As filed with the Securities and Exchange Commission on February ~~24, 2012~~25, 2013

+31 20 59 77232, eric.coutinho@philips.com, Breitner Center, Amstelplein 2, 1096 BC Amsterdam, The Netherlands

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

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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:

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. x Yes ¨ No

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934. ¨ Yes x No

Note-Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ¨ Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. ¨ Item 17 ¨ Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No

The financial information included in this document is based on IFRS, unless otherwise indicated.

Please refer to ~~the~~ Forward-looking statements, ~~and other information, in the introduction~~ of this report for more information about forward-looking statements, third-party market share data, fair value information, IFRS basis of preparation, use of non-GAAP information, statutory financial statements and management report, and reclassifications.

This document comprises regulated information within the meaning of the Dutch Financial Markets Supervision Act(WetophetFinancieelToezicht).

The chapters Group financial statements and Company financial statements contain the statutory financial statements of the Company. The introduction to the chapter Group financial statements sets out which parts of this Annual Report form the Management report within the meaning of Section 2:391 of the Dutch Civil Code (and related Decrees).

This document contains, among other things, information required for the annual report on Form 20-F for the year ended December 31, ~~2011~~2012 of Koninklijke Philips Electronics N.V. (the ~~2011~~2012 Form 20-F.) Reference is made to the Form 20-F cross reference table herein. Only (i) the information in this document that is referenced in the Form 20-F cross reference table, (ii) this introduction, the cautionary statement concerning forward-looking statements and explanation on use of non-GAAP information 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 herein 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 ~~2011~~2012 Form 20-F and is furnished to the Securities and Exchange Commission for information only.

The terms “Philips”, the “Group”, “we”, “our” and “us” refer to the Company and as applicable to its subsidiaries and or its interest in joint ventures and associates.

The audited consolidated financial statements as of December 31, ~~2011~~2012 and ~~2010,~~2011, and for each of the years in the three-year period ended December 31, ~~2011,~~2012, included in the ~~2011~~2012 Form 20-F have been prepared in accordance with International Financial Reporting Standards (IFRS) as endorsed by the European Union (EU). All standards and interpretations issued by the International Accounting Standards Board (IASB) and the IFRS Interpretations Committee effective year-end ~~2011~~2012 have been endorsed by the EU, except that the EU did not adopt certain paragraphs of IAS 39 applicable to certain hedge transactions. Philips has no hedge transactions to which these paragraphs are applicable. Consequently, the accounting policies applied by Philips also comply fully with IFRS as issued by the IASB.

In presenting and discussing the Philips Group’s financial position, operating results and cash flows, management uses certain non-GAAP financial measures such as: comparable growth; adjusted income from operations; net operating capital; net debt; cash flow before financing activities; net capital expenditures and free cash flow. These non-GAAP financial measures should not be viewed in isolation as alternatives to the equivalent IFRS measure and should be used in conjunction with the most directly comparable IFRS measure(s). Reference is made to the section titled “Use of non-GAAP information” for further information.

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 ~~2011~~2012 is not yet available to Philips, those statements may also be based on estimates and projections prepared by outside sources or management. Rankings are based on sales unless otherwise stated.

In presenting the Philips Group’s financial position, fair values are used for the measurement of various items in accordance with the applicable accounting standards. These fair values are based on market prices, where available, and are obtained from sources that are deemed to be reliable. Readers are cautioned that these values are subject to changes over time and are only valid at the balance sheet date. When quoted prices or observable market values do not exist, fair values are estimated using valuation models, which we believe are appropriate for their purpose. They require management to make significant assumptions with respect to future developments which are inherently uncertain and may therefore deviate from actual developments. Critical assumptions used are disclosed in the financial statements. In certain cases, independent valuations are obtained to support management’s determination of fair values.

It is possible to read and copy documents referred to in the ~~2011~~2012 Form 20-F that have been filed with the SEC at the SEC’s public reference room located at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms and their copy charges. Philips SEC filings are also publicly available through the SEC’s website atwww.sec.gov.

For definitions and abbreviations reference is made to chapter 18, Definitions and abbreviations, of this report.

Pursuant to provisions of the United States Private Securities Litigation Reform Act of 1995, Philips is providing the following cautionary statement.

This document, including the information referred to in the Form 20-F cross reference table, contains certain forward looking statements with respect to the financial condition, results of operations and business of Philips and certain of the plans and objectives of Philips with respect to these items, in particular, among other statements, certain statements in Item 4 “Information on the Company” with regard to management objectives, market trends, market standing, product volumes, business risks, the implementation of our Accelerate! program, the statements in Item 8 “Financial Information” relating to legal proceedings, the statements in Item 5 “Operating and financial review and prospects” with regard to trends in results of operations, margins, overall market trends, risk management, exchange rates and statements in Item 11 “Quantitative and qualitative disclosures about market risks” relating to risk caused by derivative positions, interest rate fluctuations and other financial exposure are forward-looking in nature. Forward-looking statements can be identified generally as those containing words such as “anticipates”, “assumes”, “believes”, “estimates”, “expects”, “should”, “will”, “will likely result”, “forecast”, “outlook”, “projects”, “may” or similar expressions. By their nature, forward-looking statements involve risk and uncertainty, because they relate to events that depend on circumstances that will occur in the future. There are a number of factors that could cause actual results and developments to differ materially from those expressed or implied by these forward-looking statements.

These factors include, but are not limited to, domestic and global economic and business conditions, developments within the euro zone, the successful implementation of our strategy and our ability to realize the benefits of this strategy, our ability to develop and market new products, changes in legislation, legal claims, changes in exchange and interest rates, changes in tax rates, pension costs and actuarial assumptions, raw materials and employee costs, our ability to identify and complete successful acquisitions and to integrate those acquisitions into our business, our ability to successfully exit certain businesses or restructure our operations, the rate of technological changes, political, economic and other developments in countries where Philips operates, industry consolidation and competition.

As a result, Philips’ actual future results may differ materially from the plans, goals and expectations set forth in such forward-looking statements. For a discussion of factors that could cause future results to differ from such forward-looking statements, reference is made to the information in Item 3D “Risk Factors”.

Koninklijke Philips Electronics N.V. (the ‘Company’) believes that an understanding of sales performance is enhanced when the effects of currency movements and acquisitions and divestments (changes in consolidation) are excluded. Accordingly, in addition to presenting ‘nominal growth’, ‘comparable growth’ is provided.

Comparable sales exclude the effects of currency movements and changes in consolidation. As indicated in the section 12.10, Significant accounting policies, sales and income are translated from foreign currencies into the Company’s reporting currency, the euro, at the exchange rate on transaction dates during the respective years. As a result of significant currency movements during the years presented, the effects of translating foreign currency sales amounts into euros could have a material impact on our sales figures. Therefore, these impacts have been excluded in arriving at the comparable sales in euros. Currency effects have been calculated by translating previous years’ foreign currency sales amounts into euros at the following year’s exchange rates in comparison with the sales in euros as historically reported. The years under review were characterized by a number of acquisitions and divestments, as a result of which activities were consolidated or deconsolidated. The effect of consolidation changes has also been excluded in arriving at the comparable sales. For the purpose of calculating comparable sales growth, when a previously consolidated entity is sold or contributed to a venture that is not consolidated by the Company, relevant sales are excluded from impacted prior-year periods. Similarly, when an entity is acquired, relevant sales are excluded from impacted periods.

Philips discusses “adjusted income from operations” in the ~~2011~~2012 Form 20-F. Adjusted income from operations represents income from operations before amortization and impairment of intangible assets generated in acquisitions (excluding software and capitalized development expenses).

The Company uses the term “adjusted income from operations” to evaluate the performance of the Philips Group and its sectors. Referencing “adjusted income from operations” is considered appropriate in light of the following:

Philips has announced that one of its strategic drivers is to increase profitability through re-allocation of its resources towards opportunities offering more consistent and higher returns. Moreover, Philips intends to redeploy capital through value-creating acquisitions. Since 2006, management has used the “adjusted income from operations” measurement internally to monitor performance of the businesses on a comparable basis. As of 2007, Philips has also set external performance targets based on this measurement as it will not be distorted by the unpredictable effects of future, unidentified acquisitions.

Non US investors are advised that such presentation is different from the terms used in Philips’ results announcements and ~~2011~~2012 Annual Report.

Philips believes that an understanding of the Group’s financial condition is enhanced by the disclosure of net operating capital (NOC), as this figure is used by Philips’ management to evaluate the capital efficiency of the Philips Group and its operating sectors. NOC is defined as: total assets excluding assets from discontinued operations~~less:~~less: (a) cash and cash equivalents, (b) deferred tax assets, (c) other (non)-current financial assets, (d) investments in associates, andafter deduction of: (e) provisions excluding deferred tax liabilities, (f) accounts and notes payable, (g) accrued liabilities, (h) current/noncurrent liabilities, and (i) trading securities.

Net debt is defined as the sum of long- and short-term debt minus cash and cash equivalents. The net debt position as a percentage of the sum of group equity (shareholders’ equity and non-controlling interests) and net debt is presented to express the financial strength of the Company. This measure is widely used by management and investment analysts and is therefore included in the disclosure.

Cash flows before financing activities, being the sum total of net cash from operating activities and net cash from investing activities, and free cash flow, being net cash from operating activities minus net capital expenditures, are presented separately to facilitate the reader’s understanding of the Company’s funding requirements.

Net capital expenditures comprise of purchase of intangible assets, expenditures on development assets, capital expenditures on property, plant and equipment and proceeds from disposals of property, plant and equipment. This measure is widely used by management to calculate free cash flow.

Only (i) the information in this document that is referenced in the Form 20-F cross reference table, (ii) the ~~introductory information (including~~Introduction, the cautionary statements concerning Forward-looking statements and explanation on use of non-GAAP ~~information)~~information, of this report on pages 5-7, ~~of this report,~~ 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 ~~2011~~2012 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 ~~2011~~2012 Form 20-F and is furnished to the Securities and Exchange Commission for information only.

The table below sets out the location in this document of the information required by SEC Form 20-F. The exact location is included in the column ‘Location in this document’. The column ‘Page’ includes the starting page of the section/paragraph for reference only.

Based upon a renewed culture of entrepreneurship and accountability, Accelerate! is reducing the complexity of our organization, tightening customer focus, ~~on growth geographies~~

~~Growth geographies are vitally important to Philips. As the number of middle-class households in these~~increasing empowerment and collaboration between businesses and markets grows, we expect demand for our products to increase as people have more money to spend on feeling and staying healthy. Therefore, we will continue to make sure we address local needs effectively and to invest in havingwith the right ~~capabilities and~~ resources ~~in place~~ to win, ~~in these growth geographies.~~

~~We want~~and increasing the speed and excellence of innovation and end-to-end execution. Through Accelerate! we are creating an agile, entrepreneurial and innovative company that delivers meaningful, locally relevant products and solutions to our customers. At the same time, our costs efficiency need to be ~~seen as clear leaders~~at least in ~~sustainability~~

~~We are committed to being a leading company in matters of sustainability. We look at sustainability through the lenses~~line with that of our sectors and define specific ambitions (to be realized by the end of 2015) for each of them: bring care to 500 million people; improve the energy efficiency of our overall portfolio by 50%; double the global collection and recycling amounts of Philips products as well as the amount of recycled materials in our products.competitors.

We measure value through a balanced combination of sales growth, profitability and capital usage (the latter two measured through return on invested ~~capital (driven by Adjusted IFO, capital turns and free cash flow)~~capital) in conjunction with other financial, operational and strategic key performance indicators.

Set in 2011 as part of the Accelerate! program, our mid-term financial targets, ~~(to~~to be realized by the end of ~~2013):~~2013, are:

Comparable sales growth CAGR of 4-6%, assuming real GDP growth of 3-4% per annum

Reported Adjusted IFO margins of 10-12% for the Group; 15-17% for Healthcare; 8-10% for Consumer Lifestyle (excluding unrelated licenses); 8-10% for Lighting

Return on invested capital of 12-14%

China faces a major challenge as it works to provide healthcare to more than 1.3 billion people. We are committed to helping the Chinese medical community find answers to China’s healthcare needs through innovative technology solutions.

As its population grows and its middle class expands, China faces a huge societal and fiscal challenge: how to provide high-quality cost-effective healthcare to over 1.3 billion people? China is working to meet three key strategic goals. First, it must grow its healthcare system to provide basic medical services for all, particularly in under-served regions. Second, its medical community must find solutions to address the different needs of the emerging middle class. Finally, it must achieve these goals while keeping its remarkable economic growth on track. China’s decision to make major investments in the expansion of its healthcare infrastructure is an important step on this journey to provide accessible, affordable care for its people.

As a leading healthcare innovator, Philips has a unique ability and opportunity to help China improve the health and well-being of its people. Starting in 2007, our China Team worked with China’s medical community and government to identify the country’s primary needs and develop innovative technology solutions to meet their Changing healthcare demands. We began our journey by listening. What we heard was that our customers wanted more clinical benefits from imaging systems and more research collaboration between Philips and China’s great university hospitals. Out of these conversations have come ongoing peer-to-peer engagements, continuing education workshops, customer appreciation events and perhaps most important, dynamic, ongoing research.

As we began this journey, we also set a goal for ourselves: to become one of the CT and MR market leaders in China. Today, our CT and MR offerings serve a wide range of needs in environments from rural community hospitals to the country’s leading teaching hospitals. The cooperative effort within our China Team – encompassing our MR and CT businesses, sales and service – and targeted collaborations with customers got us to our goal of becoming one of the imaging technology leaders in China.

“The Center for Biomedical Imaging Research at Tsinghua University chose Philips 3T Achieva TX as its main research scanner,” says Chun Yuan, Ph.D, the Center’s Director. “With the help of many different branches within Philips, especially Philips China, and through scientific collaboration, our researchers were able to start active imaging research in several focus areas in cardiovascular, tumor and neurological imaging.”

The success of our CT and MR business’s China journey is reflected in its growth performance, with sales tripling in the period 2007-2010. This momentum continued in 2011, with a double-digit annual growth rate.

We are succeeding in China because our focus extends beyond sales. We are committed to enhancing patients’ lives through our clinical expertise and working with our customers to improve the ability to deliver care. With our complete imaging portfolio, today we are even better positioned to help China meet its growing clinical care needs. The next phase of the journey? China plans to make significant investments in county-level hospitals and in digitization to improve healthcare informatics and clinical decision support. As a global healthcare leader and working partner with China, Philips will be there every step of the way.

Chronic obstructive pulmonary disease, a life-threatening lung disorder, affects nearly 600 million people. Philips’ comprehensive portfolio of home oxygen therapy is changing the quality of life for COPD sufferers around the world.

Chronic obstructive pulmonary disease (COPD), which includes emphysema and chronic bronchitis, threatens the lives and futures of nearly 600 million people according to the World Health Organization. By 2020, COPD will become the third leading cause of death worldwide. Unfortunately, there is no cure. But there is hope and promising treatments. Clinicians have found that the use of supplemental home oxygen is one of the most effective new treatment options. In fact, long-term oxygen therapy has been shown to significantly improve life expectancy in patients with COPD.

But improved quality of life is equally important. Because COPD patients using home oxygen are relatively young, averaging between 45 and 60 years old, many find themselves juggling a job and children while coping with COPD. Meeting the demands of busy lives means today’s COPD patients need a range of innovative devices that support both their health and lifestyles. To improve their quality of life, oxygen therapy must be smaller, lighter, longer-lasting, and highly portable. The ability to generate oxygen at home can also help patients avoid inconvenient waits for deliveries and better manage their time and therapy. COPD patients deserve solutions to address the health and quality of life challenges they face every day. Philips is leading the way in providing those solutions.

~~As a global leader in home healthcare, we are committed to the development of better home oxygen solutions to help people with chronic lung diseases such as COPD. At~~

live image-guidance technology, Philips ~~what began with just one product in 2005 has now become a comprehensive portfolio of products, programs~~is enabling minimally invasive procedures that were not possible before – opening up new ways to treat disease and services that is positively changing the way COPD patients live and work. With the launch of the HomeLox liquid oxygen system in June 2011, we reinforced our leadership position as the only manufacturer that offers a full line of supplemental oxygen devices for use in and out of the home.

~~But we realize that to truly~~ improve the quality of life for ~~COPD~~millions worldwide.

Many health conditions that once required open surgery can be treated far less invasively today, minimizing physical trauma to patients, allowing faster recovery and improving outcomes. Helping drive this trend is the application of X-rays, ultrasound and other imaging technologies to guide interventional procedures, which use specialized devices to diagnose and treat patients at the site of disease and trauma. From repairing fractures of the spine to treating blood vessels around the heart, clinicians need live image guidance when performing a minimally invasive intervention in order to ‘see’ real-time on a monitor where they are and what they are doing in the patient’s body.

Minimally invasive medicine is the future of progressive health care, and at Philips we are leading the way in live image-guidance technology, delivering relevant clinical value where it is needed most. For example, by integrating multi-modality images at the point of treatment, our solutions ~~have~~offer exceptional image clarity and deep insight – opening the door to ~~address both~~new clinical procedures for safer, more effective diagnosis and treatment in a number of specialties.

These solutions include our new EchoNavigator¹, which leverages our leadership in interventional X-ray and echocardiography technology. The combination of these two live modalities in a unique and intuitive way enables a more efficient and straightforward method for treating structural heart disease, a condition that affects millions of people around the personal needs of patients and the business needs of homecare providers. Given the dramatic changes in healthcare delivery and costs over the past decade, Philips’ commitment to find innovative answers to the challenges of COPD means also creating a portfolio that reflects these challenging financial and market realities. By listening to our customers, we develop strong relationships that are helping us understand their unique challenges. Working together, we are able to better serve both patients and clinicians.

“Having a manufacturer like Philips on our side is a game- changer. With reimbursements decreasing and competitive bidding on the rise, Philips helps us make good decisions. It’s a great thing. because we can’t do it alone,” says customer Gordon Ridley, area manager, Petersen Medical.

The success of Philips’ home oxygen business shows in its outstanding financial performance. We tripled sales between 2005 and 2010, and success continued in 2011 with a double-digit annual growth rate.world.

AlluraClarity with ClarityIQ technology² is another of our recent breakthroughs in live image guidance. Developed in collaboration with interventional physicians and introduced in 2012, it directly addresses the ongoing concern of radiation dose level for patients and exposure to clinical staff during interventions.

Traditionally, lower radiation doses have translated into lesser image quality in interventional procedures. In a field where image clarity is critical, AlluraClarity with ClarityIQ does a superior job of maintaining image quality at significantly reduced doses.

~~Global~~These and other advances in imaging are helping drive the transition from open to minimally invasive surgery for better clinical and economic outcomes, while transforming disease management for countless patients.

“Live image guidance is just one example of how Philips is transforming the future of health care,” said Gene Saragnese, Executive Vice President and CEO, Philips Imaging Systems. “The combination of innovation leadership, ~~through local relevance~~clinical partnership and an entrepreneurial approach has created demand in the market for our disruptive technology. It is what drives us every day to deliver the best possible patient outcome while improving the overall clinical experience.”

Philips works closely with health systems to improve quality, costs and access to care across multiple patient settings. By leveraging our leadership in healthcare technology, we are transforming critical care for war veterans.

In the US, the Veterans Integrated Service Network (VISN) 23 is one of 21 health systems operated by the Department of Veterans Affairs (VA) to provide a broad spectrum of medical care to the nation’s war veterans. Serving more than 400,000 veterans in ten Midwestern states, VISN 23, like other health systems across the country, faces the ongoing challenge of providing accessible, quality care while lowering costs – against the backdrop of a critical care resource shortage.

Nowhere are these issues more evident than in an intensive care unit (ICU), where at-risk patients require specialized care, immediate attention and constant monitoring. It is also where a vast amount of patient data is generated. The typical ICU patient is often connected to more than a half dozen bedside medical devices from different manufacturers that run on different software. To make the best informed decisions, clinicians need to be able to view all of the data coming from these devices and in different formats clearly and in one place. Yet for many healthcare facilities, the process of integrating, aggregating and analyzing this amount of data remains tedious and time-consuming.

When VISN 23 outlined its initial mission to improve critical care delivery across seven of its medical centers, Philips Healthcare immediately recognized the need to bring together two different technology platforms in patient monitoring and clinical informatics in a single, seamless solution that could be delivered using innovative telehealth technology.

Our aim was to enable better use of limited resources, more effective collaboration and greater accountability to drive early intervention during the critical care period. In doing so, we would not only empower VISN 23 medical teams to provide a higher level of care to a broader base of veterans, we would also help minimize the risk of repeated hospital admissions, reducing cost of care.

With this in mind, in 2012 we implemented a solution that combines our IntelliSpace Critical Care and Anesthesia bedside charting product and eICU platform. IntelliSpace Critical Care and Anesthesia is an advanced decision-support and documentation solution that interfaces with VistA, the VA’s electronic medical record (EMR) system. It transforms patient data into actionable information through seamless interoperability while automatically populating patient EMRs for more than 100 ICU beds across the VISN 23 system. Building on the VA’s commitment to remote patient monitoring, eICU allows monitoring of all VISN 23 ICUs from a control center staffed by critical care specialists at the Minneapolis VA Medical Center. Both solutions are integrated so that data entered into IntelliSpace Critical Care and Anesthesia is available in eICU.

~~Local salad-maker accessory speeds~~“This state-of-the-art solution provides a vital layer of service and support in diagnosing and treating high-risk patients,” said Mike Mancuso, Executive Vice President and CEO, Philips Patient Care & Clinical Informatics. “It also demonstrates the power of Philips’ telehealth technology to not only change how care is being delivered to patients, but also enable clinicians to take advantage of other innovations designed to improve patient outcomes and experiences.”

In North America we are working together with Wal-Mart to optimize every step in the value chain of our Male Grooming business. This end-to-end approach is transforming our relationship and benefiting Wal-Mart shoppers.

Philips Norelco is the leading brand in the electric shaver market in North America. Continuing to strengthen the business, Male Grooming North America embarked on an end-to-end journey with three key areas of focus: understanding the consumer, partnering with our customer to grow our businesses together, and transforming our business so that it is faster and more responsive to specific local needs.

We started by taking a granular look at consumer needs and aspirations in the North American market. Armed with breakthrough insights, we then turned to Wal-Mart, one of our largest customers.

The shaving and grooming aisle is important to Wal-Mart to meet the needs of their male shoppers. They also seek to cater to the diverse consumer needs of the American population, supporting their ‘store of the community’ strategy.

Next, we reviewed our own performance, finding significant opportunities to optimize our end-to-end value chain in terms of lead time, inventory, and cost of non-quality.

The final step was to make the change happen. We are moving from a ‘push’ to a ‘pull’ inventory model, enabling our North American business to order only what it really needs for its customers and resulting in significantly lower inventories. We have also stepped up investment in our

marketing capabilities and resources in North America. And crucially, we are spending more time talking with Wal-Mart.

The impact of this end-to-end journey has been significant, as Michael Smith, Senior Director for Personal Care at Wal-Mart, explains: “The shaving aisle for Wal-Mart is very important as almost all American males aged 16 and older buy products from these categories. I see tremendous potential when we combine Philips’ ability to innovate and create demand for new products with our collective ability to simplify the shelf.

“If we really collaborate, it’s about getting deep with our customer, understanding what they’re looking for and how we can help bring it to life at our store with your brands. And I think that’s probably been the biggest change I’ve seen from Philips: taking a step back and looking at what’s important to us as a customer and finding a way to deliver it over a long-term horizon.

“Our relationship today with Philips has changed a great deal, and much of that centers around the fact that we’ve got into some very honest and candid conversations. One of the great things about end-to-end is that it forces us both to get more focused on the shopper, digging deep and really understanding what our consumer needs, what their different needs are, and how we can bring it to shelf in a product that they will leave our store more satisfied with.”

As part of Wal-Mart’s ‘store of the community’ strategy, our team has now developed our first product to address the specific shaving needs of African-American men, such as ingrown hairs. By working with Wal-Mart and leveraging partners like Bump Patrol, a highly successful skincare brand among African-American men, we have brought this exciting new proposition to life – with launch scheduled for Q1 2013!

Across ~~Philips,~~the world, we are ~~focused~~driving growth in Kitchen Appliances by building global scale through local relevance, leveraging acquisitions, and forming alliances to offer new experiences in the preparation of fresh, healthy food.

At IFA 2012 in Berlin we announced a multi-year partnership with world-famous chef Jamie Oliver to co-design a new range of appliances that takes the strain out of life in the kitchen. The first product of this exciting collaboration is the Philips HomeCooker, a multi-functional device designed to help busy families enjoy tasty, fresh, home-cooked meals while being able to spend more quality time together. The HomeCooker does all the hard work, so you don’t have to. It chops, stirs, steams and sautés – it even switches off and keeps food warm until it is ready to be served.

“We all know it can be a struggle to get fresh, homemade food on ~~accelerating~~the table every day, especially for busy parents who have to juggle so much. It’s often a real tradeoff between spending time with the family and getting fresh food on the table,” explains Jamie Oliver. “The beauty of the Philips HomeCooker is that it removes this dilemma – you can now do both!”

Jamie Oliver is a champion of delicious home-cooked food and has been campaigning for many years to get families to eat good, fresh home-made food. This makes for a perfect fit with our ~~performance~~commitment to ~~deliver more for customers. To achieve this, many teams~~enhance the health and well-being of today’s families through meaningful innovation.

With five regional product creation hubs, we continue to accelerate the introduction of innovations that are ~~working~~tailored to ~~develop~~the specific eating habits of cultures around the world. Indeed, since 2010 we have quadrupled the number of launches of locally relevant innovations.

With sales of over one million units in less than two years, the Airfryer has been a huge success as a healthy reduced-fat and ~~superior products and bring them~~odor-free alternative to ~~market faster. Created using local insights and by quickly developing a new and unique accessory for our flagship hand blender, the cube cutter developed for Russia and Eastern Europe~~oil-fried foods. It is also a great example of ~~this.~~how a global proposition can be

successfully adapted to local cuisines – being used for traditional dishes such as ~~it is often known outside~~chicken samosas in India, chicken wings in China, and chocolate cake in the ~~country where it was first created, is~~UK.

And proving that innovation can be a ~~popular dish composed~~two-way street, our soy milk platform, developed locally for consumers in China, has now been adapted for European consumers – to make soup.

In 2012 we built upon the previous year’s acquisitions of ~~diced potatoes~~Povos (China) and ~~other vegetables,~~Preethi (India). Povos’ end-to-end capability has expanded the Philips brand offering in Chinese cuisine, driving over 30% growth in Philips-branded kitchen appliances, as well as ~~eggs and ham. It is one~~halving time-to-market. Furthermore, a number of products based on Povos’ rice cooker innovation platform have been launched outside China, such as the ~~main courses served during~~Multicooker in Russia, which has been tailored to meet the specific culinary needs of Russian ~~New Year celebrations, and as it is typically made~~households.

In India, Preethi’s product-creation capability has strengthened Philips’ kitchen appliances market leadership: we are now the clear market leader in ~~large quantities it takes a very long time to cube~~ the ~~vegetables during its preparation. This presented an opportunity to produce a dedicated cube cutter and save consumers the time and hassle of chopping manually~~important mixer-grinder category, with a ~~knife.~~

~~Our~~ market ~~and business organizations worked closely together to develop an innovative solution to the problem, developing a dedicated cube-cutting accessory~~share in excess of 30%. And we are further leveraging Preethi’s brand equity, launching Preethi-branded products for the ~~Philips Avance Collection hand blender. The team worked quickly,~~south Indian diaspora across the Middle East and ASEAN, as ~~a result~~well as expanding the ~~product was on-shelf~~portfolio in ~~Russian stores in time for the peak selling period in the run-up~~India to ~~the New Year celebrations. Localizing the product in time for this had an immediate positive effect on sales and market share.~~include garment care products.

Driven by the shift toward connected, digital lighting solutions and applications, we are strengthening our presence in the consumer market by leveraging our innovative capability to add ever greater value with light.

For more and more of us, home is the hub of our social and leisure activities. Lighting for the home is about much more than merely turning a switch on or off – it’s about allowing consumers to truly personalize their interior spaces. Today’s flexible, efficient digital lighting can transform a room in an instant, creating a pleasant ambience and enhancing the very way we feel. And it delivers significant energy savings when used to replace conventional lighting, taking some of the strain off household budgets.

As we continue to redefine and extend the possibilities of LED technology, the October 2012 launch of Philips hue has pushed the boundaries of lighting even further. Initially available exclusively from Apple stores, Philips hue – the world’s first commercially available web-enabled home lighting system – enables users to control light wirelessly with an app on their smartphone or tablet. This opens up endless possibilities for consumers to creatively personalize their lighting to suit their lifestyle. The app also features four pre-programmed light settings based on our research into the biological effects of light on the body. These scenarios set the LED bulbs to the optimum tone and brightness of white light to help us relax, read, concentrate or energize. Just as phones, media and entertainment have been revolutionized by digital technology, now consumers can also personalize light and enjoy limitless applications.

In the spirit of Open Innovation, we have opened up the hue app to the developer community, inviting developers to explore the app and come up with yet more innovative new ways to enhance life with light.

Connectivity, interoperability and outstanding light quality are key to opening up new opportunities and business models in the brave new world of digital lighting. Building upon our heritage of over 120 years as a pioneer in lighting, we remain dedicated to unlocking the full potential of light through meaningful innovation and stylish design.

Design is invariably a major factor in the consumer’s choice of lighting. With LEDs being so small, designers are no longer limited by the form factor of legacy light sources. And this design freedom is creating new possibilities for consumers to define their own style and identity.

In 2012 we demonstrated our leadership in the field of consumer luminaire design yet again, winning an unprecedented nine iF and six red dot design awards, as well as a number of other awards. iF and red dot awards are renowned throughout the world as a seal of good design. OurLirio by PhilipsBalanza luminaire range was particularly successful, winning both a coveted Gold iF awardand a red dot award. Also part of theLirio by Philipsrange, our eye-catching Nick-Knack line of LED floor lights is minimalistic in design yet has maximum impact, allowing the user to create different light effects simply by adjusting the angle of the top section.

Going forward, we will use our strong position in LED lamp technology and luminaire design, as well as our application know-how, to drive further life-enhancing innovations – and so set the standard for the consumer’s experience of light in the home.

~~With its range of Sonicare power toothbrushes Philips has pioneered innovation in oral healthcare~~healthier and ~~built up a loyal global following. Now~~more sustainable world, we are ~~expanding~~combining our ~~global presence, broadening~~market leadership in LED luminaires with intelligent lighting management and controls to enhance people’s lives and add value to business.

A century ago less than one in ten of the world’s population lived in a city. By the start of the 21st century this figure had risen to over 50%, and by 2050 over two thirds of us will be living in cities. In the face of this rapid urbanization, our ~~portfolio~~energy-efficient, intelligent lighting can help create safe, smart, vibrant and ~~winning market share.~~ecologically sound city environments.

Today, lighting accounts for 19% of the world’s electricity consumption – with some 60% used for commercial and public buildings in cities, and around 15% for street lighting. Significant savings – on average 40% and up to 90% in individual projects – can be made simply by switching to energy-efficient lighting technologies like LED.

Globally, the potential electricity cost savings amount to EUR 128 billion, leading to a reduction in CO₂emissions of 670 million tonnes.

Thanks to their small size, LEDs have opened up tremendous opportunities for innovative luminaire design. Now, luminaires like our FreeStreet LED luminaire – winner of the 2011 Dutch Design Award – can blend into the urban landscape, freeing up space and decluttering urban areas. FreeStreet is unusual because the LED lamps are actually integrated into the cable, creating a ‘floating’ effect.

“Eindhoven has ~~a proven track record of driving growth in~~opted for FreeStreet because the ~~power toothbrush market. That growth~~floating lighting system is driven by our innovation capability and the trust that dental professionals put in our products to improve their patients’ oral health. Today, we are expanding geographically into new markets, covering more price points and new channels. We are also expanding our portfolio through acquisitions and innovation to address more consumer needs, including new value spaces such as interdental cleaning.

~~Over 22 million enthusiastic users worldwide testify~~adapted to the ~~great experience~~way people move and behave, rather than people having to adapt to where the lighting is located. I think this is a good example of ~~using Philips Sonicare toothbrushes. Pioneering sonic technology generates the brushes’ unique bristle-tip velocity – a combination of high-frequency~~technological progress,” says Mary-Ann Schreurs, Municipal Executive Councillor for Innovation, Culture and ~~high-amplitude bristle motions, delivering over 31,000 strokes per minute for an unrivalled cleaning experience.~~Public Spaces.

Around the world, 80% of people suffer from gingivitis. And in the West alone, 10-30% of people suffer from a periodontal disease. We estimate the addressable global market for oral healthcare at approximately EUR 50 billion, including consumables. Through our own innovations, alliances with dental professionals and acquisitions we are significantly increasing the proportion of the market that we address. At present, the market is

As lighting goes digital, we are combining our innovative LED lamps and luminaires with smart lighting controls and software in North America, Western Europe and Japan. The substantial growth of higher-income segments will drive growth in emerging markets. And as populations in developed markets continue to age, their oral healthcare needs will increase. And it’s not just health concerns that are driving growth in the market – consumers are increasingly turning to oral healthcarefully integrated, intelligent solutions ~~that help them both look and feel good.~~

In recent years we have seen good single-digit and now double-digit growth in oral healthcare. And the business is set to continue to grow faster than the market. We have strong relationships with dental professionals, who are key in driving consumer awareness of the benefits of good oral care.

We will drive growth by investing in innovation, branding and our relationships with dental professionals. We will expand into new channels such as online and pharmacies, and we will leverage Philips’ global market capabilities and make value-adding acquisitions. In 2010, for instance, we acquired the leading tooth-whitening firm Discus Dental, providing a strong foundation for growth in cosmetic dentistry and strengthening Philips’ position as a leading oral healthcare brand amongst dental professionals and consumers.

In 2011 we launched two of our most innovative product developments to date. Sonicare AirFloss is an easy, hassle- free alternative to regular flossing: its patented micro- burst technology releases a tiny burst of air and water between the teeth which removes 99% more plaque than brushing alone (with a manual toothbrush). And the Sonicare DiamondClean takes sonic tooth brushing to its most sophisticated level andcities. Intelligent lighting provides the ~~best clean yet, removing up~~right amount of light preciselywhereit is needed andwhen it is needed. Our LumiMotion solution, for example, combines LED luminaires with motion sensors to ~~100% of plaque from hard-to-reach places.~~

~~CityTouch is an online outdoor lighting management system that enables dynamic, intelligent and flexible control city-wide. Combined with LED lighting, it can~~ save ~~up to 70%~~ on energy and maintenance costs ~~compared~~and to ~~conventional lighting.~~reduce obtrusive light, while improving public perception of safety.

Our integrated LED-based lighting solutions also offer exceptional freedom in terms of controlled lighting effects – color, dynamics, brightness, etc. This is ~~clear that static, passive streetlights simply can’t keep up with the lives we lead. Truly livable cities require~~driving a shift from ‘quantitative’ functional lighting towards ‘qualitative’ emotive lighting that ~~can adjust to~~transforms urban environments. Leveraging the ~~ebb and flow of traffic and urban activities. Drawing upon 120 years of experience in lighting innovation, we have created CityTouch – providing the right amount~~digitalization of light, ~~precisely when and where it is needed.~~

CityTouch enables users to manage all the lighting systems for an entire city from a single, intuitive online user interface. It provides easy, streamlined maintenance and oversight, with real-time status reports for each individual light point. That way, lighting operators can track the consumption and output of every part of their system and fine-tune lighting levels to meet local needs. Moreover, CityTouch helps cities face the dual challenge of cutting costs and protecting the environment. By making it possible to dim light points outside of peak hours, detect failures and provide smart lighting workflow support, the system significantly reduces operating costs and energy usage – leading to lower energy bills, lower carbon emissions and less light pollution. CityTouch’s asset management capabilities even cater for light points whichwe are ~~not connected, thereby significantly reducing maintenance and planning costs.~~

Cities can maximize these savings by adopting energy- efficient LED lighting. Currently, lighting accounts for 19% of global electricity production. Around two thirds is based on energy-wasting technologies developed before 1970. A full switch to the latestapplying our industry-leading expertise in LED lighting ~~could lead~~control across a range of segments – enabling exciting new shopper experiences, creating personalized office workspaces, and bringing to life iconic landmarks like the Empire State Building.

~~to energy savings of up to 80% in many applications~~High-quality and ~~reduce energy consumption for~~intelligently connected lighting ~~by 40% worldwide. This equates to approximately EUR 130 billion per year in running costs~~helps make a city safer, more attractive and ~~670 million tons of avoided CO~~₂ ~~emissions.~~

~~Lighting infrastructure represents a major investment for most cities, especially in times of constrained budgets. CityTouch protects~~more sustainable, thus enhancing its brand identity – the distinctive signature that ~~investment by adjusting seamlessly to new technologies~~defines its appeal and ~~to the needs of our expanding~~sets it apart from other cities. This ~~is one~~not only increases civic pride, but also attracts new residents, new businesses and investment that can boost retailing, tourism and other drivers of ~~the system’s greatest assets: that it is completely scalable~~economic growth and future-proof. As they grow, communities using CityTouch can simply add new streets and neighborhoods to the existing network. New lighting functionalities can easily be incorporated, and the underlying CityTouch service is continuously updated to meet new demands. Also, CityTouch is the first control platform that isn’t bound to one hardware type or provider. This means that users have flexibility in choosing the products that best suit their city’s requirements and budget – secure in the knowledge that their light points will work seamlessly with the CityTouch system.

CityTouch is already being used by lighting operators in several European cities, including London and Prague. The London boroughs of Croydon and Lewisham, for example, are using CityTouch for a full PFI city lighting renovation project – replacing more than 42,000 light points. CityTouch is empowering the lighting operator to adapt to the boroughs’ specific needs, providing both safety and flexibility while realizing significant savings on energy use and maintenance costs.employment.

In the growth market of Daytime Running Lights, our Automotive business has shown it’s got what it takes to Accelerate! – by teaming up with its OEM and after-market customers, addressing their needs, and winning business.

The automotive lighting industry is undergoing radical transformation. More and more people are becoming mobile – and want to stay mobile into old age. At the same time, there are growing legislative pressures, e.g. to reduce the environmental impact of motoring and to increase safety. Vehicle makers are also having to serve increasingly diverse needs, with consumer tastes ranging from functional economy cars to luxury vehicles. And new technologies – such as our cutting-edge LED technology – are changing the face of automotive design and performance.

We are getting closer to our automotive customers and taking ownership of their evolving lighting needs – such as those arising from the recent European Union legislation making Daytime Running Lights (DRL) mandatory.

~~Automotive lighting is a major safety factor when driving: 40% of all accidents occur during the daytime. And 50% of these are caused by motorists failing to see another road user in time!~~

EU legislation stipulates that, as of 2011, all new passenger car models and small delivery vans must be equipped with DRL, with trucks and buses to follow in 2012. Through our insights and research activities we helped the EU reach its decision to adopt DRL. “The introduction of DRL will make a positive contribution to our goal of reducing fatalities on European roads whilst being more fuel-efficient than existing lights,” said Günter Verheugen, Vice President responsible for enterprise and industry policy.

With 20 million cars being produced in Europe each year, the EU-wide adoption of DRL represents a significant sales opportunity. It is expected that by 2015 40% of the European car park will be equipped with DRL (today 13%).

As well as selling to OEMs for build-in, we offer LED- based DRL solutions for cars already on the road, enabling drivers to benefit from the safety of DRL right now. Our LED Daylight retrofit modules enable lights to be switched on automatically when the engine is started. These lights substantially increase a car’s visibility to other road users and have a low energy consumption compared to existing dipped-beam headlamps. LED DayLight 4 ensures high visibility for safer daytime driving, while LED DayLight 8 offers motorists maximum visibility and premium design. Both enable CO2 savings of 5.5 g per km, while their long lifetime significantly reduces the need for maintenance.

As the world’s leading automotive lighting player, we are committed to understanding our customers’ needs and helping them to enhance the motoring experience – with innovations that make their vehicles safer, more energy- efficient and more stylish. A fact not lost on Mercedes- Benz: “We have chosen Philips as our partner for the next-generation LED DRLs,” says Uwe Kostanzer, head of Mercedes-Benz’s exterior lighting department, “not only due to the product’s supremacy in lumen output, quality of light and thermal stability, but also due to the entirely trustful cooperation between the engineering teams on both sides.”

We have been engaging with stakeholders – from global political and industrial leaders at the UN Climate summit to local community leaders in rural Africa – to highlight the benefits of our locally relevant and affordable innovations.

One of our main vehicles for stakeholder engagement in 2012 was our third Cairo to Cape Town roadshow, which travelled 12,000 kilometers across Africa raising awareness of how our lighting and healthcare solutions improve the quality of people’s lives. We engaged in dialogue with customers, governments, NGOs and media on key challenges facing Africa – the need for energy-efficient lighting, mother and child care, women’s healthcare – and showcased how our innovations can help address these.

More than 500 million Africans live without electricity. For people living near the equator, darkness falls around 7 pm all year round, slowing down or completely stopping many vital activities. By highlighting the benefits of LED and solar lighting, we illustrated how our solutions can resolve this problem and help tackle some of the major issues confronting Africa, such as energy efficiency, climate change and resource scarcity.

We committed an investment of EUR 2 million, spread over three years, to a new initiative which will see the installation of 100 ‘light centers’ across rural Africa by 2015 as part of the UN’s ‘Sustainable Energy for All’ program. These ‘light centers’ are areas of approximately 1,000 m²– the size of a small soccer pitch – which are lit using a new generation of highly efficient solar-powered LED lighting. The idea is to create areas of light for rural communities that live without electricity, thus effectively extending the day and creating opportunities for social, sporting and economic activities in the evening, as well as increasing safety at night, particularly for women and children. We have already installed several of these ‘light centers’ in countries including Egypt, Morocco, Ghana, Kenya and South Africa.

The creation of ‘light centers’ is also an integral part of a three-year partnership we have entered into with the Royal Dutch Football Association (KNVB) to help expand their WorldCoaches program in rural Africa and South America. WorldCoaches trains soccer coaches in using the game for social development, focusing on communities in developing countries.

In six cities en route to Cape Town we also partnered with Right To Play – a global organization that uses the transformative power of play to educate and empower children facing adversity – on a soccer tournament that took place under our solar-powered LED floodlights.

In support of UN Millennium Development Goals 4 and 5, which aim to reduce child mortality rates and improve maternal health, we also used the roadshow to deliver clinical education on baby resuscitation, fetal monitoring and clinical ultrasound, and to train over 1,200 healthcare practitioners on how to accomplish safe childbirths and improve maternal and infant care.

“Philips remains dedicated to continuing the engagements, partnerships and commitments we have made on this journey,” says JJ van Dongen, CEO Philips Africa. “We are committed to an aggressive multiyear investment plan to significantly increase our ~~ecological~~business footprint in the coming years, based upon locally relevant products and innovations that address the needs of the growing African population.”

One of the sustainability product highlights in 2011, addressing the subject of materials, was our launch of the world’s first ever recycled designer coffee machine: the SENSEO Viva Café Eco, which uses old electronic appliances to create a first-class coffee system. All outer plastic parts – except those that come into contact with the water or coffee – are made from up to 100% recycled content. The machine also has a five-minute auto shut- off for energy saving, and its packaging is made from 90% recycled cardboard.

Also last year, after 18 months of rigorous testing, the US Department of Energy awarded us the highly prestigious ‘L Prize’ for our LED replacement for the 60 W incandescent bulb. The Department calculated that if every 60 W incandescent bulb in the US was replaced with our 10 W prize winner, the nation would save USD 3.9 billion in one year and avoid 20 million tons of carbon emissions. This is comparable with the emission reduction that could be realized by shutting down 20 medium-size power stations.

~~Our InteliVue MX40 Patient Monitor and Trilogy home healthcare solution illustrate how our innovations are also significantly reducing energy usage in the hospital and home settings.~~

~~And to ensure our green pipeline remains well stocked, we invested some EUR 470 million in Green Innovation in 2011.~~

We are also creating innovative new business models that help improve our ecological footprint. For example, the ‘Pay per Lux’ lighting concept currently being trialed in the Netherlands provides companies with energy-saving, state-of-the-art lighting systems without any capital expenditure. It works like this: after installation, we retain ownership and maintenance of the lighting, and in return the customer pays only for the amount of light emitted. This encourages the deployment of energy-efficient products and advanced lighting controls.

In addition to our own sustainability activities, we also work to influence ~~those of~~ our suppliers and their suppliers towards better sustainability practices. To that end, we are active in many supply chain ~~partners, both up- and down-stream from our activities. This helps ensure~~initiatives around the ~~broadest possible impact for positive change.~~world.

~~In recognition of our efforts in the area of responsible supply chain management, the Dutch Association of Investors for Sustainable Development (VBDO) ranked us first among 40~~Philips is one of the ~~largest publicly-listed companies~~initiators of the IDH Electronics Program, a multi-stakeholder initiative sponsored by the Sustainable Trade Initiative (IDH) together with Dell, Hewlett-Packard, and civil society organizations. Working with more than 100 electronics suppliers in China, this program steers away from traditional auditing methods and seeks to make a transformative impact by building and up-scaling the ~~Netherlands. Our scores have shown continual improvement over~~capabilities of both workers and management. By enhancing worker-management dialogue and developing employees’ skills and careers, the ~~last five years, rising from 62% in 2006~~program seeks to ~~93% in 2010,~~reduce employee turnover, increase worker satisfaction, boost energy efficiency, and ~~the highest score ever~~improve overall performance of 95% in 2011. In particular, VBDO praised the transparency and openness of our sustainability programs related to our supply chains, as well as our enhanced engagement in helping our suppliers to improve their sustainability performance.supplier factories.

~~Besides working with our supply chain partners, we~~We are ~~an active member of several initiatives implementing industry-wide sustainability programs.~~

~~For example, we are~~also a member of the Electronic Industry Citizenship Coalition (EICC), which promotes an industry code of conduct to improve working and environmental conditions within global supply chains. Today, the EICC includes more than 50 global electronics companies and their suppliers.

In 2012, the Dutch Association of Investors for Sustainable Development (VBDO) once again recognized our efforts in responsible supply chain management. VBDO ranked Philips the top performer among 40 of the ~~initiators~~largest publicly-listed companies in the Netherlands. Our scores have shown continual improvement over the last six years, rising from 62% in 2006 to the highest score ever of 96% in 2012.

The economy of the ~~IDH Electronics Program,~~Democratic Republic of the Congo (DRC) has collapsed due to decades of conflict. In an attempt to prevent the country’s rich supply of minerals, including tin, from being used to finance war, many corporations around the world have desisted from buying minerals from the DRC, creating a ~~multi-stakeholder initiative sponsored by the Sustainable Trade Initiative (IDH) together with Dell, Hewlett-Packard,~~de facto embargo. To overcome this problem and ~~civil society organizations. This program will work with over 100 electronics suppliers in China~~ to ~~support innovative workforce management practices, sustainability~~promote cooperation and ~~better business performance. The goal is to improve working conditions of more than 500,000 employees~~economic growth in the ~~electronics sector.~~region – beyond rebel control –

~~The first phase of the program started in November 2011, with four of our suppliers joining. Each supplier receives support over a period of up to 24 months on the basis of~~

~~improved dialogue between management and workers. The costs~~we helped launch the Conflict-Free Tin Initiative in September 2012. One month later, an important milestone was reached when the first bags of tagged minerals left a non-rebel-controlled mine in the DRC.

Philips is continuing to make an active contribution in this area through our membership of the ~~program are shared between~~Extractives Work Group, a joint effort of the ~~supplier, its customer,~~EICC and GeSI (Global eSustainability Initiative). This work group seeks to positively influence social and environmental conditions in the global metals extractives supply chain. In 2012 we also participated in the multi-stakeholder OECD-hosted pilot to test the implementation of the ‘OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas’. Furthermore, we continue to engage with relevant Congolese organizations as well as non-government organizations in Europe and the ~~IDH.~~

In November 2011 we announced, together with South African public utility Eskom, the largest energy-saving LED lighting deal in Africa to date. Some 200,000 of our MASTER LED lamps will be distributed at discounted prices throughout South Africa’s hotels, banks, offices and retail outlets. Because the 7 and 10 W LED lamps replace 50 W halogens, the annual CO2 reduction will be 60,000 tons. And all it takes is the simple replacement of a bulb!

In 2011 we were also praised, along with The Climate Group, for our solar-driven LED street-lighting project in China’s Guiyang community. The UN’s ‘Momentum for Change’ event cited the project as a ‘best practice’ example of public-private partnership that enhances people’s lives in poor rural communities, while spurring green growth, saving energy and combating climate change.

~~Also, for the second year running we worked with Oxfam Novib and electrical distributor Sonepar~~US on a special LED promotion in Uganda on solar-lighting solutions to stimulate education after dark. By using our simple, LED- based solar lighting solutions, thousands of children in off- grid areas can now do their homework in the evenings. And communities in general can benefit from safe, sustainable and clean lighting.this issue.

Through the Accelerate! program, Philips is driving structural change – with a renewed company culture as the foundation for performance improvement and growth, explains Carole Wainaina, Chief HR Officer.

Culture is the glue that bonds a company’s employees together – it is the very DNA of the organization. The creation of a growth and performance culture is central to Accelerate!, the multi-year transformation program designed to make us a more agile, entrepreneurial and innovative company and bring us closer to our customers.

To realize our ambitions, we need highly motivated, passionate employees who display entrepreneurial spirit, the desire to excel, and a bold determination to succeed. These traits are articulated in our Accelerate! behaviors –Eager to win,Take ownership andTeam up to excel.

With the implementation of Accelerate!, Philips is moving away from a ‘one size fits all’ company culture which has tended to inhibit growth, to a culture that drives performance – one that is focused on results and characterized by honest dialogues, fact-based conclusions and fast action. This will enable us to adapt quickly to changing market conditions and outpace the competition.

Leaders play a crucial role in driving change within an organization. From role modeling to recognizing and rewarding the desired behaviors, employees look to their leaders for direction. That’s why over 700 of our leading executives have participated in the Accelerate! Leadership Program. This immersive program is designed to strengthen our leaders’ change management capabilities so they can, in turn, lead change in the organization. In our rapidly changing world, we see these capabilities as crucial to success.

To truly change behaviors, our systems and processes need to be adjusted accordingly. We have, therefore, embedded our new behaviors in our HR processes, e.g. our People Performance Management recognition and reward system. And we have changed the annual incentive

system for executives to reflect line-of-sight accountability and aligned it with the key performance indicators of our Accelerate! mid-term 2013 financial targets.

At the same time, we are augmenting our talent management initiatives and focusing on the development of a learning organization. For example, by upgrading and expanding the various core, functional and market training curricula offered to our employees.

To understand exactly where we are on our Accelerate! journey, we have launched a quarterly Change Adoption survey. The survey provides us with a good indication of what is going well – in order to build on it further – and indicates where we need to improve. This supports the momentum for our transformation.

~~Philips employees are the key enabler for making a difference, both within the company and to the lives of people~~Ultimately, Accelerate! is all about transforming ourselves so that we ~~touch with our meaningful innovations and community programs.~~

Through the Accelerate! program, Philips is addressing structural change, focusing on execution, reducing overhead costs, investing in growth – and adopting a new company culture. This cultural shift is being driven by a new set of behaviors designed to help us unlock our full potential –~~Eager to win, Take ownership~~~~and~~~~Team up to excel.~~

At Philips, we are dedicated to making a difference wherever care is provided. In the hospital setting that means supporting and enabling the delivery of critical care, emergency care and surgery. With chronic disease on the rise, the home setting will play an increasingly prominent role in the delivery of care moving forward. Our oral healthcare, light therapy, water purification and air purification products, as well as our solar-powered indoor lamps replacing kerosene lamps in Africa – these are just some of the examples of how we bring care to people. Progress on this social dimension of our EcoVision program is measured by the number of lives we touch. Through our products and solutions for bringing care to people we touched 465 million lives in 2011, an increase of 45 million compared to 2010.

~~In parallel to our daily business focus on customers and markets, we also~~can continue to ~~encourage our people to engage with their immediate wider community. As part of our commitment to sustainability, Philips supports volunteer activities as~~be a ~~way of giving back to our communities. Employee volunteering embraces Philips’ mission to improve people’s lives not only through our technical innovations, but also through our employees~~great company – today, tomorrow, and ~~our shared belief that each of us can touch the lives of those around us, making our world~~ a ~~better place.~~

~~A key initiative~~renewed culture will make a decisive contribution in this ~~respect is our SimplyHealthy@Schools program. Across the globe, Philips employees have volunteered~~regard, by helping to upgrade lighting in local schools and educate the children on energy efficiency. But the program goes much further. The SimplyHealthy@Schools Healthy Heroes toolkit is aimed at children aged 8-12 years and illustrates simple ways of improving health and well-being by paying attention to air, light, water, sleep and oral hygiene, as well as to exercise and care for the environment. When these factors are addressed, children perform better and their overall mental and physical well-being improves.

In 2011 we also launched a new employee volunteer program in North America called “Philips Cares: giving back to our communities”. Philips Cares utilizes an online portal in conjunction with relationships with non-profit organizations across the United States to provide employees with the opportunity to participate in meaningful volunteer opportunities that suit their individual needs, schedule and passion. Since the program launched, thousands of employees have taken action to give back to their community. Examples include a Build-a- Bike event in Salina, Kansas, a Charity Chili Cook-off in Tupelo, Mississippi, and a Day of Caring event in Bothell, Washington.

~~Significant headwinds~~a shortage of qualified healthcare workers, presents a major challenge to the delivery of care. Concurrently, the continual need for broader access to care has reached critical levels in ~~parts of the Euro zone were balanced by solid performance in North America and~~ growth ~~geographies, where sales growth outpaced mature geographies.~~

~~Investments in innovation, sales and service, to some extent funded through productivity initiatives, helped accelerate growth.~~

~~We are on track to fulfill our goal to positively impact 500 million lives around the world by 2015.~~

~~We operate in a world challenged by the need to keep a growing and aging population healthy and productive as costs continue to rise. People around the world are living~~markets. At

~~longer, giving rise to an increase in the incidence of chronic conditions, such as cardiovascular disease and respiratory conditions. At the same time,~~Philips, we see ~~an increasing shortage of trained healthcare professionals right when~~ the ~~world can least afford it. These challenges reinforce our mission~~ability to provide ~~meaningful innovations that improve~~connected solutions across the ~~quality~~continuum of care ~~enhance patients’ lives~~as key to addressing these pressing issues. Technological advancements are changing and ~~enable~~will continue to change how patient care is delivered from the ~~delivery of~~hospital to the home and points in between for improved outcomes, better ~~outcomes at lower cost.~~value and greater access to effective diagnosis and treatment.

The global economic slowdown and continuing crisis in the Euro zone had a negative impact on our European business in ~~2011, and the disaster~~2012, particularly in ~~Japan caused a downturn in that country’s domestic healthcare market. These situations were~~Southern Europe. This situation was balanced in part by continued growth in North America, Japan and in growth geographies.

Our health care innovations and ongoing partnership with customers are helping us lay the groundwork for the transformational change of our global health care system.

We continue to ~~touching 500 million lives~~introduce solutions and services that connect and empower patients, their providers and support network for the more efficient and productive delivery of care.

We are dedicated to making a difference wherever care is provided. In the hospital setting that means supporting and enabling the delivery of critical care, emergency care and surgery. With chronic disease on the rise, the home setting will play an increasingly prominent role in the delivery of care moving forward. During 2011, we delivered manyalso developing new products in growth geographies to make state-of-the-art technology affordable and ~~services –~~accessible to these markets while investing in creative solutions specifically designed to make quality care possible for the ~~hospital, the home and points in-between – which brought us closer to our goal of touching 500 million lives.~~underserved.

~~Philips Healthcare~~As a global leader in health care, we are guided by the understanding that there is ~~committed to providing meaningful innovations~~a patient at the center of everything we do. By pioneering new solutions that improve ~~the quality of~~and expand care ~~enhance patients’ lives and enable the delivery of better outcomes at lower cost.~~

~~Our growth strategy is grounded in a fundamental belief that clinical excellence and continuous innovation~~ around the patient experience can fundamentally change healthcare as we know it. Our competitive advantage lies in our clinical perspective, the broad clinical subject-matter expertise within the company, as well as the deep clinical relationships we have with our customer base. This allows us to deliver solutions expertly tuned to the needs of the clinician as well as the financial and operational needs of healthcare administrators, payers, regulators and purchasing organizations by enabling a connected and holistic view of care delivery that tangibly and transparently improves clinical outcomes.

~~Philips is a~~ world, ~~leader in cardiology, and with a strong presence in cardio-pulmonary, oncology, and women’s health,~~ we are ~~well positioned~~dedicated to creating the ideal experience for all patients, young and old.

We harness the power of clinical information by providing clinicians and health care providers with real-time information all in one place – across modalities, time zones and technologies – for more confident decision-making and efficient workflow.

We focus on delivering the most technologically advanced products and solutions, as we help clinicians diagnose, treat and manage many of today’s most prevalent ~~diseases such as congestive heart failure, breast~~diseases.

We expand access to care by promoting the adoption of new mobile and ~~other cancers,~~remote technologies and developing new protocols that can lead to more efficient and productive health care systems.

These commitments are the driving force behind our research and investment in promising new approaches to radiology, cardiology, oncology, decision support, home health, respiratory and other coronary artery diseases as quickly, effectively and efficiently as possible. Our focus is on understanding the complete cycle of care – from disease prevention to screening and diagnosis through to treatment, monitoring and health management – and choosing to participate in the areas where we can add significant value.critical areas.

Our ~~go-to-market strategy~~Healthcare business is organized around businesses and markets. As a result we can better serve our customers, apply locally-relevant practices and act with greater agility and speed to serve each customer’s needs. Our business is organized across four strategic business groups reflecting Philips’ growing portfolio of radiology, oncology, and women’s health products, world-class services, and one of the largest footprints of clinical decision support in the industry:groups:

Imaging ~~Systems:~~Systems ~~interventional X-ray,~~: Integrated clinical solutions that include radiation oncology, clinical applications and platforms, and portfolio management; advanced diagnostic ~~X-ray,~~imaging, including computed tomography (CT), magnetic resonance ~~(MR), nuclear medicine (NM)~~imaging (MRI) and molecular imaging (MI); diagnostic X-ray, including digital X-ray and mammography; interventional X-ray, encompassing cardiology, radiology, surgery and other areas; and ultrasound, ~~imaging equipment; women’s health portfolio.~~a modality with diverse customers and broad clinical presence.

Patient Care & Clinical ~~Informatics:~~Informatics: Enterprise patient monitoring solutions, from value solutions to sophisticated connected solutions, for real-time clinical information at the patient’s bedside; cardiology informatics and ~~diagnostic electrocardiography (DECG),~~ enterprise imaging informatics, including ~~radiology information systems (RIS) and~~ picture archiving and communication systems ~~(PACS);~~and other clinical information systems; patient monitoring and clinical informatics; ~~perinatal~~mother and child care, including ~~fetal monitoring~~products and ~~Philips Children’s Medical Ventures;~~solutions for pregnancy, labor and delivery, newborn and neonatal intensive care and the transition home; and therapeutic care, ~~which includes~~including cardiac resuscitation, emergency care solutions, therapeutic temperature management, anesthesia care, hospital respiratory systems and ventilation.

Home Healthcare ~~Solutions:~~Solutions ~~sleep~~: Sleep management, ~~and~~ respiratory care and non-invasive ventilation; medical alert and medication dispensing services ~~remote cardiac services,~~for independent living; and remote patient ~~management.~~monitoring.

Customer ~~Services:~~Services ~~consultancy,~~: Equipment services and support, including service contracts, equipment maintenance, proactive monitoring and multi-vendor services; managed service programs, including equipment financing and asset management; and professional services, including consulting, site planning and project management, ~~clinical services, Ambient Experience,~~ education, ~~equipment financing, asset management~~ and ~~equipment maintenance and repair.~~design.

Philips is one of the ~~top-tier players in the healthcare technology market~~world’s leading health care companies (based on sales) ~~alongside~~along with General Electric ~~(GE)~~ and Siemens. The United States, our largest market, represented ~~42%~~41% of ~~the~~our Healthcare ~~sector’s 2011~~business’s global sales in 2012, followed by Japan, China and ~~China.~~Germany. Growth geographies accounted for ~~22%~~24% of Healthcare sales. Philips Healthcare employs approximately ~~38,000~~37,500 employees worldwide.

Sales at Healthcare are generally higher in the second half of the year largely due to the timing of new product availability and customer spending patterns.

Philips Healthcare is subject to extensive regulation. We are committed to compliance with regulatory product approval and quality system requirements in every market we serve by addressing specific terms and conditions of local and national regulatory authorities, including the US FDA and comparable foreign agencies. Obtaining their approval is costly and time-consuming, but a prerequisite for market introduction.

With regard to sourcing, please refer to ~~sub-section 5.3.3, Supply management,~~section 14.5, Supplier indicators, of this report.

The Annual Report ~~2010 outlined~~2011 set out a number of key targets for Philips Healthcare in ~~2011. In the course of the year, reflecting the evolving business reality and the adoption of~~2012 that are steps towards achieving our Accelerate!~~, these were encapsulated in several key trajectories designed to accelerate performance – and achieve our~~ mid-term ~~targets. We have made significant headway toward meeting those goals, as~~2013 goals. Our progress is outlined below.

The launch of Accelerating Healthcare in 2012 put us on a fast track to eliminate organizational complexity as a barrier to higher performance. We established Lean operating principles and enhanced the alignment of our product-creation and customer-facing teams to ensure speed of execution while maintaining quality.

We also continued to increase our presence and industrial footprint in growth geographies and to expand our value offering and locally relevant services.

~~In 2011 we realized our vision of~~Our Imaging 2.0. As part of this vision we delivered on our promise to bring world-class products to market that address radiologists’ fundamental needs: a new level of patient focus and safety, improved workflow and more effective integration, leading to better care coordination and improved economic value.

One of the many breakthrough products released in 2011 is the Ingenuity TF PET/MR, the first new imaging modality introduced in a decade. This system integrates the molecular imaging capabilities of PET with the superior soft tissue contrast of MR (magnetic resonance imaging), thereby enabling the system to perform both stand-alone MR and hybrid PET/MR studies. This delivers added flexibility by eliminating the need to invest in multiple scanners while cutting down on throughput time and improving patient comfort since the patient can remain on the same table for both tests. We also released the new Ingenuity CT platform, designed to provide low dose and high image quality, and Ingenia MR, the first digital broadband MR system, which delivers excellent image quality while increasing patient throughput by up to 30%.

~~Philips’ Ambient Experience solution~~2.0 initiative continued to differentiate the company and spur growth in 2011, especially in certain growth geographies such as the Middle East. With global installations now approaching 300, this unique approach to the patient experience integrates architecture, design and enabling technologies, such as lighting, sound, projection and RFID, to create a friendlier, more calming and welcoming hospital experience for patientsdeliver share gains, as well as awards for quality, performance and reliability, with over 15 new products and features introduced in 2012. Our innovative integrated clinical solutions include elastography; iterative image reconstruction technique for virtually “noise free” image quality; cardiovascular x-ray system software that allows a ~~more pleasant place~~significant reduction in X-ray dose while preserving image quality; a software application that converts analog MR images to digitized MR images; and a multi-vendor workstation that integrates image history across modality for ~~staff~~easy collaboration among physicians.

We announced new strategic alliances in 2012, including a program with Elekta in Sweden to ~~work.~~

~~In 2011, we strengthened our Women’s Health portfolio~~develop a potential breakthrough in cancer care. We also entered into an exclusive distribution agreement with Corindus Vascular Robotics in the ~~acquisition~~US for one of the digital mammography business of Sectra. The acquired system, MicroDose Mammography, delivers high-quality breast images using a unique photon-counting detector technology and can deliver outstanding image quality at up to 50% of the radiation dose used by other full-field digital mammography systems, based on phantom testing.

~~Philips also made a minority investment in Corindus to jointly develop~~their state-of-the-art robotic-assisted systems for minimally invasive treatment of obstructed coronary arteries. This emerging field of image-guided, minimally-invasive treatments can lead to faster recovery times and shorter hospital stays. The investment strengthens Philips’ position as a leader in cardiology.systems.

Achieving leadership with holistic innovation in Patient Care & Clinical Informatics

~~Our Patient Care & Clinical Informatics group (PCCI) remains focused on saving and improving lives with a ‘holistic’ portfolio that combines and connects information, technologies, and people~~A number of important advancements in ~~new and meaningful ways.~~

~~In 2011, PCCI introduced several~~2012 helped strengthen our leadership position in clinical decision support ~~algorithms, telehealth~~and address the specific needs of high-growth geographies, such as Brazil, China and India. These included FDA clearance for two groundbreaking clinical decision support applications ~~workflow tools,~~for our patient monitors, and ~~other innovations that are changing care-giving paradigms. The~~~~IntelliVue MX600, MX700, MX800~~innovative solutions for interoperability, defibrillation, clinical informatics, anesthesia care and patient ~~monitoring solution functions as a clinical workstation that provides fast, convenient access to a patient’s clinical data from hospital information systems. The~~~~IntelliVue MX40~~monitor, recognized as the best new product at the 2011 Military Smart Monitoring Summit, is a wearable patient monitor that allows clinicians to monitor ambulatory patients, not only improving the patient experience butmonitoring.

We also providing an effective and efficient alternative to traditional care for patients who are capable of walking and moving around. It also improves clinician workflow by providing local alarms to alert clinicians of patient condition changes regardless of the patient’s locationcollaborated with customers on initiatives with far-reaching implications. With Maxima Medical Center in the ~~hospital.~~

~~The PCCI group also invested~~Netherlands, we created a new concept in ~~the mother and child care segment to augment its capabilities in obstetrical care and~~ neonatal intensive ~~care. The team delivered products such as~~care called the ~~state-of-the-art OBTraceVue obstetrical information management system, which was cited among the products that will make a profound contribution to~~Woman-Mother-Child Center, where mothers and their newborn babies are kept together for fully integrated treatment and nursing care.

~~help save and improve lives as part of the UN’s 2015 Millennium Development Goals for the Global Strategy for Women and Children’s Health.~~

In 2011, Philips acquired several companies that strengthened our market position and global reach. For example, with the acquisition of Dameca, a global provider of anesthesia machines and accessories for the operating room, we significantly bolstered our therapeutic and anesthesia-care care capabilities, and furthered our ability to integrate information and technologies for ground-breaking anesthesia-related clinical decision support.

PCCI also pioneered telehealth applications to address customers’ need to improve financial and clinical outcomes. Sisters of Mercy Health System of St. Louis, Missouri, expanded its use of the Philips eICU telehealth program across four states and eight hospitals to support stroke victims with timely access to scarce stroke neurologists, and it plans to extend this to 24 hospitals by summer 2012.

~~Philips is a pioneer~~Our Home Healthcare Solutions business grew at or above market rates in ~~home healthcare solutions. As the company~~2012, with ~~the most comprehensive suite of solutions in monitoring, sleep therapy and respiratory devices available for the home, we play a significant role in improving the quality of care at lower cost.~~

~~Philips is already the leading provider of medical alert services in the US. In order to expand our presence and support independent living for an aging population~~strong growth in Japan, ~~one of the most rapidly aging countries in the world, we introduced our medical alert service Lifeline Auto Alert. Customized to the needs of Japanese patients~~Western Europe and developed in close collaboration with local Japanese hospitals, the Lifeline service offers seniors an easy-to-use personal response service that lets them summon emergency help at any time of the day or night.

~~The introduction of Lifeline in Japan is part of Philips’ multi-year international growth strategy for its~~other geographies where home ~~monitoring business under which Philips plans to continue introducing the Lifeline service in new markets in future.~~

~~Philips also aims to enter the sleep therapy and respiratory~~health care home markets in China in the near future. To this end, in 2011 we initiated a comprehensive research project in the Chinese market to obtain deeper insights and determine optimal business models. Given China’s aging population, it has become evident that there is a significant clinical need for products and services to address the rise in chronic conditions. Yet today, only a relatively small portion of the population is able to pay for these products and services. Our work in China goes beyond making the products available: we are also investigating ways to increase accessibility.

~~We contributed one of our telehealth solutions~~– as part of an extensive home healthcare clinical study, commissioned and funded by the UK’s Department of Health. In late 2011, the research showed that telehealth solutions, if used correctly, resulted in significant benefits, including a decrease in mortality rates from chronic disease management – is a ~~drop~~fundamental component of the care continuum.

We also continued to lead the way in ~~emergency admissions~~helping shape selected regional markets in the early stages of home health care development. In these markets, we focused on building awareness of chronic conditions and ~~a decrease~~understanding the value of home health care while making investments in ~~in-hospital days.~~research and clinical education.

In 2011, Philips invested in the necessary resources to drive our growth and leadership positions in key strategic markets. In line with our mission to provide meaningful innovations that improve the quality of care, enhance patients’ lives and enable the delivery of better outcomes at lower cost,2012 we ~~accelerated efforts in growth geographies through~~made a number of ~~initiatives, including:~~

~~Investing~~strategic investments in growth geographies. These included the opening of research and development centers and manufacturing facilities in China and India to drive local innovation. We also strengthened our presence in the ~~local development of~~Middle East with strategic alliances in Saudi Arabia and Abu Dhabi.

In addition, we extended our innovative telehealth solution to provide remote critical care ~~cycle approach~~~~: Using~~in India, and continued to expand our ~~leading cardiology capabilities, we introduced Chest Pain Centers~~solutions in ~~China in order to enable cardiologists to better manage acute cardiovascular events,~~imaging, patient monitoring and ~~improve patient survival rates and outcomes.~~

~~Expanding our local manufacturing capabilities:~~~~The industrial campus~~clinical informatics for imaging systems in Suzhou, China, became operational and delivered its first systems in 2011, and we also expanded our value segment assets in Interventional X-Ray Systems (IXR) by setting up a greenfield healthcare research & development and manufacturing facility in Pune, India.

~~Expanding our product portfolio to deliver the right benefits, on the right conditions, at the right times:~~~~We introduced new, cost-effective imaging solutions,~~price-sensitive markets, such as ~~the Achieva 1.5T SE Magnetic Resonance~~Brazil and MX16-slice CT systems, which allowed us to meet the growing demand for easy-to-use, full-featured imaging products that can handle large volumes of work and meet the specific needs of customers in both mature and growth geographies.

~~Introducing new business models:~~~~We provide multi-modality imaging solutions in a pay-per-use model or by entering into multi-modality partnership deals with a revenue-sharing aspect, such as with Fortis Healthcare in India.~~

~~Developing locally relevant solutions via partnership agreements~~~~: We worked with the Russian State Atomic Energy Corporation (ROSATOM) aimed at jointly manufacturing important imaging modalities in nuclear medicine in Russia.~~China.

Executing operational excellence initiatives to increase margin and time-to-market

~~We continued~~Under Accelerate! we made significant progress in the restructuring of our ~~transPHorm efficiency~~organization to innovate faster and effectiveness program aimed at improving our operating margins over time, focusing on pricing, optimization of low-cost-country sourcing, bill of material reductions, and increased service productivity and operational efficiency.more efficiently.

~~Philips Healthcare is committed to deliver~~Deliver on ~~its~~ EcoVision sustainability ~~goals. We~~commitments

As part of our EcoDesign process, we consider all Green Focal Areas ~~and aim~~ to help reduce total life cycle impact. In ~~2011~~2012 we ~~added 29~~introduced 16 Green Products to ~~our portfolio, including~~support energy efficiency, materials reduction and other sustainability goals.

In 2012, sales amounted to EUR 9,983 million, 13% higher than in 2011 on a nominal basis, driven by higher sales in all businesses. Excluding a 7% favorable impact of currency effects, comparable sales were 6% higher. Solid mid-single-digit comparable sales growth was achieved by all businesses. Green Product sales amounted to EUR 3,610 million, a 36% year-on-year increase.

Geographically, comparable sales in mature geographies were higher than in 2011 in all businesses. The year-on-year sales increase was largely attributable to North America and other mature markets, as sales in Western Europe were in line with the ~~Ingenia MRI systems~~prior year. In growth geographies, we achieved 20% growth, largely driven by strong, double-digit growth in China, Brazil, India and Russia.

Adjusted IFO increased from EUR 1,145 million, or 12.9% of sales, in 2011 to EUR 1,322 million, or 13.2% of sales, in 2012. Adjusted IFO improvements were realized at all businesses, largely as a result of higher sales and cost-saving programs. Restructuring and acquisition-related charges amounted to EUR 134 million, compared with ~~dStream, which use up~~EUR 20 million in 2011.

IFO amounted to ~~24% less energy than their predecessor. Another example is the IntelliVue MX40 Patient Monitor, which offers 85% reduction~~EUR 1,122 million, or 11.2% of sales, and included EUR 200 million of charges related to amortization of intangible assets.

Net operating capital in ~~power usage. Also our Home Healthcare Solution Trilogy, which uses 62% less energy than its predecessor. We also play~~2012 decreased by EUR 442 million to EUR 8 billion, mainly due to currency effects and an ~~active role~~increase in ~~developing environmental legislation such as self-regulatory initiatives on EcoDesign~~provisions related to restructuring charges. All businesses showed improved efficiency in inventory usage year-over-year.

Cash flows before financing activities increased from an inflow of ~~Energy-using Products.~~EUR 773 million in 2011 to an inflow of EUR 1,394 million in 2012, mainly attributable to higher earnings and lower working capital requirements.

In 2011, sales amounted to EUR 8,852 million, 3% higher than in 2010 on a nominal basis, driven by higher sales in all businesses. Excluding a 2% unfavorable impact of currency effects, comparable sales were 5% higher. Mid-single-digit comparable sales growth was achieved by all businesses. Green Product sales amounted to EUR 2,663 million, a 25% year-on-year increase.

Geographically, comparable sales in mature geographies were higher than in 2010 in all businesses except Imaging Systems. The year-on-year sales increase was largely attributable to North America, tempered by lower sales in Western Europe. In growth geographies, we achieved 15% growth, largely driven by strong, double-digit growth in China, India and Russia.

Adjusted IFO decreased from EUR 1,186 million, or 13.8% of sales, in 2010 to EUR 1,145 million, or 12.9% of sales, in 2011. Adjusted IFO improvements were realized at Patient Care & Clinical Informatics, Home Healthcare Solutions and Customer Services, largely as a result of higher sales and cost-saving programs. However, this was more than offset by lower Adjusted IFO at Imaging Systems, due to higher selling expenses and investments in R&D. Restructuring and acquisition-related charges amounted to EUR 20 million, compared with EUR 77 million in 2010.

IFO amounted to EUR 93 million, or 1.1% of sales, and included EUR 229 million of charges related to amortization of intangible fixed assets and EUR 824 million of goodwill impairment losses.

Net operating capital in 2011 decreased by EUR 490 million to EUR 8.4 billion, mainly attributable to lower intangible assets due to goodwill impairment and partially offset by higher inventories, primarily at Imaging Systems.

Cash flows before financing activities decreased from an inflow of EUR ~~1,139~~1,141 million in 2010 to an inflow of EUR ~~770~~773 million in 2011, mainly attributable to lower cash earnings.

In 2013 Philips Healthcare ~~are generally higher~~will continue to progress on the following imperatives designed to accelerate performance and achieve our goals:

Complete our Accelerating Healthcare transformation

Invest in our growth initiatives to deliver differentiated offerings from the ~~second half of the year largely due~~hospital to the ~~timing of new product availability and customers attempting to spend their annual budgeted allowances before the end of the year.~~home

~~Key data~~

~~in millions of euros~~

Create momentum behind Customer Services

~~in millions of euros~~

¹⁾	~~Revised to reflect an adjusted geographic cluster allocation~~

~~Sales and net operating capital~~

~~in billions of euros~~

~~IFO and Adjusted IFO~~¹⁾

~~in millions of euros~~

¹⁾	~~For a reconciliation to the most directly comparable GAAP measures, see chapter 15, Reconciliation of non-GAAP information, of this report~~

~~2010 financial performance~~

In 2010, sales amounted to EUR 8,601 million, 10% higher than in 2009 on a nominal basis, driven by higher sales in all businesses. Excluding a 6% favorable impact of currency effects, comparable sales were 4% higher. Mid-single-digit comparable sales growth was achieved by Patient Care & Clinical Informatics, Home Healthcare Solutions and Customer Services. Imaging Systems comparable sales were in line with 2009. Green Product sales amounted to EUR 2,136 million, a 19% year-on-year increase.

Geographically, comparable sales in mature geographies were higher than in 2009 in all businesses except Imaging Systems. The year-on-year sales increase was largely attributable to Western Europe. Comparable sales in North America were broadly in line with 2009. In growth geographies, we achieved 7% increase, largely driven by strong, double-digit growth in China and India.

~~Adjusted IFO increased from EUR 848 million, or 10.8% of sales, in 2009 to EUR 1,186 million, or 13.8% of sales, in 2010. Adjusted IFO improvements were realized~~Implement our end-to-end customer relationship management solution across all businesses in Healthcare, largely as a result of higher sales, favorable currency impact and cost-saving programs. Restructuring and acquisition-related charges were EUR 77 million, compared with EUR 106 million in 2009.

~~IFO amounted to EUR 922 million, or 10.7% of sales, and included EUR 263 million of charges related to amortization of intangible fixed assets.~~

~~Net operating capital in 2010 increased by EUR 474 million to EUR 8.9 billion. Excluding a EUR 713 million currency impact, net operating capital decreased by EUR 239 million.~~

~~Cash flows before financing activities increased from an inflow of EUR 889 million in 2009 to an inflow of EUR 1,139 million in 2010, mainly attributable to higher earnings.~~

~~6.1.7 Regulatory requirements~~

the global Philips Healthcare ~~is subject~~organization

Create a high-performance organization as measured by ongoing employee surveys and business results

Institutionalize our end-to-end operating framework to ~~extensive regulation. It strives for full compliance with regulatory product approval~~optimize financial returns on our portfolio and ~~quality system requirements in every market it serves by addressing specific terms and conditions of local ministry of health or federal regulatory authorities, including agencies like~~improve the US FDA, EU Competent Authorities and Japanese MLHW. Environmental and sustainability requirements like the European Union’s Waste from Electrical and Electronic Equipment (WEEE) and Restriction of Hazardous Substances (RoHS) directives are met with comprehensive EcoDesign and manufacturing programscustomer experience

~~In 2012~~these priorities, Philips Healthcare will continue to ~~progress on~~

~~Implement Accelerate! transformation~~

~~Driving to co-leadership in Imaging Systems and leadership in Patient Care & Clinical Informatics~~

~~Invest for leadership in growth geographies~~

~~International expansion of the Home Healthcare Solutions business~~

~~Executing operational excellence initiatives to increase margin and time-to-market~~

~~Deliver~~deliver on EcoVision sustainability ~~commitments~~commitments.

“~~With~~At Consumer Lifestyle we’re making the world healthier and more sustainable through meaningful innovation. The Accelerate! transformation program is now showing solid results in our sector. By planning, resourcing and managing performance by Business Market Combination (BMC), we ~~continued on our path~~are driving greater consumer intimacy, enabling us to launch more locally relevant products. We continue to transform Consumer Lifestyle ~~– reshaping the portfolio~~ for profitable growth, ~~and moving from a functional, centrally led organization, to an organization built around businesses and markets. We further repositioned the sector~~reshaping our portfolio towards ~~the~~ health and ~~well-being domain, focusing resources to drive global scale and category leadership.~~well-being.”Pieter Nota,CEO Philips Consumer Lifestyle

New operating model fully in place, moving decisions closer to markets and ~~cash flows have been restated to reflect the effect of classifying the Television business as discontinued operations in 2011.~~

~~Achieved strong sales growth in the Personal Care, Health & Wellness~~stimulating entrepreneurship and ~~Domestic Appliance businesses combined and increased overall market share~~speed.

~~Signed~~Granular approach to growth is showing solid results, addressing local consumer needs and leveraging our position in attractive growth geographies.

Announced start of Television joint venture named TP Vision, ensuring the future of the Philips brand in Television.

January 2013 announcement of agreement to transfer ~~Television business into a joint venture with TPV Technology~~Audio, Video, Multimedia and Accessories businesses to Funai.

~~Significantly stepped up investment in Advertising & Promotion and Research & Development~~92 Annual Report 2012

6 Sector performance 6.2.1 - 6.2.3

~~Refocused Lifestyle Entertainment portfolio on growing categories, achieving profitability for the full year~~

6.2.1 Lifestyle retail landscape

Across the world, consumers want to maintain and improve their health and ~~well-being and that of their families.~~well-being. To achieve this, they ~~look for~~seek propositions that ~~will improve~~help them to look and feel their ~~lives from brands they trust.~~best and to care for their family and friends: propositions that help them to live well. This is as true ~~for~~of consumers in growth geographies such as China as it is in developed markets such as Western ~~Europe as it is for the rapidly expanding middle class~~Europe.

In 2012 economic headwinds increased, resulting in ~~growth geographies such as China.~~

~~Consumer Lifestyle is on a journey to become a leading player in health and well-being. We have a global footprint, with an established presence in both mature and growth~~

~~Annual Report 2011 85~~

~~6 Sector performance 6.2.1 - 6.2.3~~

geographies. Our investment in research and development enables us to deliver a stream of locally relevant, meaningful innovations. We have a leading global brand, which is highly trusted across the world.

~~The fragile global economic environment in 2011 had a negative impact~~pressure on consumer ~~demand for some categories and~~spending in some markets. However, we ~~also saw strength~~believe consumers will continue to demand products that enhance their health and well-being, creating resilience in ~~growth geographies, driven in part by the continuing emergence of the middle class.~~our product categories.

Underlying trends continue to drive growth in our key categories:

~~In Male Grooming, young men~~Consumers have a growing interest in personal health

Consumers are increasingly ~~turning~~appearance-conscious

Consumers want healthy food that is also easy to ~~electrical grooming solutions to create a much wider range of facial hairstyles, helping them to express their own individual look~~prepare

In ~~Oral Healthcare, Philips Sonicare is already~~ a ~~market-leading brand in the world’s largest oral healthcare markets. It is also a business that’s poised~~complex market environment, consumers look for ~~growth thanks to its plans to expand geographically and to broaden its portfolio into new value spaces and price points~~

~~In Kitchen Appliances, Philips is delivering local innovations based on global platforms that deliver on the specific eating habits of different cultures around the world whilst driving global scale~~

In Coffee, fully automatic espresso and portioned solutions, such as the Philips SENSEO portfolio, account for more than 60% of the total coffee market value and over 95% of its growth. With the Philips Saeco and SENSEO portfolios, the company is well-positioned to capture this growthresponsible brands they can trust

6.2.2 Helping people achieve a healthier and better life

Consumer Lifestyle makes a difference to people’s lives by making it easier for them to achieve a healthier and better lifestyle.

Consumer Lifestyle ~~works~~empowers its business and market organizations to work together ~~with Philips Design~~in order to ~~monitor trends ranging from consumer tastes to design aesthetics. With its global footprint, Consumer Lifestyle is well positioned to capture~~address the different and ~~respond to emerging~~changing needs ~~in local markets. Country organizations are our interface with~~of consumers and customers across the ~~consumer, allowing us to accurately identify local needs, tastes and commercial opportunities.~~world.

We ~~apply a rigorous~~are increasing the speed, quality and local relevance of product ~~development process when creating new value propositions. At its heart are validated consumer insights, which show that~~innovation and expanding our distribution, thereby capturing the ~~propositions meet a market need. The combination~~increasing spending power of ~~insight and innovation creates a platform for sustainable business success.~~growth geographies.

6.2.3 About Consumer Lifestyle

At Consumer Lifestyle we are delivering on Philips’ vision to make the world healthier and more sustainable through innovation. We have a global footprint, with an established presence in both mature and growth geographies. Our investment in innovation and local business creation enables us to deliver a stream of locally relevant, meaningful innovations. We have a leading global brand, which is highly trusted across the world.

The Philips Consumer Lifestyle sector is organized around its businesses and markets, and is focused on value creation through category development and delivery through operational excellence.

We plan, resource and manage performance by ~~Business/~~Business Market ~~Combination.~~Combination (BMC). Our operating model stimulates entrepreneurship and speed by ensuring clear accountability and by moving decisions closer to our customers and markets. ~~Our teams are highly engaged and our local leaders empowered, which provides a strong platform to ignite growth.~~

In ~~2011~~2012 the sector consisted of the following areas of business:

Health & Wellness: mother and childcare, oral healthcare

Personal Care: male grooming, skincare, beauty

Domestic Appliances: coffee, floor care, garment care, kitchen appliances, water & air, beverage appliances

Lifestyle Entertainment: ~~communication & control,~~ audio ~~& multimedia, speech processing,~~and video entertainment; communications, headphones &and accessories ~~home cinema & home video~~

Total sales by business ~~2011~~2012

as a %

We offer a broad range of products from high to low price/value quartiles, necessitating a diverse distribution model. We ~~are expanding~~continue to expand our portfolio to increase its accessibility, particularly for lower-tier cities in growth geographies. We ~~are also developing new retail channels, for instance selling our innovative laser-based skin rejuvenation solution, Philips RéAura, in high-end beauty~~

~~86 Annual Report 2011~~

~~6 Sector performance 6.2.3 - 6.2.5~~

~~retailers. And we~~ have ~~pioneered~~implemented innovative approaches in online and social media to build our brand and drive sales.

Under normal economic conditions, the Consumer Lifestyle sector experiences seasonality, with higher sales in the fourth quarter resulting from the holiday sales.

Consumer Lifestyle employs approximately ~~18,300~~18,900 people worldwide. Our global sales and service organization covers more than 50 developed and growth geographies. In addition, we operate manufacturing and

Annual Report 2012 93

6 Sector performance 6.2.3 - 6.2.4

business creation organizations in ~~Argentina,~~ Austria, ~~Belgium,~~ Brazil, China, ~~Hungary,~~ India, Indonesia, Italy, Netherlands, ~~Singapore,~~Romania, the UK and the US.

Regulatory requirements

Consumer Lifestyle is subject to significant regulatory requirements in the markets where it operates. This includes the European Union’s Waste from Electrical and Electronic Equipment (WEEE), Restriction of Hazardous Substances (RoHS) and Energy-use of Products (EuP) requirements. Consumer Lifestyle has a growing portfolio of medically regulated products in its Health & Wellness and Personal Care businesses. For these products we strive to meet the requirements of ~~all relevant regulatory bodies such as~~ the US FDA, the European ~~Commission for Regulations and Notified Bodies,~~Medical Device Directive, the SFDA in China and the regulations stipulated by Health Authorities in India. Through our growing skincare product portfolio the range of applicable regulations has been extended to include requirements relating to cosmetics and, on a very small scale, pharmaceuticals.

With regard to sourcing, please refer to ~~sub-section 5.3.3, Supply management,~~section 14.5, Supplier indicators, of this report.

6.2.4 Progress against targets

The Annual Report ~~2010~~2011 set out a number of key targets for Philips Consumer Lifestyle in ~~2011. In the course of the year, reflecting the evolving business reality and the adoption of~~2012 that are steps towards achieving our Accelerate!~~, these were encapsulated in four key sector acceleration trajectories designed to reshape our portfolio towards growth – and to achieve our~~ mid-term ~~targets. The~~2013 goals. Our progress ~~made in addressing these trajectories~~ is outlined below.

~~Right-size the organization post TV joint venture~~Implement Accelerate! transformation

WeIn Consumer Lifestyle, Accelerate! is showing solid results. Taking a granular approach to growth, we now have 150 BMC plans in ~~place to significantly reduce the proportion of the stranded costs that resulted from the disentanglement of our TV operations.~~place. We have moved from a functional, centrally-led organization to an organization ~~centered~~built around businesses and ~~markets, where~~markets. We have clear accountability in our operating model, for both businesses ~~are responsible for~~and markets. We have seven end-to-end transformation pilots in place with clear deliverables: reduced time-to-market, reduced inventories and better gross margin management.

Right-size the ~~realization~~organization post TV joint venture establishment

We have significantly reduced overhead costs and stranded costs related to the establishment of ~~propositions~~the TV joint venture with TPV, TP Vision, which was established on April 1, 2012. Key actions taken include streamlining the headcount in the Supply Chain Management, Manufacturing and ~~markets are responsible for~~Support functions, realigning International Key Account Management, rationalizing the ~~realization of revenues.~~central Marketing set-up, reducing logistics and warehousing costs through structural improvements, and reducing the real estate footprint.

Address Lifestyle Entertainment portfolio and execute ~~turnaround~~turn-around plan

We ~~are transitioning~~continued to transition the ~~Lifestyle Entertainment~~ portfolio towards growing categories like docking and connected entertainment, away from rapidly declining ~~traditional audio/video products such as~~categories like MP3, MP4 and DVD ~~players towards growing and profitable categories~~players. We reduced the business’s cost base to reflect the lower revenue base. In North America we entered into a distribution agreement with Funai, a longstanding Philips business partner, in 2012. We also divested the ~~connected entertainment space, including solutions that integrate with the Apple Airplay and Google Android ecosystems. As a result,~~Speech Processing business in Lifestyle Entertainment, ~~was profitable over the full year 2011.~~selling it to Invest AG. In January 2013 we announced an agreement to transfer our Audio, Video, Multimedia and Accessories businesses to Funai.

Continued growth investment in core businesses towards global category leadership

~~We significantly increased~~In our ~~investment in advertising and promotion, particularly in~~key growth businesses of Male Grooming, Oral Healthcare, Kitchen Appliances and ~~Coffee.~~Coffee (which includes our Espresso and Beverage Appliance categories), we made significant progress in 2012. In Male Grooming, we have increased our share of the total market (including blade shaving), strengthening our leading position. In Oral Healthcare, we ~~launched~~are entering new channels, including pharmacies, with the launch of the Sonicare ~~AirFloss,~~PowerUp power toothbrush.

In Kitchen Appliances, acquisitions and local product creation have driven a ~~major innovation~~strong increase in ~~dental care that uses rapid bursts of air and water to provide an easier way for interdental cleaning.~~new product offerings, with leadership in key markets strengthened through local relevance. In ~~addition, we~~Coffee, a new, long-term agreement with DE Master Blenders has further strengthened ~~co-branding with our strong single-category brands like Sonicare and Saeco.~~the Senseo business.

Regional business creation; leverage fill-in acquisitions in China and India

~~We acquired~~Leading kitchen appliances companies Preethi and Povos, ~~leading kitchen appliances companies~~acquired in 2011 in India and China ~~respectively. We moved the leadership of~~respectively, continued to show strength. Povos contributed to an incremental 30% growth in China by strengthening our Domestic Appliances business to Shanghai, and implemented a network of regional business creation hubs for kitchen appliances in Europe, India, China and Brazil. Following the acquisition of Preethi we now have clear kitchen appliances marketChinese product offering. Preethi’s leadership in ~~India. As a result~~the south of ~~the acquisition of Povos and locally-driven innovation,~~India complements our position across India, where we have ~~increased~~over 30% market share in mixer grinders, the ~~proportion of~~largest category. We are also leveraging the ~~Chinese~~Preethi brand to build a portfolio beyond kitchen ~~appliances market we address from 15% to 95%.~~appliances.

~~6.2.5~~Deliver on EcoVision sustainability commitments

Sustainability ~~continued~~continues to play an important role in the product development process at Consumer Lifestyle. In 2012 we made progress in ~~our Consumer Lifestyle sector. We continued to implement~~implementing our voluntary commitment to phase out polyvinyl chloride (PVC) and

94 Annual Report 2012

6 Sector performance 6.2.4 - 6.2.5

brominated flame retardants (BFR) from our products, ~~launching new shavers~~ and ~~grooming products, among others,~~for the first time all of our espresso coffee machines launched during the year are free of these substances.

We ~~introduced~~increased the ~~SENSEO Viva Café Eco,~~use of recycled materials in our products. For example, the ~~first product in its category to be~~housing base of the Performer range of vacuum cleaners is now made from ~~50%~~ recycled plastics, resulting in the use of approximately 300 tonnes of recycled plastic by 2013.

6.2.5 2012 financial performance

Key data

in millions of euros unless otherwise stated


	2010		2011			2012
Sales		5,504		5,615			5,953
Sales growth
% increase (decrease), nominal		7		2			6
% increase (decrease), comparable¹⁾		—		1			2
Adjusted IFO¹⁾		487		297			663
as a % of sales		8.8		5.3			11.1
IFO		449		217			593
as a % of sales		8.2		3.9			10.0
Net operating capital (NOC)¹⁾		882		884			1,217
Cash flows before financing activities¹⁾		288		(257	)		597
Employees (FTEs)		14,095		18,291			18,911

¹⁾	For a reconciliation to the most directly comparable GAAP measures, see chapter 15, Reconciliation of non-GAAP information, of this report

Sales amounted to EUR 5,953 million, a nominal increase of 6% compared to 2011, mainly driven by double-digit growth in our Health & Wellness and Domestic Appliances businesses. This was partly offset by a double-digit decline in Lifestyle Entertainment, where growth was adversely affected by a slowdown in consumer spending, particularly in mature geographies. Excluding a 3% favorable currency impact and a 1% impact from portfolio changes, comparable sales were 2% higher than the previous year.

From a geographical perspective, we ~~also launched~~recorded 7% comparable sales growth in growth geographies, which was partly offset by a 2% decline in mature geographies, mainly in Western Europe. In growth geographies, the ~~EcoCare steam iron,~~year-on-year sales increase was driven by Russia and China, primarily in our Domestic Appliances and Personal Care businesses. Growth geographies’ share of sector sales increased from 42% in 2011 to 46% in 2012.

Adjusted IFO increased from EUR 297 million, or 5.3% of sales, in 2011 to EUR 663 million, or 11.1% of sales, in 2012. Restructuring and acquisition-related charges amounted to EUR 75 million in 2012, compared to EUR 54 million in 2011. 2012 results included a EUR 160 million one-time gain from the extension of our partnership with Sara Lee, including the transfer of our 50% ownership right to the Senseo trademark. Excluding this one-time gain, the year-on-year Adjusted IFO increase was driven by higher sales across all growth businesses as well as lower net costs formerly reported as part of the Television business. Compared to 2011, Adjusted IFO improvements were seen in all businesses.

IFO amounted to EUR 593 million, or 10.0% of sales, which ~~reduces energy consumption by up~~included EUR 70 million of amortization charges, mainly related to ~~25%~~intangible assets in Health & Wellness and ~~is made~~Domestic Appliances.

Net operating capital increased from ~~30% recycled materials.~~EUR 884 million in 2011 to EUR 1,217 million in 2012, primarily due to a reduction in the accounts payable balance related to the former Television business in Consumer Lifestyle.

Cash flows before financing activities increased from a cash outflow of EUR 257 million in 2011 to a cash inflow of EUR 597 million. The increase was attributable to higher cash earnings, lower cash outflows for acquisitions as well as the transfer of our 50% ownership right to the Senseo trademark to Sara Lee for cash proceeds EUR 170 million.

Sales per geographic cluster

in millions of euros

Sales and net operating capital

in billions of euros

Annual Report ~~2011 87~~2012 95

6 Sector performance ~~6.2.6~~6.2.5 - 6.2.6

~~6.2.6~~ IFO and Adjusted IFO¹⁾

in millions of euros

¹⁾	For a reconciliation to the most directly comparable GAAP measures, see chapter 15, Reconciliation of non-GAAP information, of this report

2011 financial performance

2011 proved to be a challenging year for driving sales growth in Consumer Lifestyle. We began the year with sales declines in the first two quarters, though we finished the year with two quarters of positive growth and improved stock levels. For the year, sales increased by EUR 48111 million, or 1%2% nominal growth. ~~However, adjusted for~~Excluding the effect of unfavorable currency and favorable portfolio changes, comparable sales were ~~unchanged~~1% higher from the previous year.

~~Key data~~

~~in millions of euros~~

   2009 2010    2011
Sales
   5,370    5,775       5,823
Sales growth

% increase (decrease), nominal
   (13 ) 8       1
% increase (decrease), comparable¹⁾
   (12 ) 1       —
Adjusted IFO¹⁾
   454    718       472
as a % of sales
   8.5    12.4       8.1
IFO
   436    679       392
as a % of sales
   8.1    11.8       6.7
Net operating capital (NOC)¹⁾
   625    911       887
Cash flows before financing activities¹⁾
   574    493       (38 )
Employees (FTEs)
   13,625    14,095       18,291

¹⁾	~~For a reconciliation to the most directly comparable GAAP measures, see chapter 15, Reconciliation of non-GAAP information, of this report~~

We achieved double-digit growth at Health & Wellness and high single-digit growth at Personal Care, driven by increased investment in advertising and promotion. Sales at Domestic Appliances showed high single-digit growth, led by strong growth in growth geographies, notably China. Sales declined at Lifestyle Entertainment, where growth was tempered by slow consumer spending in mature geographies.

From a geographical perspective, we recorded 10% comparable sales growth in growth geographies, which was partly offset by a 6%4% decline in mature geographies, mainly in Western Europe. Sales growth in growth geographies was driven by solid growth in Latin America and China, primarily in our Personal Care business. Growth geographies’ share of sector sales increased from ~~38%~~39% in 2010 to 42% in 2011.

Adjusted IFO decreased from EUR ~~718~~487 million, or ~~12.4%~~8.8% of sales, in 2010 to EUR ~~472~~297 million, or ~~8.1%~~5.3% of sales, in 2011. Restructuring and acquisition-related charges amounted to EUR 54 million in 2011, compared to EUR 31 million in 2010. The year-on-year Adjusted IFO decrease was largely attributable to lower gross margin and higher selling expenses, particularly from increased investment in advertising and promotion. Adjusted IFO was higher than in 2010 at Health & Wellness, but this was more than offset by lower earnings at Lifestyle Entertainment and Licenses.

IFO amounted to EUR ~~392~~217 million, or ~~6.7%~~3.9% of sales, which included EUR 80 million of amortization charges, mainly related to intangible fixed assets at Lifestyle Entertainment and Health & Wellness.

Net operating capital ~~decreased~~increased slightly from EUR ~~911~~882 million in 2010 to EUR ~~887~~884 million in 2011, primarily due to higher intangible fixed assets from acquisitions of Povos and Preethi, partially offset by higher provisions for the announced divestment of the discontinued Television ~~business, partially offset by higher intangible fixed assets from acquisitions of Povos and Preethi.~~business.

Cash flows before financing activities declined from an inflow of EUR ~~493~~288 million in 2010 to an outflow of EUR ~~38 million.~~257 million in 2011. The decline was attributable to lower cash earnings and higher cash outflows for acquisitions.

~~Sales per geographic cluster~~

~~in millions of euros~~

¹⁾	~~Revised to reflect an adjusted geographic cluster allocation~~

~~Sales and net operating capital~~

~~in billions of euros~~

~~88 Annual Report 2011~~

~~6 Sector performance~~ 6.2.6 ~~- 6.2.7~~

~~IFO and Adjusted IFO~~¹⁾

~~in millions of euros~~

¹⁾	~~For a reconciliation to the most directly comparable GAAP measures, see chapter 15, Reconciliation of non-GAAP information, of this report~~

~~2010 financial performance~~

2010 proved to be a challenging year for driving sales growth in Consumer Lifestyle. We began the year with strong comparable sales growth in the first two quarters, though we experienced sales declines in the last two quarters, with high stock levels in retail and, consequently, strong price erosion. For the year, our sales increased by EUR 405 million, or 8% nominal growth. However, adjusted for favorable currency and unfavorable portfolio changes, comparable sales growth was limited to 1%.

We achieved double-digit growth at Health & Wellness and high single-digit growth at Personal Care, driven by our increased investment in advertising and promotion. Sales at Domestic Appliances showed low single-digit growth, as strong comparable sales increases in growth geographies, notably China, was partly offset by lower sales in mature geographies. Sales at Lifestyle Entertainment declined on a comparable basis.

From a geographical perspective, we recorded 6% comparable sales increase in growth geographies, which was partly offset by a 2% decline in mature geographies, mainly in Western Europe. Sales increase in growth geographies was driven by solid growth in Latin America and Russia, though this was tempered by a sales decline in China. Growth geographies’ share of sector sales increased from 38% in 2009 to 41% in 2010. Green Product sales amounted to over EUR1.5 billion and increased from 18% of total sales in 2009 to 27% in 2010.

Adjusted IFO significantly improved from EUR 454 million, or 8.5% of sales, in 2009 to EUR 718 million, or 12.4% of sales, in 2010. Restructuring and acquisition-related charges amounted to EUR 31 million in 2010, compared to EUR 74 million in 2009. The year-on-year Adjusted IFO improvement was largely driven by improved gross margin, fixed cost savings, the previous year’s EUR 48 million product recall-related charges, and lower restructuring charges. Adjusted IFO was higher than in 2009 in all businesses, notably Domestic Appliances.

IFO amounted to EUR 679 million, or 11.8% of sales, which included EUR 39 million of amortization charges, mainly related to amortization of intangible fixed assets at Health & Wellness and Domestic Appliances.

~~Net operating capital increased from EUR 625 million in 2009 to EUR 911 million in 2010, primarily due to an increase in assets following the acquisition of Discus Holdings.~~

Cash flows before financing activities declined from an inflow of EUR 574 million in 2009 to an inflow of EUR 493 million. The decline was mainly attributable to lower cash inflow from changes in working capital, partly offset by higher earnings.

~~6.2.7 Strategy and 2012 objectives~~2013 priorities

In ~~2012~~2013 Philips Consumer Lifestyle will continue to progress on the following ~~key trajectories~~imperatives designed to accelerate performance and achieve our ~~mid-term targets:~~goals:

~~Implement Accelerate! transformation~~Drive global scale and category leadership in health and well-being categories with attractive profit pools

~~Right-size the organization post TV joint venture establishment~~Further reduce our cost base

~~Address Lifestyle Entertainment portfolio and execute turnaround plan~~Improve return on investment in marketing

~~Continued growth investment in core businesses towards global category leadership~~Roll out end-to-end programs that will drive reduced time-to-market, reduced inventories and improved gross margins

~~Regional business creation; leverage acquisitions in China and India~~

~~Deliver~~In addition to these priorities, Philips Consumer Lifestyle will continue to deliver on EcoVision sustainability ~~commitments~~commitments.

96 Annual Report ~~2011 89~~2012

6 Sector performance 6.3 - ~~6.3.1~~6.3

6.3 Lighting

“~~Philips Lighting~~The market for lighting is sizeable, attractive and growing. In the ~~global leader in~~transition towards energy-efficient ~~customer- centric~~and LED-based lighting solutions, ~~driven by strong innovation. In a rapidly evolving but exciting marketplace full of opportunities,~~ we ~~will transform~~are accelerating our ~~business model and boost growth, profitability and return on invested capital by implementing the~~ Accelerate! ~~transformation, which is targeted at improving~~program to excel in customer ~~intimacy,~~satisfaction, time-to-market, and end-to-end processes. In 2012 we made a significant step forward on our path to value. Our Accelerate! transformation and the turnaround of two of our business ~~excellence.~~groups helped drive improved profitability. Going forward, Philips Lighting will continue to strengthen its global leadership position through meaningful innovations that enhance people’s lives.”~~Frans van Houten~~Eric Rondolat,~~, acting~~ CEO Philips Lighting

~~Lighting~~The lighting industry is undergoing a radical ~~transformation~~transformation.

~~Important global trends underpinning strategy~~The lighting market is large and attractive, driven by major trends.

��

~~Winning in LED~~Strategy based on four priorities to maximize growth, improve performance and expand leadership.

Annual Report 2012 97

6 Sector performance 6.3.1 - 6.3.3

6.3.1 Lighting business landscape

We are witnessing a number of trends and transitions that will affect the lighting industry in the years to come and change the way people use and experience light.

~~The first~~We serve a large and attractive market that is driven by the ~~move from traditional vacuum-based technologies~~need for more light, energy-efficient lighting, and digital lighting. Over half the world’s population currently lives in urban areas: a figure that is expected to ~~solid-state lighting technology (LEDs). LED lighting is~~rise to over 70% by 2050. That means 3 billion extra city dwellers. These people will all need light. In addition, the ~~most profound technological transformation~~world needs more energy-efficient light in ~~lighting since~~ the ~~invention~~face of electric light well over a century ago. Offering great opportunities in terms of color, dynamics, miniaturization, architectural integration and energy efficiency, LED lighting is opening up exciting new possibilities.

~~90 Annual Report 2011~~

~~6 Sector performance 6.3.1 - 6.3.3~~

The second transition is from bulbs and components as the point of value creation, to end-user-driven applications and solutions. Increasingly, these applications and solutions will include lighting controls. We believe that, going forward, a key differentiator among lighting suppliers will be the innovative strength to create systems and solutions that are truly customer-centric, while leveraging global R&D and supply chain scale.

Consumers, businesses and national and municipal authorities are demanding highly adaptable lighting solutions which they can use to customize their indoor and outdoor environments as and when they desire. Flexible and dynamic, our LED lighting solutions allow a much higher degree of customization and provide significantly greater possibilities than solutions based on conventional technologies.

~~The third transition is the global interest in energy efficiency, in response to~~ rising energy prices and ~~increased awareness of~~ climate change. ~~Many countries and regions have introduced legislative measures~~At the same time, the lighting industry is moving from traditional to address energy consumption and the emission of greenhouse gases, which are linked to climate change. Philips will continue to play a significant role in encouraging and enabling the switch to energy-efficientdigital lighting – lighting solutions ~~helping our customers to save on energy costs while making a positive contribution to~~enabled by the ~~environment.~~integration of LED technology, luminaires, lighting controls and software.

Between now and 2015 we expect the value of the global lighting market to grow by 5-7% on a compound annual basis. The majority of the growth will come from LED-based solutions and ~~products~~applications – heading towards a 45% share by ~~2015. As one of the global leaders in LED components, applications~~2015 – and ~~solutions, with a strong global presence across the LED value chain, we believe we are well positioned for the changes at hand.~~from growth geographies.

In ~~2010~~2011 the lighting industry as a whole was recovering from the global economic developments in ~~2009.~~2010. In ~~2011,~~2012, however, this recovery slowed due to widespread downward pressure on GDP, weaker consumer markets in mature geographies, and continued weakness in the construction market. Growth geographies ~~once~~continue to show healthy growth, albeit somewhat at ~~risk of overheating, have slowed to more sustainable growth rates, albeit lower than expected.~~a slower pace.

6.3.2 ~~Simply enhancing~~Enhancing life with light

~~Philips Lighting enhances life with light through innovative lighting solutions.~~ We believe that by focusing on what people really need and leveraging our expertise with a broad range of leading partners, we can create and deliver the most innovative and meaningful solutions on the market.

~~Lighting can do more than just shedding light.~~ Our ~~innovative~~lighting solutions are transforming urban environments, helping to create livable cities ~~through the use of light to enhance~~by enhancing safety, municipal identity and residential well-being. ~~Consumers are increasingly applying lighting to create their own ambience at home as an expression of their lifestyle.~~ Building owners and retailers are recognizing the benefits of energy-efficient lighting in reducing their operational costs. And schools are learning how lighting can improve education and ~~well- being.~~ well-being. At the same time, consumers are increasingly using lighting to create their own ambience at home as an expression of their lifestyle.

We believe that the rise of LED, coupled with our global market leadership, positions us well to continue to deliver on our mission to ~~simply~~ enhance life with light.

6.3.3 About Philips Lighting

Philips Lighting is a global market leader with recognized expertise in the development, manufacturing and application of innovative lighting solutions. We have pioneered many of the key breakthroughs in lighting over the past ~~120~~121 years, laying the basis for our current ~~position.~~strength and ensuring we are well-placed to be a leader in the digital transformation. We aim to further strengthen our position in the digital market through added investment in LED leadership while at the same time capitalizing on our broad portfolio, distribution and brand in conventional lighting (‘managing the golden tail’ – there is a significant opportunity to grow market share and optimize profits in conventional lamps and drivers by flexibly anticipating the slower or faster phase-out of conventional products).

We address people’s lighting needs across a full range of market segments. Indoors, we offer lighting solutions for homes, shops, offices, schools, hotels, factories and hospitals. Outdoors, we offer solutions for roads (street lighting and car lights) and for public spaces, residential areas and sports arenas. In addition, we address the desire for light-inspired experiences through architectural projects. Finally, we offer specific applications of lighting in specialized areas, such as horticulture ~~as well as air~~ and water purification.

Philips Lighting spans the entire lighting value chain – from light sources, luminaires, electronics and controls to full applications and solutions – ~~via~~through the following businesses:

~~Lamps: incandescent, halogen,~~Light Sources & Electronics: LED, eco-halogen, (compact) fluorescent, high-intensity discharge and ~~LED~~incandescent light sources, plus electronic and electromagnetic gear, modules and drivers

Consumer Luminaires: functional, decorative, lifestyle, scene-setting luminaires

Professional ~~Luminaires:~~Lighting Solutions: controls and luminaires for city beautification, road lighting, sports lighting, office lighting, shop/hospitality lighting, industry lighting

~~Lighting Systems & Controls: electronic and electromagnetic gear, controls, modules and drivers~~

Automotive Lighting: car headlights, car signaling, interior

Lumileds: packaged ~~LEDs~~LEDs.

~~Annual Report 2011 91~~

~~6 Sector performance 6.3.3 - 6.3.4~~

~~Total sales by business 2011~~

~~as a %~~

The ~~Lamps~~Light Sources & Electronics business conducts its sales and marketing activities through the professional, OEM and consumer channels, the latter also being used by our Consumer Luminaires business. Professional ~~Luminaires~~Lighting Solutions is organized in a trade business (commodity products) and a project solutions business ~~(project~~

98 Annual Report 2012

6 Sector performance 6.3.3 - 6.3.4

(project luminaires, systems and services). ~~For the latter, the main focus is on specifiers, lighting designers, architects and urban planners.~~

Automotive Lighting is organized in two businesses: OEM and After-market. ~~Lighting Systems & Controls and Special Lighting Applications conduct their sales and marketing through both the OEM and professional channels.~~

The conventional lamps industry is highly consolidated, with GE and Siemens/Osram as key competitors. The LED ~~lamps industry is in its early days, with~~lighting market, on the other hand, features a wide variety of competitors, ~~entering the marketplace.~~ranging from start-ups to multinationals. The luminaires industry is fragmented, with our competition varying per region and per ~~segment. Our Lighting Systems & Controls and Automotive Lighting businesses operate in more consolidated~~ market ~~sectors. In the world of digital lighting, a wide range of new entrants~~segment.

Under normal economic conditions, Lighting’s sales are ~~active in the transitions to LED lighting and to applications and solutions.~~generally not materially affected by seasonality.

Philips Lighting has manufacturing facilities in some 25 countries in all regions of the world, and sales organizations in more than 60 countries. Commercial activities in other countries are handled via ~~dealers~~distributors working with our International Sales organization. Lighting has ~~approximately 53,000~~50,200 employees worldwide.

