions.
Other manufacturing costs increased by EUR 127 million in 2020, mainly due to a provision of EUR 38 million related to legal matters and charges of EUR 34 million due to changes in ventilator demand.
In 2020,2022, Philips’ gross margin was EUR 8,7817,194 million, or 45.0%40.4% of sales, compared to EUR 8,8757,168 million, or 45.6%41.8% of sales, in 2019.2021. 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 gross margin was mainly driven by a EUR 70 million decrease in IP royalty income, as well as lower coverage of fixed costs in our industrial base, mainly due to the impact of COVID-19.
In 2019, Philips’ gross margin increased to EUR 8,875 million compared to EUR 8,554 million in 2018, while the margin decreased to 45.6% of sales from 47.2% of sales in 2018. The year-on-year decrease in the 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.Philips Respironics voluntary recall notification in the Sleep & Respiratory Care business.
Selling expenses amounted to EUR 4,6064,609 million, or 23.6%25.9% of sales, in 2020,2022, compared to EUR 4,6824,258 million, or 24.0%24.8% of sales, in 2019.2021. The year-on-year decreaseincrease in selling expenses of EUR 76351 million was mainly due to an unfavorable foreign currency impact and an increase in restructuring, acquisition-related and other charges.
Selling expenses amounted to EUR 4,258 million, or 24.8% of sales, in 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 savings from productivity improvements,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, partly offset by costs from new acquisitions.costs. Selling expenses in 2020 include EUR 141 million of restructuring, acquisition-related and other charges of EUR 140 million in 2021, compared to EUR 158133 million in 2019.
Selling expenses amounted to EUR 4,682 million in 2019, or 24.0% of sales, compared to EUR 4,500 million, or 24.8% of sales, in 2018. Selling expenses in 2019 included EUR 158 million of 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.2020.
General and administrative expenses amounted to EUR 668671 million, or 3.4%3.8% of sales, in 2020,2022, compared to EUR 631599 million, or 3.2%3.5% of sales, in 2019.2021. The year-on-year increase of EUR 3772 million was mainly driven by higher restructuring, acquisition-related and other charges.
General and administrative expenses amounted to EUR 599 million, or 3.5% of sales, in 2021, compared to EUR 630 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 charges related to the separation of the Domestic Appliances business of EUR 37 million. Higherlower restructuring, acquisition-related and other charges were largely offset by savings from productivity programs.
General and administrative expenses amounted to EUR 631 million, or 3.2% of sales, in 2019, compared to EUR 631 million, or 3.5% of sales, in 2018. 2019 included EUR 24 million of restructuring, acquisition-related and other charges, compared to EUR 30 million in 2018.charges.
Research and development costs were EUR 1,9152,103 million, or 9,8%11.8% of sales, in 2020,2022, compared to EUR 1,8841,806 million, or 9.7%10.5% of sales, in 2019.2021. The year-on-year increase of EUR 31297 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 technology assetssales, in the Connected Care businesses and Diagnosis & Treatment businesses totaling2021, compared to EUR 541,822 million, offsetor 10.5% of sales, in 2020. The year-on-year decrease of EUR 16 million was mainly driven by lower restructuring, and acquisition-related costs and other charges. 20202021 includes EUR 132101 million of restructuring, acquisition-related and other charges, compared to EUR 151131 million in 2019.
Research and development costs were EUR 1,884 million, or 9,7% of sales, in 2019, compared to EUR 1,759 million, or 9.7% of sales, in 2018. Research and development costs in 2019 included EUR 151 million of restructuring, acquisition-related and other charges, compared to EUR 76 million in 2018. 2019 includes EUR 92 million related to an impairment of development costs. 2018 also included EUR 12 million of charges related to the Consent Decree.2020.
Philips Group
Research and development expenses
in millions of EUR unless otherwise stated
2018 | 2019 | 2020 | 2020 | 2021 | 2022 | |
---|---|---|---|---|---|---|
Diagnosis & Treatment | 801 | 928 | 891 | 891 | 910 | 1,124 |
Connected Care | 424 | 465 | 550 | 547 | 543 | 637 |
Personal Health | 300 | 302 | 293 | 190 | 200 | |
Other | 235 | 189 | 181 | 194 | 163 | 142 |
Philips Group | 1,759 | 1,884 | 1,915 | 1,822 | 1,806 | 2,103 |
As a % of sales | 9.7% | 9.8% | 10.5% | 11.8% |
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 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 2020 segment classifications.by segment.
Philips Group
Income from operations and Adjusted EBITA1)1)
in millions of EUR unless otherwise stated
Income from operations | as a % of sales | Adjusted EBITA1) | as a % of sales | Income from operations | as a % of sales | Adjusted EBITA1) | as a % of sales | |
---|---|---|---|---|---|---|---|---|
2022 | ||||||||
Diagnosis & Treatment | 404 | 4.4% | 774 | 8.4% | ||||
Connected Care | (2,246) | (51.0)% | 95 | 2.2% | ||||
Personal Health | 515 | 14.2% | 538 | 14.8% | ||||
Other | (202) | (89) | ||||||
Philips Group | (1,529) | (8.6)% | 1,318 | 7.4% | ||||
2021 | ||||||||
Diagnosis & Treatment | 941 | 10.9% | 1,071 | 12.4% | ||||
Connected Care | (722) | (15.8)% | 497 | 10.9% | ||||
Personal Health | 576 | 16.8% | 590 | 17.2% | ||||
Other | (242) | (105) | ||||||
Philips Group | 553 | 3.2% | 2,054 | 12.0% | ||||
2020 | ||||||||
Diagnosis & Treatment | 495 | 6.1% | 816 | 10.0% | 497 | 6.1% | 818 | 10.0% |
Connected Care | 708 | 12.7% | 1,195 | 21.5% | 704 | 12.7% | 1,191 | 21.5% |
Personal Health | 619 | 11.4% | 704 | 13.0% | 362 | 11.3% | 433 | 13.5% |
Other | (280) | (145) | (300) | (165) | ||||
Philips Group | 1,542 | 7.9% | 2,570 | 13.2% | 1,264 | 7.3% | 2,277 | 13.2% |
2019 | ||||||||
Diagnosis & Treatment | 660 | 7.8% | 1,078 | 12.7% | ||||
Connected Care | 267 | 5.7% | 618 | 13.2% | ||||
Personal Health | 844 | 14.4% | 943 | 16.1% | ||||
Other | (127) | (76) | ||||||
Philips Group | 1,644 | 8.4% | 2,563 | 13.2% | ||||
2018 | ||||||||
Diagnosis & Treatment | 629 | 8.1% | 872 | 11.3% | ||||
Connected Care | 399 | 9.2% | 662 | 15.2% | ||||
Personal Health | 796 | 14.4% | 860 | 15.6% | ||||
Other | (105) | (28) | ||||||
Philips Group | 1,719 | 9.5% | 2,366 | 13.1% |
Net income increased by EUR 22 million compared to 2019, mainly due to lower net financial expenses and lower income tax expenses, partly offset by charges of EUR 144 million related to impairment of goodwill.
Income from operations in 20202022 amounted to a loss of EUR 1,5421,529 million, or 7.9%(8.6)% of sales, compared to EUR 1,644553 million, or 8.4%3.2% of sales, in 2019.2021, 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 the sales decline and cost inflation, partly offset by pricing and productivity measures.
Amortization and goodwill impairment charges in 20202022 were EUR 5251,720 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 22 million related to an impairment of a technology asset. In 2021, amortization and goodwill impairment charges were EUR 337 million and includeincluded 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.
Restructuring, acquisition-related and other charges in 2022 were EUR 1,127 million. This includes: restructuring charges of EUR 185 million; EUR 282 million portfolio realignment impairments and charges; EUR 250 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 connection 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 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.
Income from continuing operations attributable to shareholders per common share (in EUR) - diluted, was EUR (1.84) in 2022, compared to EUR 0.67 in 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 EUR 2.1 billion compared to 2020, mainly driven by the gain on the sale of the Domestic Appliances business, partly offset by the EUR 719 million field action provision.
Income from operations in 2021 amounted to EUR 553 million, or 3.2% of sales, compared to EUR 1,264 million, or 7.3% of sales, in 2020, mainly impacted by the EUR 719 million field action provision. Adjusted EBITA*) in 2021 was EUR 2,054 million and the margin amounted to 12.0%, compared to EUR 2,277 million and a margin of 13.2%, 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, andas well as amortization charges of EUR 92 million related to an impairment of a technology asset. 2019 amortization and goodwill impairment charges were EUR 447 million and included a EUR 147 million impairment of acquired intangible assets.
Restructuring, acquisition-related and other charges in 20202021 were EUR 5041,164 million. This includes a field action provision of EUR 719 million in connection with the Philips Respironics voluntary recall notification, provisions for quality actions of EUR 94 million and includeother matters of EUR 20953 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 releasere-measurement of a contingent consideration liability, EUR 31 million related to impairments of capitalized development costs, EUR 43 million of charges due to changes in ventilator demand, EUR 42 million of separation costs related to the Domestic Appliances business, a EUR 38 million provision related to legal matters, and EUR 21 million related to pension liability de-risking in the US. 2019 charges were EUR 471 million and included EUR 249 million of restructuring charges (of which EUR 39 million related to impairments of capitalized development costs), EUR 69 million of acquisition-related charges, EUR 22 million charges related to legal matters, EUR 60 million related to an impairment of capitalized development costs, and EUR 44 million of charges related to the Consent Decree, partly offset by a gain of EUR 64 million related to a divestment.
Adjusted EBITA*) in 2020 increased by EUR 7 million to EUR 2,570 million, or 13.2% of sales.
The 2020 performance resulted in an increase in Income from continuing operations attributable to shareholders per common share (in EUR) - diluted, of 3%, fromwas EUR 1.270.67 in 20192021, compared to EUR 1.311.08 in 2020. Adjusted income from continuing operations attributable to shareholders per common share (in EUR) - diluted*) amounted towas EUR 1.98 and was1.65 in line with 2019.
Net income increased by EUR 76 million compared to 2018, mainly due to improvements in operational performance, lower net financial expenses and lower charges related to discontinued operations, partly offset by higher income tax expense and charges of EUR 97 million related to impairment of goodwill.
In 2019, Income from operations amounted to EUR 1,644 million, or 8.4% of sales, a decrease of EUR 75 million year-on-year. Restructuring, acquisition-related and other charges amounted to EUR 471 million,2021, compared to EUR 299 million1.74 in 2018. 2019 includes a gain of EUR 64 million related to a divestment, charges of EUR 99 million related to an impairment of capitalized development costs, a charge related to a litigation provision, charges related to the Consent Decree of EUR 44 million and a provision 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.
Adjusted EBITA*) in 2019 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% from EUR 1.39 in 2018 to EUR 1.30 in 2019. Adjusted income from continuing operations attributable to shareholders per common share (in EUR) - diluted*) increased by 15% from EUR 1.76 in 2018 to EUR 2.02 in 2019.2020.
Income from operations in 20202022 decreased to EUR 495404 million, compared to EUR 660941 million in 2019.2021. 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 170 million and include EUR 22 million of charges related to an impairment of a technology asset in Image-Guided Therapy and a goodwill impairment of EUR 27 million in Precision Diagnosis Solutions. 2021 charges were EUR 155 million and included EUR 55 million of charges related to an impairment of a technology asset in Image-Guided Therapy.
Restructuring, acquisition-related and other charges in 2022 were EUR 201 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 497 million in 2020. This was primarily due to lower volumes resulting in lower factory fixed cost coverage,sales growth and an adverse mix impact as a result of lower sales in the higher-margin businesses of Ultrasound and Image-Guided Therapy due to the impact of COVID-19.productivity measures. These factors also impactedresulted in an increased Adjusted EBITA*), which was 10.0%12.4% of sales in 2020.
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 includeincluded EUR 92 million of charges related to an impairment of a technology asset in Image-Guided Therapy. 2019 charges were EUR 196 million and included a EUR 69 million impairment of acquired intangible assets.
Restructuring, acquisition-related and other charges in 2021 amounted to a gain of EUR 25 million and include restructuring charges of EUR 44 million, acquisition-related charges of EUR 48 million offset by a EUR 85 million gain related to the re-measurement of contingent consideration liabilities, and a release of a legal provision of EUR 38 million. 2020 charges were EUR 112 million and includeincluded EUR 57 million of restructuring charges, EUR 73 million of acquisition-related charges offset by a EUR 101 million gain related to the releasere-measurement of a contingent consideration liability, EUR 38 million related to legal matters, and a EUR 31 million impairment of capitalized development costs. 2019 charges were EUR 222 million and included EUR 107 million of restructuring charges (of which EUR 39 million related to impairments of capitalized development costs), EUR 42 million of acquisition-related charges and EUR 60 million related to an impairment of capitalized development costs.
Income from operations in 2019 increased to EUR 660 million compared to EUR 629 million in 2018. The year 2019 included EUR 196 million of charges related to amortization and a goodwill impairment, compared to EUR 98 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 assets in Image-Guided Therapy. Restructuring, acquisition-related and other charges to improve productivity were EUR 222 million, compared to EUR 146 million in 2018. 2019 includes charges of EUR 99 million related to impairments of capitalized development costs.
Adjusted EBITA*) in 2019 amounted to EUR 816 million, or 12.7% of sales, and improved mainly due to sales growth and productivity, partly offset by investments and tariffs.
Income from operations in 2020 increased2022 decreased to EUR 708(2,246) million, compared to EUR 267(722) million in 2019.2021. This was mainly due to operating leveragethe EUR 1.3 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 programs, which more than offset investmentsmeasures.
Amortization and goodwill impairment charges in 2022 were EUR 1,530 million and include EUR 1,331 million impairment of goodwill related to ramp up production.the Sleep & Respiratory Care business. 2021 charges were EUR 161 million and 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 in 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 (722) million, compared to EUR 704 million in 2020. This was mainly due to the decline in sales and the impact of the Respironics recall on the Sleep & Respiratory Care business. These factors also impacted Adjusted EBITA*), which was 21.5%10.9% of sales in 2020.2021.
Amortization and goodwill impairment charges in 20202021 were EUR 278161 million and include EUR 14413 million impairment of goodwill related to the Population Health Managementdivested Personal Emergency Response Services (PERS) and Senior Living business. 20192020 charges were EUR 219278 million and included a charge of EUR 78144 million impairment of goodwill related to the Population Health Management business.
Restructuring, acquisition-related and other charges in 2021 were EUR 1,058 million and include a field action provision of EUR 719 million in connection with the Philips Respironics voluntary recall notification, EUR 93 million of restructuring and acquisition-related charges, provisions for quality actions of EUR 94 million and other matters of EUR 53 million, and a gain of EUR 33 million related to a minority participation. 2020 charges were EUR 209 million and includeincluded restructuring charges of EUR 76 million, acquisition-related charges of EUR 22 million, and charges of EUR 43 million due to changes in ventilator demand. 2019 charges were EUR 131 million and included restructuring charges of EUR 38 million, acquisition-related charges of EUR 26 million, and EUR 44 million of charges related to the Consent Decree.
Income from operations in 2019 amounted to EUR 267 million compared to EUR 399 million in 2018. The year 2019 includes EUR 219 million of charges 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 and Population Health Management. Restructuring, acquisition-related and other charges amounted to EUR 131 million in 2019, compared to EUR 122 million in 2018. 2019 included EUR 44 million of charges related to the Consent Decree.
Adjusted EBITA*) in 2019 amounted to EUR 618 million, or 13.2% of sales, and decreased mainly due to tariffs, an adverse currency impact, mix and higher material costs..
Income from operations in 20202022 decreased to EUR 619515 million, compared to EUR 844576 million in 2019.2021. This was mainly due to a decline in sales,driven by cost inflation and an adverse foreign currency impact, partly offset by cost savings.pricing and productivity measures. These factors also impactedresulted in a decrease in Adjusted EBITA*), which was 13.0% to 14.8% of sales.
Amortization and goodwill impairment charges in 20202022 were EUR 2015 million and include amortization charges related to intangible assets in Mother & Child Care and Domestic Appliances. 2019Care. 2021 charges were EUR 2515 million and included amortization charges related to intangible assets in Mother & Child Care and Domestic Appliances.Care.
Restructuring, acquisition-related and other charges in 20202022 and 2021 were not material.
Income from operations in 2021 increased to EUR 576 million, 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.
Amortization charges in 2021 were EUR 6515 million and include restructuringamortization charges of EUR 40 million. 2019related to intangible assets in Mother & Child Care. 2020 charges were EUR 7316 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 55 million and included restructuring charges of EUR 50 million and a provision of EUR 22 million related to legal matters.
Income from operations in 2019 increased to EUR 844 million compared to EUR 796 million in 2018. The year 2019 included EUR 25 million of amortization charges, compared to EUR 31 million in 2018. These charges mainly relate to intangible assets in Mother & Child Care and Domestic Appliances . Restructuring, acquisition-related and other charges 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*) in 2019 amounted to EUR 943 million, or 16.1% of sales, and improved mainly due to sales growth, a positive mix impact and productivity, partly offset by tariffs.million.
In Other we report on the items Innovation, IP Royalties, Central costs and Other.
Income from operations in 2020 was2022 amounted to a loss of EUR (280)202 million, compared to a loss of EUR (127)242 million in 2019. The2021. Adjusted EBITA*) in 2020 was2022 amounted to a loss of EUR (145)89 million, compared to a loss of EUR (76)105 million in 2019. The income from operations and the2021. Adjusted EBITA*) were impactedincreased, mainly by lowerdue to higher royalty income, partly offset by an adverse currency impact and charges related to movementsinvestment in environmental provisions.Quality & Regulatory.
Restructuring, acquisition-related and other charges in 2022 were EUR 107 million and include restructuring charges of EUR 61 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 EUR 64 million of separation costs related to the Domestic Appliances business, partly offset by a benefit from the re-measurement of environmental liabilities of EUR 22 million.
Income from operations in 2021 was EUR (242) million, compared to EUR (300) million in 2020. Adjusted EBITA*) in 2021 was EUR (105) million, compared to EUR (165) million in 2020. Income from operations and Adjusted EBITA*) increased, mainly due to higher royalty income and lower charges related to environmental provisions, partly offset by investments, mainly in IT and Quality & Regulatory affairs.
Restructuring, acquisition-related and other charges in 2021 were EUR 131 million and include a loss of EUR 76 million related to a divestment and EUR 64 million of separation costs related to the Domestic Appliances business, partly offset by a benefit from the re-measurement of environmental liabilities of EUR 22 million. 2020 charges were EUR 118 million and includeincluded 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. 2019 charges were EUR 43 million and included restructuring charges of EUR 54 million and a gain of EUR 64 million related to a divestment.
In 2019, Income from operations totaled EUR (127) million, compared to EUR (105) million in 2018. Restructuring, acquisition-related and other charges amounted to EUR 43 million, compared to EUR 2 million in 2018. 2019 includes a gain of EUR 64 million related to a divestment and a charge related to a litigation provision, while 2018 included a gain of EUR 43 million related to a divestment.
Adjusted EBITA*) in 2019 decreased by EUR 48 million, mainly due to charges related to movements in environmental provisions and other non-recurring items.
A breakdown of Financialfinancial income and expenses is presented in the following table.
Philips Group
Financial income and expenses
in millions of EUR
2018 | 2019 | 2020 | 2020 | 2021 | 2022 | |
---|---|---|---|---|---|---|
Interest expense (net) | (157) | (169) | (159) | |||
Interest expense, net | (160) | (141) | (210) | |||
Sale of securities | 6 | 2 | 2 | 2 | - | - |
Impairments | - | - | ||||
Net change in fair value of financial assets through profit or loss | 129 | 95 | 9 | |||
Other | (62) | 50 | 113 | (15) | 6 | 2 |
Financial income and expenses | (213) | (117) | (44) | (44) | (39) | (200) |
Net financialFinancial income and expenses decreased byresulted in a net expense of EUR 73200 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 a gain from the increase in value of our investments in limited life funds, while 2019 included dividend income and fair value gainsfinancial charges related to early redemption of EUR 67 million.and USD bonds and issuance of new EUR bonds in April 2022, compared to 2021. For further information, refer to Financial income and expenses.
Net financialFinancial income and expenses resulted in a net expense of EUR 39 million in 2021, compared to a net expense of EUR 44 million in 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 tax expense decreased by EUR 9610 million year-on-year, mainly due to dividendlower income, from investments, while 2018 included financial chargespartly 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 EUR 46 million relatedtax assets due to bond redemptions. For further information, refer to Financial income and expenses.Financial income and expensesa business transfer in 2021.
Income taxes amounted to a benefit of EUR 284 million.103 million in 2021. The effective income tax rate in 20202021 was 19.0%(20.0)%, compared to 22.1%17.6% in 2019,2020, mainly due to one-off non-cashthe impact from the recognition of tax assets and other tax benefits fromas a decrease in tax rate, and higher non-taxable results from participations, partly offset by lower non-cash benefits fromresult of a business integration, compared to 2019. For 2021, 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 337 million. The effective income tax rate in 2019 was 22.1%, compared to 12.8% in 2018, mainly due to lower non-cash benefits from tax audit resolutions and business integration compared to 2018, partly offset by lower provisions for tax risks. For 2020, we expect our effective tax rate to be within the 24%-26% range, depending on the geographical mix of taxable income.year.
Results related to investments in associates decreasedimproved from a gainloss of EUR 14 million in 20192021 to a loss of EUR 92 million in 2020, as2022. In 2022, Philips recorded an impairment of EUR 66 million in relation to its interest in Candid Care Co. As part of the majorityacquisition of associatesAffera, Inc. by Medtronic plc in August 2022, the company sold its investment in Affera to Medtronic and recorded a loss in 2020.gain of EUR 84 million on the sale.
Results related to investments in associates improved from a loss of EUR 29 million in 20182020 to a loss of EUR 14 million in 2019.2021. 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.
Philips Group
Discontinued operations, net of income taxes
in millions of EUR
2018 | 2019 | 2020 | 2020 | 2021 | 2022 | |
---|---|---|---|---|---|---|
Signify, formerly Philips Lighting | (198) | |||||
The combined Lumileds and Automotive businesses | 12 | (1) | ||||
Domestic Appliances | 206 | 2,698 | 3 | |||
Other | (27) | (19) | (9) | (10) | 13 | 10 |
Net income of Discontinued operations | (213) | (19) | (10) | 196 | 2,711 | 13 |
In 2020 and 2019,2022, Discontinued operations consistsconsisted primarily of the Domestic Appliances business and certain other divestments that were reported as discontinued operations.
Discontinued operationsIn 2021, the sale of the Domestic Appliance business resulted in 2018 mainly included dividends receivedan after-tax gain of EUR 32 million and a EUR 218 million loss related to a value adjustment of the remaining interest in Signify.2.5 billion.
For further information, refer to Discontinued operations and assets classified as held for sale.
Net income attributable to non-controlling interests increaseddecreased from EUR 54 million in 20192021 to EUR 83 million in 2020.2022.
Net income attributable to non-controlling interests decreased from EUR 78 million in 20182020 to EUR 54 million in 2019.2021.
In 2020,2022, Philips completed three acquisitions, with Intact Vascular,acquisitions. The acquisition of Vesper Medical Inc. (Intact Vascular) being, completed on January 11, 2022, was the most notable. It also announcedAcquisitions in 2022 and prior years led to acquisition and post-merger integration charges of EUR 65 million in the planned acquisitions ofConnected Care businesses.
In 2021, Philips completed two acquisitions: BioTelemetry, which was completed on February 9, 2021, and Capsule Technologies.Technologies, which was completed on March 4, 2021. Acquisitions in 2021 and prior years led to acquisition and post-merger integration charges of EUR 51 million in the Connected Care businesses.
In 2020, Philips completed three acquisitions, with Intact Vascular being the most notable. Acquisitions in 2020 and prior years led to acquisition and post-merger integration charges ofresulting in a gain of EUR 28 million in the Diagnosis & Treatment businesses and charges of EUR 22 million in the Connected Care businesses.
In 2019,2022, Philips completed one divestment, which was not material.
In 2021, Philips completed three acquisitions,divestments. On September 1, 2021, Philips sold its Domestic Appliances business to a global investment firm, Hillhouse Investment, resulting in a EUR 2.5 billion gain after tax and transaction-related costs; reported in Discontinued Operations.
In 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 the Healthcare Information Systems business of Carestream Health being the most notable. Acquisitions in 2019 and prior years led to acquisition and post-merger integration chargesa value of EUR 42 million40 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 the Diagnosis & Treatment businesses and EUR 26 million in the Connected Care businesses.
In 2018, Philips completed nine acquisitions, with EPD Solutions Ltd. (EPD) being the most notable. Acquisitions in 2018 and prior years led to acquisition and post-merger integration chargesa loss of EUR 7276 million, which is included in the Diagnosis & Treatment businesses and EUR 26 millionOther business expenses in the Connected Care businesses.our Consolidated statements of income.
Philips did not complete any divestments in 2020.
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.
Philips completed one divestment in 2018. The divestment involved an aggregated consideration of EUR 58 million and resulted in a gain of EUR 44 million. In 2014, Philips announced its plan to sharpen its strategic focus by establishing two standalone companies focused on the HealthTech and Lighting opportunities respectively. After establishing a standalone structure for the lighting activities within the Philips Group, Philips Lighting (renamed Signify in 2018) was listed and started trading on Euronext in Amsterdam under the symbol ‘LIGHT’ on May 27, 2016. Through a series of Accelerated bookbuild offerings (in total five) and open market sales in the course of 2017, 2018 and 2019, Philips’ shareholding was reduced to nil in September 2019.
For details, please refer to Acquisitions and divestments.
The movements in cash and cash equivalents balance for the years ended December 31, 2018, 20192020, 2021 and 20202022 are presented and explained below:in the following table.
Philips Group
Condensed consolidated cash flows statements
in millions of EUR
2018 | 2019 | 2020 | 2020 | 2021 | 2022 | |
---|---|---|---|---|---|---|
Beginning cash and cash equivalents balance | 1,939 | 1,688 | 1,425 | 1,425 | 3,226 | 2,303 |
Net cash flows from operating activities | 1,780 | 2,031 | 2,777 | 2,511 | 1,629 | (173) |
Net cash flows from investing activities | ||||||
Net capital expenditures | (796) | (978) | (924) | (876) | (729) | (788) |
Free cash flow1) | 984 | 1,053 | 1,852 | |||
Other cash flows from investing activities | (690) | 376 | (391) | (391) | (2,943) | (698) |
Net cash flows from financing activities | ||||||
Treasury shares transactions | (948) | (1,318) | (298) | (297) | (1,613) | (174) |
Changes in debt | 160 | 109 | 783 | 783 | (251) | 1,092 |
Dividend paid to shareholders of the Company | (401) | (453) | (1) | |||
Dividend paid to shareholders of the company | (1) | (482) | (412) | |||
Other cash flow items | (3) | (4) | (57) | (57) | 62 | 34 |
Net cash flows discontinued operations | 647 | (25) | (88) | |||
Net cash flows from discontinued operations | 129 | 3,403 | (12) | |||
Ending cash and cash equivalents balance | 1,688 | 1,425 | 3,226 | 3,226 | 2,303 | 1,172 |
Net cash flows from operating activities amounted to an outflow of EUR 2,777173 million in 2020,2022, compared to an inflow of EUR 2,0311,629 million in 2019.2021. This increasedecrease is mainly due to lower cash earnings, increased working capital improvements,and cash costs related to the Philips Respironics field action. Free cash flow*) amounted to a cash outflow of EUR 961 million in particular better management2022, compared to an inflow of receivables.EUR 900 million in 2021.
In 2021, net cash flows from operating activities amounted to EUR 1,629 million, compared to EUR 2,511 million in 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 1,852900 million in 2020,2021, compared to EUR 1,0531,635 million in 2019.2020.
NetIn 2020, net cash flows from operating activities amounted to EUR 2,0312,511 million, in 2019, compared to EUR 1,780 million in 2018.and Free cash flow*) amounted to EUR 1,053 million in 2019, compared to EUR 984 million in 2018.1,635 million.
Net cash flows from investing activities consist of net capital expenditures and other cash flows from investing activities.
In 2022, other cash flows from investing activities amounted to a cash outflow of EUR 698 million, mainly due to acquisitions of Vesper Medical and Cardiologs amounting to EUR 414 million and new minority investments.
In 2021, other cash flows from investing activities amounted to a cash outflow of EUR 2,943 million, mainly due to the acquisitions of BioTelemetry and Capsule Technologies amounting to EUR 2.8 billion.
In 2020, other cash flows from investing activities amounted to a cash outflow of EUR 391 million, mainly due to the acquisition of Intact Vascular for EUR 241 million and investments in other non-current financial assets.
In 2019, other cash flows from investing activities amounted to a cash inflow of EUR 376 million, mainly due to proceeds from the sale of the remaining Signify shares of EUR 549 million and net cash proceeds from divestment of businesses amounting to EUR 146 million, received mainly from divested businesses held for sale. Other investing activities mainly included acquisition of businesses (including acquisition of investments in associates) of EUR 255 million and EUR 166 million net cash used for foreign exchange derivative contracts related to activities for Group liquidity management.
In 2018, other cash flows from investing activities amounted to a cash outflow of EUR 690 million, mainly due to acquisition of businesses (including acquisition of investments in associates) 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 70 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 Group liquidity management.
Net cash flows from financing activities consist of treasury shares transactions, changes in debt, dividend paid and other cash flow items.
In 2022, treasury shares transactions mainly included the share buyback activities, which resulted in EUR 174 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 received a total dividend of EUR 741 million, including costs, of which the cash portion amounted to EUR 412 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 relates to short-term debt and lease repayments. Philips’ shareholders received a total dividend of EUR 773 million, including costs, of which the cash portion amounted to EUR 482 million.
In 2020, treasury shares transactions mainly included the share buyback activities, which resulted in EUR 298297 million net cash outflow. The 2019 dividend was distributed in July 2020 fully in shares. Changes in debt included EUR 991 million cash inflow from the issuance of two new bonds under the EMTN program, partly offset by outflows related to lease payments.
InThe 2019 treasurydividend was distributed fully in shares transactions mainly included the share buyback activities, which resulted in EUR 1,318 million net cash outflow. Philips' shareholders were given EUR 775 million including costs in the form of a dividend; the cash portion of the dividend amounted to EUR 453 million. Changes in debt mainly included the net proceeds from the Green Innovation Bond issued of EUR 744 million, partly offset by outflows related to bond maturity of EUR 500 million and lease payments.
In 2018, treasury shares transactions mainly included the share buy-back activities, which resulted in EUR 948 million net cash outflow. Philips’ shareholders were given EUR 738 million in the form of a dividend, of which the cash portion of the dividend amounted to EUR 401 million. Changes in debt mainly included EUR 866 million cash outflow related to the bond redemption and EUR 990 million cash inflow from bonds issued.July 2020.
Philips Group
Net cash provided by (used for) discontinued operations
in millions of EUR
2018 | 2019 | 2020 | |
---|---|---|---|
Net cash provided by (used for) operating activities | (15) | (11) | (88) |
Net cash provided by (used for) investing activities | 662 | (14) | |
Net cash provided by (used for) discontinued operations | 647 | (25) | (88) |
In 2020,2022, net cash used for discontinued operations was EUR 12 million mainly related to previously disposed businesses.
In 2021, net cash provided by discontinued operations was EUR 3,403 million and consisted primarily of the net cash inflow of EUR 3,319 million from the sale of the Domestic Appliances business on September 1, 2021.
In 2020, net cash provided by discontinued operations mainly related to the Domestic Appliances business, partly offset by advance income tax payments amounting to EUR 78 million for which Philips expects to get a refund.
In 2019, net cash used for discontinued operations consisted primarily of a divestment formerly reported as discontinued operations.
In 2018, net cash provided by (used for) discontinued operations amounted to EUR 647 million and mainly included a total of EUR 642 million in relation to the sale of Signify shares and the dividend received from Signify reported in investing activities.million.
Condensed consolidated balance sheets for the years 2018, 20192020, 2021 and 20202022 are presented below:in the following table:
Philips Group
Condensed consolidated balance sheets
in millions of EUR
2018 | 2019 | 2020 | 2020 | 2021 | 2022 | |
---|---|---|---|---|---|---|
Intangible assets | 12,093 | 12,120 | 11,012 | 11,012 | 14,287 | 13,764 |
Property, plant and equipment | 1,712 | 2,866 | 2,682 | 2,682 | 2,699 | 2,638 |
Investments and financial assets | 781 | 1,121 | 1,334 | |||
Deferred tax assets | 1,820 | 2,216 | 2,449 | |||
Inventories | 2,674 | 2,773 | 2,993 | 2,993 | 3,450 | 4,049 |
Receivables | 4,344 | 4,909 | 4,537 | 4,537 | 4,191 | 4,616 |
Assets classified as held for sale | 87 | 13 | 173 | |||
Other assets | 3,421 | 2,910 | 3,091 | 663 | 693 | 665 |
Payables | (3,957) | (3,820) | (3,854) | (3,854) | (3,784) | (3,635) |
Provisions | (2,151) | (2,159) | (1,980) | (1,980) | (2,313) | (2,115) |
Liabilities directly associated with assets held for sale | (12) | - | (30) | |||
Contract liabilities | (1,643) | (1,936) | (2,210) | |||
Other liabilities | (2,962) | (2,965) | (3,015) | (1,402) | (1,473) | (1,244) |
Net asset employed | 15,249 | 16,647 | 15,609 | 15,609 | 19,151 | 20,311 |
Cash and cash equivalents | 1,688 | 1,425 | 3,226 | 3,226 | 2,303 | 1,172 |
Debt | (4,821) | (5,447) | (6,934) | (6,934) | (6,980) | (8,201) |
Net debt1) | (3,132) | (4,022) | (3,708) | (3,708) | (4,676) | (7,028) |
Non-controlling interests | (29) | (28) | (31) | (31) | (36) | (34) |
Shareholders' equity | (12,088) | (12,597) | (11,870) | (11,870) | (14,438) | (13,249) |
Financing | (15,249) | (16,647) | (15,609) | (15,609) | (19,151) | (20,311) |
Total debt outstanding at the end of 20202022 was EUR 6,9348,201 million, compared with EUR 5,4476,980 million at the end of 2019.2021.
Philips Group
Balance sheet changes in debt
in millions of EUR
2018 | 2019 | 2020 | |
---|---|---|---|
Additional leases under IFRS16 | (1,059) | (132) | |
New borrowings/repayments short-term debt | (34) | (23) | (16) |
New borrowings long-term debt | (1,287) | (847) | (1,065) |
Repayments long-term debt | 1,161 | 761 | 298 |
Forward contracts | 124 | 706 | (793) |
Currency effects, consolidation changes and other | (70) | (170) | 221 |
Transfer to liabilities classified as held for sale | 6 | ||
Changes in debt | (105) | (626) | (1,487) |
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 2022, total debt increased by EUR 1,221 million compared to 2021. The increase mainly comes from the issuance of EUR 2 billion Notes in April 2022, offset by the early redemption of approximately EUR 1.2 billion Notes originally due in 2023, 2024, 2025 and 2026 and by the utilization of EUR 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 302 million. In February 2021, Philips entered into two bilateral loans amounting to a total of EUR 500 million that were repaid in September 2021. In addition, Philips issued commercial paper of EUR 300 million in May 2021 and EUR 150 million in July 2021 that was repaid in September 2021. Changes in payment obligations from forward contracts are mainly related to the forward contracts entered into of EUR 731 million relating to the EUR 1.5 billion share buyback program announced on July 26, 2021, and EUR 90 million relating to the long-term incentive and employee stock purchase plans announced on May 19,2021. In addition, a total amount of EUR 745 million of forward contracts matured in 2021, which completed the settlement of the EUR 1.5 billion share buyback program announced on January 29, 2019, and a total amount of EUR 123 million of forward contracts matured in 2021 relating to the long-term incentive and employee stock purchase plans announced on October 22, 2018 and January 29, 2020. These payment obligations are recorded as financial liabilities under long-term debt. Other changes, mainly resulting from currency effects, led to an increase of EUR 175 million.
In 2020, total debt increased by EUR 1,487 million compared to 2019. New borrowings of long-term debt includeincluded the net proceeds of EUR 991 million from the issuance of two new bonds under the EMTN program in 2020. Repayments of long-term debt amounted to EUR 298 million, mainly due to the repayment of leases. Changes in payment obligations from forward contracts are mainly related to the forward contracts entered into of EUR 745 million to complete the remainder of the EUR 1.5 billion share buyback program announced on January 29, 2019. In addition, Philips entered into forward contracts offor a total amount of EUR 174 million in 2020 related to the long-term incentive and employee stock purchase plans announced on January 29, 2020, and a total amount of EUR 126 million of forward contracts matured relating to the company's long-term incentive and employee stock purchase plans announced on October 22, 2018. These payment obligations are recorded as financial liabilities under long-term debt. Other changes, mainly resulting from currency effects, led to a decrease of EUR 221 million.
In 2019,At the end of 2022, long-term debt as a proportion of the total debt increased by EUR 626 millionstood at 88.6% with an average remaining term (including current portion) of 6.1 years, compared to 2018. Total debt92.7% and 6.0 years respectively at December 31, 2019 included additional lease liabilitiesthe end of EUR 1,059 million which were recorded following2021.
At the adoptionend of IFRS 16 lease accounting in 2019; this did not have a cash impact. New borrowings of2021, long-term debt included the net proceeds from the issuanceas a proportion of the Green Innovation Bond of EUR 744 million. Repayments of long-term debt amounted to EUR 761 million, mainly due to the repayment of a EUR 500 million bond at its scheduled maturity. Changes in payment obligations from forward contracts were mainly related to maturing forward contracts for the completed 2017 share buyback program and the share repurchase program announced in November 2018. These payment obligations were recorded as financial liabilities under long-term and short-term debt. Other changes, mainly resulting from currency effects, led to an increase of EUR 170 million.
In 2018, total debt increased by EUR 105 millionstood at 92.7% with an average remaining term (including current portion) of 6.0 years, compared to 2017. New borrowings82.3% and 6.3 years respectively at the end of long-term debt of EUR 1,287 million were mainly due to the issuance of fixed-rate bonds, EUR 500 million due 2024 and EUR 500 million due 2028, and a new long-term loan of EUR 200 million. Repayments of long-term debt amounted to EUR 1,161 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. 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 for the extended share repurchase program for LTI and stock purchase plans announced in November 2018. Other changes, mainly resulting from new leases recognized and currency effects, led to an increase of EUR 70 million.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.
At the end of 2019, long-term debt as a proportion of the total debt stood at 91% with an average remaining term (including current portion) of 8.0 years, compared to 71% and 7.9 years respectively at the end of 2018.
At the end of 2018, long-term debt as a proportion of the total debt stood at 71% with an average remaining term (including current portion) of 7.9 years, compared to 86% and 7.6 years respectively at the end of 2017.
For further information, please refer to Debt.
As of December 31, 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 3,370 million, compared with debt (including short and long-term) of EUR 6,980 million.
As of December 31, 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 4,2264,243 million, versuscompared with gross debt (including short and long-term) of EUR 6,934 million.
As of December 31, 2019, including the cash position (cash and cash equivalents), as well as its EUR 1 billion committed revolving credit facility, the Philips Group had access to available liquidity of EUR 2,425 million, versus gross debt (including short and long-term) of EUR 5,447 million.
As of December 31, 2018, 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 2,688 million, versus gross debt (including short and long-term) of EUR 4,821 million.
Philips Group
Liquidity position
in millions of EUR
2018 | 2019 | 2020 | 2020 | 2021 | 2022 | |
---|---|---|---|---|---|---|
Cash and cash equivalents | 1,688 | 1,425 | 3,226 | 3,226 | 2,303 | 1,172 |
Committed revolving credit facilities/CP program | 1,000 | 1,000 | ||||
Listed equity investments at fair value1) | 17 | 67 | 32 | |||
Committed revolving credit facility | 1,000 | 1,000 | ||||
Credit facility | 500 | |||||
Liquidity | 2,688 | 2,425 | 4,226 | 4,243 | 3,370 | 2,704 |
Listed equity investments at fair value | 476 | 15 | 17 | |||
Short-term debt | (1,394) | (508) | (1,229) | (1,229) | (506) | (931) |
Long-term debt | (3,427) | (4,939) | (5,705) | (5,705) | (6,473) | (7,270) |
Debt | (6,934) | (6,980) | (8,201) | |||
Net available liquidity resources | (1,656) | (3,007) | (2,691) | (2,691) | (3,609) | (5,497) |
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 April 2024.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.
ThePhilips' Commercial Paper Program amounts to USD 2.5 billion, under which Philipscommercial paper can issue commercial paperbe issued up to 364 days in tenor, both in the US and in Europe, in any major freely convertible currency. As of December 31, 2020,2022, Philips did not have any loans outstanding under these facilities.
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. As of December 31, 2020,In 2022 Philips had issued bonds amounting to EUR 1 billionthree new tranches under the program. 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.
Additionally, at December 31, 2020 Philips held EUR 17 million of listed (level 1) equity investments at fair value in common shares of companies in various industries. Refer to Other financial assets and Fair value of financial assets and liabilities.
Philips is exposed to several types of financial risks. In terms of liquidity, risk, the company has taken a number of different measuresaccess to manage this risk, specifically with relation to the COVID-19 pandemic. In addition to the successful placement of EUR 1,000 million fixed-rate notes in March (of which EUR 500 million Sustainability Innovation notes), the company also completed the remainder of the EUR 1.5 billion share buyback program that was announced on January 29, 2019 through individual forward contracts, with settlement dates extending into the second half of 2021. Furthermore, the 2019 Annual incentive of the Board of Management and the final dividend declared against the net income of 2019 were settled in shares instead of cash. Overall, the company has a solid liquidity position and the company'svarious sources. The company’s liquidity risk management procedures have not changed significantly because of COVID-19. No significant concentration risks have been identified as a result of COVID-19 and the company continues to haveduring 2022. The access to its existing lines of credit.credit remains intact. These lines of credits,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 our currentstrong 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. PhilipsPhilips' 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*). Philips’ outstanding long-term debt and credit facilities do not contain financial covenants. Adverse changes in the company’s ratings will not trigger automatic withdrawal of committed credit facilities or any acceleration in the outstanding long-term debt (provided that the USD-denominated bonds issued by Philips 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 Group
Credit rating summary
long-term | short-term | outlook | |
Fitch | A- | Stable | |
Moody's | Baa1 | P-2 | |
Standard & Poor's | BBB+ | A-2 |
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.
The following table presents a summary of the Group’s fixed contractual cash obligations and commitments atas of December 31, 2020.2022. 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 following table:
Payments due by period | payments due by period | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
total | less than 1 year | 1-3 years | 3-5 years | after 5 years | total | less than 1 year | 1-3 years | 3-5 years | after 5 years | |
Long-term debt3) | 7,430 | 1,015 | 876 | 1,365 | 4,174 | |||||
Lease obligations | 1,325 | 290 | 412 | 239 | 384 | |||||
Long-term debt | 8,168 | 842 | 1,760 | 1,809 | 3,757 | |||||
Short-term debt | 76 | 89 | ||||||||
Interest on debt | 1,683 | 159 | 304 | 264 | 956 | |||||
Derivative liabilities | 161 | 75 | 86 | 210 | 208 | 2 | ||||
Purchase obligations4) | 539 | 273 | 223 | 43 | ||||||
Purchase obligations3) | 782 | 336 | 412 | 21 | 12 | |||||
Trade and other payables | 2,119 | 1,968 | ||||||||
Contractual cash obligations | 11,650 | 3,848 | 1,597 | 1,647 | 4,558 | 12,901 | 3,603 | 2,478 | 2,094 | 4,725 |
Included in debt are remaining forward contracts of EUR 648 million related to the EUR 1.5 billion share buyback program announced in July 2021 and EUR 211 million relating to 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 13263 million (2019: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 61 million). As at December 31, 202083 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 made to these investment funds are recorded as non-current financial assets.reduction purposes.
Philips offers voluntary supply chain finance programs with third parties, which provide participating suppliers with the opportunity to factor their trade receivables at the sole discretion of both the suppliers and the third parties. Philips continues to recognize these liabilities as trade payables and settles them accordingly on the invoice maturity date based on the terms and conditions of these arrangements . Atarrangements. As of December 31, 20202022, approximately EUR 227151 million (2021: EUR 139 million) of the Philips accounts payable were transferred under these arrangements.
The company and its subsidiaries sponsor post-employment benefit plans in many countries in accordance with legal requirements, customs and the local situation in the countries involved. For a discussion of the plans and expected cash outflows, please refer to Post-employment benefits.
The company had EUR 117140 million restructuring-related provisions by the end of 2020,2022, of which EUR 100134 million is expected to result in cash outflows in 2021.2022. 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, 2020, Philips had completed the remainder of its EUR 1.5 billion share buyback program through individual forward contracts with settlement dates extending into the second half of 2021. As the program was initiated for capital reduction purposes, Philips intends to cancel all of the shares acquired under the program.
Please refer to DebtEquity for information on other Long termLong-term incentive and employee stock purchase plans.
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 20192021 and 2020.2022. Remaining off-balance-sheet business-related guarantees on behalf of third parties and associates decreased by EUR 5 million during 2020amount to EUR 162 million as of December 31, 2022 (December 31, 2019:2021: EUR 212 million).
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*). This non-IFRS measure is described in further detail in Reconciliation of non-IFRS information.
A proposal will be submitted to the Annual General Meeting of Shareholders, to be held on May 6, 2021,9, 2023, to declare a distribution of EUR 0.85 per common share, in cash orcommon shares, at the option of the shareholder, against the net income of 2020.retained earnings.
If the above dividend proposal is adopted, the shares will be traded ex-dividend as of May 10, 202111, 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 11, 2021.12, 2023.
Shareholders will be given the opportunity to make their choice between cash and shares between May 12 and June 4, 2021. If no choice is made during this election period, the dividend will be paid in cash. The number of share dividend rights entitled to one new common share will be determined based on the volume-weighted average price of all traded common shares of Koninklijke Philips N.V. at Euronext Amsterdam on June 2, 3May 11, 12 and 4, 2021.15, 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 8, 2021. PaymentMay 17, 2023. Distribution of the dividend (up to EUR 775751 million) and delivery of new common shares, with settlement of any fractions in cash, if required, will take place from June 9, 2021. 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 7, 2021.May 18, 2023.
ex-dividend date | record date | ||
Euronext Amsterdam | May | May | |
New York Stock Exchange | May | May |
Further details will be given in the agenda for the 20212023 Annual General Meeting of Shareholders. The 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 2020,June 2022, Philips settled a dividend of EUR 0.85 per common share, representing a total value of EUR 758741 million including costs.(including costs). Shareholders receivedcould elect for a cash dividend or a share dividend. Approximately 45% of the shareholders elected for a share dividend, in shares only, resulting in the issuance of 18,080,19814,174,568 new common shares, leading to a 2.0%1.6% dilution. For more information refer to Shareholders’ equity. The dilution caused bysettlement of the newly issued dividend shares was partially offset by the cancellation of 3,809,675 shares in June 2020. No cash dividend settlement took place in 2020. On March 23, 2020 Philips announced that the remainderinvolved an amount of the EUR 1.5 billion share buyback program would be executed through forward purchases. The delivery of 20,476,023 shares purchased through forward contracts will take place from June 23, 2021 to December 20, 2021. These shares are marked for cancellation.411 million (including costs).
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
2016 | 2017 | 2018 | 2019 | 2020 | 20181) | 20191) | 20202) | 20211) | 20222) | |
---|---|---|---|---|---|---|---|---|---|---|
in EUR | 0.80 | 0.85 | 0.85 | 0.80 | 0.85 | 0.85 | ||||
in USD | 0.90 | 0.94 | 0.96 | 0.95 | 0.94 | 0.96 | 0.95 | 1.03 | 0.90 |
We remain cautious in light of the Domestic Appliances business
In January 2020, Philips announced that it would review options for future ownership of its Domestic Appliances business, part of the Personal Health segment.
Following the announcement, Philips started the process of creating a separate legal structure for this business within the Philips Group, which is expected to be completed in the third quarter of 2021.
As of December 31, 2020, Philips still needs to take some important steps in its internal separation process, especially in the area of Human Resources (establishing a dedicated workforcesubdued economic outlook for the Domestic Appliances business), Information Technology (creationyear, staffing and inflationary pressures facing our customers, geopolitical risks, supply and demand volatility, and uncertainties around ongoing consent decree negotiations, litigation and Department of a dedicated IT environment to support the core processes of the Domestic Appliances business)Justice investigations. Nevertheless, we expect that, by prioritizing patient safety and Finance (completion of the allocation of assetsquality, tightening our focus on innovation and liabilities to the Domestic Appliances business asset). Based on the progress we have made so far, we concluded that the Domestic Appliances business as per December 31, 2020 is not available for immediate sale in its present condition to a third party.
The Domestic Appliances business had EUR 2.2 billion sales in 2020 (2019: EUR 2.3 billion). Following the divestment 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.
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 be most important to the presentation of Philips’ financial condition and results of operations and to make the most significant demands on management’s judgments and estimates about matters that are inherently uncertain, are discussed below. Management cautions that future events often vary from forecasts and that estimates routinely require adjustment. A more detailed description of Philips’ accounting policies appears in Significant accounting policies
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.
From time to time the Company is engaged in complex sales transactions relating to multi-element deliveries (for example a single sales transaction that combines the delivery of goods and rendering of services). The process of revenue recognition of such multi-element sales transactions involves the identification of the different performance obligations, the allocation of revenue to these performance obligations and the timing of revenue recognition as or when the performance obligation is satisfied. Each of these process steps can be complex and requires judgment. In order to identify whether the performance obligation in a single sales contract are distinct, the Company verifies if the customer can benefit from the good or service, either on its own, or with other readily available resources, and whether the promise to transfer a good or service separate from the other promised goods or services in the contract. Allocation of revenue to the different components is performed based on stand-alone selling prices of each performance obligation. The best evidence of a standalone selling price is the observable price of a good or service sold in similar circumstances and to similar customers. When a standalone selling price is not directly observable, it is estimated, based on either adjusted market assessment approach, expected cost plus margin approach or residual approach. Eventually, revenue for each performance obligation is recognized as or when the performance obligation is satisfied in accordance with IFRS 15.
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.
Goodwill and intangible assets not yet ready for use are not amortized, but tested for impairment annually and whenever impairment indicators require so. The Company reviews non-financial assets (other than goodwill and intangibles not yet ready for use) for impairment, when events or circumstances indicate that carrying amounts may not be recoverable.
In determining impairments for these assets, 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 2020 the Company performed and completed goodwill annual impairment tests in the fourth quarter, in line with 2019 and 2018.
Goodwill is allocated to cash-generating units (CGUs). The basis of the recoverable amount used in the impairment tests is the value in use, unless the fair value less cost of disposal exceeds the value in use. 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. 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. Please refer to Goodwill and Intangible assets excluding goodwill.
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 when needed. In determining impairments for these assets, management must make significant judgments and estimates to determine the cash flows it expects to receive, and changes in underlying assumptions could result in significantly different results than those recorded in the Consolidated financial statements.
Non-current assets and disposal groups comprising assets and liabilities that are expected to be recovered primarily through sale rather than through continuing use are classified as held for sale. A discontinued operation is a component of an entity that either has been disposed of, or that is classified as held for sale, and (a) represents a separate major line of business or geographical area of operations; (b) is a part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations; or (c) is a subsidiary acquired exclusively with a view to sell. Non-current assets held for sale and discontinued operations are carried at the lower of carrying amount or fair value less costs to sell.
Determining whether a non-current assetcapital, we will be primarily recovered through sale rather than through continuing use requires judgment. The Company assesses whether such asset is available for immediate sale in its present condition subject onlyable to terms that are usual and customary for sales of such assets or disposal groups, and its sale is assessed to be highly probable. Furthermore, in order to determine if that component qualifies as a discontinued operation, judgment is required when the Company assesses whether a component of an entity represents a major line of business or geographical area compared to the whole of the Company and whether the sale is part of a single coordinated plan. A change in circumstances could result in significantly different results than those recorded in the Consolidated financial statements.
For a description of the new pronouncements, please refer to the information under the heading “IFRS accounting standards adopted as from 2020” in Significant accounting policies.
Please refer to the information under the heading “Guarantees” in Cash obligations and Contingent assets and liabilities.progressively create value with sustainable impact.
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.
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:
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 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 co-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.
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:
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:
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 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.
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.
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.
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.
Environmental, Social & Governance (ESG) are the 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.
Philips is a purpose-driven company aiming to improve the health and well-being of 2.5 billion people annually by 2030. We believe that private-sector companies like ours have a vital role to play in collaborating with other partners across our supply chain, and with private and public organizations in society, to address the major challenges the world is facing.
Taking a multi-stakeholder approach, we draw inspiration from the societal impact we can 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 the part of our customers, who are increasingly turning to technology companies for support in addressing their sustainability objectives and are including ESG-related considerations in their procurement policies and criteria.
AsWe aim to be a front-runner in the area of this Annual Report 2020, weESG and have chosen to align ourbeen recognized as leading the way in, for example, sustainability, corporate governance practices and tax transparency.
Our reporting is aligned with the comprehensive and integrated Environmental, Social & Governance (ESG) commitments we introducedhave adopted for the period 2020-2025, with2020-2025.
We have excluded the aimdata from Domestic Appliances from the ESG information wherever possible. In a limited number of better integratingcases, for example for road logistics emissions, we have used proxies. If Domestic Appliances information was not available for past years, and further raising performance oncould therefore not be excluded, we have indicated this in the three dimensions of ESG.respective section. The Employee Engagement Index (EEI) and General Business Principles (GBP) results have not been restated.
There is not yet a single objective standard for measurement of ESG performance. Building on our long history andextensive experience of environmental and social impact measurement and of providing transparency on governance, Philips has taken an active role – in collaboration with, various organizationsin particular, the International Financial Reporting Standards (IFRS) Foundation, the World Economic Forum (WEF) and the European Union – to help drive the evolution towards a standard ESG reporting framework.
In 2007, Philips signed up to the United Nations Global Compact, to advance ten universal principles in the areas of human rights, labor, the environment and anticorruption.anti-corruption. In 2017, at the World Economic Forum’sWEF 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).
At the Annual Meeting of the World Economic Forum in JanuaryIn 2020, the WEF'sWEF’s International Business Council (IBC) launched a project to define common metrics for sustainable value creation, the aim being to improve the ways that companies measure and report on their contributions towards more prosperous, fulfilled societies and a more sustainable relationship with the planet.
In September 2020, the 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 governance (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:
•
•
The recommended metrics are organized under four pillars that are aligned with the SDGs and principal ESG domains: Principles of Governance, Planet, People and Prosperity. There is no intention to replace industry- or company-specific metrics (like our Lives Improved metric). Companies are encouraged to report against as many of the core and expanded metrics as they find material and appropriate, on the basis of ‘disclose or explain’.
Philips is also contributing to the IFRS Foundation’s endeavors to drive standardization of non-financial reporting.
In section 5.6 of this Annual Report, 2020, we show how Philips performed in 20202022 on the above-mentioned 21 Core metrics, mapped to the three dimensions of our ESG commitments, as well as a number of additional Philips-specific metrics that we consider fundamental to the strategy and operation of our business.
Philips is also contributing to the IFRS Foundation’s endeavors to drive standardization of non-financial reporting as well as the development of sustainability standards by the European Union by EFRAG.
The aim of the European Taxonomy Regulation (EU 2020/852), including the delegated acts adopted thereunder, is to provide companies, investors and policymakers with appropriate criteria for determining which economic activities can be considered environmentally sustainable, and it requires companies to report on how and to what extent their activities are associated with such ‘taxonomy-eligible activities’. The Taxonomy Regulation is relatively new and there are after the first year of reporting (2021) still significant uncertainties around its phased implementation. It is expected, 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 one or more of the following six environmental objectives (while not significantly harming any of the others):
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.
The 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 non-eligible economic activities in its total turnover, capital and operational expenditure, as well as certain qualitative information. We used the delegated act ((EU) 2021/2139) to identify activities that are eligible. However, none of our revenue-generating activities were included as this delegated act only applies to sectors with very high CO2 emissions. As a result, Philips’ core activities are not within the scope of this delegated act and consequently none of Philips' revenues were eligible under this delegated act during 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 per Consolidated statements of income. Philips expects to be eligible and report its taxonomy-eligible revenues under additional environmental objectives as further delegated acts with applicable technical screening criteria are adopted.
Philips Group
Proportion of turnover from products or services associated with Taxonomy aligned economic activities 2022
in millions of EUR unless otherwise stated
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 activities 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 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).
Reportable taxonomy-eligible capital expenditures in 2022 amounted to EUR 8 million, or 1% of total capital expenditure (non-eligible capital expenditures 99%), and mainly related to energy efficiency improvement measures in our buildings (installation, maintenance and repair of energy efficiency equipment), such as energy efficient heating, ventilation, and air conditioning (HVAC) in various locations around the world. Next, we invested in onsite renewable electricity generation (installation, maintenance and repair of renewable energy technologies) by installing PV panels in one of our factories in Asia.
We assessed compliance with the criteria set out in Article 3 of Regulation (EU) 2020/852 and the associated technical screening criteria on a project basis.
Philips Group
Proportion of CapEx from products or services associated with Taxonomy aligned economic activities 2022
in EUR unless otherwise stated
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 |
Similar to capital expenditures, we screened (EU) 2021/2139, assessed for relevant operational expenditures activities and have not identified any eligible operational expenditure. Total operational expenditures are determined based on the 2022 non-capitalized costs that relate to research and development, building renovation, short-term lease, maintenance and repair, and any other direct expenditures relating to day-to day servicing of property, plant and equipment.
In 2022, we did not record reportable taxonomy-eligible operational expenditures (0%), as, for example, the sourcing of renewable energy was not included in the Taxonomy. Non-eligible operational expenditures were 100%.
Philips Group
Proportion of OpEx from products or services associated with Taxonomy aligned economic activities 2022
in millions of EUR unless otherwise stated
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.
OnIn September 14, 2020, Philips further reinforced its commitments as a purpose-driven company with the announcement of an enhanced and fully integrated approach to doing business responsibly and sustainably. Philips’ new framework comprises a comprehensive set of key commitments across all the Environmental, Social and Governance (ESG) dimensions that guide execution of the company’s strategy. It includes ambitious targets and detailed plans of action.
“As a leading health technology company today, our purpose is to improve people’s health and well-being through meaningful innovation, positively impacting 2 billion lives per year by 2025,” said Frans van Houten, CEO of Philips. “We2025. We aim to grow Philips responsibly and sustainably, and we therefore continuously set ourselves challenging environmental and social targets, and live up to the highest standards of governance. Acting responsibly towards the planet and society is part of our DNA. I am convincedWe believe that this is the best way for us to create superior, long-term value for Philips’ multiple stakeholders.”
We act responsibly towards our planet in line with UN SDGs 12 and 13.
Our purpose is to improve people’s health and wellbeing through meaningful innovation, in line with UN SDG 3. We act responsibly towards society and partner with our stakeholders
We aim to deliver superior long-term value for our customers and shareholders, and we live up to the highest standards of ethics and governance in our culture and practices
In 2016, we launched our five-year sustainability program, Healthy people, Sustainable planet, which ended in December 2020. The program addressed both social and environmental challenges and included associated targets. On September 14, 2020, we launched our ESG commitments, with ambitious targets to be achieved by the end of 2025.
Besides our social impact, focusing on SDG 3, described in the nextSocial performance section, we have an environmental impact through our global operations (including our supply chain), but even more so through our products and solutions. This is where we contribute to SDG 12 (Ensure sustainable consumption and production patterns) and SDG 13 (Take urgent action to combat climate change and its impacts).
Since 1990, Philips has been performing Life-Cycle Assessments (LCAs). These since 1990. LCAs provide insight into the lifetime environmental impact of our products andproducts. They are used to steer our EcoDesign efforts by reducing the environmental impact during the lifetime of our products and to grow our GreenGreen/EcoDesigned/EcoHero and Circular Solutions portfolio. As a logical next step, for the sixth year, we have measured our environmental impact on society at large via a so-called Environmental Profit & Loss (EP&L) account, which includes the hidden environmental costs associated with our activities and products. It provides insights into the main environmental hotspots and innovation areas to reduce the environmental impact of our products and solutions.
The EP&L account is based on LCA methodology, in which the environmental impacts are expressed in monetary terms using conversion factors developed by CE Delft. These conversion factors are subject to further refinement and are expected to change over time. We used expert opinions and estimates for some parts of the calculations. The figures reported are Philips’ best possible estimates. As we gain new insights and retrieve more and better data, we will enhance the methodology, use-cases and accuracy of results in the future. For more information and details we refer to our methodology document.
An important learning that we derived from the 2017-2019 EP&L is that, in addition to the conversion factors, theThe definition of the use-case scenarios also has a significant impact on the result. This isresult, especially true offor consumer products, which have large sales volumes, long lifetimes and frequently high energy consumption (e.g. haircare products and steam irons). Based on new consumer insights, we have changed use-case scenarios, and reduced, for example, the maximum wattage used and/or the daily duration of use. This resulted in a material reduction of EUR 1.16 billion on the EP&L in 2020 (and 1.74 billion on the EP&L in 2019).consumption.
Other changes we made to improve the accuracy of our environmental impact are the inclusion of our full Sleep & Respiratory Care portfolio (resulting in 13% additional impact compared to the 2019 result) and the differentiation of the energy mix of the use-phase of our products based on the region of sales. The 2020 impact would have been EUR 150 million higher if we had still used the global average energy mix for all products regardless of where the products are used.
For comparability reasons, we have also applied the new use-cases and additional Sleep & Respiratory Care products to the 2019 EP&L. The table below shows this refined EP&L impact based on 2019 sales volumes.
Philips Group
EP&L refinement
in billions of EUR unless otherwise stated
The current EP&L account only includes the hidden environmental costs. It does not yet include the benefits to society that Philips generates by improving people’s health and well-being through our products and solutions. We have a well-established methodology to calculate the number of lives we positively touch with our products and solutions. We aim to look into valuing these societal benefits in monetary terms in the future.
The Philips products subject to the Respironics recall were evaluated as well and include them in our futurepart of the 2022 EP&L account.calculation. In accordance with the EP&L methodology, products replaced during the recall by new products with lifetime guarantees were included in the 2022 EP&L calculation for all life cycle stages. Refurbished products and repair kits were not included.
In 2020,2022, Philips' environmental impact amounted to EUR 4.911.63 billion, compared to EUR 6.082.16 billion in 2019 (refined from EUR 7.25 billion due to the updated use-case scenarios and addition of the full Sleep & Respiratory Care portfolio).2021. This significant reduction was mainly driven by lower unit sales in Personal Healthupdated energy use cases for hair dryers (causing a reduction of around EUR 450 million) and a changed product mix (causing a EUR 250 million reduction), but was mitigated by our EcoDesign efforts resulting in more energy-efficient products.the update to the EcoInvent 3.8 database (our Life Cycle Inventory database containing environmental impacts of products and services, causing around EUR 75 million increase) and further granulation of the data, including the application of country emission factors (causing around EUR 100 million increase). The mainmost significant environmental impact, 83%63% of the total, is related to the usage of our products, which is due to electricity consumption. ParticulateHuman toxicity, particulate matter formation, and climate change and acidification are the main environmental impacts, accounting for 43%, 27% and 18% respectively of the total impact.other important impacts. The environmental costs include the environmental impact of the full lifetime of the products that we put on the market in 2020,2022, e.g. 10 years in the case of a medical systemMRI or 75 years of usage in the case of a domestic appliance.Sonicare toothbrush. Products identified as rentals are the only exception, with an energy consumption of one year. As we growexpand our portfolio of Green Products and Solutions,EcoDesign activities, with a target to have all our products EcoDesigned by 2025, we expect thean environmental impact in the years to reduce.come.
Of the total 20202022 impact, just EUR 135128 million (3%(7%) is directly caused by Philips’ own operations, mainly driven by outbound logistics.logistics, followed by business travel. Compared to EUR 154106 million in 2019,2021, this is an 12% reduction,a 21% increase, mainly due to reduced business travel (COVID-19)more granular data on our operations and updating the emission factors from EcoInvent 3.4 to EcoInvent 3.8, mitigating the downward trend in logistics emissions as well as an increased share of green electricitypresented in our non-industrial sites.Sustainable Operations.
Our materials and components supply chain currently has an environmental impact of some EUR 693421 million, which is 14%26% of our total environmental impact. The main contributors are the electronic components (including printed circuit boards), cables and steelmetals used in our products. Through our Circular Economy and Supplier Sustainability programs we will continue to focus on reducing the environmental impact caused by the materials we source and apply in our products. We will also include the impact on biodiversity and ecosystem services in the future.
In order to deliver on our carbon neutrality commitment, we have set ambitious reduction targets. In 2018, we were the first health technology company to have its 2020-2040 targets (including the use-phase of our products) approved by the Science Based Targets initiative – a collaboration between CDP (formerly Carbon Disclosure Project), the United Nations Global Compact (UNGC), the World Resources Institute (WRI) and the World Wide Fund for Nature (WWF) aimed at driving ambitious corporate climate action. Approval confirms that Philips’ long-term targets are in line with the level of decarbonization required to keep the global temperature increase below 2 °C. As a next step in our journey to reduce our environmental impact, and part of our ESG commitments launched in September 2020, we have committed to reduce our full value chain emissions in line with a 1.5 °C global warming scenario,scenario.
For more information on our efforts to reduce emissions in the supply chain, please refer to Supplier indicators.
For more information on our efforts to reduce emissions in the customer use-phase, please refer to Green/EcoDesigned Innovation and Green/EcoDesigned Revenues.
According to researchResearch from the Potsdam Institute for Climate Impact research shows that over 4% of global CO2 emissions are caused by the Healthcare sector. We see a growing demand from our customers, including hospitals, to reduce their environmental impact and decarbonize healthcare. Our GreenGreen/EcoDesigned Innovation – the Research & Development spend related to the development of new generations of Green ProductsGreen/EcoDesigned products and Solutionssolutions and Green Technologies,technologies, addressing SDG 12 (Ensure sustainable consumption and production patterns) – is focused on addressing that impact.
Sustainable Innovation is the Research & Development spend related to the development of new generations of products and solutions that address the United Nations’ Sustainable Development Goals 3 (Ensure healthy lives and promote well-being for all at all ages) or 12. With regard to Sustainable Innovation spend, Philips set a target of EUR 7.5 billion (cumulative) for the period 2016-2020 as part of the Healthy people, Sustainable planet program.