Regulatory requirements

Lighting is subject to significant regulatory requirements in the markets where it operates. These include the European Union’s Waste from Electrical and Electronic Equipment (WEEE), Restriction of Hazardous Substances (RoHS), Energy-using Products (EuP) and Energy Performance of Buildings (EPBD) directives.

With regard to sourcing, please refer to ~~sub-section 5.3.3, Supply management,~~section 14.5, Supplier indicators, of this report.

Total sales by business 2012

as a %

6.3.4 Progress against targets

The Annual Report ~~2010~~2011 set out a number of key targets for Philips Lighting in ~~2011. In the course~~2012 that are steps towards achieving our Accelerate! mid-term 2013 goals. Our progress is outlined below.

Implement Accelerate! transformation

We are speeding up implementation of the ~~year, reflecting the evolving business reality and the adoption of~~ Accelerate!~~, these were encapsulated in four key “sector acceleration trajectories” designed~~ program. We have adapted our processes to improve ~~profitability~~deliveries in all our geographies. We are taking a granular approach to investment choices through our Business Market Combination (BMC) plans, which are based on local customer insights. We have projects running to increase revenue, expand margins and reduce time-to-market and inventories, and we are aligning our processes in order to better serve our customers. In addition, we are strengthening accountability and simplifying our way of working, leading to cost savings. Driving the ~~path to LED and solutions – and to achieve our mid-term targets. The progress made in addressing these trajectories~~whole transformation is ~~outlined below.~~the deployment of culture transformation programs across all levels of the organization.

Accelerate transformation to LED, applications and solutions

In ~~2011~~2012 we further strengthened our expertise in LED development and application. Our LED-based sales grew by ~~30%~~41% compared to ~~2010,~~2011, representing some ~~16%~~22% of total Lighting sales. Sales growth of LED-based ~~lamps and luminaires~~applications was approximately ~~70%~~58%. To ~~retain~~strengthen our leadership position, we ~~invested in optimizing lamp performance~~established a cost-reduction program for LED lamps and ~~lifecycle, and in expanding~~expanded our portfolio of ~~leading~~ LED solutions in professional, ~~segments such as outdoor, office and retail, and in the~~ automotive and home segments. ~~Our leadership position in LED lamps was underlined by our winning the US Department of Energy’s coveted L Prize for the first 60 W replacement LED lamp.~~

~~Our sales of solutions (luminaires, controls, software and services) grew by 50% in 2011.~~ We continued to invest in growing our solutions ~~business.~~(luminaires, controls, software and services) business, and sales increased by 31% in 2012. We hired new key account managers in nearly all our markets and staffed our Turn-Key Projects & Solutions teams, both on a global and a market level. We launched Lighting Capital – a payment program that enables customers to acquire lighting solutions without an upfront capital investment – and developed several service propositions besides system solutions such as Lumimotion, in which we combine hardware withare creating value through seamless integration of controls and management software in our LED-based solutions.

With the journey from initial idea to ~~act as a smart system. The acquisitions~~marketable product taking only nine months, the development of ~~Optimum~~our hue connected lighting system illustrates how our organization has embraced the journey to accelerate. Effective and ~~Indal will strengthen our solutions business.~~efficient collaboration across multiple disciplines significantly shortened time-to-market for this ground-breaking solution.

Strengthen performance management and execution

We are ~~implementing~~stepping up the pace of Accelerate! ~~program~~ to ~~further gear up~~prepare our organization to take full advantage of ~~the LED- driven~~LED-driven future ~~opportunities in the lighting industry.~~opportunities. We ~~are connecting~~have now connected our business and market teams through our ~~so-called~~ BMC ~~(Business/Market Combination)~~ approach to win customers in key ~~markets, reduce~~markets. Projects are reducing complexity, ~~improve~~improving execution along our end-to-end customer value chain, and ~~increase~~increasing speed to market – all with the aim of driving market leadership, accelerating growth and boosting profitability.

92 Annual Report ~~2011~~2012 99

6 Sector performance 6.3.4 - ~~6.3.6~~6.3.5

Address cost base, ~~and~~ margin management and working capital

In ~~2011,~~2012, as part of our organizational redesign and cost program, we took a fundamental approach to increase the speed and efficiency of our organization. AsWe reduced the number of ~~2012~~Business Groups from six to five. Regional layers have been simplified and regional teams no longer sit between markets and businesses. Significant reductions in overhead functions like IT, Human Resource Management and Finance & Accounting have been implemented. Furthermore, we ~~will merge business groups, take out management layers~~have endeavored to optimize our industrial asset base for maximum efficiency and ~~implement an overhead cost reduction program. Furthermore, in 2011 we accelerated our program to rationalize~~lowest cost. We have reduced our industrial footprint ~~closing eight~~by 40% compared to 2008, with four sites closed and ~~divesting three.~~four divested in 2012.

Our margin performance has been impacted by higher investment levels in R&D and commercial capabilities. Furthermore, margin pressure was driven by higher material prices and in some areas by operational issues. To protect our margins, we ~~optimized~~further improved our product mix and implemented selective price increases, mainly in our conventional lamps and luminaires ~~businesses.~~businesses, and also managed cost aggressively. While we continue to invest in innovation and our go-to market capabilities, we will continue to focus on overhead cost reductions and accelerate the rationalization of our industrial footprint.

Our focus on working capital management inis clearly paying off. Tight management of the ~~fourth quarter has clearly paid off. Inventory levels have been brought down, combined with~~value and quality of inventory led to a ~~significant reduction in overdue receivables. We will continue to focus on these aspects in 2012 and 2013.~~year-on-year improvement of 1.9% of sales.

Deliver on turnaround of Lumileds and Consumer Luminaires

Good progress has been made towards turning around our Lumileds and Consumer Luminaires businesses. Both managed to achieve a return to profitability – excluding restructuring and acquisition-related charges – in Q4 2012. At Lumileds, actions have been taken to improve manufacturing yields and innovation effectiveness. Also, the go-to-market and distribution structure has been expanded and strengthened, resulting in incremental top-line growth. At Consumer Luminaires, successful actions have been taken to improve customer intimacy and our go-to-market strategy. In addition, actions have been taken to improve productivity and to improve the end-to-end supply chain costs. In China and India in particular, we have experienced strong growth with continued expansion of branded Philips Lighting stores and shop-in-shops.

Deliver on EcoVision sustainability commitments

In Western markets, our Consumer Luminaires business has been suffering from adverse economic conditions, compounded in EMEA by poor supply reliability performance. A turnaround program is well under way and covers operational improvements, a reduction of the product portfolio and a re-focused brand portfolio towards two main channels (DIY and Lifestyle & Specialist). The brand program will result in an extended innovative product portfolio under the Philips brand name. In EMEA a comprehensive supply chain program leveraging on the roll-out of SAP resulted in the recovery of appropriate service levels.

~~Though our Lumileds business is making further progress on growing its relative share in general illumination, its sales were negatively influenced by lower sales in the display segments.~~

~~6.3.5 EcoVision~~

~~In 2011~~2012, Philips Lighting invested EUR ~~291~~325 million in Green Innovation, compared to EUR ~~230~~291 million in ~~2010. The~~2011. Major investments have been made in energy-saving technologies such as OLED and lighting controls and in the reduction of regulated substances in our product portfolio.The energy efficiency of our total product portfolio improved from 36 to 38 lm/W, mainly because of the shift to LED lighting. Within the Green Operations 2015 program, we are on track to meet our commitments to reduce Lighting’s environmental footprint. By using renewable energy and implementing energy-saving programs in our major operational sites, we have already reduced our carbon footprint by ~~some~~23%. Currently 78% of our total waste is re-used as a result of recycling.

6.3.5 2012 financial performance


Key data
in millions of euros unless otherwise stated
	2010		2011			2012
Sales		7,552		7,638			8,442
Sales growth
% increase, nominal		15		1			11
% increase, comparable¹⁾		9		6			4
Adjusted IFO¹⁾		863		445			188
as a % of sales		11.4		5.8			2.2
IFO		689		(362	)		(6	)
as a % of sales		9.1		(4.7	)		(0.1	)
Net operating capital (NOC)¹⁾		5,506		4,965			4,635
Cash flows before financing activities¹⁾		590		254			339
Employees (FTEs)		53,888		53,168			50,224

¹⁾	For a reconciliation to the most directly comparable GAAP measures, see chapter 15, Reconciliation of non-GAAP information, of this report

Sales amounted to EUR 8,442 million, a nominal increase of 11% compared to 2011, mainly driven by growth at Light Sources & Electronics and Professional Lighting Solutions, but tempered by a sales decline at Lumileds. Excluding a 5% favorable currency impact and a 2%~~. Green Product~~ impact from portfolio changes, comparable sales increased ~~from 58%~~by 4%.

The year-on-year sales increase was substantially driven by growth geographies, which grew 7% on a comparable basis. As a proportion of total ~~sector~~sales, sales in ~~2010~~growth geographies increased slightly to ~~60%~~41% of total Lighting sales, driven by double-digit growth in China and India, compared to 40% in 2011. ~~Our sustainability drive has been rewarded with~~In mature geographies, sales growth was limited to low single-digits due to lower demand in North America and Western Europe, particularly for Professional Lighting Solutions and Consumer Luminaires.

100 Annual Report 2012

6 Sector performance 6.3.5 - 6.3.5

Sales of LED-based products grew to over 22% of total sales, up from 16% in 2011, driven by Light Sources & Electronics and Professional Lighting Solutions. Sales of energy-efficient Green Products exceeded EUR 5,752 million, or 68% of sector sales.

Adjusted IFO amounted to EUR 188 million, or 2.2% of sales, compared to EUR 445 million, or 5.8% of sales, in 2011. Restructuring and acquisition-related charges amounted to EUR 315 million in 2012, compared to EUR 66 million in 2011. The decrease in Adjusted IFO was mainly attributable to higher restructuring and acquisition-related charges, as well as losses on the ~~prestigious~~sale of industrial assets amounting to EUR 81 million, partly offset by higher sales.

IFO amounted to a loss of EUR 6 million, or negative 0.1% of sales, which included EUR 194 million of amortization charges, mainly related to intangible assets at Professional Lighting Solutions.

Net operating capital decreased by EUR 330 million to EUR 4.6 billion, primarily due to an increase in provisions related to restructuring, lower inventories and currency effects, partly offset by the consolidation of Indal.

Cash flows before financing activities increased from EUR 254 million in 2011 ~~UN Leader~~to EUR 339 million, mainly attributable to lower working capital outflows, partly offset by higher outflows for acquisitions.

Sales per geographic cluster

in millions of Change Award for our visionary leadership in the global switch to innovative lighting solutions that demonstrate sustainable, environmental, economic and social value. We also received Richard Branson’s Carbon War Room Gigaton Award for outstanding business leadership in energy efficiency and eco-design to reduce carbon emissions. And at the high-level UN ‘Momentum for Change’ event during the UN Climate Change Conference (COP17) in Durban, South Africa, we were recognized along with The Climate Group for our solar-driven LED street-lighting project in China’s Guiyang community.euros

~~6.3.6~~ Sales and net operating capital

in billions of euros

IFO and Adjusted IFO¹⁾

in millions of euros

¹⁾	For a reconciliation to the most directly comparable GAAP measures, see chapter 15, Reconciliation of non-GAAP information, of this report

2011 financial performance

Sales amounted to EUR 7,638 million, a nominal increase of 1% compared to 2010, mainly driven by growth in our Professional ~~Luminaires~~Lighting Solutions business, ~~Lighting Systems~~Light Sources & ~~Controls,~~Electronics, as well as ongoing growth of our Fluorescent and LED lamps, but tempered by declining sales at Lumileds and Consumer Luminaires. Excluding a 2% unfavorable currency impact and a 3% unfavorable consolidation effect, comparable sales increased by 6%.

The year-on-year sales increase was substantially driven by growth geographies, which grew over 10% on a comparable basis. Sales in growth geographies increased to over 40% of total Lighting sales, driven by China and India, compared to 38% in 2010. In mature geographies, sales growth was limited to low single digits due to lower demand in North America and Western Europe, particularly for Lumileds and Consumer Luminaires.

Our ~~Lamps~~Light Sources & Electronics business grew strongly compared to 2010, buoyed by demand for high-end lamps in retail and growth geographies. Ongoing softness in the residential construction markets–particularly in mature geographies–meant that sales in our Consumer

Annual Report 2012 101

6 Sector performance 6.3.6 - 6.3.6

Luminaires business slightly declined compared to 2010. Sales of LED-based products grew to over 16% of total sales, up from 13% in 2010, driven by ~~Lamps~~Light Sources & Electronics and Professional ~~Luminaires.~~Lighting Solutions. Sales of energy-efficient Green Products exceeded EUR 4,571 million, or 60% of sector sales.

Adjusted IFO amounted to EUR 445 million, or 5.8% of sales, compared to EUR ~~869~~863 million, or ~~11.5%~~11.4% of sales, in 2010 . Restructuring and acquisition-related charges amounted to EUR 66 million in 2011, compared to EUR 97 million in 2010. The Adjusted IFO decrease of EUR ~~424~~418 million was mainly attributable to lower gross margin, due to raw material increases and higher investments in selling as well as research and development to drive growth.

IFO amounted to a loss of EUR 362 million, or 4.7% of sales, which included EUR 128 million related to the impairment of customer relationships and brand names resulting from the turnaround plan within Consumer Luminaires, and EUR 531 million of goodwill impairment

~~Annual Report 2011 93~~

~~6 Sector performance 6.3.6 - 6.3.6~~

losses related to revised growth and profitability expectations for our Luminaires businesses, which were taken in the second quarter of 2011.

Net operating capital declined by EUR 541 million to EUR 5.0 billion, due to decreases in intangible fixed assets from goodwill and other amortization, partially offset by currency translation.

Cash flows before financing activities declined from EUR 590 million in 2010 to EUR 254 million, reflecting lower cash earnings and additional growth-focused investments in capital expenditures.

Under normal economic conditions, the Lighting business sales are generally not materially affected by seasonality.

Key data
in millions of euros
   2009 2010    2011
Sales
   6,546    7,552       7,638
Sales growth

% increase, nominal
   (11 ) 15       1
% increase, comparable¹⁾
   (13 ) 9       6
Adjusted IFO
   145    869       445
as a % of sales
   2.2    11.5       5.8
IFO¹⁾
   (16 ) 695       (362 )
as a % of sales
   (0.2 ) 9.2       (4.7 )
Net operating capital (NOC)¹⁾
   5,104    5,561       5,020
Cash flows before financing activities¹⁾
   624    590       254
Employees (FTEs)
   51,653    53,888       53,168

¹⁾	~~For a reconciliation to the most directly comparable GAAP measures, see chapter 15, Reconciliation of non-GAAP information, of this report~~

~~Sales per geographic cluster~~

~~in millions of euros~~

~~Sales and net operating capital~~

~~in billions of euros~~

~~IFO and Adjusted IFO~~¹⁾

~~in millions of euros~~

¹⁾	~~For a reconciliation to the most directly comparable GAAP measures, see chapter 15, Reconciliation of non-GAAP information, of this report~~

~~2010 financial performance~~

Sales amounted to EUR 7,552 million, a nominal increase of 15% compared to 2009, driven by a rebound in sales of general and automotive lamps as well as ongoing growth of our Lumileds LED business. Excluding a 6% favorable currency impact and a 1% contribution from acquisitions, comparable sales increased by 9%.

The year-on-year sales increase was substantially driven by comparable sales increases in growth geographies, which grew over 20% on a comparable basis. Growth geographies sales grew to over 38% of total Lighting sales, driven by China, India and Brazil, compared to 34% in 2009. In mature geographies, sales growth was limited to low single-digits due to lower demand in North America and Western Europe, particularly for Professional and Consumer Luminaires.

A rebound in the global automotive market supported solid, double-digit sales growth in this business. Our general Lamps business also grew strongly compared to 2009, buoyed by demand for high-end lamps in retail and growth geographies. Ongoing softness in both the residential and commercial construction markets–

~~94 Annual Report 2011~~

~~6 Sector performance 6.3.7 - 6.3.7~~

~~particularly in mature geographies~~–meant that sales in our Luminaires businesses remained broadly in line with 2009. Sales of LED-based products grew to over 13% of total sales, up from 8% in 2009, driven by Lumileds, Lamps and Professional Luminaires. Sales of energy-efficient Green Products exceeded EUR 4 billion, or 58% of sector sales.

Adjusted IFO amounted to EUR 869 million, or 11.5% of sales, which included EUR 96 million of restructuring and acquisition-related charges. This compared to EUR 247 million of restructuring and acquisition-related charges in 2009. The Adjusted IFO improvement was driven by higher sales, improved gross margin and fixed cost savings from restructuring programs.

~~IFO amounted to EUR 695 million, or 9.2% of sales, which included EUR 174 million of amortization of intangible fixed assets, mainly from Lumileds and Genlyte.~~

~~Net operating capital increased by EUR 457 million to EUR 5.6 billion, due to unfavorable currency translation, higher activity levels and additional LED-related capital expenditures.~~

Cash flows before financing activities declined from EUR 624 million in 2009 to EUR 590 million, reflecting higher cash earnings which were more than offset by higher working capital requirements and additional growth- focused investments in capital expenditures.

~~6.3.7 Strategy and 2012 objectives~~6.3.6 2013 priorities

In ~~2012~~2013 Philips Lighting will continue to progress on the following ~~key trajectories~~imperatives designed to accelerate performance and achieve our ~~mid-term targets:~~goals:

~~Implement Accelerate! transformation~~Lead the technological revolution in Lighting, be the thought-leader in LED, and win the ‘golden tail’ in conventional lighting

~~Accelerate transformation to LED, applications~~Win in the professional market, developing and growing profitable solutions and services

~~Strengthen performance management~~Win in consumer markets and ~~execution~~develop new ways to go to market

~~Address cost base, margin management~~Use Accelerate! as our transformation and ~~working capital~~performance improvement platform throughout the whole organization

~~Deliver on turnaround of Consumer Luminaires and Lumileds~~

~~Deliver~~In addition to these priorities, Philips Lighting will continue to deliver on EcoVision sustainability ~~commitments~~commitments.

102 Annual Report ~~2011 95~~2012

6 Sector performance 6.4 - 6.4

6.4 Innovation, Group ~~Management~~ & Services

~~“In 2011 we streamlined our Research and Innovation Services organization and continued the build-up of innovation capabilities in growth geographies.”~~

“Innovation is absolutely core to what Philips is, and the way it ensures competitive edge and long-term value creation. We’re all about creating value through innovation more quickly, and making sure we earn that return on investment. In 2012 we continued optimizing our innovation portfolio and improved execution. At the same time, we are placing increasing emphasis on initiatives designed to leverage our intellectual property leadership.”Jim Andrew,, Chief ~~Strategy~~Innovation & ~~Innovation~~Strategy Officer

~~Philips’ performance by geographic cluster is based on the following:~~

Growth geographies, including China, India, and Latin America and other markets including Central and Eastern Europe, Russia, Ukraine and Central Asia, the Middle East and Africa, Turkey and ASEAN zone

~~Mature geographies, including Western Europe, North America, Japan, South Korea, Israel, Australia and New Zealand~~

Introduction

Innovation, Group ~~Management~~ & Services comprises the activities of the ~~corporate center,~~Group headquarters, including Philips’ global management and sustainability programs, country and regional management costs, and costs of pension and other postretirement benefit plans, as well as ~~Corporate Technologies, Philips Design, Corporate Investments~~Group Innovation and New Venture Integration. Additionally, the global shared business services for purchasing, finance, human resources, IT, real estate and supply are reported in this sector. ~~As of January 1, 2012, Corporate Technologies, New Venture Integration and Design will be merged to create a new entity within~~

Innovation, Group ~~Management & Services, called Philips Group Innovation.~~

~~Group Management~~ & Services plays an important role in the Accelerate! program, notably by helping to improve the end-to-end value chain. The ~~End to End~~end-to-end approach consists of three core processes: Idea to Market, Market to Order, and Order to Cash. Innovation, Group ~~Management~~ & Services supports Idea to Market in five focal areas: ~~Speed~~Speeding up time to market, Portfolio optimization, Driving breakthrough innovation, Improving innovation competences, and Restoring the image of Philips as an ~~innovation leader.~~

96 Annual Report ~~2011~~2012 103

6 Sector performance ~~6.4.1~~6.4 - 6.4.1

innovation leader. Based on deeper customer insights, enhanced capability and competency building, we are driving value more effectively.

6.4.1 ~~Corporate Technologies~~Philips Group Innovation

~~Corporate Technologies~~Philips Group Innovation (PGI) feeds the innovation pipeline, enabling its business partners – the three Philips operating sectors – to create new business options through new technologies, venturing and intellectual property development, to improve time-to-market efficiency, and to increase innovation effectiveness via focused research and development activities. In addition, ~~Corporate Technologies~~PGI opens up new value spaces beyond current sector scope or focus (Emerging Business Areas, EBAs), manages the EBA-related R&D portfolio, and creates synergy for cross-sector initiatives.

~~Corporate Technologies~~PGI encompasses Philips Research, ~~Incubation,~~Philips Intellectual Property & Standards (IP&S), Philips Innovation Services, the Philips Innovation Campus, Philips Design as well as ~~Philips Innovation Services.~~Emerging Business Areas. In total, ~~Corporate Technologies~~PGI employs ~~about 4,200~~some 4,800 professionals around the globe.

~~Corporate Technologies~~PGI actively participates in ‘Open Innovation’ through relationships with academic and industrial partners, as well as via European and regional projects, in order to improve innovation efficiency and share the related financial exposure. The High Tech Campus in Eindhoven (Netherlands), the Philips Innovation Campus in Bangalore (India), and Research Shanghai (China), are prime examples of environments enabling Open Innovation. In this way, we also seek to ensure proximity of innovation activities to growth geographies.

Philips Research

Philips Research is ~~a key innovation~~the main partner of Philips’ operating sectors for ~~Philips’ business sectors.~~technology-enabled innovation. It ~~has three main roles. Firstly, it~~ creates new technologies and ~~innovations that help to spur~~ the ~~growth of the Philips businesses. Secondly, it develops unique~~related intellectual property (IP), which ~~will enable longer- term~~enables Philips to grow in businesses and markets. Together with the sectors, Philips Research also co-creates innovations and game-changers to strengthen the core businesses as well as to open up new business in adjacencies beyond the core. Research’s innovation pipeline is aligned with our vision and ~~creates standardization opportunities for Philips. Lastly, it prepares~~strategy and inspired by major societal challenges as well as unmet customer needs.

One such challenge is the ~~ground for the creation of game-changers and adjacent businesses~~huge increase in the ~~sectors~~number of patients living with cancer. In the Netherlands, Philips Research and University Medical Center Utrecht have started a pilot clinical study to evaluate a new personalized treatment for breast cancer based on ~~technology-enabled innovation~~a technology called MR-guided High Intensity Focused Ultrasound (MR-HIFU). MR-HIFU has emerged as a technology with the potential to non-invasively destroy tumors by heating them up while they are still inside the body. Magnetic Resonance (MR) imaging provides real-time imaging of soft tissue structures so that the HIFU beam can be accurately focused onto the tumor.

Building on its expertise in ~~strategically aligned application areas.~~LED lighting applications, Philips Research has been testing and validating new LED-based retail lighting concepts, designed to enhance the product appearance of fashion merchandise in shops, at multiple customer locations.

On January 1, ~~2011,~~2012, the front-end innovation competencies of Lighting and the ~~former Applied Technologies~~Healthcare R&D lab in Paris were ~~merged with those of~~integrated into Philips ~~Research. The role~~Research, thereby strengthening cooperation in the early stages of the ~~new Research organization is to co-create and co-develop meaningful innovations, including the relevant IP, for the~~ innovation chain.

Philips businesses’ current and new business areas and key markets. The labs in Shanghai and Bangalore focus on local-for-local innovation, supported by key competencies and technologies from the laboratories elsewhere. Outside-in Open Innovation, leveraging the global network of innovation partners, is an important guiding principle for Research.

In 2011, Philips Research, in cooperation with Eindhoven University of Technology, achieved an important development in MRI-guided local drug delivery for cancer treatment. The joint team demonstrated in pre-clinical studies that an improved local drug uptake in tumors is achieved, and that it can be visualized and measured in real time. These measurements may give an indication at time of delivery if drug uptake in the tumor was sufficient, or if an additional treatment may be needed.

Building upon Philips’ ambient intelligence insights and in- depth understanding of the hospital patient experience, Philips Research opened a Hospital Lab to investigate the effects of healing environments (e.g. lighting, sound, projection) on the treatment and well-being of patients.

Philips applies the concepts of Incubation and Emerging Business Areas to new business creation to create strategic growth opportunities for Philips. In some cases, spin-out or technology licensing is considered. The Philips Healthcare Incubator has introduced Digital Pathology solutions to ease the workload and support decision- making in central and hospital-based pathology departments. Through its Handheld Diagnostic venture, the Healthcare Incubator has set up a number of strategic partnerships to bring unique point-of-care (PoC) diagnostic solutions to the market. The most prominent partnership announced so far is with bioMérieux, on acute cardiac PoC diagnostics. In addition, the Healthcare Incubator manages Philips’ investment/relationship with the healthcare venture capital fund Gilde Healthcare III, in which Philips made an anchor investment.

CityTouch is an activity that started in the Lighting and Cleantech Incubator and has now been launched by Philips Lighting. It is an online intelligent street lighting management system that enables savings of up to 70% in energy use and maintenance costs compared to conventional lighting. Another venture initiated in the Incubator and now being marketed by Philips Lighting is the revolutionary lighting concept of Philips luminous textiles, which bring interior spaces to life with light, texture and dynamic content. Luminous textiles are an easy-fit system that integrates multi-colored LED modules within acoustic textile panels to show dynamic content and soften sound.Intellectual Property & Standards

Philips IP&S proactively pursues the creation of new intellectual property in close co-operation with Philips’ operating sectors and ~~the other departments within Corporate Technologies.~~Philips Group Innovation. IP&S is a leading industrial IP organization providing world-class IP solutions to Philips’ businesses to support their growth, competitiveness and profitability. Philips’ IP portfolio currently consists of

~~Annual Report 2011 97~~

~~6 Sector performance 6.4.1 - 6.4.5~~

around ~~54,000~~59,000 patent rights, ~~39,000~~35,000 trademarks, ~~70,000~~81,000 design rights and ~~4,400~~4,200 domain name registrations. Philips filed approximately ~~1,450~~1,500 patents in ~~2011,~~2012, with a strong focus on the growth areas in health and well-being. IP&S participates in the setting of standards to create new business opportunities for the Healthcare, Consumer Lifestyle and Lighting sectors. A substantial portion of revenue and costs is allocated to the operating sectors. Philips believes its business as a whole is not materially dependent on any particular patent or license, or any particular group of patents and licenses.

Philips Innovation Services

Philips Innovation Services ~~was formed in 2011 from parts of the former Philips Applied Technologies~~supports internal and ~~Philips MiPlaza. Its mission is to accelerate its customers’ innovations~~third-party customers by offering ~~a range of advanced~~ services ~~expertise and high-tech facilities across the whole innovation process: from~~in concept creation support, product, process and equipment development, prototyping and ~~small series~~small-series production, quality and reliability, ~~right through to~~ sustainability, safety and ~~industrial~~health, and industry consulting. ~~It serves Philips and its partners, as well as many non affiliated companies. Situated at the High Tech Campus Eindhoven, Philips~~

Innovation Services is playing an ~~innovation hub~~increasing role in the operating sectors’ digital transformation, supporting ~~Philips’ long-term commitment to Open Innovation.~~the move into internet and network applications/services.

Philips Innovation Campus

Philips Innovation Campus Bangalore (PIC) hosts activities from all three operating sectors, Philips Research, IP&S and IT. Healthcare is the largest R&D organization at PIC, with activities in Imaging Systems and Patient Care &

104 Annual Report 2012

6 Sector performance 6.4.1 - 6.4.2

Clinical Informatics. ~~Lighting started in mid-2010, and PIC is now one of its largest software sites.~~ While PIC originally started ~~in 1996~~ as a software center, it has since developed into a product development center (including mechanical, electronics, and supply chain capabilities). ~~In 2011 several~~Several Healthcare businesses have also located business organizations focusing on growth geographies at PIC.

~~6.4.2 Corporate Investments~~

The last remaining business within Corporate Investments – Assembléon – was a wholly owned subsidiary that develops, assembles, markets and distributes a diverse range of surface-mount technology placement equipment. In 2011 we sold a majority stake in Assembléon to H2 Equity Partners, an independent private equity firm, retaining a 20% stake.

~~6.4.3~~ New Venture Integration

The New Venture Integration group focuses on the integration of newly acquired companies across all sectors.

~~6.4.4~~ Philips Design

Philips Design partners with the Philips businesses, ~~technology groups~~Group Innovation and ~~corporate~~ functions to ensure that our innovations are meaningful and locally relevant, and that the Philips brand experience is preferable and consistent across all its touch-points. ~~To further maximize~~

Philips Design is a global function within the ~~value~~company, comprised of a Group Design team that ~~it brings to Philips~~drives the function and ~~strengthen the~~develops new competences, and fully integrated sector Design teams ensuring close alignment with ~~its innovation partners, Design~~the Philips businesses. The organization is ~~becoming a company function. In 2012 the functional transformation will be completed, with the establishment of fully integrated Design teams within the sectors.~~

~~Philips Design’s creative force is comprised~~made up of designers across various disciplines, as well as psychologists, ergonomists, sociologists and anthropologists – all working together to understand people’s needs and desires and to translate these into relevant solutions and experiences that create value for people and business. Design’s forward-looking exploration projects deliver vital insights for new business development.

Philips Design is widely recognized as a leader in ~~people- centric~~people-centric design. In ~~2011,~~2012, it won 99over 120 key design awards in the areas of product, communication and innovation design.

~~6.4.5~~ Philips Healthcare Incubator

The Philips Healthcare Incubator is a dedicated corporate venturing organization within Philips. Its mission is to identify novel business opportunities based on the unmet needs of patients and their care providers, and to transform these into successful business ventures. It focuses on breakaway solutions to these unmet needs in areas that are of strategic interest to Philips. The ultimate goal is to create breakthrough businesses for Philips in health care.

6.4.2 2012 financial performance


Key data
in millions of euros unless otherwise stated
	2010			2011			2012
Sales		630			474			410
Sales growth
% increase (decrease), nominal		14			(25	)		(14	)
% increase (decrease), comparable¹⁾		14			(11	)		(7	)
Adjusted IFO of:
Group Innovation		(84	)		(51	)		(122	)
IP Royalties		258			198			179
Group and Regional costs		(142	)		(134	)		(154	)
Accelerate! investment		—			(28	)		(128	)
Pensions		100			(23	)		48
Service Units and other		(112	)		(169	)		(494	)

Adjusted IFO¹⁾		20			(207	)		(671	)
IFO		14			(217	)		(679	)
Net operating capital (NOC)¹⁾		(3,399	)		(3,895	)		(4,521	)
Cash flows before financing activities¹⁾		(542	)		(1,295	)		(1,044	)
Employees (FTEs)		11,929			12,474			11,492

¹⁾	For a reconciliation to the most directly comparable GAAP measures, see chapter 15, Reconciliation of non-GAAP information, of this report

In 2012, sales amounted to EUR 410 million, EUR 64 million lower than in 2011, attributable to the divestment of Assembléon in 2011 as well as lower royalty income.

Adjusted IFO in 2012 amounted to a loss of EUR 671 million, compared to a loss of EUR 207 million in 2011. The year-on-year decrease in Adjusted IFO was largely attributable to a EUR 313 million fine issued by the European Commission in relation to the alleged violation of competition rules in the Cathode-Ray Tube (CRT) industry and provisions related to various legal matters totaling EUR 132 million. Restructuring and acquisition-related charges amounted to EUR 56 million in 2012, compared to EUR 23 million in 2011.

Adjusted IFO at Group Innovation was EUR 71 million lower than in 2011, attributable to new innovation and design initiatives, as well as higher investments in new value spaces.

Group & Regional Overhead costs were EUR 20 million higher than in 2011, mainly due to increased costs related to strengthening the market access and growth initiatives.

Accelerate! investments amounted to EUR 128 million in 2012, and include investments in IT infrastructure, internal departments and external consultancy dedicated to the Accelerate! program.

Annual Report 2012 105

6 Sector performance 6.4.2 - 6.4.2

Adjusted IFO at Pensions was EUR 71 million higher than in 2011, mainly due to the effect of lower interest rates. In 2011, Adjusted IFO was positively impacted by a EUR 21 million gain due to a plan change in one of our major plans, while 2012 was positively impacted by a EUR 25 million gain from a change in a medical retiree plan.

Adjusted IFO at Service Units and Other decreased from a loss of EUR 169 million in 2011 to a loss of EUR 494 million. The decrease was largely attributable to the CRT fine of EUR 313 million and provisions related to various legal matters totaling EUR 132 million, partly offset by a gain on the sale of High Tech Campus of EUR 37 million and lower stranded costs from the divestment of our Television business.

Net operating capital decreased to negative EUR 4,521 million, primarily related to an increase in payables and provisions due to legal and environmental matters.

Cash flows before financing activities improved from an outflow of EUR 1,295 million in 2011 to an outflow of EUR 1,044 million, mainly attributable to higher cash inflows from the sale of fixed assets.

2011 financial performance

In 2011, sales were EUR 93156 million lower than in 2010, mainly due to the divestment of Assembléon in the first quarter of ~~2011.~~2011 as well as lower royalty income.

Adjusted IFO in 2011 amounted to a loss of EUR ~~382~~207 million, compared to a ~~loss~~gain of EUR ~~211~~20 million in 2010. The year-on-year decrease in Adjusted IFO was mainly attributable to ~~higher restructuring costs,~~lower royalty income, one-time pension items and investments related to the Accelerate! program.

Adjusted IFO at ~~Corporate Technologies~~Group Innovation was EUR 2333 million higher than in 2010, attributable to ~~higher license revenue~~one-time gains from sales in research and a continuous focus on cost efficiency.

~~Corporate~~Adjusted IFO at IP Royalties was EUR 60 million lower than in 2010, attributable to the impact of one-time settlements on Optical licensing in the first quarter of 2010.

Group & Regional costs were EUR 158 million ~~higher~~lower than in 2010, mainly attributable to ~~higher restructuring charges~~cost-saving programs.

Accelerate! investments amounted to EUR 28 million in 2011, and include investments ~~related~~in IT infrastructure, internal departments and external consultancy dedicated to the Accelerate! ~~program.~~program, our multi-year change and performance initiative.

Adjusted IFO at Pensions was EUR 123 million lower than in 2010, in part due to that year’s EUR 119 million curtailment gain, partly offset by a EUR 21 million gain in 2011, due to a plan change in one of our major plans.

~~98 Annual Report 2011~~

~~6 Sector performance 6.4.5 - 6.4.5~~

Adjusted IFO at Service Units and other decreased from a loss of EUR ~~106~~112 million in 2010 to a loss of EUR ~~162~~169 million. The decrease was largely attributable to legal and environmental provisions related to discount rate changes.

Net operating capital declined to negative EUR ~~3.898~~3.895 billion, attributable to increased pension liabilities, ~~mark- to-market~~mark-to-market changes in the group’s financial hedging instruments, and sales of tangible fixed assets.

Cash flows before financing activities decreased from an outflow of EUR ~~747~~542 million in 2010 to an outflow of EUR ~~1,514~~1,295 million, mainly attributable to higher cash outflows for taxes and pensions, as well as decreased cash inflows from sales of investments.

Key data
in millions of euros
   2009 2010 2011
Sales
   337    359    266
Sales growth

% increase (decrease), nominal
   (31 ) 7    (26 )
% increase (decrease), comparable¹⁾
   (30 ) 6    2
Adjusted IFO Corporate Technologies
   (162 ) (63 ) (40 )
Adjusted IFO Corporate & Regional costs
   (174 ) (142 ) (157 )
Adjusted IFO Pensions
   142    100    (23 )
Adjusted IFO Service Units and other
   (157 ) (106 ) (162 )


Adjusted IFO¹⁾
   (351 ) (211 ) (382 )
IFO
   (353 ) (216 ) (392 )
Net operating capital (NOC)¹⁾
   (1,514 ) (3,429 ) (3,898 )
Cash flows before financing activities¹⁾
   (861 ) (747 ) (1,514 )
Employees (FTEs)
   11,586    11,929    12,474

¹⁾	~~For a reconciliation to the most directly comparable GAAP measures, see chapter 15, Reconciliation of non-GAAP information, of this report~~

~~2010 financial performance~~

~~In 2010, sales were EUR 23 million higher than in 2009, mainly due to higher license revenues and higher sales at Assembléon.~~

Adjusted IFO in 2010 amounted to a loss of EUR 211 million, compared to a loss of EUR 351 million in 2009. The year-on-year improvement in Adjusted IFO was mainly attributable to higher revenue, lower overhead costs and the discontinuation of Molecular Healthcare.

~~Adjusted IFO at Corporate Technologies was EUR 99 million higher than in 2009, attributable to higher license revenue, the discontinuation of Molecular Healthcare and 2009’s asset write-offs.~~

~~Corporate & Regional costs were EUR 32 million lower than in 2009, attributable to lower restructuring charges and continuous focus on cost reduction.~~

Adjusted IFO at Pensions was EUR 42 million lower than in 2009, in part due to that year’s EUR 134 million curtailment gain on retiree medical benefit plans, partly offset by a EUR 119 million gain in 2010, in part due to a change in indexation.

~~Adjusted IFO at Service Units and other improved from a loss of EUR 157 million in 2009 to a loss of EUR~~ 106 ~~million. The improvement was largely driven by lower restructuring charges in our global service units.~~

~~Net operating capital declined to negative EUR 3.4 billion, mainly attributable to lower prepaid pension cost related to the pension plan in the Netherlands, which is no longer recognized as an asset.~~

Cash flows before financing activities improved from an outflow of EUR 885 million in 2009 to an outflow of EUR 658 million, mainly attributable to higher cash earnings and the EUR 485 million of final asbestos payments in 2009. This was partly offset by lower proceeds on the sale of stakes, mainly reflecting the sale of LG Display and Pace Micro Technology in 2009.

Annual Report ~~2011 99~~2012

7 Risk management 7 - 7.1

~~7Risk~~7 Risk management

~~7.1Our~~7.1 Our approach to risk management and business control

The following section presents an overview of Philips’ approach to risk management and business controls and a description of the nature and the extent of its exposure to risks. Philips’ risk management focuses on the following risk categories: Strategic, Operational, Compliance and Financial risks. These categories are further described in section 7.2, Risk categories and factors, of this report. The risk overview highlights the main risks known to Philips, which could hinder it in achieving its strategic and financial business objectives. The risk overview may, however, not include all the risks that may ultimately affect Philips. Some risks not yet known to Philips, or currently believed not to be material, could ultimately have a major impact on Philips’ businesses, objectives, revenues, income, assets, liquidity or capital resources.

All oral and written 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 other information in the Introduction~~ of this report and the overview of risk factors described in section 7.2, Risk categories and factors, of this report.

Our business, financial condition and results of operations could suffer material adverse effects due to certain risks. We have described below the main risks known to Philips and summarized them in four categories: Strategic risks, Operational risks, Compliance risks, and Financial risks.

Risk management forms an integral part of the business planning and review cycle. The company’s risk and control policy is designed to provide reasonable assurance that objectives are met by integrating management control into the daily operations, by ensuring compliance with legal requirements and by safeguarding the integrity of the company’s financial reporting and its related disclosures. It makes management responsible for identifying the critical business risks and for the implementation of ~~fit- for-purpose~~fit-for-purpose risk responses. Philips’ risk management approach is embedded in the areas of corporate governance, Philips Business Control Framework and Philips General Business Principles.

Corporate governance

Corporate governance is the system by which a company is directed and controlled. Philips believes that good corporate governance is a critical factor in achieving business success. Good corporate governance derives from, amongst other things, solid internal controls and high ethical standards.

The quality of Philips’ systems of business controls and the findings of internal and external audits are reported to and discussed by the Audit Committee of the Supervisory Board. Internal auditors monitor the quality of the business controls through risk-based operational audits, inspections of financial reporting controls and compliance audits. Audit committees at corporate level (Group, Finance, Innovation and IT), at Global Market level and at ~~sector~~Sector level (Healthcare, Lighting, Consumer Lifestyle, Innovation, Group ~~Management~~ & Services) meet quarterly to address weaknesses in the business controls infrastructure as reported by internal and external auditors or revealed by self-assessment of management, and to take corrective action where necessary. These audit committees are also involved in determining the desired company-wide internal audit planning as approved by the Audit Committee of the Supervisory Board. An ~~indepth~~in-depth description of Philips’ corporate governance structure can be found in chapter 11, Corporate governance, of this report.

Philips Business Control Framework

The Philips Business Control Framework (BCF), derived from the Committee of Sponsoring Organizations of the Treadway Commission (COSO) framework on internal control, sets the standard for risk management and business control in Philips. The objectives of the BCF are to maintain integrated management control of the company’s operations, in order to ensure the integrity of the financial reporting, as well as compliance with laws and regulations.

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As part of the BCF, Philips has implemented a global standard for internal control over financial reporting (ICS). The ICS, together with Philips’ established accounting procedures, is designed to provide reasonable assurance that assets are safeguarded, that the books and records properly reflect transactions necessary to permit preparation of financial statements, that policies and procedures are carried out by qualified personnel and that published financial statements are properly prepared and do not contain any material misstatements. ICS has been deployed in all main reporting units, where business process owners perform an extensive number of controls, document the results each quarter, and take corrective action where necessary. ICS supports sector and functional management in a quarterly cycle of assessment and monitoring of its control environment. The findings of management’s evaluation are reported to the Executive Committee and the Supervisory Board ~~of Management.~~quarterly.

As part of the Annual Report process, management’s accountability for business controls is enforced through the formal issuance of a Statement on Business Controls and a Letter of Representation by sector and functional management to the ~~Board of Management.~~Executive Committee. Any deficiencies noted in the design and operating effectiveness of controls over financial reporting which were not completely remediated are evaluated at year-end by the ~~Board of Management.~~Executive Committee. The ~~Board of Management’s~~Executive Committee’s report, including its conclusions regarding the effectiveness of internal control over financial reporting, can be found in section 12.1, Management’s report on internal control, of this report.

Philips General Business Principles

The Philips General Business Principles (GBP) govern Philips’ business decisions and actions throughout the world, applying to corporate actions and the behavior of individual employees. They incorporate the fundamental principles within Philips for doing business. The intention of the GBP is to ensure compliance with laws and regulations, as well as with Philips’ norms and values.

The GBP are available in most of the local languages and are an integral part of the labor contracts in virtually all countries where Philips has business activities. Responsibility for compliance with the principles rests primarily with the management of each business. Every country organization and each main production site has a compliance officer. All compliance officers operate under the supervision of the GBP Review Committee. Confirmation of compliance with the GBP is an integral part of the annual Statement on Business Controls that has to be issued by the management of each business unit.

The GBP incorporate a whistleblower policy, standardized complaint reporting and a formal escalation procedure.

The global implementation of the One Philips Ethics hotline seeks to ensure that alleged violations are registered and dealt with consistently within a company-wide system. To drive the practical deployment of the GBP, a set of directives has been published, which are applicable to all employees. There are also separate directives which apply to specific categories of employees (e.g. the Supply Management Code of Ethics and Financial Code of Ethics, refer to www.philips.com/gbp).

In November 2011 an updated version of the GBP Directives and the Philips Whistleblower Policy came into force, reflecting the effect of recent developments in the area of business ethics (UK Bribery Act, Dodd-Frank Act, UN Guiding Principles on Human Rights). To seek to ensure compliance with the highest standards of transparency and accountability by all employees performing important financial functions, the Financial Code of Ethics contains, amongst other things, standards to promote honest and ethical conduct, as well as full, accurate and timely disclosure procedures in order to avoid conflicts of interest. ~~Philips did not grant any waivers of~~

Both the ~~Financial Code of Ethics in 2011.~~

~~2011 saw a further tightening of the checks on compliance with the~~Finance and Supply Management Code of ~~Ethics: Philips employees performing purchasing functions~~Ethics are ~~now obliged to sign,~~signed on an annual basis by the relevant employees, to confirm their awareness of and compliance with, ~~this code.~~the respective codes.

In ~~order to seek to ensure 100% management commitment to the GBP,~~2012 a global internal communications program was launched in support of the roll out of the updated version of the GBP Directives and the Philips Whistleblower Policy, reflecting the effect of recent developments in the area of business ethics (UK Bribery Act, Dodd-Frank Act, UN Guiding Principles on Human Rights). This communication program, addressing the 5,000 highest-ranking employees, was developed to support local management in their communications about the updated GBP Directives, thereby ensuring a consistent “tone at the top”. Moreover, GBP dilemma training was provided for Philips Executives, while the 5,000 highest-ranking ~~managers~~employees were enrolled on a dedicated GBP e-training course. The GBP dilemma training tool has been made available to all GBP Compliance Officers in support of local training activities.

The GBP self-assessment process is fully embedded in ~~the Philips ICS tool, a~~an automated workflow application (ICS) supporting ~~sector/ function~~Sector, Market and functional management in monitoring internal controls. Management of reporting ~~units~~entities are required to answer these questions before year-end and report their ~~findings via a dedicated control.~~findings. Embedding GBP self-assessments in ICS seeks to ensure that GBP compliance is now part of ~~sector/function~~Sector, Market and functional management’s quarterly ICS/SOx (Sarbanes-Oxley) monitoring process, and that

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GBP non-compliance issues, if significant, are reported to the Board of Management/Executive Committee via the Quarterly Certification Statement process.

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In order to support management in executing the mandatory risk analysis to identify the major GBP risk areas and issues for their activities, a GBP risk-assessment tool was developed and included in all ICS self-assessment questionnaires.

In the course of ~~2011~~2012 significant progress was made with the roll-out of dedicated anti-corruption programs targeted at our dealers, agents and distributors:

Implementation of a harmonized Due Diligence Process (DDP) across ~~businesses~~Sectors and ~~regions,~~Markets, supported by a dedicated global DDP program office, with specific focus on selected geographies such as Latin America, Eastern Europe, Asia and China

Ongoing alignment between ~~sectors~~Sectors on DDP execution through a One Philips contract management system

Continuous training to promote an understanding – among all relevant stakeholders – of the One Philips DDP for selecting distributors and agents

For further details, please refer to the General Business Principles paragraph in chapter 14, Sustainability statements, of this report.

Financial Code of Ethics

The Company recognizes that its businesses have responsibilities within the communities in which they operate. The Company has a Financial Code of Ethics which applies to the CEO (the principal executive officer) and CFO (the principal financial and principal accounting officer), and to the heads of the Corporate Control, Corporate Treasury, Corporate Fiscal and Corporate Internal Audit departments of the Company. The Company has published its Financial Code of Ethics within the investor section of its website located at www.philips.com. No changes have been made to the Code of Ethics since its adoption and no waivers have been granted therefrom to the officers mentioned above in ~~2011.~~2012.

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~~7.2Risk~~7.2 Risk categories and factors

Taking risks is an inherent part of entrepreneurial behavior. A structured risk management process ~~encourages~~allows management to take risks in a controlled manner. In order to provide a comprehensive view of Philips’ business activities, risks and opportunities are identified in a structured way combining elements of a top-down and bottom-up approach. Risks are reported on a regular basis as part of the ‘Business Performance Management’ process. All relevant risks and opportunities are prioritized in terms of impact and likelihood, considering quantitative and/or qualitative aspects. The bottom-up identification and prioritization process is supported by workshops with the respective management at Sector, Market and Corporate Function level. The top-down element ~~ensures that~~allows potential new risks and opportunities ~~are~~to be discussed at management level and ~~are~~ included in the subsequent reporting process, if found to be applicable. Reported risks and opportunities are analyzed for potential cumulative effects and are aggregated at Sector, ~~Cross-Sector/Region~~Market and Corporate level. Philips has a structured risk management process to address different risk categories: Strategic, Operational, Compliance and Financial risks.

Strategic risks and opportunities may affect Philips’ strategic ambitions. Operational risks include adverse unexpected developments resulting from internal processes, people and systems, or from external events that are linked to the actual running of each business (examples are solution and product creation, and supply chain management). Compliance risks cover unanticipated failures to implement, or comply with, appropriate laws, regulations, policies and procedures. Within the area of Financial risks, Philips identifies risks related to Treasury, Accounting and reporting, Pensions and Tax. Philips does not classify these risk categories in order of importance.

Philips describes the risk factors within each risk category in order of Philips’ current view of expected significance, to give stakeholders an insight into which risks and opportunities it considers more prominent than others at present. The risk overview highlights the main risks and opportunities known to Philips, which could hinder it in achieving its strategic and financial business objectives. The risk overview may, however, not include all the risks that may ultimately affect Philips. Describing risk factors in their order of expected significance within each risk category does not mean that a lower listed risk factor may not have a material and adverse impact on Philips’ business, strategic objectives, revenues, income, assets, liquidity, capital resources or achievement of Philips’ ~~targets 2013.~~Accelerate! mid-term 2013 goals. Furthermore, a risk factor described after other risk factors may ultimately prove to have more significant adverse consequences than those other risk factors. Over time Philips may change its view as to the relative significance of each risk factor. ~~Philips does not classify the risk categories themselves in order of importance.~~

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~~7.3Strategic~~7.3 Strategic risks

As Philips’ business is global, its operations are exposed to economic and political developments in countries across the world that could adversely impact its revenues and income.

Philips’ business environment is influenced by conditions in the domestic and global economies. ~~Although~~Continued concerns about the macroeconomic environment ~~showed further overall improvement in the first half of 2011, the development of certain economic indicators as well as the recent turbulences in the~~has shown its impact on global financial markets ~~in the second half of 2011, primarily as a result of the ongoing sovereign debt crisis in~~during 2012. It is clear that the Eurozone ~~still indicate a highly volatile macroeconomic environment. Future macroeconomic development is dependent upon the evolution of a number of global and local factors such as the~~ crisis ~~in the credit markets, economic crises arising from sovereign debt overruns,~~ and the ~~related government budget consolidation and monetary policy measures, including~~fiscal problems in the US ~~Italy, Greece~~are still far from being resolved and ~~other European countries. As a result,~~political stability and international cooperation remain major drivers to make further progress. The current macroeconomic situation and the economic policies in developed economies continue to point towards reduced levels of capital expenditures ~~declining~~in general, continued pressure on consumer and business confidence and increasing unemployment in certain countries, fluctuating commodity prices, bankruptcies, natural disasters, political crises and other challenges affecting the speed of sustainable macroeconomic growth, may lead to lower demand and more challenging market environments across our sectors.countries. Political developments, such as healthcare reforms in various countries (e.g. the US Healthcare Reform) may impose additional uncertainties by redistributing sector spending, changing ~~reinbursement~~reimbursement models and fiscal changes.

Numerous other factors, such as the fluctuation of energy and raw material prices, as well as global political conflicts in North Africa, the Middle East and other regions, could continue to impact macroeconomic factors and the international capital and credit markets. Economic and political uncertainty may have a material adverse impact on Philips’ financial condition or results of operations and can also make it more difficult for Philips to budget and forecast accurately. Philips may encounter difficulty in planning and managing operations due to unfavorable political factors, including unexpected legal or regulatory changes such as foreign exchange import or export controls, increased healthcare regulation, nationalization of assets or restrictions on the repatriation of returns from foreign investments and the lack of adequate infrastructure. Given that growth geographies are becoming increasingly important in Philips’ operations, the above-mentioned risks are also expected to grow and could have ana material adverse ~~impact~~effect on Philips’ financial condition and operating results.

Philips may be unable to adapt swiftly to changes in industry or market circumstances, which could have a material adverse impact on its financial condition and results.

Fundamental shifts in the industry, like the transition from traditional lighting to LED lighting, may drastically change the business environment. If Philips is unable to recognize these changes in good time, is too inflexible to rapidly adjust its business models, or if circumstances arise, such as pricing actions by competitors, then could have a material adverse effect on Philips’ growth ambitions financial condition and operating ~~results could be affected materially.~~result.

~~Acquisitions could expose Philips to integration risks and challenge management in continuing to reduce the complexity of the company.~~

~~Philips has recently completed acquisitions, and may continue to do so~~Philips’ overall performance in the ~~future, exposing~~coming years is dependent on realizing its growth ambitions in growth geographies.

Growth geographies are becoming increasingly important in the global market. In addition, Asia is an important production, sourcing and design center for Philips. Philips faces strong competition to ~~integration risks~~attract the best talent in ~~areas such~~tight labor markets and intense competition from local companies as ~~sales~~well as other global players for market share in growth geographies. Philips needs to maintain and ~~service force integration, logistics, regulatory compliance, information technology~~grow its position in growth geographies, invest in local talents, understand developments in end-user preferences and ~~finance. Integration difficulties~~localize the portfolio in order to stay competitive. If Philips fails to achieve this, then could have a material adverse effect on growth ambitions financial condition and complexity may adversely impact the realization of an increased contribution from acquisitions. Philips may incur significant acquisition, administrative and other costs in connection with these transactions, including costs related to the integration of acquired businesses.

Furthermore, organizational simplification and resulting cost savings may be difficult to achieve. Acquisitions may also lead to a substantial increase in long-lived assets, including goodwill. Write-downs of these assets due to unforeseen business developments may materially adversely affect Philips’ earnings, particularly in Healthcare and Lighting which have significant amounts of goodwill (see also note 9, Goodwill).operating result.

Philips may not control joint ventures or associated companies in which it invests, which could limit the ability of Philips to identify and manage risks.

Philips has invested or will invest in joint ventures or associated companies in which Philips will have a non-controlling ~~interest.~~interest (e.g. TP Vision). In these cases , Philips has limited influence over, and limited or no control of, the governance, performance and cost of operations of joint ventures or associated companies. Some of these joint ventures or associated companies may represent significant investments. The joint ventures and associated companies that Philips does not control may make business, financial or investment decisions contrary to Philips’ interests or decisions different from those which

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Philips itself may have made. Additionally, Philips partners or members of a joint venture or associated company may not be able to meet their financial or other obligations, which could expose Philips to additional financial or other obligations, as well as ~~adversely~~a material adverse affect on the value of its investments in those entities or potentially subject Philips to additional claims.

Acquisitions could expose Philips to integration risks and challenge management in continuing to reduce the complexity of the company.

Philips acquisitions may continue to expose Philips in the future to integration risks in areas such as sales and service force integration, logistics, regulatory compliance, information technology and finance. Integration difficulties and complexity may adversely impact the realization of an increased contribution from acquisitions.

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Philips may incur significant acquisition, administrative and other costs in connection with these transactions, including costs related to the integration of acquired businesses.

Furthermore, organizational simplification and resulting cost savings may be difficult to achieve. Acquisitions may also lead to a substantial increase in long-lived assets, including goodwill. Write-downs of these assets due to unforeseen business developments may have a material adverse affect on Philips’ earnings, particularly in Healthcare and Lighting which have significant amounts of goodwill (see also note 9, Goodwill).

Philips’ inability to secure and retain intellectual property rights for products, whilst maintaining overall competitiveness, could have a material adverse effect on its results.

Philips is dependent on its ability to obtain and retain licenses and other intellectual property (IP) rights covering its products and its design and manufacturing processes. The IP portfolio is the result of an extensive patenting process that could be influenced by a number of factors, including innovation. The value of the IP portfolio is dependent on the successful promotion and market acceptance of standards developed or co-developed by Philips. This is particularly applicable to Consumer Lifestyle where third-party licenses are important and a loss or impairment could ~~adversely~~have a material adverse impact on Philips’ financial condition and operating results.

~~Philips’ ongoing investments to raise its brand preference could have less impact than anticipated.~~7.4 Operational risks

Philips has made large investments in the reshaping of the Group into a more market-driven company focusing on delivering advanced and easy-to-use products and easy relationships with Philips for its customers. If Philips failsFailure to deliver on ~~its brand promise, its growth opportunities~~the objectives of the transformation programs.

In 2011 Philips has started a very extensive transformation program (Accelerate!) to unlock Philips’ full potential. Accelerate! spans a time period of several years. Failure to achieve the objectives of the transformation programs may ~~be hampered, which could~~ have a material adverse effect on ~~Philips’ revenue~~the mid and ~~income.~~

~~Philips’ overall performance in the coming years is dependent on realizing its growth ambitions in growth geographies.~~

~~7.4 Operational risks~~targets.

Failure to achieve improvements in Philips’ solution and product creation process and/or increased speed in innovation-to-market could hamper Philips’ profitable growth ambitions.

Further improvements in Philips’ solution and product creation process, ensuring timely delivery of new solutions and products at lower cost and upgrading of customer service levels to create sustainable competitive advantages, are important in realizing Philips’ profitable growth ambitions. The emergence of new low-cost competitors, particularly in Asia, further underlines the importance of improvements in the product creation process. The success of new solution and product creation, however, depends on a number of factors, including timely and successful completion of development efforts, market acceptance, Philips’ ability to manage the risks associated with new products and production ramp-up issues, the availability of products in the right quantities and at appropriate costs to meet anticipated demand and the risk that new products and services may have quality or other defects in the early stages of introduction. Accordingly, Philips cannot determine in advance the ultimate effect that new solutions and product creations will have on its financial condition and operating results. If Philips fails to accelerate its innovation-to-market processes and fails to ensure that end-user insights are fully captured and translated into solution and product creations that improve product mix and consequently contribution, it may face an erosion of its market share and competitiveness, which could have a material adverse affect on its financial condition and operating results.

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If Philips is unable to ensure effective supply chain management, e.g. facing an interruption of its supply chain, including the inability of third parties to deliver parts, components and services on time, and if it is subject to rising raw material prices, it may be unable to sustain its competitiveness in its markets.

Philips is continuing the process of creating a leaner supply base with fewer suppliers, while maintaining dual sourcing strategies where possible. This strategy very much requires close cooperation with suppliers to enhance, amongst other things, time to market and quality. In addition, Philips is continuing its initiatives to reduce assets through outsourcing. These processes may result in increased dependency. Although Philips works closely with its suppliers to avoid supply-related problems, there can be no assurance that it will not encounter supply problems in the future or that it will be able to replace a

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supplier that is not able to meet its demand. Shortages or delays could materially harm its business. ~~Philips maintains a regular review of its strategic and critical suppliers to assess financial stability.~~

Most of Philips’ activities are conducted outside of the Netherlands, and international operations bring challenges. For example, production and procurement of products and parts in Asian countries are increasing, and this creates a risk that production and shipping of products and parts could be interrupted by a natural disaster, such as occurred in Japan in 2011. A general shortage of materials, components or subcomponents as a result of natural disasters also bears the risk of unforeseeable fluctuations in prices and demand, which could have a material adverse affect on its financial condition and operating results.

Sectors purchase raw materials including so-called rare earth metals, copper, steel, aluminum and oil, which exposes them to fluctuations in energy and raw material prices. In recent times, commodities have been subject to volatile markets, and such volatility is expected to continue. If we are not able to compensate for our increased costs or pass them on to customers, price increases could have a material adverse impact on Philips’ results. In contrast, in times of falling commodity prices, Philips may not fully profit from such price decreases as Philips attempts to reduce the risk of rising commodity prices by several means, such as long-term contracting or physical and financial hedging. In addition to the price pressure that Philips may face from our customers expecting to benefit from falling commodity prices or adverse market conditions, this could also adversely affect its financial condition and operating results.

Diversity in information technology (IT) could result in ineffective or inefficient business management. IT outsourcing and off-shoring strategies could result in complexities in service delivery and contract management. Furthermore, we observe a global increase in IT security threats and higher levels of professionalism in computer crime, posing a risk to the confidentiality, availability and integrity of data and information.

Philips is engaged in a continuous drive to create a more open, standardized and consequently, more cost-effective IT landscape. This is leading to an approach involving further outsourcing, off-shoring, commoditization and ongoing reduction in the number of IT systems. This could introduce additional 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. The global increase in security threats and higher levels of professionalism in computer crime have increased the importance of effective IT security measures, including proper identity management processes to protect against unauthorized systems access. Nevertheless, Philips’ systems, networks, products, solutions and services remain potentially vulnerable to attacks, which could potentially lead to the leakage of confidential information, improper use of its systems and networks or defective products, which could in turn materially adversely affect Philips’ financial condition and operating results. In recent years, the risks that we and other companies face from cyber attacks have increased significantly. The objectives of these cyber attacks vary widely and may include, among things, disruption of operations including provision of services to customers or theft of intellectual property or other sensitive information belonging to us or other business partners. Successful cyber attacks may result in substantial costs and other negative consequences, which may include, but are not limited to, lost revenues, reputational damage, remediation costs, and other liabilities to customers and partners. Furthermore, enhanced protection measures can involve significant costs. Although we have experienced cyber attacks but to date have not incurred any significant damage as a result, there can be no assurance that in the future Philips will be as successful in avoiding damages from cyber attacks. Additionally, the integration of new companies and successful outsourcing of business processes are highly dependent on secure and well-controlled IT systems.

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Due to the fact that Philips is dependent on its personnel for leadership and specialized skills, the loss of its ability to attract and retain such personnel would have an adverse effect on its business.

The attraction and retention of talented employees in sales and marketing, research and development, finance and general management, as well as of highly specialized technical personnel, especially in transferring technologies to low-cost countries, is critical to Philips’ success. This is particularly valid in times of economic recovery. The loss of specialized skills could also result in business interruptions. There can be no assurance that Philips will continue to be successful in attracting and retaining all the highly qualified employees and key personnel needed in the future.

Philips is engaged in a continuous drive to create a more open, standardized and consequently, more cost-effective IT landscape. This is leading to an approach involving further outsourcing, off-shoring, commoditization and ongoing reduction in the number of IT systems. The global increase in security threats and higher levels of professionalism in computer crime have raised the company’s awareness of the importance of effective IT security measures, including proper identity management processes to protect against unauthorized systems access. Nevertheless, Philips’ systems, networks, products, solutions and services remain potentially vulnerable to attacks, which could potentially lead to the leakage of confidential information, improper use of its systems and networks or defective products, which could in turn adversely affect Philips’financial condition and operating results. In recent years, the risks that we and other companies face from cyber attacks have increased significantly. The objectives of these cyber attacks vary widely and may include, among things, disruption of operations including provision of services to customers or theft of intellectual property or other sensitive information belonging to us or other business partners. Successful cyber attacks may result in substantial costs and other negative consequences, which may include, but are not limited to, lost revenues, reputational damage, remediation costs, and other liabilities to customers and partners. Furthermore, enhanced protection measures can involve significant costs. We have experienced cyber attacks but to date have not incurred any significant damage as a result. However, there can be no assurance that in the future Philips will be as successful in avoiding damages from cyber attacks. Additionally, the integration of new companies and successful outsourcing of business processes are highly dependent on secure and well-controlled IT systems.

Warranty and product liability claims against Philips could cause Philips to incur significant costs and affect Philips’ results as well as its reputation and relationships with key customers.

Philips is from time to time subject to warranty and product liability claims with regard to product performance and effects. Philips could incur product liability losses as a result of repair and replacement costs in response to customer complaints or in connection with

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the resolution of contemplated or actual legal proceedings relating to such claims. In addition to potential losses arising from claims and related legal proceedings, product liability claims could affect Philips’ reputation and its relationships with key customers (both customers for end products and customers that use Philips’ products in their production process). As a result, product liability claims could materially impact Philips’ financial condition and operating results.

Any damage to Philips’ reputation could have an adverse effect on its businesses.

Philips is exposed to developments which could affect its reputation. Such developments could be of an environmental or social nature, or connected to the behavior of individual employees or suppliers and could relate to adherence to regulations related to labor, health and safety, environmental and chemical management. Reputational damage could materially impact Philips’ financial condition and operating results.

7.5 Compliance risks

Legal proceedings covering a range of matters are pending in various jurisdictions against Philips and its current and former group companies. Due to the uncertainty inherent in legal proceedings, it is difficult to predict the final outcome.

Philips, including a certain number of its current and former group companies, is involved in legal proceedings relating to such matters as competition issues, commercial transactions, product liability, participations and environmental pollution. Since the ultimate outcome of asserted claims and proceedings, or the impact of any claims that may be asserted in the future, cannot be predicted with certainty, Philips’ financial position and results of operations could be affected materially by adverse outcomes.

Please refer to note 25, Contingent liabilities, for additional disclosure relating to specific legal proceedings.

Philips is exposed to governmental investigations and legal proceedings with regard to increased scrutiny of possible anti-competitive market practices.

Philips is facing increased scrutiny by national and European authorities of possible anti-competitive market practices, especially in product segments where Philips has significant market shares. For example, Philips and certain of its (former) affiliates are involved in investigations by competition law authorities in several jurisdictions into possible anti-competitive activities in the Cathode-Ray Tubes (CRT) industry and are engaged in litigation in this respect. Philips’ financial position and results could be materially affected by an adverse final outcome of these investigations and litigation, as well as any potential claims relating to this matter. Furthermore, increased scrutiny may hamper planned growth opportunities provided by potential acquisitions (see also note 25, Contingent liabilities).

Philips’ global presence exposes the company to regional and local regulatory rules which may interfere with the realization of business opportunities and investments in the countries in which Philips operates.

Philips has established subsidiaries in over 80 countries. These subsidiaries are exposed to changes in governmental regulations and unfavorable political developments, which may limit the realization of business opportunities or impair Philips’ local investments. Philips’ increased focus on the healthcare sector increases its exposure to highly regulated markets, where obtaining clearances or approvals for new products is of great

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importance, and the dependency on the funding available for healthcare systems. In addition, changes in reimbursement policies may affect spending on healthcare.

Philips is exposed to non-compliance with General Business Principles.

Philips’ attempts to realize its growth targets could expose it to the risk of non-compliance with the Philips General Business Principles, in particular anti-bribery provisions. This risk is heightened in growth geographies as corporate governance systems, including information structures and the monitoring of ethical standards, are less developed in growth geographies compared to mature geographies. Examples include commission payments to third parties, remuneration payments to agents, distributors, commissioners and the like, ~~(‘Agents’),~~ and the acceptance of gifts, which may be considered in some markets to be normal local business practice. (See also note 25, Contingent liabilities.)

Defective internal controls would adversely affect our financial reporting and management process.

The reliability of reporting is important in ensuring that management decisions for steering the businesses and managing both top-line and bottom-line growth are based on top-quality data. Flaws in internal control systems could adversely affect the financial position and results and hamper expected growth.

The correctness of disclosures provides investors and other market professionals with significant information for a better understanding of Philips’ businesses. Imperfections or lack of clarity in the disclosures could create market uncertainty regarding the reliability of the data presented and could have a negative impact on the Philips share price.

The reliability of revenue and expenditure data is key for steering the business and for managing top-line and bottom-line growth. The long lifecycle of healthcare sales, from order acceptance to accepted installation, together with the complexity of the accounting rules for when revenue can be recognized in the accounts, presents a challenge in terms of ensuring there is consistency of application of the accounting rules throughout Philips Healthcare’s global business.

Compliance procedures have been adopted by management to ensure that the use of resources is consistent with laws, regulations and policies, and that resources are safeguarded against waste, loss and misuse.

~~Ineffective compliance procedures relating to the use of resources could have an adverse effect on the financial condition and operating results.~~

Philips is exposed to non-compliance with data privacy and product safety laws.

Philips’ brand image and reputation would be adversely impacted by non-compliance with the various (patient) data protection and (medical) product security laws. In particular, Philips Healthcare is subject to various data protection and safety laws. Privacy and product safety and security issues may arise, especially with respect to remote access or monitoring of patient data or loss of data on our customers’ systems, although Philips Healthcare contractually limits liability, where permitted.

Philips operates in a highly regulated product safety and quality environment. Philips’ products are subject to regulation by various government agencies, including the FDA (US) and comparable foreign agencies. Obtaining their approval is costly and time consuming, but a prerequisite for market introduction. A delay or inability to obtain the necessary regulatory approvals for new products could have a material adverse effect on business. The risk exists that product safety incidents or user concerns could trigger FDA business reviews which, if failed, could lead to business interruption which in turn could adversely affect Philips’ financial condition and operating results.

~~108~~ Annual Report ~~2011~~2012 115

7 Risk management 7.6 - 7.6

~~7.6Financial~~7.6 Financial risks

Philips is exposed to a variety of treasury risks including liquidity risk, currency risk, interest rate risk, commodity price risk, credit risk, country risk and other insurable risk.

Negative developments impacting the global liquidity markets could affect the ability of Philips to raise or ~~re-finance~~refinance debt in the capital markets or could lead to significant increases in the cost of such borrowing in the future. If the ~~market~~markets expect a downgrade or downgrades by the rating agencies or if such a downgrade has actually taken place, it could increase ~~our~~the cost of borrowing, reduce our potential investor base and adversely affect our business.

Philips is exposed to fluctuations in exchange rates, especially between the US dollar and the euro. A high percentage of its business volume is conducted in the US but based on exports from Europe, whilst, a considerable amount of US dollar—denominated imports is also sold in Europe. A weakening of the US dollar versus the euro would have an adverse effect on reported earnings of the company. In addition, Philips is exposed to ~~currency effects involving~~ the fluctuation in exchange rates of other currencies such as the Japanese yen and currencies of growth geographies such as China, India and Brazil.

The credit risk of financial and non-financial counterparties with outstanding payment obligations creates exposures for Philips, ~~is also exposed to interest rate risk,~~ particularly in relation to ~~its long-term debt position; this risk~~accounts receivable with customers and liquid assets and fair values of derivatives and insurance receivables contracts with financial counterparties. A default by counterparties in such transactions can ~~take the form of either fair value or cash flow risk. Failure to effectively hedge this risk can impact~~have a material adverse effect on Philips’ financial condition and operating results.

Philips’ supply chain is ~~also~~ exposed to fluctuations in energy and raw material prices. ~~In recent times, commodities~~Commodities such as oil ~~have been~~are subject to volatile markets and significant price increases from time to time. If Philips is not able to compensate for, or pass on, its increased costs to customers, such price increases could have an adverse impact on its financial condition and operating results.

~~The credit~~Philips is exposed to interest rate risk, ~~of financial and non-financial counterparties with outstanding payment obligations creates exposure for Philips,~~ particularly in relation to ~~accounts receivable and liquid assets and~~its long-term debt position; this risk can take the form of either fair ~~values of derivatives and insurance contracts with financial counterparties. A default by counterparties in such transactions~~value or cash flow risk. Failure to effectively hedge this risk can ~~have a material adverse effect on~~impact Philips’ financial condition and operating results.

For further analysis, please refer to note 34, Details of treasury risks.

~~Corporate Control, together~~Philips is exposed to a number of different fiscal uncertainties which could have a significant impact on local tax results.

Philips is exposed to a number of different tax uncertainties which could result in double taxation, penalties and interest payments. These include transfer pricing uncertainties on internal cross-border deliveries of goods and services, tax uncertainties related to acquisitions and divestments, tax uncertainties related to the use of tax credits and permanent establishments, tax uncertainties due to losses carried forward and tax credits carried forward and potential changes in tax law that could result in higher tax expense and payments. Those uncertainties may have a significant impact on local tax, results which in turn could adversely affect Philips’ financial condition and operating results.

The value of the losses carried forward is subject to having sufficient taxable income available within the loss-carried-forward period, but also to having sufficient taxable income within the foreseeable future in the case of losses carried forward with ~~Sector~~an indefinite carry-forward period. The ultimate realization of the Company’s deferred tax assets, including tax losses and ~~Functional~~credits carried forward, is dependent upon the generation of future taxable income in the countries where the temporary differences, unused tax losses and unused tax credits were incurred and during the periods in which the deferred tax assets become deductible. Additionally, in certain instances, realization of such deferred tax assets is dependent upon the successful execution of tax planning strategies. Accordingly, there can be no absolute assurance that all (net) tax losses and credits carried forward will be realized.

For further details, please refer to the fiscal risks paragraph in note 3, Income taxes.

Philips has defined-benefit pension plans in a number of countries. The funded status and the cost of maintaining these plans are influenced by movements in financial market and demographic developments, creating volatility in Philips’ financials.

The majority of employees in Europe and North America are covered by defined-benefit pension plans. The accounting for defined-benefit pension plans requires management ~~performs an assessment~~to make estimates on discount rates, inflation, longetivity and expected rates of compensation. Changes in these assumptions can have a significant impact on the projected benefit obligations and net periodic pension costs. A negative performance of the financial

116 Annual Report 2012

7 Risk management 7.6 - 7.6

markets could have a material impact on cash funding requirements and net periodic pension costs and also affect the value of certain financial assets and liabilities of the company.

For further details, please see note 29, Pensions and other postretirement benefits.

Philips is exposed to a number of reporting ~~risks at least annually.~~risks.

A risk rating is assigned for each risk identified, based on the likelihood of occurrence and the potential impact of the risk on the financial statements and related disclosures. In determining the probability that a risk will result in a misstatement of a more than inconsequential amount or material nature, the following factors are considered to be critical: complexity of the associated accounting activity or transaction process, history of accounting and reporting errors, likelihood of significant (contingent) liabilities arising from activities, exposure to losses, existence of a related party transaction, volume of activity and homogeneity of the individual transactions processed and changes to the prior period in accounting characteristics compared to the previous period.

Important critical reporting risk areas identified within Philips following the risk assessment are:

complex accounting for sales-related accruals, warranty provisions, tax assets and liabilities, pension benefits, and business combinations

complex sales transactions relating to multi-element deliveries (combination of goods and services)

valuation procedures with respect to assets (including goodwill and inventories)

past experience of control failures relating to segregation of duties

significant (contingent) liabilities such as environmental claims and other litigation

outsourcing of high volume/homogeneous transactional finance and IT operations to third-party service providers

Processes and controls related to the identified critical risk areas will be subject to a more detailed set of requirements in terms of control documentation and control evaluation (monitoring) by Sector and Functional management due to their importance for the reliability of the financial statements and disclosures of the Group.

~~Philips is exposed to a number of different fiscal uncertainties which could have a significant impact on local tax results.~~

Annual Report ~~2011 109~~

~~7 Risk management 7.6 - 7.6~~

carried forward and potential changes in tax law that could result in higher tax expense and payments. Those uncertainties may have a significant impact on local tax, results which in turn could adversely affect Philips’ financial condition and operating results.

The value of the losses carried forward is subject to having sufficient taxable income available within the loss-carried-forward period, but also to having sufficient taxable income within the foreseeable future in the case of losses carried forward with an indefinite carry-forward period. The ultimate realization of the Company’s deferred tax assets, including tax losses and credits carried forward, is dependent upon the generation of future taxable income in the countries where the temporary differences, unused tax losses and unused tax credits were incurred and during the periods in which the deferred tax assets become deductible. Additionally, in certain instances, realization of such deferred tax assets is dependent upon the successful execution of tax planning strategies. Accordingly, there can be no absolute assurance that all (net) tax losses and credits carried forward will be realized.

~~For further details, please refer to the fiscal risks paragraph in note 3, Income taxes.~~

Philips has defined-benefit pension plans in a number of countries. The funded status and the cost of maintaining these plans are influenced by financial market and demographic developments, creating volatility in Philips’ financials.

The majority of employees in Europe and North America are covered by defined-benefit pension plans. The accounting for defined-benefit pension plans requires management to determine discount rates, expected rates of compensation and expected returns on plan assets. Changes in these variables can have a significant impact on the projected benefit obligations and net periodic pension costs. A negative performance of the financial markets could have a material impact on funding requirements and net periodic pension costs and also affect the value of certain financial assets and liabilities of the company.

~~For further details, please see note 29, Pensions and other postretirement benefits.~~

~~110 Annual Report 2011~~2012 117

8 Management 8 - 8

~~8Management~~8 Management

Koninklijke Philips Electronics N.V. is managed by an Executive Committee which comprises the members of the Board of Management and certain key officers from functions, businesses and markets.

The Executive Committee operates under the chairmanship of the Chief Executive Officer and shares responsibility for the deployment of Philips’ strategy and policies, and the achievement of its objectives and results.

Under Dutch Law, the Board of Management is accountable for the actions and decisions of the Executive Committee and has ultimate responsibility for the management and external reporting of Koninklijke Philips Electronics N.V. and is answerable to shareholders at the Annual General Meeting of Shareholders. Pursuant to the two-tier corporate structure, the Board of Management is accountable for its performance to a separate and independent Supervisory Board.

The Rules of Procedure of the Board of Management and Executive Committee are published on the Company’s website(www.philips.com/investor).

Corporate governance

A full description of the Company’s corporate governance structure is published in chapter 11, Corporate governance, of this report.

Frans van Houten

President/Chief Executive Officer (CEO)

Chairman of the Board of Management since April 2011 ~~& Chief~~

~~Executive Officer of Philips Lighting (ad interim)~~

Corporate responsibilities: Chairman of the Executive Committee, ~~Sector~~Internal

~~Lighting, Internal~~ Audit, Information Technology, Supply Management,

Marketing &

Communication, Accelerate! - Overall transformation, End 2 End

Born 1960, Dutch

Jim Andrew*Andrew

Executive Vice President & Chief Strategy and Innovation Officer

Corporate responsibilities: Strategy, Innovation, Design, Sustainability

Born 1962, American

Eric Coutinho

Executive ~~Vice-President,~~Vice President, General Secretary & Chief Legal Officer

Corporate responsibilities: Legal, General Business Principles

Born 1951, Dutch

Deborah DiSanzo

Executive Vice President & Chief Executive Officer of Philips Healthcare

Corporate responsibilities: Sector Healthcare

Born 1960, American

Ronald de Jong

Executive Vice President & Chief Market Leader

Corporate responsibilities: Markets, Areas & Countries (except Greater

China), Accelerate! - Customer Centricity

Born 1967, Dutch

Patrick Kung

Executive Vice President & Chief Executive Officer Philips Greater China

Corporate responsibilities: Philips Greater China

Born 1951, American

~~Annual General Meeting of Shareholders. Pursuant to the two-tier corporate structure, the Board of Management is accountable for its performance to a separate and independent Supervisory Board.~~

~~The Rules of Procedure of the Board of Management and Executive Committee are published on the Company’s website~~

(~~www.philips.com/investor~~).

~~Corporate governance~~

~~A full description of the Company’s corporate governance structure is published in chapter 11, Corporate governance, of this report.~~

Pieter Nota

Executive ~~Vice-President~~Vice President & Chief Executive Officer of Philips Consumer Lifestyle

~~Lifestyle~~ Member of the Board of Management since April 2011

Corporate responsibilities: Sector Consumer Lifestyle, Accelerate! -

Resource to Win

Born 1964, Dutch

~~Steve Rusckowski~~Eric Rondolat

Executive ~~Vice-President~~Vice President & Chief Executive Officer of Philips ~~Healthcare~~

~~Member of the Board of Management since April 2007~~Lighting

Corporate responsibilities: Sector ~~Healthcare, Accelerate! - End to end~~

~~business re-engineering~~Lighting

Born ~~1957, American~~1966, Italian/French

Carole Wainaina

Executive Vice President & Chief HR Officer

Corporate responsibilities: Human Resource Management, Accelerate! -

Culture and change management

Born 1966, Kenyan

Ron Wirahadiraksa

Executive ~~Vice-President~~Vice President & Chief Financial Officer (CFO)

Member of the Board of Management since April 2011

Corporate responsibilities: Finance, Mergers & Acquisitions, Accelerate! -

Operating Model

Born 1960, Dutch

*	~~In the course of 2011, Jim Andrew took over the innovation portfolio from Gottfried Dutiné, who retired per December 31, 2011.~~

118 Annual Report ~~2011 111~~2012

8 Management 8 - 8

~~112~~ Annual Report ~~2011~~2012 119

9 Supervisory Board 9 - 9

9 Supervisory Board

The Supervisory Board supervises the policies of the executive management and the general course of affairs of Philips and advises the executive management thereon. The Supervisory Board, in the two-tier corporate structure under Dutch law, is a separate and independent corporate body.

The Rules of Procedure of the Supervisory Board are published on the Company’s website. For details on the activities of the Supervisory Board, see chapter 10, Supervisory Board report, of this report.

J. van der Veer

Chairman

Chairman of Corporate Governance and Nomination & Selection Committee

Member of the Supervisory Board since 2009; first term expires in 2013.

Former Chief Executive and currently ~~Non-executive~~Non-Executive Director of Royal Dutch Shell and ~~Vice-Chairman~~Chairman of the Supervisory Board of ING Group.

Member of the Supervisory Board of Concertgebouw N.V.

Born 1947, Dutch** ***

~~J.M. Thompson •~~

~~Vice-Chairman and Secretary~~

~~Member of the Supervisory Board since 2003; third term expires in 2015~~

Former Executive Vice-Chairman of the Board of Directors of IBM, and director of Hertz and Robert Mondavi; currently member of the Boards of Directors of Toronto Dominion Bank and Thomson Reuters Corporation

Born 1942, Canadian ** ***

C.J.A. van Lede

~~Chairman of Remuneration Committee~~

Member of the Supervisory Board since 2003; third term expires in 2015.

Former Chairman of the Board of Management of Akzo Nobel and currently Chairman of the Supervisory Board of Heineken, member of the Boards of AirFrance/KLM, ~~Sara Lee Corporation,~~DE Master Blenders, Air Liquide and Senior Advisor JP Morgan Plc.

Born 1942, Dutch**

~~E. Kist~~H. von Prondzynski

Member of the Supervisory Board since 2007; second term expires in 2015

Former member of the Corporate Executive Committee of the F. Hofmann-La Roche Group and former CEO of Roche Diagnostics, currently Chairman of the Supervisory Board of HTL Strefa and Epigenomics AG. Member of the Supervisory Boards of various private and listed companies including Qiagen and Hospira

Born 1949, German*

J. Tai

Chairman of Audit Committee

Member of the Supervisory Board since ~~2004; second~~2011; first term expires in ~~2012.~~2015

Former Vice-Chairman and CEO of DBS Group and DBS Bank Ltd and former managing director at J.P. Morgan &Co. Incorporated. Currently a member of the Board of Directors at NYSE Euronext, The Bank of China Limited, Singapore Airlines and MasterCard incorporated. Also Non-Executive Chairman of privately-held Brookstone, Inc., and director of Vapor Stream

Born 1950, American*

J.J. Schiro

Vice-Chairman and Secretary; Chairman of the ~~Executive Board of ING Group and currently member of the Supervisory Boards of the Dutch Central Bank, DSM, Moody’s Investor Service and Stage Entertainment~~

Born 1944, Dutch*

~~J.J. Schiro~~Remuneration Committee

Member of the Supervisory Board since 2005; second term expires in 2013

Former CEO of Zurich Financial Services and Chairman of the Group Management Board. Also serves on various boards of private and listed companies including Goldman Sachs as ~~Chairman~~Lead Director and member of the audit committee, PepsiCo as presiding director of the Supervisory Board and ~~member of the audit committee and~~ Reva Medical as member of the Supervisory Board and audit ~~committee~~committee. Senior Advisor CVC Capital Partners Ltd.

Born 1946, American** ***

~~H. von Prondzynski~~E. Kist

Member of the Supervisory Board since ~~2007; second~~2004; third term expires in ~~2015~~2016.

Former ~~member of the Corporate Executive Committee of the F. Hofmann- La Roche Group and former CEO of Roche Diagnostics, currently~~ Chairman of the ~~Supervisory~~Executive Board of ~~HTL Strefa. Member~~ING Group and currently member of the Supervisory Boards of ~~various private~~DSM, Moody’s Investor Service and ~~listed companies including Qiagen and Hospira~~Stage Entertainment

Born 1949, German*1944, Dutch**

C.A. Poon

Member of the Supervisory Board since 2009; first term expires in 2013

Former ~~Vice Chairman~~Vice-Chairman of Johnson & Johnson’s Board of Directors and Worldwide Chairman of the Pharmaceuticals Group. Currently dean of Ohio State University’s Fisher College of Business and member of the Board of Directors of Prudential and Regeneron

Born 1952, American** ***

~~J. Tai~~N. Dhawan

Member of the Supervisory Board since ~~2011;~~2012; first term expires in ~~2015~~2016

~~Former vice-chairman and CEO~~Currently Managing Director of DBS Group and DBS Bank Ltd and former managing director at J.P. Morgan &Co. Incorporated. Currently a member of the Board of Directors at NYSE Euronext, The Bank of China Limited, Singapore Airlines and MasterCard incorporated. Also non-executive chairman of privately-held Brookstone, Inc., and director of privately-held Cassis International Pte.Hewlett-Packard India

Born 1950, American*1959, Indian*

*	member of the Audit Committee

**	member of the Remuneration Committee

***	member of the Corporate Governance and Nomination & Selection Committee

*	~~Mr Thompson has expressed his wish to relinquish his position as a member of the Supervisory Board as of the closing of the 2012 General Meeting of Shareholders.~~

120 Annual Report ~~2011 113~~2012

9 Supervisory Board 9 - 9

~~114~~ Annual Report ~~2011~~2012 121

10 Supervisory Board report 10 - 10

~~10Supervisory~~10 Supervisory Board report

Introduction

General

The supervision of the policies and actions of the executive management of Koninklijke Philips Electronics N.V. (the ‘Company’) is entrusted to the Supervisory Board, which, in the two-tier corporate structure under Dutch law, is a separate and independent corporate body. This independence is also reflected in the requirement that members of the Supervisory Board can neither be a member of the Board of Management, member of the Executive Committee nor an employee of the Company. The Supervisory Board considers all its members to be independent pursuant to the Dutch Corporate Governance Code of December 2008 (the ‘Dutch Corporate Governance Code’) and the applicable US standards.

While retaining overall responsibility, the Supervisory Board assigns certain of its tasks to three permanent committees: the Corporate Governance and Nomination & Selection Committee, the Remuneration Committee and the Audit Committee. The separate reports of these committees are part of this report and are published below. The members (of the committees) of the Supervisory Board are listed in chapter 9, Supervisory Board, of this report.

For further information on the Company’s corporate governance structure and a more detailed description of the duties and functioning of the Supervisory Board, see chapter 11, Corporate governance, of this report.

Activities of the Supervisory Board

In ~~2011, 10~~2012, seven regular meetings were ~~held of which three meetings were ad hoc to discuss specific topics such as the approval of the formation of the TV joint venture.~~held. Furthermore, the Supervisory board from time to time collectively and individually interacted with management outside the formal Supervisory Board meetings. ~~All members were frequently present at the meetings~~The attendance percentage of the Supervisory ~~Board.~~Board meetings including the Supervisory Board committee meetings was in excess of 95%. The Audit Committee met five times. The Corporate Governance and Nomination & Selection Committee had ~~four~~three regular meetings and ~~several~~some ad hoc meetings in connection with ~~succession matters.~~the composition of the Supervisory Board. The Remuneration Committee had ~~seven~~nine regular ~~meetings.~~meetings and several conference calls in connection with the design of the new Long-Term Incentive Plan.

During ~~2011~~2012 the Supervisory Board devoted considerable time to discuss the Company’s strategy and performance as well as the effects of the macroeconomic outlook on Philips. The Supervisory Board frequently engaged with management on topics such as capital structure, the share buyback program, inventory reduction and gross margin improvement. It furthermore monitored the creation of the TV joint venture as well as discussed the strategic scenarios of the Lifestyle Entertainment business. Additionally, the sustainability program was reviewed.

In respect of the Accelerate! program, the Supervisory Board reviewed and advised on the various initiatives that are part of the transformation such as the transformation of the Finance function, the HR strategy & transformation and the overhaul of the IT infrastructure. Furthermore, the Supervisory Board engaged in dedicated sessions on risk management and reviewed the ~~formation~~impact of the ~~TV joint venture and~~European Commission fine for alleged violation of competition rules in the ~~Accelerate! program.~~Cathode-Ray Tube industry.

In ~~January~~addition to the regular meetings, in June 2012, the Supervisory Board ~~discussed the financial performance of~~visited the Philips ~~Group~~Healthcare operations in ~~2010,~~Andover, Massachusetts where they met with Healthcare management, employees and customers. In the Management Agenda 2011, the strategy for the TV business, the agenda for the 2011 General Meeting of Shareholders, including the proposed dividend to shareholders, the dividend policy and recommendations for (re)appointment of candidates for the Board of Management and Supervisory Board. Moreover,same week, the Supervisory Board ~~received an update on and discussed M&A activities and made amendments to~~visited the ~~Rules of Procedure of the Supervisory Board.~~

Philips Lighting operations in Burlington, Massachusetts. In ~~February~~August 2012, the Supervisory Board ~~discussed~~visited the ~~report~~High Tech Campus in Eindhoven, the Netherlands to review various projects in Philips Research and Philips Design. In October 2012 and December 2012, working visits were made to the headquarters of ~~the external auditor of the Company~~Philips Lighting and ~~approved the Annual Report 2010. Furthermore,~~Philips Consumer Lifestyle respectively. During these visits, the Supervisory Board ~~discussed the developments~~engaged with Sector management and business reviews were conducted in ~~the TV business.~~

~~In March the Supervisory Board discussed the performance~~respect of ~~the Philips Group, various M&A activities, the developments in the TV business~~existing and ~~the intention to form a TV joint venture, the IT strategy~~future products and ~~innovation strategy of the company. The Remuneration Committee gave an update to the full Supervisory Board on remuneration topics.~~services.

~~In April the Supervisory Board assembled in an ad hoc session to discuss the formation of the TV joint venture and the formation of the Executive Committee.~~

~~In May the Supervisory Board had a special session to approve the acquisition of Povos (China).~~

In June the overall strategy of the Company and that of the individual sectors was discussed including the main risks related thereto. In addition, the Supervisory Board discussed the capital and financing structure of the Philips Group and possibility to launch a share buyback program, the progress made in forming the TV joint venture, elements of the Accelerate! program and the Philips General Business Principles.

~~Annual Report 2011 115~~

10	~~Supervisory Board report 10 - 10~~

~~In July a meeting was held to discuss the Company’s second quarter results.~~

~~In August the Supervisory Board discussed the in-depth strategy of the Company and the individual operating sectors, the IT architecture of the company and the formation of the TV joint venture.~~

~~In October the Supervisory Board discussed the third quarter 2011 financial results, the TV joint venture, the sustainability program and risk management.~~

In December the Supervisory Board discussed the 2012 Commitment (management agenda), the situation on the financial markets, especially in Europe, and possible implications for the financing needs of the Philips Group, the share buyback and the Accelerate! program.

~~Other discussion topics included:~~

~~financial performance of the Philips Group and the sectors~~

~~implementation of the Philips Business System to improve granular performance insights~~

~~management development and succession planning, especially with respect to the CEO of the Lighting sector~~

~~evaluation of the Board of Management and its members~~

~~geographic performance and opportunities in growth geographies, including the shift of resources from mature to growth geographies~~

~~the mid-term performance targets 2013 as well as financial scenarios for 2012 and beyond~~

~~the system of internal business controls and risk management~~

~~legal proceedings, including antitrust proceedings~~

~~the EUR 800 million cost-savings program which forms part of the Accelerate! program~~

~~the governance and financial position of Philips’ major pension funds~~

Composition and evaluation of the Supervisory Board

The Supervisory Board currently consists of eight members. The Supervisory Board aims for an appropriate combination of knowledge and experience among its members in relation to the global and multi-product character of Philips’ businesses. Consequently, the Supervisory Board aims for an appropriate level of experience in marketing, technological, manufacturing, financial, economic, social and legal aspects of international business, government and public administration. The full profile is described in the chapter

122 Annual Report 2012

10 Supervisory Board report 10 - 10

Corporate governance. Members are appointed for fixed terms of four years and may be reappointed for two additional four-year terms.

All members of the Supervisory Board completed a questionnaire to verify compliance in ~~2011~~2012 with applicable corporate governance rules and the Rules of Procedure of the Supervisory Board. Each member of the Supervisory Board provided written feedback to the Chairman of the Supervisory Board in respect of the functioning of the Supervisory Board including but not limited to the composition and competence of the Supervisory Board, access to information and education, the frequency and quality of the meetings, quality and timeliness of the meeting materials and the functioning of the Supervisory Board committees. Based on this written feedback, ~~from each Supervisory Board member,~~ the Chairman of the Supervisory Board discussed the functioning of the Supervisory Board, its committees and its members in private ~~discussions.~~sessions. He shared common themes and conclusions derived from the written feedback and individual discussions in a private session of the Supervisory ~~Board; items discussed include the follow-up to the evaluation regarding 2010, the composition and competencies of the Supervisory~~ Board ~~and the set-up and content of meetings and meeting materials. In the same~~during which meeting the relationship with the Board of Management and Executive Committee was also discussed.

~~116 Annual Report 2011~~

~~10 Supervisory Board report 10 - 10~~

Changes Supervisory Board and committees ~~2011~~2012

~~Mr Hessels has resigned as Chairman and member of the Supervisory Board as from the closing of the 2011 General Meeting of Shareholders.~~

~~Mr Van der Veer has succeeded Mr Hessels as Chairman of the Supervisory Board.~~

Mr Thompson has ~~been reappointed as member of the Supervisory Board.~~

~~Mr Van Lede has been reappointed as member of the Supervisory Board.~~

~~Mr Von Prondzynski has been reappointed as member of the Supervisory Board.~~

~~Mr Tai has become a member of the Supervisory Board as from the 2011 General Meeting of Shareholders and has become a member of the Audit Committee.~~

~~Mr Van der Veer has become Chairman of the Corporate Governance and Nomination & Selection Committee and is no longer a member of the Audit Committee.~~

~~Changes and reappointments Supervisory Board 2012~~

It is proposed to appoint Ms Dhawan.* **

It is proposed to reappoint Mr Kist.*

~~Mr Thompson has expressed his wish to relinquish~~relinquished his position as a member of the Supervisory Board as offrom the closing of the 2012 General Meeting of Shareholders.

Mr ~~Schiro will replace Mr Thompson~~Kist has been reappointed as ~~Vice- Chairman of the Supervisory Board as per April 26, 2012.~~

~~Mr Tai will become Chairman of the Audit Committee as per April 26, 2012.~~

~~Mr van Lede and Ms Dhawan will join the Audit Committee, Mr Kist and Ms Poon will no longer be~~ a member of the ~~Audit Committee as per April 26, 2012.~~

~~Mr Schiro will become Chairman of the Remuneration Committee as per April 26, 2012.~~Supervisory Board.

Ms ~~Poon and Mr Kist will join the Remuneration Committee, Mr van Lede will no longer be~~Dhawan has been appointed as a member of the ~~Remuneration Committee as per April 26, 2012.~~Supervisory Board.

Changes and reappointments Supervisory Board 2013

It is proposed to reappoint Ms Poon.*

~~Ms Poon will join the Corporate Governance and Nomination & Selection Committee as per April 26, 2012.~~It is proposed to reappoint Mr Schiro.*

It is proposed to reappoint Mr Van der Veer.*

*	Subject to approval of ~~(re)appointment~~reappointment by the General Meeting of Shareholders

**	~~Ms Dhawan has held various positions in sales and marketing at leading Indian IT companies and currently is the Managing Director of Hewlett-Packard India~~

~~Annual Report 2011 117~~

10	~~Supervisory Board report 10 - 10.1~~

Changes Management ~~2011~~2012

Mr ~~Kleisterlee has retired as President/CEO and as a member of the Board of Management as from the closing of the 2011 General Meeting of Shareholders.~~

~~Mr Sivignon has relinquished his position as CFO and as a member of the Board of Management as from the closing of the 2011 General Meeting of Shareholders.~~

~~Mr Van Houten has been appointed as President/ CEO and as a member of the Board of Management.~~

~~Mr Wirahadiraksa has been appointed as a member of the Board of Management.~~

~~Mr Nota has been appointed as a member of the Board of Management.~~

~~Mr Provoost has relinquished his position as a member of the Board of Management as from September 30, 2011.~~

~~Mr Dutiné has retired as a member of the Board of Management as from December 31, 2011.~~

~~Messrs Andrew, Coutinho, De Jong, and Kung have been appointed as members of the Executive Committee as from July 2011.~~

~~Ms Wainaina~~Rondolat has been appointed as a member of the Executive Committee as from ~~September 2011.~~April 2012.

Ms DiSanzo has been appointed as a member of the Executive Committee as from May 2012.

Annual Report 2012 123

10 Supervisory Board report 10.1 - 10.1

~~10.1Report~~10.1 Report of the Corporate Governance and Nomination & Selection Committee

The Corporate Governance and Nomination & Selection Committee, currently consisting of three members, reviews the corporate governance principles applicable to the Company and the selection criteria and appointment procedures for the Board of Management, Executive Committee as well as the Supervisory Board. The Committee then advises the full Supervisory Board thereon. Furthermore, it supervises the policy on the selection criteria and appointment procedures for Philips’ senior management.

In ~~2011,~~2012, the Committee consulted with the President/ CEO and other members of the Board of Management on the appointment or reappointment of candidates to fill current and future vacancies on the Board of Management, Executive Committee and Supervisory Board. Following which it prepared decisions and advised the Supervisory Board on the candidates for appointment.

The Company pursues a policy to appoint a well-balanced mix of women and men to its Board of Management, Executive Committee and Supervisory Board. Moreover, new Dutch legislation, effective per January 1, 2013, requires companies to pursue a policy of having at least 30% of the seats on the board of management and supervisory board held by men and at least 30% of the seats held by women. This rule will cease to have effect on January 1, 2016.

The Supervisory Board believes it is making good progress in implementing this policy as evidenced by recent new appointments to the Executive Committee and Supervisory Board. It, however, notes that various pragmatic reasons – such as the other relevant selection criteria – play a complicating role in fully achieving the set targets at the short term.

The Supervisory Board strives to continue this trend and give appropriate weight to its diversity policy in the nomination and appointment process on future vacancies also at the level of the Board of Management, while taking into account the overall profile and selection criteria for appointments of suitable candidates to the Board of Management, Executive Committee and Supervisory Board.

The Committee devoted specific attention to identifying a suitable candidate matching the ~~establishment~~profile of the ~~new Executive Committee that is tasked with the management of the Company and comprises the members of the Board of Management and certain senior executives.~~Supervisory Board. Subsequently, the Nomination & Selection Committee reviewed and approved the ~~individual appointments~~nomination of Neelam Dhawan as member of the ~~members~~Supervisory Board. The Committee also devoted specific attention to identifying suitable candidates for the position of CEO Lighting and CEO Healthcare.

In addition, the ~~Executive Committee.~~Committee reviewed the succession plans for top 70 positions and emergency candidates for key roles in the company.

The Committee further discussed developments in the area of corporate governance and relevant legislative ~~changes.~~changes, including the newly adopted Dutch Bill on Management and Supervision effective January 1, 2013 and the Dutch Bill on Corporate Governance which is expected to enter into force on July 1, 2013. It also discussed possible agenda items for the upcoming ~~2012~~2013 General Meeting of Shareholders.

~~118~~124 Annual Report ~~2011~~2012

10 Supervisory Board ~~report10.2~~report 10.2 - 10.2.2

~~10.2Report~~10.2 Report of the Remuneration Committee

Introduction

The Remuneration Committee, currently consisting of four members, is responsible for preparing decisions of the Supervisory Board on the remuneration of individual members of the Board of Management and the Executive Committee. In performing its duties and responsibilities the Remuneration Committee is assisted by an in-house remuneration expert acting on the basis of a protocol which ensures that he acts on the instructions of the Remuneration Committee and maintains an independent position in which conflicts of interest are avoided. The Remuneration Committee’s tasks are laid down in the Charter of the Remuneration Committee that forms part of the Rules of Procedure of the Supervisory Board. Currently, no member of the Remuneration Committee is a member of the management board of another listed company. In line with applicable statutory and other regulations this report focuses on the employment and remuneration of the members of the Board of Management.

10.2.1 Remuneration policy

The objective of the remuneration policy for members of the Board of Management, as adopted by the General Meeting of Shareholders, is in line with that for executives throughout the Philips Group: to attract, motivate and retain qualified senior executives of the highest caliber, with an international mindset and background essential for the successful leadership and effective management of a large global company. The Board of Management remuneration policy is benchmarked regularly against companies in the general industry and aims at the median market position.

One of the goals behind the policy is to focus on improving the performance of the company and enhance the value of the Philips Group. Consequently, the remuneration package includes a variable part in the form of an annual cash incentive and a long-term incentive consisting of restricted share rights and stock options. 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 pay-out of the annual cash incentive and the long-term incentive grant upward or downward if the predetermined performance criteria were to produce an ~~“unfair”~~inappropriate result in extraordinary circumstances. The authority for such adjustments exists on the basis of the ultimum remedium- and claw back clauses (in accordance with best practice provisions II.2.10 and II.2.11 of the Dutch Corporate Governance Code). Further information on the performance targets is given in the chapters on the Annual Incentive and the Long-Term Incentive Plan respectively.

10.2.2 Contracts ~~of employment~~

The main elements of the contracts of the members of the Board of Management are made public no later than the date of the notice convening the General Meeting of Shareholders at which the appointment of the member of the Board of Management will be proposed.

Term of appointment

The members of the Board of Management are appointed for a period of 4 years.

Contract terms for current members¹⁾


	end of term

F.A. van Houten		March 31, 2015

R.H. Wirahadiraksa		March 31, 2015

~~G.H.A. Dutiné~~²⁾		~~April 1, 2014~~

P.A.J. Nota		March 31, 2015

~~S.H. Rusckowski~~		~~April 1, 2014~~

¹⁾	Reference date for board membership is December 31, ~~2011~~

²⁾2012

~~Mr Dutiné retired as from December 31, 2011~~

Notice period

Termination of ~~employment~~the contract by a member of the Board of Management is subject to three months’ notice. A notice period of six months will be applicable in the case of termination by the Company.

Severance payment

The severance payment is set at a maximum of one year’s salary.

~~Annual Report 2011 119~~

~~10 Supervisory Board report 10.2.2 - 10.2.5~~

Share ownership

To further align the interests of the members of the Board of Management and shareholders, restricted share rights granted to members of the Board of Management shall be retained for a period of at least five years or until at least the end of their employment, if this period is shorter.

Annual Report 2012 125

10 Supervisory Board report 10.2.3 - 10.2.7

10.2.3 Scenario analysis

The Remuneration Committee annually conducts scenario analysis. This includes the calculation of remuneration under different scenarios, whereby different Philips performance assumptions and corporate actions are looked at. The Supervisory Board concluded that the current policy has ~~and continues to prove~~proven to function well in terms of ~~the~~a relationship between the strategic objectives and the chosen performance ~~criteria.~~criteria and believes that the proposed changes to the Long-Term Incentive Plan will further improve this relationship.

~~10.2.3~~10.2.4 Remuneration costs

The table below gives an overview of the costs incurred by the Company in the financial year in relation to the remuneration of the Board of Management. Costs related to stock option and restricted share right grants are taken by the Company over a number of years. As a consequence, the costs mentioned below in the columns stock options and restricted share rights are the accounting cost of multi-year grants given to members of the Board of Management during their board membership.

~~Information on the individual remuneration of the (former) members of the Board of Management is shown in the tables below as well as in the table in note 32, Information on remuneration.~~

The previously granted stock options and restricted share rights to ~~Messrs. P-J. Sivignon and R.S. Provoost continue to vest~~Mr S.H. Rusckowski have lapsed per April 30, 2012 in accordance with the terms and conditions of the Long-Term Incentive ~~Plan.~~Plan upon termination.

Remuneration Board of Management 2012¹⁾

in euros

~~Remuneration Board of Management 2011~~¹⁾

~~in euros~~

         Costs in the year
   annual       realized    stock    restricted    pension    other
   base salary    base salary    annual incentive    options    share rights    costs    compensation
F.A. van Houten²⁾
   1,100,000       825,000       363,000       125,957       253,926       297,179       39,709
R.H. Wirahadiraksa²⁾
   600,000       450,000       148,500       105,477       180,686       170,299       72,125
G.H.A. Dutiné
   650,000       650,000       214,500       462,263       334,186       245,018       143,774
P.A.J. Nota²⁾
   600,000       450,000       148,500       131,159       255,159       168,532       67,067
S.H. Rusckowski
   700,000       687,500       231,000       211,915       341,856       254,975       336,773
         Costs in the year²⁾
   annual       realized    stock    restricted    pension    other
   base salary    base salary    annual incentive    options    share rights    costs    compensation
F.A. van Houten
   1,100,000       1,100,000       1,279,520       209,589       315,760       422,845       47,154
R.H. Wirahadiraksa
   600,000       600,000       523,440       149,067       217,020       243,438       34,961
P.A.J. Nota
   600,000       600,000       556,200       188,029       253,836       247,883       60,754

¹⁾
Reference date for board membership is December 31, ~~2011~~2012
²⁾
~~Costs mentinoned relate~~A one-time crisis tax levy of 16% as imposed by the Dutch government amounts to EUR 413,405 in total. This crisis tax levy is payable by the ~~period~~employer and is charged over income of ~~board membership. Messrs Van Houten, Wirahadiraksa and Nota have been appointed per March 31, 2011, therefore~~employees exceeding a EUR 150,000 threshold in 2012. These expenses do not form part of the ~~amounts are related to the period April - December 2011.~~remuneration costs mentioned.
~~This table ‘Remuneration Board of Management 2011’ forms an integral part of the Group financial statements, please refer to note 32, Information on remuneration.~~
~~10.2.4~~10.2.5 Base salary
The salaries of the members of the Board of Management have not been increased ~~in line with the policy for other employees~~ on the yearly review date in April ~~2011.~~2012.
~~10.2.5~~10.2.6 Annual Incentive
Each year, a variable cash incentive (Annual Incentive) can be earned, based on the achievement of specific and challenging targets. The Annual Incentive criteria are for 80% the financial indicators of the Company ~~(net income, comparable sales growth~~ and ~~free cash flow). In 2011~~for 20% the highest weighting was for comparable sales growth. The comparable sales growth calculation focuses on organic growth of the businesses and excludes currency translation effects and impact of acquisitions/ divestments. The 20% team targets ~~comprise the major elements~~comprising sustainability targets as part of ~~the management agenda, including sustainability elements such as Employee Engagement Score and Green Product sales.~~our EcoVision program.
The on-target Annual Incentive percentage is set at 60% of the base salary for members of the Board of Management and 80% of the base salary for the ~~President/~~ CEO, and the maximum Annual Incentive achievable is 120% of the annual base salary for members of the Board of Management and for the ~~President/~~CEO it is 160% of the annual base salary.
~~120~~To support the new performance culture, the Annual ~~Report 2011~~
~~10 Supervisory Board report 10.2.5 - 10.2.6~~
Incentive plan of 2012 is based on (financial) targets at ‘own level’ and ‘group’ level results (line-of-sight). The pay-outs are a reflection of above-target realization in Comparable Sales Growth, Return on Invested Capital (ROIC) and Team Targets and close to on-target for Adjusted IFO as a percentage of sales, resulting in the pay-out as presented in the table below.
Pay-out in ~~2012~~2013¹⁾
in euros

   realized annual    as a % of base
   incentive    salary (2011)
F.A. van Houten²⁾
   363,000       44.0 %
R.H. Wirahadiraksa²⁾
   148,500       33.0 %
G.H.A. Dutiné
   214,500       33.0 %
P.A.J. Nota²⁾
   148,500       33.0 %
S.H Rusckowski
   231,000       33.0 %
   realized annual    as a % of base
   incentive    salary (2012)
F.A. van Houten
   1,279,520       116.3 %
R.H. Wirahadiraksa
   523,440       87.2 %
P.A.J. Nota
   556,200       92.7 %

¹⁾
Reference date for board membership is December 31, ~~2011~~
²⁾2012
~~Period March 31 - December 31, 2011~~
~~10.2.6~~10.2.7 Long-Term Incentive Plan
The ~~LTIP~~Long-Term Incentive Plan (LTIP) consists of a mix of stock options and restricted share rights. It aims to align the interests of the participating employees with the shareholders’ interests and to attract, motivate and retain participating employees.
126      Annual Report 2012
10 Supervisory Board report 10.2.7 - 10.2.7
The stock option plan vests three years after grant, dependent upon employment on the vesting date. The exercise price is the share price upon grant, and the total option term is 10 years.
A restricted share right is a right to receive a share, subject to being employed with Philips on the vesting date. Vesting occurs in three equal tranches 1, 2 and 3 years respectively after grant. An additional 20% of the restricted share rights grant is deferred, subject to the condition that released shares are held for three years after vesting, and employment with Philips is continued during this period.
The actual number of stock options and restricted share rights to be granted to the board members is performance-related and depends on the ranking of Philips in the Total Shareholder Return (TSR) peer group and the realization of the team targets of the Board of Management. The peer group comprises the following companies: Electrolux, Emerson Electric, General Electric, Hitachi, Honeywell International, Johnson & Johnson, ~~Matsushita,~~Panasonic, Philips, Schneider, Siemens, Toshiba and 3M.
The TSR ranking is the basis for the two different multipliers that apply to the grant of stock options and restricted share rights. The multipliers are determined in line with the table below.
TSR multiplier

Philips’ position ranking
   1       2       3       4       5       6
restricted share rights
   2.0       1.8       1.6       1.4       1.2       1.0
stock options
   1.2       1.2       1.2       1.2       1.0       1.0
TSR multiplier

Philips’ position ranking
   7       8       9       10       11       12
restricted share rights
   1.0       0.8       0.6       0.4       0.2       0.0
stock options
   1.0       1.0       0.8       0.8       0.8       0.8
Based on Philips’ share performance over the period December ~~2007 -~~2008- December ~~2010,~~2011, Philips ranked 8^thin its peer group.
In ~~2011,~~2012, members of the Board of Management were granted ~~303,000~~177,000 stock options and ~~80,808~~47,205 restricted share rights under the LTIP (excluding 20% premium shares deferred for a three-year holding period).
The following tables provide an overview of ~~stock option grants made,~~granted but not yet vested (locked up), stock option grants and an overview of restricted share rights granted but not yet released. The reference date for board membership is December 31, ~~2011.~~
~~Annual Report 2011      121~~
~~10 Supervisory Board report 10.2.6 - 10.2.7~~
2012.
Stock options
in euros

      number of stock       value at end of lock       number of stock       value at end of lock
   grant date    options value at grant date    end of lock up period    up period    grant date    options value at grant date    end of lock up period    up period
F.A. van Houten
   2010       20,400 ¹⁾ 103,428       2013       n.a.       2010       20,400 ¹⁾ 103,428       2013       n.a.
   2011       75,000    366,000       2014       n.a.       2011       75,000    366,000       2014       n.a.
   2012       75,000    212,550       2015       n.a.
R.H. Wirahadiraksa
   2008       10,800 ¹⁾ 59,616       2011       38,238       2009       12,000 ¹⁾ 33,240       2012       34,399
   2009       12,000 ¹⁾ 33,240       2012       n.a.
   2010       16,500 ¹⁾ 81,675       2013       n.a.
   2011       51,000    248,880       2014       n.a.
G.H.A. Dutiné
   2008       38,403    211,985       2011       135,970
   2009       38,400    106,368       2012       n.a.       2010       16,500 ¹⁾ 81,675       2013       n.a.
   2010       40,800    201,960       2013       n.a.       2011       51,000    248,880       2014       n.a.
   2011       51,000    248,880       2014       n.a.       2012       51,000    144,534       2015       n.a.
P.A.J. Nota
   2010       40,800 ¹⁾ 206,856       2013       n.a.       2010       40,800 ¹⁾ 206,856       2013       n.a.
   2011       51,000    248,880       2014       n.a.       2011       51,000    248,880       2014       n.a.
S.H. Rusckowski
   2008       38,403    211,985       2011       135,970
   2009       38,400    106,368       2012       n.a.       2012       51,000    144,534       2015       n.a.
   2010       40,800    201,960       2013       n.a.
   2011       75,000    366,000       2014       n.a.
¹⁾   Awarded before date of appointment as a member of the Board of Management
Annual Report 2012      127
10 Supervisory Board report 10.2.7 - 10.2.11
Restricted share rights
in euros

      originally granted    number of restricted          originally granted    number of restricted
      number of restricted    share rights released    value at release date       number of restricted    share rights released    value at release date
   grant date    share rights value at grant date    in 2011    in 2011    grant date    share rights value at grant date    in 2012    in 2012
F.A. van Houten
   2010       5,100 ¹⁾ 116,688       1,700       24,939       2010       5,100 ¹⁾ 116,688       1,700       32,691
   2011       20,001    418,021       n.a.       n.a.       2011       20,001    418,021       6,667       94,605
   2012       20,001    296,415       n.a.       n.a.
R.H. Wirahadiraksa
   2008       3,600 ¹⁾ 83.196       1,200       25,644       2009       3,200 ¹⁾ 40,416       1,067       14,714
   2009       3,200 ¹⁾ 40,416       1,067       22,802
   2010       4,125 ¹⁾ 102,713       1,375       27,954
   2011       13,602    284,282       n.a.       n.a.
G.H.A. Dutiné
   2008       12,801    295,831       4,267       91,186
   2009       10,242    129,356       3,414       72,957       2010       4,125 ¹⁾ 102,713       1,375       19,250
   2010       10,200    253,980       3,400       69,122       2011       13,602    284,282       4,534       64,337
   2011       13,602    284,282       n.a.       n.a.       2012       13,602    201,582       n.a.       n.a.
P.A.J. Nota
   2010       10,200 ¹⁾ 233,376       3,400       49,878       2010       10,200 ¹⁾ 233,376       3,400       65,382
   2011       13,602    284,282       n.a.       n.a.       2011       13,602    284,282       4,534       64,337
S.H. Rusckowski
   2008       12,801    295,831       4,267       91,186
   2009       10,242    129,356       3,414       72,957       2012       13,602    201,582       n.a.       n.a.
   2010       10,200    253,980       3,400       69,122
   2011       20,001    418,021       n.a.       n.a.
¹⁾     Awarded before date of appointment as a member of the Board of Management
For more details of the LTIP, see note 30, Share-based compensation.
~~10.2.7~~10.2.8 Pensions
~~Eligible members~~Members of the Board of Management participate in the Executives Pension Plan in the Netherlands consisting of a combination of a defined-benefit (career average) and defined-contribution plan. The target
~~122      Annual Report 2011~~
~~10 Supervisory Board report 10.2.7 - 10.2.10~~
retirement age under the plan is 62.5. The plan does not require employee contributions. For more details, see note 32, Information on remuneration.
~~10.2.8~~10.2.9 Additional arrangements
In addition to the main conditions of employment, a number of additional arrangements apply to members of the Board of Management. These additional arrangements, such as expense and relocation allowances, medical insurance, accident insurance and company car arrangements, are in line with those for Philips executives in the Netherlands. In the event of disablement, members of the Board of Management are entitled to benefits in line with those for other Philips executives in the Netherlands.
Unless the law provides otherwise, the members of the Board of Management and of the Supervisory Board shall be reimbursed by the Company for various costs and expenses, like reasonable costs of defending claims, as formalized in the articles of association. Under certain circumstances, described in the articles of association, such as an act or failure to act by a member of the Board of Management or a member of the Supervisory Board that can be characterized as intentional (“opzettelijk”), intentionally reckless (“bewust roekeloos”) or seriously culpable (“ernstig verwijtbaar”), there will be no entitlement to this reimbursement. The Company has also taken out liability insurance (D&O—Directors & Officers) for the persons concerned.
~~10.2.9~~10.2.10 Remuneration Supervisory Board
The table below gives an overview of the remuneration structure, which has remained unchanged since 2008.
Remuneration ~~2011~~2012¹⁾
in euros per year

   Chairman    Member
Supervisory Board
   110,000       65,000
Audit Committee
   15,000       10,000
Remuneration Committee
   12,500       8,000
Corporate Governance and Nomination & Selection Committee
   12,500       6,000
Fee for intercontinental traveling per trip
   3,000       3,000
Entitlement Philips product arrangement
   2,000       2,000
¹⁾   For more details, see note 32, Information on remuneration
~~10.2.10 2012~~10.2.11 Year 2013
~~Annual Incentive~~
Philips is undertaking a worldwide transformation program to unlock the organisation’s full potential and become more agile and entrepreneurial. To support ~~the~~this new strategic direction and performance culture the Remuneration Committee has decided to redesign the reward plans. The Annual Incentive has already been revised in 2012 and now a new Long-Term Incentive Plan (LTIP) has been designed to take this transformation forward. The main rationale behind this is the desire to stronger link pay and performance. The main characteristics of the ~~Company the financial targets~~new LTIP for the Annual Incentive 2012 have been set in line with our (mid-term) performance goals. Following the overall direction within Philips, line-of-sight for the sector CEO’s will be introduced, whereby half of their financial targets will be related to their sector and the remaining half to the Philips Group. The team targets will remain 20%members of the ~~total annual incentive opportunity.~~Board of Management are performance shares with 3
~~Long-Term Incentive~~
A128      Annual Report 2012
10 Supervisory Board report 10.2.11 - 10.3
years cliff vesting, performance criteria based on EPS Growth and relative TSR, grants expressed as a percentage of base salary and higher mandatory share ownership.
As mentioned already in the 2011 Annual Report, a one-time special Long-Term Incentive grant was made to a group of key employees below the level of Board of Management ~~(approx. 500 persons)~~ in January ~~2012. The purpose of this~~2012 and the Supervisory Board contemplated introducing the Accelerate! Grant ~~is to focus~~for the ~~key-leaders on achieving the 2013 objectives: 4-6% comparable sales growth CAGR, 10-12% Reported Adjusted IFO and 12-14% return on invested capital (ROIC).~~
~~The Accelerate! Grant has the following features:~~
~~An equal balance~~members of ~~shares and options (1 to 1);~~
~~The vesting of the granted shares and options is based on achieving specific midterm (2013) financial objectives. Thus the vesting of this special grant is dependent on future performance;~~
~~The vesting period for both the shares and the options is two years with an additional two year holding period applying to the shares.~~
~~The Supervisory Board is supportive of this program and contemplates introducing similar awards for~~ the Board of Management. ~~This will be further discussed by~~The Supervisory Board feels that this grant supports the change in the performance culture and is a good bridge between the current LTIP and the new LTIP. As the performance elements of the Accelerate! Grant (CSG%, Adjusted IFO % and ROIC%) are measured over the year 2013 the Supervisory Board has decided to make the grant at the start of the performance period in January 2013. The grant is conditional, subject to shareholders consent.
The explanatory notes of the Agenda for the 2013 General Shareholders Meeting give more detailed information regarding the new LTIP and ~~in due time submitted to~~ the ~~General Meeting of Shareholders for approval.~~
~~Annual Report 2011      123~~
~~10 Supervisory Board report 10.3 - 10.3~~
Accelerate! Grant.
~~10.3Report~~10.3 Report of the Audit Committee
The Audit Committee, currently consisting of four members, assists the Supervisory Board in fulfilling its supervisory responsibilities for the integrity of the Company’s financial statements, the financial reporting process, the system of internal business controls and risk management, the internal and external audit process, the internal and external auditor’s findings and recommendations, independence and performance, as well as the Company’s process for monitoring compliance with laws and regulations and the General Business Principles (GBP). Moreover, the Audit Committee evaluates the performance of the external auditor every 3 years, in accordance with the Philips Policy on Auditor Independence.
The Audit Committee met five times in ~~2011~~2012 and reported its findings to the plenary Supervisory Board. The President/CEO, the Chief Financial Officer, the internal auditor, the Group Controller and the external auditor attended all regular meetings. Furthermore, the Audit Committee met each quarter separately with each of the President/CEO, the Chief Financial Officer, the internal auditor and the external auditor.
In accordance with its charter, which is part of the Rules of Procedure of the Supervisory Board, the Audit Committee in ~~2011~~2012 reviewed the Company’s annual and interim financial statements, including non-financial information, prior to publication thereof. It also assessed in its quarterly meetings the adequacy and appropriateness of internal control policies and internal audit programs and their findings.
In its ~~2011~~2012 meetings, the Audit Committee periodically reviewed matters relating to accounting policies, financial risks and compliance with accounting standards. Compliance with statutory and legal requirements and regulations, particularly in the financial domain, was also reviewed. Important findings, identified risks and follow-up actions were examined thoroughly in order to allow appropriate measures to be taken.
With regard to the internal audit, the Audit Committee reviewed, and if required approved, the internal audit charter, audit plan, audit scope and its coverage in relation to the scope of the external audit, as well as the staffing, independence and organizational structure of the internal
Annual Report 2012      129
10 Supervisory Board report 10.3 - 10.3
audit function. With regard to the external audit, the Audit Committee reviewed the proposed audit scope, approach and fees, the independence of the external auditors, non-audit services provided by the external auditors in conformity with the Philips Policy on Auditor Independence, as well as any changes to this policy. The Audit Committee has assessed the performance of the external auditor. For information on the fees of KPMG Accountants N.V., please refer to the table ‘Fees KPMG’ in note 1, Income from operations.
In ~~2011,~~2012, the Audit Committee periodically discussed the company’s policy on business controls, the GBP including the deployment thereof and amendments thereto, and Philips’ major areas of risk, including the internal auditor’s reporting thereon. The Audit Committee was informed on, discussed and monitored closely the company’s internal control certification processes, in particular compliance with section 404 of the US Sarbanes-Oxley Act and its requirements regarding assessment, review and monitoring of internal controls. It also discussed risk management, tax issues, the annual goodwill impairment test performed in the second quarter, the IT strategy and transformation, the Company’s finance transformation, developments in regulatory investigations as well as legal proceedings including antitrust investigations and related provisions, environmental exposures and financing and liquidity of the company, dividend, pensions, valuation and performance of financial holdings and recent acquisitions ~~developments~~and new Dutch legislation on mandatory auditor rotation and prohibition on non-audit services. The legislation on mandatory auditor rotation will become effective January 1, 2016, meaning the Company must engage a new audit firm for its statutory audit starting per January 1, 2016. The new legislation also provides for the separation of audit and non-audit services, meaning the Company’s external auditor is no longer allowed to provide non-audit services, with an exception for non-audit service arrangements already in ~~regulatory investigations, as well as~~place on December 31, 2012, which will be grandfathered for a ~~financial evaluation~~maximum term of two years (until December 31, 2014). In light of this new Dutch legislation, the ~~investments made~~auditor policy is in ~~2008.~~the process of being updated. During each Audit Committee meeting, the Audit Committee discussed the report from the External Auditor in which the External Auditor set forth its findings and attention points during the relevant period.
Financial statements ~~2011~~2012
The financial statements of Koninklijke Philips Electronics N.V. for ~~2011,~~2012, as presented by the Board of Management, have been audited by KPMG Accountants N.V., independent auditors. Their reports have been included in the section Group financial statements; section 12.12, Independent auditor’s report - Group, of this report and the section Company financial statement; section 13.5, Independent auditor’s report - Company, of this report. We have approved these financial statements, and all individual members of the Supervisory Board (together with the members of the Board of Management) have signed these documents.
We recommend to shareholders that they adopt the ~~2011~~2012 financial statements. We likewise recommend to shareholders that they adopt the proposal of the Board of Management to make a distribution of EUR 0.75 per common share (up to EUR ~~695~~685 million), in cash or in shares at the option of the shareholder, against the net income for 2012 and the reserve retained ~~earnings.~~
~~124      Annual Report 2011~~
~~10 Supervisory Board report 10.3 - 10.3~~
earnings of the Company.
Finally, we would like to express our thanks to the members of the Executive Committee and all other employees for their continued contribution during the year.
February ~~23, 2012~~25, 2013
The Supervisory Board

130      Annual Report ~~2011      125~~2012
11 Corporate governance ~~11.1~~11 - 11.1

11 Corporate governance
Corporate governance of the Philips group
Introduction
Koninklijke Philips Electronics N.V., a company organized under Dutch law (the ‘Company’), is the parent company of the Philips Group (‘Philips’ or the ‘Group’). The Company, which started as a limited partnership with the name Philips & Co in Eindhoven, the Netherlands, in 1891, was converted into the company with limited liability N.V. Philips’ Gloeilampenfabrieken on September 11, 1912. On May 6, 1994, the name was changed to Philips Electronics N.V., and on April 1, 1998, the name was changed to Koninklijke Philips Electronics N.V. Its shares have been listed on the Amsterdam Stock Exchange, Euronext Amsterdam, since ~~1913.~~1912. The shares have been traded in the United States since 1962 and have been listed on the New York Stock Exchange since 1987.
Over the last decades the Company has pursued a consistent policy to enhance and improve its corporate governance in line with Dutch, US and international (codes of) best practices. The Company has incorporated a fair disclosure practice in its investor relations policy, has strengthened the accountability of its executive management and its independent supervisory directors, and has increased the rights and powers of shareholders and the communication with investors. The Company is required to comply with, inter alia, Dutch Corporate Governance rules, the US Sarbanes-Oxley Act, New York Stock Exchange rules and related regulations, insofar as applicable to the Company. A summary of significant differences between the Company’s corporate governance structure and the New York Stock Exchange corporate governance standards is published on the Company’s website (www.philips.com/investor).
In this report, the Company addresses its overall corporate governance structure and states to what extent it applies the provisions of the revised Dutch Corporate Governance Code of December 10, 2008 (the ‘Dutch Corporate Governance Code’). This report also includes the information which the Company is required to disclose pursuant to the governmental decree on Article 10 Takeover Directive and the governmental decree on Corporate Governance. The Supervisory Board and the Board of Management, which are responsible for the corporate governance structure of the Company, are of the opinion that the principles and best practice provisions of the Dutch Corporate Governance Code that are addressed to the Board of Management and the Supervisory Board, interpreted and implemented in line with the best practices followed by the Company, are being applied. Deviations from aspects of the corporate governance structure of the Company, when deemed necessary in the interests of the Company, will be disclosed in the Annual Report. Substantial changes in the Company’s corporate governance structure and in the Company’s compliance with the Dutch Corporate Governance Code are submitted to the General Meeting of Shareholders for discussion under a separate agenda item.
11.1 Board of Management
Introduction
The Board of Management (the ‘Board of Management’) is entrusted with the management of the Company. Certain key officers have been appointed to manage the Company together with the Board of Management. The members of the Board of Management and these key officers together constitute the Executive Committee (the ‘Executive Committee’). Under the chairmanship of the President/Chief Executive Officer (‘CEO’) the members of the Executive Committee share responsibility for the deployment of its strategy and policies, and the achievement of its objectives and results. The Executive Committee has, for practical purposes, adopted a division of responsibilities indicating the functional and business areas monitored and reviewed by the individual members. For the purpose of this document, where the Executive Committee is mentioned this also includes the Board of Management unless the context requires otherwise.
The members of the Board of Management remain accountable for the actions and decisions of the Executive Committee and have ultimate responsibility for the Company’s management and the external reporting and are answerable to shareholders of the Company at the Annual General Meeting of Shareholders.
All resolutions of the Executive Committee are adopted by majority vote comprising the majority of the members of the Board of Management present or represented, such majority comprising the vote of the CEO. The Board of Management retains the authority to, at all times and in all circumstances, adopt resolutions without the participation of the other members of the Executive Committee. In discharging its duties, the Executive Committee shall be guided by the interests of the Company and its affiliated enterprise, taking into consideration the interests of the Company’s stakeholders.
The Executive Committee is supervised by the Supervisory Board and provides the latter with all information the Supervisory Board needs to fulfill its own responsibilities. Major decisions of the Board of Management and Executive Committee require the approval of the Supervisory Board; these include decisions concerning (a) the operational and financial objectives of the Company, (b) the strategy designed to achieve the objectives, (c) if necessary, the parameters to be applied in relation to the strategy and (d) corporate social responsibility issues that are relevant to the Company.
The Executive Committee follows the Rules of Procedure of the Board of Management and Executive Committee, which set forth procedures for meetings, resolutions, minutes and (vice-) chairmanship. These Rules of Procedure are published on the Company’s website.
(Term of) Appointment and conflicts of interests
Members of the Board of Management and the CEO are elected 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. Pursuant to newly adopted Dutch legislation, effective January 1, 2013, the requirement that a binding nomination for the appointment of a member of the management board or supervisory board consists of at least two persons for each vacancy has been abolished. The remaining members of the Executive Committee are appointed by the CEO, subject to approval by the Supervisory Board.
Members of the Board of Management and the CEO are appointed for a term of four years, it being understood that this term expires at the end of the General Meeting of Shareholders to be held in the fourth year after the year of their appointment. Reappointment is possible for consecutive terms of four years or, if applicable, until a later retirement date or other contractual termination date in the fourth year, unless the General Meeting of Shareholders resolves otherwise. Members may be suspended by the Supervisory Board and the General Meeting of Shareholders and dismissed by the latter. Individual data on the members of the Board of Management and Executive Committee are published in chapter 8, Management, of this report.
The acceptance by a member of the Board of Management of ~~membership~~a position as a member of ~~the~~a supervisory board or a position of non-executive director in a one-tier board (a ‘Non-Executive Directorship’) at another company requires the approval of the Supervisory Board. The Supervisory Board is required to be notified of other important positions (to be) held by a member of the Board of Management. No member of the Board of Management holds more than two ~~supervisory board memberships of~~Non-Executive Directorships at listed companies, or is a chairman of ~~such~~a supervisory board or one-tier board, other than of a Group company or participating interest of the Company. In addition, pursuant to newly adopted Dutch legislation, effective January 1, 2013, no member of the Board of Management holds more than two Non-Executive Directorships at ‘large companies’ as defined under Dutch law and no member of the Board of Management holds the position of chairman of another one-tier board or the position of chairman of another supervisory board. A company qualifies as a ‘large company’ if at least two of the following criteria apply: (i) the value of the assets according
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to the balance sheet with explanatory notes, considering the acquisition or manufacturing price, exceeds EUR 17.5 million; (ii) the net turnover exceeds EUR 35 million; or (iii) the average number of employees equals or exceeds 250.
Pursuant to new Dutch legislation effective January 1, 2013, the Company shall pursue a policy of having at least 30% of the seats on the Board of Management held by men and at least 30% of the seats held by women. The rule will cease to have effect on January 1, 2016.
The Company has formalized its rules to avoid conflicts of interests between the Company and members of the Board of Management. The ~~articles~~Articles of ~~association~~Association state that in the event of a legal act or a lawsuit between the Company and a member of the Board of Management, certain of such member’s relatives, or certain (legal) entities in which a member of the Board of Management has an interest, and insofar as the legal act is of material significance to the Company and/or to the respective member of the Board of Management, the respective member of the Board of Management shall not take part in the decision-making in respect of the lawsuit or the legal act. Resolutions concerning such legal acts or lawsuits require the approval of the Supervisory Board.
~~126      Annual Report 2011~~
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Newly adopted Dutch legislation on conflicts of interest, effective January 1, 2013, no longer contains restrictions on the powers of directors to represent the Company in case of a conflict, but provides that a member of the Board of Management may not participate in the adoption of resolutions if he or she has a direct or indirect personal conflict of interest with the Company or related enterprise. If all members of the Board of Management have a conflict, the resolution concerned will be adopted by the Supervisory Board.
These rules apply to members of the Executive Committee correspondingly.
Legal acts as referred to above shall be mentioned in the Annual Report for the financial year in question. The Rules of Procedure of the Board of Management and Executive Committee establish further rules on the reporting of (potential) conflicts of interests. No legal acts as referred to above have occurred during the financial year ~~2011.~~2012.
Amount and composition of the remuneration of the Board of Management
The remuneration of the individual members of the Board of Management is determined by the Supervisory Board on the proposal of the Remuneration Committee of the Supervisory Board, and is consistent with the policies thereon as adopted by the General Meeting of Shareholders. The remuneration policy applicable to the Board of Management was adopted by the 2004 General Meeting of Shareholders, and lastly amended by the 2008 General Meeting of Shareholders and is published on the Company’s website. A full and detailed description of the composition of the remuneration of the individual members of the Board of Management is included in chapter 10, Supervisory Board report, of this report.
The remuneration structure, including severance pay, is such that it promotes the interests of the Company in the medium and long-term, does not encourage members of the Board of Management to act in their own interests or take risks that are not in line with the adopted strategy, and does not reward failing members of the Board of Management upon termination of their employment. The level and structure of remuneration shall be determined in the light of factors such as the results, the share price performance and other developments relevant to the Company. Deviations on elements of the remuneration policy in extraordinary circumstances, when deemed necessary in the interests of the Company, will be disclosed in the Annual Report or, in case of an appointment, in good time prior to the appointment of the person concerned.
The main elements of the contract of employment of a new member of the Board of Management—including the amount of the fixed base salary, the structure and amount of the variable remuneration component, any severance plan, pension arrangements and the general performance criteria - shall be made public no later than at the time of issuance of the notice convening the General Meeting of Shareholders in which a proposal for appointment of that member of the Board of Management has been placed on the agenda. From August 1, 2003 onwards, for new members of the Board of Management the term of their contract ~~of employment~~ is set at four years, and in case of termination, severance payment is limited to a maximum of one year’s base salary; if the maximum of one-year’s salary would be manifestly unreasonable for a member of the Board of Management who is dismissed during his first term of office, the member of the Board of Management shall be eligible for a severance payment not exceeding twice the annual salary. Current members of the Board of Management are employed by means of a contract of employment. ~~Subject~~Pursuant to ~~the implementation of new~~newly adopted Dutch legislation, effective January 1, 2013, new members of the Board of Management will be employed by means of an agreement of assignment (overeenkomst van opdracht). The Company does not grant personal loans, guarantees or the like to members of the Board of Management, and no such (remissions of) loans and guarantees were granted to such members in 2011, nor are outstanding as per December 31, 2011.
In 2003, Philips adopted a Long-Term Incentive Plan (‘~~LTIP’ or the ‘Plan’~~LTI Plan’), lastly amended by the 2009 General Meeting of Shareholders, consisting of a mix of restricted shares rights and stock options for members of the Board of Management, Philips executives and other key employees. This LTI Plan was approved by the 2003 General Meeting of Shareholders. ~~Future substantial changes~~For more details on the LTI Plan please be referred to the Annual Report 2011 and the Remuneration Report of the Supervisory Board in this Annual Report. A fully revised LTI Plan applicable to members of the Board of Management will be submitted to the 2013 General Meeting of Shareholders for approval. AsThe revised plan consists of performance shares only, shifting away from ~~2002, the Company grants fixed stock options that expire after ten years to members~~pre-grant measurement of the Board of Management (and other grantees). The options vest after three years and may therefore not be exercised in the first three years after they have been granted. Options are granted at fair market value, based on the closing price of Euronext Amsterdam on the date of grant, and neither the exercise price nor the other conditions regarding the granted options can be modified during the term of the options, except in certain exceptional circumstances in accordance with established market practice. The value of the options granted to members of the Board of Management and other personnel and the method followed in calculating this value are stated in the notes to the annual accounts. Philips is one of the first companies to have introduced restricted shares as part of the LTIP. A grantee will receive the restricted shares in three equal installments in three successive years, provided he/she is still with Philips on the respective delivery dates. If the grantee still holds the shares after three years from the delivery date, Philips will grant 20% additional (premium) shares, provided he/she is still with Philips. The Plan is designed to stimulate long-term investment in Philips shares. To further align the interests of members of the Board of Management and shareholders, restricted shares granted to these members of the Board of Management shall be retained forperformance over a period of ~~at least five~~three years ~~or until at least~~preceding the ~~end of employment, if this period is shorter.~~
grant to a more standard three year post-grant performance measurement. The ~~actual~~performance shares will replace the original number of ~~long-term incentives (both stock~~ options ~~and restricted shares rights) that are to~~in each grant. For more details please be ~~granted~~referred to the ~~members~~Remuneration Report of ~~the Board of Management will be determined by~~ the Supervisory Board in this Annual Report and ~~depends on~~ the ~~achievement~~Agenda of the ~~set team targets in the areas~~2013 General Meeting of responsibility monitored by the individual members of the Board of Management and on the share performance of Philips. The share performance of Philips is measured on the basis of the Philips Total Shareholder Return (TSR) compared to the TSR of a peer group of 12 leading multinational electronics/electrical equipment companies over a three-year period; the composition of this group is described in the section Supervisory Board Report. With regard to stock options the TSR performance of Philips and the companies in the peer group is divided into three groups: top 4, middle 4 and bottom 4. Based on this relative TSR position, the Supervisory Board establishes a multiplier which varies from 1.2 to 0.8 and depends on the group in which the Philips TSR result falls. With regard to restricted share rights the TSR performance of Philips and the companies in the peer group is ranked from 1 to 12. Based on this relative TSR position, the Supervisory Board establishes a multiplier which varies from 0.0 to 2.0 and depends on the TSR position of Philips within the peer group. Every individual grant, the size of which depends on the positions and performance of the individuals, will be multiplied by the TSR-multiplier.Shareholders.
The so-called ultimum remedium clause and claw-back clause of best practice provisions II.2.10 and II.2.11 of the Dutch Corporate Governance Code is applicable to Annual Incentive payments and ~~LTIP~~LTI grants for the year 2009 onwards to all members of the Board of Management. In respect of the ~~LTIP~~LTI grants, the ultimum remedium clause can be applied to the performance-related actual number of stock options and restricted share rights that is (unconditionally) granted.
Members of the Board of Management hold shares in the Company for the purpose of long-term investment and are required to refrain from short-term transactions in Philips securities. According to the Philips Rules of Conduct on Inside Information, members of the Board of Management are only allowed to trade in Philips securities (including the exercise of stock options) during ‘windows’ of ten business days following the publication of annual and quarterly results (provided the person involved has no ‘inside information’ regarding Philips at that ~~time)~~time unless an exemption is ~~available.~~available). Furthermore, the Rules of Procedure of the Board of Management and Executive Committee contain provisions concerning ownership of and transactions in ~~non- Philips~~non-Philips securities by members of the Board of Management. Members of the Board of Management are prohibited from trading, directly or indirectly, in securities of any of the companies belonging to the peer group, during one week preceding the disclosure of Philips’ annual or quarterly figures. These rules apply to members of the Executive Committee correspondingly. Transactions in shares in the Company carried out by members of the Board of Management or members of the Supervisory Board and other Insiders (if applicable) are notified to the Netherlands Authority for the Financial Markets (AFM) in accordance with Dutch law and, if necessary, to other relevant authorities.
Indemnification of members of the Board of Management and Supervisory Board
Unless the law provides otherwise, the members of the Board of Management and of the Supervisory Board shall be reimbursed by the Company for various costs and expenses, such as the reasonable costs of defending claims, as formalized in the ~~articles~~Articles of ~~association.~~Association. Under certain circumstances, described in the ~~articles~~Articles of ~~association,~~Association, such as an act or failure to act by a member of the Board of Management or a member of the Supervisory Board that can be characterized as intentional (‘opzettelijk’), intentionally reckless (‘bewust roekeloos’) or seriously culpable (‘ernstig verwijtbaar’), there will be no entitlement to this reimbursement. The Company has also taken out liability insurance (D&O - Directors & Officers) for the persons concerned.
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In line with regulatory requirements, the Company’s policy forbids personal loans to and guarantees on behalf of members of the Board of Management or the Supervisory Board, and no loans and guarantees have been granted and issued, respectively, to such members in ~~2011,~~2012, nor are any loans or guarantees outstanding as of ~~the date of this Annual Report on Form 20-F.~~December 31, 2012.
The aggregate share ownership of the members of the Board of Management and the Supervisory Board represents less than 1% of the outstanding ordinary shares in the Company.
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Risk management approach
Within Philips, risk management forms an integral part of business management. The Company has implemented a risk management and internal control system that is designed to provide reasonable assurance that strategic objectives are met by creating focus, by integrating management control over the Company’s operations, by ensuring compliance with applicable laws and regulations and by safeguarding the reliability of the financial reporting and its disclosures. The Executive Committee reports on and accounts for internal risk management and control systems to the Supervisory Board and its Audit Committee. The Company has designed its internal control system in accordance with the recommendations of the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
The Company’s risk management approach is embedded in the periodic business planning and review cycle and forms an integral part of business management. On the basis of risk assessments, management determines the risks and appropriate risk responses related to the achievement of business objectives and critical business processes. Risk factors and the risk management approach, as well as the sensitivity of the Company’s results to external factors and variables, are described in more detail in chapter 7, Risk management, of this report. Significant changes and improvements in the Company’s risk management and internal control system have been discussed with the Supervisory Board’s Audit Committee and the external auditor and are disclosed in that section as well.
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. Internal representations received from management, regular management reviews, reviews of the design and effectiveness of internal controls and reviews in corporate and divisional audit committees are integral parts of the Company’s risk management approach. On the basis thereof, the Board of Management confirms that internal controls over financial reporting provide a reasonable level of assurance that the financial reporting does not contain any material inaccuracies, and confirms that these controls have properly functioned in ~~2011.~~2012. The financial statements fairly represent the financial condition and result of operations of the Company and provide the required disclosures.
It should be noted that the above does not imply that these systems and procedures provide certainty as to the realization of operational and financial business objectives, nor can they prevent all misstatements, inaccuracies, errors, fraud and non-compliances with rules and regulations.
In view of the above the Board of Management believes that it is in compliance with the requirements of recommendation II.1.4. of the Dutch Corporate Governance Code. The above statement on internal controls should not be construed as a statement in response to the requirements of section 404 of the US Sarbanes-Oxley Act. The statement as to compliance with section 404 is set forth in the section Management’s report on internal control over financial reporting of this ~~Annual Report.~~report.
Philips has a financial code of ethics which applies to certain senior officers, including the CEO and CFO, and to employees performing an accounting or financial function (the financial code of ethics has been published on the Company’s website). The Company, through the Supervisory Board’s Audit Committee, also has appropriate procedures in place for the receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls or auditing matters and the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters. Internal ‘whistleblowers’ have the opportunity, without jeopardizing their position, to report on irregularities of a general, operational or financial nature and to report complaints about members of the Executive Committee to the Chairman of the Supervisory Board.
In view of the requirements under the US Securities Exchange Act, procedures are in place to enable the CEO and the CFO to provide certifications with respect to the Annual Report on Form 20-F.
A Disclosure Committee is in place, which advises the various officers and departments involved, including the CEO and the CFO, on the timely review, publication and filing of periodic and current (financial) reports. Apart from the certification by the CEO and CFO under US law, each individual member of the Supervisory Board and the Board of Management must under Dutch law, sign the Group and Company financial statements being disclosed and submitted to the General Meeting of Shareholders for adoption. If one or more of their signatures is missing, this shall be stated, and the reasons given for this. The members of the Board of Management issue the responsibility statement with regard to chapter 12, Group financial statements, of this report, pursuant to requirements of Dutch civil and securities laws.
11.2 Supervisory Board
Introduction
The Supervisory Board supervises the policies of the Board of Management and Executive Committee and the general course of affairs of Philips and advises the executive management thereon. The Supervisory Board, in the two-tier corporate structure under Dutch law, is a separate body that is independent of the Board of Management. Its independent character is also reflected in the requirement that members of the Supervisory Board can be neither a member of the Board of Management nor an employee of the Company. The Supervisory Board considers all its members to be independent pursuant to the Dutch Corporate Governance Code and under the applicable US Securities and Exchange Commission standards.
The Supervisory Board, acting in the interests of the Company and the Group and taking into account the relevant interest of the Company’s stakeholders, supervises and advises the Board of Management and Executive Committee in performing its management tasks and setting the direction of the Group’s business, including (a) achievement of the Company’s objectives, (b) corporate strategy and the risks inherent in the business activities, (c) the structure and operation of the internal risk management and control systems, (d) the financial reporting process, (e) compliance with legislation and regulations, (f) the operational and financial objectives, (g) the parameters to be applied in relation to the strategy, (h) corporate social responsibility issues and (i) the company-shareholder relationship. Major management decisions and the Group’s strategy are discussed with and approved by the Supervisory Board. In its report, the Supervisory Board describes its activities in the financial year, the number of committee meetings and the main items discussed.
Rules of Procedure of the Supervisory Board
The Supervisory Board’s Rules of Procedure set forth its own governance rules (including meetings, items to be discussed, resolutions, appointment and re-election, committees, conflicts of interests, trading in securities, profile of the Supervisory Board). Its composition follows the profile, which aims for an appropriate combination of knowledge and experience among its members encompassing marketing, technological, manufacturing, financial, economic, social and legal aspects of international business and government and public administration in relation to the global and multi-product character of the Group’s businesses. The Supervisory Board attaches great importance to diversity in its composition. More particularly, it aims at having members with a European and a ~~non- European~~non-European background (nationality, working experience or otherwise)~~, one or more female members~~ and one or more members with an executive or similar position in business or society no longer than 5 years ago. Furthermore, in line with new Dutch legislation, it strives to have at least 30% of the Supervisory Board seats held by women. In line with US and Dutch best practices, the Chairman of the Supervisory Board should be independent pursuant to the Dutch Corporate Governance Code and under the applicable US standards.
The Rules of Procedure of the Supervisory Board are published on the Company’s website. They include the charters of its committees, to which the plenary Supervisory Board, while retaining overall responsibility, has assigned certain tasks: the Corporate Governance and Nomination & Selection Committee, the Audit Committee and the Remuneration Committee. A maximum of one member of each committee need not be independent as defined by the Dutch Corporate Governance Code. Each committee reports, and submits its minutes for information, to the Supervisory Board.
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The Supervisory Board is assisted by the General Secretary of the Company. The General Secretary sees to it that correct procedures are followed and that the Supervisory Board acts in accordance with its statutory obligations and its obligations under the ~~articles~~Articles of ~~association.~~Association. Furthermore the General Secretary assists the Chairman of the Supervisory Board in the actual organization of the affairs of the Supervisory Board (information, agenda, evaluation, introductory program) and is the contact person for interested parties who want to make concerns known to the Supervisory Board. The General Secretary shall, either on the recommendation of the Supervisory
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Board or otherwise, be appointed and may be dismissed by the Executive Committee, after the approval of the Supervisory Board has been obtained.
(Term of) Appointment, individual data and conflicts of interests
The Supervisory Board consists of at least five members (currently eight), including a Chairman, Vice-Chairman and Secretary. The so-called Dutch ‘structure regime’ does not apply to the Company itself. Members are currently elected by the General Meeting of Shareholders for fixed terms of four years, upon a binding recommendation from the Supervisory Board. According to the Company’s ~~articles~~Articles of ~~association,~~Association, 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.
Members may be suspended and dismissed by the General Meeting of Shareholders. In the event of inadequate performance, structural incompatibility of interests, and in other instances in which resignation is deemed necessary in the opinion of the Supervisory Board, the Supervisory Board shall submit to the General Meeting of Shareholders a proposal to dismiss the respective member of the Supervisory Board. There is no age limit applicable, and members may be re-elected twice. The date of expiration of the terms of Supervisory Board members is published on the Company’s website. Individual data on the members of the Supervisory Board are published in the Annual Report, and updated on the Company’s website.
After their appointment, all members of the Supervisory Board shall follow an introductory program, which covers general financial and legal affairs, financial reporting by the Company, any specific aspects that are unique to the Company and its business activities, and the responsibilities of a Supervisory Board member. Any need for further training or education of members will be reviewed annually, also on the basis of an annual evaluation survey.
In accordance with policies adopted by the Supervisory Board, no member of the Supervisory Board shall hold more than five supervisory board memberships of Dutch listed companies, the chairmanship of a supervisory board counting as two regular memberships. In addition, pursuant to newly adopted Dutch legislation, effective January 1, 2013, no member of the Supervisory Board holds more than five Non-Executive Directorships at ‘large companies’ as defined under Dutch law (see par. II.I of this Corporate Governance Report), with a position as chairman counting for two.
In compliance with the Dutch Corporate Governance Code, the Company has formalized strict rules to avoid conflicts of interests between the Company and members of the Supervisory Board; all information about a conflict of interests situation is to be provided to the Chairman of the Supervisory Board. No decisions to enter into material transactions in which there are conflicts of interest with members of the Supervisory Board have occurred during the financial year ~~2011.~~2012.
Meetings of the Supervisory Board
The Supervisory Board meets at least six times per year, including a meeting on strategy. The Supervisory Board, on the advice of its Audit Committee, also discusses, in any event at least once a year, the main risks of the business, and the result of the assessment of the structure and operation of the internal risk management and control systems, as well as any significant changes thereto. The members of the Executive Committee attend meetings of the Supervisory Board except in matters such as the desired profile, composition and competence of the Supervisory Board and the Executive Committee, as well as the remuneration and performance of individual members of the Executive Committee and the conclusions that must be drawn on the basis thereof. In addition to these items, the Supervisory Board, being responsible for the quality of its own performance, discusses, at least once a year on its own, without the members of the Executive Committee being present, both its own functioning and that of the individual members, and the conclusions that must be drawn on the basis thereof. The President/CEO and other members of the Executive Committee have regular contacts with the Chairman and other members of the Supervisory Board. The Executive Committee is required to keep the Supervisory Board informed of all facts and developments concerning Philips that the Supervisory Board may need in order to function as required and to properly carry out its duties, to consult it on important matters and to submit certain important decisions to it for its prior approval. The Supervisory Board and its individual members each have their own responsibility to request from the Executive Committee and the external auditor all information that the Supervisory Board needs in order to be able to carry out its duties properly as a supervisory body. If the Supervisory Board considers it necessary, it may obtain information from officers and external advisers of the Company. The Company provides the necessary means for this purpose. The Supervisory Board may also require that certain officers and external advisers attend its meetings.
The Chairman of the Supervisory Board
The Supervisory Board’s Chairman will see to it that: (a) the members of the Supervisory Board follow their introductory program, (b) the members of the Supervisory Board receive in good time all information which is necessary for the proper performance of their duties, (c) there is sufficient time for consultation and decision-making by the Supervisory Board, (d) the committees of the Supervisory Board function properly, (e) the performance of the Executive Committee members and Supervisory Board members is assessed at least once a year, and (f) the Supervisory Board elects a Vice-Chairman. The ~~Vice- Chairman~~Vice-Chairman of the Supervisory Board shall deputize for the Chairman when the occasion arises. The Vice-Chairman shall act as contact of individual members of the Supervisory Board or the Board of Management concerning the functioning of the Chairman of the Supervisory Board.
Remuneration of the Supervisory Board and share ownership
The remuneration of the individual members of the Supervisory Board, as well as the additional remuneration for its Chairman and the members of its committees is determined by the General Meeting of Shareholders. The remuneration of a Supervisory Board member is not dependent on the results of the Company. Further details are published in the Supervisory Board report. The Company shall not grant its Supervisory Board members any personal loans, guarantees or similar arrangements. No such (remissions of) loans and guarantees were granted to such members in 2011, nor were any outstanding as per December 31, 2011.
Shares or rights to shares shall not be granted to a Supervisory Board member. In accordance with the Rules of Procedure of the Supervisory Board, any shares in the Company held by a Supervisory Board member are long-term investments. The Supervisory Board has adopted a policy on ownership of transactions in non-Philips securities by members of the Supervisory Board. This policy is included in the Rules of Procedure of the Supervisory Board.
The Corporate Governance and Nomination & Selection Committee
The Corporate Governance and Nomination & Selection Committee consists of at least the Chairman and Vice-Chairman of the Supervisory Board. The Committee reviews the corporate governance principles applicable to the Company at least once a year, and advises the Supervisory Board on any changes to these principles as it deems appropriate. It also (a) draws up selection criteria and appointment procedures for members of the Supervisory Board, the Board of Management and the Executive Committee; (b) periodically assesses the size and composition of the Supervisory Board, the Board of Management and the Executive Committee, and makes the proposals for a composition profile of the Supervisory Board, if appropriate; (c) periodically assesses the functioning of individual members of the Supervisory Board, the Board of Management and the Executive Committee, and reports on this to the Supervisory Board. The Committee also consults with the President/CEO and the Executive Committee on candidates to fill vacancies on the Supervisory Board, the Executive Committee, and advises the Supervisory Board on the candidates for appointment. It further supervises the policy of the Executive Committee on the selection criteria and appointment procedures for Philips Executives.
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The Remuneration Committee
The Remuneration Committee meets at least twice a year and is responsible for preparing decisions of the Supervisory Board on the remuneration of individual members of the Board of Management and the Executive Committee.
The Remuneration Committee prepares an annual remuneration report. The remuneration report contains an account of the manner in which the remuneration policy has been implemented in the past financial year, as well as an overview of the implementation of the remuneration policy planned by the Supervisory Board for the next year(s). The Supervisory Board aims to have appropriate experience
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available within the Remuneration Committee. No more than one member of the Remuneration Committee shall be an executive board member of another Dutch listed company.
In performing its duties and responsibilities the Remuneration Committee is assisted by an in-house remuneration expert acting on the basis of a protocol ensuring that the expert acts on the instructions of the Remuneration Committee and on an independent basis in which conflicts of interests are avoided.
The Audit Committee
The Audit Committee meets at least four times a year, before the publication of the annual, semi-annual and quarterly results. All of the members of the Audit Committee are considered to be independent under the applicable US Securities and Exchange Commission rules and at least one of the members of the Audit Committee, which currently consists of four members of the Supervisory Board, is a financial expert as set out in the Dutch Corporate Governance Code and each member is financially literate. In accordance with this code, a financial expert has relevant knowledge and experience of financial administration and accounting at the company in question. The Supervisory Board considers the fact of being compliant with the Dutch Corporate Governance Code, in combination with the knowledge and experience available in the Audit Committee as well as 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 Supervisory Board has determined that none~~None of the members of the Audit Committee is designated as an Audit Committee financial expert as defined under the regulations of the US Securities and Exchange Commission. The Audit Committee may not be chaired by the Chairman of the Supervisory Board or by a (former) member of the Board of Management.
All members of the Audit Committee are independent
The tasks and functions of the Audit Committee, as described in its charter, which is published on the Company’s website as part of the Rules of Procedure of the Supervisory Board, include the duties recommended in the Dutch Corporate Governance Code. More specifically, the Audit Committee assists the Supervisory Board in fulfilling its oversight responsibilities for the integrity of the Company’s financial statements, the financial reporting process, the system of internal business controls and risk management, the internal and external audit process, the internal and external auditor’s qualifications, its independence and its performance, as well as the Company’s process for monitoring compliance with laws and regulations and the General Business Principles (GBP). 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.
In reviewing the Company’s annual and interim statements, including non-financial information, and advising the Supervisory Board on internal control policies and internal audit programs, the Audit Committee reviews matters relating to accounting policies and compliance with accounting standards, compliance with statutory and legal requirements and regulations, particularly in the financial domain. Important findings and identified risks are examined thoroughly by the Audit Committee in order to allow appropriate measures to be taken. With regard to the internal audit, the Audit Committee, in cooperation with the external auditor, reviews the internal audit charter, audit plan, audit scope and its coverage in relation to the scope of the external audit, staffing, independence and organizational structure of the internal audit function.
With regard to the external audit, the Audit Committee reviews the proposed audit scope, approach and fees, the independence of the external auditor, its performance and its (re-)appointment, audit and permitted non-audit services provided by the external auditor in conformity with the Philips Policy on Auditor Independence, as well as any changes to this policy. The Audit Committee also considers the report of the external auditor and its report with respect to the annual financial statements. According to the procedures, the Audit Committee acts as the principal contact for the external auditor if the auditor discovers irregularities in the content of the financial reports. It also advises on the Supervisory Board’s statement to shareholders in the annual accounts. The Audit Committee periodically discusses the Company’s policy on business controls, the GBP including the deployment thereof, overviews on tax, IT, litigation and legal proceedings, environmental exposures, financial exposures in the area of treasury, real estate, pensions, and the Group’s major areas of risk. The Company’s external auditor, in general, attends all Audit Committee meetings and the Audit Committee meets separately at least on a quarterly basis with each of the President/CEO, the CFO, the internal auditor and the external auditor.
~~The Company does not have an Audit Committee financial expert as defined under the regulations of the US Securities and Exchange Commission serving on its Audit Committee.~~
11.3 General Meeting of Shareholders
Introduction
A General Meeting of Shareholders is held at least once a year to discuss the Annual Report, including the report of the Board of Management, the annual financial statements with explanatory notes thereto and additional information required by law, and the Supervisory Board report, any proposal concerning dividends or other distributions, the appointment of members of the Board of Management and Supervisory Board (if any), important management decisions as required by Dutch law, and any other matters proposed by the Supervisory Board, the Board of Management or shareholders in accordance with the provisions of the Company’s ~~articles~~Articles of ~~association.~~Association. The Annual Report, the financial statements and other regulated information such as defined in the Dutch Act on Financial Supervision ~~(Wet~~(Wet op het Financieel ~~Toezicht)~~Toezicht), will solely be published in English. As a separate agenda item and in application of Dutch law, the General Meeting of Shareholders discusses the discharge of the members of the Board of Management and the Supervisory Board from responsibility for the performance of their respective duties in the preceding financial year. However, this discharge only covers matters that are known to the Company and the General Meeting of Shareholders when the resolution is adopted. The General Meeting of Shareholders is held in Eindhoven, Amsterdam, Rotterdam, The Hague, Utrecht or Haarlemmermeer (Schiphol Airport) no later than six months after the end of the financial year.
Meetings are convened by public notice, via the Company’s website or other electronic means of communication and by letter or by the use of electronic means of communication, to registered ~~shareholders.~~shareholders at least 42 days prior to the (Extraordinary) General Meeting of Shareholders. Extraordinary General Meetings of Shareholders may be convened by the Supervisory Board or the Board of Management if deemed necessary and must be held if shareholders jointly representing at least 10% of the outstanding share capital make a written request to that effect to the Supervisory Board and the Board of Management, specifying in detail the business to be dealt with. The agenda of the General Meeting of Shareholders shall contain such business as may be placed thereon by the Board of Management or the Supervisory Board, and agenda items will be explained where necessary in writing. The agenda shall list which items are for discussion and which items are to be voted upon. Material amendments to the ~~articles~~Articles of ~~association~~Association and resolutions for the appointment of members of the Board of Management and Supervisory Board shall be submitted separately to the General Meeting of Shareholders, it being understood that amendments and other proposals that are connected in the context of a proposed (part of the) governance structure may be submitted as one proposal. In accordance with the ~~articles~~Articles of ~~association~~Association and Dutch law, requests from shareholders for items to be included on the agenda will generally be honored, subject to the Company’s rights to refuse to include the requested agenda item under Dutch law, provided that such requests are made in writing at least 60 days before a General Meeting of Shareholders to the Board of Management and the Supervisory Board by shareholders representing at least 1% of the Company’s outstanding capital or, according to the official price list of Euronext Amsterdam, representing a value of at least EUR 50 million. Written requests may be submitted electronically and shall comply with the procedure stipulated by the Board of Management, which procedure is posted on the Company’s website.
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Main powers of the General Meeting of Shareholders
All outstanding shares carry voting rights. The main powers of the General Meeting of Shareholders are to appoint, suspend and dismiss members of the Board of Management and of the Supervisory Board, to adopt the annual accounts, declare dividends and to discharge the Board of Management and the Supervisory Board from responsibility for the performance of their respective duties for the previous financial year, to appoint the external auditor as required by Dutch law, to adopt amendments to the ~~articles~~Articles of ~~association~~Association and proposals to dissolve or liquidate the Company, to issue shares or rights to shares, to restrict or exclude pre-emptive rights of shareholders and to repurchase or cancel outstanding shares. Following common corporate practice in the Netherlands, the Company each year requests limited authorization to issue (rights to) shares, to restrict or exclude pre-emptive rights and to repurchase shares. In compliance with Dutch law, decisions of the Board of Management that are so far-reaching that they would greatly change the identity or nature of the Company or the business require
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the approval of the General Meeting of Shareholders. This includes resolutions to (a) transfer the business of the Company, or almost the entire business of the Company, to a third party (b) enter into or discontinue long-term cooperation by the Company or a subsidiary with another legal entity or company or as a fully liable partner in a limited partnership or ordinary partnership, if this cooperation or its discontinuation is of material significance to the Company or (c) acquire or dispose of a participating interest in the capital of a company to the value of at least one-third of the amount of the assets according to the balance sheet and notes thereto or, if the Company prepares a consolidated balance sheet, according to the consolidated balance sheet and notes thereto as published in the last adopted annual accounts of the Company, by the Company or one of its subsidiaries. Thus the Company applies principle IV.1 of the Dutch Corporate Governance Code within the framework of the ~~articles~~Articles of ~~association~~Association and Dutch law and in the manner as described in this corporate governance report.
The Board of Management and Supervisory Board are also accountable, at the Annual General Meeting of Shareholders, for the policy on the additions to reserves and dividends (the level and purpose of the additions to reserves, the amount of the dividend and the type of dividend). This subject is dealt with and explained as a separate agenda item at the General Meeting of Shareholders. Philips aims for a sustainable and stable dividend distribution to shareholders in the long term. A resolution to pay a dividend is dealt with as a separate agenda item at the General Meeting of Shareholders.
The Board of Management and the Supervisory Board are required to provide the General Meeting of Shareholders with all requested information, unless this would be prejudicial to an overriding interest of the Company. If the Board of Management and the Supervisory Board invoke an overriding interest in refusing to provide information, reasons must be given. If a serious private bid is made for a business unit or a participating interest and the value of the bid exceeds a certain threshold (currently one-third of the amount of the assets according to the balance sheet and notes thereto or, if the Company prepares a consolidated balance sheet, according to the consolidated balance sheet and notes thereto as published in the last adopted annual accounts of the Company), and such bid is made public, the Board of Management shall, at its earliest convenience, make public its position on the bid and the reasons for this position.
A resolution to dissolve the Company or change its ~~articles~~Articles of ~~association~~Association can be adopted at the General Meeting of Shareholders by at least three-fourths of the votes cast, at which meeting more than half of the issued share capital is represented. If the requisite share capital is not represented, a further meeting shall be convened, to be held within eight weeks of the first meeting, to which no quorum requirement applies. Furthermore, the resolution requires the approval of the Supervisory Board. If the resolution is proposed by the Board of Management, the adoption needs an absolute majority of votes and no quorum requirement applies to the meeting.
Repurchase and issue of (rights to) own shares
The ~~2011~~2012 General Meeting of Shareholders has resolved to authorize the Board of Management, subject to the approval of the Supervisory Board, to acquire shares in the Company within the limits of the ~~articles~~Articles of ~~association~~Association and within a certain price range ~~until September 30, 2012.~~up to and including October 26, 2013. The maximum number of shares the company may hold, will not exceed 10% of the issued share capital as of ~~March 31, 2011,~~April 26, 2012, which number may be increased by 10% of the issued capital as of that same date in connection with the execution of share repurchase programs for capital reduction programs.
In addition, the ~~2011~~2012 General Meeting of Shareholders resolved to authorize the Board of Management, subject to the approval of the Supervisory Board, to issue shares or grant rights to acquire shares in the Company as well as to restrict or exclude the pre-emption right accruing to shareholders ~~until September 30, 2012.~~up to and including October 26, 2013. This authorization is limited to a maximum of 10% of the number of shares issued as of ~~March 31, 2011~~April 26, 2012 plus 10% of the issued capital in connection with or on the occasion of mergers and acquisitions.
11.4 Logistics of the General Meeting of Shareholders and provision of information
Introduction
The Company will set a ~~registration~~record date for the exercise of the voting rights and the rights relating to General Meetings of Shareholders. In accordance with Dutch law this ~~registration~~record date is fixed at the 28^thday prior to the day of the meeting. Shareholders registered at such date are entitled to attend the meeting and to exercise the other shareholder rights (in the meeting in question) notwithstanding subsequent sale of their shares thereafter. This date will be published in advance of every General Meeting of Shareholders. Shareholders who are entitled to attend a General Meeting of Shareholders may be represented by proxies.
Information which is required to be published or deposited pursuant to the provisions of company law and securities law applicable to the Company and which is relevant to the shareholders, is placed and updated on the Company’s website, or hyperlinks are established. The Board of Management and Supervisory Board shall ensure that the General Meeting of Shareholders is informed by means of a ‘shareholders circular’ published on the Company’s website of facts and circumstances relevant to the proposed resolutions.
Resolutions adopted at a General Meeting of Shareholders shall be recorded by a civil law notary and co-signed by the chairman of the meeting; such resolutions shall also be published on the Company’s website within 15 days after the meeting. A summary of the discussions during the General Meeting of Shareholders, in the language of the meeting, is made available to shareholders, on request, no later than three months after the meeting. Shareholders shall have the opportunity to respond to this summary for three months, after which a final summary is adopted by the chairman of the meeting in question. Such summary shall be made available on the Company’s website.
Proxy voting and the Shareholders Communication Channel
Philips was one of the key companies in the establishment of the Shareholders Communication Channel, a project of Euronext Amsterdam, banks in the Netherlands and several major Dutch companies to simplify contacts between a participating company and shareholders that hold their shares through a Dutch securities account with a participating bank. The Company uses the Shareholders Communication Channel to distribute a voting instruction form for the Annual General Meeting of Shareholders. By returning this form, shareholders grant power to an independent proxy holder who will vote according to the instructions expressly given on the voting instruction form. Also other persons entitled to vote shall be given the possibility to give voting proxies or instructions to an independent third party prior to the meeting. The Shareholders Communication Channel can also be used, under certain conditions, by participating Philips shareholders to distribute – either by mail or by placing it on the Company’s or Shareholders Communication Channel’s website – information directly related to the agenda of the General Meeting of Shareholders to other participating Philips shareholders.
Preference shares and the Stichting Preferente Aandelen Philips
As a means to protect the Company and its stakeholders against an unsolicited attempt to obtain (de facto) control of the Company, the General Meeting of Shareholders in 1989 adopted amendments to the Company’s ~~articles~~Articles of ~~association~~Association that allow the Board of Management and the Supervisory Board to issue (rights to) preference shares to a third party. As a result, the Stichting Preferente Aandelen Philips (the ‘Foundation’) was created, which was granted the right to acquire preference shares in the Company. The mere notification that the Foundation wishes to exercise its rights, should a third party ever seem likely in the judgment of the Foundation to obtain (de facto) control of the Company, will result in the preference shares being effectively issued. The Foundation may exercise this right for as many preference shares as there are ordinary shares in the Company outstanding at that time. No preference shares have been issued as of December 31, ~~2011.~~2012. In addition, the Foundation has the right to file a petition with the
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Enterprise Chamber of the Amsterdam Court of Appeal to commence an inquiry procedure within the meaning of section 2:344 Dutch Civil Code.
The object of the Foundation is to represent the interests of the Company, the enterprises maintained by the Company and its affiliated companies within the Group, in such a way that the interests of Philips, those enterprises and all parties involved with them are safeguarded as effectively as possible, and that they are afforded maximum protection against influences which, in conflict with those interests, may undermine the autonomy and identity of Philips and those enterprises, and also to do anything related to the above ends or conducive to them. In the event of (an attempt at) a hostile takeover or other attempt to obtain (de facto) control of the Company this arrangement will allow the Company and its Board of Management and Supervisory Board to determine its position in relation to the third party and its plans, seek alternatives and defend Philips’ interests and those of its stakeholders
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from a position of strength. The members of the self-electing Board of the Foundation are Messrs S.D. de Bree, F.J.G.M. Cremers and M.W. den Boogert. No Philips board members or officers are represented on the board of the Foundation.
The Company does not have any other anti-takeover measures in the sense of other measures which exclusively or almost exclusively have the purpose of frustrating future public bids for the shares in the capital of the Company in case no agreement is reached with the Board of Management on such public bid. Furthermore, the Company does not have measures which specifically have the purpose of preventing a bidder who has acquired 75% of the shares in the capital of the Company from appointing or dismissing members of the Board of Management and subsequently amending the ~~articles~~Articles of ~~association~~Association of the Company. It should be noted that also in the event of (an attempt at) a hostile takeover or other attempt to obtain (de facto) control of the Company, the Board of Management and the Supervisory Board are authorized to exercise in the interests of Philips all powers vested in them.
Audit of the financial reporting and the position of the external auditor
The annual financial statements are prepared by the Board of Management and reviewed by the Supervisory Board upon the advice of its Audit Committee and 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 final 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 to the Annual General Meeting of Shareholders, to be convened subsequently. Philips, under US securities regulations, separately files its Annual Report on Form 20-F, incorporating major parts of the Annual Report as prepared under the requirements of Dutch law.
Internal controls and disclosure policies
Comprehensive internal procedures, compliance with which is supervised by the Supervisory Board, are in place for the preparation and publication of the Annual Report, the annual accounts, the quarterly figures and ad hoc financial information. As from 2003, the internal assurance process for business risk assessment has been strengthened and the review frequency has been upgraded to a quarterly review cycle, in line with emerging best practices in this area.
As part of these procedures, a Disclosure Committee has been appointed by the Board of Management to oversee the Company’s disclosure activities and to assist the Executive Committee in fulfilling its responsibilities in this respect. The Committee’s purpose is to ensure that the Company implements and maintains internal procedures for the timely collection, evaluation and disclosure, as appropriate, of information potentially subject to public disclosure under the legal, regulatory and stock exchange requirements to which the Company is subject. Such procedures are designed to capture information that is relevant to an assessment of the need to disclose developments and risks that pertain to the Company’s various businesses, and their effectiveness for this purpose will be reviewed periodically.
Auditor information
In accordance with the procedures laid down in the Philips Policy on Auditor Independence 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. Under this Auditor Policy, once every three years the Supervisory Board and the Audit Committee conduct a thorough assessment of the functioning of the external auditor. The main conclusions of this assessment shall be communicated to the General Meeting of Shareholders for the purposes of assessing the nomination for the appointment of the external auditor. The current auditor of the Company, KPMG Accountants N.V., was appointed by the 1995 General Meeting of Shareholders. In 2002, when the Auditor Policy was adopted, the appointment of KPMG Accountants N.V. was confirmed by the Supervisory Board for an additional three years. The 2008 and 2011 General Meeting of Shareholders resolved to re-appoint KPMG Accountants N.V. as auditor. Mr ~~M.A. Soeting~~J.F.C. van Everdingen is the current partner of KPMG Accountants N.V. in charge of the audit duties for Philips. In accordance with the rotation schedule determined in accordance with the Auditor Policy, he will be replaced by another partner of KPMG Accountants N.V., Mr J.F.C. van Everdingen, in the course of 2012. The external auditor shall attend the Annual General Meeting of Shareholders. Questions may be put to him at the meeting about his report. The Board of Management and the Audit Committee of the Supervisory Board shall report on their dealings with the external auditor to the Supervisory Board on an annual basis, particularly with regard to the auditor’s independence. The Supervisory Board shall take this into account when deciding upon its nomination for the appointment of an external auditor. New Dutch legislation on mandatory auditor rotation will become effective January 1, 2016, meaning the Company must engage a new audit firm for its statutory audit starting per January 1, 2016.
The external auditor attends, in principle, all meetings of the Audit Committee. The findings of the external auditor, the audit approach and the risk analysis are also discussed at these meetings. The external auditor attends the meeting of the Supervisory Board at which the report of the external auditor with respect to the audit of the annual accounts is discussed, and at which the annual accounts are approved. In its audit report on the annual accounts to the Board of Management and the Supervisory Board, the external auditor refers to the financial reporting risks and issues that were identified during the audit, internal control matters, and any other matters, as appropriate, requiring communication under the auditing standards generally accepted in the Netherlands and the US.
Auditor policy
The Company maintains a policy of auditor independence, and this policy restricts the use of its auditing firm for non-audit services, in line with US Securities and Exchange Commission rules under which the appointed external auditor must be independent of the Company both in fact and appearance. The policy is laid down in the comprehensive policy on auditor independence published on the Company’s website.
The policy includes rules for the pre-approval by the Audit Committee of all services to be provided by the external auditor. The policy also describes the prohibited services that may never be provided. Proposed 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, designed to ensure that there is no management discretion in determining whether a service has been approved and to ensure the Audit Committee is informed of each 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 ~~2011,~~2012, there were no services provided to the Company by the external auditor which were not pre-approved by the Audit Committee.
New Dutch legislation effective January 1, 2013 has been adopted on the separation of audit and non-audit services, meaning the Company’s external auditor is no longer allowed to provide non-audit services, with an exception for non-audit service arrangements already in place on December 31, 2012, which will be grandfathered for a maximum term of two years (until December 31, 2014). In light of this new Dutch legislation, the auditor policy is in the process of being updated.
11.5 Investor Relations
Introduction
The Company is continually striving to improve relations with its shareholders. In addition to communication with its shareholders at the Annual General Meeting of Shareholders, Philips elaborates its financial results during (public) conference calls, which are broadly accessible. It publishes informative annual, semi-annual and quarterly reports and
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press releases, and informs investors via its extensive website. The Company is strict in its compliance with applicable rules and regulations on fair and non-selective disclosure and equal treatment of shareholders.
Each year the Company organizes Philips Capital Market Days and participates in several broker conferences, announced in advance on the Company’s website and by means of press releases. Shareholders can follow in real time, by means of webcasting or telephone lines, the meetings and presentations organized by the Company. Thus the Company applies recommendation IV.3.1 of the Dutch Corporate Governance Code, which in its perception and in view of market
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practice does not extend to less important analyst meetings and presentations. It is Philips’ policy to post presentations to analysts and shareholders on the Company’s website. These meetings and presentations will not take place shortly before the publication of annual, semi-annual and quarterly financial information.
Furthermore, the Company engages in bilateral communications with investors. These communications either take place at the initiative of the Company or at the initiative of individual investors. During these communications the Company is generally represented by its Investor Relations department. However, on a limited number of occasions the Investor Relations department is accompanied by one or more members of the Board of Management. The subject matter of the bilateral communications ranges from single queries from investors to more elaborate discussions on the back of disclosures that the Company has made such as its annual and quarterly reports. Also here, the Company is strict in its compliance with applicable rules and regulations on fair and non-selective disclosure and equal treatment of shareholders.
The Company shall not, in advance, assess, comment upon or correct, other than factually, any analyst’s reports and valuations. No fee(s) will be paid by the Company to parties for the carrying-out of research for analysts’ reports or for the production or publication of analysts’ reports, with the exception of credit-rating agencies.
Major shareholders and other information for shareholders
The Dutch Act on Financial Supervision imposes a duty to disclose percentage holdings in the capital and/or voting rights in the Company when such holdings reach, exceed or fall below ~~5%, 10%, 15%, 20%, 25%, 30%, 40%, 50%, 60%, 75%~~5, 10, 15, 20, 25, 30, 40, 50, 60, 75 and ~~95%~~95 percent (as a result of an acquisition or disposal by a person, or as a result of a change in the company’s total number of voting rights or capital issued). Such disclosure must be made to the Netherlands Authority for the Financial Markets (AFM) without delay. The AFM then notifies the Company. As of January 1, 2012, certain cash settled derivatives are also taken into account when calculating the capital interest. New Dutch legislation has been adopted and is expected to enter into force as per July 1, 2013, introducing an initial threshold of 3 percent.
On ~~July 13, 2011~~November 27, 2012 the Company received notification from the AFM that it had received disclosures under the Dutch Act on Financial Supervision of a substantial holding of ~~5.10%~~5.02% (representing ~~51,428,846~~47,683,639 shares) by ~~Southeastern Asset Management~~BlackRock, Inc., in the Company’s common shares. On December 7, 2011 the Company received notification from the AFM that it had received disclosures under the Financial Markets Supervision Act of a substantial holding of 5.05% (representing 50,990,018 shares) by Dodge & Cox, in the Company’s common shares. The common shares are held by shareholders worldwide in bearer and registered form. As per December 31, ~~2011,~~2012, approximately 91% of the common shares were held in bearer form and approximately 9% of the common shares were represented by registered shares of New York Registry issued in the name of approximately ~~1,311~~1,252 holders of record, including Cede & Co. Cede & Co acts as nominee for the Depository Trust Company holding the shares (indirectly) for individual investors as beneficiaries. Citibank, N.A., 388 Greenwich Street, New York, New York 10013 is the transfer agent and registrar.
Only bearer shares are traded on the stock market of Euronext Amsterdam. Only shares of New York Registry are traded on the New York Stock Exchange. Bearer shares and registered shares may be exchanged for each other. Since certain shares are held by brokers and other nominees, these numbers may not be representative of the actual number of United States beneficial holders or the number of Shares of New York Registry beneficially held by US residents.
The provisions applicable to all corporate bonds that have been issued by the Company in March 2008 and 2012 contain a ‘Change of Control Triggering Event’. This means that if the Company experienced such an event with respect to a series of corporate bonds the Company might be required to offer to purchase the bonds of that series at a purchase price equal to 101% of their principal amount, plus accrued and unpaid interest, if any.
~~Major shareholders do not have different voting rights than other shareholders.~~
Corporate seat and head office
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, Sections 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 Breitner Center, Amstelplein 2, 1096 BC Amsterdam, the Netherlands, telephone 310031 (0)20 59 77 777.
Compliance with the Dutch Corporate Governance Code
In accordance with the governmental decree of December 10, 2009, the Company fully complies with the Dutch Corporate Governance Code and applies all its principles and best practice provisions that are addressed to the Board of Management and the Supervisory Board. The full text of the Dutch Corporate Governance Code can be found at the website of the Monitoring Commission Corporate Governance Code (www.commissiecorporategovernance.nl).
February ~~23, 2012~~
~~11.6 Additional information~~25, 2013
~~Articles of association~~11.6 Additional information
~~Summaries~~Set forth below is a summary of certain provisions of the Articles of Association of the Company, applicable Dutch law and related Company ~~policies appear below.~~policies. This summary does not constitute legal advice regarding those matters and should not be regarded as such.
Articles of association
Object and purpose
The objects of the 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.
Share Capital
As of December 31, 2012, the issued share capital consists only of common shares; no preference shares have been issued.
Voting rights
Each common share and each preference share is entitled to one vote. All common shares vote together on all matters presented at a General Meeting of Shareholders. ~~As of December 31, 2011, the issued share capital consists only of common shares; no preference shares have been issued.~~
Dividends
A dividend will first be declared on preference shares out of net income. The remainder of the net income, after reservations made with the approval of the Supervisory Board, shall be available for distribution to holders of common shares subject to shareholder approval after year-end. 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. ~~As of December 31, 2011, the issued share capital consists only of common shares; no preference shares have been issued.~~
Liquidation rights
In the event of the dissolution and liquidation of the Company, the assets remaining after payment of all debts and liquidation expenses are to be distributed in the following order of priority: to the holders of ~~Preference~~preference shares, the amount paid thereon; and the remainder to the holders of the common shares. ~~As of December 31, 2011, the issued share capital consists only of common shares; no preference shares have been issued.~~
Preemptive rights
Shareholders have a pro rata preferential right of subscription to any common share issuance unless the right is restricted or excluded. If designated by the General Meeting of Shareholders, the Board of Management has the power to restrict or exclude the preferential subscription rights. A designation of the Board of Management will be
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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 ~~until September 30, 2012.~~up to and including October 26, 2013. 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.
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11 Corporate governance 11.6 - 11.6
General Meeting of Shareholders
The ordinary 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 bearer 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. 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 the 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 determined by the Board of Management and published in the above announcement. Holders of registered shares must advise the Company in writing of their intention to attend the General Meeting of Shareholders. Holders of bearer shares who either in person or by proxy wish to attend the General Meeting of Shareholders, should notify ~~The Royal~~ABN AMRO Bank ~~of Scotland~~ N.V. 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 a participating institution (‘aangesloten instelling’) of Nederlands Centraal Instituut voor Giraal Effectenverkeer B.V. (Euroclear Nederland).
In connection with the General Meeting of Shareholders, the Company doesn’t 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 and, unless specified otherwise in the articles of association of the Company, resolutions of the General Meeting of Shareholders shall be adopted by a simple majority of votes. Certain shareholder actions and certain resolutions may require a quorum.
Limitations on right to hold or vote Common Shares
There are no limitations imposed by Dutch law or by the Articles of Association on the right of non-resident owners to hold or vote the Common Shares.
Exchange controls
There are currently no limitations, either under the laws of the Netherlands or in the Articles of Association of the Company, to the rights of non-residents to hold or vote common shares of the Company. Cash dividends payable in Euros on Netherlands registered shares and bearer shares may be officially transferred from the Netherlands and converted into any other currency without Dutch legal restrictions, except that for statistical purposes such payments and transactions must be reported to the Dutch Central Bank, and furthermore, 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 Shares of New York Registry 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.
General
The corporate governance rules introduced by the New York Stock Exchange (“NYSE”) allow foreign private issuers, like Koninklijke Philips Electronics N.V., 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 domestic US companies under the NYSE listing standards. A summary of significant differences between certain ~~provisions of the Code~~Dutch practices on corporate governance matters and the corporate governance provisions applicable to US companies under the NYSE listing standards appears below.
Dutch corporate governance provisions
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 10, 2008 (the ~~“Code”~~‘Dutch Corporate Governance Code’). Philip’s New York Registry Shares, representing Common Shares of the Company, are listed on the NYSE.
Board structure
The NYSE listing standards prescribe regularly scheduled executive sessions of ~~nonexecutive~~non-executive directors. As a Dutch company, 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 ~~nonexecutive~~non-executive directors. Members of the Board of Management and other officers and employees cannot simultaneously act as member of the Supervisory Board. The Supervisory Board must approve specified decisions of the Board of Management.
Independence of members of our Supervisory Board
Under the Dutch Corporate Governance Code all members of the Supervisory Board with the exception of not more than one person, must be independent. The present members of our Supervisory Board are all independent within the meaning of 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.
Committees of our Supervisory Board
The Company has established an Audit Committee, a Remuneration Committee and a Corporate Governance and Nomination & Selection Committee, consisting of members of the Supervisory Board only. The roles, responsibilities and composition of these committees reflect the requirements of the Dutch Corporate Governance Code, the company’s ~~articles~~Articles of ~~association~~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 they were prepared by one of the Supervisory Board’s committees.
The NYSE requires that, when an audit committee member of a U.S. domestic listed company 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.
Dutch law requires that the Company’s external auditors be appointed at the ~~general meeting~~General Meeting of Shareholders and not by the Audit Committee.
Major shareholders as filed with SEC
On February 22, 2010, Southeastern Asset Management, Inc. filed a Schedule 13G with the SEC indicating that it beneficially owned 4.9% (representing 47,838,028 shares) of the Company’s common shares. On February 6, 2012, Southeastern Asset Management Inc. filed a Schedule 13G with the SEC indicating that it beneficially owned 7.1% (representing 72,051,468 shares) of the Company’s common shares. On February 10, 2012, Dodge & Cox filed a Schedule 13G with the SEC indicating that it beneficially owned 5.3% (representing 53,180,318 shares) of the Company’s common shares. On January 30, 2013, BlackRock Inc. filed a Schedule 13G with the SEC indicating that it beneficially owned 5.09% (48,728,999 shares) of the Company’s common shares. On February 13, 2013, Dodge and Cox filed a Schedule 13G with the SEC indicating that it beneficially owned 6.7% (63,848,817 shares) of the Company’s common shares. On February 14, 2013,

~~134~~      Annual Report ~~2011~~2012      139
11 Corporate governance 11.6 - 11.6

Southeastern Asset Management Inc. filed a Schedule 13G with the SEC indicating that it beneficially owned 6.5% (62,001,965 shares) of the Company’s common shares.
Equity compensation plans
The Company complies with Dutch legal requirements regarding shareholder approval of equity compensation plans. Dutch law does not require shareholder approval of certain equity compensation plans for which the NYSE listing standards would require such approval. ~~Although the~~The Company is ~~only~~ subject to a requirement to seek shareholder approval for equity compensation-plans for its ~~members of the Board of Management, the General Meeting of Shareholders adopted, in 2003, a Long-Term Incentive Plan consisting of a mix of restricted shares and stock options for~~ members of the Board of Management.
Code of business conduct
The listing standards of the NYSE prescribe certain parameters for listed company codes of business conduct and ethics. The Company has implemented the Philips General Business Principles applicable to all employees and a Financial Code of Ethics applicable to all employees performing an accounting or financial function. Waivers granted to Senior (Financial) Officers (as defined in our Financial Code of Ethics) will be disclosed. In ~~2011~~2012 the Company did not grant any waivers of the Financial Code of Ethics.
~~General meeting~~
~~The articles of association of the Company provide that there are no quorum requirements to hold a general meeting, although certain shareholder actions and certain resolutions may require a quorum.~~
140      Annual Report ~~2011      135~~2012
Performance Statements

12
Group financial statements    138    Group financial statements    143
12.1
Management’s report on internal control    138    Management’s report on internal control    143
12.2
Reports of the independent auditor    139    Reports of the independent auditor    143
12.3
Auditors’ report on internal control over financial reporting    139    Auditors’ report on internal control over financial reporting    144
12.4
Consolidated statements of income    140    Consolidated statements of income    145
12.5
Consolidated statements of comprehensive income    141    Consolidated statements of comprehensive income    146
12.6
Consolidated balance sheets    142    Consolidated balance sheets    147
12.7
Consolidated statements of cash flows    144    Consolidated statements of cash flows    149
12.8
Consolidated statements of changes in equity    146    Consolidated statements of changes in equity    151
12.9
Information by sector and main country    147    Information by sector and main country    152
12.10
Significant accounting policies    150    Significant accounting policies    155
12.11
Notes    158    Notes    164
12.12
Independent auditors’ report – Group    196    Independent auditors’ report – Group    204
13
Company financial statements    197    Company financial statements    205
13.1
Balance sheets before appropriation of results    198    Balance sheets before appropriation of results    206
13.2
Statements of income    199    Statements of income    207
13.3
Statement of changes in equity    199    Statement of changes in equity    207
13.4
Notes    200    Notes    208
13.5
Independent auditor’s report - Company    203    Independent auditor’s report - Company    211
14
Sustainability statements    204    Sustainability statements    212
14.1
Economic indicators    207    Economic indicators    215
14.2
EcoVision    207    EcoVision    216
14.3
Green Manufacturing 2015    209    Green Operations    216
14.4
Social indicators    211    General Business Principles    218
14.5
General Business Principles    213    Supplier indicators    219
14.6
Supplier indicators    214    Independent assurance report    224
14.7
Independent assurance report    218    Global Reporting Initiative (GRI) table    225
14.8
Global Reporting Initiative (GRI) table    219

Annual Report ~~2011      136~~2012      141
Notes overview

Group financial statements
Income from operations    ~~158~~164
Financial income and expenses    ~~159~~165
Income taxes    ~~160~~166
Investments in associates    ~~163~~169
Discontinued operations and other assets classified as held for sale    ~~163~~169
Earnings per share    ~~165~~171
Acquisitions and divestments    ~~165~~171
Property, plant and equipment    ~~167~~173
Goodwill    ~~168~~174
Intangible assets excluding goodwill    ~~169~~175
Non-current receivables    ~~171~~176
Other non-current financial assets    ~~171~~177
Other non-current assets    ~~171~~177
Inventories    ~~171~~177
Current financial assets    ~~171~~177
Other current assets    ~~172~~177
Current receivables    ~~172~~177
~~Shareholders’ equity~~Equity    ~~172~~178
Long-term debt and short-term debt    ~~173~~180
Provisions    ~~174~~181
Other non-current liabilities    ~~176~~183
Accrued liabilities    ~~176~~183
Other current liabilities    ~~176~~183
Contractual obligations    ~~176~~183
Contingent liabilities    ~~177~~184
Cash from (used for) derivatives and securities    ~~179~~186
Proceeds from non-current financial assets    ~~179~~186
Assets in lieu of cash from sale of businesses    ~~179~~186
Pensions and other postretirement benefits    ~~179~~186
Share-based compensation    ~~183~~191
Related-party transactions    ~~186~~194
Information on remuneration    ~~186~~195
Fair value of financial assets and liabilities    ~~191~~198
Details of treasury risks    ~~192~~200
Subsequent events    ~~195~~203
Company financial statements
Investments in affiliated companies    ~~200~~208
Other non-current financial assets    ~~200~~208
Receivables    ~~200~~208
Shareholders’ equity    ~~200~~209
Long-term debt and short-term debt    ~~202~~210
Other current liabilities    ~~202~~210
Net income    ~~202~~210
Employees    ~~202~~210
Contingent liabilities    ~~202~~210
Audit fees    ~~202~~210
Subsequent events    ~~202~~210

142      Annual Report ~~2011      137~~2012
12 Group financial statements 12 - ~~12.1.2~~12.2

12 Group financial statements
Introduction
This section of the Annual Report contains the audited consolidated financial statements including the notes thereon that have been prepared in accordance with International Financial Reporting Standards (IFRS) as ~~adopted~~endorsed by the European Union (EU) and with the statutory provisions of Part 9, Book 2 of the Dutch Civil Code. ~~The Consolidated financial statements in this section have been prepared in accordance with International Financial Reporting Standards (IFRS) as endorsed by the European Union (EU).~~ All standards and interpretations issued by the International Accounting Standards Board (IASB) and the IFRS Interpretations Committee effective year-end ~~2011~~2012 have been endorsed by the EU, except that the EU did not adopt some paragraphs of IAS 39 applicable to certain hedge transactions. Philips has no hedge transactions to which these paragraphs are applicable. Consequently, the accounting policies applied by Philips also comply fully with IFRS as issued by the IASB.
Together with the section Company financial statements, this section contains the statutory financial statements of the Company.
The following sections and chapters of this Annual Report:

chapter 1, Our company, of this report

chapter 2, ~~Our~~Group strategic focus, of this report

chapter 3, Our strategy in action, of this report

chapter 4, Our planet, our partners, our people, of this report

chapter 5, Group performance, of this report

chapter 6, Sector performance, of this report

chapter 7, Risk management, of this report

section 10.1, Report of the Corporate Governance and Nomination & Selection Committee, of this report
section 10.2, Report of the Remuneration Committee, of this report

chapter 11, Corporate governance, of this report

~~Introduction,~~ Forward-looking statements, ~~and other information,~~ of this report
form the Management report within the meaning of section 2:391 of the Dutch Civil Code (and related Decrees).
The sections Group performance and Sector performance provide an extensive analysis of the developments during the financial year ~~2011~~2012 and the results. The term EBIT has the same meaning as Income from operations (IFO), and is used to evaluate the performance of the business. These sections also provide information on the business outlook, investments, financing, personnel and research and development activities.
The Statement of income included in the section Company financial statements has been prepared in accordance with section 2:402 of the Dutch Civil Code, which allows a simplified Statement of income in the Company financial statements in the event that a comprehensive Statement of income is included in the consolidated Group financial statements.
For ‘Additional information’ within the meaning of section 2:392 of the Dutch Civil Code, please refer to section 12.12, Independent auditor’s report - Group, of this report on the Group financial statements, section 13.5, Independent auditor’s report - Company, of this report on the Company financial statements, section ~~5.5,~~5.4, Proposed distribution to shareholders, of this report, and note 35, Subsequent events.
Please refer to ~~chapter 19,~~ Forward-looking statements, ~~and other information,~~ of this report for more information about ~~forward- looking~~forward-looking statements, third-party market share data, fair value information, and revisions and reclassifications.
The Board of Management of the Company hereby declares that, to the best of our knowledge, the Group financial statements and Company financial statements give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole and that the management report referred to above gives a true and fair view concerning the position as per the balance sheet date, the development and performance of the business during the financial year of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks that they face.
Board of Management
February ~~23, 2012~~25, 2013
12.1 Management’s report on internal control
Management’s report on internal control over financial reporting pursuant to section 404 of the US Sarbanes-Oxley Act
The Board of Management of Koninklijke Philips Electronics N.V. (the Company) is responsible for establishing and maintaining an adequate system of internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the US Securities Exchange Act). Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting for external purposes in accordance with IFRS as issued by the IASB.
Internal control over financial reporting includes maintaining records that, in reasonable detail, accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of our financial statements; providing reasonable assurance that receipts and expenditures of company assets are made in accordance with management authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of company assets that could have a material effect on our financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected.
The Board of Management conducted an assessment of the Company’s internal control over financial reporting based on the“Internal Control-Integrated Framework”established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that assessment, the Board of Management concluded that, as of December 31, ~~2011,~~2012, the Company’s internal control over Group financial reporting is considered effective.
The effectiveness of the Company’s internal control over financial reporting as of December 31, ~~2011,~~2012, as included in this section Group financial statements, has been audited by KPMG Accountants N.V., an independent registered public accounting firm, as stated in their report which follows hereafter.
Board of Management
February ~~23, 2012~~25, 2013
12.1.1 Disclosure controls and procedures
The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(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, ~~2011.~~2012.
12.1.2 Changes in internal control over financial reporting
During the year ended December 31, ~~2011~~2012 there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
~~138      Annual Report 2011~~
~~12 Group financial statements 12.2 - 12.3~~
12.2 Reports of the independent auditor
The report set out below is provided in compliance with auditing standards of the Public Company Accounting Oversight Board in the US and includes an opinion on the effectiveness of internal control over financial reporting as at December 31, ~~2011.~~2012. Management’s report on internal control over financial reporting is set out in section 12.1, Management’s report on internal control, of this Annual Report. KPMG Accountants N.V. has also issued a report on the consolidated financial statements in accordance with the standards of the Public Company
Annual Report 2012      143
12 Group financial statements 12.2 - 12.3
Accounting Oversight Board in the US, which is set out in 12.12, Independent ~~auditors’report~~auditors’ report - Group, of this Annual Report. KPMG Accountants N.V. has also issued reports on the consolidated financial statements in accordance with Dutch law, including the Dutch standards on auditing, and on the Company Financial Statements of Koninklijke Philips Electronics N.V. ~~These audit reports dated February 23, 2012, have been included in the Annual Report that will be filed with the Commercial Register.~~
~~12.3Auditors’~~12.3 Auditors’ report on internal controlover financial reporting
Report of Independent Registered Public Accounting Firm
To the Supervisory Board and Shareholders of Koninklijke Philips Electronics N.V.:
We have audited Koninklijke Philips Electronics N.V. and subsidiaries’ internal control over financial reporting as of December 31, ~~2011,~~2012, based on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Koninklijke Philips Electronics N.V.’s Board of 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 12.1, Management’s report on internal control, of this Annual Report. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included 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.
In our opinion, Koninklijke Philips Electronics N.V. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, ~~2011,~~2012, based on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Koninklijke Philips Electronics N.V. and subsidiaries as of December 31, ~~2011~~2012 and ~~2010,~~2011, and the related consolidated statements of income, comprehensive income, cash flows and changes in equity ~~and cash flows~~ for each of the years in the three-year period ended December 31, ~~2011.~~2012. Our report dated February ~~23, 2012~~25, 2013 expressed an unqualified opinion on those consolidated financial statements.
~~/s/~~ KPMG ~~ACCOUNTANTS~~Accountants N.V.
Amsterdam, The Netherlands
February ~~23, 2012~~25, 2013

144      Annual Report ~~2011      139~~2012
12 Group financial statements 12.4 - 12.4

12.4 Consolidated statements of income
in millions of euros unless otherwise stated

   Consolidated statements of income of the Philips Group for the years ended December 31
      2009 2010 2011
   Sales    20,092    22,287    22,579
   Cost of sales    (12,519 ) (13,191 ) (13,932 )


   Gross margin    7,573    9,096    8,647
   Selling expenses    (4,703 ) (4,876 ) (5,160 )
   General and administrative expenses    (721 ) (713 ) (841 )
   Research and development expenses    (1,542 ) (1,493 ) (1,610 )
   Impairment of goodwill    —      —      (1,355 )
   Other business income    95    93    125
   Other business expenses    (42 ) (27 ) (75 )


   Income from operations    660    2,080    (269 )
   Financial income    225    214    112
   Financial expenses    (387 ) (335 ) (352 )


   Income before taxes    498    1,959    (509 )
   Income tax expense    (99 ) (499 ) (283 )


   Income (loss) after taxes    399    1,460    (792 )
   Results relating to investments in associates:
   - Company’s participation in income    23    14    18
   - Other results    54    4    (2 )


   Income (loss) from continuing operations    476    1,478    (776 )
   Discontinued operations - net of income tax    (52 ) (26 ) (515 )


   Net income (loss)    424    1,452    (1,291 )
   Attribution of net income (loss)
   Net income (loss) attributable to shareholders    410    1,446    (1,295 )
   Net income (loss) attributable to non-controlling interests    14    6    4
   Earnings per common share attributable to shareholders
      2009    2010    2011
   Basic earnings per common share in euros
   Income (loss) from continuing operations attributable to shareholders    0.50    1.57    (0.82 )
   Net income (loss) attributable to shareholders    0.44    1.54    (1.36 )
   Diluted earnings per common share in euros
   Income (loss) from continuing operations attributable to shareholders    0.50    1.55    (0.82 )
   Net income (loss) attributable to shareholders    0.44    1.52    (1.36 )
   Consolidated statements of income of the Philips Group for the years ended December 31
      2010 2011 2012
   Sales    22,287    22,579    24,788
   Cost of sales    (13,265 ) (13,845 ) (15,379 )


   Gross margin    9,022    8,734    9,409
   Selling expenses    (4,808 ) (5,247 ) (5,468 )
   General and administrative expenses    (713 ) (841 ) (798 )
   Research and development expenses    (1,493 ) (1,610 ) (1,810 )
   Impairment of goodwill    —      (1,355 ) —
   Other business income    93    125    297
   Other business expenses    (27 ) (75 ) (600 )


   Income from operations    2,074    (269 ) 1,030
   Financial income    214    112    106

Financial expenses
   (335 ) (352 ) (352 )


   Income before taxes    1,953    (509 ) 784
   Income tax expense    (497 ) (283 ) (308 )


   Income (loss) after taxes    1,456    (792 ) 476
   Results relating to investments in associates:
   - Company’s participation in income    14    18    (8 )
   - Other results    4    (2 ) (206 )


   Income (loss) from continuing operations    1,474    (776 ) 262
   Discontinued operations - net of income tax    (26 ) (515 ) (31 )


   Net income (loss)    1,448    (1,291 ) 231
   Attribution of net income (loss)
   Net income (loss) attributable to shareholders    1,442    (1,295 ) 226
   Net income (loss) attributable to non-controlling interests    6    4    5
   Earnings per common share attributable to shareholders
      2010    2011    2012
   Basic earnings per common share in euros
   Income (loss) from continuing operations attributable to shareholders    1.56    (0.82 ) 0.28
   Net income (loss) attributable to shareholders    1.53    (1.36 ) 0.25
   Diluted earnings per common share in euros¹⁾
   Income (loss) from continuing operations attributable to shareholders    1.55    (0.82 ) 0.28
   Net income (loss) attributable to shareholders    1.52    (1.36 ) 0.24
~~The years 2009~~Prior periods amounts have been revised to reflect certain voluntary adopted accounting policy changes, and ~~2010 are restated to present the Television business as discontinued operations.~~
immaterial adjustments (see section 12.10, Significant accounting policies, of this report). The accompanying notes are an integral part of these consolidated financial statements.

¹⁾
The incremental shares from assumed conversion are not taken into account in the periods for which there is a loss attributable to shareholders, as the effect would be antidilutive
~~140~~
Annual Report ~~2011~~2012      145
12 Group financial statements 12.5 - 12.5

12.5 Consolidated statements of comprehensive income
in millions of euros unless otherwise stated

Consolidated statements of comprehensive income of the Philips Group for the years ended December 31 Consolidated statements of comprehensive income of the Philips Group for the years ended December 31 Consolidated statements of comprehensive income of the Philips Group for the years ended December 31
   2009 2010 2011    2010 2011 2012
Net income (loss)
   424    1,452    (1,291 )    1,448    (1,291 ) 231
Other comprehensive income:

Actuarial gains (losses) on pension plans:

Pensions and other post employment plans:

Net current period change, before tax
   (1,110 ) (1,948 ) (618 )    (1,948 ) (618 ) (550 )
Actuarial gains and (losses)
   (1,521 ) (1,487 ) (251 )
Changes in the effect of the asset ceiling
   (427 ) 869    (299 )
Income tax on net current period change
   177    602    171       602    171    144
Revaluation reserve:

Release revaluation reserve
   (15 ) (16 ) (16 )    (16 ) (16 ) (16 )
Reclassification into retained earnings
   15    16    16       16    16    16
Currency translation differences:

Net current period change, before tax
   (64 ) 535    71       535    71    (99 )
Income tax on net current period change
   (5 ) (2 )    (5 ) (2 ) —
Reclassification adjustment for (loss)gain realized
   —      (4 ) 3
Reclassification adjustment for (loss) gain realized
   (4 ) 3    (1 )
Non-controlling interests
   (1 ) —      —         —      —      —
Available-for-sale financial assets:

Net current period change, before tax
   272    180    (87 )    180    (87 ) 8
Income tax on net current period change
   —      —      19       —      19    (2 )
Reclassification adjustment for (loss) gain realized
   (127 ) (161 ) (26 )    (161 ) (26 ) 3
Cash flow hedges:

Net current period change, before tax
   (19 ) (44 ) (31 )    (44 ) (31 ) 23
Income tax on net current period change
   (15 ) 5    —         5    —      (8 )
Reclassification adjustment for (loss) gain realized
   72    24    27       24    27    14




Other comprehensive income (loss) for the period
   (815 ) (816 ) (473 )    (816 ) (473 ) (468 )
Total comprehensive income (loss) for the period
   (391 ) 636    (1,764 )    632    (1,764 ) (237 )
Total comprehensive income (loss) attributable to:

Shareholders
   (404 ) 630    (1,768 )    626    (1,768 ) (242 )
Non-controlling interests
   13    6    4       6    4    5
~~The years 2009 and 2010 are restated~~Prior periods amounts have been revised to ~~present the Television business as discontinued operations.~~
reflect immaterial adjustments (see section 12.10, Significant accounting policies, of this report). The accompanying notes are an integral part of these consolidated financial ~~statements~~statements.

146      Annual Report ~~2011      141~~2012
12 Group financial statements 12.6 - 12.6

12.6 Consolidated balance sheets
in millions of euros unless otherwise stated

   Consolidated balance sheets of the Philips Group as of December 31
   Assets
      2010 2011
   Non-current assets
      Property, plant and equipment:
   - At cost    8,112 ¹⁾ 7,828
   - Less accumulated depreciation    (4,967 )¹⁾ (4,814 )
      3,145    3,014
      Goodwill    8,035    7,016
      Intangible assets excluding goodwill:
   - At cost    7,197    7,663
   - Less accumulated amortization    (2,999 ) (3,667 )
      4,198    3,996
      Non-current receivables    88    127
      Investments in associates    181    203
      Other non-current financial assets    479    346
      Deferred tax assets    1,351    1,713
      Other non-current assets    75    71


   Total non-current assets    17,552    16,486
   Current assets
      Inventories - net    3,865    3,625
      Current financial assets    5    —
      Other current assets    348    351
      Derivative financial assets    112    229
      Income tax receivable    79    162
      Receivables:
   - Accounts receivable - net    4,104    4,171
   - Accounts receivable from related parties    20    19
   - Other current receivables    231    225
      4,355    4,415
      Assets classified as held for sale    120 ¹⁾ 551
      Cash and cash equivalents    5,833    3,147


   Total current assets    14,717    12,480
      32,269    28,966


¹⁾
~~Revised to reflect a property, plant and equipment reclassification to assets classified as held for sale~~
   Consolidated balance sheets of the Philips Group as of December 31
   Assets
      2011    2012
   Non-current assets
      Property, plant and equipment:
   - At cost    7,812       7,880
   - Less accumulated depreciation    (4,798 )    (4,921 )
      3,014       2,959
      Goodwill    7,016       6,948
      Intangible assets excluding goodwill:
   - At cost    7,663       7,821
   - Less accumulated amortization    (3,667 )    (4,090 )
      3,996       3,731
      Non-current receivables    127       176
      Investments in associates    203       177
      Other non-current financial assets    346       549
      Deferred tax assets    1,729       1,917
      Other non-current assets    71       94


   Total non-current assets    16,502       16,551
   Current assets
      Inventories - net    3,625       3,495
      Current financial assets    —         —
      Other current assets    351       337
      Derivative financial assets    229       137
      Income tax receivable    162       97
      Receivables:
   - Accounts receivable - net    4,584       4,334
   - Accounts receivable from related parties    19       13
   - Other current receivables    225       238
      4,828       4,585
      Assets classified as held for sale    551       43
      Cash and cash equivalents    3,147       3,834


   Total current assets    12,893       12,528


      29,395       29,079

~~142~~      Annual Report ~~2011~~2012      147
12 Group financial statements 12.6 - 12.6

   Equity and liabilities
      2011    2012
   Equity
      Shareholders’ equity:
   Preference shares, par value EUR 0.20 per share:
   - Authorized: 2,000,000,000 shares (2011: 2,000,000,000 shares), issued none
   Common shares, par value EUR 0.20 per share:
   - Authorized: 2,000,000,000 shares (2011: 2,000,000,000 shares)
   - Issued and fully paid: 957,132,962 shares (2011: 1,008,975,445 shares)    202       191
   Capital in excess of par value    813       1,304
   Retained earnings    12,878       10,713
   Revaluation reserve    70       54
   Other reserves    43       (19 )
   Treasury shares, at cost 42,541,687 shares (2011: 82,880,543 shares)    (1,690 )    (1,103 )
      12,316       11,140
      Non-controlling interests    34       34


   Group equity    12,350       11,174
   Non-current liabilities
         Long-term debt    3,278       3,725
         Long-term provisions    1,907       2,132
      Deferred tax liabilities    77       92
      Other non-current liabilities    1,999       2,001


   Total non-current liabilities    7,261       7,950
   Current liabilities
         Short-term debt    582       809
      Derivative financial liabilities    744       517
      Income tax payable    191       200
         Accounts and notes payable:
   - Trade creditors    3,340       2,835
   - Accounts payable to related parties    6       4
      3,346       2,839
      Accrued liabilities    3,026       3,171
         Short-term provisions    787       837
      Liabilities directly associated with assets held for sale    61       27
      Other current liabilities    1,047       1,555


   Total current liabilities    9,784       9,955
         Contractual obligations and contingent liabilities


      29,395       29,079

   Equity and liabilities
      2010    2011
   Equity
      Shareholders’ equity:
   Preference shares, par value EUR 0.20 per share:
   - Authorized: 2,000,000,000 shares (2010: 2,000,000,000 shares), issued none
   Common shares, par value EUR 0.20 per share:
   - Authorized: 2,000,000,000 shares (2010: 2,000,000,000 shares)
   - Issued and fully paid: 1,008,975,445 shares (2010: 986,078,784 shares)    197
         202
   Capital in excess of par value    354       813
   Retained earnings    15,416       12,917
   Revaluation reserve    86       70
   Other reserves    69       43
   Treasury shares, at cost 82,880,543 shares (2010: 39,572,400 shares)    (1,076 )    (1,690 )
      15,046       12,355
   Non-controlling interests    46       34


   Group equity    15,092       12,389
   Non-current liabilities
         Long-term debt    2,818       3,278
         Long-term provisions    1,716       1,880
      Deferred tax liabilities    171       77
      Other non-current liabilities    1,714       1,999


   Total non-current liabilities    6,419       7,234
   Current liabilities
         Short-term debt    1,840       582
      Derivative financial liabilities    564       744
      Income tax payable    291       191
         Accounts and notes payable:
   - Trade creditors    3,686       3,340
   - Accounts payable to related parties    5       6
      3,691       3,346
      Accrued liabilities    2,995       3,026
         Short-term provisions    623       759
      Liabilities directly associated with assets held for sale    —         61
      Other current liabilities    754       634


   Total current liabilities    10,758       9,343
         Contractual obligations and contingent liabilities


      32,269       28,966
Prior periods amounts have been revised to reflect immaterial adjustments (see section 12.10, Significant accounting policies, of this report). The accompanying notes are an integral part of these consolidated financial ~~statements~~statements.

148      Annual Report ~~2011      143~~2012
12 Group financial statements 12.7 - 12.7

12.7 Consolidated statements of cash flows
in millions of euros

Consolidated statements of cash flows of the Philips Group for the years ended December 31
   2009 2010 2011
Cash flows from operating activities
Net (loss) income    424    1,452    (1,291 )
Loss from discontinued operations    52    26    515
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization    1,395    1,356    1,456
Impairment of goodwill, other non-current financial assets and investments in associates    2    5    1,387
Net gain on sale of assets    (139 ) (204 ) (88 )
Income from investments in associates    (23 ) (18 ) (14 )
Dividends received from investments in associates    35    19    44
Dividends paid to non-controlling interests    (4 ) (4 ) (4 )
Decrease (increase) in receivables and other current assets    337    (241 ) (339 )
(Increase) decrease in inventories    516    (498 ) (81 )
(Decrease) increase in accounts payable and accrued and other current liabilities    (203 ) 755    (259 )
Increase in non-current receivables, other assets and other liabilities    (365 ) (297 ) (596 )
Decrease (increase) in provisions    (667 ) (211 ) 6
Other items    31    (19 ) 100


Net cash provided by operating activities    1,391    2,121    836
Cash flows from investing activities
Purchase of intangible assets    (96 ) (80 ) (116 )
Expenditures on development assets    (162 ) (193 ) (231 )
Capital expenditures on property, plant and equipment    (495 ) (621 ) (725 )
Proceeds from disposals of property, plant and equipment    125    129    128
Cash from (used for) derivatives and securities    (38 ) (25 ) 26
Purchase of other non-current financial assets    (6 ) (16 ) (43 )
Proceeds from other non-current financial assets    718    268    87
Purchase of businesses, net of cash acquired    (295 ) (225 ) (509 )
Proceeds from sale of interests in businesses, net of cash disposed of    84    117    19


Net cash used for investing activities    (165 ) (646 ) (1,364 )
Cash flows from financing activities
Proceeds from (payments on) issuance of short-term debt    (201 ) 143    (217 )
Principal payments on short-term portion of long-term debt    (50 ) (78 ) (1,097 )
Proceeds from issuance of long-term debt    312    71    457
Treasury shares transaction    29    65    (671 )
Dividends paid    (634 ) (296 ) (259 )


Net cash used for financing activities    (544 ) (95 ) (1,787 )
Net cash (used for) provided by continuing operations    682    1,380    (2,315 )
Consolidated statements of cash flows of the Philips Group for the years ended December 31
   2010 2011 2012
Cash flows from operating activities
Net income (loss)    1,448    (1,291 ) 231
Loss from discontinued operations    26    515    31
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization    1,343    1,454    1,433
Impairment of goodwill, other non-current financial assets and investments in associates    5    1,387    14
Net gain on sale of assets    (204 ) (88 ) (163 )
(Income) loss from investments in associates    (18 ) (14 ) 8
Dividends received from investments in associates    19    44    15
Dividends paid to non-controlling interests    (4 ) (4 ) (4 )
(Increase) in receivables and other current assets    (325 ) (365 ) (245 )
(Increase) in inventories    (545 ) (149 ) (19 )
Increase (decrease) in accounts payable and accrued and other current liabilities    839    (233 ) 806
Increase in non-current receivables, other assets and other liabilities    (299 ) (596 ) (584 )
(Decrease) increase in provisions    (205 ) 6    434
Other items    (6 ) 102    241


Net cash provided by operating activities    2,074    768    2,198
Cash flows from investing activities
Purchase of intangible assets    (53 ) (69 ) (39 )
Proceeds from sale of intangible assets    —      —      160
Expenditures on development assets    (220 ) (278 ) (347 )
Capital expenditures on property, plant and equipment    (572 ) (653 ) (675 )
Proceeds from disposals of property, plant and equipment    129    128    426
Cash from (used for) derivatives and securities    (25 ) 25    (47 )
Purchase of other non-current financial assets    (16 ) (43 ) (167 )
Proceeds from other non-current financial assets    268    87    3
Purchase of businesses, net of cash acquired    (225 ) (509 ) (259 )
Proceeds from sale of interests in businesses, net of cash disposed of    117    19    33


Net cash used for investing activities    (597 ) (1,293 ) (912 )
Cash flows from financing activities
Proceeds from (payments on) issuance of short-term debt    143    (217 ) 133
Principal payments on short-term portion of long-term debt    (78 ) (1,097 ) (630 )
Proceeds from issuance of long-term debt    69    454    1,228
Treasury shares transaction    65    (671 ) (768 )
Dividends paid    (296 ) (259 ) (255 )


Net cash used for financing activities    (97 ) (1,790 ) (292 )


Net cash provided by (used for) continuing operations    1,380    (2,315 ) 994

~~144~~      Annual Report ~~2011~~2012      149
12 Group financial statements 12.7 - 12.7

   2010 2011 2012
Cash flows from discontinued operations

Net cash provided by (used for) operating activities
   34    (270 ) (296 )

Net cash provided by (used for) investing activities
   (56 ) (94 ) 40


Net cash provided by (used for) discontinued operations
   (22 ) (364 ) (256 )


Net cash provided by (used for) continuing and discontinued operations
   1,358    (2,679 ) 738

Effect of changes in exchange rates on cash and cash equivalents
   89    (7 ) (51 )

Cash and cash equivalents at the beginning of the year
   4,386    5,833    3,147


Cash and cash equivalents at the end of the year
   5,833    3,147    3,834

   2009 2010 2011
Cash flows from discontinued operations

Net cash used for operating activities
   153    34    (270 )

Net cash provided by investing activities
   (54 ) (56 ) (94 )


Net cash used for discontinued operations
   99    (22 ) (364 )


Net cash (used for) provided by continuing and discontinued operations
   781    1,358    (2,679 )

Effect of changes in exchange rates on cash and cash equivalents
   (15 ) 89    (7 )

Cash and cash equivalents at the beginning of the year
   3,620    4,386    5,833


Cash and cash equivalents at the end of the year
   4,386    5,833    3,147
Supplemental disclosures to the Consolidated statements of cash flows
   2010 2011 2012

Net cash paid during the year for:


Pensions
   (474 ) (639 ) (610 )

Interest
   (226 ) (231 ) (239 )

Income taxes
   (206 ) (582 ) (359 )

Net gain on sale of assets:


Cash proceeds from the sale of assets
   514    234    622

Book value of these assets
   (667 ) (164 ) (434 )

Deferred results on sale and leaseback transactions
   (4 ) —      (25 )

Non-cash proceeds
   361    18    —


   204    88    163

Non-cash investing and financing information


Assets in lieu of cash from the sale of businesses:


Shares/share options/convertible bonds (continuing operations)
   3    18    —

Shares/share options/convertible bonds (discontinued operations)
   —      —      17

Conversion of convertible personnel debentures
   6    —      4

Treasury shares transaction:


Shares acquired
   —      (751 ) (816 )

Exercise of stock options
   65    80    48

Supplemental disclosures to the Consolidated statements of cash flows
   2009 2010 2011

Net cash paid during the year for:


Pensions
   (422 ) (474 ) (639 )

Interest
   (244 ) (226 ) (231 )

Income taxes
   (197 ) (206 ) (582 )

Net gain on sale of assets:


Cash proceeds from the sale of assets
   927    514    234

Book value of these assets
   (788 ) (675 ) (164 )

Deferred results on sale and leaseback transactions
   —      4    —

Non-cash proceeds
   —      361    18


   139    204    88

Non-cash investing and financing information


Assets in lieu of cash from the sale of businesses:


Shares/share options/convertible bonds
   —      3    18

Conversion of convertible personnel debentures
   3    6    —

Treasury shares transaction:


Shares acquired
   —      —      (751 )

Exercise of stock options
   29    65    80
~~The years 2009 and 2010 are restated~~Prior periods amounts have been revised to ~~present the Television business as discontinued operations.~~reflect immaterial adjustments (see section 12.10, Significant accounting policies, of this report).
The accompanying notes are an integral part of these consolidated financial statements.
For a number of reasons, principally the effects of translation differences and consolidation changes, certain items in the statements of cash flows do not correspond to the differences between the balance sheet amounts for the respective items.

150      Annual Report ~~2011      145~~2012
12 Group financial statements 12.8 - 12.8

12.8 Consolidated statements of changes in equity
in millions of euros unless otherwise stated
Consolidated statements of changes in equity of the Philips Group

   outstanding
number of
shares in
thousands common
share    capital in
excess of
par value retained
earnings revaluation
reserve other re-
serves treasury
shares at
cost sharehold-
ers’ equity non-con-
trolling in-
terests group
equity    outstanding
number of
shares in
thousands common
share
capital in
excess of
par value
retained
earnings revaluation
reserve other
reserves
treasury
shares at
cost

shareholders’
equity

non-controlling
interests
group
equity
Balance as of Jan. 1, 2009
   922,982    194       —      17,101    117    (580 ) (1,288 ) 15,544    49    15,593
Total comprehensive income (loss)
      (508 ) (15 ) 119    (404 ) 13    (391 )
Dividend distributed
      (647 ) (647 ) (647 )
Non-controlling interests movement
      —      (13 ) (13 )
Purchase of treasury shares
   (2 )    —      —
Re-issuance of treasury shares
   4,477       (70 ) 1    101    32    32
Share-based compensation plans
      65    65    65
Income tax share-based compensation plans
      5    5    5


   4,475    —         —      (1,154 ) (15 ) 119    101    (949 ) —      (949 )


Balance as of Dec. 31, 2009
   927,457    194       —      15,947    102    (461 ) (1,187 ) 14,595    49    14,644
Balance as of Jan. 1, 2010
   927,457    194    —      15,912    102    (461 ) (1,187 ) 14,560    49    14,609
Total comprehensive income (loss)
      116    (16 ) 530    630    6    636       112    (16 ) 530    626    6    632
Dividend distributed
   13,667    3       343    (650 ) (304 ) (304 )    13,667    3    343    (650 ) (304 ) (304 )
Non-controlling interests movement
      (6 ) (6 ) (9 ) (15 )    (6 ) (6 ) (9 ) (15 )
Purchase of treasury shares
   (15 )    —      —         (15 ) —      —
Re-issuance of treasury shares
   5,397       (49 ) 9    111    71    71       5,397    (49 ) 9    111    71    71
Share-based compensation plans
      55    55    55       55    55    55
Income tax share-based compensation plans
      5    5    5       5    5    5




   19,049    3       354    (531 ) (16 ) 530    111    451    (3 ) 448       19,049    3    354    (535 ) (16 ) 530    111    447    (3 ) 444




Balance as of Dec. 31, 2010
   946,506    197       354    15,416    86    69    (1,076 ) 15,046    46    15,092       946,506    197    354    15,377    86    69    (1,076 ) 15,007    46    15,053
Total comprehensive income (loss)
      (1,726 ) (16 ) (26 ) (1,768 ) 4    (1,764 )    (1,726 ) (16 ) (26 ) (1,768 ) 4    (1,764 )
Dividend distributed
   22,897    5       443    (711 ) (263 ) (263 )    22,897    5    443    (711 ) (263 ) (263 )
Non-controlling interests movement
      (5 ) (5 ) (16 ) (21 )    (5 ) (5 ) (16 ) (21 )
Purchase of treasury shares
   (47,508 )    (51 ) (700 ) (751 ) (751 )    (47,508 ) (51 ) (700 ) (751 ) (751 )
Re-issuance of treasury shares
   4,200       (34 ) (6 ) 86    46    46       4,200    (34 ) (6 ) 86    46    46
Share-based compensation plans
      56    56    56       56    56    56
Income tax share-based compensation plans
      (6 ) (6 ) (6 )    (6 ) (6 ) (6 )




   (20,411 ) 5       459    (2,499 ) (16 ) (26 ) (614 ) (2,691 ) (12 ) (2,703 )    (20,411 ) 5    459    (2,499 ) (16 ) (26 ) (614 ) (2,691 ) (12 ) (2,703 )




Balance as of Dec. 31, 2011
   926,095    202       813    12,917    70    43    (1,690 ) 12,355    34    12,389       926,095    202    813    12,878    70    43    (1,690 ) 12,316    34    12,350
Total comprehensive income (loss)
   (164 ) (16 ) (62 ) (242 ) 5    (237 )
Dividend distributed
   30,522    6    422    (687 ) (259 ) (259 )
Non-controlling interests movement
   —      —      (5 ) (5 )
Cancellation of treasury shares
   (17 ) (1,221 ) 1,238    —      —
Purchase of treasury shares
   (46,871 ) (47 ) (769 ) (816 ) (816 )
Re-issuance of treasury shares
   4,845    (22 ) (46 ) 118    50    50
Share-based compensation plans
   84    84    84
Income tax share-based compensation plans
   7    7    7


   (11,504 ) (11 ) 491    (2,165 ) (16 ) (62 ) 587    (1,176 ) —      (1,176 )


Balance as of Dec. 31, 2012
   914,591    191    1,304    10,713    54    (19 ) (1,103 ) 11,140    34    11,174
Prior periods amounts have been revised to reflect immaterial adjustments (see section 12.10, Significant accounting policies, of this report). The accompanying notes are an integral part of these consolidated financial ~~statements~~statements.