In 2020,2022, Philips invested EUR 280168 million in GreenGreen/EcoDesigned Innovation, and somea reduction compared to 2021 due to the completion of a number of sizeable innovation projects in the course of 2022. We expect this spend to increase again in the years to come. In 2022, over EUR 1.71.8 billion was invested in Sustainable Innovation. Total Sustainable Innovation spend over
As the past five years amountedcurrent EU Taxonomy delegated act only applies to EUR 7.4 billion, about 1% belowsectors with highest CO2 emissions, Philips’ activities are not within the target.scope of this delegated act and consequently none of Philips' R&D investments were eligible under this taxonomy during 2022.
Philips Group
Green Innovation per segment
in millions of EUR
Philips develops innovative diagnosis and treatment solutions that support precision diagnosis and effective, minimally invasive interventions and therapy, while respecting the limits of natural resources. Investments in Green Innovation in 20202022 amounted to EUR 12293 million, a significant increase comparedcomparable to 2019.EUR 96 million in 2021.
All Philips EcoDesign/Green Focal Areas are taken into account as we aim to reduce environmental impact over the total lifecycle. Energy efficiency is an area of focus, especially for our large imaging systems such as MRI. Through circular-ready design, Philips also pays particular attention to enabling the upgrading ofand reuse pathways, so our customers can benefit from enhancements in workflow, dose management and imaging quality and availability of re-used service parts with the equipment they already own. Our Diagnosis & Treatment businesses actively support a voluntary industry initiative with European trade association COCIR to improve the energy efficiency and material efficiency of medical imaging equipment, as well as lowering its hazardous substances content. Moreover,In addition, we are reducing the amount of hazardous substance and improving our packaging. We continued to actively partneringpartner with multiple leading care providers to investigate innovative ways to reduce the environmental impact of healthcare, for example by maximizing energy-efficient use of medical equipment (by for example introducing EcoModes) and optimizing lifecycle value. Additionally, Philips aimedaims to close the loop on all large medical equipment that becamebecomes available to us by the end of 2020, and to extend circular practices to all medical equipment by 2025. To achieve this target, we actively drive trade-ins in markets where de-install, trade-in and reverse logistics capabilities are in place, and build these capabilities in countries that do not yet have them.
Philips’ connected health IT solutions integrate, collect, combine and deliver quality data for actionable insights to help improve access to quality care, while respecting the limits of natural resources. It is our belief that well-designed e-health solutions can reduce the travel-related carbon footprint of healthcare, increase efficiency in hospitals, and improve access to care and outcomes. This has also become apparent during the COVID-19 crisis. GreenGreen/EcoDesigned Innovation investments in 20202022 amounted to EUR 5131 million, a sizeable increase compared to 2019, andin line with EUR 32 million in 2021. Green Innovation projects in 2020 delivered,2022 will deliver the coming years, among other things, new greenEcoDesigned patient monitors with lower environmental footprints, reflecting all the Philips EcoDesign/Green Focal Areas. Energy efficiency, and material reduction, less hazardous substances and closing the loop activities are the main areas of focus.
The continued high level of R&D investments at our Personal Health businesses is also reflected in the Green Innovation spend, which amounted to EUR 10540 million in 2020,2022, compared with EUR 9965 million in 2019.2021, as some larger innovation projects were finalized in the course of 2022. The Personal Health businesses continued their work on improving the energy efficiency of their products, closing the materials loop (e.g. by using recycled materials in products and packaging), and the voluntary phase-out of polyvinyl chloride (PVC), brominated flame retardants (BFR), Bisphenol A (BPA) and phthalates from, among others, food contact and childcare products. Mother & Child Care introduced a reusable sterilization boxMore specifically, as part of our Fit for soothers and breastfeeding accessories, eliminating the need for separate packaging. In our Oral Healthcare portfolio, we have been able to achieve a 40% average packaging reduction for the Protective Clean products for US retail. In our Garment Care portfolio,Future Packaging program, we launched the first plastic free, mailbox-ready, packaging solution in our first green optimal-temperature pressurized steam generator; thisGrooming and Beauty portfolio for an online One Blade shaver, and plastic free packaging in the Female Depilation and Hairstyling portfolio. Philips also launched a foldable, more energy-efficient product containshairdryer containing recycled plastic and is free of PVC and BFR.plastic.
The segment Other invested EUR 24 million in GreenGreen/EcoDesigned Innovation, spread over projects focused on global challenges relating to water, air, energy, food, circular economy, and access to affordable healthcare.
For a sustainable world, the transition from a linear to a circular economy is essential. A circular economy aims to decouple economic growth from the use of natural resources and ecosystems by using these resources more effectively. It is a driver of innovation in the areas of material, component and product re-use, as well as new business models such as system solutions and services. At Philips, we have set ambitious targets to guide this journey. In 2016,2020, as we launchedannounced our Healthy people, Sustainable planet program,ESG commitments, we aimed, among other things, to generate 15%25% of our revenues from circular products and services, to extend our ‘closing the loop’ practices across all our medical products, and to further embed circular practices at our sites and send zero waste to landfill in our own operations, by 2020. At the beginning of 2018, we added a pledge to take back and repurpose all the large medical systems equipment (e.g. MRI and CT scanners) that our customers are prepared to return to us, and to extend those practices across our professional portfolio by 2025. At the end of 2020, we had achieved these ambitious circular economy goals.operations.
GreenGreen/EcoDesigned Revenues are generated through products and solutions that offer a significant environmental improvement in one or more Green Focal Areas -– Energy efficiency, Packaging, Hazardous substances, Weight, Circularity, and Lifetime reliability -– and thereby deliver a contribution to SDG 12 (Ensure sustainable consumption and production patterns). GreenGreen/EcoDesigned Revenues increasedamounted to EUR 13.912.8 billion in 2020,2022, or 71.0 %71.7% of sales (67.2%(70.5% in 2019), reaching a record level for Philips2021). This increase is mainly attributable to higher Green/EcoDesigned revenues in the Precision Diagnosis and exceedingPersonal Health businesses.
As the 2020 targetcurrent EU Taxonomy delegated act only applies to sectors with highest CO2 emissions, Philips’ activities are not within the scope of 70%.this delegated act and consequently none of Philips' revenues were eligible under this taxonomy during 2022.
Philips Group
Green Revenues per segment
in millions of EUR unless otherwise stated
Through our EcoDesign process we aim to create products and solutions that have significantly less impact on the environment over their whole lifecycle. Overall, the most significant improvements have been in energy efficiency and lower weight (thus less resources), although increased attention was also given to hazardous substances, packaging and recyclability in all segments in 2020,2021, the latter driven by our Circular Economy initiatives.
In 2020,2022, a number of main platforms were launched in our Diagnosis & Treatment businesses expanded their Green Productsbusinesses. CT7500 and Solutions portfolio with new Green Products - the CT Incisive, Mobile X-Ray system Zenition 50 and 70 - and withvarious redesigns of various Green Productscurrent platforms have been launched offering further environmental improvements such as the MR Ambition and Elition systems. These products improve patient outcomes, provide better value, and enable accessimprovements. Specific attention was paid to high-quality care, while reducing environmental impact. A good example is BlueSeal magnet technology, which is designed to reduce lengthy and costly disruptions in MRI practicepreparing for the MR Ambition, and help healthcare facilities transition to more productive and sustainable, almost helium-free operations. The new Green Products offer an improvement of over 10% in at least one of the Green Focal Areas compared to their predecessor products, e.g. 12-13% lowerfuture EcoDesigned product weight for the Zenition compared to Veradius/Pulsera and 30% lower packaging weight for the CT Incisive compared to Ingenuity CT.launches.
Our Connected Care businesses continued to develop their Green ProductsAfter several launches of new Green/EcoDesigned products in 2020, no major new launches took place in 2021 and Solutions portfolio in 2020. Recently launched VS30 and MX850 patient monitors, EV300 and EVO ventilators and the Intrepid HeartStart monitor & defibrillator came onto the market with over 10% lower energy usage and/or product weight compared to their predecessor products. For example, energy savings2022 except for the EVO and EV300 ventilators were around 25% compared to their predecessor Trilogy 100 and 202 products. VS20 monitor which has good performance on all EcoDesign focal areas. New EcoDesigned Products are expected in 2023 with improvements on all EcoDesign focal areas.
In our Personal Health businesses, the focus is on GreenGreen/EcoDesigned Products and Solutions that meet or exceed our minimum requirements in the areas of energy consumption, packaging, substances of concern, and application of recycled plastics. GreenGreen/EcoDesigned Revenues in 2020 advanced2022 amounted to 72%90% of total sales, compared to 63%85% in 2019.2021. We continue to make progress in developing PVC/BFR-free products. More than 84%90% of our consumer product sales consist of PVC/BFR-free products, with the exception of power cords, for which there are not yet economically viable alternatives available. In our coffeeOral Healthcare portfolio we launchedintroduced the Senseo Viva Café Eco, with overfirst brush heads containing 75% recycled content in non-food-contact plastic parts. in our Kitchen Appliances portfolio, we stepped up the application of recycled plastic for our Eole and Viva/Bond Airfryers, switching over from virgin plastic to recycled plastic for the internal housing parts.bio-based materials.
Philips’ Sustainable Operations programs focus on the main contributors to climate change, recycling of waste, reduction of water consumption, and reduction of emissions.
At Philips, we see climate change as a serious threat. Therefore, we are taking action to rethink our business models and decouple economic growth from the impact we have on the environment. We believe large corporates should lead the transition to a low-carbon economy. This will not only benefit the environment, but will also positively impact social and economic aspects.
During the COP 21 United Nations Climate Conference in Paris in 2015, we committed to become carbon-neutral in our operations, pursue all efforts to reduce our operational emissions, source all our electricity from 100% renewable sources, and to offset all unavoidable emissions by year-end 2020. We are proud to confirm that as ofSince 2020, Philips ishas been carbon-neutral in its operations. We delivered on this commitment as a result of a comprehensive program that included energy-efficiency improvements, on-site renewables, Power Purchase Agreements, but alsoas well as business travel reduction and transport mode shifts to low-carbon emitting alternatives, and finally a carbon offset program.
We are proud that ourOur efforts are acknowledged by the CDP (formerly known as the Carbon Disclosure Project), a global NGO that assesses the greenhouse gas (GHG) emission performance and management of reporting companies. In 2020,2022, we were ranked on the CDP Climate Change 'A' List for our continued climate performance and transparency for the eighth year in a row.10th consecutive year.
Having achieved our 2020 carbon neutrality target, we have raised the bar and set ambitious emission reduction targets to ensure we help limit the impact of global warming, not only in our operations, but throughout our value chain – collaborating with suppliers and customers to amplify our impact. That is why Philips has set new long-term emission reduction targets, which have been assessed and approved by the Science Based Targets initiative (SBTi) – locking down our commitment to drive climate action across the value chain, from suppliers to customers, and ensuring that we contribute to the decarbonization required to keep the global temperature increase well below 1.5 °C. At COP 26, we announced our plan to step up our acclaimed supplier sustainability program with the goal of having at least 50% of our suppliers (based on spend) committing to science-based targets (SBTs) for CO₂-e emissions reduction by 2025.
We stepped up our commitment to reduce our scope 3 carbon emissions in line with the 1.5 °C global warming scenario (Paris agreement). This commitment has been reviewed and approved by the Science Based Targets initiative (SBTi) in 2022, after we sold the Domestic Appliances business in 2021. The latter had a material downward impact on our scope 3 emissions, requiring a new assessment by the SBTi.
In 2020,2022, our net operational carbon footprint resulted in zero kilotonnes carbon dioxide-equivalent (CO2-e), mainly driven by increasedcontinued use of 100% electricity from renewable sources and a significantcontinuing reduction in air travel due to COVID-19, and a reduction in air freight, notwithstanding emergency flights with respiratory and other equipment for hospitals during the COVID-19 crisis.freight. A total of 535438 kilotonnes carbon dioxide-equivalent (CO2-e) were compensated via carbon offsets.
Philips reports all its emissions in line with the Greenhouse Gas Protocol (GHGP).
Philips Group
Net operational carbon footprint
in kilotonnes CO2 -equivalent
In 2020, our operational carbon intensity (in tonnes CO2e/EUR million sales) improved by 24%, even as our company recorded 2.5% comparable sales growth*). This excludes the acquired carbon offsets.
In our sites, we achieved significant reductions inreduced our scope 1 (direct) CO2 (indirect)-e emissions by 16% compared to 2021. Scope 1 emissions cover the emissions from our direct fuel consumption and the use of refrigerants that have a global warming potential. The reduction in scope 1 emissions is mainly driven by an increase in globalour continued energy efficiency measures, our program to phase out fossil fuels, working from home, and mild winters. As the consumption of natural gas is still the main source of our scope 1 emissions, we will continue to drive down our overall consumption and find alternative renewable sources to heat our buildings.
In 2022, our indirect scope 2 (market-based method) CO2-e emissions declined by 33% compared to 2021. Scope 2 (market-based) emissions cover the emissions of non-renewable electricity and purchased (city/district) heating and cooling. As we have already been sourcing 100% renewable electricity since 2020, the remaining emissions are associated with purchasing (city/district) heating and cooling, which we leverage as a low-carbon alternative to natural gas to heat our buildings. Moving forward, we will continue to increase the renewable energy share from 95% in 2019 to 100% in 2020. Allof our US operations were already powered by(city/district) heating and cooling that we purchase.
To secure long-term delivery and quality of our renewable electricity, fromwe have multiple Power Purchase Agreements (PPAs) in place. For instance, the Los Mirasoles wind farm. Then,farm in 2019,the US and the Krammer and Bouwdokken wind farms in the Dutch province of Zeeland,Zeeland. We closed the latter agreements with which we closed long-term contracts through our renewable electricity purchasing consortium with Nouryon, DSM and Google, poweredpowering all our operations in the Netherlands. Combined with the Los Mirasoles wind farm, this covers some 50%49% of our total electricity demand. Combined with the achieved energy reductions, this led to a 28% reduction in emissions from our energy consumption (scope 1 and scope 2 market-based) in 2020 compared to 2019.
In December 2020, Philips announced its next Power Purchase Agreement that will become operational during the summer of 2023, again in a purchasing consortium with Heineken, Nouryon and Signify, to power most of the remaining European sites with renewable electricity.electricity for the long term.
In 2022, our indirect scope 2 (location-based method) CO2-e emissions declined by 6% compared to 2021. Scope 2 (location-based method) emissions cover the emissions of electricity (excluding the renewable share) and purchased (city/district) heating and cooling. Emissions are calculated using average grid emission factors, ignoring the renewable electricity share of the reporting entity. This method indicates the efforts to reduce energy.
Our operational energy efficiency improved by 9%, from 0.031 GWh/millions EUR sales in 2021 to 0.028 GWh/millions EUR sales in 2022.
Our continued efforts to reduce our energy consumption, eliminate refrigerants with a high global warming potential (GWP), and increase our renewable energy share led to a 16% reduction in (scope 1 and scope 2 market-based) emissions in 2022 compared to 2021. Overall, we are making good progress, increasing our renewable energy share to 77% in 2022, from 74% in 2021. We are already overachieving our 2025 ambition to source 75% of our energy from renewable sources and delivering on our 2025 scope 1 and scope 2 (market-based method) ambition. Even though we have already achieved our 2025 SBTi targets, we will continue to accelerate our efforts to phase out fossil fuels (mainly natural gas) consumption from our operations by driving down overall consumption and finding alternative renewable sources, making sure we remain well on track to deliver on our long-term (2040) science-based targets.
In our operational carbon footprint, we include two scope 3 (indirect) emission categories – not included in scope 2 – that occur in the value chain, namely business travel and transportation & distribution. Together with our scope 1 and scope 2 (market-based method) emissions, these comprise our operational carbon footprint.
Our business travel emissions, covering emissions from air travel, lease cars and rental cars, decreasedincreased by 54%20% compared to 2019. We2021. This is mainly due to the fact that more of our employees are traveling to meet customers and are using their lease cars again post-COVID-19. The remaining effects of COVID-19 also continued to keep these emissions low compared to pre-COVID-19 levels. Moving forward, we continue to electrify our lease fleet and to promote online collaboration post-COVID-19 to limit air travel, as well as increasing our efforts to move travelers to rail transport for shorter distances.
In 2022, we recorded a 78% reduction22% decrease in our air travel emissions, mainly as a result of COVID-19 and our 'Travel less, travel smarter' campaign. This campaign was initiated to further reduce our business travel emissions by installing more online collaboration rooms as an alternative to travel, stimulating behavioral change via our Global Connect Challenge, and promoting alternative modes of transport. In addition to the emission reduction in air travel, emissions from our lease car fleet decreased by 11%, mainly due to COVID-19 and the working-from-home protocol, partially mitigated by an increase in fleet size. Emissions resulting from rental cars decreased by 54%transportation & distribution compared to 2019.
In 2020,2021. The scope of these emissions covers the CO2-e emitted by air freight, ocean freight, road freight and parcel shipments. As air freight accounts for most of our operational carbon footprint, we recorded ahave taken several measures, such as the Corridor Project, where we shifted air freight shipments to ocean freight for several lanes. This helped to reduce our air freight emissions by 15% decrease in emissions in our overall logistics operations compared to 2019. We reduced overall2021. CO2-e emissions from air freight by 6%. Emissions from ocean freight reduceddecreased by 47%, mainly as a result43% in 2022 compared to 2021. Most of improvedthese reductions can be attributed to the fact that the Domestic Appliances businesses have now been fully disentangled and (combined) shipment data insights, allowing us to more accuratelyfor ocean freight now fully excludes all their related shipments. To quantify our ocean freight emissions. emissions by leveraging carrier-trade-lane specific emission factors, we use data from the Smart Freight Center – Clean Cargo (formerly known as the CCWG). This improved approach was implemented in 2021, allowing us to quantify our ocean freight emissions more accurately. This approach has been implemented for 2020, 2021 and 2022.
Emissions from parcel shipments decreased by 1%10%, as we shipped more parcels,the number of shipments increased but over awas mitigated by shorter distance compared to previous years. Emissionsaverage distances per shipment. The emissions from road transport decreased by 12%51%, mainly driven by a decreased demandreduction of shipments and the average weight per shipment. The emission reductions in road freight are also impacted by the inclusion of combined shipments of Domestic Appliances and Philips in 2021. Historically, we were not able to exclude all the Domestic Appliances businesses' shipments from our shipment data.
Moving forward, we will continue to drive efforts to further reduce emissions from air freight and are exploring options to source sustainable fuel alternatives for Personal Health products in the first half year of 2020. We continuedshipments, which will help us to make transport mode shifts to low-carbon alternatives, but departed from this while addressing the significant and urgent increase in demand for respiratory and other healthcare equipment during the COVID-19 crisis. reach our long-term emission reduction targets.
Although reduction is key to achieving carbon neutrality, unavoidable carbon emissions required offsetting in order to gradually drive down our emissions to zero by year-end 2020.2022. We did this by financing projects in emerging regions that have a strong link with UN Sustainable Development Goals 3 (Ensure healthy lives and promote well-being for all at all ages) and 12 (Ensure sustainable consumption and production patterns). In 2020,2022, we increaseddecreased offsets to 535438 kilotonnes, equivalent to the annual uptake of approximately 1613 million medium-sized oak trees. This covers the total emissions of our entire operations, coveringincluding all CO2-e emissions from our sites, all business travel, and all logistics flows.transportation & distribution. We do this by financing carbon reduction projects through long-term carbon offsets in emerging regions that drive social, economic and additional environmental progress for the local communities, such as:
TheseThis carbon-emission reduction projectsproject will provide millions of liters of safe drinking water in Uganda and Ethiopia and will reduce the mortality risk from water-borne diseases. Additionally, less wood will be required for boiling water, leading to less indoor air pollution and slowing down the deforestation rate. To ensure quality, all offsets are verified under the Gold Standard.
Planting trees will improve livelihoods and address issues such as deforestation, biodiversity loss, and adaptation to climate change and provide support and education including on HIV and malaria. To ensure quality, all offsets are verified under the VCS standard.
Deforestation is reduced through promotion of sustainable businesses to protect the forest. Unsustainable harvest of fuelwood is reduced. The forest supports the supply of water to other parts of Ethiopia and neighboring countries. It is also the habitat of diverse and, in some cases, rare species. To ensure quality, all offsets are verified under the VCS standard.
The energy supply gap is reduced by providing access to clean energy and related employment through wind generation in India. This enables an improvement in livelihoods. To ensure quality, all offsets are verified under the VCS standard.
By financing highly efficient cookstoves insupporting a range of cookstove technologies across Ghana and Kenya, the projects improve respiratory health, reduce fuel costs and Uganda, less wood will be requiredreduce deforestation for cooking, leading to lower carbon emissions, a reduction in diseases caused by indoor air pollution, and a lower deforestation rate in these regions.fuel. This also enables more time for paid work, thus improving prospects. To ensure quality, all offsets are verified under the Gold Standard.
This project will reduce the demand-supply gap in the Dewas region of India and will provide renewable energy to more than 50,000 households. The project will also provide a mobile medical unit in 24 villages, giving diagnosis and medicines free of charge twice a month. Additional funding will be provided for educational programs and improved sanitation facilities in five local schools in order to maximize the social impact. To ensure quality, all offsets are verified under the Gold Standard.
Philips Group
Operational carbon footprint by scope
in kilotonnes CO2-equivalent unless otherwise stated
2016 | 2017 | 2018 | 2019 | 2020 | 2018 | 2019 | 2020 | 2021 | 2022 | |
---|---|---|---|---|---|---|---|---|---|---|
Scope 1 | 42 | 38 | 40 | 35 | 32 | 36 | 32 | 30 | 27 | 23 |
Scope 2 (market-based) | 121 | 58 | 25 | 14 | 3 | 26 | 14 | 3 | 2 | |
Scope 2 (location-based) | 252 | 225 | 227 | 203 | 182 | 200 | 196 | 173 | 177 | 167 |
Scope 3 | 649 | 785 | 721 | 657 | 500 | 687 | 622 | 485 | 489 | 413 |
Total (scope 1, 2 (market-based), and 3) | 812 | 881 | 786 | 706 | 535 | |||||
Scope 3 - Transportation & Distribution | 540 | 470 | 415 | 417 | 327 | |||||
Scope 3 - Business Travel | 147 | 152 | 70 | 72 | 86 | |||||
Total (scope 1, 2 (market-based), and 3)1) | 749 | 668 | 518 | 519 | 438 | |||||
Emissions compensated by carbon offset projects | - | 220 | 330 | 440 | 535 | 314 | 416 | 518 | 519 | 438 |
Net operational carbon emissions | 812 | 661 | 456 | 266 | 0 | 435 | 252 | - | - | |
Operational CO2e efficiency in tonnes CO2e/mln EUR sales | 47.9 | 47.5 | 43.4 | 36.2 | 27.4 | 47.2 | 39.0 | 29.9 | 30.3 | 24.6 |
During 2020, the appliedIn 2022, we updated our emission factors used to calculatethe latest available sources to reflect the most accurate results. Historical emissions of our operational carbon footprint remained unchanged compared to 2019.discontinued Domestic Appliances business have been excluded for all years, except for some combined ocean and road freight shipments in 2021 as described above. Where available, actual emission allocations were applied. Where business-specific emission data were not available, a spend allocation key was applied. Philips reports all its emissions in line with the Greenhouse Gas Protocol (GHGP).
Philips Group
Energy consumption1)
in terajoules (TJ)gigawatt hours (GWh) unless otherwise stated
2016 | 2017 | 2018 | 2019 | 2020 | 2018 | 2019 | 2020 | 2021 | 2022 | |
---|---|---|---|---|---|---|---|---|---|---|
Total electricity consumption | 1,742 | 1,560 | 1,582 | 1,531 | 1,446 | |||||
Electricity consumption | 421.6 | 403.5 | 381.6 | 389.1 | 382.1 | |||||
Renewable electricity | 374.6 | 382.0 | 381.3 | 389.1 | 382.1 | |||||
In-contract renewable electricity | 146.8 | 95.5 | 63.1 | 56.7 | 39.6 | |||||
Power Purchase Agreement (PPA) | 45.7 | 160.9 | 186.2 | 168.7 | 187.4 | |||||
Purchased renewable electricity certificates | 181.1 | 124.5 | 130.0 | 161.3 | 152.3 | |||||
Renewable electricity generated and consumed on-site | 1.0 | 1.1 | 2.1 | 2.4 | 2.7 | |||||
Fuel consumption | 652 | 558 | 603 | 550 | 525 | 146.1 | 134.7 | 133.8 | 120.6 | 102.7 |
Natural gas | 137.0 | 127.3 | 126.4 | 116.3 | 97.7 | |||||
Other non-renewable fuel | 9.1 | 7.4 | 4.3 | 5.0 | ||||||
Purchased heat, steam and cooling | 83 | 48 | 61 | 60 | 45 | 17.2 | 17.8 | 12.4 | 14.4 | 11.9 |
Total energy | 2,477 | 2,166 | 2,246 | 2,141 | 2,016 | |||||
Total energy consumption | 584.9 | 556.1 | 527.9 | 524.1 | 496.7 | |||||
Renewable electricity | 986 | 1,228 | 1,423 | 1,450 | 1,445 | |||||
Renewable energy consumption | 374.6 | 382.0 | 381.3 | 389.1 | 382.1 | |||||
Renewable energy share | 64% | 69% | 72% | 74% | 77% | |||||
Renewable electricity share | 57% | 79% | 90% | 95% | 100% | 89% | 95% | 100% | 100% | |
Renewable energy share | 40% | 57% | 63% | 68% | 72% | |||||
Sales in millions of EUR | 17,422 | 17,780 | 18,121 | 19,482 | 19,535 | |||||
Royal Philips revenues | ||||||||||
Operational energy efficiency in TJ/mln EUR sales | 0.15 | 0.12 | 0.11 | 0.10 | ||||||
Non-renewable energy consumption | 210.3 | 174.0 | 146.5 | 135.0 | 114.7 | |||||
Non-renewable energy share | 36% | 31% | 28% | 26% | 23% | |||||
Sales to thirds in millions of EUR | 15,878 | 17,147 | 17,313 | 17,156 | 17,827 | |||||
Operational energy efficiency in GWh/millions EUR sales | 0.037 | 0.032 | 0.030 | 0.031 | 0.028 |
Philips has set long-term CO2-e emission targets approved by the Science Based Targets initiative (SBTi) for all three scopes. The approval confirms that Philips’ targets across our value chain are in line to limit global warming to below 1.5 °C. By joining forces with our customers and suppliers, we can reduce our shared carbon footprint and help create a sustainable and more resilient healthcare industry.
Together with our customers and suppliers, we intend to continue to reduce our collective need for fossil fuels by using renewable and energy-efficient alternatives. To deliver, we will focus on the following four objectives:
Philips recognizes the importance of identifying, assessing and mitigating climate-related risks to ensure business continuity and resilience. This 2022 integrated financial, social and environmental report aims to follow the recommendations of the TCFD.
In 2022, relevant risks and opportunities have been quantified by applying Philips’ internal risk assessment methodology. This ensures alignment with the risk management team, increasing cross-business comparability and integration with already existing risk screening procedures. Moreover, physical risk factors were evaluated on a site-specific level by exploring 25 of our financially material sites in more detail. Transition risks on the other hand, were assessed on a company level and by subject matter experts. The reason for this differentiation is because physical risks vary on a regional level while transition forces generally apply on a global scale.
The site-specific analysis leveraged both the external Munich RE NATHAN tool and internal site experts. While RE NATHAN uses scientific models to determine how exposed different regions are to climate risk factors, the site-specific experts have access to specialized knowledge on the climate change preparedness of the sites. Combining both internal and external expertise ensured we have a holistic view that considers both regional implications and Philips specific implications. RE NATHAN assessed which of the following hazards are most threatening in the medium-term accounting for four global warming scenarios (RCP 1.9, RCP 2.6, RCP 4.5, and RCP 8.5): drought, heat stress, precipitation, river flood, and tropical cyclones. In case one or multiple risk factors seemed impactful in the future we then asked site specific experts to provide us with a more detailed impact and control measure evaluation. This thereby provided us with a good overview on how exposed we currently are to extreme or chronic weather conditions and highlighted key action points.
We also further assessed internal and external forces pushing Philips to a low carbon future considering three global warming scenarios. In our 1.5 and 2 degrees model (RCP 1.9 and 2.6) we assumed that strong cross sector pressures exist. Governments enforce strict environmental rules, society is environmentally conscious, and the private sector invests in collaborative innovations. In contrast, the 4ºC global warming scenario (RCP 4.5) assumed short-sighted governments focused on protectionism, customers with a cost orientation, and a private sector focused on product innovation. For each scenario, experts were then consulted to determine the potential likelihood of the predefined transition risks/opportunities becoming material. We, furthermore, assessed the potential impact of the risks/opportunities unraveling and to what extent we can control the underpinning risk or exploit the opportunity.
Through our ambition to reduce CO2 emissions in our entire value chain in line with a 1.5 °C global warming scenario, we are reducing our exposure to transition risks, such as changing legislation, changing customer demands and carbon pricing. Nonetheless, strong government policies in line with the Paris Agreement could result in higher carbon pricing impacts for Philips, its supply chain, and its customers. Furthermore, a global financial downturn could also promote inertia in the field of environmentally friendly innovations. Hence, our Science Based Targets are a key factor in mitigating the risk associated with the changing legislation, customer preferences and preventing inertia.
In 2023, we plan to further assess the impact of climate change on our value chain and continue to standardize our assessment process.
Philips is not a water-intense company. However, a number of our manufacturing sites are located in water-stressed regions in, for example, India. USA (California), India and Israel. With the help of the WRI Aqueduct tool, the water withdrawn from areas with high baseline water stress was identified across all Philips' industrial operations. It shows that around 13% of the industrial sites are located in Extremely High (>80%) baseline water stress areas. However, the impact from these operational sites is very limited, only amounting to 4% of Philips' total water withdrawal.
We were included in the CDP "A-list" for water in the 2022 ranking, achieving a 'double-A' score when combined with our Climate Change results.
Total water intakewithdrawal in 20202022 was 777,476677,632 m3, a 13%4% decrease compared to 2021 and a 5% reduction compared to 2019. The2019 (pre-COVID level). Water consumption in 2020 and 2021 was impacted by the government-mandated lockdowns and the working-from-home protocol resulted– resulting in a significant reduction in water intake at several sites. Personal Health,sites (mainly in China).
Diagnosis & Treatment, which consumes 48%46% of total water usage, recorded an 8% decrease, mainly caused by lower construction activity and effective processes, mitigated by a 16% decrease. The decreasesite expansion in India. Personal Health recorded a 4% increase. This was mainly due to fewer employees working on the sites andconstruction of a new factory in China, mitigated by decreased production volume decreases at a water-intensive manufacturing sitessite in Asia. Diagnosis & Treatment showed a decrease of 3%, mainly caused by the working-from-home protocol, partially mitigated by the installation of a water-intense technology on a site in North America. Connected Care showed a decrease of 23%7%, notwithstanding a significant volume ramp-up, due to changesthe decreased production volume at a site in the organizational footprint and the working-from-home protocol.Asia, mitigated by construction activity at a site in North America.
Philips Group
Water intakewithdrawal
in thousands of m3
2016 | 2017 | 2018 | 2019 | 2020 | 2018 | 2019 | 2020 | 2021 | 2022 | |
---|---|---|---|---|---|---|---|---|---|---|
Diagnosis & Treatment | 269 | 312 | 288 | 295 | 286 | 288 | 295 | 286 | 337 | 310 |
Connected Care | 152 | 168 | 161 | 150 | 116 | 161 | 150 | 116 | 119 | 111 |
Personal Health | 542 | 408 | 442 | 445 | 375 | 238 | 265 | 221 | 247 | 257 |
Philips Group | 963 | 888 | 891 | 890 | 777 | 687 | 710 | 623 | 703 | 678 |
In 2020, 99.8%2022, 99.7% of water was purchased and 0.2%0.3% was extracted from groundwater wells.
In 2020,2022, our manufacturing sites generated 35.5 kilotonnes22,802 tonnes of waste, an increase of 34%3% compared to 2019,2021, mainly driven by the high impact of our construction activities in different locations across the globe. globe and changes in the operations.
The Diagnosis & Treatment businesses increased their waste by 103% as7%, mainly driven by a result of variousstrong increase in construction-related reused material in Best (see below), which was partially offset by the operational changes and lower construction activities in Asia and Europe and increased production,activity on the other sites. The reported reused materials now constituting 56%constitute 22% of total waste. The Connected Care decreasedbusinesses increased waste by 15%5% due to the increased volume of reused materials and operational changes andchanges. The reported reused materials are 24% of the working-from-home protocol, notwithstanding a sizable production ramp-up;total waste. Personal Health decreased waste by 3% due to operationallower construction activity and changes in production.
In the past, Philips in Best (Netherlands) decided to purchase temporary offices to resolve office space shortages, and increased production, now constituting 35%after many years these temporary offices became redundant. Since the temporary offices were still of total waste.good quality, Philips made every effort to find a sustainable solution for the building and found a partner in COA (Centraal Orgaan opvang asielzoekers, the Dutch national organization helping asylum seekers). These units were completely refurbished for their new purpose: a COA location for people seeking asylum in the Netherlands. The 'new' building is located in Zeist. By re-using the offices, we are contributing to the provision of good housing for asylum seekers and to a circular society.
Philips Group
Total waste
in kilotonnestonnes
2016 | 2017 | 2018 | 2019 | 2020 | 2018 | 2019 | 2020 | 2021 | 2022 | |
---|---|---|---|---|---|---|---|---|---|---|
Diagnosis & Treatment | 9.2 | 8.3 | 8.4 | 9.7 | 19.7 | 8,368 | 9,675 | 19,703 | 9,974 | 10,694 |
Connected Care | 3.5 | 3.9 | 4.0 | 4.1 | 3.5 | 3,962 | 4,095 | 3,475 | 2,753 | 2,899 |
Personal Health | 12.2 | 12.4 | 12.1 | 12.6 | 12.3 | 8,820 | 8,758 | 7,929 | 9,477 | 9,209 |
Philips Group | 24.9 | 24.6 | 24.5 | 26.4 | 35.5 | 21,150 | 22,528 | 31,107 | 22,204 | 22,802 |
TotalUntil 2020, total waste consistsconsisted of waste that is delivered for landfill, incineration, waste to energy or recycling. We extended the scope with materials sent for reuse and other recovery as of 2021.
Materials delivered for reuse, other recovery or recycling via an external contractor amounted to 20,406 tonnes, which equals 89% of the total waste. Of the 11% remaining waste, 77% comprised non-hazardous waste and 23% hazardous waste. We recorded 1,484 tonnes of waste prevented in our own activities in 2022, compared to 1,525 tonnes in 2021.
Philips Group
Total waste by destination in tonnes
Waste generated | Hazardous waste | Non-hazardous waste | |
---|---|---|---|
Reuse | 3,382 | 11 | 3,371 |
Recycling | 16,978 | 1,582 | 15,396 |
Other recovery | 46 | 0 | 46 |
Waste diverted from disposal by recovery operation | 20,406 | 1,593 | 18,813 |
Incineration (with energy recovery) | 1,802 | 156 | 1,646 |
Incineration (without energy recovery) | 412 | 383 | 29 |
Landfilling | 182 | 5 | 177 |
Waste directed to disposal by disposal operation | 2,396 | 544 | 1,852 |
Total waste generated | 22,802 | 2,137 | 20,665 |
Our sites addressed both the recyclingCircular Material Management percentage as well as waste sent to landfill, as part of our ESG commitments.
The Circular Material Management percentage has replaced the Healthy people, Sustainable planet 2016-2020 program. Materialsrecycling percentage, and includes circular measures such as waste prevented, reuse and other recovery, but excludes waste delivered for recycling via an external contractor amounted to 31.9 kilotonnes, which equals 90% of total waste, a significant improvementlandfill and incineration (with and without energy recovery) due to regulatory requirements. The Circular Material Management percentage was 91% in 2022, compared to 83%87% in 2019. Philips thereby achieved its 2020 recycling target.2021.
Of the 10% remaining (not recycled) waste, 78% comprised non-hazardous waste and 22% hazardous waste. Our Zero Waste to Landfill KPI excludes one-time-only waste and waste delivered to landfill due to regulatory requirements. According to this definition, in 20202022 we reported 0.5 kilotonnes1 tonne of waste sent to landfill, a significant reduction of 39% compared to 2019.19 tonnes in 2021. All our 3223 industrial sites achieved Zero Waste to Landfill status byat the end of 2020.2022.
Philips Group
IndustrialTotal waste delivered for recycling
by composition in %tonnes
Waste generated | Waste diverted from disposal | Waste directed to disposal | |
---|---|---|---|
Wood | 4,413 | 4,356 | 57 |
Paper/cardboard | 4,122 | 4,117 | 5 |
Metal scrap | 3,490 | 3,440 | 49 |
Plastic waste | 2,891 | 2,533 | 358 |
General waste | 2,308 | 1,266 | 1,042 |
Demolition scrap | 2,216 | 2,163 | 53 |
Chemical waste | 2,117 | 1,570 | 547 |
Other | 1,245 | 961 | 285 |
Philips included reduction targets for the substances that are most relevant for its businesses in its Healthy people, Sustainable planet 2016-2020 program. In order to provide comparable information at Group level, please find below a summary of the emissions of the formerly targeted substances. Emissions of restricted substances were again zero in 2020. The level of emissions of hazardous substances decreased from 2,521 kilos in 2019 to 616 kilos in 2020 (-76%), mainly driven by the significant reduction in styrene emissions in the Personal Health businesses.
Philips Group
Restricted and hazardous substances
in kilos
2016 | 2017 | 2018 | 2019 | 2020 | |
---|---|---|---|---|---|
Restricted substances | 1 | 0 | 0 | 0 | 0 |
Hazardous substances | 10,496 | 5,243 | 3,363 | 2,521 | 616 |
Philips’ purpose to improve people’s health and well-being extends throughout our value chain. At Philips, we have a direct business relationship with approximately 3,3005,300 product and component suppliers and 16,00017,100 service providers. Our supply chain sustainability strategy is updatedevaluated annually through a structured process, combined with dedicated multi-stakeholder dialogues. Our most recent stakeholder dialogue took place in June 2019. From this, we have developed multiple programs aimed at driving sustainable improvement. These programs cover compliance with our policies, improvement of our suppliers’ sustainability performance, our approach towards responsible sourcing of minerals, and reducing the environmental impact of our supply base.
Two core policy documents form the basis of our supplier sustainability compliance approach: the Supplier Sustainability Declaration and the Regulated Substances List.
The SSD sets out the standards and behaviors Philips requires from its suppliers. The SSD is based on the Responsible Business Alliance (RBA) Code of Conduct, in alignment with the UN Guiding Principles on Business and Human Rights and key international human rights standards, including the ILO Declaration on Fundamental Principles and Rights at Work and the UN Universal Declaration of Human Rights. It covers topics such as Labor, Health & Safety, Environment, Ethics, and Management Systems. This year, we made several changes to the supplier code of conduct, adding multiple expected behaviors that go beyond the RBA Code of Conduct. The RBA is the world’s largest industry coalition dedicated to responsible business conduct in global supply chains. As a Regular member of the RBA, Philips is required to commit publicly to the RBA Code of Conduct and actively pursue conformance to the Code and its standards, which must be regarded as a total supply chain initiative.
The RSL specifies the chemical substances regulated by legislation. Suppliers are required to follow all the requirements stated in the RSL. Substances are marked as restricted or declarable.
All suppliers are required to commit to the SSD and RSL. Through integration of a Sustainability Agreement (SA) in our General Purchase Agreement, suppliers declare compliance to both the SSD and RSL. Upon request, they provide additional information and evidence.
In 2016, Philips moved away fromfirst piloted its traditional'Beyond Auditing' approach to auditengage suppliers which it had been taking since 2004. Insights from data analysis showed this old approach was insufficient to drive sustainable improvements. Our SSP approach, first piloted in 2016, focuseson ESG matters, with a focus on:
This systematic approach is shown in the figure below and is a high-level representation of the SSP program.
First, a set of references, international standards, and Philips requirements are used to develop the Frame of Reference, which covers management systems, environment, health & safety, business ethics, and human rights. For each, the maturity level of suppliers is identified in the Program Execution Wheel, which assesses suppliers against the Plan–Do–Check–Act (PDCA) cycle. Suppliers are then categorized through the Supplier Classification model, which differentiates on the basis of supplier maturity, resulting in supplier-specific proposals for improvement. The SSP process is monitored and adjusted through continuous feedback loops. The outcome of the SSP assessment is a supplier sustainability score ranging from 0 to 100. This score is based on supplier performance in environmental management, health & safety, business ethics, and human rights.
Supplier selection for the program is initially based on criticality, whichcriticality. Criticality of suppliers is determined through an assessment of the supplier’s associated risks and opportunities, such as strategic importance of their components, annual spend, and annual spend.substitutability. In 2022, 14% of our suppliers were considered critical. After this initial assessment, the engagement strategy is tailored based on the suppliers’ current performance in terms of sustainability.
There are four different engagement approaches: BiC (Best in Class), SSIP (Supplier Sustainability Improvement Plan), DIY (Do It Yourself) and PZT (Potential Zero Tolerance). The PZT status is a temporary status and requires immediate attention and action. Depending on the categorization, suppliers are engaged in different ways to improve their sustainability performance.
If a (Potential) Zero Tolerance is identified, immediate action is taken. If the requested additional information and evidence lead to the conclusion that there is no structural Zero Tolerance, the supplier’s status will be changed and the supplier will go back to the original track in the program. If the conclusion gives rise to a structural Zero Tolerance, the supplier is required to:
Philips defines six Zero Tolerances:
For more details on the SSP process, refer to the SSP brochure.
In 2020, eight2022, three zero tolerances were found across the following categories: health and safety, remuneration,labor, and environmental impact. Most cases related to fire safety risks at our suppliers. FourTwo of the eightthree cases were successfully closed in 2020.2022. The remaining arezero tolerance was found in Q4 2022 and is still pending closure, while having active mitigation plans in place.closure.
Philips measures the impact of SSP engagements through the number of lives improved in the supply chain. This is derived from the improvements that suppliers make in their performance. To determine improvements, we calculate the pro rata change in performance from one year to the next.
Philips Group
Lives improved in the Supply Chain (thousands of Lives)
2020 | 2021 | 2022 | |
---|---|---|---|
Lives improved in the Supply Chain | 302 | 430 | 459 |
In 2020,2022, the overall year-on-year improvement in performance is 36%was 51% for suppliers that entered the program in 2019.2021. The number of employees impacted at suppliers participating in the SSP program was approximately 302,000.459,000. This figure includes suppliers assessed in the last three years, for which the supplier has communicated their number of employees via the self-assessment questionnaire, which was validated during the on-site assessment. For those workers, labor conditions improved, the risk of serious injury reduced, and the negative environmental impact of suppliers was brought down. This includes the workers at suppliers of the Domestic Appliances business, for which Philips continued the sustainability engagement. For a detailed break-down of percentage improvements realized by active suppliers in the past year, by comparing the assessment in 2022 to their previous assessment, refer to the table below.following table.
Philips Group
SSP 20202022 performance: pro-rata improvements
in %
Topics | Policy | Procedures | Implementation | Management Responsibility | Communication | Risk control | Target Setting &Tracking | Corrective action approach | Supplier management | Policy | Procedures | Implementation | Management Responsibility | Communication | Risk control | Target Setting &Tracking | Corrective action approach | Supplier management |
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Environment | 6% | 10% | 15% | 8% | 10% | 11% | 8% | 5% | 3% | 10% | 14% | 9% | 7% | 29% | 17% | 15% | 17% | |
Health and Safety | 3% | 11% | 21% | 8% | 11% | 9% | 14% | 6% | 17% | 22% | 29% | 2% | 9% | 25% | 37% | 23% | 13% | |
Business Ethics | 1% | 8% | (8)% | 5% | 7% | 23% | 2% | 1% | 24% | 19% | 63% | 86% | 42% | 551% | 54% | 141% | (10)% | |
Human Capital | 6% | 21% | 12% | 10% | 12% | 14% | 18% | 3% | 19% | 27% | 48% | 24% | 13% | 37% | 1% | 14% | 6% |
Categories which showed the biggest improvement are:
In 2020, 202022, 47 suppliers were added to the SSP program. Of the population of suppliers that entered the program in the year before 2022 and have been assessed at least once in the past three years, before 2020, 237249 suppliers were still active in 2020.2022. The combined group represents 39% of our critical suppliers who are in the program.
As part of the 2020 adoption of our new ESG commitments, we have set the target to improve the lives of 1 million workers in our supply chain by 2025. To achieve this, we started to ramp-up our engagement since 2021, adding a significant ramp-up is requiredhigher number of 2nd tier suppliers due to changing risk profiles. We expect to roll out the program to additional manufacturing countries in the coming years.years to come.
ApartPhilips started a collaboration with the Responsible Business Alliance (RBA) in 2021, to extend the reach of its Supplier Sustainability Performance program across the wider industry – and impact lives outside of its own supply chain. From 2022, cross-industry peers can access Philips’ Supplier Sustainability Performance program tools and methodologies through the RBA’s Responsible Factory Initiative (RFI), which helps companies to assess and develop supply chain partners. This means Philips’ industry peers around the world will now benefit from proven approaches to supplier sustainability and are enabled to make their own rapid advances. As part of the inclusionlaunch of additionalthe RFI program, Philips had 15 of its own suppliers annually intojoin. It plans to direct more suppliers towards the award-winning SSPRFI program in the years to come.
Philips is actively applying the latest insights in data science and machine learning methods to make the SSP program more efficient in determining the sustainability maturity of suppliers, while also increasing the effectiveness of our supplier improvement approach.
In 2020,2022, a machine learningsoftware tool was developed, whichlaunched that enables prediction of suppliers’ actual performance, based on a limited number of survey questions. This tool is ablehelping us to predict expert scorings on detailed pieces of evidence, thereby reducinggreatly reduce the time spent on assessments. This leaves more room for Philips experts to support suppliers in their capability building, by sharing best practices and creating business cases that enable improvements.
In addition,On an annual basis, Philips launched its newly developedexperts organize quality trainings in the sustainability area for suppliers in the scope of the SSP IT platform, which fully supports the entire engagement process, from onboarding to data analysis. It is set up in such a way that other companies can easily start using the system for their own supplier engagements. The program design also enables various codesprogram.
The supply chains for minerals are long and complex. Philips does not source minerals directly from mines as there are typically 7+ tiers between end-user companies like Philips and the mines where the minerals are extracted. The extraction of minerals can take place in conflict-affected and high-risk regions, where mining is often informal and unregulated and carried out at artisanal small-scale mines (ASM). These ASMs are vulnerable to exploitation by armed groups and local traders. Within this context, there is an increased risk of severe human rights violations (forced labor, child labor or widespread sexual violence), unsafe working conditions or environmental concerns.
Philips addresses the complexities of the minerals supply chains through a continuous due diligence process, combined with active participation in multi-stakeholder initiatives to promote the responsible sourcing of minerals.
Each year, Philips investigates its supply chain to identify smelters of tin, tantalum, tungsten and gold in its supply chain and we have committed to not purchasing raw materials, sub-assemblies, or supplies found to contain conflict minerals.
Philips applies collective cross-industry leverage through active engagement via the Responsible Minerals Initiative (RMI, formerly known as the Conflict Free Sourcing Initiative (CFSI)). RMI identifies smelters that can demonstrate, through an independent third-party audit, that the minerals they procure are conflict-free. In 2020,2022, Philips continued to actively direct its supply chain towards these smelters.
The Philips Conflict Minerals Due Diligence framework, measures and outcomes are described in the Conflict Minerals Report that we file annually to the U.S.US Securities and Exchange Commission (SEC). The conflict minerals report is also publicly available on Philips’ website.
Each year, we work with our suppliers on the quality of their due diligence reporting by setting minimum criteria for the Conflict Minerals Reporting Templates (CMRT). In addition, we strive to reduce the number of non-identified smelters. The quality of the CMRTs remaineddropped 6 percentage points compared to the same as the 20192021 due diligence results, despite the COVID-19 pandemic.results. The number of non-listed smelters continued to decline, reachingremained zero for the first time in our program history (2019: 3)(2021: 0).
Philips Group
Conflict Minerals Due Diligence results
Key performance indicator | 2018 | 2019 | 2020 | 2020 | 2021 | 2022 |
---|---|---|---|---|---|---|
Response rate of suppliers | 95% | 100% | 99% | 99% | 95% | |
CMRTs that satisfied minimum acceptance criteria | 83% | 86% | 86% | 85% | 84% | 78% |
Non-listed smelters in our supply chain | 5 | 3 | 0 | 0 | 0 |
In 2020, Philips expanded the scope of itshas performed due diligence program to includeon cobalt as a new material.since 2019. We use cobalt predominantly in lithium-ion batteries. As part of this expansion,initiative, we engaged suppliers that provide materials containing cobalt. In 2020,2022, we again reached a 100% response rate. In addition, we performed smelter outreach on several occasions. Where appropriate, we worked with direct suppliers to facilitate alternative sourcing.rate (2021: 100%).
Whilst legally registered and recognized by government bodies, Artisanal Small-scale Mining organizations (ASMOs) in Puno largely fail to meet the due diligence requirements of international buyers. The cause of this is the use of informal practices, poor productivity and exposure to health and safety risks including the use of mercury. For the same reason, these mines fail to receive lines of credit from formal lenders (e.g. banks), meaning they are less able to upgrade their production methods. This lack of formalization presents drawbacks, mainly that mines miss out on better terms of trade and finance, gold is at greater risk of sale into illicit markets, and that mines are less likely to pursue responsible mining practices and modern equipment, negatively impacting miners and the environment.
The Responsible Peruvian Gold (RPG) project will support target ASMOs to achieve Fairtrade certification and export Fairtrade certified gold. ASMOs will be supported to operate legally and formally, enabling them to access finance from formal lenders, uptake more responsible and productive mining practices, and access international markets on Fairtrade terms. Fairtrade (one of the world’s leading certification schemes for responsible ASM) will work alongside FairCapital (a pioneering lender) and Valcambi (one of the world’s largest precious metals refiners) in the delivery of project activities between 2021 and 2023.
In Kenya's and Uganda's artisanal and small-scale gold mining (ASGM) sector, miners' organizations are often unable to qualify for financing from formal lenders. This hinders ASGM’s ability to invest into improving their productive and sustainability performance and instead perpetuates the cycle of poverty and associated negative social and environmental impacts. ASGM's are in many instances also unable to meet due diligence expectations of international off-takers. Meeting these due diligence standards is essential for maintaining local markets and their positive contributions to development, especially in light of the heightened due diligence standards
The LVGP is working towards a service-led approach to professionalize ASGM across the Lake Victoria region. Leveraging previous work by project partners in the region, the LVGP will provide formalization support to ASMOs, ensure access to creditsformal markets and savings in the Democratic Republic of Congo
Women represent 45provide access to 50% of the artisanal small-scale mining workforce. Studies have shown that they often struggleequipment to access formal creditimprove production and savings. When they can get credit they often have to accept unfavorable repayment terms, otherwise they have to depend on informal financial practices. The Artisanal Mining Women’s Empowerment Credithealth & Savings project addressed this issuesafety performance, by supporting the creation of village savings and loans associations for women and men in artisanal gold mining communities, in an effort to promote entrepreneurship and economic security.
In contrast to microfinance institutions, the interest paid on credit go back into the communal fund so members see their savings increase over time. The project also facilitated sensitization on gender equality and led to discussions with female members of associations and their partners about household finances, challenging traditional stereotypes and gender roles. The project provided financial literacy training to women who access credit from their association, to undertake new entrepreneurial activities around mine sites
The CADD Project consists of theproviding capacity development and pilot deploymenttechnical assistance needed to enable this transition. In parallel, the project aims to integrate responsibly produced ASM gold into electronics supply chains, aiming to match production of an open-source, public frameworkresponsibly produced ASM gold with downstream demand for upstream supply chain stakeholders to operationalize requirementsASM gold from the OECD Due Diligence Guidance. Such a framework is an essential implementation mechanism for companies operating in, and procuring from countries covered by European regulation 2017/821 where no upstream due diligence program is established. It provides a solution to systemic constraints on upstream due diligence scalability, sustainability, accountability and reliability — the most significant challenge to responsible mineral procurement globally.
Mining and mineral trade operators in countries covered by EU regulation are enabled to secure compliant access to international markets while minimizing due diligence costs. This in turn is expected to boost due diligence uptake by upstream operators and incentivize formal trade — an important step towards improving the socio-economic conditions of artisanal small-scale mining communities in conflict-affected and high-risk areas (CAHRAs).
We believe that multi-stakeholder collaboration in the responsible sourcing of minerals is the most viable approach for addressing the complexities of minerals value chains.
Philips is a founding partner of EPRM and has been a strategic member since its inception in May 2016. EPRM is a multi-stakeholder partnership between governments, companies, and civil society actors working toward more sustainable minerals supply chains. The goal of EPRM is to create better social and economic conditions for mine workers and local mining communities by increasing the number of mines that adopt responsible mining practices in Conflict-Affected and High-Risk Areas (CAHRAs).
EPRM is an accompanying measure to the EU Conflict Minerals Regulation dedicated to making real change ‘on the ground’. Through EPRM, Philips financially supports activities to improve responsible mining practices in mining areas in CAHRAs and shares our knowledge and practice in conducting due diligence. Since 2018, Philips has actively participated in aseveral working groupgroups focused on makingstrengthening the on-the-ground projects financially and strategically effective. From here, the call for new proposals was developed, decisions on co-funding were made, and criteria for scale-up potential were created.
Since January 2019, Philips has been an active board member in EPRM, taking the seatresponsible production of vice-chair by representing the industrials pillar. minerals, as well as improving responsible sourcing practices.
In June 2017 Philips signed the Responsible Gold Agreement, joining a coalition to work on improving international responsible business conduct across the gold value chain. Signees includeincluded goldsmiths, jewelers, recyclers, NGOs, electronics companies, trade unions, and the Dutch government. This partnership intends to bring about cooperation between companies, government, trade unions, and NGOs to prevent abuses within production chains. From September 2019, Philips representsrepresented gold and precious metal, recycling, and electronic companies in the steering committee of the Responsible Gold Agreement. From this partnership, Philips co-developed a project with several other parties including civil society actors, to facilitate sourcing of responsible gold from Uganda. The project is aimed specifically at artisanal and small-scale mines (ASM) and works to establish a sustainable, traceable gold supply chain with improved working conditions for miners and free of child labor. The approach is designed to be scaled up and serves as a potential blueprint for minesmultistakeholder initiative concluded in other regions. Since 2019, Philips is also an active memberJune 2022. While not all of the steering committeeinitially set-out goals were met, the partnership achieved the following results:
Since 2003, Philips has looked at ways to improve the environmental performance of its suppliers. When it comes to climate change, we have adopted a multi-pronged approach: reducing the environmental impact of our products, committing to carbon neutrality in our own operations, and engaging with our supply chain to reduce their carbon footprint. Through our partnership with the CDP supply chain program, Philips motivates its suppliers to disclose emissions, embed board responsibility on climate change, and actively work on reduction activities.
In October 2021, during COP26, Philips announced its target to have at least 50% of its suppliers (based on spend) committed to science-based targets for carbon reduction by 2025.
Philips Group
% of suppliers committed to science-based targets
2021 | 2022 | |
---|---|---|
% of suppliers committed to Science Based Target | 28% | 41% |
We consider suppliers to have committed to science-based targets when this is communicated via their CDP disclosures, public websites and announcements (on a Science Based Target, Net Zero Target, or equivalent), or the Science Based Targets Initiative website. Multiple activities have been deployed to support our achievement of this climate target. We consider spend to be relevant if it relates to product and component suppliers and relevant service providers, like logistics and information technology suppliers.
CDP engagement:Since 2011 we have been partnering with the CDP Supply Chain, through which we invite suppliers to disclose their environmental performance and carbon intensity. This year,In 2022, there was a response rate of 92% (2019: 80%85% (2021: 87%). Part of the reason for the lower response rate is an increase in the number of invited suppliers by 62% compared to 2021. With more than 500 of our biggest suppliers included in the CDP engagement program in 2022, CDP confirmed Philips is in the top tier in terms of its supplier engagement coverage.
Of the group that responded, 59% engaged in emission-reduction initiatives (2021: 61%). In addition, 47% committed to carbon emission targets (2021: 56%). Our suppliers undertook projects in 2022 that resulted in savings on carbon emissions amounting to 27 million metric tonnes CO2.
Philips Group
Supplier response rate to CDP questionnaire
2018 | 2019 | 2020 | |
---|---|---|---|
77% | 80% | 92% |
2020 | 2021 | 2022 | |
---|---|---|---|
91% | 87% | 85% |
From this group, 61% engagedData-driven insights: Through accurate data insights, Philips’ buyers are enabled to consider climate action in emission reduction initiatives (2019: 66%).their supplier selection. In addition, 61%2022, 41% of our purchases (in spend) were made at suppliers that have committed to science-based CO2 reduction targets.
Capability building: We support suppliers in advancing their company approach to climate action, offering (online) guidance that is tailored to their climate action maturity. In 2022, we further grew the offering of tailored feedback and guidance for 76% of our suppliers to support their growth in capabilities and help improve their approach.
Opportunities for decarbonization: Through on-site assessments we identify energy efficiency opportunities that enable our suppliers to make cost-effective carbon emission targets (2019: 59%). Furthermore, 43% ofreductions. Our team calculates for the responding suppliers have set science-based targets ofsupplier what the cost impact would be, and also the return. In 2022, 17 on-site assessments took place, which 31% was have been formally approved. Our suppliers undertook projects in 2020 that resulted in savings on carbon emissions amounting to 17 million metric tonnes CO2.tailored plans for improvement.
As part of 2020 adoption of our new ESG commitments, we have set the target to actively engage 80% of our supply base to:
Lack of access to affordable, quality care is one of the most pressing issues of our time. Climate change is exacerbating this situation and putting the lives of millions of people at risk. At Philips, itwe are conscious of our responsibilities towards society and the planet. It is our purpose to improve people’s health and well-being through meaningful innovation. WeAs such, we aim to improve the lives of 2.5 billion people a year by 2030.
To guide our efforts and measure our progress,ensure we takeremain on track to achieve this goal, we have developed an integrated approach. Products orapproach that tells us how many lives have been improved by our products and solutions fromin a given year. We call this our portfolio that directly support the curative or preventive side of people’s health determine the contributionLives Improved model.
The Lives Improved model helps us to the social dimension. This is alsotrack our contribution toperformance on a country-to-country basis in line with UN Sustainable Development Goal 3, (allowing us to shape strategies to Ensureensure 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 means of our steadily growing Green Products and Solutions portfolio, such as the energy-efficient products in our Personal Health businesses. This is our contribution to Sustainable Development Goal 12 (Ensure sustainable consumption and production patterns) and SDG 13 (Take urgent action to combat climate change and its impacts).
In 2022, Philips improved 1.751.81 billion lives, in 2020, an increase of around 110135 million compared to 2019,2021. This increase was driven by a steady growth of all segments and the inclusion of our Picture Archiving and Communication System (PACS) products in the Lives Improved model. PACS is an image-management software within our Enterprise Diagnostic Informatics business. From a market perspective, we saw significant growth mainly in China, the ASEAN countries,Latin America, North America, Asia Pacific, Iberia, Middle East & Turkey, and Africa.
Philips believes that improving access to healthcare requires meaningful innovation. It also requires a deep understanding of the Indian Subcontinent. Through Philips productsrelationship between all stakeholders and solutions that support people’s healththeir specific needs in underserved communities to truly make a difference and well-being, we improved the lives of 1.53 billion people in 2020 (2019: 1.54 billion), mainly driven by Diagnosis & Treatment businesses and Connected Care businesses. Our Green Products and Solutions that support a healthy ecosystem contributed 1.19 billion lives (2019: 1.07 billion). After the elimination of double counts – people touched multiple times – we arrived at 1.75 billion lives improved.
In 2019, Philips extended itshelp improve access to healthcare. We have an additional commitment to improve the lives of 300 million people in underserved communities with our health-related products by 2025, rising 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 theThis commitment allows us to increase in non-communicable diseases (NCDs) in communities already struggling without adequateour focus on those populations where we can make a positive impact by providing access to healthcare. To monitor progress on this extended commitment,effective and affordable healthcare for those in greatest need. By combining the strengths of Philips, Philips Ventures, Philips Foundation, and its partners, we track lives improved in underserved communities.can provide better healthcare and improve health outcomes for all. In 20202022, our health and well-beinghealth-related solutions improved the lives of 207202 million people in underserved markets (an increase of 1335 million compared to 2019)2021).
Following the launch ofFor more information, please refer to our ESG commitments in September 2020, we will also change the definition of Lives Improved with effect from 2021, to be aligned with our purpose. The new definition will only include products or solutions that contribute to people’s health and well-being.methodology document.
The following table shows the number of Lives Improved per market.
Philips Group
Lives improved per market
Market | Lives Improved (million)1) | Population (million)2) | Saturation rate (as % of population) | GDP (USD million)3) | Lives Improved (million)1) | Population (million)2) | Saturation rate (as % of population) |
---|---|---|---|---|---|---|---|
Africa | 34 | 1,234 | 3% | 2,335 | 29 | 1,340 | 2% |
ASEAN & Pacific | 172 | 966 | 18% | 6,580 | 125 | 976 | 13% |
Benelux | 27 | 29 | 93% | 1,458 | 26 | 30 | 87% |
Central & Eastern Europe | 82 | 162 | 51% | 1,874 | 79 | 164 | 48% |
Germany, Austria & Switzerland | 83 | 101 | 82% | 4,928 | 84 | 101 | 83% |
France | 47 | 68 | 69% | 2,626 | 44 | 68 | 64% |
Greater China | 471 | 1,436 | 33% | 15,801 | 496 | 1,442 | 34% |
Iberia | 31 | 57 | 54% | 1,474 | 47 | 58 | 81% |
Indian Subcontinent | 88 | 1,601 | 5% | 3,026 | 92 | 1,610 | 6% |
Italy, Israel & Greece | 40 | 82 | 49% | 2,465 | 47 | 81 | 58% |
Japan | 45 | 126 | 36% | 4,911 | 48 | 125 | 38% |
Latin America | 101 | 639 | 16% | 4,388 | 158 | 654 | 24% |
Middle East & Turkey | 74 | 379 | 20% | 2,962 | 72 | 378 | 19% |
Nordics | 19 | 28 | 68% | 1,530 | 19 | 28 | 68% |
North America | 354 | 368 | 96% | 22,408 | 360 | 369 | 98% |
Russia & Central Asia | 48 | 251 | 19% | 1,895 | 50 | 252 | 20% |
UK & Ireland | 36 | 72 | 50% | 3,052 | 41 | 73 | 56% |
The challenges presentedIn 2022, transforming our organization and workforce for the future remained a key pillar of our People strategy. We are operating in a fast-changing landscape and adapting to changes in the nature of work accelerated by the fast-evolving industry landscape demandpandemic. Moreover, at the end of 2022, a networked organization,company-wide change initiative was launched. This requires us to continuously evolve capabilities in which cross-functional teams actively draw on resources across the organization and across the world.support of our business transformation. Our focus on the Workforce of the Future helps us to attract, onboard, develop and retain a workforce that will deliver the strategic capabilities we need to win.
By applying Strategic Workforce Planning, in close alignmentis fit for today and future with the strategic planning of our businesses, we identify and develop the employee capabilities needed to realize our ambitions as a health technology company. In 2020 we implemented company-wide initiatives to retain and staff our most strategic positions with top performers. At the end of 2020 we had retained 94% of these employees and staffed 49% 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 continued to embed our Total Workforce Strategy – looking at all sources, channels and locations for skills and capabilities including employees, contingent workers, freelancers and services. Talent Acquisition has deployedto successfully deliver on our Right Shoring & Right Sourcing methodology into every business segment and multiple functions. In addition, we are now attracting 42% of our freelancers via our Careers site and building talent pools in US, Germany and the Netherlands.
We continued to devote additional attention to our campus, graduate and early-career hiring in 2020, which resulted in an increase of 29% in the number of campus hires compared to 2019, despite the impact of the pandemic. Our focus on the Workforce of the Future continues in 2021, with emphasis on strategic capabilities.
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, and the markets we serve. We believe that an inclusive culture allows our 120-plus nationalities to bring 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 team- and business performance.
Driving Inclusion & Diversity, Philips has set a new goal of 30% gender diversity in senior leadership positions (a subset of Management and Executive positions) by the end of 2025, up from the 2020 target of 25% that we met before the end of 2020. This is part of our reinforced commitments as a purpose-driven company. A company-wide training on unconscious bias awareness is part of the long-term program to create an ongoing dialogue in teams that will help us build and foster that inclusive environment.
Philips has also deployed a range of programs to support the health and well-being of its employees, including a global employee assistance program aimed at helping employees with urgent needs. When COVID-19 emerged, Philips provided support in this area without losing sight of longer-term needs, such as a healthy work-life balance, stress management, resilience and prevention of mental health issues.
With regard to appointment and promotion opportunities, we transparently share open positions and endeavor to attract candidates from a diverse range of backgrounds, resulting in a 50/50 hiring ratio when we recruit externally. We increased the number of women in senior positions for the third consecutive year.
Our Inclusion & Diversity scores steadily increased to 39% at year-end, surpassing the global high-performance levels for the first time in the last two years. The number of awards won in 2020 – including appearances on Forbes Best Employers lists for both Women and Diversity, and Financial Times Diversity Leader 2021 – reflect the progress Philips has made in this important area.
Philips Group
Gender diversity
in %
Overall gender diversity increased one percentage point to 39% in 2020 whilst gender diversity among Executives increased from 22% to 24% female executives. Philips employed 27% females in leadership positions, exceeding our 2020 goal of 25% gender diversity in leadership positions.
As we continue our transformation into a focused leader in health technology – shifting from products to solutions and building long-term relationships with our customers – we foster 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 is 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 are also 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 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, inspiring each other through the work we do.imperatives.
We staff our positions based on assessed behavior, potential and capabilities. In 2020,2022, we filled 74%71% of our Director-level and more senior positions from within the company. For these internal hires, weWe ensure our candidates are high performers with strong potential. In 2020, 84%potential – more than 69% of all internal promotions to Director level and more senior positionsvacancies were realizedfilled 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.
We apply an enterprise-wide Strategic Workforce Planning approach, which all businesses, markets and functions adopt as part of the strategic planning cycle, to identify and develop the capabilities needed to realize our ambitions as a health technology company. This approach recognizes that capabilities are complex, with people, processes and systems being developed holistically. In 2022, we strengthened our focus on strategic priorities and top talent and used the lens of strategic enterprise capabilities to streamline our talent attraction, onboarding, and development initiatives.
We continue our Total Workforce Strategy, which considers all sources of skills, capabilities, locations and changes in the labor market in order to deliver the Workforce of the Future. Our Right Shoring & Sourcing methodology is used to implement this strategy. This methodology steers improvements in workforce composition towards the ‘right shore’ (onshore, nearshore and offshore) and the ‘right source’ (employees, contingent workers and outsourced). The program has delivered € 20 million in savings in 2022.
We continue working with the Freelance Management System, which covers India, Netherlands, Germany and the USA. By advertising opportunities for freelancers on our own career site alongside employee jobs, in 2022 we filled 48% of all our freelancer roles without having to go through staffing agencies.
Our Philips-wide Graduate Development Program (GDP) continues to perform well and has increased from 40 participants in 2021 to 285 in 2022. The GDP lasts two years and includes three job rotations, as well as offering the graduates a comprehensive learning and development track and access to career centers to help guide future steps. We continue focusing on campus hiring, with 901 campus hires in 2022. Philips also offered meaningful work experience to 1,822 interns in 2022, and they formed a critical source of our graduate hires – with 55% of all graduate hires having been an intern with us prior.
As a health technology leader, we attach great importance to the health and well-being of our workforce and to creating an environment of inclusion and belonging, where all employees feel psychologically safe. Our company’s success depends on our employees feeling valued, respected, and empowered to contribute fully. We are a diverse team made up of some 77,000 individuals across over 100 countries, all with different backgrounds, perspectives, and experiences. We fully value and leverage these differences to ensure that creativity and innovation can flourish. Philips’ commitment towards Inclusion & Diversity is reflected in our General Business Principles and the company-wide Inclusion & Diversity Policy and Fair Employment Policy.
Representation
We continue to put in place measures to enhance representation of diverse talent at all levels within the organization, and to ensure that representation at senior management levels reflects the diversity of our stakeholders, including consumers, our customers and their patients.
To this end, in 2022, Philips restated its commitment to having 35% of senior management positions held by women, by the end of 2025. Senior management positions (including senior directors and executives) amount to approximately 1,300 employees. As of year-end 2022, we had reached our initial goal (set in 2020) of a 30% representation of women in senior management.
Our Supervisory Board has adopted the Diversity Policy for the Supervisory Board, Board of Management and Executive Committee, which also includes the Supervisory Board’s aim that at least one-third of the members of each of the Board of Management and the Executive Committee are women and at least one-third are men. For more information on the Diversity Policy, please refer to Report of the Corporate Governance and Nomination & Selection Committee. At year-end, none of the three members of the Board of Management were women, and two out of the other nine members of the Executive Committee were women. These numbers reflect a slight decline compared to previous years (2021: 3 out of 13; 2020: 3 out of 15), pending expected announcements of new leaders. The company generally seeks to fill vacancies by considering candidates that bring a diversity of (amongst others) gender, and it is noted that the selection of candidates is based on merit and there have been and may be pragmatic reasons – such as other relevant selection criteria and the availability of suitable candidates – that have impacted the achievement of our gender diversity goals.
Long-term Inclusion & Diversity ambitions are embedded in our People strategy. In our ongoing effort to increase transparency and accountability, we are sharing data on the representation of women throughout our businesses, markets and functions, including a monthly review with the Executive Committee. We closely monitor the inflow, advancement and outflow of talent, which makes it possible to customize goals and intervene where appropriate. We continue various initiatives around unconscious bias, health and well-being, inclusion and development of underrepresented talent.
Philips Group
Gender diversity
in %1)
Global Diversity Council
Our Global Diversity Council is comprised of 10 senior leaders representing our businesses, markets and functions. The Council provides governance and oversight on diversity efforts, promotes company-wide behavior change, and communicates on progress. Additionally, every Council member is an Executive Sponsor to one of our Employee Resource Groups.
Employee Resource Groups
Since 2016, Employee Resource Groups (ERGs) provide an inclusive space for employees to support and care for one another, develop skills, experience meaningful cultural connections, expand their knowledge, all while strengthening relationships among the Philips community.
Philips currently has 13 ERGs globally, with over 7,000 employees participating: Able & Allies; Asian Employee Resource Group; Black Employee Resource Group; #BeTheChange Network; Caregivers Network; Future Leaders and Rising Employees; Latinx Employee Resource Group; Middle Eastern Employee Resource Group; Philips Empowering Parents; Philips Women Lead; Pride Network; Veterans and Family Coalition; and Neurodiversity Network.
Health & Well-being
In 2022, we embedded our health and well-being framework further across our businesses, markets and functions. We continued to address mental health by rolling out the Employee Assistance Program (EAP), extending the service to a further 25 countries, including crisis support for Ukraine and Poland.
We grew our Mental Health Champion program to 180 Champions across the globe, providing accredited training for peer-to-peer confidential support. We also encouraged leader-led dialogues on mental health, to remove stigma and help engender a sense of psychological safety.
Our efforts culminated in World Mental Health Day, with a variety of virtual mental well-being sessions and self-care tips that engaged employees from across our markets. In collaboration with Philips University, the Philips Energy Management well-being program was further extended across the organization.
Building Capability
In 2022, we continued the deployment of Unconscious Bias training across the organization while focusing new content on Allyship, Resilience and Psychological Safety. In North America, we launched four mandatory e-learnings, reaching our 20,000 employees in this market.
External awards
Many stakeholders, including customers and potential partners and employees, view third-party assessments as objective indications of how well we are demonstrating the strength of our commitment. Awards received in 2022 included: Forbes Best Employers for Women; Forbes Best Place to Work in America; Forbes World Best Employers; and 100% Human Rights Campaign’s Corporate Equality Index.
Culture is foundational to achieving our strategic ambitions. Our behaviors create a shared understanding of how we all need to act in order to live up to our purpose of improving the lives of people around the world. All Philips employees are expected to commit to living our behaviors – customers first, patient safety, quality and integrity always, team up to win, take ownership to deliver fast, and be eager to improve and inspire – every step of the way. As we evolve our culture, we will drive patient- and people-centricity, accountability and empowerment, transparency and execution rigor in order to become an industry-leading player in HealthTech.
As we continue strengthening our position as a focused leader in health technology, leading with open, respectful and caring communication is critical. We foster a culture within Philips that will help us achieve operational excellence and extend our solutions capability to address our customers’ unmet needs. Patient safety and quality are at the heart of our purpose. To further strengthen our patient- and people-centric culture, we launched in 2022 a company-wide ‘Accelerating Patient Safety & Quality’ culture program. We also foster an inclusive and psychologically safe environment where our people feel valued for who they are and for their contributions. We do this through our rich Well-being offering, as well as a ‘Speak Up!’ campaign in 2022. As a health technology leader, the health and well-being of our people is imperative for success.
In the wake of the evolving external economic, geopolitical, and global health situation, we remain flexible in our ways of working, making use of learnings developed through the COVID-19 pandemic. We have embraced a hybrid working model that offers greater flexibility and improved collaboration across teams. Our new ways of working are defined by three goals:
All of the above underpins how we lead, engage, hire and develop our employees. We have been focusing on well-being, deepening our leadership asks into the organization and supporting our culture shift as a leading innovative, customer-focused health technology company.
We are building an organization that is fit for today and the future with the skills and capabilities needed to successfully deliver on our strategic imperatives. We attract, onboard and retain the best talent to accelerate our business transformation.
We continue to keep a close pulse on our employee sentiment through our quarterly Employee Engagement Survey. In times like these,2022, average employee engagement scores remained high at 77% in line with the pandemic continuing to impact our lives, it is keyFortune 500 benchmark. However there was a decline in overall engagement levels in the second half of 2022. This feedback does not come as a surprise given the recent challenges that our people feel connectedthe company has encountered and actively listen to each other. High employee engagement is pivotal to the successannouncement of our strategy. Our employee survey consistently reports that our employee engagement is on the rise and well exceeding the global high-performance norm of 71%. Our average engagement score for 2020 was 79%, driven by our people feeling proud to live our company purpose, being optimistic about the future of Philips, and energized to contribute with their work.productivity measures.
Philips Group
Employee Engagement index
2018 | 2019 | 2020 | 2020 | 2021 | 2022 | |
---|---|---|---|---|---|---|
Favorable | 74% | 79% | 79% | 77% | ||
Neutral | 17% | 14% | 14% | 15% | ||
Unfavorable | 9% | 7% | 7% | 8% |
Our quarterly employee surveys help to keep our finger on the pulse of employee sentiment toward the company. We listen to employees’ ideas for improvement, show employees that their feedback is valued, and work to ensure that every person in our company hasIn a role to play in creating lasting value for our customers, shareholders, and other stakeholders.
At Philips, we believe we perform at our best when we feel connected and supported. In these extraordinary circumstances in 2020,challenging business environment, we listened actively to our employees to provide them with greater clarity ofon future direction and increased autonomy and flexibility toproactively deal with variouschange to meet our customer and patient needs. Using the Customer Experience Index we look at how well employees think we orient ourselves to customer needs. These inputs are actively exchanged with the customer experience team to design and work situations. Moreover, we strengthened our Health & Well-being programs, which are designed to engageon related programs.
Our employee engagement is primarily driven by how proud our employees help themfeel to adopt a healthier lifestyle,work for Philips, as well as feeling that they can be themselves and achieve a better work/life balance.have trusting relationships at work. Another significant factor driving engagement is our high scores on the Inclusion & Diversity index, which stays above the Industry Benchmark.
The total number of Philips Group employees was 81,59277,233 at the end of 2020,2022, compared to 80,49578,189 at the end of 2019,2021, a decrease of 956 FTE.
Together with the announcement of our Q3 results in October 2022, we had to take the difficult decision to reduce our workforce by approximately 4,000 roles globally. This was followed in January 2023 by the announcement of a further reduction of our workforce by an increaseadditional 6,000 roles globally. As we go through this change, we do it with the utmost care and respect for our people, with a strong focus on supporting them in finding a new role.
Subject to local country legislation, our support offers include:
Philips Group
Employees per segment
in FTEs at year-end
2018 | 2019 | 2020 | 2020 | 2021 | 2022 | |
---|---|---|---|---|---|---|
Diagnosis & Treatment | 29,546 | 31,311 | 32,193 | 32,193 | 32,390 | 32,904 |
Connected Care | 15,085 | 14,939 | 15,866 | 15,866 | 17,751 | 16,673 |
Personal Health | 16,132 | 16,448 | 16,844 | 10,253 | 10,134 | 9,319 |
Other | 16,637 | 17,797 | 16,689 | 16,689 | 17,913 | 18,337 |
Philips Group | 77,400 | 80,495 | 81,592 | 75,001 | 78,189 | 77,233 |
Philips Group
Employment
in FTEs
2018 | 2019 | 2020 | 2020 | 2021 | 2022 | |
---|---|---|---|---|---|---|
Balance as of January 1 | 73,951 | 77,400 | 80,495 | 73,311 | 75,001 | 78,189 |
Consolidation changes: | ||||||
Acquisitions | 331 | 900 | 72 | 72 | 2,594 | 87 |
Divestments | (107) | (286) | (744) | (33) | ||
Other changes | 3,225 | 2,481 | 1,025 | 1,618 | 1,338 | (1,010) |
Balance as of December 31 | 77,400 | 80,495 | 81,592 | 75,001 | 78,189 | 77,233 |
Approximately 57% (2019:58% (2021: 59%) of the Philips workforce is located in mature geographies and 43% (2019:42% (2021: 41%) in growth geographies. In 2020,2022, the number of employees in mature geographies decreased by 1,442.1,774. The number of employees in growth geographies increased by 2,538.819.
Philips Group
Employees per geographic cluster
in FTEs at year-end
2018 | 2019 | 2020 | 2020 | 2021 | 2022 | |
---|---|---|---|---|---|---|
Western Europe | 21,399 | 21,645 | 20,614 | 19,925 | 19,775 | 19,297 |
North America | 21,703 | 21,483 | 21,127 | 21,118 | 21,807 | 20,618 |
Other mature geographies | 4,236 | 4,718 | 4,664 | 4,664 | 4,683 | 4,576 |
Mature geographies | 47,338 | 47,846 | 46,404 | 45,707 | 46,265 | 44,491 |
Growth geographies | 30,062 | 32,650 | 35,188 | 29,294 | 31,923 | 32,742 |
Philips Group | 77,400 | 80,495 | 81,592 | 75,001 | 78,189 | 77,233 |
In 2020,2022, employee turnover amounted to 14.0%17.5%, of which 7.3%11.1% was voluntary, compared to 15.0% (8.6%17.6% (10.0% voluntary) in 2019.2021. External benchmarks show that our voluntary employee turnover remains well belowin line with similar-sized companies, and that we are reasonably successful in retaining our employees.
With our focus on increasing gender diversity in leadership positions, voluntary female executive turnover decreased from 4.2% in 2019 to 3.8% in 2020.
Philips Group
Employee turnover
20202022
Staff | Professionals | Management | Executives | Total | Staff | Professionals | Management | Executives | Total | |
---|---|---|---|---|---|---|---|---|---|---|
Female | 20.9% | 11.3% | 10.3% | 13.8% | 16.2% | 23.2% | 16.7% | 14.6% | 22.4% | 19.6% |
Male | 17.5% | 9.8% | 11.0% | 16.2% | 12.6% | 19.5% | 14.5% | 17.5% | 16.2% | |
Philips Group | 19.2% | 10.3% | 10.8% | 15.6% | 14.0% | 21.3% | 15.3% | 14.5% | 18.7% | 17.5% |
Philips Group
Voluntary turnover
20202022
Staff | Professionals | Management | Executives | Total | Staff | Professionals | Management | Executives | Total | |
---|---|---|---|---|---|---|---|---|---|---|
Female | 8.1% | 7.2% | 5.8% | 3.8% | 7.6% | 12.9% | 11.8% | 9.2% | 11.8% | 12.2% |
Male | 9.5% | 5.8% | 4.6% | 2.8% | 7.0% | 11.8% | 9.9% | 8.2% | 7.1% | 10.4% |
Philips Group | 8.8% | 6.3% | 4.9% | 3.1% | 7.3% | 12.3% | 10.5% | 8.5% | 8.2% | 11.1% |
Although Philips has undertaken regularis committed to ensuring equal pay analysis at country level, in 2020 we took this to the next stage to gain a globally recognized Certification in Gender Equality. We are working with an independent, external company who analyze our workforce analytical data, HR policies and practices, to holistically target areas both in our systems and processes to ensure gender equity in support of our ambition to build and foster a culture of inclusion.
We started with a pilot infor equal work. In the Netherlands, to assess and learn from the audit, which gives usPhilips was certified for Gender Equality by Economic Dividends for Gender Equality (EDGE) in 2021. The study did not find a strong baseline to develop a global framework that benefits all. As part of the Certification, we make an Action Plan to concentrate on areas for development and continue to conduct yearlygender pay gap assessments,that exceeds the threshold as set by using a regression analysis and systematically checking the need for corrective measures. ForEDGE. Philips continues to be continually certified, we have to show tangible evidence that we have completed our Action Plan, and make further improvements on our focus areas that are brought to the surface by the Gender Equality audit.
We will also pro-actively communicate about the organization’s commitment to ensure gender equity includingstudy gender pay equity.parity using EDGE methodology. Many countries in which Philips operates have already undertaken pay equity reviews, for example in Australia, UK, Sweden, India and certain US states. In the US, Philips will be executing a company-wide Pay Equity Project during 2023, originally scheduled for 2022, building on work completed at US state level.
Philips can only achieve its aim to improve the lives of 2.5 billion people per year by 2030 if we support and empower our people, so they can be their best and perform effectively. To this end, we conducted a living wage analysis for the fourth year in a row on the lowest salaries in every country in which we currently operate.
The living wage is a concept defined by Anker and Anker (2017) as “Remuneration received by a worker in a particular place sufficient to afford a decent standard of living for the worker and her or his family. Elements of a decent standard of living include food, water, housing, education, health care,healthcare, transport, clothing, and other essential needs, including provision for unexpected events”. ToWe combined forces with Valuing Nature, several local NGOs, WageIndicator and other global corporates to develop living wage standards that are complete and have a reliable geographical scope, we combined forces with Valuing Nature, several local NGOs, WageIndicator and other global corporates.scope.
In 2019, we conducted our first analysis of salaries and benefits for employees globally with respect toBased on the living wage. Thiswage analysis covered 78 countries and we identified 31conducted in 2022, all Philips employees in one country for whomreceived wages and benefits were slightly belowthat are consistent with at least the defined living wage. Based on these results, our local HR teams made relevant adjustmentsminimum Living Wage standard for the year 2020.
In 2020, we performed the same analysis with the updated living wage data from WageIndicator. This time, allan individual. Furthermore, 99% of Philips employees received wages and benefits were abovethat are consistent with at least the defined living wage levelsminimum Living Wage standard for a family (based on reference data from WageIndicator). Assuming no significant changes in all 78 countries.reference data, it is expected that the wages of the 1% of employees currently below the family standard will be within that standard in the course of 2023.
The COVID-19 global pandemic significantly affected Philips’ global operations in many ways including government-mandated lockdowns, Personal Protective Equipment (PPE) supply chain shortages, travel restrictions, and most importantly ensuring employee health and safety whilst maintaining critical operational commitments. Philips responded by developing a Triple Duty of Care strategy: continuing to fulfill critical customer needs, ensuringIn 2022, the health and safety of our employees and ensuring business continuity. Aremained paramount. However, as the COVID-19 pandemic entered the endemic phase, the centralized controls put in place during the pandemic were relaxed in line with local governments’ advice. Control was gradually returned from the Group Crisis Operations Team andto the local Crisis Management TeamsTeams. As Philips started to resume normal operations, office occupancy started to rise and business travel restarted. However, critical control measures were activated to providemaintained, including maintaining safety stocks of PPE, and the internal website containing guidance was updated regularly. Campaigns and advice concerning the importance of vaccinations was promoted widely. Philips has emerged from the pandemic with a global integrated response. This enabled Philips to disseminate a centralizedgood record of management and consistent message for every employee, regardless of market, business or location. A COVID-19 intranet site with guidance and information was set up and received over 128,000 hits in 2020.
Working as a team across all functions, Philips was able to maintain manufacturing operations (and in some cases significantly increase output) and also ensure support for our customers, including frontline hospitals, to minimize interruption to key service and support activities. During 2020, approximately 1,800 Philips employees were infected bycontrol that restricted the COVID-19 virus. Whilst most infections were of mild severity, there were unfortunately some more severe outcomes, including a small number of fatalities. However, less than 1% of contamination cases and noneimpact of the fatalities resulted from infections acquired during workplace activities.
Unfortunately, one Philips employee was fatally injured in a road traffic accident in India in 2020. This happened when company transport takingpandemic on employees home after a shift was involved in an accident during bad weather.and the wider business operations.
At Philips, we strive for an injury-free and illness-free work environment. Since 2016, the Total Recordable Cases (TRC) rate has been defined as a Key Performance Indicator (KPI). A TRC is a case where an injured employee is unable to work for one or more days, has medical treatment, or sustains an industrial illness. We set yearly TRC targets for the company, businesses and industrial sites.
We recorded 185172 TRCs in 2020,2022, a 17%19% decrease compared to 224213 in 2019.2021. While our workforce continued to expand in 2020,2022, the TRC rate decreased from 0.300.29 per hundred FTEs in 20192021 to 0.240.23 in 2020.2022.
In 20202022 we recorded 9881 Lost Workday Injury Cases (LWIC). These are occupational injury cases where an injured person is unable to work for one or more days after the injury. This represents a 5%29% decrease compared with 103114 in 2019.2021. The LWIC rate decreased to 0.130.11 per 100 FTEs in 2020,2022, compared with 0.140.16 in 2019.2021. The number of Lost Workdays caused by injuries decreased by 1,845216 days (40%(5%) to 2,7884,020 days in 2020.2022.
Stichting Philips Foundation, an independent foundation organized under Dutch law, is a registered charity established in 2014. In 2020,2022, Royal Philips supported the Philips Foundation with a contribution of EUR 6.7 million, and provided the operating staff as well as the expert assistance of skilled employees in the execution of the Foundation’s programs.
The Philips Foundation’s mission is to reduce healthcare inequality by providing access to quality healthcare for disadvantaged communities.underserved communities through meaningful innovation. It does this through the provision and application of Philips’ healthcare expertise, innovation power, talent and resources and by financial support. Together with key partners around the globe (including respected NGOs such as Red Cross organizations, UNICEF, Amref and Save the Children), the Philips Foundation seeks to identify challenges where a combination of Philips expertise and partner experience can be used to create meaningful solutions that have an impact on people’s lives.
In organizing ourselves around customers and markets, we conduct dialogues with our stakeholders in order to explore common ground for addressing societal challenges, building partnerships and jointly developing supporting ecosystems for our innovations around the world.
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.
Please also refer to Corporate governance where the main elements of the company’s corporate governance structure have been addressed.
As we drive our transformation to become a solutions provider to our customers and consumers, we have adopted a single standardOur operating model that defines exactly how we want to work – the Philips Business System (PBS).
The PBS – integrates key aspects of how we operate – from our strategy, governance, organizational design, processes and systems, to our people and team practices, and our culture and performance management.
Towards the end of 2022 we initiated the process of simplifying the way we work to drive accountability and agility, and to unlock significant productivity and margin gains. This simplification – with end-to-end accountable businesses supported by a much leaner Group layer and a culture of patient and people centricity, innovation impact and clear accountability – is a primary enabler to drive flawless execution.
It is designed to make Philips a simpler, faster, customer-focused, learning organization, in orderhelp us to fulfill our purpose of improving the health and well-being of billions of people. One that aspires topeople and ensure the highest standards of quality and integrity in everything we do. Building on standard work and best practices, with clear accountabilities and a culture of continuous improvement and compliance. Applying our creativity to make a competitive difference in serving our customers. Making Philips the best place to work.
OurEnabling the delivery of patient-centric, safe and high-quality care – the essence of patient safety and quality – is inextricably linked to Philips’ purpose to improve the health and well-being of people through meaningful innovation. Patient safety and quality management represents the very foundation of our license to operate as a health technology company. Compliance with quality and regulatory standards is a pre-requisite for ensuring patient safety, which is Philips’ highest priority.
Philips’ reputation – and ultimately our long-term business continuity and success – fully depends on the quality and safety of our products, services and solutions for patients, customers and consumers, and on our compliance with manyglobal regulations and standardsstandards. This has never been more crucial than in this last year as we continued to remediate the devices included in the Philips Respironics recall: see section below, ‘Philips Respironics voluntary recall notification’.
Acting with due urgency, in 2022 we accelerated our focus on patient safety and quality, with the goal of achieving and maintaining the highest level of quality. We upgraded the Quality & Regulatory leadership team with emphasis on medical technology expertise; over 90% of the renewed team has direct industry experience. We further strengthened our Post Market Surveillance global complaint handling organization and improved ways of working; this represents a significant milestone toward improving investigation and issues reporting and moving away from transactional elements of complaint handling. In addition, Philips continued to focus on harmonizing processes and enhancing the quality culture across the enterprise. Activities include training approximately 77,000 employees throughout the world on key process changes and refreshers on quality and regulatory topics.
As 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,we must ensure compliance with various and evolving regulations and standards, includingstandards. In the dynamic medical technology industry, we also must stay ahead of innovation and trends such as data privacy and cybersecurity,cybersecurity. This involves increased levels of investment along withto meet the competitive demands of increasedand evolving regulatory enforcement activity. Our business relies on thecompliance activities in such areas as secure electronic transmission and storage and hosting of sensitive information, includingsolutions for protected personal information, protected health information, financial information, intellectual property, and other sensitive information related to our customers, consumers, patients, and workforce. For information on how Philips manages cybersecurity risk, please refer to Operational risks.
Quality is an integral part of the leadership and culture at Philips. Philips is committed to delivering the highest quality products, services and solutions, which are compliant with all applicable laws and quality and safety standards. We are investing substantiallycontinuously strive to raise our performance in embeddingensuring quality, in our organizational culture as well as consolidatingwhich is demonstrated by the continued, substantial investment to embed quality through standardization and standardizingadoption of industry best practices throughout our Quality Management Systems. We will continueSystems and enhanced capabilities.
Through quality system improvement program activities, our aim is to raise the performance bar.enhance consistency in how we work, collaborate, and make decisions. Our critical Accelerating Patient Safety & Quality program initially focused on awareness and compliance improvements, triaging, and process design. Examples of improvements include reducing and consolidating our Quality Management Systems from 107 to 75 by year-end 2022, with further reductions planned. In 2022 we harmonized and improved consistency for a significant number of processes across Philips to enhance our best practices and implemented standard education programs tailored to specific roles plus many mandatory all-employee, quality-related courses for capability building and to demonstrate compliance. The program is now focused on further strengthening design and product reliability, and patient safety and quality culture and competencies, while continuing efforts reducing complexity. This is an integralongoing journey of continuous improvement and we expect our plans to yield demonstrable progress starting in 2023.
In 2022, we updated our Quality Policy, which expresses our overall intention and direction with respect to quality. Established by management with executive responsibility, it states our objectives for, and commitment to, quality. Everyone at Philips is responsible for understanding, implementing, and maintaining the Quality Policy, and all employees now have patient safety and quality as one of five key KPIs. Underscoring leadership's continued commitment, all Philips business leaders are held accountable for patient safety and quality, and performance on Quality metrics will be part of the evaluationremuneration of all levels of management. With consistency of purpose, top-down accountability, consolidation, standardization and leveraging continuous improvement, we aim to drive greater speed in the adoption of a quality mindset as well as improved quality outcomes throughout the enterprise.Philips Executives.
As required by global regulatory requirements, Philips actively maintains Quality Management Systems globally that establish procedures, processes for itsand documentation to ensure quality at each stage of the product lifecycle. These requirements outline actions from product design manufacturing and pre-market submissions, production, operations, distribution, processes; these standards areservicing and post-market management and oversight in compliance withevery market we serve. These requirements include those from national government regulatory authorities (e.g. the US Food and Drug Administration (FDA)/International Organizationand China National Medical Products Administration), Notified Bodies, and National Competent Authorities in the EU.
Products that we introduce to the market often must undergo pre-market regulatory review (e.g. pre-market approval (PMA), pre-market notification (510(k), or de novo authorization) before they can be marketed and sold in the USA as an FDA-regulated device, subjected to Notified Body review in the EU for Standardization (ISO) requirements. Our businesses are subjecta CE Mark, and subjected to compliance with regulatory pre-marketing and quality system requirementsreview in every market we serve, and to specific requirements of local and national regulatory authorities including the US FDA, the European Medicines Agency (EMA),China by the National Medical Products Administration (NMPA)Association. If the regulatory body reviewing the submission determines that the required supporting data has not been provided, further data may be required to obtain the clearance or approval, which could prolong the process to market the product. During the lifecycle of a cleared/approved device, any modification that could significantly affect its safety or effectiveness, or that would constitute a new or major change in Chinaits intended use, may require a further regulatory submission and comparable agenciesreview. Regulatory bodies require each manufacturer to determine whether the proposed change requires a submission, but can review any such decision and disagree with a manufacturer’s determination. If the regulatory body disagrees with a manufacturer’s determination regarding whether a new submission is required for the modification of an existing device, they can require the manufacturer to cease marketing and/or recall the modified device until the relevant approval/clearance is obtained. In addition, in these circumstances, significant regulatory fines or other countries. penalties may be imposed.
We also must comply with the European Union’sEU’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. other product safety regulations.
WeAfter a device is cleared or approved for marketing, numerous and pervasive regulatory requirements continue to apply. In the USA these include:
Often, new products that we introduce are subjectcaused or contributed to a pre-market regulatorydeath or serious injury, or has malfunctioned and the device or a similar device that it markets would be likely to cause or contribute to a death or serious injury, if the malfunction were to recur;
Our manufacturing processes (e.g. pre-market notification (510[k]), or pre-market approval (PMA) for marketing of FDA-regulated devices in the USA, and CE Marking in the European Union). Failingare required to comply with the applicable portions of the QSR and/or ISO13485, which cover the methods and the facilities and controls for the design, manufacture, testing, production, processes, controls, quality assurance, labeling, packaging, distribution, installation and servicing of finished devices intended for human use. The QSR also requires, among other things, maintenance of a device master file, device history file and complaint files. As a manufacturer, we will be subject to periodic scheduled or unscheduled inspections by the FDA, Notified Bodies or other relevant regulatory bodies. Our failure to maintain compliance with the QSR or ISO 13485 requirements can have significant legal and business consequences. The number and diversity of regulatory bodiescould result in the various markets we operateshut-down of, or the imposition of restrictions on, our manufacturing operations, imposition of an import alert, or the recall or seizure of our products, which would have a material adverse effect on our business. The discovery of previously unknown problems with any of our products, including unanticipated adverse events or adverse events of increasing severity or frequency, whether resulting from the use of the device within the scope of its clearance or off-label by a physician in globally adds complexity and time tothe practice of medicine, could result in restrictions on the device, including the removal of the product introductions. from the market or voluntary or mandatory device recalls.
In the USA, the FDA has broad regulatory compliance and enforcement powers, which it can impose on its own or in coordination with the Department of Justice (DoJ), which has separate enforcement authority. If the FDA determines that we failed to comply with applicable regulatory requirements, it may lead to any of the following sanctions:
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 theEuropean Union Medical Device Regulation is operative. We have accomplished several milestones within(EU-MDR) passed its date of application (May 26, 2021). For a portion of the program: completing certifying audits, receiving updated CE Certificates and executing several shipmentsportfolio, we used the available grace period, where products that were placed on the market under the predecessor of MDR compliant productsthe EU-MDR, the European Union Medical Device Directive (EU-MDD), can continue to be placed on the market if meeting a subset of EU-MDR requirements in addition to the EU aheadEU-MDD requirements. Reasons for this include stock depletion management and Notified Body capacity limitations. Throughout 2022, we made progress in transitioning some of the date of application. To achieve these milestones, we made an annual EU MDR investment of around EUR 68 millionportfolio to become EU-MDR-compliant. We also started registering our entities and medical devices in 2020 and will expect to have additional compliance coststhe European Database for the new regulations of around EUR 37 million in 2021. We believeMedical Devices (EUDAMED) on a voluntary basis.
As the global regulatory environment will continuecontinues to evolve, which couldwe are working to address the impact theon cost, the time and resources needed to approve,obtain future approvals, and ultimately, our ability to maintain existing approvals or obtain future approvals for our products.products, services, and solutions.
On June 14, 2021, Philips’ subsidiary, Philips Respironics, initiated a voluntary recall notification in the United States, and field safety notice outside the United States, for certain sleep and respiratory care products to address identified potential health risks related to the polyester-based polyurethane (PE-PUR) sound abatement foam in these devices.
This recall let down the patients who depended on them, as well as their caregivers, and we are deeply sorry for that. We are treating this matter with the highest possible seriousness and are working to address this issue as efficiently and thoroughly as possible.
Following the FDA’s inspection of a Philips Respironics manufacturing facility in connection with the recall and the subsequent inspectional observations, the US DoJ, acting on behalf of the FDA, began discussions with Philips in July 2022 regarding the terms of a consent decree to resolve the identified issues. Philips is engaged in ongoing discussions with FDA and DoJ on the proposed consent decree. For more information, see Note Contingencies.
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 conducted in 2015 and before 2015,prior, focusing primarily on Philips’ Emergency Care & Resuscitation (ECR) business operations in Andover, (Massachusetts)Massachusetts, and Bothell, (Washington). Washington.
Under the decree, Philips suspended the manufacture and distribution for the US market of external defibrillators, subject to certain exceptions. In January 2020, the Emergency Care & Resuscitation (ECR) business obtained Quality Management System Certification from an independent expert, fulfilling a significant consent decree requirement. Following a successful inspection in Bothell, (Washington),Washington, in April 2020, the FDA determined that Philips had met the conditions for resuming on the manufacturemanufacturing and distribution of defibrillators in the US. The consent decree remains in effect for a number ofseveral years, during which the Emergency Care (formerly Emergency Care & Resuscitation (ECR)Resuscitation) business will be subject to a series of annual assessments by an independent expert. Hospital Patient Monitoring (formerly Monitoring & Analytics), also named in the consent decree, is also under a heightened level of scrutiny over the same period.
Substantial progress continues to be made in our compliance efforts. However, weIn August 2021, the FDA inspected Emergency Care in Bothell as a consent decree follow-up. Three observations (Form 483) were issued and subsequently remediated and reported to the FDA. The FDA later presented Emergency Care with four Establishment Inspection Reports dating back to 2015, signaling the closure of the four open inspections. There was a consent decree follow-up inspection in October 2022, resulting in three observations (Form 483). These will soon be reported as fully remediated.
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 ECREmergency Care or Hospital Patient Monitoring & Analytics 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.
The objectivesOur remuneration policy is designed to encourage employees to deliver on our purpose and strategy and create stakeholder value, and to motivate and retain them. Our executive long-term incentive plan includes environmental and social commitments. A description of the composition of the remuneration policy forof the individual members of the Board of Management as adopted by the General Meeting of Shareholders in 2017, are in line with that for executives throughout the Philips Group. That is, to focus them on improving the performance of the company and enhancing the long-term value of the Philips Group, to motivate and retain them, and to be able to attract other highly qualified executives to enter into Philips’ services, when required.
In order to compete for talent in the health technology market, the Supervisory Board identified a new peer group*) for remuneration benchmarking purposesis included in 2017 to align the Board of Management’s remuneration levels closer to equivalent positions in this market. These peer companies are either business competitors, with an emphasis on companies in the healthcare, technology related or consumer products area, or companies we compete with for executive talent. These consist of predominantly Dutch and other European companies, plus a minority number (up to 25%) of US based global companies, of comparable size, complexity and international scope. Annual changes to the peer group can be made by the Supervisory Board, for example for reasons of changes in business or competitive natureReport of the companies involved. Such change will be disclosed if it has a substantial impact on peer group composition. No changes were made to the peer group during 2018.
To support the policy’s objectives, the remuneration package includes a significant variable part in the form of an annual cash bonus incentive and long-term incentive in the form of performance shares. The policy does not encourage inappropriate risk-taking.
The performance targets for the members of the Board of Management are determined annually at the beginning of the year. The Supervisory Board determines whether performance conditions have been met and can adjust the payout of the annual cash bonus incentive and the long-term incentive grant upward or downward if the predetermined performance criteria were to produce an inappropriate result in extraordinary circumstances. The authority for such adjustments exists on the basis of contractual ultimum-remedium and claw-back clauses. In addition, pursuant to Dutch legislation effective January 1, 2014, incentives may, under certain circumstances, be amended or clawed back pursuant to statutory powers. For more information please refer to Corporate governanceRemuneration Committee. Further information on the performance targets is given in the chapters on the Annual Incentive (see 2020 Annual Incentive) and the Long-Term Incentive Plan (see 2018 Long-Term Incentive) respectively.
The list below highlights Philips’ approach to remuneration, in particular taking into account Corporate Governance practices in the Netherlands.
While pursuing our business objectives, we aim to be a responsible partner in society, acting with integrity towards our employees, customers, business partners and shareholders, as well as the wider community in which we operate. Everyone at Philips is expected to always act with integrity, and Philips rigorously enforces compliance of its General Business Principles (GBP) throughout the company.
In the highly regulated world of healthcare, integrity requires in-depth knowledge of the applicable rules and regulations and a sensitivity to healthcare-specific issues. The GBP – part of the Philips Business System – incorporate and represent the fundamental principles by which all Philips businesses and employees around the globe must abide. They set the minimum standard for business conduct, both for individual employees and for the company and our subsidiaries. Our GBP also serve as a reference for the business conduct we expect from all our business partnerspartners.
The GBP also include principles which set our integrity standard on inside information, aiming to prevent trading on or disclosure of non-public information, the publication of which would be likely to have a significant influence on the trading price of Philips securities or securities of companies that Philips is seeking to acquire. More specifically, Philips has adopted Rules of Conduct with respect to trading in Philips securities to promote compliance with applicable insider trading and suppliers.other market abuse laws, rules and regulations, in particular the EU Market Abuse Regulation. The Rules of Conduct apply to all employees, the members of the Board of Management and the Supervisory Board of Royal Philips.
Translations of the GBP text are available in 30 languages, allowing almost every employee to read the GBP in their native language. Detailed underlying policies, manuals, training, and tools are in place to give employees practical guidance on how to apply and uphold the GBP in their daily work environment. Details can be found at www.philips.com/gbp.
In 2020,2022, a total of 571706 concerns were reported via Philips Speak Up (Ethics Line) and through our network of GBP Compliance Officers. TheThis represents an increase of 16% from the total of 610 concerns in the previous reporting period (2019) saw a total of 545 concerns, resulting in an increase of 5% in the number of reports.(2021).
While this is a continuation of the upward trend, reported since 2014, the year in which Philips updated its General Business Principles and deployed a strengthened global communication campaign, the increase is flattening. Specifically in 2020,2022, we once more focused on increasing awareness on Integrity and on the importance of speaking up, through and following up on the deploymentconclusions of the deep-dives executed after our 2021 biennial Business Integrity Survey. We still believe the upward trend in reporting remains in line with our multi-year efforts to encourage our employees to express their concerns, butwhilst realizing that the extraordinary business conditions in 2020the past few years make it imprudent to draw any specific conclusions from these numbers.
More information on the Philips GBP can be found in Risk management.
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 provision 1.4.2 of the Dutch Corporate Governance Code. It should be noted that the above does not imply that the internal risk management and control systems provide certainty as to the realization of operational and financial business objectives, nor can they prevent all misstatements, inaccuracies, errors, fraud or non- compliances with rules and regulations. The above statement on internal control should not be construed as a statement in response to the requirements of section 404 of the US Sarbanes-Oxley Act. The statement as to compliance with section 404 is set forth in . Management’sManagement's annual report on internal control over financial reporting.
To fulfillfulfil our company purpose, a responsible tax approach is required. We fully acknowledge our societal role when it comes to paying taxes in the geographies where value is created. We consider our tax payments as a contribution to the communities in which we operate, as part of our social value creation.
Our Approach to Tax sets the standard for our conduct, by which individual employees, the company and its subsidiaries must abide. We consider tax in the context of the broader society, inspired by our stakeholder dialogues, global initiatives of the Organization for Economic Cooperation and Development and United Nations, human rights, international (tax)tax laws and regulations and relevant codes of conduct.
Under the ultimate responsibility of the Board of Management, the Chief Financial Officer annually reviews, evaluates, approves and where necessary adjusts Philips’ Approach to Tax. Part of our approach is to tax.acknowledge the importance of transparency in respect of our tax contributions. Philips supports and participates in transparency initiatives such as the Dow Jones Sustainability Index (DJSI) and the Tax Transparency Benchmark of the Dutch Association of Investors for Sustainable Development (VBDO). Since 2020, we have been providing certain voluntary disclosures about taxes paid and collected in the countries in which we operate. The 2022 Country Activity and Tax Report is published on our website, in addition to, and simultaneously with the disclosures on tax included in this Annual Report.
Philips also endorses the ambitions expressed in the Tax Governance Code published by Dutch employers' organization VNO-NCW. We comply with the principles prescribed in the Code, available at www.vno-ncw.nl/taxgovernancecode, and we have touched upon the elements on this code in our Country Activity and Tax Report.
In 2020,2022, Philips contributed to the communities where we operate through taxes paid (e.g., corporate income tax) and taxes collected (e.g., VAT). As part of its ESG commitments, announcedPhilips' total tax contribution in September 2020, Philips committed2022, amounting to provide more transparency on its taxes paid and collectedEUR 3,469 million, is presented by tax type in the countries it operates in. Our firstfollowing table. Please refer to our 2022 Country Activity and Tax Report can be found on our website. Philips' total tax contribution in 2020, amounting to EUR 3.38 billion, is described by tax type below:for more details.
Philips Group
Total Contribution 20202022 per Tax Type
in millions of EUR
Corporate Income Tax | VAT1) | Payroll Tax | Customs duties | Other Tax | Total | Corporate income tax paid | Customs duties | VAT1) | Payroll Tax | Other Taxes | Total | |
---|---|---|---|---|---|---|---|---|---|---|---|---|
Western Europe | 249 | 300 | 901 | 14 | 35 | 1,498 | 224 | 10 | 183 | 848 | 68 | 1,333 |
North America | 86 | 86 | 590 | 30 | 9 | 801 | 80 | 45 | 102 | 846 | 8 | 1,081 |
Other mature geographies | 42 | 80 | 124 | 2 | 1 | 249 | 35 | 3 | 63 | 134 | 1 | 236 |
Growth geographies | 89 | 329 | 247 | 111 | 58 | 834 | 22 | 86 | 317 | 345 | 48 | 818 |
Philips Group | 466 | 794 | 1,862 | 156 | 102 | 3,381 | 362 | 144 | 664 | 2,174 | 124 | 3,469 |
Below we show how Philips performed in 20202022 on the 21 Core metrics of the WEF ESG reporting framework, mapped to the three dimensions of our ESG commitments, as well as a number of additional Philips-specific metrics that we consider fundamental to the strategy and operation of our business.
Philips believesapproaches risk management isas a value-creating activity that complements ouris integral to innovation and entrepreneurship. Philips’ risk management approachAs such, it is an integral part of the Philips Business System (PBS), and key. Key elements are our Riskrisk management governance, Risk appetite, the Risk Management Processmanagement process standard, the Philips Business Control Framework, and our General Business Principles (GBP). These, which are further described in this chapter. The company’s risk management is designed to provide reasonable assurance that strategic and operational objectives are met, legal requirements are complied with, and the integrity of the company’s financial reporting and related disclosures is safeguarded. However, thereThere can be no absolute assurance that our risk management will avoid or mitigate all risks that Philips faces. The material risks are described in Risk factors.
All forward-looking statements made on or after the date of this Annual Report and attributable to Philips are expressly qualified, in their entirety, by the factors described in the cautionary statement included in Forward-looking statements and in the overview of risk factors described insection Risk factors.
The Executive Committee identifies oversees, and manages the risks Philips faces in realizing its objectives. It defines the Risk Appetite,risk appetite, provides the risk management framework, and monitors the effectiveness thereof. The Risk Management Support Team, consisting of experts on various categories of enterprise risk, supports the Executive Committee through regular analysis of the enterprise risk profile and enhancement of the risk management framework. Management is responsible for identifying critical risks and implementing appropriate risk responses within their areaareas of responsibility. Various functions (such as Internal Control, Quality & Regulatory, Legal, and Group Security) support the management of specific risk areas.
The Internal Audit function assesses the quality of risk management and controls through the execution of a risk-based audit plan, as approved by the Audit Committee of the Supervisory Board. Leadership from our Board of Management,the Executive Committee, Businesses, Markets and key Functions meet quarterly with Internal Audit in Audit & Risk Committees to discuss strengths and weaknesses of risk management and controls – as evaluated by internal and external auditors and by means of other (self) assessments – and take corrective action where necessary.
The Disclosure Committee oversees the company’s disclosure activities and assists the Board of Management in fulfilling its responsibilities in this respect. The Committee’s purpose is to ensureDisclosure Committee ensures that the company implements and maintains internal procedures for the timely collection, evaluation and disclosure as appropriate, of information potentially subject to public disclosure under the legal, regulatory and stock exchange requirements to which the company is subject.
The GBP Review Committee is responsible for the effective deployment of the Philips General Business Principles (GBP) and for generally promoting a culture of compliance and ethics within the company. For more information see below under ‘Philips General Business Principles’.
The Security Steering Committee (SSC) and the Group Security function manage security (including cybersecurity) risks at Philips.risks. The SSC evaluates and sets the Group’s security strategy, issues security policies and evaluates progress and effectiveness. Dedicated security reports are shared with the Executive Committee, the Supervisory Board and external auditors. On a quarterly basis, briefings on cybersecurity risks are provided to the IT Audit & Risk Committee.
The Environmental, Social and Governance (ESG) Committee initiates, drives and coordinates ESG strategy development, policy setting, disclosures and planning of programs and activities in relation to our ESG commitments and obligations. It administers ESG reporting, monitors progress, assesses risks in relation to ESG and makes recommendations to the Executive Committee on our ESG endeavors.
Philips actively maintains Quality Management Systems (QMS) with the aim of ensuring the quality and safety of product design, manufacturing, distribution, and servicing in compliance with regulation from various government and regulatory agencies, e.g., FDA (US), EMA (Europe), NMPA (China). Our Quality & Regulatory function closely monitors developments in the regulatory landscape. Through specialist teams at the global, regional or local level, standards and requirements are defined and continuously improved, deployed, and monitored to ensure our employees are aware of and comply with these requirements. Next to continuous improvement a program runs with the aim to accelerate patient safety and quality. A formal quality audit program assesses our organization’s compliance with our QMS. Quality & safety is a standard item in personal goal setting and evaluation of all Philips’ employees.
The Supervisory Board oversees Philips’ risk management, including the identified risks in relation to the Risk appetite, the response measures put in place and the effectiveness thereof. The Audit Committee and the Quality & Regulatory Committee of the Supervisory Board assist the full Supervisory Board in fulfilling its risk management oversight responsibilities in relation to risk.responsibilities. The Audit Committee reviews the quality of risk management and controls, and the reported findings of internal and external audits, are reported to, and discussed with, the Audit Committee of the Supervisory Board.audits. The Quality & Regulatory Committee’s role particularly relates to the quality includingand regulatory compliance of the Company’scompany’s products (including software), services and systems andthroughout their development, testing, manufacturing, marketing and servicing.lifecycle.
InThe Corporate governance the Companychapter of this report addresses the main elements of itsthe company’s corporate governance structure, reports on how it applies the principles and best practicespractice provisions of the Dutch Corporate Governance Code and provides certain other information.information relevant to risk management governance.
The Executive Committee and management seek to manage risks consistently within the risk appetite. Risk appetite is set by the Executive Committee and captured in the Risk Management Policy.risk management policy. It is effectuated as an integral part ofthrough our PBS, of which various elements – e.g. Strategy, Behaviors, GBP, Authority Schedules, Policies, Process Standardssuch as our strategy, Philips General Business Principles (GBP) and Performance Management Systemsbehaviors, authority schedules, policies, process standards and performance management systems – include or reflect risk-taking guidance.
Philips’ risk appetite differs depending on the type of risk, ranging from an averse to a seeking approach. We believe we must operatePhilips operates within the dynamics of the health technology industry and aims to take the risks needed to ensure we continually revitalize our offerings and the way we work. At the same time, Philips attaches prime importanceis committed to always act with integrity sustainability, product quality and is averse to risks impacting our GBP, which include (but not limited to) the Philips behavior ‘Patient safety, includingQuality, and Integrity always’. Our employees are expected to ensure compliance with our GBP, laws and regulations and quality standards.to act in case of concerns or violations to our GBP, please refer to the GBP section below for more information. Philips’ Risk appetite for the four main risk categories is visualized below.
Philips does not classify these risk categories in order of importance.
In order toTo provide a comprehensive view of Philips’ risks, structured risk assessments take place according to the Philips risk management process standard, applying a top-down and bottom-up approach. Our process standard is designed based on the Enterprise Risk Management Framework: Integrating with Strategy and Performance (2017) from the committeeCommittee of sponsoring organizationsSponsoring Organizations of the treadway commissionTreadway Commission (COSO) and on ISO 31000 - Risk Management. The process is supported by regular risk workshops with management at Group, Business, Market and Function levels. During 2020, several risk management workshops were held to assess and respond to enterprise risks.
Key elements of the Philips Risk Management Policyrisk management process are:
Examples of measures taken during 20202022 to further strengthen risk management:
The Philips Business Control Framework (PBCF) sets the standard for Internal Control over Financial Reportinginternal control at Philips. The objective of the PBCF is to maintain integrated management control of the company’s operations in order to ensure the integrity of the financialand reporting, as well as safeguard compliance with applicable laws and regulations. Philips has designed its PBCF based on the COSO Internal Control-Integrated Framework (2013).
As part of the PBCF, Philips has implemented a standard set of internal controlsInternal Controls over financial reporting.Financial Reporting (ICFR). Together with Philips’ established accounting procedures, this standard set of internal controls is designed to provide reasonable assurance that assets are safeguarded, that the books and records properly reflect transactions necessary to permit preparation of financial statements, that policies and procedures are carried out by qualified personnel, and that published financial statements are properly prepared and do not contain any material misstatements. In each reporting unit, management is responsible for customizing the controls set for their business, risk profile and operations.
Each year, management’s accountability for internal controls for financial reportingICFR is evidenced through the formal certification statement sign-off. Any deficiencies noted in the design and operating effectiveness of Internal Controls over Financial Reporting whichICFR that were not completely remediated are evaluated at year-end by the Board of Management. The Board of Management’s report, including its conclusions regarding the effectiveness of Internal Controls over Financial Reporting,ICFR, can be found in this report in the section Management’sManagement's annual report on internal control over financial reporting.
AsThe GBP – part of the Philips Business System our GBP– incorporate and represent the fundamental principles by which all Philips businesses and employees around the globe must abide. They set the minimum standard for our business conduct as a health technology company.company, for our individual employees and for our subsidiaries. The GBP form an integral part of labor contracts in virtually every country in which Philips operates, and translations are available in 30 languages. Each year, employees reconfirm their commitment to the code of conduct after completing their GBP e-learning, whileand there is an additional annual sign-off for Executives. A similar sign-off is in place for Finance and Procurement staff for their respective codes of conduct. Detailed underlying policies, manuals, training, and tools are in place to give employees practical guidance on how to apply and uphold the GBP in their daily work.
The GBP Review Committee is responsible for the effective deployment of the GBP and for generally promoting a culture of compliance and ethics within the company. The Committee is chaired by the Chief ESG & Legal Officer, and its members include the Chief Financial Officer, Chief HRHuman Resources Officer and the Chief of International Markets. Furthermore, each quarter all our 17key markets have quarterlyconvene market compliance committees, which act as local satellites of the GBP Review Committee, dealing with GBP-related matters withinin the local context. They are also responsible for the design and execution of localized compliance plans that are tailored to their market-specific risks and organizational set-up, and regularly review the relevant compliance metrics for their respective market through dashboards delivered by the legal compliance monitoring team. The Secretariat of the GBP Review Committee, together with a worldwide network of GBP Compliance Officers, supports the organization with the implementation of GBP initiatives.
As part of our continuous effort to raise GBP awareness and foster dialogue throughout the organization, each year a global GBP communications and training plan is deployed, including our annual GBP Dialogue Initiative,structured dialogues led by managers where quality, integrity and speaking up are discussed. This is part of a company-wide initiative aimed at reinforcing a culture of dialogue through the use ofusing ethical dilemma case studies that are relevant to our workforce.
A key control to measure implementation of our GBP is the GBP Self-Assessment,monitoring and reporting program, which is part of our Internal Control framework. In addition, we continue to expand the capabilities of our legal compliance monitoring team, serving both our business customers as well as compliance networks with actionable compliance data, thus further improving our compliance control framework.
The GBP are supported by established mechanisms that ensurewith the aim of ensuring standardized reporting and enable both employees and third parties to escalate concerns 24/7. Concerns raised are registered consistently in a single database hosted outside of Philips servers to ensure confidentiality and security of identity and information. Encouraging people to speak up through the available channels if they have a concern will continue to be a cornerstone of our GBP communications and awareness campaigns. To further facilitate this, we completely redesigned our web-based intake site in 2020, improving employees’ experience when filing reports. At least twice a year, the GBP Review Committee, as well as the Executive Committee and Audit Committee of the Supervisory Board, are informed on relevant GBP metrics, cases, trends and learnings.
Through the Audit Committee of the Supervisory Board, the company also has procedures in place for the receipt, retention and treatment of complaints specifically relating to accounting, internal accounting controls or auditing matters. The Reporting Policy Accounting and Audit Matters allowsmatters, which enable the confidential, anonymous submission of complaints regarding questionable accounting or auditing matters.complaints.
More information on the Philips GBP can be found in Environmental, Social and Governance. The GBP and underlying policies, including the Financial and Procurement Code of Ethics, are published on the company website, at https://www.philips.com/gbp.a-w/about/investor-relations/governance/business-principles.html .
Philips believes the risks set out below are the material risks that, individually or in combination, could impact itsour ability to achieve its objectives.our objectives and to live up to the expectations of our customers and stakeholders. These risk factors may not, however, include all the risks that ultimately may affect Philips. Some risks not yet known to Philips, or currently believed not to be material, may ultimately have a major impact on Philips’ business, revenues,revenue, income, assets, liquidity, capital resources, reputation and/or ability to achieve its business and ESG objectives. Please note that this section is not intended to describe risk that have materialized, as these are addressed in other sections and referenced to where relevant. Philips defines risks in four main categories: Strategic, Operational, Compliance and Financial risks.Financial. Philips presents the risk factors within each risk category in order of Philips’our current view of their expected significance. Compared to the previous year we have prioritized risk factors relating to patient safety and quality management, addressing the Respironics voluntary recall and the regulatory and legal processes connected to this, geopolitical and macro-economic factors, and to our supply chain operations. Although still relevant, we have de-emphasized risk factors related to pandemics. This does not mean that a lower-listed risk factor may not have a material and adverse impact on Philips’ business, revenues,revenue, income, assets, liquidity, capital resources, reputation, and/or ability to achieve its business and ESG objectives. Furthermore, a risk factor listed below other risk factors not listed below may ultimately prove to have more significant adverse consequences than those otherthe listed risk factors.
Fundamental shifts in the health technology industry, such as the transition to digital and increased emphasis on ESG (Environmental, Social and Governance), may drastically change the business environment in which Philips operates. If Philips fails to recognize these changes in time, adjust business models, or introduce new products and services in response to these changes, or fails to meet its ESG commitments, this could result in a material adverse effect on Philips’ business, financial condition and operating results.
Philips’ business environment is influencedcan be adversely impacted by political, economicmacroeconomic and societalgeopolitical conditions in global and individual and global markets. Inevitably there is uncertainty with regard to the levels of (public) capital expenditure in general, unemployment levels, and consumer and business confidence, all of which could adversely affect demand for products and services offered by Philips.
Mature economies are currently the main source of Philips’ revenues, while emerginggrowth economies are an increasing source of revenues. Philips produces, sources, and designs its products and services mainly from the US,United States (US), the EUEuropean Union (EU) (primarily the Netherlands) and China, and the majority of Philips’ assets are located in these geographies. Changes in politics and monetary, policy and trade and tax lawspolicies in the US, the EU and China may trigger reactions and EU cancountermeasures and may also have a significantan adverse impact on other mature economies, emerging economies and international financial markets. Such changes, includingmarkets in which Philips is active. Philips continues to expect global market conditions to remain highly uncertain and volatile due to geopolitical and macroeconomic factors, whether or not related to or caused by the Russia-Ukraine war.
Philips observes a trend of geopolitical tensions and deglobalization which intensifies protectionism. Examples of protectionism measures are policies on trade, tariffs, sanctions, local value creation and sanctions,production requirements to obtain market access, custom duties, taxation, technology and data restrictions, cyberattacks, import or export controls, increased healthcare regulation,talent mobility restrictions, nationalization of assets, or restrictions on the repatriation of returns from foreign investments, and general uncertainty on the development of local regulations and compliance thereto. Philips observes this trend in the major markets in which it operates and has a particular concern on the development of the US-China relationship and China’s drive to expand its global political footprint and become self-sufficient in critical technologies, including health-related ones. If this trend continues, geopolitical relations deteriorate and economies decouple, it is expected that existing global trade and investment restrictions will remain, and further regulatory and compliance challenges for doing business globally may trigger reactionsemerge, resulting in continued pressure on market growth and countermeasures, leadinginvestments.
Uncertainty and challenges regarding various global macroeconomic factors continue to persist. Examples of general factors are an overall weakening economy, declines in economic growth projections in the US, the EU and China (which collectively account for around two-thirds of Philips’ sales), reduced government spending, declining customer and consumer confidence and spending, rising inflation and interest rates, and the emergence of economic impacts related to the climate crisis. Examples of healthcare-specific potential factors include rising uncertainty over the future direction of public healthcare policy and the risk of declining public investment in healthcare ecosystems.
The Russia-Ukraine war has increased global economic and political uncertainty. Governments in the US, UK, EU, Canada, and Japan have each imposed export controls on certain products and sanctions on certain industry sectors and institutions in Russia, and additional controls and sanctions could be enacted in the future.
The Russia-Ukraine war may heighten the impact of other risks factors described herein, including but not limited to: volatility in prices for transportation, energy, commodities and other raw materials; disruptions in the global supply chain; decreased customer and consumer confidence and spending; increased cyberattacks; intensified protectionism; political and social instability; increased exposure to foreign currency fluctuations; rising inflation and interest rates; and constraints, volatility or disruptions in the credit and capital markets. It is possible that the conflict in Ukraine may escalate or expand and current or future sanctions and resulting geopolitical and macroeconomic disruptions could be significant. We cannot predict the impact the conflict may have on the global economy in the future.
Changes in geopolitical and macroeconomic conditions are difficult to predict, and the factors described above, or other factors, may lead to adverse impacts on global trade levels and flows, economic growth, and financial market and political stability, all of which could adversely affect the demand for, and supply of, Philips’ products and services. This may have an adverse effect on business growth and stability on international financial markets.
The factors described above, or other factors which may impact economic and societal conditions relevant to Philips (e.g. COVID-19 and Brexit), are difficult to predict and may haveresult in a material adverse impact on Philips’ business, financial condition, and operating results. They canThese factors could also make it more difficult to budget and to make reliable financial forecasts or could have a negative impact on Philips’ access to funding.
With Philips’ overall risk profile is changing as a result of its focus on health technology, our business model is transforming from transactional, product-focused business models to outcome-oriented, multi-year customer partnerships enabled by solutions and solutions.
As Philips’value-added services. If this transformation is made too slowly or is not successful, Philips may not meet the expectations of patients and other stakeholders in the Health Technology business profile continuesenvironment. It may face a loss of customer relevance, fail to further shift focus towardscapture growth, and lose market share. In addition, because of our health technology with a changing products and services portfolio and acquisitions, divestments and partnerships to support the execution of its health technology strategy,focus, Philips is more exposed to developments in the health technology industry. It may therefore have a reduced ability to offset potential negative impacts of those developments(including, but not limited to, impacts on sales, operating results, liabilities, compliance, financing) on its health technology business by other businesses through a more diversified portfolio. As a result of the shift to a solutions and services business model, Philips transitionsis becoming more dependent on a number of key customers for long-term recurring revenues, thus increasing the risk that the loss of, or a significant reduction in, orders from selling health technology products to selling health technology solutions, the natureone or more of our customer relations is also evolving, which raises the long-term riskkey customers could cause a significant decline in our revenues. Any of (amongst others) customer default and dependency. Philipsthese factors may pursue divestments from time to time, including divestments consistent with Philips’ focus on health technology, such as the disentanglement and future divestment of Philips’ Domestic Appliances business. These divestments may result in additional costs and divert management attention from other business priorities and risks, and the timing, terms, execution and proceeds of any such divestments are uncertain.
Growth geographies are becoming increasingly important to Philips’ business plan, and Asia is an important production, sourcing and design center for Philips. Philips faces intense competition from local companies as well as other global players for market share in growth geographies. Philips needs to maintain and grow its position in growth geographies, invest in data-driven services and local talent, understand end-user preferences, and localize its portfolio in order to stay competitive. If Philips fails to achieve these objectives, it could have a material adverse effectimpact on Philips’ brand value and reputation, business, financial condition, and operating results. More specific Health Technology risks and their potential impacts are included in the company’sOperational, Financial and Compliance risk sections below as well as in the Note Contingencies.
New digital technologies and ways of conducting business are fundamentally changing the health technology industry, and thus our competitive business environment. A key trend, started in radiology, is the application of artificial intelligence (AI) and machine learning (ML) to drive quality and efficiency in clinical and operational workflows. Another trend, accelerated by the pandemic, is the shift toward cloud-based Software as a Service (SaaS) business models and remotely upgradable and serviceable systems with suites of apps. These new types of offerings are enabled by hybrid cloud/on-premise digital platforms. Our informatics and systems businesses may fall behind established and new ‘born digital’ competitors if Philips fails to, in a timely way, develop the requisite capabilities, adjust its business models, and find ways to globally commercialize new products and services at scale. This could result in an inability to satisfy customer and patient needs, thereby missing out on revenue and margin growth opportunities, which may have a material adverse impact on Philips’ business, financial condition and operating results.
Selected acquisitions have been, and are expected to be aremain, part of Philips’ growth strategy. AcquisitionsWe may not be able to successfully or efficiently integrate new acquisitions with our existing operations, culture and systems, which may expose Philips to integration risks in areas such as sales and service, logistics, quality, regulatory compliance, legal claims, information technology and finance. Integration challenges may adversely impact the realization of expected contributions from acquisitions. Philipsvalue creation expectations. Transactions may incur significant costs, result in connection with these transactions. Acquisitions may alsounforeseen operating difficulties, divert management attention from other business priorities.priorities, and may ultimately be unsuccessful. Cost savings expected to be implemented, following anor other assumptions underlying the business case relating to a particular acquisition, may not be difficultrealized. If we are unable to achieve.accomplish any of our objectives in respect of any of our new acquisitions, we may not realize the anticipated benefits of such acquisitions and we may experience lower than anticipated profits, or even incur losses. Acquisitions may also lead to a substantial increase in long-lived assets, including goodwill, which may later be subject to write-down if an acquired business does not perform as expected, which may have a material adverse effect on Philips’ earnings.
Environmental, Social and Governance (ESG) factors may directly and indirectly impact the business environment in which Philips operates. Philips may, from time to time, disclose ESG-related initiatives or aims in connection with the conduct of its business and operations (for example, with respect to reducing greenhouse gas emissions in its supply chain). However, there is no guarantee that Philips will be able to implement such initiatives or meet such aims within anticipated timeframes, or at all. In addition, there is an increasing focus from Philips’ stakeholders – including customers, employees, regulators, and investors – on ESG matters, and those stakeholders may also have ESG-related expectations with respect to Philips’ business and operations. For example, customers may focus on ESG-related criteria in buying our products, and any inability by Philips to address concerns about ESG-related matters could negatively impact sentiment towards Philips and our products and brands. There are an increasing number of regulatory and legislative initiatives in the EU and other jurisdictions to address ESG issues, which will or may (if implemented) require Philips to significantly increase the scope of mandatory ESG disclosures. They will or may (if implemented) require Philips to identify and act on adverse environmental and human rights impacts across the organization and potentially the entire value chain, beyond our current efforts. These regulatory and legislative initiatives, in turn, could also affect how customers or other stakeholders perceive our products or business operations. If our products or business operations do not meet the criteria for sustainability according to, for example, the EU Taxonomy Regulation (including the related delegated regulations) or any other similar regulations, this may negatively affect how customers or other stakeholders view Philips. Philips may fail to fulfill internal or external ESG-related initiatives, aims or expectations, or be perceived to do so, or we may fail adequately or accurately to report performance or developments with respect to such initiatives, aims or expectations. In addition, Philips could be criticized or held responsible for the scope of its initiatives or goals regarding ESG matters. Any of these factors may have an adverse impact on Philips’ reputation and brand value, or on Philips’ business, financial condition and operating results.
Philips is dependent on its ability to obtain and maintain licenses and other intellectual property (IP) rights covering its products and services and its design and manufacturing processes. The IP portfolio is the result of an extensive patentingIP generation process that could be influenced by a number of factors, including innovation.innovation and acquisitions. The value of the IP portfolio is dependent on the successful promotion and market acceptance of standards (co-)developed or co-developed by Philips. This is particularly applicable to the segment Other,‘Other’, where licenses from Philips to third parties generate IP royalties and are important to Philips’ results of operations. The timing of licenses from Philips to third parties and associated revenues from IP royalties are uncertain and may vary significantly from period to period. Additionally, royalties are often based on sales by third parties, creating an exposure to macroeconomic effects and continuity of these third parties. A loss or impairment in connection with such licenses to third parties could have a material adverse impact on Philips’ financial condition and operating results. Philips is also exposed to the risk that a third party may claim to own the intellectual propertyIP rights to technology applied in Philips’ products and services. If any such claims of infringement of these intellectual propertyIP rights are successful, Philips may be required to pay damages to such third parties or may incur other costs or losses.
COVID-19 has affected Philips’ operations and results in 2020. Looking ahead, Philips continues to see uncertainty and volatility related to the impact of COVID-19 across the world, driven by, amongst others, the effectiveness of vaccination programs, mutations of COVID-19 and potentially new viruses whichservices may cause new pandemics. Philips expects that COVID-19 may continue to impact the delivery on our triple duty of care in various ways: health and safety of our employees (in various working environments such as production, supply, field service, R&D, and working from home); meeting critical customer needs (for example to our production capacity and our ability to deliver, install and provide service); and business continuity (for example of our functional operations, supply chain, and commercial processes). These will require effort and expense to deal with and may negatively impact results from operations for an uncertain period.
Philips’ customers may not be focused on making new investmentsfail quality or face liquidity issues caused by COVID-19,security standards, which may adversely affect patient safety and customer operations
The safety of patients and our reputation depends on the safety and quality of our products and services. Our products and services, either new and/or in field use by our customers, may fail to meet product quality or product security standards. In particular, Philips is exposed to the ongoing impact Philips’ cash flow generation. COVID-19of the Respironics voluntary recall and related matters. Please refer to the section Quality & Regulatory and patient safety and the Note Contingencies. If products fail to meet product quality and/or security standards, this may also affect planned divestments consistent withcause (patient) harm, negatively impact customer operations and their ability to provide healthcare, provide unauthorized access to patient records and medical devices through cybersecurity incidents or generally cause customer dissatisfaction. Given Philips’ focus on health technology, products and services often require regulatory approvals, including approval of quality and benefit/risk prior to market introduction. Many of our products also have multiple software components, which may be exposed to security threats, including potentially in relationthe event of obsolescence or insufficient maintenance. Issues with the quality or security of our products and services can occur as a result of various factors, including product design, production, suppliers, materials used, installation, or newly emerging and rapidly evolving cybersecurity threats. These (and other) issues could cause events that need to be actively addressed, which may lead to (amongst others) higher costs of design, market de-activation, stop use, field recalls and repairs, financial claims and liabilities, damage to our brand reputation, competitive disadvantage, regulatory non-compliance (refer to the section Compliance risks), consent decrees or losing our license to operate for products or access to markets. Any of these may have a material adverse impact on Philips’ business, financial condition and operating results.