~~146~~      Annual Report ~~2011~~2012      151
12 Group financial statements 12.9 - 12.9

12.9 Information by sector and main country
in millions of euros
Prior periods amounts have been revised to reflect certain voluntary adopted accounting policy changes, and immaterial adjustments (see section 12.10, Significant accounting policies, of this report).
Information by sector and main country
Sectors

   sales    sales including
intercompany research and
development
expenses income from
operations income from
operations as a % of
sales cash flow before
financing
activities
2011
Healthcare
   8,852       8,866    (740 ) 93    1.1    770
Consumer Lifestyle
   5,823       5,834    (313 ) 392    6.7    (38 )
Lighting
   7,638       7,652    (409 ) (362 ) (4.7 ) 254
Group Management & Services
   266       517    (148 ) (392 ) —      (1,514 )
Inter-sector eliminations
      (290 )


   22,579       22,579    (1,610 ) (269 ) (1.2 ) (528 )
2010
Healthcare
   8,601       8,611    (698 ) 922    10.7    1,139
Consumer Lifestyle
   5,775       5,788    (282 ) 679    11.8    493
Lighting
   7,552       7,563    (355 ) 695    9.2    590
Group Management & Services
   359       530    (158 ) (216 ) —      (747 )
Inter-sector eliminations
      (205 )


   22,287       22,287    (1,493 ) 2,080    9.3    1,475

2009
Healthcare
   7,839       7,850    (679 ) 593    7.6    889
Consumer Lifestyle
   5,370       5,386    (300 ) 436    8.1    574
Lighting
   6,546       6,554    (351 ) (16 ) (0.2 ) 624
Group Management & Services
   337       455    (212 ) (353 ) —      (861 )
Inter-sector eliminations
      (153 )


   20,092       20,092    (1,542 ) 660    3.3    1,226
~~The years 2009 and 2010 are restated to present the Television business as discontinued operations~~
   sales
sales including
intercompany
research and
development
expenses
income from
operations
income from
operations as a % of
sales cash flow before
financing
activities
2012
Healthcare
   9,983       10,005    (803 ) 1,122    11.2    1,394
Consumer Lifestyle
   5,953       5,967    (301 ) 593    10.0    597
Lighting
   8,442       8,465    (453 ) (6 ) (0.1 ) 339
Innovation, Group & Services
   410       680    (253 ) (679 ) —      (1,044 )
Inter-sector eliminations
      (329 )


   24,788       24,788    (1,810 ) 1,030    4.2    1,286
2011
Healthcare
   8,852       8,866    (740 ) 93    1.1    773
Consumer Lifestyle
   5,615       5,626    (313 ) 217    3.9    (257 )
Lighting
   7,638       7,652    (409 ) (362 ) (4.7 ) 254
Innovation, Group & Services
   474       725    (148 ) (217 ) —      (1,295 )
Inter-sector eliminations
      (290 )


   22,579       22,579    (1,610 ) (269 ) (1.2 ) (525 )

2010
Healthcare
   8,601       8,611    (698 ) 922    10.7    1,141
Consumer Lifestyle
   5,504       5,518    (282 ) 449    8.2    288
Lighting
   7,552       7,563    (355 ) 689    9.1    590
Innovation, Group & Services
   630       801    (158 ) 14    —      (542 )
Inter-sector eliminations
      (206 )


   22,287       22,287    (1,493 ) 2,074    9.3    1,477
Our sectors are organized based on the nature of the products and services. The four sectors comprise Healthcare, Consumer Lifestyle, Lighting and Innovation, Group ~~Management~~ & Services as shown in the table above. A short description of these sectors is as follows:
Healthcare: Consists of the following businesses - Imaging Systems, Home Healthcare Solutions, Patient Care & Clinical Informatics, and Customer Services.
Consumer Lifestyle: Consists of the following businesses - Lifestyle Entertainment, Personal Care, Domestic Appliances, and Health & Wellness.
Lighting: Consists of the following businesses - ~~Lamps,~~Light Sources & Electronics, Professional ~~Luminaires,~~Lighting Solutions, Consumer Luminaires, ~~Lighting Systems & Controls,~~ Automotive Lighting, and Lumileds.
Innovation, Group ~~Management~~ & Services: Consists of ~~the corporate center,~~group headquarters, as well as the overhead expenses of regional and country organizations. Also included are the ~~costs~~net results of group innovation, intellectual property & services, the global service units and Philips’ pension and other postretirement benefit costs not directly allocated to the other sectors.
Transactions between the sectors mainly relate to services provided by the sector Innovation, Group ~~Management~~ & Services to the other sectors. The pricing of such transactions is determined on an arm’s length principle.

152      Annual Report ~~2011      147~~2012
12 Group financial statements 12.9 - 12.9

Sectors

   total assets    net operating
capital
total liabilities
excl. debt
   current accounts
receivable, net    tangible and
intangible assets    depreciation and
amortization¹⁾ capital
expenditures
2012
Healthcare
   11,248       7,976    3,185       1,967       7,130       (543 ) 135
Consumer Lifestyle
   3,325       1,217    2,108       892       1,699       (234 ) 146
Lighting
   6,970       4,635    2,313       1,364       4,293       (543 ) 290
Innovation, Group & Services
   7,493       (4,521 ) 5,738       111       516       (113 ) 104


   29,036       9,307    13,344       4,334       13,638       (1,433 ) 675
Assets classified as held for sale
   43       27





   total assets    net operating
capital total liabilities
excl. debt    current accounts
receivable, net    tangible and
intangible assets    depreciation and
amortization^1,2) capital
expenditures¹⁾    29,079       13,371
2011
Healthcare
   11,591       8,418    3,087       1,882       7,479       (540 ) 224       11,591       8,418    3,087       1,882       7,479       (538 ) 153
Consumer Lifestyle
   3,616       887    2,726       1,111       1,755       (224 ) 148       3,841       884    2,954       1,339       1,755       (224 ) 148
Lighting
   6,771       5,020    1,729       1,119       4,320       (570 ) 279       6,914       4,965    1,927       1,261       4,320       (570 ) 279
Group Management & Services
   6,437       (3,898 ) 5,114       59       472       (122 ) 74
Innovation, Group & Services
   6,498       (3,895 ) 5,156       102       472       (122 ) 73




   28,415       10,427    12,656       4,171       14,026       (1,456 ) 725       28,844       10,372    13,124       4,584       14,026       (1,454 ) 653
Assets classified as held for sale
   551       61                551       61









   28,966       12,717                29,395       13,185
2010
Healthcare
   11,962       8,908    2,978       1,848       8,194       (563 ) 179       11,962       8,908    2,978       1,848       8,194       (549 ) 130
Consumer Lifestyle
   3,858       911    2,946       1,085       1,525       (195 ) 115       4,110       882    3,227       1,335       1,525       (195 ) 115
of which Television
   893       (299 ) 1,188       377       70          1,010       (305 ) 1,315       494       70
Lighting
   7,379       5,561    1,800       1,072       5,014       (458 ) 273       7,495       5,506    1,972       1,188       5,014       (458 ) 273
Group Management & Services
   8,950       (3,429 ) 4,795       99       645       (140 ) 54
Innovation, Group & Services
   9,023       (3,399 ) 4,822       158       645       (141 ) 54




   32,149       11,951    12,519       4,104       15,378       (1,356 ) 621       32,590       11,897    12,999       4,529       15,378       (1,343 ) 572
Assets classified as held for sale³⁾
   120
Assets classified as held for sale
   120





   32,269                   32,710
2009
Healthcare
   10,969       8,434    2,464       1,572       7,766       (584 ) 164
Consumer Lifestyle
   3,286       625    2,660       1,099       1,383       (173 ) 107
of which Television
   599       (386 ) 984       334       61
Lighting
   6,748       5,104    1,633       909       4,860       (503 ) 165
Group Management & Services
   9,524       (1,514 ) 4,859       89       766       (135 ) 59


   30,527       12,649    11,616       3,669       14,775       (1,395 ) 495

¹⁾
~~The years 2009 and 2010 are restated to present the Television business as discontinued operations~~
²⁾
Includes impairments of tangible and intangible assets excluding goodwill
³⁾
~~Revised ro reflect a property, plant and equipment reclassification to assets classified as held for sale~~
Goodwill assigned to sectors


carrying value
at January 1
   acquisitions divestments impairment
transfer to
assets
classified as
held for sale

translation
differences and
other changes
carrying value
at December 31
2012
Healthcare
   4,703       (1 ) —      —      —      (129 ) 4,573
Consumer Lifestyle
   674       (1 ) (6 ) —      —      1    668
Lighting
   1,639       100    —      —      —      (32 ) 1,707
Innovation, Group & Services
   —         —      —      —      —      —      —


   carrying value
at January 1    acquisitions    divestments impairment transfer to
assets
classified as
held for sale translation
differences and
other changes    carrying value
at December 31    7,016       98    (6 ) —      —      (160 ) 6,948
2011
Healthcare
   5,381       64       (3 ) (824 ) (2 ) 87       4,703       5,381       64    (3 ) (824 ) (2 ) 87    4,703
Consumer Lifestyle
   532       131       (5 ) —      (3 ) 19       674       532       131    (5 ) —      (3 ) 19    674
Lighting
   2,122       30       —      (531 ) —      18       1,639       2,122       30    —      (531 ) —      18    1,639
Group Management & Services
   —         —         —      —      —      —         —
Innovation, Group & Services
   —         —      —      —      —      —      —




   8,035       225       (8 ) (1,355 ) (5 ) 124       7,016       8,035       225    (8 ) (1,355 ) (5 ) 124    7,016
2010
Healthcare
   4,923       21       —      —      —      437       5,381
Consumer Lifestyle
   463       49       —      —      —      20       532
Lighting
   1,976       14       —      —      —      132       2,122
Group Management & Services
   —         —         —      —      —      —         —


   7,362       84       —      —      —      589       8,035

~~148~~      Annual Report ~~2011~~2012      153
12 Group financial statements 12.9 - 12.9

Main countries


   sales¹⁾    tangible and intangible assets
2012
Netherlands
   669       886
United States
   7,018       8,007
China
   2,705       1,114
Germany
   1,456       271
Japan
   1,208       537
France
   1,051       90
India
   777       147
Other countries
   9,904       2,586


   24,788       13,638
Assets classified as held for sale
      6
000000000000000000 000000000000000000

   sales^1,2)    tangible and intangible assets       13,644
2011
Netherlands
   691       908       691       908
United States
   6,373       8,473       6,373       8,473
China
   2,102       1,126       2,102       1,126
Germany
   1,431       252       1,431       252
Japan
   911       618
France
   1,046       97       1,046       97
Japan
   911       618
Brazil
   694       119
India
   678       161
Other countries
   9,331       2,433       9,347       2,391




   22,579       14,026       22,579       14,026
Assets classified as held for sale
      287          287




      14,313          14,313
2010
Netherlands
   661       1,109 ³⁾    661       1,109
United States
   6,430       9,693       6,430       9,693
China
   1,864       785       1,864       785
Germany
   1,436       282       1,436       282
Japan
   856       568
France
   1,134       100       1,134       100
Japan
   856       568
Brazil
   654       148
India
   596       81
Other countries
   9,252       2,693       9,310       2,760




   22,287       15,378       22,287       15,378
Assets classified as held for sale³⁾
      120
Assets classified as held for sale
      120




      15,498          15,498
2009
Netherlands
   727       1,193
United States
   6,106       9,198
China
   1,442       684
Germany
   1,416       288
France
   1,151       111
Japan
   678       489
Brazil
   595       128
Other countries
   7,977       2,684


   20,092       14,775

¹⁾
~~The years 2009 and 2010 are restated to present the Television business as discontinued operations~~
²⁾
The sales are reported based on country of destination
³⁾
~~Revised to reflect a property, plant and equipment reclassification to assets classified as held for sale~~

154      Annual Report ~~2011      149~~2012
12 Group financial statements 12.10 - 12.10

12.10 Significant accounting policies
The Consolidated financial statements in this section have been prepared in accordance with International Financial Reporting Standards (IFRS) as endorsed by the European Union (EU). 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 year-end ~~2011~~2012 have been endorsed by the EU, except that the EU did not adopt some of the paragraphs of IAS 39 applicable to certain hedge transactions. Philips has no hedge transactions to which these paragraphs are applicable. Consequently, the accounting policies applied by Philips also comply fully with IFRS as issued by the IASB. These accounting policies have been applied by group entities.
~~Certain comparative amounts~~As mentioned in the ~~Statement~~semi-annual financial statements and detailed at ‘IFRS accounting standards and voluntary accounting policy changes adopted as from 2012’ of income have been reclassified to conform to the current year’s presentation. In addition, the comparative Statement of income and statements of cash-flows have been represented as if an operation discontinued during the current year had been discontinued from the startthis section of the ~~comparative years (See note 5, Discontinued operations and other assets classified as held for sale and section 12.4,~~Annual report, the Company applied three voluntary accounting policy changes retrospectively, which resulted in certain reclassifications in the Consolidated statements of income and sector information only and have no impact on Earnings per share, the Consolidated balance sheet, Consolidated statement of cash-flows and Consolidated statement of changes in equity.
As mentioned in section 12.9 Segment information of this ~~report, section 12.7, Consolidated statements of cash flows, of~~Annual Report the previously reported segment GM&S (Group, Management & Services) has been renamed to IG&S (Innovation, Group & Services). This change did not affect the description and the financial information reported under this ~~report and section 12.9, Information by sector and main country, of this report).~~segment.
The Consolidated financial statements have been prepared under the historical cost convention, unless otherwise indicated.
The Consolidated financial statements are presented in euros, which is the Company’s presentation currency.
On February ~~23, 2012,~~25, 2013, the Board of Management authorized the Consolidated financial statements for issue. The Consolidated financial statements as presented in this report are subject to the adoption by the Annual General Meeting of Shareholders.
Use of estimates
The preparation of the Consolidated financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. These estimates inherently contain certain degree of uncertainty. Actual results may differ from these estimates under different assumptions or conditions.
These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the date of the Consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. We evaluate these estimates and judgments on an ongoing basis and base our estimates on historical experience, current and expected future ~~conditions,~~outcomes, third-party evaluations and various other assumptions that we believe are reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities as well as identifying and assessing the accounting treatment with respect to commitments and contingencies. ~~Actual results may differ from these estimates.~~We revise material estimates if changes occur in the circumstances or there is new information or experience on which an estimate was or can be based.
Estimates significantly impact goodwill and other intangibles acquired, tax on activities disposed, impairments, financial instruments, the accounting for an arrangement containing a lease, revenue recognition (multiple element arrangements), assets and liabilities from employee benefit plans, other provisions and tax and other contingencies, classification of assets and liabilities held for sale and the presentation of items of profit and loss and cash-flows as continued or discontinued. The fair values of acquired identifiable intangibles are based on an assessment of future cash flows. Impairment analyses of goodwill and ~~indefinite-life~~indefinite-lived intangible assets are performed annually and whenever a triggering event has occurred to determine whether the carrying value exceeds the recoverable amount. These analyses generally are based on estimates of future cash flows.
The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. The Company uses its judgment to select from a variety of common valuation methods including the discounted cash flow method and option valuation models and to make assumptions that are mainly based on market conditions existing at each balance sheet date.
Actuarial assumptions are established to anticipate future events and are used in calculating pension and other postretirement benefit expense and liability. These factors include assumptions with respect to interest rates, expected investment returns on plan assets, rates of increase in health care costs, rates of future compensation increases, turnover rates, and life expectancy.
Basis of consolidation
The Consolidated financial statements include the accounts of Koninklijke Philips Electronics N.V. (‘the Company’) and all subsidiaries that fall under its power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The existence and effect of potential voting rights that are currently exercisable are considered when assessing whether the Company controls another entity. Subsidiaries are fully consolidated from the date that control commences until the date that control ceases. All intercompany balances and transactions have been eliminated in the Consolidated financial statements. Unrealized losses are eliminated in the same way as unrealized gains, but only to the extent that there is no evidence of impairment.
Business combinations
Business combinations are accounted for using the acquisition method. Under the acquisition method, the identifiable assets acquired, liabilities assumed and any non-controlling interest in the acquiree are recognized as at the acquisition date, which is the date on which control is transferred to the Company. Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, the Company takes into consideration potential voting rights that currently are exercisable.
For acquisitions on or after January 1, 2010, the Company measures goodwill at the acquisition date as:

the fair value of the consideration transferred; plus

the recognized amount of any non-controlling interest in the acquiree; plus

~~plus~~ if the business combination is achieved in stages, the fair value of the existing equity interest in the acquiree; less

~~less~~ the net recognized amount (generally fair value) of the identifiable assets acquired and liabilities assumed.
When the excess is negative, a bargain purchase gain is recognized immediately in profit or loss (hereafter referred to as the Statement of income).
The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts are generally recognized in the Statement of income.
Costs related to the acquisition, other than those associated with the issue of debt or equity securities, that the Company incurs in connection with a business combination are expensed as incurred.
Any contingent consideration payable is recognized at fair value at the acquisition date and initially is presented as Long-term provisions. When timing and amount of the consideration become more certain, it is reclassified to Other current liabilities as accrued liabilities. If the contingent consideration is classified as equity, it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent changes to the fair value of the contingent consideration are recognized in the Statement of income.
Acquisitions between January 1, 2004 and January 1, 2010
For acquisitions between January 1, 2004 and January 1, 2010, goodwill represents the excess of the cost of the acquisition over the Company’s interest in the recognized amount (generally fair value) of the identifiable assets, liabilities and contingent liabilities of the acquiree. Transaction costs, other than those associated with the issue of debt or equity securities, that the Company incurred in connection with business combinations were capitalized as part of the cost of the acquisition. In particular, with respect to contingent consideration
Annual Report 2012      155
12 Group financial statements 12.10 - 12.10
arising from a business combination only in the aforementioned period, any subsequent changes in the measurement of contingent consideration will continue to be treated as an adjustment to the combination’s cost, and thus goodwill, until the amount of consideration is finally determined.
Acquisitions of ~~Non-controlling~~and adjustments to non-controlling interests
Acquisitions of non-controlling interests are accounted for as transactions with owners in their capacity as owners and therefore no goodwill is recognized as a result. 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.
For changes to non-controlling interest without the loss of control, the difference between such change and any consideration paid or received is recognized directly in equity.
Loss of control
Upon the loss of control, the Company derecognizes the assets and liabilities of the subsidiary, any non-controlling interests and the other components of equity related to the subsidiary. Any surplus or deficit arising on the loss of control is recognized in profit or loss. If the Company retains any interest in the previous subsidiary, then such
~~154      Annual Report 2011~~
~~12 Group financial statements 12.10 - 12.10~~
interest is measured at fair value at the date the control is lost. Subsequently it is accounted for as an equity-accounted investee or as an available-for-sale financial asset depending on the level of influence retained.
Investments in associates (equity-accounted investees)
Associates are all entities over which the Company has significant influence, but not 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 ~~Company’s~~group’s investment in associates includes goodwill identified on acquisition, net of any accumulated impairment loss.
The Company’s share of the net income of these companies is included in ~~Results~~results relating to ~~investments in~~ associates in the Statement 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. 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 an associate. Unrealized gains on transactions between the Company and its associates are eliminated to the extent of the Company’s interest in the associates. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Remeasurement differences of equity stake resulting from gaining control over the investee previously recorded as associate are recorded under ~~Results relating~~results related to investments in associates.
Investments in associates include loans from the Company to these ~~investees, which in substance form part of the investment.~~investees.
Accounting for capital transactions of a consolidated subsidiary or an associate
The Company recognizes dilution gains or losses arising from the sale or issuance of stock by a consolidated subsidiary or an associate in the Statement of income, unless the Company or the subsidiary either has reacquired or plans to reacquire such shares. In such instances, the result of the transaction will be recorded directly in equity.
Dilution gains and losses arising in investments in associates are recognized in the Consolidated statements of income under “Results relating to investments in associates”.
Foreign currencies
Foreign currency transactions
The financial statements of all group entities are measured using the currency of the primary economic environment in which the entity operates (functional currency). The euro (EUR) is the functional and presentation currency of the Company. Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or valuation where items are remeasured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the Statement of income, except when deferred in other comprehensive income as qualifying cash flow hedges and qualifying net investment hedges.
Foreign currency differences arising on retranslation are recognized in profit or loss, except for available-for-sale equity investments (except on impairment in which case foreign currency differences that have been recognized in other comprehensive income are reclassified to profit and loss), which are recognized in other comprehensive income.
All exchange difference items are presented in the same line item as they relate in the Statement of income. However, the results ensuing from fluctuations in foreign currency exchange rates with respect to accounts receivables, ~~and~~ accounts payables and intercompany current accounts are credited or debited to ~~financial income and expense.~~Cost of sales.
Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency ~~of at~~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 date of transaction.
Foreign operations
The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated to euro at exchange rates at the reporting date. The income and expenses of foreign operations, are translated to euro at exchange rates at the dates of the transactions.
Foreign currency differences arising on translation of foreign operations into the group’s presentation currency are recognized in other comprehensive income, and presented in the foreign currency translation reserve (translation reserve) in equity. However, if the operation is a non-wholly owned subsidiary, then the relevant proportionate share of the translation difference is allocated to the non-controlling interests. When a foreign operation is disposed of such that control, significant influence or joint control is lost, the cumulative amount in the translation reserve related to the foreign operation is ~~released~~reclassified to the Statement of income as part of the gain or loss on disposal. When the Company disposes of only part of its interest in a subsidiary that includes a foreign operation while retaining control, the relevant proportion of the cumulative amount is reattributed to ~~non- controlling~~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 ~~released~~reclassified to the Statement of income.
Financial instruments
Non-derivative financial instruments
Non-derivative financial instruments are recognized initially at fair value when the Company becomes a party to the contractual provisions of the instrument.
Regular way purchases and sales of financial instruments are accounted for at trade date. Dividend and interest income are recognized when earned. Gains or losses, if any, are recorded in financial income and expenses.
Non-derivative financial instruments comprise cash and cash equivalents, receivables, other non-current financial assets and debt and other financial liabilities.
Cash and cash equivalents
Cash and cash equivalents include all cash balances and short-term highly liquid investments with an original maturity of three months or less that are readily convertible into known amounts of cash.
Receivables
Receivables are carried at the lower of amortized cost or the present value of estimated future cash flows, taking into account discounts given or agreed. The present value of estimated future cash flows is determined through the use of allowances for uncollectible amounts. As soon as individual trade accounts receivable can no longer be collected in the normal way and are expected to result in a loss, they are designated as doubtful trade accounts receivable and valued at the expected collectible amounts. They are written off when they are
156      Annual Report 2012
12 Group financial statements 12.10 - 12.10
deemed to be uncollectible because of bankruptcy or other forms of receivership of the debtors. The allowance for the risk of non-collection of trade accounts receivable takes into account credit-risk concentration, collective debt risk based on average historical losses, and specific circumstances such as serious adverse economic conditions in a specific country or region.
In the event of sale of receivables and factoring, the Company derecognizes receivables when the Company has given up control or continuing involvement, which is deemed to have occurred when:

~~The~~the Company has transferred its rights to receive cash flows from the receivables or has assumed an obligation to pay the received cash flows in full without any material delay to a third party under a ‘pass-through’ arrangement; and

either (a) the Company has transferred substantially all of the risks and rewards of the ownership of the receivables, or (b) the Company has neither transferred nor retained substantially all of the risks and rewards, but has transferred control of the assets.
However, in case the Company neither transfers nor retains substantially all the risks and rewards of ownership of the receivables nor transfers control of the receivables, the receivable is recognized to the extent of the Company’s continuing involvement in the assets. In
~~Annual Report 2011      151~~
~~12 Group financial statements 12.10 - 12.10~~
this case, the Company also recognizes an associated liability. The transferred receivable and associated liability are measured on a basis that reflects the rights and obligations that the Company has retained.
Other non-current financial assets
Other non-current financial assets include held-to-maturity investments, loans and available-for-sale financial assets and financial assets at fair value through profit or loss.
Held-to-maturity investments are those debt securities which the Company has the ability and intent to hold until maturity. ~~Held-to- maturity~~Held-to-maturity debt investments are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts using the effective interest method.
Loans receivable are stated at amortized cost, less ~~the related allowance for impaired loans receivable.~~impairment.
Available-for-sale financial assets are non-derivative financial assets that are designated as available-for-sale and that are not classified in any of the other categories of financial assets. Subsequent to initial recognition, they are measured at fair value and changes therein, other than impairment losses and foreign currency differences on available for sale-debt instruments are recognized in other comprehensive income and presented in the fair value reserve in equity. When an investment is derecognized, the gain or loss accumulated in equity is reclassified to the Statement of income.
Available-for-sale financial assets including investments in privately-held companies that are not associates, and do not have a quoted market price in an active market and whose fair value could not be reliably determined, are carried at cost.
A financial asset is classified as fair value through profit or loss if it is classified as held for trading or is designated as such upon initial recognition. Financial assets are designated as fair value through profit or loss if the Company manages such investments and makes purchase and sale decisions based on their fair value in accordance with the Company-documented risk management or investment strategy. Attributable transaction costs are recognized in the Statement of income as incurred. Financial assets at fair value through profit or loss are measured at fair value, and changes therein are recognized in profit or loss.
Share capital
Common shares are classified as equity. Incremental costs directly attributable to the issuance of shares are recognized as a deduction from equity. Where the Company purchases the Company’s equity share capital (treasury shares), the consideration paid, including any directly attributable incremental costs (net of income taxes) is deducted from equity attributable to the Company’s equity holders until the shares are cancelled or reissued. Where such ordinary shares are subsequently reissued, any consideration received, net of any directly attributable incremental transaction costs and the related income tax effects, is included in equity attributable to the Company’s equity holders.
Debt and other liabilities
Debt and liabilities other than provisions are stated at amortized cost. However, loans that are hedged under a fair value hedge are remeasured for the changes in the fair value that are attributable to the risk that is being hedged.
Derivative financial instruments, including hedge accounting
The Company uses derivative financial instruments principally to manage its foreign currency risks and, to a more limited extent, for managing interest rate and commodity price risks. All derivative financial instruments are classified as current assets or liabilities and are accounted for at trade date. Embedded derivatives are separated from the host contract and accounted for separately if the economic characteristics and risks of the host contract and the embedded derivative are not closely related. The Company measures all derivative financial instruments ~~based on~~at fair ~~values~~value derived from market prices of the instruments, or calculated as the present value of the estimated future cash flows based on observable interest yield curves, basis spread and foreign exchange rates, or from option ~~pricing~~prices models, as appropriate. Gains or losses arising from changes in fair value of derivatives are recognized in the Statement of income, except for derivatives that are highly effective and qualify for cash flow or net investment hedge accounting.
Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the Statement of income, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. For interest rate swaps designated as a fair value hedge of an interest bearing asset or liability that are unwound, the amount of the fair value adjustment to the asset or liability for the risk being hedged is released to the Statement of income over the remaining life of the asset or liability based on the recalculated effective yield.
Changes in the fair value of a derivative that is highly effective and that is designated and qualifies as a cash flow hedge, are recorded in equity, until the Statement of income is affected by the variability in cash flows of the designated hedged item. To the extent that the hedge is ineffective, changes in the fair value are recognized in the Statement of income.
The Company formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. When it is established that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, the Company discontinues hedge accounting prospectively. When hedge accounting is discontinued because it is expected that a forecasted transaction will not occur, the Company continues to carry the derivative on the Balance sheet at its fair value, and gains and losses that were accumulated in equity are recognized immediately in the Statement of income. If there is a delay and it is expected that the transaction will still occur, the amount in equity remains there until the forecasted transaction affects income. In all other situations in which hedge accounting is discontinued, the Company continues to carry the derivative at its fair value on the Balance sheet, and recognizes any changes in its fair value in the Statement of income.
Foreign currency differences arising on the retranslation of a financial liability designated as a hedge of a net investment in a foreign operation are recognized directly as a separate component of equity through other comprehensive income, to the extent that the hedge is effective. To the extent that the hedge is ineffective, such differences are recognized in the Statement of income.
Property, plant and equipment
Items of property, plant and equipment are measured at cost less accumulated depreciation and accumulated impairment losses. The useful lives and residual values are evaluated annually.
Assets manufactured by the Company include direct manufacturing costs, production overheads and interest charges incurred for qualifying assets during the construction period. Government grants are deducted from the cost of the related asset. Depreciation is calculated using the straight-line method over the useful life of the asset. Depreciation of special tooling is generally also based on the straight-line method. Gains and losses on the sale of property, plant and equipment are included in other business income. Costs related to
Annual Report 2012      157
12 Group financial statements 12.10 - 12.10
repair and maintenance activities are expensed in the period in which they are incurred unless leading to an extension of the original lifetime or capacity.
Plant and equipment under finance leases and leasehold improvements are amortized using the straight-line method over the shorter of the lease term or the estimated useful life of the asset. The gain realized on sale and operating leaseback transactions that are concluded based upon market conditions is recognized at the time of the sale.
The Company capitalizes interest as part of the cost of assets that take a substantial period of time to become ready for ~~use.~~use, which is defined by the Company as a period of more than 6 months.
Goodwill
Measurement of goodwill at initial recognition is described under ‘Basis of consolidation’. Goodwill is subsequently measured at cost less accumulated impairment losses. In respect of investment in associates, the carrying amount of goodwill is included in the carrying amount of investment, and an impairment loss on such investment is not allocated to any asset, including goodwill, that forms part of the carrying amount of investment in associates.
Intangible assets other than goodwill
Acquired finite-lived intangible assets are amortized using the straight-line method over their estimated useful life. The useful lives are evaluated annually. Patents and trademarks with a finite useful life acquired from third parties either separately or as part of the business
~~152  ��   Annual Report 2011~~
~~12 Group financial statements 12.10 - 12.10~~
combination are capitalized at cost and amortized over their remaining useful lives. Intangible assets acquired as part of a business combination are capitalized at their acquisition-date fair value.
The Company expenses all research costs as incurred. Expenditure on development activities, whereby research findings are applied to a plan or design for the production of new or substantially improved products and processes, is capitalized as an intangible asset if the product or process is technically and commercially feasible and the Company has sufficient resources and the intention to complete development.
The development expenditure capitalized includes the cost of materials, direct labor and an appropriate proportion of overheads. Other development expenditures and expenditures on research activities are recognized in the Statement of income. Capitalized development expenditure is stated at cost less accumulated amortization and impairment losses. Amortization of capitalized development expenditure is charged to the Statement of income on a straight-line basis over the estimated useful lives of the intangible assets.
Costs relating to the development and purchase of software for both internal use and software intended to be sold are capitalized and subsequently amortized over the estimated useful life.
Leased assets
Leases in which the Company is the lessee and has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalized at the commencement of the lease at the lower of the fair value of the leased assets and the present value of the minimum lease payments. Each lease payment is allocated between the liability and finance charges. The interest element of the finance cost is charged to the Statement of income over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The corresponding rental obligations, net of finance charges, are included in other short-term and other non-current liabilities. The property, plant and equipment acquired under finance leases is depreciated over the shorter of the useful life of the assets and the lease term.
Leases in which substantially all risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are recognized in the Statement of income on a straight-line basis over the term of the lease.
Inventories
Inventories are stated at the lower of cost or net realizable value. The cost of inventories comprises all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. The costs of conversion of inventories include direct labor and fixed and variable production overheads, taking into account the stage of completion and the normal capacity of production facilities. Costs of idle facility and abnormal waste are expensed. The cost of inventories is determined using the first-in, first-out (FIFO) method. Inventory is reduced for the estimated losses due to obsolescence. This reduction is determined for groups of products based on purchases in the recent past and/or expected future demand.
Provisions
Provisions are recognized if, as a result of a past event, the Company has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognized as interest expense.
A provision for warranties is recognized when the underlying products or services are sold. The provision is based on historical warranty data and a weighing of possible outcomes against their associated probabilities.
The Company accrues for losses associated with environmental obligations when such losses are probable and can be estimated reliably. Measurement of liabilities is based on current legal and constructive requirements. Liabilities and expected insurance recoveries, if any, are recorded separately. The carrying amount of liabilities is regularly reviewed and adjusted for new facts and changes in law.
The provision for restructuring relates to the estimated costs of initiated reorganizations, the most significant of which have been approved by the Board of Management, and which generally involve the realignment of certain parts of the industrial and commercial organization. When such reorganizations require discontinuance and/ or closure of lines of activities, the anticipated costs of closure or discontinuance are included in restructuring provisions. A liability is recognized for those costs only when the Company has a detailed formal plan for the restructuring and has raised a valid expectation with those affected that it will carry out the restructuring by starting to implement that plan or announcing its main features to those affected by it. ~~Provisions~~Before a provision is established, the Company recognizes any impairment loss on the assets associated with the restructuring.
The Company provides for onerous contracts, ~~represent~~based on the ~~lesser~~lower of the ~~unavoidable costs of either fulfilling or exiting the related contract, and in which the costs to fulfill the contract exceed the benefits~~ expected ~~to be received under such contract. In determining the~~ cost of fulfilling the contract the payments due in the period in which the contract cannot be cancelled are considered. If there is an option to cancel the contract and pay a penalty, then the present value of the amount to be paid on cancellation of the contract is also considered, and the ~~contract is measured at the lowest~~expected net cost ~~to exit. Generally,~~of terminating the unavoidable cost of meeting the obligations under the contract are only costs that are directly variable with the contract and therefore incremental to the performance of the contract, do not include allocated or shared costs that will be incurred regardless of whether the entity fulfills the contract or not, and cannot be avoided by future actions.contract. Before a provision is established, the Company recognizes any impairment loss on the assets associated with that contract.
Impairment
Value in use is measured as the present value of future cash flows expected to be generated by the asset. If the carrying amount of an asset is deemed not recoverable, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the recoverable amount. ~~The review for impairment is carried out at the level where discrete cash flows occur that are independent of other cash flows.~~
Impairment of goodwill
Goodwill is not amortized but tested for impairment annually and whenever impairment indicators require. In most cases the Company identified its cash generating units as one level below that of an operating segment. Cash flows at this level are substantially independent from other cash flows and this is the lowest level at which goodwill is monitored by the Board of Management. The Company performed and completed annual impairment tests in the same quarter of all years presented in the Consolidated Statements of income. A goodwill impairment loss is recognized in the Statement of income whenever and to the extent that the carrying amount of a cash-generating unit exceeds the unit’s recoverable amount, which is the greater of value in use and fair value less cost to sell. An impairment loss on an investment in associates is not allocated to any asset, including goodwill, that forms part of the carrying amount of the investment in associates.
Impairment of non-financial assets other than goodwill, inventories and deferred tax assets
Non-financial assets other than goodwill, inventories and deferred tax assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is recognized and measured by a comparison of the carrying amount of an asset with the greater of its value in use and its fair value less cost to sell. Value in use is measured as the present value of future cash flows expected to
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be generated by the asset. If the carrying amount of an asset is deemed not recoverable, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the recoverable amount. The review for impairment is carried out at the level where discrete cash flows occur that are independent of other cash flows.
Impairment losses recognized in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if and to the extent there has been a change in the estimates used to determine the recoverable amount. The loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized. Reversals of impairment are recognized in the Statement of income.
Impairment of financial assets
A financial asset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset. In case of available-for-sale financial assets, a significant or prolonged decline in the fair value of the financial assets below its cost is considered an indicator that the
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financial assets are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative ~~loss-measured~~loss - measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in the Statement of ~~income-is~~income - is reclassified from the fair value reserve in equity to the Statement of income.
If objective evidence indicates that financial assets that are carried at cost need to be tested for impairment, calculations are based on information derived from business plans and other information available for estimating their fair value. Any impairment loss is charged to the Statement of income.
An impairment loss related to financial assets is reversed if in a subsequent period, the fair value increases and the increase can be related objectively to an event occurring after the impairment loss was recognized. The loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined if no impairment loss had been recognized. Reversals of impairment are recognized in the Statement of income except for reversals of impairment of available-for-sale equity securities, which are recognized in other comprehensive income.
Employee benefit accounting
A ~~defined contribution~~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 benefit contribution~~defined-contribution pension plans are recognized as an employee benefit expense in the Statement of income in the periods during which services are rendered by employees.
A ~~defined benefit~~defined-benefit plan is a post-employment benefit plan other than a ~~defined contribution~~defined-contribution plan. The net pension asset or liability recognized in the Consolidated balance sheet in respect of defined-benefit postemployment plans is the fair value of plan assets less the present value of the projected defined-benefit obligation (DBO) at the balance sheet date, together with adjustments for projected unrecognized past-service costs. The projected 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.
To the extent that post-employment benefits vest immediately following the introduction of a change to a defined-benefit plan, the resulting past service costs are recognized immediately.
For the Company’s major plans, a full discount rate curve of high-quality corporate bonds ~~(Bloomberg AA Composite)~~(Towers Watson RATE:Link; 2011: Bloomberg) is used to determine the defined-benefit obligation, whereas for the other plans a single-point discount rate is used based on the plan’s maturity. Plans in countries without a deep corporate bond market use a discount rate based on the local sovereign curve and the plan’s maturity.
Pension costs in respect of defined-benefit postemployment plans primarily represent the increase of the actuarial present value of the obligation for postemployment benefits based on employee service during the year and the interest on this obligation in respect of employee service in previous years, net of the expected return on plan assets.
Actuarial gains and losses arise mainly from changes in actuarial assumptions and differences between actuarial assumptions and ~~what has actually occurred.~~actual experience. The Company immediately recognizes all actuarial gains and losses in other comprehensive income.
The Company recognizes gains and losses on the curtailment or settlement of a ~~defined benefit~~defined-benefit plan when the curtailment or settlement occurs. The gain or loss on curtailment comprises any resulting change in the fair value of plan assets, change in the present value of ~~defined benefit~~defined-benefit obligation and any related ~~actuarial gains and losses and~~ past service cost that had not previously been recognized.
In certain countries, the Company also provides post-retirement benefits other than pensions. The costs relating to such plans consist primarily of the present value of the benefits attributed on an equal basis to each year of service and interest cost on the accumulated postretirement benefit obligation, which is a discounted amount.
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 profit-sharing, based on a formula that takes into consideration the profit attributable to the Company’s shareholders after certain adjustments. The Company recognizes a provision where contractually obliged or where there is a past practice that has created a constructive obligation and the obligation can be measured reliably.
Share-based payment
The Company recognizes the estimated fair value, measured as of grant date of equity instruments granted to employees as personnel expense over the vesting period on a straight-line basis, taking into account expected forfeitures. The Company uses the Black-Scholes option-pricing model to determine the fair value of equity instruments.
The fair value of the amount payable to employees in respect of share appreciation rights, which are settled in cash, is recognized as an expense, with a corresponding increase in liabilities, over the vesting period. The liability is remeasured at each reporting date and at settlement date. Any changes in fair value of the liability are recognized as personnel expense in the Statement of income.
Revenue recognition
Revenue from the sale of goods in the course of the ordinary activities is measured at the fair value of the consideration received or receivable, net of returns, trade discounts and volume rebates. Revenue for sale of goods is recognized when the significant risks and rewards of ownership have been transferred to the buyer, recovery of the consideration is probable, the associated costs and possible return of the goods can be estimated reliably, there is no continuing involvement with goods, and the amount of revenue can be measured reliably. If it is probable that discounts will be granted and the amount can be measured reliably, then the discount is recognized as a reduction of revenue as the sales are recognized.
Transfer of risks and rewards varies depending on the individual terms of the contract of sale. For consumer-type products in the ~~Sectors~~sectors Lighting and Consumer Lifestyle, these criteria are met at the time the product is shipped and delivered to the customer and, depending on the delivery conditions, title and risk have passed to the customer and acceptance of the product, when contractually required, has been obtained, or, in cases where such acceptance is not contractually required, when management has established that all aforementioned conditions for revenue recognition have been met. Examples of the above-mentioned delivery conditions are ‘Free on Board point of delivery’ and ‘Costs, Insurance Paid point of delivery’, where the point of delivery may be the shipping warehouse or any other point of destination as agreed in the contract with the customer and where title and risk infor the goods pass to the customer.
Revenues of transactions that have separately identifiable components are recognized based on their relative fair values. These transactions mainly occur in the Healthcare sector and include arrangements that require subsequent installation and training activities in order to become operable for the customer. However, since payment for the equipment is contingent upon the completion of the installation
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process, revenue recognition is generally deferred until the installation has been completed and the product is ready to be used by the customer in the way contractually agreed.
Revenues are recorded net of sales taxes, customer discounts, rebates and similar charges. For products for which a right of return exists during a defined period, revenue recognition is determined based on the historical pattern of actual returns, or in cases where such information is not available, revenue recognition is postponed until the return period has lapsed. Return policies are typically based on customary return arrangements in local markets.
For products for which a residual value guarantee has been granted or a buy-back arrangement has been concluded, revenue recognition takes place when significant risks and rewards of ownership are transferred to the customer. The following are the principal factors that the Company considers in determining that the Company has transferred significant risks and rewards:

~~The~~the period from the sale to the repurchase represents the major (normally at least 75%) part of the economic life of the asset;

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~~12 Group financial statements 12.10 - 12.10~~
~~The~~the proceeds received on the initial transfer and the amount of any residual value or repurchase price, measured on a present value basis, is equal to substantially all (normally at least 90%) of the fair value of the asset at the sale date;

~~Insurance~~insurance risk is borne by the customer; however, if the customer bears the insurance risk but the Company bears the remaining risks, then risks and rewards have not been transferred to the customer; and

~~The~~the repurchase price is equal to the market value at the time of the buy-back.
In case of loss under a sales agreement, the loss is recognized immediately.
Shipping and handling billed to customers is recognized as revenues. Expenses incurred for shipping and handling of internal movements of goods are recorded as cost of sales. Shipping and handling related to sales to third parties are recorded as selling expenses. When shipping and handling is part of a project and billed to the customer, then the related expenses are recorded as cost or sales. Service revenue related to repair and maintenance activities for goods sold is recognized ratably over the service period or as services are rendered.
A provision for product warranty is made at the time of revenue recognition and reflects the estimated costs of replacement and ~~free- of-charge~~free-of-charge services that will be incurred by the Company with respect to the products. For certain products, the customer has the option to purchase an extension of the warranty, which is subsequently billed to the customer. Revenue recognition occurs on a straight-line basis over the contract period.
Revenue from services is recognized when the Company can reliably measure the amount of revenue and the associated cost related to the stage of completion of a contract or transaction, and the recovery of the consideration is considered probable.
Royalty income, which is generally earned based upon a percentage of sales or a fixed amount per product sold, is recognized on an accrual basis.
Grants from the government are recognized at their fair value where there is a reasonable assurance that the grant will be received and the Company will comply with all attached conditions. Government grants relating to costs are deferred and recognized in the Statement of income over the period necessary to match them with the costs that they are intended to compensate.
Financial income and expenses
Financial income comprises interest income on funds invested (including available-for-sale financial assets), dividend income, net gains on the disposal of available-for-sale financial assets, net fair value gains on financial assets at fair value through profit or loss, net gains on the remeasurement to fair value of any pre-existing available-for-sale interest in an acquiree, and net gains on hedging instruments that are recognized in the Statement of income. Interest income is recognized on accrual basis in the Statement of income, using the effective interest method. Dividend income is recognized in the Statement of income on the date that the Company’s right to receive payment is established, which in the case of quoted securities is normally the ex-dividend date.
Financial expenses comprise interest expense on borrowings, unwinding of the discount on provisions and contingent consideration, losses on disposal of available-for-sale financial assets, net fair value losses on financial assets at fair value through profit or loss, impairment losses recognized on financial assets (other than trade receivables), and net losses on hedging instruments that are recognized in the Statement of income.
Borrowing costs that are not directly-attributable to the acquisition, construction or production of a qualifying asset are recognized in the Statement of income using the effective interest method.
Foreign currency gains and losses are reported on a net basis as either financial income or financial cost depending on whether foreign currency movements are in a net gain or net loss position.
Income tax
Income tax comprises current and deferred tax. Income tax is recognized in the Statement of income except to the extent that it relates to items recognized directly within equity or in other comprehensive income. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially-enacted at the reporting date, and any adjustment to tax payable in respect of previous years.
Deferred tax assets and liabilities are recognized, using the balance sheet method, for the expected tax consequences of temporary differences between the carrying amounts of assets and liabilities and the amounts used for taxation purposes. Deferred tax is not recognized for the following temporary differences: the initial recognition of goodwill, the initial recognition of assets and liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit, and differences relating to investments in subsidiaries to the extent that they probably will not reverse in the foreseeable future. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantially-enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally-enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net 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 future taxable profits will be available against which they can be utilized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in the countries where the deferred tax assets originated and during the periods when the deferred tax assets become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.
Deferred tax liabilities for withholding taxes are recognized for subsidiaries in situations where the income is to be paid out as dividend in the foreseeable future, and for undistributed earnings of unconsolidated companies to the extent that these withholding taxes are not expected to be refundable or deductible. Changes in tax rates are reflected in the period when the change has been enacted or substantially-enacted by the reporting date.
Discontinued operations and non-current assets held for sale
Non-current assets (disposal groups comprising assets and liabilities) that are expected to be recovered primarily through sale rather than through continuing use are classified as held for sale.
A discontinued operation is a component of an entity that either has been disposed of, or that is classified as held for sale, and (a) represents a separate major line of business or geographical area of operations; and (b) is a part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations; or (c) is a subsidiary acquired exclusively with a view to resale. Only those costs that are clearly identifiable as costs of the components that is being disposed of and that will not be recognized on an ongoing basis by the Company, are included under discontinued operations.
Non-current assets held for sale and discontinued operations are carried at the lower of carrying amount or fair value less costs to sell. Any gain or loss from disposal of a business, together with the results of these operations until the date of disposal, is reported separately as discontinued operations. The financial information of discontinued operations is excluded from the respective captions in the Consolidated financial statements ~~of income, Consolidated statements of cash flow~~ and related notes for all years
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presented. A discontinued operation is a component of the Company, which comprises operations and cash flows that can be distinguished clearly, both operationally and for financial reporting purposes, from the rest of the Company. A component that previously was held for use will have been one or more cash-generating units. Generally, the disposal of a business that previously was part of a single cash-generating unit does not qualify as a component of an entity and therefore shall not be classified as a discontinued operation if disposed of.
Comparatives in the balance sheet are not re-presented when a ~~non- current~~non-current asset or disposal group is classified as held for sale. Comparatives are restated for presentation of discontinued operations in the Statement of cash flow and Statement of income.
Upon classification of a disposal group as held for sale the Company may agree with the buyer to retain certain assets and liabilities (e.g. accounts receivable), in which case such items are not presented as part
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~~12 Group financial statements 12.10 - 12.10~~
of assets/liabilities held for sale, even though the associated item in the Statement of Income would be presented as part of discontinued operations. The presentation of cash flows relating to such items in that case mirrors the classification in the Statement of Income, i.e. as cash flows from discontinued operations.
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 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 a 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 product warranty obligations retained by the Company, or the settlement of employee benefit plan obligations provided that the settlement is directly related to the disposal transaction.
Segments
Operating segments are components of the Company’s business activities about which separate financial information is available that is evaluated regularly by the chief operating decision maker (the Board of Management of the Company). The Board of Management decides how to allocate resources and assesses performance. Reportable segments comprise the operating sectors: Healthcare, Consumer Lifestyle, Lighting, and, until 2011, the Television business which was part of Consumer Lifestyle. Segment accounting policies are the same as the accounting policies as applied to the Group. Segment reporting comparatives are reclassified for profit or loss purposes, so it is no longer mentioned for the Television business. The previously reported segment GM&S (Group, Management & Services) has been renamed IG&S (Innovation, Group & Services). This change did not affect the description and the financial information reported under this segment. Please refer to section 12.9 for details.
Cash flow statements
Cash flow statements are prepared using the indirect method. Cash flows in foreign currencies have been translated into euros using the weighted average rates of exchange for the periods involved. Cash flows from derivative instruments that are accounted for as fair value hedges or cash flow hedges are classified in the same category as the cash flows from the hedged items. Cash flows from other derivative instruments are classified consistent with the nature of the instrument.
Earnings per share
The Company presents basic and diluted earnings per share (EPS) data for its common shares. Basic EPS is calculated by dividing the net income attributable to shareholders of the Company by the weighted average number of common shares outstanding during the period, adjusted for own shares held. Diluted EPS is determined by adjusting the Statement of income attributable to shareholders and the weighted average number of common shares outstanding, adjusted for own shares held, for the effects of all dilutive potential common shares, which comprise convertible personnel debentures, restricted shares and share options granted to employees.
Financial guarantees
The Company recognizes a liability at the fair value of the obligation at the inception of a financial guarantee contract. The guarantee is subsequently measured at the higher of the best estimate of the obligation or the amount initially recognized.
Accounting changes
In the absence of explicit transition requirements for new accounting pronouncements, the Company accounts for any change in accounting principle retrospectively.
~~Reclassifications~~
~~Certain items previously reported under specific financial statement captions have been reclassified to conform to the current year presentation.~~
IFRS accounting standards and voluntary accounting policy changes adopted as from ~~2011~~2012
The accounting policies set out above have been applied consistently to all periods presented in these Consolidated financial statements except as explained below which addresses changes in accounting policies.
The Company has adopted the following new and amended IFRSs as of January 1, ~~2011.~~2012.
~~Improvements~~IFRS 7 Financial Instruments: Disclosures - Transfer of financial assets
According to ~~IFRSs 2010~~
~~In May 2010, the IASB issued~~~~‘Improvements to IFRSs 2010~~’, a collection of amendments to seven International Financial Reporting Standards, as part of its program of annual improvements to its standards, which was intended to make necessary, but non-urgent, amendments to standardsthis amendment, disclosures are required for financial assets that are not included as part of another major project. The amendments resulting from this standard mainly have effective dates for annual periods beginning on or after January 1, 2011. The improvements did not have a material impact onderecognized in their entirety and where the ~~Company’s Consolidated financial statements.~~
~~Revised IAS 24 ‘Related Parties Disclosures’~~
The revised standard simplifies the definition of a related party, clarifying its intended meaning and eliminating inconsistencies from the definition. The Company applied IAS 24 (revised) retrospectively from January 1, 2011. The changeentity has continuing ‘involvement’ in ~~accounting policy impacted disclosures only.~~
~~Amendment to IAS 32 ‘Classification of Rights Issues’~~
them. The amendment addresses the accounting for rights issues (rights, options or warrants) that are denominated in a currency other than the functional currency of the issuer. Previously, such rights issues were accounted for as derivative liabilities. The amendment requires that, provided certain conditions are met, such rights issues are classified as equity regardless of the currency in which the exercise price is denominated. This amendment was ~~applied~~adopted by the Company on January 1, 2012 and impacted disclosures only.
Voluntary changes
The Company has also adopted a number of voluntary accounting policy changes on January 1, 2012. The accounting policy changes have no impact on Earnings per share, the Consolidated balance sheets, Consolidated statements of cash flows and Consolidated statement of changes in equity.
Warranty costs previously reported in Selling expenses have been reclassified to Cost of Sales. The reason for this change follows the rationale that warranty expenses are an integral part of the sale of goods and services. The amount included in Cost of Sales in 2012 is EUR 280 million. This policy change has been applied retrospectively and reduced Selling expenses and increased Cost of sales as follows for 2010 and 2011:
   2010 2011
Statements of income

Cost of sales
   (325 ) (328 )
Selling expenses
   325    328
Amortization of brand name and customer relationship intangible assets previously reported in Cost of sales in the Statements of income has been reclassified to Selling expenses. The reclassification follows the rationale that the use of brand names and customer relationship intangible assets supports the sales process. The amount included in Selling expenses in 2012 is EUR 342 million. This policy change has been applied retrospectively and resulted in a reclassification from Cost of sales to Selling expenses as follows for 2010 and 2011:
   2010 2011
Statements of income

Cost of sales
   257    415
Selling expenses
   (257 ) (415 )
The third change relates to the intellectual property (IP) policy. IP royalties on products sold by a sector are allocated to that sector. IP royalties related to products, which are no longer sold by a sector, were allocated to Group Management & Services (currently Innovation, Group & Services), with the exception of sector Consumer Lifestyle, where IP royalties on such products were allocated to the sector Consumer Lifestyle itself. As of 2012, all IP royalties on products no longer sold by a sector have been allocated to the sector Innovation, Group & Services (IG&S) to ensure consistency, and the exception for Consumer Lifestyle IP royalties has been abolished. This policy change is applied retrospectively and only impacts the sector information (section 12.9), resulting in a reclassification on the Sales and Income from operations respectively from the sector Consumer Lifestyle to the sector IG&S. This change also has reclassification impacts on the Total assets of sector Consumer Lifestyle and sector IG&S as shown in the sector information (section 12.9). As of 2012, IP royalties have been integrated in the IG&S sector. The reclassifications have been included in the table below.
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12 Group financial statements 12.10 - 12.10
   2010 2011
Sales in sector information(section 12.9)

Consumer Lifestyle
   (270 ) (208 )
IG&S
   270    208
Income from operations in sector information (section 12.9)

Consumer Lifestyle
   (230 ) (175 )
IG&S
   230    175
Total assets in sector information (section 12.9)

Consumer Lifestyle
   (56 ) (42 )
IG&S
   56    42
Other
The following amendments to standards have not been adopted by the Company in 2012 as they are not applicable to the Company’s Consolidated Financial Statements:
•
IFRS 1First-time Adoption of IFRSs - Severe Hyperinflation and Removal of Fixed Dates for First-time Adopters;
•
IAS 12Income Taxes - Deferred Tax: Recovery of Underlying Assets.
Changes in accounting estimate
Pension liability discount rate
The Company uses interest rate curves to discount pension liabilities as part of the accounting for retirement benefits under IAS 19Employee Benefits. These discount rates are also used for the calculation of pension cost.
Until 2011 the Company has been using interest rate curves as compiled and ~~did not have~~provided by Bloomberg. Some of these curves, used for the main defined-benefit plans, are no longer available or are no longer fit for continued use. Therefore the Company has decided to select Towers Watson RATE:Link as new source for interest rate curves as the basis for discounting of pension liabilities and calculation of pension cost. It is the assessment of the Company that the RATE:Link curves provide a ~~material~~better estimate of the discount rates. This change has an impact on the ~~Company’s Consolidated financial statements.~~
~~Amendment~~balance sheet position for pension plans and the level of pension cost in Income from Operations in the future. However, as the Bloomberg rates are no longer available or fit for use it is not possible to ~~IFRIC 14 ‘Prepayments of a Minimum Funding Requirement’~~
~~This amendment allows~~provide an assessment for the ~~recognition~~impact of ~~an asset~~this change in accounting estimate as of the defined obligation measurement date of December 31, 2012.
Fair value of derivative financial instruments
The Company uses valuation techniques in order to determine the fair value of derivative financial instruments. During 2012 we revisited the approach of including the basis spread in our calculation of the fair value of derivative instruments to better reflect the contract terms under the current market conditions. As a result of this change in estimate a gain of EUR 46 million was recognised in Financial income and expenses.
Reclassifications and adjustments
Certain items previously reported under specific financial statement captions have been reclassified or adjusted to conform to the current year reporting:
Prior period amounts have been revised to adjust for warranty provisions in Lighting related to prior years. These adjustments are not material to the financial statements in any ~~surplus arising~~of the prior years. The table below outlines the impact of these adjustments:
   2010 2011
Statements of income

Income from operations
   (6 ) 0
Income taxes
   2    0


Net income (loss)
   (4 ) 0
   December 31,
2010 December 31,
2011
Balance sheets

Long-term provisions
   27    27
Short-term provisions
   28    28
Deferred tax assets
   16    16
Shareholders’ equity
   (39 ) (39 )
Following a detailed analysis of software development activities, as from 2012 certain software development cost are capitalized under the product development category rather than under the software category. This leads to the following reclassifications:
   December 31,
2010 December 31,
2011
Note 10 – Intangible assets excluding goodwill

Column Product development
   104    129
Column Software
   (104 ) (129 )
   2010 2011
Statements of cash flows

Investing: Purchase of intangible assets
   27    47
Investing: Expenditures on development assets
   (27 ) (47 )
Up to 2011 the Company offset certain payables to customers at the Lighting and Consumer Lifestyle sectors with the receivables from the ~~voluntary prepayment of minimum funding contributions for defined-benefit plans in respect of future service. The amendment~~same customers (netting). In order to ~~IFRIC 14 was adopted on January 1, 2011, was applied retrospectively and did not have a material~~reflect appropriate netting, as from 2012 payables to customers that cannot be offset due to accounting rules are recognized as Other current liabilities, with comparative figures being adjusted to follow the same approach. This also has an impact on the ~~Company’s Consolidated financial statements.~~
~~IFRIC 19 ‘Extinguishing Financial Liabilities with Equity Instruments’~~
~~IFRIC 19 clarifies~~statements of cash flows, resulting in the ~~accounting when~~following reclassifications:
   December 31,
2010 December 31,
2011
Balance sheets

Receivables
   426    412
Other current liabilities
   (426 ) (412 )
   2010 2011
Statements of cash flows

Operating: Increase in receivables and other current assets
   (84 ) (26 )
Operating: Increase (decrease) in accounts payable, accrued and other liabilities
   84    26
In 2012 it was noted that intercompany profit elimination on property, plant and equipment was accidentally recognized on a net basis as part of the ~~terms of debt are renegotiated with~~Translation differences in the ~~result that the liability is extinguished by the debtor issuing its own equity instruments~~property, plant and equipment carrying amount, rather than on a gross basis in Cost and Accumulated depreciation. With regard to the ~~creditor (referred to as a ‘debt for equity swap’). The interpretation requires a gain or loss to~~same business, the presentation of finance lease cash inflows should be ~~recognized~~appropriately presented in ~~Statement of income when a liability is settled through~~ the ~~issuance of~~Operating and Financing category rather than in the ~~entity’s own equity instruments. The reclassification of the carrying value of the existing~~
162      Annual Report 2012
12 Group financial liability into equity (with no gain or loss being recognized in Statement of income) is no longer permitted. IFRIC 19 was applied on January 1, 2011 and with retrospective effect. The application of this IFRIC did not have a material impact on the Company’s Consolidated financial statements.statements 12.10 - 12.10
Investing category. In the consolidated statements of cash flows, prior years have been adjusted as shown in the table below to reflect appropriate presentation:
   2010 2011
Statements of cash flows

Operating: Depreciation and amortization
   (14 ) (2 )
Operating: Other items
   14    2
Operating: Decrease (increase) in inventories
   (47 ) (68 )
Investing: Capital expenditures on property, plant and equipment
   49    71
Financing: Proceeds from issuance of long-term debts
   (2 ) (3 )
IFRS accounting standards adopted as from ~~2012~~2013 and onwards
The following standards and amendments to existing standards have been published and are mandatory for the Company beginning on or after January 1, ~~2012~~2013 or later periods, and the Company has not yet early adopted ~~them:~~them.
IAS 1 ~~‘Presentation~~Presentation of financial ~~statements’~~statements (2011 amendment)
The new amendment requires separation of items presented in ~~OCI~~other comprehensive income into two groups, based on whether or not they can be recycled into the Statement of income in the future. Items that will not be recycled in the future are presented separately from items that may be recycled in the future. The amendment will be adopted on January 1, 2013 and will be applied retrospectively. ~~However, the~~The amendment ~~has not yet been~~was endorsed by the EU. The application of this amendment impacts presentation and disclosures only.
IAS 19 ~~‘Employee benefits’~~Employee benefits
The revisions to IAS 19 are effective for annual periods beginning on or after January 1, 2013, ~~but~~and have ~~not yet~~ been endorsed by the EU. In general, the amendment no longer allows for deferral of actuarial gains and losses or cost of plan changes and it introduces significant changes to the recognition and measurement of ~~defined benefit~~defined-benefit pension expenses and their presentation in the Statement of income. Additional disclosure requirements have been added for risks and plan objectives
~~156      Annual Report 2011~~
~~12 Group financial statements 12.10 - 12.10~~
and the distinction between short-term and other long-term benefits has been revised. The revisions further clarify the classification of various costs involved in benefit plans like expenses and taxes.
The amendment will have a material impact on income from operations and net income of the Company, resulting from the changes in measurement and reporting of expected returns on plan assets (and interest costs), which is currently reported under income from operations.
The revised standard requires interest income or expense to be calculated on the net balance recognized, with the rate used to discount the ~~defined benefit~~defined-benefit obligations.
There is no impact on the cash flow statement and the balance sheet, since the Company already applies immediate recognition of actuarial gains and ~~losses.~~losses in other comprehensive income. The ~~impact on net income leads to lower amount recognized in actuarial~~Company also has some unrecognized past-service cost gains and losses ~~in equity.~~which must be recognized. The net impact lowers our balance sheet liabilities with EUR 10 million.
The new standard no longer allows for accrual of future pension administration costs as part of the DBO. Such costs should be expensed as incurred. Under the current standard, the Company in the Dutch plan includes a surcharge for pension administration costs as part of the service costs into the DBO. With the adoption of the new standard this accrual needs to be eliminated resulting in an exclusion of EUR 200 million from the DBO, thereby improving the funded status. This funded status improvement is offset by the impact ~~was determined by applying~~of the ~~revised~~asset ceiling test regarding the Dutch plan’s surplus, and hence there is no further impact on the Company’s balance sheet figures.
The expected negative impact of IAS ~~19R on current~~19 Revised for post employment ~~benefit~~defined-benefit plans ~~excluding long term plans not requiring actuarial valuations~~on Income from Operations and ~~projecting it to 2013. The estimated negative impacts on Adjusted IFO and income~~Income before tax for 2013 ~~would be:~~(as compared to current IAS 19) is:

~~Adjusted IFO~~Income from operations
   EUR ~~(260)~~(280) million
Financial income and expenses
   EUR ~~(90)~~(75) million
Income before ~~tax~~taxes
   EUR ~~(350)~~(355) million
As from January 1, 2013 the Company will present net interest expense as part of Financial income and expenses. Comparative figures will be restated accordingly.
The standard also enhances the definition of termination benefits and what constitutes a benefit for future service. In many cases these clarifications are reinforcing the current guidance; therefore this is not expected to materially impact the Consolidated financial statements.
IFRS 9 ~~‘Financial Instruments’~~Financial Instruments
The standard introduces certain new requirements for classifying and measuring financial assets and liabilities. IFRS 9 divides all financial assets that are currently in the scope of IAS 39 into two classifications, those measured at amortized cost and those measured at fair value. The standard along with proposed expansion of IFRS 9 for classifying and measuring financial liabilities, ~~de-recognition~~derecognition of financial instruments, impairment, and hedge accounting will be applicable from January 1, 2015, although entities are permitted to adopt earlier. This standard has not yet been endorsed by the EU. The new standard will primarily impact the accounting for the available-for-sale securities within Philips and will, accordingly, change the timing and placement (profit or loss versus other comprehensive income) of changes in the respective fair value. The actual impact in the year it is applied cannot be estimated on a reasonable basis.
IFRS 10 ~~‘Consolidated~~Consolidated Financial ~~Statements’~~Statements, IFRS 11 Joint Arrangements and IFRS 12 Disclosure of Interests in Other Entities (2011)
IFRS 10 ~~replaces the consolidation requirements in SIC-12 Consolidation—~~~~Special Purpose Entities~~~~and IAS 27~~~~Consolidated and Separate Financial Statements~~~~. IFRS 10 changes the definition of~~introduces a single control ~~so the same criteria are applied to all entities~~model to determine ~~control. The revised definition of control focuses on the need to have both power and variable returns before control is present.~~whether an investee should be consolidated. The new standard includes guidance on control with less than half of the voting rights (‘~~de-facto’~~de facto’ control), participating and protective voting rights and agent/principal relationships. ~~This new standard will be applicable from January 1, 2013, but has not yet been endorsed by the EU.~~ The Company ~~is currently evaluating~~does not expect that the ~~impact that this new standard~~adoption will have ~~on the Company’s Consolidated financial statements.~~
The Company is currently assessing the potential other new standards, amendments to standards and interpretations that are effective for annual periods on or after January 1, 2012 and which the Company has not early adopted. None of these are expected to have a ~~material effect~~significant impact on the Company’s Consolidated financial statements.
Under IFRS 11, the structure of the joint arrangement, although still an important consideration, is no longer the main factor in determining the type of joint arrangement and therefore the subsequent accounting. Instead:
The Company’s interest in a joint operation, which is an arrangement in which the parties have rights to the assets and obligations for the liabilities, will be accounted for on the basis of the Company’s interest in those assets and liabilities.
The Company’s interest in a joint venture, which is an arrangement in which the parties have rights to the net assets, will be equity-accounted.
The currently applied accounting policy by the Company already means that jointly controlled entities are being accounted for using the equity method. The adoption therefore does not have a material impact on the Company’s Consolidated financial statements.
IFRS 12 brings together into a single standard all the disclosure requirements about an entity’s interests in subsidiaries, joint arrangements, associates and unconsolidated structured entities. IFRS 12 requires the disclosure of information about the nature, risks and financial effects of these interests. The Company is currently assessing the disclosure requirements for interests in subsidiaries, interests in joint arrangements and associates and unconsolidated structured entities in comparison with the existing disclosures.
These standards are effective for annual periods beginning on or after January 1, 2013 with early adoption permitted.

Annual Report ~~2011      157~~2012      163
12 Group financial statements 12.10 - 12.11

12.11 Notes
~~All~~all amounts in millions of euros unless otherwise ~~stated.~~stated
Prior periods amounts have been revised to reflect certain voluntary adopted accounting policy changes, and immaterial adjustments (see section 12.10, Significant accounting policies, of this report). Discontinued operations reflect the effect of classifying the Television business as discontinued operations in 2011, for which the previous years’ results and cash flows have been restated. Movement schedules of balance sheet items include items from continuing and discontinued operations and therefore cannot be reconciled to income from continuing operations and cash flow from continuing operations only.
Notes to the Consolidated financial statements of the Philips Group
Income from operations
For information related to Sales and Income from operations on a geographical and sector basis, see section 12.9, Information by sector and main country, of this report.
Sales and costs by nature

   2009 2010 2011    2010 2011 2012
Sales
   20,092    22,287    22,579       22,287    22,579    24,788
Costs of materials used
   (7,290 ) (7,600 ) (8,098 )    (7,614 ) (8,100 ) (9,009 )
Employee benefit expenses
   (5,580 ) (5,777 ) (6,053 )    (5,777 ) (6,053 ) (6,933 )
Depreciation and amortization
   (1,395 ) (1,356 ) (1,456 )    (1,343 ) (1,454 ) (1,433 )
Shipping and handling
   (420 ) (422 ) (398 )
Shipping and handling¹⁾
   (931 ) (857 ) (854 )
Advertising and promotion
   (714 ) (835 ) (938 )    (835 ) (938 ) (890 )
Lease expense¹⁾
   (338 ) (297 ) (320 )
Lease expense
   (297 ) (320 ) (370 )²⁾
Audit fees
   (20 ) (20 ) (19 )    (20 ) (19 ) (22 )
Other operational costs
   (3,728 ) (3,966 ) (4,261 )    (3,462 ) (3,802 ) (3,944 )
Impairment of goodwill
   —      —      (1,355 )    —      (1,355 ) —
Other business income and expenses
   53    66    50       66    50    (303 )




Income from operations
   660    2,080    (269 )    2,074    (269 ) 1,030

¹⁾
Revised to reflect an adjusted presentation of shipping and handling costs
²⁾
Lease expense ~~contains both minimal lease~~includes EUR 35 million of other costs, ~~and contingent expense~~ such as ~~maintenance,~~ fuel and electricity, and taxes to be paid and reimbursed to the lessor
Sales composition

   2009    2010    2011    2010    2011    2012
Goods
   17,176       18,904       19,222       18,904       19,222       21,248
Services
   2,527       2,867       2,926       2,867       2,926       3,130
Licenses and royalties
   389       516       431
Royalties
   516       431       410




   20,092       22,287       22,579       22,287       22,579       24,788
Philips has no single external customer that represents 10% or more of revenues and therefore no further information is disclosed.
Costs of materials used
Cost of materials used represents the inventory recognized in cost of sales.
Employee benefit expenses

   2009    2010    2011    2010    2011    2012
Salaries and wages
   4,862    5,035    5,123    5,035    5,123    5,974
Pension costs
   103    8    138    8    138    104
Other social security and similar charges:

- Required by law
   614    571    612    571    612    693
- Voluntary
   1    163    180    163    180    162




   5,580    5,777    6,053    5,777    6,053    6,933
~~The~~For further information on pension costs, ~~in 2010 were impacted by the recognition of EUR 119 million due to prior service cost gain in 2010.~~
~~See~~see note 29, Pensions and other postretirement ~~benefits for further information~~benefits. Details on ~~pension costs.~~
~~For~~the remuneration ~~details~~ of the members of the Board of Management and the Supervisory Board, see note 32, Information on remuneration.
Employees
The average number of employees by category is summarized as follows (in FTEs):

   2009¹⁾    2010¹⁾    2011
Production
   58,674    56,005    57,804
Research & development
   10,876    11,817    12,941
Other
   34,343    32,354    33,033


Permanent employees
   103,893    100,176    103,778
Temporary employees
   9,430    13,040    16,207


Continuing operations
   113,323    113,216    119,985
Discontinued operations
   4,800    4,355    3,545
¹⁾
~~Adjusted to reflect a change of employees reported in the Healthcare sector~~
   2010    2011    2012
Production
   56,005    57,804    58,613
Research & development
   11,817    12,941    13,378
Other
   32,354    33,033    33,855


Permanent employees
   100,176    103,778    105,846
Temporary employees
   13,040    16,207    15,575


Continuing operations
   113,216    119,985    121,421
Discontinued operations
   4,355    3,545    2,982
Depreciation and amortization
Depreciation of property, plant and equipment and amortization of intangibles are as follows:

   2009    2010    2011    2010    2011    2012
Depreciation of property, plant and equipment
   702    644    634    630    632    696
Amortization of internal-use software
   106    89    82    62    55    45
Amortization of other intangible assets
   436    482    594    482    594    472
Amortization of development costs
   151    141    146    169    173    220




   1,395    1,356    1,456    1,343    1,454    1,433
Depreciation of property, plant and equipment and amortization (including impairment) of software ~~and other intangible assets are~~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 (including impairment) of development cost is included in research and development expenses.
Shipping and handling
Shipping and handling costs are included in cost of sales and selling ~~expenses.~~expenses (see section 12.10, Significant accounting policies, of this report for more information).
Advertising and promotion
Advertising and promotion costs are included in selling expenses.

~~158~~164      Annual Report ~~2011~~2012
12 Group financial statements 12.11 - 12.11

Audit fees
Fees KPMG
~~in millions of euros~~
   2009    2010    2011    2010    2011    2012
Audit fees
   16.3       16.4       15.6       16.4       15.6       14.7
- consolidated financial statements
   11.1       10.6       10.1       10.6       10.1       9.7
- statutory financial statements
   5.2       5.8       5.5       5.8       5.5       5.0
Audit-related fees¹⁾
   1.2       2.3       1.9       2.6       2.4       5.6
- acquisitions and divestments
   0.2       1.0       0.1       1.0       0.1       2.9
- sustainability assurance
   0.3       0.5       0.8
- other
   1       1.3       1.8       1.3       1.8       1.9
Tax fees²⁾
   0.9       0.4       0.9       0.4       0.9       1.3
-tax compliance services
   0.9       0.4       0.9
- tax compliance services
   0.4       0.9       1.3
Other fees³⁾
   1.3       1.3       1.0       1.0       0.5       0.7
- royalty investigation
   0.6       0.3       0.4       0.4       0.4       0.1
- sustainability and other services
   0.7       1.0       0.6
- other
   0.6       0.1       0.6




Total
   19.7       20.4       19.4       20.4       19.4       22.3

¹⁾
The percentage of services provided in ~~2011~~2012 is ~~9.8%~~25.1% of the total fees
²⁾
The percentage of services provided in ~~2011~~2012 is ~~4.6%~~5.8% of the total fees
³⁾
The percentage of services provided in ~~2011~~2012 is ~~5.2%~~3.1% of the total fees
This table ‘Fees KPMG’ forms an integral part of the Company Financial Statements, please refer to note J, Audit fees.
Impairment of goodwill
In 2011, goodwill has been impaired in the Healthcare sector for an amount of EUR 824 million and in the Lighting sector for an amount of EUR 531 million. For further information on impairment of goodwill, see note 9, Goodwill.
Other business income (expenses)
Other business income (expenses) consists of the following:

   2009 2010 2011    2010 2011 2012
Result on disposal of businesses:

- income
   13    9    28       9 28 30
- expense
   (17 ) (10 ) (26 )    (10) (26) (85)
Result on disposal of fixed assets:

- income
   33    49    47       49 47 225
- expense
   (13 ) (9 ) (11 )    (9) (11) (9)
Result on other remaining businesses:

- income
   49    35    50       35 50 42
- expense
   (12 ) (8 ) (38 )    (8) (38) (506)




   53    66    50       66 50 (303)
Total other business income
   95    93    125       93 125 297
Total other business expense
   (42 ) (27 ) (75 )    (27) (75) (600)
In ~~2011, income from~~2012, results on disposal of business was mainly due to sale of industrial sites.
In 2012, results of disposal of fixed assets was mainly due to the transfer of its 50% ownership of Senseo trademark to Sara Lee and sale of ~~buildings~~real estate assets of the High Tech Campus in ~~Italy, Singapore, Turkey, Chile~~Eindhoven, The Netherlands. For further information, see note 5, Discontinued operations and ~~Brazil.~~other assets classified as held for sale and note 7, Acquisitions and divestments
In ~~2011, income from results on other remaining businesses was due to non-core revenue.~~
~~In 2011,~~2012, results on other remaining business ~~expenses~~ were mainly due to ~~provision for legal exposure,~~non-core revenue and the European Commission fine, related to alleged violation of competition rules in the Cathode-Ray Tubes (CRT) ~~case.~~industry, and various legal matters. For further information, see note 25, Contingent liabilities.
Financial income and expenses

   2009 2010 2011    2010 2011 2012
Interest income
   45    40    38       40    38    37
Interest income from loans and receivables
   18    17    4       17    4    9
Interest income from cash and cash equivalents
   27    23    34       23    34    28
Dividend income from available for sale financial assets
   16    6    11       6    11    4
Net gains from disposal of financial assets
   126    162    51       162    51    1
Net change in fair value of financial assets at fair value through profit or loss
   20    —      6       —      6    —
Net change in fair value of financial liabilities at fair value through profit or loss
   —      —      44
Net foreign exchange gains
   —      1    —         1    —      —
Other finance income
   18    5    6       5    6    20




Finance income
   225    214    112       214    112    106
Interest expense
   (297 ) (265 ) (248 )    (265 ) (248 ) (278 )
Interest on debts and borrowings
   (294 ) (263 ) (245 )    (263 ) (245 ) (271 )
Finance charges under finance lease contract
   (3 ) (2 ) (3 )    (2 ) (3 ) (7 )
Unwind of discount of provisions
   (15 ) (20 ) (33 )    (20 ) (33 ) (22 )
Net foreign exchange losses
   (3 ) —      (2 )    —      (2 ) —
Impairment loss of financial assets
   (58 ) (2 ) (34 )    (2 ) (34 ) (8 )
Net change in fair value of financial assets at fair value through profit or loss
   —      (21 ) —         (21 ) —      (2 )
Other finance expenses
   (14 ) (27 ) (35 )    (27 ) (35 ) (42 )




Finance expense
   (387 ) (335 ) (352 )    (335 ) (352 ) (352 )




Financial income and expenses
   (162 ) (121 ) (240 )    (121 ) (240 ) (246 )
Net financial income and expense showed a EUR 246 million expense in 2012, which was EUR 6 million higher than in 2011. Total finance income of EUR 106 million included a EUR 46 million gain related to a change in estimate on the valuation of long term derivative contracts. Other finance income was EUR 20 million. Total finance expense of EUR 352 million included EUR 8 million impairment charges. Other financial expense consisted of EUR 22 million of accretion expenses mainly associated with discounted provisions and uncertain tax positions and EUR 42 million other financing charges.
Net financial income and expense showed a EUR 240 million expense in 2011, which was EUR 119 million higher than in 2010. Total finance income of EUR 112 million included EUR 51 million gain on the disposal of financial assets, of which EUR 44 million resulted from the sale of shares in TCL and EUR 6 million resulted from the sale of Digimarc. Remaining financial income included dividend income of EUR 11 million and a total net EUR 6 million gain from fair value changes, mainly the revaluation of the NXP option. Total finance expense of EUR 352 million included EUR 34 million impairment charges, mainly related to the shareholding in TPV Technology. Other financial expense consisted of EUR 33 million of accretion expenses mainly associated with discounted provisions and uncertain tax positions and EUR 35 million other financing charges.
Net financial income and expense showed a EUR 121 million expense in 2010, which was EUR 41 million lower than in 2009. Total finance income of EUR 214 million included EUR 162 million gain on the disposal of financial assets, of which EUR 154 million resulted from the sale of shares in NXP (please refer to Other non-current financial assets
Annual Report 2012      165
12 Group financial statements 12.11 - 12.11
for more details) and EUR 4 million resulted from the sale of SHL Telemedicine ~~Ltd.~~Ltd Interest income from loans and receivables included EUR 15 million related to interest received on the convertible bonds received from the shareholding in TPV Technology and CBaySystems Holdings (CBAY). Total finance expense of EUR 335 million included EUR 21 million of losses mainly in relation to fair value revaluations on the convertible bonds received from TPV Technology and CBAY prior to their redemption in September and October respectively.
Net financial income and expense showed a EUR 162 million expense in 2009. Financial income was EUR 225 million, including EUR 126 million income from the disposal of financial assets, mainly from a EUR 69 million gain from the sale of remaining shares in LG Display, and a EUR 48 million gain from the sale of remaining shares in Pace Micro Technology. During 2009, Philips had a net EUR 20 million fair value gain mainly related to the revaluation of the convertible bonds received from TPV Technology and CBAY. Philips also received EUR 16 million dividend income, of which EUR 12 million related to holdings in LG
~~Annual Report 2011      159~~
~~12 Group financial statements 12.11-12.11~~
Display. Total financial expense was EUR 387 million, including impairment charges amounting to EUR 58 million mainly from shareholdings in NXP, and EUR 15 million of accretion expenses mainly associated with discounted asbestos and environmental provisions.
Income taxes
The tax expense on income before tax amounted to EUR 308 million (2011: EUR 283 million, ~~(2010:~~2010: EUR ~~499 million, 2009: EUR 99~~497 million).
The components of income before taxes and income tax expense are as follows:

   2009 2010 2011    2010 2011 2012
Netherlands
   206    952    244       952    244    (158 )
Foreign
   292    1,007    (753 )    1,001    (753 ) 942




Income before taxes of continuing operations
   498    1,959    (509 )    1,953    (509 ) 784
Netherlands:

Current tax income (expense)
   (17 ) (103 ) (40 )    (103 ) (40 ) (79 )
Deferred tax income (expense)
   (72 ) (144 ) 44       (144 ) 44    (43 )




   (89 ) (247 ) 4       (247 ) 4    (122 )
Foreign:

Current tax income (expense)
   (201 ) (210 ) (360 )    (210 ) (360 ) (280 )
Deferred tax income (expense)
   189    (52 ) 149       (50 ) 149    117




   (12 ) (262 ) (211 )    (260 ) (211 ) (163 )
Income tax expense of continuing operations
   (99 ) (499 ) (283 )    (497 ) (283 ) (308 )
Income tax expense of discontinued operations
   (2 ) (10 ) 76       (10 ) 76    23




Income tax expense
   (101 ) (509 ) (207 )    (507 ) (207 ) (285 )
The components of income tax expense are as follows:
The components of income tax expense are as follows:


   2009 2010 2011    2010 2011 2012
Current tax expense
   (239 ) (357 ) (390 )    (357 ) (390 ) (371 )
Prior year results
   21    44    (10 )    44    (10 ) 12




Current tax income (expense)
   (218 ) (313 ) (400 )    (313 ) (400 ) (359 )
   2009 2010 2011    2010 2011 2012
Recognition of previously unrecognized tax losses
   1    9    20       9    20    1
Current year tax loss carried forwards not realized
   (60 ) (55 ) (89 )
Current year tax loss carried forwards not recognized
   (55 ) (89 ) (50 )
Temporary differences (not recognized) recognized
   2    (5 ) 15       (5 ) 15    2
Prior year results
   119    (16 ) 31       (16 ) 31    (2 )
Tax rate changes
   —      (4 ) (1 )    (4 ) (1 ) (4 )
Origination and reversal of temporary differences
   55    (125 ) 217       (125 ) 217    127




Deferred tax income (expense)
   117    (196 ) 193       (196 ) 193    74
Philips’ operations are subject to income taxes in various foreign jurisdictions. The statutory income tax rates vary from 10.0% to ~~42.3%~~42.0%, which results in a difference between the weighted average statutory income tax rate and the Netherlands’ statutory income tax rate of 25% (2011: 25.0% ~~(2010: 25.5%~~; ~~2009:~~2010: 25.5%).
A reconciliation of the weighted average statutory income tax rate to the effective income tax rate of continuing operations is as follows:
in %

   2009 2010 2011    2010 2011 2012
Weighted average statutory income tax rate
   18.1    26.6    55.4       26.6    55.4    25.8
Tax rate effect of:

Changes related to:

- utilization of previously reserved loss carryforwards
   (0.2 ) (0.5 ) 3.9       (0.5 ) 3.9    (0.1 )
- new loss carryforwards not expected to be realized
   9.3    2.1    (17.6 )    2.1    (17.6 ) 6.4
- addition (releases)
   (0.4 ) 0.3    2.9       0.3    2.9    (0.3 )
Non-tax-deductible impairment charges
   2.8    —      (98.3 )    —      (98.3 ) 0.3
Non-taxable income
   (23.3 ) (7.5 ) 11.1       (7.5 ) 11.1    (7.6 )
Non-tax-deductible expenses
   23.6    3.9    (22.4 )    3.9    (22.4 ) 27.9
Withholding and other taxes
   4.2    1.2    (4.5 )    1.2    (4.5 ) 2.8
Tax rate changes
   (0.1 ) 0.2    (0.1 )    0.2    (0.1 ) 0.5
Prior year tax results
   (28.1 ) (1.4 ) 4.5       (1.4 ) 4.5    (1.2 )
Tax expenses due to other liabilities
   7.5    (0.4 ) (9.0 )    (0.4 ) (9.0 ) 1.2
Tax incentives and other
   6.5    1.0    18.5       0.9    18.5    (16.4 )




Effective tax rate
   19.9    25.5    (55.6 )    25.4    (55.6 ) 39.3
The weighted average statutory income tax rate ~~increased~~decreased in ~~2011~~2012 compared to ~~2010,~~2011, as a consequence of a change in the country mix of income tax rates, as well as a significant change of the mix of profits and losses in the various ~~countries, which resulted in a loss recorded for the period.~~countries.
The effective income tax rate is ~~negative because a~~higher than the weighted average statutory income tax ~~charge was recorded despite a loss recorded~~rate in 2012, mainly due to the non-tax-deductible European Commission ruling for the ~~period, mainly attributable~~alleged violation of competition rules in the Cathode-Ray Tubes (CRT) industry, new losses carryforward not expected to ~~non-tax-deductible impairment charges.~~be realized, and income tax expenses due to tax provisions for uncertain tax positions, which were partly offset by non-taxable income as well as incidental tax benefits.

~~160~~166      Annual Report ~~2011~~2012
12 Group financial statements 12.11—12.11

Deferred tax assets and liabilities
Net deferred tax assets relate to the following balance sheet captions and tax loss carryforwards (including tax credit carryforwards), of which the movements during the years ~~2011~~2012 and ~~2010~~2011 respectively are as follows:

   December 31, recognized in acquisitions/ December 31,
   2010 income recognized in equity divestments other¹⁾ 2011    December 31,
2011 recognized in
income recognized in OCI acquisitions/
divestments other¹⁾ December 31,
2012
Intangible assets
   (1,217 ) 180    —      (3 ) (34 ) (1,074 )    (1,074 ) 165    —      (35 ) 16    (928 )
Property, plant and equipment
   40    30    —      —      7    77       77    (2 ) —      —      (7 ) 68
Inventories
   242    (9 ) —      —      (12 ) 221       221    41    —      —      (4 ) 258
Prepaid pension assets
   (1 ) (55 ) 58    —      —      2       2    (70 ) 72    —      (4 ) —
Other receivables
   38    6    —      —      —      44       44    13    —      —      (2 ) 55
Other assets
   28    (26 ) 19    —      (2 ) 19       19    17    (7 ) —      13    42
Provisions:

- pensions
   569    (88 ) 119    —      17    617       617    (80 ) 82    —      (22 ) 597
- guarantees
   11    7    —      —      —      18       34    (8 ) —      —      —      26
- termination benefits
   68    (26 ) —      —      —      42       42    67    5    —      4    118
- other postretirement benefits
   79    (4 ) (6 ) —      2    71       71    3    (3 ) —      1    72
- other provisions
   545    62    (6 ) 1    34    636       636    (33 ) 10    —      (8 ) 605
Other liabilities
   82    145    (1 ) (4 ) 9    231       231    (63 ) (4 ) —      7    171
Tax loss carryforwards

(including tax credit carryforwards)
   696    (29 ) —      1    64    732       732    24    (7 ) 6    (14 ) 741




Net deferred tax assets
   1,180    193    183    (5 ) 85    1,636       1,652    74    148    (29 ) (20 ) 1,825
   December 31,
2010 recognized in
income recognized in OCI acquisitions/
divestments other¹⁾ December 31,
2011
Intangible assets
   (1,217 ) 180    —      (3 ) (34 ) (1,074 )
Property, plant and equipment
   40    30    —      —      7    77
Inventories
   242    (9 ) —      —      (12 ) 221
Prepaid pension costs
   (1 ) (55 ) 58    —      —      2
Other receivables
   38    6    —      —      —      44
Other assets
   28    (26 ) 19    —      (2 ) 19
Provisions:

- pensions
   569    (88 ) 119    —      17    617
- guarantees
   27    7    —      —      —      34
- termination benefits
   68    (26 ) —      —      —      42
- other postretirement benefits
   79    (4 ) (6 ) —      2    71
- other provisions
   545    62    (6 ) 1    34    636
Other liabilities
   82    145    (1 ) (4 ) 9    231
Tax loss carryforwards (including tax credit carryforwards)
   696    (29 ) —      1    64    732


Net deferred tax assets
   1,196    193    183    (5 ) 85    1,652

¹¹⁾
Primarily includes foreign currency translation differences which were recognized in ~~equity~~

   December 31, recognized in acquisitions/ December 31,
   2009 income recognized in equity divestments other¹⁾ 2010
Intangible assets
   (1,218 ) 97    —      (3 ) (93 ) (1,217 )
Property, plant and equipment
   15    34    —      —      (9 ) 40
Inventories
   193    44    —      —      5    242
Prepaid pension costs
   (387 ) (75 ) 462    —      (1 ) (1 )
Other receivables
   36    4    —      —      (2 ) 38
Other assets
   118    (94 ) —      —      4    28
Provisions:

- pensions
   450    (58 ) 150    —      27    569
- guarantees
   11    —      —      —      11
- termination benefits
   100    (34 ) —      —      2    68
- other postretirement benefits
   91    (7 ) (10 ) —      5    79
- other provisions
   567    (71 ) 5    (1 ) 45    545
Other liabilities
   (29 ) 107    —      —      4    82
Tax loss carryforwards (including tax credit carryforwards)
   766    (143 ) (1 ) 1    73    696


Net deferred tax assets
   713    (196 ) 606    (3 ) 60    1,180
¹OCI
~~Primarily includes foreign currency translation differences which were recognized in equity~~

Annual Report ~~2011      161~~2012      167
12 Group financial statements 12.11 - 12.11

Deferred tax assets and liabilities relate to the balance sheet captions, as follows:

   assets liabilities net    assets liabilities net
2011
2012
Intangible assets
   55    (1,129 ) (1,074 )    151    (1,079 ) (928 )
Property, plant and equipment
   147    (70 ) 77       115    (47 ) 68
Inventories
   231    (10 ) 221       263    (5 ) 258
Prepaid pension costs
   6    (4 ) 2       2    (2 ) —
Other receivables
   56    (12 ) 44       58    (3 ) 55
Other assets
   50    (31 ) 19       54    (12 ) 42
Provisions:

- pensions
   619    (2 ) 617       599    (2 ) 597
- guarantees
   18    —      18       26    —      26
- termination benefits
   59    (17 ) 42       117    1    118
- other postretirement
   70    1    71       72    —      72
- other
   654    (18 ) 636       624    (19 ) 605
Other liabilities
   267    (36 ) 231       198    (27 ) 171
Tax loss carryforwards (including tax credit carryforwards)
   732    —      732       741    —      741




   2,964    (1,328 ) 1,636       3,020    (1,195 ) 1,825
Set-off of deferred tax positions
   (1,251 ) 1,251    —         (1,103 ) 1,103    —




Net deferred tax assets
   1,713    (77 ) 1,636       1,917    (92 ) 1,825

   assets liabilities net    assets liabilities net
2010
2011
Intangible assets
   104    (1,321 ) (1,217 )    55    (1,129 ) (1,074 )
Property, plant and equipment
   106    (66 ) 40       147    (70 ) 77
Inventories
   267    (25 ) 242       231    (10 ) 221
Prepaid pension costs
   2    (3 ) (1 )    6    (4 ) 2
Other receivables
   53    (15 ) 38       56    (12 ) 44
Other assets
   50    (22 ) 28       50    (31 ) 19
Provisions:
      —
- pensions
   571    (2 ) 569       619    (2 ) 617
- guarantees
   11    —      11       34    —      34
- termination benefits
   70    (2 ) 68       59    (17 ) 42
- other postretirement
   78    1    79       70    1    71
- other
   579    (34 ) 545       654    (18 ) 636
Other liabilities
   110    (28 ) 82       267    (36 ) 231
Tax loss carryforwards (including tax credit carryforwards)
   696    —      696       732    —      732




   2,697    (1,517 ) 1,180       2,980    (1,328 ) 1,652
Set-off of deferred tax positions
   (1,346 ) 1,346    —         (1,251 ) 1,251    —




Net deferred tax assets
   1,351    (171 ) 1,180       1,729    (77 ) 1,652
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.
The net deferred tax assets of EUR ~~1,636~~1,825 million ~~(2010:~~(2011: EUR ~~1,180~~1,652 million) consist of deferred tax assets of EUR ~~1,713~~1,917 million ~~(2010:~~(2011: EUR ~~1,351~~1,729 million) in countries with a net deferred tax asset position and deferred tax liabilities of EUR 7792 million ~~(2010:~~(2011: EUR ~~171~~77 million) in countries with a net deferred tax liability position. Of the total deferred tax assets of EUR ~~1,713~~1,917 million at December 31, ~~2011, (2010:~~2012, (2011: EUR ~~1,351~~1,729 million), EUR ~~487~~507 million ~~(2010:~~(2011: EUR ~~812~~487 million) is recognized in respect of fiscal entities in various countries where there have been fiscal losses in the current or preceding period. Management’s projections support the assumption that it is probable that the results of future operations will generate sufficient taxable income to utilize these deferred tax assets.
At December 31, ~~2011~~2012 and ~~2010,~~2011, there were no recognized deferred tax liabilities for taxes that would be payable on the unremitted earnings of certain foreign subsidiaries of Philips Holding USA (PHUSA) since it has been determined that undistributed profits of such subsidiaries will not be distributed in the foreseeable future. The temporary differences associated with the investments in subsidiaries of PHUSA, for which a deferred tax liability has not been recognized, aggregate to EUR 3635 million ~~(2010:~~(2011: EUR 3436 million).
At December 31, ~~2011,~~2012, operating loss carryforwards expire as follows:

                  2017/       unlimi-                   2017/       unlimi-
Total    2012    2013    2014    2015    2016    2021    later    ted    2013    2014    2015    2016    2017    2021    later    ted
4,600
   11       8       21       26       31       21       930       3,552
4,812
   32       39       9       18       11       29       989       3,685
The Company also has tax credit carryforwards of EUR ~~120~~110 million, which are available to offset future tax, if any, and which expire as follows:

                  2017/       unlimi-                   2017/       unlimi-
Total    2012    2013    2014    2015    2016    2021    later    ted    2013    2014    2015    2016    2017    2021    later    ted
120
   1       1       3       —         8       75       30       2
110
   —         —         —         —         4       19       72       15
At December 31, ~~2011~~2012 , operating loss and tax credit carryforwards for which no deferred tax assets have been recognized in the balance sheet, expire as follows:

                  2017/       unlimi-                   2017/       unlimi-
Total    2012    2013    2014    2015    2016    2021    later    ted    2013    2014    2015    2016    2017    2021    later    ted
1,847
   3       —         5       2       5       25       11       1,796
2,007
   13       15       2       2       1       11       11       1,952
At December 31, ~~2011,~~2012, the amount of deductible temporary differences for which no deferred tax asset has been recognized in the balance sheet is EUR ~~164~~157 million ~~(2010:~~(2011: EUR ~~193~~164 million).
Classification of the income tax payable and receivable is as follows:

   2010 2011    2011 2012
Income tax receivable
   79    162       162    97
Income tax receivable - under non-current receivables
   2    1       1    —
Income tax payable
   (291 ) (191 )    (191 ) (200 )
Income tax payable - under non-current liabilities
   (1 ) (1 )    (1 ) —
~~Fiscal~~Tax risks
Philips is exposed to ~~fiscal~~tax uncertainties. These uncertainties ~~include~~included amongst others the following:
Transfer pricing uncertainties
Philips has issued transfer pricing directives, which are in accordance with international guidelines such as those of the Organization of Economic Co-operation and Development. As transfer pricing has a cross-border effect, the focus of local tax authorities on implemented transfer pricing procedures in a country may have an impact on results in another country. In order to ~~mitigate~~reduce the transfer pricing uncertainties, ~~audits~~monitoring procedures are ~~executed~~carried out by ~~Corporate Fiscal~~Group Tax and Internal Audit ~~on a regular basis~~ to safeguard the correct implementation of the transfer pricing directives.
Tax uncertainties on general service agreements and specific allocation contracts
Due to the centralization of certain activities in a limited number of countries (such as research and development, centralized IT, corporate functions and head office), costs are also centralized. As a consequence, ~~for tax reasons~~ these costs and/or revenues must be allocated to the beneficiaries, i.e.

~~162~~168      Annual Report ~~2011~~2012
12 Group financial statements 12.11 - 12.11

~~beneficiaries, i.e.~~ the various Philips entities. For that purpose, apart from specific allocation contracts for costs and revenues, general service agreements (GSAs) are signed with a large number of group entities. Tax authorities review the implementation of GSAs, apply benefit tests for particular countries or audit the use of tax credits attached to GSAs and royalty payments, and may reject the implemented procedures. Furthermore, buy in/out situations in the case of (de)mergers could affect the tax allocation of GSAs between countries. The same applies to the specific allocation contracts.
Tax uncertainties due to disentanglements and acquisitions
When a subsidiary of Philips is disentangled, or a new company is acquired, related tax uncertainties arise. Philips creates merger and acquisition (M&A) teams for these disentanglements or acquisitions. In addition to representatives from the involved sector, these teams consist of specialists from various corporate functions and are formed, amongst other things, to identify hidden tax uncertainties that could subsequently surface when companies are acquired and to reduce tax claims related to disentangled entities. These tax uncertainties are investigated and assessed to mitigate tax uncertainties in the future as much as possible. Several tax uncertainties may surface from M&A activities. Examples of uncertainties are: applicability of the participation exemption, allocation issues, and non-deductibility of parts of the purchase price.
Tax uncertainties due to permanent establishments
In countries where e.g. Philips starts new operations or alters business models, the issue of permanent establishment may arise. This is because when operations in a country ~~are led from~~involves a Philips organization in another country, there is a risk that tax claims will arise in the former country as well as in the latter country.
Investments in associates
~~Results relating to investments in associates~~

   2009    2010 2011
Company’s participation in income
   23       14    18
Results on sales of shares
   —         5    —
Gains from dilution effects
   —         —      1
Investment impairment / other charges
   54       (1 ) (3 )


   77       18    16
~~Company’s participation in income relates mainly to shares in Intertrust Technologies (EUR 14 million in 2011, EUR 10 million in 2010 and EUR 14 million in 2009).~~
In 2009, the gain of EUR 54 million includes a reversal of an impairment charge related to TPV Technology Ltd. of EUR 55 million, which was recognized as an impairment charge in 2008 due to the weak stock price performance of TPV during that year. In 2010, Philips sold 9.4% of the shares in TPV. Philips retained 3.0% of the TPV shares. The transaction resulted in a gain of EUR 5 million, which was recognized under Results on sales of shares.
~~Investments in associates~~
The changes during ~~2011~~2012 are as follows:
Investments in associates

   loans investments total    loans investments total
Balance as of January 1, 2011
   3    178    181
Balance as of January 1, 2012
   2    201    203
Changes:

Acquisitions/Additions
   —      38    38       —      13    13
Sales/Redemption
   (1 ) —      (1 )    (2 ) (1 ) (3 )
Reclassifications
   —      3    3       —      (6 ) (6 )
Share in income
   —      19    19       —      (8 ) (8 )
Impairments
   —      2    2       —      (5 ) (5 )
Dividends received
   —      (44 ) (44 )
Dividends declared
   —      (15 ) (15 )
Translation and exchange rate differences
   —      5    5       —      (2 ) (2 )




Balance as of December 31, 2011
   2    201    203
Balance as of December 31, 2012
   —      177    177
The share in income mainly relates to restructuring charges recognized within a lighting venture in which Philips has a participation of 50%.
On December 5, 2012 the Company announced that it received a fine of EUR 313 million from the European Commission following an investigation into alleged violation of competition rules in the Cathode-Ray Tubes (CRT) industry. In addition, the European Commission has ordered Philips and LG Electronics to be jointly and severally liable to pay a fine of EUR 392 million for an alleged violation of competition rules by LG.Philips Displays (LPD), a 50/50 joint venture between the Company and LG Electronics. In 2006, LPD went bankrupt. The amount of EUR 196 million (being 50% of the fine related to LPD) is recorded under Results relating to investments in associates. The book value of our interest in LPD is valued at nil, therefore the loss is recognized in Other current liabilities and is not visible in the table above.
Summarized information of investments in associates
Unaudited summarized financial information on the Company’s most significant investments in associates, on a combined basis, is presented below. It is based on the most recent available financial information.
~~The decline of values~~Included from April 2012 is ~~mainly related to~~ the ~~sale of TPV shares~~30%-interest in ~~March 2010.~~TP Vision Holding which includes the former Philips TV business.

   2009 2010 2011    2010 2011 2012
Net sales
   4,165    353    408       353    408    2,534
Income before taxes
   142    47    86       47    86    (7 )
Income taxes
   (30 ) (16 ) (27 )    (16 ) (27 ) 2
Other income (loss)
   (6 ) —      —         —      —      —




Net income
   106    31    59       31    59    (5 )
Total share in net income of associates recognized in the Consolidated statements of income
   23    14    18       14    18    (8 )

   2010 2011    2011 2012
Current assets
   760    669       669    1,635
Non-current assets
   282    227       227    485




   1,042    896       896    2,120
Current liabilities
   (631 ) (475 )    (475 ) (1,544 )
Non-current liabilities
   (99 ) (58 )    (58 ) (186 )




Net asset value
   312    363       363    390
Investments in associates included in the Consolidated balance sheet
   178    201       201    177
Discontinued operations and other assets classified as held for sale
Discontinued operations: Television business
~~In conjunction with the announcement made on April 18~~^th~~of the~~The Television business’s long-term strategic partnership agreement with TPV ~~Technology Limited the Television business is presented as a discontinued operation. Therefore in accordance with IFRS 5, the~~was signed on April 1, 2012. The results ~~directly~~ related to the Television business ~~and to be discontinued from a Philips perspective,~~ are reported under ~~discontinued~~Discontinued operations in the Consolidated statements of income and ~~cash flow reported in the~~
~~Annual Report 2011      163~~
~~12 Group financial statements 12.11 - 12.11~~
Consolidated statements of cash flows. ~~Assets classified as held for sale and liabilities directly associated with assets held for sale are~~
In 2012, the Television business reported ~~on the face~~a loss of ~~the balance sheet as of the moment of announcement.~~
~~The closing of the deal is expected at the end of the first quarter of 2012.~~
~~The following table summarizes the~~EUR 31 million. Net operational results of the ~~Television business included~~discontinued operations after-tax amounted to a loss of EUR 31 million (2011: loss of EUR 162 million; 2010: loss of EUR 26 million).
At moment of the divestment a loss of EUR 5 million related to currency translation differences reported in other comprehensive income was recognized in discontinued operations in the ~~Consolidated statements of~~ income ~~as discontinued operations.~~statement.

   2009 2010 2011
Sales
   3,097    3,132    2,702
Costs and expenses
   (3,147 ) (3,148 ) (2,913 )
Expected loss on sale of discontinued operations
   —      —      (380 )


Income (loss) before taxes
   (50 ) (16 ) (591 )
Income taxes
   (2 ) (10 ) 76
Operational income tax
   (2 ) (10 ) 49
Income tax on loss on sale of discontinued operations
   —      —      27


Results from discontinued operations
   (52 ) (26 ) (515 )
~~The~~In 2011, the total ~~anticipated~~ net loss reported related to the sale of the Television operations ~~amounts~~and amounted to approximately EUR 380 million, which mainly comprises present value of initial contributions ~~to be~~ made to the TV venture (EUR 183 million), total ~~incurred and expected~~ disentanglement costs (EUR 81 million), contributed assets ~~that will~~which were not be fully recovered (EUR 66 million) and various smaller other items, offset by the ~~expected~~ revenue associated with the sale, including the fair value of a contingent consideration and a retained 30% interest in the TV venture.
In addition to the contributions that were agreed and recognized as loss on onerous contract, Philips made commitments to provide further financing to the TV venture if needed; for more details see note 24, ~~for more detail.~~Contractual obligations.
~~Net operational~~The following table summarizes the results of the ~~discontinued operations after-tax amounted to a loss of EUR 162 million (2010: loss of EUR 26 million; 2009: loss of EUR 52 million).~~
~~When the deal is closed and the related balance sheet positions are transferred, the related currency translation differences and cash flow hedges will be recognized~~Television business included in the Consolidated statements of income ~~statment. At December 31, 2011, both are part of the Other reserves within Shareholders’ equity, the amount is EUR 4 million.~~as discontinued operations.
Annual Report 2012      169
12 Group financial statements 12.11 - 12.11
   2010 2011 2012
Sales
   3,132    2,702    563
Costs and expenses
   (3,148 ) (2,913 ) (622 )
Expected loss on sale of discontinued operations
   —      (380 ) 5


Income (loss) before taxes
   (16 ) (591 ) (54 )
Income taxes
   (10 ) 76    23
Operational income tax
   (10 ) 49    28
Income tax on loss on sale of discontinued operations
   —      27    (5 )


Results from discontinued operations
   (26 ) (515 ) (31 )
The following table presents the assets and liabilities of the Television business, classified as held for sale and liabilities directly associated with assets held for sale in the Consolidated balance ~~sheets.~~sheets at December 31, 2011.
In the 2012 column the divested assets and liabilities are presented.
   2011 2012¹⁾
Property, plant and equipment
   46    91
Intangible assets including goodwill
   44    —
Write down to fair value less costs to sell
   (90 ) —
Inventories
   175    124
Other assets
   26    25


Assets classified as held for sale
   201    240
Provisions
   (7 ) (6 )


Liabilities directly associated with assets held for sale
   (7 ) (6 )

¹⁾
~~2011~~
~~Property, plant and equipment~~
46
~~Intangible assets including goodwill~~
44
~~Write down to~~At fair value ~~less costs to sell~~transferred assets
~~(90~~ )
~~Inventories~~
~~175~~
~~Other assets~~
26
~~Assets classified as held for sale~~
~~201~~
~~Accounts payable~~
—
~~Provisions~~
(7 )
~~Other liabilities~~
—
~~Liabilities directly associated with assets held for sale~~
(7 )
Non-transferrable balance sheet positions, such as accounts receivable, accounts payable and restructuring and warranty provisions are reported on the respective balance sheet captions and within the net operating capital of sector Consumer Lifestyle. For the reconciliation of net operating capital, please refer to chapter 15, Reconciliation of non-GAAP information, of this report.captions.
For further information see notes, note 20, Provisions and note 24, Contractual obligations.
Other assets classified as held for sale
~~Other assets classified as held for sale (December 31, 2011: EUR 350 million, December 31, 2010: EUR 120 million)~~Assets and liabilities directly associated with assets ~~classified as~~ held for sale ~~(December 31, 2011: EUR 54 million, December 31, 2010: nil) primarily~~ relate to property, plant and ~~equipment.~~equipment for an amount of EUR 1 million (December 31, 2011 EUR 269 million) and business divestments of EUR 15 million at December 31 2012 (December 31, 2011 EUR 27 million).
On March 29, 2012, Philips announced the completion of the High Tech Campus transaction with proceeds of EUR 425 million, consisting of a EUR 373 million cash transaction and an amount of EUR 52 million that will be received in future years. The gain from the transaction, after deducting expenses related to other real estate efficiency measures which are part of the EUR 800 million cost reduction program announced in 2011, will be EUR 65 million, EUR 37 million of which was recognized in the first quarter of 2012 in income from operations while EUR 28 million was deferred to future periods and is recognized periodically starting as of April 2012. The deferral of the gain relates to the finance lease element in the sale and lease-back arrangement part of the deal.
In 2012, Philips divested several industrial sites in sector Lighting, the Speech Processing business in Consumer Lifestyle and a minor service activity in sector Healthcare. The transactions of the industrial sites resulted in a loss of EUR 95 million, consisting of contributed assets, which were not fully recovered leading to an EUR 14 million impairment on property, plant and equipment and EUR 81 million loss reported in other business expense as result on disposal of businesses. As part of these divestments onerous supply agreements were signed, which amount to EUR 60 million at December 31, 2012. The speech Processing business resulted in a gain of EUR 21 million gain reported in other business income as result on disposal of business.