Notwithstanding the proliferation of technology and technology-based control systems to detect defects or other errors in our products before they are released, our business ultimately relies on people as our greatest resource, and, from time to time, they make mistakes or engage in violations of applicable policies, laws, rules or procedures. These events are not always caught immediately by our technological processes or by our controls and other procedures, which are intended to prevent and detect such errors or violations. In addition to human error, our quality controls are also subject to overriding, as well as resource or technical constraints. As such, these quality controls and preventative measures may not be effective in detecting all defects or errors in our products before they have been released into the marketplace. In such an event, the technological reliability and safety of our products could be below our standards, and our reputation, brand and sales could be adversely affected. In addition, we could be required to, or may find it necessary to, offer a refund for the product or service, suspend the availability or sale of the product or service, or expend significant resources to cure the defect or error. Any of these factors may have an adverse impact on Philips’ reputation and brand value, or on Philips’ business, financial condition and operating results.
Most of Philips’ operations are conducted internationally, which exposes Philips to supply chain challenges and uncertainties. Philips produces and procures products and parts in various countries globally, including Asian countries. Disruption to production in, and shipping from, Asian countries could have a disproportionate impact on our business compared to disruptions in other markets. The production and shipping of products and parts, whether from Philips or from third parties, could be interrupted by various external factors, such as geopolitics (for example, US-China relations and protectionist measures taken in other markets), regional conflicts, natural disasters or extreme weather events (the effects of which may be exacerbated by climate change), container imbalances, port congestions, and continued uncertainty related to COVID-19 measures (particularly in China). Throughout 2022 we experienced supply chain headwinds and expect these to continue throughout 2023. Currently, components are scarce. Global supply constraints and cost impacts as a result of worldwide economic disruptions, electronic component shortages, fear of future or ongoing pandemics, inflation, and geopolitical events, including the war in Ukraine, are impacting our ability to procure components. Obtaining alternative sources of components could involve significant costs and regulatory challenges and may not be available to us on reasonable terms, if at all. As a health technology company, Philips is dependent on the availability of components, including semiconductors. Semiconductors have been subject to an ongoing global supply shortage. At the same time our product design may include obsolescent semiconductors and other components. If semiconductor shortage continues, we may experience delays, production interruptions, increased costs, the need to make engineering design changes or the inability to fulfill customer demand, any of which could adversely affect our business and financial performance. Philips, our customers, our suppliers, and our third-party service providers may also be exposed to labor shortages, potentially as a result of COVID-19. These factors may cause increased lead times and adversely impact our production capacity, which may negatively impact the delivery of products and services to customers, for example the postponement of equipment installations in hospitals. If Philips is not able to respond swiftly to those factors, this may result in an inability to deliver on customer needs, ultimately resulting in loss of revenue and margin.
A general shortage of energy, materials, (sub-)components or means of transportation may drive fluctuations in price. Philips purchases raw materials, including rare-earth metals, copper, steel, aluminum, noble gases and oil-related products. There is no assurance that these raw materials will be available for purchase in the future. The actions by the governments in the US, UK, and the EU in response to the war between Russia and Ukraine, among other factors, have had an adverse impact on the cost of the raw materials that we purchase. Commodities have been subject to volatile markets, and such volatility is expected to continue and costs to increase. Costs may also increase as a result of stricter climate-change-related laws and regulations. Such legislation could require investments in technology to reduce energy use and greenhouse gas emissions, beyond what we expect in our existing plans, or could result in additional and increased carbon pricing. If Philips is not able to compensate for increased costs of energy, (sub-)components, (raw) materials and transportation – either by reducing reliance thereon or passing on increased costs to customers – then price increases could have a material adverse impact on Philips’ business, financial condition, and operating results.
Philips may increase its dependency on a concentration of external suppliers, as a result of the continuing process of creating a leaner supply base and launching initiatives to replace internal capabilities with less costly outsourced products and services. These initiatives also need to be balanced with local-market value-creation requirements, including those relating to local manufacturing and data storage. Although Philips works closely with its suppliers to avoid supply discontinuities, there can be no assurance that Philips will not encounter future supply issues, causing disruptions or unfavorable conditions.
As announced in January 2023, Philips has prioritized the further strengthening of our patient safety and quality management, our supply chain operations, and the simplification of the organization and the ways we work. If we do not effectively manage the necessary changes, including any upgrades to Philips’ Domestic Appliances business;IT architecture, this may result in us not realizing our business ambitions with respect to growth, safety, quality, operational excellence, productivity and solutions delivery, amongst others, and/or may cause business discontinuities. There can be no assurance that the timing, terms, executionrecently announced changes in operating model will be successful in supporting Philips’ strategy or improving Philips’ results of operations, and proceedsPhilips may need to undertake further restructurings in the future. If the recently announced restructuring or any future restructurings ultimately prove unsuccessful or have a material adverse effect on Philips’ reputation and brand value, Philips’ business, financial condition, and operating results could be materially adversely affected.
Philips continually seeks to create a more open, standardized, and cost-effective IT landscape. Approaches include further outsourcing, offshoring, commoditization, and ongoing reduction in the number of IT systems. These changes create third-party dependency risks regarding the delivery of IT services, the availability of IT systems, and the functionality offered by IT systems. Although Philips has sought to strengthen security measures and quality controls relating to these systems, these measures may prove to be insufficient or unsuccessful, which may lead to a material adverse impact on Philips’ business, financial condition, and operating results.
In October 2022 and January 2023, Philips announced a series of reductions in workforce. These restructuring measures may negatively impact Philips’ reputation and its ability to attract and retain employees whose skills and experience are important for its business. Layoffs of skilled employees may subject Philips to potential employment lawsuits and benefit Philips’ competitors. Philips’ restructuring measures may also pose operational challenges and place a substantial strain on remaining management and employees. The reduction in workforce may adversely affect the pace and breadth of Philips’ research and development efforts. The diversion of management time to planning and implementing any restructuring measures may also cause disruptions to Philips’ business.
The attraction and retention of talented employees is critical to Philips’ success, and the loss of employees with specialized skills could result in business interruptions. There is fierce competition for talent in key capability segments, and there is a heightened expectation of attrition post-pandemic. The announced organizational restructuring may also impact employee engagement. These factors may affect Philips’ ability to attract and retain critical talent. Post-COVID-19 adjustments such disposalsas hybrid working may become more uncertain. Some further COVID-19 impactscontinue to present challenges to team interactions and the onboarding of new people. If employees perceive our post-COVID-19 approach to working to be inadequate, overly burdensome, or prefer the safety or convenience of working from home, employees may choose to terminate their employment with us, productivity may decline, or we may experience employee unrest, slowdowns, stoppages or other demands. Philips is competing for the best talent and most sought-after skills, and there is no assurance of succeeding compared to other companies in attracting and retaining the highly qualified employees needed in the future. Wage inflation is increasing the competition for talent and the cost of labor. This may negatively impact our ability to deliver on our strategic imperatives, and if we are described in other risk factors.unable to offset the increased costs of labor through higher selling prices, then rising costs could also have a material adverse impact on Philips’ business, financial condition and operating results.
Philips relies on information technology to operate and manage its businesses and store and process confidential data (relating to patients, employees, customers, intellectual property, suppliers and other partners). Philips���Philips’ products, solutions and services increasingly contain sophisticated and complex information technologytechnology. The healthcare industry is subject to strict privacy, security and generate confidential data relatedsafety regulations with regard to customers and patients. Potentiala wide range of health information. At the same time, geopolitical conflicts and criminal activity continue to drive increases in the number, severity, and severitysophistication of cyber-attackscyberattacks globally. Considering the general increase in general. Like manycybercrime, our customers and other multinational companies,stakeholders are becoming more demanding regarding the cybersecurity of our products and services. As a global health technology company, Philips is therefore inherently and increasingly exposed to the risk of cyber-attacks.cyberattacks and potential impact of attacks on our suppliers. Information systems may be damaged, disrupted (including the provision of services to customers), or shut down due to cyber-attacks.cyberattacks. In addition, breaches in the security of our systems (or the systems of our customers, suppliers, or other partners) could result in the misappropriation, destruction or unauthorized disclosure of confidential information (including intellectual property) or personal data belonging to us or to our employees, customers, suppliers or other partners. These risks are particularly significant with respect to patient medical records. Cyber-attacksCyberattacks may result in substantial costs and other negative consequences, which may include, but are not limited to, lost revenues, reputational damage, remediation and enhancement costs, penalties, and other liabilities to regulators, customers and other partners,partners. Philips has not encountered any material breaches or penalties.other cybersecurity incidents in 2022. While cyber-attacks have not historically resulted inPhilips deals with the operational threat of cybercrime on a continuous basis and has so far been able to prevent significant damage or caused Philips to incur significant monetary cost in taking corrective action, there can be no assurance that future cyber-attackscyberattacks will not result in significant or other consequences than as described above.
Philips continuously seeks to create a more open, standardized and cost-effective IT landscape, for instance through further outsourcing, offshoring, commoditization and ongoing reduction in the number of IT systems. These changes create third-party dependency risk with regard to the delivery of IT services, the availability of IT systems, and the scope and nature of the functionality offered by IT systems. Although Philips has sought to strengthen security measures and quality controls relating to these systems, these measures may prove to be insufficient or unsuccessful.
Philips is continuing the process of creating a leaner supply base and is continuing its initiatives to replace internal capabilities with less costly outsourced products and services. These processesabove, which may result in increased dependency on a concentration of external suppliers. Although Philips works closely with its suppliers to avoid supply-related problems, there can be no assurance that it will not encounter supply problems in the future causing disruptions or unfavorable conditions.
Shortages or delays could materially harm Philips’ business. Most of Philips’ operations are conducted internationally, which exposes Philips to challenges. For example, Philips depends partly on the production and procurement of products and parts from Asian countries; the production and shipping of products and parts could be interrupted by events such as geopolitical changes (e.g. US-China relations), regional conflicts, pandemics (e.g. COVID-19), natural disasters or extreme weather events caused by climate change. Such changes may lead to adverse impacts on global trade levels and supply chains. COVID-19, more specifically, imposes supply chain challenges due to shifts in demand, need for production capacity adjustments and impacts on the safety of the environments for production, field service, installations, R&D.
A general shortage of materials, (sub) components also poses the risk of fluctuations in prices and demand, which could have a material adverse effect on Philips’ financial condition and operating results. Philips purchases raw materials, including so-called rare earth metals, copper, steel, aluminum, noble gases and oil-related products, which exposes it to fluctuations in energy and raw material prices. Commodities have been subject to volatile markets, and such volatility is expected to continue. If Philips is not able to compensate for increased costs of raw materials, reduce reliance on such raw materials or pass on increased costs to customers, then price increases could have a material adverse impact on Philips’ business, financial condition and operating results.
To gain sustainable competitive advantage and realize Philips’ ambitions for profitable growth,to deliver on our purpose and the Quadruple Aim (better health outcomes, improved patient experience, improved staff experience and lower cost of care), it is important that Philips continues to innovate and delivers these innovations to the company makes further improvements in its product and solution creation process, ensuringmarket on a timely delivery of new products and solutions at lower cost and high customer service levels.basis. The emergence of new low-cost competitors, particularly in Asia, further underlines the importance of improvements in the product creationinnovation process. The success of new product and solution creation, however,Success in launching innovations depends on a number of factors, including timelydevelopment of value propositions, architecture and successful completion ofplatform creation, product development, market acceptance, the ability to attractproduction, and retain skilled employees, production ramp-up to meet anticipated demand,delivery ramp-up. It is also dependent on addressing potential quality issues or other defects in the early stages of introduction.introduction, and on attracting and retaining skilled employees. Costs of developing new products and solutions may partially be reflected on Philips’ balance sheet and may be subject to write-down or impairment as a result ofdepending on the performance of such products or services; theservices. The significance and timing of such write-downs or impairments are uncertain.uncertain, as is the ultimate commercial success of new product introductions. Accordingly, Philips cannot determine in advance the ultimate effect that new product and solution creationinnovations will have on its financial condition and operating results. If Philips fails to create and commercialize products and solutions,its innovations at scale, it may lose market share and competitiveness, which could have a material adverse effect on its financial condition and operating results.
Although the ability to manage pandemics (for example, resurgences of COVID-19 or mutations thereof) has improved, pandemics may continue to affect Philips’ operations and results in 2023 and Philips expects uncertainty and volatility related to the impact of pandemics and the local response policies thereto, in China in particular given our footprint in China and recent developments in China to loosen restrictions and countervailing measures imposed by other countries. This is driven by, among other things, the extent and depth of government policies to restrict the spread of viruses, the effectiveness of vaccination programs, the appearance of mutations, and the emergence of new viruses that may cause new pandemics. COVID-19 and other pandemics may continue to impact delivery on our triple duty of care in various ways: the health and safety of our employees (in our various working environments); meeting critical customer needs (for example, our production capacity and our ability to deliver, install and provide services); and business continuity (for example, our functional operations, supply chain, and commercial processes). In 2022, we have gradually reopened our offices mostly applying a hybrid schedule. For further discussion or the risks related to hybrid working, see the risk factor “Philips is dependent on its people for leadership and specialized skills and may be unable to attract and retain such personnel.
personnel”. The attraction and retention of talented employees in sales and marketing, research and development, finance, and general management, as well as highly specialized technical personnel, especially in transferring operations and enabling functions to low-cost countries, is critical to Philips’ success. The loss of employees with specialized skills could also result in business interruptions. The COVID-19 pandemic places additional challenges on team interactions and the onboarding of new people and brings uncertainty as to what will be the ‘new normal’ way of working after the pandemic. There can be no assuranceexpectation remains that Philips will be successful in attracting and retaining highly qualified employees and the key personnel needed in the future.
Philips sells products and services in the United Kingdom, although, following footprint adjustments, we no longer have manufacturing in the UK, only configuration. The potential financial impact following the trade arrangements between the UK and the EU or other countries following Brexit, ranges from adverse movements of the pound sterling versus the euro and the US dollar to supply chain disruptions dueresponses to the re-introductionrisks of customs controlsCOVID-19 continue to require effort and the impositionexpense and may negatively affect Philips’ business, financial conditions, and results of operations. In addition, Philips’ customers may not yet be fully focused on making new tariffs on importsinvestments in medical equipment while recovering from COVID-19 disruptions, or exports tothey may be facing liquidity issues caused by COVID-19, which may adversely impact Philips’ revenue and from the United Kingdom. An unsuccessful response to trade arrangements may have a material adverse effect on Philips’ financial condition and operating results.cash flow generation.
Philips operates in a highly regulated product safety and quality environment and its products and services, including parts or materials from suppliers, are subject to regulation by various government and regulatory agencies (e.g. FDA (US), EMA (Europe), NMPA (China), MHRA (UK), ASNM (France), BfArM (Germany), IGZ (the Netherlands)). 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. Examples of other product-related regulations are the EU’s Waste from Electrical and Electronic Equipment (WEEE), Restriction of Hazardous Substances (RoHS) and Registration, Evaluation, Authorization and Restriction of Chemicals (REACH) and Energy-using Products (EuP).
With Philips’ focus on healthcare, new products and services frequently require regulatory approvals for market introduction. The number and diversity of regulatory bodies in the various markets we operate in adds complexity and may negatively impact time to market and implementation costs. Non-compliance with conditions imposed by regulatory authorities could result in product recalls, a temporary ban on products, stoppages at production facilities, remediation costs, fines or claims for damages. Product safety incidents or user concerns, as in the past, could trigger business reviews by the FDA or other regulatory agencies, which, if failed, could trigger these impacts.
The ongoing digitalization of Philips’ products and services, including its holding of personal health data and medical data, increases the importance of compliance with data privacy and similar laws.
Non-compliance could adversely impact Philips’ financial condition or operating result through lost revenue and cost of any required remedial actions, penalties or claims for damages. These issues could also further negatively impact Philips’ reputation, brand, relationship with customers and market share.
In the execution of its strategy, Philips could be exposed to the risk of non-compliance with business conduct rules and regulations. This risk is heightened in growth geographies as the legal and regulatory environment is less developed compared to mature geographies. Examples include commission payments to third parties, remuneration payments to agents, distributors, consultants and the like, and the acceptance of gifts, which may be considered in some markets to be normal local business practice. These risks could adversely affect Philips’ financial condition, reputation and brand and trigger the additional risk of exposure to governmental investigations, inquiries and legal proceedings. For further detail see section 'Legal proceedings' within Contingent assets and liabilities.
Negative developments impacting the liquidity of global capital markets could affect Philips’ ability to raise or re-finance debt in the capital markets or could lead to significant increases in the cost of such borrowing in the future. If the markets expect a downgrade by the rating agencies, or if such a downgrade has actually taken place, this could increase the cost of borrowing, reduce our potential investor base and adversely affect our business.
Philips’ financing and liquidity position may also impact its ability to implement or complete any share-buyback program or distribute any dividends in accordance with its dividend policy or at all. Any announced share-buyback program or dividend policy may also be amended, suspended or terminated at any time, including at Philips’ discretion or as a result of applicable law, regulation or regulatory guidance, and any such amendment, suspension or termination could negatively affect the trading price of, increase trading price volatility of, or reduce the market liquidity of Philips’ shares or other securities. Additionally, any share-buyback program or distribution of dividend could diminish Philips’ cash or other reserves, which may impact its ability to finance future growth and to pursue potential future strategic opportunities. Any share-buyback program or dividend payment will depend on factors such as availability of financing, liquidity position, business outlook, cash flow requirements and financial performance, the state of the market and the general economic climate, and other factors, including tax and other regulatory considerations. Philips and its subsidiaries may also be subject to limitations on the distribution of shareholders’ equity under applicable law.
Philips operates in over 100 countries and its reported earnings and equity are therefore inevitably exposed to fluctuations in exchange rates of foreign currencies against the euro. Philips’ sales and net investments in its foreign subsidiaries are sensitive in particular to movements in the US dollar, Japanese yen, Chinese renminbi, and a wide range of other currencies from developed and emerging economies. Philips’ sourcing and manufacturing spend is concentrated in the European Union,EU, the United StatesUS and China. Income from operations is particularly sensitive to movements in currencies of countries where Philips has no or very small-scale manufacturing/local sourcing activities but significant sales of its products or services, such as Japan, Canada, Australia, the United Kingdom, and a range of emerging markets, such as Russia, South Korea, Indonesia, India and Brazil. Philips’ operations in all segments were scaled back in Russia and Ukraine in 2022, which together represented less than 2% of group sales in 2021 and in 2022. The asset value of the activities in Russia and Ukraine were less than 1% of the consolidated total assets of the group as of December 31, 2022. While there have been no significant asset write-downs to date in Russia and Ukraine, we continue to closely monitor developments in this regard.
In view of the long lifecycle of health technology solution sales and long-term strategic partnerships, the financial risk of counterparties with outstanding payment obligations creates exposure risks for Philips, particularly in relation to accounts receivable from customers, liquid assets, and the fair value of derivatives and insurance contracts with financial counterparties. A default by counterparties in such transactions can have a material adverse effect on Philips’ financial condition and operating results.
Contingent liabilities may have a significant impact on the company’s consolidated financial position, results of operations and cash flows. For an overview of current cases please refer to the Note Contingencies.
Philips is exposed to tax risks which could result in double taxation, penalties and interest payments. The source of the risks could originate from local tax rules and regulations as well as international and EU regulatory frameworks. These include transfer pricing risks on internal cross-border deliveries of goods and services, as well as tax risks relating to changes in the transfer pricing model. Examples of initiatives that may result in changing tax rules and regulations include, but are not limited to, the OECD/G20 Inclusive Framework to address the allocation of income to user markets (“Pillar One”) and a 15 per cent. minimum income tax rate (“Pillar Two”). The formal adoption of Directive (EU) 2022/2523 (the “Pillar Two Directive”) per December 2022 aims to achieve a coordinated implementation of Pillar Two in EU Member States, which is expected to have an effect on the draft Dutch legislative proposal for the proposed Minimum Tax Rate Act 2024 (the “MTR Act”) Philips is closely monitoring these developments, but does not currently expect that it will be affected by Pillar One implementing measures (subject to clarity on final regulations). However, Philips may be affected by the “MTR Act” following its implementation, which is expected to occur on 1 January 2024, and other regulations and rules that have been, or will be, enacted to implement Pillar Two (for example, any implementing acts in EU Member States in respect of the “Pillar Two Directive”). This may impose an additional tax burden and increase Philips’ tax compliance requirements. Furthermore, Philips is exposed to tax risks related to acquisitions and divestments, tax risks related to permanent establishments, tax risks relating to tax loss, interest and tax credits carried forward, and potential changes in tax law that could result in higher tax expenses and payments. The risks may have a significant impact on local financial tax results, which, in turn, could adversely affect Philips’ financial condition and operating results. The value of the deferred tax assets, such as tax losses carried forward, is subject to the availability of sufficient taxable income within the tax loss-carry-forward period, butperiod. It is also subject to the availability of sufficient taxable income within the foreseeable future, in the case of tax losses carried forward with an indefinite carry-forward period. The ultimate realization of the company’s deferred tax assets is uncertain. Accordingly, there can be no absolute assurance that all deferred tax assets, such as (net) tax losses and credits carried forward, will be realized.
A significant proportion of (former) employees in Europe and North and Latin America are covered by defined-benefit pension plans and other post-retirement plans. The accounting for such plans requires management to make estimates on assumptions such as discount rates, inflation, longevity, expected cost of medical care and expected rates of compensation. Changes in these assumptions (e.g. due to movements in financial markets) can have a significant impact on the Defined Benefit Obligation and net interest cost.
Accurate disclosures provide investors and other market professionals with significant information for a better understanding of Philips’ businesses. Failures in internal controls or other issues with respect to Philips’ public disclosures, including disclosures with respect to cybersecurity risks and incidents, could create market uncertainty regarding the reliability of the information (including financial data) presented andpresented. This could have a negative impact on the price of Philips securities. In addition, the reliability of revenue and expenditure data is key for steering the businesses and for managing top-line and bottom-line growth. The long lifecycle of health technology solution sales, from order acceptance to accepted installation and servicing, together with the complexity of the accounting rules for whenrecognizing revenue can be recognized in the accounts, presents a challenge in terms of ensuring consistent and correct application of the accounting rules throughout Philips’ global business. Significant changes in the way of working, such as hybrid working from home during a pandemic,and shifting processes to remote Global Business Services locations, may have an adverse impact on the control environment under which controls are executed, monitored, reviewed and tested. Any flaws in internal controls, or regulatory or investor actions in connection with flaws in internal controls, could have a material adverse effect on Philips’ business, financial condition, operation results, and reputation and brand.
Changes in macroeconomic conditions, supply chain constraints, labor shortages, the conflict in Ukraine, and steps taken by governments and central banks, particularly in response to the COVID-19 pandemic as well as other stimulus and spending programs, have led to higher inflation, which is likely, in turn, to lead to increased interest rates and adverse changes in the availability and cost of capital. These inflationary pressures could affect our manufacturing costs, operating expenses (including wages), and other expenses. We may not be able to compensate for increased costs by driving productivity to reduce costs and by passing these cost increases on through price measures in a timely manner, if at all, which could have an impact on our gross margins and profitability. Inflation may also cause our customers to reduce or delay orders for our products, which could have a material adverse effect on our business, results of operations, and cash flows.
Our reputation and license to operate depends on our compliance with global regulations and standards. In particular, Philips is exposed to the ongoing impact of the Respironics voluntary recall and related matters. Please refer to the section Quality & Regulatory and patient safety and the Note Contingencies. Philips operates in a highly regulated health-technology product safety and quality environment and its products and services, including parts or materials from suppliers, are subject to regulation by various government and regulatory agencies, e.g., FDA (US), EMA (Europe), NMPA (China), MHRA (UK), ASNM (France), BfArM (Germany), and IGZ (the Netherlands). In the EU, the Medical Device Regulation (EU MDR) became effective in May 2021 and imposes significant additional pre-market and post-market requirements. Examples of other product-related regulations are the EU’s Waste from Electrical and Electronic Equipment (WEEE), Restriction of Hazardous Substances (RoHS), Registration, Evaluation, Authorization and Restriction of Chemicals (REACH) and Energy-using Products (EuP) regulations. We are subject to various domestic, EU, US and foreign environmental laws and regulations, which are continuing to develop. Any failure to comply with such laws and regulations could jeopardize product quality, safety and security and/or expose us to lawsuits, administrative penalties and civil remedies, which may have a material adverse impact on Philips’ business, financial condition and operating results.
Philips has observed an increase in safety and security requirements in a variety of new and upcoming legislation dealing with market access of consumer goods, medical devices, information and communication technology products, (cloud) services, and specific areas such as data protection, AI, and supply chain. Both regulators and customers require us to demonstrate legal compliance and adequate security management using national and international standards and associated certifications. Non-compliance with conditions imposed by regulatory authorities could result in product recalls, a temporary ban on products, stoppages at production facilities, remediation costs, fines, disgorgements of profits, and/or claims for damages. Product safety incidents or user concerns could jeopardize patient safety and/or trigger inspections by the FDA or other regulatory agencies, which, if failed, could trigger the impacts described above, as well as other consequences. These issues could adversely impact Philips’ financial condition or operating result through lost revenue and cost of any required remedial actions, penalties or claims for damages. They could also negatively impact Philips’ reputation, brand, relationship with customers and market share.
In the execution of its strategy, Philips could be exposed to the risk of non-compliance with business conduct rules and regulations and our General Business Principles, including, but not limited to, patient safety, quality, anti-bribery, healthcare compliance, privacy and data protection, as well as upcoming ESG disclosure requirements and due diligence requirements. This risk is heightened in growth geographies, as the legal and regulatory environment is less developed compared to mature geographies. Examples of compliance risk areas include commission payments to third parties and remuneration payments to agents, distributors, consultants and similar entities, as well as the acceptance of gifts, which may be considered in some markets to be normal local business practice. The ongoing digitalization of Philips’ products and services, including its processing of personal data, increases the importance of compliance with privacy, data protection and similar laws. These risks could adversely affect Philips’ financial condition, results of operation, reputation and brand.brand and trigger the additional risk of exposure to governmental investigations, inquiries and legal proceedings and fines. In various jurisdictions, ESG disclosure requirements are currently being drafted. In Europe, the Corporate Sustainability Reporting Directive has been approved. European Sustainability Reporting Standards (ESRS) will be adopted in 2023 and will significantly increase the scope of mandatory ESG disclosures. Also, the proposed European Corporate Sustainability Due Diligence Directive will (if implemented) require companies to identify and act on adverse environmental and human rights impacts across their organization – and potentially their entire value chain. Failure to meet these requirements could trigger the additional risk of exposure to inquiries from supervisory bodies and adversely affect Philips’ reputation and brand, or could adversely impact Philips’ financial condition or operating result through lost revenue and cost of any required remedial actions, penalties or claims for damages.
For further details, please refer to the sub-section Legal proceedings within the Note Contingencies.
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. 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. Please also refer to Supervisory Board within the chapter Corporate governance.
Former Group CEO of Singapore Telecommunications Limited and currently member of the Board of Directors of Prudential plc, Bharti Airtel Limited, Bharti Telecom Limited and Ayala Corporation. Member of ICICI Bank Limited, Yatra Online Inc and Skylo Technologies Inc. Former Vice President, Global Sales and Alliance - Asia Pacific & Japan, Hewlett Packard Enterprise.the Council of Presidential Advisors of Singapore, Deputy Chairman of the Public Service Commission of Singapore.
Former Vice-ChairwomanCFO and Chairman and CEO of Johnson & Johnson’sPepsiCo. Currently member of the Board of Directors and Worldwide ChairwomanChair of the Pharmaceuticals Group. Former deanAudit Committee of Ohio State University’s Fisher CollegeAmazon, Inc. Member of Business. Currentlythe International Board of Advisors of Temasek, member of the BoardsBoard of Trustees of the Memorial Sloan Kettering Hospital.
Former Chief Operating Officer at VMware and President at SAP. Currently CEO and President of Cohesity and member of the Board of Directors of Prudential, Regeneron and Sherwin WilliamsSnyk.
Currently Vice ChairCEO of PostNL, member of the Executive CommitteeSupervisory Board of ING Groep N.V., member of the Supervisory Board of Het Concertgebouw N.V., member of the Advisory Board of Goldschmeding Foundation and Chief Scientific Officer at Johnson & Johnson. Previously, Worldwide Chairmember of Pharmaceuticals at Johnson & Johnson, CEOthe executive committee and general board of VircoVNO/NCW (Confederation of Netherlands Industry and Chairman of Tibotec.Employers).
2022 was an extremely challenging year for Philips, which was reflected in a disappointing set of results. The company faced significant issues, including the consequences of the Philips Respironics recall, supply chain and inflationary pressures, the war in Ukraine and the COVID situation in China, which all contributed to the below-par business and financial performance. These developments had a significant impact on our shareholders and employees. In that context, we greatly appreciate the trust our customers show in us, as reflected in our order book.
Mindful of the seriousness of the situation, the Supervisory Board is fully committed to supporting management in leading the company out of its current difficulties and towards a future of progressive value creation with sustainable impact. As we explain in our Report, the Supervisory Board spent many sessions in 2022 engaging with the Board of Management and closely and actively reviewing key priority issues and actions to put Philips back on a value creation track for its stakeholders.
In 2020, Philips demonstrated both resiliencethe course of the year, our succession planning – during which we extensively evaluated internal and agilityexternal candidates – resulted in the faceappointment of Roy Jakobs as CEO of Philips. The Board recognizes the portfolio transformation of Philips over the last decade into a focused, global solutions leader in health technology, which needs further performance improvement on several aspects. Our Board is convinced that Roy is the right CEO to take Philips to the next level of performance, by driving execution of the COVID-19 pandemicstrategic plan and the healthcarefirm measures announced in the October and economic challenges it unleashed. TheJanuary releases. Our Board focus is fully aligned with the company’s achievements in reconfiguringpriorities: driving quality, completing the recall, improving supply chains, scaling up productionchain and developing new ways of engaging with customersbusiness performance, and employees ensured it was ablesimplifying the organization. We continue to deliver against its triple duty of care – meeting critical customer needs, safeguardingoffer the health and safety of its employees, and ensuring business continuity. leadership team our support wherever applicable.
The eventsSupervisory Board knows that addressing the Philips Respironics recall and strengthening patient safety and quality is Philips’ first priority. We feel encouraged by the most recent update around the recall, as the company strives to finalize remediation and testing. We fully understand the impact this issue has had on patients, clinicians, care givers, as well on regulators and investors. We are pleased to note that by year-end 2022, following the substantial ramp-up of 2020 validate Philips’ strategy to becomecapacity, Philips Respironics had completed around 90% of the leading provider of health technology and to advance value-based care along the health continuum. Over the past years, Philips has significantly invested in informatics, data science and cloud technology to enableproduction required for the delivery of integrated solutions acrossreplacement devices to patients. We are also encouraged by the health continuum and across care settings through telehealth. Philips’ innovations – supporting personal health, precision diagnosis, image-guided therapies and connected care, and leveraging the power of data and informatics – and its strong focus on customer needs continue to generate a growing proportion of solutions-based sales. It is an approach that is resonating more strongly than ever with customers and investors.
In 2020, Philips continued to reinforce its leadership as a purpose-driven company with the announcement of a fully integrated approach to doing business responsibly and sustainably. Building on the company’s strong heritage in environmental and social responsibility, this framework comprises a comprehensivecomplete set of key commitments acrosstest results for the Environmental, Social and Governance (ESG) dimensions that guide executionfirst-generation DreamStation (DS1), which accounts for over two thirds of the company’s strategy. I share management’s conviction that this approach issleep therapy devices subjected to the best way for Philips to create superior, long-term value for its multiple stakeholders. recall.
Despite the challenging circumstances, Philips was able to execute its plans and return to growth and improved profitability in the second half of 2020. This was driven by the successful conversion of a strong order book and a gradual return of consumer demand. Philips continued to maintain a strong balance sheet and robust liquidity position throughout the period. Nevertheless, in view of the likely continued impact of the COVID-19 pandemic, Philips took several measures to further enhance its liquidity position. At its Capital Markets Day with investors and financial analysts in November 2020, the company outlined its strategic plan and performance trajectory for the 2021–2025 period.
The Supervisory Board spent several sessionsalso discussed the supply chain situation frequently and in 2020 reviewing, among other things,depth in 2022 – both the external situation and the improvements needed internally to improve business and financial performance.
The Supervisory Board supports the simplification of Philips’ COVID-19 response, performance, strategy, talent pipeline, business controls, quality,organizational structure, where the businesses are leading, supported by the regions and sustainability programs. global functions, with more focused KPIs. The workforce reductions announced in October 2022 and January 2023 were difficult, yet necessary measures as the company as drives a major step-up in productivity, including focusing its R&D activities on fewer, yet more impactful projects. Philips will strive to implement these reductions with due respect for every employee affected and in line with all local rules and regulations.
At the Annual General Meeting of Shareholders held in April 2020,May 2022, the Supervisory Board was further strengthened by the addition of Feike SijbesmaHerna Verhagen and Peter Löscher. Feike Sijbesma isSanjay Poonen as new members. With her proven track record in driving a recognizedcustomer-first company culture and a background in e-commerce logistics, Herna Verhagen has brought valued and new perspectives to the Supervisory Board, while Sanjay Poonen’s extensive experience in enterprise IT and cloud-enabled business models has further strengthened the Supervisory Board’s digital competencies. I also wish to thank Neelam Dhawan, who stepped down at the end of the 2022 AGM, for her long-term counsel and sustainability leader, while Peter Löscher is a seasoned business leader in the medical technology and pharmaceutical industries. Their outstanding experience will be highly valuablesupport.
Together with my fellow Supervisory Board members, I look forward to our Board and toproviding further oversight of Philips as the company expandsaddresses the key priorities for its leadership in health technology solutions.
We are also very pleased to propose Indra Nooyirecovery and Chua Sock Koong as new members of the Supervisory Board to the Annual General Meeting of Shareholders, which will be held on May 6, 2021. Indra Nooyi is a proven business leader in the consumer and technology sectors, with a strong track record of delivering sustained profitable growth in a sustainable and responsible way. Chua Sock Koong has deep knowledge of information technologies and digitalization. She is the former CEO of Singapore Telecommunications Limited (Singtel), Asia's leading communications technology group. Their strategic insights will be of great value to Philips, as the company embarks on its next growth phase as a health technology leader.
I consider it a privilege to have served three terms on the Supervisory Board of Philips, of which ten years as Chairman. When I step down at the Annual General Meeting of Shareholders in May 2021, I will hand over the reinssame time continues to my successor, Feike Sijbesma. Together with our colleagues on the Supervisory Board, he will continue to provide thorough oversight of the company as it deliversdeliver on its purpose of improving people’s health and well-being through meaningful innovation.
Jeroen van der VeerFeike Sijbesma
Chairman of the Supervisory Board
The Supervisory Board supervises, advises and adviseschallenges the Board of Management and Executive Committee in performing their management tasks, as well as setting and settingexecuting the direction of the businessstrategy of the Philips Group. The Supervisory Board acts, and we as individualAs members of the Supervisory Board, we act in the interests of Royal Philips, its businesses and all its stakeholders. This report includes a more specific description of the Supervisory Board’s activities during the financial year 20202022 and other relevant information on its functioning.
In 2022, Philips’ performance continued to be impacted by the Philips Respironics voluntary recall and operational and supply challenges, such a shortage of electronic components, longer shipping timelines, and disruptions at suppliers caused by the COVID-19 pandemic, which also affected Philips’ manufacturing sites in China. The overview below indicatescompany also faced other headwinds, such as inflationary pressure and the Russia-Ukraine war. These headwinds negatively impacted the conversion of the company’s strong order book into sales and the 2022 margin. Furthermore, performance continued to be negatively impacted by the consequences of the Philips Respironics voluntary recall notification in the Sleep & Respiratory Care business in June 2021.
Against this background, the Supervisory Board was regularly updated by management on the company’s performance and outlook, and the Supervisory Board engaged in discussions with management on improving performance, among others by addressing the patient safety and accelerating our focus on quality, resilience and quality of the supply chain operations and simplifying the ways of working at Philips to improve performance and increase productivity and agility. Near term and longer-term actions to strengthen the supply chain resilience, as proposed by management, were reviewed by the Supervisory Board.
In this context, the Supervisory Board and management also discussed the external environment in which the company operates, and the impact that the macro-economic outlook has on its performance.
In 2022, the Supervisory Board devoted considerable time to the Philips Respironics voluntary recall, as a recurring agenda item for each of its (regular) meetings. The Supervisory Board discussed and tracked the progress made with the repair and replacement program, as well as the comprehensive test and research approach for the CPAP, BiPAP and mechanical ventilator devices affected. Putting the interest of patients first, the Supervisory Board asked management to keep patients regularly updated on the status of the repair or replacement of their devices and to accelerate the repair and replacement program where possible, despite operational and supply challenges. The Supervisory Board was also regularly updated on other aspects of the recall, such as the ongoing engagements with the US Food and Drug Administration (FDA) and other competent authorities globally, discussions with the US Department of Justice (DOJ), acting on behalf of the FDA regarding the consent decree, as well as the criminal and civil investigation opened by the DOJ's Consumer Protection Branch and Civil Fraud Section, and the US Attorney’s Office for the Eastern District of Pennsylvania to which Philips Respironics is subject and the ongoing class-action lawsuits and individual personal injury claims in which Philips Respironics is a defendant.
Recognizing the importance of patient safety and quality of products and solutions sold by the Philips Group generally, significant time was spent in 2022 on reviewing and tracking progress of the company-wide program launched in 2021 (‘Accelerating Patient Safety and Quality’) to improve and foster a culture, behaviors and a mindset that puts quality and patient safety first. In the context of this program, the Supervisory Board also discussed the process framework for product design and production controls in the company.
The Supervisory Board carefully considered the CEO succession planning and ran an extensive selection and evaluation process, supported by an external executive search firm, during which various scenarios were considered to ensure the best outcome. Following the completion of this process in which both internal and external candidates were considered and evaluated, the Supervisory Board unanimously concluded that Mr Roy Jakobs was the best candidate. The Supervisory Board subsequently nominated Mr Jakobs as the new CEO/President of the company effective October 15, 2022, to allow for him to take full ownership of the 2023 budget and business plan. The Supervisory Board is very pleased that Philips' shareholders appointed Mr Jakobs at the Extraordinary General Meeting of Shareholders (with 99.77% of our shareholders voting favor) held on September 30, 2022. Since the appointment of Mr Jakobs, the Supervisory Board has been working closely with him on his key matters that we reviewed and/or discussed during meetings throughout 2020:priorities to further improve and strengthen Philips’ performance as a leading health technology company, which priorities include: (i) further deepening the patient safety and quality capability across the company, which includes the completion of the Philips Respironics voluntary recall; (ii) leading the Philips Group to resume its profitable growth trajectory by addressing current headwinds, including strengthening the supply chain resilience as noted above; and (iii) simplification of the organization to improve performance and productivity.
Following Mr Jakobs' appointment, the Supervisory Board and the Board of Management interacted on the company’s overall strategy to extend its leadership as a health technology company. These included reviewscompany and its plan to create value with sustainable impact towards 2025 and beyond, based on focused organic growth and scalable innovation with improved execution as the key value driver, as presented on January 30, 2023. This plan is designed to restore sales growth and improvement of profitability, including the strategic plans and priorities forof each of the business clusters,segments Diagnosis & Treatment, Connected Care and Personal Health. These interactions led to the company’s overall innovation strategyambition and innovation transformation program, Researchproductivity initiatives, restructuring and other actions designed to improve its supply operations and performance, as well as its plans to invest in quality, simplify ways of working, remove organizational complexity by putting businesses with single accountability in the lead, enabled by strong regions and lean functions, and reduce operating expenses, as publicly announced by management on October 24, 2022 and January 30, 2023. Furthermore, the number of key performance indicators that is used to track the company’s performance will be significantly reduced. In this context, the Supervisory Board is also pleased with the strengthening of the Executive Committee with the appointments of Steve C. de Baca and Jeff DiLullo as members of the Executive Committee, in their roles as Chief Patient Safety & DevelopmentQuality Officer and Chief Market Leader of Philips North America respectively. This includes the immediate reduction of around 4,000 roles globally across the organization announced on October 24, 2022 and the Data and Artificial Intelligence strategy. They also included regular reviewsfurther reduction of the company’s acquisitions, divestmentsworkforce by around 6,000 roles globally by 2025 announced on January 30, 2023.
The overview below indicates other key matters that were reviewed and/or discussed during one or more meetings in the course of 2022:
The Supervisory Board also conducted 'deep dives' into a range of topics including:the strategy and performance of:
The Supervisory Board also reviewed Philips’ annual and interim financial statements, including non- financial information related to ESG, prior to publication.
In 2020,2022, the members of the Supervisory Board convened for seven regular meetings and threefour extraordinary meetings. Moreover, wethe Supervisory Board members collectively and individually interacted with members of the Board of Management, with members of the Executive Committee and with senior management outside the formal Supervisory Board meetings. The Chairman of the Supervisory Board and the CEO met regularly for bilateral discussions about the company’s progress on a variety of matters. Feike SijbesmaHerna Verhagen and Peter Löscher,Sanjay Poonen were appointed to the Supervisory Board with effect from April 30, 2020,May 10, 2022. They followed an induction program and interacted with the members of the Board of Management and various Executive Committee members for deep-divesdeep dives on strategy, finance and investor relations, governance and legal affairs.
The Supervisory Board meetings were well attended in 2020.2022. All Supervisory Board members were present during the Supervisory Board meetings in 2020, with the exception of one member not able to attend the April 2020 meeting.2022. The committees of the Supervisory Board also convened regularly (see the separate reports of the committees below) and the committees reported back on their activities to the full Supervisory Board. In addition to the formal meetings of the Board and its committees, the Board and Committee members held private meetings. We, asThe members of the Supervisory Board concluded that they devoted sufficient time to engage (proactively if the circumstances so required) in ourtheir supervisory responsibilities.
BecauseIn May 2022, some Supervisory Board members visited Philips’ Personal Health site in Drachten, the Netherlands and some Supervisory Board members participated in an innovation tour at the Philips site at the High Tech Campus in Eindhoven. In the course of restrictions related2022, various Supervisory Board members visited Philips’ Diagnosis & Treatment manufacturing site in Best, the Netherlands, including a visit to the COVID-19 pandemic, the meetings ofCustomer Experience Center. Furthermore, in June 2022, the Supervisory Board visited the headquarters of Philips North America in Cambridge, Massachusetts, US, where the North American Research & Development Center of the company is based and its committees were mostly held virtually and no local site visits were organized.met with several key members of the North American management team.
The Supervisory Board is a separate corporate 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 currently consists of ten10 members. In 2020,2022, there were a number of changes to the composition of the Board. AtSupervisory Board, all effective as per (the end of) the 20202022 Annual General Meeting of Shareholders, Neelam Dhawan was re-appointed as a member of the Supervisory Board for an additional term of two yearsShareholders. Herna Verhagen and Feike Sijbesma and Peter LöscherSanjay Poonen were each appointed as a member ofto the Supervisory Board for a term of four years. The agendaPaul Stoffels and Marc Harrison were each re-appointed for the upcoming 2021 Annual General Meetinga term of Shareholders will include proposals to appoint Indra Nooyi and Chua Sock Koong as members of the Supervisory Board.
four years. The term of appointment of Jeroen van der Veer and Christine Poon will expire at the end of the 2021 Annual General Meeting of Shareholders, after each having served three consecutive terms on the Supervisory Board. Furthermore, Orit Gadiesh will step down from the Supervisory Board at the end of the 2021 Annual General Meeting of Shareholders, after having served seven years on the Supervisory Board. We, as members of the Supervisory Board, would like to take this opportunity to thank Jeroen van der Veer, Christine Poon and Orit Gadiesh for their contributions to our work. After an internal selection process, the Supervisory Board appointed Feike Sijbesma as Chairman of the Supervisory Board, succeeding Jeroen van der Veer, and Paul Stoffels as Vice-Chair of the Supervisory Board, succeeding Christine Poon and Feike Sijbesma. Both appointments will be effective as per the end of the 2021 Annual General Meeting of Shareholders.Neelam Dhawan expired.
The Supervisory Board attaches great value to diversity in its composition and has adopted a Diversity Policy for the Supervisory Board, Board of Management and Executive Committee. As laid downFor more information on the Diversity Policy, please refer to Report of the Corporate Governance and Nomination & Selection Committee. The Supervisory Board spent time in 2022 considering its composition, as well as the composition of the Executive Committee (including the Board of Management), taking into account the criteria set forth in the Diversity Policy, the aim is thatPolicy.
The composition of the Supervisory Board Board of Management and Executive Committee comprise members with a European and a non-European background (nationality, working experience or otherwise) and overall at least four different nationalities, and that they comprise at least 30% male and at least 30% female members. The Supervisory Board’s composition furthermore follows theits profile (which was updated in early 2023), as included in the Rules of Procedure of the Supervisory Board,Board. The profile which aims for an appropriate combination of knowledge and experience among itsthe members of the Supervisory Board, encompassing marketing,general management, international business, environmental, social and governance (ESG) and sustainability, (consumer) health and medical technology, quality and regulatory, finance and accounting, human resources, manufacturing and supply chain, information technology and informatics, healthcare, financial, economic, socialdigital, marketing, and legal aspects of international business and governmentgovernmental and public administrationaffairs, all in relation to the global and multiproduct character of Philips’ businesses. The aim isSupervisory Board also to haveaims for having members with different nationalities and (cultural) backgrounds, working experiences or otherwise diverse qualities, as well as one or more members with an executive or similar position in business or society no longermore than five years ago. The composition of the Supervisory Board shall furthermore be in accordance with the Dutch Corporate Governance Code best practice provisions on independence, of the Dutch Corporate Governance Code, and each member of the Supervisory Board shall be capable of assessing the broad outline of the overall policy of the company. The size of the Supervisory Board may vary as it considers appropriate to support its profile.
The Supervisory Board spent time in 2020 considering its composition, as well as the compositionEffective 2022, (re-)appointments of the Executive Committee (including the Board of Management). Currently, the compositionmembers of the Supervisory Board meetsmust meet the above-mentioned gender diversity goals, as 40%quota, in accordance with Dutch law, requiring that at least one-third of the supervisory board members are women and at least one-third are 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.) Currently, the statutory quota is met, as out of ten Supervisory Board members, (4 out of 10)four members are female. Overall, 28% (7 out of 25) of the positions to which the Diversity Policy applies (Supervisory Boardfemale and Executive Committee/Board of Management)six members are held by women. As explained in the report of the Corporate Governance and Nomination and Selection Committee, the company continues its efforts to enhance inclusion and diversity in the entire organization. The Supervisory Board expects these efforts to contribute to the achievement of the company’s diversity goals, although there may be various pragmatic reasons – such as other relevant selection criteria and the availability of suitable candidates – that could have an impact on the achievement of the diversity goals. The Supervisory Board will continue to devote attention to this topic in 2021.male.
In 2020,2022, each member of the Supervisory Board completed a questionnaire to verify compliance with the applicable corporate governance rules and the Rules of Procedure of the Supervisory Board. The outcome of this survey was satisfactory.
An independent external party facilitated the 20202022 self-evaluation process for the Supervisory Board and its committees. This included drafting theand submitting relevant questionnaire andquestionnaires, interviewing members of the Supervisory Board as well asand aggregating and reporting on the results. The questionnairemembers of the Board of Management also provided their input. The questionnaires covered topics such as the composition, size, skills and experience, geographical coverage and diversity of the Supervisory Board, and the required profile of future Supervisory Board members, stakeholder oversight, strategic oversight, riskthe management, dynamics and focus of Supervisory Boardthe meetings succession planning and human resources oversight, the relationship between the Supervisory Board and Management and the priorities of the Supervisory Board, in 2021.the effectiveness of the Supervisory Board’s oversight of various aspects of the company’s business, risk management, succession planning and people oversight, the CEO succession process, the engagement with management and recommendations to improve the Supervisory Board’s functioning and ways of working going forward. Furthermore, the performance of the Chairman, the other Supervisory Board members individually, and of the Supervisory Board’s committees was reviewed. The Chairman of the Supervisory Board was evaluated through a separate questionnaire and his evaluation was also part of the discussions of the Supervisory Board about the selection of the new Chairman. The responses to the questionnaires were aggregated into reports.separately.
The reports on the results of the self-evaluationevaluation were shared and discussed in a private meeting of the Supervisory Board. The responses provided byresults of the Supervisory Board membersevaluation indicated that the Supervisory Board continues to be a well-functioning team. A numberteam, as also demonstrated during the expedited CEO succession process in 2022. The results demonstrated that the Supervisory Board is of suggestionsappropriate size and benefits from different expertise, diversity, and international geographical representation. Suggestions were made to further improvestrengthen the performance of the Supervisory Board over the coming period, with the top priorities being: a smooth transition of the Chair when Jeroen van der Veer steps down from the Supervisory Board, oversight of technology and innovation, the balance between organic and inorganic growth and the oversight of the CEO succession. The functioning of the Supervisory Board committees was rated highly. Furthermore,and its Committees going forward. The Supervisory Board stresses the importance of going deep in some important matters, in which the Committees play a key role too. This is in full alignment with the current focus of management on patient safety and quality, supply chain reliability and performance and simplification of the organization, with the aim to enhance organic growth and people and patient centric innovation. Early 2023, the Chairman of the Supervisory Board held bilateral meetings early 2021 wherealso discussed the results wereof the self-evaluation with each of the individual members of the Supervisory Board; the Chairman also discussed.discussed the evaluation of his own functioning with the Vice -Chairman.
Key topics that the Supervisory Board and its Committees will focus on in 2023 include tracking progress on certain aspects of the Philips Respironics voluntary recall notification (including but not limited to the repair and replace program and the testing program), the internal Accelerating Patient Safety and Quality program launched in 2021, with respect to improving the resilience of the supply chain and the company’s performance and cash flow generation. Furthermore, in 2023, the Supervisory Board will focus on the company’s liquidity position and financial headroom and prepare updates to the remuneration policies for the Supervisory Board and the Board of Management that will be submitted to the 2024 Annual General Meeting of Shareholders, and track the progress made with the simplification of the company’s operating model with the aim of reducing complexity and clarifying accountabilities and tracking the reduction of roles as announced by the company on October 24, 2022 and January 30, 2023 respectively.
The periodic use of an external facilitator to measure the functioning of the Supervisory Board will continue to be considered in the future.
Supervisory Board composition
Jeroen van der Veer | Neelam Dhawan | Orit Gadiesh | Christine Poon | David Pyott | Paul Stoffels | Marc Harrison | Liz Doherty | Feike Sijbesma1) | Peter Löscher1) | Feike Sijbesma | Paul Stoffels | Chua Sock Koong | Liz Doherty | Marc Harrison | Peter Löscher | Indra Nooyi | Sanjay Poonen1) | David Pyott | Herna Verhagen1) | |
Year of birth | 1947 | 1959 | 1951 | 1952 | 1953 | 1962 | 1964 | 1957 | 1959 | 1957 | 1959 | 1962 | 1957 | 1964 | 1957 | 1955 | 1969 | 1953 | 1966 | |
Gender | Male | Female | Male | Female | Male | Male | Male | Female | Male | Male | Female | Male | Male | Female | ||||||
Nationality | Dutch | Indian | Israeli/American | American | British/American | Belgian | American | British/Irish | Dutch | Austrian | Dutch | Belgian | Singaporean | British/Irish | American | Austrian | American | American | British/American | Dutch |
Initial appointment date | 2009 | 2012 | 2014 | 2009 | 2015 | 2018 | 2019 | 2020 | 2020 | 2018 | 2021 | 2019 | 2018 | 2020 | 2021 | 2022 | 2015 | 2022 | ||
Date of (last) (re-)appointment | 2017 | 2020 | 2018 | 2017 | 2019 | n/a | n/a | 2022 | n/a | 2022 | n/a | n/a | n/a | 2019 | n/a | |||||
End of current term | 2021 | 2022 | 2021 | 2023 | 2022 | 2023 | 2024 | 2024 | 2026 | 2025 | 2023 | 2026 | 2024 | 2025 | 2026 | 2023 | 2026 | |||
Independent | yes | yes | yes | yes | yes | yes | yes | yes | yes | yes | ||||||||||
Committee memberships2) | RC & CGNSC | AC | RC | RC, CGNSC & QRC | AC & QRC | RC | QRC | AC | CGNSC | AC & QRC | RC & CGNSC | RC & CGNSC | AC | QRC | AC & QRC | CGNSC | AC3) | RC & QRC | RC4) | |
Attendance at Supervisory Board meetings | (10/10) | (9/10) | (10/10) | 7/7 | (11/11) | (11/11) | (11/11) | (11/11) | (11/11) | (11/11) | (8/8) | (11/11) | (8/8) | |||||||
Attendance at Committee meetings | RC (6/6 CGNSC (6/6) | AC (5/5) | RC (6/6) | RC (6/6) CGNSC (6/6) QRC (5/5) | AC (5/5) QRC (5/5) | RC(3/4)3) | QRC (5/5) | AC(5/5) | CGNSC (5/5)4) | AC (2/2)5) QRC (4/4)6) | ||||||||||
Attendance at committee meetings | RC (7/7) CGNS (9/9) | RC (7/7) CGNSC (9/9) | AC (7/7) | QRC (6/6) | AC (7/7) QRC (6/6) | CGNSC (8/9) | AC (4/4) | RC (7/7) QRC (6/6) | RC (5/5) | |||||||||||
General management | yes | yes | yes | yes | yes | yes | yes | yes | yes | |||||||||||
International business | yes | yes | yes | yes | yes | yes | yes | yes | yes | yes | ||||||||||
ESG & sustainability | yes | yes | yes | yes | ||||||||||||||||
(Consumer) health and medical technology | yes | yes | yes | yes | yes | yes | ||||||||||||||
Patient safety, quality & regulatory and product development | yes | yes | yes | yes | ||||||||||||||||
Finance and accounting | yes | yes | yes | yes | yes | yes | yes | yes | yes | |||||||||||
Human Resources | yes | yes | yes | yes | yes | yes | yes | yes | yes | |||||||||||
Manufacturing and supply chain | yes | yes | yes | yes | yes | |||||||||||||||
Information technology and digital | yes | yes | yes | yes | yes | yes | yes | yes | ||||||||||||
Marketing | yes | yes | yes | yes | yes | yes | yes | yes | yes | |||||||||||
Manufacturing | yes | yes | yes | |||||||||||||||||
Technology & informatics | yes | yes | ||||||||||||||||||
Healthcare | yes | yes | ||||||||||||||||||
Finance | yes | yes | yes | |||||||||||||||||
Governmental and public affairs | yes | yes | yes | yes | yes | yes | yes |
TheWhile retaining overall responsibility, the Supervisory Board has assigned certain of its tasks to the three long-standing committees, also referred to in the Dutch Corporate Governance Code: the Corporate Governance and Nomination & Selection Committee, the Remuneration Committee and the Audit Committee. TheIn 2015, the Supervisory Board also established the Quality & Regulatory Committee. The separate reports of these committees are part of this Supervisory Board report and are published below.
The function of all of the Supervisory Board’s committees is to prepare the decision-making of the full Supervisory Board, and the committees currently have no independent or assigned powers. The full Supervisory Board retains overall responsibility for the activities of its committees.
The term of Marnix van Ginneken’s appointment as member of the Board of Management will expire at the end of the upcoming 2021 Annual General Meeting of Shareholders. The Supervisory Board is pleased that Marnix van Ginneken remains available as member of the Board of Management. The agenda for the Annual General Meeting of Shareholders 2021 will therefore include a proposal to re-appoint Marnix van Ginneken as member of the Board of Management.
The financial statements of the company for 2020,2022, as presented by the Board of Management, have been audited by Ernst & Young Accountants LLP, the independent external auditor appointed by the General Meeting of Shareholders. We have approved these financial statements, and all individual members of the Supervisory Board have signed these documents (as did the members of the Board of Management).
We recommend to shareholders that they adopt the 20202022 financial statements. We likewise recommend to shareholders that they adopt the proposal of the Board of Management to make a distribution of declare a dividend of EUR 0.85 per common share, against retained earnings, and to distribute such dividend in cash or shares at the option of the shareholder, against the net income of 2020.shares.
Finally, we would like to express our thanks to the members of the Board of Management, the Executive Committee and all other employees for their continued contribution throughout 2020. 2022.
February 23, 202121, 2023
The Supervisory Board
Jeroen van der VeerFeike Sijbesma
Christine PoonNeelam DhawanPaul Stoffels
Chua Sock Koong
Liz Doherty
Orit Gadiesh
Marc Harrison
Peter Löscher
Indra Nooyi
Sanjay Poonen
David PyottPaul StoffelsHerna Verhagen
To gain a better understanding of the responsibilities of the Supervisory Board and the internal regulations and procedures governing its functioning and that of its committees, please refer to Corporate governance and to the following documents published on the company’s website:
The Corporate Governance and Nomination & Selection Committee is chaired by Jeroen van der Veer.Feike Sijbesma. Its other members are Christine PoonPaul Stoffels and Feike Sijbesma (who joined in the course of 2020).Indra Nooyi. The Committee is responsible for the review of selection criteria and appointment procedures for the Board of Management, the Executive Committee, certain other key management positions, as well as the Supervisory Board.
In 2020,2022, the Corporate Governance and Nomination & Selection Committee members held sixnine meetings and all Committee members attended these meetings.meetings, with the exception of one member unable to attend the meeting in August 2022. Furthermore, the Committee had numerous additional special meetings in 2022, in particular on the topic of the CEO succession process, which were attended by all Committee members.
The Committee devoted time to the appointment or reappointment of candidates to fill current and future vacancies on the Supervisory Board. Following those consultations, it prepared decisions and advised the Supervisory Board on candidates for appointment. This resulted in the re-appointment of Neelam Dhawan and the appointment of Feike SijbesmaHerna Verhagen and Peter LöscherSanjay Poonen as members of the Supervisory Board at the 2020 Annual General Meeting of Shareholders. This also resulted in the proposals to appoint Indra Nooyi and Chua Sock Koong as members of the Supervisory Board, at the upcoming 20212022 Annual General Meeting of Shareholders.
Under its responsibility for the selection criteria and appointment procedures for Philips’ senior management, the Committee reviewed the functioning of the Board of Management and its individual members, the Executive Committee succession plans and emergency candidates for key roles in the company. The conclusions from these reviews were taken into account in the performance evaluation of the Board of Management and Executive Committee members and the selection of succession candidates. Reference is made to 2022 Annual Incentive, setting out the performance review of the Board of Management and the Executive Committee members by the Remuneration Committee.
In 2020,2022, the Committee devoted ample time to the selection and appointment of the new CEO/President of the company as discussed above in the report of the Supervisory Board. This resulted in the appointment of Mr Roy Jakobs as President/CEO and member of the Board of Management at the Extraordinary General Meeting of Shareholders on September 30, 2022. Furthermore, the Committee devoted time in 2022 to the appointment selection and/or reappointmentappointment of candidates to fill other current and future vacancies on the Board of Management and the Executive Committee. These includedThis resulted in: the appointments of: Roy Jakobsappointment of Willem Appelo as Chief Business Leader Connected Care, effective January 2020, succeeding Carla Kriwet who left the company; Kees Wesdorp as Chief Business Leader Precision Diagnosis, effective April 2020 (and in that role also jointly responsible for Diagnosis & Treatment), succeeding Rob Cascella, who transitioned to a role as Strategic Business Development Leader, where he remains a member of the Executive Committee; Deeptha KhannaCommittee in his role as Chief Business Leader Personal Health,Operations Officer (succeeding Sophie Bechu who stepped down from the Executive Committee), effective July 2020, succeeding Roy Jakobs; Edwin PaalvastSeptember 2022; the appointment of Steve C. de Baca as Chief of International Markets, effective August 2020, succeeding Henk de Jong. Henk de Jong transitioned to the role of CEO of the Domestic Appliances business (which is currently being separated from Philips) and remains a member of the Executive Committee. Furthermore, this resultedCommittee in his role as Chief Patient Safety & Quality Officer, effective February 6, 2023; and the proposal to re-appoint Marnix van Ginnekenappointment of Jeff DiLullo as a member of the BoardExecutive Committee in his role as Chief Market Leader of Management atPhilips North America (succeeding Vitor Rocha who left the 2021 Annual General Meetingcompany), also effective February 6, 2023. 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 Shareholders.the Precision Diagnosis businesses.
With respect to corporate governance matters, the Committee discussed relevant developments and legislative changes, including pending or expectedthe revised Dutch legislationCorporate Governance Code and the regulatory regimes around disclosure requirements related to ESG. Finally, the Committee reviewed the Charter of the Corporate Governance and Nomination and Selection Committee and concluded it remains appropriate.
With respect to the productivity initiatives and other actions to improve the company’s performance (including the unfortunate but necessary reduction of roles), the Committee was updated by management on takeoversthe impact on employees and shareholder activismthe phased deployment approach and on gender diversity.reviewed the simplification of the organization.
In 2017, the Supervisory Board adopted aThe Diversity Policy for the Supervisory Board, Board of Management and Executive Committee whichwas adopted in 2017 and revised in early 2023, and is published on the company website. The Committee periodically assesses the Diversity Policy and the size and composition of the Supervisory Board and makes recommendations, if relevant, relating to the profile for the Supervisory Board.
The criteria in the Diversity Policy aim to ensure that the Supervisory Board, the Board of Management and the Executive Committee have a sufficient diversity of views and the expertise needed for a good understanding of current affairs and longer-term risks and opportunities related to the company’s business and sufficient diversity of views to provide appropriate challenge.business. The nature and complexity of the company’s business is taken into account when assessing optimal board diversity, as well as the social and environmental context in which the company operates.
Pursuant to the Diversity Policy, the selection of candidates for appointment to the Supervisory Board, Board of Management and Executive Committee will beis based on merit. With due regard to the above,criteria set forth in the Diversity Policy, the company shall seek to fill vacancies by considering candidates that bringrepresent a diversity of (amongst(among others) age,ages, gender, identities and educational and professional backgrounds. Please refer to the Supervisory Board report for more information on the diversity of the Supervisory Board.
The Diversity Policy includes the Supervisory Board’s aim is that the Supervisory Board, Board of Management and the Executive Committee comprise members with a European and a non-European background (nationality, working experience or otherwise) and overall at least four different nationalities and (cultural) backgrounds, working experiences or otherwise diverse qualities. Effective 2022, Dutch law requires listed companies to set appropriate and ambitious gender diversity targets for the Board of Management and for a management level of a seniority to be determined by the company. To this end, the Diversity Policy includes the Supervisory Board’s aim that they comprise at least 30% maleone-third of the members of each of the Board of Management and the Executive Committee are women and at least 30% female members.
Currently, the Supervisory Board and the Board of Management/Executive Committee comprise members withone-third are men. For more than 10 different nationalities. The composition of the Supervisory Board currently meets the above-mentioned gender diversity goals, with 40% of the Supervisory Board members (4 out of 10) being female. Overall, 28% (7 out of 25) of the positionsinformation, please refer to which the Diversity Policy applies (Supervisory Board and Executive Committee/Board of Management) are currently held by women.
The company continues to put in place measures to enhance diversity and inclusion at all levels within the organization, with the aim of retaining and progressing talent and of ensuring diversity and inclusion at senior management levels. To this end, Philips has set a new goal of 30% gender diversity in senior leadership positions by the end of 2025. With diversity being part of Philips’ purpose and one of the three strategic pillars of the global Human Resources strategy, long-term Inclusion & Diversity ambitions are embedded in that strategy. Execution is monitored through a diversity dashboard that is based on a global scorecard with specific goals, but also provides insights into the inflow, advancement and outflow of talent. This ensures clarity, accountability and focus and makes it possible to customize goals and intervene where appropriate. During 2020, further work was done to bring together various initiatives around unconscious bias, health, well-being and identity, to stand up against racism and to drive an ongoing dialogue about inclusion within teams across the company. These initiatives create a more holistic approach and include:
Philips’ commitment towards Inclusion & Diversity is furthermore reflected in the company-wide Inclusion & Diversity Policy, the General Business Principles and the Fair Employment Policy. Reference is also made to the section Inclusion & Diversity of this Annual Report for more information. .
On behalf of the Remuneration Committee, I am pleased to report on the Committee’s activities in 20202022 and to present the 20202022 Remuneration Report on behalf of the Board of Management and the Supervisory Board.
An important milestone in 2020 was the updateThe Remuneration Committee has been very mindful of the Remuneration Policy for the Board of Management and the Supervisory Board respectively, as approved by our shareholdersfact that during the 2020 Annual General Meeting of Shareholders. The relevant proposals followed the implementationShareholders (AGM) held in 2022, a majority of the revised EU Shareholders Rights Directive (2017/828) into Dutch law (effective December 2019). To ensureadvisory votes were cast against the 2021 Remuneration Report. We have taken this negative advisory vote very seriously and that is why we reached out to the Remuneration Committee was able to properly consider all feedback before submitting final remuneration packages tocompany’s shareholders immediately after the 2022 AGM, and further engaged with our shareholders the Remuneration Committee initiated a dedicated remuneration roadshow in the second half of 2019, engaging with a number2022. I, as the Chairman of the company’sRemuneration Committee, together with Investor Relations, held discussions with thirteen of our larger shareholders (in aggregate representing approximately 35%45% of the issued share capital) and with three of the most representative institutional advisory organizations.
As partMost of our shareholders understand that under certain circumstances the update ofSupervisory Board should be able to adjust the Remuneration PolicyAnnual Incentive (AI) and the Long-Term Incentive Plan(LTI) payouts, but they did express their specific concern regarding the adjustments made for the members of the Board of Management over 2021 also in view of the following changes wereimpact the year had on our shareholders. Our shareholders, however, did understand the discretionary adjustments made (comparedfor the wider employee workforce, particularly to address retention risks. Furthermore, they requested us to be more transparent in the previous 2017 versions):
Naturally the AI and LTI pay-out was impacted by the low company performance. As explained in our 2021 Remuneration PolicyReport and during our engagements ahead of the 2022 AGM we have applied the adjustments in the best interest of the company and employees to address retention risks in view of the challenging circumstances our purposepeople had and still have to work in. However, in discussions with our shareholders after the 2022 AGM, we concluded that in making adjustments for the members of the Board of Management, a stronger alignment with the interest of our shareholders should be applied. Therefore, the Supervisory Board reconsidered the company’s long standing practice, and decided to no longer automatically apply a uniform AI and LTI adjustment methodology for the entire company and effectively de-couple the remuneration approaches for the members of the Board of Management and for the broader workforce.