~~164~~170      Annual Report ~~2011~~2012
12 Group financial statements 12.11 - 12.11

Earnings per share
Earnings per share

      2009    2010    2011       2010    2011    2012
Income (loss) from continuing operations
      476       1,478       (776 )       1,474       (776 )    262
Income attributable to non-controlling interest
      14       6       4          6       4       5




Income (loss) from continuing operations attributable to shareholders
      462       1,472       (780 )       1,468       (780 )    257
Income (loss) from discontinued operations
      (52 )    (26 )    (515 )       (26 )    (515 )    (31 )
Net income (loss) attributable to shareholders
      410       1,446       (1,295 )       1,442       (1,295 )    226
Weighted average number of common shares outstanding (after deduction of treasury shares) during the year
      926,546,328 ¹⁾    940,528,107 ¹⁾    951,646,557          941,417,235 ¹⁾    952,535,685 ¹⁾    921,827,725
Plus incremental shares from assumed conversions of:

Options and restricted share rights
   3,555,559       7,548,916       4,309,777          7,548,916       4,309,777       5,014,991
Convertible debentures
   —         314,874       173,890          314,874       173,890       106,204
Dilutive potential common shares
      3,555,559       7,863,790       4,483,667          7,863,790       4,483,667       5,121,195
Adjusted weighted average number of shares (after deduction of treasury shares) during the year
      930,101,887 ¹⁾    948,391,897 ¹⁾    956,130,224          949,281,025 ¹⁾    957,019,352 ¹⁾    926,948,920
Basic earnings per common share in euros²⁾
Income (loss) from continuing operations
      0.51       1.57       (0.82 )       1.57       (0.81 )    0.28
Income (loss) from discontinued operations
      (0.06 )    (0.03 )    (0.54 )       (0.03 )    (0.54 )    (0.03 )
Income (loss) from continuing operations attributable to shareholders
      0.50       1.57       (0.82 )       1.56       (0.82 )    0.28
Net income (loss) attributable to shareholders
      0.44       1.54       (1.36 )       1.53       (1.36 )    0.25
Diluted earnings per common share in euros^2,3,4)
Income (loss) from continuing operations
      0.51       1.56       (0.82 )       1.55       (0.81 )    0.28
Income (loss) from discontinued operations
      (0.06 )    (0.03 )    (0.54 )       (0.03 )    (0.54 )    (0.03 )
Income (loss) from continuing operations attributable to shareholders
      0.50       1.55       (0.82 )       1.55       (0.82 )    0.28
Net income (loss) attributable to shareholders
      0.44       1.52       (1.36 )       1.52       (1.36 )    0.24
Dividend distributed per common share in euros
      0.70       0.70       0.75          0.70       0.75       0.75

¹⁾
Adjusted to make ~~2009 and 2010~~previous years comparable for the bonus shares (889 thousand) issued in ~~April 2010 (398 thousand) and April 2011 (667 thousand)~~May 2012
²⁾
The effect on income of items affecting earnings per share is considered immaterial
³⁾
In 2012, 2011 and 2010, ~~and 2009,~~ respectively 36 million, 37 million ~~36 million~~ and 5236 million securities that could potentially dilute basic EPS were not included in the computation of dilutive EPS because the effect would have been antidilutive for the periods presented
⁴⁾
The incremental shares from assumed conversion are not taken into account in the periods for which there is a loss attributable to shareholders, as the effect would be antidilutive
Acquisitions and divestments
2012
During 2012, Philips entered into one acquisition. On January 9, 2012 Philips acquired (in)directly 99.93% of the outstanding shares of Industrias Derivadas del Aluminio, S.L. (Indal). This acquisition involved a cash consideration of EUR 210 million and has been accounted for using the acquisition method. By the end of July 2012, Indal was fully owned by Philips.
Measured on a yearly basis, the aggregated impact of this acquisition on Group Sales, Income from operations, Net income and Net income per common share (on a fully diluted basis) is not material in respect of IFRS 3 disclosure requirements.
Philips completed in the first quarter of 2012 the divestment of the Television business. Furthermore there were several divestments of business activities during 2012, which comprised the divestment of certain Lighting manufacturing activities, Speech Processing activities and certain Healthcare service activities. These transactions involved an aggregated consideration of EUR 49 million and are therefore deemed immaterial in respect of IFRS 3 disclosure requirements .
For further information on divestments, reference is made to note 5, Discontinued operations and other assets classified as held for sale.
On January 26, 2012, Philips agreed to extend its partnership with Sara Lee Corp (Sara Lee) to drive growth in the global coffee market. Under a new exclusive partnership framework, which will run through to 2020, Philips will be the exclusive Senseo consumer appliance manufacturer and distributor for the duration of the agreement. As part of the agreement, Philips transferred its 50% ownership right in the Senseo trademark to Sara Lee. Under the terms of the agreement, Sara Lee paid Philips a total consideration of EUR 170 million. The consideration was recognized in Other business income for an amount of EUR 160 million. The remainder was included in various line items of the Consolidated statements of income (EUR 8 million) or deducted from the book value of Property, plant and equipment (EUR 2 million).
Annual Report 2012      171
12 Group financial statements 12.11 - 12.11
2011
During 2011, Philips entered into six acquisitions. These acquisitions involved an aggregated purchase price of EUR 498 million and have been accounted for using the acquisition method. Measured on an annualized basis, the aggregated impact of the six acquisitions on group Sales, Income from operations (excluding charges related to goodwill impairment), Net income and Net income per common share (on a fully diluted basis) is not material in respect of IFRS 3 disclosure requirements.
The divestments in 2011 involved an aggregated consideration of EUR 57 million and were therefore deemed immaterial in respect of IFRS 3 disclosure requirements.
2010
During 2010, Philips entered into 11 acquisitions. These acquisitions involved an aggregated purchase price of EUR 235 million and have been accounted for using the acquisition method. Measured on an annualized basis, the aggregated impact of the 11 acquisitions on group Sales, Income from operations, Net income and Net income per common share (on a fully diluted basis) is not material in respect of IFRS 3 disclosure requirements.
On March 9, 2010, Philips divested 9.4% of the shares in TPV Technology Ltd. (TPV). The TPV shares were sold to CEIEC Ltd., a Hong Kong-based technology company, for a cash consideration of EUR 98 million. The transaction resulted in a gain of EUR 5 million, which was reported under Results relating to Investments in Associates.
The remaining divestments in 2010 involved an aggregated consideration of EUR 22 million and were therefore deemed immaterial in respect of IFRS 3 disclosure requirements.
~~2009~~
~~During 2009, Philips entered into a number of acquisitions and completed several divestments.~~
172      Annual Report ~~2011      165~~
~~12 Group financial statements 12.11 - 12.11~~
Saeco International Group S.p.A. of Italy (Saeco) was the largest acquisition in 2009. Other acquisitions, both individually and in the aggregate, as well as divestments were deemed immaterial with respect to the IFRS 3 disclosure requirements.
~~The acquisition of Saeco is summarized in the following table and described in the paragraph below.~~
~~Acquisitions~~

   net cash    net assets    other intangible
   outflow    acquired¹⁾    assets    goodwill
Saeco
   171       17       74       80
¹⁾
~~Net assets acquired includes an adjustment of EUR 10 million for Non-controlling interests and is net of cash acquired~~
~~Saeco~~
On July 24, 2009, Philips reached an agreement with Saeco’s senior lenders. Under the terms of the agreement, Philips acquired full ownership of Saeco through the assumption of all outstanding senior debt and related financial instruments for an upfront payment of EUR 170 million plus a deferred consideration of EUR 30 million payable no later than the 5^th~~anniversary of the transaction.~~
The impact of the Saeco acquisition on Philips’ net cash position in 2009 was EUR 171 million, including acquisition-related costs of EUR 7 million and a loan of EUR 8 million provided by Philips to finance working capital. The acquisition-related costs include legal fees and due diligence costs.
This acquisition allowed Philips to strengthen its position in the espresso machine market through the addition of a comprehensive range of espresso solutions. As of the acquisition date, Saeco is consolidated as part of the Consumer Lifestyle sector.
~~The condensed balance sheet of Saeco, immediately before and after the acquisition date was as follows:~~

   before acquisition date¹⁾ after acquisition date
Assets and liabilities
Goodwill
   —      80
Other intangible assets
   182    74
Property, plant and equipment
   94    41
Working capital
   43    38
Deferred tax assets
   31    40
Provisions
   (32 ) (48 )
Cash
   14    14


   332    239
Financed by
Group equity
   100    185
Non-controlling interests
   10    10
Deferred consideration
   —      30
Loans
   222    14


   332    239
¹⁾
~~Unaudited figures~~
~~Non-controlling interests relate to minority stakes held by third parties in some of Saeco’s group companies.~~
~~The goodwill is primarily related to the synergies expected to be achieved from integrating Saeco in the Consumer Lifestyle sector.~~
~~Other intangible assets comprised of the following:~~

      amortization
   amount    period in years
Core technology
   25       5
Trademarks and trade names
   49       4-10


   74
~~For the period from July 24 to December 31, 2009, Saeco contributed sales of EUR 143 million and a loss from operations of EUR 18 million.~~
~~Pro forma disclosures on acquisitions~~
~~The following table presents the 2009 year-to-date unaudited pro-forma results of Philips, assuming Saeco had been consolidated as of January 1, 2009:~~
~~Unaudited~~


January-December 2009

      pro forma pro forma
   Philips Group    adjustments¹⁾ Philips Group
Sales
   20,092       66    20,158
Income from operations
   660       (20 ) 640
Net income (loss)
   410       (18 ) 392
Earnings per share—in euros
   0.44       0.42
¹⁾
~~Pro forma adjustments include sales, income from operations and net income from continuing operations of Saeco from January 1, 2009 to the date of acquisition~~
~~166      Annual Report 2011~~2012
12 Group financial statements 12.11 - 12.11

Property, plant and equipment

   land and
buildings machinery
and
installations other
equipment prepayments and
construction in
progress total    land and
buildings machinery
and
installations other
equipment prepayments and
construction in
progress total
Balance as of January 1, 2011:

Balance as of January 1, 2012:

Cost
   2,273    3,851    1,715    273    8,112       1,981    3,914    1,552    365    7,812
Accumulated depreciation
   (964 ) (2,684 ) (1,319 ) —      (4,967 )    (895 ) (2,762 ) (1,141 ) —      (4,798 )




Book value
   1,309    1,167    396    273    3,145       1,086    1,152    411    365    3,014
Change in book value:

Capital expenditures
   16    140    103    486    745       95    114    98    497    804
Assets available for use
   49    216    117    (382 ) —         125    312    116    (553 ) —
Acquisitions
   1    11    2    2    16       1    4    12    —      17
Disposals and sales
   (58 ) (12 ) (12 ) (3 ) (85 )    (64 ) (8 ) (10 ) (10 ) (92 )
Depreciation
   (84 ) (350 ) (166 ) —      (600 )    (77 ) (358 ) (188 ) —      (623 )
Impairments
   (13 ) (16 ) (14 ) (2 ) (45 )    (13 ) (33 ) (12 ) (1 ) (59 )
Transfer to assets classified as held for sale
   (157 ) (10 ) (17 ) (16 ) (200 )    (23 ) (2 ) (1 ) 1    (25 )
Reclassifications
   11    —      —      —      11       (29 ) —      —      —      (29 )
Translation differences
   12    6    2    7    27       (12 ) (28 ) (3 ) (5 ) (48 )




Total changes
   (223 ) (15 ) 15    92    (131 )    3    1    12    (71 ) (55 )
Balance as of December 31, 2011:

Balance as of December 31, 2012:

Cost
   1,981    3,930    1,552    365    7,828       1,924    4,004    1,658    294    7,880
Accumulated depreciation
   (895 ) (2,778 ) (1,141 ) —      (4,814 )    (835 ) (2,851 ) (1,235 ) —      (4,921 )




Book value
   1,086    1,152    411    365    3,014       1,089    1,153    423    294    2,959

   land and
buildings machinery
and
installations other
equipment prepayments
and
construction
in progress total    land and
buildings machinery
and
installations other
equipment prepayments
and
construction
in progress total
Balance as of January 1, 2010:

Balance as of January 1, 2011:

Cost
   2,447    3,692    1,708    207    8,054       2,273    3,837    1,715    273    8,098
Accumulated depreciation
   (1,013 ) (2,518 ) (1,271 ) —      (4,802 )    (964 ) (2,670 ) (1,319 ) —      (4,953 )




Book value
   1,434    1,174    437    207    3,252       1,309    1,167    396    273    3,145
Change in book value:

Capital expenditures
   67    134    24    428    653       16    118    103    486    723
Assets available for use
   24    212    126    (362 ) —         49    216    117    (382 ) —
Acquisitions
   1    2    5    (1 ) 7       1    11    2    2    16
Disposals and sales
   (32 ) (32 ) (19 ) (4 ) (87 )    (58 ) (12 ) (12 ) (3 ) (85 )
Depreciation
   (95 ) (357 ) (176 ) —      (628 )    (84 ) (347 ) (166 ) —      (597 )
Impairments
   (18 ) (12 ) (20 ) —      (50 )    (13 ) (16 ) (14 ) (2 ) (45 )
Transfer to assets classified as held for sale
   (120 ) —      —      —      (120 )    (157 ) (10 ) (17 ) (16 ) (200 )
Reclassifications
   11    —      —      —      11
Translation differences
   48    46    19    5    118       12    25    2    7    46




Total changes
   (125 ) (7 ) (41 ) 66    (107 )    (223 ) (15 ) 15    92    (131 )
Balance as of December 31, 2010:

Balance as of December 31, 2011:

Cost
   2,273    3,851    1,715    273    8,112       1,981    3,914    1,552    365    7,812
Accumulated depreciation
   (964 ) (2,684 ) (1,319 ) —      (4,967 )    (895 ) (2,762 ) (1,141 ) —      (4,798 )




Book value
   1,309    1,167    396    273    3,145       1,086    1,152    411    365    3,014
Land with a book value of EUR ~~180~~152 million at December 31, ~~2011 (2010:~~2012 (2011: EUR ~~193~~180 million) is not depreciated.
Property, plant and equipment includes lease assets with a book value of EUR ~~196~~248 million at December 31, ~~2011 (2010:~~2012 (2011: EUR ~~156~~196 million). The total book value of assets no longer productively employed, mainly included in land and buildings, amounted to EUR 114 million at December 31, ~~2011 (2010:~~2012 (2011: EUR 1511 million).
The expected useful lives of property, plant and equipment are as follows:

Buildings
   from 5 to 50 years
Machinery and installations
   from 3 to 20 years
~~Lease assets~~
~~from 1 to 15 years~~
Other equipment
   from 1 to 10 years

Annual Report ~~2011      167~~2012      173
12 Group financial statements 12.11 - 12.11

Capitalized interest included in capital expenditures is not significant.
Changes in expected useful lives and residual values have an insignificant effect on depreciation in current and future years.
Goodwill
The changes in ~~2010~~2011 and ~~2011~~2012 were as follows:

   2010 2011    2011 2012
Balance as of January 1:

Cost
   8,021    8,742       8,742    9,224
Amortization / Impairments
   (659 ) (707 )    (707 ) (2,208 )




Book value
   7,362    8,035       8,035    7,016
Changes in book value:

Acquisitions
   84    225       225    98
Divestments
   —      (8 )    (8 ) (6 )
Impairments
   —      (1,355 )    (1,355 ) —
Transfer to assets classified as held for sale
   —      (5 )    (5 ) —
Translation differences
   589    124       124    (160 )
Balance as of December 31:

Cost
   8,742    9,224       9,224    9,119
Amortization / Impairments
   (707 ) (2,208 )    (2,208 ) (2,171 )




Book value
   8,035    7,016       7,016    6,948
Acquisitions in 2012 include goodwill related to the acquisition of Indal for EUR 100 million. In addition, goodwill changed due to the finalization of purchase price accounting related to acquisitions in the prior year.
Acquisitions in 2011 include mainly the goodwill related to the acquisition of Povos (kitchen appliances) for EUR 102 million, Sectra (mammography business operations) EUR 41 million and Optimum Lighting EUR 30 million.
Acquisitions in 2010 include goodwill related to the acquisition of Discus for EUR 47 million and several other companies. In addition, goodwill changed due to the finalization of purchase price accounting related to acquisitions in the prior year.
For impairment testing, goodwill is allocated to (groups of) cash-generating units (typically one level below operating sector level), which ~~represent~~represents the lowest level at which the goodwill is monitored internally for management purposes.
In 2012, the organizational structure of the Lighting sector was changed. As a result of the change, the goodwill associated with the former unit Lamps was allocated to Light Sources & Electronics. In addition, the goodwill associated with the former Lighting Systems & Controls unit was allocated to Light Sources & Electronics and to Professional Lighting Solutions (former name was Professional Luminaires).
Goodwill allocated to the cash-generating units Respiratory Care ~~and~~& Sleep Management, Imaging Systems, Patient Care & Clinical Informatics and Professional ~~Luminaires~~Lighting Solutions is considered to be significant in comparison to the total book value of goodwill for the Group at December 31, ~~2011.~~2012. The amounts allocated are presented below:

   2010    2011    2011 2012
Respiratory Care and Sleep Management
   2,209       1,779
Respiratory Care & Sleep Management
   1,779    1,706
Imaging Systems
   1,422       1,507       1,507    1,482
Patient Care & Clinical Informatics
   1,297       1,360       1,360    1,331
Professional Luminaires
   1,485       1,229
Professional Lighting Solutions
   1,260 ¹⁾ 1,337
¹⁾
Revised to reflect the new organizational structure of the Lighting sector
The basis of the recoverable amount used in the annual (performed in the second quarter) and trigger-based impairment tests is the value in use. Key assumptions used in the impairment tests for the units in the table above were sales growth rates, ~~adjusted~~ income from operations and the rates used for discounting the projected cash flows. These cash flow projections were determined using management’s internal forecasts that cover an initial period from ~~2011~~2012 to ~~2015~~2016 that matches the period used for our strategic ~~review.~~process. Projections were extrapolated with stable or declining growth rates for a period of 5 years, after which a terminal value was calculated. For terminal value calculation, growth rates were capped at a historical long-term average growth rate.
The sales growth rates and margins used to estimate cash flows are based on past performance, external market growth assumptions and industry long-term growth averages.
~~Adjusted income~~Income from operations in all units is expected to increase over the projection period as a result of volume growth and cost efficiencies.
Cash flow projections of Respiratory Care & Sleep Management, Imaging Systems, Patient Care & Clinical Informatics and Professional ~~Luminaires~~Lighting Solutions for ~~2011~~2012 were based on the following key assumptions (based on the annual impairment test performed in the second quarter):
in %

   compound sales growth rate¹⁾
   initial
forecast
period    extra-
polation
period    terminal
value    pre-tax
discount
rates
Respiratory Care and Sleep Management
   7.6       5.6       2.7       11.5
Imaging Systems
   7.2       4.7       2.7       11.8
Patient Care & Clinical

Informatics
   8.2       5.6       2.7       13.4
Professional Luminaires
   9.5       6.1       2.7       13.6
   compound sales growth rate¹⁾
   initial
forecast
period    extra-
polation
period²⁾    used to
calculate
terminal
value    pre-tax
discount
rates
Respiratory Care & Sleep Management
   8.0       5.8       2.7       11.2
Imaging Systems
   3.4       2.9       2.7       12.8
Patient Care & Clinical Informatics
   6.5       4.1       2.7       13.2
Professional Lighting Solutions
   6.6       5.3       2.7       13.0

¹⁾
Compound sales growth rate is the annualized steady growth rate over the forecast period
²⁾
Also referred to later in the text as compound long-term sales growth rate
The assumptions used for the ~~2010~~2011 cash flow projections were as follows:
in %

   compound sales growth rate¹⁾       compound sales growth rate¹⁾
   forecast
period    extra-
polation
period    terminal
value    pre-tax
discount
rates    forecast
period    extra-
polation
period²⁾    used to
calculate
terminal
value    pre-tax
discount
rates
Respiratory Care and Sleep Management
   9.4       5.0       2.7       10.2
Respiratory Care & Sleep Management
   7.6       5.6       2.7       11.5
Imaging Systems
   5.2       4.0       2.7       11.1       7.2       4.7       2.7       11.8
Patient Care & Clinical Informatics
   6.5       5.4       2.7       12.1       8.2       5.6       2.7       13.4
Professional Luminaires
   11.3       7.2       2.7       14.0       9.5       6.1       2.7       13.6

¹⁾
Compound sales growth rate is the annualized steady growth rate over the forecast period
²⁾
Also referred to later in the text as compound long-term sales growth rate
The headroom of Respiratory Care & Sleep Management was estimated at EUR 560 million. The following changes could, individually, cause the value in use to fall to the level of the carrying value:
   increase in
pre-tax
discount rate,
basis points    decrease in
long-term
growth rate,
basis points    decrease in
terminal value
amount, %
Respiratory Care & Sleep Management
   210       400       30.0
174      Annual Report 2012
12 Group financial statements 12.11 - 12.11
Based on the annual impairment test, it was noted that for Professional Lighting Solutions the estimated recoverable amount approximates the carrying value of the cash-generating unit. Consequently, any adverse change in key assumptions would, individually, cause an impairment loss to be recognized.
The results of the annual impairment test of Imaging Systems and Patient Care & Clinical Informatics have indicated that a reasonably possible change in key assumptions would not cause the value in use to fall to the level of the carrying value.
Additional information 2012
Other cash-generating units, to which a lower amount of goodwill is allocated, are sensitive to fluctuations in the assumptions as set out above.
Based on the annual impairment test, it was noted that the headroom for the cash-generating unit Home Monitoring was EUR 49 million. An increase of 140 points in pre-tax discounting rate, a 250 basis points decline in the compound long-term sales growth rate or a 20 % decrease in terminal value would cause its value in use to fall to the level of its carrying value. The goodwill allocated to Home Monitoring at at December 31, 2012 amounted to EUR 42 million.
Based on the annual impairment test, it was noted that the headroom for the cash-generating unit Consumer Luminaires was EUR 153 million. An increase of 380 points in pre-tax discounting rate, a 710 basis points decline in the compound long-term sales growth rate or a 52 % decrease in terminal value would cause its value in use to fall to the level of its carrying value. The goodwill allocated to Consumer Luminaires at December 31, 2012 amounted to EUR 133 million.
Based on the Q4 trigger-based impairment test, it was noted that the headroom for the cash-generating unit Lumileds was EUR 174 million. An increase of 150 basis points in pre-tax discounting rate, a 400 basis points decline in the compound long-term sales growth or a 19% decrease in terminal value would cause its value in use to fall to the level of its carrying value. The goodwill allocated to Lumileds at December 31, 2012 amounted to EUR 132 million.
Impairment charge 2011
Based on the annual test in 2011 the recoverable amounts for certain cash-generating units were estimated to be lower than the carrying amounts, and therefore impairment was identified as follows:

Cash-generating unit    reportable
segment    amount of
~~Cash-generating unit~~ ~~segment~~
impairment
Respiratory Care ~~and~~& Sleep Management
   Healthcare       450
Home Monitoring
   Healthcare       374
Professional Luminaires
Lighting 304
Consumer Luminaires
   Lighting       227
~~Professional Luminaires~~
~~Lighting~~ ~~304~~
Compared to the previous impairment test, for the four cash-generating units mentioned above, there has been no change in the organization structure which impacts how goodwill is allocated to these cash-generating units.
~~168      Annual Report 2011~~
~~12 Group financial statements 12.11 - 12.11~~
Respiratory Care & Sleep Management
The annual impairment test resulted in EUR 450 million impairment. This was mainly as a consequence of a weaker market outlook, lower profitability projections from increasing investments and price competition, as well as an adverse movement in the pre-tax discount rate.
Home Monitoring
The annual impairment test resulted in EUR 374 million impairment. This was mainly as a consequence of lower growth projections, particularly in the US markets, and lower profitability projections based on historical performance.
The pre-tax discount rate applied to the ~~most recent~~2011 cash flow projection is 11.6%~~. The pre-tax discount rate applied in the previous projection was 11.1%~~.
Professional Luminaires
The annual impairment test resulted in EUR 304 million impairment, as a consequence of lower growth projections, lower profitability and higher investment levels required.
Consumer Luminaires
The annual impairment test resulted in EUR 227 million impairment. This was mainly as a consequence of lower growth projections on slower than anticipated recovery of the market, a slower LED adoption rate and an adverse movement in the pre-tax discount rate.
The pre-tax discount rate applied to the ~~most recent~~2011 cash flow projection is 12.6%. ~~The pre-tax discount rate applied in the previous projection was 11.8%.~~
~~Additional information~~
After the impairment charge mentioned above, the estimated recoverable amount for Respiratory Care & Sleep Management, Home Monitoring and Professional Luminaires equals their respective carrying value. Consequently, any adverse change in key assumptions would, individually, cause a further impairment loss to be recognized.
The results of the annual impairment test of Imaging Systems and Patient Care & Clinical Informatics have indicated that a reasonably possible change in key assumptions would not cause the value in use to fall to the level of the carrying value.
Based on the Q3 trigger-based impairments test, it was noted that the headroom for the cash-generating unit Lumileds was EUR 102 million. An increase of 90 basis points in pre-tax discounting rate, a 270 basis points decline in the compound long term sales growth rate or a 12% decrease in terminal value would cause its value in use to fall to the level of its carrying value. Goodwill allocated to Lumileds at December 31, 2011 amounts to EUR 135 million.
Based on the Q4 trigger-based impairment test, it was noted that the estimated recoverable amount for Consumer Luminaires approximates the carrying value of the cash-generating unit. Consequently, any adverse change in key assumptions would, individually, cause a further impairment loss to be recognized. Goodwill allocated to Consumer Luminaires at December 31, 2011 amounts to EUR 134 million.
Please refer to section 12.9, Information by sector and main country, of this report for a specification of goodwill by sector.
Intangible assets excluding goodwill
The changes were as follows:

   other
intangible product    other
intangible
assets product
development software total
   assets development software total
Balance as of January 1, 2011:

Balance as of January 1, 2012:

Cost
   5,486    1,046    665    7,197       5,857    1,437    369    7,663
Accumulated amortization
   (1,956 ) (587 ) (456 ) (2,999 )
Amortization/impairments
   (2,593 ) (793 ) (281 ) (3,667 )




Book value
   3,530    459    209    4,198       3,264    644    88    3,996
Changes in book value:

Additions
   31    241    91    363       11    347    29    387
Acquisitions and purchase price allocation adjustments
   242    (1 ) (1 ) 240       137    —      —      137
Amortization
   (444 ) (146 ) (79 ) (669 )    (455 ) (190 ) (44 ) (689 )
Impairment losses
   (153 ) (15 ) (2 ) (170 )    (17 ) (30 ) (2 ) (49 )
Transfer to assets classified as held for sale
   (8 ) (26 ) 1    (33 )
Translation differences
   72    12    5    89       (42 ) (10 ) —      (52 )
Other
   (6 ) (9 ) (7 ) (22 )    (2 ) 6    (3 ) 1




Total changes
   (266 ) 56    8    (202 )    (368 ) 123    (20 ) (265 )
Balance as of December 31, 2011:

Balance as of December 31, 2012:

Cost
   5,857    1,159    647    7,663       5,868    1,584    369    7,821
Accumulated amortization
   (2,593 ) (644 ) (430 ) (3,667 )
Amortization/impairments
   (2,972 ) (817 ) (301 ) (4,090 )




Book Value
   3,264    515    217    3,996       2,896    767    68    3,731

Annual Report ~~2011      169~~2012      175
12 Group financial statements 12.11 - 12.11

   other
intangible product    other
intangible
assets product
development software total
   assets development software total
Balance as of January 1, 2010:

Balance as of January 1, 2011:

Cost
   5,040    820    606    6,466       5,486    1,271    440    7,197
Accumulated amortization
   (1,484 ) (436 ) (385 ) (2,305 )
Amortization/impairments
   (1,956 ) (708 ) (335 ) (2,999 )




Book value
   3,556    384    221    4,161       3,530    563    105    4,198
Changes in book value:

Additions
   64    219    76    359       31    292    40    363
Acquisitions and purchase price allocation adjustments
   131    (13 ) 1    119       242    (1 ) (1 ) 240
Amortization/deductions
   (484 ) (155 ) (89 ) (728 )    (444 ) (172 ) (53 ) (669 )
Impairment losses
   (3 ) (13 ) —    (16 )    (153 ) (15 ) (2 ) (170 )
Transfer to assets classified as held for sale
   (8 ) (26 ) 1    (33 )
Translation differences
   268    17    11    296       72    16    1    89
Other
   (2 ) 20    (11 ) 7       (6 ) (14 ) (2 ) (22 )




Total changes
   (26 ) 75    (12 ) 37       (266 ) 80    (16 ) (202 )
Balance as of December 31, 2010:

Balance as of December 31, 2011:

Cost
   5,486    1,046    665    7,197       5,857    1,437    369    7,663
Accumulated amortization
   (1,956 ) (587 ) (456 ) (2,999 )
Amortization/impairments
   (2,593 ) (793 ) (281 ) (3,667 )




Book value
   3,530    459    209    4,198       3,264    644    88    3,996
The additions for ~~2011~~2012 contain internally generated assets of EUR ~~241~~347 million and EUR 6329 million for product development and software respectively ~~(2010:~~(2011: EUR ~~219~~292 million, EUR 7040 million).
The acquisitions through business combinations in 2012 mainly consist of the acquired intangibles assets of Indal for EUR 134 million. The acquisitions in 2011 mainly consist of the acquired intangible assets of Povos for EUR 138 million, Preethi EUR 69 million and Sectra EUR 22 million. ~~The acquisitions through business combinations in 2010 consist of the acquired intangible assets of Discus for EUR 67 million and several other smaller acquisitions.~~
The amortization of intangible assets is specified in note 1, Income from operations.
The impairment charges in ~~2011 include an impairment charge of EUR 128 million~~2012 for ~~customer relationships and~~other intangibles mainly relates to brand names in ~~Consumer Luminaires. This charge is based on a Q4 trigger-based test on the category level in Consumer Luminaires.~~
Professional Lighting Solutions. As part of the ~~turnaround plan, most~~rationalization of the go-to-market model in Professional Lighting Solutions, the Company decided to discontinue the use of several brands ~~for Consumer Luminaires products will be re-branded as Philips,~~ which resulted in the mentioned impairment charge.
The ~~basis~~impairment of ~~the recoverable amount used~~product development of EUR 30 million relates to various projects in ~~this test is the value in use and a pre-tax discount rate of 12.7% is applied.~~all three operating sectors.
Other intangible assets consist of:


December 31, 2010

December 31, 2011

      accumulated    accumulated
   gross    amortization gross    amortization
Brand names
   843       (206 ) 966       (301 )
Customer relationships
   2,839       (762 ) 3,114       (1,165 )
Technology
   1,743       (948 ) 1,699       (1,072 )
Other
   61       (40 ) 78       (55 )


   5,486       (1,956 ) 5,857       (2,593 )
~~170      Annual Report 2011~~
~~12 Group financial statements 12.11 - 12.11~~

December 31, 2011
December 31, 2012
   gross    amortization/
impairments gross    amortization/
impairments
Brand names
   966       (301 ) 966       (374 )
Customer relationships
   3,114       (1,165 ) 3,045       (1,318 )
Technology
   1,699       (1,072 ) 1,759       (1,202 )
Other
   78       (55 ) 98       (78 )


   5,857       (2,593 ) 5,868       (2,972 )
The estimated amortization expense for other intangible assets for each of the next five years is:

2012
   529
2013
   372       380
2014
   342       327
2015
   318       298
2016
   288       264
2017
   238
The expected useful lives of the intangible assets excluding goodwill are as follows:

Brand names
   2-20 years
Customer relationships
   2-25 years
Technology
   3-20 years
Other
   1-8 years
Software
   3 years
Development
   3-5 years
The expected weighted average remaining life of other intangible assets is ~~11.4~~11.2 years as of December 31, ~~2011 (2010: 9.1~~2012 (2011: 11.4 years).
The Group reviewed the useful lives of the intangible assets, resulting in no material changes.
The unamortized costs of computer software to be sold, leased or otherwise marketed amounted to EUR 91 million (2010: EUR 82 million). The amounts charged to the Consolidated statements of income for amortization or impairment of these capitalized computer softwaredevelopment costs amounted to EUR 26361 million ~~(2010:~~(2011: EUR 25201 million).
Non-current receivables
Non-current receivables include receivables with a remaining term of more than one ~~year, and the non-current portion of income taxes receivable amounting to EUR 1 million (2010: EUR 2 million).~~year.
176      Annual Report 2012
12 Group financial statements 12.11 - 12.11
Other non-current financial assets
The changes during ~~2011~~2012 are as follows:

   available-
for-sale
financial
assets loans and
receivables held-to-
maturity
invest-
ments    financial
assets at
fair
value
through
profit or
loss total    available-
for-sale
financial
assets loans and
receivables held-to-
maturity
invest-
ments    financial
assets at
fair
value
through
profit or
loss total
Balance as of January 1, 2011
   362    53    2       62    479
Balance as of January 1, 2012
   204    72    3       67    346
Changes:

Reclassifications
   (4 ) 2    —         1    (1 )    13    2    —         —      15
Acquisitions/additions
   30    26    —         —      56       19    208    —         17    244
Sales/redemptions/reductions
   (96 ) (6 ) —         (2 ) (104 )    (2 ) (1 ) —         (35 ) (38 )
Impairment
   (34 ) —      —         —      (34 )    (8 ) —      —         —      (8 )
Value adjustments
   (55 ) —      —         6    (49 )    7    (10 ) —         (3 ) (6 )
Translation and exchange differences
   1    (3 ) 1       —      (1 )    (1 ) (4 ) —         1    (4 )




Balance as of December 31, 2011
   204    72    3       67    346
Balance as of December 31, 2012
   232    267    3       47    549
Available-for-sale financial assets
The Company’s investments in available-for-sale financial assets mainly consist of investments in common stock of companies in various industries.
On March 10, March 11 and March 30, 2011, Philips sold all shares of common stock in TCL Corporation (TCL) to financial institutions in a capital market transaction. This transaction represented 3.84% of TCL’s issued share capital. The transaction resulted in a gain of EUR 44 million, reported under Financial income.
Impairment mainly relates to our 2.7% interest in TPV Technologies Ltd. (TPV). At year-end the fair value based on the stock price of TPV was EUR 25 million below the carrying value (fair value plus losses recognized in accumulated other comprehensive income). As this loss was considered significant and prolonged, an impairment charge of EUR 25 million was recorded by releasing the accumulated amounts under Other comprehensive income to Financial expense.
Loans and receivables
The increase of loans and receivables in ~~2011~~2012 mainly relates to loans provided to TPV Technology Limited and the television joint venture TP Vision Holding BV (EUR 151 million in aggregate), which was established on April 1, 2012 in the context of the divestment of Philips’ Television business. Additionally there was an increase of EUR 53 million in Loans and receivables related to the ~~loan given~~sale of real estate belonging to ~~Philips Sport Vereniging (PSV).~~the High Tech Campus.
Financial assets at fair value through profit or loss
~~On September 7,~~The reduction of financial assets at fair value through profit and loss with EUR 35 million in 2012 mainly relates to financial assets earmarked for the Swiss pension plan, which have been used in a buy-out transaction.
Also included in this category are certain financial instruments that Philips received in exchange for the transfer of its television activities. The initial value of EUR 17 million was adjusted by EUR 11 million during 2012.
In 2010 Philips sold its entire holding of common shares in NXP Semiconductors B.V. (NXP) to Philips Pension Trustees Limited (herein ~~after~~ referred to as “UK Pension Fund”). As a result of this transaction the UK Pension Fund obtained the full legal title and ownership of the NXP shares, including the entitlement to any future dividends and the proceeds from any sale of shares. From the date of the transaction the NXP shares are an integral part of the plan assets of the UK Pension Fund. The purchase agreement with the UK Pension Fund includes an arrangement that may entitle Philips to a cash payment from the UK Pension Fund on or after September 7, 2014, if the value of the NXP shares has increased by this date to a level in excess of a predetermined threshold, which at the time of the transaction was substantially above the transaction price, and the UK Pension Fund is in a surplus (on the regulatory funding basis) on September 7, 2014. The arrangement qualifies as a financial instrument and is reported under Other non-current financial ~~assets at fair value through profit and loss.~~assets. The fair value of the arrangement was estimated to be ~~zero~~EUR 8 million as of December 31, ~~2010.~~2011. As of December 31, ~~2011~~2012 management’s best estimate of the fair value of the arrangement is EUR 814 million, based on the risks, the stock price of NXP, the current progress and the long-term nature of the recovery plan of the UK Pension Fund. The change in fair value ~~until December 31, 2011~~in 2012 is reported under ~~value~~Value adjustments in the table above and also recognized in Financial income.
Other non-current assets
Other non-current assets in ~~2011~~2012 are comprised of prepaid pension costs of EUR 57 million ~~(2010:~~(2011: EUR 145 million) and prepaid expenses of EUR 6687 million ~~(2010:~~(2011: EUR 6166 million).
For further details see note 29, Pensions and other postretirement benefits.
Inventories
Inventories are summarized as follows:

   2010    2011    2011    2012
Raw materials and supplies
   1,131       1,083       1,083       1,039
Work in process
   510       630       630       540
Finished goods
   2,224       1,912       1,912       1,916




   3,865       3,625       3,625       3,495
The amounts recorded above are net of allowances for obsolescence.
In ~~2011,~~2012, the write-down of inventories to net realizable value amounted to EUR ~~239~~276 million ~~(2010:~~(2011: EUR ~~228~~239 million). The write-down is included in cost of sales.
Current financial assets
Other current financial assets were EUR nil million as at December 31, ~~2011 (2010:~~2012 (2011: EUR 5nil million). During 2010, two convertible bonds previously issued to Philips by TPV Technology Limited and CBAY were redeemed generating a total of EUR 239 million cash inflow and a fair value loss of EUR 21 million was recognized in financial income and expense, mainly related to these instruments.
~~Annual Report 2011      171~~
~~12 Group financial statements 12.11 - 12.11~~
Other current assets
Other current assets include prepaid expenses of EUR ~~351~~337 million ~~(2010:~~(2011: EUR ~~348~~351 million).
Current receivables
The accounts receivable, net, per sector are as follows:

   2010    2011    2011    2012
Healthcare
   1,848       1,882       1,882       1,967
Consumer Lifestyle
   1,082       1,111       1,339       892
Lighting
   1,072       1,119       1,261       1,364
Group Management & Services
   102       59
Innovation, Group & Services
   102       111




   4,104       4,171       4,584       4,334
The aging analysis of accounts receivable, net, is set out below:

   2010    2011    2011    2012
current
   3,439       3,553       3,966       3,624
overdue 1-30 days
   297       290       290       272
overdue 31-180 days
   283       234       234       298
overdue > 180 days
   85       94       94       140




   4,104       4,171       4,584       4,334
A large part of overdue trade accounts receivable relates to public sector customers with slow payment approval processes. The allowance for doubtful accounts receivable has been primarily established for receivables that are past due.
Annual Report 2012      177
12 Group financial statements 12.11 - 12.11
The changes in the allowance for doubtful accounts receivable are as follows:

   2009 2010 2011    2010 2011 2012
Balance as of January 1
   280    261    264       261    264    233
Additions charged to income
   23    24    20       24    20    11
Deductions from allowance¹⁾
   (58 ) (37 ) (31 )    (37 ) (31 ) (43 )
Other movements
   16    16 ²) (20 )    16    (20 ) 1




Balance as of December 31
   261    264 ²⁾ 233       264    233    202

¹⁾
Write-offs for which an allowance was previously provided
²⁾
~~Adjusted to reflect a change in the other movements~~
~~Shareholders’ equity~~Equity
~~Objectives, policies and processes for managing capital~~
For information regarding our objectives, policies and processes for managing capital, please refer to chapter 15, Reconciliation of non- GAAP information, of this report, which is deemed incorporated and repeated herein by reference.
Common shares
As of December 31, ~~2011,~~2012, the issued and fully paid share capital consists of ~~1,008,975,445~~957,132,962 common shares, each share having a par value of EUR 0.20.
In May ~~2011,~~2012, Philips settled a dividend of EUR 0.75 per common share, representing a total value of EUR ~~711~~687 million. Shareholders could elect for a cash dividend or a share dividend. Approximately ~~63%~~62.4% of the shareholders elected for a share dividend, resulting in the issuance of ~~22,896,661~~30,522,107 new common shares. The settlement of the cash dividend resulted in a payment of EUR ~~263~~259 million.
Preference shares
The ‘Stichting Preferente Aandelen Philips’ has been granted the right to acquire preference shares in the Company. Such right has not been exercised. As a means to protect the Company and its stakeholders against an unsolicited attempt to acquire (de facto) control of the Company, the General Meeting of Shareholders in 1989 adopted amendments to the Company’s articles of association that allow the Board of Management and the Supervisory Board to issue (rights to acquire) preference shares to a third party. As of December 31, ~~2011,~~2012, no preference shares have been issued.
Option rights/restricted shares
The Company has granted stock options on its common shares and rights to receive common shares in the future (see note 30, ~~Share- based~~Share-based compensation).
Treasury shares
In connection with the Company’s share repurchase programs, shares which have been repurchased and are held in treasury for (i) delivery upon exercise of options and convertible personnel debentures and under restricted share programs and employee share purchase programs, and (ii) capital reduction purposes, are accounted for as a reduction of shareholders’ equity. Treasury shares are recorded at cost, representing the market price on the acquisition date. When issued, shares are removed from treasury shares on a first-in, first-out (FIFO) basis.
Any difference between the cost and the cash received at the time treasury shares are issued, is recorded in capital in excess of par value, except in the situation in which the cash received is lower than cost and capital in excess of par has been depleted.
The following transactions took place resulting from employee option and share plans:

   2010    2011    2011    2012
Shares acquired
   15,237       32,484       32,484       5,147
Average market price
   EUR 25.35       EUR 19.94       EUR 19.94       EUR 17.86
Amount paid
   —         EUR 1 million       EUR 1 million       —
Shares delivered
   5,397,514       4,200,181       4,200,181       4,844,898
Average market price
   EUR 23.99       EUR 20.54       EUR 20.54       EUR 24.39
Amount received
   EUR 71 million       EUR 87 million       EUR 87 million       EUR 118 million
Total shares in treasury at year-end
   37,720,402       33,552,705       33,552,705       28,712,954
Total cost
   EUR 1,051 million       EUR 965 million       EUR 965 million       EUR 847 million
In order to reduce share capital, the following transactions took ~~place in 2011 (in 2010 there were no transactions to reduce share capital):~~place:

   2010    2011    2011    2012
Shares acquired
   —         47,475,840       47,475,840       46,865,485
Average market price
   —         EUR 14.74       EUR 14.74       EUR 16.41
Amount paid
   —         EUR 700 million       EUR 700 million       EUR 769 million
Reduction of capital stock
   —         —         —         82,364,590
Total shares in treasury at year-end
   1,851,998       49,327,838       49,327,838       13,828,733
Total cost
   EUR 25 million       EUR 725 million       EUR 725 million       EUR 256 million
Dividend ~~distributed from retained earnings~~distribution
A proposal will be submitted to the General Meeting of Shareholders to pay a dividend of EUR 0.75 per common share, in cash or shares at the option of the shareholder, from the 2012 net income and retained earnings.
Limitations in the distribution of shareholders’ equity
Pursuant to Dutch law, limitations exist relating to the distribution of shareholders’ equity of EUR ~~1,413~~1,480 million ~~(2010:~~(2011: EUR ~~1,500~~1,418 million). Such limitations relate to common shares of EUR ~~202~~191 million ~~(2010:~~(2011: EUR ~~197~~202 million) as well as to legal reserves required by Dutch law
~~172      Annual Report 2011~~
~~12 Group financial statements 12.11 - 12.11~~
included under revaluation reserves of EUR 7054 million ~~(2010:~~(2011: EUR 8670 million), retained earnings of EUR ~~1,089~~1,161 million ~~(2010:~~(2011: EUR ~~1,078~~1,094 million) and other reserves of EUR 5274 million ~~(2010:~~(2011: EUR ~~139~~52 million).
In general unrealized gains ~~related~~relating to ~~currency translation differences,~~ available-for-sale financial assets and cash flow hedges cannot be distributed as part of shareholders’ equity as they form part of the legal reserves protected under Dutch law. By their nature, unrealized losses relating to currency translation differences ~~available-for-sale financial assets and cash flow hedges~~ reduce shareholders’ equity, and thereby distributable amounts.
Therefore, unrealized gains related to ~~currency translation differences (2011: EUR 7 million) and~~ available-for-sale financial assets ~~(2011:~~(2012: EUR 4554 million) and cash flow hedges (2012: EUR 20 million), both included in other reserves, limit the distribution of shareholders’ equity. The unrealized losses related to ~~cash flow hedges (2011:~~currency translation (2012: EUR 993 million) reduce the distributable amount by their nature.
The legal reserve required by Dutch law of EUR ~~1,089~~1,161 million ~~(2010:~~(2011: EUR ~~1,078~~1,094 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.
Non-controlling interests
Non-controlling interests represent the claims that third parties have on equity of consolidated group companies that are not wholly owned by the Company. The Sales, Income from operations and Net income of these companies is not material in view of the consolidated financial data of the Company.
Objectives, policies and processes for managing capital
Philips manages capital based upon the measures net operating capital (NOC), net debt and cash flows before financing activities.
178      Annual Report 2012
12 Group financial statements 12.11 - 12.11
The Company believes that an understanding of the Philips Group’s financial condition is enhanced by the disclosure of net operating capital (NOC), as this figure is used by Philips’ management to evaluate the capital efficiency of the Philips Group and its operating sectors. NOC is defined as: total assets excluding assets from discontinued operations less: (a) cash and cash equivalents, (b) deferred tax assets, (c) other (non-)current financial assets, (d) investments in associates, and after deduction of: (e) provisions excluding deferred tax liabilities, (f) accounts and notes payable, (g) accrued liabilities, (h) current/non-current liabilities, and (i) trading securities.
Net debt is defined as the sum of long- and short-term debt minus cash and cash equivalents. The net debt position as a percentage of the sum of group equity (shareholders’ equity and non-controlling interests) and net debt is presented to express the financial strength of the Company. This measure is widely used by management and investment analysts and is therefore included in the disclosure. Our net debt position is managed in such a way that we can meet our objective to retain our target at A3 rating (Moody’s) and A- rating (Standard and Poor’s). Furthermore, the Group’s objective when managing the net debt position is to fulfill our commitment to a stable dividend policy with a 40% to 50% pay-out of continuing net income.
Cash flows before financing activities, being the sum total of net cash from operating activities and net cash from investing activities, and free cash flow, being net cash from operating activities minus net capital expenditures, are presented separately to facilitate the reader’s understanding of the Company’s funding requirements.
NOC composition
   2010 2011 2012
Intangible assets
   12,233    11,012    10,679
Property, plant and equipment
   3,145    3,014    2,959
Remaining assets
   9,347    9,393    8,921
Provisions
   (2,394 ) (2,694 ) (2,969 )
Other liabilities
   (10,434 ) (10,353 ) (10,283 )


Net operating capital
   11,897    10,372    9,307
Composition of net debt to group equity
   2010 2011    2012
Long-term debt
   2,818    3,278       3,725
Short-term debt
   1,840    582       809


Total debt
   4,658    3,860       4,534
Cash and cash equivalents
   5,833    3,147       3,834


Net debt (cash)¹⁾
   (1,175 ) 713       700
Shareholders’ equity
   15,007    12,316       11,140
Non-controlling interests
   46    34       34


Group equity
   15,053    12,350       11,174
Net debt and group equity
   13,878    13,063       11,874
Net debt divided by net debt and group equity (in %)
   (8 ) 5       6
Group equity divided by net debt and group equity (in %)
   108    95       94
¹⁾
Total debt less cash and cash equivalents
Composition of cash flows
   2010 2011 2012
Cash flows from operating activities
   2,074    768    2,198
Cash flows from investing activities
   (597 ) (1,293 ) (912 )


Cash flows before financing activities
   1,477    (525 ) 1,286
Cash flows from operating activities
   2,074    768    2,198
Net capital expenditures:
   (716 ) (872 ) (475 )
Purchase of intangible assets
   (53 ) (69 ) (39 )
Proceeds from sale of intangible assets
   —      —      160
Expenditures on development assets
   (220 ) (278 ) (347 )
Capital expenditures on property, plant and equipment
   (572 ) (653 ) (675 )
Proceeds from disposals of property, plant and equipment
   129    128    426


Free cash flows
   1,358    (104 ) 1,723
Annual Report 2012      179
12 Group financial statements 12.11 - 12.11
Long-term debt and short-term debt
Long-term debt

   (range of)
interest
rates average
rate of
interest amount
outstanding    due in
1 year    due
after 1
year    due
after 5
years    average
remaining
term (in
years)    amount
outstanding
2010    (range of)
interest
rates average
rate of
interest amount
outstanding    due in
1 year    due
after 1
year    due
after 5
years    average
remaining
term (in
years)    amount
outstanding
2011
Eurobonds
   —      —      —         —         —         —         —         750
USD bonds
   4.6 - 7.8 % 6.2 % 2,505          2,505       2,007       12.2       2,687       3.8 - 7.8 % 5.6 % 3,198       109       3,089       3,089       14.2       2,505
Convertible debentures
   —      —      23       23       —         —         —         38       —      —      12       12       —         —         —         23
Private financing
   1.0 - 2.0 % —      1       1       —         —         1.1       1       0 - 1.6 % 1.6 % 2       2       —         —         0.9       1
Bank borrowings
   2.8 - 12.4 % 5.5 % 627       —         627       202       4.5       268       2.3 - 7.8 % 2.7 % 469       13       456       203       4.6       627
Finance leases
   1.1 - 16.1 % 1.7 % 204       59       145       31       3.7       164
Other long-term debt
   2.3 - 19.0 % 4.7 % 57       56       1          4.0       64       1.3 - 19.0 % 5.0 % 52       50       2       —         4.0       57




   3,417       139       3,278       2,240          3,972       3,733       186       3,546       3,292          3,213
Finance leases
   0.6 - 15.1 % 3.6 % 243       65       178       65       7.3       204


   5.2 % 3,976       251       3,725       3,357          3,417
Corresponding data of previous year
   5.5 % 3,972       1,154       2,818       1,986          3,786       5.8 % 3,417       139       3,278       2,240          3,972
The following amounts of long-term debt as of December 31, ~~2011,~~2012, are due in the next five years:

2012
   139
2013
   723       251
2014
   285       305
2015
   20       33
2016
   10       19
2017
   11




Total
   1,177       619
Corresponding amount of previous year
   1,986       1,177

   effective
rate 2010 2011    effective
rate 2011 2012
Unsecured Eurobonds
Due 5/16/11; 6 1/8%
   6.122 % 750    —
Unsecured USD Bonds
Due 5/15/25; 7 3/4%
   7.429 % 74    77       7.429 % 77    75
Due 6/01/26; 7 1/5%
   6.885 % 124    128       6.885 % 128    126
Due 8/15/13; 7 1/4%
   6.382 % 107    110       6.382 % 110    108
Due 5/15/25; 7 1/8%
   6.794 % 77    79       6.794 % 79    78
Due 03/11/11; 3 3/8%¹⁾
   3.128 % 262    —
Due 03/11/13; 4 5/8%¹⁾
   4.949 % 374    386
Due 03/11/18; 5 3/4%¹⁾
   6.066 % 935    966
Due 03/11/38; 6 7/8%¹⁾
   7.210 % 748    773
Due 3/11/13; 4 5/8%¹⁾
   4.949 % 386    —
Due 3/11/18; 5 3/4%¹⁾
   6.066 % 966    948
Due 3/11/38; 6 7/8%¹⁾
   7.210 % 773    758
Due 3/15/22; 3.750%¹⁾
   3.906 % —      758
Due 3/15/42; 5.000%¹⁾
   5.273 % —      379
Adjustments²⁾
   (14 ) (14 )    (14 ) (32 )




   2,687    2,505       2,505    3,198
¹⁾ The provisions applicable to these bonds, issued in March 2008 and in March 2012, contain a ‘Change of Control Triggering Event’. If the Company would experience such an event with respect to a series of corporate bonds, the Company may be required to offer to purchase the bonds of the series at a purchase price equal to 101% of the principal amount, plus accrued and unpaid interest, if any.
²⁾
Adjustments relate to issued bond discounts, transaction costs and fair value adjustments for interest rate derivatives
~~Annual Report 2011      173~~
~~12 Group financial statements 12.11 - 12.11~~
Secured liabilities
In ~~2011,~~2012, none of the long-term and short-term debt was secured by collateral ~~of manufacturing assets (2010:~~(2011: EUR ~~3.7 million of long-term and short-term debt was secured by collateral of EUR 3.8 million manufacturing assets)~~nil million).
Short-term debt

   2010    2011    2011    2012
Short-term bank borrowings
   670       422       422       533
Other short-term loans
   16       21       21       25
Current portion of long-term debt
   1,154       139       139       251




   1,840       582       582       809
During ~~2011,~~2012, the weighted average interest rate on the bank borrowings was 7.8% (2011: 10.5% ~~(2010: 8.5%~~).
In the Netherlands, the Company issued personnel debentures with a 5-year right of conversion into common shares of Royal Philips Electronics. Convertible personnel debentures may not be converted within a period of 3 years after the date of issue. These convertible personnel debentures were available to most employees in the Netherlands and were purchased by them with their own funds and were redeemable on demand. The convertible personnel debentures become non-convertible debentures at the end of the conversion period.
Although convertible debentures have the character of long-term financing, the total outstanding amounts are classified as current portion of long-term debt. At December 31, ~~2011,~~2012, an amount of EUR 2312 million ~~(2010:~~(2011: EUR 3823 million) of convertible personnel debentures was outstanding, with an average conversion price of EUR ~~22.02.~~19.73. The conversion price varies between EUR 14.19 and EUR ~~31.59~~29.5 with various conversion periods ending between January 1, ~~2012~~2013 and December 31, 2013. As of January 1, 2009, Philips no longer issues these debentures.
Furthermore, Philips has a USD 2.5 billion Commercial Paper Program and a EUR 1.8 billion revolving credit facility that can be used for general corporate ~~purpose,~~purposes and as a ~~bilateral credit~~backstop of its commercial paper program. In January 2013, the EUR 1.8 billion facility ~~of EUR 900 million and a EUR 500 million bilateral credit facility.~~was extended by 2 years until February 18, 2018. As of December 31, ~~2011~~2012 Philips did not have any loans outstanding under ~~any of these facilities.~~either facility.
180      Annual Report 2012
12 Group financial statements 12.11 - 12.11
Provisions

   2010    2011    2011    2012
   long-
term    short-
term    long-
term    short-
term    long-
term    short-
term    long-
term    short-
term
Provisions for defined-benefit plans (see note 29)
   719       52       760       55       760       55       808       52
Other postretirement benefits (see note 29)
   297       21       264       22       264       22       246       17
Postemployment benefits and obligatory severance payments
   95       21       79       25       79       25       56       26
Product warranty
   94       254       65       258       92       286       90       229
Loss contingencies (environmental remediation and product liability)
   222       28       268       37
Environmental provisions
   268       37       330       45
Restructuring-related provisions
   49       177       51       118       51       118       108       277
Onerous contract provision
         84       164       84       164       67       61
Other provisions
   240       70       309       80       309       80       427       130




   1,716       623       1,880       759       1,907       787       2,132       837
Postemployment benefits and obligatory severance payments
The provision for postemployment benefits covers benefits provided to former or inactive employees after employment but before retirement, including salary continuation, supplemental unemployment benefits and disability-related benefits.

   2009 2010 2011    2010 2011 2012
Balance as of January 1
   89    135    116       135    116    104
Changes:

Additions
   38    20    29       20    29    12
Utilizations
   (2 ) (33 ) (41 )    (33 ) (41 ) (37 )
Translation differences
   (1 ) (7 ) —         (7 ) —      1
Changes in consolidation
   11    1    —         1    —      2




Balance as of December 31
   135    116    104       116    104    82
The provision for obligatory severance payments covers the ~~Group’s~~Company commitment to pay employees a lump sum upon the employee’s dismissal or resignation. In the event that a former employee has passed away, the ~~Group~~Company may have a commitment to pay a lump sum to the deceased employee’s relatives. The Company expects the provision will be utilized mostly within the next three years.
Product warranty
The provision for product warranty reflects the estimated costs of replacement and free-of-charge services that will be incurred by the ~~Group~~Company with respect to products sold. The ~~Group~~Company expects the provision will be utilized ~~mostly~~mainly within the next year. The changes in the provision for product warranty are as follows:

   2009 2010 2011
Balance as of January 1
   310    335    348
Changes:

Additions
   333    309    388
Utilizations
   (324 ) (312 ) (415 )
Translation differences
   3    16    3
Changes in consolidation
   13    —      (1 )


Balance as of December 31
   335    348    323
~~Product warranty reimbursement recognized as receivable totalling EUR 34 million.~~
   2010 2011 2012
Balance as of January 1
   385    404    378
Changes:

Additions
   365    444    370
Utilizations
   (361 ) (470 ) (427 )
Translation differences
   15    1    (4 )
Changes in consolidation
   —      (1 ) 2


Balance as of December 31
   404    378    319
~~Loss contingencies (environmental remediation and product liability)~~Environmental provision
This provision ~~primarily~~ includes accrued losses recorded with respect ~~to environmental remediation and asbestos product liability. The asbestos liability was settled in 2009. At December 31, 2010, the provision relates~~ to environmental remediation. Approximately half of this provision is expected to be utilized within the next 5five years. The remaining portion relates to longer-term remediation activities.
The changes in this provision are as follows:

   2009 2010 2011    2010 2011 2012
Balance as of January 1
   812    200    250       200    250    305
Changes:

Additions
   34    55    48       55    48    48
Utilizations
   (603 ) (17 ) (15 )    (17 ) (15 ) (22 )
Releases
   —      (3 ) (15 )    (3 ) (15 ) (1 )
Changes in discount rate
   7    3    25       3    25    18
Accretion
   4    3    6       3    6    6
Translation differences
   (54 ) 9    6       9    6    (4 )
Changes in consolidation
   —      —      25




Balance as of December 31
   200    250    305       250    305    375
Restructuring-related provisions
The most significant projects in 2012
In 2012, the most significant restructuring projects related to Lighting and Healthcare and were driven by our change program Accelerate!.
In Healthcare, the largest projects were undertaken in Imaging Systems and Patient Care & Clinical Informatics in various locations in the United States, the Netherlands and Germany to reduce the operating costs and simplify the organization.
Consumer Lifestyle restructuring charges were mainly related to Lifestyle Entertainment (primarily in Hong Kong and the United States) and Coffee (mainly Italy).
Restructuring projects at Lighting centered on Luminaires businesses and Light Sources & Electronics, the largest of which took place in the Netherlands, Belgium and in various locations in the US.
Innovation, Group & Services restructuring projects focused on the IT and Financial Operations Service Units (primarily in the Netherlands), Group & Regional Overheads (mainly in the Netherlands and Italy) and Philips Innovation Services (in the Netherlands and Belgium).
The Company expects the provision will be utilized mainly within the next year. The movements in the provisions and liabilities for restructuring in 2012 are presented by sector as follows:
   Dec. 31,
2011    addi-
tions    utilized released other
changes¹⁾ Dec. 31,
2012
Healthcare
   18       100       (29 ) (7 ) (5 ) 77
Consumer Lifestyle
   39       58       (41 ) (8 ) —      48
Lighting
   52       225       (61 ) (16 ) (2 ) 198
IG&S
   60       67       (47 ) (10 ) (8 ) 62


   169       450       (178 ) (41 ) (15 ) 385
¹⁾
Other changes primarily relate to translation differences and transfers between sectors
The most significant projects in 2011
In 2011, the most significant restructuring projects related to Lighting and Innovation, Group ~~Management~~ & Services ~~and~~ were driven by our change program Accelerate!.
~~174      Annual Report 2011~~
~~12 Group financial statements 12.11 - 12.11~~

In Healthcare, the largest projects were undertaken in Home Healthcare Solutions, Imaging Systems and Patient Care & Clinical Informatics in various locations in the United States to reduce the operating costs and simplify the organization.

Consumer Lifestyle restructuring charges mainly relate to our remaining Television operations in Europe.

Restructuring projects at Lighting are driven by our change program Accelerate!. In addition projects centered on the Luminaires business and ~~Lamps,~~Light Sources & Electronics, the largest of which took place in Brazil, the Netherlands and in various locations in the US.

Annual Report 2012      181
12 Group financial statements 12.11 - 12.11
Innovation, Group ~~Management~~ & Services restructuring projects focused on the Global Service Units (primarily in the Netherlands), ~~Corporate and Country~~Group & Regional Overheads (mainly the Netherlands, Brazil and Italy) and Philips Design (Netherlands).
~~The Group expects the provision will be utilized mostly within the next year.~~ The movements in the provisions and liabilities for restructuring in 2011 are presented by sector as follows:

   Dec. 31,
2010    addi-
tions    utilized released other
changes¹⁾ Dec. 31,
2011    Dec. 31,
2010    addi-
tions    utilized released other
changes¹⁾ Dec. 31,
2011
Healthcare
   33       16       (17 ) (14 ) —      18       33       16       (17 ) (14 ) —      18
Consumer Lifestyle
   75       25       (56 ) (6 ) 1    39
Consumer

Lifestyle
   75       25       (56 ) (6 ) 1    39
Lighting
   70       44       (47 ) (13 ) (2 ) 52       70       44       (47 ) (13 ) (2 ) 52
GM&S
   48       37       (15 ) (14 ) 4    60
IG&S
   48       37       (15 ) (14 ) 4    60




   226       122       (135 ) (47 ) 3    169       226       122       (135 ) (47 ) 3    169

¹⁾
Other changes primarily relate to translation differences and transfers between sectors
The most significant projects in 2010

Within Healthcare, the largest projects were reorganizations of the commercial organizations in Imaging Systems (Germany, the Netherlands, and the US).

Consumer Lifestyle restructuring charges were mainly in Television, particularly in China due to the brand licensing agreement with ~~TPV.~~TPV Technology Limited.

Restructuring projects in Lighting were focused on reduction of production capacity in traditional lighting technologies, such as incandescent. The largest projects were in Brazil, France, and the US.
The movements in the provisions and liabilities for restructuring in 2010 are presented by sector as follows:

   Dec. 31,    addi-    other Dec. 31,
   2009    tions    utilized released changes¹⁾ 2010    Dec. 31,
2009    addi-
tions    utilized released other
changes¹⁾ Dec. 31,
2010
Healthcare
   24       63       (39 ) (17 ) 2    33       24       63       (39 ) (17 ) 2    33
Consumer Lifestyle
   142       32       (78 ) (14 ) (7 ) 75       142       32       (78 ) (14 ) (7 ) 75
Lighting
   164       65       (128 ) (26 ) (5 ) 70       164       65       (128 ) (26 ) (5 ) 70
GM&S
   66       11       (30 ) (20 ) 21    48
IG&S
   66       11       (30 ) (20 ) 21    48




   396       171       (275 ) (77 ) 11    226       396       171       (275 ) (77 ) 11    226

¹⁾
Other changes primarily relate to translation differences and transfers between sectors
~~The most significant projects in 2009~~
Healthcare initiated various restructuring projects aimed at reduction of the fixed cost structure, mainly impacting Imaging Systems (Netherlands), Home Healthcare Solutions and Clinical Care Systems (various locations in the US).
Consumer Lifestyle restructuring projects focused on Television (primarily Belgium and France), Peripherals & Accessories (mainly Technology & Development in the Netherlands) and Domestic Appliances (mainly Singapore and China).
Restructuring projects at Lighting aimed at further increasing organizational effectiveness, and centered on Lamps. The largest restructuring projects were in the Netherlands, Belgium, Poland and various locations in the US.
In Group Management & Services restructuring projects focused on reducing the fixed cost structure of Corporate Research Technologies, Philips Information Technology, Philips Design, and Corporate Overheads.
In 2009, restructuring provisions of EUR 81 million were released, mainly as a result of transferring employees within the Group and the release of a restructuring provision in conjunction with the sale of Hoffmeister (Lighting).
~~The movements in the provisions and liabilities for restructuring in 2009 are presented by sector as follows:~~

   Dec. 31,    addi-    other Dec. 31,
   2008    tions    utilized released changes 2009
Healthcare
   58       37       (61 ) (11 ) 1    24
Consumer Lifestyle
   137       134       (109 ) (23 ) 3    142
Lighting
   135       186       (116 ) (41 ) —      164
GM&S
   42       68       (37 ) (6 ) (1 ) 66


   372       425       (323 ) (81 ) 3    396
Onerous contract provision
The provision for onerous contract ~~relates to~~includes provision for the loss recognized upon signing the agreement with TPV Technology Limited for the Television ~~business.~~ business of EUR 24 million (2011: EUR 248 million), provision for onerous supply contracts of EUR 60 million, onerous (sub)lease contracts of EUR 35 million and expected losses on existing projects/orders of EUR 9 million.
More details on provision for losses on divestments can be found in Note 5 Discontinued operations and other assets classified as held for sale.
The ~~Group~~Company expects the provision will be utilized mostly within the next ~~year.~~three years. The changes in the provision for Onerous contract are as follows:

~~2011~~
~~Balance as of January 1~~
—
~~Changes:~~
~~Additions~~
~~270~~
~~Utilizations~~
~~(22~~ )
~~Balance as of December 31~~
~~248~~
   2011 2012
Balance as of January 1
   —    248
Changes:

Additions
   270    142
Utilizations
   (22 ) (277 )
Releases
   —    (6 )
Reclassification
   —    21


Balance as of December 31
   248    128
Other provisions
~~Other~~Main elements of other provisions ~~include provisions~~are: provision for employee jubilee funds totaling EUR 7276 million ~~(2010:~~(2011: EUR 8072 million), self-insurance liabilities of EUR 6261 million ~~(2010:~~(2011: EUR 6465 million), liabilities related to business combinations totaling EUR 736 million ~~(2010:~~(2011: EUR 2437 million), provisions for ~~expected losses on existing projects/orders~~rights of return of EUR 445 million ~~(2010:~~(2011: EUR 7nil million), ~~provision for legal claims~~provisions in respect of outstanding litigations totaling EUR ~~101~~238 million ~~(2010:~~(2011: EUR 53101 million) and provision for possible taxes/social security ~~contract~~ of EUR 28 million (2011: EUR 22 million).
The reclassification of EUR 67 million ~~(2010: EUR 24 million).~~in 2012 relates mainly to provision for rights of return. The ~~Group~~liability was recognized in previous years in accrued liabilities.
There are provisions in respect of certain outstanding litigation within various operations, of which management expects the outcomes of these disputes to ~~utilize~~be resolved within the forthcoming five years. The actual outcome of these disputes and the timing of the resolution cannot be estimated by the Company at this time. The further information ordinarily required by IAS 37, ‘Provisions, contingent liabilities and contingent assets’ has not been disclosed on the grounds that it can be expected to seriously prejudice the outcome of the disputes.
Less than a half of the provision for employee jubilee funds is expected to be utilized within next five years. Provision for self-insurance liabilities and provision for liabilities related to business combinations ~~and self-insurance liabilities~~are expected to be utilized mainly within the next ~~three~~five years ~~and the provision for expected losses on existing projects/orders mainly within the next year. The provisions for employee jubilee funds~~ and all other provisions ~~are expected to be mainly utilized~~ within the next ~~five~~three years.

   2009 2010 2011    2010 2011 2012
Balance as of January 1
   310    337    310       337    310    389
Changes:

Additions
   231    197    192       205    201    396
Utilizations
   (238 ) (246 ) (138 )    (246 ) (138 ) (260 )
Releases
   (8 ) (9 ) (27 )
Reclassification
   —      —      67
Liabilities directly associated with assets held for sale
   —      —      (6 )    —      (6 ) —
Translation differences
   1    14    (4 )    14    (4 ) (9 )
Changes in consolidation
   33    8    35       8    35    1




Balance as of December 31
   337    310    389       310    389    557

182      Annual Report ~~2011      175~~2012
12 Group financial statements 12.11 - 12.11

Other non-current liabilities
Other non-current liabilities are summarized as follows:

   2010    2011    2011    2012
Accrued pension costs
   1,044       1,191       1,191       1,163
Income tax payable
   1       1       1       —
Asset retirement obligations
   28       23       23       23
Other tax liability
   483       566       566       488
Other liabilities
   158       218       218       327




   1,714       1,999       1,999       2,001
The ~~increase~~decrease in the accrued pension costs is mainly attributable to the funding of the ~~US and~~ Switzerland plans. See also note 29, Pensions and other postretirement benefits.
For further details on tax related liabilities refer to note note 3, Income taxes.
~~Please~~ ~~refer to note 3, Income taxes for a specification of the income tax payable.~~
Accrued liabilities
Accrued liabilities are summarized as follows:

   2010    2011    2011    2012
Personnel-related costs:

- Salaries and wages
   474       459       459       590
- Accrued holiday entitlements
   184       193       193       192
- Other personnel-related costs
   196       159       159       148
Fixed-asset-related costs:

- Gas, water, electricity, rent and other
   70       62       62       69
Distribution costs
   91       96       96       114
Sales-related costs:

- Commission payable
   56       62       62       52
- Advertising and marketing-related costs
   139       121       121       149
- Other sales-related costs
   145       236       236       118
Material-related costs
   197       200       200       186
Interest-related accruals
   87       65       65       75
Deferred income
   807       878       878       824
Other accrued liabilities
   549       495       495       654




   2,995       3,026       3,026       3,171
Other current liabilities
Other current liabilities are summarized as follows:

   2010    2011    2011    2012
Advances received from customers on orders not covered by work in process
   291       293       293       308
Other taxes including social security premiums
   227       143       143       176
Other liabilities
   236       198       611       1,071




   754       634       1,047       1,555
On December 5, 2012 the Company announced that it received a fine of EUR 313 million from the European Commission following an investigation into alleged violation of competition rules in the Cathode-Ray Tubes (CRT) industry. In addition, the European Commission has ordered Philips and LG Electronics to be jointly and severally liable to pay a fine of EUR 392 million for an alleged violation of competition rules by LG.Philips Displays (LPD), a 50/50 joint venture between the Company and LG Electronics. In 2006, LPD went bankrupt. The aggregate of the amount of EUR 313 million and EUR 196 million (being 50% of the fine related to LPD) has been recorded under Other liabilities.
Contractual obligations
Contractual cash obligations at December 31, ~~2011~~
~~in millions of euros~~2012¹⁾

   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 debt
   3,213       80       923       1       2,209
Long-term debt²⁾
   3,733       186       253       2       3,292
Finance lease obligations
   218       60       90       33       35       298       73       97       40       88
Short-term debt
   443       443       —         —         —         558       558       —         —         —
Operating leases
   1,017       242       371       224       180       1,219       240       368       236       375
Derivative liabilities
   749       208       474       67       —         544       138       143       138       125
Interest on debt²⁾
   1,737       138       268       215       1,116
Purchase obligations³⁾
   505       242       211       29       23
Interest on debt³⁾
   2,802       201       376       360       1,865
Purchase obligations⁴⁾
   289       133       105       36       15
Trade and other payables
   3,346       3,346       —         —         —         2,839       2,839       —         —         —




   11,228       4,759       2,337       569       3,563       12,282       4,368       1,342       812       5,760

¹⁾
Data in this table is undiscounted
²⁾
Long-term debt includes short-term portion of long-term debt and excludes finance lease obligations
³⁾
Approximately ~~27%~~28% of the debt bears interest at a floating rate. Majority of the interest payments on variable interest rate loans in the table above reflect market forward interest rates at the period end and these amounts may change as market interest rate changes
³⁾⁴⁾
Philips has commitments related to the ordinary course of business which in general relate to contracts and purchase order commitments for less than 12 months. In the table, only the commitments for multiple years are presented, including their short-term portion
Long-term operating lease commitments totaled EUR ~~1,017~~1,219 million. ~~These~~Majority of those leases will expire at various dates during the next 2015 years. The long-term operating leases are mainly related to the rental of buildings.
A number of these leases originate from sale-and-leaseback arrangements. Operating lease payments under sale-and-leaseback arrangements for ~~2011~~2012 totaled EUR 1635 million ~~(2010:~~(2011: EUR 16 million). The increase in 2012 is related mainly to sale and lease back of real estate belonging to the High Tech Campus.
The remaining minimum payments from operating leases originating from sale-and-leaseback arrangements are as follows:

2012
   18
2013
   18
2014
   18
2015
   14
2016
   13
Thereafter
   39
~~Finance lease liabilities~~

   2010    2011
   future
mini-
mum
lease
pay-
ments    interest    present
value of
mini-
mum
lease
pay-
ments    future
mini-
mum
lease
pay-
ments    interest    present
value of
mini-
mum
lease
pay-
ments
Less than one year
   44       1       43       60       1       59
Between one and five years
   94       9       85       123       9       114
More than five years
   40       4       36       35       4       31


   178       14       164       218       14       204
2013
   41
2014
   41
2015
   38
2016
   38
2017
   39
Thereafter
   237

~~176~~      Annual Report ~~2011~~2012      183
12 Group financial statements 12.11 - 12.11

Finance lease liabilities
   2011    2012
   future
mini-
mum
lease
pay-
ments    interest    present
value of
mini-
mum
lease
pay-
ments    future
mini-
mum
lease
pay-
ments    interest    present
value of
mini-
mum
lease
pay-
ments
Less than one year
   60       1       59       73       7       65
Between one and five years
   123       9       114       137       25       113
More than five years
   35       4       31       88       23       65


   218       14       204       298       55       243
Philips entered into contracts with several venture capitalists where it committed itself to make, under certain conditions, capital contributions to investment funds to an aggregated amount of EUR 48 million until June 30, 2021. These investments will qualify as non-controlling interests once the capital contributions have been paid.
Philips made various commitments upon, signing the agreement with TPV Technology Limited (TPV), to provide further funding to the venture ~~and TPV, as follows:~~(TP Vision):

A subordinated shareholder loan of EUR 51 million has been provided to TP Vision based on Philips’ share of 30% of the venture. EUR 21 million of this loan is due April, 2015 and EUR 30 million due April, 2017. Both loans can be extended depending on the venture’s funding needs;
A Senior 12-month EUR 30 million bridge loan to the venture, based on Philips’ share of 30% ofin TP Vision, that can be extended up to April, 2017 depending on TP Vision’s funding needs. This bridge loan replaced the ~~venture~~
~~A nine-month~~9-month EUR 100 million senior bridge loan to the venture ~~depending on funding needs~~
~~A subordinated loan of EUR 100 million to TPV~~which was not drawn upon during 2012;

Payment of EUR ~~185~~50 million non-refundable one-off advertising and promotion support for ~~the venture~~TP Vision to be effected in ~~two installments of EUR 135 million and EUR 50 million respectively in the first two years~~2013.
In addition, depending on the funding needs of ~~the venture,~~TP Vision, Philips has committed to provide EUR 60 million based on its 30% ~~of additional financing of EUR 200 million.~~share in TP Vision. This additional funding is considered to have only a remote possibility of occurring.
See also note 5, Discontinued operations and other assets classified as held for sale for further details on the total loss related to the discontinued operation.
Contingent liabilities
Guarantees
Philips’ policy is to provide guarantees and other letters of support only in writing. Philips does not stand by other forms of support. At the end of ~~2011,~~2012, the total fair value of guarantees recognized by Philips in other non-current liabilities ~~was~~amounted to less than EUR 91 million. The following table outlines the total outstanding off-balance sheet credit-related guarantees and business-related guarantees provided by Philips for the benefit of unconsolidated companies and third parties as at December 31, ~~2011.~~2012.
Expiration per period
in millions of euros

   business-
related
guarantees    credit-
related
guarantees    total
2012
Total amounts committed
   295       27       322
Less than one year
   113       11       124
Between one and five years
   114       —         114
After five years
   68       16       84
   business-
related
guarantees    credit-related
guarantees    total
2011
Total amounts committed
   297       39       336       297       39       336
Less than one year
   99       22       121       99       22       121
Between one and five years
   126       —         126       126       —         126
After five years
   72       17       89       72       17       89
2010
Total amounts committed
   302       49       351
Less than one year
   100       22       122
Between one and five years
   133       8       141
After five years
   69       19       88
Environmental remediation
The Company and its subsidiaries are subject to environmental laws and regulations. Under these laws, the Company and/or its subsidiaries may be required to remediate the effects of the release or disposal of certain chemicals on the environment. The Company accrues for losses associated with environmental obligations when such losses are probable and reliably estimable. Such amounts are recognized on a discounted basis since they reflect the present value of estimated future cash flows.
Provisions for environmental remediation can change significantly due to the emergence of additional information regarding the extent or nature of the contamination, the need to utilize alternative technologies, actions by regulatory authorities and changes in judgments, assumptions, and discount rates.
The Company and/or its subsidiaries have recognized environmental remediation provisions for sites in various countries. In the United States, subsidiaries of the Company have been named as potentially responsible parties in state and federal proceedings for the clean-up of certain sites.
Legal proceedings
The Company and certain of its group companies and former group companies are involved as a party in legal proceedings, including regulatory and other governmental proceedings, including discussions on potential remedial actions, relating to such matters as competition issues, commercial transactions, product liability, participations and environmental pollution.
In respect of antitrust laws, the Company and certain of its (former) group companies are involved in investigations by competition law authorities in several jurisdictions and are engaged in litigation in this respect.
In relation to the fraud in the Dutch real estate sector uncovered in 2007, Philips and the Philips Pension Fund in the Netherlands are currently assessing the amount of residual damages, if any, and the possibilities of a settlement thereof. Reference is made to note 29, Pensions and other postretirement benefits for further disclosures.
Since the ultimate disposition of asserted claims and proceedings and investigations cannot be predicted with certainty, an adverse outcome could have a material adverse effect on the Company’s consolidated financial position, results of operations and cash flows.
Provided below are disclosures of the more significant cases:
LCD
On December 11, 2006, LG Display Co. Ltd (formerly LG Philips LCD Co. Ltd.), a company in which the Company then held a minority common stock interest, announced that officials from the Korean Fair Trade Commission had visited the offices of LG Display and that it had received a subpoena from the United States Department of Justice (DOJ) and a similar notice from the Japanese Fair Trade Commission
184      Annual Report 2012
12 Group financial statements 12.11 - 12.11
in connection with inquiries by those regulators into possible anticompetitive conduct in the LCD industry. ~~The Company sold its remaining shareholding in LG Display on March 11, 2009 and subsequently no longer holds shares in LG Display.~~
On March 6, 2009, the Washington State Attorney General’s Office (the ‘Washington AG’) issued a Civil Investigative Demand (CID) to Philips Electronics North America Corporation (PENAC) pursuant to which PENAC was requested, amongSince then various other things, to produce documents and to provide answers to interrogatories concerning the sale of thin-film transistor liquid crystal display panels (TFT-LCD panels) and the sale of TFT-LCD products. PENAC was also requested to provide to the Washington AG any documents previously produced to the DOJauthorities have started investigations as part of the DOJ’s ongoing investigation into the TFT-LCD industry. After discussions with the Washington AG, the Washington AG agreed to allow PENAC, instead of responding to the CID, to provide the limited amount of aggregate sales data and component data that was previously provided to the plaintiffs in the direct purchaser plaintiff’s class action. On March 27, 2009, PENAC produced that information to the Washington AG. Thereafter, PENAC provided the same information to the Missouri Attorney General’s Office and the Illinois Attorney General’s Office in response to a CID and subpoena issued, respectively, on March 18, 2009 and April 2, 2009 to PENAC. The Company is also subject to investigations by other competition authorities into the LCD industry.well.
Subsequent to the public announcement of these inquiries, ~~certain Philips group companies were named as defendants in~~ a number of class action antitrust complaints were filed in the United States courts, seeking, among other things, damages on behalf of purchasers of products incorporating TFT-LCD panels, based on alleged anticompetitive conduct by manufacturers of such panels. Those lawsuits were consolidated in two master actions in the United States District Court for the Northern District of California: one, asserting a claim under federal antitrust law, on behalf of direct purchasers of TFT-LCD panels and products containing such panels, and another, asserting claims under federal antitrust law, as well as various state antitrust and unfair competition laws, on behalf of indirect purchasers of such panels and products. On November 5, 2007 and September 10, 2008, the Company and certain other companies within the Philips group companies that were named as defendants in various of the original complaints entered into agreements with the indirect purchaser plaintiffs and the direct purchaser plaintiffs, respectively, that generally toll the statutes of limitations applicable to plaintiffs’ claims, following which the plaintiffs agreed to dismiss without prejudice the claims against the Philips defendants. On December 5, 2008, following the partial grant of motions to dismiss consolidated class action complaints in the master actions, the plaintiffs filed amended consolidated class action complaints, asserting essentially the same legal claims as those alleged in the prior complaints. On December 2, 2009,Both the direct purchaser plaintiffs filed a third consolidated class action complaint under seal. None of the companies within the Philips group of companies currently is named as a defendant in the pending amended complaints, although the Company and ~~PENAC are named as coconspirators with named defendants in the~~ indirect purchaser ~~case, but~~plaintiffs reached initial settlements with the ~~litigation is continuing.~~
~~Annual Report 2011      177~~
~~12 Group financial statements 12.11 - 12.11~~
remaining defendants earlier this year, and those settlements have been submitted to the court for final approval.
In addition, a number of plaintiffs have filed separate, individual actions alleging essentially the same claims as those asserted in the class ~~actions.~~actions in which the Company and/or Philips Electronics North America Corporation were named as defendants. The Company has resolved these matters or entered into tolling agreements with certain potential claimants tolling the statute of limitations and ~~PENAC~~ currently, ~~are named as defendants in the actions brought by Jaco Electronics, Inc. Additionally, PENAC~~no Philips entity is named as a defendant in the actions brought by Motorola Mobility, Inc. and T- Mobile U.S.A., Inc. and in the action brought collectively by Target Corp, Sears, Roebuck and Co, Kmart Corp, Old Comp Inc, Good Guys, Inc. RadioShack Corp., and Newegg Inc. Each of these actions has been designated as related to the consolidated actions alreadyany pending ~~before Judge Illston in the United States District Court for the Northern District of California and have been consolidated for pre-trial purposes with the class actions.~~LCD action.
Due to the considerable uncertainty associated with certain of these matters, on the basis of current knowledge the Company has concluded that potential losses cannot be reliably estimated with respect to these matters. ~~An adverse final resolution of these~~These investigations and litigation could have a materially adverse effect on the Company’s consolidated financial position, results of operations and cash flows.
Cathode-Ray Tubes (CRT)
On November 21, 2007, the Company announced that competition law authorities in several jurisdictions ~~have~~had commenced investigations into possible anticompetitive activities in the Cathode-Ray Tubes, or CRT industry. As one of the companies that formerly was active in the CRT business, ~~Philips~~the Company is subject to a number of these ongoing investigations in various jurisdictions. The Company has assisted the regulatory authorities in these investigations. In November 2009, the European Commission sent a Statement of Objections to ~~Philips,~~the Company, indicating that it intends to hold ~~Philips~~it liable for antitrust infringements in the CRT industry. On May 26 and May 27, 2010, ~~Philips~~the Company presented its defense at the Oral Hearing. The ECCompany received a supplementary Statement of Objections in June 2012 to which it responded both in writing and at an Oral Hearing. On 5 December 2012, the European Commission issued a decision ~~is expected sometime~~imposing fines on (former) CRT manufacturers including the Company. The European Commission imposed a fine of EUR 313 million on the Company and a fine of EUR 392 million jointly and severally on the Company and LG Electronics, Inc. The Company intends to appeal the European Commission’s decision. In total a payable of EUR 509 million has been recognized (under other current liabilities). The amount of EUR 313 million has been recorded in ~~2012.~~ the Innovation, Group & Services sector. 50% of the fine of EUR 392 million (i.e. EUR 196 million) was recorded in the line results relating to investments in associates.
In the US, the Department of Justice has deferred Philips’ obligation to respond to the grand jury subpoena Philips received in November ~~2007.~~2007 and Philips expects that no penalties will result from that proceeding. On August 26, 2010, the Czech competition authority issued a decision in which it held that the Company had been engaged in anticompetitive activities with respect to Color Picture Tubes in the Czech Republic between September 21, 1999 and June 30, 2001. No fine was imposed because the statute of limitation for the imposition of fine had expired. On September 14, 2011, the Slovakian competition authority issued a decision in which it held that the Company had been engaged in anticompetitive activities with respect to Color Picture Tubes in Slovakia between March 30, 1999 and June 30, 2001. No fine was imposed because the statute of limitation for the imposition of fine had expired. In April 2012, the authority’s decision was annulled by the authority’s internal administrative review body.
Subsequent to the public announcement of these investigations in 2007, certain Philips group companies were named as defendants in over 50 class action antitrust complaints filed in various federal district courts in the United States. These actions allege anticompetitive conduct by manufacturers of CRTs and seek treble damages on behalf of direct and indirect purchasers of CRTs and products incorporating CRTs. These complaints assert claims under federal antitrust law, as well as various state antitrust and unfair competition laws and may involve joint and several liability among the named defendants. These actions have been consolidated by the Judicial Panel for Multidistrict Litigation for pretrial proceedings in the United States District Court for the Northern District of California.
On March 30, 2010, the District Court ~~adopted the Special Master’s Report and Recommendation denying~~denied the bulk of the motions to dismiss filed on behalf of all Philips entities in response to both the direct and indirect purchaser actions in the federal class actions pending in the Northern District of California. Following a preliminary ruling by the magistrate judge to strike from the Consolidated Amended Complaint plaintiff’s claims regarding an alleged conspiracy in products containing CRTs, theactions. The direct and indirect purchasers ~~have both~~ stipulated to remove allegations of a conspiracy in CRT finished products from their complaints. ~~These cases have now proceeded~~In February 2012, the Company reached an agreement with counsel for direct purchaser plaintiffs fully resolving all claims of the direct purchaser class and obtaining a complete release by class members. The settlement agreement received preliminary approval on May 3, 2012 and final approval on October 22, 2012.
On October 1, 2012, counsel for indirect purchasers sought certification of the purported class of indirect purchasers pursuant to ~~discovery. Certain~~F.R.C.P. 23. Philips opposed plaintiffs motion and a decision is expected by mid-2013. Discovery is proceeding in the indirect purchaser actions. Seventeen individual plaintiffs, principally large retailers of CRT products who ~~otherwise would be members of~~sought exclusion from the ~~putative~~direct purchaser class settlement, have filed ~~independent~~separate “opt-out” actions against Philips and other defendants based on the same substantive allegations as the putative class ~~plaintiffs.~~ plaintiff complaints. These cases have all been consolidated for pre-trial purposes with the putative class actions in the Northern District of California and discovery is being coordinated with the putative class cases. Philips’ motions to dismiss the complaints of the individual plaintiffs are pending before the Court. A decision on the motion is expected by mid-2013. Actions by other similarly situated plaintiffs are possible. Philips intends to continue to vigorously defend these indirect purchaser and individual lawsuits.
In addition, the ~~State~~state attorneys general of California, Florida, ~~has~~Illinois, Oregon and Washington filed ~~an action~~actions against Philips and other defendants seeking to recover damages on behalf of the ~~State~~states and, in parens patriae capacity, their consumers. Philips’ motion to dismiss the Florida complaint as untimely was upheld by the Special Master and pursuant to a stipulation with Florida the Court ordered the dismissal of the Florida complaint with prejudice on December 27, 2012. Philips has answered the Complaints of Washington and ~~its consumers.~~Oregon. Philips has not yet been required to respond to the ~~Complaints~~Complaint filed by ~~the individual plaintiffs of the State of Florida.~~Illinois. These additional actions ~~have been consolidated for pre-trial purposes with the class action~~are pending in the ~~Northern District~~respective state courts of ~~California.~~the plaintiffs. The ~~Court has~~Courts have not set a trial ~~date~~dates and there is no timetable for the resolution of these cases.
In February, 2012, Philips entered into a settlement agreement with the purported class of Direct Purchaser Plaintiffs in these actions. The settlement agreement must be submitted to the Court for approval. Under US legal procedure, individual members of the Direct Purchaser Plaintiff class may choose not to participate in the settlement by “opting out”, seeking to be excluded from the settlement class, or filing independent actions as noted above. Philips will pay into a settlement fund an amount depending on the Direct Purchaser Plaintiffs that participate in the settlement and the proportion of Philips’ sales represented by these participating Direct Purchaser Plaintiffs once the settlement has been finally approved. This settlement agreement release does not extinguish liability as to the purported indirect purchaser class, the individual plaintiffs, or the State of Florida. Philips intends to continue to vigorously defend these remaining lawsuits.
Certain Philips group companies have also been named as defendants, in proposed class proceedings in Ontario, Quebec and British Columbia, Canada, along with numerous other participants in the industry. ~~Philips intends to vigorously oppose these claims, and~~In December 2012, the ~~proceedings remain~~class plaintiffs issued an amended statement of claim with more detailed allegations against the defendants. However, at ~~a preliminary stage. In Canada, the plaintiffs have reached a settlement with the Chunghwa defendants, and the settlement has received final court approval. At~~ this time, no statement of defense has been filed, no certification motion has been scheduled and no class proceeding has been certified as against the Philips ~~defendants and no statement of defense has been filed.~~defendants. Philips intends to vigorously oppose these claims.
Due to the considerable uncertainty associated with certain of these matters, on the basis of current knowledge, the Company has concluded that ~~total~~ potential losses cannot be reliably estimated with respect to these matters. ~~An adverse final resolution of these~~These investigations and litigation could have a materially adverse effect on the Company’s consolidated financial position, results of operations and cash flows.
In addition to the above cases, in 2006 Italian investor Mr. Carlo Vichi filed a claim against Philips for the repayment of a 2002 EUR 200 million loan (plus interest and damages) that was given to an affiliate of the CRT joint venture LG.Philips Displays (“LPD”) that went bankrupt in January of 2006. The Company vigorously denies that it has any liability for the
Annual Report 2012      185
12 Group financial statements 12.11 - 12.11
repayment of the loan. The trial in the case took place in December 2012 and after a period of post-trial briefing, a decision is expected in the summer of 2013. One of the remaining issues in the case is whether LPD’s alleged participation in the CRT cartel as determined by the European Commission is a matter that should have been disclosed to Mr. Vichi.
Optical Disc Drive (ODD)
On October 27, 2009, the Antitrust Division of the United States Department of Justice confirmed that it had initiated an investigation into possible anticompetitive practices in the Optical Disc Drive (ODD) industry. Philips Lite-On Digital Solutions Corp. (PLDS), a joint venture owned by the Company and Lite-On IT Corporation, as an ODD market participant, is included in this investigation. PLDS is also subject to similar investigations outside the US relating to the ODD market. PLDS and Philips intend to cooperate with the authorities in these investigations.
In July 2012, the European Commission issued a Statement of Objections addressed to (former) ODD suppliers including the Company. The European Commission granted the Company immunity from fines, conditional upon the Company’s continued cooperation. The Company responded to the Statement of Objections both in writing and at an oral hearing.
Subsequent to the public announcement of these investigations in 2009, the Company, PLDS and Philips & Lite-On Digital Solutions USA, Inc., were named as defendants in numerous class action antitrust complaints filed in various federal district courts in the United States. These actions allege anticompetitive conduct by manufacturers of ODDs and seek treble damages on behalf of direct and indirect purchasers of ODDs and products incorporating ODDs. These complaints assert claims under federal antitrust law, as well as various state antitrust and unfair competition laws and may involve joint and several liability among the named defendants. These actions have been consolidated by the Judicial Panel for Multidistrict Litigation for pre-trial proceedings in the United States District Court for the Northern District of California.
Consolidated amended complaints were filed on August 26, ~~2010. Motions~~2010 and initially dismissed. Second Consolidated Amended Complaints were filed on September 3, 2011. The defendants’ motions to dismiss ~~these complaints~~the Second Consolidated Complaints were denied on April 12, 2012 and Philips has filed ~~by various other defendants. On August 3, 2011,~~Answers to the ~~Court dismissed the Consolidated Amended~~ Complaints of the direct and indirect purchaser plaintiffs for failing to state a cognizable claim, but gave leave to plaintiffs reinstituting the claims. Certain defendants have moved to dismiss the Second Consolidated Complaints, and a hearing has been set. The motions seek to dismiss all claims against these defendants on various grounds. The Company, PLDS and Philips & Lite-On Digital Solutions USA, Inc. have not yet been required to move to dismiss or otherwise respond to the Second Consolidated Complaints.plaintiffs. Discovery is ~~being permitted~~proceeding. Plaintiffs are expected to ~~move forward, but is~~file motions seeking to certify the putative classes of direct and indirect purchasers under F.R.C.P. Rule 23 in ~~preliminary stages.~~April of 2013. Philips intends to vigorously defend these actions.
The Company and certain Philips group companies have also been named as defendants, in proposed class proceedings in Ontario, Quebec, British Columbia, and Manitoba, Canada along with numerous other participants in the industry. These complaints assert claims against various ODD manufacturers under federal competition laws as well as tort laws and may involve joint and several liability among the named defendants. Philips intends to vigorously defend these lawsuits.
~~178      Annual Report 2011~~
~~12 Group financial statements 12.11 - 12.11~~
~~These matters are in their initial stages and due~~Due to the considerable uncertainty associated with these matters, on the basis of current knowledge, the Company has concluded that potential losses cannot be reliably estimated with respect to these matters. ~~An adverse final resolution of these~~These investigations and litigation could have a materially adverse effect on the Company’s consolidated financial position, results of operations and cash flows.
Philips Polska
In connection with an indictment issued by authorities in Poland in December 2009 against numerous individuals, including three former employees of Philips Polska sp. z.o.o., involved in the sale of medical equipment to hospitals in Poland, Philips has been conducting a review of certain activities related to sales of medical equipment for potential violations of the U.S. Foreign Corrupt Practices Act (FCPA). Philips has reported the review to US authorities, including the US Securities and Exchange Commission, and is cooperating with US authorities in connection with the review. Potential penalties for violations of the FCPA and related statutes and regulations include monetary ~~penalties.~~penalties based, amongst others, on disgorgement of profits relating to the sale of certain medical equipment in Poland. The discussions with the US authorities are progressing. At this time the Company cannot ~~at this time quantify meaningfully~~indicate when the ~~possible loss or range of loss to which this~~ matter ~~may give rise.~~will be resolved.
Cash from (used for) derivatives and securities
A total of EUR 2647 million cash was ~~received~~paid with respect to foreign exchange derivative contracts related to financing activities ~~(2010:~~(2011: EUR 25 million ~~outflow; 2009:~~inflow; 2010: EUR 3825 million outflow).
Cash flow from interest-related derivatives is part of cash flow from operating activities. During ~~2010,~~2012, there was no cash flow in relation to these derivatives ~~(2010:~~(2011: EUR nil million; ~~2009:~~2010: EUR nil million).
Proceeds from non-current financial assets
In 2011, the sale of Philips’ interest in TCL Corporation (TCL) and Digimarc generated cash totaling EUR 79 million.
In 2010, the redemption of TPV and CBAY convertible bonds generated cash totaling EUR 239 million.
~~In 2009, the sale of Philips’ interests in LG Display and Pace Micro Technology generated cash totaling EUR 704 million.~~
Assets in lieu of cash from sale of businesses
In 2012 Philips received certain financial instruments in exchange for the transfer of its television business. At the date of this transaction the fair value of these financial instruments involved an amount of EUR 17 million.
In 2011, the Company entered into four transactions with different venture capital partners where certain incubator activities were transferred in exchange for shares in separately established investment entities. The investment entities represented a value of EUR 18 million at the date that these transactions were closed.
In August 2010, the Company acquired a 49.9% interest in Shapeways Inc. in exchange for the transfer of certain Consumer Lifestyle incubator activities, which represented a value of EUR 3 million at the date of the closing of that transaction.
~~In 2009, the Company received only cash as consideration in connection with the sale of businesses.~~
Pensions and other postretirement benefits
Defined-benefit plans: pensions
Employee pension plans have been established in many countries in accordance with the legal requirements, customs and the local situation in the countries involved. The Company also sponsors a number of defined-benefit pension plans. The benefits provided by these plans are based on employees’ years of service and compensation levels. The measurement date for all defined-benefit plans is December 31.
The Company’s contributions to the funding of defined-benefit pension plans are determined based upon various factors, including minimum contribution requirements, as established by local government, legal and tax considerations as well as local customs.
Summary of pre-tax costs for pensions and other postretirement benefits

   2009 2010 2011    2010 2011    2012
Defined-benefit plans
   —      (105 ) 18       (105 ) 18       (38 )
Defined-contribution plans including multi-employer plans
   103    114    120       114    120       142
Retiree medical plans
   (100 ) 11    16       11    16       (14 )




   3    20    154       20    154       90
The 2012 cost were impacted by the recognition of a EUR 25 million curtailment gain due to the accumulated reduction of employees as a result of restructuring programs. A prior service cost gain of EUR 25 million was recognized in one of our major retiree medical plans. The plan change reduced certain Company post retirement risks. In 2012 a buy-out of the Swiss Pension Fund to an Insurance Company was executed. The related decrease in DBO and assets for retirees is included in the tables below as a settlement.
The 2011 costs were impacted by the recognition of EUR 18 million curtailment gains mainly resulting from one of our defined-benefit plans in which all remaining accrual of benefits was stopped and participants were transferred to a defined-contribution plan. In the same plan a large number of retirees opted for a higher yet non-indexed pension. The resulting prior-service cost gain forms the larger part of the EUR 20 million prior-service cost gains recognized in 2011.
186      Annual Report 2012
12 Group financial statements 12.11 - 12.11
The 2010 costs were impacted by the recognition of EUR 119 million of negative prior service costs. These resulted from a reduction of pension benefits expected to be paid in the future, in part due to a change in indexation. In 2010, a curtailment gain of EUR 9 million in one of our retiree medical plans was recognized due to the partial closure of a US site.
In 2009, curtailment gains totaling EUR 134 million, relating to changes in retiree medical plans, positively impacted the result. These curtailment gains are the result of changes in the benefit level and the scope of eligible participants of a retiree medical plan, which became effective and irreversible in 2009.
The table below provides a summary of the changes in the ~~defined- benefit~~defined-benefit obligations for defined-benefit pension plans and the fair value of their plan assets for ~~2011~~2012 and ~~2010.~~2011. It also provides a reconciliation of the funded status of these plans to the amounts recognized in the Consolidated balance sheets.

   2011 2012
   Netherlands other total Netherlands other total
Defined-benefit obligation at the beginning of year
   12,226    7,940    20,166    13,493    8,920    22,413
Service cost
   127    73    200    174    86    260
Interest cost
   557    404    961    509    387    896
Employee contributions
   —      3    3    —      4    4
Actuarial losses
   1,307    848    2,155    1,215    423    1,638
Plan amendments
   —      (21 ) (21 ) —      —      —
Acquisitions
   —      3    3    —      —      —
Divestments
   —      —      —      —      (13 ) (13 )
Settlements
   —      (52 ) (52 ) —      (294 ) (294 )
Curtailments
   —      (19 ) (19 ) (25 ) (6 ) (31 )
Reclassifications
   —      —      —      —      —      —
Benefits paid
   (724 ) (431 ) (1,155 ) (716 ) (465 ) (1,181 )
Exchange rate differences
   —      168    168    —      (34 ) (34 )
Miscellaneous
   —      4    4    —      12    12


Defined-benefit obligation at end of year
   13,493    8,920    22,413    14,650    9,020    23,670
Present value of funded obligations at end of year
   13,486    8,102    21,588    14,643    8,167    22,810
Present value of unfunded obligations at end of year
   7    818    825    7    853    860
   2011 2012
   Netherlands other total Netherlands other total
Fair value of plan assets at beginning of year
   13,606    6,474    20,080    13,946    7,303    21,249
Expected return on plan assets
   713    389    1,102    739    429    1,168
Actuarial gains and (losses) on plan assets
   155    483    638    1,025    363    1,388
Employee contributions
   —      3    3    —      4    4
Employer contributions
   196    243    439    209    216    425
Acquisitions
   —      —      —      —      —      —
Divestments
   —      —      —      —      (1 ) (1 )
Settlements
   —      (51 ) (51 ) —      (294 ) (294 )
Benefits paid
   (724 ) (371 ) (1,095 ) (716 ) (407 ) (1,123 )
Exchange rate differences
   —      133    133    —      (25 ) (25 )
Miscellaneous
   —      —      —      —      —      —


Fair value of plan assets at end of year
   13,946    7,303    21,249    15,203    7,588    22,791


Funded status
   453    (1,617 ) (1,164 ) 553    (1,432 ) (879 )
Unrecognized prior-service cost
   —      5    5    —      4    4
Unrecognized net assets
   (460 ) (399 ) (859 ) (560 ) (587 ) (1,147 )


Net balance sheet position
   (7 ) (2,011 ) (2,018 ) (7 ) (2,015 ) (2,022 )
Annual Report ~~2011      179~~2012      187
12 Group financial statements 12.11 - 12.11

The classification of the net balance is as follows:


2010
2011
   Netherlands other total Netherlands other total
Defined-benefit obligation at the beginning of year
   10,681    7,039    17,720    12,226    7,940    20,166
Service cost
   92    77    169    127    73    200
Interest cost
   521    418    939    557    404    961
Employee contributions
   —      3    3    —      3    3
Actuarial losses
   1,662    593    2,255    1,307    848    2,155
Plan amendments
   —      (113 ) (113 ) —      (21 ) (21 )
Acquisitions
   —      —      —      3    3
Divestments
   —      (1 ) (1 ) —      —      —
Settlements
   —      (44 ) (44 ) —      (52 ) (52 )
Curtailments
   —      (1 ) (1 ) —      (19 ) (19 )
Reclassifications
   —      5    5    —      —
Benefits paid
   (730 ) (432 ) (1,162 ) (724 ) (431 ) (1,155 )
Exchange rate differences
   —      398    398    —      168    168
Miscellaneous
   —      (2 ) (2 ) —      4    4


Defined-benefit obligation at end of year
   12,226    7,940    20,166    13,493    8,920    22,413
Present value of funded obligations at end of year
   12,217    7,178    19,395    13,486    8,102    21,588
Present value of unfunded obligations at end of year
   9    762    771    7    818    825
   2010 2011
   Netherlands other total Netherlands other total
Fair value of plan assets at beginning of year
   13,329    5,141    18,470    13,606    6,474    20,080
Expected return on plan assets
   743    344    1,087    713    389    1,102
Actuarial gains and (losses) on plan assets
   95    625    720    155    483    638
Employee contributions
   —      3    3    —      3    3
Employer contributions
   165    458    623    196    243    439
Acquisitions
   —      —      —      —      —      —
Divestments
   —      (1 ) (1 ) —      —      —
Settlements
   —      (40 ) (40 ) —      (51 ) (51 )
Benefits paid
   (727 ) (370 ) (1,097 ) (724 ) (371 ) (1,095 )
Exchange rate differences
   —      313    313    —      133    133
Miscellaneous
   1    1    2    —      —      —


Fair value of plan assets at end of year
   13,606    6,474    20,080    13,946    7,303    21,249


Funded status
   1,380    (1,466 ) (86 ) 453    (1,617 ) (1,164 )
Unrecognized prior-service cost
   —      6    6    —      5    5
Unrecognized net assets
   (1,389 ) (345 ) (1,734 ) (460 ) (399 ) (859 )


Net balance sheet position
   (9 ) (1,805 ) (1,814 ) (7 ) (2,011 ) (2,018 )
The classification of the net balance is as follows:
   2010 2011
   Netherlands other total Netherlands other total
Prepaid pension costs under other non-current assets
   —      14    14    —      5    5
Accrued pension costs under other liabilities
   —      (1,057 ) (1,057 ) —      (1,198 ) (1,198 )
Provision for pensions under provisions
   (9 ) (762 ) (771 ) (7 ) (808 ) (815 )
Liabilities directly associated with assets held for sale formely reported as provision
   —      —      —      —      (10 ) (10 )


   (9 ) (1,805 ) (1,814 ) (7 ) (2,011 ) (2,018 )
~~180      Annual Report 2011~~
~~12 Group financial statements 12.11 - 12.11~~
   2011 2012
   Netherlands other total Netherlands other total
Prepaid pension costs under other non-current assets
   —      5    5    —      7    7
Accrued pension costs under other liabilities
   —      (1,198 ) (1,198 ) —      (1,169 ) (1,169 )
Provision for pensions under provisions
   (7 ) (808 ) (815 ) (7 ) (853 ) (860 )
Liabilities directly associated with assets held for sale formerly reported as provision
   —      (10 ) (10 ) —      —      —


   (7 ) (2,011 ) (2,018 ) (7 ) (2,015 ) (2,022 )
Cumulative amount of actuarial (gains) and losses recognized in the Consolidated statements of comprehensive income (pre tax): EUR ~~3,909~~4,160 million ~~(2010:~~(2011 EUR ~~3,291~~3,909 million).
Plan assets in the Netherlands
The asset allocation in the Company’s pension plan ~~asset allocation~~ in the Netherlands at December 31 was as follows:
in %


   2010    2011    2011    2012
      actual       actual       actual       actual
Matching portfolio:
   70          72          72          71
- Debt securities
      70          72          72          71
Return portfolio:
   30          28          28          29
- Equity securities
      18          16          16          15
- Real estate
      5          5          5          5
- Other
      7          7          7          9




      100          100          100          100
The objective of the Matching portfolio is to match part of the interest rate sensitivity of the plan’s real pension liabilities. The Matching portfolio is mainly invested in euro-denominated government bonds and investment grade debt securities and derivatives. Leverage or gearing is not permitted. The size of the Matching portfolio is targeted to be at least 64% of the fair value of the plan’s real pension obligations (on the assumption of 2% inflation). The objective of the Return portfolio is to maximize returns within well-specified risk constraints. The long-term rate of return on total plan assets is expected to be 5.4% per annum, based on expected long-term returns on debt securities, equity securities and real estate of 4.5%, 9.0% and 8% respectively.
Philips Pension Fund in the Netherlands
On November 13, 2007, various officials, on behalf of the Public Prosecutor’s office in the Netherlands, visited a number of offices of the Philips Pension Fund and the Company in relation to a widespread investigation into potential fraud in the real estate sector. The Company was notified that one former employee and one employee of an affiliate of the Company had been detained. This affiliate, Philips Real Estate Investment Management B.V., managed the real estate portfolio of the Philips Pension Fund between 2002 and 2008. The investigation by the public prosecutor concerns the potential involvement of (former) employees of a number of Dutch companies with respect to fraud in the context of certain real estate transactions. Neither the Philips Pension Fund nor any Philips entity is a suspect in this investigation. The Philips Pension Fund and Philips ~~are cooperating~~have cooperated with the authorities and have also conducted their own investigation. Formal notifications of suspected fraud have been filed with the public prosecutor against the (former) employees concerned and with our insurers. This has resulted in several convictions in 2012. Furthermore, actions have been taken to claim damages from the responsible individuals and legal entities. This has resulted in a number of ~~settlements.~~settlements between the responsible individuals and Philips Pension Fund. Philips Pension Fund has also received payment on the insurance claims in 2012. The Philips Pension Fund and Philips are currently assessing the amount of residual damages, if any, and the possibilities of a settlement thereof. At this time it is not possible to assess the outcome and consequences of this ~~matter nor the potential consequences. At present, it is management’s assessment that this matter will not cause a decline in plan assets nor an increase in pension costs in any material respect.~~matter.
Plan assets in other countries
The asset allocation in the Company’s pension ~~plan asset allocation~~plans in other countries at December 31 is shown in the table below. This table also shows the Trustees’ target allocation for ~~2012:~~2013:
in %


   2010    2011    2012
   actual    actual    target
Equity securities
   23       16       18
Debt securities
   70       75       80
Real estate
   1       1       1
Other
   6       8       1


   100       100       100

   2011    2012    2013
   actual    actual    target
Equity securities
   16       16       17
Debt securities
   75       75       81
Real estate
   1       —         —
Other
   8       9       2


   100       100       100
Plan assets in ~~2011~~2012 do not include property occupied or financial instruments ~~held~~issued by the ~~Philips Group.~~Company.
188      Annual Report 2012
12 Group financial statements 12.11 - 12.11
Pension expense of defined-benefit plans recognized in the Consolidated statements of income:

         2009       2010       2011
   Netherlands other total Netherlands other total Netherlands other total
Service cost
   107    75    182    92    77    169    127    73    200
Interest cost on the defined-benefit obligation
   532    395    927    521    418    939    557    404    961
Expected return on plan assets
   (758 ) (343 ) (1,101 ) (743 ) (344 ) (1,087 ) (713 ) (389 ) (1,102 )
Prior-service cost
   —      (3 ) (3 ) —      (119 ) (119 ) —      (20 ) (20 )
Settlement loss (gain)
   —      —      —      —      (6 ) (6 ) —      (1 ) (1 )
Curtailment loss (gain)
   —      (5 ) (5 ) —      (1 ) (1 ) —      (18 ) (18 )
Other
   2    1    3    1    1    2    (1 ) 1    —


Net periodic cost (income)
   (117 ) 120    3    (129 ) 26    (103 ) (30 ) 50    20
of which discontinued operations
   3    —      3    2    —      2    2    —      2
~~Annual Report 2011      181~~
~~12 Group financial statements 12.11 - 12.11~~
         2010       2011       2012
   Netherlands other total Netherlands other total Netherlands other total
Service cost
   92    77    169    127    73    200    174    86    260
Interest cost on the defined-benefit obligation
   521    418    939    557    404    961    509    387    896
Expected return on plan assets
   (743 ) (344 ) (1,087 ) (713 ) (389 ) (1,102 ) (739 ) (429 ) (1,168 )
Prior-service cost
   —      (119 ) (119 ) —      (20 ) (20 ) —      1    1
Settlement loss (gain)
   —      (6 ) (6 ) —      (1 ) (1 ) —      1    1
Curtailment loss (gain)
   —      (1 ) (1 ) —      (18 ) (18 ) (25 ) (6 ) (31 )
Other
   1    1    2    (1 ) 1    —      —      —      —


Net periodic cost (income)
   (129 ) 26    (103 ) (30 ) 50    20    (81 ) 40    (41 )
of which discontinued operations
   2    —      2    2    —      2    —      (3 ) (3 )
Amounts recognized in the Consolidated statements of comprehensive income:

   2009    2010    2011    2010    2011 2012
Actuarial losses
   678       1,535       1,517       1,535       1,517    250
Change in the effect of the cap on prepaids
   369       427       (869 )    427       (869 ) 299




Total recognized in Consolidated statements of comprehensive income
   1,047       1,962       648
Total recognised in other comprehensive income
   1,962       648    549




Total recognized in net periodic pension cost and Consolidated statements of comprehensive income
   1,050       1,859       668
Total recognised in total comprehensive income
   1,859       668    508
Actual return on plan assets
   1,218       1,807       1,740       1,807       1,740    2,556
The pension expense of defined-benefit plans is recognized in the following line items in the Consolidated statements of income:

   2009 2010 2011    2010 2011    2012
Cost of sales
   6    6    8       6    8       (3 )
Selling expenses
   12    12    7       12    7       9
General and administrative expenses
   (14 ) (120 ) 3       (120 ) 3       (41 )
Research and development expenses
   (4 ) (3 ) —         (3 ) —         (3 )




   —      (105 ) 18       (105 ) 18       (38 )
The Company also sponsors defined-contribution and similar types of plans for a significant number of salaried employees. The total cost of these plans amounted to EUR 142 million (2011: EUR 120 ~~million (2010:~~million; 2010: EUR 114 ~~million, 2009: EUR 103~~ million). In ~~2011,~~2012, the defined-contribution cost includes contributions to multi-employer plans of EUR 8 million ~~(2010:~~(2011: EUR 68 million; ~~2009:~~2010: EUR 56 million).
Cash flows and costs in ~~2012~~2013
Philips expects considerable cash outflows in relation to employee benefits which are estimated to amount to EUR ~~633~~648 million in ~~2012,~~2013, consisting of EUR ~~420~~432 million employer contributions to defined-benefit pension plans, EUR ~~135~~142 million employer contributions to defined-contribution pension plans, EUR 5458 million expected cash outflows in relation to unfunded pension plans and EUR 2416 million in relation to unfunded retiree medical plans. The employer contributions to defined-benefit pension plans are expected to amount to EUR ~~203~~250 million for the Netherlands and EUR ~~217~~182 million for other countries. The Company plans to fund part of the existing deficit in the US pension plan in ~~2012,~~2013, which amount is included in the amounts aforementioned.
In accordance with revised IAS19 the service costs and interest expense will be disclosed seperately for defined-benefit plans. The service cost for ~~2012~~2013 is expected to amount to EUR ~~134~~279 million, consisting of EUR ~~(12)~~277 million for defined-benefit pension plans and EUR ~~135~~2 million for ~~defined-contribution~~defined-benefit retiree medical plans. The net interest expense for 2013 is expected to amount to EUR 75 million, consisting of EUR 64 million for defined-benefit pension plans and EUR 11 million for defined-benefit retiree medical plans. The cost for defined-contribution pension plans in 2013 is expected to amount EUR 142 million.
Assumptions
A significant demographic assumption used in the actuarial valuations is the mortality table.
The mortality tables used for the Company’s major schemes are:
Netherlands: Prognosis table ~~2010-2060~~2012-2062 including experience rating ~~TW2010~~TW2010.
United Kingdom retirees: SAPS 2002- ~~short cohort 2009 - medium cohort 1% floor~~Core CMI 2011 projection
United States: RP2000 CH Fully Generational
Germany: Richttafeln 2005 G.K. Heubeck
Longevity is one of the risks of postemployment benefits. The table below illustrates the impact on the 2011 defined-benefit obligation and expense of a 10% decrease in the assumed rates of mortality for the Company’s major schemes. A 10% decrease in assumed mortality rates equals improvement of life expectancy by 0.5 - 1 year.