We still have the opinion that it is good to have a strong alignment in remuneration between members of the Board of Management and our contribution to society,broader workforce, but we realize that in certain circumstances addressing the retention risks of our own people can result in a sustainability criterion (non-financial) has been introduced indisalignment between the Long-Term Incentive in addition to the financial criteria TSR and EPS. In addition, the TSR vesting schedule has been changed, reducing pay-out at and around median performance.
A decision we have taken – already prior to the 2022 AGM – to increase clarity on potential adjustments and reward for compensation benchmarking purposes changed from 26performance, is to 24 companies. Alcatel Lucent was excludedset targets going forward, starting with the 2022 AI based on our adjusted EBITA*) metric reported externally and as such apply a well-defined and disclosed set of adjustments (please refer to Reconciliation of non-IFRS information for an exact definition of the performance metric).
In the context of our company’s performance in 2022 and to align with the shareholder experience, the Supervisory Board and Board of Management have jointly concluded that it was acquired by Nokia (which was already included in the Quantum Peer Group),appropriate to waive any 2022 AI pay-out and Essilor International was excluded after its merger into a company with a business profile with less relevance for Philips.
During the 2020 Annual General Meeting of Shareholders, our shareholders approved the 2019 Remuneration Report (by a 92.06% for vote). Based on our shareholder engagement, we noted the request for an increased level of transparency in the Remuneration Report, and therefore we further increased disclosures in our 2020 Remuneration Report. For example, we have updated the annual incentive disclosure tables, showing the realized financial performance, the selected individual performance criteria and the assessment of performance for the individual targetsany vesting of the 2020 annual incentive. During its regular meetings throughout the year, the Remuneration Committee obtained updates on remuneration-related developments and societal trends. Overall, the Remuneration Committee concluded that our Remuneration Policy and its implementation are well aligned with market practice and the prevailing corporate governance requirements, while it enables us to achieve alignmentLTI grant of the current members of the Board of Management. Specifically, this means that an amount of EUR 236,957 of the AI and an amount of EUR 188,994 of the LTI was waived.
For transparency purposes, we provided an enhanced disclosure of the individual performance realization. While there would have been a payout based on the individual performance realization, there was no AI payout for the financial performance criteria because the realized performance is below the respective thresholds. For the avoidance of doubt we confirm that the financial targets that were set for 2022 took into account the adjustments made in relation to the 2021 remuneration in a way that the members of the Board of Management would not benefit twice from these adjustments.
Other feedback received during these (and future) shareholder engagements will also be taken into account when preparing for a renewal of our shareholders’ mandate on our remuneration policies (to be voted on during our 2024 AGM). As I have mentioned in my letter last year, it is our purpose at Philips to improve people’s health and well-being through meaningful innovation. As a Remuneration Committee we want to assure that our remuneration policy supports this purpose.
Per October 15, 2022, Roy Jakobs was appointed as CEO of the company. The annual base compensation of Mr Jakobs was set at EUR 1,200,000, below the base salary of his predecessor, and in line with Philips’ purpose and strategy.
As highlightedour Quantum Peer Group. Upon his appointment, Mr Jakobs received performance shares with a grant value of EUR 314,137, which equals his 2022 CEO LTI grant value pro-rated for the time in the letter from the Chairmanrole in 2022. The 2022 LTI grant that Mr Jakobs received as part of the Supervisory Board within Supervisory Board report, Philips demonstrated resilienceremuneration, in his previous role, was likewise pro-rated for the time in role and agility inuntil he took over the facerole as CEO. Our 2022 Remuneration Report also includes a description of the COVID-19 pandemic and the healthcare and economic challenges it unleashed. The Remuneration Committee is mindful of the measures the company took in the first half of 2020 to further enhance its liquidity position, in view of the possible continued impact of the COVID-19 pandemic. As part of these measures, the 2019 Annual Incentive for the Board of Management was paid out in shares, which will be subject to the 5-year holding period as prescribedremuneration (to be) received by the Dutch Corporate Governance Code. Group-wide, merit and promotional salary increases for senior management were delayed fromformer CEO after his succession under his services agreement terminating on April 1, 2020 to October 1, 2020.
Looking back, the Remuneration Committee acknowledges that COVID-19 has impacted Philips’ results30, 2023. All payments are in the year. Demand for our professional healthcare products and solutions to help diagnose, treat, monitor and manage COVID-19 patients increased strongly. At the same time, COVID-19 led to the postponement of installations and elective procedures in hospitals, which impacted parts of our business, and there was a decline in consumer activity, as a result of which our Personal Health businesses have been impacted. Overall, COVID-19 had an impact on Philips’ business performance in 2020. Management is to be commended strongly for leading the Company through the pandemic and achieving a satisfactory result for the year. Please refer to Strategy and Businesses and Financial performance of our Annual Report 2020 for more information on the effects of COVID-19.line with contractual obligations.
The Remuneration Committee is chaired by Christine Poon.Paul Stoffels. Its other members are Jeroen van der Veer, Orit GadieshDavid Pyott, Herna Verhagen and (since May 2020) Paul Stoffels.Feike Sijbesma. The Committee is responsible for preparing decisions of the Supervisory Board on the remuneration of individual members of the Board of Management and the Executive Committee, as well as the policies governing this remuneration. In performing its duties and responsibilities, the Remuneration Committee is assisted by an external consultant and an in-house remuneration expert. For a full overview of the responsibilities of the Committee, please refer to the Charter of the Remuneration Committee, as outlinedset forth in Chapter 3 of the Rules of Procedure of the Supervisory Board (which are published on the company’s website).
Our annual Remuneration Committee cycle enables us to have an effective decision-making process supporting the determination, review and implementation of the Remuneration Policy. The main (recurring) activities during the annual cycle are outlined below:
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The Committee met sixseven times in 2020.2022. All Committee members were present during these meetings.
At Philips,I look forward to presenting this Remuneration report at our purpose is to improve people’s health and well-being through meaningful innovation. The Remuneration Committee believes thatannual General Meeting of Shareholders.
On behalf of the Remuneration Policy (and Long-Term Incentive Plan) for the Board of Management supports this purpose. Please refer to the Remuneration Report below, for the way the Remuneration Policy has been implemented in the year 2020.Committee,
Christine PoonPaul StoffelsChairwomanChairman of the Remuneration Committee
In this Remuneration Report, the Supervisory Board provides a comprehensive overview, in accordance with article 2:135b of the Dutch Civil Code, of the remuneration paid and owed to the individual members of the Board of Management and the Supervisory Board respectively in the financial year 2020.2022. The report will also be published as a stand-alone document on the company’s website after the 20202023 Annual General Meeting of Shareholders, the agenda of which will include an advisory vote on this Remuneration Report.
The Remuneration Policy and Long-Term Incentive Plan for the Board of Management have been adopted and approved respectively by the Annual General Meeting of Shareholders 2020, which took place on April 30, 2020.
The objectives of the Remuneration Policy for the Board of Management are: to focus them on delivering on our purpose and strategy, to motivate and retain them, and to create stakeholder value.
Thus, the Remuneration Policy:
Compensation element | Purpose and link to strategy | Operation | Policy Level |
---|---|---|---|
Total Direct Compensation | To support the Remuneration Policy’s objectives, the Total Direct Compensation includes a significant variable part in the form of an Annual Incentive (cash bonus) and Long-Term Incentive in the form of performance shares. As a result, a significant proportion of pay is ‘at risk’. | The Supervisory Board ensures that a competitive remuneration package for Board-level executive talent is maintained and benchmarked. The positioning of Total Direct Compensation is reviewed against benchmark data on an annual basis and is recalibrated if and when required. To establish this benchmark, data research is carried out each year on the compensation levels in the Quantum Peer Group. | Total direct remuneration is aimed at or close to, the median of the Quantum Peer Group. |
Annual Base Compensation | Fixed cash payments intended to attract and retain executives of the highest caliber and to reflect their experience and scope of responsibilities. | Annual Base Compensation levels and any adjustments made by the Supervisory Board are based on factors including the median of Quantum Peer Group data and performance and experience of the individual member. The annual review date for the base salary is typically before April 1. | The individual salary levels are shown in this Remuneration Report. |
Annual Incentive | Variable cash bonus incentive of which achievement is tied to specific financial and non-financial targets derived from the company’s annual strategic plan. These targets are set at challenging levels and are partly linked to the results of the company (80% weighting) and partly to the contribution of the individual member (20% weighting). | The payout in any year relates to the achievements of the preceding year. Metrics are disclosed ex-ante in the Remuneration Report and there will be no retroactive changes to the selection of metrics used in any given year once approved by the Supervisory Board and disclosed. | President & CEO Other BoM members |
Long-Term Incentive | Our Long-Term Incentives form a substantial part of total remuneration, with payouts contingent on achievement of challenging EPS targets, relative TSR performance against a high performing peer group and sustainability objectives that are directly aligned with our purpose to make the world healthier and more sustainable through innovation. | The annual award size is set by reference to a multiple of base salary. The actual number of performance shares to be awarded is determined by reference to the average of the closing price of the Royal Philips share on the day of publication of the first quarterly results and the four subsequent trading days. Dependent upon the achievement of the performance conditions, cliff-vesting applies three years after the date of grant. During the vesting period, the value of dividends will be added to the performance shares in the form of shares. These dividend-equivalent shares will only be delivered to the extent that the award actually vests. | President & CEO Other BoM members |
Mandatory share ownership and holding requirement | To further align the interests of executives to those of stakeholders and to motivate the achievement of sustained performance. | The guideline for members of the Board of Management is to hold at least a minimum shareholding in the company. Until this level has been reached the members of the Board of Management are required to retain all after-tax shares derived from any Long-Term Incentive Plan. All Board of Management members have reached the required share ownership level. The shares granted under the Long-Term Incentive Plan shall be retained for a period of at least 5 years or until at least the end of their contract period if this period is shorter. | The minimum shareholding requirement is 400% of annual base compensation for the CEO and 300% for other members of the Board of Management. |
Pension | Pension plan and pension contribution intended to result into an appropriate level at retirement. |
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Additional arrangements | To aid retention and remain competitive within the marketplace | Additional arrangements include expense and relocation allowances, medical insurance, accident insurance and company car arrangements, which are in line with other Philips executives in the Netherlands. The members of the Board of Management also benefit from coverage under the company’s Directors & Officers (D&O) liability insurance. The company does not grant personal loans to members of the Board of Management. |
We use a Quantum Peer Group for remuneration benchmarking purposes, and therefore we aim to ensure that it includes business competitors, with an emphasis on companies in the healthcare, technology-related or consumer products area, and other companies we compete with for executive talent. The Quantum Peer Group consists of predominantly Dutch and other European companies, plus a minority (up to 25%) of US-based global companies, of comparable size, complexity and international scope. As of 2023, the Supervisory Board has decided to replace Atos with Baxter in the Quantum Peer Group.
Philips Group
Quantum Peer Group
20202022
European companies | Dutch companies | US companies | |
---|---|---|---|
Ahold Delhaize | Becton Dickinson | ||
AkzoNobel | Boston Scientific | ||
ASML | Danaher | ||
Heineken | Medtronic | ||
Ericsson | |||
Siemens Healthineers | Stryker | ||
Fresenius Medical Care | Smith & Nephew | ||
Thales | |||
Nokia | |||
In addition, we use a TSR Performance Peer Group to benchmark our relative Total Shareholder Return performance for Long-Term IncentiveLTI purposes and against our business peers in the health technology market and other markets in which we compete. The companies we have selected for this peer group include predominantly US-based healthcare companies. Given that a substantial number of relevant competitors are US-headquartered, the weighting of US-based healthcare companies is more notable than for the Quantum Peer Group.
Philips Group
TSR Performance Peer Group
20202022
US companies | European companies | Japanese companies |
---|---|---|
Becton Dickinson | ||
Boston Scientific | Elekta | Terumo |
Cerner | Fresenius Medical Care | |
Danaher | Getinge | |
General Electric | ||
Hologic | ||
Johnson & Johnson | ||
Medtronic | ||
Resmed | ||
Stryker |
The Remuneration Policy and the Long-Term IncentiveLTI Plan allow changes to the peer groups to be made by the Supervisory Board without further approval from the General Meeting of Shareholders in respect of up to three companies on an annual basis (for instance: following a delisting of a company or, a merger of two peer companies), or six companies in total during the four years following adoption and approval of the Remuneration Policy and the Long-Term IncentiveLTI Plan respectively (or, if earlier, until the adoption or approval of a revised Remuneration Policy or revised Long-Term IncentiveLTI Plan). In addition to these changes,Since the adoption of the current Remuneration Policy in view of Philips’ planned portfolio change through2020, the divestment of itsthe Domestic Appliances business in 2021 led to the decision of the Supervisory Board may decide to remove Groupe SEBElectrolux, Essity and De’LonghiHenkel from the TSRQuantum Performance Peer Group and replace them by other business competitors in the health technology market.with Alcon, GlaxoSmithKline and Stryker. No changes were made to either peer groupthe TSR Peer Group during 2020.2022. However, as Cerner has been delisted after its acquisition by Oracle in 2022, the Supervisory Board has selected Baxter to replace Cerner for the 2023 LTI grant. In addition, following the initial public offering of GE Healthcare, GE Healthcare is included in the TSR Performance Peer Group for the 2023 LTI grant, replacing General Electric.
The members of the Board of Management are engaged by means of a services agreement (overeenkomst van opdracht). Termination of the contract by either party is subject to six months’ notice period. The severance payment is set at a maximum of one year’s annual base compensation. No severance payment is due if the agreement is terminated early on behalf of the Board of Management member or in the case of urgent cause (dringende reden) as defined in article 7:678 and further inof the Dutch Civil Code. The term of the services agreement is aligned with the term for which the relevant member has been appointed by the General Meeting of Shareholders (which is a maximum period of four years, it being understood that this period expires no later than at the end of the AGMAnnual General Meeting of Shareholders (AGM) held in the fourth year after the year of appointment).
Philips Group
Contract terms for current members
20202022
end of term | |
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AGM | |
Abhijit Bhattacharya | AGM 2023 |
Marnix van Ginneken | AGM |
The Supervisory Board has determined the 20202022 pay-outs and awards to the members of the Board of Management, upon the proposal of the Remuneration Committee, in accordance with the 2020 Remuneration Policy and Long-Term Incentive Plan as adopted and approved respectively by our shareholders during the 2020 Annual General Meeting of Shareholders.LTI Plan. In addition, the Supervisory Board has determined the 20202022 pay-out of the 2018 Long-Term Incentive2020 LTI Plan, of which the performance period ended on December 31, 2020.2022. This was done in accordance with the Long-Term IncentiveLTI Plan as approved during the 20172020 Annual General Meeting of Shareholders.
The Remuneration Committee annually conducts a scenario analysis. This includes the calculation of remuneration under different scenarios, whereby different Philips performance assumptions and corporate actions are examined. The Supervisory Board concluded that the relationship between the strategic objectives and the chosen performance criteria for the 20202022 Annual Incentive, as well as 2018 Long-Term Incentive performance criteria,for the 2020 LTI, were adequate.
However, in the context of our company’s performance in 2022 and to align with the shareholder experience, the Supervisory Board and Board of Management have jointly concluded that it was appropriate to waive any 2022 AI pay-out and any vesting of the 2020 LTI grant of the members of the Board of Management. The partial 2022 AI pay-out and partial vesting of the 2020 LTI grant was not waived by the former CEO, consequently the company will comply with its contractual obligations in this regard.
This 2022 Remuneration Report also includes a description of the remuneration (to be) received by the former CEO of the company in respect of the period after October 15, 2022 (the date on which he was succeeded by Mr Jakobs) pursuant to and in line with the terms of his services agreement that was concluded and published on the company’s website and presented to the AGM in view of his appointment in 2019 and which will terminate on April 30, 2023 (reference is made to ‘Remuneration former CEO’).
The annual base compensation of Roy Jakobs as new CEO was set at EUR 1,200,000 (below the base salary of his predecessor of EUR 1,325,000), in line with Philips’ remuneration policy, following market practice and considering the complexity of the role. The annual base compensation of the other members of the Board of Management has been reviewed as part of the regular remuneration review. In the case of Frans van Houten and Abhijit Bhattacharya, the annual compensation remained unchanged in 2020 compared to 2019 at EUR 1,325,000 and EUR 785,000 respectively. As a result, of the review, the annual base compensation of Abhijit Bhattacharya and Marnix van Ginneken has been increased per OctoberApril 1, 2020,2022, from EUR 575,000795,000 to EUR 595,000.810,000 and EUR 615,000 to EUR 630,000, respectively. This increase was made to move the total compensation level closer to the market median level, as well as to reflect internal relativities. Typically, the salary increase is implemented on April 1, however all merit and promotional salary increases for senior management globally were delayed from April 1, 2020 to October 1, 2020.
The Annual Incentive performance has been assessed based on:on company financial results as well as individual results. Details are as follows:
To supportIn line with the performance culture,Remuneration Policy, the company sets financial targets we set are at group levelin advance of the year for all members of the Board of Management. EBITA*) and free cash flow*) for Annual Incentive calculation purposes are corrected for restructuring and acquisition related costs as well as specific unexpected events which are outside of management’s control, toFor the extent they have not been reflected inyear 2022, the original targets. The 2020 realizations, shown in the following table, reflect the performance on the criteriafinancial targets set at Group level that apply to the Board of Management. The performance on the comparable sales growthcover Comparable Sales Growth*), Adjusted EBITA*) and EBITAFree Cash Flow*) based criteria were below. The realized performance regrettably did not reach the threshold performance target whereas the performance on the free cash flow*) based criterion was above target.any of these three criteria.
Financial performance criteria | Weighting as % of target Annual Incentive | Assessment of performance | Weighted pay-out as % of target Annual Incentive | Weighting as % of target Annual Incentive | Assessment of performance | Weighted pay-out as % of target Annual Incentive | ||||||||
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threshold performance | target performance | maximum performance | realized performance | resulting payout as % of target | threshold performance | target performance | maximum performance | realized performance | resulting payout as % of target | |||||
Comparable Sales Growth1) | 30% | 2.3% | 4.3% | 6.3% | 2.5% | 55.0% | 17% | 30% | 1.8% | 4.8% | 6.8% | (2.8)% | 0.0% | 0% |
EBITA1) | 30% | 10.4% | 12.4% | 14.4% | 10.7% | 57.5% | 17% | |||||||
Adjusted EBITA1) | 30% | 9.7% | 12.7% | 14.7% | 7.4% | 0.0% | 0% | |||||||
Free Cash Flow1) | 20% | 1,096 | 1,505 | 1,914 | 1,852 | 185.1% | 37% | 20% | 400 | 700 | 1,000 | (961) | 0.0% | 0% |
Total | 80% | 71% | 80% | 0% |
In the context of our company’s performance in 2022 and to align with the shareholder experience, the members of the Supervisory Board and Board of Management jointly concluded that it was appropriate to waive any 2022 AI pay-out of the current members of the Board of Management, despite a positive realization on their individual performance criteria. Specifically, this means that aggregately an amount of EUR 236,957 (including an amount of EUR 35,881 related to the AI for Roy Jakobs in his role as Chief Business Leader Connected Care for the period January 1, 2022 up and until October 14, 2022) was waived.
For the sake of transparency, the individual performance criteria and assessment targets set at the beginning of the year, have been disclosed in the table below. To determine the payout levels for the individual goals, the Supervisory Board typically applies a holistic assessment as to the performance against the set goals as well as the relative weighting of the goal categories. Overall,These relative weightings are not in all cases equal, but such that any goal category remains relevant and aligned with the Supervisory Board commendsstrategic priorities for the Board of Management on their strong performance in 2020, taking into account the exceptional challenges caused by the COVID-19 pandemic.year.
Board of Management Member | Individual Performance criteria | Assessment of performance | Weighted pay-out as% of target Annual Incentive |
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Strategy execution |
| (fully waived) | |
Quality & operational excellence |
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People & organization |
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Customer results |
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Abhijit Bhattacharya | Strategy execution |
| (fully waived) |
Quality & operational excellence |
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People & organization |
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Marnix van Ginneken | Strategy execution |
| (fully waived) |
Quality & operational excellence |
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People & organization |
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Environmental, Social & Governance / Sustainability |
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Overall this leads to the following total Annual Incentive realization and payout (payout in 2021):no payout:
Annual Incentive realization 20202022
in EUR unless otherwise stated
Annual incentive opportunity | Realized annual incentive | Annual incentive opportunity | Realized annual incentive | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Target as a % of base compensation | Target Annual Incentive | Financial performance (weighted pay-out %) | Individual performance (weighted pay-out %) | Payout as % of target Annual Incentive | Realized annual incentive | Target as a % of base compensation | Target Annual Incentive | Financial performance (weighted pay-out %) | Individual performance (weighted pay-out %) | Payout as % of target Annual Incentive1) | Realized annual incentive | Payout of annual incentive | |
Frans van Houten | 100% | 1,325,000 | 71% | 27% | 98% | 1,298,500 | |||||||
Roy Jakobs2) | 100% | 256,438 | 0% | 69% | 14% | 35,260 | 0 | ||||||
Abhijit Bhattacharya | 80% | 628,000 | 71% | 24% | 95% | 596,600 | 80% | 648,000 | 0% | 63% | 13% | 81,648 | 0 |
Marnix van Ginneken | 80% | 476,000 | 71% | 21% | 92% | 437,920 | 80% | 504,000 | 0% | 84% | 17% | 84,168 | 0 |
The Annual Incentive criteria consist of:
For the year 2021,2023, the following financial indicators of the company’s results are selected to ensure alignment with the key (strategic) priorities in the year:
The contribution of the individual member is assessed based on areas of responsibility, for which annually two to a maximum of five performance categories are selected for each Board of Management member from the following list:
For the year 2021,2023, the following performance categories are selected to ensure alignment with the key (strategic) priorities in the year:
Board of Management Member | Selected performance categories |
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Abhijit Bhattacharya |
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Marnix van Ginneken |
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The 3-year performance period of the 20182020 LTI grant, consisting of performance share grantshares, ended on December 31, 2020.2022. The payout results are explained below.realization of this grant is based on TSR achievement, adjusted EPS growth and sustainability objectives.
In the context of our company’s performance in 2022 and to align with the shareholder experience, the Supervisory Board and Board of Management jointly concluded that it was appropriate to waive any vesting of the 2020 LTI grant of the current members of the Board of Management, despite a positive performance achievement of the sustainability objectives. Specifically, this means that an amount of EUR 188,994 was waived.
Philips Group
Performance achievement and vesting levels
achievement | weighting | vesting level | adjusted vesting level (waived) | |
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TSR | 0% | 50% | 0% | 0% |
EPS | 0% | 40% | 0% | 0% |
Sustainability objectives | 180% | 10% | 18% | 0% |
Total | 18% | 0% |
A ranking approach to TSR applies with Philips itself included in the TSR Performance Peer Group. TSR scores are calculated based on a local currency approach and by taking a 3-month averaging period prior to the start and end of the 3-year performance period. The performance incentive pay-out zone is outlined in the following table, which results in zero vesting for performance below the 40th percentile and 200% vesting for performance levels above the 75th percentile. The incentive zone range has been constructed such that the average pay-out over time is expected to be approximately 100%.
Philips Group
Performance-incentive zone for TSR
in %
Position | 20-14 | 13 | 12 | 11 | 10 | 9 | 8 | 7 | 6 | 5-1 |
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Payout | 0 | 60 | 80 | 100 | 120 | 140 | 160 | 180 | 190 | 200 |
The TSR achieved by Philips during the performance period was 35.03%-63.66%, using a start date of October 20172019 and end date of December 2020.2022. This resulted in Philips being positioned at rank 920 in the TSR performance peer group shown in the following table, resulting in a TSR achievement of 140%0%.
Following Oracle’s acquisition of Cerner (completed June 2022), the Supervisory Board adopted the approach of recognizing Cerner’s performance through the delisting date. As a proxy for future performance, reinvestment in an index of the remaining 19 peer companies was assumed (effectively retaining a peer group of 20 companies).
TSR results LTI Plan 20182020 grant: 35.03%(63.66%)
Company | total return | rank number | ||
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total return | rank number | |||
Danaher | 150.51% | 1 | 85.47% | 1 |
Hitachi | 74.64% | 2 | ||
ResMed | 150.36% | 2 | 56.08% | 3 |
Getinge | 44.14% | 4 | ||
Hologic | 76.98% | 3 | 43.04% | 5 |
Johnson & Johnson | 37.70% | 6 | ||
Siemens Healthineers | 24.07% | 7 | ||
De Longhi | 15.22% | 8 | ||
Terumo | 70.86% | 4 | 14.05% | 9 |
Stryker | 13.15% | 10 | ||
Cerner | 7.70% | 11 | ||
Boston Scientific | 3.48% | 12 | ||
Becton Dickinson | (1.36)% | 13 | ||
General Electric | (3.63)% | 14 | ||
Medtronic | (20.68)% | 15 | ||
Smith & Nephew | (35.25)% | 16 | ||
Groupe SEB | (39.46)% | 17 | ||
Elekta | 53.78% | 5 | (48.80)% | 18 |
Stryker | 53.70% | 6 | ||
Gentige | 50.72% | 7 | ||
Medtronic | 47.01% | 8 | ||
Fresenius Medical | (51.91)% | 19 | ||
Philips | 35.03% | 9 | (63.66)% | 20 |
Boston Scientific | 30.68% | 10 | ||
Siemens Healthineers | 26.15% | 11 | ||
Smith & Nephew | 16.65% | 12 | ||
Becton Dickinson | 15.72% | 13 | ||
De'Longhi | 15.05% | 14 | ||
Johnson & Johnson | 14.91% | 15 | ||
Cerner | 8.95% | 16 | ||
Groupe SEB | (3.31)% | 17 | ||
Hitachi | (3.59)% | 18 | ||
Fresenius Medical | (13.20)% | 19 | ||
General Electric | (51.05)% | 20 |
The LTI Plan EPS payouts and targets set at the beginning of the performance period were as follows:
Philips Group
LTI Plan EPS payouts
Below threshold | Threshold | Target | Maximum | Actual | Below threshold | Threshold | Target | Maximum | Actual | |
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EPS (euro) | <1.23 | 1.23 | 1.43 | 1.63 | 1.45 | |||||
LTI plan EPS (euro) | <1.28 | 1.28 | 1.50 | 1.71 | (1.43) | |||||
Payout | 0% | 40% | 100% | 200% | 110% | 0% | 40% | 100% | 200% | 0% |
In respect of the 2020 LTI grant, the LTI plan EPS is calculated based on a reported net income attributable to shareholders divided by the number of common shares outstanding (after deduction of treasury shares) on the day prior to the beginning of the performance period (to eliminate the impact of any share buyback, stock dividend, etc.), resulting in an EPS of EUR (1.82). Furthermore, as per the 2020 LTI Plan, the LTI Plan EPS is based on the underlying income from continuing operations attributableincludes adjustments to shareholders, as included in the Annual Report, adjustedaccount for changes in accounting principles. Furthermore, the Supervisory Board has also deemed it appropriate to make adjustments relating to certain other itemsevents that were not contemplatedplanned when the targets were set in 2018. These relate toor were outside management’s control such as the profit and loss impact of acquisitions and divestitures (positive adjustment), the profit and loss impact of portfolio restructuring (positive impact), the profit and loss impact of legal charges (positive impact) and impact of foreign exchange variations versus plan and profit and loss impact of legal cases and pension de-risking. The sum of these adjustments increased the achieved(positive adjustment). Overall, this resulted in an LTI Plan EPS of EUR (1.43) based on adjusted net income from continuing operations, leading to a realization of 0% of target.
In order to further align the remuneration package for the Board of Management with our purpose and our ESG commitment, a sustainability criterion was introduced in the 2020 LTI Plan. Philips believes that ESG performance will improve the company’s performance as a whole and, therefore, that it should be explicitly linked to (long-term) remuneration. The criteria are based on three Sustainable Development Goals (SDGs) as defined by EUR 0.16.the United Nations that are included in Philips’ strategy on sustainability (no. 3, 12 and 13). These three SDGs are translated in five underlying objectives, which are measured against a specific target range.
At the beginning of the performance period, challenging target ranges are set for each of the five objectives. Based on a point-to-point method, performance achievement is measured at the end of the performance period (i.e. 3 years) versus the beginning of the performance period. The resulting LTI Plan EPS achievement waspay-out is determined bybased on the following scheme:
No. of measures achieved within or above target zone | Pay-out % |
---|---|
1 | 0% |
2 | 0% |
3 | 50%-100% |
4 | 100%-150% |
5 | 150%-200% |
The realized performance is described in the following table. As five out of five objectives are achieved within or above target zone, the payout % lies between 150% and 200% of target. Based on the overall performance of the five objectives, the Supervisory Board has assessed that a vesting level of 180% would reflect an appropriate positioning within the target range. However, as 110%.
In viewexplained above, any vesting of the above,2020 LTI grant of the followingBoard of Management was waived, including vesting relating to the achieved sustainability objectives. While the strong performance achievement andon the sustainability objectives is therefore not resulting in any vesting levels have been determinedfor the current members of the Board of Management, it is celebrated by the Supervisory Boardcompany as it contributes to our purpose and our ESG commitment.
For more information on the realized performance on all five objectives please refer to our Environmental, Social and Governance.
Sustainability category | Underlying objective | Target range | realized performance | |
---|---|---|---|---|
Ensure healthy lives and promote well-being for all at all ages (SDG3) Lives Improved | Targeted # of Lives Improved in year 31) | 1,467 – 1,667 million | 1,810 million | Above target zone |
Ensure sustainable consumption and production patterns (SDG12) Circularity | Targeted circular revenue in year 32) | 12.2% – 16.2% | 18.1% | Above target zone |
Targeted waste to landfill in year 33) | 4.7% – 0.1% | <0.1% | Within target zone | |
Targeted closing the loop in year 34) | 14.5 – 23.0% | 35.2% | Above target zone | |
Take urgent action to combat climate change and its impacts (SDG13) Carbon footprint | Targeted CO2 equivalent (in Kilo Tonnes) in year 3 | 661 – 589 KTonnes CO2 | 438 Ktonnes CO2 | "Above" target zone |
Philips Group
Performance achievement and vesting levels
achievement | weighting | vesting level | |
---|---|---|---|
TSR | 140% | 50% | 70% |
EPS | 110% | 50% | 55% |
Total | 125% |
The vesting of the 20212023 Long-Term Incentive grant consisting of performance shares is subject to performance over a period of 3 years and based on two financial criteria and one non-financial criterion:
Please refer to the Long-Term Incentive Plan published on the company’s website for more information.
The following pension arrangement is in place for the members of the Board of Management working under a services agreement governed by Dutch contract:law:
For further details on the pension allowances and pension scheme costs, please refer to Pensions / section 4.1.2 of the Annual Report.
The following table gives an overview of the costs incurred by the company in 20202022 and 20192021 in relation to the remuneration of the Board of Management. Costs related to performance shares and restricted share right grantsare based on accounting standards (IFRS), which prescribe that costs for each LTI grant are recognized byover the company over a number of years.full (multi-year) vesting period, proportionate to the relevant fiscal year. Therefore, the costs mentioned below infor any year reflect costs of multiple LTI grants, as opposed to the performance shares and restricted share rights columns areactual value for the accounting costholder of multi-year Long-Term Incentive grants toan LTI grant at the vesting date. Hence, the waiving of the 2020 LTI grant by the current members of the Board of Management.Management is not apparent in this table. Please refer to section 2020 Long-Term Incentive for more details on the actual vesting of the performance shares.
Philips Group
Remuneration Board of Management1)
in EUR
Costs in the year | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|
reported year | annual base compensation2) | base compensation | realized annual incentive | performance shares3) | pension allowances4) | pension scheme costs | other compensation5) | total cost | Fixed-variable remuneration6) | |
F.A. van Houten | 2020 | 1,325,000 | 1,325,000 | 1,298,500 | 2,874,467 | 565,922 | 27,001 | 62,176 | 6,153,067 | 32%-68% |
2019 | 1,325,000 | 1,295,000 | 1,091,800 | 2,235,166 | 559,052 | 26,380 | 52,713 | 5,260,111 | 37%-63% | |
A. Bhattacharya | 2020 | 785,000 | 785,000 | 596,600 | 1,295,996 | 233,126 | 27,001 | 70,267 | 3,007,990 | 37%-63% |
2019 | 785,000 | 770,000 | 517,472 | 995,483 | 230,006 | 26,380 | 63,265 | 2,602,606 | 42%-58% | |
M.J. van Ginneken | 2020 | 595,000 | 580,000 | 437,920 | 952,453 | 158,800 | 27,001 | 46,986 | 2,203,160 | 37%-63% |
2019 | 575,000 | 571,250 | 335,685 | 713,815 | 171,018 | 26,380 | 38,278 | 1,856,426 | 43%-57% | |
Total | 2020 | 2,690,000 | 2,333,020 | 5,122,916 | 957,849 | 81,004 | 179,428 | 11,364,217 | 34%-66% | |
2019 | 2,636,250 | 1,944,957 | 3,944,464 | 960,076 | 79,140 | 154,256 | 9,719,143 | 39%-61% |
Accounting costs in the year | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|
reported year | annual base compensation2) | base compensation | realized annual incentive | performance shares3) | pension allowances4) | pension scheme costs | other compensation5) | total cost | Fixed-variable remuneration6) | |
R. Jakobs7) | 2022 | 1,200,000 | 256,438 | waived | 112,7378) | 57,973 | 6,012 | 11,507 | 444,667 | 75%-25% |
F.A. van Houten7) | 2022 | 1,325,000 | 1,041,849 | 208,370 | 2,930,068 | 444,051 | 22,121 | 42,533 | 4,688,992 | 33%-67% |
2021 | 1,325,000 | 1,325,000 | 850,915 | 2,626,295 | 565,403 | 27,462 | 57,224 | 5,452,299 | 36%-64% | |
A. Bhattacharya | 2022 | 810,000 | 806,250 | waived | 763,1408) | 237,250 | 28,133 | 61,308 | 1,896,081 | 60%-40% |
2021 | 795,000 | 790,000 | 360,103 | 1,172,533 | 233,857 | 27,462 | 68,908 | 2,652,864 | 42%-58% | |
M.J. van Ginneken | 2022 | 630,000 | 626,250 | waived | 585,4908) | 141,622 | 28,133 | 35,343 | 1,416,837 | 59%-41% |
2021 | 615,000 | 605,000 | 317,192 | 886,035 | 150,755 | 27,462 | 42,610 | 2,029,054 | 41%-59% | |
Total | 2022 | 2,730,788 | 208,370 | 4,391,434 | 880,896 | 84,398 | 150,691 | 8,446,577 | 46%-54% | |
2021 | 2,720,000 | 1,528,210 | 4,684,863 | 950,015 | 82,386 | 168,742 | 10,134,217 | 39%-61% |
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.
Internal 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. For the 20202022 financial year, the ratio between the annual total compensation for the CEO and the average annual total compensation for an employee was 71:55:1. The ratio increaseddecreased from 60:63:1 in 2019.2021. 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 reflect total remuneration costs to the company which differ from the actual payout to the members of the Board of Management.
Philips Group
Remuneration cost
in EUR
2016 | 2017 | 2018 | 2019 | 2020 | |
Remuneration | |||||
CEO Total Remuneration Costs (A)1) | 4,675,042 | 5,101,429 | 5,391,265 | 5,260,111 | 6,153,067 |
CFO Total Remuneration Cost | 1,856,175 | 2,247,822 | 2,595,688 | 2,602,606 | 3,007,990 |
CLO Total Remuneration Cost | 1,861,200 | 1,856,426 | 2,203,160 | ||
Chief Business Leader Personal Health Total Remuneration Cost | 2,373,642 2) | ||||
Average Employee (FTE) Total Remuneration Costs (B)3) | 86,074 | 91,288 | 86,136 | 87,321 | 86,523 |
Ratio A versus B4) | 54:1 | 56:1 | 63:1 | 60:1 | 71:1 |
Company performance | |||||
Annual TSR5) | 18.4% | 26.5% | 1.2% | 25.6% | 6.2% |
Comparable Sales Growth%6) | 4.9% | 3.9% | 4.7% | 4.5% | 2.5% |
EBITA%6) | 9.8% | 10.1% | 11.4% | 10.7% | 10.6% |
Free Cash Flow6) | 429 | 1,185 | 984 | 1,053 | 1,852 |
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) |
Under the LTI Plan the current members of the Board of Management were granted 118,322153,891 performance shares in 2020.
2022. The following table provides an overview at end December 20202022 of performance share grants. The reference date for board membership is December 31, 2020.
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, 2020 | number of shares awarded in 2020 | (dividend) shares awarded | number of shares vested in 20201) | value at vesting date in 2020 | unvested closing balance at Dec. 31, 2020 | |
---|---|---|---|---|---|---|---|---|---|---|---|
F.A. van Houten | 5/11/2017 | 73,039 | 2,410,000 | 5/11/2020 | 5/11/2022 | 78,413 | - | - | 95,663 | 3,764,350 | - |
4/27/2018 | 69,005 | 2,410,000 | 4/27/2021 | 4/27/2023 | 72,262 | - | 1,467 | - | - | 73,729 | |
5/6/2019 | 70,640 | 2,650,000 | 5/6/2022 | 5/6/2024 | 72,339 | - | 1,468 | - | - | 73,807 | |
4/30/2020 | 66,431 | 2,650,000 | 4/30/2023 | 4/30/2025 | - | 66,431 | 1,349 | - | - | 67,780 | |
A. Bhattacharya | 5/11/2017 | 31,822 | 1,050,000 | 5/11/2020 | 5/11/2022 | 34,163 | - | - | 41,679 | 1,640,071 | - |
4/27/2018 | 31,138 | 1,087,500 | 4/27/2021 | 4/27/2023 | 32,608 | - | 662 | - | - | 33,270 | |
5/6/2019 | 31,388 | 1,177,500 | 5/6/2022 | 5/6/2024 | 32,143 | - | 652 | - | - | 32,795 | |
4/30/2020 | 29,518 | 1,177,500 | 4/30/2023 | 4/30/2025 | - | 29,518 | 599 | - | - | 30,117 | |
M.J. van Ginneken | 5/11/2017 | 18,5632) | 612,500 | 5/11/2020 | 5/11/2022 | 19,929 | - | - | 24,313 | 956,717 | - |
4/27/2018 | 24,052 | 840,000 | 4/27/2021 | 4/27/2023 | 25,187 | - | 511 | - | - | 25,699 | |
5/6/2019 | 22,991 | 862,500 | 5/6/2022 | 5/6/2024 | 23,544 | - | 478 | - | - | 24,022 | |
4/30/2020 | 22,373 | 892,500 | 4/30/2023 | 4/30/2025 | - | 22,373 | 454 | - | - | 22,827 |
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 |
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 | - | - | - | - | - |
Please find below a brief summary of the Remuneration Policy for the Supervisory Board, as 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 at the 2018 Extraordinary General Meeting of Shareholders.
The overarching objective of the 2020 Remuneration Policy for the Supervisory Board is to enable its members to fulfill their duties, acting independently: supervising the policies, and management and the general affairs of Philips, and supporting the Board of Management and the Executive Committee with advice. Also, the members of the Supervisory Board are guided by the company’s long-term interests, with due observance of the company’s purpose and strategy, taking into account the interests of shareholders and all other stakeholders.
To support the objectives mentioned above, the 2020 Remuneration Policy is aimed at attracting and retaining international Supervisory Board members of the highest caliber and with experience and expertise relevant to our health technology businesses.
In compliance with the Dutch Corporate Governance Code, the 2020 Remuneration Policy provides that the remuneration for the members of the Supervisory Board is not dependent on the results of the company and does not include any shares (or rights to shares). MembersNevertheless, members of the Supervisory Board may onlyare encouraged to hold shares in the company for the purpose of long-term investment and must refrain from short-term transactionsto reflect their confidence in Philips securities.the future course of the company. The company does not grant personal loans to members of the Supervisory Board.
The Supervisory Board reviews fee levels in principle every three years in order to monitor and take account of market developments and manage expectations of our key stakeholders. The levels are aimed at broadly median market levels (and around the 25th percentile market level for the Chairman) paid in the Quantum Peer Group (as used in the 2020 Remuneration Policy for the Board of Management).
The following table below provides an overview of the current remuneration structure:
Philips Group
Remuneration Supervisory Board
in EUR
2020
Chair | Vice Chair | Member | |
---|---|---|---|
Supervisory Board | 155,000 | 115,000 | 100,000 |
Audit Committee | 27,000 | n.a. | 18,000 |
Remuneration Committee | 21,000 | n.a. | 14,000 |
Corporate Governance and Nomination & Selection Committee | 21,000 | n.a. | 14,000 |
Quality & Regulatory Committee | 21,000 | n.a. | 14,000 |
Attendance fee per inter-European trip | 2,500 | 2,500 | 2,500 |
Attendance fee per intercontinental trip | 5,000 | 5,000 | 5,000 |
Entitlement to Philips product arrangement | 2,000 | 2,000 | 2,000 |
Annual fixed net expense allowance | 11,345 | 2,269 | 2,269 |
Other travel expenses | As reasonably incurred |
The members of the Supervisory Board benefit from coverage under the company’s Directors and Officers (D&O) liability insurance.
The individual members of the Supervisory Board received, by virtue of the positions they held, the following remuneration in 2020:2022:
membership | committees | other compensation2) | total | membership | committees | other compensation1) | total | |
---|---|---|---|---|---|---|---|---|
20203) | ||||||||
J. van der Veer | 155,000 | 35,000 | 11,345 | 201,345 | ||||
C.A. Poon | 115,000 | 49,000 | 7,269 | 171,269 | ||||
F. Sijbesma | 155,000 | 35,000 | 16,345 | 206,345 | ||||
P.A.M. Stoffels | 115,000 | 35,000 | 27,269 | 177,269 | ||||
N. Dhawan | 100,000 | 18,000 | 7,269 | 125,269 | 35,616 | 6,411 | 5,808 | 47,836 |
O. Gadiesh | 100,000 | 14,000 | 2,269 | 116,269 | ||||
D.E.I. Pyott | 100,000 | 42,000 | 12,269 | 154,269 | 100,000 | 35,000 | 17,269 | 152,269 |
P.A.M. Stoffels | 100,000 | 9,333 | 9,769 | 119,102 | ||||
A.M. Harrison | 100,000 | 14,000 | 2,269 | 116,269 | 100,000 | 14,000 | 12,269 | 126,269 |
M.E. Doherty | 100,000 | 24,000 | 9,769 | 133,769 | 100,000 | 27,000 | 24,769 | 151,769 |
P. Löscher | 66,667 | 21,333 | 1,513 | 89,513 | 100,000 | 32,000 | 24,769 | 156,769 |
F. Sijbesma4) | 76,667 | 9,333 | 1,513 | 87,513 | ||||
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 | 1,013,333 | 236,000 | 65,254 | 1,314,587 | 1,105,616 | 248,411 | 192,574 | 1,546,602 |
The Audit Committee is chaired by Liz Doherty (who succeeded David Pyott in the course of 2020).Doherty. Its other members are David Pyott, Neelam Dhawan and Peter Löscher, Chua Sock Koong and Sanjay Poonen (who joined in the course of 2020)2022). Jeroen van der VeerFeike Sijbesma also regularly attends Audit Committee meetings. The Committee assists the Supervisory Board in fulfilling its supervisory responsibilities, including ensuring the integrity of the company’s financial statements, reviewing the company’s internal controls and overseeing the enterprise risk management process.
In 2020,2022, the Audit Committee held five regular meetings including an education sessionand two extraordinary meetings, which all Audit Committee members attended.
The CEO, CFO, Chief ESG & Legal Officer, 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 each of 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 Treasurer as well as with each of the Managementmanagement who regularly attend the Audit Committee meetings (as set out in the previous paragraph) and with the external auditor (Ernst & Young Accountants LLP).
The following overview below highlights a number of matters that were reviewed and/or discussed during Committee meetings throughout 2020:in the course of, or in respect of, the financial year 2022:
TheFurthermore, the Committee held an education sessionreceived a report from the company’s Head of Tax, updating the Committee on financial supervision by the Netherlands Authority for the Financial Markets (Stichting Autoriteit Financiële Markten),several tax aspects, including the relevant regulatory framework, types of market behavior under supervisioncompany’s effective tax rate, tax transparency and oversight on financial reporting.tax assets and liabilities.
In February 2021,2023, 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 20202022 financial statements included in the Annual Report 20202022 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 as well as in private sessions with Management.management.
Finally, the Committee reviewed the Audit Committee Charter and concluded it remains appropriate.
The Quality & Regulatory Committee was established in view of the importance of patient safety and the quality 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, systems, services and software.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 Poon, Marc Harrison and Peter Löscher, who joined in the course of 2020.scher.
In 2020,2022, the Quality & Regulatory Committee held fivesix meetings and all Committee members attended these 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 2020:in the course of 2022:
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 2020; 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.
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.
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.
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.
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).
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.
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 2020,2022, there were no services provided to the Companycompany by the external auditor which were not pre-approved by the Audit Committee.
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, 2020.2022.
The members of the self-electing Board of the Foundation are Messrs J.M. Hessels, P.N. Wakkie and J.P. de Kreij.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 Debt.
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’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 were 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.
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.
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. These objects can be found in Article 2 of the Articles of Association.
On December 31, 2020,2022, the issued share capital amounted to EUR 182,210,600.20177,863,016.40 divided into 911,053,001889,315,082 common shares and no preference shares.
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.
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.
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.
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 October 29, 2021.November 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.
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.
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.
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.
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.
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.
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.
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.
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.
The company complies with Dutch legal requirements regarding shareholder approval of equity compensation plans for the members of the Board of Management. Dutch law does not require shareholder approval of certain equity compensation plans for which the NYSE listing standards would require such approval. The company is subject to a Dutch requirement to seek shareholder approval for equity compensation plans for its members of the Board of Management.
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 20202022 the company did not grant any waivers of the Financial Code of Ethics.
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.
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).
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’scompany’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’scompany’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
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 20212023 Annual General Meeting of Shareholders.
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
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, 2020,2022, it has concluded that, as of December 31, 2020,2022, Royal Philips' internal control over Group financial reporting is considered effective.
The effectiveness of the Royal Philips'Philips’ internal control over financial reporting as of December 31, 2020,2022, 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 23, 2021
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, 2020.
There were no changes in our internal control over financial reporting during 20202022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s report on internal control over financial reporting is set out on Management’sManagement's annual report on internal control over financial reporting. The report set out on Independent auditor’s report on internal control over financial reporting, is provided in compliance with standards of the Public Company Accounting Oversight Board in the US and includes an opinion on the effectiveness of internal control over financial reporting as at December 31, 2020,2022, based on COSO criteria.
Ernst & Young Accountants LLP (PCAOB ID: 1396) has also issued a report on the consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board in the US, which is set out on Independent auditor’s report on the consolidated financial statements.
To: The Supervisory Board and Shareholders of Koninklijke Philips N.V.
We have audited Koninklijke Philips N.V.’s internal control over financial reporting as of December 31, 2020,2022, 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, 2020,2022, 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, 20202022 and 2019,2021, 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, 2020,2022, and the related notes and our report dated February 23, 202121, 2023 expressed an unqualified opinion thereon.
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.
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 23, 202121, 2023
To: The Supervisory Board and Shareholders of Koninklijke Philips N.V.
We have audited the accompanying consolidated balance sheets of Koninklijke Philips N.V. (the(Philips or the Company) as of December 31, 20202022 and 2019,2021, 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, 2020,2022, 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, 20202022 and 2019,2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020,2022, 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, 2020,2022, 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 23, 202121, 2023 expressed an unqualified opinion thereon.
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.
The critical audit matters communicated below are matters arising from the current period audit of the group financial statements that were communicated or required to be communicated to the Audit Committee of the Supervisory Board and that: (1) relate to accounts or disclosures that are material to the group financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the group financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Revenue recognition – | |
Description of the Matter | Primarily in the Personal Health businesses, the Company has sales Auditing the Company’s measurement of sales related accruals Further reference is made to note 1, |
How We Addressed the Matter in Our Audit |
We also assessed the adequacy of the |
Valuation of Goodwill for Cash Generating | |
Description of the Matter |
|
How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over management’s goodwill impairment review process related to the
|
Description of the Matter | The Company and certain of its group companies and former group companies are involved as a party in legal proceedings, including regulatory and other governmental proceedings, as well as being investigated by governmental authorities for alleged non-compliance with laws and regulations. As more fully described in Note 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 We evaluated
|
How We Addressed the Matter in Our Audit |
|
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 requires significant judgment by management. Significant assumptions used to determine the provision relate to the estimated total quantity of devices remaining and the replacement share. |
How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of the Company’s controls relating to the Field Action provision calculation 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.
|
/s/ Ernst & Young Accountants LLP
We have served as the Company‘s auditor since 2016.
Amsterdam, the Netherlands
February 23, 202121, 2023
Philips Group
Consolidated statements of income
in millions of EUR
For the year ended December 31
2018 | 2019 | 2020 | 2020 | 2021 | 2022 | |
---|---|---|---|---|---|---|
Sales7 | 18,121 | 19,482 | 19,535 | |||
Sales6 | 17,313 | 17,156 | 17,827 | |||
Cost of sales | (9,568) | (10,607) | (10,754) | (9,493) | (9,988) | (10,633) |
Gross margin | 8,554 | 8,875 | 8,781 | 7,820 | 7,168 | 7,194 |
Selling expenses | (4,500) | (4,682) | (4,606) | (4,054) | (4,258) | (4,609) |
General and administrative expenses | (631) | (668) | (630) | (599) | (671) | |
Research and development expenses | (1,759) | (1,884) | (1,915) | (1,822) | (1,806) | (2,103) |
Other business income7 | 88 | 155 | 123 | |||
Other business expenses7 | (33) | (188) | (173) | |||
Income from operations7 | 1,719 | 1,644 | 1,542 | |||
Financial income8 | 51 | 117 | 160 | |||
Financial expenses8 | (264) | (233) | (204) | |||
Impairment of goodwill11 | (144) | (15) | (1,357) | |||
Other business income6 | 122 | 186 | 127 | |||
Other business expenses6 | (29) | (123) | (109) | |||
Income from operations6 | 1,264 | 553 | (1,529) | |||
Financial income7 | 158 | 149 | 58 | |||
Financial expenses7 | (202) | (188) | (258) | |||
Investments in associates, net of income taxes | (2) | 1 | (9) | (9) | (4) | (2) |
Income before taxes | 1,503 | 1,529 | 1,490 | 1,211 | 509 | (1,731) |
Income tax expense9 | (193) | (337) | (284) | |||
Income tax expenses8 | (212) | 103 | 113 | |||
Income from continuing operations | 1,310 | 1,192 | 1,205 | 999 | 612 | (1,618) |
Discontinued operations, net of income taxes4 | (213) | (19) | (10) | |||
Discontinued operations, net of income taxes3 | 196 | 2,711 | 13 | |||
Net income | 1,097 | 1,173 | 1,195 | 1,195 | 3,323 | (1,605) |
Attribution of net income | ||||||
Net income attributable to Koninklijke Philips N.V. shareholders | 1,090 | 1,167 | 1,187 | |||
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 | 7 | 5 | 8 | 8 | 4 | 3 |
Philips Group
Earnings per common share attributable to shareholders of Koninklijke Philips N.V. shareholders
in EUR unless otherwise stated
2018 | 2019 | 2020 | |
---|---|---|---|
Basic earnings per common share in EUR1) | |||
Income from continuing operations attributable to shareholders | 1.38 | 1.29 | 1.32 |
Net income attributable to shareholders | 1.16 | 1.27 | 1.31 |
Diluted earnings per common share in EUR1) | |||
Income from continuing operations attributable to shareholders | 1.37 | 1.27 | 1.31 |
Net income attributable to shareholders | 1.14 | 1.25 | 1.29 |
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.
Philips Group
Consolidated statements of comprehensive income
in millions of EUR
forFor the year ended December 31
2018 | 2019 | 2020 | 2020 | 2021 | 2022 | |
---|---|---|---|---|---|---|
Net income for the period | 1,097 | 1,173 | 1,195 | 1,195 | 3,323 | (1,605) |
Pensions and other-post employment plans:21 | ||||||
Remeasurement | (8) | 30 | 51 | |||
Income tax effect on remeasurements9 | (19) | 3 | (12) | |||
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 | (147) | 82 | 0 | - | (39) | (32) |
Reclassification directly into retained earnings | (5) | |||||
Income tax effect on net current-period change | - | 1 | 1 | |||
Total of items that will not be reclassified to Income Statement | (179) | 114 | 39 | 39 | 74 | 49 |
Currency translation differences: | ||||||
Net current period change, before tax | 383 | 218 | (1,040) | (1,040) | 1,078 | 748 |
Income tax effect on net current-period change9 | (29) | 0 | 1 | |||
Income tax effect on net current-period change8 | 1 | (5) | 2 | |||
Reclassification adjustment for (gain) loss realized | 4 | 36 | - | |||
Reclassification adjustment for (gain) loss realized, in discontinued operations | (6) | 16 | 69 | |||
Cash flow hedges: | ||||||
Net current-period change, before tax | (13) | (53) | 69 | 69 | (52) | (29) |
Income tax effect on net current-period change9 | 11 | 6 | (17) | |||
Reclassification adjustment for loss (gain) realized | (31) | 33 | (6) | |||
Income tax effect on net current-period change8 | (17) | 18 | (10) | |||
Reclassification adjustment for (gain) loss realized | (6) | (14) | 63 | |||
Total of items that are or may be reclassified to Income Statement | 315 | 225 | (992) | (992) | 1,129 | 774 |
Other comprehensive income for the period | 136 | 340 | (953) | (953) | 1,203 | 823 |
Total comprehensive income for the period | 1,233 | 1,512 | 242 | 242 | 4,527 | (782) |
Total comprehensive income attributable to: | ||||||
Shareholders of Koninklijke Philips N.V. | 1,225 | 1,507 | 235 | 235 | 4,520 | (786) |
Non-controlling interests | 8 | 5 | 6 | 6 | 7 | 4 |
Amounts may not add up due to rounding.
Amounts may not add up due to rounding.
Philips Group
Consolidated balance sheets
in millions of EUR unless otherwise stated
As of December 31
2019 | 2020 | |
---|---|---|
Non-current assets | ||
Property, plant and equipment 113 | 2,866 | 2,682 |
Goodwill123 | 8,654 | 8,014 |
Intangible assets excluding goodwill133 | 3,466 | 2,997 |
Non-current receivables17 | 178 | 230 |
Investments in associates6 | 233 | 240 |
Other non-current financial assets14 | 248 | 430 |
Non-current derivative financial assets29 | 1 | 6 |
Deferred tax assets9 | 1,865 | 1,820 |
Other non-current assets15 | 47 | 66 |
Total non-current assets | 17,557 | 16,486 |
Current assets | ||
Inventories16 | 2,773 | 2,993 |
Other current financial assets14 | 1 | 0 |
Other current assets15 | 476 | 424 |
Current derivative financial assets29 | 38 | 105 |
Income tax receivable9 | 177 | 150 |
Current receivables2617 | 4,554 | 4,156 |
Assets classified as held for sale4 | 13 | 173 |
Cash and cash equivalents30 | 1,425 | 3,226 |
Total current assets | 9,459 | 11,227 |
Total assets | 27,016 | 27,713 |
Equity18 | ||
Equity | 12,597 | 11,870 |
Common shares | 179 | 182 |
Reserves | 652 | (340) |
Other | 11,766 | 12,028 |
Non-controlling interests18 | 28 | 31 |
Group equity | 12,625 | 11,901 |
Non-current liabilities | ||
Long-term debt 19 | 4,939 | 5,705 |
Non-current derivative financial liabilities29 | 124 | 86 |
Long-term provisions2120 | 1,603 | 1,458 |
Deferred tax liabilities9 | 143 | 59 |
Non-current contract liabilities23 | 348 | 403 |
Non-current tax liabilities 9 | 186 | 291 |
Other non-current liabilities23 | 71 | 74 |
Total non-current liabilities | 7,413 | 8,077 |
Current liabilities | ||
Short-term debt 19 | 508 | 1,229 |
Current derivative financial liabilities29 | 67 | 77 |
Income tax payable9 | 100 | 57 |
Accounts payable26 | 2,089 | 2,119 |
Accrued liabilities22 | 1,632 | 1,678 |
Current contract liabilities23 | 1,170 | 1,239 |
Short-term provisions2120 | 556 | 522 |
Liabilities directly associated with assets held for sale4 | 0 | 30 |
Other current liabilities23 | 856 | 785 |
Total current liabilities | 6,978 | 7,735 |
Total liabilities and group equity | 27,016 | 27,713 |
2021 | 2022 | |
---|---|---|
Non-current assets | ||
Property, plant and equipment 102 | 2,699 | 2,638 |
Goodwill112 | 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 |
Deferred tax assets8 | 2,216 | 2,449 |
Other non-current assets14 | 129 | 98 |
Total non-current assets | 20,613 | 20,429 |
Current assets | ||
Inventories15 | 3,450 | 4,049 |
Other current financial assets13 | 2 | 11 |
Other current assets14 | 493 | 490 |
Current derivative financial assets28 | 61 | 123 |
Income tax receivable | 180 | 222 |
Current receivables2516 | 3,787 | 4,115 |
Assets classified as held for sale3 | 71 | 77 |
Cash and cash equivalents29 | 2,303 | 1,172 |
Total current assets | 10,347 | 10,259 |
Total assets | 30,961 | 30,688 |
Equity17 | ||
Shareholders' equity | 14,438 | 13,249 |
Common shares | 177 | 178 |
Capital in excess of par value | 4,646 | 5,025 |
Reserves | 748 | 1,488 |
Other | 8,868 | 6,558 |
Non-controlling interests17 | 36 | 34 |
Group equity | 14,475 | 13,283 |
Non-current liabilities | ||
Long-term debt 18 | 6,473 | 7,270 |
Non-current derivative financial liabilities28 | 119 | 4 |
Long-term provisions2019 | 1,315 | 1,097 |
Deferred tax liabilities8 | 83 | 91 |
Non-current contract liabilities22 | 446 | 515 |
Non-current tax liabilities 8 | 544 | 435 |
Other non-current liabilities22 | 56 | 60 |
Total non-current liabilities | 9,037 | 9,471 |
Current liabilities | ||
Short-term debt 18 | 506 | 931 |
Current derivative financial liabilities28 | 83 | 207 |
Income tax payable | 128 | 40 |
Accounts payable25 | 1,872 | 1,968 |
Accrued liabilities21 | 1,784 | 1,626 |
Current contract liabilities22 | 1,491 | 1,696 |
Short-term provisions2019 | 998 | 1,018 |
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 |
Amounts may not add up due to rounding.
Philips Group
Consolidated statements of cash flows1)
in millions of EUR
For the year ended December 31
2018 | 2019 | 2020 | 2020 | 2021 | 2022 | |
---|---|---|---|---|---|---|
Cash flows from operating activities | ||||||
Net income (loss) | 1,097 | 1,173 | 1,195 | 1,195 | 3,323 | (1,605) |
Results of discontinued operations, net of income tax | 213 | 19 | 10 | (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 | 1,089 | 1,402 | 1,520 | |||
Impairment of goodwill and other non-current financial assets | 1 | 97 | 144 | |||
Depreciation, amortization, and impairment of assets | 1,462 | 1,323 | 1,602 | |||
Impairment of goodwill | 144 | 15 | 1,357 | |||
Share-based compensation | 97 | 98 | 115 | 112 | 108 | 95 |
Net gain on sale of assets | (71) | (77) | (2) | |||
Net loss (gain) on sale of assets | (1) | 55 | (115) | |||
Interest income | (31) | (27) | (14) | (13) | (18) | (25) |
Interest expense on debt, borrowings, and other liabilities | 165 | 174 | 160 | 159 | 152 | 226 |
Investments in associates, net of income taxes | 9 | 4 | 112 | |||
Income taxes | 193 | 337 | 284 | 212 | (103) | (113) |
Investments in associates, net of income taxes | 2 | 6 | 8 | |||
Decrease (increase) in working capital | (179) | (819) | (87) | (98) | (401) | (862) |
Decrease (increase) in receivables and other current assets | (97) | (274) | 87 | 92 | (39) | (342) |
Decrease (Increase) in inventories | (394) | (175) | (584) | (578) | (581) | (572) |
Increase (decrease) in accounts payable, accrued and other current liabilities | 311 | (369) | 411 | 387 | 219 | 52 |
Decrease (increase) in non-current receivables, other assets and other liabilities | (49) | 122 | 40 | |||
Increase (decrease) in provisions20 | (271) | 27 | (87) | |||
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) | |||
Other items | (59) | (5) | 13 | 96 | (164) | (39) |
Interest received | 13 | 17 | 15 | |||
Interest paid | (170) | (172) | (148) | (148) | (151) | (205) |
Interest received | 35 | 27 | 15 | |||
Dividends received from investments in associates | 20 | 12 | 4 | 4 | 14 | 12 |
Income taxes paid | (301) | (363) | (394) | (390) | (249) | (333) |
Net cash provided by (used for) operating activities | 1,780 | 2,031 | 2,777 | 2,511 | 1,629 | (173) |
Cash flows from investing activities | ||||||
Net capital expenditures | (796) | (978) | (924) | (876) | (729) | (788) |
Purchase of intangible assets | (123) | (156) | (127) | (114) | (107) | (105) |
Expenditures on development assets | (298) | (339) | (302) | (296) | (259) | (257) |
Capital expenditures on property, plant and equipment | (422) | (518) | (513) | (485) | (397) | (444) |
Proceeds from sales of property, plant and equipment4 | 46 | 35 | 18 | |||
Net proceeds from (cash used for) derivatives and current financial assets24 | (175) | 385 | (13) | |||
Purchase of other non-current financial assets24 | (34) | (63) | (131) | |||
Proceeds from other non-current financial assets24 | 77 | 162 | 65 | |||
Purchase of businesses, net of cash acquired5 | (628) | (255) | (317) | |||
Net proceeds from sale of interests in businesses, net of cash disposed of4 | 70 | 146 | 4 | |||
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 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 | (1,486) | (603) | (1,316) | (1,267) | (3,672) | (1,487) |
Cash flows from financing activities | ||||||
Proceeds from issuance (payments on) short-term debt19 | 34 | 23 | 16 | |||
Principal payments on short-term portion of long-term debt19 | (1,161) | (761) | (298) | |||
Proceeds from issuance of long-term debt19 | 1,287 | 847 | 1,065 | |||
Proceeds from issuance (payments on) short-term debt18 | 16 | (25) | 47 | |||
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 shares | 94 | 58 | 46 | 46 | 23 | 12 |
Purchase of treasury shares | (1,042) | (1,376) | (343) | (343) | (1,636) | (187) |
Dividends paid to shareholders of Koninklijke Philips N.V. | (401) | (453) | (1) | (1) | (482) | (412) |
Dividends paid to shareholders of non-controlling interests | (3) | (2) | (2) | (2) | (6) | |
Net cash provided by (used for) financing activities | (1,192) | (1,665) | 483 | 483 | (2,347) | 500 |
Net cash provided by (used for) continuing operations | (898) | (237) | 1,944 | 1,727 | (4,390) | (1,160) |
Net cash provided by (used for) discontinued operations4 | 647 | (25) | (88) | |||
Net cash provided by (used for) discontinued operations3 | 129 | 3,403 | (12) | |||
Net cash provided by (used for) continuing and discontinued operations | (251) | (262) | 1,856 | 1,856 | (986) | (1,172) |
Effect of changes in exchange rates on cash and cash equivalents | 0 | (2) | (55) | (55) | 65 | 41 |
Cash and cash equivalents at the beginning of the year | 1,939 | 1,688 | 1,425 | |||
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 | 1,688 | 1,425 | 3,226 | 3,226 | 2,303 | 1,172 |
Philips Group
Consolidated statements of changes in equity
in millions of EUR
For the year ended December 31
Common share | Currency translation differences1) |
Amounts may not add up due to rounding. 13.10Notes
|
---|
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 |
Under IFRS, an entity shall choose either the cost model or the revaluation model as its accounting model1)Includes impairments (excluding goodwill impairment); 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 choseplease refer 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) |
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 |
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.
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.
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 |
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 |
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.
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.
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
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.
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.
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.
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.
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.
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.
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.
During 2022 Philips completed two divestments that were not material.
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 |
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.
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.
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.
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.
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 |
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.
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).
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.
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
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.
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.
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.
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) 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.
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.
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) |
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 |
Cost of materials used represents the inventory recognized in cost of sales.
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.
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 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.
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 costs are included in cost of sales and selling expenses in the Consolidated balance sheets.statements of income.
Advertising and promotion costs are included in selling expenses in the Consolidated statements of income.
Lease expense relates to short-term and low value leases.
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 .
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 |
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.
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.
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.
In cases where it is concluded it is not probable that tax authorities will accept a tax treatment, the effect of the uncertainty is reflected in the recognition and measurement of tax assets and liabilities or, alternatively, a 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.
Further information on income
ProvisionsDeferred tax assets are recognized if, as a result of a past event,to the company has a present legal or constructive obligation, the amount can be estimated reliably, andextent that it is probable that an outflow of economic benefitsthere will be requiredfuture taxable profits against which these can be utilized. Significant judgment is involved in 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 settlesupport business goals and on the obligation. Provisionsbasis of forecasts.
Uncertain tax positions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax discount rate that reflects current market assessments of the time value of money. The increase in the provision due to passage of time is recognized as interest expense. The accounting and presentation for some of the company’s provisions is as follows:
Further information on provisions can be found in Provisions.
The measurement of goodwill at initial recognition is described in the Basis of consolidation note. Goodwill is subsequently measured at cost less accumulated impairment losses. Further information on goodwill can also be found in Goodwill.
Acquired finite-lived intangible assets are amortized using the straight-line method over their estimated useful life. The useful lives are evaluated annually. Intangible assets are initially capitalized at cost, with the exception of intangible assets acquired as part of a business combination, which are capitalized at their acquisition date fair value.
The company expenses all research costs as incurred. Expenditure on development activities, whereby research findings are applied to a plan or design for the production of new or substantially improved products and processes, is capitalized as an intangible asset if the product or process is technically and commercially feasible, the company has sufficient resources and the intention to complete development and can measure the attributable expenditure reliably.
The capitalized development expenditure comprises of all directly attributable costs (including the cost of materials and direct labor). Other development expenditures and expenditures on research activities are recognized in the Consolidated statements of income. Capitalized development expenditure is stated at cost less accumulated amortization and impairment losses. Amortization of capitalized development expenditure is charged to the Consolidated statements of income on a straight-line basis over the estimated useful lives of the intangible assets.
Further information on intangible assets other than goodwill can be found in Intangible assets excluding goodwill.
Non-current assets and disposal groups comprising assets and liabilities that are expected to be recovered primarily through sale rather than through continuing use are classified as held for sale.
Non-current assets classified as held for sale and the assets of a disposal group classified as held for sale are presented separately from the other assets in the Consolidated balance sheets. The liabilities of a disposal group classified as held for sale are presented separately from other liabilities in the Consolidated balance sheets.
A discontinued operation is a component of an entity that has either been disposed of or is classified as held for sale, and represents a separate major line of business or geographical area of operations; or is a part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations; or is a subsidiary acquired exclusively with a view to sell.
If a discontinued operation is sold in stages as part of a single coordinated plan until it is completely sold, then the Investment in associate that is recognized upon sale of a portion that results in Philips having significant influence in the operation (rather than control) is continued to be treated as discontinued operation provided that the held for sale criteria are met.
Non-current assets held for sale and discontinued operations are carried at the lower of carrying amount or fair value less cost of disposal. Any gain or loss from disposal, together with the results of these operations until the date of disposal, is reported separately as discontinued operations. The financial information of discontinued operations is excluded from the respective captions in the Consolidated financial statements and related notes for all periods presented. Comparatives in the Consolidated balance sheets are not represented when a non-current asset or disposal group is classified as held for sale. Comparatives are represented for presentation of discontinued operations in the Consolidated statements of cash flows and Consolidated statements of income.
Adjustments in the current period to amounts previously presented in discontinued operations that are directly related to the disposal of a discontinued operation in a prior period, and for which no specific arrangements were made at the time of divestment, are classified separately in discontinued operations. Circumstances to which these adjustments may relate include resolution of uncertainties that arise from the terms of the disposal transaction, such as the resolution of purchase price adjustments and indemnifications, resolution of uncertainties that arise from and are directly related to the operations of the component before its disposal, such as environmental and assurance-type product warranty obligations retained by the company, and the settlement of employee benefit plan obligations provided that the settlement is directly related to the disposal transaction.
Further information on discontinued operations and non-current assets held for sale can be found in Discontinued operations and assets classified as held for sale.
Goodwill and intangible assets not yet ready for use are not amortized but are tested for impairment annually and whenever impairment indicators require. In case of goodwill and intangible assets not yet ready for use, either internal or external sources of information are considered indicators that an asset or a CGU may be impaired. In most cases the company identified its cash-generating units for goodwill at one level below that of an operating segment. Cash flows at this level are substantially independent from other cash flows and this is the lowest level at which goodwill is monitored by the Executive Committee. An impairment loss is recognized in the Consolidated statements of income whenever and to the extent that the carrying amount of a cash-generating unit exceeds the unit’s recoverable amount, whichever is the greater, its value in use or its fair value less cost of disposal. Value in use is measured as the present value of future cash flows expected to be generated by the asset. Fair value less cost of disposal is measured as the amount obtained from the sale of an asset in an arm’s length transaction, less costs of disposal.
Further information on impairment of goodwill and intangible assets not yet ready for use can be found in Goodwill and Intangible assets excluding goodwill respectively.
Non-financial assets other than goodwill, intangible assets not yet ready for use, inventories and deferred tax assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is assessed by a comparison of the carrying amount of an asset with the greater of its value in use and fair value less cost of disposal. Value in use is measured as the present value of future cash flows expected to be generated by the asset. Fair value less cost of disposal is measured as the amount obtained from a sale of an asset in an arm’s length transaction, less costs of disposal. If the carrying amount of an asset is deemed not recoverable, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the recoverable amount. The review for impairment is carried out at the level where cash flows occur that are independent of other cash flows.
Impairment losses recognized in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if and to the extent it is probable that there has been a change inadditional tax will be due and 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.
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.
The Consolidated financial statements comprise the financial statements of Koninklijke Philips N.V. and all subsidiaries that the company controls, i.e. when itreliably measured. Significant judgment is exposed or has rights to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Generally, there is a presumption that a majority of voting rights results in control. To support this presumption and in cases where Philips has less than a majority of the voting or similar rights of an investee, Philips considers all relevant facts and circumstances in assessing whether it has power over an investee, including the contractual arrangement(s) with the other vote holders of the investee, rights arising from other contractual arrangements and the company’s voting rights and potential voting rights. Subsidiaries are fully consolidated from the date that control commences until the date that control ceases. All intercompany balances and transactions have been eliminated in the Consolidated financial statements. Unrealized losses are eliminated in the same way as unrealized gains, but only to the extent that there is no evidence of impairment.
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 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:
Costs related to the acquisition, other than those associated with the issue of debt or equity securities, that the company incurs are expensed as incurred.
Any contingent consideration payable is recognized at fair value at the acquisition date and initially is presented in Long-term provisions. When the timing and amount of the consideration become more certain, it is reclassified to Accrued liabilities. If the contingent consideration that meets the definition of a financial instrument is classified as equity, it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent changes to the fair value of the contingent consideration are recognized in the Consolidated statements of income.
Non-controlling interests are measured on the basis of their proportionate share of the acquiree’s identifiable net assets at the date of acquisition.
Further information on business combinations can be found in Acquisitions and divestments.
Acquisitions of non-controlling interests are accounted for as transactions with owners in their capacity as owners and therefore no goodwill is recognized. Adjustments to non-controlling interests arising from transactions that do not involve the loss of control are based on a proportionate amount of the net assets of the subsidiary.
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 included in Investments in associates, net of income taxes, in the Consolidated statements of income, after adjustments to align the accounting policies with those of the company, from the date that significant influence commences until the date that significant influence ceases. Dilution gains and losses arising from investments in associates are recognized in the Consolidated statements of income as part of Investments in associates, net of income taxes. When the company’s share of losses exceeds its interest in an associate, the carrying amount of that interest (including any long-term loans) is reduced to zero and recognition of further losses is discontinued except to the extent that the company has incurred legal or constructive obligations or made payments on behalf of the associate. Unrealized gains on transactions between the company and its associates are eliminated to the extent of the company’s interest in the associates. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Remeasurement differences of an equity stake resulting from gaining control over an investee that was previously recorded as an associate are recorded under Investments in associates.
Further information on investments in associates can be found in Interests in entities.
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.
The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated to euros at the exchange rates prevailing at the reporting date. The income and expenses of foreign operations are translated to euros at the exchange rates prevailing at the dates of the transactions.
Foreign currency differences arising upon translation of foreign operations into euros are recognized in Other comprehensive income, and presented as part of Currency translation differences in Equity. However, if the operation is a non-wholly-owned subsidiary, the relevant proportionate share of the translation difference is allocated to Non-controlling interests.
When a foreign operation is disposed of such that control, significant influence or joint control is lost, the cumulative amount in the Currency translation differences related to the foreign operation is reclassified to the Consolidated statements of income as part of the gain or loss on disposal. When the company disposes of only part of its interest in a subsidiary that includes a foreign operation while retaining control, the respective proportion of the cumulative amount is reattributed to Non-controlling interests. When the company disposes of only part of its investment in an associate or joint venture that includes a foreign operation while retaining significant influence or joint control, the relevant proportion of the cumulative amount is reclassified to the Consolidated statements of income.
Non-derivative financial assets are recognized when the company becomes a party to the contractual provisions of the instrument. Purchases and sales of financial assets in the normal course of business are accounted for at the trade date. Dividend and interest income are recognized when earned. Gains or losses, if any, are recorded in Financial income and expense. Non-derivative financial assets are derecognized when the rights to receive cash flows from the asset have expired or the company has transferred its rights to receive cash flows from the asset.
At initial recognition, the company measures a financial asset at its fair value plus, in the case of a financial asset not measured at fair value through profit or loss (FVTPL), transaction costs that are directly attributable to the acquisition of the financial asset. Transaction costs of financial assets carried at FVTPL are expensed in the Consolidated statements of income.
The company classifies its non-derivative financial assets in the following measurement categories:
In assessing the classification, the company considers the business model for managing the financial assets and the contractual terms of the cash flows.
For assets measured at fair value, gains and losses will be recorded in either the Consolidated statements of income or in Other comprehensive income (OCI). For investments in equity instruments that are not held for trading, this will depend on whether the company has made an irrevocable election at the time of initial recognition to account for the equity investment at FVTOCI. For investments in these equity instruments, the company does not subsequently reclassify between FVTOCI and FVTPL. For debt investments, assets are reclassified between FVTOCI, FVTPL and amortized cost only when its business model for managing those assets changes.
Non-derivative financial assets comprise cash and cash equivalents, receivables and other financial assets.
Cash and cash equivalents 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.
Receivable balances that are held to collect are subsequently measured at amortized cost and are subject to impairment as explained in the impairment section of this note. Receivables that are held to collect and sell are subsequently measured at FVTOCI and are also subject to impairment. The company derecognizes receivables on entering into factoring transactions if the company has transferred substantially all risks and rewards or if the company does not retain control over those receivables. Further information on receivables can be found in Receivables.
Other (non-)current financial assets include both debt instruments and equity instruments.
Debt instruments include those subsequently carried at amortized cost, those carried at FVTPL and those carried at FVTOCI. Classification depends on the company’s business model for managing the asset and the cash flow characteristics of the asset.
Debt instruments that are held for collection of contractual cash flows, where those cash flows represent solely payments of principal and interest, are measured at amortized cost and are subject to impairment. Interest income from these financial assets is included in Financial income using the effective interest rate method. Financial assets with embedded derivatives are considered in their entirety when determining whether their cash flows are solely payment of principal and interest.
Debt instruments that are held for collection of contractual cash flows and for selling the financial assets, where the assets’ cash flows represent solely payments of principal and interest, are measured at FVTOCI and are subject to impairment. Movements in the carrying amounts are taken through OCI, except for the recognition of impairment gains or losses, interest revenue and foreign exchange gains and losses, which are recognized in the Consolidated statements of income. When the financial asset is derecognized, the cumulative gain or loss previously recognized in OCI is reclassified from equity to the Consolidated statements of income. Interest income from these financial assets is included in Financial income using the effective interest rate method.
Debt instruments that do not meet the criteria for amortized cost or FVTOCI are measured at FVTPL. A gain or loss on a debt investment that is subsequently measured at FVTPL is recognized in the Consolidated statements of income in the period in which it arises.
Equity investments are subsequently measured at fair value. Equity instruments that are held for trading are measured at FVTPL. For equity instruments that are not held for trading, the company makes an irrevocable election at the time of initial recognition whether to account for the equity investment at FVTPL or FVTOCI. Where management has elected to present fair value gains and losses on equity investments in OCI, there is no subsequent reclassification of fair value gains and losses to the Consolidated statements of income following the derecognition of the investment. Dividends from such investments continue to be recognized in the Consolidated statements of income when the company’s right to receive payments is established.
Further information on other (non-)current financial assets can be found in Other financial assets
Debt and other financial liabilities, 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.
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.
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.
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.
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. Costs related to repair and maintenance activities are expensed in the period in which they are incurred unless leading to an extension of the original lifetime or capacity.
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.
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.
Leases are recognized as a right-of-use asset 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.
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:
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 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 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:
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 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:
Inventories are stated at the lower of cost or net realizable value. The cost of inventories comprises all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. The costs of conversion of inventories include direct labor and fixed and variable production overheads, taking into account the stage of completion and the normal capacity of production facilities. Costs of idle facility and abnormal waste are expensed. The cost of inventories is determined using the first-in, first-out (FIFO) method. Inventory is reduced for the estimated losses due to obsolescence. This reduction is determined for groups of products based on sales in the recent past and/or expected future demand.
Further information on inventories can be found in Inventories.
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.
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 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.
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.
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 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.
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.
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.
The company applies, for the first time, certain standards and amendments, which are effective for annual periods beginning on or after January 1, 2020.
The amendment to IFRS 3 Business Combinations clarifies that to be considered a business, an integrated set of activities and assets must include, at a minimum, an input and a substantive process that, together, significantly contribute to the ability to create output. Furthermore, it clarifies that a business can exist without including all of the inputs and processes needed to create outputs. This amendment had no impact on the consolidated financial statements of the company, but may impact business combinations entered into by the company in future periods.
The amendments to IFRS 9 Financial Instruments, IAS 39 Financial Instruments: Recognition and Measurement and IFRS 7 Financial Instruments: Disclosures provide a number of reliefs, which apply to all hedging relationships that are directly affected by interest rate benchmark reform. A hedging relationship is affected if the reform gives rise to uncertainty about the timing and/or amount of benchmark-based cash flows of the hedged item or the hedging instrument. These amendments have no impact on the consolidated financial statements of the company as it does not have interest rate hedge relationships that are impacted by this.
The amendments provide a new definition of material that states, “information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity.” The amendments clarify that materiality will depend on the nature or magnitude of information, either individually or in combination with other information, in the context of the financial statements. A misstatement of information is material if it could reasonably be expected to influence decisions made by the primary users. These amendments had no impact on the consolidated financial statements of, nor is there expected to be any future impact to the company.
The Conceptual Framework is not a standard, and none of the concepts contained therein override the concepts or requirements in any standard. The purpose of the Conceptual Framework is to assist the IASB in developing standards, to help preparers develop consistent accounting policies where there is no applicable standard in place and to assist all parties to understand and interpret the standards. This will affect those entities which developed their accounting policies based on the Conceptual Framework. The revised Conceptual Framework includes some new concepts, updated definitions and recognition criteria for assets and liabilities and clarifies some important concepts. This revision had no material impact on the consolidated financial statements of the company.
On May 28, 2020, the IASB issued Covid-19-Related Rent Concessions - amendment to IFRS 16 Leases. The amendments provide relief to lessees from applying IFRS 16 guidance on lease modification accounting for rent concessions arising as a direct consequence of the Covid-19 pandemic. As a practical expedient, a lessee may elect not to assess whether a Covid-19 related rent concession from a lessor is a lease modification. A lessee that makes this election accounts for any change in lease payments resulting from the Covid-19 related rent concession the same way it would account for the change under IFRS 16, if the change were not a lease modification. This amendment had no material impact on the consolidated financial statements of the company.
A number of amendments to existing standards have been published and are mandatory for the company beginning on or after January 1, 2021, 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.
In 2020 COVID-19 affected the global economy and the company’s results, balance sheet and cash flows presented in these Consolidated financial statements. A discussion on the impact of the pandemic on the company's financial performance and risks is included in Financial performance and Risk management. The impact of the pandemic on significant accounting matters is disclosed below. Other areas have also been affected, but did not have a significant impact and are therefore not separately disclosed.
As a result of the uncertainties associated with the nature of the COVID-19 pandemic, and in line with existing accounting policies, 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 our Significant accounting policies, those which are primarily impacted by COVID-19 include impairment testing, valuation of inventories, measurement of financial instruments and the determination of fair values (for example fair values of acquired identifiable intangible assets, contingent considerations and certain investments). These significant judgments and estimates are further discussed below.
Impairment testing of goodwill and intangible assets not ready for use
Goodwill and intangible assets not yet ready for use are not amortized but are tested for impairment annually and whenever impairment indicators require such testing. For the Image-Guided Therapy cash-generating unit (CGU), the Sleep & Respiratory Care (S&RC) CGU, and a number of other smaller CGUs, such indicators were identified during the year because of deterioration in the economic environment or market in which these CGUs operate. The impairment tests performed for these CGUs did not result in any impairments.
In addition, for all goodwill and intangible assets not yet ready for use an annual impairment test was performed during Q4 2020.
In determining the recoverable amounts, consideration was given to the uncertainties embedded in the discounted cash flow projections and the appropriateness of key assumptions used in light of the pandemic, which included increased uncertainties around forecasted revenues, higher volatility in applied discount rates and other factors. Further details on these impairment procedures and the results thereof are disclosed in Goodwill and Intangible assets excluding goodwill.
Impairment testing of non-financial assets other than goodwill, intangible assets not yet ready for use, inventories and deferred tax assets
Similar to the above, for certain non-financial assets other than goodwill, intangible assets not yet ready for use, inventories and deferred tax assets, the changes in the economic environment provided an indicator that the carrying amount of the asset may not be recoverable. Uncertainties in the market and volatility in the financial markets resulted in increased levels of judgment in both the value-in-use calculations as well as in determining the fair value less costs of disposal of such an asset. These uncertainties were reflected in updated assessments on the future use of such assets (including useful life assessments) and in updated input parameters used in underlying calculations, which included using revised expected future cash flows due to the pandemic. Further details on the results of these impairment procedures are disclosed in Intangible assets excluding goodwill.
Impairment testing of financial assets
The company recognizes an allowance for expected credit losses (ECLs) for trade receivables, contract assets, lease receivables and debt investments carried at fair value through Other comprehensive income (FVTOCI) and amortized cost. In line with the accounting policy disclosed in the Significant accounting policies, for all financial assets to which the company applies the simplified approach, an updated assessment was made on the lifetime ECL allowance, taking into the account uncertainties resulting from the pandemic. In addition, for those assets to which the company does not apply the simplified approach to measuring ECLs, an assessment was made whether a significant increase in credit risk was observed as a result of COVID-19. In those instances, the allowance was updated to also reflect lifetime ECLs.
In making these assessments, all reasonable and supportable information was considered. Examples of indicators identified included counterparties breaching their agreed payment terms and counterparties requesting extended payment terms or (partial) waivers. In addition, forward looking elements were taken into consideration such as a deterioration of the credit rating of a counterparty or changes in risks associated with specific countries or regions due to COVID-19. Albeit the methodology applied is consistent with prior periods, certain of these factors triggered by the pandemic required an updated assessment of the ECLs. Relevant financial assets were individually assessed and additional ECL allowances were accounted for in those cases where deemed necessary. The overall impact of the increase in the level of ECLs did not have a material impact on the company’s financial assets. The company further concluded that none of the agreed changes with counterparties resulted in a substantial modification of such instruments under IFRS 9 Financial instruments.
Certain of the company’s financial instruments and other assets and liabilities are carried at fair value. The fair values included in these Consolidated financial statements reflect market participant views and market data at the measurement date under current market conditions. This implies that due to the increased volatility and uncertainty in the financial markets due to the pandemic, these fair values are subject to significant estimates, in particular for assets and liabilities for which the fair value is based on unobservable inputs (sometimes referred to as Level 3 measurements). Expectations around future cash flows, discount rates and other significant valuation inputs related to the asset or liability as at December 31, 2020 have become subject to a greater level of uncertainty. The fair values determined taking into account these revised input parameters have been reflected in the consolidated balance sheet as of December 31, 2020. There was no significant impact as a result of the pandemic on any individual assets or liabilities carried at fair value. Further reference is made to Fair value of financial assets and liabilities.
In addition to what has been described above in terms of impairment testing of non-financial assets, the COVID-19 pandemic triggered a significant increase in demand for our products mainly in the Connected Care businesses. As a result, the company made investments during the financial year in order to meet this demand. These investments include, amongst others, additions to existing production lines, establishing new production lines and investing in company-specific tooling used in the supply chain. Assessing the useful life of these new investments involves a significant amount of judgment, due to the volatility in the demand forecast that affects the expected period over which these assets will be used. In certain cases, this assessment has resulted in new machinery and installations being depreciated over a useful life that is less than three years, whereas the normal useful life of these assets would be between 5 and 10 years. In addition, the general market volatility increased the level of judgment involved in determining the residual values of certain of these assets. Neither of these developments did result in significant changes to our Property, plant and equipment.
COVID-19 also had an impact on the company’s long-term employee benefits, including defined-benefit plans. Volatility in the financial markets following the COVID-19 outbreak resulted in increased judgment being required in setting key parameters used in determining these benefits, including discount rates, mortality rates, retention rates and other assumptions supporting the actuarial calculations. In those situations, we established the most appropriate parameters with the help of actuaries and taking into consideration relevant economic conditions. For our funded defined-benefit plans, increased fluctuations in the fair values of the plan assets during the financial year ended December 31, 2020 also caused further volatility in the net obligation. Neither of these impacts were significant for the balances as of December 31, 2020.
As described in the Significant accounting policies, the accounting for provisions requires significant judgment around the amount and timing of the outflow of economic benefits required to settle the obligation. As a result of the pandemic, volatility increased in our supplier commitments and customer demand for many of our businesses, requiring the company to assess its related contracts for onerous elements. In doing so, the company applied assumptions and estimates in relation to future demand forecasts, expected costs of termination and the likely outcomes of ongoing negotiations with suppliers. This has resulted in the recognition of an onerous contract provision, for which reference is made to the disclosure on Other provisions included in Provisions. No other provisions were materially impacted by COVID-19.
The company’s inventories are stated at the lower of cost or net realizable value. In determining the appropriate level of provision for obsolescence, changes in the aging of inventory items in certain businesses and markets due to COVID-19 were considered throughout the year. In addition, current and potential excess stock levels were analyzed, incorporating the impact COVID-19 had on demand in 2020 as well as revised expectations of future demand for these items. No material change in the provision for obsolescence was identified as a result of these procedures.
Due to the changes in demand and therefore production levels within several of our businesses, the company evaluated its standard cost prices, particularly in relation to the absorption of overhead costs and additional costs. The company assessed, based on currently available information, that the change in demand and production levels is not expected to be a sustained change and therefore the standard cost prices were not updated relating to those elements.
In response to COVID-19, many governments have changed tax regulations aimed at deferring tax filings and payments, providing tax relief and offering financial assistance. Apart from applied payment deferrals on social contribution payments, the company has no material payment deferrals. In determining the recoverability of deferred tax assets, the company took into account the uncertainties caused by the COVID-19 pandemic in its projections on the results of future operations that will generate taxable income, which did not result in a significant impact.
Philips is exposed to several types of financial risks. In terms of liquidity risk, the company has taken a number of different measures to manage this risk. In addition to the successful placement of EUR 1,000 million fixed-rate notes in March (of which EUR 500 million Sustainability Innovation notes), the company also completed the remainder of the EUR 1.5 billion share buyback program that was announced on January 29, 2019 through individual forward contracts, with settlement dates extending into the second half of 2021. Furthermore, the 2019 Annual Incentive of the Board of Management and the final dividend declared against the net income of 2019 were settled in shares instead of cash. Overall, the company has a solid liquidity position and the company’s liquidity risk management procedures have not changed significantly because of COVID-19. No significant concentration risks have been identified as a result of COVID-19 and the company continues to have access to its existing lines of credit. These lines of credits, along with other financial risks to which Philips is exposed, are disclosed in Details of treasury and other financial risks. Apart from the above measures, COVID-19 did not have a significant impact on other financial risks, including how we manage those.
Philips Group
Information on income statements
in millions of EURpositions.
sales | sales including intercompany | depreciation and amortization1) | Adjusted EBITA2)3) | |
---|---|---|---|---|
2020 | ||||
Diagnosis & Treatment4) | 8,175 | 8,289 | (536) | 816 |
Connected Care | 5,564 | 5,640 | (415) | 1,195 |
Personal Health | 5,407 | 5,424 | (187) | 704 |
Other | 389 | 463 | (382) | (145) |
Inter-segment eliminations | (281) | |||
Philips Group | 19,535 | 19,535 | (1,520) | 2,570 |
2019 | ||||
Diagnosis & Treatment | 8,485 | 8,576 | (564) | 1,078 |
Connected Care | 4,674 | 4,705 | (327) | 618 |
Personal Health | 5,854 | 5,864 | (186) | 943 |
Other | 469 | 542 | (326) | (76) |
Inter-segment eliminations | (204) | |||
Philips Group | 19,482 | 19,482 | (1,402) | 2,563 |
2018 | ||||
Diagnosis & Treatment | 7,726 | 7,806 | (349) | 872 |
Connected Care | 4,341 | 4,358 | (326) | 662 |
Personal Health | 5,524 | 5,538 | (171) | 860 |
Other | 530 | 612 | (244) | (28) |
Inter-segment eliminations | (193) | |||
Philips Group | 18,121 | 18,121 | (1,089) | 2,366 |
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.
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
Philips Group | Diagnosis & Treatment | Connected Care | Personal Health | Other | |
---|---|---|---|---|---|
2020 | |||||
Net Income | 1,195 | ||||
Discontinued operations, net of income taxes | 10 | ||||
Income tax expense | 284 | ||||
Investments in associates, net of income taxes | 9 | ||||
Financial expenses | 204 | ||||
Financial income | (160) | ||||
Income from operations | 1,542 | 495 | 708 | 619 | (280) |
Amortization of intangible assets | 381 | 209 | 134 | 20 | 18 |
Impairment of goodwill | 144 | 0 | 144 | ||
EBITA1) | 2,067 | 704 | 986 | 639 | (262) |
Restructuring and acquisition-related charges | 203 | 29 | 97 | 40 | 37 |
Other items | 301 | 83 | 112 | 25 | 81 |
Adjusted EBITA1) | 2,570 | 816 | 1,195 | 704 | (145) |
2019 | |||||
Net Income | 1,173 | ||||
Discontinued operations, net of income taxes | 19 | ||||
Income tax expense | 337 | ||||
Investments in associates, net of income taxes | (1) | ||||
Financial expenses | 233 | ||||
Financial income | (117) | ||||
Income from operations | 1,644 | 660 | 267 | 844 | (127) |
Amortization of intangible assets | 350 | 177 | 141 | 25 | 8 |
Impairment of goodwill | 97 | 19 | 78 | ||
EBITA1) | 2,091 | 856 | 486 | 869 | (119) |
Restructuring and acquisition-related charges | 318 | 149 | 64 | 50 | 54 |
Other items | 153 | 73 | 67 | 23 | (11) |
Adjusted EBITA1) | 2,563 | 1,078 | 618 | 943 | (76) |
2018 | |||||
Net Income | 1,097 | ||||
Discontinued operations, net of income taxes | 213 | ||||
Income tax expense | 193 | ||||
Investments in associates, net of income taxes | 2 | ||||
Financial expenses | 264 | ||||
Financial income | (51) | ||||
Income from operations | 1,719 | 629 | 399 | 796 | (105) |
Amortization of intangible assets | 347 | 98 | 140 | 31 | 79 |
EBITA1) | 2,066 | 727 | 539 | 827 | (27) |
Restructuring and acquisition-related charges | 258 | 146 | 66 | 15 | 31 |
Other items | 41 | 0 | 56 | 18 | (33) |
Adjusted EBITA1) | 2,366 | 872 | 662 | 860 | (28) |
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
sales1) | tangible and intangible assets2) | |
---|---|---|
2020 | ||
Netherlands | 555 | 1,926 |
United States | 6,636 | 9,080 |
China | 2,432 | 313 |
Germany | 1,314 | 302 |
Japan | 1,113 | 511 |
United Kingdom | 545 | 545 |
France | 509 | 49 |
Other countries | 6,432 | 968 |
Total main countries | 19,535 | 13,694 |
2019 | ||
Netherlands | 522 | 2,148 |
United States | 6,667 | 9,864 |
China | 2,707 | 340 |
Japan | 1,186 | 550 |
Germany | 1,087 | 308 |
France | 505 | 46 |
United Kingdom | 470 | 611 |
Other countries | 6,338 | 1,119 |
Total main countries | 19,482 | 14,986 |
2018 | ||
Netherlands | 510 | 1,666 |
United States | 6,050 | 9,493 |
China | 2,380 | 353 |
Japan | 1,045 | 491 |
Germany | 1,032 | 263 |
France | 519 | 30 |
South Korea | 498 | 3 |
Other countries | 6,087 | 1,506 |
Total main countries | 18,121 | 13,805 |
In 2020 and 2019 Discontinued operations consist primarily of net costs related to divestments formerly reported as discontinued operations. The below table summarizes the results of discontinued operations, net of income taxes, reported in the consolidated statements of income.
Philips Group
Discontinued operations, net of income taxes
in millions of EUR
2018 | 2019 | 2020 | |
---|---|---|---|
Signify | (198) | ||
Combined Lumileds and Automotive businesses | 12 | (1) | |
Other | (27) | (19) | (9) |
Discontinued operations, net of income taxes | (213) | (19) | (10) |
In 2020 and 2019 there were no results from discontinued operations for 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 continuing 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
Certain costs related to other divestments, which were previously reported as discontinued operations, resulted in a net loss of EUR 9 million in 2020 (2019: a net loss of EUR 19 million, 2018: a net loss of EUR 27 million)
The following table presents the net cash provided by (used for) discontinued operations reported in the Consolidated statements of cash flows.
Discontinued operations cash flows
in millions of EUR
2018 | 2019 | 2020 | |
---|---|---|---|
Cash flows from operating activities | (15) | (11) | (88) |
Cash flows from investing activities | 662 | (14) | |
Total discontinued operations cash flows | 647 | (25) | (88) |
In 2020, net cash used for discontinued operations mainly related to advance income tax payments amounting to EUR 78 million for which Philips expects to get a refund.
In 2019, net cash used for discontinued operations consisted primarily of a 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.
As of December 31, 2020 assets held for sale consisted of property, plant and equipment for an amount of EUR 2 million and assets and liabilities directly associated with the Aging and Caregiving (ACG) business of EUR 141 million, consisting mainly of intangible assets excluding goodwill. In 2020, the decision to divest the ACG business was made after reviewing the Connected Care business portfolio and strategic priorities. We expect to divest the ACG business to a third-party buyer in 2021.
As of December 31, 2019, assets held for sale consisted of property, plant and equipment for an amount of EUR 13 million.
Philips completed three acquisitions in 2020. The acquisitions involved an aggregated net cash outflow of EUR 259 million and a contingent consideration of EUR 70 million at fair value. The company recognized an aggregated Goodwill of EUR 175 million, Other intangible assets of EUR 184 million and Deferred tax liabilities generated from the Intangible assets of EUR 45 million.
Opening balance positions are provisional and subject to final purchase price adjustments, which will be finalized in 2021. The primary provisional accounts subject to change are mainly related to the valuation of the intangible assets and goodwill, as the valuation studies necessary to determine the fair market value of the intangible assets and goodwill assumed are preliminary.
Intact Vascular, Inc. (Intact Vascular) was the most notable acquisition and is discussed below. The remaining two acquisitions involved an aggregated net cash outflow of EUR 28 million. The two acquisitions resulted in an increase in Goodwill of EUR 20 million. Other intangible assets and the related Deferred tax liabilities increased by EUR 15 million and EUR 2 million respectively.
On September 4, 2020, Philips acquired all shares of Intact Vascular, headquartered in Wayne, Pennsylvania. Intact Vascular is a developer of medical devices for minimally invasive peripheral vascular surgery. Philips acquired Intact Vascular to expand its portfolio of minimally invasive therapy options for Peripheral Artery Disease with the Tack Endovascular System, an implant that restores blood flow in small limb vessels, promotes healing and preserves limbs. The Company has purchased shares for an amount of EUR 241 million cash and a contingent consideration of EUR 70 million.
As of the acquisition date, Intact Vascular forms part of the Image-guided therapy business portfolio of the Diagnosis & Treatment segment.
In 2020, acquisition-related costs of EUR 2 million were recognized in General and administrative expenses.
The preliminary condensed opening balance sheet of Intact Vascular was as follows:
Intact Vascular
Opening Balance sheet
in millions of EUR
Goodwill recognized in the amount of EUR 155 million mainly represents revenue synergies expected from the combination of Philips’ interventional imaging platform and diagnostic and therapeutic devices with Intact Vascular’s unique, specialized implantable device to optimize the treatment of patients with Peripheral Artery Disease (PAD). Intact Vascular Goodwill is not tax deductible.
The provision for contingent consideration represents a Long-term provision of EUR 70 million, due in 2022 and 2023. The contingent consideration is based on a specified percentage of forecast revenue share, for which the maximum amount is unlimited. The estimated fair value of the contingent consideration is re-measured at each reporting period. Therefore, any changes in the fair value impacts reported earnings in each reporting period, thereby resulting in variability in earnings. For more details about the fair value measurements please refer to Fair value of financial assets and liabilities
Other intangible assets were comprised of the following:
Intact Vascular
Other intangible assets
in millions of EUR unless otherwise stated
amount at acquisition date | amortization period in years | |
---|---|---|
Technology | 160 | 14 |
Other | 9 | 14 |
Total other intangible assets | 169 |
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, discounted at a rate of 15.0%. The line Other includes the Intact Vascular trademarks; Tack Endovascular System and Tack.
The opening balance position represent the preliminary determination of the fair value of identifiable assets acquired and liabilities assumed from the acquisition. The final determination of the fair market values will be completed in 2021. As of December 31, 2020, the valuation studies necessary to determine the fair market value of the intangible assets and goodwill are preliminary.
Intact Vascular is an early stage revenue acquisition. As of the acquisition date, Intact Vascular contribution to sales and net income was not material. The same applies to the combined entity for the reporting period as though the acquisition date had been as of the beginning of the reporting period.
Philips did not complete any divestments in 2020.
On January 28, 2020, Philips announced that it will review options for future ownership of its Domestic Appliances business belonging to Personal Health. Philips started the process of creating a separate legal structure for this business within the Philips Group, which is expected to be completed in the course of 2021. Under the IFRS 5 assessment Philips has determined that Domestic Appliances business does not qualify as held for sale as of December 31, 2020. Philips concluded that the business as per December 31, 2020 is not available for immediate sale in its present condition to a third party. The Domestic Appliances business had EUR 2.2 billion sales in 2020. 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.
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. Including final purchase price adjustment processed in the course of 2020, the aggregated impact on Goodwill and Other intangible assets was EUR 83 million and EUR 105 million, respectively.
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.
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.
Below is a list of material subsidiaries as per December 31, 2020 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 by country
2020
As of December 31, 2020, 6 consolidated subsidiaries are not wholly owned by Philips (December 31, 2019: 6). In 2020, Sales to third parties and Net income for these subsidiaries in aggregate are EUR 468 million (December 31, 2019: EUR 581 million) and EUR 6 million (December 31, 2019: EUR 9 million) respectively.
Philips has investments in a number of associates. None of them are regarded as individually material. During 2020, Philips purchased 6 investments in associates, which involved an aggregate amount of EUR 37 million.
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.
At December 31, 2020, Philips’ shareholding in Philips Medical Capital, LLC had a carrying value of EUR 26 million (December 31, 2019: EUR 25 million).
The company does not have any material exposures to losses from interests in unconsolidated structured entities other than the invested amounts.
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
2018 | 2019 | 2020 | |
---|---|---|---|
Sales | 18,121 | 19,482 | 19,535 |
Costs of materials used | (4,826) | (5,321) | (5,240) |
Employee benefit expenses | (5,827) | (6,307) | (6,490) |
Depreciation and amortization1) | (1,089) | (1,402) | (1,520) |
Shipping and handling | (605) | (636) | (689) |
Advertising and promotion | (937) | (972) | (920) |
Lease expense2)3)3) | (225) | (52) | (36) |
Other operational costs4) | (2,947) | (3,114) | (3,047) |
Other business income (expenses) | 55 | (34) | (50) |
Income from operations | 1,719 | 1,644 | 1,542 |
Philips Group
Sales composition
in millions of EUR
2018 | 2019 | 2020 | |
---|---|---|---|
Goods | 13,973 | 14,810 | 14,698 |
Services | 3,325 | 3,811 | 4,058 |
Royalties | 402 | 381 | 317 |
Total sales from contracts with customers | 17,700 | 19,003 | 19,073 |
Other sources1) | 421 | 479 | 462 |
Sales | 18,121 | 19,482 | 19,535 |
At December 31, 2020, the aggregate amount of the transaction price allocated to remaining performance obligations from a sale of goods and services was EUR 12,193 million. The company expects to recognize approximately 48% 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 Sales per segment
in millions of EUR
2020 | |||||
---|---|---|---|---|---|
Sales at a point in time | Sales over time | Total sales from contracts with customers | Sales from other sources1) | Total sales2) | |
Diagnosis & Treatment | 5,132 | 2,998 | 8,129 | 46 | 8,175 |
Connected Care | 4,204 | 944 | 5,147 | 417 | 5,564 |
Personal Health | 5,396 | 11 | 5,407 | 0 | 5,407 |
Other | 61 | 327 | 389 | 0 | 389 |
Philips Group | 14,793 | 4,279 | 19,073 | 462 | 19,535 |
Philips Group
Disaggregation of Sales per segment
in millions of EUR
2018 | 2019 | ||||||
---|---|---|---|---|---|---|---|
Total sales | Sales at a point in time | Sales over time | Total sales from contracts with customers | Sales from other sources1) | Total sales2) | ||
Diagnosis & Treatment | 7,726 | 5,428 | 2,988 | 8,417 | 68 | 8,485 | |
Connected Care | 4,341 | 3,545 | 718 | 4,263 | 411 | 4,674 | |
Personal Health | 5,524 | 5,848 | 6 | 5,854 | 0 | 5,854 | |
Other | 530 | 162 | 308 | 469 | 0 | 469 | |
Philips Group | 18,121 | 14,982 | 4,021 | 19,003 | 479 | 19,482 |
Philips Group
Disaggregation of Sales per geographical cluster
in millions of EUR
2020 | |||||
---|---|---|---|---|---|
Sales at a point in time | Sales over time | Total sales from contracts with customers | Sales from other sources1) | Total sales2) | |
Western Europe | 3,663 | 931 | 4,594 | 19 | 4,613 |
North America | 4,712 | 2,140 | 6,853 | 95 | 6,949 |
Other mature geographies | 1,145 | 373 | 1,518 | 342 | 1,860 |
Total mature geographies | 9,520 | 3,444 | 12,965 | 457 | 13,422 |
Growth geographies | 5,273 | 835 | 6,108 | 5 | 6,113 |
Sales | 14,793 | 4,279 | 19,073 | 462 | 19,535 |
Philips Group
Disaggregation of Sales per geographical cluster
in millions of EUR
2018 | 2019 | ||||||
---|---|---|---|---|---|---|---|
Total sales | Sales at a point in time | Sales over time | Total sales from contracts with customers | Sales from other sources1) | Total sales2) | ||
Western Europe | 3,990 | 3,165 | 931 | 4,096 | 38 | 4,134 | |
North America | 6,338 | 4,944 | 1,894 | 6,837 | 114 | 6,951 | |
Other mature geographies | 1,892 | 1,226 | 357 | 1,583 | 322 | 1,905 | |
Total mature geographies | 12,221 | 9,335 | 3,181 | 12,515 | 474 | 12,990 | |
Growth geographies | 5,901 | 5,647 | 840 | 6,488 | 5 | 6,492 | |
Sales | 18,121 | 14,982 | 4,021 | 19,003 | 479 | 19,482 |
Cost of materials used represents the inventory recognized in cost of sales.
Philips Group
Employee benefit expenses
in millions of EUR
2018 | 2019 | 2020 | |
---|---|---|---|
Salaries and wages1) | 4,849 | 5,251 | 5,372 |
Post-employment benefits costs | 351 | 379 | 427 |
Other social security and similar charges: | |||
Required by law | 524 | 564 | 580 |
Voluntary | 103 | 112 | 112 |
Employee benefit expenses | 5,827 | 6,307 | 6,490 |
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.
The average number of employees by category is summarized as follows:
Philips Group
Employees
in FTEs
2018 | 2019 | 2020 | |
---|---|---|---|
Production | 30,774 | 35,640 | 39,770 |
Research & development | 10,700 | 12,287 | 11,129 |
Other | 26,175 | 24,301 | 24,110 |
Employees | 67,649 | 72,228 | 75,009 |
3rd party workers | 7,239 | 6,164 | 5,522 |
Philips Group | 74,888 | 78,392 | 80,531 |
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
2018 | 2019 | 2020 | |
---|---|---|---|
Netherlands | 11,427 | 11,679 | 11,585 |
Other countries | 63,460 | 66,713 | 68,946 |
Philips Group | 74,888 | 78,392 | 80,531 |
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
2018 | 2019 | 2020 | |
---|---|---|---|
Depreciation of property, plant and equipment | 438 | 645 | 726 |
Amortization of software | 64 | 75 | 86 |
Amortization of other intangible assets | 347 | 350 | 381 |
Amortization of development costs | 240 | 332 | 328 |
Depreciation and amortization | 1,089 | 1,402 | 1,520 |
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 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 costs are included in selling expenses in Consolidated statements of income.
The table below shows the fees attributable to the fiscal years 2018, 2019 and 2020 for services rendered by the respective Group auditors.
Philips Group
Agreed fees
in millions of EUR
2018 | 2019 | 2020 | |||||||
---|---|---|---|---|---|---|---|---|---|
EY NL1) | EY Network | Total | EY NL1) | EY Network | Total | EY NL1) | EY Network | Total | |
Audit fees | 7.2 | 5.0 | 12.2 | 8.4 | 6.2 | 14.6 | 8.8 | 5.6 | 14.4 |
consolidated financial statements | 7.2 | 2.4 | 9.6 | 8.4 | 3.4 | 11.8 | 8.8 | 2.9 | 11.7 |
statutory financial statements | 2.6 | 2.6 | 2.8 | 2.8 | 2.7 | 2.7 | |||
Audit-related fees2) | 0.6 | 0.4 | 1.0 | 0.5 | 0.3 | 0.8 | 2.0 | 0.5 | 2.5 |
divestment | 1.4 | 0.2 | 1.6 | ||||||
sustainability assurance | 0.4 | 0.4 | 0.4 | 0.4 | 0.5 | 0.5 | |||
other | 0.2 | 0.4 | 0.6 | 0.1 | 0.3 | 0.4 | 0.1 | 0.3 | 0.4 |
Fees | 7.8 | 5.4 | 13.2 | 8.9 | 6.5 | 15.4 | 10.8 | 6.1 | 16.9 |
Other business income (expenses) consists of the following:
Philips Group
Other business income (expenses)
in millions of EUR
2018 | 2019 | 2020 | |
---|---|---|---|
Result on disposal of businesses: | |||
income | 45 | 69 | 0 |
expense | 0 | (2) | 0 |
Result on disposal of fixed assets: | |||
income | 20 | 5 | 2 |
expense | (1) | 0 | 0 |
Result on other remaining businesses: | |||
income | 23 | 81 | 121 |
expense | (32) | (88) | (30) |
Impairment of goodwill | (97) | (144) | |
Other business income (expense) | 55 | (34) | (50) |
Total other business income | 88 | 155 | 123 |
Total other business expense | (33) | (188) | (173) |
The result on disposal of businesses was mainly due to divestment of non-strategic businesses. For more information, please refer to Acquisitions and divestments.
The result on disposal of fixed assets was mainly due to the sale of real estate assets.
The result on other remaining businesses mainly relates to revaluation of contingent consideration, non-core revenue and various legal matters. In 2020 revisions to EPD's forecast due to delays in commercialization caused by the need to do more work on the maturity of the technology resulted in a EUR 101 million decrease in the fair value of the respective contingent consideration liability and is reflected in Other business income. For more details on the contingent consideration updates, please refer to Provisions.
Impairment of goodwill is disclosed in detail in the goodwill section, please refer to Goodwill.
Philips Group
Financial income and expenses
in millions of EUR
2018 | 2019 | 2020 | |
---|---|---|---|
Interest income | 31 | 27 | 14 |
Interest income from loans and receivables | 8 | 10 | 8 |
Interest income from cash and cash equivalents | 22 | 17 | 7 |
Dividend income from financial assets | 2 | 52 | 3 |
Net gains from disposal of financial assets | 6 | 2 | 2 |
Net change in fair value of financial assets at fair value through profit or loss | 17 | 129 | |
Other financial income | 12 | 17 | 12 |
Financial income | 51 | 117 | 160 |
Interest expense | (188) | (196) | (173) |
Interest on debt and borrowings | (158) | (167) | (154) |
Finance charges under lease contract | (7) | (6) | (6) |
Interest expenses - pensions | (23) | (22) | (13) |
Provision-related accretion and interest | (15) | (22) | (22) |
Net foreign exchange losses | (2) | (2) | 3 |
Net change in fair value of financial assets at fair value through profit or loss | (1) | ||
Other financial expenses | (58) | (13) | (12) |
Financial expense | (264) | (233) | (204) |
Financial income and expenses | (213) | (117) | (44) |
In 2020, Financial income and expenses decreased by EUR 73 million year-on-year, mainly due to fair value gains of EUR 133 million from investments in limited life funds (mainly Gilde Healthcare) and other investments recognized at fair value through profit or loss. The fair value gain from investments in limited life funds is caused by IPO’s by certain of the investments held by the limited life funds. Net interest expenses in 2020 was EUR 10 million lower than in 2019, mainly due to lower interest expenses on net debt*) and interest expenses on pensions. Dividend income from investments decreased by EUR 49 million versus prior year.
In 2019, Financial income and expenses were EUR 117 million, which was EUR 97 million lower than in 2018 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 higher interest expenses on net debt*). The definition of this non-IFRS measure and a reconciliation to the IFRS measure is included in Equity.
The income tax expensebenefit of continuing operations amountedamounts to EUR 284113 million (2019:(2021: EUR 337103 million 2018tax benefit, 2020: EUR 193 million)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
2018 | 2019 | 2020 | 2020 | 2021 | 2022 | |
---|---|---|---|---|---|---|
Income before taxes of continuing operations1) | 1,505 | 1,528 | 1,499 | |||
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 | (314) | (324) | (475) | (380) | (298) | (97) |
Deferred tax (expense) benefit | 121 | (13) | 190 | 167 | 401 | 210 |
Income tax expense of continuing operations | (193) | (337) | (284) | |||
Income tax (expense) of continuing operations | (212) | 103 | 113 |
Income tax expensebenefit of continuing operations excludes the tax expensebenefit of the discontinued operations of EUR 1018 million (2019:(2021: EUR 9737 million tax benefit, 2018:expense, 2020: EUR 1481 million tax benefit).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
2018 | 2019 | 2020 | 2020 | 2021 | 2022 | |
---|---|---|---|---|---|---|
Current year tax (expense) benefit | (318) | (322) | (485) | (390) | (291) | (111) |
Prior year tax (expense) benefit | 4 | (2) | 10 | 10 | (7) | 14 |
Current tax (expense) | (314) | (324) | (475) | |||
Current tax (expense) benefit | (380) | (298) | (97) |
Philips Group
Deferred income tax expense
In millions of EUR
2018 | 2019 | 2020 | 2020 | 2021 | 2022 | ||
---|---|---|---|---|---|---|---|
Changes to recognition of tax loss and credit carry forwards | (2) | 59 | 0 | ||||
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 | 4 | (32) | 19 | 19 | (1) | (4) | |
Prior year tax (expense) benefit | 15 | (7) | (8) | (8) | 20 | (1) | |
Tax rate changes | (26) | 2 | 13 | 12 | 10 | (18) | |
Origination and reversal of temporary differences, tax losses and tax credits | 130 | (35) | 166 | 137 | 245 | 244 | |
Deferred tax (expense) benefit | 121 | (13) | 190 | 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% (2019: 25.0% 2018:2020: 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 %
2018 | 2019 | 2020 | 2020 | 2021 | 2022 | |
---|---|---|---|---|---|---|
Weighted average statutory income tax rate in % | 24.9 | 25.2 | 25.0 | 25.2 | 22.7 | 23.6 |
Recognition of previously unrecognized tax loss and credit carryforwards | (0.4) | (3.9) | (0.4) | (0.5) | (26.9) | 0.1 |
Unrecognized tax loss and credit carryforwards | 0.5 | 0.1 | 0.4 | 0.0 | 1.9 | (0.7) |
Changes to recognition of temporary differences | (0.3) | 2.1 | (1.3) | (1.6) | 0.3 | (0.2) |
Non-taxable income and tax incentives | (11.9) | (9.5) | (10.8) | (12.9) | (40.6) | 5.8 |
Non-deductible expenses | 3.7 | 5.3 | 5.8 | 7.0 | 19.3 | (22.9) |
Withholding and other taxes | 4.5 | 3.7 | 0.5 | 0.6 | 7.2 | (1.4) |
Tax rate changes | 1.8 | (0.1) | (0.9) | (1.0) | (1.9) | (1.0) |
Prior year tax | (1.3) | 0.6 | (0.1) | (0.2) | (2.4) | 0.7 |
Tax expense (benefit) due to change in uncertain tax treatments | (8.6) | (1.6) | 0.9 | 1.2 | 4.4 | 2.8 |
Others, net | (0.1) | 0.2 | (0.1) | (0.2) | (4.0) | (0.2) |
Effective income tax rate | 12.8 | 22.1 | 19.0 | 17.6 | (20.0) | 6.5 |
The effective income tax rate is lower than the weighted average statutory income tax rate in 20202022 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 relatingrelated to R&D investments, the innovation box regime in the Netherlands and export activities, and one-off benefits fromactivities.
Due to the loss position in 2022, items such as non-deductible expense lead to a decrease in tax rate and non-taxable results from participations, presented under Withholding and other taxes and Non-taxable income and tax incentives respectively.
The decrease inof the effective income tax rate comparedand items such as tax incentives lead to 2019 is mainly due to these one-off benefits. This effect is partly offset by lower non-cash benefits from business integration compared to 2019.an increase in the effective income tax rate.
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 20202022 and 20192021 respectively are presented in the tables below.following tables.
The net deferred tax assets of EUR 1,7612,358 million (2019:(2021: EUR 1,7212,134 million) consist of deferred tax assets of EUR 1,8202,449 million (2019:(2021: EUR 1,8652,216 million) and deferred tax liabilities of EUR 5991 million (2019:(2021: EUR 14383 million). Of the total deferred tax assets of EUR 1,8202,449 million atas of December 31, 2020 (2019:2022 (2021: EUR 1,8652,216 million), EUR 351,453 million (2019:(2021: EUR 23912 million) is recognized in respect of entities in various countries where there have been tax losses in the current or preceding period. Management’sThe 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 the results of future operations will generate sufficient taxable income to utilize thesethe 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 monitored closely.
AtAs of December 31, 20202022 the temporary differences associated with investments, including potential income tax consequences on dividends, for which no deferred tax liabilities are recognized, aggregate to EUR 275355 million (2019:(2021: EUR 327298 million).
Philips Group
Deferred tax assets and liabilities
in millions of EUR
Balance as of January 1, 2020 | recognized in income statement | other1) | Balance as of December 31, 2020 | Assets | Liabilities | Balance as of January 1, 2022 | recognized in income statement | other1) | Balance as of December 31, 2022 | Assets | Liabilities | |
---|---|---|---|---|---|---|---|---|---|---|---|---|
Intangible assets | 132 | 147 | (39) | 240 | 379 | (140) | 587 | 63 | (20) | 630 | 783 | (152) |
Property, plant and equipment | 58 | (22) | (4) | 32 | 65 | (32) | 29 | (33) | 2 | (2) | 49 | (52) |
Inventories | 252 | 77 | (16) | 313 | 317 | (4) | 372 | 75 | 17 | 464 | 473 | (8) |
Other assets | 56 | 37 | 4 | 97 | 135 | (38) | 68 | (16) | (8) | 44 | 98 | (55) |
Pensions and other employee benefits | 269 | 4 | (27) | 245 | 251 | (6) | 180 | 6 | (32) | 153 | 175 | (22) |
Other liabilities | 334 | 81 | (30) | 384 | 436 | (52) | 499 | (34) | 17 | 483 | 560 | (77) |
Deferred tax assets on tax loss carryforwards | 620 | (133) | (38) | 449 | 398 | 149 | 38 | 586 | ||||
Set-off deferred tax positions | (212) | 212 | (275) | 275 | ||||||||
Net deferred tax assets | 1,721 | 190 | (151) | 1,761 | 1,820 | (59) | 2,134 | 210 | 14 | 2,358 | 2,449 | (91) |
Philips Group
Deferred tax assets and liabilities
in millions of EUR
Balance as of January 1, 2019 | recognized in income statement | other1) | Balance as of December 31, 2019 | Assets | Liabilities | Balance as of January 1, 2021 | recognized in income statement | other1) | Balance as of December 31, 2021 | Assets | Liabilities | |
---|---|---|---|---|---|---|---|---|---|---|---|---|
Intangible assets | (162) | 317 | (23) | 132 | 280 | (148) | 240 | 535 | (188) | 587 | 716 | (130) |
Property, plant and equipment | 12 | 38 | 8 | 58 | 67 | (9) | 32 | 13 | (16) | 29 | 55 | (26) |
Inventories | 257 | (6) | 1 | 252 | 259 | (7) | 313 | 31 | 28 | 372 | 381 | (9) |
Other assets | 50 | (15) | 21 | 56 | 90 | (33) | 97 | (30) | 1 | 68 | 112 | (43) |
Pensions and other employee benefits | 267 | 4 | (1) | 269 | 270 | (1) | 245 | (45) | (21) | 180 | 182 | (2) |
Other liabilities | 428 | (119) | 25 | 334 | 436 | (102) | 384 | 91 | 25 | 499 | 584 | (84) |
Deferred tax assets on tax loss carryforwards | 824 | (231) | 27 | 620 | 449 | (194) | 143 | 398 | ||||
Set-off deferred tax positions | (156) | 156 | (211) | 211 | ||||||||
Net deferred tax assets | 1,676 | (13) | 59 | 1,721 | 1,865 | (143) | 1,761 | 401 | (28) | 2,134 | 2,216 | (83) |
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, 2019 | Unrecognized balance as of December 31, 2019 | Total Balance as of December 31, 2020 | Unrecognized balance as of December 31, 2020 | Total Balance as of December 31, 2021 | Unrecognized balance as of December 31, 2021 | Total Balance as of December 31, 2022 | Unrecognized balance as of December 31, 2022 | |
---|---|---|---|---|---|---|---|---|
Within 1 year | 3 | 0 | 5 | 1 | 1,593 | 1,592 | 4 | 3 |
1 to 2 years | 6 | 3 | 1,546 | 1,541 | 6 | - | 10 | 5 |
2 to 3 years | 1,680 | 1,679 | 13 | 3 | 9 | - | 9 | 3 |
3 to 4 years | 14 | 7 | 235 | 0 | 7 | - | 13 | 4 |
4 to 5 years | 519 | 3 | 23 | 0 | 18 | - | 38 | 3 |
Later | 1,173 | 12 | 1,026 | 24 | 751 | 21 | 812 | 93 |
Unlimited | 1,746 | 1,123 | 1,428 | 951 | 1,567 | 934 | 2,301 | 920 |
Total | 5,141 | 2,826 | 4,276 | 2,520 | 3,951 | 2,547 | 3,187 | 1,032 |
AtAs of December 31, 2020,2022, 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 (2019:million). The unrecognized balance as of December 31, 2021 (expiring within 1 year, EUR 311,592 million). which were partly utilized and the remainder expired unutilized.
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 (2020:(2022: EUR 291435 million, 2019:2021: EUR 186544 million, increasedecrease due to lowerrelease 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:
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.
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.
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.
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.
Philips Group
Property,The cost of property, plant and equipment comprise all directly attributable costs (including the cost of material and direct labor).
in millionsDepreciation is generally calculated using the straight-line method over the useful life of EUR
land and buildings | machinery and installations | other equipment | prepayments and construction in progress | total | ||||||
---|---|---|---|---|---|---|---|---|---|---|
owned | right-of-use | owned | right-of-use | owned | right-of-use | owned | right-of-use | owned | right-of-use | |
Balance as of January 1, 2020 | ||||||||||
Cost | 876 | 1,355 | 1,531 | 251 | 1,548 | 233 | 323 | 1 | 4,279 | 1,839 |
Accumulated depreciation | (395) | (326) | (1,055) | (188) | (1,184) | (105) | (2,634) | (618) | ||
Book value | 481 | 1,029 | 476 | 63 | 365 | 127 | 323 | 1 | 1,645 | 1,221 |
Change in book value: | ||||||||||
Capital expenditures/additions | 28 | 80 | 60 | 53 | 84 | 97 | 399 | 2 | 571 | 231 |
Assets available for use | 117 | 2 | 162 | 160 | 3 | (441) | (2) | (2) | 2 | |
Depreciation | (47) | (161) | (167) | (55) | (180) | (73) | 0 | 0 | (394) | (289) |
Impairments | (3) | (5) | (13) | (4) | (16) | 0 | 0 | (32) | (10) | |
Reclassifications | 0 | (64) | (7) | (7) | (1) | (21) | (3) | (11) | (91) | |
Translations differences and other | (39) | (43) | (33) | 5 | (25) | (6) | (17) | 0 | (114) | (44) |
Total changes | 56 | (192) | 2 | (8) | 22 | (1) | (62) | 0 | 17 | (201) |
Balance as of December 31, 2020 | ||||||||||
Cost | 1,076 | 1,147 | 1,506 | 199 | 1,572 | 213 | 261 | 1 | 4,415 | 1,560 |
Accumulated depreciation | (539) | (310) | (1,028) | (144) | (1,185) | (86) | (2,752) | (540) | ||
Book value | 537 | 837 | 478 | 55 | 387 | 126 | 261 | 1 | 1,663 | 1,020 |
Philips Group
Property,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
in millions of EUR
land and buildings | machinery and installations | other equipment | prepayments and construction in progress | total | ||||||
---|---|---|---|---|---|---|---|---|---|---|
owned | right-of-use | owned | right-of-use | owned | right-of-use | owned | right-of-use | owned | right-of-use | |
Balance as of January 1, 2019 | ||||||||||
Cost | 1,069 | 813 | 1,476 | 192 | 1,442 | 152 | 203 | 4,190 | 1,158 | |
Accumulated depreciation | (528) | (44) | (1,040) | (124) | (1,104) | (36) | (2,671) | (205) | ||
Book value | 541 | 769 | 436 | 68 | 338 | 116 | 203 | 1,519 | 953 | |
Change in book value: | ||||||||||
Capital expenditures | 5 | 373 | 34 | 96 | 40 | 59 | 425 | 3 | 505 | 532 |
Assets available for use | 51 | 6 | 108 | 138 | 4 | (306) | (3) | (9) | 7 | |
Acquisitions | 0 | 27 | 1 | 28 | ||||||
Depreciation | (30) | (157) | (123) | (80) | (157) | (57) | (310) | (293) | ||
Impairments | (17) | (1) | (14) | (1) | (9) | (1) | 0 | 0 | (40) | (2) |
Reclassifications | (74) | 47 | 25 | (21) | (30) | 20 | 1 | 1 | (79) | 48 |
Translations differences and other | 4 | (9) | 9 | 18 | (14) | 0 | 0 | 31 | (23) | |
Total changes | (61) | 260 | 40 | (5) | 26 | 11 | 120 | 1 | 126 | 268 |
Balance as of December 31, 2019 | ||||||||||
Cost | 876 | 1,355 | 1,531 | 251 | 1,548 | 233 | 323 | 1 | 4,278 | 1,840 |
Accumulated depreciation | (395) | (326) | (1,055) | (188) | (1,184) | (105) | (2,634) | (619) | ||
Book value | 481 | 1,029 | 476 | 63 | 365 | 127 | 323 | 1 | 1,645 | 1,221 |
Land with a book value of EUR 47 million (2019: EUR 51 million) is not depreciated. items are depreciated over their estimated useful lives to their estimated residual values.
The expectedestimated useful lives of property, plant and equipment are as follows:
Philips Group
Useful lives of property, plant and equipment
in years
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.
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.
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.
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.
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 future cash flows.
Estimates are required to determine the (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 asset's expected sales price (based on recent market transactions of similar sold items) and its material scrap value.
Significant judgment is required to determine the lease term. The assessment of whether the company is reasonably certain to exercise extension options impacts the lease term, which could affect the amount of lease liabilities and right-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 use in Philips' operating activities.
Philips Group
Property, plant and equipment
in 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 |
Below are the references with respect to year-end disclosures as lessee:
Other qualitative and quantitative disclosures regarding the nature of lessee’s leasing activities and future lease obligations, refer to Debt.
Below are the references with respect to year-end disclosures as lessor:
The measurement of goodwill at initial recognition is described in the Acquisitions and divestments note. Goodwill is subsequently measured at cost less accumulated impairment losses.
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.The changes in 20192021 and 20202022 were as follows:
Philips Group
Goodwill
in millions of EUR
2019 | 2020 | 2021 | 2022 | |
---|---|---|---|---|
Balance as of January 1: | ||||
Balance as of January 1 | ||||
Cost | 9,908 | 10,182 | 9,094 | 11,793 |
Impairments | (1,405) | (1,528) | (1,080) | (1,156) |
Book value | 8,503 | 8,654 | 8,014 | 10,637 |
Changes in book value: | ||||
Acquisitions | 83 | 189 | 2,095 | 317 |
Impairments | (97) | (144) | (15) | (1,357) |
Divestments and transfers to assets classified as held for sale | 0 | (12) | (189) | |
Translation differences and other | 165 | (673) | 732 | 641 |
Balance as of December 31: | ||||
Total change | 2,622 | (399) | ||
Balance as of December 31 | ||||
Cost | 10,182 | 9,094 | 11,793 | 12,747 |
Impairments | (1,528) | (1,080) | (1,156) | (2,509) |
Book value | 8,654 | 8,014 | 10,637 | 10,238 |
In 2020,2022, goodwill decreased by EUR 640399 million, mainly due to translation differences which impactedprimarily as a result of goodwill denominated in USD and impairments totalingof EUR 1441,357 million related to Population Health Management (PHM). The decrease is partially offset by goodwill increases from the acquisition of Intact Vascular for an amounttranslation differences of EUR 155641 million and other acquisitions as well asof EUR 317 million (which includes changes in the provisional opening balance sheet position for certain 20192021 acquisitions, (referrefer to Acquisitions and divestments).
GoodwillIn 2021, goodwill increased by EUR 832,622 million, in 2019 primarily as a result of severalprovisional goodwill recognized on new acquisitions of which none were individually material as well as changesBioTelemetry (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 provisional opening balance sheet position for certain 2018 acquisitions. The further increaseperiod, mostly relating to the Domestic Appliances business. For details on the impact of EUR 165 million is mainly duenew acquisitions and the divestment of the Domestic Appliances business, refer 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)Acquisitions and Neuro cash generating units (CGUs),divestments.
In Q4 2020, the PHM CGU was split, resulting in a separate CGU for the Aging2022 and Caregiving (ACG) business in anticipation of its future divestment. After the PHM impairment, remaining goodwill was allocated2021 there were changes to the ACG CGU and remaining PHM CGU based on relative fair value. The goodwill allocated to the remaining PHM CGU is immaterial. An additional CGU change in 2020structure 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.
In 2019 thereThese reallocations were several changes to the CGU structure following the reorganization announced in January 2019 in order to align business with customer needs. This resulted in goodwill reallocations across CGUs, none of which hadperformed using a significant impact on headroom or lead to goodwill impairments.
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. In Q4 2019 CGU PIC/VH and Aging and Caregiving combined into one Population Health Management (PHM) CGU. Unrelated
During 2022 goodwill impairment charges of EUR 1,357 million were recognized. This relates to this combination, prior to this in the third quarter impairment charge of 2019,EUR 1,331 million in the then PIC/VHSleep & Respiratory Care (S&RC) CGU recognizedof the Connected Care segment. In addition, as a result of the annual impairment testing a goodwill impairment further explained below.
Incharge of EUR 27 million was recognized in relation to the fourth quarterPrecision Diagnosis Solutions (PDS) CGU which is part of 2020, the PHMDiagnosis & 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 split, resulting indivested as of June 30, 2021. Prior to the divestment a separate CGU for the ACG business in anticipation of its future divestment. Thegoodwill impairment test indicated that the pre-split PHM’s carrying balance of EUR 30313 million exceededwas recorded to reflect a decrease in the recoverable amount of EUR 195 million, resulting in a EUR 108 millionthe CGU, this reduced the goodwill impairment charge. After the PHM impairment, further described below, remaining goodwill in the amount of EUR 63 million was allocated to the ACG CGU and remaining PHM CGU based on their relative fair value. Upon reallocation, standalone impairment tests were completed for ACG and the remaining PHM business. This second impairment test indicated that ACG’s carrying balance of EUR 186 million exceeded the recoverable amount of EUR 150 million resulting in a EUR 36 million impairment charge. In total, EUR 144 million of impairment charges were recorded within the Connected Care segment, in the line Other business expenses in the statement of income.
In accordance with IFRS, theCGU to zero. The fair value less cost of disposal methodology was the basis used to estimate the recoverable amount for these CGUs, as at the date of the impairment tests described above, the fair value less cost of disposalPERS CGU, this was higher than the value-in-use for these CGUs. The declinebased on Level 3 inputs. Key assumptions and inputs used in the value-in-use as compared tocalculation included the fair value less cost of disposal is mainly due to revisions to the financial forecast of our Personal Emergency Response System business as a result of lower demand. The fair value, determined by Management, reflects the current operating environment and business outlook, including COVID-19 uncertainties,signed purchase agreement for the PHMPERS divestment. The impairment of EUR 13 million was recorded in the Connected Care segment.
As explained in the accounting policy above, goodwill is tested for impairment annually and ACG CGU. Refer to the ‘Key assumptions- general’ for further detail on the fair value methodology.
Remaining ACG goodwill post-reallocation andwhenever impairment charges totaled EUR 12 million, and was subsequently classified as asset held for sale (AHFS) after the impairment. Refer to Discontinued operations and assets classified as held for sale for further detail. Remaining PHM goodwill post-reallocation totaled EUR 15 million.
Duringindicators require. In the third quarter of 2019, it2022, an impairment indicator was determined thatnoted in relation to the PIC/VHS&RC CGU withinas a consequence of revisions to 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 withinexpected future cashflows of the CGU. The business offers services and solutions leveraging data, analytics and actionable workflow products for solutions to improve clinical and financial results. The valuedrivers of the CGU, determined basedrevised 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 value in use methodology, presented a recoverable amount of EUR 158 million based onFDA, along with updates to expected business performance and changes to the revised downward forecast, while the carrying amount totaled EUR 236 million as of September 30, 2019. The results of thatpre-tax discount rate. An impairment test indicated that the recoverable amount was lower than the carrying value, resultingperformed 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 imagingorder 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, whiledetermine 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 totaledimpairment charge of EUR 191,331 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 timeinterim testing date are presented below:
Philips Group
Key assumptions
- 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% |
In addition to the above assumptions, assumptions were made regarding the estimated impact of impairment. This resulted in a write-offconsent decree on the business. These assumptions included the expected financial impact of the fullscope 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.
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 Image-Guided Therapy,Ambulatory Monitoring & AnalyticsDiagnostics, Hospital Patient Monitoring and Sleep & Respiratory CareImage-Guided Therapy is considered to be significant in comparison to the total book value of goodwill for the Group atas of December 31, 2020.2022. The amounts associated as of December 31, 20202022 are presented below:in the following table:
Philips Group
Goodwill allocated to the cash-generating units
in millions of EUR
2019 | 2020 | 2021 | 2022 | |
---|---|---|---|---|
Ambulatory Monitoring & Diagnostics | 1,897 | 2,215 | ||
Hospital Patient Monitoring | 1,663 | 1,806 | ||
Image-Guided Therapy | 2,673 | 2,610 | 2,802 | 3,154 |
Monitoring & Analytics | 1,360 | 1,246 | ||
Sleep & Respiratory Care | 2,071 | 1,915 | 2,031 | 731 |
Other (units carrying a non-significant goodwill balance) | 2,550 | 2,244 | 2,245 | 2,332 |
Book value | 8,654 | 8,014 | 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 to disposeof 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.