Increase of current year:
DBO       expense
581
      27
The Expected Return on Assets for any funded plan equals the average of the expected returns per asset class weighted by their portfolio weights in accordance with the fund’s strategic asset allocation. Where liability-driven investment (LDI) strategies apply, the weights are in accordance with the actual matching part and the strategic asset allocation of the return portfolio.
The weighted averages of the assumptions used to calculate the defined-benefit obligations as of December 31 were as follows:

      2010       2011       2011       2012
   Netherlands other Netherlands other    Netherlands other Netherlands other
Discount rate
   4.7 % 5.3 %    3.9 % 4.4 %    3.9 % 4.4 %    3.3 % 4.1 %
Rate of compensation increase
   *    4.0 %    *    2.9 %    *    2.9 %    *    3.3 %
Annual Report 2012      189
12 Group financial statements 12.11 - 12.11
The weighted averages of the assumptions used to calculate the net periodic pension cost for years ended December 31:

      2010       2011       2011       2012
   Netherlands other Netherlands other    Netherlands other Netherlands other
Discount rate
   5.0 % 5.7 %    4.7 % 5.3 %    4.7 % 5.3 %    3.9 % 4.4 %
Expected returns on plan assets
   5.7 % 6.5 %    5.3 % 6.2 %    5.3 % 6.2 %    5.4 % 5.9 %
Rate of compensation increase
   *    4.1 %    *    4.0 %    *    4.0 %    *    2.9 %
* The rate of compensation increase for the Netherlands consists of a general compensation increase and an individual salary increase based on merit, seniority and promotion. The average individual salary increase for all active participants for the remaining working lifetime is 0.75% annually. The assumed rate of general compensation increase for the Netherlands for calculating the projected benefit obligations amounts to 2.0% ~~(2010:~~(2011: 2.0%). The indexation assumption used to calculate the projected benefit obligations for the Netherlands is 1.0% ~~(2010:~~(2011: 1.0%).
Sensitivity analysis

Historical data
   2007 2008 2009 2010 2011
Present value of defined-benefit obligations
   18,679    16,846    17,720    20,166    22,413
Fair value of plan assets
   20,200    17,899    18,470    20,080    21,249
Surplus
   1,521    1,053    750    (86 ) (1,164 )
Experience adjustments in % on:

- defined-benefit obligations (gain) loss
   (0.8 %) 1.2 % (0.9 %) 0.8 % (0.6 %)
- fair value of plan assets (gain) loss
   2.8 % 10.9 % (0.6 %) (3.6 %) (3.0 %)
The table below illustrates the approximate impact on the defined-benefit obligation if the Company were to change key assumptions by one-percent point.
Impact on DBO
   increase decrease
   assumption 1% assumption 1%
2012

Discount rate
   (2,784 ) 3,039
2011

Discount rate
   (2,583 ) 3,159
Longevity also impacts postemployment benefit liabilities. The table below illustrates the impact on the 2012 defined-benefit obligation and expense of a 10% decrease in the assumed rates of mortality for the Company’s major schemes. A 10% decrease in assumed mortality rates equals improvement of life expectancy by 0.5 - 1 year.
Increase of current year:
DBO       expense
663
      28
Historical data
   2008 2009 2010 2011 2012
Present value of defined-benefit obligations
   16,846    17,720    20,166    22,413    23,670
Fair value of plan assets
   17,899    18,470    20,080    21,249    22,791
Surplus
   1,053    750    (86 ) (1,164 ) (879 )
Experience adjustments in % on:

- defined-benefit obligations (gain) loss
   1.2 % (0.9 %) 0.8 % (0.6 %) (0.4 %)
- fair value of plan assets (gain) loss
   10.9 % (0.6 %) (3.6 %) (3.0 %) (6.1 %)
Defined-benefit plans: other postretirement benefits
In addition to providing pension benefits, the Company provides other postretirement benefits, primarily retiree medical benefits, in certain countries. The Company funds those other postretirement benefit plans as claims are incurred.
~~182      Annual Report 2011~~
~~12 Group financial statements 12.11 - 12.11~~
Movements in the net liability for other defined-benefit obligations:

   2010 2011    2011 2012
Defined-benefit obligation at the beginning of year
   295    297       297    269
Service cost
   2    1       1    1
Interest cost
   20    17       17    12
Actuarial (gains) or losses
   (11 ) (30 )    (30 ) 1
Plan amendments
   —      —         —      (25 )
Curtailment gains
   (9 ) —         —      —
Changes in consolidation
   —      —         —      —
Benefits paid
   (25 ) (17 )    (17 ) (17 )
Exchange rate differences
   24    1       1    (6 )
Miscellaneous
   1    —         —      15




Defined-benefit obligation at end of year
   297    269       269    250
Present value of funded obligations at end of year
   —      —         —      —
Present value of unfunded obligations at end of year
   297    269       269    250
Funded status
   (297 ) (269 )    (269 ) (250 )
Unrecognized prior-service cost
   (21 ) (17 )    (17 ) (13 )




Net balances
   (318 ) (286 )    (286 ) (263 )
Classification of the net balance is as follows:

Provision for other postretirement benefits
   (318 ) (286 )    (286 ) (263 )
Other postretirement benefit expense recognized in the Consolidated statements of income:

   2009 2010 2011    2010 2011 2012
Service cost
   2    2    1       2    1    1
Interest cost on accumulated postretirement benefits
   32    20    17       20    17    12
Prior-service cost
   (1 ) (2 ) (2 )    (2 ) (2 ) (27 )
Curtailment loss (gain)
   (134 ) (9 ) —         (9 ) —      —
Other
   1    —      —         —      —      —




   (100 ) 11    16       11    16    (14 )
Amounts recognized in the Consolidated statements of comprehensive income:

   2009 2010 2011    2010 2011 2012
Actuarial (gains) losses
   63    (11 ) (30 )    (11 ) (30 ) 1
Total recognized in net periodic pension cost and Consolidated statements of comprehensive income
   (37 ) —      (14 )
Total recognized in Total Comprehensive Income
   —      (14 ) (13 )
The expense for other postretirement benefits is recognized in the following line items in the Consolidated statements of income:

   2009 2010 2011    2010 2011    2012
Cost of sales
   2    (7 ) 2       (7 ) 2       1
Selling expenses
   (1 ) 1    1       1    1       1
General and administrative expenses
   (101 ) 17    13       17    13       (16 )




   (100 ) 11    16       11    16       (14 )
190      Annual Report 2012
12 Group financial statements 12.11 - 12.11
The weighted average assumptions used to calculate the postretirement benefit obligations other than pensions as of December 31 were as follows:

   2010 2011    2011 2012
Discount rate
   6.6 % 5.1 %    5.1 % 4.5 %
Compensation increase (where applicable)
   —      —         —      —
The weighted average assumptions used to calculate the net cost for years ended December 31:

   2010 2011    2011 2012
Discount rate
   6.7 % 6.6 %    6.6 % 5.1 %
Compensation increase (where applicable)
   —      —         —      —
Assumed healthcare cost trend rates at December 31:

   2010 2011
Healthcare cost trend rate assumed for next year
   8.4 % 8.3 %
Rate that the cost trend rate will gradually reach
   4.8 % 4.4 %
Year of reaching the rate at which it is assumed to remain
   2018    2018
~~Sensitivity analysis~~
   2011 2012
Healthcare cost trend rate assumed for next year
   8.3 % 7.5 %
Rate that the cost trend rate will gradually reach
   4.4 % 5.2 %
Year of reaching the rate at which it is assumed to remain
   2018    2019
Assumed healthcare trend rates can have a significant effect on the amounts reported for the retiree medical plans. A one ~~percentage- point~~percentage-point change in assumed healthcare cost trend rates would have the following effects as at December 31:

   2010    2011    2011    2012
   increase
of 1%
decrease
of 1%

increase
of 1%

decrease
of 1%
   increase
of 1%    decrease
of 1% increase
of 1%    decrease
of 1%
Effect on total of service and interest cost
   1       (1 ) 1       (1 )    1       (1 ) 1       —
Effect on postretirement benefit obligation
   19       (17 ) 16       (14 )    16       (14 ) 15       (13 )
Historical data

   2007 2008 2009 2010 2011    2008 2009 2010 2011 2012
Present value of defined-benefit obligation
   413    353    295    297    269       353    295    297    269    250
Fair value of plan assets
   —      —      —      —      —         —      —      —      —      —
(Deficit)
   (413 ) (353 ) (295 ) (297 ) (269 )    (353 ) (295 ) (297 ) (269 ) (250 )
Experience adjustments in % on defined-benefit obligations; (gains) and losses
   0.2 % 0.1 % 4.9 % (8.1 %) (9.4 %)    0.1 % 4.9 % (8.1 %) (9.4 %) (4.8 %)
Share-based compensation
The Company has granted stock options on its common shares and rights to receive common shares in the future (restricted share rights) to members of the Board of Management and other members of the Executive Committee, Philips executives and certain selected employees. The purpose of the share-based compensation plans is to align the interests of management with those of shareholders by providing incentives to improve the Company’s performance on a long-term basis, thereby increasing shareholder value.
The Company has granted the following:
options on its common shares;
rights to receive common shares in the future (restricted share rights).
These options and restricted share rights are granted to members of the Board of Management and other members of the Executive Committee, executives and certain selected employees. The number of granted options and restricted share rights depend on multipliers which are based on the relative Total Shareholders Return of Philips in comparison with a peer group of 11 multinationals.
Furthermore, in January 2012, as part of the Accelerate! program, the Company has granted the following:
options on its common shares (Accelerate! options);
rights to receive common shares in the future (Accelerate! share rights).
These Accelerate! options and share rights are granted to a group of approximately 500 key employees below the level of Board of Management.
USD-denominated options and share rights are granted to employees in the United States only.
Share-based compensation costs were EUR 88 million (EUR 76 million, net of tax), EUR 56 million (EUR 58 million, net of tax) and EUR 83 million (EUR 66 million, net of tax) in 2012, 2011 and 2010, respectively.
Option plans
Under the Company’s plans, options are granted at fair market value on the date of grant.
~~Annual Report 2011      183~~
~~12 Group financial statements 12.11 - 12.11~~
The number of granted stock options and restricted share rights depend on multipliers which are based on the relative Total Shareholder Return of Philips in comparison with a peer group of 11 multinationals.
~~USD-denominated stock options and restricted share rights are granted to employees in the United States only.~~
Share-based compensation expense was EUR 56 million (EUR 58 million, net of tax), EUR 83 million (EUR 66 million, net of tax) and EUR 94 million (EUR 86 million, net of tax) in 2011, 2010 and 2009, respectively.
~~Option plans~~
The Company grants ~~stock~~ options that expire after 10 years. Generally, ~~the~~these options vest after 3 years; however, a limited number of options granted to certain employees of acquired businesses may contain accelerated vesting. AsExcept for the Accelerate! options, as of December 31, ~~2011~~2012 there are no outstanding options which contain non-market performance conditions.
The fair value of the Company’s 2012, 2011 ~~2010~~ and ~~2009~~2010 option grants was estimated using a Black-Scholes option valuation model and the following weighted average assumptions:


EUR-denominated    2009 2010 2011    2010 2011 2012
Risk-free interest rate
   2.88 % 2.43 % 2.89 %    2.43 % 2.89 % 1.87 %
Expected dividend yield
   4.3 % 4.1 % 3.3 %    4.1 % 3.3 % 4.7 %
Expected option life
   6.5 yrs    6.5 yrs    6.5 yrs       6.5 yrs    6.5 yrs    6.5 yrs
Expected share price volatility
   32 % 30 % 30 %    30 % 30 % 32 %

USD-denominated    2009 2010 2011
Risk-free interest rate
   2.25 % 2.43 % 2.78 %    2.43 % 2.78 % 1.23 %
Expected dividend yield
   4.1 % 3.9 % 3.6 %    3.9 % 3.6 % 4.5 %
Expected option life
   6.5 yrs    6.5 yrs    6.5 yrs       6.5 yrs    6.5 yrs    6.5 yrs
Expected share price volatility
   33 % 32 % 34 %    32 % 34 % 38 %
The Company grants Accelerate! options that expire after 10 years. The Accelerate! options ultimately vest on March 31, 2014. The actual number of Accelerate! options that will ultimately vest is dependent on achievement of the performance targets under the Accelerate! program, which are based on the 2013 mid-term financial targets, and provided that the employee is still employed with the Company.
Annual Report 2012      191
12 Group financial statements 12.11 - 12.11
The fair value of the Company’s Accelerate! option was estimated using a Black-Scholes option valuation model and the following assumptions:
EUR-denominated 2012
Risk-free interest rate
1,52 %
Expected dividend yield
4.3 %
Expected option life
6.5 yrs
Expected share price volatility
32 %
USD-denominated
Risk-free interest rate
1.19 %
Expected dividend yield
4.0 %
Expected option life
6.5 yrs
Expected share price volatility
38 %
The assumptions were used for these calculations only and do not necessarily represent an indication of Management’s expectations of future developments.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of subjective assumptions, including the expected price volatility.
The Company has based its volatility assumptions on historical experience for a period equal to the expected life of the options. The expected life of the options is also based upon historical experience.
The Company’s employee stock options have characteristics significantly different from those of traded options, and changes in the assumptions can materially affect the fair value estimate.
The following tables summarize information about ~~Philips stock~~the Company’s options as of December 31, ~~2011~~2012 and changes during the year:
Option plans (excluding Accelerate! options)
EUR-denominated

   shares    weighted average
exercise price    shares    weighted average
exercise price
Outstanding at January 1, 2011
   31,804,356       25.68
Outstanding at January 1, 2012
   25,552,128       23.77
Granted
   4,266,162       20.69       3,983,925       14.89
Exercised
   246,170       18.70       754,979       13.76
Forfeited
   6,414,055       25.83       2,263,287       22.92
Expired
   3,858,165       33.00       3,408,522       32.02




Outstanding at December 31, 2011
   25,552,128       23.77
Outstanding at December 31, 2012
   23,109,265       21.43




Exercisable at December 31, 2011
   15,699,546       26.35
Exercisable at December 31, 2012
   13,019,540       22.89
The exercise prices range from EUR 12.63 to EUR ~~34.78.~~32.04. The weighted average remaining contractual term for options outstanding and options exercisable at December 31, ~~2011,~~2012, was ~~5.4~~5.9 years and ~~3.5~~3.9 years, respectively. The aggregate intrinsic value of the options outstanding and options exercisable at December 31, ~~2011,~~2012, was EUR 1038 million and EUR ~~nil~~18 million, respectively.
The weighted average grant-date fair value of options granted during 2012, 2011, ~~2010,~~ and ~~2009~~2010 was EUR 2.84, EUR 4.82 and EUR 4.95, ~~and EUR 2.78,~~ respectively. The total intrinsic value of options exercised during 2012, 2011, ~~2010,~~ and ~~2009~~2010 was approximately EUR 13 million, EUR 61 million and EUR ~~nil~~6 million, respectively.
Option plans (excluding Accelerate! options)
USD-denominated

   shares    weighted average
exercise price    shares    weighted average
exercise price
Outstanding at January 1, 2011
   18,420,554       30.51
Outstanding at January 1, 2012
   17,110,352       30.56
Granted
   2,899,530       29.36       3,280,941       19.60
Exercised
   802,051       25.20       651,330       17.42
Forfeited
   2,537,467       31.47       1,441,659       29.68
Expired
   870,214       27.65       1,691,652       30.10




Outstanding at December 31, 2011
   17,110,352       30.56
Outstanding at December 31, 2012
   16,606,652       29.04




Exercisable at December 31, 2011
   10,285,013       33.16
Exercisable at December 31, 2012
   9,420,431       31.25
The exercise prices range from USD 16.41 to USD 44.15. The weighted average remaining contractual term for options outstanding and options exercisable at December 31, ~~2011,~~2012, was ~~5.7~~6.1 years and ~~4.0~~4.2 years, respectively. The aggregate intrinsic value of the options outstanding and options exercisable at December 31, ~~2011,~~2012, was USD 1041 million and USD 119 million, respectively.
The weighted average grant-date fair value of options granted during 2012, 2011 ~~2010~~ and ~~2009~~2010 was USD 4.56, USD 7.47 and USD 7.71, ~~and USD 3.83,~~ respectively. The total intrinsic value of options exercised during 2012, 2011 ~~2010~~ and ~~2009~~2010 was USD 4 million, USD 74 million and USD 7 million.
At December 31, 2012, a total of EUR 28 million of unrecognized compensation costs relate to non-vested options. These costs are expected to be recognized over a weighted-average period of 1.7 years. Cash received from exercises under the Company’s option plans amounted to EUR 19 million, EUR 20 million and EUR 39 million in 2012, 2011, and 2010, respectively. The actual tax deductions realized as a result of option exercises totaled approximately EUR 1 million, EUR 1 million and EUR 2 million, in 2012, 2011, and 2010, respectively.
~~184      Annual Report 2011~~
~~12 Group financial statements 12.11 - 12.11~~
The outstanding options are categorized in exercise price ranges as follows:
~~EUR-denominated~~Option plans (excluding Accelerate! options)

exercise
price
   shares    intrinsic
value in
millions
weighted average
remaining
contractual term

10-15
   2,861,322       10       7.4 yrs
15-20
   2,700,633       —         2.9 yrs
20-25
   11,258,030       —         7.3 yrs
25-30
   2,301,112       —         4.3 yrs
30-35
   6,431,031       —         2.6 yrs


   25,552,128       10       5.4 yrs
~~USD-denominated~~
exercise
price
   shares    intrinsic
value in
millions    weighted average
remaining
contractual term    shares    intrinsic
value in
millions    weighted average
remaining
contractual term
EUR-denominated

10-15
   5,894,502       34       8.2 yrs
15-20
   2,378,247       4       2.3 yrs
20-25
   10,054,042       —         6.3 yrs
25-30
   2,009,241       —         3.3 yrs
30-35
   2,773,233       —         4.3 yrs


   23,109,265       38       5.9 yrs
USD-denominated

15-20
   2,545,878       10       6.2 yrs       4,656,080       38       7.7 yrs
20-25
   207,937       —         7.7 yrs       396,606       2       8.6 yrs
25-30
   4,778,796       —         6.4 yrs       4,073,352       1       5.7 yrs
30-35
   5,367,217       —         4.9 yrs       3,527,301       —         5.5 yrs
35-40
   2,123,649       —         6.2 yrs       2,014,092       —         5.2 yrs
40-45
   2,086,875       —         5.3 yrs
40-55
   1,939,221       —         4.3 yrs




   17,110,352       10       5.7 yrs       16,606,652       41       6.1 yrs
The aggregate intrinsic value in the tables and text above represents the total pre-tax intrinsic value (the difference between the Company’s closing share price on the last trading day of ~~2011~~2012 and the exercise
192      Annual Report 2012
12 Group financial statements 12.11 - 12.11
price, multiplied by the number of in-the-money options) that would have been received by the option holders if the options had been exercised on December 31, ~~2011.~~2012.
The following table summarizes information about the Company’s Accelerate! options as of December 31, 2012 and changes during the year:
Accelerate! options
   shares    weighted average
exercise price
EUR-denominated

Granted
   3,082,000       15.24
Forfeited
   155,000       15.24


Outstanding at December 31, 2012
   2,927,000       15.24
USD-denominated

Granted
   940,000       20.02
Forfeited
   80,000       20.02


Outstanding at December 31, 2012
   860,000       20.02
The exercise price of the Accelerate! options are EUR 15.24 and USD 20.02. The average remaining contractual term for both EUR and USD Accelerate! options outstanding at December 31, 2012, was 9.1 years. The aggregate intrinsic value of the Accelerate! options outstanding at December 31, 2012, was EUR 14 million and USD 6 million respectively.
The grant-date fair value of Accelerate! options granted during 2012 was EUR 3.01 and USD 4.90. At December 31, ~~2011,~~2012, a total of EUR 396 million of unrecognized compensation ~~cost related~~costs relate to both EUR and USD non-vested ~~stock~~Accelerate! options. ~~This cost is~~These costs are expected to be recognized over a ~~weighted-average~~ period of ~~1.9~~1.3 years. Cash received from option exercises under the Company’s option plans amounted to EUR 20 million, EUR 39 million and EUR 4 million in 2011, 2010, and 2009, respectively. The actual tax deductions realized as a result of stock option exercises totaled approximately EUR 1 million, EUR 2 million and EUR nil million, in 2011, 2010, and 2009, respectively.
~~Restricted shares~~Share plans
The fair value of restricted and Accelerate! share rights is equal to the fair value of the share at grant date less the present value of dividends which will not be received up to the vesting date.
The Company issues restricted share rights that vest in equal annual installments over a three-year period, starting one year after the date of grant. If the grantee still holds the shares after three years from the delivery date, Philips will grant 20% additional (premium) shares, provided the grantee is still with the Company on the respective delivery dates.
A summary of the status of the Company’s restricted share plans as of December 31, ~~2011~~2012 and changes during the year are presented below:
Restricted share rights ~~EUR-denominated~~(excluding Accelerate! share rights)¹⁾¹⁾

   shares
weighted
average grant-
date fair value
   shares    weighted
average grant-
date fair value
Outstanding at January 1, 2011
   1,697,368       18.96
EUR-denominated

Outstanding at January 1, 2012
   1,860,891       19.10
Granted
   1,149,645       19.21       1,147,926       13.44
Vested/Issued
   863,731       18.99       849,144       18.28
Forfeited
   122,391       19.12       204,688       17.69




Outstanding at December 31, 2011
   1,860,891       19.10
Outstanding at December 31, 2012
   1,954,985       16.45
USD-denominated

Outstanding at January 1, 2012
   1,264,699       26.33
Granted
   1,445,614       17.81
Vested/Issued
   579,861       24.87
Forfeited
   206,296       22.39


Outstanding at December 31, 2012
   1,924,156       20.99
¹⁾
Excludes 20% additional (premium) shares that may be received if shares delivered under the restricted share rights plan are not sold for a three-year period
~~Restricted share rights, USD-denominated~~¹⁾

   shares    weighted
average grant-
date fair value
Outstanding at January 1, 2011
   1,199,042       26.28
Granted
   787,271       27.21
Vested/Issued
   654,017       27.34
Forfeited
   67,597       26.07


Outstanding at December 31, 2011
   1,264,699       26.33
¹⁾
~~Excludes 20% additional (premium) shares that may be received if shares delivered under the restricted share rights plan are not sold for a three-year period~~
At December 31, ~~2011,~~2012, a total of EUR 3935 million of unrecognized compensation ~~cost related~~costs relate to non-vested restricted share rights. ~~This cost is~~These costs are expected to be recognized over a weighted-average period of 2 years.
The Company issues Accelerate! share rights that ultimately vest on March 31, 2014. After vesting an additional two-year holding period applies. The actual number of Accelerate! share rights that will ultimately vest is dependent on the performance targets under the Accelerate! program, which are based on the 2013 mid-term financial targets, and provided that the employee is still employed with the Company.
A summary of the status of the Company’s Accelerate! share plans as of December 31, 2012 and changes during the year are presented below:
Accelerate! share rights
   shares    weighted
average grant-
date fair value
EUR-denominated

Granted
   3,082,000       13.75
Forfeited
   155,000       13.75


Outstanding at December 31, 2012
   2,927,000       13.75
USD-denominated

Granted
   940,000       18.05
Forfeited
   80,000       18.05


Outstanding at December 31, 2012
   860,000       18.05
At December 31, 2012, a total of EUR 27 million of unrecognized compensation costs relate to both EUR and USD non-vested Accelerate! share rights. These costs are expected to be recognized over a period of 1.3 years.
Annual Report 2012      193
12 Group financial statements 12.11 - 12.11
Other plans
Employee share purchase plan
Under the terms of employee stock purchase plans established by the Company in various countries, substantially all employees in those countries are eligible to purchase a limited number of Philips shares at discounted prices through payroll withholdings, of which the maximum ranges from ~~8.5%~~5% to 10% of total salary. Generally, the discount provided to the employees is in the range of 10% to 20%. A total of ~~1,851,718~~1,906,183 shares were sold to employees in ~~2011~~2012 under the plan at an average price of EUR 15.69 (2011: 1,851,718 shares at EUR 17.93, ~~(2010:~~2010: 1,411,956 shares at EUR ~~22.54, 2009: 2,185,647 shares at EUR 13.30)~~22.54).
Convertible personnel debentures
In the Netherlands, the Company issued personnel debentures with a 2-year right of conversion into common shares of Royal Philips Electronics starting three years after the date of issuance, with a conversion price equal to the share price on that date. The last issuance of this particular plan was in December 2008. From 2009 onwards, employees in the Netherlands are able to join an employee share purchase plan as described in the previous paragraph. The fair value of the conversion option of EUR 2.13 in 2008 was recorded as compensation expense. In ~~2011, 1,079~~2012, 270,827 shares were issued in conjunction with conversions at an average price of EUR 14.22 (2011: 1,079 shares at an average price of EUR 24.66, ~~(2010:~~2010: 279,170 shares at an average price of EUR ~~20.86, 2009: 183,330 shares at an average price of EUR 19.56)~~20.86).
Lumileds plan
In December 2006, the Company offered to exchange outstanding Lumileds Depository Receipts and options for cash and share-based instruments settled in cash. The amount to be paid to settle the obligation, with respect to share-based instruments, will fluctuate based upon changes in the fair value of Lumileds. Substantially all of the holders of the options and the depository receipts accepted the Company’s
~~Annual Report 2011      185~~
~~12 Group financial statements 12.11 - 12.11~~
offer. The amount of the share-based payment liability, which is denominated in US dollars, recorded at December 31, ~~2010~~2011 was EUR ~~38.1~~2.7 million. During ~~2011,~~2012, the Company paid EUR ~~32.1~~2.7 million as a ~~part of the~~final settlement of the liability. Additionally, a decrease of EUR 3.3 million was recognized to reflect an adjustment to the value of the liability. The balance at December 31, 2011 amounted to EUR 2.7 million, which will be settled in 2012.
Related-party transactions
In the normal course of business, Philips purchases and sells goods and services from/to various related parties in which Philips typically holds a 50% or less equity interest and has significant influence. These transactions are generally conducted with terms comparable to transactions with third parties.

   2009    2010    2011
Sales of goods and services¹⁾
   249       240       278
Purchases of goods and services
   424       229       117
Receivables from related parties
   14       20       19
Payables to related parties
   95       5       6

¹⁾
~~Revised to reflect an adjusted related party allocation~~
   2010    2011    2012
Sales of goods and services
   240       278       288
Purchases of goods and services
   229       117       130
Receivables from related parties
   20       19       13
Payables to related parties
   5       6       4

~~During~~Philips made various commitments, upon signing the agreement with TPV Technology Limited (TPV), to provide further funding to the venture (TP Vision):
A subordinated shareholder loan of EUR 51 million has been provided to TP Vision based on Philips’ share of 30% of the venture. EUR 21 million of this loan is due April, 2015 and EUR 30 million due April, 2017. Both loans can be extended depending on the venture’s funding needs;
A Senior 12-month EUR 30 million bridge loan to TP Vision, based on Philips’ share of 30% in the venture, that can be extended until April, 2017 depending on the venture’s funding needs. This bridge loan replaced the 9-month EUR 100 million senior bridge loan to the venture which was not drawn upon during 2012;
Payment of EUR 172 million non-refundable one-off advertising and promotion support for the venture in two installments: EUR 122 million which was disbursed in 2012, and EUR 50 million to be paid in 2013.
A EUR 100 million loan has been provided to TPV, due April, 2015.
In addition, depending on the funding needs of the venture, Philips has committed to provide EUR 60 million based on its 30% share in TP Vision. This additional funding is considered to have only a remote possibility of occurring.
See also note 5, Discontinued operations and Other assets classified as held for sale for further details on the Television business divestment.
In light of the composition of the Executive Committee during 2012, the Company considered the members of the Executive Committee and the Supervisory board to be the key management personnel as defined in IAS 24 ‘Related parties’. In 2010 and 2011, wethe Company considered the members of the Board of Management and the Supervisory ~~Board~~board to be the key management ~~personnel as defined in IAS 24 “Related parties”.~~ personnel.
For remuneration details of the ~~members of~~Executive Committee, the Board of Management and the Supervisory Board see note 32, Information on remuneration.
For employee benefit plans see note 29, Pensions and other postretirement benefits.
~~In 2010, Philips sold its entire stake in NXP to Philips Pension Trustees Limited. For further details of this related party transaction see note~~
194      Annual Report 2012
12 ~~Other non-current~~Group financial ~~assets.~~statements 12.11 - 12.11
Information on remuneration
Remuneration of the Executive Committee
In 2012, the total remuneration costs relating to the members of the Executive Committee (including the members of the Board of Management) amounted to EUR 18,585,112 consisting of the elements in the table below.
Remuneration costs of the Executive Committee 2012
in euros
Salary
5,640,090
Annual incentive¹⁾
4,839,949
Stock options²⁾
1,194,444
Restricted share rights²⁾
2,615,653
Pension costs
2,054,516
Other compensation³⁾
2,240,460
¹⁾
The annual incentives are related to the performance in the year reported which are paid out in the subsequent year.
²⁾
Costs of stock options and restricted share rights are based on accounting standards (IFRS) and do not reflect the value of stock options at the end of the lock up period and the value of restricted share rights at the release date
³⁾
The stated amount concern (share of) allowances to members of the Executive Committee that can be considered as remuneration. In a situation where such a share of an allowance can be considered as (indirect) remuneration (for example, private use of the company car), then the share is both valued and accounted for here. The method employed by the fiscal authorities in the Netherlands is the starting point for the value stated. The one-time crisis tax levy of 16% as imposed by the Dutch government amounts to EUR 702,940. This crisis tax is payable by the employer and is charged over income of employees exceeding a EUR 150,000 threshold in 2012. This once-only amount is included in the amount stated under ‘other compensation’.
At December 31, 2012, the members of the Executive Committee (including the members of the Board of Management) held 1,376,913 stock options at a weighted average exercise price of EUR 18.23.
Remuneration of the Board of Management
In ~~2011,~~2012, the total remuneration costs relating to the members of the Board of Management amounted to EUR ~~10,844,833 (2010:~~7,301,334 (2011: EUR ~~12,174,279; 2009:~~10,844,833; 2010: EUR ~~12,222,191).~~
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 2011, no (additional) pension benefits were granted to former members of the Board of Management.
~~Out of the total remuneration costs in 2011, an amount of EUR 3,311,748 relates to stock options and restricted share rights (2010: EUR 3,242,191, 2009: EUR 3,465,778)~~12,174,279).
At December 31, ~~2011,~~2012, the members of the Board of Management held ~~1,072,431~~454,500 stock options ~~(2010: 1,957,282; 2009: 2,064,872)~~(2011: 1,072,431; 2010: 1,957,282) at a weighted average exercise price of EUR ~~23.01 (2010:~~18.78 (2011: EUR ~~24.94; 2009:~~23.01; 2010: EUR ~~25.47)~~24.94).

~~186~~      Annual Report ~~2011~~2012      195
12 Group financial statements 12.11 - 12.11

Remuneration costs of individual members of the Board of Management
in euros

   salary    annual incentive¹⁾    stock options²⁾ restricted share rights²⁾ pension costs other compensation³⁾
2012⁴⁾
F.A. van Houten
   1,100,000       1,279,520       209,589    315,760    422,845    47,154
R.H. Wirahadiraksa
   600,000       523,440       149,067    217,020    243,438    34,961
P.A.J. Nota
   600,000       556,200       188,029    253,836    247,883    60,754
S.H. Rusckowski (Jan. - Apr.)
   233,333       178,500       (200,400 ) (209,638 ) 90,211    159,833


   salary    annual incentive¹⁾    pension cost other compensation²⁾    2,533,333       2,537,660       346,285    576,978    1,004,377    302,701
2011
F.A. van Houten (Apr. - Dec.)
   825,000       363,000       297,179    39,709       825,000       363,000       125,957    253,926    297,179    39,709
R.H. Wirahadiraksa (Apr. - Dec.)
   450,000       148,500       170,299    72,125       450,000       148,500       105,477    180,686    170,299    72,125
G.H.A. Dutiné
   650,000       214,500       245,018    143,774       650,000       214,500       462,263    334,186    245,018    143,774
P.A.J. Nota (Apr. - Dec.)
   450,000       148,500       168,532    67,067       450,000       148,500       131,159    255,159    168,532    67,067
S.H. Rusckowski
   687,500       231,000       254,975    336,773       687,500       231,000       211,915    341,856    254,975    336,773
G.J. Kleisterlee (Jan. - March)³⁾
   275,000       92,400       (48,117 )⁴⁾ 105,679
P-J. Sivignon (Jan. - March)⁵⁾
   178,750       45,045       68,830    9,340
R.S. Provoost (Jan. - Sept.)⁶⁾
   512,500       132,300       175,301    22,606
G.J. Kleisterlee (Jan. - March)
   275,000       92,400       375,736    29,973    (48,117 )⁵⁾ 105,679
P-J. Sivignon (Jan. - March)
   178,750       45,045       213,435    7,041    68,830    9,340
R.S. Provoost (Jan. - Sept.)
   512,500       132,300       213,434    69,545    175,301    22,606




   4,028,750       1,375,245       1,332,017    797,073       4,028,750       1,375,245       1,839,376    1,472,372    1,332,017    797,073
2010
G.J. Kleisterlee
   1,100,000       962,720       (255,757 )⁴⁾ 321,778       1,100,000       962,720       328,485    444,005    (255,757 )⁵⁾ 321,778
P-J. Sivignon
   711,250       469,326       240,051    28,122       711,250       469,326       187,763    255,398    240,051    28,122
G.H.A Dutiné
   643,750       426,660       203,404    135,459       643,750       426,660       185,364    252,057    203,404    135,459
R.S. Provoost
   646,250       426,660       193,194    30,919       646,250       426,660       185,364    251,225    193,194    30,919
A. Ragnetti (Jan. - Aug.)⁷⁾
   429,583       284,440       134,353    433,489 ⁸⁾
A. Ragnetti (Jan. - Aug.)
   429,583       284,440       425,340    284,199    134,353    433,489 ⁶⁾
S.H. Rusckowski
   646,250       426,660       216,814    76,713       646,250       426,660       187,763    255,228    216,814    76,713




   4,177,083       2,996,466       732,059    1,026,480       4,177,083       2,996,466       1,500,079    1,742,112    732,059    1,026,480
2009
G.J. Kleisterlee
   1,100,000       962,720       (302,855 )³⁾ 329,117
P-J. Sivignon
   700,000       459,480       235,226    37,988
G.H.A. Dutiné
   625,000       410,250       186,722    119,197
R.S. Provoost
   635,000       416,814       187,073    25,465
A. Ragnetti
   635,000       416,814       198,798    42,777
S.H. Rusckowski
   635,000       416,814       217,410    66,603


   4,330,000       3,082,892       722,374    621,147
¹⁾
The annual incentives are related to the performance in the year reported which are paid out in the subsequent year. ~~The amounts for 2010 and 2009 have been adjusted to reflect this.~~ For more details on the annual incentives, see sub-section ~~10.2.5,~~10.2.6, Annual Incentive, of this report
²⁾
Costs of stock options and restricted share rights are based on accounting standards (IFRS) and do not reflect the value of stock options at the end of the lock up period and the value of restricted share rights at the release date
³⁾
The stated amounts concern (share of) allowances to members of the Board of Management that can be considered as remuneration. In a situation where such a share of an allowance can be considered as (indirect) remuneration (for example, private use of the company car), then the share is both valued and accounted for here. The method employed by the fiscal authorities in the Netherlands is the starting point for the value stated. In 2011 the other compensation for Mr Rusckowski includes an amount of USD 445,976 (= EUR 325,352) related to tax equalization in connection with pension obligations
³⁾⁴⁾
~~In addition an amount~~A one-time crisis levy of 16% as imposed by the Dutch government amounts to EUR ~~76,114 for stock options~~413,405 in total. This crisis tax levy is payable by the employer and is charged over income of employees exceeding a EUR ~~92,211 for restricted share rights are taken as cost~~150,000 threshold in ~~2011 and an additional (negative) amount~~2012. These expenses do not form part of ~~EUR 299,622 for stock options and EUR (62,238) for restricted share rights for previously granted stock options and restricted share rights that are still outstanding~~the remuneration costs mentioned.
⁴⁾⁵⁾
As Mr Kleisterlee was born before January 1, 1950, he continued to be a member of the final pay plan with a pensionable age of 60. No further accrual took place
⁵⁾
In addition an amount of EUR 43,353 for stock options and EUR 52,382 for restricted share rights are taken as cost in 2011 and an additional (negative) amount of EUR 170,082 for stock options and EUR (45,341) for restricted share rights for previously granted stock options and restricted share rights that are still outstanding
⁶⁾
In addition an amount of EUR 94,740 for stock options and EUR 94,130 for restricted share rights are taken as cost in 2011 and an additional (negative) amount of EUR 118,694 for stock options and EUR (24,585) for restricted share rights for previously granted stock options and restricted share rights that are still outstanding
⁷⁾
In addition an amount of EUR 127,555 for stock options and EUR 165,280 for restricted share rights are taken as cost in 2010 and an additional amount of EUR 297,785 for stock options and EUR 118,919 for restricted share rights for previously granted stock options and restricted share rights that are still outstanding
⁸⁾
The other compensation amount includes an amount of EUR 400,000 as a one-off payment provided in conjunction with ~~his~~the departure of Mr Ragnetti from the Company
For further information on remuneration costs, see sub-section ~~10.2.3,~~10.2.4, Remuneration costs, of this report.
~~Annual Report 2011      187~~
~~12 Group financial statements 12.11 - 12.11~~
The tables below give an overview of the interests of the members of the Board of Management under the restricted share rights plans and the stock option plans of the Company:
Number of restricted share rights

   January 1,
2011 awarded
2011    released
2011    December 31,
2011    potential
premium
shares    January 1,
2012 awarded
2012    released
2012    December 31,
2012    potential
premium
shares
F.A. van Houten
   5,100 ¹⁾ 20,001       1,700       23,401       5,022       23,401 ¹⁾ 20,001       8,367       35,035       9,024
R.H. Wirahadiraksa
   7,459 ¹⁾ 13,602       3,642       17,419       4,908       17,419 ¹⁾ 13,602       6,976       24,045       7,389
G.H.A. Dutiné
   21,295    13,602       11,081       23,816       10,350
P.A.J. Nota
   10,200 ¹⁾ 13,602       3,400       20,402       4,761       20,402 ¹⁾ 13,602       7,934       26,070       7,482
S.H. Rusckowski
   21,295    20,001       11,081       30,215       13,361




   65,349    80,808       30,904       115,253       38,402       61,222    47,205       23,277       85,150       23,895
¹⁾
(Partly) awarded before date of appointment as a member of the Board of Management
196      Annual Report 2012
12 Group financial statements 12.11 - 12.11
Stock options
   January 1, 2012 granted    exercised    expired    December
31, 2012    exercise price
(in euros)    share (closing)
price on
exercise date    expiry date
F.A. van Houten
   20,400 ¹⁾ —         —         —         20,400       22.88       —         10.18.2020
   75,000    —         —         —         75,000       20.90       —         04.18.2021
   —      75,000       —         —         75,000       14.82       —         04.23.2022
R.H. Wirahadiraksa
   10,800 ¹⁾ —         —         —         10,800       23.11       —         04.14.2018
   12,000 ¹⁾ —         —         —         12,000       12.63       —         04.14.2019
   16,500 ¹⁾ —         —         —         16,500       24.90       —         04.19.2020
   51,000    —         —         —         51,000       20.90       —         04.18.2021
   —      51,000       —         —         51,000       14.82       —         04.23.2022
P.A.J. Nota
   40,800 ¹⁾ —         —         —         40,800       22.88       —         10.18.2020
   51,000    —         —         —         51,000       20.90       —         04.18.2021
   —      51,000       —         —         51,000       14.82       —         04.23.2022


   277,500    177,000       —         —         454,500
¹⁾
Awarded before date of appointment as a member of the Board of Management
~~Stock options~~

   January 1, 2011 granted    exercised    expired    December
31, 2011    exercise price
(in euros)    share (closing)
price on
exercise date    expiry date
F.A. van Houten
   20,400 ¹⁾ —         —         —         20,400       22.88       —         10.18.2020
   —      75,000       —         —         75,000       20.90       —         04.18.2021
   —         —         —               —
R.H. Wirahadiraksa
   10,800 ¹⁾ —         —         —         10,800       23.11       —         04.14.2018
   12,000 ¹⁾ —         —         —         12,000       12.63       —         04.14.2019
   16,500 ¹⁾ —         —         —         16,500       24.90       —         04.19.2020
   —      51,000       —         —         51,000       20.90       —         04.18.2021
G.H.A. Dutiné
   124,800 ¹⁾ —         —         —         124,800       30.17       —         02.07.2012
   35,208    —         —         —         35,208       16.77       —         04.15.2013
   32,004    —         —         —         32,004       24.13       —         04.13.2014
   32,004    —         —         —         32,004       19.41       —         04.18.2015
   30,006    —         —         —         30,006       26.28       —         04.18.2016
   39,600    —         —         —         39,600       30.96       —         04.16.2017
   38,403    —         —         —         38,403       23.11       —         04.14.2018
   38,400    —         —         —         38,400       12.63       —         04.14.2019
   40,800    —         —         —         40,800       24.90       —         04.19.2020
   —      51,000       —         —         51,000       20.90       —         04.18.2021
P.A.J. Nota
   40,800 ¹⁾ —         —         —         40,800       22.88       —         10.18.2020
   —      51,000       —         —         51,000       20.90       —         04.18.2021
¹⁾
~~Awarded before date of appointment as a member of the Board of Management~~
~~188      Annual Report 2011~~
~~12 Group financial statements 12.11 - 12.11~~
~~Stock options~~

   January 1, 2011 granted    exercised    expired    December
31, 2011 exercise price
(in euros or
USD)    share (closing)
price on
exercise date    expiry date
S.H. Rusckowski
   27,000 ¹⁾ —         —         —         27,000 ¹⁾ $ 28.78       —         04.13.2014
   2,700 ¹⁾ —         —         —         2,700 ¹⁾ $ 25.43       —         01.27.2015
   31,500 ¹⁾ —         —         —         31,500 ¹⁾ $ 25.28       —         04.18.2015
   31,500 ¹⁾ —         —         —         31,500 ¹⁾ $ 32.25       —         04.18.2016
   4,500 ¹⁾ —         —         —         4,500 ¹⁾ $ 34.56       —         10.16.2016
   42,903    —         —         —         42,903    30.96       —         04.16.2017
   38,403    —         —         —         38,403    23.11       —         04.14.2018
   38,400    —         —         —         38,400    12.63       —         04.14.2019
   40,800    —         —         —         40,800    24.90       —         04.19.2020
   —      75,000       —         —         75,000    20.90       —         04.18.2021


   769,431    303,000       —         —         1,072,431
¹⁾
~~Awarded under US stock option plan and before date of appointment as a member of the Board of Management~~
See note 30, Share-based compensation for further information on stock options and restricted share rights as well sub-section ~~10.2.6,~~10.2.7, Long-Term Incentive Plan, of this ~~report~~report.
The accumulated annual pension entitlements and the pension costs of individual members of the Board of Management are as follows (in euros):

   age at
December
31, 2011    accumulated
annual
pension as of
December
31, 2011¹⁾    pension costs^2,3⁾    age at
December
31, 2012    accumulated
annual
pension as of
December 31,
2012¹⁾    pension costs^2,3)
F.A. van Houten
   51       33,103       297,179       52       46,655       422,845
R.H. Wirahadiraksa
   51       17,904       170,299       52       25,207       243,438
G.H.A. Dutiné
   59       115,397       245,018
P.A.J. Nota
   47       9,951       168,532       48       17,253       247,883
S.H. Rusckowski
   54       37,796       254,975       55       40,647       90,211
G.J. Kleisterlee⁴⁾
   65       848,571       (48,117 )
P-J. Sivignon
   55       49,370       68,830
R.S. Provoost
   52       91,273       175,301




         1,332,017             1,004,377

¹⁾
Under average pay plan as of December 31, ~~2011~~2012 or the end date of employment
²⁾
Including costs related to employer contribution in defined-contribution pension plan
³⁾
Cost are related to the period of board membership
⁴⁾
~~As Mr Kleisterlee was born before January 1, 1950, he continued to be a member of the final pay plan with a pensionable age of 60 until his retirement on March 31, 2011~~
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 2012, no (additional) pension benefits were granted to former members of the Board of Management.
Remuneration of the Supervisory Board
The remuneration of the members of the Supervisory Board amounted to EUR ~~803,250 (2010:~~799,500 (2011: EUR ~~777,000; 2009:~~803,250; 2010: EUR ~~817,500)~~777,000); former members received no remuneration.
At December 31, ~~2011,~~2012, the members of the Supervisory Board held no stock options.

Annual Report ~~2011      189~~2012      197
12 Group financial statements 12.11 - 12.11

The individual members of the Supervisory Board received, by virtue of the positions they held, the following remuneration (in euros):

   membership    committees    other
compensation¹⁾    total
2012
J. van der Veer
   110,000       20,500       5,000       135,500
J.M. Thompson (Jan. - Apr.)
   32,500       4,667       11,000       48,167
C.J.A. van Lede
   65,000       10,834       5,000       80,834
E. Kist
   65,000       10,333       5,000       80,333
J.J. Schiro
   65,000       17,000       17,000       99,000
H. von Prondzynski
   65,000       10,000       5,000       80,000
C. Poon
   65,000       12,666       14,000       91,666
J.P. Tai
   65,000       13,333       17,000       95,333
N. Dhawan (Apr. - Dec.)
   65,000       6,667       17,000       88,667


   membership    committees    other
compensation¹⁾    total    597,500       106,000       96,000       799,500
2011
J. van der Veer
   98,750       19,375       2,000       120,125       98,750       19,375       2,000       120,125
J-M. Hessels (Jan.-March)
   55,000       5,125       2,000       62,125
J-M. Hessels (Jan. - March)
   55,000       5,125       2,000       62,125
J.M. Thompson
   65,000       14,000       20,000       99,000       65,000       14,000       20,000       99,000
C.J.A. van Lede
   65,000       12,500       2,000       79,500       65,000       12,500       2,000       79,500
E. Kist
   65,000       15,000       2,000       82,000       65,000       15,000       2,000       82,000
J.J. Schiro
   65,000       14,000       17,000       96,000       65,000       14,000       17,000       96,000
H. von Prondzynski
   65,000       10,000       2,000       77,000       65,000       10,000       2,000       77,000
C. Poon
   65,000       10,000       20,000       95,000       65,000       10,000       20,000       95,000
J. Tai (Apr.-Dec.)
   65,000       7,500       20,000       92,500
J.P. Tai (Apr. - Dec.)
   65,000       7,500       20,000       92,500




   608,750       107,500       87,000       803,250       608,750       107,500       87,000       803,250
2010
J.-M.Hessels
   110,000       20,500       5,000       135,500
J.-M. Hessels
   110,000       20,500       5,000       135,500
J.M. Thompson
   65,000       14,000       14,000       93,000       65,000       14,000       14,000       93,000
R. Greenbury (Jan.-March)
   32,500       2,000       2,000       36,500
R. Greenbury (Jan. - March)
   32,500       2,000       2,000       36,500
C.J.A. van Lede
   65,000       12,500       5,000       82,500       65,000       12,500       5,000       82,500
E. Kist
   65,000       15,000       5,000       85,000       65,000       15,000       5,000       85,000
J.J. Schiro
   65,000       14,500       11,000       90,500       65,000       14,500       11,000       90,500
H. von Prondzynski
   65,000       10,000       5,000       80,000       65,000       10,000       5,000       80,000
C. Poon
   65,000       7,500       17,000       89,500       65,000       7,500       17,000       89,500
J. van der Veer
   65,000       14,500       5,000       84,500       65,000       14,500       5,000       84,500




   597,500       110,500       69,000       777,000       597,500       110,500       69,000       777,000
2009
J-M. Hessels
   110,000       20,500       2,000       132,500
J.M. Thompson
   65,000       14,000       17,000       96,000
R. Greenbury
   65,000       8,000       2,000       75,000
K.A.L.M. van Miert (Jan.-June)
   32,500       5,000       2,000       39,500
C.J.A. van Lede
   65,000       12,500       2,000       79,500
E. Kist
   65,000       15,000       2,000       82,000
N.L. Wong (Jan.-March)
   32,500       —         5,000       37,500
J.J. Schiro
   65,000       16,000       2,000       83,000
H. von Prondzynski
   65,000       10,000       2,000       77,000
C. Poon (Apr.-Dec.)
   65,000       —         11,000       76,000
J. van der Veer (July-Dec.)
   32,500       5,000       2,000       39,500


   662,500       106,000       49,000       817,500
¹⁾
The amounts mentioned under other compensation relate to the fee for intercontinental travel and the entitlement of EUR 2,000 under the Philips product arrangement. ~~The amounts for 2010 and 2009 have been adjusted to reflect the entitlement under the Philips product arrangement.~~
Supervisory Board members’ and Board of Management members’ interests in Philips shares
Members of the Supervisory Board and of the Board of Management are not allowed to hold any interests in derivative Philips securities.
Number of shares¹⁾

   December 31,
2010    December 31,
2011    December 31,
2011    December 31,
2012
J. van der Veer
   5,586       15,781       15,781       16,624
H. von Prondzynski
   3,010       3,124       3,124       3,290
J.M. Thompson
   1,000       1,038
J.P. Tai
   —         1,053
F.A. van Houten
   —         11,700       11,700       21,048
R.H. Wirahadiraksa
   4,226       8,030       8,030       16,060
G.H.A. Dutiné
   72,815       85,358
P.A.J. Nota
   —         3,400       3,400       11,757
S.H. Rusckowski
   71,019       87,340

¹⁾
Reference date for board membership is December 31, ~~2011~~2012
~~190      Annual Report 2011~~
~~12 Group financial statements 12.11 - 12.11~~
Fair value of financial assets and liabilities
The estimated fair value of financial instruments has been determined by the Company using available market information and appropriate valuation methods. The estimates presented are not necessarily indicative of the amounts that will ultimately be realized by the Company upon maturity or disposal. The use of different market assumptions and/or estimation methods may have a material effect on the estimated fair value amounts.
For cash and cash equivalents, current receivables, current payables, interest accrual and short-term debts, the carrying amounts approximate fair value, because of the short maturity of these instruments.
The fair value of Philips’ debt is estimated on the basis of the quoted market prices for certain issues, or on the basis of discounted cash flow analysis based upon market rates plus Philips’ spread for the particular tenors of the borrowing arrangement. Accrued interest is not within the carrying amount or estimated fair value of debt.

   December 31, 2010 December 31, 2011
   carrying
amount estimated
fair value carrying
amount estimated
fair value
Financial assets

Carried at fair value:

Available-for-sale financial assets-non-current
   298    298    139    139
Available-for-sale financial assets-current
   —      —      —      —
Fair value through profit and loss-non-current
   62    62    67    67
Fair value through profit and loss-current
   —      —      —      —
Derivative financial instruments
   112    112    229    229


   472    472    435    435
Carried at (amortized) cost:

Cash and cash equivalents
   5,833    5,833    3,147    3,147
Other current financial assets
   5    5    —      —
Loans and receivables:

Other non-current loans and receivables including guarantee deposits
   53    53    72    72
Loans to investments in associates
   3    3    2    2
Receivables-current
   4,355 ¹⁾ 4,355 ¹⁾ 4,415    4,415
Receivables-non-current
   88    88    127    127
Held-to-maturity investments
   2    2    3    3
Available-for-sale financial assets
   64    64    65    65


   10,403    10,403    7,831    7,831
Financial liabilities

Carried at fair value:

Derivative financial instruments
   (564 ) (564 ) (744 ) (744 )
Carried at (amortized) cost:

Accounts payable
   (3,691 ) (3,691 ) (3,346 ) (3,346 )
Interest accrual
   (87 ) (87 ) (65 ) (65 )
Debt
   (4,658 ) (5,156 ) (3,860 ) (4,489 )


   (8,436 ) (8,934 ) (7,271 ) (7,900 )
¹⁾
~~Adjusted for income tax receivable as income tax receivable does not qualify as a financial asset~~
198      Annual Report ~~2011      191~~2012
12 Group financial statements 12.11 - 12.11

   December 31, 2011 December 31, 2012
   carrying
amount estimated
fair value carrying
amount estimated
fair value
Financial assets

Carried at fair value:

Available-for-sale financial assets-non-current
   139    139    153    153
Available-for-sale financial assets-current
   —      —      —      —
Fair value through profit and loss-non-current
   67    67    47    47
Fair value through profit and loss-current
   —      —      —      —
Derivative financial instruments
   229    229    137    137


   435    435    337    337
Carried at (amortized) cost:

Cash and cash equivalents
   3,147    3,147    3,834    3,834
Other current financial assets
   —      —      —      —
Loans and receivables:

Other non-current loans and receivables including guarantee deposits
   72    72    267    267
Loans to investments in associates
   2    2    —      —
Receivables-current
   4,828    4,828    4,585    4,585
Receivables-non-current
   127    127    176    176
Held-to-maturity investments
   3    3    3    3
Available-for-sale financial assets
   65    65    79    79


   8,244    8,244    8,944    8,944
Financial liabilities

Carried at fair value:

Fair value through profit and loss-non-current
   —      —      (11 ) (11 )
Derivative financial instruments
   (744 ) (744 ) (517 ) (517 )
Carried at (amortized) cost:

Accounts payable
   (3,346 ) (3,346 ) (2,839 ) (2,839 )
Interest accrual
   (65 ) (65 ) (75 ) (75 )
Debt
   (3,860 ) (4,489 ) (4,534 ) (5,532 )


   (7,271 ) (7,900 ) (7,448 ) (8,446 )
The table below analyses financial instruments carried at fair value, by different hierarchy levels:

Fair value hierarchy
   level 1    level 2 level 3    total    level 1    level 2 level 3 total
December 31, 2011

December 31, 2012

Available-for-sale financial assets - non-current
   139          139       110       43    153
Available-for-sale financial assets - current
   —            —         —         —
Financial assets designated at fair value through profit and loss - non-current
   59       8       67       28       19    47
Financial asses designated at fair value through profit and loss - current
   —            —
Financial assets designated at fair value through profit and loss - current
   —         —
Derivative financial instruments - assets
      229       229          137    137




Total financial assets carried at fair value
   198       229    8       435       138       137    62    337
Financial liabilities designated at fair value through profit and loss - non-current
      (11 ) (11 )
Derivative financial instruments - liabilities
      (744 ) —         (744 )       (517 ) —      (517 )
December 31, 2010

December 31, 2011

Available-for-sale financial assets - non-current
   298          298       103       36    139
Available-for-sale financial assets - current
   —            —         —         —
Financial assets designated at fair value through profit and loss - non-current
   62          62       59       8    67
Financial assets designated at fair value through profit and loss - current
   —            —         —         —
Derivative financial instruments - assets
      112       112          229    229




Total financial assets carried at fair value
   360       112    —         472       162       229    44    435
Derivative financial instruments - liabilities
      (564 )    (564 )       (744 ) (744 )
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 available-for-sale financial assets, investees and financial assets designated at fair value through profit and loss.
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) are determined by using valuation techniques. These valuation techniques maximize the use of observable market data where it is available and rely as little as possible on 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.
Annual Report 2012      199
12 Group financial statements 12.11 - 12.11
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, the instrument is included in level 3. The arrangement with the UK Pension Fund in conjunction with the sale of NXP is a financial instrument carried at fair value classified as level 3. At the end of ~~2011,~~2012, the fair value of this instrument is estimated to be EUR 814 million with the changes of fair value recorded to financial income and expense. Please refer to note 12, Other non-current financial assets for more details.
Furthermore, deferred consideration and loan extension options to TP Vision are also included in level 3.
The table below shows the reconciliation from the beginning balance to the end balance for fair value measured in Level 3 of the fair value hierarchy.

~~in thousands of euro~~ ~~equity securities~~
~~Balance at January 1, 2011~~
—
~~Total gains and losses recognised in:~~
~~- profit or loss~~
8
~~- other comprehensive income~~
—
~~Balance at December 31, 2011~~
8
   financial assets    financial liabilities
Balance at January 1, 2012
   44       —
Total gains and losses recognised in:

- profit or loss
   11       (11 )
- other comprehensive income
   7       —


Balance at December 31, 2012
   62       (11 )
Details of treasury risks
Philips is exposed to several types of financial risk. This note further analyzes financial risks. Philips does not purchase or hold derivative financial instruments for speculative purposes. Information regarding financial instruments is included in note 33, Fair value of financial assets and liabilities.
Liquidity risk
Liquidity risk is the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities.
Liquidity risk for the group is monitored through the Treasury liquidity committee which tracks the development of the actual cash flow position for the group and uses input from a number of sources in order to forecast the overall liquidity position both on a short and ~~long-~~long term basis. Corporate Treasury invests surplus cash in money market deposits with appropriate maturities to ensure sufficient liquidity is available to meet liabilities when due.
The rating of the Company’s debt by major rating services may improve or deteriorate. As a result, Philips’ future borrowing capacity may be influenced and its financing costs may fluctuate. Philips has various sources to mitigate the liquidity risk for the group. At ~~the reporting date,~~December 31, 2012, Philips had EUR ~~3,147~~3,834 million in cash and cash equivalents ~~(2010:~~(2011: EUR ~~5,833~~3,147 million), within which short-term deposits of EUR ~~2,422~~3,177 million ~~(2010:~~(2011: EUR ~~5,229~~2,422 million) and other liquid assets of EUR ~~119~~120 million ~~(2010:~~(2011: EUR ~~101~~119 million). Philips pools cash from subsidiaries to the extent legally and economically feasible; cash not pooled remains available for ~~local~~ operational or investment ~~needs.~~needs by the Company.
Furthermore, Philips has a USD 2.5 billion Commercial Paper Program and a EUR 1.8 billion revolving credit facility that can be used for general corporate purpose and as a ~~bilateral credit~~backstop for its commercial paper program. In January 2013 the EUR 1.8 billion facility ~~of EUR 900 million,~~was extended by 2 years until February 18, 2018. The facility has no financial covenants and ~~a EUR 500 million bilateral credit facility.~~repetitive material adverse change clauses and can be used for general corporate purposes. As of December 31, ~~2011,~~2012, Philips did not have any ~~loans~~amounts outstanding under any of these facilities. Additionally Philips also held EUR ~~110~~120 million of equity investments in available-for-sale financial assets (fair value at December 31, ~~2011)~~2012).
Currency risk
Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. Currency fluctuations may impact Philips’ financial results. Philips is exposed to currency risk in the following areas:
~~192      Annual Report 2011~~
~~12 Group financial statements 12.11 - 12.11~~

Transaction exposures, related to forecasted sales and purchases and on-balance-sheet receivables/payables resulting from such transactions

Translation exposure of net income in foreign entities

Translation exposure of foreign-currency intercompany and external debt and deposits

Translation exposure of foreign-currency-denominated equity invested in consolidated companies

Translation exposure to equity interests in non-functional-currency investments in associates and available-for-sale financial assets.
It is Philips’ policy that significant transaction exposures are hedged by the businesses. Accordingly, all businesses are required to identify and measure their exposures resulting from material transactions denominated in currencies other than their own functional currency. Philips’ policy generally requires committed foreign currency exposures to be fully hedged using forwards. Anticipated transactions may be hedged using forwards or options or a combination thereof. The amount hedged as a proportion of the total anticipated exposure identified varies per business and is a function of the ability to project cash flows, the time horizon for the cash flows and the way in which the businesses can adapt to ~~changed~~changing levels of foreign-currency exchange rates. As a result, hedging activities cannot and will not eliminate all currency risks for these anticipated transaction exposures. Generally, the maximum tenor of these hedges is 18 months.
200      Annual Report 2012
12 Group financial statements 12.11 - 12.11
The following table outlines the estimated nominal value in millions of euros for transaction exposure and related hedges for Philips’ most significant currency exposures consolidated as of December 31, ~~2011:~~2012:
Estimated transaction exposure and related hedges
in millions of euros

   maturity 0-60 days maturity over 60 days    maturity 0-60 days maturity over 60 days
   exposure hedges exposure hedges    exposure hedges exposure hedges
Receivables

Functional vs. exposure currency

EUR vs. USD
   471    (457 ) 1,637    (1,093 )    454    (440 ) 1,803    (1,212 )
USD vs. EUR
   255    (227 ) 1,208    (653 )    259    (226 ) 1,050    (553 )
EUR vs. JPY
   46    (45 ) 201    (139 )
EUR vs. GBP
   70    (64 ) 166    (100 )    50    (43 ) 165    (94 )
USD vs. JPY
   32    (30 ) 182    (93 )
EUR vs. PLN
   54    (47 ) 56    (30 )    40    (34 ) 60    (32 )
EUR vs. JPY
   50    (49 ) 198    (142 )
USD vs. JPY
   32    (26 ) 157    (80 )
EUR vs. SEK
   27    (22 ) 53    (31 )
CLP vs. USD
   24    (24 ) —      —
HKD vs. USD
   23    (23 ) 4    (4 )
USD vs. AUD
   19    (14 ) 61    (31 )
USD vs. CAD
   15    (12 ) 62    (32 )
CNY vs. EUR
   22    (18 ) 112    (54 )    17    (13 ) 58    (38 )
EUR vs. RUB
   21    (21 ) —      —
USD vs. GBP
   12    (9 ) 57    (29 )
Others
   203    (169 ) 558    (300 )    154    (131 ) 338    (201 )
Payables

Functional vs. exposure currency

EUR vs. USD
   (572 ) 565    (1,107 ) 756       (188 ) 184    (653 ) 435
ARS vs. USD
   (76 ) 76    (1 ) 1
BRL vs. USD
   (54 ) 51    (129 ) 88
USD vs. CNY
   (68 ) 68    (303 ) 173
EUR vs. PLN
   (39 ) 31    (152 ) 80       (34 ) 27    (151 ) 80
USD vs. CNY
   (38 ) 38    (237 ) 144
GBP vs. EUR
   (27 ) 19    (73 ) 38
IDR vs. USD
   (23 ) 16    (99 ) 52       (28 ) 20    (108 ) 56
CLP vs. USD
   (21 ) 20    (11 ) 5
MXN vs. USD
   (15 ) 7    (100 ) 6
USD vs. SGD
   (17 ) 12    (87 ) 45
USD vs. MYR
   (21 ) 15    (54 ) 22       (12 ) 8    (65 ) 26
EUR vs. GBP
   (17 ) 16    (52 ) 31       (18 ) 17    (50 ) 27
CAD vs. USD
   (23 ) 17    (42 ) 23
BRL vs. USD
   (19 ) 16    (39 ) 13
Others
   (241 ) 195    (588 ) 337       (200 ) 184    (277 ) 167
The derivatives related to transactions are, for hedge accounting purposes, split into hedges of on-balance-sheet accounts receivable/ payable and forecasted sales and purchases. Changes in the value of on-balance-sheet foreign-currency accounts receivable/payable, as well as the changes in the fair value of the hedges related to these exposures, are reported in the income statement under costs of sales. Hedges related to forecasted transactions, where hedge accounting is applied, are accounted for as cash flow hedges. The results from such hedges are deferred in other comprehensive income within equity to the extent that the hedge is effective. As of December 31, ~~2011,~~2012, a gain of EUR 920 million was deferred in equity as a result of these hedges. The result deferred in equity will be released to earnings mostly during ~~2012~~2013 at the time when the related hedged transactions affect the income statement. During ~~2011,~~2012, a net gain of EUR 18 million was recorded in the income statement as a result of ineffectiveness on certain anticipated cash flow hedges.
The total net fair value of hedges related to transaction exposure as of December 31, ~~2011~~2012 was an unrealized asset of EUR 725 million. An instantaneous 10% increase in the value of the euro against all currencies would lead to a decrease of EUR 69 million in the value of the derivatives; including a EUR 96 million decrease related to foreign exchange transactions of the US dollar against the euro, a EUR 17 million decrease related to foreign exchange transactions of the Japanese yen against euro, a EUR 8 million decrease related to foreign exchange transactions of the Pound sterling, partially offset by a EUR 69 million increase related to foreign exchange transactions of the euro against the US dollar.
The EUR 69 million decrease includes a loss of EUR 28 million that would impact the income statement, which would largely offset the opposite revaluation effect on the underlying accounts receivable and payable, and the remaining loss of EUR 41 million would be recognized in equity to the extent that the cash flow hedges were effective.
The total net fair value of hedges related to transaction exposure as of December 31, 2011 was an unrealized asset of EUR 7 million. As of February 2012, an instantaneous 10% increase in the value of the euro against all currencies would have led to an increase of EUR 19 million in the value of the derivatives; including a EUR 77 million increase related to foreign exchange transactions of the euro against the US dollar, partially offset by a EUR 17 million decrease related to foreign exchange transactions
~~Annual Report 2011      193~~
~~12 Group financial statements 12.11 - 12.11~~
of the US dollar against the euro, a EUR 14 million decrease related to foreign exchange transactions of the Japanese yen against the euro, and a EUR 10 million decrease related to foreign exchange transactions of the pound sterling.
The EUR 19 million increase includes a gain of EUR 21 million that would impact the income statement, which would largely offset the opposite revaluation effect on the underlying accounts receivable and payable, and the remaining loss of EUR 3 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. In certain cases where group companies may also have external foreign currency debt or liquid assets, these exposures are also hedged through the use of foreign exchange derivatives. Changes in the fair value of hedges related to this translation exposure are recognized within financial income and expenses in the income statement and are largely offset by the revaluation of the hedged items. The total net fair value of these derivatives as of December 31, 2011, was a liability of EUR 518 million. An instantaneous 10% increase in the value of the euro against all currencies would lead to an increase of EUR 388 million in the value of the derivatives, including a EUR 329 million increase related to the US dollar.
~~Philips does not hedge the translation exposure of net income in foreign entities.~~statement. Translation exposure of foreign-currency equity invested in consolidated entities may be hedged. If a hedge is entered into, it is accounted for as a net investment hedge. AsThe total net fair value of these financing derivatives as of December 31, ~~2011, Philips had no outstanding~~2012, was a liability of EUR 404 million. An instantaneous 10% increase in the value of the euro against all currencies would lead to an increase of EUR 423 million in the value of the derivatives, ~~accounted for as~~including a EUR 356 million increase related to the US dollar. The total amount recorded in other comprehensive income related to net investment ~~hedges.~~hedges in 2012 was EUR 14 million.
Philips does not currently hedge the foreign exchange exposure arising from equity interests in non-functional-currency investments in associates and available-for-sale financial assets.
Interest rate risk
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. ~~As of December 31, 2011,~~ Philips had outstanding debt of EUR ~~3,860~~4,534 million, which created an inherent interest rate risk. Failure to effectively hedge this risk could negatively impact financial results. At year-end, Philips held EUR ~~3,147~~3,834 million in cash and cash equivalents, total long-term debt of EUR ~~3,278~~3,725 million and total short-term debt of EUR ~~582~~809 million. At December 31, ~~2011,~~2012, Philips had a ratio of fixed-rate long-term debt to total outstanding debt of approximately ~~73%~~72%, compared to ~~55%~~73% one year earlier.
A sensitivity analysis conducted as of January 2013 shows that if long-term interest rates were to decrease instantaneously by 1% from their level of December 31, 2012, with all other variables (including foreign exchange rates) held constant, the fair value of the long-term debt would increase by approximately EUR 422 million. If there was an increase of 1% in long-term interest rates, this would reduce the market value of the long-term debt by approximately EUR 339 million.
If interest rates were to increase instantaneously by 1% from their level of December 31, 2012, with all other variables held constant, the annualized net interest expense would decrease by approximately EUR 25 million. This impact was based on the outstanding net cash position at December 31, 2012.
A sensitivity analysis conducted as of February 2012 showed that if long-term interest rates were to decrease instantaneously by 1% from their level of December 31, 2011, with all other variables (including foreign exchange rates) held constant, the fair value of the long-term debt would increase by approximately EUR 245 million. If there was an increase of 1% in long-term interest rates, this would reduce the market value of the long-term debt by approximately EUR 245 million.
Annual Report 2012      201
12 Group financial statements 12.11 - 12.11
If interest rates were to increase instantaneously by 1% from their level of December 31, 2011, with all other variables held constant, the annualized net interest expense would decrease by approximately EUR 21 million. This impact was based on the outstanding net cash position at December 31, 2011.
Equity price risk
Equity price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in equity prices.
Philips is a shareholder in several publicly listed companies, including Chimei Innolux, Shenyang Neusoft Corporation Ltd, and TPV Technology Ltd. As a result, Philips is exposed to potential financial loss through movements in their share prices. The aggregate equity price exposure ~~of publicly listed investments~~ in its main available-for-sale financial assets amounted to approximately EUR ~~110~~120 million at year-end ~~2011 (2010:~~2012 (2011: EUR ~~270~~110 million including investments in associates shares that were sold during ~~2010)~~2011). Philips does not hold derivatives in its own stock or in the above-mentioned listed companies. Philips is also a shareholder in several privately owned companies amounting to EUR 2336 million. As a result, Philips is exposed to potential value adjustments.
As part of the sale of shares in NXP to Philips Pension Trustees Limited there was an arrangement that may entitle Philips to a cash payment from the UK Pension Fund on or after September 7, 2014 if the value of the NXP shares has increased by this date to a level in excess of a predetermined threshold, which at the time of the transaction was substantially above the transaction price, and the UK Pension Fund is in surplus (on the regulatory funding basis) on September 7, 2014.
Commodity price risk
Commodity price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in commodity prices.
Philips is a purchaser of certain base metals, precious metals and energy. Philips hedges certain commodity price risks using derivative instruments to minimize significant, unanticipated earnings fluctuations caused by commodity price volatility. The commodity price derivatives that Philips enters into are accounted for as cash flow hedges to offset forecasted purchases. As of December 2012, a loss of EUR 0.3 million was deferred in equity as a result of these hedges. A 10% increase in the market price of all commodities as of December 31, 2012 would increase the fair value of the derivatives by EUR 2 million.
As of December 2011, a loss of EUR 1 million was deferred in equity as a result of these hedges. AAs of February 2012, a 10% increase in the market price of all commodities as of December 31, 2011 would increase the fair value of the derivatives by EUR 1 million.
Credit risk
Credit risk represents the loss that would be recognized at the reporting date, if counterparties failed completely to perform their payment obligations as contracted. Credit risk is present within Philips trade receivables. 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 whom it deals in derivative transactions to complete legally enforceable netting agreements under an International Swap Dealers Association master agreement or otherwise prior to trading, and whenever possible, to have a strong credit rating from Standard & Poor’s and Moody’s Investor Services. Philips also regularly monitors the development of the credit risk of its financial counterparties. Wherever possible, cash is invested and financial transactions are concluded with financial institutions with strong credit ratings or with governments or government-backed institutions.
Below table shows the credit ratings of the financial institutions with which Philips had short-term deposits above EUR 25 million as of December 31, ~~2011:~~2012:
Credit risk with number of counterparties
for deposits above EUR 25 million

   25-100
million    100-500
million    500-2,000
million
AAA-rated governments
   —         1       —
AAA-rated government banks
   —         —         1
AAA-rated bank counterparties
   —         —         —
AA-rated bank counterparties
   2       1       1
A-rated bank counterparties
   1       —         —


   3       2       2
~~194      Annual Report 2011~~
~~12 Group financial statements 12.11 - 12.11~~
   25-100
million    100-500
million    500-2,000
million
AAA-rated governments
   —         1       —
AAA-rated government banks
   —         —         1
AAA-rated bank counterparties
   —         —         —
AA-rated bank counterparties
   1       1       1
A-rated bank counterparties
   1       3       —


   2       5       2
For an overview of the overall maximum credit exposure of the group’s financial assets, please refer to note 33, Fair value of financial assets and liabilities for details of carrying amounts and fair value.
Country risk
Country risk is the risk that political, legal, or economic developments in a single country could adversely impact our performance. The country risk per country is defined as the sum of the equity of all subsidiaries and associated companies in country cross-border transactions, such as intercompany loans, accounts receivable from third parties and intercompany accounts receivable. The country risk is monitored on a regular basis.
As of December 31, ~~2011,~~2012, the company had country risk exposure of EUR ~~10 billion in Belgium, EUR 9~~8 billion in the United States, EUR 3 billion in the Netherlands and EUR ~~1.4~~1 billion in China (including Hong Kong). Other countries higher than EUR 500 million are Japan (EUR ~~876~~750 million), and United Kingdom (EUR ~~728 million) and the Netherlands (EUR 618~~741 million). Countries where the risk exceeded EUR 300 million but was less than EUR 500 million are ~~Germany, Poland~~Belgium and ~~Italy.~~Germany. The degree of risk of a country is taken into account when new investments are considered. The company does not, however, use financial derivative instruments to hedge country risk.
Other insurable risks
Philips is covered for a broad range of losses by global insurance policies in the areas of property damage/business interruption, general and product liability, transport, directors’ and officers’ liability, employment practice liability, crime, and aviation product liability.
The counterparty risk related to the insurance companies participating in the above mentioned global insurance policies are actively managed. As a rule Philips only selects insurance companies with a S&P credit rating of at least A-. Throughout the year the counterparty risk is monitored on a regular basis.
To lower exposures and to avoid potential losses, Philips has a ~~worldwide~~global Risk Engineering program in place. The main focus inof this program is on property damage and business interruption risks ~~which also include~~including company interdependencies. Regular on-site assessments take place at Philips ~~sites,~~locations and ~~also a limited number of sites of key~~business critical suppliers ~~are inspected on a regular basis~~ by ~~the Risk Engineering personnel~~risk engineers of the ~~insurer. Inspections~~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 ~~Management~~Improvement report and are ~~reviewed~~monitored centrally. This is the basis for decision-making by the local management of the business as to which recommendations will be implemented. In ~~2011~~2012 additional focus was put on assessing natural catastrophe ~~exposures.~~ exposure.
For all policies, deductibles are in place, which vary from EUR 250,000 to EUR 2,500,000 per occurrence and this variance is designed to differentiate between the existing risk categories within Philips. Above this first layer of working deductibles, Philips operates its own ~~re-insurance~~reinsurance captive, which during ~~2011~~2012 retained EUR 2.5 million per occurrence for property damage and business interruption losses and EUR 5 million in the aggregate per year. For general and product liability claims, the captive retained EUR 1.5 million per claim and EUR 6 million
202      Annual Report 2012
12 Group financial statements 12.11 - 12.11
in the aggregate. New contracts were signed on December 31, ~~2011,~~2012, for the coming year, whereby the re-insurance captive retentions remained unchanged.
Subsequent events
~~Acquisition~~Transfer of ~~Indal Group~~Audio, Video, Multimedia and Accessories businesses to Funai
On 29 January ~~9, 2012,~~2013, Philips ~~completed~~signed an agreement regarding the ~~purchase~~transfer of ~~all outstanding shares~~its Lifestyle Entertainment business (Audio, Video, Multimedia and Accessories) to Funai Electric Co., Ltd. (Funai). Under the terms of ~~Indal Group,~~this agreement, Funai will pay a ~~Spanish professional luminaires company mainly focused on outdoor lighting solutions. Philips paid a total net~~ cash consideration of EUR ~~210 million.~~ 150 million and a brand license fee, relating to a license agreement for an initial period of five and a half years, with an optional renewal of five years. Currently these businesses belong to the operating sector Consumer Lifestyle.
The ~~impact~~deal for the Audio, Video, Multimedia and Accessories businesses is expected to close second half of ~~this acquisition~~2013. The Video business is ~~not~~expected to transfer in 2017, related to existing intellectual property licensing agreements. The gain on the transaction will be recorded at the closing date.
The transaction is subject to customary conditions, including regulatory and works council procedures.
Renewal of EUR 1.8 billion stand-by facility
On 18 January 2013, the Company extended its EUR 1.8 billion stand-by facility for 2 years until February 18, 2018. The facility has no financial covenants and repetitive material ~~in respect of IFRS 3 disclosure requirements.~~adverse change clauses and can be used for general corporate purposes.
Philips ~~and Sara Lee Corp. agreement on Senseo trademark~~intends to sell its shareholding in Philips-Neusoft Medical Systems joint venture to Neusoft Medical Systems
On ~~January 26, 2012,~~February 5, Philips announced that itis has ~~agreed~~entered into a term sheet to ~~extend~~sell its ~~partnership with Sara Lee Corp (Sara Lee) to drive growth~~51 percent shareholding in the ~~global coffee market. Under~~Philips-Neusoft Medical Systems (PNMS) joint venture between Philips and Neusoft Medical Systems, a ~~new exclusive partnership framework, which will run through 2020, Philips will be the exclusive Senseo consumer appliance manufacturer~~subsidiary of Neusoft Corporation, in Shenyang, China, to Neusoft Medical Systems and ~~distributor for the duration of the agreement.~~ its overseas associates.
As part of the proposed agreement, ~~Philips~~a team of approximately 100 to 150 Computed Tomography (CT) system and component engineers and supporting staff will transfer ~~its 50% ownership right~~from the joint venture to a new development center of Philips in ~~the Senseo trademark to Sara Lee. Under the terms~~Shenyang.
Financial details of the ~~agreement, Sara Lee will pay Philips a total consideration~~proposed transaction were not disclosed. The signing of ~~EUR 170 million. The consideration for~~ the ~~agreement, which~~definitive agreements and subsequent closing is expected to ~~close in the first half of 2012, will be recorded as pre-tax earnings.~~
~~Divestment of TV Business~~
~~On February 22, 2012, the shareholders of TPV Technology Limited (TPV) approved the strategic partnership with Philips regarding its Television business. At~~take place before the end of ~~the first quarter of 2012, Philips will transfer its Television business to a newly established entity in which TPV will hold a 70% interest and Philips will hold the remaining 30%~~2013. The closing of the ~~shares.~~transaction is subject to the relevant shareholder and regulatory approvals.

Annual Report ~~2011      195~~2012      203
12 Group financial statements 12.12 - 12.12

12.12 Independent auditors’ report – Group
Report of Independent Registered Public Accounting Firm
To the Supervisory Board and Shareholders of Koninklijke Philips Electronics N.V.:
We have audited the accompanying consolidated balance sheets of Koninklijke Philips Electronics N.V. and subsidiaries as of December 31, ~~2011~~2012 and ~~2010,~~2011, and the related consolidated statements of income, comprehensive income, cash flows and changes in equity ~~and cash flows~~ for each of the years in the three-year period ended December 31, ~~2011~~2012 included in section 12.4 to 12.11. These consolidated financial statements are the responsibility of Koninklijke Philips Electronics N.V.’s‘s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Koninklijke Philips Electronics N.V. and subsidiaries as of December 31, ~~2011~~2012 and ~~2010,~~2011, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, ~~2011,~~2012, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.
We also have ~~also~~ audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Koninklijke Philips Electronics N.V.’s‘s internal control over financial reporting as of December 31, ~~2011,~~2012, based on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February ~~23, 2012,~~25, 2013 expressed an unqualified opinion on the effectiveness of the company’s internal control over financial reporting.
/s/ KPMG ACCOUNTANTS N.V.
Amsterdam, The Netherlands
February ~~23, 2012~~25, 2013

~~196~~204      Annual Report ~~2011~~2012
13 Company financial statements 13 - 13

13 Company financial statements
Introduction
Statutory financial statements
The sections Group financial statements and Company financial statements contain the statutory financial statements of Koninklijke Philips Electronics N.V. (the Company).
Accounting policies applied
The financial statements of the Company included in this section are prepared in accordance with Part 9 of Book 2 of the Dutch Civil Code. Section 362 (8), Book 2, Dutch Civil Code, allows companies that apply IFRS as adopted by the European Union in their consolidated financial statements to use the same measurement principles in their company financial statements. The Company has prepared these Company financial statements using this provision.
The accounting policies are described in section 12.10, Significant accounting policies, of this report.
Subsidiaries are accounted for using the net equity value in these Company financial statements.
Presentation of Company financial statements
The structure of the Company balance sheets is aligned with the Consolidated balance sheets in order to achieve optimal transparency between the Group financial statements and the Company financial statements. Consequently, the presentation of the Company balance sheets deviates from Dutch regulations.
The Company balance sheet has been prepared before the appropriation of result.
The Company statement of income has been prepared in accordance with Section 2:402 of the Dutch Civil Code, which allows a simplified Statement of income in the Company financial statements in the event that a comprehensive Statement of income is included in the consolidated Group financial statements.
Additional information
For ‘Additional information’ within the meaning of Section 2:392 of the Dutch Civil Code, please refer to section 12.12, Independent auditor’s report—Group, of this report, section 13.5, Independent auditor’s report—Company, of this report, and section ~~5.5,~~5.4, Proposed distribution to shareholders, of this report.
Adjustments
Prior period amounts have been revised to reflect certain immaterial adjustments (see section 12.10, Significant accounting policies, of this report).

Annual Report ~~2011      197~~2012      205
13 Company financial statements 13.1 - 13.1

~~13.1Balance~~13.1 Balance sheets before appropriation of results
Balance sheets of Koninklijke Philips Electronics N.V. as of December 31
in millions of euros

   2010    2011    2011    2012
Assets
Non-current assets:

Property, plant and equipment
   1       1       1       2
Intangible assets
   38       19       19       9
Investments in affiliated companies¹⁾
   21,060       19,601
Investments in affiliated companies
   19,543       16,586
Non-current receivables
   —         49
Deferred tax assets
   38       129       148       212
Other non-current financial assets
   109       114       114       325
   21,246       19,864       19,825       17,183
Current assets:

Receivables
   1,668       3,206       3,206       7,988
Cash and cash equivalents
   3,527       1,000       1,000       2,879
   5,195       4,206       4,206       10,867




   26,441       24,070       24,031       28,050
Liabilities and shareholders’ equity
Shareholders’ equity:

Preference shares, par value EUR 0.20 per share:

- Authorized: 2,000,000,000 shares (2010: 2,000,000,000 shares)

- Authorized: 2,000,000,000 shares (2011: 2,000,000,000 shares)

- Issued: none

Common shares, par value EUR 0.20 per share:

- Authorized: 2,000,000,000 shares (2010: 2,000,000,000 shares)

- Issued and fully paid: 1,008,975,445 shares (2010: 986,078,784 shares)
   197       202
- Authorized: 2,000,000,000 shares (2011: 2,000,000,000 shares)

- Issued and fully paid: 957,132,962 shares (2011: 1,008,975,445 shares)
   202       191
Capital in excess of par value
   354       813       813       1,304
Legal reserve: revaluation
   86       70       70       54
Legal reserve: available-for-sale financial assets
   139       45       45       54
Legal reserve: cash flow hedges
   (5 )    (9 )    (9 )    20
Legal reserve: affiliated companies
   1,078       1,089       1,094       1,161
Legal reserve: currency translation differences
   (65 )    7       7       (93 )
Retained earnings
   12,892       13,123       13,079       9,326
Net income²⁾
   1,446       (1,295 )
Treasury shares, at cost: 82,880,543 shares (2010: 39,572,400 shares)
   (1,076 )    (1,690 )
Net income¹⁾
   (1,295 )    226
Treasury shares, at cost: 42,541,687 shares (2011: 82,880,543 shares)
   (1,690 )    (1,103 )
   15,046       12,355       12,316       11,140
Non-current liabilities:

Long-term debt
   2,678       2,955       2,955       3,539
Long-term provisions¹⁾
   17       49
Long-term provisions
   49       10
Deferred tax liabilities
   41       9       9       19
Other non-current liabilities
   52       82       82       139
   2,788       3,095       3,095       3,707
Current liabilities:

Short-term debt
   7,244       7,351       7,351       11,742
Short-term provisions¹⁾
   5       —
Other current liabilities¹⁾
   1,358       1,269
Other current liabilities
   1,269       1,461
   8,607       8,620       8,620       13,203
Contractual obligations and contingent liabilities not appearing in the balance sheet





   26,441       24,070       24,031       28,050

¹⁾
~~Prior period insignificant amounts have been reclassified due to new insights in line with accounting policies~~
²⁾
Prepared before appropriation of results

~~198~~206      Annual Report ~~2011~~2012
13 Company financial statements 13.2 - 13.3

13.2 Statements of income
Statements of income of Koninklijke Philips Electronics N.V. for the years ended December 31
in millions of euros

   2010    2011    2011 2012
Net income from affiliated companies
   1,262       (1,227 )    (1,259 ) 635
Other net income
   184       (68 )    (36 ) (409 )




Net income
   1,446       (1,295 )    (1,295 ) 226
13.3 Statement of changes in equity
Statement of changes in equity of Koninklijke Philips Electronics N.V.
in millions of euros unless otherwise stated

   legal reserves    legal reserves
   outstand-
ing num-
ber of
shares in
thousands com-
mon
shares    capital
in
excess
of par
value revalua-
tion available-
for-sale
financial
assets cash
flow
hedges affiliated
compa-
nies    currency
translation
differences retained
earnings net
income treasury
shares
at cost share-
holders’
equity    outstand-
ing num-
ber of
shares in
thousands com-
mon
shares capital
in
excess
of par
value revalua-
tion available-
for-sale
financial
assets cash
flow
hedges affiliated
compa-
nies    currency
translation
differences retained
earnings net
income treasury
shares
at cost share-
holders’
equity
Balance as of January 1, 2011
   946,506    197       354    86    139    (5 ) 1,078       (65 ) 12,892    1,446    (1,076 ) 15,046
Balance as of January 1, 2012
   926,095    202    813    70    45    (9 ) 1,094       7    13,079    (1,295 ) (1,690 ) 12,316
Appropriation of prior year result
         1,446    (1,446 ) —            (1,295 ) 1,295    —
Net income
         (1,295 ) (1,295 )       226    226
Release revaluation reserve
      (16 )    16    —         (16 )    16    —
Net current period change
      (87 ) (31 ) 11       71    (458 ) (494 )    8    23    67       (99 ) (473 ) (474 )
Income tax on net current period change
      19       (2 ) 17       (2 ) (8 )    —      (10 )
Reclassification into income
      (26 ) 27       3    4       3    14       (1 ) 16
Dividend distributed
   22,897    5       443       (711 ) (263 )    30,522    6    422       (687 ) (259 )
Non-controlling interest
         (5 ) (5 )
Cancellation of treasury shares
   (17 )    (1,221 ) 1,238    —
Purchase of treasury shares
   (47,508 )       (51 ) (700 ) (751 )    (46,871 )    (47 ) (769 ) (816 )
Re-issuance of treasury shares
   4,200       (34 )    (6 ) 86    46       4,845    (22 )    (46 ) 118    50
Share-based compensation plans
      56       56       84       84
Income tax on share-based compensation plans
      (6 )    (6 )    7       7




Balance as of December 31, 2011
   926,095    202       813    70    45    (9 ) 1,089       7    13,123    (1,295 ) (1,690 ) 12,355
Balance as of December 31, 2012
   914,591    191    1,304    54    54    20    1,161       (93 ) 9,326    226    (1,103 ) 11,140

Annual Report ~~2011      199~~2012      207
13 Company financial statements 13.4 - 13.4

~~13.4Notes~~13.4 Notes
All amounts in millions of euros unless otherwise stated
Notes to the Company financial statements
Investments in affiliated companies
The investments in affiliated companies (including goodwill) are presented in the balance sheet based on either their net asset value in accordance with the aforementioned accounting principles of the consolidated financial statements, or at amortized cost.

   investments
in Group
companies¹⁾ investments
in associates loans total
Balance as of January 1, 2011
   19,256    80    1,724    21,060
Changes:

Reclassifications
   —      1    —      1
Acquisitions/additions
   734    28    285    1,047
Sales/redemptions
   (137 ) —      (249 ) (386 )
Net income from affiliated companies
   (1,237 ) 10    —      (1,227 )
Dividends received
   (454 ) (27 ) —      (481 )
Translation differences
   59    3    (6 ) 56
Other
   (469 ) —      —      (469 )


Balance as of December 31, 2011
   17,752    95    1,754    19,601
¹⁾
~~Prior period insignificant amounts have been reclassified due to new insights in line with accounting policies~~
   investments
in Group
companies investments
in associates loans total
Balance as of January 1, 2012
   17,694    95    1,754    19,543
Changes:

Acquisitions/additions
   4,613    9    4,623    9,245
Sales/redemptions
   (11,725 ) —      (202 ) (11,927 )
Net income from affiliated companies
   850    (16 ) —      834
Dividends received
   (535 ) —      —      (535 )
Translation differences
   (100 ) (1 ) (72 ) (173 )
Other
   (401 ) —      —      (401 )


Balance as of December 31, 2012
   10,396    87    6,103    16,586
A list of subsidiaries and affiliated companies, prepared in accordance with the relevant legal requirements (Dutch Civil Code, Book 2, Sections 379 and 414), is deposited at the Chamber of Commerce in Eindhoven, The Netherlands.
In December 2012, the Company revisited its foreign based intra-group finance activities. In this context certain intra group finance activities were established in a new foreign based group company and existing activities, embedded in another foreign based group company, were wound down. The establishment and funding of the new finance company involved capital injections of EUR 4,183 million and the issuance of a Subordinated Loan of EUR 4,473 million subject to variable interest payments currently accrued at 5.85% per year. Both amounts are reflected in the line Acquisitions/additions. The winding down of existing foreign based intra-group finance activities resulted in a capital reduction of EUR 11,655 million, which is reflected in the line Sales/ redemptions.
On December 5, 2012 the Company announced that it received a fine of EUR 313 million from the European Commission following an investigation into alleged violation of competition rules in the Cathode-Ray Tubes (CRT) industry. In addition, the European Commission has ordered Philips and LG Electronics to be jointly and severally liable to pay a fine of EUR 392 million for an alleged violation of competition rules by LG.Philips Displays (LPD), a 50/50 joint venture between the Company and LG Electronics. In 2006, LPD went bankrupt. The amount of EUR 196 million (being 50% of the fine related to LPD) is therefore recorded directly under net income from afficiated companies and not as a decrease of the investment value in associates. The book value of our interest in LPD, which qualifies as an investment in associates, is valued at nil. The loss of EUR 196 million is therefore recognized in Other current liabilities and is not visible in the table above.
Included in Other, under Investments in ~~affiliated~~Group companies, are actuarial gains and losses of EUR ~~447~~406 million related to ~~defined- benefit~~defined-benefit plans of group companies.
Other non-current financial assets

   available-
for-sale
financial
assets loans and
receivables    financial
assets at
fair
value
through
profit
and loss    total    available-
for-sale
financial
assets loans and
receivables financial
assets at
fair
value
through
profit
and loss total
Balance as of January 1, 2011
   108    1       —         109
Balance as of January 1, 2012
   81    25    8    114
Changes:

Reclassifications
   (1 ) —         —         (1 )
Acquisitions/additions
   22    24       —         46       13    206    17    236
Sales/redemptions/reductions
   (12 ) —         —         (12 )
Value adjustments
   (29 ) —         8       (21 )    (2 ) (10 ) (5 ) (17 )
Impairments
   (7 ) —         —         (7 )    (8 ) —      —      (8 )




Balance as of December 31, 2011
   81    25       8       114
Balance as of December 31, 2012
   84    221    20    325
Available-for-sale financial assets
The Company’s investments in available-for-sale financial assets mainly consists of investments in common stock of companies in various industries.
Loans and receivables
The increase of loans and receivables in ~~2011~~2012 mainly relates to loans provided to TPV Technology Limited and the television joint venture TP Vision Holding BV (EUR 151 million in aggregate), which was established on April 1, 2012 in the context of the divestment of Philips’ Television business. Additionally there was an increase of EUR 53 million in Loans and receivables related to the ~~loan given~~sale of real estate belonging to ~~Philips Sport Vereniging (PSV).~~the High Tech Campus.
Financial assets at fair value through profit and loss
~~On September 7,~~Included in this category are certain financial instruments that Philips received in exchange for the transfer of its television activities. The initial value of EUR 17 million was adjusted by EUR 11 million during 2012.
In 2010, ~~Philips~~the Company sold its entire holding of common shares in NXP Semiconductors B.V. (NXP) to Philips Pension Trustees Limited (herein ~~after~~ referred to as “UK Pension Fund”). As a result of this transaction the UK Pension ~~fund~~Fund obtained the full legal title and ownership of the NXP shares, including the entitlement to any future dividends and the proceeds from any sale of shares. From the date of the transaction the NXP shares are an integral part of the plan assets of the UK Pension Fund. The purchase agreement with the UK Pension Fund includes an arrangement that may entitle Philips to a cash payment from the UK Pension Fund on or after September 7, 2014, if the value of the NXP shares has increased by this date to a level in excess of a predetermined threshold, which at the time of the transaction was substantially above the transaction price, and the UK Pension Fund is in a surplus (on the regulatory funding basis) on September 7, 2014. The arrangement qualifies as a financial instrument and is reported under Other non-current financial ~~assets at fair value through profit and loss.~~assets. The fair value of the arrangement was estimated to be ~~zero~~EUR 8 million as of December 31, ~~2010.~~2011. As of December 31, ~~2011,~~2012 management’s best estimate of the fair value of the arrangement is EUR 814 million, based on the risks, the stock price of NXP, the current progress and the long-term nature of the recovery plan of the UK Pension Fund. ~~The change in fair value until December 31, 2011, is reported under value adjustments in the table above.~~
Receivables

   2010    2011    2011    2012
Trade accounts receivable
   106       85       85       83
Affiliated companies
   1,261       2,679       2,679       7,690
Other receivables
   28       27       27       23
Advances and prepaid expenses
   43       36       36       16
Derivative instruments—assets
   230       379       379       176




   1,668       3,206       3,206       7,988
208      Annual Report 2012
13 Company financial statements 13.4 - 13.4
In ~~2011,~~2012, receivables increased by EUR ~~1,538~~4,782 million, which largely relates to increased receivables with affiliated companies of EUR ~~1,418 million as a result of increased financing towards these~~5,011 million. From July 2012, cash transactions with US-based group companies are executed directly through Koninklijke Philips Electronics (KPENV) resulting in significant short term intercompany receivables and payables. Consequently, the intercompany receivables stated under ‘Affiliated Companies’ are significantly higher compared to ~~meet their cash flow requirements. This movement is also partially reflected within the Company’s cash and cash equivalents position, which fell by EUR 2,527 million.~~previous years.
Shareholders’ equity
Common shares
As of December 31, ~~2011,~~2012, the issued and fully paid share capital consists of ~~1,008,975,445~~957,132,962 common shares, each share having a par value of EUR 0.20.
In May ~~2011, Philips~~2012, the Company settled a dividend of EUR 0.75 per common share, representing a total value of EUR ~~711~~687 million. Shareholders could elect for a cash dividend or a share dividend. Approximately ~~63%~~62.4% of the shareholders elected for a share dividend, resulting in the issuance of ~~22,896,661~~30,522,107 new common shares. The settlement of the cash dividend resulted in a payment of EUR ~~263~~259 million.
Preference shares
The ‘Stichting Preferente Aandelen Philips’ has been granted the right to acquire preference shares in the Company. Such right has not been exercised. As a means to protect the Company and its stakeholders against an unsolicited attempt to (de facto) take over control of the Company, the General Meeting of Shareholders in 1989 adopted amendments to the Company’s articles of association that allow the Board of Management and the Supervisory Board to issue (rights to acquire) preference shares to a third party. As of December 31, ~~2011,~~2012, no preference shares have been issued.
Option rights/restricted shares
The Company has granted stock options on its common shares and rights to receive common shares in the future. Please refer to note 30, Share-based compensation, which is deemed incorporated and repeated herein by reference.
~~200      Annual Report 2011~~
~~13 Company financial statements 13.4 - 13.4~~
Treasury shares
In connection with the Company’s share repurchase programs, shares which have been repurchased and are held in treasury for (i) delivery upon exercise of options and convertible personnel debentures and under restricted share programs and employee share purchase programs, and (ii) capital reduction purposes, are accounted for as a reduction of shareholders’ equity. Treasury shares are recorded at cost, representing the market price on the acquisition date. When issued, shares are removed from treasury shares on a FIFO basis.
Any difference between the cost and the cash received at the time treasury shares are issued, is recorded in capital in excess of par value, except in the situation in which the cash received is lower than cost, and capital in excess of par has been depleted.
The following transactions took place resulting from employee option and share plans:

   2010    2011    2011    2012
Shares acquired
   15,237       32,484       32,484       5,147
Average market price
   EUR 25.35       EUR 19.94       EUR 19.94       EUR 17.86
Amount paid
   —         EUR 1 million       EUR 1 million       EUR 0 million
Shares delivered
   5,397,514       4,200,181       4,200,181       4,844,898
Average market price
   EUR 23.99       EUR 20.54       EUR 20.54       EUR 24.39
Amount received
   EUR 71 million       EUR 87 million       EUR 87 million       EUR 118 million
Total shares in treasury at year-end
   37,720,402       33,552,705       33,552,705       28,712,954
Total cost

EUR 1,051
million

EUR 965
million


EUR 965
million




EUR 847
million


In order to reduce share capital, the following transactions took place in ~~2011~~2012 (there were no transactions to reduce share capital in 2011):

   2010    2011    2011    2012
Shares acquired
   —         47,475,840       47,475,840       46,865,485
Average market price
   —         EUR 14.74       EUR 14.74       EUR 16.41
Amount paid
   —         EUR 700 million       EUR 700 million       EUR 769 million
Reduction of capital stock
   —         —         —         82,364,590
Total shares in treasury at year-end
   1,851,998       49,327,838       49,327,838       13,828,733
Total cost
   EUR 25 million       EUR 725 million       EUR 725 million       EUR 256 million
Dividend ~~distributed from retained earnings~~distribution
A proposal will be submitted to the 2013 General Meeting of Shareholders to pay a dividend of EUR 0.75 per common share, in cash or shares at the option of the shareholder, from the 2012 net income and retained ~~earnings.~~earnings of the Company.
Legal reserves
As of December 31, ~~2011,~~2012, legal reserves relate to the revaluation of assets and liabilities of acquired companies in the context of multi-stage acquisitions of EUR 7054 million ~~(2010:~~(2011: EUR 8670 million), unrealized gains on available-for-sale financial assets of EUR 4554 million ~~(2010:~~(2011: EUR ~~139~~45 million), unrealized ~~losses~~gains on cash flow hedges of EUR 920 million ~~(2010:~~(2011: unrealized losses of EUR 59 million), ‘affiliated companies’ of EUR ~~1,089~~1,161 million ~~(2010:~~(2011: EUR ~~1,078~~1,094 million) and unrealized currency translation losses of EUR 93 million (2011: gains of EUR 7 ~~million (2010: losses of EUR 65~~ million).
The item ‘affiliated companies’ relates to the ‘wettelijke reserve deelnemingen’, which is required by Dutch law. This reserve relates to any legal or economic restrictions on the ability of affiliated companies to transfer funds to the parent company in the form of dividends.
Limitations in the distribution of shareholders’ equity
Pursuant to Dutch law, limitations exist relating to the distribution of shareholders’ equity of EUR ~~1,413~~1,480 million ~~(2010:~~(2011: EUR ~~1,500~~1,418 million). As at December 31, ~~2011,~~2012, such limitations relate to common shares of EUR ~~202~~191 million ~~(2010:~~(2011: EUR ~~197~~202 million) as well as to legal reserves included under ‘revaluation’ of EUR 54 million (2011: EUR 70 ~~million (2010: EUR 86~~ million)~~, currency translation gains of EUR 7 million (2010 involved losses, see comment below)~~, available-for-sale financial assets of EUR 54 million (2011: EUR 45 ~~million (2010:~~million), unrealized gains on cash flow hedges of EUR ~~139 million)~~20 million and ‘affiliated companies’ of EUR ~~1,089~~1,161 million ~~(2010:~~(2011: EUR ~~1,078~~1,094 million). The 2011 limitation included unrealized gains of currency translations of EUR 7 million, that are negative in 2012 (see explanation below).
In general unrealized gains ~~related~~relating to ~~currency translation differences,~~ available-for-sale financial assets and cash flow hedges cannot be distributed as part of shareholders’ equity as they form part of the legal reserves protected under Dutch law. By their nature, unrealized losses relating to currency translation differences ~~available-for-sale financial assets and cash flow hedges~~ reduce shareholders’ equity, and thereby distributable amounts.
Therefore, gains related to ~~currency translation differences (2011: EUR 7 million) and~~ available-for-sale financial assets ~~(2011:~~(2012: EUR 4554 million) and cash flow hedges (2012: EUR 20 million) included in ~~other~~legal reserves limit the distribution of shareholders’ equity. The unrealized losses related to ~~cash flow hedges (2011:~~currency translation (2012: EUR 993 million) reduce the distributable amount by their nature.

Annual Report ~~2011      201~~2012      209
13 Company financial statements 13.4 - 13.4

Long-term debt and short-term debt
Long-term debt

   (range of)
interest
rates average
interest
rate amount
outstanding    due in
1 year    due
after 1
year    due
after 5
years    average
remaining
term (in
years)    amount
outstanding
2010    (range of)
interest
rates average
interest
rate amount
outstanding    due in
1 year    due
after 1
year    due
after 5
years    average
remaining
term (in
years)    amount
outstanding
2011
Eurobonds
   —      —      —         —         —         —         —         750
USD bonds
   4.6 -7.8 % 6.2 % 2,505       —         2,505       2,007       12.2       2,687       3.8 - 7.8 % 5.6 % 3,198       109       3,089       3,089       14.2       2,505
Convertible debentures
   —      —      23       23       —         —         —         38       —      —      12       12       —         —         —         23
Private financing
   —      —      2       2       —         —         1.0       —
Intercompany financing
   0.2 -5.7 % 1.1 % 996       996       —         —         —         211       0.0 - 1.4 % 0.7 % 442       442       —         —         0.2       996
Bank borrowings
   2.8 -3.4 % 3.2 % 450       —         450       200       5.6       250       2.3 - 2.8 % 2.5 % 450       —         450       200       4.6       450
Other long-term debt
   2.3 -19.0 % 4.7 % 56       56       —         —         1.0       54       2.5 - 19.0 % 5.0 % 49       49       —         —         1.0       56




   4,030       1,075       2,955       2,207          3,990       4,153       614       3,539       3,289          4,030
Corresponding data previous year
   3,990       1,312       2,678       1,943          4,177       4,030       1,075       2,955       2,207          3,990
The following amounts of the long-term debt as of December 31, ~~2011,~~2012, are due in the next five years:

2012
   1,075
2013
   498       614
2014
   250       250
2015
   —         —
2016
   —         —
2017
   —




   1,823       864
Corresponding amount previous year
   2,047       1,823
Convertible debentures include Philips personnel debentures. For more information, please refer to note 19, Long-term debt and short-term debt.
Short-term debt
Short-term debt includes the current portion of outstanding external and intercompany long-term debt of EUR ~~1,075~~614 million ~~(2010:~~(2011: EUR ~~1,312~~1,075 million), other debt to group companies totaling EUR ~~6,214~~11,015 million ~~(2010:~~(2011: EUR ~~5,869~~6,214 million) and short-term bank borrowings of EUR 62113 million ~~(2010:~~(2011: EUR 6362 million).
Debt to other group companies is significantly higher compared to previous years as a result of the adoption of a new practice to clear cash transactions with US-based subsidiaries (see note C, Receivables for further explanation).
Other current liabilities

   2010¹⁾    2011    2011    2012
Income tax payable
   79       —         —         78
Other short-term liabilities
   40       64       64       538
Accrued expenses
   231       171       171       253
Derivative instruments—liabilities
   1,008       1,034       1,034       592




   1,358       1,269       1,269       1,461
Other short-term liabilities include a payable amount of EUR 509 million related to a fine from the European Commission following an investigation into alleged violation of competition rules in the Cathode-Ray Tubes (CRT) industry. The payable amount represents the aggregate of the amount of EUR 313 million to be paid by the Company and EUR 196 million, being 50% of the fine related to LPD (see note A, Investments in affiliated companies for further explanation).
¹⁾
~~Prior period insignificant amounts have been reclassified due to new insights in line with accounting policies~~
Net income
Net income in ~~2011~~2012 amounted to a profit of EUR 226 million (2011: a loss of EUR 1,295 ~~million (2010: a gain of EUR 1,446~~ million). The ~~decrease~~increase of net results in ~~2011~~2012 compared to ~~2010~~2011 is especially due to the financial performance of affiliated companies.
Employees
The number of persons employed by the Company at year-end ~~2011~~2012 was ~~9 (2010: 11)~~10 (2011: 9) and included the members of the Board of Management and certain leaders from functions, businesses and markets, together referred to as the Executive Committee.
For the remuneration of past and present members of both the Board of Management and the Supervisory Board, please refer to note 32, Information on remuneration, which is deemed incorporated and repeated herein by reference.
Contractual obligations and contingent liabilities not appearing in the balance sheet
Philips entered into contracts with several venture capitalists where it committed itself to make, under certain conditions, capital contributions to investment funds to an aggregated amount of EUR 5648 million until ~~December 31,~~June 30, 2021. These investments will qualify as non-controlling interests once the capital contributions have been paid. Furthermore, Philips made commitments to third parties of EUR 3325 million with respect to sponsoring activities. The amounts are due before 2016.
General guarantees as referred to in Section 403, Book 2, of the Dutch Civil Code, have been given by the Company on behalf of several group companies in the Netherlands. The liabilities of these companies to third parties and investments in associates totaled EUR ~~1,450~~1,416 million as of year-end ~~2011 (2010:~~2012 (2011: EUR ~~1,434~~1,450 million).
Guarantees totaling EUR ~~279~~284 million ~~(2010:~~(2011: EUR ~~266~~279 million) have also been given on behalf of other group companies and credit guarantees totaling EUR 144 million ~~(2010:~~(2011: EUR 2914 million) on behalf of unconsolidated companies and third parties. The Company is the head of a fiscal unity that contains the most significant Dutch wholly-owned group companies. The Company is therefore jointly and severally liable for the tax liabilities of the tax entity as a whole. For additional information, please refer to note 25, Contingent liabilities.
Audit fees
For a summary of the audit fees, please refer to the Group Financial statements, note 1, Income from operations.
Subsequent events
~~Acquisition~~Transfer of ~~Indal Group~~Audio, Video, Multimedia and Accessories businesses to Funai
On 29 January ~~9, 2012,~~2013, Philips ~~completed~~signed an agreement regarding the ~~purchase~~transfer of ~~all outstanding shares~~its Lifestyle Entertainment business (Audio, Video, Multimedia and Accessories to Funai Electric Co., Ltd. (Funai). Under the terms of ~~Indal Group,~~this agreement, Funai will pay a ~~Spanish professional luminaires company mainly focused on outdoor lighting solutions. Philips paid a total net~~ cash consideration of EUR ~~210 million. The impact~~150 million and a brand license fee, relating to a license agreement for an initial period of ~~this acquisition is not material in respect~~five and a half years, with an optional renewal of ~~IFRS 3 disclosure requirements.~~
~~Philips and Sara Lee Corp. agreement on Senseo trademark~~
~~On January 26, 2012, Philips announced that it has agreed~~five years. Currently these businesses belong to ~~extend its partnership with Sara Lee Corp (Sara Lee) to drive growth in~~ the global coffee market. Under a new exclusive partnership framework, which will run through 2020, Philips will be the exclusive Senseo consumer appliance manufacturer and distributor for the duration of the agreement. As part of the agreement, Philips will transfer its 50% ownership right in the Senseo trademark to Sara Lee. Under the terms of the agreement, Sara Lee will pay Philips a total consideration of EUR 170 million. The consideration for the agreement, which is expected to close in the first half of 2012, will be recorded as pre-tax earnings.operating sector Consumer Lifestyle.

~~202~~210      Annual Report ~~2011~~2012
13 Company financial statements 13.5 - 13.5

The deal for the Audio, Multimedia and Accessories businesses is expected to close second half of 2013. The Video business is expected to transfer in 2017, related to existing intellectual property licensing agreements. The gain on the transaction will be recorded at the closing date.
The transaction is subject to customary conditions, including regulatory and works council procedures.
~~Divestment~~Renewal of ~~TV Business~~EUR 1.8 bilion stand-by facility
On 18 January 2013, the Company extended its EUR 1.8 billion stand-by facility for 2 years until February 18, 2018. The facility has no financial covenants and repetitive material adverse change clauses and can be used for general corporate purposes.
Philips intends to sell its shareholding in Philips-Neusoft Medical Systems joint venture to Neusoft Medical Systems
On February ~~22, 2012,~~5, Philips announced that it has entered into a term sheet to sell its 51 percent shareholding in the ~~shareholders~~Philips-Neusoft Medical Systems (PNMS) joint venture between Philips and Neusoft Medical Systems, a subsidiary of ~~TPV Technology Limited (TPV) approved~~Neusoft Corporation, in Shenyang, China, to Neusoft Medical Systems and its overseas associates.
As part of the ~~strategic partnership with~~proposed agreement, a team of approximately 100 to 150 Computed Tomography (CT) system and component engineers and supporting staff will transfer from the joint venture to a new development center of Philips ~~regarding its Television business. At~~in Shenyang.
Financial details of the proposed transaction were not disclosed. The signing of the definitive agreements and subsequent closing is expected to take place before the end of ~~the first quarter of 2012, Philips will transfer its Television business to a newly established entity in which TPV will hold a 70% interest and Philips will hold the remaining 30%~~2013. The closing of the ~~shares.~~transaction is subject to the relevant shareholder and regulatory approvals.
February ~~23, 2012~~25, 2013
The Supervisory Board
The Board of Management
~~13.5Independent~~13.5 Independent auditor’s report—Company
Independent auditor’s report
To the Supervisory Board and Shareholders of Koninklijke Philips Electronics N.V.:
Report on the Company financial statements
We have audited the accompanying Company financial statements ~~2011~~2012 which are part of the financial statements of Koninklijke Philips Electronics N.V., Eindhoven, the Netherlands, and comprise the Company balance sheet as at December 31, ~~2011,~~2012, the Company statements of income and changes in equity for the year then ended, and the notes, comprising a summary of the accounting policies and other explanatory information as included in section 13 to ~~13.5.~~13.4.
Management’s responsibility
The Board of Management is responsible for the preparation and fair presentation of ~~the~~these Company financial statements and for the preparation of the Management report, both in accordance with Part 9 of Book 2 of the Dutch Civil Code. Furthermore, management is responsible for such internal control as it determines is necessary to enable the preparation of the Company financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s responsibility
Our responsibility is to express an opinion on these Company financial statements based on our audit. We conducted our audit in accordance with Dutch law, including the Dutch Standards on Auditing. This requires that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the Company financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the Company financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the Company financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the Company financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the Company financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the Company financial statements give a true and fair view of the financial position of Koninklijke Philips Electronics N.V. as at December 31, ~~2011,~~2012, and of its result for the year then ended in accordance with Part 9 of Book 2 of the Dutch Civil Code.
Report on other legal and regulatory requirements
Pursuant to the legal requirements under Section 2:393 sub 5 at e and f of the Dutch Civil Code, we have no deficiencies to report as a result of our examination whether the Management report, to the extent we can assess, as defined in the introduction paragraph of section 12 Group financial statements, ~~and to the extent we can assess,~~ has been prepared in accordance with part 9 of Book 2 of this Code, and if the information as required under Section 2:392 sub 1 at b - h has been annexed. Further, we report that the Management report, to the extent we can assess, is consistent with the Company financial statements as required by Section 2:391 sub 4 of the Dutch Civil Code.
Amsterdam, The Netherlands
February ~~23, 2012~~25, 2013
KPMG ~~ACCOUNTANTS~~Accountants N.V.
~~M.A. Soeting~~J.F.C. van Everdingen RA

Annual Report ~~2011      203~~2012      211
14 Sustainability statements 14 - 14

~~14Sustainability~~14 Sustainability statements
Approach to sustainability reporting
Philips has a long tradition of sustainability reporting, beginning in 1999 when we published our first environmental annual report. WeIn 2003, we expanded our reporting ~~in 2003~~ with the launch of our first sustainability annual report, which provided details of our social and economic performance in addition to our environmental results.
~~In 2012,~~As a next step, we ~~published our fourth annual~~decided to publish an integrated financial, social and environmental report, reflecting the progress we have made embedding sustainability in our way of doing ~~business.~~business in 2008. This is also supported by the inclusion of sustainability in the Philips ~~Management Agenda~~Commitments and the company strategy.
~~Reporting standards~~
We have followed relevant best practice standards and international guidelines while compiling the sustainability performance covered in this report. Most important are the Global Reporting Initiative’s (GRI) G3.1 Sustainability Reporting Guidelines.
With regard to the GRI Application Levels system, we assessed ourselves at the A+ level. A detailed overview of our Management Approach and the G3.1 Core Indicators is provided at the end of this section.
We signed on to the United Nations Global Compact in March 2007, joining thousands of companies from all regions of the world as well as international labor and civil society organizations to advance 10 universal principles in the areas of human rights, labor, the environment and anti-corruption. Our General Business Principles, Sustainability and Environmental Policies, and our Supplier Sustainability Declaration are the cornerstones that enable us to live up to the standards set by the Global Compact. This is ~~closely monitored~~our fifth annual integrated financial, social and ~~reported, as illustrated throughout this report, which is our annual Communication on Progress (COP) submitted to the UN Global Compact Office.~~environmental report.
Tracking trends
We continuously follow external trends to determine the issues most relevant for our company and those where we can make a positive contribution to society at large. In addition to our own research, we make use of a variety of sources, including the United Nations Environmental Programme (UNEP), World Bank, World Business Council for Sustainable Development (WBCSD), World Economic Forum and World Health Organization. Our work also involves tracking topics of concern to governments, regulatory bodies, academia, and non-governmental organizations, and following the resulting media coverage.
Stakeholder engagement
Across all our activities we seek to engage stakeholders to gain their feedback on specific areas of our business. Working in partnerships is crucial in delivering on our ~~commitment~~vision to ~~bring “sense~~make the world healthier and ~~simplicity” to people’s health and well-being.~~more sustainable through innovation. We participate in meetings and task forces as a member of organizations including the WBCSD, Electronic Industry Citizenship Coalition (EICC), Carbon Disclosure Project Supply Chain, European Committee of Domestic Equipment Manufacturers (CECED), Federation of National Manufacturers Associations for Luminaires and Electrotechnical Components for Luminaires in the European Union (CELMA), European Coordination Committee of the Radiological, Electromedical and Healthcare IT Industry (COCIR), Digital Europe, European Lamp Companies Federation (ELC), European Roundtable of Industrialists (ERT), National Electrical Manufacturers Association (NEMA), Environmental Leadership Council of the Information Technology Industry Council (ELC ITIC), Consumer Electronics Association (CEA), Association of Home Appliance Manufacturers (AHAM) and Healthcare Plastics Recycling Council (HPRC).
In 2011, a multi-stakeholder project with the Sustainable Trade Initiative (IDH), a number of NGOs, and electronic companies was started. The program focuses on improving working circumstances in the electronics industry in China.
Furthermore, we engaged with a number of NGOs, including Enough, GoodElectronics, MakeITfair, the leading Dutch labor union (FNV), the Chinese Institute of Public and Environmental Affairs, SOMO, Amnesty International and Greenpeace.
~~The Philips Center for Health and Well-being~~
Philips seeks to address key societal issues and solutions relating to themes such as healthy and active aging, livable cities and healthy lifestyles through The Philips Center for Health and Well-being. The Center was launched in December 2009 and brings together teams of multidisciplinary experts from all over the world in think tanks. Participants include NGOs such as the World Bank, Global Health Council, European Patient’s Forum, ISOCARP (international association of urban planners), and global experts on each of the respective subjects. The aging well think tank works from the US and is debating how aging populations can remain independent and engaged through their life transitions. The livable cities think tank works from Singapore and Shanghai, and is taking a holistic view of a livable city and is defining “livability” which includes a city being resilient, sustainable, authentic and inclusive. Additionally, the Philips Index for Health & Well-being is a global research project being conducted by the Center. It aims to identify what citizens find important when it comes to their health and well-being. The research examines the mega-trends that shape each nation’s healthcare, lifestyle and who we are as a society, with a focus on what aspects of health and well-being are most important. It was conducted in 31 countries during 2010 and 2011, with over 31,000 consumers surveyed. In addition, during 2011 the Center also conducted a survey on parents and parenting in 7 countries across the world, asking parents about their health & well-being, their experiences of childbirth and breastfeeding and their concerns for their children’s future. For more information on the work of the Center, go to www.philips-thecenter.org.
~~Working on global issues~~
In 2011, Philips participated in the United Nations Climate Change Conference in Durban, South Africa. We partnered with other leading industry players, governmental organizations, NGOs (like The Climate Group) and the United Nations Environmental Program to create a global sectoral agreement on phasing out inefficient lighting.
~~In 2011, to mark Philips’ 120~~^thanniversary, we organized the Philips Innovation Experience. As our innovations address key societal developments —e.g. reforming healthcare, improving the livability of our cities and promoting healthy lifestyles—we firmly believe that true innovation is not achieved in isolation, but thrives on constructive dialogue with all stakeholders involved. To fuel this dialogue, about 100 thought leaders and decision makers, more than 100 media representatives, employees and students convened for the interactive event on Innovation for Health and Well-being in the Evoluon in Eindhoven, The Netherlands.
Biodiversity
~~Philips has continued~~Philips’ commitment to ~~progress on~~ the subject of biodiversity made several significant steps forward in ~~2011 and participated for~~2012. This was led mainly by the 4^th~~year running in the IUCN NL~~Philips Leaders for Nature ~~programs.~~ (LFN) team which is part of the IUCN Netherlands committee LFN program. The program brings companies, NGOs and government together to work on the topic of business and biodiversity. The Philips LFN team grew both in the number of team members, local and company-wide initiatives, as well as widening the scope of discussions on the internal company-wide social network platform. This year the LFN team not only took an active part for the 5th year in the LFN programs but was represented on the LFN organizing committee for the second year running.
In ~~December 2011~~October, the Philips LFN team organized the Philips sustainability week. This was planned to coincide with the Dutch Sustainability awareness day. The Philips activities took place across multiple sites and were intended to raise awareness of sustainability and biodiversity among Philips employees in the Netherlands. The program included education around biodiversity, sustainable transport, recycling, green products, and reducing your footprint by adopting a more vegetarian diet. There were also recycling and biodiversity restoration activities at the Philips Innovation Campus in Bangalore, Cleveland, Klagenfurt, Reedsville, and the Eindhoven High-Tech Campus amongst others.
The Philips Drachten site green teams have started a program to investigate opportunities for biodiversity restoration locally. This is part of a campaign to raise awareness that healthy ecosystems are the very foundations of our existence. The teams carried out a biodiversity scan of their site and are implementing recommended actions to increase site biodiversity. This will enable the restoration of the local flora and fauna and creating a pleasant outdoor environment for Drachten employees.
In November, the LFN team together with the Philips Corporate Sustainability Office organized the first and very successful Business Ecosystems Training (BET). The training was web-based and nearly 200 Philips employees from all sectors and 21 countries participated. This was the first of a series of trainings intended to increase the knowledge and understanding of the links between ecosystems and business. The BET program was developed by the WBCSD, its member companies and partners, and the IUCN. The training included an introduction to biodiversity and ecosystems, the link to Philips (risks and opportunities) what Philips and 10 other ~~Dutch~~companies have done and ~~multinational companies signed a statement of intent~~can do to ~~address biodiversity and ecosystem restoration in the Netherlands and abroad during which the Dutch Taskforce Biodiversity and Natural Resources presented~~include natural capital into their ~~final report to the Dutch government.~~everyday activities.
The participating companies intend to work together during the coming 20 years to protect and restore biodiversity and ecosystems. To begin with partner companies will work on a pilot project to improve biodiversity on joint company premises, linking green areas and thereby increasing biodiversity. The partner companies will also share best practices on closing the materials loop, supply chain sustainability, and processes. This is especially important in view of increasing risks concerning the prices and availability of new and recycled materials, and non-renewable energy.
~~The partner companies realize that limits of growth are being determined by the status of our ecosystems and only by working together can we learn how to grow sustainably.~~ Philips policy continues to focus on:
~~204      Annual Report 2011~~
~~14 Sustainability statements 14 - 14~~

•
Continuing to reduce the impact of our operations through our Green ~~Manufacturing 2015~~Operations program, focusing^{on CO}₂^emissions,water, waste and restricted and hazardous substances

Continuing our EcoDesign activities, resulting in Green Products

Study concepts such as ‘Cradle to Cradle’, ‘Biomimicry’ and ‘The Natural Step’ – all focused on learning or imitating nature’s remarkably efficient designs – for our Sustainable Innovation efforts

Continuing our global partnership with IUCN, the International Union for the Conservation of Nature. Together we are exploring how specific lighting technology can redress the disturbance of fauna around the world, enabling it to co-exist with human sea and coastal development, for instance.
Reporting standards
In this report, we have followed relevant best practice standards and international guidelines while reporting on our sustainability performance. Most important are the Global Reporting Initiative’s (GRI) G3.1 Sustainability Reporting Guidelines.
With regard to the GRI Application Levels system, we assessed ourselves at the A+ level. A detailed overview of our Management Approach and the G3.1 Core Indicators is provided at the end of this section.
We signed on to the United Nations Global Compact in March 2007, joining thousands of companies from all regions of the world as well as international labor and civil society organizations to advance 10 universal principles in the areas of human rights, labor, the environment and anti-corruption. Our General Business Principles, Sustainability and Environmental Policies, and our Supplier Sustainability Declaration are the cornerstones that enable us to live up to the standards set by the Global Compact. This is closely monitored and reported, as illustrated throughout this report, which is also our annual Communication on Progress (COP) submitted to the UN Global Compact Office.
Material issues and our focus
Based on ongoing trend analysis and stakeholder input, we identify the key material issues for our company from a sustainability perspective. We have mapped the issues in the table below, taking into account the:

level of concern to society at large and stakeholders, versus impact on Philips, and
212      Annual Report 2012
14 Sustainability statements 14 - 14

level of control or influence we can have on an issue through our operations and products/solutions.
This is a dynamic process, as we continuously monitor the world around us. We develop our policies and programs based on our findings. The results have been reviewed and approved by the Sustainability Board.
Key material issues

   Reference¹⁾
Environmental

- Climate change

section 4.1, ~~Optimizing our ecological footprint,~~The power to make a difference, of this report
section 5.3, Environmental performance, of this report
section 14.2, EcoVision, of this report
- Energy management

section 3.5, ~~Innovation bringing city~~Re-inventing lighting ~~to life,~~for consumers, of this report
section 4.1, ~~Optimizing our ecological footprint,~~The power to make a difference, of this report
section ~~5.4, Sustainability,~~5.3, Environmental performance, of this report
- Clean technologies
   sub-section 6.4.1, ~~Corporate Technologies,~~Philips Group Innovation, of this report
- Collection and recycling (waste)

chapter 2, ~~Our~~Group strategic focus, of this report
section 4.1, ~~Optimizing our ecological footprint,~~The power to make a difference, of this report
section ~~5.4, Sustainability,~~5.3, Environmental performance, of this report
section 14.2, EcoVision, of this report
- Limited natural resources and resource efficiency

chapter 2, ~~Our~~Group strategic focus, of this report
section 4.1, ~~Optimizing our ecological footprint,~~The power to make a difference, of this report
section ~~5.4, Sustainability,~~5.3, Environmental performance, of this report
section 14.2, EcoVision, of this report
- ~~Biodiversity~~
~~- Increasing product regulation~~Decreasing biodiversity (including wood and paper sources)

chapter 14, Sustainability statements, of this report
- Water scarcity
~~section 7.5, Compliance risks,~~
chapter 14, Sustainability statements, of this report
- Nano materials
sub-section ~~6.1.7, Regulatory requirements,~~6.4.1, Philips Group Innovation, of this report
~~sub-section 6.2.3, About Consumer Lifestyle, of this report~~
~~sub-section 6.3.3, About Philips Lighting, of this report~~
   Reference¹⁾
Societal

- Aging population

chapter 2, ~~Our~~Group strategic focus, of this report
section 6.1, Healthcare, of this report
- Rising healthcare costs

chapter 2, ~~Our~~Group strategic focus, of this report
section 6.1, Healthcare, of this report
- Chronic and lifestyle related diseases

chapter 2, ~~Our~~Group strategic focus, of this report
section 6.1, Healthcare, of this report
- Healthy Living

Message from the CEO, of this report
chapter 2, ~~Our~~Group strategic focus, of this report
section 6.2, Consumer Lifestyle, of this report
- Expanding middle class in growth geographies

Message from the CEO, of this report
section 6.2, Consumer Lifestyle, of this report
- Rising attention for human rights (deeper into the supply chain)

section 5.2, Social performance, of this report
chapter 14, Sustainability statements, of this report
section 14.5, Supplier indicators, of this report
- Demographic shift and urbanization

section 3.1, ~~Philips’ China journey –a dynamic partnership,~~Driving progressive health care, of this report
section ~~3.5, Innovation bringing city lighting to~~3.6, Enhancing urban life with light, of this report
- Conflict minerals

sub-section ~~5.4.5,~~5.2.10, Supplier ~~performance,~~sustainability, of this report
section ~~14.6,~~14.5, Supplier indicators, of this report
- Employee health and safety

~~sub-section 5.4.3,~~section 5.2, Social performance, of this report
~~section 14.4, Social indicators, of this report~~
- Economic downturn
   Message from the CEO, of this report
- Transparency and stakeholder activism
sub-section 5.2.9, Stakeholder engagement, of this report
sub-section 5.2.10, Supplier sustainability, of this report
section 14.5, Supplier indicators, of this report
- Food scarcity
sub-section 5.3.1, Green Innovation, of this report
chapter 14, Sustainability statements, of this report

Annual Report ~~2011      205~~2012      213
14 Sustainability statements 14 - 14

   Reference¹⁾
Governance

- Privacy
   section ~~14.5,~~14.4, General Business Principles, of this report
~~- Growing demand for transparency in the supply chain~~
~~sub-section 5.4.5, Supplier performance, of this report~~
~~section 14.6, Supplier indicators, of this report~~
- Business ethics and General Business Principles

section ~~14.5,~~14.4, General Business Principles, of this report

~~section 4.2, Partnering to drive change, of this report~~
- Partnerships and co-creation

section 4.2, Encouraging positive change, of this report
sub-section 6.4.1, Philips Group Innovation, of this report
chapter 14, Sustainability statements, of this report
- Impact of social media
sub-section 5.2.9, Stakeholder engagement, of this report
section 14.4, General Business Principles, of this report
- Metrics beyond financials
section 5.2, Social performance, of this report
section 5.3, Environmental performance, of this report
- Increasing product regulation
section 7.5, Compliance risks, of this report
sub-section 6.1.3, About Philips Healthcare, of this report
sub-section 6.2.3, About Consumer Lifestyle, of this report
sub-section 6.3.3, About Philips Lighting, of this report
¹⁾
With the exception of section 5.2, Social performance, section 5.3, Environmental performance, and chapter 14, Sustainability statements, of this report, the sections and chapters referred to are not included in the scope of the assurance engagement
~~Sustainability programs~~Programs and targets
Our sustainability commitments are grouped under the label EcoVision, comprising the following elements:
   target 2015    baseline year
Green Product Sales
   50% of total sales
Lives Improved
   2 billion
Green Innovation

- Investments
   EUR 2 billion (cumulative)       2010
- Energy Efficiency
   49 Lumen/Watt (up 50%)       2009
- Materials

- Collection & Recycling
   74,000 tonnes (up 100%)       2009
- Recycled content
   15,000 tonnes (up 100%)       2009
Green Operations

- CO₂reduction
   40%       2007
- Health & Safety


0.26 Lost Workday
Injury Cases per 100 FTE



Supplier Sustainability¹⁾
   72% compliant
¹⁾
For more information see section 14.5, Supplier indicators, of this report
All of our programs are guided by the Philips General Business Principles, which provide the framework for all of our business decisions and actions.
With our longstanding commitment to reducing the environmental impact of our products and processes, we have been establishing action programs with measurable targets starting in 1994 with the program “The Environmental Opportunity”, followed by the range of successive EcoVision programs.
~~EcoVision4, which was launched in 2007, focuses on the environmental performance of our products and reducing the energy consumption of our operations in order to realize the following by 2012:~~
~~generate 30% of total revenues from Green Products~~
~~double investment in Green Innovation to a cumulative EUR 1 billion~~
•
~~improve our operational energy efficiency by 25% and reduce CO~~₂ ~~emissions by 25%, all compared with the base year 2007~~
~~In February 2010, we launched EcoVision5, comprising three sustainability leadership key performance indicators on ‘care’, ‘energy efficiency’ and ‘materials’ including targets for 2015.~~
~~Bringing care to people~~
~~Target: 500 million lives touched~~
~~Improving the energy efficiency of Philips products~~
~~Target: 50% improvement (for the average total product portfolio) compared to 2009~~
~~Closing the materials loop~~
~~Target: double global collection and recycling amounts and recycled materials in products compared to 2009~~
As we achieved our Green Product Sales and the Green Innovation target of our EcoVision4 program ahead of schedule, we renewed our 2015 target for Green Product Sales to 50% and Green Innovation to a cumulative EUR 2 billion, to be invested as of 2011.
~~From 2012 onwards, EcoVision4 and EcoVision5 are merged into a single program labeled as EcoVision.~~
~~To continue our efforts to improve our environmental performance in manufacturing, we developed in 2010 our Green Manufacturing 2015 program.~~
In addition, we have been running programs in other sustainability areas. Our employee programs include engagement, diversity and inclusion, and health and safety. Through our Supplier Sustainability Involvement Program we have been embedding sustainability into our supply management processes since 2003. Further, we have a targeted approach to our social investment programs in the communities in which we operate that reflects our business.
~~We report on the results of these programs versus targets.~~
Scope of sustainability reporting
Our sustainability performance reporting encompasses the consolidated Philips Group activities, following the consolidation criteria detailed in this section.
The consolidated selected financial information in this sustainability statements section has been derived from the Group Financial Statements, which are based on IFRS.
Comparability and completeness
For comparability reasons, the Green Product sales, Green Innovation and collection and recycling data was restated to reflect the Television business classified as discontinued operations. Other sustainability data was not adjusted as the impact of Television is not material.
We used expert opinions and estimates for some parts of the ~~Leadership KPI models.~~Key Performance Indicator calculations. There is therefore an inherent uncertainty in our calculations. The figures reported are Philips’ best possible estimate. As our insight increases, we may enhance the methodology in the future.
~~Environmental~~Lives improved by Healthcare have been restated for 2010 and 2011 as a result of improved data quality. Collection and Recycling data for 2011 has been restated to reflect the inclusion of Consumer Luminaires.
The Green Product definition has changed in 2012 to include absolute product norms as well as the revenues from remote servicing. The introduction of absolute norms has a downward impact on the Green Product sales, since these are ~~measured for~~more stringent than the previous definition. The inclusion of remote servicing in Healthcare has an immaterial upward impact on the trend.
The emissions of substances data is based on measurements and estimates at manufacturing ~~sites with more than 50 industrial employees.~~ site level. There is therefore an inherent uncertainty in our calculations. The figures reported are Philips’ best possible estimate. As our insight increases, we may enhance the methodology in the future.
Integration of newly acquired ~~manufacturing sites~~activities is scheduled according to a defined integration timetable (in principle, first full reporting year after the year of acquisition) and subject to the integration agenda. Data for activities that are divested during the reporting year are not included in full-year reporting. Environmental data are measured for manufacturing sites with more than 50 industrial employees.
Social data cover all employees, including temporary employees, but exclude contract workers. Due to the implementation of new HRM systems, we are able to provide ~~additional~~exit diversity information on Philips employees for ~~2009, 2010 and 2011.~~2012. Historical comparisons may not be available, however.
Health and safety data is measured for units with over 50 FTEs (full-time equivalents) and is voluntary for smaller units. New acquisitions must report, in principle, the first year after acquisition and subject to the integration agenda. Data for activities that are divested during the reporting year are not included in full-year reporting.
Prior periods amounts have been revised to reflect certain immaterial adjustments (see section 12.10, Significant accounting policies, of this report).
Data definitions and scope
~~Leadership key performance indicators~~Lives improved, energy efficiency and materials
The ~~three leadership~~ key performance indicators on ~~‘care’~~‘lives improved’, ‘energy efficiency’ and ‘materials’ and the scope are defined in the respective methodology documents that can be found at www.philips.com/sustainability.
Green Products
Green Products offer a significant environmental improvement in one or more Green Focal Areas: Energy efficiency, Packaging, Hazardous substances, Weight, Recycling and disposal and Lifetime reliability. The life cycle approach is used to determine a product’s overall environmental improvement. It calculates the environmental impact of a product over its total life cycle (raw materials, manufacturing, product use and disposal).
Green Products need to ~~have a score~~prove leadership in at least one Green Focal Area ~~that is significantly better (at least 10%),~~ compared to ~~the~~industry standards, which is defined by a sector specific peer group. This is done either by outperforming reference ~~product, which~~products (which can be a competitor or predecessor product in the particular product ~~family.~~family ) by at least 10%, outperforming product-specific eco-requirements or by being awarded with a recognized eco-performance label. Because of different product portfolios, sectors have specified additional criteria for Green ~~Products.~~Products, including product-specific minimum requirements where relevant.
214      Annual Report 2012
14 Sustainability statements 14 - 14.1
Green Innovation
Green Innovation comprise all R&D activities directly contributing to the development of Green Products or Green Technologies. A wide set of additional criteria and boundaries have been defined as the basis for internal and external validation.
Environmental data
All environmental data from manufacturing operations are reported on a half-year basis in our ~~intranet-based EcoVision~~sustainability reporting and validation tool, according to defined company guidelines that include definitions, procedures and calculation methods.
Internal validation processes are followed and audits performed to ensure consistent data ~~quality. The sector validation officers provide support to the data collectors at site level~~quality and ~~regularly conduct audits~~ to assess the robustness of data reporting systems.
These ~~EcoVision~~environmental data from manufacturing are tracked and reported to measure progress against our Green ~~Manufacturing 2015~~operations program targets.
~~206      Annual Report 2011~~
~~14 Sustainability statements 14 - 14.2~~
Reporting on ISO 14001 certification is based on manufacturing units reporting in ~~EcoVision.~~the sustainability reporting system.
Operational carbon footprint
The Philips operational carbon footprint is calculated on a half-yearly 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

Logistics – air, sea and road transport
All emission factors used to transform input data (for example, amount of ~~ton-kilometers~~tonne-kilometers transported)^{into CO}₂ emissions are from the Greenhouse Gas Protocol (GHGP), except for business travel, where the service providers supplied ~~CO2~~CO₂ data based on their own verified methodology. The GHGP distinguishes three scopes. It is mandatory to report on the first two to comply with the GHGP reporting standards.

Scope 1 – direct CO2 emissions – is reported on with direct emissions from our industrial and non-industrial sites in full. Emissions from industrial sites, which consist of direct emissions resulting from processes and fossil fuel combustion on site, are reported in the EcoVision reporting system. Emissions from industrial sites that are not yet reporting in EcoVision following recent acquisitions are collected separately, or where actual data is not available, calculated based on average CO2 emissions per square meter of comparable sites in the same sector. Energy use and CO2 emissions from non-industrial sites are based on actual data where available. If this is not the case, they are estimated based on square meters, taking the geographical location and building type of the site into account.
•
Scope 1 – direct CO₂ emissions – is reported on with direct emissions from our industrial and non-industrial sites in full. Emissions from industrial sites, which consist of direct emissions resulting from processes and fossil fuel combustion on site, are reported in the sustainability reporting system. Energy use and CO₂ emissions from non-industrial sites are based on actual data whereavailable. If this is not the case, they are estimated based on square meters, taking the geographical location and building type of the site into account.

•
Scope 2 – ~~CO2~~CO₂ emissions resulting from the generation of purchased electricity for our premises – is reported on with electricity use from industrial and non-industrial sites in full. Indirect CO^CO₂2^emissionsresulting from purchased electricity, steam and heat are reported in the ~~EcoVision~~sustainability reporting system. Those emissions of industrial sites not yet reporting ~~in EcoVision~~ are calculated on the same basis as described in Scope 1. Indirect emissions of non-industrial sites are calculated in the same manner as described in Scope 1.

Scope 3 – other CO2 emissions related to activities not owned or controlled by the Group is reported on for our business travel and distribution activities. Commuting by our employees, upstream distribution (before suppliers ship to us), outsourced activities and emissions resulting from product use by our customers are not included in our operational carbon footprint. The calculations for business travel by lease cars are based on actual fuel usage and for rental cars on distance traveled. Emissions from business travel by airplane are calculated by the supplier based on mileage flown and emission factors from DEFRA (UK Department of Environment, Food and Rural Affairs), distinguishing between short, medium and long flights. Further, emissions from air freight for distribution are calculated based on the amount of ton-kilometers transported between airports (distinguishing between short, medium and long hauls), including an estimate (based on actual data of the lanes with the largest volumes) for trucking from sites and distribution centers to airports and vice versa. Express shipments are generally a mix of road and air transport, depending on the distance. Therefore the assumption is applied that shipments over less than 600 km are transported by road and the rest of the shipments by air (those emissions by air are calculated in the same way as air freight). For sea transport, only data on transported volume were available so an estimate had to be made about the average weight of a container. Transportation to and from ports is not registered. This fore and aft part of sea transport was estimated to be around 3% of the total distance (based on actual data of the lanes with the largest volumes), consisting of a mix of modalities, and was added to the total emissions accordingly. CO2 emissions from road transport were also calculated based on ton-kilometers. If data were incomplete, the emissions were estimated based on sales volumes. Return travel of vehicles is not included in the data for sea and road distribution.
•
Scope 3 – other CO₂ emissions related to activities not owned or controlled by the Group is reported on for our business travel and distribution activities. Commuting by our employees, upstream distribution (before suppliers ship to us), outsourced activities and emissions resulting from product use by our customers are not included in our operational carbon footprint. The calculations for business travel by lease cars are based on actual fuel usage and for rental cars on distance traveled. Emissions from business travel by airplane are calculated by the supplier based on mileage flown and emission factors from DEFRA (UK Department of Environment, Food and Rural Affairs), distinguishing between short, medium and long flights. Further, emissions from air freight for distribution are calculated based on the amount of tonne-kilometers transported between airports (distinguishing between short, medium and long hauls), including an estimate (based on actual data of the lanes with the largest volumes) for trucking from sites and distribution centers to airports and vice versa. Express shipments are generally a mix of road and air transport, depending on the distance. Therefore the assumption is applied that shipments over less than 600 km are transported by road and the rest of the shipments by air (those emissions by air are calculated in the same way as air freight). For sea transport, only data on transported volume were available so an estimate had to be made about the average weight of a container. Transportation to and from ports is not registered. This fore and aft part of sea transport was estimated to be around 3% of the total distance (based on actual data of the lanes with the largest volumes), consisting of a mix of modalities, and was added to the total emissions accordingly. CO₂ emissions from road transport were also calculated based on tonne-kilometers. If data were incomplete, the emissions were estimated based on sales volumes. Return travel of vehicles is not included in the data for sea and road distribution.
Health and safety
Health and safety data are reported ~~monthly~~ and validated ~~on a half- yearly basis.~~monthly. The focus is on reporting work-related injuries, which predominantly occur in manufacturing operations. The annual number of cases leading to at least one lost workday is reported per 100 FTEs (full-time equivalents). Fatalities are reported for staff, contractors and visitors and include commuting accidents.
General Business Principles
Alleged GBP violations are registered in our intranet-based reporting and validation tool. ~~The reporting period is from December 15 (previous year)—December 15 (current year).~~
Supplier audits
Supplier audits are primarily focused on identified risk suppliers, based on identified risk countries and on spend of more than EUR 1 million (new suppliers EUR 100,000 and no threshold for high risk suppliers).

Based on the Maplecroft Human Rights Risk Indexes, risk countries for Supply Management in ~~2011~~2012 were: Belarus, Brazil, China, Dominican Republic, India, Indonesia, Mexico, the Philippines, Russia, ~~the Ukraine~~ and ~~Vietnam.~~Ukraine.

Suppliers of new ventures are included to the extent that the integration process of these ventures has been finalized. Normative integration period is two years after closure of the new venture.
Sustainability governance
Sustainability is strongly embedded in our core business processes, like innovation (EcoDesign), sourcing (Supplier Sustainability Involvement Program), manufacturing (Green Manufacturing 2015) and Logistics (Green Logistics).
The Sustainability Board is the highest governing sustainability body in Philips, chaired by Jim Andrew, member of the Executive Committee. Three other Executive Committee members sit in the Sustainability Board jointly with sector and functional executives. The Sustainability Board convenes four times per year, defines Philips’ sustainability strategy and programs, monitors progress and takes corrective action where needed.
External assurance
KPMG has provided ~~limited~~reasonable assurance on whether the information in chapter 14, Sustainability statements, of this report including the information referred to in section 5.2, Social performance, of this report and section 5.3, Environmental performance, of this report is, in all material respects, fairly stated in accordance with the reporting criteria. KPMG has provided reasonable assurance on whether the information on 2011 in chapter 14, Sustainability statements, in the sections 14.1 to 14.6 with the exclusion of section 14.3 and the section ‘Health and Safety’ in section 14.4 of this Annual Report is, in all material respects, presented in accordance with the reporting criteria. We refer to section ~~14.7,~~14.6, Independent assurance report, of this report.
~~14.1Economic~~14.1 Economic indicators
This section provides summarized information on contributions on an accruals basis to the most important economic stakeholders as a basis to drive economic growth. For a full understanding of each of these indicators, see the specific financial statements and notes in this report.
Distribution of direct economic benefits
in millions of euros

   2009    2010    2011    2010    2011    2012
Suppliers: goods and services
   12,519       13,191       13,932       13,265       13,845       15,379
Employees: salaries and wages
   4,862       5,035       5,123       5,035       5,123       5,974
Shareholders: distribution from retained earnings
   647       650       711       650       711       687
Government: corporate income taxes
   99       499       283       497       283       308
Capital providers: net interest
   252       225       210       225       210       241
Annual Report 2012      215
14 Sustainability statements 14.1 - 14.3
Total purchased goods and services amounted to EUR ~~13.9~~15.4 billion, representing 62% of total revenues of the Philips Group. Of this amount, ~~72%~~65% was spent with global suppliers, the remainder with local suppliers. Compared ~~with 2010,~~to 2011, spending increased in absolute terms as a result of higher sales volumes.
In ~~2011,~~2012, the salaries and wages totaled EUR ~~5.1~~6.0 billion. This amount is EUR 88851 million higher than in ~~2010,~~2011, mainly caused by ~~the increase in employees as a result of acquisitions.~~restructuring costs. See note 1, Income from operations for more information.
Dividend distributed to shareholders amounted to EUR ~~711~~687 million, EUR 6124 million updown compared to ~~2010.~~2011.
Corporate income taxes ~~decreased significantly from~~increased slightly to EUR ~~499~~308 million in ~~2010 to~~2012 from EUR 283 million in 2011, mainly attributable to ~~lower~~higher taxable earnings. For a further understanding, see note 3, Income taxes.
14.2 EcoVision
~~In February 2010, we announced our~~Our latest EcoVision program, ~~which~~ includes ~~three sustainability leadership~~ key performance indicators in relation to ~~which we bring~~Green Product sales, Improving people’s lives, Green Innovation, Green Operations, Health & Safety, Employee Engagement and Supplier Sustainability.
Improving people’s lives
Philips products and solutions that directly can support the curative or preventive side of people’s health was one of the parameters of our ~~competencies to bear, namely ‘care’, ‘energy efficiency’ and ‘materials’.~~
~~Bringing~~EcoVision 5 program, labelled ‘Bringing care to ~~people~~people’, with a target of 500 million lives touched in 2015. In this category in 2012, we already touched over 570 million lives, driven by our Healthcare sector.
~~Bringing care to people is a parameter~~With the renewal of our company vision in 2012 we have extended that ~~is based on the~~approach with our ‘well-being’ products that help people live a healthy life as well as our Green Products and solutions of all sectors that contribute to a healthy ecosystem. For the year 2012 we have established our total baseline of 1.7 billion people a ~~direct relation to health, expressed as the number of people per year that benefit from those products (‘lives touched’).~~ year.
Examples of product categories ~~involved~~contributing to the ‘care’ category are all healthcare ~~products, water and air purification, oral healthcare and light therapy. In 2011, we touched~~products.
~~Annual Report 2011      207~~
~~14 Sustainability statements 14.2 - 14.2~~
~~over 465 million lives, mainly through our Healthcare sector. Further details on this parameter and the methodology can be found in the document ‘Bringing care to people’.~~
~~Energy Efficiency~~Examples of ~~Philips products~~
Energy efficiency is a key Green Focal Area for our Green Products. Our analysis has shown that about 97% of the energy consumed during the use phase of our products is attributable to Lighting products. The remaining 3% is split over Consumer Lifestyle and Healthcare. Therefore, we focus on the energy efficiency of our Lighting products in the ~~calculation. The annual energy consumption per product~~‘well-being’ category ~~is calculated by multiplying the power consumption of~~that help people live a ~~product by the average annual operating hours~~healthier life are juicers, blenders, air fryers, but also mother and the annual pieces sold and then dividing the light output (Lumen) by the energy consumed (Watt). The average energy efficiency of our total product portfolio improved slightly (some 2% in 2011 and 8% compared to 2009). Our LED sales advanced well, but as demand for traditional lamps remained fairly stable, the energy efficiency improvement of the total Lighting portfolio was limited. Further details on this parameter and the methodology can be found in the document ‘Energy efficiency of Philips products’.
~~Closing the materials loop~~
In 2010 we determined the 2009 baseline for global collection and recycling amounts at around 37,000 tons (excluding TV), based on the data retrieved from the WEEE collection schemes and from our own recycling and refurbishment services (mainly Healthcare). The amount of collection and recycling for 2010 was calculated at 35,000 tons as we noticed a decrease in recycled Lightingchildcare products. Further details on this parameter and the methodology can be found in the document ~~‘Collection and recycling’~~‘Improving people’s lives’.
We determined the amount of recycled materials in our products in 2011 at some 10,000 tons, by focusing on the material streams plastics, aluminum and refurbished products, depending on the relevance in each sector. Further details on this parameter and the methodology can be found in the document ‘Recycled materials’.
~~Green Product sales~~
~~Sales from Green Products grew in 2011 to EUR 8,805 million. Green Product sales increased 9% from EUR 8,069 million.~~
~~Green Product sales~~
~~in millions of euros unless otherwise stated~~

   2009    2010    2011
Philips Group
   6,163       8,069       8,805
as a % of total sales
   31       36       39
All sectors contributed to the growth in Green Product sales. Healthcare achieved the highest Green Product nominal sales growth (25%), followed by Lighting (4%) and Consumer Lifestyle (1%). Lighting introduced over 4,000 new Green Products in 2011, Consumer Lifestyle over 200 and Healthcare 29.
~~Green Product sales per sector~~
~~as a % of Group sales~~

   2009    2010    2011
Healthcare
   23       25       30
Consumer Lifestyle
   18       27       27
Lighting
   52       58       60


Philips Group
   31       36       39
The Philips EcoDesign process aims to create products that have significantly less impact on the environment during their whole lifecycle. Overall, the most significant improvements have been predominantly realized in our energy efficiency Green Focal Area.
~~New Green Products from each sector include the following examples.~~
~~Healthcare~~
During 2011, we added 29 green products to our Green Product portfolio – for the hospital, the home and points in-between – which brought us closer to our goal of touching 500 million lives, while reducing the environmental impact of our products. All Business Groups in the sector contributed to the increase. The BG Imaging Systems launched the 3T Ingenia Magnetic Resonance systems with digital dStream architecture, which uses up to 24% less energy and 24% less weight in materials versus its reference product. Innovations by the BG PCCI include the IntelliVue MX40 Patient Monitor, a wearable patient monitor that can be used for the monitoring of ambulatory patients and during patient transport. Next to the clinical benefits it also offers a 85% reduction in power usage, as well as achieving product and packaging weigh reductiont. Another example is the Home Healthcare Solutions Trilogy that uses 62% less energy than its predecessor, as well as achieving 72% weight reduction and 49% packaging weight reduction.
~~Consumer Lifestyle~~
Energy management has always been a strong focus in the Consumer Lifestyle sector as well as the avoidance of substances of concern in our products, in addition to our efforts to close the materials loop. Philips continued with the introduction of products free of polyvinyl chloride (PVC) and brominated flame retardants (BFR), like the PowerTouch and AquaTouch Shaver ranges, and Electric Steam Sterilizers.
~~Lighting~~
Philips is proud to be the provider of the LED headlighting source in Nissan’s zero emission electrical vehicle, the Nissan Leaf. Our LUXEON Altilon features the industry’s lowest power consumption headlamp and the Nissan Leaf is a first of a kind family size car which applies LED headlighting as standard lighting technology in the base model.
Philips’ new StyliD Performance and LuxSpace Accent solutions are revolutionizing accent lighting solutions for supermarkets and fashion retailers, exceeding the performance of cHID high flux lamps. With extremely high light flux and long system lifetime, these are the only LED accent lighting solutions on the market that are able to deliver high light quality (CRI90) with three well-defined beams that create the perfect balance between the accent effect and the surrounding environment. Furthermore, LED accent lighting solutions omit less heat and UV, ensuring longevity of products such as leather clothes and cosmetics which perish faster under conventional lighting. Philips’ StyliD Performance and LuxSpace Accent lighting solutions thus both reduce heat output and provide the best quality white light which is highly efficient.
The Philips eye-catching Ledino range provides a new light experience in an energy efficient way. With its long lifetime it saves up to 80% energy versus traditional light sources. The Luxeon LEDs inside provide a clear and warm light which can be dimmed in order to achieve light delicately, creating the preferred atmosphere.
~~Green Innovation~~
In 2011, Philips invested EUR 479 million in Green Innovation – the R&D spend related to the development of new generations of Green Products and Green Technologies. We intend to invest a cumulative EUR 2 billion over the coming five years.
~~Green Innovation per sector~~
~~in millions of euros~~

   2009    2010    2011
Healthcare
   50       60       85
Consumer Lifestyle
   68       56       67
Lighting
   185       230       291
Corporate Technologies
   44       46       36


Philips Group
   347       392       479
~~Healthcare~~
Philips Healthcare innovation projects are targeted at making a difference wherever care is provided—in the hospital, the home and points in-between. The investments in Green Innovation amounted to some EUR 85 million, concentrating on innovation projects that that take into account all of the Green Focal Areas and aim to reduce total life cycle impact. In particular the sector focuses on reducing energy consumption, weight and radiation dosage. Healthcare is also reducing amounts of environmentally relevant substances in order to prepare for substance legislation such as RoHS and REACH.
~~208      Annual Report 2011~~
~~14 Sustainability statements 14.2 - 14.3~~
~~Consumer Lifestyle~~
In 2011, the Consumer Lifestyle sector invested about EUR 67 million in Green Innovation. The sector is dedicated to developing new Green Products with a focus on further enhancing energy efficiency and closing material loops, for example by using recycled materials or offering better recyclability.
~~Lighting~~
In 2011, Lighting invested a record EUR 291 million in Green Innovation compared to EUR 230 million in 2010. The focus continues to be on developing new energy-efficient lighting solutions, further enhancing current Green Products and realizing technological breakthroughs in the area of solid-state lighting.
~~Corporate Technologies~~
Corporate Technologies invested about EUR 36 million, spread over Green Innovation projects focused on global challenges related to water, air, waste and energy. One example of a Philips Research project is related to LED-based treatments. Many diseases, e.g. in dermatology or pain, are currently treated with drugs like steroids, cortisone and opiates. Unfortunately, these often cause negative side effects. Philips Lighting’s Light & Health Venture, in close collaboration with Philips Research are developing innovative LED-based solutions. By understanding how blue light affects many human biological and physiological processes, and applying our expertise in LED and textile technology, Philips created the BlueTouch Pain Relief Patch – answering the needs of millions of back pain sufferers around the world. Another application is the Bilirubin Blanket that treats neonatal jaundice, a condition affecting many newborns and premature babies.
Operational carbon footprint and energy efficiency
In the course of 2011 we implemented a new IT solution for our carbon footprint reporting, thereby further improving the data quality and the accuracy of the reporting process. To maintain comparability, we recalculated the carbon footprint for all previous years in this new IT solution, resulting in slightly different figures for those years (mostly for non-industrial operations).
Our operational carbon footprint decreased 4%9% in ~~2011.~~2012.
~~Operational carbon footprint~~
~~in kilotons CO2-equivalent~~

   2007    2008    2009    2010    2011
Manufacturing
   947       959       909       767       703
Non-industrial operations
   211       181       174       159       155
Business travel
   276       265       220       247       256
Logistics
   714       706       627       672       657


Philips Group
   2,148       2,111       1,930       1,845       1,771
~~Our total operational carbon footprint can also be expressed according to the three scopes of the Greenhouse Gas Protocol.~~
~~Operational carbon footprint by Greenhouse Gas Protocol scopes~~
~~in kilotons CO2-equivalent~~

   2007    2008    2009    2010    2011
Scope 1
   442       467       447       441       431
Scope 2
   716       673       636       485       427
Scope 3
   990       971       847       919       913




Philips Group
   2,148       2,111       1,930       1,845       1,771
Operational energy efficiency and carbon footprint: ~~2011~~2012 details
The ~~2011~~2012 results can be attributed to several factors:

•
Accounting for ~~40%~~44% of the total footprint, total CO₂ emissions from manufacturing ~~decreased 8%~~increased due to acquisitions which were largely mitigated by continued energy efficiency improvement programs, our changing industrial footprint and the further increase of the share of purchased electricity from renewable sources to ~~44%~~47% of total purchased electricity.

•
CO₂ emissions from non-industrial operations (offices, warehouses, etc.) represent 9% of the total. ~~Our acquisitions resulted in a slight~~The overall ~~increase in~~ floor ~~space.~~space decreased marginally. However, CO₂ emissions decreased 2%9% as we continued to centralize and re-allocate existing facilities, focusing on the most efficient use of facility space and increasing the share of purchased electricity from renewable sources.

•
The total CO₂ emissions related to business travel, accounting for ~~14%~~13% of our carbon footprint, ~~increased 4%~~decreased 15%. Our stringent in-house travel policy resulted in a significant decrease of CO₂ emissions from air travel ~~increased slightly as~~and rental cars. Furthermore, the ~~number~~fleet of ~~travel movements increased. However, due to our green lease car policy, our~~ lease cars ~~continued to become more CO~~₂ ~~efficient, thereby further reducing~~increased but the ~~average~~total CO₂ emissions ~~per kilometer by 8% compared to 2010. We will continue to promote videoconferencing as an alternative to travel as well.~~decreased.

•
Overall CO₂ emissions from logistics, representing approximately one third of the total, decreased 2%17%. This decrease ~~is a result~~mainly resulted from the exclusion of TV business. However, results can also be attributed to an effective gatekeeping process to move freight from air to sea, as well as our continued focus on optimizing container ~~utilization and opting for the cleanest and most cost effective mode of transport, in which we continue to shift from air to sea freight where possible.~~utilization.
Operational carbon footprint for logistics
in ~~kilotons~~kilotonnes CO₂-equivalent

   2007    2008    2009    2010    2011
Air transport
   338       305       308       345       328
Road transport
   205       211       174       160       176
Sea transport
   171       190       145       167       153




Philips Group
   714       706       627       672       657
~~For comparison purposes, the most relevant ratios for CO~~₂ ~~emissions and energy efficiency are provided below. We reduced CO~~₂ ~~emissions by 4%. Our energy efficiency – expressed in terajoules per million EUR sales – improved 4% as well, because of our continued focus on operational excellence and efficiency improvements.~~
~~Ratios relating to carbon emissions and energy use~~

   2007    2008    2009    2010    2011
Operational CO₂ emissions in kilotons CO₂-equivalent
   2,148       2,111       1,930       1,845       1,771
Operational CO₂ efficiency in .tons CO₂-equivalent per million euro sales
   80       80       83       73       70
Operational energy use in terajoules
   34,450       33,831       31,145       32,766       31,402
Operational energy efficiency in terajoules per million euro sales
   1.29       1.28       1.34       1.29       1.24
~~Carbon emissions in our Supply Chain~~
~~In 2011, we engaged with the Carbon Disclosure Project and Trucost, an environmental data and insight company specializing in supply chain CO~~₂ ~~reporting, to quantify the carbon emissions in our supply chain.~~
The emissions were estimated at approximately 5.6 million tons, which is almost 6 times our scope 1 and 2 emissions. The study also unveiled the “hotspots” in our supply chain, which allows us to focus our energy efficiency improvement and carbon reduction activities with our suppliers.
   2008    2009    2010    2011    2012
Air transport
   305       308       345       328       309
Road transport
   211       174       160       176       105
Sea transport
   190       145       167       153       132




Philips Group
   706       627       672       657       546
14.3 Green ~~Manufacturing 2015~~Operations
In 2010, we decided to group all activities related to improving the environmental performance of our manufacturing facilities (including chemicals management) under the Green Manufacturing 2015 ~~program.~~program, which we renamed to Green Operations. The program focuses on most contributors to climate change, but also addresses water, recycling of waste and chemical substances.
In the course of 2012 we implemented a new IT solution for our environmental reporting, thereby further improving the data quality and the accuracy of the reporting process. Next, we implemented a new process to monitor chemicals used in processes in more detail. Since Philips focuses its reduction efforts on the restricted and hazardous substances listed below, we decided to exclude the categories ‘Other restricted substances’ and ‘Other hazardous substances’ from our reporting in 2012. Based on the new insights gained through the new chemicals management process, we will define new reduction targets in 2013 for some of those chemicals.
~~Annual Report 2011      209~~Green Operations
~~14 Sustainability statements 14.3 - 14.3~~
in % unless otherwise stated

~~Green Manufacturing 2015~~¹⁾
~~parameters~~

   2015 target    2011 actual
   (%)    (%)
Total CO₂ from manufacturing
   (25)       (12)
Water
   (10)       3
Materials provided for recycling via external contractor per total waste
   80       77
Restricted substances:

Benzene emission
   (50)       6
Mercury emission
   (100)       (73)
CFCs, HCFCs
   (100)       (97)
Other restricted substances (excluding CFCs from cooling systems)
   (90)       (14)
Hazardous substances:

Lead emission
   (100)       (98)
PFCs
   (35)       20
Toluene emission
   (90)       160
Xylene emission
   (90)       741
Styrene
   (90)       (75)
Antimony, Arsenic and their compounds
   (100)       106
   2007 2012
   baseline year actual¹⁾    2015 target¹⁾
Total CO₂from manufacturing

865 kilotonnes CO₂-
equivalent
   -20       -25
Water
   4.2 million m ³ 15       -10
Materials provided for recycling via external contractor per total waste
   79    77       80
Restricted substances:

Benzene emission
   52 kg    -100       achieved
Mercury emission
   185 kg    -71       -100
CFCs, HCFCs
   156 kg    -100       achieved
Hazardous substances

Lead emission
   1,838 kg    -96       -100
PFCs
   1,534 kg    67       -35
Toluene emission
   2,210 kg    180       -90
Xylene emission
   4,506 kg    320       -90
Styrene
   80,526 kg    -47       -90
Antimony, Arsenic and their compounds
   18 kg    -99       -100
¹⁾
~~Total reduction targets against~~Against the base year 2007
Energy use in manufacturing
Total energy usage in manufacturing amounted to ~~13,982~~14,421 terajoules in ~~2011,~~2012, of which Lighting consumes about 80%. Compared ~~with 2010,~~to 2011, energy consumption at Philips went ~~down~~up by 3%. This was driven by new acquisitions reporting for the first time, organizational changes and energy efficiency ~~improvements, less load in glass furnaces and production mix changes.~~improvements.
216      Annual Report 2012
14 Sustainability statements 14.3 - 14.3
Total energy consumption in manufacturing
in terajoules

   2007    2008    2009    2010    2011    2008    2009    2010    2011    2012
Healthcare
   1,602       1,612       1,670       1,545       1,541       1,612       1,670       1,545       1,541       1,798
Consumer Lifestyle
   1,451       1,521       1,188       1,274       1,252       1,521       1,188       1,274       1,252       1,104
Lighting
   12,053       11,359       11,535       11,580       11,189       11,359       11,535       11,580       11,189       11,519
Group Management & Services
   35       34       28       27       —
Innovation, Group & Services
   34       28       27       —         —




Philips Group
   15,141       14,526       14,421       14,426       13,982       14,526       14,421       14,426       13,982       14,421
Carbon emissions in manufacturing
The greenhouse gas emissions of our manufacturing operations totaled ~~635 kilotons~~691 kilotonnes CO₂-equivalent in ~~2011, 6% lower~~2012, 9% higher than ~~2010. Both direct and indirect~~2011. Indirect CO₂ emissions ~~decreased,~~increased, mainly as a result of new acquisitions reporting for the ~~change in the industrial footprint, energy efficiency improvement and an increased share of electricity generated by renewable sources.~~first time.
Total carbon emissions in manufacturing
in ~~kilotons~~kilotonnes CO₂-equivalent

   2007    2008    2009    2010    2011    2008    2009    2010    2011    2012
Direct CO₂¹⁾
   323       303       298       302       297       300       295       299       294       294
Indirect CO₂
   470       430       439       313       269       436       443       317       273       310
Other greenhouse gases
   41       61       54       34       41       61       54       34       40       60
From glass production
   29       28       24       25       28       28       24       25       28       27




Philips Group
   863       822       815       674       635
Philips Group²⁾
   825       816       675       635       691

¹⁾
From energy
²⁾
Excluding new acquisitions therefore different from Operational carbon footprint
CO₂ emissions ~~decreased~~increased at ~~all sectors~~Healthcare and CL due to new acquisitions reporting for the first time, mitigated by energy efficiency improvements and ~~an increased share of~~ electricity generated by renewable sources. Lighting achieved additional reductions in CO₂ emissions due to changes in the industrial footprint.
Total carbon emissions in manufacturing per sector
in ~~kilotons~~kilotonnes CO₂-equivalent

   2007    2008    2009    2010    2011
Healthcare
   118       120       118       57       54
Consumer Lifestyle
   65       65       49       39       37
Lighting
   678       636       647       577       544
Group Management & Services
   2       1       1       1       —


Philips Group
   863       822       815       674       635
~~Water usage in manufacturing~~
~~Total water intake in 2011 was 4.3 million m~~³, about 3% higher than in 2010. This increase was mainly due to a change in the manufacturing process at a major Lighting site, coupled with 2 new acquisitions that started to report in 2011. Lighting represents about 85% of total water usage. In this sector, water is used in manufacturing as well as for domestic purpose. The other sectors use water mainly for domestic purposes.
~~Water intake~~
~~in thousands m~~³

   2007    2008    2009    2010    2011
Healthcare
   369       370       363       256       308
Consumer Lifestyle
   485       452       315       351       338
Lighting
   3,350       3,168       3,531       3,604       3,682
Group Management & Services
   5       6       7       7       —


Philips Group
   4,209       3,996       4,216       4,218       4,328
~~In 2011, 74% of water was purchased and 26% was extracted from groundwater wells.~~
~~Waste in manufacturing~~
Total waste decreased 10% to 94 kilotons in 2011 from 105 kilotons in 2010. Lighting (69%) and Consumer Lifestyle (21%) account for 90% of our total waste. The reduction was due to the closure of a glass furnace and organizational changes in Consumer Lifestyle and Lighting.
~~210      Annual Report 2011~~
~~14 Sustainability statements 14.3 - 14.4~~
~~Total waste~~
~~in kilotons~~

   2007    2008    2009    2010    2011
Healthcare
   7.9       8.2       8.2       11.2       9.3
Consumer Lifestyle
   40.4       28.0       20.1       23.2       19.6
Lighting
   79.2       77.3       69.3       70.1       65.1
Group Management & Services
   0.1       0.1       0.1       0.1       —


Philips Group
   127.6       113.6       97.7       104.6       94.0
Total waste consists of waste that is delivered for landfill, incineration or recycling. Materials delivered for recycling via an external contractor comprised 72 kilotons, which equaled 77% of total waste. The remaining waste consisted of 16% non-hazardous and 7% hazardous waste.
   2008    2009    2010    2011    2012
Healthcare
   120       118       57       54       70
Consumer Lifestyle
   70       53       42       39       38
Lighting
   633       644       575       542       583
Innovation, Group & Services
   2       1       1       —         —


Philips Group
   825       816       675       635       691
Restricted substances
Emissions of restricted substances totaled ~~946~~55 kilos in ~~2011,~~2012, a decrease of 2%50% versus ~~2010.~~2011 mainly as a result of the successful phase-out of benzene in Lighting. With the Green ~~Manufacturing 2015~~Operations program we continue to focus on a selection of the most important substances in our processes.
Restricted substances
in kilos

   2007    2008    2009    2010    2011
Benzene and Benzene compounds
   52       1       136       101       55
Mercury and Mercury Compounds
   185       211       122       83       51
CFCs/HCFCs¹⁾
   157       213       14       4       5
Other restricted substances
   973       673       366       777       835


Total
   1,367       1,098       638       965       946
   2008    2009    2010    2011    2012
Benzene and Benzene compounds
   1       136       101       55       —
Mercury and Mercury Compounds
   211       122       83       51       54
CFCs/HCFCs¹⁾
   213       14       4       5       1


Total
   425       272       188       111       55
¹⁾
Excluding cooling systems
Benzene
Lighting iswas the only sector that ~~uses~~used benzene in ~~manufacturing. The decrease of 46%~~manufacturing, but has been successful in ~~2011 was a result of less load, and~~2012 in the ~~plan to~~ phase-out ~~the use~~ of benzene.
Mercury
Mercury is used exclusively by Lighting. Emissions ~~decreased significantly~~increased from ~~83 kg in 2010 to~~ 51 kg in 2011 to 54 kg in 2012, due to ~~process improvements (using solid Mercury)~~increased loads and a product mix change.
CFCs/HCFCs
In ~~2011~~2012 total emissions from CFCs/HCFCs ~~remained stable at 5 kg at one Healthcare site.~~
~~Other restricted substances~~
~~Emissions of other restricted substances totaled 835 kg in 2011, increasing from 777 kg the previous year. This increase is due~~reduced further to ~~specific manufacturing and maintenance processes at sites in Healthcare and Consumer Lifestyle.~~1 kg.
Hazardous substances
Targets have been set on a selected number of hazardous substances.
Hazardous substances
in kilos

   2007    2008    2009    2010    2011    2008    2009    2010    2011    2012
Lead and lead compounds
   1,838       684       1,958       108       44       684       1,958       108       44       73
PFCs (Per Fluorinated Compounds)
   1,534       1,858       2,535       1,507       1,842       1,858       2,535       1,507       1,842       2,560
Toluene
   2,210       2,524       2,160       6,745       5,745       2,524       2,160       6,745       5,745       6,184
Xylene
   4,506       3,684       4,619       30,491       37,889       3,684       4,619       30,491       37,889       18,947
Styrene
   80,526       37,454       21,567       22,920       19,920       37,454       21,567       22,920       19,920       42,329
Antimony, Arsenic and their compounds
   18       16       30       24       37       16       30       24       37       —
Other hazardous substances
   175       96       775       3,846       1,715




Total
   90,807       46,316       33,644       65,641       67,192       46,220       32,869       61,795       65,477       70,093
Lead and lead compounds
The ~~59% decrease~~66% increase in ~~2011~~2012 was mainly related to ~~the termination of a glass furnace operation~~soldering activities and ~~changes in the industrial footprint~~increased load in Lighting.
PFCs
The increase in ~~2011~~2012 to ~~1,842~~2,560 kg was ~~mainly~~ caused by ~~two~~one Lighting ~~sites~~site where PFCs are used as process chemicals.
Toluene
The emission of toluene, mainly used in wet lacquers, ~~decreased~~increased by ~~15%~~8% in 2012 largely as a result of ~~new processes applied at Consumer Lifestyle.~~an increased number of reporting sites.
Xylene
~~The increase was attributable to~~Activities focused on the reduction of Xylene were successful as wet ~~lacquering processes~~lacquers were replaced by powder coatings mainly ~~applied by new acquisitions in~~at Consumer Lifestyle and ~~Lighting and a changed product mix.~~Lighting.
Styrene
~~The~~In 2012, the emission of styrene ~~decreased by 13% mainly~~more than doubled compared to 2011 due to ~~production portfolio changes at a Lighting~~one new reporting site ~~that plans to eliminate the use of styrene.~~in Lighting.
Antimony, Arsenic and their compounds
~~The increase from 24 to 37 kg~~Lighting was ~~caused by one Lighting site.~~
~~Other hazardous substances~~
~~The emissions of other hazardous substances decreased by 55% to 1,715 kg~~successful in ~~2011. Multiple sites contributed to this decrease.~~phasing-out these substances.
ISO 14001 certification
In ~~2011, 89%~~2012, 71% of reporting manufacturing sites were certified. This decrease compared to the previous year is attributable to new acquisitions being included in the reporting for the first time, but not being certified yet. The sectors have programs in place to address this.
Annual Report 2012      217
14 Sustainability statements 14.3 - 14.4
ISO 14001 certification
as a % of all reporting organizations

   2007    2008    2009    2010    2011
Philips Group
   90       95       92       95       89
   2008    2009    2010    2011    2012
Philips Group
   95       92       95       89       71
Environmental Incidents
In ~~2011, 12~~2012, 2 incidents were reported by ~~Consumer Lifestyle and Lighting in the following categories. They were~~Healthcare related to ~~water (3), restricted substances (1), noise (2) and fire (6).~~
~~One non-material fine was~~water. There were no fines reported in our ~~EcoVision system~~sustainability reporting tool in connection with one of the incidents.
14.4 ~~Social indicators~~
~~Engagement~~
In September Philips employees took part in the Engagement Survey, giving their answers to 40 questions on leadership, management capabilities, alignment with the company’s vision, identification with the
~~Annual Report 2011      211~~
~~14 Sustainability statements 14.4 - 14.4~~
~~brand, communication, reward and recognition, diversity and inclusion and sustainability. The participation rate was 87%, a slight increase compared to 2010.~~
~~Engagement Index~~
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.
~~Employee Engagement Index~~

   2007    2008    2009    2010    2011
% favorable
   67       72       71       77       76
% neutral
   20       16       15       12       14
% unfavorable
   13       12       14       11       10
~~The EEI decreased 1 point to 76% in 2011 compared with 2010. The target for 2012 is to achieve the high-permance norm.~~
~~People Leadership Index~~
We have developed the People Leadership Index (PLI), which focuses on overall people leadership effectiveness, as managers contribute significantly to the engagement of their employees. Our PLI – measuring 7 aspects relating to management capabilities – increased by 2% overall, reaching 78% this year. We believe, these positive results reflect employees’ confidence in the availability of their leaders and underline the fact that Philips’ managers are encouraging engagement. It also shows that our efforts to improve our managers’ leadership skills are yielding results.
~~A look at the results~~
Over the years we have created a solid platform for engagement by improving our leaders’ people management capabilities. Analyzing a number of high performing units, we learned that significant improvements are possible and how this can be achieved. The biggest advancements in our EEI scores were seen where teams worked on areas identified last year as needing improvement. Putting the EEI results into action is therefore very important. Employees were given the opportunity to participate in “deep dives”, in which they analyzed their team’s EEI performance and prepared concrete action plans for improvement.
~~Diversity and inclusion~~
We continue to focus on increasing the opportunities for women and other under-represented groups in key positions, and on developing a diverse talent pipeline, as we know diversity enables us to better serve our customers. In 2011, Philips employed 36% females, a slight increase compared to last year.
~~Workforce diversity~~
~~in %~~
¹⁾
~~Left to right: 2009, 2010 and 2011~~
~~as a % of total executives~~

   2007    2008    2009    2010    2011
Female executives
   8       10       10       11       13
~~Executives~~
In 2011, Philips made progress towards its targets relating to the diversity of the company’s executive population. The share of female executives increased to more than 13% compared to 11% in 2010 – just two percentage points off the 2012 target of 15% female executives.
The share of executives with Brazilian, Russian, Indian and Chinese nationality increased from 5% to over 8% compared to the 2012 target of 10% of the total population. Overall, the 567 executives of Philips represent 31 different nationalities.
~~Employees per age category~~
~~in %~~
¹⁾
~~Left to right: 2009, 2010 and 2011~~
~~New hire diversity~~
~~in %~~
¹⁾
~~Left to right: 2009, 2010 and 2011~~
~~In 2011, the turnover of Philips employees amounted to 11%.~~
~~Employee turnover~~
~~in %~~
~~2011~~
~~Female~~
13
~~Male~~
10
~~Philips Group~~
11
~~Developing our people~~
Employees across the world can access detailed information about our Global Learning Curricula and register for courses online via our Global Learning Portal, Learning @ Philips. In 2011 we extended the range of programs and provided free and unlimited access to our employees. As a result, we have recorded a significant increase in course participation.
~~212      Annual Report 2011~~
~~14 Sustainability statements 14.4 - 14.5~~
~~number of enrollments~~

   2007    2008    2009    2010    2011
Core Curriculum programs
   12,000       10,000       5,500       20,000       39,600
Our Core Curriculum offers learning opportunities in the areas of personal effectiveness, people management and business acumen. With over 39,000 enrollments in programs in the Core Curriculum during 2011, enrollment increased significantly compared with 20,000 the previous year.
Our Functional Core Curriculum includes courses in Marketing, Sales, Customer Services, IT, HRM, Supply Management and Finance. Enrollment in the Functional Core Curriculum was over 25,000 in 2011, compared with around 15,500 in 2010. Many Functional Curricula are tied to mandatory learning plans designed to increase our organizational capability.
~~We had over 30,000 employees participate in various ethics and compliance related trainings.~~
~~Talent pipeline curriculum~~
The Talent Pipeline Curriculum consists of specially designed learning interventions across the talent pool. These programs are created and deployed in collaboration with the top global universities. They provide accelerated learning opportunities to our talent and offer action learning projects to apply learnings to a business opportunity that in turn creates value for Philips.
Octagon is a development program for top potentials and Inspire is for high potentials. We continued our investment in and focus on talent development by facilitating the completion of 18 Inspire project assignments. Top potentials in the Octagon program completed eight business projects. These business projects are sponsored by senior business leaders and enable the realization of Philips’ strategic goals.
~~Executive education~~
To help our executives to continue to develop their careers and strengthen their leadership skills, we have been offering a curriculum of internal and external programs. Participation in these programs was comparable to 2010.
~~Training spend~~
~~Our training spend in 2011 amounted to EUR 58 million, about 10% less than in 2010.~~
~~Health and Safety~~
Philips strives for an injury-free and illness-free work environment, with a sharp focus on decreasing the number of injuries. This is defined as a KPI, on which we set yearly targets for the company and our individual sectors.
~~We regret to report two fatalities in 2011, of which one was related to a safety accident and one to a traffic accident whilst commuting.~~
In 2011, we recorded 405 Lost Workday Injuries cases, i.e. occupational injury cases where the injured person is unable to work the day after the injury. This is a 16% decrease compared with 2010. The number of Lost Workdays caused by these injuries amounted to 11,602 days. The rate of Lost Workday Injuries decreased to 0.38 per 100 FTEs, compared with 0.50 in 2010.
~~Lost Workday Injuries~~
~~per 100 FTEs~~

   2007    2008    2009    2010    2011
Healthcare
   0.29       0.27       0.20       0.25       0.20
Consumer Lifestyle
   0.61       0.44       0.26       0.26       0.23
Lighting
   1.35       1.17       0.76       0.80       0.64
Group Management & Services
   0.12       0.12       0.07       0.13       0.04


Philips Group
   0.81       0.68       0.44       0.50       0.38
All sectors showed a decrease in Lost Workday Injury cases, but the reduction was most visible in Lighting. In Lighting a dedicated action program, Safety First was launched four years ago to drive down injury levels. We started a number of health and safety initiatives in the other sectors as well.
~~Social Investment Programs~~
As part of our drive to improve the health and well-being of people around the world, our focus on engaging the next generation on healthy lifestyle continued in 2011 with the further expansion of our SimplyHealthy@Schools program. We expanded the program from 38 countries in 2010 to 55 countries and over 400 schools and reaching over 120,000 students via our school visits and road shows. Over 4,500 employees around the world actively engaged in the program.
We also continued our support of the American Heart Association’s Start! Heart Walk multi-city events. In 2011, we also launched a new employee volunteer program in North America called “Philips Cares: giving back to our communities”. Over 3,500 Philips employees from North America volunteered for these programs.
~~14.5General~~General Business Principles
~~In 2011, 269~~The analysis is based upon 374 reports ~~were~~ submitted in 2012 relating to alleged violations of the General Business Principles (GBP), compared ~~with 338 reports~~to 269 in ~~2010, 318 in 2009 and 360 in 2008.~~2011.
We see a considerable ~~decline~~increase in number of complaints ~~reported. This~~reported, which can be ~~contributed~~attributed mainly to ~~a decline~~an increase in number of complaints in ~~the Americas. However,~~ North America, ~~still~~which accounted for ~~the largest number of reports (32% compared with 36% in 2010), closely followed by Latin America that accounted for 32%~~47% of all complaints ~~reported (compared with 36% in 2010)~~(2011: 32%). This dominance ~~remains probably~~in North America we believe is due to a corporate culture in which employees are very much aware of compliance issues, their rights and the opportunities for reporting potential violations. A considerable decrease in complaints reported is shown in Latin America (2012: 21%; 2011: 32%). The management attention and additional training in 2012 including the launch of a ‘Mutual Respect’ e-training in Brazil early 2012 we believe may have contributed to this decline. With ~~19%~~15% of the total number of reported complaints, Europe and the Middle East region show a ~~small~~ relative ~~increase~~decrease in comparison ~~with 2010 (17%~~to 2011 (19%). ~~The strongest~~A minor increase ~~took place~~is witnessed in the Asia Pacific region, ~~that~~which accounted for ~~17%~~18% of all reports ~~(2010: 11%~~(2011: 17%).
Most common types of alleged violations
Treatment of employees
~~While they have decreased considerably,~~The most common alleged violations ~~still fall under~~remain related to the Treatment of employees category, which represented ~~49%~~55% of all violations ~~(2010: 54%~~(2011: 49%).
As in ~~2010,~~2011, the vast majority of ~~these~~the Treatment of employees complaints (almost 85%) remains related to two issues – Discrimination and Respectful treatment. The increase in number of complaints this year can be attributed to the increase related to these two issues.
Complaints regarding Discrimination mainly relate to discrimination based on gender and favoritism, and originated principally in the US and Brazil. Of the complaints reported in the US, ~~23%~~30% related to ~~discrimination. Of~~discrimination, and of the complaints reported in Brazil, ~~23%~~14% related to discrimination, whereas that figure was ~~just over 15%~~19% for ~~Philips as~~Philips. For Brazil, this is a ~~whole.~~notable decline in percentage in comparison to last year (23%).
Most complaints regarding lack of Respectful treatment – primarily verbal abuse, (sexual) harassment and ~~harassment –~~unfair treatment- again ~~came~~come from the US and ~~Brazil, as well as Mexico.~~Brazil. Of the complaints reported in the US, ~~35%~~37% related to respectful ~~treatment. Of~~treatment; of the complaints reported in Brazil, ~~34%~~32% related to respectful ~~treatment. Of the complaints reported in Mexico, 35% related~~treatment; compared to ~~respectful treatment, compared with 26%~~27% for Philips as a whole. There is no clear indication of the reason for this sudden decline. In any case, the number of complaints is reason to remain vigilant and devote enhanced attention in management and worker training to this topic. One of the initiatives taken in this regard is the planned launch of a ‘Mutual Respect’ e-training in Brazil early in 2012. Further, these topics are part of the GBP e-training for management, that was launched late in 2011 to higher management and executive level.
Business integrity
In second place, with ~~40%~~32% of the total number of complaints, are allegations in the Business ~~Integrity~~integrity category ~~(2010: 33%~~(2011: 40%). While the percentage has gone up, we see a slight decrease in the actual number of complaints. The increase in percentage was mainly due to the effect of a considerable decrease in the number of allegations in the Treatment of employees category.
~~Annual Report 2011      213~~
~~14 Sustainability statements 14.5 - 14.6~~
~~The category Other~~
~~Allegations in the category Other represented 5% of reported complaints (2010: 7%). This number also shows a decrease in comparison with 2010, in percentage as well as actual number.~~
Supply Management
All employees who are performing (certain) purchasing functions should adhere to and fully comply with the Philips Supply Management Code of Ethics. As in the previous two years, we ~~noticed very few~~witnessed a low number of complaints in this regard in 2012, with only 3 complaints concerning alleged violations ~~in 2011.~~of the Code (2011: 3 complaints).
More information on these categories can be found in the GBP Directives on www.philips.com/gbp.
Breakdown of alleged violations GBP

   2007    2008    2009    2010    2011    2008    2009    2010    2011    2012
Health & Safety
   10       10       6       3       2       10       6       3       2       11


Treatment of employees
   236       197       162       184       132       197       162       184       132       205
- Collective bargaining
   1       1       —         1       —         1       —         1       —         1
- Discrimination
   75       76       63       64       41       76       63       64       41       72
- Employee development
   4       8       3       1       —         8       3       1       —         —
- Employee privacy
   9       2       2       2       1       2       2       2       1       1
- Employee relations
   3       14       15       4       1       14       15       4       1       2
- Respectful treatment
   115       81       53       96       71       81       53       96       71       102
- Remuneration
   11       7       22       12       6       7       22       12       6       15
- Right to organize
   5       —         —         —         —         —         —         —         —         1
- Working hours
   13       8       4       4       2       8       4       4       2       —
- HR other
   —         —         —         10       11




Legal
   14       8       4       13       10       8       4       13       10       19




Business Integrity
   83       62       88       112       107       62       88       112       107       119




Supply management
   10       5       4       4       3       5       4       4       3       3




Other
   36       78       54       22       13       78       54       22       15       17




Total
   389       360       318       338       269       360       318       338       269       374
Actual violations versus not proven allegations
Although 8876 of the ~~269~~374 GBP complaints reported in ~~2011~~2012 are still pending (especially those lodged during the last three months of the year), the ~~following~~ table of investigated complaints provides an initial indication of the number of ~~actual~~substantiated violations compared ~~with~~to the number of complaints which, upon investigation, ~~proved to~~could not be ~~non-violations.~~substantiated.
OfOut of the ~~181~~298 complaints investigated, it was found that roughly one ~~third (32%~~quarter (26%) were justified, ~~as was the case~~considerably lower than in ~~2010. In 2009, almost 40% of complaints turned out~~2011 (32%).
With regard to ~~be justified after investigation.~~
~~In the other major category, i.e.~~ complaints regarding Treatment of employees, there was ~~an increase~~a considerable decrease in the number of justified complaints ~~in 2011~~ to ~~21%~~13% of the total number of complaints in this category ~~(2010: 17%; 2009: 25%~~(2011: 21%). ~~With regard to~~
In the other major category, i.e. the investigated complaints in the Business ~~Integrity~~integrity category, the percentage of complaints that were justified ~~fell~~decreased slightly to 42% (2011: 43%~~, below the level~~).
A range of disciplinary and corrective measures have been implemented as a result of established violations of the ~~previous two years (2010: 46%; 2009: 60%).~~General Business Principles, ranging from dismissal and written warnings to awareness training sessions and organizational measures.
~~In 2011, the focus of the internal communication in the context of the extended and updated anti-corruption/anti-bribery guidelines was on the need – at all times – to report possible violations.~~
218      Annual Report 2012
14 Sustainability statements 14.4 - 14.5
Classification of the complaints investigated

   2009    2010    2011       2010       2011       2012
category    actual
violations    not proven
allegations    actual
violations    not proven
allegations    actual
violations    not proven
allegations    substantiated    unsubstantiated    substantiated    unsubstantiated    substantiated    unsubstantiated
Health & Safety
   2       4       1       2       —         2       1       2       —         2       2       7
Treatment of employees
   30       88       22       111       18       68       22       111       18       68       22       150
Legal
   —         2       4       7       —         5       4       7       —         5       5       8
Business Integrity
   41       27       39       45       33       43       39       45       33       43       37       51
Supply Management
   —         —         2       2       2       1       2       2       2       1       1       —
Other
   22       27       10       9       3       5       10       9       3       5       11       4




Total
   95       148       78       176       56       124       78       176       56       124       78       220
~~14.6~~14.5 Supplier indicators
Philips has a direct ~~relations~~business relationship with approximately 10,000 product and component suppliers and 30,000 service providers. Given the size and complexity of our supply chain we need to focus our efforts. Therefore, we developed an approach based on the supplier’s sustainability risk profile related to spend, country of production, business risk and type of supplier relationship. ~~634~~594 supplier sites have been identified as risk suppliers, including ~~552~~497 product and component suppliers, and 8297 service providers. Different types of service providers ~~make up~~are part of our audit program, including labor agencies and transportation companies. All risk suppliers are by definition part of our audit program.
~~2011~~Philips Supplier Sustainability Declaration
The Philips Supplier Sustainability Declaration is based on the EICC code of conduct and we added requirements on Freedom of Association and Collective Bargaining. The topics covered include labor and human rights, worker health and safety, environmental impact, ethics, and management systems. We monitor supplier compliance to the Declaration through a system of regular audits.
In 2012 we updated the Philips Supplier Sustainability Declaration and audit tools, to be in line with the new version of the EICC code of conduct that was recently issued. The updated Declaration includes 4 entirely new provisions, and 14 updates to existing provisions. The new provisions are related to responsible sourcing of minerals, protection of privacy, non-retaliation, and supplier responsibility to monitor code compliance at next tier suppliers. We begin to roll-out the updated Philips Supplier Sustainability Declaration via the purchasing contracts signed with suppliers, and via all trainings and audits conducted.
The Declaration requires suppliers to cascade the EICC Code of Conduct down to their next tier suppliers. This roll-out to deeper tiers in the supply chain is reviewed during the on-site audits. Risk suppliers with who we have a direct business relationship are included in the audit program, and most of these are tier 1 suppliers. However, sometimes Philips also selects and prescribes the tier 2 suppliers, in which case these tier 2 suppliers will also be included in the audit program.
We monitor supplier compliance with the Declaration through a system of regular audits. During these audits, an independent external party visits the supplier’s site for several man-days to hold interviews with workers and management, do a factory tour, and review documentation. Based on purchasing spend, production country and type of business, Philips selects suppliers for inclusion in the audit and supplier development program. 594 suppliers have been identified as risk suppliers and are included in the audit program; the majority of these are in China. During the audits, compliance with all sections of the Declaration is reviewed. In the event of non-compliance we require suppliers to make a corrective action plan, and we monitor its implementation until all major non-compliances are resolved. Full-scope audits are conducted in a 3-year cycle; to date we have audited 90% of all identified risk suppliers.
2012 supplier sustainability audits
In ~~2011,~~2012 we audited ~~212~~159 of our current risk suppliers, including 75100 continual conformance audits with suppliers that we already audited in ~~2008.~~2009. Risk suppliers from ~~all~~ recently acquired companies are also included, and this year we ~~completed the audit program with~~audited 17 suppliers from the acquisitions of ~~Saeco, Dixtal,~~Indal, Povos, and ~~Apex.~~Preethi. As in previous years, the majority of the audits were done in ~~China, representing~~China. Also in Brazil and India audits were done, as well as a ~~substantial part~~small number of ~~our supply base.~~audits in Mexico, Indonesia, Philippines, Russia, Belarus, Ukraine and the Dominican Republic. With these audits we directly or indirectly impacted over 124,000 workers employed at the production sites that were audited.
On top of the audits with current risk suppliers, we also audited 5865 potential suppliers ~~as part of~~during the supplier selection process. Below we report on the findings at existing suppliers only; findings at potential suppliers are not included in this report since these suppliers are not (yet) part of Philips’ supply base.
~~214      Annual Report 2011~~
~~14 Sustainability statements 14.6 - 14.6~~
~~Number of initial and continual conformance audits in 2011~~
To track our progress in improving compliance with risk suppliers we ~~introduced~~use the ~~new~~ key performance indicator ‘compliance rate’, being the percentage of the risk suppliers that was ~~recently~~ audited in the last 3 years, and has resolved all major non-compliances. Major non-compliances include two categories: zero tolerance and limited tolerance non-compliances. By increasing the scope of our KPI to limited tolerance issues, we aim to structurally drive implementation across all categories of the Supplier Sustainability Declaration.non compliances. During ~~2011~~2012 we achieved a compliance rate of 75% (2011: 72%).
Number of initial and continual conformance audits
Audit findings
Below table shows the results of the full scope audits done during 2012. On average we identified 18 major non-compliances per audit, 5 zero tolerance and 13 limited tolerance non-compliances, and we work with each supplier to resolve these non-compliances within 90 days where possible. The limited-tolerance non-compliances include all management systems related issues, accounting for an average of 8 non-compliances per audit. The continual conformance audits showed on average a better result than the initial audits with suppliers that went through the audit cycle for the first time.
When the audit reveals areas of non-compliance we request suppliers to implement corrective actions and we monitor the implementation during resolution audits. During the year a total of 1,375 corrective actions were implemented successfully by our suppliers to resolve major non-compliances. The results of the resolution audits are not shown in below table.
During 2012 for 2 supplier sites the phase-out decision was taken due to, amongst others, a lack of sustainability improvements.
The most frequently observed areas of major non-compliance are:

Working hours, wages and benefits: excessive overtime, continual seven-day ~~work~~working weeks, insufficient record keeping of standard and overtime working hours, no payment of overtime premiums
Annual Report 2012      219
14 Sustainability statements 14.5 - 14.5

Emergency preparedness: inadequate fire detection and suppression systems, blocked or insufficient emergency exits

Occupational safety: worker exposure to safety hazards, e.g. electrical shocks

Lack of adequate management systems to safeguard compliance to the EICC code for labor and ethics, health and safety and environment
Compared to 2011 we note on average per audit 8% more non-compliances for wages and benefits, and in particular full payment of all overtime premiums is an issue. Suppliers reported difficulties in implementing the yearly legal wage increases in China, especially in the current weak economic environment. For industrial hygiene and occupational safety non-compliances we observe a 9% and 7% increase respectively, which is mainly due to the application of new and stricter legislation in China.
Areas where we observe improvements compared to previous ~~years~~year are ~~the payment of overtime premiums, industrial hygiene~~mainly related to environmental impact, especially for environmental permits and ~~workers health checks, as well as hazardous substances management.~~reporting, pollution prevention and resource reduction, and product content restrictions. These improvements are ~~due to an increasing awareness at both worker~~the result of increased enforcement and management ~~level,~~awareness, and we believe that the Philips ~~program has~~programs have contributed to this.
Since we updated the audit tool mid-2010 with increased focus on management systems and EICC code roll-out to next tier suppliers, we have observed more non-compliance in these sections. Around 40% of the audited suppliers did not implement an effective process to ensure that their next tier suppliers implement the EICC code. In relation to management systems, the most frequently observed areas of non-compliance are a lack of self-audits and risk assessments, absence of performance objectives and a lack of worker feedback and participation.
Excessive working hours
In China, there is a wide gap between legislated working hours and reality. Especially in regions with high shares of migrant workers a ~~72-~~72 hour working week is not uncommon. While this issue is not unique to Philips, we have decided to take a step-wise approach by working with our suppliers to ~~first~~ reduce to a maximum of 60 work hours per week and at least one day off per week, except in emergency or unusual circumstances.
During the ~~2011~~2012 audits we identified ~~138~~119 suppliers with working weeks exceeding 60 hours, and 8988 cases where workers were not provided with one day off per week. In these cases we require suppliers to submit a corrective action plan taking into account factors like employee turnover, seasonality, workforce size, shift structure, productivity, demand planning, etc.
~~Audit findings~~Management systems
~~The table below shows~~There may be areas where our audits reveal compliance in actual practice, but the results of the full scope audits conducted during 2011. On average we identified 15 major non-compliances per audit: 4 zero tolerance and 11 limited tolerance non-compliances. The limited-tolerance non-compliances include allrelated underlying management systems ~~related issues, accounting for an average of 8 non-compliances per audit.~~
~~When~~to safeguard continued compliance may not be sufficient. Therefore, also management systems are reviewed during the ~~full-scope audit reveals~~audits. We see this area as a continued weak area at suppliers where further capacity building is necessary. Related to management systems the most frequently observed areas of non-compliance ~~we request suppliers to implement corrective actions~~are insufficient risk assessment and ~~we monitor the implementation during resolution audits. During the year a total~~self-audits, absence of ~~2,010 corrective actions were implemented successfully by our suppliers to resolve major non-compliances. The results of the resolution audits are not shown in the table below.~~
~~During 2011 the decision was taken to phase-out 15 supplier sites in part to~~performance objectives, and a lack of ~~sustainability improvements.~~worker feedback and communication.
More information on the Supplier Sustainability Involvement Program, the ~~EICC Code of Conduct~~Philips Supplier Sustainability Declaration and audit approach can be found at www.philips.com/suppliers.

220      Annual Report ~~2011      215~~2012
14 Sustainability statements ~~14.6~~14.5 - ~~14.6~~14.5

Summary of ~~2011~~2012 initial and continued conformance audit findings per region
suppliers with one or more major non-compliances per category (in %)% of suppliers audited in 2012)

   China Asia excl. China LATAM EMEA Total    China Asia excl. China LATAM EMEA Total
No. of audits 2011
   151    24    34    3    212
Initial audits 2011
   92    16    26    3    137
Continued conformance audits 2011
   59    8    8    —      75
Workers employed at sites audited in 2011
   155,099    8,785    8,406    412    172,702
No. of audits
   110    30    16    3    159
Initial audits
   37    12    9    1    59
Continued conformance audits
   73    18    7    2    100
Average number of non-compliance per audit
   19    16    16    7    18
Workers employed at sites audited
   102,494    12,789    6,163    2,788    124,234
Labor

Freely Chosen Employment
   <10 % 10-25 % 10-25 % —      <10 %
Child labor avoidance /young worker management
   —      —      —      —      —
Freely Chosen Employment¹⁾
   <10 % 25-50 % 10-25 % —      10-25 %
Child labor avoidance /young worker management²⁾
   <10 % —      —      —      <10 %
Working hours
   >75 % 50-75 % 10-25 % —      50-75 %    >75 % 50-75 % 25-50 % —      >75 %
Wages and Benefits
   50-75 % 25-50 % 10-25 % —      25-50 %    50-75 % 25-50 % 10-25 % —      50-75 %
Humane Treatment
   —      —      <10 % —      <10 %    —      —      —      —      —
Non-discrimination
   <10 % —      10-25 % —      <10 %    10-25 % —      10-25 % —      <10 %
Freedom of association
   <10 % 10-25 % —      —      <10 %    —      10-25 % —      —      <10 %
Collective bargaining
   —      —      —      —      —         —      —      —      —      —
Health & Safety

Occupational Safety
   50-75 % 50-75 % 25-50 % 50-75 % 50-75 %    50-75 % 25-50 % 50-75 % 50-75 % 50-75 %
Emergency Preparedness
   50-75 % 50-75 % 50-75 % >75 % 50-75 %    50-75 % 50-75 % 50-75 % >75 % 50-75 %
Occupational Injury and Illness
   25-50 % 25-50 % <10 % 50-75 % 25-50 %    25-50 % 25-50 % <10 % 25-50 % 25-50 %
Industrial Hygiene
   25-50 % 25-50 % <10 % 25-50 % 25-50 %    50-75 % 25-50 % 10-25 % —      25-50 %
Physically demanding work
   <10 % —      —      —      <10 %    <10 % —      10-25 % —      <10 %
Machine safeguarding
   <10 % <10 % <10 % 25-50 % <10 %    10-25 % <10 % 10-25 % —      10-25 %
Dormitory and canteen
   10-25 % 10-25 % 10-25 % —      10-25 %    10-25 % 10-25 % 10-25 % —      10-25 %
Environment

Environmental Permits and Reporting
   25-50 % 10-25 % 25-50 % —      25-50 %    25-50 % 10-25 % 10-25 % —      10-25 %
Pollution prevention and resource reduction
   <10 % 25-50 % 25-50 % —      10-25 %    <10 % 10-25 % 10-25 % —      <10 %
Hazardous substances
   25-50 % 25-50 % 10-25 % —      25-50 %    25-50 % 10-25 % 10-25 % —      25-50 %
Waste water and solid waste
   <10 % <10 % 10-25 % —      <10 %    <10 % 10-25 % 10-25 % —      <10 %
Air emissions
   10-25 % 10-25 % <10 % —      10-25 %    <10 % 10-25 % <10 % —      <10 %
Product content restrictions
   25-50 % 50-75 % 10-25 % —      25-50 %    25-50 % 25-50 % 25-50 % —      25-50 %
Management systems

Company Commitment
   25-50 % 25-50 % 25-50 % —      25-50 %    25-50 % 25-50 % 25-50 % 25-50 % 25-50 %
Management Accountability and responsibility
   25-50 % 25-50 % 25-50 % —      25-50 %    50-75 % 25-50 % 50-75 % 25-50 % 50-75 %
Legal and Customer Requirements
   25-50 % 25-50 % 25-50 % —      25-50 % �� 25-50 % 25-50 % 50-75 % 50-75 % 25-50 %
Risk Assessment and Risk Management
   50-75 % 50-75 % 25-50 % 25-50 % 25-50 %    50-75 % 50-75 % 50-75 % 25-50 % 50-75 %
Performance Objectives
   50-75 % 50-75 % 50-75 % 50-75 % 50-75 %    50-75 % 50-75 % 50-75 % 25-50 % 50-75 %
Training
   25-50 % 25-50 % 25-50 % —      25-50 %    50-75 % 25-50 % 50-75 % —      50-75 %
Communication
   25-50 % 25-50 % 25-50 % —      25-50 %    50-75 % 25-50 % 25-50 % 25-50 % 50-75 %
Worker feedback and participation
   50-75 % 25-50 % 25-50 % —      25-50 %    50-75 % 50-75 % 50-75 % 25-50 % 50-75 %
Audits and assessments
   50-75 % 50-75 % 50-75 % —      50-75 %    50-75 % 50-75 % 50-75 % 25-50 % 50-75 %
Corrective action process
   25-50 % 25-50 % 25-50 % 25-50 % 25-50 %    50-75 % 25-50 % 50-75 % 50-75 % 50-75 %
Documentation and records
   25-50 % 25-50 % 25-50 % 25-50 % 25-50 %    50-75 % 25-50 % 25-50 % —      25-50 %
Ethics

Business Integrity
   <10 % 10-25 % 10-25 % 25-50 % <10 %    <10 % 10-25 % —      —      <10 %
No Improper Advantage
   <10 % 10-25 % 10-25 % 50-75 % 10-25 %    <10 % 10-25 % <10 % —      <10 %
Disclosure of information
   —      —      —      —      —         —      —      —      —      —
Protection of Intellectual Property
   <10 % 10-25 % —      25-50 % <10 %    <10 % 10-25 % —      —      <10 %
Fair business, advertising and competition
   10-25 % 25-50 % 25-50 % 50-75 % 10-25 %    <10 % 10-25 % 10-25 % —      <10 %
Protection of identity
   <10 % <10 % 10-25 % —      <10 %    10-25 % 10-25 % 10-25 % —      10-25 %
General

EICC Code
   25-50 % 50-75 % 25-50 % 25-50 % 25-50 %
Compliance with law
   —      —      <10 % —      <10 %

~~216~~      Annual Report ~~2011~~2012      221
14 Sustainability statements ~~14.6~~14.5 - ~~14.6~~14.5

China Asia excl. China LATAM EMEA Total
General
EICC Code
25-50 % >75 % 10-25 % 25-50 % 25-50 %
Compliance with law
—   —   —   —   —

¹⁾
Freely chosen employment: these cases are related to 1) workers having to pay a deposit for uniforms, safety equipment, and/or tools. We requested suppliers to return these deposits to the workers and provide these items without demanding a deposit, and 2) in some cases no labor contract was signed. We requested suppliers to take corrective actions and verified that contracts were in place for all workers.
²⁾
Child labor avoidance/young worker management: this is related to one case of historic child labor, where a supplier hired 2 workers prior to reaching the legal age, but they were no longer underage at the time of the audit. We requested the supplier to strengthen its management system and age verification procedure, and ensured that the workers were enrolled in the young worker management program.
Supplier training and capability building
Based on many years of experience with the audit program, we know that a combination of audits, capacity building, consequence management and structural attention from management is crucial to realize structural and lasting changes at supplier production sites. During ~~2011~~2012 we ~~continued our training programs~~extended capacity building initiatives which are offered to ~~support~~help suppliers ~~in risk countries.~~improve their practices. We ~~organized~~organize classroom training sessions, inPhilips sustainability experts regularly visit suppliers to provide on-site consultancy and training, and we invite suppliers to participate trainings provided by the EICC. In China ~~Brazil~~ and India ~~for suppliers included in~~we held dedicated training sessions about the ~~audit program. Over 400~~EICC code of conduct, trainings about fire safety, electrical and machine safety, chemical management, and industry hygiene, which were attended by more than 380 supplier representatives ~~attended the training sessions.~~for active and potential suppliers, including suppliers for recent acquisitions. In ~~November~~Shenzhen, China we also hosted ~~the EICC Worker Management Communication~~a Health and Safety Training ~~in Shenzhen, China. This~~that was developed in a joint effort by the EICC and GeSI.
In India, in a project initiated with the ~~Fair Labor Association.~~Dutch Ministry suppliers were coached by local consultants in the development and implementation of a sustainability strategy for their company, integrated in their business strategy. Three suppliers participated in this bottom-up approach, which helped suppliers to set their own objectives, based on their own priorities and values as responsible corporate citizens.
Sustainable Trade Initiative IDH
Philips is one of the initiators of the IDH Electronics Program, an innovative multi-stakeholder initiative sponsored by the Sustainable Trade Initiative (IDH) together with Dell, HP, Philips and civil society organizations. The program will work with over 100 electronics suppliers in China to support innovative workforce management practices, sustainability and better business performance. The goal is to improve ~~the~~ working conditions of more than 500,000 employees in the electronics sector.
The program was formally kicked off ~~in October in Shenzhen, China, bringing together more than 200 participants from 60~~end 2011 when the first suppliers ~~the regional government, the Dutch government and a large number of NGOs and labor unions. The kickoff event galvanized commitment to~~entered the program, onand in 2012 we continued the ~~part~~implementation phase in China’s Pearl River Delta. A total of ~~all stakeholders, including our suppliers and the regional government.~~
~~The first phase of the program started in November 2011, with four~~8 Philips suppliers ~~joining~~are now involved in the program. Suppliers ~~received~~receive a so-called Entry Point Assessment to identify challenges common to factory management and workers such as worker-management communication, occupational health and safety, production, performance management and environmental issues. ~~Each~~Based on this a tailor made action plan is developed with each supplier ~~receives support over a period of up to 24 months~~ on the basis of improved dialogue between management and workers. ~~The~~Suppliers receive support over a period of up to 24 months, and the costs of the program are shared between the supplier, Philips, and the IDH.
~~‘Conflict’~~Conflict minerals
~~Conflict minerals can come from many sources around the world including mines in the Democratic Republic of the Congo (DRC).~~ Philips is concerned about the situation in the east of the ~~DRC~~Democratic Republic of the Congo (DRC) where proceeds from the extractives sector are used to finance rebel conflicts in the region. These minerals may end up in many different products such as cars, planes, chemicals, packaging, and electronics equipment. Philips is committed to address this issue, even though it does not directly source minerals from the DRC. ~~Mines are typically seven or more tiers removed in the~~The supply chain ~~from our~~for the metals of concern consists of many tiers, including mines, traders, exporters, smelters, refiners, alloy producers and component manufacturers, before reaching Philips’ direct suppliers. Philips is working towards the following goals:

Minimize trade in conflict minerals that benefit armed groups in the DRC or an adjoining country

Enable legitimate minerals from the region to enter global supply chains, thereby supporting the Congolese economy and the local communities that depend on these exports.
What are conflict minerals?
Conflict minerals are defined in the US Dodd-Frank Act as tin, tantalum, tungsten and gold. They can come from many sources around the world, including mines in the DRC which are estimated to provide approximately 18% of global tantalum production, 4% of tin, 3% of tungsten, and 2% of gold. Some of the mines in the DRC are controlled by militias responsible for atrocities ~~that have been~~ committed in the Congolese civil war.
Collaboration with different stakeholders
We believe that industry collaboration and stakeholder dialogue are key to creating impact at these deeper levels of our supply chain. Since 2008 Philips is actively contributing to the Extractives Work Group, a joint effort of the electronic and mobile phone industry organizations EICC and GeSI, to positively influence the social and environmental conditions in the metals extractives supply chain. In 2011 Philips helped organizing the first European session of the EICC-GeSI Conflict Minerals Workshop in Brussels, which convened over 150 stakeholders from different industries, governments and civil society organizations. See also http://www.eicc.info/extractives.htm.
~~Philips engaged~~As we have been doing for years, we continued our engagement with relevant stakeholders including the ~~Dutch government~~European Parliament, other industry organizations and local as well as international NGOs in Europe and the ~~European Parliament~~US to see how we can resolve the issue. ~~We also joined~~To demonstrate our commitment we signed on to the multi-stakeholder statement from the Responsible Sourcing Network, urging stakeholders to continue the momentum on removing conflict minerals from the supply chain.
In September 2012, the Conflict Free Tin Initiative was launched, introducing a tightly controlled conflict-free supply chain of tin from a mine in Congo all the way down to an end-product. Philips is one of the industry partners brought together by the Dutch government that initiated this conflict-free sourcing program in eastern DRC. Although this region has a rich supply of minerals, its economy has collapsed due to decades of ongoing conflict. In an effort to prevent minerals from financing war, many companies worldwide have shielded away from purchasing minerals from the DRC, creating a de facto embargo and a collapse of the local economy. To overcome this issue and promote cooperation and economic growth in the region outside the control of the rebels, we launched the Conflict Free Tin initiative. In October 2012 an important milestone was reached when the first bags of tagged minerals left the mine. The first end-user products containing this conflict-free tin are expected mid 2013.
Supply chain due diligence
To assist in developing a due diligence standard for conflict minerals, we participated in the multi-stakeholder OECD-hosted pilot ~~to test~~for the ~~OECD~~implementation of the ‘OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from ~~Conflict- Affected~~Conflict-Affected and High-Risk ~~Areas. Furthermore,~~Areas’.
During 2012 we ~~continued our engagement on this topic with relevant Congolese organizations as well as NGOs in Europe and the US.~~
~~Due diligence of the Philips supply chain~~
We worked with ~~100~~347 priority suppliers to raise awareness and start supply chain ~~investigations.~~investigations into the country of origin for the metals. These suppliers cover more than 80% of the relevant purchasing spend. Using the EICC-GeSI ~~Due Diligence survey tool~~Conflict Minerals Template we requested our suppliers to report back their progress and to disclose which smelters are used in their supply ~~chains.~~chains to produce the metals. For all four metals together we identified ~~over 100~~127 smelters in our supply ~~chain.~~chain, of which the majority is located in Asia. By having published this smelter list on our internet we created transparency at deeper levels in our supply chain of those actors that we believe hold the key towards effectively addressing the concerns around conflict minerals.
222      Annual Report 2012
14 Sustainability statements 14.5 - 14.5
Number of identified smelters per region
Number of identified smelters per metal
Conflict-free smelter program
The smelter is at a key point in the supply chain to enforce responsible sourcing because at that stage minerals from many sources are processed to produce a refined metal. The EICC-GeSI Conflict-Free Smelter (CFS) program makes it possible to identify smelters that can demonstrate through an independent third party assessment that the minerals they procure did not originate from sources that contribute to conflict in the DRC.
~~Having~~ After having identified ~~more than 100~~ smelters in our supply chain, ~~as a result of the due diligence,~~ Philips started to invite these smelters to participate in the CFS program. ~~We also visited a number~~
A list of CFS compliant smelters for tantalum and gold has been published, and audits for tin and tungsten smelters are under way. As sufficient conflict-free smelters for all four metals become available, Philips plans to ~~encourage them to enter the CFS audit program.~~direct its supply chain towards these smelters. See www.conflictfreesmelter.org for more details.
For more details, see www.philips.com/suppliers and the published Philips position paper on Conflict Minerals.