As a result of the uncertainty associated with the nature of the COVID-19 pandemic, the company includes various scenarios in the business forecasting process and the most reasonable and supportable assumptions that represent management’s best estimate is used as basis for the value-in-use test. While determining assumptions on COVID-19 recovery, management considered external factors including COVID-19 spread by country, specific dynamics for each CGU, other macroeconomic conditions as well as Philips specific assumptions, including expected customer capex spend and business market growth. Philips considered multiple scenarios for each market that included high, mid and low COVID recovery scenarios. The high recovery scenario suggests a more rapid recovery through the first half of the initial forecast period while the low scenario suggests a more prolonged recovery through the same period. By the end of the initial forecast period, all three scenarios converge to roughly the same market growth rates. Philips generally utilized the mid scenario forecasting short-term COVID-19 impacts with expected market recovery later in the initial forecast period. In addition, results of the goodwill impairment tests were analyzed to determine alignment with current market conditions. In the case that market data indicated that models didn’t fully consider impacts of COVID-19 within the forecasts, Philips would reexamine key inputs, such as forecast inputs or discount rates used. Upon this review, no additional changes were required. There were certain CGUs that were more negatively impacted by COVID-19 than others. Amongst those, IGT within the D&T segment as well as the CGUs within Personal Health were negatively impacted. Considering the current headroom in these CGUs, any reasonable change in these assumptions reflecting increased COVID-19 risks or prolonged impact would not cause the value in use to fall to the level of the carrying value. Refer to COVID-19 for further detail on COVID-19 considerations.
Key assumptions used in the value-in-use impairment tests for the units were sales growth rates, EBITA%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 20212023 to 2024.2025. Projections were extrapolated with stable or declining growth rates for aan extrapolation period of 34 years (2025-2027)(2026-2029), after which a terminal value was calculated per 2028.2030. For the terminal value calculation, growth rates were capped at a historical long-term average growth rate. This represents a change in methodology from previous years asIn the explicit forecast increased from 3 to 4 years whilecase of the extrapolated growth period decreased from 4 to 3 years. The change in methodology from 2019 to 2020 was based on changesAmbulatory Monitoring & Diagnostics CGU management's internal forecasts were used in the internal forecasting process.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 differ 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 previously noted,explained above, for S&RC this increased pre-tax discount rate contributed to the fair value less cost of disposal methodology was used as the recoverable amount when the amount was greater than the value-in-use, specifically for the PHM and ACG CGUs. The fair value is based on Level 3 inputs. Key assumptions and inputs usedimpairment charge recognized in the fair value less costthird quarter of disposal calculation include the trading and M&A peer groups used to determine the sales market multiples, the control premium applied to the trading sales market multiples. These inputs were applied against 2020 actual revenue for the CGUs. The trading and M&A peer groups were comprised of public companies or publicly disclosed transactions in similar industries, markets, geographies and other relevant characteristics. This trading and M&A peer group was derived from input by the business, M&A and Treasury and was evaluated and challenged for completeness and inclusion based on management’s industry experience as well as the current business and market environment. External sources were used to determine the enterprise value and revenue for the trading peer group. A control premium was added to the trading sales market multiple to simulate the premium a market participant would pay, representing the high end of the range. The control premium was sourced from global public M&A transactions from 2019 and 2020. The sales market multiple with no premium represents the low end of the range. The recoverable amount for the test was a point in between the high and low end of the range.2022.
CashIn 2022 cash flow projections of Image-Guided Therapy,Ambulatory Monitoring & AnalyticsDiagnostics, Hospital Patient Monitoring, Image-Guided Therapy and Sleep & Respiratory Care are based on the key assumptions included in the following table, below, which were used in the annual impairment test performed in the fourth quarter. For certain CGUs, including M&A and S&RC, the initial forecast period projects negative growth as these businesses experienced benefits from COVID-19 in 2020.
Philips Group
Key assumptions
20202022
compound sales growth rate1) | compound sales growth rate1) | |||||||
---|---|---|---|---|---|---|---|---|
initial forecast period | extra-polation period2) | used to calculate terminal value3) | pre-tax discount rates | 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 | 8.6% | 4.9% | 2.5% | 9.0% | 8.7% | 5.0% | 2.5% | 10.6% |
Monitoring & Analytics | (0.3)% | 3.3% | 2.5% | 9.4% | ||||
Sleep & Respiratory Care | (1.2)% | 4.4% | 2.5% | 9.7% | 10.0% | 5.0% | 2.5% | 9.9% |
The assumptions used for the 20192021 cash flow projections were as follows:
Philips Group
Key assumptions
20192021
compound sales growth rate1) | compound sales growth rate1) | |||||||
---|---|---|---|---|---|---|---|---|
initial forecast period | extra-polation period2) | used to calculate terminal value3) | pre-tax discount rates | 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 | 9.3% | 6.4% | 2.5% | 8.8% | 10.2% | 5.4% | 2.5% | 8.9% |
Monitoring & Analytics | 4.6% | 3.8% | 2.5% | 10.1% | ||||
Sleep & Respiratory Care | 8.1% | 4.8% | 2.5% | 9.7% | 9.2% | 5.0% | 2.5% | 9.2% |
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 significant 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 Contingencies.
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 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.
ForThe results of the otherannual 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.
Philips Group
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 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, 2020 | ||||||||
Cost | 709 | 2,476 | 2,491 | 2,387 | 578 | 784 | 154 | 9,579 |
Amortization/ impairments | (524) | (1,587) | (1,530) | (1,795) | (56) | (527) | (94) | (6,113) |
Book value | 184 | 890 | 961 | 592 | 523 | 257 | 59 | 3,466 |
Changes in book value: | ||||||||
Additions | 1 | 12 | 0 | 305 | 127 | 2 | 449 | |
Assets available for use | 373 | (374) | 0 | 0 | ||||
Acquisitions | 8 | 1 | 175 | 0 | 0 | 185 | ||
Amortization | (26) | (121) | (103) | (221) | 0 | (84) | (4) | (560) |
Impairments | 0 | (1) | (118) | (62) | (44) | (2) | (8) | (235) |
Transfers to assets classified as held for sale | (33) | (55) | (1) | (8) | (2) | (3) | (102) | |
Translation differences and other | (13) | (64) | (58) | (53) | (10) | 0 | (6) | (204) |
Total changes | (65) | (239) | (92) | 30 | (125) | 38 | (15) | (468) |
Balance as of December 31, 2020 | ||||||||
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 |
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, 2019 | ||||||||
Cost | 689 | 2,421 | 2,400 | 2,103 | 532 | 684 | 168 | 8,997 |
Amortization/ impairments | (484) | (1,488) | (1,330) | (1,483) | (51) | (480) | (93) | (5,408) |
Book value | 205 | 934 | 1,070 | 621 | 481 | 204 | 75 | 3,589 |
Changes in book value: | ||||||||
Additions | 0 | 28 | (1) | 338 | 129 | 4 | 497 | |
Assets available for use | 296 | (296) | 0 | 1 | ||||
Acquisitions | 3 | 56 | 24 | 0 | (5) | 77 | ||
Amortization | (31) | (119) | (127) | (229) | (75) | (6) | (587) | |
Impairments | 0 | (1) | (66) | (96) | (8) | 0 | (171) | |
Translation differences and other | 7 | 20 | 32 | 0 | 8 | 0 | (9) | 59 |
Total changes | (21) | (44) | (110) | (29) | 41 | 54 | (16) | (124) |
Balance as of December 31, 2019 | ||||||||
Cost | 709 | 2,476 | 2,491 | 2,387 | 578 | 784 | 154 | 9,579 |
Amortization/ impairments | (524) | (1,587) | (1,530) | (1,795) | (56) | (527) | (94) | (6,113) |
Book Value | 184 | 890 | 961 | 592 | 523 | 257 | 59 | 3,466 |
Acquisitions in 2020 involved Intangible assets of EUR 185 million in aggregate (2019: EUR 77 million). For more information, please refer to Acquisitions and divestments. Impairments in 2020 were EUR 235 million. The most notable impairment in 2020 is in the Diagnosis & Treatment segment, for technology assets in Image Guided Therapy-Systems (IGT-Systems) of EUR 92 million. This impairment charge is based on a trigger-based test on the CGU EPD which is a business category and an innovator in image-guided procedures for cardiac arrhythmias (heart rhythm disorders). The impairment charge is a result of revisions to forecast due to delays in commercialization caused by the need to do more work on the maturity of the technology. The basis of the recoverable amount used in this test is the value in use and an after-tax discount rate of 6.92% is applied. After the impairment charge the recoverable amount of the related intangible assets is EUR 93 million.
Other notable impairments are in the Diagnosis & Treatment segment, for product development under construction in IGT-Devices of EUR 22 million and in the Connected Care segment, for product development in the business Therapeutic Care (TC) of EUR 23 million and in the business Sleep & Respiratory Care (S&RC) of EUR 23 million. The impairments in the IGT-Devices and TC business are the result of revision of strategies in the respective businesses and resulted in full impairment of the respective assets. The impairment in the business S&RC is due to delays in commercialization as a result of further product improvements in combination with expected COVID-19 market dynamics. After impairment the carrying value of the related intangible asset is EUR 70 million. The basis of the recoverable amount used in these tests is the value in use.
As a result of the uncertainty associatedinitially capitalized at cost, with the nature of the COVID-19 pandemic, the company includes various scenarios in the business forecasting process and the most reasonable and supportable assumptions that represent management’s best estimate is used as basis for the value-in-use test. While determining assumptions on COVID-19 recovery, management considered external factors including COVID-19 spread by country, specific dynamics for each CGU, other macroeconomic conditions as well as Philips specific assumptions, including expected customer capex spend and business market growth. Philips considered multiple scenarios for each business that included high, mid and low COVID recovery scenarios. The high recovery scenario suggests a more rapid recovery, while the low scenario suggests a more prolonged recovery over several years. The mid scenario suggests short-term COVID-19 impacts with expected market recovery earlier than the low scenario. For the impairment tests on product development in the business S&RC Philips utilized a scenario forecasting short-term COVID-19 impacts, which means a dip in demand post-COVID, with expected market recovery later in the forecast period. For the EPD impairment test, Philips used the high recovery scenario. A reasonably prolonged recovery would not materially affect the outcome of the impairment test. In addition, there were certain businesses that were more negatively impacted by COVID-19 than others. Amongst those, IGT within the D&T segment as well as the businesses within Personal Health were negatively impacted. Considering the current headroom in these CGUs, any reasonable change in these assumptions reflecting increased COVID-19 risks or prolonged impact would not cause the value in use to fall to the level of the carrying value. Refer to COVID-19 for further detail on COVID-19 considerations.
The amortizationexception 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 specifiedcapitalized 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 Income from operations.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.
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
Brand names | 2-20 |
Customer relationships | 2-25 |
Technology | 3-20 |
Other | 1-10 |
Software | 1-10 |
Product development |
The weighted average expected remaining life of brand names, customer relationships, technology and other intangible assets is 9.19.4 years as of December 31, 2020 (2019: 8.22022 (2021: 9.6 years).
Intangible assets not yet ready for use are not amortized but are tested for impairment annually and whenever impairment indicators require. In the case of 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.
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.
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, 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 Acquisitions and divestments.
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 2022 an initiative was undertaken to enhance productivity in R&D, specifically to shift the focus to fewer, high-impact projects in the innovation pipeline. As a result of this initiative EUR 132 million of product development (including product development construction in progress) asset impairments were recognized.
The most notable impairments in 2022, recognized as part of the above 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 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 amortization of intangible assets is specified in Income from operations.
The most notable intangible assetassets as of December 31, 2020 relates2022 relate to the BioTelemetry customer relationships and technology with a carrying value of EUR 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 287291 million and EUR 212203 million and a remaining amortization period of 1715 years and 1210 years, respectively. The most notable intangible assetassets as of December 31, 2019 relates2021 relate to the BioTelemetry customer relationships and technology with value of EUR 391 million and EUR 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 333292 million and EUR 252210 million and a remaining amortization period of 1816 years and 1311 years, respectively.
The classification of financial assets 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 at fair value through profit or loss, transaction costs.
For the purposes of subsequent measurement, financial assets are classified into four categories:
The company recognizes a loss allowance for expected credit losses for trade receivables, contract assets, lease receivables, debt investments carried 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.
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 assessment. The calculation of expected credit losses requires the company to apply significant judgment and make estimates and assumptions that involve significant uncertainty at the time 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 recognized.
In 2020,2022, Other current financial assets decreasedincreased from EUR 12 million to EUR 0 million.
In 2019, Other current financial assets decreased by EUR 43511 million (2021: increased from EUR 436nil million to EUR 1 million. 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.2 million).
The changes during 2020 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, 2020 | 136 | 72 | 40 | 248 |
Changes: | ||||
Acquisitions/additions | 44 | 82 | 4 | 131 |
Sales/redemptions/reductions | (59) | (3) | (2) | (65) |
Value adjustment through OCI | 0 | 3 | 0 | 3 |
Value adjustment through P&L | 133 | 0 | 0 | 133 |
Translation differences and other | (6) | (5) | (6) | (17) |
Reclassifications | 0 | (3) | 0 | (3) |
Balance as of December 31, 2020 | 248 | 146 | 37 | 430 |
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, 2019 | 116 | 198 | 46 | 360 |
Changes: | ||||
Acquisitions/additions | 48 | 15 | 11 | 75 |
Sales/redemptions/reductions | (48) | (109) | (17) | (174) |
Value adjustment through OCI | 0 | (33) | 0 | (33) |
Value adjustment through P&L | 18 | 0 | 1 | 18 |
Translation differences and other | 1 | 2 | 0 | 3 |
Reclassifications | 1 | (1) | (1) | (1) |
Balance as of December 31, 2019 | 136 | 72 | 40 | 248 |
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. AtThe 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, 2020,2022, equity investments of EUR 119259 million (2019:(2021: EUR 45273 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 2020,The company recognizes contract assets for revenue earned from installation services because the main addition in Other non-current financial assets at FVTOCIreceipt of consideration is related toconditional on successful completion of the company's investment in DC Health Digital Medical Technologies Co., Ltd in Chinainstallation. Upon completion of EUR 45 million. The main movement in Other non-current financial assets at FVTPL is related to the value adjustments through P&L, mainly due to fair value gains of EUR 133 million from investments in limited life funds (mainly Gilde Healthcare)installation and other investments. The fair value gains from investments in limited life funds is caused by certain IPO’s of investments heldacceptance by the limited life funds.customer, the amount recognized as contract assets is reclassified to trade receivables.
Other assets are measured at amortized cost minus any impairment losses.
Other non-current assets in 2020as of December 31, 2022 were EUR 6698 million (2019:(2021: EUR 47129 million). These are mainly related to prepaid expenses.
Other current assets as of December 31, 2022 of EUR 424490 million (2019:(2021: EUR 476493 million) included contract assets of EUR 229292 million (2019:(2021: EUR 247290 million), EUR 26 million (2019: EUR 41 million) accrued income of EUR 24 million (2021: EUR 31 million) and prepaid expenses of EUR 169174 million (2019:(2021: EUR 188172 million) for prepaid expense mainly related to Diagnosis & Treatment businesses and Connected Care businesses.
Inventories are summarized as follows:
Philips Group
Inventories
in millions of EUR
2019 | 2020 | 2021 | 2022 | |
---|---|---|---|---|
Raw materials and supplies | 901 | 992 | 1,143 | 1,541 |
Work in process | 403 | 537 | 646 | 648 |
Finished goods | 1,469 | 1,464 | 1,660 | 1,860 |
Inventories | 2,773 | 2,993 | 3,450 | 4,049 |
The write-down of inventories to net realizable value was EUR 187215 million in 2020 (2019:2022 (2021: EUR 138177 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.
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.
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 are associated mainly with customer financing in the Diagnosis & Treatment businesses amounting to EUR 2970 million (2019:(2021: EUR 3144 million), for Signify indemnification amounting to EUR 5526 million (2019:(2021: EUR 7646 million), advancean income tax paymentsreceivable amounting to EUR 78126 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 3830 million (2019:(2021: EUR 4137 million).
Current receivables of EUR 4,1564,115 million (2019:(2021: EUR 4,5543,787 million) atas of December 31, 20202022 included trade accounts receivable (net of allowance) of EUR 3,9283,832 million (2019:(2021: EUR 4,2803,559 million), accounts receivable other of EUR 191228 million (2019:(2021: EUR 242188 million) and accounts receivable from investments in associates of EUR 3755 million (2019:(2021: EUR 3240 million).
The trade accounts receivable, net, per segment are as follows:
Philips Group
Accounts receivables-netTrade accounts receivable, net
in millions of EUR
2019 | 2020 | 2021 | 2022 | |
---|---|---|---|---|
Diagnosis & Treatment | 1,905 | 1,653 | 1,759 | 2,013 |
Connected Care | 1,089 | 1,124 | 980 | 1,114 |
Personal Health | 1,122 | 1,017 | 575 | 479 |
Other | 163 | 133 | 245 | 226 |
Accounts receivable-net | 4,280 | 3,928 | ||
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
2019 | 2020 | |
---|---|---|
current | 3,591 | 3,413 |
overdue 1-30 days | 251 | 189 |
overdue 31-180 days | 333 | 224 |
overdue > 180 days | 105 | 102 |
Accounts receivable-net | 4,280 | 3,928 |
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 changes in the allowance for doubtful accounts receivable are as follows:
Philips Group
Allowance for accounts receivable
in millions of EUR
2019 | 2020 | 2021 | 2022 | |
---|---|---|---|---|
Balance as of January 1 | 194 | 211 | 195 | 190 |
Additions charged to expense | 23 | 19 | 4 | 66 |
Deductions from allowance1) | (9) | (17) | (17) | (51) |
Transfer to assets held for sale | (1) | (8) | ||
Other movements | 3 | (16) | 16 | 21 |
Balance as of December 31 | 211 | 195 | 190 | 226 |
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, 20202022 are allowances for individually impaired receivables of EUR 186222 million (2019:(2021: EUR 200188 million) .
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.
As of December 31, 2020,2022, authorized common shares consist of 2 billion shares (December 31, 2019:2021: 2 billion; December 31, 2018:2020: 2 billion) and the issued and fully paid share capital consists of 911,053,001889,315,082 common shares, each share having a par value of EUR 0.20 (December 31, 2019: 896,733,721;2021: 883,898,969; December 31, 2018: 926,195,539)2020: 911,053,001).
As a means to protect the Companycompany against (an attempt at) an unsolicited takeover or other attempt to exert (de facto) control of the company, the ‘Stichting Preferente Aandelen Philips’ has been granted the right to acquire preference shares in the Company.company. As of December 31, 2020,2022, 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, 20202022 (December 31, 2019:2021: 2 billion; December 31, 2018:2020: 2 billion).
Under its share-based compensation plans, the Companycompany 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).
In connection with the Company’scompany’s share repurchase programs, 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 re-issueddelivered by the Companycompany 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 delivered by the Companycompany upon vesting of restricted shares or performance shares (granted under the Company’scompany’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
2018 | 2019 | 2020 | 2020 | 2021 | 2022 | |
---|---|---|---|---|---|---|
Balance as of January 1 | 926,191,723 | 914,184,087 | 890,973,790 | 890,973,790 | 905,128,293 | 870,182,445 |
Dividend distributed | 9,533,223 | 9,079,538 | 18,080,198 | 18,080,198 | 6,345,968 | 14,174,568 |
Purchase of treasury shares | (31,993,879) | (40,390,495) | (8,669,622) | (8,669,622) | (45,486,392) | (5,080,693) |
Re-issuance of treasury shares | 10,453,020 | 8,100,660 | 4,695,170 | |||
Delivery of treasury shares | 4,695,170 | 4,194,577 | 2,204,207 | |||
Issuance of new shares | 48,757 | 48,757 | ||||
Balance as of December 31 | 914,184,087 | 890,973,790 | 905,128,293 | 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
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 former and current share-based remuneration plans:for capital reduction purposes:
Philips Group
Employee option and share plan transactionsTransactions related to capital reduction
2018 | 2019 | 2020 | |
---|---|---|---|
Shares acquired | 8,226,101 | 5,497,675 | 5,351,411 |
Average market price | EUR 32.59 | EUR 34.25 | EUR 33.81 |
Amount paid | EUR 268 million | EUR 188 million | EUR 181 million |
Shares delivered | 10,453,020 | 8,100,660 | 4,695,170 |
Average price (FIFO) | EUR 32.66 | EUR 32.87 | EUR 34.35 |
Cost of delivered shares | EUR 341 million | EUR 266 million | EUR 161 million |
Total shares in treasury at year-end | 7,871,452 | 5,268,467 | 5,924,708 |
Total cost | EUR 258 million | EUR 180 million | EUR 199 million |
In order to reduce share capital, the following transactions took place:
Philips Group
Share capital transactions
2018 | 2019 | 2020 | 2020 | 2021 | 2022 | |
---|---|---|---|---|---|---|
Shares acquired | 23,767,778 | 34,892,820 | 3,318,211 | 3,318,211 | 41,489,816 | 2,938,248 |
Average market price | EUR 32.58 | EUR 34.29 | EUR 39.21 | EUR 39.21 | EUR 36.22 | EUR 36.61 |
Amount paid | EUR 774 million | EUR 1,196 million | EUR 130 million | EUR 130 million | EUR 1,503 million | EUR 108 million |
Cancellation of treasury shares (shares) | 24,246,711 | 38,541,356 | 3,809,675 | 3,809,675 | 33,500,000 | 8,758,455 |
Cancellation of treasury shares (EUR) | EUR 783 million | EUR 1,316 million | EUR 152 million | EUR 152 million | EUR 1,216 million | EUR 299 million |
Total shares in treasury at year-end | 4,140,000 | 491,464 | 7,989,816 | 2,169,609 | ||
Total cost | EUR 141 million | EUR 22 million | 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 311187 million. A cash inflow of EUR 4612 million from treasury shares mainly includes settlementsrelates to the exercise of share-based remuneration plans.employee stock options (granted until 2013).
Philips uses different methods to repurchase shares in its own capital: (i) share buyback repurchases in the open market via an intermediary; (ii) repurchase of shares via forward contracts for future delivery of shares; and (iii) the unwinding of call options on own shares. During 2020,2022, Philips used methods (i) and (ii) to repurchase shares for capital reduction purposes and methods (ii) and (iii) to repurchase shares for share-based compensation plans.
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 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 and a weighted average forward price of EUR 19.75.
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 5 million shares with settlement dates varying between October 2021 and November 2022 and a weighted average forward price of EUR 34.85. No further transactions are expected in respect to this program.
On October 22, 2018, Philips announced and started a share repurchase program for an amount26, 2022, the original settlement date of up to EUR 174 million to cover its long-term incentive and employee stock purchase plans, after which it repurchased shares via an intermediary to allow for buybacks in the open market during both open and closed periods. On November 12, 2018, Philips announced to extendtwo tranches entered into under this program and entered into three forward contracts for an amount of EUR 319(in total 1.75 million shares) has been extended from November 23, 2022 to repurchase 10 million shares with settlement dates varying between October 2019November 2023, and November 2021 and a weighted average forward price of EUR 31.89.2024, respectively. As of December 31, 2020,2022, a total of 83.3 million shares (December 31, 2021: 1.5 million) under this program were acquired (4 million of which were settled(settled in the fourth quarter of 20192021 and 4 million in the fourth quarter of 2020)2022, respectively). This resulted in a EUR 25657 million (December 31, 2021: EUR 61 million) increase in retained earnings against treasury shares (EUR 130 million and EUR 126 million pertaining to 2019 and 2020 respectively).shares.
As of December 31, 2020,2022, the remaining forward contracts to cover obligations under share-based remuneration plans related to 77.0 million shares.shares (December 31, 2021: 5.5 million) and amounted to EUR 211 million (December 31, 2021: EUR 203 million).
On January 29, 2019,July 26, 2021, Philips announced a share buyback program for share cancellation purposes for an amount of up to EUR 1.5 billion. Philips started the program in the first quarter of 2019. On March 23, 2020, Philips announced that 50.3% of the program had been completed through repurchases by an intermediary to allow for purchases in the open market during both open and closed periods, and that the remainder of the program would be executed through one or more individual forward transactions. Consequently, in the first halfthird quarter of 20202021 Philips entered into fourthree forward contracts for an amount of EUR 745731 million to acquire 20 million shares with settlement dates varying between June 2021in 2022, 2023 and December 20212024 and a weighted average forward price of EUR 36.40.37.36. 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, 2020, all2022, a total of these2.2 million shares under this program were acquired (in the fourth quarter of 2022). This resulted in EUR 83 million increase in retained earnings against treasury shares.
As of December 31, 2022, the remaining forward contracts were outstanding. entered into for capital reduction purposes relate to 17.4 million shares (December 31, 2021: 19.6 million) and amounted to EUR 648 million (December 31, 2021: EUR 731 million).
In 2016, Philips purchased EUREUR-denominated and USD-denominated call options on its own shares to hedge options granted to employees up to 2013.
In 2020,2022, the company unwound 498,144239,880 EUR-denominated and 853,267152,565 USD-denominated call options against the transfer of the same number of its own shares (1,351,411(392,445 shares) and an additional 31EUR 6 million cash payment to the buyer of the call options.
OnAs of December 31, 2020,2022, the remaining EUR-denominated options and USD-denominatedcall options related to 670,456 and 274,31555,750 shares respectively.while there are no remaining USD-denominated call options.
In June 20202022, Philips completed the cancellation of 3,809,6758.8 million of its common shares (with a cost price of EUR 152299 million). The cancelled shares were acquired as part of the Philips’ EUR 1.5 billion share repurchase programprograms announced on January 29, 2019.July 26, 2021.
In May 2022, Philips distributed a dividend of EUR 0.85 per common share, representing a total value of EUR 741 million (including costs). Shareholders could elect for a cash dividend or a share dividend. Approximately 45% of the shareholders elected for a share dividend, resulting in the issuance of 14,174,568 new common shares. The settlement of the cash dividend involved an amount of EUR 411 million (including costs).
A proposal will be submitted to the 2023 Annual General Meeting of Shareholders to pay a dividend of EUR 0.85 per common share, in common shares only, against retained earnings for 2022.
In June 2021, Philips distributed a dividend of EUR 0.85 per common share, representing a total value of EUR 773 million (including costs). Shareholders could elect for a cash dividend or a share dividend. Approximately 38% of the shareholders elected for a share dividend, resulting in the issuance of 6,345,968 new common shares. The settlement of the cash dividend involved an amount of EUR 482 million (including costs).
In July 2020, Philips distributed a dividend of EUR 0.85 per common share, representing a total value of EUR 758 million including costs.(including costs). The dividend was distributed in the form of shares only resulting in the issuance of 18,080,198 new common shares. Per share calculations have been adjusted retrospectively for all periods presented to reflect the issuance of shares for the share dividend in respect of 2019. Further reference is made to Earnings per share.
A proposal will be submitted to the 2021 Annual General Meeting of Shareholders to pay a dividend of EUR 0.85 per common share, in cash or shares at the option of the shareholders, against the net income of the Company for 2020.
In June 2019, Philips settled a dividend of EUR 0.85 per common share, representing a total value of EUR 775 million including costs. Shareholders could elect for a cash dividend or a share dividend. Approximately 42% of the shareholders elected for a share dividend, resulting in the issuance of 9,079,538 new common shares. The settlement of the cash dividend involved an amount of EUR 453 million (including costs).
In June 2018, Philips settled a dividend of EUR 0.80 per common share, representing a total value of EUR 738 million including costs. Shareholders could elect for a cash dividend or a share dividend. Approximately 46% of the shareholders elected for a share dividend, resulting in the issuance of 9,533,233 new common shares. The settlement of the cash dividend involved an amount of EUR 400 million (including costs).
As atof December 31, 2020,2022, pursuant to Dutch law, certain limitations exist relating to the distribution of shareholders’ equity of EUR 8313,054 million. Such limitations relate to common shares of EUR 182178 million, as well as to legal reserves required by Dutch law included under retained earnings of EUR 6261,010 million and unrealized gainscurrency translation differences of EUR 1,866 million. The unrealized loss related to cash flow hedges of EUR 23 million. The unrealized currency translation differences of EUR 582 million and unrealized lossesloss related to fair value through OCI financial assets of EUR 305376 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 6261,010 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, 2019,2021, these limitations in distributable amounts were EUR 1,8701,947 million and related to common shares of EUR 179177 million, as well as to legal reserves required by Dutch law included under retained earnings of EUR 713654 million and unrealized currency translation differences of EUR 9781,117 million. The unrealized losses related to fair value through OCI financial assets of EUR 303344 million and unrealized lossesloss related to cash flow hedges of EUR 2425 million qualify as a revaluation reserve and reduce the distributable amount due to the fact that this reserve is negative.
Non-controlling interests relate to minority stakes held by third parties in consolidated group companies.
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
2018 | 2019 | 2020 | 2020 | 2021 | 2022 | |
---|---|---|---|---|---|---|
Long-term debt | 3,427 | 4,939 | 5,705 | 5,705 | 6,473 | 7,270 |
Short-term debt | 1,394 | 508 | 1,229 | 1,229 | 506 | 931 |
Total debt | 4,821 | 5,447 | 6,934 | 6,934 | 6,980 | 8,201 |
Cash and cash equivalents | 1,688 | 1,425 | 3,226 | 3,226 | 2,303 | 1,172 |
Net debt1) | 3,132 | 4,022 | 3,708 | |||
Net debt | 3,708 | 4,676 | 7,028 | |||
Shareholders' equity | 12,088 | 12,597 | 11,870 | 11,870 | 14,438 | 13,249 |
Non-controlling interests | 29 | 28 | 31 | 31 | 36 | 34 |
Group equity | 12,117 | 12,625 | 11,901 | 11,901 | 14,475 | 13,283 |
Net debt and group equity ratio1) | 21:79 | 24:76 | 24:76 | |||
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 20202022 is included in the table below.following table.
Philips Group
2019 | 2020 | |
---|---|---|
Net income | 1,173 | 1,195 |
Discontinued operations, net of income taxes | 19 | 10 |
Income from continuing operations | 1,192 | 1,205 |
Continuing operations non-controlling interests | (5) | (8) |
Income from continuing operations attributable to shareholders1)2) | 1,186 | 1,197 |
Adjustments for: | ||
Amortization of acquired intangible assets | 350 | 381 |
Impairment of goodwill | 97 | 144 |
Restructuring costs and acquisition-related charges | 318 | 203 |
Other items | 153 | 301 |
Net finance expenses3) | 13 | (125) |
Tax impact of adjusted items | (280) | (285) |
Adjusted Income from continuing operations attributable to shareholders1)2) | 1,838 | 1,814 |
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 |
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 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. As of December 31, 2020,2022, 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 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, March 2020, Philips has established a Euro Medium-Term Note (EMTN) program, a framework that facilitates the issuance of notes for a total amount up to EUR 10 billion. In 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 2019 (due 2023, 2024, 2026 and 2028) and the new bonds issued in 20202022 (due 2025, 2026, 2027, 2028, 2029, 2030 and 2030)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.
In March 2020,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 fixed-rate sustainability innovation bond duewas utilized and outstanding under the credit facility. In 2022, Philips entered into a total amount of EUR 63 million 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 2025 with2020 and EUR 83 million of forwards related to the share buyback program announced in 2021 matured throughout 2022.
In February 2021, Philips entered into two new bilateral loans amounting to a coupon ratetotal of 1.375%, and a EUR 500 million fixed-rate bond due in 2030(EUR 250 million each) with a coupon ratetenor of 2.000% under the EMTN program.up to one year, that were repaid in September 2021. In 2020,2021, Philips also entered into a total amount of EUR 731 million of forward contracts relating to the EUR 1.5 billion share buyback program announced on July 26, 2021, with maturity dates in 2022, 2023 and 2024. A total amount of EUR 745 million of forward contracts to completematured in 2021, which completed the remaindersettlement of the EUR 1.5 billion share buyback program announced on January 29, 2019, with maturity dates in 2021.2019. In addition, Philips entered into a total amount of EUR 17490 million of forward contracts in 2020 related2021 relating to the long-term incentive and employee stock purchase plans announced on January 29,2020,May 19, 2021, with maturity dates in 2023, and a total amount of EUR 126123 million of forward contracts matured in 2021 relating to the company's long-term incentive and employee stock purchase plans announced on October 22, 2018.
As of2018 and January 1, 2019 lease liabilities of EUR 803 million were recognized upon the adoption of IFRS 16 and additional lease liabilities of EUR 256 million were recognized through December 31, 2019. In May 2019, Philips issued a fixed-rate Green Innovation Bond with an aggregate principal amount of EUR 750 million (0.500%, due 2026). In September 2019, EUR bonds of EUR 500 million were repaid upon their scheduled maturity. In 2019, a total nominal amount of EUR 576 million of forward contracts matured relating to the EUR 1.5 billion share buyback program announced on June 28, 2017. In addition, a total nominal amount of EUR 130 million of forward contracts matured relating to the company's long-term incentive and employee stock purchase plans.29, 2020.
The belowfollowing tables present information about the long-term debt outstanding, its maturity and average interest rates in 20202022 and 2019.2021.
Philips Group
Long-term debt
in millions of EUR unless otherwise stated
2022 | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
amount outstanding in 2020 | Current portion | Non-current portion | Between 1 and 5 years | amount due after 5 years | average remaining term (in years) | average rate of interest | 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 | |
USD bonds | 1,210 | 1,210 | 122 | 1,088 | 16.1 | 6.3% | 1,378 | 1,378 | 250 | 1,128 | 14.3 | 6.3% | ||
EUR bonds | 3,229 | 3,229 | 1,494 | 1,735 | 5.4 | 1.0% | 4,061 | 4,061 | 1,836 | 2,225 | 5.7 | 1.7% | ||
Forward contracts | 982 | 869 | 113 | 0.9 | 858 | 606 | 252 | 252 | 1.0 | |||||
Lease liability | 1,216 | 267 | 948 | 596 | 352 | 3.9 | 2.1% | |||||||
Lease liabilities | 1,082 | 230 | 852 | 504 | 348 | 3.9 | 2.4% | |||||||
Bank borrowings | 205 | 1 | 203 | 3 | 200 | 4.1 | 0.2% | 705 | 2 | 702 | 702 | 1.9 | 1.7% | |
Other long-term debt | 16 | 15 | 1 | 0 | 1.0 | 0.0% | 28 | 4 | 24 | 17 | 6 | 8.9 | 2.9% | |
Long-term debt | 6,857 | 1,153 | 5,705 | 2,329 | 3,376 | 6.3 | 2.0% | 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
2021 | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
amount outstanding in 2019 | Current portion | Non-current portion | Between 1 and 5 years | amount due after 5 years | average remaining term (in years) | average rate of interest | 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 | |
USD bonds | 1,328 | 1,328 | 1,328 | 17.1 | 6.3% | 1,313 | 1,313 | 255 | 1,058 | 15.1 | 6.3% | |||
EUR bonds | 2,234 | 2,234 | 995 | 1,239 | 5.8 | 0.8% | 3,233 | 3,233 | 2,242 | 991 | 4.4 | 1.0% | ||
Forward contracts | 188 | 126 | 62 | 1.2 | 934 | 196 | 738 | 738 | 1.6 | |||||
Lease liability | 1,381 | 272 | 1,109 | 618 | 491 | 4.3 | 2.4% | |||||||
Lease liabilities | 1,220 | 257 | 963 | 580 | 383 | 4.2 | 2.1% | |||||||
Bank borrowings | 206 | 1 | 205 | 5 | 200 | 5.1 | 0.3% | 203 | 1 | 202 | 202 | 3.2 | 0.1% | |
Other long-term debt | 17 | 1.0 | 1.8% | 30 | 5 | 26 | 18 | 8 | 8.6 | 3.5% | ||||
Long-term debt | 5,355 | 416 | 4,939 | 1,681 | 3,258 | 8.0 | 2.5% | 6,933 | 459 | 6,473 | 4,034 | 2,439 | 6.0 | 2.1% |
The belowfollowing table disclosespresents the amount outstanding and effective rate of bonds.
Philips Group
Unsecured Bonds
in millions of EUR unless otherwise stated
effective rate | 2019 | 2020 | effective rate | 2021 | 2022 | |
---|---|---|---|---|---|---|
Unsecured EUR Bonds | ||||||
Due 9/06/2023; 1/2% | 0.634% | 500 | 500 | |||
Due 5/02/2024; 3/4% | 0.861% | 500 | 500 | |||
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 | 0.608% | 750 | 750 |
Due 5/02/2028; 1 3/8% | 1.523% | 500 | 500 | |||
Due 02/05/2028; 1 3/8% | 1.523% | 500 | 500 | |||
Due 30/03/2025; 1 3/8% | 1.509% | 500 | 1.509% | 500 | 346 | |
Due 30/03/2030; 2% | 2.128% | 500 | 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 5/15/2025; 7 3/4% | 7.429% | 56 | 51 | |||
Due 6/01/2026; 7 1/5% | 6.885% | 122 | 111 | |||
Due 5/15/2025; 7 1/8% | 6.794% | 75 | 68 | |||
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% | 648 | 591 | 7.210% | 641 | 683 |
Due 3/15/2042; 5% | 5.273% | 446 | 407 | |||
Due 15/03/2042; 5% | 5.273% | 441 | 470 | |||
Adjustments1) | (35) | (39) | (37) | (57) | ||
Unsecured Bonds | 3,562 | 4,439 | 4,545 | 5,439 | ||
The following table presents a reconciliation between the total of future minimum lease payments and their present value.
Philips Group
Lease liabilities
in millions of EUR
2019 | 2020 | 2021 | 2022 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
future minimum lease payments | interest | 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 | future minimum lease payments | interest | present value of minimum lease payments | |
Less than one year | 292 | 20 | 272 | 290 | 23 | 267 | 280 | 22 | 257 | 251 | 21 | 230 |
Between one and five years | 698 | 80 | 618 | 651 | 55 | 596 | 636 | 56 | 580 | 554 | 49 | 505 |
More than five years | 543 | 52 | 491 | 384 | 31 | 352 | 417 | 34 | 383 | 376 | 28 | 348 |
Lease liability | 1,533 | 152 | 1,381 | 1,325 | 109 | 1,216 | ||||||
Lease liabilities | 1,333 | 113 | 1,220 | 1,180 | 98 | 1,082 |
Philips Group
Short-term debt
in millions of EUR
2019 | 2020 | 2021 | 2022 | |
---|---|---|---|---|
Short-term bank borrowings | 92 | 76 | 47 | 89 |
Current portion of long-term debt | 416 | 1,153 | 459 | 842 |
Short-term debt | 508 | 1,229 | 506 | 931 |
During 2020,2022, the weighted average interest rate on the bank borrowings was 5.9% (2019: 14.2%5.7% (2021: 1.2%). This decreaseincrease was mainly driven by both lowerfinancial market conditions across various countries globally.
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 rates overallexpense.
Provisions for severance and termination benefits are recognized for those costs only when the company has a lower relativedetailed 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.
By their nature, the recognition of provisions require estimates and assumptions regarding the timing and the amount of borrowingsoutflow of resources. The main estimates include:
Philips Group
Provisions
in millions of EUR
2019 | 2020 | 2021 | 2022 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
long-term | short-term | total | long-term | short-term | total | long-term | short-term | total | long-term | short-term | total | |
Post-employment benefit1) | 824 | 824 | 751 | 751 | ||||||||
Product warranty | 38 | 172 | 210 | 28 | 139 | 167 | ||||||
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 | 145 | 25 | 170 | 162 | 21 | 183 | 99 | 26 | 124 | 83 | 20 | 104 |
Restructuring-related provisions | 31 | 125 | 156 | 17 | 100 | 117 | 8 | 58 | 66 | 6 | 134 | 140 |
Legal provisions | 14 | 40 | 55 | 19 | 53 | 72 | 53 | 39 | 91 | 14 | 74 | 89 |
Contingent consideration provisions | 245 | 108 | 354 | 203 | 114 | 318 | 156 | 52 | 208 | 89 | 23 | 113 |
Other provisions | 305 | 86 | 392 | 279 | 93 | 372 | 257 | 92 | 349 | 279 | 112 | 390 |
Provisions | 1,603 | 556 | 2,159 | 1,458 | 522 | 1,980 | 1,315 | 998 | 2,313 | 1,097 | 1,018 | 2,115 |
On June 14, 2021, Philips’ subsidiary, Philips Respironics initiated a voluntary recall notification in the United States and field safety notice outside the United States for certain sleep and respiratory care products 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
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.
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
2018 | 2019 | 2020 | 2021 | 2022 | |
---|---|---|---|---|---|
Balance as of January 1 | 201 | 190 | 210 | 167 | 238 |
Changes: | |||||
Additions | 248 | 291 | 239 | 364 | 320 |
Utilizations | (261) | (274) | (270) | (265) | (224) |
Transfer to liabilities associated with assets held for sale | (37) | ||||
Translation differences and other | 2 | 3 | (12) | 10 | 9 |
Balance as of December 31 | 190 | 210 | 167 | 238 | 344 |
Additions in 2022 include quality actions of EUR 108 million in the Connected Care segment, mainly for the following matters:
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.
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.
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 9173 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
2018 | 2019 | 2020 | 2021 | 2022 | |
---|---|---|---|---|---|
Balance as of January 1 | 160 | 144 | 170 | 183 | 124 |
Changes: | |||||
Additions | 23 | 20 | 9 | 18 | 15 |
Utilizations | (15) | (18) | (16) | (15) | (17) |
Releases | (4) | (1) | 0 | (64) | (2) |
Changes in discount rate | (28) | 9 | 37 | (10) | (27) |
Accretion | 5 | 3 | 3 | 4 | |
Translation differences and other | 4 | 12 | (19) | 9 | 7 |
Balance as of December 31 | 144 | 170 | 183 | 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.
Philips Group
Restructuring-related provisions
in millions of EUR
Jan. 1, 2020 | additions | utilizations | releases | other changes | Dec. 31, 2020 | January 1, 2022 | additions | utilizations | releases | other changes | December 31, 2022 | |
---|---|---|---|---|---|---|---|---|---|---|---|---|
Diagnosis & Treatment | 61 | 36 | (47) | (16) | (1) | 33 | 26 | 58 | (27) | (8) | 0 | 49 |
Connected Care | 28 | 17 | (21) | (5) | (2) | 17 | 17 | 34 | (13) | (3) | (1) | 34 |
Personal Health | 25 | 30 | (22) | (3) | (1) | 28 | 9 | (7) | (2) | 0 | 10 | |
Other | 42 | 35 | (31) | (7) | 0 | 38 | 14 | 52 | (14) | (5) | 0 | 47 |
Philips Group | 156 | 118 | (122) | (32) | (4) | 117 | 66 | 154 | (61) | (18) | (1) | 140 |
In 2020,2022, 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.
In 2019,2021, the most significant restructuring projects impacted Diagnostic & Treatment and OtherConnected Care businesses and mainly took place in the Netherlands US and Germany.US.
The movements in the provisions for restructuring in 2019 are presented by segment as follows:
Philips Group
Restructuring-related provision
in millions of EUR
Jan. 1, 2019 | additions | utilizations | releases | other changes | Dec. 31, 2019 | |
---|---|---|---|---|---|---|
Diagnosis & Treatment | 57 | 51 | (37) | (10) | 0 | 61 |
Connected Care | 22 | 33 | (16) | (9) | (2) | 28 |
Personal Health | 9 | 33 | (12) | (4) | 0 | 25 |
Other | 26 | 57 | (31) | (11) | 0 | 42 |
Philips Group | 114 | 175 | (97) | (34) | (1) | 156 |
In 2018, the most significant restructuring projects impacted Diagnosis & Treatment, Connected Care & Health Informatics and Other businesses and mainly took place in the US, Germany and Netherlands.
The movements in the provisions for restructuring in 20182021 are presented by segment as follows:
Philips Group
Restructuring-related provisions
in millions of EUR
Jan. 1, 2018 | additions | utilizations | releases | Dec. 31, 2018 | January 1, 2021 | additions | utilizations | releases | other changes | December 31, 2021 | |
---|---|---|---|---|---|---|---|---|---|---|---|
Diagnosis & Treatment | 45 | 62 | (38) | (12) | 57 | 33 | 23 | (19) | (13) | 1 | 26 |
Connected Care | 15 | 24 | (10) | (8) | 22 | 17 | 16 | (12) | (4) | - | 17 |
Personal Health | 6 | 8 | (5) | (1) | 9 | 28 | 6 | (21) | (6) | 2 | 9 |
Other | 45 | 42 | (45) | (16) | 26 | 38 | 10 | (21) | (16) | 4 | 14 |
Philips Group | 112 | 136 | (98) | (37) | 114 | 117 | 55 | (73) | (39) | 6 | 66 |
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
Legal provisions
in millions of EUR
2018 | 2019 | 2020 | 2021 | 2022 | |
---|---|---|---|---|---|
Balance as of January 1 | 50 | 26 | 55 | 72 | 91 |
Changes: | |||||
Additions | 17 | 69 | 72 | 43 | 89 |
Acquisitions | 38 | 4 | |||
Utilizations | (29) | (36) | (45) | (17) | (100) |
Releases | (11) | (6) | (6) | (48) | (3) |
Accretion | 2 | 1 | 1 | - | |
Translation differences and other | (3) | 0 | (5) | 3 | 7 |
Balance as of December 31 | 26 | 55 | 72 | 91 | 89 |
The majority of the movements in the above schedule are 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 and investigation with the Italian Competition Authority (ICA).
In 2020, the company recorded a legal provision in relation to an investigation initiated by the Italian Competition authority in February 2018. The investigation focusses on whether the company and certain other healthcare companies violated antitrust lawssettlement of investigations in the maintenance services aftermarket for medical diagnostic imaging devices.
In 2020 and 2018, the majority of the movements in relationConnected Care businesses (unrelated to the CRT antitrust litigation were utilizations due to the transfer toPhilips Respironics voluntary recall notification).
For details of other liabilities for which the company was able to reach a settlement. These settlements were subsequently paid out during the year or in the respective following year.
For more details,legal matters, including regulatory and other governmental proceedings, refer to Contingent assets and liabilitiesContingencies.
The company expects the provisions to be utilized mainly within the next three years.
Philips Group
Contingent consideration provisions
in millions of EUR
2018 | 2019 | 2020 | 2021 | 2022 | |
---|---|---|---|---|---|
Balance as of January 1 | 66 | 409 | 354 | 318 | 208 |
Acquisitions | 366 | 6 | 70 | 16 | 96 |
Utilizations | (48) | (44) | (14) | (48) | (105) |
FV changes | 26 | (17) | (93) | ||
Fair value changes | (78) | (86) | |||
Balance as of December 31 | 409 | 354 | 318 | 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 2020,2021 and 2022, the acquisitions through business combinations consistsfair value changes mainly related to EPD. In 2022, the decrease of a provision forEUR 61 million in the fair value of the contingent consideration comprised of EUR 7030 million relatingdue to the acquisition of Intact Vascular.
In 2020, revisions to EPD’s forecast due to more severe short-term impacts of COVID-19 and the competitive environment, and EUR 31 million due to delays in commercialization caused byachievement of certain milestones. In 2021, the need to do more work on the maturitydecrease of the technology, resulted in a EUR 10145 million decrease in the fair value of the respective contingent consideration liability and is reflected in Other business income. For more details of the EPD contingent consideration refer to Fair value of financial assets and liabilities.
In 2018, the acquisitions through business combinations mainly consisted of a provision for contingent considerationcomprised of EUR 23914 million relatingdue to the acquisitionrevisions to EPD’s forecast due to more severe short-term impacts of EPD. COVID-19 and 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 three years.
Philips Group
Other provisions
in millions of EUR
2018 | 2019 | 2020 | 2021 | 2022 | |
---|---|---|---|---|---|
Closing balance as of December 31 | 499 | 432 | 392 | ||
IFRS 16 adjustment | (6) | ||||
Opening balance as of January 1 | 499 | 426 | 392 | ||
Changes: | |||||
Balance as of January 1 | 372 | 349 | |||
Additions | 169 | 143 | 161 | 89 | 160 |
Utilizations | (178) | (127) | (109) | (87) | (95) |
Releases | (57) | (61) | (49) | (29) | (35) |
Accretion | 2 | 1 | (1) | (5) | (3) |
Translation differences and other | (3) | 10 | (21) | 9 | 14 |
Balance as of December 31 | 432 | 392 | 372 | 349 | 390 |
The main elements of other provisions are:
The company expects the provisions to be utilized mainly within the next five years, except for:
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.
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.
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
United States | Germany | Other Countries | Total | Germany | United States | Other Countries | Total | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2019 | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | 2020 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | |
Present value of funded DBO | (1,738) | (568) | (630) | (649) | (317) | (304) | (2,684) | (1,521) | (606) | (489) | (558) | (440) | (206) | (179) | (1,370) | (1,108) |
Present value of unfunded DBO | (148) | (141) | (351) | (344) | (166) | (147) | (666) | (633) | (316) | (249) | (149) | (128) | (135) | (136) | (600) | (513) |
Total present value of DBO | (1,886) | (709) | (981) | (993) | (484) | (451) | (3,350) | (2,153) | (921) | (738) | (708) | (568) | (341) | (315) | (1,970) | (1,621) |
Fair value of plan assets | 1,743 | 613 | 524 | 543 | 259 | 247 | 2,526 | 1,403 | 572 | 477 | 623 | 474 | 185 | 171 | 1,380 | 1,122 |
Net balance sheet position | (143) | (95) | (457) | (450) | (224) | (205) | (824) | (750) | ||||||||
Net position | (349) | (261) | (84) | (94) | (157) | (144) | (590) | (499) | ||||||||
Value of reimbursement rights | 6 | 6 |
The significant decrease in the present value of funded DBO in the United States in 2020 is a result of a partial settlement which is described in more detail below.
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 continued efforts to de-risk the company’s existing and ongoing DB pension plans, the company executed a lump-sum window and annuity purchase program during 2020 regarding the US funded pension plan. Both events have been recognized as a settlement with a combined lossmillions of EUR 21 million in 2020.
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) |
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” 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 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.
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. The lump-sum window and cash-out and annuity-purchase program in the US pension plan in 2020 as mentioned above are examples of that strategy.
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.
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
2018 | 2019 | 2020 | 2020 | 2021 | 2022 | |
---|---|---|---|---|---|---|
Defined-benefit plans | 46 | 56 | 74 | |||
Defined benefit plans | 74 | 36 | 50 | |||
- included in income from operations | 23 | 34 | 61 | 59 | 28 | 39 |
- included in financial expense | 23 | 22 | 13 | 13 | 8 | 10 |
- included in Discontinued operations | 1 | |||||
Defined-contribution plans | 327 | 346 | 366 | |||
Defined contribution plans | 366 | 375 | 400 | |||
- included in income from operations | 327 | 346 | 366 | 358 | 368 | 400 |
- included in Discontinued operations | 8 | 7 | ||||
Post-employment benefits costs | 374 | 401 | 440 | 440 | 411 | 449 |
The adjacent tables contain the reconciliations for the DBO and plan assets.
Philips Group
Defined-benefitDefined benefit obligations
in millions of EUR
2019 | 2020 | 2021 | 2022 | |
---|---|---|---|---|
Balance as of January 1 | 2,998 | 3,350 | 2,153 | 1,970 |
Service cost | 36 | 39 | 36 | 32 |
Interest cost | 99 | 71 | 33 | 36 |
Employee contributions | 12 | 15 | 7 | 4 |
Actuarial (gains) / losses | ||||
- demographic assumptions | (52) | 16 | 3 | 2 |
- financial assumptions | 304 | 163 | (86) | (366) |
- experience adjustment | 29 | 39 | (6) | 12 |
(Negative) past service cost | 0 | 2 | (5) | 16 |
Settlements | (5) | (1,185) | (90) | |
Benefits paid from plan | (159) | (221) | (95) | (95) |
Benefits paid directly by employer | (41) | (35) | (33) | (41) |
Translation differences and other | 130 | (100) | 52 | 52 |
Balance as of December 31 | 3,350 | 2,153 | 1,970 | 1,621 |
Philips Group
Plan assets
in millions of EUR
2019 | 2020 | 2021 | 2022 | |
---|---|---|---|---|
Balance as of January 1 | 2,164 | 2,526 | 1,403 | 1,380 |
Interest income on plan assets | 77 | 58 | 25 | 26 |
Admin expenses paid | (1) | (1) | (1) | (1) |
Return on plan assets excluding interest income | 305 | 268 | 44 | (254) |
Employee contributions | 12 | 15 | 7 | 4 |
Employer contributions | 28 | 34 | 33 | 17 |
Settlements | (1) | (1,205) | (86) | 0 |
Benefits paid from plan | (159) | (221) | (96) | (95) |
Translation differences and other | 103 | (71) | 50 | 45 |
Balance as of December 31 | 2,526 | 1,403 | 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.
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
2019 | 2020 | 2021 | 2022 | |
---|---|---|---|---|
Assets quoted in active markets | ||||
- Debt securities | 1,476 | 782 | 790 | 560 |
- Equity securities | ||||
- Other | 209 | 175 | 195 | 203 |
Assets not quoted in active markets | ||||
- Debt securities | 9 | 7 | 1 | |
- Equity securities | 473 | 133 | 122 | 101 |
- Other | 359 | 307 | 272 | 258 |
Total assets | 2,526 | 1,403 | 1,380 | 1,122 |
The plan assets in 20202022 contain 32% (2019: 33%(2021: 29%) unquoted plan assets. Plan assets in 20202022 do not include property occupied by or financial instruments issued by the company.
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 MP2020MP2021 improvement scale + white collar adjustment
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 %
US | Germany | Other | Total | Germany | United States | Other Countries | Total | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2019 | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | 2020 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | |
Discount rate | 3.1% | 2.3% | 0.8% | 0.6% | 2.6% | 2.2% | 2.4% | 1.5% | 1.1% | 4.1% | 2.6% | 5.2% | 2.1% | 4.9% | 1.8% | 4.7% |
Inflation rate | 2.0% | 2.0% | 1.8% | 1.6% | 1.9% | 1.7% | 1.9% | 1.7% | 1.8% | 2.0% | 2.2% | 2.3% | 2.0% | 2.6% | 2.0% | 2.2% |
Salary increase | 0.0% | 0.0% | 2.5% | 2.5% | 2.8% | 2.7% | 2.6% | 2.5% | 2.5% | 2.8% | 0.0% | 0.0% | 2.9% | 3.3% | 2.6% | 2.9% |
The following table illustrates the approximate impact on the DBO from movements in key assumptions. The DBO was recalculated using a change in the assumptions of 1% which overall is considered a reasonably possible change. The impact on the DBO because of changes in discount rate is normally accompanied by offsetting movements in plan assets, especially when using matching strategies.
The average duration of the DBO of the DB plans is 128 years (US: 12, DE: 11(Germany: 9, United States: 8, and Other: 10)Other countries: 8) as perof December 31, December 2020 (2019:2022 (2021: 11 years).
Philips Group
Sensitivity of key assumptions
in millions of EUR
2019 | 2020 | 2021 | 2022 | |
---|---|---|---|---|
Increase | ||||
Discount rate (1% movement) | (340) | (226) | (196) | (122) |
Inflation rate (1% movement) | 113 | 86 | ||
Pension increase (1% movement) | 99 | 57 | ||
Salary increase (1% movement) | 23 | 16 | 19 | 12 |
Longevity1) | 90 | 51 | 48 | 32 |
Decrease | ||||
Discount rate (1% movement) | 401 | 265 | 241 | 145 |
Inflation rate (1% movement) | (107) | (78) | ||
Pension increase (1% movement) | (83) | (49) | ||
Salary increase (1% movement) | (22) | (19) | (18) | (11) |
The company expects considerable cashCash outflows in relation to post-employment benefits which are estimated to amount to EUR 429464 million in 2021,2023, consisting of:
The service and administration cost for 20212023 is expected to amount to EUR 4229 million for DB plans. The net interest cost for 20212023 for the DB plans is expected to amount to EUR 821 million. The cost for DC pension plans in 20212023 is equal to the expected DC cash flow.
Accrued liabilities are summarized as follows:
Philips Group
Accrued liabilities
in millions of EUR
2019 | 2020 | 2021 | 2022 | |
---|---|---|---|---|
Personnel-related costs: | ||||
- Salaries and wages | 554 | 614 | 566 | 490 |
- Accrued holiday entitlements | 118 | 124 | 127 | 97 |
- Other personnel-related costs | 66 | 78 | 108 | 101 |
Fixed-asset-related costs: | ||||
- Gas, water, electricity, rent and other | 24 | 21 | 33 | 46 |
Communication and IT costs | 48 | 64 | 82 | 64 |
Distribution costs | 115 | 93 | 122 | 110 |
Sales-related costs: | ||||
- Commission payable | 8 | 10 | 7 | 8 |
- Advertising and marketing-related costs | 186 | 197 | 175 | 127 |
- Other sales-related costs | 25 | 20 | 20 | 20 |
Material-related costs | 106 | 103 | 130 | 132 |
Interest-related accruals | 38 | 52 | 52 | 71 |
Other accrued liabilities | 343 | 302 | 362 | 361 |
Accrued liabilities | 1,632 | 1,678 | 1,784 | 1,626 |
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).
Non-current liabilities were EUR 7460 million atas of December 31, 20202022 (December 31, 2019:2021: EUR 7156 million).
Non-current liabilities are associated mainly with indemnification and non-current accruals.
Other current liabilities are summarized as follows:
Philips Group
Other current liabilities
in millions of EUR
2019 | 2020 | 2021 | 2022 | |
---|---|---|---|---|
Accrued customer rebates that cannot be offset with accounts receivables for those customers | 427 | 412 | ||
Accrued customer rebates | 280 | 213 | ||
Other taxes including social security premiums | 241 | 253 | 190 | 115 |
Other liabilities | 188 | 119 | 116 | 120 |
Other current liabilities | 856 | 785 | 587 | 448 |
The other liabilities per December 31, 2019 include reclassifications from litigation provisions to liabilities due to settlements reached. As per December 31, 2020 no material reclassification of such kind occurred. For more details reference is made to Litigation provisions in Provisions and to Legal proceedings in Contingent assets and liabilities.
Non-current contract liabilities were EUR 403515 million atas of December 31, 20202022 (December 31, 2019:2021: EUR 348446 million) and current contract liabilities were EUR 1,2391,696 million atas of December 31, 20202022 (December 31, 2019:2021: EUR 1,1701,491 million).
The current contract liabilities increased withby EUR 70 million. The year-on-year change205 million, which is mainly driven by an increase in deferred balancebalances for customer service contracts.
The current contract liabilities as perof December 31, 20192021 resulted in revenue recognized of EUR 1,1701,491 million in 2020.2022.
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. Bank overdrafts are included in borrowings in current liabilities.
The cash flow statement is prepared using the indirect method. Cash flows related to interest and tax are included in operating activities. Assets and liabilities acquired as part of a business combination are included in investing activities (net of cash acquired). Dividends paid to shareholders are included in financing activities. Dividends received are included in operating activities.
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.
In 2020,2022, gross lease payments of EUR 325316 million (2019:(2021: EUR 281308 million; 2020: EUR 325 million) included interest of EUR 2925 million (2019:(2021: EUR 2625 million; 2020: EUR 29 million).
In 2020,2022, a total of EUR 1372 million cash was paid with respect to foreign exchange derivative contracts related to activities for liquidity management and funding (2019:(2021: EUR 16648 million outflow; 2018:inflow; 2020: EUR 17713 million outflow).
In 2022, the net cash outflow is EUR 38 million.
In 2021, the net cash flow is EUR 0 million.
In 2020, the net cash outflow of EUR 66 million was mainly the cash outflow due to investment in DC Health amounting to EUR 45 million in China.
In 2019,Certain items in the netstatements of cash inflow of EUR 99 million was mainly dueflows do not correspond to the saledifferences between the balance sheet amounts for the respective items, principally because of the company's investment in Corindus Vascular Roboticseffects of translation differences and other stakes, partly offset by an outflow due to capital contributions into investment funds.
In 2018, the net cash inflow of EUR 43 million was mainly due to inflows from the repayment of loans receivable, the sale of stakes and capital distributions from investment funds, partly offset by an outflow due to capital contributions into investment funds.consolidation changes.
Philips Group
Reconciliation of liabilities arising from financing activities
in millions of EUR
Balance as of Dec. 31, 2019 | Cash flow | Currency effects and consolidation changes | Other1) | Balance as of Dec. 31, 2020 | Balance as of December 31, 2021 | Cash flow | Currency effects and consolidation changes | Other1) | Balance as of December 31, 2022 | |
---|---|---|---|---|---|---|---|---|---|---|
Long term debt2) | 5,355 | 767 | (180) | 916 | 6,857 | 6,933 | 1,045 | 107 | 27 | 8,111 |
EUR bonds | 3,233 | 827 | 4,061 | |||||||
USD bonds | 1,328 | (117) | 1,210 | 1,313 | (20) | 85 | 1,378 | |||
EUR bonds | 2,234 | 991 | 3 | 3,229 | ||||||
Leases | 1,220 | (260) | 17 | 105 | 1,082 | |||||
Forward contracts3) | 934 | (76) | 858 | |||||||
Bank borrowings | 206 | (2) | 205 | 203 | 498 | 4 | 705 | |||
Other long-term debt | 17 | (1) | 1 | 16 | 30 | (1) | 1 | (1) | 28 | |
Leases | 1,381 | (223) | (61) | 119 | 1,216 | |||||
Forward contracts3) | 188 | 793 | 982 | |||||||
Short term debt2) | 92 | 16 | (32) | 76 | 47 | 47 | (6) | 1 | 89 | |
Short-term bank borrowings | 92 | 15 | (32) | 76 | 47 | 47 | (6) | 1 | 89 | |
Other short-term loans | 1 | 1 | ||||||||
Forward contracts3) | ||||||||||
Equity | (390) | (300) | (491) | (1,181) | (1,410) | (593) | 869 | (1,133) | ||
Dividend payable | (2) | 2 | (418) | 418 | ||||||
Forward contracts3) | (188) | (793) | (982) | (934) | 76 | (858) | ||||
Treasury shares | (201) | (298) | 299 | (199) | (476) | (174) | 375 | (275) | ||
Total | 483 | 500 |
Philips Group
Reconciliation of liabilities arising from financing activities
in millions of EUR
Balance as of Dec. 31, 2018 | Cash flow | Currency effects and consolidation changes | Other1) | Balance as of Dec. 31, 2019 | Balance as of December 31, 2020 | Cash flow | Currency effects and consolidation changes | Other1) | Balance as of December 31, 2021 | |
---|---|---|---|---|---|---|---|---|---|---|
Long term debt2) | 4,657 | 86 | 37 | 575 | 5,355 | 6,857 | (226) | 200 | 101 | 6,933 |
EUR bonds | 3,229 | 4 | 3,233 | |||||||
USD bonds | 1,303 | 25 | 1,328 | 1,210 | 103 | 1,313 | ||||
EUR bonds | 1,988 | 244 | 2 | 2,234 | ||||||
Leases | 1,216 | (239) | 98 | 145 | 1,220 | |||||
Forward contracts3) | 982 | (48) | 934 | |||||||
Bank borrowings | 211 | (5) | 206 | 205 | (1) | 203 | ||||
Other long-term debt | 18 | (1) | 17 | 16 | 14 | 30 | ||||
Leases | 330 | (152) | 12 | 132 | 322 | |||||
IFRS 16 new lease recognition2) | 1,059 | |||||||||
Forward contracts3) | 807 | (618) | 188 | |||||||
Short term debt2) | 164 | 23 | (7) | (88) | 92 | 76 | (25) | (5) | 47 | |
Short-term bank borrowings | 76 | 23 | (7) | 92 | 76 | (24) | (5) | 47 | ||
Other short-term loans | 1 | (1) | ||||||||
Forward contracts3) | 88 | (88) | ||||||||
Equity | (1,293) | (1,774) | 2,677 | (390) | (1,181) | (2,096) | 1,868 | (1,410) | ||
Dividend payable | (456) | 456 | (484) | 484 | ||||||
Forward contracts3) | (894) | 706 | (188) | (982) | 48 | (934) | ||||
Treasury shares | (399) | (1,318) | 1,516 | (201) | (199) | (1,613) | 1,336 | (476) | ||
Total | (1,665) | (2,347) |
A contingent liability is a liability of uncertain timing and liabilities
As per December 31, 2020,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.
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.
As of December 31, 2022, the company had no material contingent assets.
The total fair value of guarantees recognized on the balance sheet amounts to EUR nil million for both 20192022 and 2020.2021. Remaining off-balance-sheet business related guarantees on behalf of third parties and associates decreased by EUR 5 million during 2020 to EUR 162 million in 2022 (December 31, 2019:2021: EUR 212 million).
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.
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.
Following the public investigations into alleged anticompetitive activities in the Cathode Ray Tubes industry that began in 2007 and 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 numerous (class action) lawsuits in the United States, Canada, Germany, the Netherlands, Denmark, the United Kingdom, Turkey, and Israel. Plaintiffs in these cases varied from classes of indirect and direct purchasers, state attorneys general, electronics retailers and TV and monitor manufacturers.
By the end of 2020, settlements have been reached in most of these cases. Litigation is still pending or threatened in relation to: (i) the revised US indirect purchaser class settlement which received approval from the District Court for the Northern District of California in July 2020 but is still subject to appeal, (ii) potential claims that may still be filed by certain objectors to the original US indirect purchaser class settlement (iii) a claim filed by the state attorney general for Puerto Rico, (iv) a claim filed by a monitor manufacturer in the UK, (v) a claim filed by three Brazilian TV manufacturers in the Netherlands, (vi) a consumer class action in Israel and (vii) a consumer action in the Netherlands.
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 approximately EUR 210 million, representing a portion of the fine that LGE paid to the European Commission relating to the joint venture LG. Philips Displays for which LGE and 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. In November 2020, the Seoul Central District Court dismissed LGE’s case. LGE has appealed the decision.
In July 2018, theThe company was informed that the public prosecution serviceis engaged in Rio de Janeirodiscussions with, and the Brazilian antitrust authority CADE were conducting an investigation into tender irregularities in the medical device industry in Brazil. Philips was one of a number of companies involved in the investigation. After conducting an internal investigation into the matter focusing on certain transactions that took place before 2011, the company reached a leniency agreement with the Brazilian public prosecution service in 2020 under which the company agreedhas provided information to, pay EUR 9.7 million. The investigation by CADE is ongoing.
In respect of the investigation in Brazil, the company also received inquiries from the US Securities and Exchange Commission (SEC) and US Department of Justice (DoJ). In addition, starting in June 2019, the company has engaged in discussions with and provided information to the SEC and DoJ regarding alleged tender irregularities in the medical device industry in certain other jurisdictions. These interactions are ongoing and focus primarily focused on a number of compliance findings that the company is addressing in Brazil, China and Bulgaria. In connection with these discussions and their status, the company recorded a provision in the amount of EUR 60 million.
Given the uncertainsignificant uncertainty regarding the nature of the relevant events and potential obligations, and based on current knowledge,Philips is not currently able to reliably estimate the full financial effect if any, cannot be reliably estimated.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.
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”).
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.
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.
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.
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.
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.
For details on other contractual obligations, please refer to liquidity risk in Details of treasury and other financial risks.
In 2020,2022, the total remuneration costs relating to the members of the Executive Committee (consisting of 1514 members throughout the year, including the members of the Board of Management) amounted to EUR 33.225.6 million (2019:(2021: EUR 30.033.4 million; 2018:2020: EUR 26.833.2 million) consisting of the elements in the following table.
Philips Group
Remuneration costs of the Executive Committee1)
in EUR
2018 | 2019 | 2020 | 2020 | 2021 | 2022 | |
---|---|---|---|---|---|---|
Base salary/Base compensation | 8,370,406 | 9,241,364 | 9,299,794 | 9,299,794 | 9,598,588 | 9,528,279 |
Annual incentive2) | 5,651,996 | 5,566,763 | 6,726,768 | 6,726,768 | 5,250,408 | 208,370 |
Performance shares3)4) | 8,896,369 | 11,143,320 | 13,153,975 | |||
Performance shares3) | 13,153,975 | 12,610,073 | 11,242,581 | |||
Restricted share rights3) | 492,237 | 168,404 | 288,372 | 288,372 | 1,380,644 | 1,191,529 |
Pension allowances5) | 1,919,839 | 2,076,834 | 2,054,570 | |||
Pension allowances4) | 2,054,570 | 2,107,953 | 1,949,204 | |||
Pension scheme costs | 411,028 | 440,003 | 382,513 | 382,513 | 306,694 | 288,179 |
Other compensation6) | 1,013,128 | 1,331,990 | 1,264,908 | |||
Other compensation5) | 1,264,908 | 2,104,044 | 1,216,163 | |||
Total | 26,755,003 | 29,968,678 | 33,170,901 | 33,170,901 | 33,358,405 | 25,624,305 |
AtAs of December 31, 2020,2022, the members of the Executive Committee (including the members of the Board of Management) held 193,300 (2019: 291,520; 2018: 333,670)0 stock options at a weighted average exercise price of EUR 17.31 (2019: EUR 18.61; 2018: EUR 18.99)(2021: 184,900; 2020: 193,300).
In 2020,2022, the total remuneration costs relating to the members of the Board of Management amounted to EUR 11.48.4 million (2019:(2021: EUR 9.710.3 million; 2018:2020: EUR 9.811.4 million), see table below.the following table.
Philips Group
Remuneration costs of individual members of the Board of Management
in EUR
base compensation/salary | annual incentive1) | performance shares2) | restricted share rights2) | pension allowances3) | pension scheme costs | other compensation | total costs | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2022 | ||||||||||||||||
R. Jakobs4) | 256,438 | 112,737 | - | 57,973 | 6,012 | 11,507 | 444,667 | |||||||||
F.A. van Houten4) | 1,041,849 | 208,370 | 2,930,068 | - | 444,051 | 22,121 | 42,533 | 4,688,992 | ||||||||
A. Bhattacharya | 806,250 | - | 763,140 | - | 237,250 | 28,133 | 61,308 | 1,896,081 | ||||||||
M.J. van Ginneken | 626,250 | - | 585,490 | - | 141,622 | 28,133 | 35,343 | 1,416,837 | ||||||||
2,730,788 | 208,370 | 4,391,434 | - | 880,896 | 84,398 | 150,691 | 8,446,577 | |||||||||
2021 | ||||||||||||||||
F.A. van Houten | 1,325,000 | 850,915 | 2,626,295 | - | 565,403 | 27,462 | 57,224 | 5,452,299 | ||||||||
A. Bhattacharya | 790,000 | 360,103 | 1,172,533 | - | 233,857 | 27,462 | 68,908 | 2,652,864 | ||||||||
M.J. van Ginneken | 605,000 | 317,192 | 886,035 | - | 150,755 | 27,462 | 42,610 | 2,029,054 | ||||||||
base compensation/salary | annual incentive1) | performance shares2) | restricted share rights2) | pension allowances3) | pension scheme costs | other compensation | total costs | 2,720,000 | 1,528,211 | 4,684,863 | - | 950,014 | 82,387 | 168,742 | 10,134,217 | |
2020 | ||||||||||||||||
F.A. van Houten | 1,325,000 | 1,298,500 | 2,874,467 | 0 | 565,922 | 27,001 | 62,176 | 6,153,067 | 1,325,000 | 1,298,500 | 2,874,467 | - | 565,922 | 27,001 | 62,176 | 6,153,067 |
A. Bhattacharya | 785,000 | 596,600 | 1,295,996 | 0 | 233,126 | 27,001 | 70,267 | 3,007,990 | 785,000 | 596,600 | 1,295,996 | - | 233,126 | 27,001 | 70,267 | 3,007,990 |
M.J. van Ginneken | 580,000 | 437,920 | 952,453 | 0 | 158,800 | 27,001 | 46,986 | 2,203,160 | 580,000 | 437,920 | 952,453 | - | 158,800 | 27,001 | 46,986 | 2,203,160 |
2,690,000 | 2,333,020 | 5,122,916 | 0 | 957,849 | 81,004 | 179,428 | 11,364,217 | 2,690,000 | 2,333,020 | 5,122,916 | - | 957,849 | 81,004 | 179,428 | 11,364,217 | |
2019 | ||||||||||||||||
F.A. van Houten | 1,295,000 | 1,091,800 | 2,235,166 | 0 | 559,052 | 26,380 | 52,713 | 5,260,111 | ||||||||
A. Bhattacharya | 770,000 | 517,472 | 995,483 | 0 | 230,006 | 26,380 | 63,265 | 2,602,606 | ||||||||
M.J. van Ginneken | 571,250 | 335,685 | 713,815 | 0 | 171,018 | 26,380 | 38,278 | 1,856,426 | ||||||||
2,636,250 | 1,944,957 | 3,944,464 | 0 | 960,076 | 79,140 | 154,256 | 9,719,143 | |||||||||
2018 | ||||||||||||||||
F.A. van Houten | 1,205,000 | 1,264,286 | 2,319,460 | 588 | 537,181 | 25,708 | 39,042 | 5,391,265 | ||||||||
A. Bhattacharya | 718,750 | 637,536 | 942,220 | 129 | 217,823 | 25,708 | 53,522 | 2,595,688 | ||||||||
M.J. van Ginneken | 557,500 | 362,611 | 711,806 | 66 | 168,210 | 25,708 | 35,299 | 1,861,200 | ||||||||
2,481,250 | 2,264,433 | 3,973,486 | 783 | 923,214 | 77,124 | 127,863 | 9,848,153 |
For further information on remuneration costs, see Total remuneration costs in 2020.
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
age at December 31, 2020 | accumulated annual pension as of December 31, 2020 | total pension related costs | age at December 31, 2022 | accumulated annual pension as of December 31, 2022 | total pension related costs | |
---|---|---|---|---|---|---|
F.A. van Houten | 60 | 329,412 | 592,924 | |||
R. Jakobs | 48 | 53,175 | 63,985 | |||
A. Bhattacharya | 59 | 33,307 | 260,128 | 61 | 37,446 | 265,383 |
M.J. van Ginneken | 47 | 46,220 | 185,802 | 49 | 50,614 | 169,755 |
Pension costs | 1,038,853 | 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 2020,2022, no (additional) pension benefits were granted to former members of the Board of Management.
The remuneration of the members of the Supervisory Board amounted to EUR 1.5 million (2021: EUR 1.3 million (2019: EUR 1.2 million; 2018: 1.12020: 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, 20202022 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
membership | committees | other compensation1) | total | membership | committees | other compensation1) | total | |
---|---|---|---|---|---|---|---|---|
20202) | ||||||||
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 | ||||||||
J. van der Veer | 155,000 | 35,000 | 11,345 | 201,345 | 53,507 | 12,082 | 3,916 | 69,505 |
C.A. Poon | 115,000 | 49,000 | 7,269 | 171,269 | 39,699 | 16,915 | 783 | 57,397 |
N. Dhawan | 100,000 | 18,000 | 7,269 | 125,269 | 100,000 | 18,000 | 2,269 | 120,269 |
O. Gadiesh | 100,000 | 14,000 | 2,269 | 116,269 | 34,521 | 4,833 | 783 | 40,137 |
D.E.I. Pyott | 100,000 | 42,000 | 12,269 | 154,269 | 100,000 | 36,370 | 2,269 | 138,639 |
P.A.M. Stoffels | 100,000 | 9,333 | 9,769 | 119,102 | 109,863 | 27,808 | 4,769 | 142,440 |
A.M. Harrison | 100,000 | 14,000 | 2,269 | 116,269 | 100,000 | 14,000 | 2,269 | 116,269 |
M.E. Doherty | 100,000 | 24,000 | 9,769 | 133,769 | 100,000 | 27,000 | 4,769 | 131,769 |
P. Löscher | 66,667 | 21,333 | 1,513 | 89,513 | 100,000 | 32,000 | 4,769 | 136,769 |
F. Sijbesma | 76,667 | 9,333 | 1,513 | 87,513 | 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 | ||||
1,013,333 | 236,000 | 65,254 | 1,314,587 | 1,044,644 | 242,652 | 38,595 | 1,325,891 | |
20192) | ||||||||
2020 | ||||||||
J. van der Veer | 155,000 | 35,000 | 7,000 | 197,000 | 155,000 | 35,000 | 11,345 | 201,345 |
C.A. Poon | 115,000 | 50,167 | 22,000 | 187,167 | 115,000 | 49,000 | 7,269 | 171,269 |
H.N.F.M. von Prondzynski | 33,333 | 16,333 | 5,667 | 55,333 | ||||
J.P. Tai | 25,000 | 10,250 | 5,500 | 40,750 | ||||
P. Löscher | 66,667 | 21,333 | 1,513 | 89,513 | ||||
F. Sijbesma | 76,667 | 9,333 | 1,513 | 87,513 | ||||
N. Dhawan | 100,000 | 18,000 | 27,000 | 145,000 | 100,000 | 18,000 | 7,269 | 125,269 |
O. Gadiesh | 100,000 | 19,833 | 12,000 | 131,833 | 100,000 | 14,000 | 2,269 | 116,269 |
D.E.I. Pyott | 100,000 | 41,500 | 17,000 | 158,500 | 100,000 | 42,000 | 12,269 | 154,269 |
P.A.M. Stoffels | 100,000 | 0 | 14,500 | 114,500 | 100,000 | 9,333 | 9,769 | 119,102 |
A.M. Harrison | 100,000 | 9,333 | 12,000 | 121,333 | 100,000 | 14,000 | 2,269 | 116,269 |
M.E. Doherty | 41,667 | 1,500 | 8,333 | 51,500 | 100,000 | 24,000 | 9,769 | 133,769 |
870,000 | 201,917 | 131,000 | 1,202,917 | 1,013,333 | 236,000 | 65,254 | 1,314,587 | |
20182) | ||||||||
J. van der Veer | 140,000 | 27,500 | 12,000 | 179,500 | ||||
C.A. Poon | 96,250 | 36,625 | 22,000 | 154,875 | ||||
H.N.F.M. von Prondzynski | 85,000 | 36,625 | 14,500 | 136,125 | ||||
J.P. Tai | 85,000 | 34,625 | 22,000 | 141,625 | ||||
N. Dhawan | 85,000 | 14,250 | 24,500 | 123,750 | ||||
O. Gadiesh | 85,000 | 14,250 | 22,000 | 121,250 | ||||
D.E.I. Pyott | 85,000 | 25,250 | 32,000 | 142,250 | ||||
P.A.M. Stoffels | 38,333 | 0 | 8,333 | 46,667 | ||||
A.M. Harrison | 31,667 | 0 | 10,667 | 42,333 | ||||
731,250 | 189,125 | 168,000 | 1,088,375 |
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.
December 31, 2019 | December 31, 2020 | December 31, 2021 | December 31, 2022 | |
---|---|---|---|---|
J. van der Veer | 18,366 | 18,738 | ||
R. Jakobs | 101,156 | 109,422 | ||
F.A. van Houten | 347,565 | 424,029 | 525,761 | 578,840 |
A. Bhattacharya | 90,083 | 123,077 | 148,365 | 169,517 |
M.J. van Ginneken | 67,600 | 88,996 | 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 |
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:
Transfers between levels of the fair value hierarchy are recognized at the end of the reporting period during which the change has occurred.
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.
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 following table, equity instruments carried at FVTOCI were designated as such upon the adoption of IFRS 9 and upon initial measurement of new equity instruments. Remaining financial assets are mandatorily classified as FVTPL or FVTOCI.
Philips Group
Fair value of financial assets and liabilities
in millions of EUR
2020
carrying amount | estimated fair value1) | Level 1 | Level 2 | Level 3 | |
---|---|---|---|---|---|
Financial assets | |||||
Carried at fair value: | |||||
Debt instruments | 207 | 207 | 207 | ||
Equity instruments | 5 | 5 | 5 | ||
Other financial assets | 36 | 36 | 30 | 5 | |
Financial assets carried at FVTPL | 248 | 248 | 5 | 30 | 212 |
Debt instruments | 27 | 27 | 27 | ||
Equity instruments | 119 | 119 | 12 | 107 | |
Current financial assets | 0 | 0 | |||
Receivables - current | 91 | 91 | 91 | ||
Financial assets carried at FVTOCI | 237 | 237 | 12 | 27 | 198 |
Derivative financial instruments | 111 | 111 | 111 | ||
Financial assets carried at fair value | 596 | 596 | 17 | 168 | 411 |
Carried at (amortized) cost: | |||||
Cash and cash equivalents | 3,226 | ||||
Loans and receivables: | |||||
Current loans receivables | 0 | ||||
Other non-current loans and receivables | 37 | ||||
Receivables - current | 4,065 | ||||
Receivables - non-current | 230 | ||||
Financial assets carried at (amortized) cost | 7,558 | ||||
Total financial assets | 8,154 | ||||
Financial liabilities | |||||
Carried at fair value: | |||||
Contingent consideration | (318) | (318) | (318) | ||
Financial liabilities carried at FVTP&L | (318) | (318) | (318) | ||
Derivative financial instruments | (163) | (163) | (163) | ||
Financial liabilities carried at fair value | (481) | (481) | (163) | (318) | |
Carried at (amortized) cost: | |||||
Accounts payable | (2,119) | ||||
Interest accrual | (52) | ||||
Debt (Corporate bonds and leases) | (5,655) | (6,431) | (5,216) | (1,216) | |
Debt (excluding corporate bonds and leases) | (1,279) | ||||
Financial liabilities carried at (amortized) cost | (9,104) | ||||
Total financial liabilities | (9,585) |
Philips Group
Fair value of financial assets and liabilities
in millions of EUR
2019
carrying amount | estimated fair value1) | Level 1 | Level 2 | Level 3 | |
---|---|---|---|---|---|
Financial assets | |||||
Carried at fair value: | |||||
Debt instruments | 92 | 92 | 92 | ||
Equity instruments | 7 | 7 | 7 | ||
Other financial assets | 37 | 37 | 31 | 6 | |
Financial assets carried at FVTPL | 136 | 136 | 7 | 31 | 98 |
Debt instruments | 28 | 28 | 27 | 0 | |
Equity instruments | 45 | 45 | 8 | 37 | |
Current financial assets | 0 | 0 | |||
Receivables - current | 77 | 77 | 77 | ||
Financial assets carried at FVTOCI | 150 | 150 | 8 | 27 | 114 |
Derivative financial instruments | 39 | 39 | 39 | ||
Financial assets carried at fair value | 324 | 324 | 15 | 97 | 212 |
Carried at (amortized) cost: | |||||
Cash and cash equivalents | 1,425 | ||||
Loans and receivables: | |||||
Current loans receivables | 1 | ||||
Other non-current loans and receivables | 40 | ||||
Receivables - current | 4,476 | ||||
Receivables - non-current | 178 | ||||
Financial assets carried at (amortized) cost | 6,121 | ||||
Total financial assets | 6,445 | ||||
Financial liabilities | |||||
Carried at fair value: | |||||
Contingent consideration | (354) | (354) | (354) | ||
Financial liabilities carried at FVTP&L | (354) | (354) | (354) | ||
Derivative financial instruments | (191) | (191) | (191) | ||
Financial liabilities carried at fair value | (544) | (544) | (191) | (354) | |
Carried at (amortized) cost: | |||||
Accounts payable | (2,089) | ||||
Interest accrual | (38) | ||||
Debt (Corporate bonds and finance leases) | (4,943) | (5,500) | (4,119) | (1,381) | |
Debt (excluding corporate bonds and finance leases) | (504) | ||||
Financial liabilities carried at (amortized) cost | (7,574) | ||||
Total financial liabilities | (8,118) |
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.
As part of the EPDrespective acquisition Philipsagreement that may be requiredrequire Philips 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, respectively. The discount rates used in the risk-adjustedrisk adjusted approach are ranging from 7 to 9 percent and reflect the inherent risk related to achieving the commercial 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, 2020 shows that if the probabilities of success for regulatory milestones are 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 of the provision would increase by approximately 9%. Similarly, a decrease in the probabilities of successhierarchy. Fair value information for regulatory milestones by 10 percentage points would reduce thefinancial assets and financial liabilities not carried at fair value by approximately 10%. Ifis not included if the discount rates for commercial milestones were to increase instantaneously by 100 basis points fromcarrying 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) |
As a result of the uncertainty associated with the nature of the COVID-19 pandemic, the company includes various scenariosthese instruments (including maturity and interest conditions) and therefore fair value information is not included in the business forecasting processtable above.
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, 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) |
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
Financial assets | Financial liabilities | Financial assets | Financial liabilities | |
---|---|---|---|---|
Balance at January 1, 2020 | 212 | 354 | ||
Balance as of January 1, 2022 | 523 | 208 | ||
Acquisitions | 70 | 96 | ||
Purchase | 127 | 131 | ||
Sales | (60) | (76) | ||
Utilizations | (15) | (105) | ||
Recognized in profit and loss: | ||||
other business income | (93) | (85) | ||
financial income and expenses1) | 129 | 6 | 7 | (8) |
Recognized in other comprehensive income2) | (8) | (6) | 8 | |
Receivables held to collect and sell | 11 | (41) | ||
Balance at December 31, 2020 | 411 | 318 | ||
Reclassification | 5 | |||
Balance as of December 31, 2022 | 549 | 113 |
Philips Group
Reconciliation of Level 3 fair value measurements
in millions of EUR
Financial assets | Financial liabilities | Financial assets | Financial liabilities | |
---|---|---|---|---|
Balance at January 1, 2019 | 255 | 409 | ||
Balance as of January 1, 2021 | 411 | 318 | ||
Acquisitions | 6 | 16 | ||
Purchase | 54 | 113 | ||
Sales | (24) | (122) | ||
Utilizations | (44) | (48) | ||
Recognized in profit and loss: | ||||
other business income | (35) | (87) | ||
financial income and expenses | 2 | 14 | 98 | 1 |
Recognized in other comprehensive income1) | (120) | 4 | 12 | 9 |
Receivables held to collect and sell | 46 | (25) | ||
Balance at December 31, 2019 | 212 | 354 | ||
Reclassification from associates | 36 | |||
Balance as of December 31, 2021 | 523 | 208 |
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:
Philips Group
Financial assets subject to offsetting, enforceable master netting arrangements or similar agreements
in millions of EUR
2019 | 2020 | 2021 | 2022 | |
---|---|---|---|---|
Derivatives | ||||
Gross amounts of recognized financial assets | 39 | 111 | 63 | 127 |
Gross amounts of recognized financial liabilities offset in the balance sheet | ||||
Net amounts of financial assets presented in the balance sheet | 39 | 111 | 63 | 127 |
Related amounts not offset in the balance sheet | ||||
Financial instruments | (33) | (55) | (47) | (54) |
Cash collateral received | ||||
Net amount | 6 | 57 | 17 | 73 |
Philips Group
Financial liabilities subject to offsetting, enforceable master netting arrangements or similar agreements
in millions of EUR
2019 | 2020 | 2021 | 2022 | |
---|---|---|---|---|
Derivatives | ||||
Gross amounts of recognized financial liabilities | (191) | (163) | (202) | (211) |
Gross amounts of recognized financial assets offset in the balance sheet | ||||
Net amounts of financial liabilities presented in the balance sheet | (191) | (163) | (202) | (211) |
Related amounts not offset in the balance sheet | ||||
Financial instruments | 33 | 55 | 47 | 54 |
Cash collateral received | ||||
Net amount | (158) | (109) | (155) | (157) |
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.
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 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, 2020,2022, Philips had EUR 3,2261,172 million in cash and cash equivalents (2019:(2021: EUR 1,4252,303 million), within which short-term deposits of EUR 1,983482 million (2019:(2021: EUR 8841,357 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.Program. As of December 31, 2020,2022, 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.EUR 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, March 2020, Philips has established a Euro Medium-Term Note (EMTN) program, a framework that facilitates the issuance of notes for a total amount up to EUR 10 billion. In 2022, Philips issued three new tranches under the program for a total of EUR 2 billion, of which two bonds have been issued inwhile also redeeming its outstanding 2023 and 2024 Notes and issuing a tender offer on the year 2020 amounting to EUR 1 billion. Aoutstanding 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, 2020,2022, Philips also held EUR 1732 million of listed (level 1) equity investments at fair value (classified as other non-current financial assets).
The following table below presents a summary of the Group’s fixed contractual cash obligations and commitments atas of December 31, 2020.2022. 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:
payments due by period | payments due by period | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
total | less than 1 year | 1-3 years | 3-5 years | after 5 years | total | less than 1 year | 1-3 years | 3-5 years | after 5 years | |
Long-term debt3) | 7,430 | 1,015 | 876 | 1,365 | 4,174 | |||||
Lease obligations | 1,325 | 290 | 412 | 239 | 384 | |||||
Long-term debt | 8,168 | 842 | 1,760 | 1,809 | 3,757 | |||||
Short-term debt | 76 | 89 | ||||||||
Interest on debt | 1,683 | 159 | 304 | 264 | 956 | |||||
Derivative liabilities | 161 | 75 | 86 | 210 | 208 | 2 | ||||
Purchase obligations4) | 539 | 273 | 223 | 43 | ||||||
Purchase obligations3) | 782 | 336 | 412 | 21 | 12 | |||||
Trade and other payables | 2,119 | 1,968 | ||||||||
Contractual cash obligations | 11,650 | 3,848 | 1,597 | 1,647 | 4,558 | 12,901 | 3,603 | 2,478 | 2,094 | 4,725 |
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 132127 million (2019:(2021: EUR 61116 million). As atof December 31, 20202022 capital contributions already made to these investment funds are recorded as non-current financial assets.
Philips offers voluntary supply chain finance programs with third parties which provide participating suppliers the opportunity to factor their trade receivables at the sole discretion of both the suppliers and the third parties. Philips continues to recognize these liabilities as trade payables and settles them accordingly on the invoice maturity date based on the terms and conditions these arrangements . Atarrangements. As of December 31, 20202022 approximately EUR 227151 million (2021: EUR 139 million)of the Philips account payable were transferred under these arrangements.
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.
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 328400 million. In addition, the company is committed to leases not yet commenced to EUR 22393 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 financing activities. Lease payments under sale-and-leaseback arrangements for 20202022 were EUR 11272 million (2019:(2021: EUR 10885 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
2021 | 85 | |
2022 | 65 | |
2023 | 44 | 55 |
2024 | 27 | 38 |
2025 | 11 | 23 |
2026 | 14 | |
2027 | 5 | |
Thereafter | 18 | 18 |
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, 20202022 was EUR 0.20.6 million (2019:(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 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:
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, 2020:2022:
Philips Group
Estimated transaction exposure and related hedges
in millions of EUR
Sales/Receivables | Purchases/Payable | Sales/Receivables | Purchases/Payable | |||||
---|---|---|---|---|---|---|---|---|
exposure | hedges | exposure | hedges | exposure | hedges | exposure | hedges | |
Balance as of December 31, 2020 | ||||||||
Balance as of December 31, 2022 | ||||||||
Exposure currency | ||||||||
USD | 1,915 | (1,356) | (900) | 799 | 1,754 | (1,530) | (979) | 936 |
JPY | 689 | (372) | (9) | 9 | 479 | (289) | (9) | 9 |
GBP | 304 | (180) | (11) | 11 | 303 | (188) | (7) | 7 |
CNY | 438 | (290) | (146) | 145 | 346 | (259) | (80) | 79 |
CAD | 256 | (156) | 203 | (138) | ||||
PLN | 155 | (92) | 65 | (62) | ||||
AUD | 229 | (130) | 139 | (92) | (1) | 1 | ||
CHF | 124 | (68) | (10) | 10 | 132 | (56) | (3) | 2 |
CZK | 67 | (42) | 48 | (50) | ||||
SEK | 88 | (53) | (1) | 1 | 55 | (17) | (1) | 1 |
RUB | 87 | (87) | 192 | (192) | (129) | 129 | ||
Others | 355 | (323) | (412) | 293 | 64 | (46) | (259) | 162 |
Total 2020 | 4,707 | (3,149) | (1,489) | 1,268 | ||||
Total 2019 | 5,233 | (3,292) | (1,606) | 1,244 | ||||
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, 2020,2022, a gainloss of EUR 232 million was deferred in equity as a result of these hedges (2019:(2021: EUR 2425 million loss). The result deferred in equity will be released to earnings mostly during 20212023 at the time when the related hedged transactions affect the income statement. During 2020,2022, EUR nil1 million (2019:(2021: EUR 0.8nil 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. During 2020,2022, a gainloss of EUR 2842 million included in the cash flow hedges reserve in 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 was released to income statement.
The total net fair value of hedges related to transaction exposure as of December 31, 2020,2022, was an unrealized gain of EUR 266 million. The estimated impact of a 10% increase of value of the EUR is estimated to be EUR 136114 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
2019 | 2020 | 2021 | 2022 | |
---|---|---|---|---|
USD | 85 | 71 | 78 | 68 |
JPY | 19 | 17 | 13 | 15 |
GBP | 14 | 15 | 14 | 16 |
CHF | 5 | 6 | 5 | 4 |
PLN | 9 | 8 | 3 | 2 |
RUB | 3 | 8 | 10 | 0 |
The EUR 136114 million increase includes a gain of EUR 1141 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 12573 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 is 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 negative EUR 1,040748 million mainly relates to the development of the USD versus the EUR. AtAs of December 31, 2020,2022, a weakening of USD by 10% versus the EUR would result in a decrease in the currency translation reserve in equity of approximately EUR 7871,132 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 9621,384 million. Refer to the country risk paragraph for countries with significant foreign currency denominated equity invested.
As of December 31, 2020,2022, cross-currency interest rate swaps for a nominal value of USD 500 million (liability at fair value: EUR 83147 million) and external bond funding for a nominal value of USD 1,4731,490 million (liability at book value: EUR 1,2101,378 million) were designated as net investment hedges of our financing investments in foreign operations for an equal amount. During 20202022 a total gainloss 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, 2020,2022, was a liability of EUR 83147 million. An instantaneous 10% increase in the value of the EUR against all currencies would lead to an increase of EUR 53192 million in the value of the derivatives, including a EUR 86191 million increase related to the USD.
As of December 31, 2019,2021, cross-currency interest rate swaps for a nominal value of USD 500 million (liability at fair value: EUR 123116 million) and external bond funding for a nominal value of USD 1,473 million (liability at book value: EUR 1,3281,313 million) were designated as net investment hedges of our financing investments in foreign operations for an equal amount. During 20192021 a total lossgain of EUR nil1.1 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, 2019,2021, was a liability of EUR 123116 million. An instantaneous 10% increase in the value of the EUR against all currencies would lead to an increase of EUR 740 million in the value of the derivatives, including a EUR 5340 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 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 6,9348,201 million (2019:(2021: EUR 5,4476,980 million), which constitutes an inherent interest rate risk with potential negative impact on financial results. At year-end, Philips held EUR 3,2261,172 million in cash and cash equivalents (2019:(2021: EUR 1,4252,303 million), and had total long-term debt of EUR 5,7057,270 million (2019:(2021: EUR 4,9396,473 million) and total short-term debt of EUR 1,229931 million (2019:(2021: EUR 508506 million) At. As of December 31, 2020,2022, Philips had a ratio of fixed-rate long-term debt to total outstanding debt of approximately 79%80% compared to 87%90% one year earlier. Philips debt has a long maturity profile with an average tenor of long-term debt of 6.36.1 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
2019 | 2020 | 2021 | 2022 | |
---|---|---|---|---|
Impact 1% interest increase on the fair value of the fixed-rate long-term debt2)3) | (300) | (345) | (297) | (274) |
Impact 1% interest decrease on the fair value of the fixed-rate long-term debt2)3) | 301 | 346 | 298 | 274 |
Impact 1% interest increase on the annualized net interest expense4) | 11 | 28 | 20 | 4 |
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 is in the process of evaluating the implications of such a phase out. The Company has no interest rate hedging relationships which get affected by the reform and dodoes not expect any significant impact on existing contracts due to change in the 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 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 1732 million atas of December 31, 2020 (2019:2022 (2021: EUR 1567 million). Philips does not hold derivatives in the above-mentioned listed companies. Philips also has shareholdings in several privately-owned companies amounting to EUR 107229 million, mainly consisting of minority stakes in companies in various industries. As a result, Philips is exposed to potential value adjustments.
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, 20202022 and 2019,2021, respectively, Philips did not have any significant outstanding financial commodity derivatives.
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, 2020.2022.
Philips Group
Credit risk with number of counterparties
for deposits above EUR 10 million
10-100 million | 100-500 million | 500 million and above | 10-100 million | 100-500 million | 500 million and above | |
---|---|---|---|---|---|---|
AA- rated bank counterparties | 1 | 0 | ||||
A+ rated bank counterparties | 2 | 3 | 1 | 3 | 1 | 0 |
A rated bank counterparties | 1 | 1 | 0 | 1 | 0 | |
A- rated bank counterparties | 3 | 1 | 0 | |||
3 | 6 | 2 | 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 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, 2020,2022, the company had country risk exposure of EUR 10.514.0 billion in the United States, EUR 1.21.3 billion in China (including Hong Kong). Other countries higher than EUR 500 million are JapanGermany EUR 684808 million, and the United Kingdom EUR 726766 million, and Japan EUR 639 million. Other countriescountry which have significant exposure are Germanyis Singapore EUR 300 million and India EUR 299206 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.
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 20202022 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, 2020,2022, for the coming year, whereby the re-insurance captive retentions remained unchanged.the same.
On December 18, 2020,January 30, 2023, Philips announced plans to create value with sustainable impact, which is based on focused organic growth to deliver patient- and BioTelemetry, Inc. (BioTelemetry) announced that they have entered intopeople-driven innovation at scale with improved execution as key value driver, prioritizing patient safety and quality, supply chain reliability and a definitive merger agreement. BioTelemetry is a leading U.S.-based provider of remote cardiac diagnostics and monitoring. The acquisition is part of the Philips strategy to be a leading provider of patient care management solutions. On February 9, 2021, Philips completed a tender offer to acquire all of the issued and outstanding shares of BioTelemetry for USD 72.00 per share. The total equity purchase price and the settlement of stock option rights, including BioTelemetry’s cash and debt, involved an amount of USD 2.8 billion (approximately EUR 2.3 billion). BioTelemetry and its approximately 1,900 employees form part of Philips' Connected Care business segment. Philips consolidates 100% of BioTelemetry as of the acquisition date. Duesimplified operating model. In addition to the recent closing date,reduction of its workforce by 4,000 roles announced in October 2022, Philips plans to reduce its workforce by an additional IFRS disclosures cannot6,000 roles globally by 2025, of which 3,000 will be made until the initial accounting for the business combination has been completed.
On January 19, 2021, Philips announced it had signed an agreement to acquire Capsule Technologies, Inc., a global leaderimplemented in medical device integration and data technologies for hospitals and healthcare organizations. The acquisition will become part of Philips’ Connected Care segment and expand Philips’ patient care management solutions for all care settings. Philips will acquire Capsule Technologies for a cash consideration of USD 635 million (approximately EUR 520 million based on2023 in line with the relevant exchange ratelocal regulations and processes. These reductions are focused on the agreement date). The transaction is subject to certain closing conditions, including regulatory clearancesCorporate and Functions optimization and non-core activities, for which charges in relevant jurisdictions, and is2023 are expected to be completed in the first quarter of 2021.
In February 2021, Philips entered and has drawn two new bilateral loans amounting to totalapproximately EUR 500 million (EUR 250 million each) with a tenor of up to one year. These loans will be used for general group purposes and will strengthen the liquidity position of the company.470 million.
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:
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, 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 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 %
nominal growth | consolidation changes | currency effects | comparable growth | nominal growth | consolidation changes | currency effects | comparable growth | |
---|---|---|---|---|---|---|---|---|
2022 versus 2021 | ||||||||
Diagnosis & Treatment | 6.2 | 0.0 | (6.8) | (0.7) | ||||
Connected Care | (3.7) | (0.1) | (7.0) | (10.8) | ||||
Personal Health | 5.7 | 0.0 | (5.7) | 0.1 | ||||
Philips Group | 3.9 | (0.2) | (6.5) | (2.8) | ||||
2021 versus 2020 | ||||||||
Diagnosis & Treatment | 5.6 | 0.0 | 2.5 | 8.1 | ||||
Connected Care | (17.5) | (7.2) | 2.2 | (22.6) | ||||
Personal Health | 7.2 | 0.0 | 1.6 | 8.8 | ||||
Philips Group | (0.9) | (2.5) | 2.2 | (1.2) | ||||
2020 versus 2019 | ||||||||
Diagnosis & Treatment | (3.7) | (1.0) | 2.3 | (2.3) | (3.7) | (1.0) | 2.3 | (2.3) |
Connected Care | 19.1 | 0.7 | 2.3 | 22.0 | 18.6 | 0.7 | 2.3 | 21.6 |
Personal Health | (7.6) | 0.0 | 3.5 | (4.2) | (9.0) | 0.0 | 2.8 | (6.2) |
Philips Group | 0.3 | (0.4) | 2.6 | 2.5 | 1.0 | (0.5) | 2.4 | 2.9 |
2019 versus 2018 | ||||||||
Diagnosis & Treatment | 9.8 | (1.2) | (3.2) | 5.5 | ||||
Connected Care | 7.7 | (0.4) | (4.2) | 3.1 | ||||
Personal Health | 6.0 | 0.2 | (1.2) | 5.0 | ||||
Philips Group | 7.5 | (0.3) | (2.8) | 4.5 | ||||
2018 versus 2017 | ||||||||
Diagnosis & Treatment | 4.9 | (2.4) | 4.1 | 6.6 | ||||
Connected Care | 0.2 | (1.6) | 4.1 | 2.7 | ||||
Personal Health | (2.8) | 0.6 | 4.6 | 2.3 | ||||
Philips Group | 1.9 | (1.4) | 4.2 | 4.7 |
Philips Group
Sales growth composition perby geographic clusterarea
in %
nominal growth | consolidation changes | currency effects | comparable growth | nominal growth | consolidation changes | currency effects | comparable growth | |
---|---|---|---|---|---|---|---|---|
2022 versus 2021 | ||||||||
Western Europe | (1.2) | (1.3) | (0.4) | (2.8) | ||||
North America | 11.9 | 0.2 | (12.4) | (0.3) | ||||
Other mature geographies | (3.0) | 0.0 | 2.5 | (0.5) | ||||
Total mature geographies | 5.9 | (0.3) | (6.7) | (1.1) | ||||
Growth geographies | (0.8) | - | (6.0) | (6.9) | ||||
Philips Group | 3.9 | (0.2) | (6.5) | (2.8) | ||||
2021 versus 2020 | ||||||||
Western Europe | (1.5) | (1.3) | (0.4) | (3.2) | ||||
North America | (1.5) | (5.5) | 3.6 | (3.4) | ||||
Other mature geographies | (3.2) | (0.1) | 3.6 | 0.3 | ||||
Total mature geographies | (1.8) | (3.5) | 2.4 | (2.8) | ||||
Growth geographies | 1.2 | - | 1.8 | 3.0 | ||||
Philips Group | (0.9) | (2.5) | 2.2 | (1.2) | ||||
2020 versus 2019 | ||||||||
Western Europe | 11.6 | (0.9) | 0.1 | 10.8 | 11.2 | (1.1) | 0.1 | 10.2 |
North America | 0.0 | (0.3) | 1.9 | 1.5 | (0.3) | 1.9 | 1.3 | |
Other mature geographies | (2.3) | (0.5) | 0.5 | (2.3) | (3.0) | (0.5) | 0.4 | (3.1) |
Total mature geographies | 3.3 | (0.5) | 1.1 | 3.9 | 2.5 | (0.6) | 1.1 | 3.0 |
Growth geographies | (5.8) | (0.1) | 5.7 | (0.3) | (2.6) | (0.2) | 5.4 | 2.6 |
Philips Group | 0.3 | (0.3) | 2.6 | 2.5 | 1.0 | (0.5) | 2.4 | 2.9 |
2019 versus 2018 | ||||||||
Western Europe | 3.6 | (1.0) | (0.2) | 2.4 | ||||
North America | 9.7 | (0.6) | (5.5) | 3.5 | ||||
Other mature geographies | 0.7 | (0.3) | (3.7) | (3.4) | ||||
Total mature geographies | 6.3 | (0.7) | (3.5) | 2.1 | ||||
Growth geographies | 10.0 | 0.6 | (1.0) | 9.6 | ||||
Philips Group | 7.5 | (0.3) | (2.8) | 4.5 | ||||
2018 versus 2017 | ||||||||
Western Europe | 4.9 | (2.6) | 0.4 | 2.7 | ||||
North America | (1.1) | (2.6) | 4.4 | 0.7 | ||||
Other mature geographies | 10.8 | (0.4) | 4.1 | 14.5 | ||||
Total mature geographies | 2.5 | (2.3) | 3.1 | 3.3 | ||||
Growth geographies | 0.7 | 0.4 | 6.5 | 7.6 | ||||
Philips Group | 1.9 | (1.4) | 4.2 | 4.7 |
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 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 | Philips Group | Diagnosis & Treatment | Connected Care | Personal Health | Other | |
---|---|---|---|---|---|---|---|---|---|---|
2020 | ||||||||||
2022 | ||||||||||
Net Income | 1,195 | (1,605) | ||||||||
Discontinued operations, net of income taxes | 10 | (13) | ||||||||
Income tax expense | 284 | (113) | ||||||||
Investments in associates, net of income taxes | 9 | 2 | ||||||||
Financial expenses | 204 | 258 | ||||||||
Financial income | (160) | (58) | ||||||||
Income from operations | 1,542 | 495 | 708 | 619 | (280) | (1,529) | 404 | (2,246) | 515 | (202) |
Amortization of acquired intangible assets | 381 | 209 | 134 | 20 | 18 | |||||
Amortization and impairment of acquired intangible assets | 363 | 143 | 199 | 15 | 7 | |||||
Impairment of goodwill | 144 | 144 | 1,357 | 27 | 1,331 | |||||
EBITA | 2,067 | 704 | 986 | 639 | (262) | 192 | 573 | (716) | 531 | (196) |
Restructuring and acquisition-related charges | 203 | 29 | 97 | 40 | 37 | 202 | 21 | 108 | 11 | 61 |
Other items | 301 | 83 | 112 | 25 | 81 | |||||
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 | |||||||||
Provisions for quality actions in Connected Care | 59 | 59 | ||||||||
Remaining items | 63 | - | 24 | (6) | 46 | |||||
Adjusted EBITA | 2,570 | 816 | 1,195 | 704 | (145) | 1,318 | 774 | 95 | 538 | (89) |
2019 | ||||||||||
Net Income | 1,173 | |||||||||
Discontinued operations, net of income taxes | 19 | |||||||||
Income tax expense | 337 | |||||||||
Investments in associates, net of income taxes | (1) | |||||||||
Financial expenses | 233 | |||||||||
Financial income | (117) | |||||||||
Income from operations | 1,644 | 660 | 267 | 844 | (127) | |||||
Amortization of acquired intangible assets | 350 | 177 | 141 | 25 | 8 | |||||
Impairment of goodwill | 97 | 19 | 78 | |||||||
EBITA | 2,091 | 856 | 486 | 869 | (119) | |||||
Restructuring and acquisition-related charges | 318 | 149 | 64 | 50 | 54 | |||||
Other items | 153 | 73 | 67 | 23 | (11) | |||||
Adjusted EBITA | 2,563 | 1,078 | 618 | 943 | (76) | |||||
2018 | ||||||||||
Net Income | 1,097 | |||||||||
Discontinued operations, net of income taxes | 213 | |||||||||
Income tax expense | 193 | |||||||||
Investments in associates, net of income taxes | 2 | |||||||||
Financial expenses | 264 | |||||||||
Financial income | (51) | |||||||||
Income from operations | 1,719 | 629 | 399 | 796 | (105) | |||||
Amortization of acquired intangible assets | 347 | 98 | 140 | 31 | 79 | |||||
EBITA | 2,066 | 727 | 539 | 827 | (27) | |||||
Restructuring and acquisition-related charges | 258 | 146 | 66 | 15 | 31 | |||||
Other items | 41 | - | 56 | 18 | (33) | |||||
Adjusted EBITA | 2,366 | 872 | 662 | 860 | (28) |
Philips Group
Reconciliation of Net income to Adjusted EBITA
in millions of EUR
Philips Group | Diagnosis & Treatment | Connected Care | Personal Health | Other | |
---|---|---|---|---|---|
2021 | |||||
Net Income | 3,323 | ||||
Discontinued operations, net of income taxes | (2,711) | ||||
Income tax expense | (103) | ||||
Investments in associates, net of income taxes | 4 | ||||
Financial expenses | 188 | ||||
Financial income | (149) | ||||
Income from operations | 553 | 941 | (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) |
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.
In 2020, Philips revised the definition of net finance expenses used in the calculation of Adjusted income from continuing operations attributable to shareholders, to exclude fair value movements of limited life fund investments recognized at fair value through profit and loss. This change leads to more relevant information as the fair value movements are not indicative of Philips' performance. In addition, the fair value movements do not represent cash items. Philips believes making this change is helpful for investors to evaluate Philips' performance. Limited life fund investments are presented under Other non-current financial assets and classified as financial assets at fair value through profit or loss (refer to note Other financial assets), and related fair value movements are presented in financial income and expense (refer to note Financial income and expenses). Fair value movements of equity investments in limited life funds in 2020 were EUR 131 million. Fair value movements of equity investments in limited life funds in 2019 were EUR 1 million.
Philips considers the use of Adjusted income from continuing operations attributable to shareholders appropriate as Philips uses it as the basis for the Adjusted income from continuing operations attributable to shareholders per common share (in EUR) - diluted, a non-IFRS measure.
Adjusted income from continuing operations attributable to shareholders may be subject to limitations as an analytical tool for investors, as it excludes certain items and therefore does not reflect the expense associated with such items, which may be significant and have a significant effect on Philips’ net income. Net income, for the years indicated is included in the following table. Net income is not allocated to segments as certain income and expense line items are 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 following table.
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
2018 | 2019 | 2020 | 2020 | 2021 | 2022 | |
---|---|---|---|---|---|---|
Net income | 1,097 | 1,173 | 1,195 | 1,195 | 3,323 | (1,605) |
Discontinued operations, net of income taxes | 213 | 19 | 10 | (196) | (2,711) | (13) |
Income from continuing operations | 1,310 | 1,192 | 1,205 | 999 | 612 | (1,618) |
Continuing operations non-controlling interests | (7) | (5) | (8) | |||
Income from continuing operations attributable to non-controlling interests | (8) | (4) | (3) | |||
Income from continuing operations attributable to shareholders1) | 1,303 | 1,186 | 1,197 | 991 | 608 | (1,622) |
Adjustments for: | ||||||
Amortization of acquired intangible assets | 347 | 350 | 381 | |||
Amortization and impairment of acquired intangible assets | 377 | 322 | 363 | |||
Impairment of goodwill | 97 | 144 | 144 | 15 | 1,357 | |
Restructuring costs and acquisition-related charges | 258 | 318 | 203 | 195 | 95 | 202 |
Other items | 41 | 153 | 301 | |||
Net finance expenses2) | 57 | 13 | (125) | |||
Tax impact of adjusted items | (365) | (280) | (285) | |||
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) | 1,643 | 1,838 | 1,814 | 1,594 | 1,497 | 845 |
Earnings per common share:3) | ||||||
Earnings per common share: | ||||||
Income from continuing operations attributable to shareholders1) per common share (in EUR) - diluted | 1.37 | 1.27 | 1.31 | 1.08 | 0.67 | (1.84) |
Adjusted income from continuing operations attributable to shareholders1) per common share (in EUR) - diluted | 1.72 | 1.98 | 1.98 | 1.74 | 1.65 | 0.96 |
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 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 | Philips Group | Diagnosis & Treatment | Connected Care | Personal Health | Other | |
---|---|---|---|---|---|---|---|---|---|---|
2020 | ||||||||||
2022 | ||||||||||
Net Income | 1,195 | (1,605) | ||||||||
Discontinued operations, net of income taxes | 10 | (13) | ||||||||
Income tax expense | 284 | (113) | ||||||||
Investments in associates, net of income taxes | 9 | 2 | ||||||||
Financial expenses | 204 | 258 | ||||||||
Financial income | (160) | (58) | ||||||||
Income from operations | 1,542 | 495 | 708 | 619 | (280) | (1,529) | 404 | (2,246) | 515 | (202) |
Depreciation, amortization and impairment of fixed assets | 1,520 | 536 | 415 | 187 | 382 | 1,602 | 559 | 514 | 132 | 397 |
Impairment of goodwill | 144 | - | 144 | 1,357 | 27 | 1,331 | ||||
Restructuring and acquisition-related charges | 203 | 29 | 97 | 40 | 37 | 202 | 21 | 108 | 11 | 61 |
Other items | 301 | 83 | 112 | 25 | 81 | |||||
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 | |||||||||
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 | (102) | (35) | (64) | 1 | (4) | (252) | (135) | (84) | (3) | (30) |
Adjusted EBITDA | 3,608 | 1,108 | 1,412 | 872 | 215 | 2,305 | 1,055 | 326 | 652 | 272 |
2019 | ||||||||||
Net Income | 1,173 | |||||||||
Discontinued operations, net of income taxes | 19 | |||||||||
Income tax expense | 337 | |||||||||
Investments in associates, net of income taxes | (1) | |||||||||
Financial expenses | 233 | |||||||||
Financial income | (117) | |||||||||
Income from operations | 1,644 | 660 | 267 | 844 | (127) | |||||
Depreciation, amortization and impairment of fixed assets | 1,402 | 564 | 327 | 186 | 326 | |||||
Impairment of goodwill | 97 | 19 | 78 | |||||||
Restructuring and acquisition-related charges | 318 | 149 | 64 | 50 | 54 | |||||
Other items | 153 | 73 | 67 | 23 | (11) | |||||
Adding back impairment of fixed assets included in Restructuring and acquisition-related changes and Other items | (111) | (109) | (2) | - | (1) | |||||
Adjusted EBITDA | 3,503 | 1,357 | 802 | 1,104 | 241 | |||||
2018 | ||||||||||
Net Income | 1,097 | |||||||||
Discontinued operations, net of income taxes | 213 | |||||||||
Income tax expense | 193 | |||||||||
Investments in associates, net of income taxes | 2 | |||||||||
Financial expenses | 264 | |||||||||
Financial income | (51) | |||||||||
Income from operations | 1,719 | 629 | 399 | 796 | (105) | |||||
Depreciation, amortization and impairment of fixed assets | 1,089 | 349 | 326 | 171 | 244 | |||||
Restructuring and acquisition-related charges | 258 | 146 | 66 | 15 | 31 | |||||
Other items | 41 | - | 56 | 18 | (33) | |||||
Adding back impairment of fixed assets included in Restructuring and acquisition-related changes and Other items | (15) | (7) | (8) | - | 1 | |||||
Adjusted EBITDA | 3,093 | 1,116 | 839 | 1,000 | 139 |
Philips Group
Reconciliation of Net income to Adjusted EBITDA
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) |
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 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, 2020 and 2019 includes the impact of IFRS 16. Free cash flow calculations for the year ended December 31, 2018 have not been restated for this impact.
Philips Group
Composition of free cash flow
in millions of EUR
2018 | 2019 | 2020 | 2020 | 2021 | 2022 | |
---|---|---|---|---|---|---|
Net cash flows provided by operating activities | 1,780 | 2,031 | 2,777 | 2,511 | 1,629 | (173) |
Net capital expenditures: | (796) | (978) | (924) | (876) | (729) | (788) |
Purchase of intangible assets | (123) | (156) | (127) | (114) | (107) | (105) |
Expenditures on development assets | (298) | (339) | (302) | (296) | (259) | (257) |
Capital expenditures on property, plant and equipment | (422) | (518) | (513) | (485) | (397) | (444) |
Proceeds from disposals of property, plant and equipment | 46 | 35 | 18 | 19 | 33 | 18 |
Free cash flow | 984 | 1,053 | 1,852 | 1,635 | 900 | (961) |
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
2018 | 2019 | 2020 | 2020 | 2021 | 2022 | |
---|---|---|---|---|---|---|
Long-term debt | 3,427 | 4,939 | 5,705 | 5,705 | 6,473 | 7,270 |
Short-term debt | 1,394 | 508 | 1,229 | 1,229 | 506 | 931 |
Total debt | 4,821 | 5,447 | 6,934 | 6,934 | 6,980 | 8,201 |
Cash and cash equivalents | 1,688 | 1,425 | 3,226 | 3,226 | 2,303 | 1,172 |
Net debt | 3,132 | 4,022 | 3,708 | 3,708 | 4,676 | 7,028 |
Shareholders' equity | 12,088 | 12,597 | 11,870 | 11,870 | 14,438 | 13,249 |
Non-controlling interests | 29 | 28 | 31 | 31 | 36 | 34 |
Group equity | 12,117 | 12,625 | 11,901 | 11,901 | 14,475 | 13,283 |
Net debt : group equity ratio | 21:79 | 24:76 | 24:76 | 24:76 | 35:65 |
Organic Return on Invested Capital (ROIC) is defined as organic return which includes income from operations for the year excluding the impact of: Income or Loss from operations of businesses acquired in the five year period prior to the measurement date; certain tax gains and losses determined by management to be material in nature and require separate disclosure and; certain other items; and tax effects of the other adjustments (calculated at group effective tax rate) divided by average of the Net operating capital at the end of each of the five quarters ending on the relevant measurement date excluding the average net operating capital at the end of each of the five quarters ending on the relevant measurement date of the businesses acquired in the five year period prior to the measurement date, expressed as a percentage.
Net operating capital is defined as tangible fixed assets, intangible fixed assets, including goodwill, inventories and receivable balances, minus payable balances and provisions, all as further defined below. Net operating capital is also adjusted to exclude assets and liabilities of businesses acquired in the five year period prior to the relevant measurement date. Organic ROIC is calculated after taxes.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 2019-20202020-2022 these other items included legal provisions, pension settlements, and results of divestments.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, December 20192020, 2021 and 20202022 is included in the table below.following table.
Philips Group
Return on total assets
in millions of EUR unless otherwise stated
2018 | 2019 | 2020 | 2020 | 2021 | 2022 | |
---|---|---|---|---|---|---|
Income from operations | 1,719 | 1,644 | 1,542 | 1,264 | 553 | (1,529) |
Total assets | 26,019 | 27,016 | 27,713 | 27,713 | 30,961 | 30,688 |
Return on total assets (%) | 6.6% | 6.1% | 5.6% | 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, December 2018, 20192020, 2021 and 20202022 are included in the following tables. Philips adopted IFRS 16 on January 1, 2019. As a result, Philips calculation of Organic ROIC for the year ended December 31, 2020 and 2019 includes the impact of IFRS 16. Organic ROIC calculations for the year ended December 31, 2018 have not been restated for this impact.
Philips Group
Reconciliation of Average Net operating capital1)
in millions of EUR unless otherwise stated
2018 | 2019 | 2020 | 2020 | 2021 | 2022 | |
---|---|---|---|---|---|---|
Tangible fixed assets | 1,603 | 2,412 | 2,799 | 2,799 | 2,716 | 2,715 |
Intangible fixed assets (including goodwill) | 11,473 | 12,242 | 11,789 | |||
Intangible assets (including goodwill) | 11,789 | 13,454 | 14,684 | |||
Inventories | 2,611 | 2,918 | 3,056 | 3,056 | 3,248 | 3,999 |
Receivables balances2) | 4,514 | 4,955 | 5,010 | |||
Receivable balances2) | 5,010 | 4,648 | 5,043 | |||
Payable balances3) | (6,245) | (6,461) | (6,520) | (6,520) | (6,627) | (7,129) |
Provisions4) | (2,091) | (2,183) | (2,066) | (2,066) | (2,178) | (2,313) |
Group Average Net operating capital | 11,865 | 13,882 | 14,068 | 14,068 | 15,261 | 16,999 |
Net operating capital of businesses acquired | (3,798) | (4,176) | (3,176) | (3,176) | (5,511) | (5,739) |
Average Net operating capital | 8,067 | 9,706 | 10,892 | 10,892 | 9,750 | 11,260 |
Philips Group
Reconciliation of Net Income to Organic ROIC
in millions of EUR unless otherwise stated
2018 | 2019 | 2020 | 2020 | 2021 | 2022 | |
---|---|---|---|---|---|---|
Net Income | 1,097 | 1,173 | 1,195 | 1,195 | 3,323 | (1,605) |
Discontinued operations, net of income taxes | 213 | 19 | 10 | (196) | (2,711) | (13) |
Income tax expense | 193 | 337 | 284 | 212 | (103) | (113) |
Investments in associates, net of income taxes | 2 | (1) | 9 | 9 | 4 | 2 |
Financial expenses | 264 | 233 | 204 | 202 | 188 | 258 |
Financial Income | (51) | (117) | (160) | |||
Financial income | (158) | (149) | (58) | |||
Income from operations | 1,719 | 1,644 | 1,542 | 1,264 | 553 | (1,529) |
(Income) Loss from operations of businesses acquired | 194 | 301 | 265 | |||
Loss from operations of businesses acquired | 265 | 124 | 178 | |||
Tax gains and losses | (188) | (22) | (22) | (197) | (169) | |
Other items | (18) | 59 | ||||
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 | (193) | (337) | (284) | (212) | 103 | 113 |
Tax effects of other adjustments | (24) | (61) | 30 | 30 | (33) | (45) |
Organic return | 1,508 | 1,529 | 1,590 | 1,528 | 1,437 | 707 |
Average Net operating capital | 8,067 | 9,706 | 10,892 | 10,892 | 9,750 | 11,260 |
Organic ROIC (%) | 18.7% | 15.8% | 14.6% | 14.0% | 14.7% | 6.3% |
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.
Lives ImprovedThe 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. We define Lives Improved as the number of individuals who have interacted with Philips products that contribute to the social or ecological dimension over the lifetime of a product. 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
As a responsible company, 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 half-year basis and include industrial sites (manufacturing and assembly sites), non-industrial sites (offices, warehouses, IT centers and R&D facilities), business travel (lease and rental cars and airplane travel) and logistics (air, sea and road transport) See Sustainable Operations for more information on our Operational Carbon Footprint.
Circular Revenues As a company committed to the transition to a circular economy, we aim to decouple economic growth from the use of natural resources and ecosystems by using those resources more effectively. We define Circular Revenues as revenues generated through products and solutions that meet specific Circular Economy requirements (including performance and access-based business models, refurbished, reconditioned and remanufactured products and systems, refurbished, reconditioned and remanufactured components, upgrades or refurbishment on site or remote, and products with a recycled plastics content of >25% post-consumer recycled plastics or >30% post-industrial/postconsumer recycled plastics by total weight of eligible plastics). We calculate Circular Revenues as annual revenues attributable to products and solutions that meet the Circular Economy requirements.
Waste to Landfill
At Philips, as a responsible company, we strive to reduce our environmental impact. We define Waste to Landfill as total waste that is delivered for landfill and exclude one-time-only waste and waste delivered to landfill due to regulatory requirements. We calculate Waste to Landfill in kilotonnes per year. See Sustainable Operations for more information on Waste to Landfill.
Closing the Loop
At Philips, we are committed to offer a trade-in on all our professional medical equipment and to take care of responsible repurposing of such trade-in systems. We call this “Closing the Loop”. We calculate Closing the Loop as Process Adherence (%) * Reclaim (%). Process adherence (%) is defined as the % of won Replacement Philips deals which are associated with a trade in request in our CRM system. Reclaim (%) is defined as the % of won Replacement Philips deals with a customer accepted trade in request in our CRM system and a repurposing strategy that fulfills our reclaim requirements.
Philips believes that the five other key performance indicators described above (Lives Improved, Operational Carbon Footprint, Circular Revenues, Waste to Landfill and Closing the Loop) provide important information to investors and are important to understanding the long-term performance and prospects of the 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 2020 for more information on the Philips’ Long-Term Incentive (LTI) Plan.
Comparable order intakeComparable 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.
Effective 2020, Philips has simplified its order intake policy by aligning horizons for all modalities to 18 months to revenue, compared to previously used delivery horizons of 6 months for Ultrasound, 12 months for Connected Care and 15 months for Diagnosis & Treatment. At the time, Philips has aligned order intake for software contracts to the same 18 months to revenue horizon, meaning that only the next 18 months conversion to revenue under the contract is recognized, compared to the full contract values recognized previously. This change eliminates major variances in order intake growth and better reflects expected revenue in the short term from order intake booked in the reporting period. Prior-year comparable order intake amounts Comparative results have been restated accordingly. This realignment has not resulted in any material additional order intake recognition.
Philips uses comparable order intaketo reflect the treatment of the Domestic Appliances business as an indicator of business activitya discontinued operation (for more information, please refer to Discontinued operations and performance. Comparable order intake is not an alternative to revenue and may be subject to limitationsassets classified 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.held for sale).
Philips Group
Other Key Performance Indicators
2016 | 2017 | 2018 | 2019 | 2020 | 2020 | 2021 | 2022 | |
---|---|---|---|---|---|---|---|---|
Lives improved, in billions | 1.36 | 1.47 | 1.54 | 1.64 | 1.75 | 1.53 | 1.67 | 1.81 |
Operational carbon footprint, in kilotonnes CO2-equivalent | 812 | 881 | 786 | 706 | 535 | 518 | 519 | 438 |
Circular revenues | 9% | 11% | 12% | 13% | 15% | 15% | 16% | 18% |
Waste to landfill | 12% | 11% | 7% | 5% | 2% | 2.6% | 0.1% | 0.0% |
Closing the Loop1)2) | 100% | |||||||
Comparable order intake1) | 6% | 10% | 6% | 9% | ||||
Closing the Loop1) | N/A | 34% | 35% | |||||
Comparable order intake | 9% | 4% | (3)% |
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 factors suchdivergence in practice, other companies may calculate this or a similar measure (such as acquisitionsorder backlog) differently and divestments, the amounts, percentages and ratios are not directly comparable.therefore comparisons between companies may be complicated.
Philips Group
Selected financial data
in millions of EUR unless otherwise stated
2016 | 2017 | 2018 | 2019 | 2020 | |
---|---|---|---|---|---|
Sales | 17,422 | 17,780 | 18,121 | 19,482 | 19,535 |
Income from operations | 1,464 | 1,517 | 1,719 | 1,644 | 1,542 |
Financial income and expenses - net | (442) | (137) | (213) | (117) | (44) |
Income (loss) from continuing operations | 830 | 1,028 | 1,310 | 1,192 | 1,205 |
Income (loss) from continuing operations attributable to shareholders1)2) | 826 | 1,017 | 1,303 | 1,186 | 1,197 |
Income (loss) from discontinued operations | 660 | 843 | (213) | (19) | (10) |
Net income (loss) | 1,490 | 1,870 | 1,097 | 1,173 | 1,195 |
Net income (loss) attributable to shareholders1) | 1,448 | 1,657 | 1,090 | 1,167 | 1,187 |
Total assets | 32,269 | 25,315 | 26,019 | 27,016 | 27,713 |
Net assets | 13,435 | 12,023 | 12,117 | 12,625 | 11,901 |
Debt | 5,606 | 4,715 | 4,821 | 5,447 | 6,934 |
Provisions | 3,605 | 2,059 | 2,151 | 2,159 | 1,980 |
Shareholders’ equity | 12,546 | 11,999 | 12,088 | 12,597 | 11,870 |
Non-controlling interests | 907 | 24 | 29 | 28 | 31 |
Weighted average shares outstanding:3) | |||||
basic | 936,096 | 946,878 | 941,067 | 921,062 | 907,721 |
diluted | 946,869 | 963,212 | 953,931 | 930,771 | 916,625 |
Amount of common shares outstanding at year-end | 922,437 | 926,192 | 914,184 | 890,974 | 905,128 |
Basic earnings per common share:3) | |||||
Income (loss) from continuing operations attributable to shareholders1) | 0.88 | 1.07 | 1.38 | 1.29 | 1.32 |
Net income (loss) attributable to shareholders1) | 1.55 | 1.75 | 1.16 | 1.27 | 1.31 |
Diluted earnings per common share:3) | |||||
Income (loss) from continuing operations attributable to shareholders1) | 0.87 | 1.06 | 1.37 | 1.27 | 1.31 |
Net income (loss) attributable to shareholders1) | 1.53 | 1.72 | 1.14 | 1.25 | 1.29 |
Dividend distributed per common share | 0.80 | 0.80 | 0.80 | 0.85 | 0.85 |
Total employees at year-end (FTEs) | 114,731 | 73,951 | 77,400 | 80,495 | 81,592 |
Financial calendar
Annual General Meeting of Shareholders | |
Record date | April |
May | |
Quarterly reports1) | |
First quarter results | April |
Second quarter results | July |
Third quarter results | October |
Fourth quarter results | January |
The Agenda and the explanatory notes to the Agenda for the Annual General Meeting of Shareholders on May 6, 2021,9, 2023, will be published on the company’s website.
For the 20212023 Annual General Meeting of Shareholders, a record date of April 8, 202111, 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.
Shareholders and other interested parties can make inquiries about the Annual Report 20202022 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.
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,The Netherlands
Telephone: +31-20-34 42000+31-20-628-6070
E-mail: corporate.broking@nl.abnamro.com
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
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
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
The registered office of Royal Philips is:
High Tech Campus 5, 5656 AE Eindhoven, The Netherlands
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
Royal Philips
High Tech Campus 51, 1st floor
5656 AG Eindhoven, The Netherlands
Telephone: +31-40-27 83651
Website: www.philips.com/sustainability
E-mail: philips.sustainability@philips.com
Royal Philips
Philips Center
Amstelplein 2
1096 BC Amsterdam, The Netherlands
E-mail: group.communications@philips.com
For media contacts please refer to:
https://www.philips.com/a-w/about/news/contacts.html
High Tech Campus 52, 5656 AG Eindhoven, The Netherlands
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 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).
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 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 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.
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.
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.
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.
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 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.
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 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 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 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 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 are generally defined as substances posing imminent and substantial danger to public health and welfare or the environment.
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 as reported on the IFRS consolidated statement of income, which is net income from continuing operations, or net income excluding discontinued operations.
Large medical equipment
MRI systems, CT scanners, NM systems, DXR equipment, and IGT Fixed systems. This includes all Main Article Groups (MAGs) in the portfolio of these business units, except for the MAGs that represent non-life-extending upgrades: 'T82', 'Q72', 'I66', 'X19', 'Q71', 'W62', 'P10', 'S08', 'S14', 'Q74', 'S47', 'S33', 'Z44', 'S66', 'Q76', 'BI9'.
The basic insight of Lean thinking is that if every person is trained to identify wasted time and effort in their own job and to better work together to improve processes by eliminating such waste, the resulting enterprise will deliver more value at less expense.
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.
Multi-year contractual agreement that represents a partnership to enable long-term collaboration
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 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:
•
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).
A carbon footprint is the total set of greenhouse gas emissions caused by an organization, event, product or person; usually expressed in kilotonnes CO2-equivalent. Philips' operational carbon footprint is calculated on a half-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).
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, better known as PVC or vinyl, is an inexpensive plastic so versatile it has become completely pervasive in modern society.
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.
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.
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.
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.
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.
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 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.
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 covers all employees who resigned of their own volition.
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.
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.
Exhibit 1 | English translation of the Articles of Association of the |
Exhibit 2 | 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) |
Exhibit 4 | Material Contracts. |
Exhibit 4 (a) | Services contract between the
|
Exhibit 4 (b) | Services contract between the (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) |
Exhibit 4 (c) | Services contract between the
|
Exhibit 4 (d) | Global Philips Performance Share Plan applicable to the Board of Management of Koninklijke Philips N.V. |
Exhibit 4 (e) | Services contract between the company and F.A. van Houten (Incorporated by reference to Exhibit 4 (a) to the Annual Report on Form 20-F (File No. 001-05146-01) filed with the Securities and Exchange Commission on February 25, 2020) |
Exhibit 8 | List of Subsidiaries. |
Exhibit 12 (a) | Certification of |
Exhibit 12 (b) | Certification of A. Bhattacharya filed pursuant to 17 CFR 240. 13a-14(a). |
Exhibit 13 (a) | Certification of |
Exhibit 13 (b) | Certification of A. Bhattacharya furnished pursuant to 17 CFR 240. 13a-14(b). |
Exhibit 15 (a) | EY Consent of independent registered public accounting firm. |
101.INS | 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. |
101.SCH | XBRL Taxonomy Extension Schema Document. |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document. |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase |
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) | |
/s/ (Chief Executive Officer, Chairman of the Board of Management and the Executive Committee) | /s/A. Bhattacharya (Chief Financial Officer, Member of the Board of Management and the Executive Committee) |
Date: February |