Annual Report ~~2011      217~~2012      223
14 Sustainability statements ~~14.7~~14.6 - ~~14.7~~14.6

~~14.7Independent~~14.6 Independent assurance report
To the Supervisory Board and Shareholders of Koninklijke Philips Electronics N.V.:
~~Introduction~~
We ~~have been~~were engaged by the Supervisory Board of Koninklijke Philips Electronics N.V. (further ‘Philips’) to provide assurance on the information in the chapter Sustainability statements in the Annual Report ~~2011.~~2012 including the information referred to in the sections Social performance and Environmental performance (further ‘The Sustainability Information’). The Board of Management is responsible for the preparation and fair presentation of The Sustainability Information, including the ~~information in the chapter Sustainability statements.~~identification of material issues. Our responsibility is to ~~provide~~issue an assurance report based on ~~this information contained in this Annual Report.~~the engagement outlined below.
Scope
Our assurance engagement was designed to ~~provide:~~
~~limited~~provide reasonable assurance on whether ~~the information in chapter 14,~~The Sustainability ~~statements, of this report~~Information is presented fairly, in all material respects, ~~fairly stated~~ in accordance with the reporting criteria.
~~reasonable~~We do not provide any assurance on ~~whether~~ the information on 2011 in chapter 14, Sustainability statements, in the sections 14.1 to 14.6 with the exclusion of section 14.3 and the section ‘Health and Safety’ in section 14.4 of this Annual Report is, in all material respects, presented in accordance with the reporting criteria.
~~Procedures performed to obtain a limited level of assurance are aimed at determining the plausibility of data and are less extensive than those for a reasonable level of assurance.~~
~~Our procedures for limited level of assurance included reviewing systems and processes for data management, assessing the appropriateness~~achievability of the ~~accounting policies used, assessing the design~~objectives, targets and ~~existence~~expectations of ~~data collection and reporting process at a limited number of sites and evaluating the overall presentation of sustainability information within our scope.~~
For the information subject to a reasonable level of assurance additional procedures were carried out. These procedures included testing of the operational effectiveness of systems and methods used to collect and process the data and information reported.
We have also reviewed, to the extent of our competence, whether the information on sustainability in the Performance highlights of this Annual Report, the Management’s report as defined in the introduction paragraph of chapter 12, Group financial statements, of this report is consistent with the information in chapter 14, Sustainability statements, of this report.Philips.
Reporting criteria and assurance standard
~~Koninklijke~~ Philips ~~Electronics N.V.~~ applies the Sustainability Reporting Guidelines G3.1 of the Global Reporting Initiative ~~(G3.1)~~ supported by internally developed guidelines as ~~detailed~~described in Approach to sustainability reporting in the chapter ~~14,~~ Sustainability statements, of this ~~report.~~Annual Report. It is important to view the performance data in the context of this explanatory information. We believe ~~that~~ these criteria are suitable in view of the purpose of our assurance engagement.
~~Standards~~
We conducted our engagement in accordance with the International Standard for Assurance ~~Engagements (ISAE) 3000:~~Engagement (ISAE 3000): Assurance ~~Engagements~~Engagement other than Audits or Reviews of Historical Financial Information, issued by the International Auditing and Assurance Standards Board. This ~~Standard~~standard requires, ~~amongst~~among others, that the assurance team possesses the specific knowledge, skills and professional competencies needed to ~~understand~~provide assurance on sustainability information, and that they comply with the requirements of the Code of Ethics for Professional Accountants ~~from~~of the International Federation of Accountants to ensure their independence.
~~Conclusion~~Work undertaken
~~Based~~Our procedures included assessing the appropriateness of the accounting policies used, evaluating the design and implementation, and testing the operating effectiveness of the systems and processes for collecting and processing the qualitative and quantitative information in The Sustainability Information (including the implementation of these at a number of sites), and evaluating the overall presentation of sustainability information within our scope. Also we held interviews with relevant management and evaluated documentation on ~~our work described in this report, we conclude that:~~
~~nothing came~~a sample basis to ~~our attention to indicate that~~determine whether the information is supported by sufficient evidence.
We have also reviewed, to the extent of our competence, whether the information on sustainability in ~~chapter 14,~~the rest of the Annual Report 2012 is consistent with The Sustainability ~~statements, of this report~~Information.
Opinion
In our opinion, The Sustainability Information is ~~not,~~fairly presented, in all material respects, ~~fairly stated~~ in accordance with the reporting criteria.
the 2011 information in chapter 14, Sustainability statements, in sections 14.1 to 14.6 with the exclusion of section 14.3 and the section ‘Health and Safety’ in section 14.4 of this Annual Report is, in all material respects, presented in accordance with the reporting criteria
~~and~~
We also report, to the extent of our competence, that the information on sustainability in the ~~Performance highlights,~~rest of ~~this report,~~ the ~~Management’s report as defined in the introduction paragraph of chapter 12, Group financial statements, of this report~~Annual Report 2012 is consistent with ~~the information in chapter 14,~~The Sustainability ~~statements, of this report.~~Information.
Amsterdam, The Netherlands
February ~~23, 2012~~25, 2013
KPMG ~~ACCOUNTANTS~~Accountants N.V.
~~M.A. Soeting~~J.F.C. van Everdingen RA

~~218~~224      Annual Report ~~2011~~2012
14 Sustainability statements ~~14.8~~14.7 - ~~14.8~~14.7

~~14.8~~14.7 Global Reporting Initiative (GRI) table

   profile

disclosure    description    cross-reference¹⁾
Strategy and
analysis

   1.1    Statement from the most senior ~~decision-maker~~decision- maker of the organization    Message from the CEO
   1.2    Description of key impacts, risks, and opportunities
Message from the CEO
section 7.2, Risk categories and factors
section 7.3, Strategic risks
section 7.4, Operational risks
section 7.5, Compliance risks
section 7.6, Financial risks
chapter 14, Sustainability statements
   profile

disclosure    description    cross-reference¹⁾
Organizational
profile

   2.1    Name of the organization    chapter 1, Our company
   2.2    Primary brands, products, and/or services
chapter 1, Our company
chapter 2, ~~Our~~Group strategic focus
   2.3    Operational structure of the organization, including main divisions, operating companies, subsidiaries and joint ventures
chapter 2, ~~Our~~Group strategic focus
chapter 6, Sector performance
   2.4    Location of organization’s headquarters
chapter 1, Our company
section 17.7, Investor contact
   2.5    Number of countries where the organization operates, and names of countries with either major operations or that are specifically relevant to the sustainability issues covered in the report ��
chapter 1, Our company
chapter 6, Sector performance
   2.6    Nature of ownership and legal form    chapter 11, Corporate governance
   2.7    Markets served (including geographic breakdown, sectors served and types of customers/beneficiaries)    Performance highlights
   2.8    Scale of the reporting organization    Performance highlights
   2.9    Significant changes during the reporting ~~section 17.2, Share information~~
period relating to size, structure, or ownership
section 17.2, Share information
section 17.5, Philips’ acquisitions
~~ownership~~
note 5, Discontinued operations and other assets classified as held for sale
note 7, Acquisitions and divestments
   2.10    Awards received in the reporting period
Message from the CEO
section 4.1, ~~Optimizing our ecological footprint~~
The power to make a difference
section 14.2, EcoVision
   profile

disclosure    description    cross-reference¹⁾
Report parameters

Report profile
   3.1    Reporting period    Performance highlights
   3.2    Date of most recent previous report    chapter 12, Group financial statements
   3.3    Reporting cycle    section 17.6, Financial calendar
   3.4    Contact point for questions regarding the report or its contents    section 17.7, Investor contact
Report scope and
boundary    3.5    Process for defining report content
chapter 12, Group financial statements
~~boundary~~
section 12.1, Management’s report on internal control
section 12.2, Reports of the independent auditor
section 12.3, Auditors’ report on internal control over financial reporting
chapter 14, Sustainability statements

Annual Report ~~2011      219~~2012      225
14 Sustainability statements ~~14.8~~14.7 - ~~14.8~~14.7

   profile
disclosure    description    cross-reference¹⁾
   3.6    Boundary of the report
chapter 12, Group financial statements
section 12.1, Management’s report on internal control
section 12.2, Reports of the independent auditor
section 12.3, Auditors’ report on internal control over financial reporting
chapter 14, Sustainability statements
   3.7    State any specific limitations on the scope or boundary of the report
chapter 12, Group financial statements
section 12.1, Management’s report on internal control
section 12.2, Reports of the independent auditor
section 12.3, Auditors’ report on internal control over financial reporting
chapter 14, Sustainability statements
   3.8    Basis for reporting on joint ventures, subsidiaries, leased facilities, outsourced operations and other entities that can significantly affect comparability from period to period and/or between organizations
chapter 12, Group financial statements
section 12.1, Management’s report on internal control
section 12.2, Reports of the independent auditor
section 12.3, Auditors’ report on internal control over financial reporting
section 12.10, Significant accounting policies
chapter 14, Sustainability statements
   3.9    Data measurement techniques and the bases of calculations
chapter 12, Group financial statements
section 12.1, Management’s report on internal control
section 12.2, Reports of the independent auditor
section 12.3, Auditors’ report on internal control over financial reporting
section 12.10, Significant accounting policies
chapter 14, Sustainability statements
   3.10    Explanation of the effect of any re-statements
chapter 12, Group financial statements
section 12.1, Management’s report on internal control
section 12.2, Reports of the independent auditor
section 12.3, Auditors’ report on internal control over financial reporting
section 12.10, Significant accounting policies
chapter 14, Sustainability statements
~~chapter 19,~~ Forward-looking statements ~~and other information~~
   3.11    Significant changes from previous reporting periods
chapter 12, Group financial statements
section 12.1, Management’s report on internal control
section 12.2, Reports of the independent auditor
section 12.3, Auditors’ report on internal control over financial reporting
section 12.10, Significant accounting policies
chapter 14, Sustainability statements
~~Introduction,~~ Forward-looking statements ~~and other information~~
   3.12    Table identifying the location of the Standard Disclosures in the report
Contents
Performance statements
Assurance
   3.13    Policy and current practice with regard to seeking external assurance for the report
section 10.3, Report of the Audit Committee
chapter 11, Corporate governance
section 11.2, Supervisory Board
section 11.4, Logistics of the General Meeting of Shareholders
chapter 14, Sustainability statements
section ~~14.7,~~14.6, Independent assurance report

   profile

disclosure    description    cross-reference¹⁾
Governance

Governance
   4.1    Governance structure of the organization
chapter 11, Corporate governance
section 11.1, Board of Management
section 11.2, Supervisory Board
section 11.3, General Meeting of Shareholders
section 11.4, Logistics of the General Meeting of Shareholders
   4.2    Indicate whether the Chair of the highest governance body is also an executive officer
section 11.1, Board of Management
section 11.2, Supervisory Board
   4.3    For organizations that have a unitary board structure, state the number of members of the highest governance body that are independent and/or non-executive members    Not relevant for Philips, see chapter 11, Corporate governance

~~220~~226      Annual Report ~~2011~~2012
14 Sustainability statements ~~14.8~~14.7 - ~~14.8~~14.7

   profile
disclosure    description    cross-reference¹⁾
   4.4    Mechanisms for shareholders and employees to provide recommendations or direction to the highest governance body
chapter 11, Corporate governance
section 11.1, Board of Management
section 11.2, Supervisory Board
section 11.3, General Meeting of Shareholders
section 11.4, Logistics of the General Meeting of Shareholders
~~section 14.4, Social indicators~~
chapter 17, Investor Relations
   4.5    Linkage between compensation for members of the highest governance body, senior managers and executives and the organization’s performance    section 10.2, Report of the Remuneration Committee
   4.6    Processes in place for the highest governance body to ensure, that conflicts of interest are avoided
chapter 10, Supervisory Board report
section 11.2, Supervisory Board
   4.7    Process for determining the qualifications and expertise of the members of the highest governance body    chapter 10, Supervisory Board report
   4.8    Internally developed statements of mission or values, codes of conduct, and principles relevant to economic, environmental and social performance and the status of their implementation
chapter 1, Our company
chapter 2, ~~Our~~Group strategic focus
section 7.1, Our approach to risk management and business control
~~section 14.4, Social indicators~~
   4.9    Procedures of the highest governance body for overseeing the organization’s identification and management of performance, including relevant risks and opportunities, and adherence or compliance with internationally agreed standards, codes of conduct and principles
chapter 10, Supervisory Board report
chapter 11, Corporate governance
section 11.1, Board of Management
section 11.2, Supervisory Board
section 11.3, General Meeting of Shareholders
section 11.4, Logistics of the General Meeting of Shareholders
   4.10    Processes for evaluating the highest governance body’s own performance
chapter 10, Supervisory Board report
chapter 11, Corporate governance
section 11.1, Board of Management
section 11.2, Supervisory Board
section 11.3, General Meeting of Shareholders
section 11.4, Logistics of the General Meeting of Shareholders
Commitments to external initiatives    4.11    Explanation of whether and how the precautionary approach or principle is addressed by the organization
section 7.1, Our approach to risk management and business control
chapter 11, Corporate governance
   4.12    Externally developed economic, environmental and social charters, principles, or other initiatives to which the organization subscribes or endorses    chapter 14, Sustainability statements
   4.13    Memberships in associations (such as industry associations)    chapter 14, Sustainability statements
Stakeholder engagement    4.14    List of stakeholder groups engaged by the organization    chapter 14, Sustainability statements
   4.15    Basis for identification and selection of stakeholders with whom to engage    chapter 14, Sustainability statements
   4.16    Approaches to stakeholder engagement, including frequency of engagement by type and by stakeholder group    chapter 14, Sustainability statements
   4.17    Key topics and concerns that have been raised through stakeholder engagement, and how the organization has responded to those key topics and concerns, including through its reporting
Message from the CEO
chapter 10, Supervisory Board report
chapter 14, Sustainability statements

Annual Report ~~2011      221~~2012      227
14 Sustainability statements ~~14.8~~14.7 - ~~14.8~~14.7


profile
disclosure
   description    cross-reference¹⁾
Economic

Economic performance       Disclosure on management approach to economic aspects
Message from the CEO
chapter 7, Risk management
   EC1    Direct economic value generated and distributed, including revenues, operating costs, employee compensation, donations and other community investments, retained earnings and payments to capital providers and governments
Performance highlights
section 14.1, Economic indicators
   EC2    Financial implications and other risks and opportunities for the organization’s activities due to climate change    chapter 14, Sustainability statements
   EC3    Coverage of the organization’s defined-benefit plan obligations    note 29, Pensions and other postretirement benefits
   EC4    Significant financial assistance received from government    Philips does not receive significant financial assistance from governments
   EC6    Policy, practices and proportion of spending on locally-based suppliers at significant locations of operation
chapter 14, Sustainability statements
section 14.1, Economic indicators
section ~~14.6,~~14.5, Supplier indicators
   EC7    Procedures for local hiring and proportion of senior management hired from the local community at significant locations of operation
sub-section ~~5.1.13,~~5.2.4, Employment
~~sub-section 5.4.3,~~section 5.2, Social performance
~~section 14.4, Social indicators~~
   EC8    Development and impact of infrastructure investments and services provided primarily for public benefit through commercial, in-kind or pro bono engagement
section ~~14.4,~~3.6, Enhancing urban life with light
section 4.1, The power to make a difference
sub-section 5.2.8, Social Investment Programs
EC9 Understanding and describing significant indirect economic impacts, including the extent of impacts
section 3.6, Enhancing urban life with light
section 4.1, The power to make a difference
sub-section 5.2.8, Social Investment Programs
section 14.1, Economic indicators

~~222~~228      Annual Report ~~2011~~2012
14 Sustainability statements ~~14.8~~14.7 - ~~14.8~~14.7


profile
disclosure
   description    cross-reference¹⁾
Environment

      Disclosure on management approach to environmental aspects
Message from the CEO
section ~~5.4, Sustainability~~5.3, Environmental performance
Materials    EN1    Materials used by weight or volume
section 14.2, EcoVision
section 14.3, Green ~~Manufacturing 2015~~Operations
   EN2    Percentage of materials used that are recycled input materials
section 14.2, EcoVision
section 14.3, Green ~~Manufacturing 2015~~Operations
Energy    EN3    Direct energy consumption by primary energy source
section 14.2, EcoVision
section 14.3, Green ~~Manufacturing 2015~~Operations
   EN4    Indirect energy consumption by primary source
section 14.2, EcoVision
section 14.3, Green ~~Manufacturing 2015~~Operations
Water    EN8    Total water withdrawal by source    section 14.3, Green ~~Manufacturing 2015~~Operations
Biodiversity    EN11    Location and size of land owned, leased, managed in or adjacent to protected areas and areas of high biodiversity value outside protected areas    This indicator is not material to Philips because the company does not own land in protected areas and areas with high biodiversity
   EN12    Description of significant impacts of activities, products and services on biodiversity in protected areas and areas of high biodiversity value outside protected areas    chapter 14, Sustainability statements
Emissions, effluents, and waste    EN16    Total direct and indirect greenhouse gas emissions by weight
section 14.2, EcoVision
section 14.3, Green ~~Manufacturing 2015~~Operations
   EN17    Other relevant indirect greenhouse gas emissions by weight
section 14.2, EcoVision
section 14.3, Green ~~Manufacturing 2015~~Operations
   EN19    Emissions of ozone-depleting substances by weight    section 14.3, Green ~~Manufacturing 2015~~Operations
Commitments to external initiatives    EN20    NOx, SOx and other significant air emissions by type and weight    section 14.3, Green ~~Manufacturing 2015~~Operations
   EN21    Total water discharge by quality and destination    section 14.3, Green ~~Manufacturing 2015~~Operations
   EN22    Total weight of waste by type and disposal method    section 14.3, Green ~~Manufacturing 2015~~Operations
   EN23    Total number and volume of significant spills    section 14.3, Green ~~Manufacturing 2015~~Operations
   EN26    Initiatives to mitigate environmental impacts of products and services, and extent of impact mitigation
section 4.1, ~~Optimizing our ecological footprint~~The power to make a difference
section ~~5.4, Sustainability~~5.2, Social performance
section 14.2, EcoVision
   EN27    Percentage of products sold and their packaging materials that are reclaimed by category
section ~~5.4, Sustainability~~5.2, Social performance
section 14.2, EcoVision
Compliance    EN28    Monetary value of significant fines and total number of non-monetary sanctions for non- compliance with environmental laws and regulations    section 14.3, Green ~~Manufacturing 2015~~Operations

Annual Report ~~2011      223~~2012      229
14 Sustainability statements ~~14.8—14.8~~14.7 - 14.7


profile
disclosure
   description    cross-reference¹⁾
Labor practices and decent work
      Disclosure on management approach to labor practices and decent work
section 14.4, ~~Social indicators~~
~~section 14.5,~~ General Business Principles
Employment    LA1    Total workforce by employment type, employment contract and region    ~~section 14.4, Social indicators~~sub-section 5.2.4, Employment
   LA2    Total number and rate of employee turnover by age group, gender and region
~~section 14.4, Social indicators~~sub-section 5.2.3, Diversity and inclusion
sub-section ~~5.1.13,~~5.2.4, Employment
Labor/Management relations    LA4    Percentage of employees covered by collective bargaining agreements    ~~section 14.4, Social indicators~~ See also www.philips.com/gbp
   LA5    Minimum notice period(s) relating to significant operational changes, including whether it is specified in collective agreements    See www.philips.com/gbp
Occupational health and safety    LA7    Rates of injury, occupational diseases, lost days and absenteeism, and number of work- related fatalities by region    ~~section 14.4, Social indicators~~sub-section 5.2.6, Health and Safety
   LA8    Education, training, counseling, prevention and risk-control programs in place to assist workforce members, their families or community members in relation to serious diseases
section 4.2, ~~Partnering to drive~~Encouraging positive change
section 4.3, ~~Our people – making a difference~~Embracing culture change
Training and education    LA10    Average hours of training per year per employee by employee category
section ~~14.4, Social indicators~~4.3, Embracing culture change
sub-section 5.2.5, Developing our people
Diversity and equal opportunity    LA13    Composition of governance bodies and breakdown of employees per category according to gender, age group, minority group membership and other indicators of diversity    ~~section 14.4, Social indicators~~
sub-section 5.2.3, Diversity and inclusion
chapter 8, Management
chapter 9, Supervisory Board
   LA14    Ratio of basic salary of men to women by employee category    ~~section 14.4, Social indicators~~ See also www.philips.com/gbp

profile

disclosure
   description    cross-reference¹⁾
Human rights
      Disclosure on management approach to human rights
section ~~14.5,~~14.4, General Business Principles
section ~~14.6,~~14.5, Supplier indicators
Investment and procurement practices    HR1    Percentage and total number of significant investment agreements that include human rights clauses or that have undergone human rights screening    section ~~14.4, Social indicators~~5.1, Financial performance
   HR2    Percentage of significant suppliers and contractors that have undergone screening on human rights and actions taken    section ~~14.6,~~14.5, Supplier indicators
Non-discrimination    HR4    Total number of incidents of discrimination and actions taken    section 14.4, ~~Social indicators~~General Business Principles
Freedom of association and collective bargaining    HR5    Operations identified in which the right to exercise freedom of association and collective bargaining may be at significant risk, and actions taken to support these rights    section 14.4, ~~Social indicators~~General Business Principles
Child labor    HR6    Operations identified as having significant risk for incidents of child labor, and measures taken to contribute to the elimination of child labor    section 14.4, ~~Social indicators~~General Business Principles
Forced and compulsory labor    HR7    Operations identified as having significant risk for incidents of forced or compulsory labor, and measures to contribute to the elimination of forced or compulsory labor    section 14.4, ~~Social indicators~~General Business Principles

~~224~~230      Annual Report ~~2011~~2012
14 Sustainability statements ~~14.8~~14.7 - ~~14.8~~14.7


profile
disclosure
   description    cross-reference¹⁾
Society

      Disclosure on management approach to society and community involvement
section 4.1, ~~Optimizing our ecological footprint~~The power to make a difference
section 4.2, ~~Partnering to drive~~Encouraging positive change
section 4.3, ~~Our people – making a difference~~Embracing culture change
Community    SO1    ~~Nature, scope and effectiveness of any programs and practices that assess and manage the impacts~~Percentage of operations ~~on communities, including entering operating,~~with implemented local community engagement, impact assessments, and ~~exiting~~development programs
section ~~14.4,~~4.3, Embracing culture change
section 5.2, Social ~~indicators~~performance
Ethics    SO2    Percentage and total number of business units analyzed for risks related to ethics
section 14.4, ~~Social indicators~~
~~section 14.6, Supplier indicators~~
General Business Principles
   SO3    Percentage of employees trained in organization’s anti-corruption policies and procedures
section 14.4, ~~Social indicators~~
~~section 14.6, Supplier indicators~~
General Business Principles
   SO4    Actions taken in response to incidents of ethics
section 14.4, ~~Social indicators~~
~~section 14.6, Supplier indicators~~
General Business Principles
Public policy    SO5    Public policy positions and participation in public policy development and lobbying    chapter 14, Sustainability statements
Compliance    SO8    Monetary value of significant fines and total number of non-monetary sanctions for ~~non-compliance~~non- compliance with laws and regulations
section 12.11, Notes
section 14.3, Green ~~Manufacturing 2015~~Operations

profile

disclosure
   description
cross-reference¹⁾
Product
responsibility

      Disclosure on management approach to product responsibility    section 4.1, ~~Optimizing our ecological footprint~~The power to make a difference
Customer health and safety    PR1    Life cycle stages in which health and safety impacts of products and services are assessed for improvement, and percentage of significant products and services categories subject to such procedures
section ~~5.4, Sustainability~~5.2, Social performance
section 14.2, EcoVision
Product and service labeling    PR3    Type of product and service information required by procedures, and percentage of significant products and services subject to such information requirements    section 4.1, ~~Optimizing our ecological footprint~~The power to make a difference
Marketing communications    PR6    Programs for adherence to laws, standards, and voluntary codes related to marketing communications, including advertising, promotion and sponsorship    chapter 14, Sustainability statements
   PR9    Monetary value of significant fines for ~~non-compliance~~non- compliance with laws and regulations relating to the provision and use of products and services
section 12.11, Notes
section 14.3, Green ~~Manufacturing 2015~~Operations

¹⁾
The sections referred to, except for the sections in chapter 14, Sustainability statements, are not included in the scope of the assurance engagement on Sustainability performance

Annual Report ~~2011      225~~2012      231
15 Reconciliation of non-GAAP information 15 - 15

~~15Reconciliation~~15 Reconciliation of non-GAAP information
Explanation of Non-GAAP measures
Koninklijke Philips Electronics N.V. (the ‘Company’) believes that an understanding of sales performance is enhanced when the effects of currency movements and acquisitions and divestments (changes in consolidation) are excluded. Accordingly, in addition to presenting ‘nominal growth’, ‘comparable growth’ is provided.
Comparable sales exclude the effects of currency movements and changes in consolidation. As indicated in the Significant accounting policies, sales and income are translated from foreign currencies into the Company’s reporting currency, the euro, at the exchange rate on transaction dates during the respective years. As a result of significant currency movements during the years presented, the effects of translating foreign currency sales amounts into euros could have a material impact. Therefore, these impacts have been excluded in arriving at the comparable sales in euros. Currency effects have been calculated by translating previous years’ foreign currency sales amounts into euros at the following year’s exchange rates in comparison with the sales in euros as historically reported. Years under review were characterized by a number of acquisitions and divestments, as a result of which activities were consolidated or deconsolidated. The effect of consolidation changes has also been excluded in arriving at the comparable sales. For the purpose of calculating comparable sales growth, when a previously consolidated entity is sold or contributed to a venture that is not consolidated by the Company, relevant sales are excluded from impacted prior-year periods. Similarly, when an entity is acquired, relevant sales are excluded from impacted periods.
The Company uses the term IFO and Adjusted IFO to evaluate the performance of the Philips Group and its operating sectors. The term ~~EBIT~~IFO has the same meaning as Income from operations (IFO). Referencing Adjusted IFO will make the underlying performance of our businesses more transparent by factoring out the amortization of acquired intangible assets. Adjusted IFO represents income from operations excluding results attributable to non-controlling interests holders, results relating to investments in associates, income taxes, financial income and expenses, amortization and impairment on intangible assets (excluding software and capitalized product development).
The Company believes that an understanding of the Philips Group’s financial condition is enhanced by the disclosure of net operating capital (NOC), as this figure is used by Philips’ management to evaluate the capital efficiency of the Philips Group and its operating sectors. NOC is defined as: total assets excluding assets ~~from discontinued operations~~classified as held for sale less: (a) cash and cash equivalents, (b) deferred tax assets, (c) other (non-)current financial assets, (d) investments in associates, and after deduction of: (e) provisions excluding deferred tax liabilities, (f) accounts and notes payable, (g) accrued liabilities, (h) current/non-current liabilities, and (i) trading securities.
232      Annual Report 2012
15 Reconciliation of non-GAAP information 15 - 15
Net debt is defined as the sum of long- and short-term debt minus cash and cash equivalents. The net debt position as a percentage of the sum of group equity (shareholders’ equity and non-controlling interests) and net debt is presented to express the financial strength of the Company. This measure is widely used by management and investment analysts and is therefore included in the disclosure. Our net debt position is managed in such a way that we can meet our objective to retain an A3 rating (Moody’s) and A- rating (Standard and Poor’s). Furthermore, the Group’s objective when managing the net debt position is to fulfill our commitment to a stable dividend policy with a 40% to 50% pay-out of continuing net income.
Cash flows before financing activities, being the sum total of net cash from operating activities and net cash from investing activities, and free cash flow, being net cash from operating activities minus net capital expenditures, are presented separately to facilitate the reader’s understanding of the Company’s funding requirements.
Net capital expenditures comprise of purchase of intangible assets, expenditures on development assets, capital expenditures on property, plant and equipment and proceeds from disposals of property, plant and equipment. This measure is widely used by management to calculate free cash flow.
Adjustments
~~226      Annual Report 2011~~
~~15 Reconciliation~~Prior periods amounts have been revised to reflect certain voluntary adopted accounting policy changes, and immaterial adjustments (see section 12.10, Significant accounting policies, of ~~non-GAAP information 15 - 15~~
this report).
Sales growth composition per sector
in %

   comparable growth currency effects consolidation changes nominal growth
2011 versus 2010
Healthcare
   5.3    (2.5 ) 0.1    2.9
Consumer Lifestyle
   (0.1 ) (1.7 ) 2.6    0.8
Lighting
   6.1    (2.3 ) (2.7 ) 1.1
Group Management & Services
   2.4    —      (28.3 ) (25.9 )


Philips Group
   4.1    (2.2 ) (0.6 ) 1.3
2010 versus 2009
Healthcare
   3.9    6.0    (0.2 ) 9.7
Consumer Lifestyle
   1.3    4.8    1.4    7.5
Lighting
   8.7    6.0    0.7    15.4
Group Management & Services
   6.4    2.7    (2.6 ) 6.5


Philips Group
   4.8    5.6    0.5    10.9
2009 versus 2008
Healthcare
   (2.7 ) 2.6    2.6    2.5
Consumer Lifestyle
   (12.0 ) (0.6 ) (0.6 ) (13.2 )
Lighting
   (12.6 ) 1.0    0.5    (11.1 )
Group Management & Services
   (30.2 ) (0.1 ) (0.2 ) (30.5 )


Philips Group
   (9.2 ) 1.0    0.9    (7.3 )
~~Sales growth composition per geographic cluster~~
~~in %~~

   comparable growth currency effects consolidation changes nominal growth
2011 versus 2010
Western Europe
   (2.6 ) 0.3    (1.7 ) (4.0 )
North America
   2.9    (4.7 ) 0.3    (1.5 )
Other mature geographies
   7.0    2.7    (2.0 ) 7.7


Total mature geographies
   1.0    (1.8 ) (0.8 ) (1.6 )
Growth geographies
   11.1    (3.2 ) (0.2 ) 7.7


Philips Group
   4.1    (2.2 ) (0.6 ) 1.3
2010 versus 2009
Western Europe¹⁾
   (1.5 ) 1.2    0.7    0.4
North America
   1.5    5.8    —      7.3
Other mature geographies
   12.6    14.5    3.2    30.3


Total mature geographies
   1.2    4.3    0.6    6.1
Growth geogrpahies¹⁾
   13.6    9.3    0.3    23.2


Philips Group
   4.8    5.6    0.5    10.9
2009 versus 2008
Western Europe
   (10.0 ) (1.1 ) 1.2    (9.9 )
North America
   (13.1 ) 4.3    1.4    (7.4 )
Other mature geographies
   (4.7 ) 4.8    2.8    2.9


Total mature geographies
   (11.0 ) 1.8    1.4    (7.8 )
Growth geographies
   (4.4 ) (1.2 ) (0.6 ) (6.2 )


Philips Group
   (9.2 ) 1.0    0.9    (7.3 )
¹⁾
~~Revised to reflect an adjusted geographic cluster allocation~~
   comparable growth currency effects consolidation changes nominal growth
2012 versus 2011
Healthcare
   6.4    6.4    —      12.8
Consumer Lifestyle
   1.7    3.8    0.5    6.0
Lighting
   3.8    4.6    2.1    10.5
Innovation, Group & Services
   (7.4 ) 0.1    (6.2 ) (13.5 )


Philips Group
   4.1    5.0    0.7    9.8
2011 versus 2010
Healthcare
   5.3    (2.5 ) 0.1    2.9
Consumer Lifestyle
   1.1    (1.8 ) 2.7    2.0
Lighting
   6.1    (2.3 ) (2.7 ) 1.1
Innovation, Group & Services
   (10.7 ) (0.1 ) (14.0 ) (24.8 )


Philips Group
   4.1    (2.2 ) (0.6 ) 1.3
2010 versus 2009
Healthcare
   3.9    6.0    (0.2 ) 9.7
Consumer Lifestyle
   0.4    4.9    1.5    6.8
Lighting
   8.7    6.0    0.7    15.4
Innovation, Group & Services
   13.9    2.0    (1.6 ) 14.2


Philips Group
   4.8    5.6    0.5    10.9

Annual Report ~~2011      227~~2012      233
15 Reconciliation of non-GAAP information 15 - 15

Sales growth composition per geographic cluster
in %
   comparable growth currency effects consolidation changes nominal growth
2012 versus 2011
Western Europe
   (2.9 ) 1.1    1.9    0.1
North America
   2.0    8.8    (0.8 ) 10.0
Other mature geographies
   11.5    9.2    (0.1 ) 20.6


Total mature geographies
   1.2    5.4    0.4    7.0
Growth geographies
   10.1    4.2    1.1    15.4


Philips Group
   4.1    5.0    0.7    9.8
2011 versus 2010
Western Europe
   (2.6 ) 0.3    (1.7 ) (4.0 )
North America
   2.9    (4.7 ) 0.3    (1.5 )
Other mature geographies
   7.0    2.7    (2.0 ) 7.7


Total mature geographies
   1.0    (1.8 ) (0.8 ) (1.6 )
Growth geographies
   11.1    (3.2 ) (0.2 ) 7.7


Philips Group
   4.1    (2.2 ) (0.6 ) 1.3
2010 versus 2009
Western Europe
   (1.5 ) 1.2    0.7    0.4
North America
   1.5    5.8    —      7.3
Other mature geographies
   12.6    14.5    3.2    30.3


Total mature geographies
   1.2    4.3    0.6    6.1
Growth geographies
   13.6    9.3    0.3    23.2


Philips Group
   4.8    5.6    0.5    10.9
Composition of net debt to group equity

   2009 2010 2011    2010 2011    2012
Long-term debt
   3,640    2,818    3,278       2,818    3,278       3,725
Short-term debt
   627    1,840    582       1,840    582       809




Total debt
   4,267    4,658    3,860       4,658    3,860       4,534
Cash and cash equivalents
   (4,386 ) (5,833 ) (3,147 )    5,833    3,147       3,834




Net debt (cash)¹⁾
   (119 ) (1,175 ) 713       (1,175 ) 713       700
Shareholders’ equity
   14,595    15,046    12,355       15,007    12,316       11,140
Non-controlling interests
   49    46    34       46    34       34




Group equity
   14,644    15,092    12,389       15,053    12,350       11,174
Net debt and group equity
   14,525    13,917    13,102       13,878    13,063       11,874
Net debt divided by net debt and group equity (in %)
   (1 ) (8 ) 5       (8 ) 5       6
Group equity divided by net debt and group equity (in %)
   101    108    95       108    95       94

¹⁾
Total debt less cash and cash equivalents
~~Composition of cash flows~~

   2009 2010 2011
Cash flows from operating activities
   1,391    2,121    836
Cash flows from investing activities
   (165 ) (646 ) (1,364 )


Cash flows before financing activities
   1,226    1,475    (528 )
Cash flows from operating activities
   1,391    2,121    836
Net capital expenditures:
   (628 ) (765 ) (944 )
Purchase of intangible assets
   (96 ) (80 ) (116 )
Expenditures on development assets
   (162 ) (193 ) (231 )
Capital expenditures on property, plant and equipment
   (495 ) (621 ) (725 )
Proceeds from disposals of property, plant and equipment
   125    129    128


Free cash flows
   763    1,356    (108 )
~~Adjusted IFO to Income from operations (or IFO )~~

   Philips Group Healthcare Consumer Lifestyle Lighting
Group Management
& Services

2011
Adjusted IFO
   1,680    1,145    472    445    (382 )
Amortization of intangible assets¹⁾
   (594 ) (229 ) (80 ) (276 ) (10 )
Impairment of goodwill
   (1,355 ) (824 ) —      (531 ) —


Income from operations (or IFO)
   (269 ) 93    392    (362 ) (392 )
2010
Adjusted IFO
   2,562    1,186    718    869    (211 )
Amortization of intangible assets¹⁾
   (482 ) (264 ) (39 ) (174 ) (5 )


Income from operations (or IFO)
   2,080    922    679    695    (216 )
2009
Adjusted IFO
   1,096    848    454    145    (351 )
Amortization of intangible assets¹⁾
   (436 ) (255 ) (18 ) (161 ) (2 )


Income from operations (or IFO)
   660    593    436    (16 ) (353 )
¹⁾
~~Excluding amortization of software and product development~~
~~228~~234      Annual Report ~~2011~~2012
15 Reconciliation of non-GAAP information 15 - 15

Composition of cash flows
   2010 2011 2012
Cash flows from operating activities
   2,074    768    2,198
Cash flows from investing activities
   (597 ) (1,293 ) (912 )


Cash flows before financing activities
   1,477    (525 ) 1,286
Cash flows from operating activities
   2,074    768    2,198
Net capital expenditures:
   (716 ) (872 ) (475 )
Purchase of intangible assets
   (53 ) (69 ) (39 )
Proceeds from sale of intangible assets
   —      —      160
Expenditures on development assets
   (220 ) (278 ) (347 )
Capital expenditures on property, plant and equipment
   (572 ) (653 ) (675 )
Proceeds from disposals of property, plant and equipment
   129    128    426


Free cash flows
   1,358    (104 ) 1,723
Adjusted IFO to Income from operations (or IFO )
   Philips Group Healthcare Consumer Lifestyle Lighting Innovation, Group
& Services
2012
Adjusted IFO
   1,502    1,322    663    188    (671 )
Amortization of intangible assets¹⁾
   (472 ) (200 ) (70 ) (194 ) (8 )


Income from operations (or IFO)
   1,030    1,122    593    (6 ) (679 )
2011
Adjusted IFO
   1,680    1,145    297    445    (207 )
Amortization of intangible assets¹⁾
   (594 ) (228 ) (80 ) (276 ) (10 )
Impairment of goodwill
   (1,355 ) (824 ) —      (531 ) —


Income from operations (or IFO)
   (269 ) 93    217    (362 ) (217 )
2010
Adjusted IFO
   2,556    1,186    487    863    20
Amortization of intangible assets¹⁾
   (482 ) (264 ) (38 ) (174 ) (6 )


Income from operations (or IFO)
   2,074    922    449    689    14
¹⁾
Excluding amortization of software and product development
NOC composition

   2007 2008 2009 2010 2011    2008 2009 2010 2011 2012
Intangible assets
   6,635    11,757    11,523    12,233    11,012       11,757    11,523    12,233    11,012    10,679
Property, plant and equipment
   3,194    3,496    3,252    3,145    3,014       3,496    3,252    3,145    3,014    2,959
Remaining assets
   11,193    10,361    8,960    8,921    8,980       10,784    9,316    9,347    9,393    8,921
Provisions
   (2,403 ) (2,837 ) (2,450 ) (2,339 ) (2,639 )    (2,894 ) (2,498 ) (2,394 ) (2,694 ) (2,969 )
Other liabilities
   (7,817 ) (8,708 ) (8,636 ) (10,009 ) (9,940 )    (9,131 ) (8,992 ) (10,434 ) (10,353 ) (10,283 )




Net operating capital
   10,802    14,069    12,649    11,951    10,427       14,012    12,601    11,897    10,372    9,307

Annual Report ~~2011      229~~2012      235
15 Reconciliation of non-GAAP information 15 - 15

Net operating capital to total assets

   Philips Group    Healthcare    Consumer Lifestyle    Lighting    Group
Management
& Services
2011
Net operating capital (NOC)
   10,427       8,418       887       5,020       (3,898 )
Eliminate liabilities comprised in NOC:

- payables/liabilities
   9,940       2,697       2,081       1,450       3,712
- intercompany accounts
   —         103       87       51       (241 )
- provisions
   2,639       287       558       227       1,567
Include assets not comprised in NOC:

- investments in associates
   203       86       3       23       91
- other current financial assets
   —         —         —         —         —
- other non-current financial assets
   346       —         —         —         346
- deferred tax assets
   1,713       —         —         —         1,713
- liquid assets
   3,147       —         —         —         3,147


   28,415       11,591       3,616       6,771       6,437
Assets classified as held for sale
   551



Total assets
   28,966
2010
Net operating capital (NOC)
   11,951       8,908       911       5,561       (3,429 )¹⁾
Eliminate liabilities comprised in NOC:

- payables/liabilities
   10,009       2,603       2,509       1,485       3,412
- intercompany accounts
   —         54       95       68       (217 )
- provisions
   2,339       321       342       247       1,429
Include assets not comprised in NOC:

- investments in associates
   181       76       1       18       86
- other current financial assets
   6       —         —         —         6
- other non-current financial assets
   479       —         —         —         479
- deferred tax assets
   1,351       —         —         —         1,351
- liquid assets
   5,833       —         —         —         5,833


   32,149       11,962       3,858       7,379       8,950
Assets classified as held for sale¹⁾
   120



Total assets
   32,269
2009
Net operating capital (NOC)
   12,649       8,434       625       5,104       (1,514 )
Eliminate liabilities comprised in NOC:

- payables/liabilities
   8,635       2,115       2,155       1,247       3,118
- intercompany accounts
   —         32       85       62       (179 )
- provisions
   2,450       317       420       324       1,389
Include assets not comprised in NOC:

- investments in associates
   281       71       1       11       198
- other current financial assets
   192       —         —         —         192
- other non-current financial assets
   691       —         —         —         691
- deferred tax assets
   1,243       —         —         —         1,243
- liquid assets
   4,386       —         —         —         4,386


   30,527       10,969       3,286       6,748       9,524
¹⁾
~~Revised to reflect a property, plant and equipment reclassification to assets classified as held for sale~~
   Philips Group    Healthcare    Consumer Lifestyle    Lighting    Innovation, Group
& Services
2012
Net operating capital (NOC)
   9,307       7,976       1,217       4,635       (4,521 )
Eliminate liabilities comprised in NOC:

- payables/liabilities
   10,283       2,760       1,741       1,695       4,087
- intercompany accounts
   —         71       45       37       (153 )
- provisions
   2,969       355       322       581       1,711
Include assets not comprised in NOC:

- investments in associates
   177       86       —         22       69
- other non-current financial assets
   549       —         —         —         549
- deferred tax assets
   1,917       —         —         —         1,917
- liquid assets
   3,834       —         —         —         3,834


   29,036       11,248       3,325       6,970       7,493
Assets classified as held for sale
   43



Total assets
   29,079
2011
Net operating capital (NOC)
   10,372       8,418       884       4,965       (3,895 )
Eliminate liabilities comprised in NOC:

- payables/liabilities
   10,353       2,697       2,309       1,593       3,754
- intercompany accounts
   —         103       87       51       (241 )
- provisions
   2,694       287       558       282       1,567
Include assets not comprised in NOC:

- investments in associates
   203       86       3       23       91
- other non-current financial assets
   346       —         —         —         346
- deferred tax assets
   1,729       —         —         —         1,729
- liquid assets
   3,147       —         —         —         3,147


   28,844       11,591       3,841       6,914       6,498
Assets classified as held for sale
   551



Total assets
   29,395
2010
Net operating capital (NOC)
   11,897       8,908       882       5,506       (3,399 )
Eliminate liabilities comprised in NOC:

- payables/ liabilities
   10,434       2,603       2,790       1,601       3,440
- intercompany accounts
   —         54       95       68       (217 )
- provisions
   2,394       321       342       302       1,429
Include assets not comprised in NOC:

- investments in associates
   181       76       1       18       86
- other current financial assets
   6       —         —         —         6
- other non-current financial assets
   479       —         —         —         479
- deferred tax assets
   1,367       —         —         —         1,367
- liquid assets
   5,832       —         —         —         5,832


   32,590       11,962       4,110       7,495       9,023
Assets classified as held for sale
   120



Total assets
   32,710

~~230~~236      Annual Report ~~2011~~2012
16 Five-year overview 16 - 16

~~16Five-year~~16 Five-year overview
~~All~~all amounts in millions of euros unless otherwise ~~stated.~~stated
~~Discontinued operations reflect the effect of classifying the Television business as discontinued operations in 2011, for which the previous years results and cash flows~~Prior periods amounts have been ~~restated.~~revised to reflect certain immaterial adjustments (see section 12.10, Significant accounting policies, of this report).
Due to factors such as acquisitions and divestments, the amounts, percentages and ratios are not directly comparable.


2007¹⁾
EUR
2008
EUR 2009
EUR 2010
EUR 2011
EUR 2011
USD²⁾    2008
EUR 2009
EUR 2010
EUR 2011
EUR 2012
EUR 2012
USD¹⁾
General data

Sales
   20,751    21,682    20,092    22,287    22,579    29,217       21,682    20,092    22,287    22,579    24,788    32,693
Income from operations (IFO) (loss)
   1,781    296    660    2,080    (269 ) (348 )    287    667    2,074    (269 ) 1,030    1,358
Financial income and expenses - net
   2,847    88    (162 ) (121 ) (240 ) (311 )    87    (162 ) (121 ) (240 ) (246 ) (324 )
Income (loss) from continuing operations
   5,016    106    476    1,478    (776 ) (1,004 )    99    482    1,474    (776 ) 262    346
Income (loss) from discontinued operations
   (136 ) (198 ) (52 ) (26 ) (515 ) (666 )    (198 ) (52 ) (26 ) (515 ) (31 ) (41 )
Net income (loss)
   4,880    (92 ) 424    1,452    (1,291 ) (1,671 )    (99 ) 430    1,448    (1,291 ) 231    305
Total assets
   36,381    31,910    30,527    32,269    28,966    37,482       32,349    30,897    32,710    29,395    29,079    38,353
Net assets
   21,868    15,593    14,644    15,092    12,389    16,031       15,552    14,610    15,053    12,350    11,174    14,738
Financial structure

Debt
   3,563    4,188    4,267    4,658    3,860    4,995       4,188    4,267    4,658    3,860    4,534    5,980
Provisions
   2,403    2,837    2,450    2,339    2,639    3,415       2,894    2,498    2,394    2,694    2,969    3,916
Shareholders’ equity
   21,741    15,544    14,595    15,046    12,355    15,987       15,503    14,561    15,007    12,316    11,140    14,693
Non-controlling interests
   127    49    49    46    34    44       49    49    46    34    34    45
Key figures per share

Weighted average shares outstanding:

- basic³⁾
   1,087,193    992,485    926,546    940,528    951,647    951,647
- diluted³⁾
   1,099,990    997,779    930,102    948,392    956,130    956,130
Basic earnings per common share⁴⁾

- basic²⁾
   993,374    927,435    941,417    952,536    921,828    921,828
- diluted²⁾
   997,780    930,991    949,281    957,019    926,949    926,949
Basic earnings per common share³⁾

Income (loss) from continuing operations per share
   4.61    0.11    0.51    1.57    (0.82 ) (1.06 )    0.10    0.52    1.57    (0.81 ) 0.28    0.37
Net income (loss)
   4.49    (0.09 ) 0.46    1.54    (1.36 ) (1.76 )    (0.10 ) 0.46    1.54    (1.36 ) 0.25    0.33
Diluted earnings per common share⁴⁾

Diluted earnings per common share³⁾

Income (loss) from continuing operations
   4.56    0.11    0.51    1.56    (0.82 ) (1.06 )    0.10    0.52    1.55    (0.81 ) 0.28    0.37
Net income (loss)
   4.44    (0.09 ) 0.46    1.53    (1.36 ) (1.76 )    (0.10 ) 0.46    1.53    (1.36 ) 0.25    0.33

¹⁾
~~Discontinued operations reflect the effect of the sale of MedQuist in 2007~~
²⁾
For the convenience of the reader, the euro amounts have been converted into US dollars at the exchange rate used for balance sheet purposes at December 31, ~~2011~~2012 (USD 1 = EUR ~~0.7728.~~0.7582. The US dollar amounts are unaudited.)
²⁾
In thousands of shares
³⁾
~~In thousands of shares~~
⁴⁾
In euros or US dollars as indicated in the header

Annual Report ~~2011      231~~2012      237
17 Investor Relations 17 - 17.1

~~17Investor~~17 Investor Relations
~~17.1Key~~17.1 Key financials and dividend policy
Prior ~~years results and cash flows~~periods amounts have been ~~restated~~revised to reflect ~~the effect~~certain immaterial adjustments (see section 12.10, Significant accounting policies, of ~~classifying the Television business as discontinued operations in 2011.~~this report).
Net income and EPS
Net income of the Philips Group showed a gain of EUR 231 million, or EUR 0.25 per common share, compared to a loss of EUR 1,291 million, or EUR 1.36 per common share, ~~compared to a profit of EUR 1,452 million, or EUR 1.54 per common share,~~ in ~~2010.~~2011.
Net income (loss)
in millions of euros

IFO and Adjusted IFO¹⁾
in millions of euros

¹⁾
For a reconciliation to the most directly comparable GAAP measures, see chapter 15, Reconciliation of non-GAAP information, of this report
Operating cash flows
in millions of euros

¹⁾
For a reconciliation to the most directly comparable GAAP measures, see chapter 15, Reconciliation of non-GAAP information, of this report
Dividend policy
We are committed to a stable dividend policy with a 40% to 50% pay-out of continuing net income.
Continuing net income ~~or net income excluding material non-recurring items and discontinued operations,~~ is the base figure used to calculate the dividend payout for the year. For ~~2011,~~2012, the key exclusions ~~used~~from net income to arrive at continuing net income are the following: the results related to the Television business of Consumer Lifestyle ~~where we signed a joint venture agreement with TPV and consequently show these results~~that are shown as discontinued ~~operations. The impairment charges taken on goodwill and other intangibles impairment charges in Q2 and Q4,~~operations, the ~~curtailment~~fine imposed by the European Commission related to alleged violation of competition rules in the ~~UK Pension Fund,~~Cathode-Ray Tubes (CRT) industry, an increase in legal provisions and ~~restructuring~~the loss on the sale of industrial assets. Gains that were excluded relate to the sale of the Senseo trademark and the High Tech Campus, the divestment of the Speech Processing activities in Consumer Lifestyle as well as a one-time gain of prior service cost related to a medical retiree benefit plan. Restructuring and post-acquisition charges are also excluded.
Proposed distribution
A proposal will be submitted to the ~~2012~~2013 Annual General Meeting of Shareholders to declare a dividend of EUR 0.75 per common share (up to EUR 685 million), in cash or in shares at the option of the shareholder, against the net income for 2012 and the reserve retained ~~earnings. Such dividend is expected to result in a distribution with a total value~~earnings of ~~EUR 695 million.~~the Company.
Shareholders will be given the opportunity to make their choice between cash and shares between May ~~7, 2012,~~10, 2013, and May ~~25, 2012 (US ends on May 24).~~31, 2013. If no choice is made during this election period, the dividend will be paid in shares. On May ~~25,~~31,
238      Annual Report 2012
17 Investor Relations 17.1 - 17.1
2013 after close of trading, the number of share dividend rights entitled to one new common share will be determined based on the ~~volume-weighted~~volume weighted average price of all traded common shares of
~~232      Annual Report 2011~~
~~17 Investor Relations 17.1 - 17.1~~
Koninklijke Philips Electronics N.V. at Euronext Amsterdam on ~~23, 24~~29, 30 and 2531 May, ~~2012.~~2013. The Company will calculate the number of share dividend rights entitled to one new common share, such that the gross dividend in shares will be approximately 3%1.5% higher than the gross dividend in cash. Payment of the dividend and delivery of new common shares, with settlement of fractions in cash, if required, will take place from ~~May 30, 2012.~~June 5, 2013. The distribution of dividend in cash to holders of New York registry shares will be made in USD at the USD/EUR rate fixed by the European Central Bank on ~~May 28, 2012.~~June 3, 2013.
Dividend in cash is in principle subject to 15% Dutch dividend withholding tax, which will be deducted from the dividend in cash paid to the shareholders. Dividend in shares paid out of earnings and retained earnings is subject to 15% dividend withholding tax, but only in respect of the par value of the shares (EUR 0.20 per share). This withholding tax in the case of dividend in shares will be borne by Philips.
In ~~2011,~~2012, a dividend of EUR 0.75 per common share was paid in cash or shares, at the option of the shareholder. Approximately ~~63%~~62.4% elected for a share dividend resulting in the issuance of ~~22,896,661~~30,522,107 new common shares, leading to a ~~2.4%~~3.4% dilution. The remainder of the dividend (EUR 255 million) was paid in ~~cash (EUR 259 million) against the net income of the Company.~~cash.

   ex-dividend date    record date    payment date
Amsterdam shares
   May ~~2, 2012~~7, 2013    May ~~4, 2012~~9, 2013    ~~May 30, 2012~~June 5, 2013
New York shares
   May ~~2, 2012~~7, 2013    May ~~4, 2012~~9, 2013    ~~May 30, 2012~~June 5, 2013
Dividend and dividend yield per common share

¹⁾
Dividend yield % is as of December 31 of previous year
²⁾
Subject to approval by the ~~2012~~2013 Annual General Meeting of Shareholders
Information for US investors
Dividends and distributions per Common Share
The following table sets forth in euros the gross dividends on the Common Shares in the fiscal years indicated (from prior-year profit distribution) and such amounts as converted into US dollars and paid to holders of Shares of the New York registry:

   2007    2008    2009    2010    2011    2008    2009    2010    2011    2012
in EUR
   0.60       0.70       0.70       0.70       0.75       0.70       0.70       0.70       0.75       0.75
in USD
   0.80       1.09       0.94       0.93       1.11       1.09       0.94       0.93       1.11       0.94
Exchange rates USD : EUR
The following two tables set forth, for the periods and dates indicated, certain information concerning the exchange rate for US dollars into euros based on the Noon Buying Rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York (the “Noon Buying Rate”). The Noon Buying Rate on February ~~17, 2012~~15, 2013 was EUR ~~0.7605~~0.7484 per USD 1.

calendar period    period end    average    high
EUR per USD
low

2006
   0.7577       0.7906       0.8432       0.7504
   period end    average    high    EUR per USD
low
2007
   0.6848       0.7259       0.7750       0.6729       0.6848       0.7259       0.7750       0.6729
2008
   0.7184       0.6844       0.8035       0.6246       0.7184       0.6844       0.8035       0.6246
2009
   0.6977       0.7187       0.7970       0.6623       0.6977       0.7187       0.7970       0.6623
2010
   0.7536       0.7579       0.8362       0.6879       0.7536       0.7579       0.8362       0.6879
2011
   0.7708       0.7186       0.7736       0.6723       0.7708       0.7186       0.7736       0.6723
2012
   0.7584       0.7782       0.8290       0.7428

   highest rate    lowest rate
August, 2011
   0.7063       0.6892
September, 2011
   0.7437       0.7001
October, 2011
   0.7530       0.7056
November, 2011
   0.7551       0.7245
December, 2011
   0.7736       0.7415
January, 2012
   0.7885       0.7580
   highest rate    lowest rate
August, 2012
   0.8231       0.7947
September, 2012
   0.7958       0.7609
October, 2012
   0.7766       0.7614
November, 2012
   0.7865       0.7686
December, 2012
   0.7734       0.7541
January, 2013
   0.7665       0.7362
Philips publishes its financial statements in euros while a substantial portion of its net assets, earnings and sales are denominated in other currencies. Philips conducts its business in more than 50 different currencies.
Unless otherwise stated, for the convenience of the reader the translations of euros into US dollars appearing in this report have been made based on the closing rate

Annual Report ~~2011      233~~2012      239
17 Investor Relations 17.1 - 17.2

on December 31, ~~2011~~2012 (USD 1 = EUR ~~0.7728)~~0.7582). This rate is not materially different from the Noon Buying Rate on such date (USD 1 = EUR ~~0.7708)~~0.7584).
The following table sets out the exchange rate for US dollars into euros applicable for translation of Philips’ financial statements for the periods specified.

         EUR per USD          EUR per USD
   period end    average    high    low    period end    average    high    low
2006
   0.7591       0.7935       0.8375       0.7579
2007
   0.6790       0.7272       0.7694       0.6756       0.6790       0.7272       0.7694       0.6756
2008
   0.7096       0.6832       0.7740       0.6355       0.7096       0.6832       0.7740       0.6355
2009
   0.6945       0.7170       0.7853       0.6634       0.6945       0.7170       0.7853       0.6634
2010
   0.7485       0.7540       0.8188       0.7036       0.7485       0.7540       0.8188       0.7036
2011
   0.7728       0.7192       0.7728       0.6721       0.7728       0.7192       0.7728       0.6721
2012
   0.7582       0.7776       0.8166       0.7500
~~17.2Share~~17.2 Share information
Market capitalization
Philips’ market capitalization was EUR ~~15.1~~18.2 billion at ~~year- end 2011.~~year-end 2012. The highest closing price for Philips’ shares during ~~2011~~2012 in Amsterdam was EUR ~~25.34~~20.33 on ~~January 18, 2011~~December 11, 2012 and the lowest was EUR ~~12.23~~13.76 on ~~September 12, 2011.~~April 11, 2012. The highest closing price for Philips’ shares during ~~2011~~2012 in New York was USD ~~33.81~~26.81 on ~~January 18, 2011~~December 20, 2012 and the lowest was USD ~~16.87~~17.32 on ~~September 22, 2011.~~June 1, 2012.
Market capitalization
in billions of euros

¹⁾
The ~~years 2007 and~~year 2008 mainly ~~reflect~~reflects our ~~shareholdings~~shareholding in ~~TSMC and~~ LG Display which ~~were~~was exited in ~~2008 and~~ 2009 ~~respectively~~
Share capital structure
During ~~2011,~~2012, Philips’ issued share capital ~~increased~~decreased by approximately 2352 million common shares to a level of ~~1,009~~957 million common shares. The main ~~reason~~reasons for this isare the cancellation of 82,364,590 Philips shares acquired pursuant to the EUR 2 billion share repurchase program and the elective dividend, resulting in the issue of ~~22,896,661~~30,522,107 new common shares. The basic shares outstanding decreased from ~~947~~926 million at the end of December ~~2010~~2011 to ~~926~~915 million at the end of ~~2011.~~2012. As of December 31, ~~2011,~~2012, the shares held in treasury amounted to ~~82.9~~42.5 million shares, of which ~~33.6~~28.7 million are held by Philips to cover long-term incentive and employee stock purchase plans.
The Dutch Financial Markets Supervision Act (Wet op het financieel toezicht) imposes a duty to disclose percentage holdings in the capital and/or voting rights in the Company when such holding reaches, exceeds or falls below 5%, 10%, 15%, 20%, 25%, 30%, 40%, 50%, 60%, 75% and 95%. Such disclosure must be made to the Netherlands Authority for the Financial Markets (AFM) without delay. The AFM then notifies the Company.
240      Annual Report 2012
17 Investor Relations 17.2 - 17.2
On ~~July 13, 2011,~~May 2, 2012, the Company received notification from the AFM that it had received disclosures under the Financial Markets Supervision Act of a substantial holding of ~~5.10%~~5.42% by ~~Southeastern Asset Management, Inc.~~Barclays Plc in the
~~234      Annual Report 2011~~
~~17 Investor Relations 17.2 - 17.2~~
Company’s common shares. This was reduced to below 5% on May 4, 2012. On ~~August 10, 2011~~June 12, 2012 the Company received notification from the AFM that it had received disclosures under the Financial Markets Supervision Act of a substantial holding of ~~5.08%~~10.02% by the Company in its own shares. This was reduced to below 5% on September 21, 2012. On ~~December 7, 2011~~November 27, 2012 the Company received notification from the AFM that it had received disclosures under the Financial Markets Supervision Act of a substantial holding of ~~5.05%~~5.02% by ~~Dodge & Cox~~BlackRock, Inc. in the Company’s common shares.
Based on a survey in December ~~2011~~2012 and information provided by several large custodians, the following shareholder portfolio information is included in the graphs Shareholders by region and Shareholders by style.
Shareholders by region (estimated)¹⁾¹⁾
in %
¹⁾
Split based on identified shares in shareholder identification
Shareholders by style (estimated)¹⁾¹⁾
in %

¹⁾
Split based on identified shares in shareholder identification
²⁾
SWF: Sovereign Wealth Fund
³⁾
GARP: growth at reasonable price
Share repurchase programs for capital reduction purposes
On July 18, 2011, Philips announced a further EUR 2 billion share repurchase program to be completed within 12 months. Taking into consideration the volatility of the financial markets, it was decided to extend the program through the end of Q2 2013. ~~In 2011,~~By the end of 2012, Philips has completed ~~35%~~73% of the EUR 2 billion share buy-back program.
Further details on the share repurchase programs can be found on the Investor Relations website. For more information see chapter 11, Corporate governance, of this report.
Impact of share repurchases on share count
in millions of shares

   2007    2008    2009    2010    2011    2008    2009    2010    2011    2012
Shares issued
   1,143       972       972       986       1,009       972       972       986       1,009       957
Shares in treasury
   78       49       45       39       83       49       45       39       83       42
Shares outstanding
   1,065       923       927       947       926       923       927       947       926       915
Shares repurchased
   26       146       —         —         48       146       —         —         48       47
Shares cancelled
   —         170       —         —         —         170       —         —         —         82
A total of ~~82,880,543~~42,541,687 shares were held in treasury by the Company at December 31, ~~2011 (2010: 39,572,400~~2012 (2011: 82,880,543 shares). As of that date, a total of ~~47,142,041~~52,289,603 rights to acquire shares (under convertible personnel debentures, ~~restricted~~ share rights programs and stock options) were outstanding ~~(2010: 54,941,221)~~(2011: 47,142,041).

Annual Report ~~2011      234~~2012      241
17 Investor Relations 17.2 - 17.3

Period    total number of shares
purchased
average price paid per share
in EUR
   total number of shares
purchased as part of publicly
announced programs    maximum EUR amount of
shares that may yet be
purchased under the
programs
January, 2011
   —
February, 2011
   —
March, 2011
   478       22.34
April, 2011
   —
May, 2011
   30,957       20.11
June, 2011
   —
July, 2011
   6,955,000       17.27       6,955,000       1,879,859,456
August, 2011
   20,320,770       14.52       20,320,770       1,584,853,914
September, 2011
   5,679,001       13.06       5,678,500       1,510,666,241
October, 2011
   2,002,076       14.65       2,001,787       1,481,342,489
November, 2011
   6,846,807       13.97       6,846,807       1,385,696,231
December, 2011
   5,673,235       15.08       5,672,976       1,300,173,760
Period    total number of shares
purchased
average price paid per share
in EUR
   total number of shares
purchased as part of publicly
announced programs    maximum EUR amount of
shares that may yet be
purchased under the
programs
January, 2012
   3,004,358       15.22       3,004,358       1,254,459,971
February, 2012
   3,849,302       15.68       3,849,302       1,194,096,499
March, 2012
   3,757,005       15.44       3,757,005       1,136,078,795
April, 2012
   2,421,544       14.55       2,421,544       1,100,844,958
May, 2012
   8,222,700       14.39       8,222,700       982,487,277
June, 2012
   6,738,465       14.60       6,736,989       884,137,601
July, 2012
   2,970,187       16.45       2,968,778       835,297,403
August, 2012
   2,413,941       18.47       2,413,941       790,700,971
September, 2012
   3,051,738       18.82       3,050,133       733,305,045
October, 2012
   5,369,200       18.78       5,369,000       632,473,872
November, 2012
   2,718,375       19.88       2,717,918       578,439,218
December, 2012
   2,353,817       20.06       2,353,817       531,215,106
~~17.3Philips’~~17.3 Philips’ rating
Philips’ existing long-term debt is rated A3 (with negative outlook) by Moody’s and A- (with negative outlook) by Standard & Poor’s. It is ~~our~~Philips’ objective to manage ~~our~~its financial ratios to be in line with ~~A3 / A-.~~an A3/A- rating. There is no assurance that wePhilips will be able to achieve this ~~goal and ratings~~goal. Ratings are subject to change at any time. Outstanding long-term bonds and credit facilities do not have a repetitive material adverse change clause, financial covenants or credit rating-related acceleration possibilities.
Credit rating summary

   long-term    short-term    outlook
Standard and Poor’s
   A-       A-2       Negative ¹⁾
Moody’s
   A3       P-2       Negative ²⁾

¹⁾
On February 3, 2012, Standard and Poor’s decided to change their outlook from stable to negative
²⁾
On February 8,3, 2012, Moody’s decided to change their outlook from stable to negative

~~236~~242      Annual Report ~~2011~~2012
17 Investor Relations 17.4 - 17.4

~~17.4Performance~~17.4 Performance in relation to market indices
The Common Shares of the Company are listed on the stock market of Euronext Amsterdam. The New York Registry Shares of the Company, representing Common Shares of the Company, are listed on the New York Stock Exchange. The principal market for the Common Shares is Euronext Amsterdam. For the New York Registry Shares is the New York Stock Exchange.
The following table shows the high and low closing sales prices of the Common Shares on the stock market of Euronext Amsterdam as reported in the Official Price List and the high and low closing sales prices of the New York Registry Shares on the New York Stock Exchange:

      Euronext Amsterdam (EUR)    New York stock exchange (USD)
      high    low    high    low
2007
      32.99       26.71       45.87       35.36
2008
   1st quarter    28.94       23.63       42.34       35.64
   2nd quarter    25.31       21.61       39.50       33.80
   3rd quarter    23.33       18.48       35.34       25.49
   4th quarter    19.68       12.09       26.75       14.79
2009
   1st quarter    16.05       10.95       20.78       13.98
   2nd quarter    14.77       11.52       20.30       15.45
   3rd quarter    17.65       12.59       25.82       17.52
   4th quarter    21.03       15.79       30.19       22.89
2010
   1st quarter    25.28       20.34       33.48       28.26
   2nd quarter    26.94       22.83       35.90       28.09
   3rd quarter    26.23       21.32       33.32       26.84
   4th quarter    24.19       20.79       33.90       27.10
2011
   1st quarter    25.34       21.73       33.81       29.81
   2nd quarter    22.84       16.33       32.44       23.36
   3rd quarter    17.84       12.23       25.74       16.87
   4th quarter    16.28       12.77       22.54       17.22
August, 2011
      16.99       13.28       24.20       18.94
September, 2011
      14.49       12.23       20.58       16.87
October, 2011
      15.73       12.77       22.54       17.22
November, 2011
      15.37       13.38       21.35       17.59
December, 2011
      16.28       14.64       20.95       18.90
January, 2012
      16.56       14.48       21.47       18.34
      Euronext Amsterdam (EUR)    New York stock exchange (USD)
      high    low    high    low
2008
      28.94       12.09       42.34       14.79
2009
   1st quarter    16.05       10.95       20.78       13.98
   2nd quarter    14.77       11.52       20.30       15.45
   3rd quarter    17.65       12.59       25.82       17.52
   4th quarter    21.03       15.79       30.19       22.89
2010
   1st quarter    25.28       20.34       33.48       28.26
   2nd quarter    26.94       22.83       35.90       28.09
   3rd quarter    26.23       21.32       33.32       26.84
   4th quarter    24.19       20.79       33.90       27.10
2011
   1st quarter    25.34       21.73       33.81       29.81
   2nd quarter    22.84       16.33       32.44       23.36
   3rd quarter    17.84       12.23       25.74       16.87
   4th quarter    16.28       12.77       22.54       17.22
2012
   1st quarter    16.56       14.48       21.51       18.34
   2nd quarter    15.57       13.76       20.26       17.32
   3rd quarter    19.49       15.51       24.89       19.11
   4th quarter    20.33       18.27       26.81       23.52
August, 2012
      18.86       18.09       23.30       22.00
September, 2012
      19.49       18.16       24.89       22.99
October, 2012
      20.11       18.27       26.23       23.52
November, 2012
      20.21       19.47       26.01       24.80
December, 2012
      20.33       19.83       26.81       25.91
January, 2013
      23.13       20.26       31.16       26.54

Annual Report ~~2011      237~~2012      243
17 Investor Relations 17.4 - 17.4

Euronext Amsterdam
Share price development in Amsterdam ~~2011~~
in euros

PHIA    Jan    Feb    Mar    Apr    May    Jun    Jul    Aug    Sep    Oct    Nov    Dec
High
   25.34       23.83       23.98       22.84       20.70       19.05       17.84       16.99       14.49       15.73       15.37       16.28
Low
   22.77       22.49       21.73       20.02       19.01       16.33       16.91       13.28       12.23       12.77       13.38       14.64
Average
   23.91       23.22       22.86       21.07       19.86       17.71       17.45       14.50       13.17       14.55       14.27       15.32
Average daily volume¹⁾
   10.64       6.53       8.30       9.23       8.54       12.10       8.45       12.08       10.75       8.06       7.10       5.76
~~Share price development in Amsterdam, 2010~~
~~in euros~~
PHIA    Jan    Feb    Mar    Apr    May    Jun    Jul    Aug    Sep    Oct    Nov    Dec    Jan    Feb    Mar    Apr    May    Jun    Jul    Aug    Sep    Oct    Nov    Dec
2012

High
   22.33       22.31       25.28       26.94       25.92 ��    26.72       26.23       24.49       24.08       24.19       23.11       23.08       16.56       16.42       16.26       15.32       15.26       15.57       17.90       18.86       19.49       20.11       20.21       20.33
Low
   20.34       20.98       22.26       24.10       22.83       23.78       23.45       21.32       22.39       21.73       20.79       21.49       14.48       15.45       14.95       13.76       14.00       13.87       15.51       18.09       18.16       18.27       19.47       19.83
Average
   21.25       21.60       23.80       25.08       24.53       25.21       24.53       22.84       23.28       22.94       22.31       22.58       15.31       15.80       15.55       14.51       14.49       14.67       16.47       18.46       18.80       18.95       19.95       20.05
Average daily volume¹⁾
   8.25       7.46       6.84       9.80       11.09       7.74       7.09       7.07       7.46       8.32       7.33       5.70       6.77       5.53       5.54       8.05       6.91       6.10       6.15       4.68       5.60       4.97       4.89       3.88
2011

High
   25.34       23.83       23.98       22.84       20.70       19.05       17.84       16.99       14.49       15.73       15.37       16.28
Low
   22.77       22.49       21.73       20.02       19.01       16.33       16.91       13.28       12.23       12.77       13.38       14.64
Average
   23.91       23.22       22.86       21.07       19.86       17.71       17.45       14.50       13.17       14.55       14.27       15.32
Average daily volume¹⁾
   10.64       6.53       8.30       9.23       8.54       12.10       8.45       12.08       10.75       8.06       7.10       5.76
New York Stock Exchange
Share price development in New York ~~2011~~
in US dollars

PHG    Jan    Feb    Mar    Apr    May    Jun    Jul    Aug    Sep    Oct    Nov    Dec
High
   33.81       32.70       33.32       32.44       30.53       27.15       25.74       24.20       20.58       22.54       21.35       20.95
Low
   29.81       30.99       29.94       29.27       26.79       23.36       23.79       18.94       16.87       17.22       17.59       18.90
Average
   31.93       31.75       32.01       30.49       28.47       25.49       24.92       20.81       18.19       20.03       19.37       20.13
Average daily volume¹⁾
   1.31       0.72       0.86       0.88       0.96       2.45       1.56       2.04       2.17       2.07       1.79       1.48
~~Share price development in New York, 2010~~
~~in US dollars~~
PHG    Jan    Feb    Mar    Apr    May    Jun    Jul    Aug    Sep    Oct    Nov    Dec    Jan    Feb    Mar    Apr    May    Jun    Jul    Aug    Sep    Oct    Nov    Dec
2012

High
   31.51       31.17       33.48       35.90       33.87       32.44       33.32       32.19       31.42       33.90       32.06       30.70       21.47       21.36       21.51       20.26       20.00       19.67       22.11       23.30       24.89       26.23       26.01       26.81
Low
   28.26       28.38       30.22       32.25       28.63       28.09       30.03       26.84       29.51       30.45       27.10       28.15       18.34       20.24       19.58       17.98       17.68       17.32       19.11       22.00       22.99       23.52       24.80       25.91
Average
   30.30       29.64       32.29       33.69       30.72       30.65       31.43       29.41       30.43       31.83       30.49       29.82       19.73       20.85       20.57       19.10       18.53       18.41       20.26       22.84       24.20       24.48       25.51       26.27
Average daily volume¹⁾
   1.00       0.68       0.93       2.50       2.15       2.29       1.64       1.10       1.55       1.16       1.00       0.95       1.64       0.93       1.32       1.80       1.03       0.83       0.63       0.54       0.82       0.64       0.77       0.62
2011

High
   33.81       32.70       33.32       32.44       30.53       27.15       25.74       24.20       20.58       22.54       21.35       20.95
Low
   29.81       30.99       29.94       29.27       26.79       23.36       23.79       18.94       16.87       17.22       17.59       18.90
Average
   31.93       31.75       32.01       30.49       28.47       25.49       24.92       20.81       18.19       20.03       19.37       20.13
Average daily volume¹⁾
   1.31       0.72       0.86       0.88       0.96       2.45       1.56       2.04       2.17       2.07       1.79       1.48

¹⁾
In millions of shares

~~238~~244      Annual Report ~~2011~~2012
17 Investor Relations ~~17.6—~~17.4 - 17.4

5-year relative performance: Philips and AEX
base 100 = Dec ~~29, 2006~~31, 2007

5-year relative performance: Philips and unweighted
TSR peer group indexbase 100 -= Dec ~~29, 2006~~31, 2007

3M, Electrolux, Emerson, GE, Hitachi, Honeywell, Johnson & Johnson, Panasonic, Schneider, Siemens, Toshiba,
5-year relative performance: Philips and Dow Jones
base 100 = Dec ~~29, 2006~~31, 2007

~~Amsterdam,~~
Share listings
Amsterdam, New York
Ticker code
PHIA, PHG
No. of shares issued at Dec. 31, ~~2011~~2012
EUR ~~1,009~~957 million
No. of shares outstanding issued at Dec. 31, ~~2011~~2012
EUR ~~926~~915 million
Market capitalization at year-end ~~2011~~2012
EUR ~~15.1~~18.2 billion
Industry classification

MSCI: Capital Goods
20105010
ICB: ~~Consumer Electronics~~Diversified Industrials¹⁾
~~3743~~2727
Members of indices

~~AEX,102~~AEX, NYSE, DJSI, and others

¹⁾
The change of ICB classification took place on June 18, 2012
Annual Report ~~2011      239~~2012      245
17 Investor Relations 17.5 - 17.5

~~17.5Philips’~~17.5 Philips’ acquisitions
Philips made no announcements of acquisitions in 2012.

Acquisitions 2011 / Announcement dates

January 5, 2011
   Optimum Lighting, LLC    Professional Luminaires    Expand portfolio with customized energy-efficient lighting solutions
January 20, 2011
   Preethi¹⁾    Domestic Appliances    Become a leading kitchen appliances company in India
March 9, 2011
   Dameca A/S    Patient Care ~~and~~& Clinical
~~Clinical~~ Informatics    Expand portfolio with integrated, advanced anesthesia care solutions
June 20, 2011
   AllParts Medical    Customer Services    Expand capabilities in imaging equipment services, strengthening Philips’ ~~Multi- Vendor~~Multi-Vendor Services business
June 27, 2011
   Sectra Mamea AB²⁾    Imaging Systems    Expand Women’s Healthcare portfolio with a unique digital mammography solution in terms of radiation dose
June 29, 2011
   Indal Group    Professional Luminaires    Strengthen leading position in professional lighting within Europe
July 11, 2011
   Povos Electric Appliance (Shanghai) Co., Ltd.²⁾    Domestic Appliances    Expand product portfolio in China and continue to build business creation capabilities in growth geographies

¹⁾
Asset transaction

²⁾
Combined asset transaction / share transaction

Acquisitions 2010 / Announcement dates

February 11, 2010
   Luceplan ~~S.p.A.~~    Consumer Luminaires    Iconic brand in the premium design segment for residential applications
February 24, 2010
   Somnolyzer¹⁾    Home Healthcare    Somnolyzer 24x7 automated-scoring solution that can improve the productivity of sleep centers
March 26, 2010
   Tecso ~~Informática Ltda.~~    Patient Care ~~and~~&
Clinical Informatics    Strengthen clinical informatics portfolio with leading Brazilian provider of Radiology Information Systems (RIS)
July 13, 2010
   Street Light Control Portfolio¹⁾    Lighting Electronics    Strengthen outdoor lighting portfolio with acquisition control portfolio. Street Lighting controls activities of Amplex A/S
July 28, 2010
   ~~Shanghai~~ Apex ~~Electronics Technology Co., Ltd.~~    Imaging Systems    Strengthen portfolio of high-quality transducers aimed at the value segment in emerging markets
August 2, 2010
   CDP Medical¹⁾    Patient Care ~~and~~&
Clinical Informatics    Expand clinical informatics portfolio in high-growth markets in the area of PACS
August 20, 2010
   Burton ~~Medical Products Corporation~~    Professional
Luminaires    Expand portfolio with leading provider of specialized lighting solutions for healthcare facilities
September 13, 2010
   Wheb ~~Informática Ltda.~~Sistemas    Patient Care ~~and~~&
Clinical Informatics    Strengthen clinical informatics portfolio with a leading Brazilian provider of clinical information systems
October 11, 2010
   Discus ~~Holdings, Inc.~~    Health & Wellness    Expand oral healthcare portfolio with leading manufacturer of professional tooth whitening products
December 6, 2010
   NCW ~~Holdings Ltd.~~    Professional
Luminaires    Expand global leadership position of professional lighting entertainment solutions
January 6, 2011
   medSage Technologies¹⁾    Home Healthcare    Strengthen portfolio by becoming a leading provider of patient interaction and management applications

¹⁾
Asset transaction

~~240~~246      Annual Report ~~2011~~2012
17 Investor ~~Relationa~~Relations 17.6 - 17.7

~~17.6Financial~~17.6 Financial calendar

Financial calendar
Annual General Meeting of Shareholders

Record date Annual General Meeting of Shareholders
   ~~March 29, 2012~~April 5, 2013
Annual General Meeting of Shareholders
   ~~April 26, 2012~~May 3, 2013
Quarterly reports ~~2012~~2013

First quarterly report ~~2012~~2013
   April ~~23, 2012~~22, 2013
Second quarterly report ~~2012~~2013
   July ~~23, 2012~~22, 2013
Third quarterly report ~~2012~~2013
   October ~~22, 2012~~21, 2013
Fourth quarterly report ~~2012~~2013
   January 28, ~~2013~~2014¹⁾¹⁾
Capital Markets Days ~~2012~~2013

Capital Markets Day (Healthcare)
   ~~May 10, 2012~~March 19, 2013
Capital Markets Day (Consumer Lifestyle and Lighting)
   September ~~11, 2012~~17, 2013

¹⁾
Subject to final confirmation
17.7 Investor contact
Shareholder services
Holders of shares listed on Euronext
Philips offers a dynamic print manager that facilitates the creation of a customized PDF. Non-US shareholders and other non-US interested parties can make inquiries about the Annual Report ~~2011~~2012 to:
Royal Philips Electronics
Annual Report Office
Breitner Center, HBT ~~11.03~~14
P.O. Box 77900
1070 MX Amsterdam, Netherlands
E-mail:annual.report@philips.com
Communications concerning share transfers, lost certificates, dividends and change of address should be directed to:
~~The Royal~~ABN AMRO Bank ~~of Scotland~~ N.V.
Department Equity Capital ~~Markets HQ3130~~Markets/Corporate Broking HQ7050
Gustav Mahlerlaan 10, 1082 PP Amsterdam, Netherlands
Telephone: ~~+31-20-46 43707~~+31-20-34 42000
Fax: ~~+31-20-46 41707~~+31-20-62 88481
Holders of New York Registry shares
Philips offers a dynamic print manager that facilitates the creation of a customized PDF. Holders of New York Registry shares and other interested parties in the US can make inquiries about the Annual Report ~~2011~~2012 to:
Citibank Shareholder Service
P.O. Box 43077 Providence, Rhode Island 02940-3077
Telephone: 1-877-CITI-ADR (toll-free)
Telephone: 1-781-575-4555 (outside of US)
Fax: 1-201-324-3284
Website: www.citi.com/dr
E-mail:citibank@shareholders-online.com
Communications concerning share transfers, lost certificates, dividends and change of address should be directed to Citibank. The Annual Report on Form 20-F is filed electronically with the US Securities and Exchange Commission.
International direct investment program
Philips offers a dividend reinvestment and direct stock purchase plan designed for the US market. This program provides existing shareholders and interested investors ~~with an economical and convenient way to purchase and~~

Annual Report ~~2011      241~~2012      247
17 Investor Relations 17.7 - 7.7

with an economical and convenient way to purchase and sell Philips New York Registry shares and to reinvest cash dividends. Philips does not administer or sponsor the program and assumes no obligation or liability for the operation of the plan. For further information on this program and for enrollment forms, contact:
Citibank Shareholder Service
Telephone: 1-877-248-4237 (1-877-CITI-ADR)
Monday through Friday 8:30 AM EST
through 6:00 PM EST
Website ~~www.citibank.com/adr~~www.citi.com/dr
or by writing to:
Citibank Shareholder Service
International Direct Investment Program
P.O. Box 2502, Jersey City, NJ 07303-2502
Shareholders Communication Channel
Philips is continually striving to improve relations with its shareholders. For instance, Philips was one of the key companies involved in the establishment of the Shareholders Communication Channel, a project of Euronext Amsterdam, banks in the Netherlands and several major Dutch companies to simplify contacts between participating companies and their shareholders.
Philips will use the Shareholders Communication Channel to distribute the Agenda for this year’s Annual General Meeting of Shareholders as well as an instruction form to enable proxy voting at that meeting.
For the Annual General Meeting of Shareholders on ~~April 26, 2012,~~May 3, 2013, a record date of ~~March 29, 2012,~~April 5, 2013, will apply. Those persons who on ~~March 29, 2012~~April 5, 2013 hold shares in the Company and are registered as such in one of the registers designated by the Board of Management for the Annual General Meeting of Shareholders will be entitled to participate in and vote at the meeting.
Investor relations activities
From time to time the Company engages in communications with investors via road shows, ~~one-on- one~~one-on-one meetings, group meetings, broker conferences and capital markets days. The purpose of these meetings is to inform the market on the results, strategy and decisions made, as well as to receive feedback from our shareholders. Also, the Company engages in bilateral communications with investors. These communications take place either at the initiative of the Company or at the initiative of individual investors. During these communications the Company is generally represented by its Investor Relations department. However, on a limited number of occasions the Investor Relations department is accompanied by one or more members of the Board of Management. The subject matter of the bilateral communications ranges from individual queries from investors to more elaborate discussions following disclosures that the Company has made such as its annual and quarterly reports. The Company is strict in its compliance with applicable rules and regulations on fair and non-selective disclosure and equal treatment of shareholders.
More information on the activities of Investor Relations can be found in chapter 11, Corporate governance, of this report.
Analysts’ coverage
Philips is covered by approximately 3536 analysts who frequently issue reports on the company.

~~242~~248      Annual Report ~~2011~~2012
17 Investor Relations 17.7 - 17.8

How to reach us
Investor Relations contact
Royal Philips Electronics
Breitner Center, HBT ~~11-8~~14
P.O. Box 77900
1070 MX Amsterdam, Netherlands
Telephone: +31-20-59 77221
Website: www.philips.com/investor
E-mail:investor.relations@philips.com
Abhijit Bhattacharya
Executive Vice President – Investor Relations
Telephone: +31-20-59 77222
Vanessa Bruinsma-Kleijkers
Manager – Investor Relations
Telephone: +31-20-59 77447
The registered office of Royal Philips Electronics is
High Tech Campus 5
5656 AE Eindhoven, Netherlands
~~Telephone: +31-20-59 77777~~Switch board, telephone: +31-40-27 91111
Sustainability contact
Philips Corporate Sustainability Office
~~Building VS-4C.226~~High Tech Campus 5 (room 2.56)
~~P.O. Box 218~~
~~5600 MD~~5656 AE Eindhoven, Netherlands
Telephone: ~~+31 (0)40 27~~+31-40-27 83651
Fax: ~~+31 (0)40 27~~+31-40-27 86161
Website: www.philips.com/sustainability
E-mail:philips.sustainability@philips.com
Corporate Communications contact
Royal Philips Electronics
Breitner Center, ~~HBT-18~~HBT 19
P.O. Box 77900
1070 MX Amsterdam, Netherlands
Telephone: +31-20-59 ~~77914~~77411
E-mail:corporate.communications@philips.com
~~17.8Taxation~~17.8 Taxation
Netherlands Taxation
The statements below are only a general summary of certain material Dutch tax consequences for holders of Common Shares that are non-residents of the Netherlands based on present Netherlands tax laws and the Tax Convention of December 18, 1992, as amended by the protocol that entered into force on December 28, 2004, between the United States of America and the Kingdom of the Netherlands (the U.S. 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 the 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 the Common Shares and this income received or capital gains derived are attributable to past, present or future employment activities of such holder, the income of which is taxable in the Netherlands, the Dutch tax position is not discussed in this summary.
Dividend withholding tax
In general, a distribution to shareholders by a company resident in the Netherlands (such as the Company) is subject to a withholding tax imposed by the Netherlands at a rate of 15%. Share dividends paid out of the Company’s paid-in share premium recognized for Netherlands tax purposes are not subject to the above mentioned withholding tax. Share dividends paid out of the Company’s retained earnings are subject to dividend withholding tax on the nominal value of the shares issued. Pursuant to the provisions of the U.S. Tax Treaty, a reduced rate may be applicable in respect of dividends paid by the Company to a beneficial owner holding directly 10% or more of the voting power of the Company, if such owner is a resident of the United States (as defined in the U.S. Tax Treaty) and entitled to the benefits of the U.S. 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 wholly or partly benefits from the dividends; (ii) whereby such other person retains, directly or indirectly, an interest similar to that in the Common Shares on which

Annual Report ~~2011      243~~2012      249
17 Investor Relations 17.8 - 17.8

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 U.S. 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 available; such exempt US organizations should apply for a refund of the 15% withholding tax withheld.
The Company may, with respect to certain dividends received from qualifying non-Netherlands subsidiaries, credit taxes withheld from those dividends against the Netherlands withholding tax imposed on certain qualifying dividends that are redistributed by the Company, up to a maximum of the lesser of:

3% of the amount of qualifying dividends redistributed by the Company; and

3% of the gross amount of certain qualifying dividends received by the Company.
The reduction is applied to the Dutch dividend withholding tax that the Company must pay to the Dutch tax authorities and not to the Dutch dividend withholding tax that the Company must withhold.
Income and capital gains
Income and capital gains derived from the Common Shares by a non-resident individual or non-resident corporate shareholder are generally not subject to Dutch income or corporation tax, unless (i) such income and gains are attributable to a (deemed) permanent establishment or (deemed) permanent representative in the Netherlands of the shareholder; or (ii) the shareholder is entitled to a share in the profits of an enterprise or (in 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 a company (such substantial participation not being a business asset);, and, in the case of a non-resident corporate shareholder only, it being held with the primary aim or one of the primary aims to avoid the levy of income tax or dividend withholding tax from another person; or (iv) in 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, while the profits of such shareholder are taxable in the Netherlands pursuant to article 17(3)(c) of the Dutch Corporate Income Tax Act 1969; or (v) in case of a non-resident individual, (a) 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 ordinary shares that exceed regular portfolio management; or (b) such individual has elected to be treated as a Dutch resident.
In general, a holder of Common Shares has a substantial participation if he holds either directly or indirectly and either independently or jointly with his partner (as defined in the Dutch Income Tax Act 2001), the ownership of, or certain other rights over, at least 5% of the total issued share capital or total issued particular class of shares of the Company or rights to acquire shares, whether or not already issued, that represent at any time 5% or more of the total issued capital (or the total issued particular class of shares) or the ownership of certain profit participating certificates that relate to 5% or more of the annual profit or to 5% or more of the liquidation proceeds. A shareholder will also have a substantial participation in the Company if one or more of certain relatives of the shareholder hold a substantial participation in the Company. A deemed substantial participation amongst others exists if (part of) a substantial participation has been disposed of, or is deemed to have been disposed of, on a non-recognition basis.
Estate and gift taxes
No estate, inheritance or gift taxes are imposed by the Netherlands on the transfer or deemed transfer of Common Shares by way of gift by or on the death of a shareholder if, at the time of the death of the shareholder or the gift of the Common Shares (as the case may be), such shareholder is not a resident of the Netherlands.
Inheritance or gift taxes (as the case may be) are due, however, if such shareholder:

has Dutch nationality and has been a resident of the Netherlands at any time during the ten years preceding the time of the death or gift; or

250      Annual Report 2012
17 Investor Relations 17.8 - 17.8
has no Dutch nationality but has been a resident of the Netherlands at any time during the twelve months preceding the time of the gift (for Netherlands gift taxes only)~~; or~~
~~244      Annual Report 2011~~
~~17 Investor Relations 17.8 - 17.8~~
~~dies within 180 days after having made a gift, while being a resident or deemed resident of the Netherlands at the moment of his death (for Netherlands gift taxes only).~~
United States Federal Taxation
This section describes the material United States federal income tax consequences to a US holder (as defined below) of owning Common Shares. It applies only if the Common Shares are held as capital assets for tax purposes. This section does not apply to a member of a special class of holders subject to special rules, including:

a dealer in securities,

a trader in securities that elects to use a ~~mark-to- market~~mark-to-market method of accounting for securities holdings,

a tax-exempt organization,

a life insurance company,

a person liable for alternative minimum tax,

a person that actually or constructively owns 10% or more of our voting stock,

a person that holds Common Shares as part of a straddle or a hedging or conversion transaction,

a person that purchases or sells Common Shares as part of a wash sale for tax purposes, or

a person whose functional currency is not the US dollar.
This section is based on the Internal Revenue Code of 1986, as amended, its legislative history, existing and proposed regulations, published rulings and court decisions, all as currently in effect, as well as on the U.S. Tax Treaty. These laws and regulations are subject to change, possibly on a retroactive basis.
If a partnership 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:

a citizen or resident of the United States,

a domestic corporation,

an estate whose income is subject to United States federal income tax regardless of its source, or

a trust if a United States court can exercise primary supervision over the trust’s administration and one or more United States persons are authorized to control all substantial decisions of the trust.
A US holder should consult its own tax advisor regarding the United States federal, state and local and other tax consequences of owning and disposing of Common Shares in its particular circumstances.
This discussion addresses only United States federal income taxation.
Taxation of Dividends
Under the United States federal income tax laws, the gross amount of any dividend paid out of our current or accumulated earnings and profits (as determined for United States federal income tax purposes) is subject to United States federal income taxation. For a ~~non- corporate~~non-corporate US holder, dividends paid ~~in taxable years beginning before January 1, 2013~~ that constitute qualified dividend income will be taxable at a maximum tax rate of ~~15%~~20% provided that the non-corporate US holder holds the Common Shares for more than 60 days during the ~~121- day~~121-day period beginning 60 days before the ex-dividend date and meets other holding period requirements. Dividends paid with respect to the Common Shares generally will be qualified dividend ~~income.~~income¹⁾. 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. 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 is includible in its income, 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 income 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.
Subject to certain limitations, the Dutch tax withheld in accordance with the U.S. Tax Treaty and paid over to the Netherlands will be creditable or deductible against a US

Annual Report ~~2011      245~~2012      251
17 Investor Relations ~~17.9~~17.8 - ~~17.9~~17.8

holder’s United States federal income tax liability. Special rules apply in determining the foreign tax credit limitation with respect to dividends that are subject to the maximum ~~15%~~20% tax rate. To the extent a refund of the tax withheld is available under Dutch law, or under the U.S. Tax Treaty, the amount of tax withheld that is refundable will not be eligible for credit against United States federal income tax liability. Dividends will be income from sources outside the United States, and depending on a holder’s circumstances, will generally be either “passive” or “general” income for purposes of computing the foreign tax credit allowable to the holder.
Taxation of Capital Gains
A US holder that sells or otherwise disposes of its Common Shares will recognize capital gain or loss for United States federal income tax purposes equal to the difference between the US dollar value of the amount that it realizes and its tax basis, determined in US dollars, in its Common Shares. Capital gain of a non-corporate US holder is generally taxed at ~~preferential rates~~a maximum tax rate of 20% where the holder has a holding period greater than one ~~year.~~year²⁾. The gain or loss will generally be income or loss from sources within the United States for foreign tax credit limitation purposes.
PFIC Rules
We do not believe that the Common Shares will be treated as stock of a passive foreign investment company, or PFIC, for United States federal income tax purposes, but this conclusion is a factual determination that is made annually and thus is subject to change. If we are treated as a PFIC, unless a US holder elects to be taxed annually on a mark-to-market basis with respect to the Common Shares, gain realized on the sale or other disposition of the Common Shares would in general not be treated as capital gain. Instead a US holder would 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.
1) In addition, a US holder that is an individual or estate, or a trust that does not fall into a special class of trusts that is exempt from such tax, will be subject to a 3.8% tax on the lesser of (1) the US holder’s “net investment income” for the relevant taxable year and (2) the excess of the US holder’s modified adjusted gross income for the taxable year over a certain threshold (the “Medicare tax”). A US holder’s net investment income will generally include its dividend income.
2) In addition, the gain or loss will generally be included in a US holder’s net investment income, which may be subject to a 3.8% tax as described in the discussion of the Medicare tax under the heading “– Taxation of Dividends.”
252      Annual Report 2012
17 Investor Relations 17.9 - 17.9
~~17.9New~~17.9 New York Registry Shares
Fees and Charges Payable by a Holder of New York Registry Shares
Citibank, N.A. as the US registrar, transfer agent, paying agent and shareholder servicing agent (“Agent”) under Philips’ New York Registry Share program (the “Program”), collects fees for delivery and surrender of New York Registry Shares directly from investors depositing ordinary shares or surrendering New York Registry Shares for the purpose of withdrawal or from intermediaries acting for them. The Agent collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of the distributable property to pay the fees.
The charges of the Agent payable by investors are as follows:
The New York Transfer Agent charges shareholders a fee of up to USD 5.00 per 100 shares for the exchange of New York Registry shares for ordinary shares and vice versa.
~~Fees~~Green Products
Green Products offer a significant environmental improvement in one or more Green Focal Areas: Energy efficiency, Packaging, Hazardous substances, Weight, Recycling and ~~Payments made~~disposal and Lifetime reliability. The life cycle approach is used to determine a product’s overall environmental improvement. It calculates the environmental impact of a product over its total life cycle (raw materials, manufacturing, product use and disposal).
Green Products need to prove leadership in at least one Green Focal Area compared to industry standards, which is defined by a sector specific peer group. This is done either by outperforming reference products (which can be a competitor or predecessor product in the ~~Agent~~particular product family ) by at least 10%, outperforming product-specific eco-requirements or by being awarded with a recognized eco-performance label. Because of different product portfolios, sectors have specified additional criteria for Green Products, including product-specific minimum requirements where relevant.
214      Annual Report 2012
14 Sustainability statements 14 - 14.1
Green Innovation
Green Innovation comprise all R&D activities directly contributing to ~~Philips~~the development of Green Products or Green Technologies. A wide set of additional criteria and boundaries have been defined as the basis for internal and external validation.
Environmental data
All environmental data from manufacturing operations are reported on a half-year basis in our sustainability reporting and validation tool, according to defined company guidelines that include definitions, procedures and calculation methods.
Internal validation processes are followed and audits performed to ensure consistent data quality and to assess the robustness of data reporting systems.
These environmental data from manufacturing are tracked and reported to measure progress against our Green operations program targets.
Reporting on ISO 14001 certification is based on manufacturing units reporting in the sustainability reporting system.
Operational carbon footprint
The ~~Agent~~Philips operational carbon footprint is calculated on a half-yearly 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
Logistics – air, sea and road transport
All emission factors used to transform input data (for example, amount of tonne-kilometers transported) into CO₂ emissions are from the Greenhouse Gas Protocol (GHGP), except for business travel, where the service providers supplied CO₂ data based on their own verified methodology. The GHGP distinguishes three scopes. It is mandatory to report on the first two to comply with the GHGP reporting standards.
•
Scope 1 – direct CO₂ emissions – is reported on with direct emissions from our industrial and non-industrial sites in full. Emissions from industrial sites, which consist of direct emissions resulting from processes and fossil fuel combustion on site, are reported in the sustainability reporting system. Energy use and CO₂ emissions from non-industrial sites are based on actual data whereavailable. If this is not the case, they are estimated based on square meters, taking the geographical location and building type of the site into account.
•
Scope 2 – CO₂ emissions resulting from the generation of purchased electricity for our premises – is reported on with electricity use from industrial and non-industrial sites in full. Indirect CO₂emissions resulting from purchased electricity, steam and heat are reported in the sustainability reporting system. Those emissions of industrial sites not yet reporting are calculated on the same basis as described in Scope 1. Indirect emissions of non-industrial sites are calculated in the same manner as described in Scope 1.
•
Scope 3 – other CO₂ emissions related to activities not owned or controlled by the Group is reported on for our business travel and distribution activities. Commuting by our employees, upstream distribution (before suppliers ship to us), outsourced activities and emissions resulting from product use by our customers are not included in our operational carbon footprint. The calculations for business travel by lease cars are based on actual fuel usage and for rental cars on distance traveled. Emissions from business travel by airplane are calculated by the supplier based on mileage flown and emission factors from DEFRA (UK Department of Environment, Food and Rural Affairs), distinguishing between short, medium and long flights. Further, emissions from air freight for distribution are calculated based on the amount of tonne-kilometers transported between airports (distinguishing between short, medium and long hauls), including an estimate (based on actual data of the lanes with the largest volumes) for trucking from sites and distribution centers to airports and vice versa. Express shipments are generally a mix of road and air transport, depending on the distance. Therefore the assumption is applied that shipments over less than 600 km are transported by road and the rest of the shipments by air (those emissions by air are calculated in the same way as air freight). For sea transport, only data on transported volume were available so an estimate had to be made about the average weight of a container. Transportation to and from ports is not registered. This fore and aft part of sea transport was estimated to be around 3% of the total distance (based on actual data of the lanes with the largest volumes), consisting of a mix of modalities, and was added to the total emissions accordingly. CO₂ emissions from road transport were also calculated based on tonne-kilometers. If data were incomplete, the emissions were estimated based on sales volumes. Return travel of vehicles is not included in the data for sea and road distribution.
Health and safety
Health and safety data are reported and validated monthly. The focus is on reporting work-related injuries, which predominantly occur in manufacturing operations. The annual number of cases leading to at least one lost workday is reported per 100 FTEs (full-time equivalents). Fatalities are reported for staff, contractors and visitors and include commuting accidents.
General Business Principles
Alleged GBP violations are registered in our intranet-based reporting and validation tool.
Supplier audits
Supplier audits are primarily focused on identified risk suppliers, based on identified risk countries and on spend of more than EUR 1 million (new suppliers EUR 100,000 and no threshold for high risk suppliers).
Based on the Maplecroft Human Rights Risk Indexes, risk countries for Supply Management in 2012 were: Belarus, Brazil, China, Dominican Republic, India, Indonesia, Mexico, the Philippines, Russia, and Ukraine.
Suppliers of new ventures are included to the extent that the integration process of these ventures has ~~agreed~~been finalized. Normative integration period is two years after closure of the new venture.
Sustainability governance
Sustainability is strongly embedded in our core business processes, like innovation (EcoDesign), sourcing (Supplier Sustainability Involvement Program), manufacturing (Green Manufacturing 2015) and Logistics (Green Logistics).
The Sustainability Board is the highest governing sustainability body in Philips, chaired by Jim Andrew, member of the Executive Committee. Three other Executive Committee members sit in the Sustainability Board jointly with sector and functional executives. The Sustainability Board convenes four times per year, defines Philips’ sustainability strategy and programs, monitors progress and takes corrective action where needed.
External assurance
KPMG has provided reasonable assurance on whether the information in chapter 14, Sustainability statements, of this report including the information referred to ~~reimburse certain expenses~~in section 5.2, Social performance, of this report and section 5.3, Environmental performance, of this report is, in all material respects, fairly presented in accordance with the reporting criteria. We refer to section 14.6, Independent assurance report, of this report.
14.1 Economic indicators
This section provides summarized information on contributions on an accruals basis to the most important economic stakeholders as a basis to drive economic growth. For a full understanding of each of these indicators, see the specific financial statements and notes in this report.
Distribution of direct economic benefits
in millions of euros
   2010    2011    2012
Suppliers: goods and services
   13,265       13,845       15,379
Employees: salaries and wages
   5,035       5,123       5,974
Shareholders: distribution from retained earnings
   650       711       687
Government: corporate income taxes
   497       283       308
Capital providers: net interest
   225       210       241
Annual Report 2012      215
14 Sustainability statements 14.1 - 14.3
Total purchased goods and services amounted to EUR 15.4 billion, representing 62% of total revenues of the Philips Group. Of this amount, 65% was spent with global suppliers, the remainder with local suppliers. Compared to 2011, spending increased in absolute terms as a result of higher sales volumes.
In 2012, the salaries and wages totaled EUR 6.0 billion. This amount is EUR 851 million higher than in 2011, mainly caused by restructuring costs. See note 1, Income from operations for more information.
Dividend distributed to shareholders amounted to EUR 687 million, EUR 24 million down compared to 2011.
Corporate income taxes increased slightly to EUR 308 million in 2012 from EUR 283 million in 2011, mainly attributable to higher taxable earnings. For a further understanding, see note 3, Income taxes.
14.2 EcoVision
Our latest EcoVision program, includes key performance indicators in relation to Green Product sales, Improving people’s lives, Green Innovation, Green Operations, Health & Safety, Employee Engagement and Supplier Sustainability.
Improving people’s lives
Philips products and solutions that directly can support the curative or preventive side of people’s health was one of the parameters of our EcoVision 5 program, labelled ‘Bringing care to people’, with a target of 500 million lives touched in 2015. In this category in 2012, we already touched over 570 million lives, driven by our Healthcare sector.
With the renewal of our company vision in 2012 we have extended that approach with our ‘well-being’ products that help people live a healthy life as well as our Green Products and solutions of all sectors that contribute to a healthy ecosystem. For the year 2012 we have established our total baseline of 1.7 billion people a year.
Examples of product categories contributing to the ‘care’ category are all healthcare products.
Examples of products in the ‘well-being’ category that help people live a healthier life are juicers, blenders, air fryers, but also mother and childcare products. Further details on this parameter and the methodology can be found in the document ‘Improving people’s lives’.
Operational carbon footprint and energy efficiency
Our operational carbon footprint decreased 9% in 2012.
Operational energy efficiency and carbon footprint: 2012 details
The 2012 results can be attributed to several factors:
•
Accounting for 44% of the total footprint, total CO₂ emissions from manufacturing increased due to acquisitions which were largely mitigated by continued energy efficiency improvement programs, our changing industrial footprint and the further increase of the share of purchased electricity from renewable sources to 47% of total purchased electricity.
•
CO₂ emissions from non-industrial operations (offices, warehouses, etc.) represent 9% of the total. The overall floor space decreased marginally. However, CO₂ emissions decreased 9% as we continued to centralize and re-allocate existing facilities, focusing on the most efficient use of facility space and increasing the share of purchased electricity from renewable sources.
•
The total CO₂ emissions related to business travel, accounting for 13% of our carbon footprint, decreased 15%. Our stringent in-house travel policy resulted in a significant decrease of CO₂ emissions from air travel and rental cars. Furthermore, the fleet oflease cars increased but the total CO₂ emissions decreased.
•
Overall CO₂ emissions from logistics, representing approximately one third of the total, decreased 17%. This decrease mainly resulted from the exclusion of TV business. However, results can also be attributed to an effective gatekeeping process to move freight from air to sea, as well as our continued focus on optimizing container utilization.
Operational carbon footprint for logistics
in kilotonnes CO₂-equivalent
   2008    2009    2010    2011    2012
Air transport
   305       308       345       328       309
Road transport
   211       174       160       176       105
Sea transport
   190       145       167       153       132




Philips Group
   706       627       672       657       546
14.3 Green Operations
In 2010, we decided to group all activities related to improving the environmental performance of our manufacturing facilities (including chemicals management) under the Green Manufacturing 2015 program, which we renamed to Green Operations. The program focuses on most contributors to climate change, but also addresses water, recycling of waste and chemical substances.
In the course of 2012 we implemented a new IT solution for our environmental reporting, thereby further improving the data quality and the accuracy of the reporting process. Next, we implemented a new process to monitor chemicals used in processes in more detail. Since Philips focuses its reduction efforts on the restricted and hazardous substances listed below, we decided to exclude the categories ‘Other restricted substances’ and ‘Other hazardous substances’ from our reporting in 2012. Based on the new insights gained through the new chemicals management process, we will define new reduction targets in 2013 for some of those chemicals.
Green Operations
in % unless otherwise stated
   2007 2012
   baseline year actual¹⁾    2015 target¹⁾
Total CO₂from manufacturing

865 kilotonnes CO₂-
equivalent
   -20       -25
Water
   4.2 million m ³ 15       -10
Materials provided for recycling via external contractor per total waste
   79    77       80
Restricted substances:

Benzene emission
   52 kg    -100       achieved
Mercury emission
   185 kg    -71       -100
CFCs, HCFCs
   156 kg    -100       achieved
Hazardous substances

Lead emission
   1,838 kg    -96       -100
PFCs
   1,534 kg    67       -35
Toluene emission
   2,210 kg    180       -90
Xylene emission
   4,506 kg    320       -90
Styrene
   80,526 kg    -47       -90
Antimony, Arsenic and their compounds
   18 kg    -99       -100
¹⁾
Against the base year 2007
Energy use in manufacturing
Total energy usage in manufacturing amounted to 14,421 terajoules in 2012, of which Lighting consumes about 80%. Compared to 2011, energy consumption at Philips went up by 3%. This was driven by new acquisitions reporting for the first time, organizational changes and energy efficiency improvements.
216      Annual Report 2012
14 Sustainability statements 14.3 - 14.3
Total energy consumption in manufacturing
in terajoules
   2008    2009    2010    2011    2012
Healthcare
   1,612       1,670       1,545       1,541       1,798
Consumer Lifestyle
   1,521       1,188       1,274       1,252       1,104
Lighting
   11,359       11,535       11,580       11,189       11,519
Innovation, Group & Services
   34       28       27       —         —


Philips Group
   14,526       14,421       14,426       13,982       14,421
Carbon emissions in manufacturing
The greenhouse gas emissions of our manufacturing operations totaled 691 kilotonnes CO₂-equivalent in 2012, 9% higher than 2011. Indirect CO₂ emissions increased, mainly as a result of new acquisitions reporting for the first time.
Total carbon emissions in manufacturing
in kilotonnes CO₂-equivalent
   2008    2009    2010    2011    2012
Direct CO₂¹⁾
   300       295       299       294       294
Indirect CO₂
   436       443       317       273       310
Other greenhouse gases
   61       54       34       40       60
From glass production
   28       24       25       28       27


Philips Group²⁾
   825       816       675       635       691
¹⁾
From energy
²⁾
Excluding new acquisitions therefore different from Operational carbon footprint
CO₂ emissions increased at Healthcare and CL due to new acquisitions reporting for the first time, mitigated by energy efficiency improvements and electricity generated by renewable sources. Lighting achieved additional reductions in CO₂ emissions due to changes in the industrial footprint.
Total carbon emissions in manufacturing per sector
in kilotonnes CO₂-equivalent
   2008    2009    2010    2011    2012
Healthcare
   120       118       57       54       70
Consumer Lifestyle
   70       53       42       39       38
Lighting
   633       644       575       542       583
Innovation, Group & Services
   2       1       1       —         —


Philips Group
   825       816       675       635       691
Restricted substances
Emissions of restricted substances totaled 55 kilos in 2012, a decrease of 50% versus 2011 mainly as a result of the successful phase-out of benzene in Lighting. With the Green Operations program we continue to focus on a selection of the most important substances in our processes.
Restricted substances
in kilos
   2008    2009    2010    2011    2012
Benzene and Benzene compounds
   1       136       101       55       —
Mercury and Mercury Compounds
   211       122       83       51       54
CFCs/HCFCs¹⁾
   213       14       4       5       1


Total
   425       272       188       111       55
¹⁾
Excluding cooling systems
Benzene
Lighting was the only sector that used benzene in manufacturing, but has been successful in 2012 in the phase-out of benzene.
Mercury
Mercury is used exclusively by Lighting. Emissions increased from 51 kg in 2011 to 54 kg in 2012, due to increased loads and a product mix change.
CFCs/HCFCs
In 2012 total emissions from CFCs/HCFCs reduced further to 1 kg.
Hazardous substances
Targets have been set on a selected number of hazardous substances.
Hazardous substances
in kilos
   2008    2009    2010    2011    2012
Lead and lead compounds
   684       1,958       108       44       73
PFCs (Per Fluorinated Compounds)
   1,858       2,535       1,507       1,842       2,560
Toluene
   2,524       2,160       6,745       5,745       6,184
Xylene
   3,684       4,619       30,491       37,889       18,947
Styrene
   37,454       21,567       22,920       19,920       42,329
Antimony, Arsenic and their compounds
   16       30       24       37       —


Total
   46,220       32,869       61,795       65,477       70,093
Lead and lead compounds
The 66% increase in 2012 was mainly related to soldering activities and increased load in Lighting.
PFCs
The increase in 2012 to 2,560 kg was caused by one Lighting site where PFCs are used as process chemicals.
Toluene
The emission of toluene, mainly used in wet lacquers, increased by 8% in 2012 largely as a result of an increased number of reporting sites.
Xylene
Activities focused on the reduction of Xylene were successful as wet lacquers were replaced by powder coatings mainly at Consumer Lifestyle and Lighting.
Styrene
In 2012, the emission of styrene more than doubled compared to 2011 due to one new reporting site in Lighting.
Antimony, Arsenic and their compounds
Lighting was successful in phasing-out these substances.
ISO 14001 certification
In 2012, 71% of reporting manufacturing sites were certified. This decrease compared to the previous year is attributable to new acquisitions being included in the reporting for the first time, but not being certified yet. The sectors have programs in place to address this.
Annual Report 2012      217
14 Sustainability statements 14.3 - 14.4
ISO 14001 certification
as a % of all reporting organizations
   2008    2009    2010    2011    2012
Philips Group
   95       92       95       89       71
Environmental Incidents
In 2012, 2 incidents were reported by Healthcare related to water. There were no fines reported in our sustainability reporting tool in connection with one of the incidents.
14.4 General Business Principles
The analysis is based upon 374 reports submitted in 2012 relating to alleged violations of the General Business Principles (GBP), compared to 269 in 2011.
We see a considerable increase in number of complaints reported, which can be attributed mainly to an increase in number of complaints in North America, which accounted for 47% of all complaints (2011: 32%). This dominance in North America we believe is due to a corporate culture in which employees are very much aware of compliance issues, their rights and the opportunities for reporting potential violations. A considerable decrease in complaints reported is shown in Latin America (2012: 21%; 2011: 32%). The management attention and additional training in 2012 including the launch of a ‘Mutual Respect’ e-training in Brazil early 2012 we believe may have contributed to this decline. With 15% of the total number of reported complaints, Europe and the Middle East region show a relative decrease in comparison to 2011 (19%). A minor increase is witnessed in the Asia Pacific region, which accounted for 18% of all reports (2011: 17%).
Most common types of alleged violations
Treatment of employees
The most common alleged violations remain related to the ~~Program~~Treatment of employees category, which represented 55% of all violations (2011: 49%).
As in 2011, the vast majority of the Treatment of employees complaints (almost 85%) remains related to two issues – Discrimination and ~~incurred by~~Respectful treatment. The increase in number of complaints this year can be attributed to the increase related to these two issues.
Complaints regarding Discrimination mainly relate to discrimination based on gender and favoritism, and originated principally in the US and Brazil. Of the complaints reported in the US, 30% related to discrimination, and of the complaints reported in Brazil, 14% related to discrimination, whereas that figure was 19% for Philips. For Brazil, this is a notable decline in percentage in comparison to last year (23%).
Most complaints regarding lack of Respectful treatment – primarily verbal abuse, (sexual) harassment and unfair treatment- again come from the US and Brazil. Of the complaints reported in the US, 37% related to respectful treatment; of the complaints reported in Brazil, 32% related to respectful treatment; compared to 27% for Philips as a whole.
Business integrity
In second place, with 32% of the total number of complaints, are allegations in ~~connection~~the Business integrity category (2011: 40%).
Supply Management
All employees who are performing (certain) purchasing functions should adhere to and fully comply with the ~~Program.~~ Philips Supply Management Code of Ethics. As in the previous two years, we witnessed a low number of complaints in this regard in 2012, with only 3 complaints concerning alleged violations of the Code (2011: 3 complaints).
More information on these categories can be found in the GBP Directives on www.philips.com/gbp.
Breakdown of alleged violations GBP
   2008    2009    2010    2011    2012
Health & Safety
   10       6       3       2       11


Treatment of employees
   197       162       184       132       205
- Collective bargaining
   1       —         1       —         1
- Discrimination
   76       63       64       41       72
- Employee development
   8       3       1       —         —
- Employee privacy
   2       2       2       1       1
- Employee relations
   14       15       4       1       2
- Respectful treatment
   81       53       96       71       102
- Remuneration
   7       22       12       6       15
- Right to organize
   —         —         —         —         1
- Working hours
   8       4       4       2       —
- HR other
   —         —         —         10       11


Legal
   8       4       13       10       19


Business Integrity
   62       88       112       107       119


Supply management
   5       4       4       3       3


Other
   78       54       22       15       17


Total
   360       318       338       269       374
Actual violations versus not proven allegations
Although 76 of the 374 GBP complaints reported in 2012 are still pending (especially those lodged during the last three months of the year), the table of investigated complaints provides an initial indication of the number of substantiated violations compared to the number of complaints which, upon investigation, could not be substantiated.
Out of the 298 complaints investigated, it was found that roughly one quarter (26%) were justified, considerably lower than in 2011 (32%).
With regard to complaints regarding Treatment of employees, there was a considerable decrease in the number of justified complaints to 13% of the total number of complaints in this category (2011: 21%).
In the other major category, i.e. the investigated complaints in the Business integrity category, the percentage of complaints that were justified decreased slightly to 42% (2011: 43%).
A range of disciplinary and corrective measures have been implemented as a result of established violations of the General Business Principles, ranging from dismissal and written warnings to awareness training sessions and organizational measures.
218      Annual Report 2012
14 Sustainability statements 14.4 - 14.5
Classification of the complaints investigated
      2010       2011       2012
category    substantiated    unsubstantiated    substantiated    unsubstantiated    substantiated    unsubstantiated
Health & Safety
   1       2       —         2       2       7
Treatment of employees
   22       111       18       68       22       150
Legal
   4       7       —         5       5       8
Business Integrity
   39       45       33       43       37       51
Supply Management
   2       2       2       1       1       —
Other
   10       9       3       5       11       4


Total
   78       176       56       124       78       220
14.5 Supplier indicators
Philips has a direct business relationship with approximately 10,000 product and component suppliers and 30,000 service providers. Given the size and complexity of our supply chain we need to focus our efforts. Therefore, we developed an approach based on the supplier’s sustainability risk profile related to spend, country of production, business risk and type of supplier relationship. 594 supplier sites have been identified as risk suppliers, including 497 product and component suppliers, and 97 service providers. Different types of service providers are part of our audit program, including labor agencies and transportation companies. All risk suppliers are by definition part of our audit program.
Philips Supplier Sustainability Declaration
The Philips Supplier Sustainability Declaration is based on the EICC code of conduct and we added requirements on Freedom of Association and Collective Bargaining. The topics covered include labor and human rights, worker health and safety, environmental impact, ethics, and management systems. We monitor supplier compliance to the Declaration through a system of regular audits.
In 2012 we updated the Philips Supplier Sustainability Declaration and audit tools, to be in line with the new version of the EICC code of conduct that was recently issued. The updated Declaration includes 4 entirely new provisions, and 14 updates to existing provisions. The new provisions are related to responsible sourcing of minerals, protection of privacy, non-retaliation, and supplier responsibility to monitor code compliance at next tier suppliers. We begin to roll-out the updated Philips Supplier Sustainability Declaration via the purchasing contracts signed with suppliers, and via all trainings and audits conducted.
The Declaration requires suppliers to cascade the EICC Code of Conduct down to their next tier suppliers. This roll-out to deeper tiers in the supply chain is reviewed during the on-site audits. Risk suppliers with who we have a direct business relationship are included in the audit program, and most of these are tier 1 suppliers. However, sometimes Philips also selects and prescribes the tier 2 suppliers, in which case these tier 2 suppliers will also be included in the audit program.
We monitor supplier compliance with the Declaration through a system of regular audits. During these audits, an independent external party visits the supplier’s site for several man-days to hold interviews with workers and management, do a factory tour, and review documentation. Based on purchasing spend, production country and type of business, Philips selects suppliers for inclusion in the audit and supplier development program. 594 suppliers have been identified as risk suppliers and are included in the audit program; the majority of these are in China. During the audits, compliance with all sections of the Declaration is reviewed. In the event of non-compliance we require suppliers to make a corrective action plan, and we monitor its implementation until all major non-compliances are resolved. Full-scope audits are conducted in a 3-year cycle; to date we have audited 90% of all identified risk suppliers.
2012 supplier sustainability audits
In 2012 we audited 159 of our current risk suppliers, including 100 continual conformance audits with suppliers that we already audited in 2009. Risk suppliers from recently acquired companies are also included, and this year ~~ended December 31, 2011~~we audited 17 suppliers from the ~~Agent reimbursed~~acquisitions of Indal, Povos, and Preethi. As in previous years, the majority of the audits were done in China. Also in Brazil and India audits were done, as well as a small number of audits in Mexico, Indonesia, Philippines, Russia, Belarus, Ukraine and the Dominican Republic. With these audits we directly or indirectly impacted over 124,000 workers employed at the production sites that were audited.
On top of the audits with current risk suppliers, we also audited 65 potential suppliers during the supplier selection process. Below we report on the findings at existing suppliers only; findings at potential suppliers are not included in this report since these suppliers are not (yet) part of Philips’ supply base.
To track our progress in improving compliance with risk suppliers we use the key performance indicator ‘compliance rate’, being the percentage of the risk suppliers that was audited in the last 3 years, and has resolved all major non compliances. During 2012 we achieved a compliance rate of 75% (2011: 72%).
Number of initial and continual conformance audits
Audit findings
Below table shows the results of the full scope audits done during 2012. On average we identified 18 major non-compliances per audit, 5 zero tolerance and 13 limited tolerance non-compliances, and we work with each supplier to ~~Philips, or paid amounts~~resolve these non-compliances within 90 days where possible. The limited-tolerance non-compliances include all management systems related issues, accounting for an average of 8 non-compliances per audit. The continual conformance audits showed on ~~Philips behalf~~average a better result than the initial audits with suppliers that went through the audit cycle for the first time.
When the audit reveals areas of non-compliance we request suppliers to ~~third parties,~~implement corrective actions and we monitor the implementation during resolution audits. During the year a total ~~sum~~ of ~~EUR 408,536.~~1,375 corrective actions were implemented successfully by our suppliers to resolve major non-compliances. The results of the resolution audits are not shown in below table.
During 2012 for 2 supplier sites the phase-out decision was taken due to, amongst others, a lack of sustainability improvements.
The most frequently observed areas of major non-compliance are:
Working hours, wages and benefits: excessive overtime, continual seven-day working weeks, insufficient record keeping of standard and overtime working hours, no payment of overtime premiums
Annual Report 2012      219
14 Sustainability statements 14.5 - 14.5

Emergency preparedness: inadequate fire detection and suppression systems, blocked or insufficient emergency exits
~~246~~
Occupational safety: worker exposure to safety hazards, e.g. electrical shocks
Lack of adequate management systems to safeguard compliance to the EICC code for labor and ethics, health and safety and environment
Compared to 2011 we note on average per audit 8% more non-compliances for wages and benefits, and in particular full payment of all overtime premiums is an issue. Suppliers reported difficulties in implementing the yearly legal wage increases in China, especially in the current weak economic environment. For industrial hygiene and occupational safety non-compliances we observe a 9% and 7% increase respectively, which is mainly due to the application of new and stricter legislation in China.
Areas where we observe improvements compared to previous year are mainly related to environmental impact, especially for environmental permits and reporting, pollution prevention and resource reduction, and product content restrictions. These improvements are the result of increased enforcement and management awareness, and we believe that the Philips programs have contributed to this.
Excessive working hours
In China, there is a wide gap between legislated working hours and reality. Especially in regions with high shares of migrant workers a 72 hour working week is not uncommon. While this issue is not unique to Philips, we have decided to take a step-wise approach by working with our suppliers to reduce to a maximum of 60 work hours per week and at least one day off per week, except in emergency or unusual circumstances.
During the 2012 audits we identified 119 suppliers with working weeks exceeding 60 hours, and 88 cases where workers were not provided with one day off per week. In these cases we require suppliers to submit a corrective action plan taking into account factors like employee turnover, seasonality, workforce size, shift structure, productivity, demand planning, etc.
Management systems
There may be areas where our audits reveal compliance in actual practice, but the related underlying management systems to safeguard continued compliance may not be sufficient. Therefore, also management systems are reviewed during the audits. We see this area as a continued weak area at suppliers where further capacity building is necessary. Related to management systems the most frequently observed areas of non-compliance are insufficient risk assessment and self-audits, absence of performance objectives, and a lack of worker feedback and communication.
More information on the Supplier Sustainability Involvement Program, the Philips Supplier Sustainability Declaration and audit approach can be found at www.philips.com/suppliers.
220      Annual Report ~~2011~~2012
~~17 Investor Relations 17.8~~14 Sustainability statements 14.5 - ~~17.9~~14.5

~~The table below sets from the types~~Summary of ~~expenses that the Agent has agreed to reimburse~~2012 initial and ~~the amounts reimbursed~~continued conformance audit findings per region
suppliers with one or more major non-compliances per category (in % of suppliers audited in ~~the year ended December 31, 2011:~~2012)
~~Category of Expense Reimbursed to Philips~~
   China Asia excl. China LATAM EMEA Total
No. of audits
   110    30    16    3    159
Initial audits
   37    12    9    1    59
Continued conformance audits
   73    18    7    2    100
Average number of non-compliance per audit
   19    16    16    7    18
Workers employed at sites audited
   102,494    12,789    6,163    2,788    124,234
Labor

Freely Chosen Employment¹⁾
   <10 % 25-50 % 10-25 % —      10-25 %
Child labor avoidance /young worker management²⁾
   <10 % —      —      —      <10 %
Working hours
   >75 % 50-75 % 25-50 % —      >75 %
Wages and Benefits
   50-75 % 25-50 % 10-25 % —      50-75 %
Humane Treatment
   —      —      —      —      —
Non-discrimination
   10-25 % —      10-25 % —      <10 %
Freedom of association
   —      10-25 % —      —      <10 %
Collective bargaining
   —      —      —      —      —
Health & Safety

Occupational Safety
   50-75 % 25-50 % 50-75 % 50-75 % 50-75 %
Emergency Preparedness
   50-75 % 50-75 % 50-75 % >75 % 50-75 %
Occupational Injury and Illness
   25-50 % 25-50 % <10 % 25-50 % 25-50 %
Industrial Hygiene
   50-75 % 25-50 % 10-25 % —      25-50 %
Physically demanding work
   <10 % —      10-25 % —      <10 %
Machine safeguarding
   10-25 % <10 % 10-25 % —      10-25 %
Dormitory and canteen
   10-25 % 10-25 % 10-25 % —      10-25 %
Environment

Environmental Permits and Reporting
   25-50 % 10-25 % 10-25 % —      10-25 %
Pollution prevention and resource reduction
   <10 % 10-25 % 10-25 % —      <10 %
Hazardous substances
   25-50 % 10-25 % 10-25 % —      25-50 %
Waste water and solid waste
   <10 % 10-25 % 10-25 % —      <10 %
Air emissions
   <10 % 10-25 % <10 % —      <10 %
Product content restrictions
   25-50 % 25-50 % 25-50 % —      25-50 %
Management systems

Company Commitment
   25-50 % 25-50 % 25-50 % 25-50 % 25-50 %
Management Accountability and responsibility
   50-75 % 25-50 % 50-75 % 25-50 % 50-75 %
Legal and Customer Requirements
�� 25-50 % 25-50 % 50-75 % 50-75 % 25-50 %
Risk Assessment and Risk Management
   50-75 % 50-75 % 50-75 % 25-50 % 50-75 %
Performance Objectives
   50-75 % 50-75 % 50-75 % 25-50 % 50-75 %
Training
   50-75 % 25-50 % 50-75 % —      50-75 %
Communication
   50-75 % 25-50 % 25-50 % 25-50 % 50-75 %
Worker feedback and participation
   50-75 % 50-75 % 50-75 % 25-50 % 50-75 %
Audits and assessments
   50-75 % 50-75 % 50-75 % 25-50 % 50-75 %
Corrective action process
   50-75 % 25-50 % 50-75 % 50-75 % 50-75 %
Documentation and records
   50-75 % 25-50 % 25-50 % —      25-50 %
Ethics

Business Integrity
   <10 % 10-25 % —      —      <10 %
No Improper Advantage
   <10 % 10-25 % <10 % —      <10 %
Disclosure of information
   —      —      —      —      —
Protection of Intellectual Property
   <10 % 10-25 % —      —      <10 %
Fair business, advertising and competition
   <10 % 10-25 % 10-25 % —      <10 %
Protection of identity
   10-25 % 10-25 % 10-25 % —      10-25 %
~~in euros~~Annual Report 2012      221
~~amount Reimbursed in the year ended December 31, 2011~~
14 Sustainability statements 14.5 - 14.5

China Asia excl. China LATAM EMEA Total
~~Program related expenses such as investor relations activities, legal fees and New York Stock Exchange listing fees~~General
   ~~74,517~~
~~A portion of the issuance and cancellation fees actually received by the Agent from holders of New York Registry Shares, net of Program-related expenses already reimbursed by the Agent to Philips.~~
~~408,536~~ ¹⁾
~~Total~~EICC Code
   ~~483,053~~25-50 % >75 % 10-25 % 25-50 % 25-50 %
Compliance with law
—   —   —   —   —

¹⁾
~~Translated at USD/EUR exchange rate of actual date(s) of reimbursement(s) during 2011~~Freely chosen employment: these cases are related to 1) workers having to pay a deposit for uniforms, safety equipment, and/or tools. We requested suppliers to return these deposits to the workers and provide these items without demanding a deposit, and 2) in some cases no labor contract was signed. We requested suppliers to take corrective actions and verified that contracts were in place for all workers.
~~The Agent has also agreed to waive certain fees for standard costs associated~~
²⁾
Child labor avoidance/young worker management: this is related to one case of historic child labor, where a supplier hired 2 workers prior to reaching the legal age, but they were no longer underage at the time of the audit. We requested the supplier to strengthen its management system and age verification procedure, and ensured that the workers were enrolled in the young worker management program.
Supplier training and capability building
Based on many years of experience with the ~~administration~~audit program, we know that a combination of audits, capacity building, consequence management and structural attention from management is crucial to realize structural and lasting changes at supplier production sites. During 2012 we extended capacity building initiatives which are offered to help suppliers improve their practices. We organize classroom training sessions, Philips sustainability experts regularly visit suppliers to provide on-site consultancy and training, and we invite suppliers to participate trainings provided by the EICC. In China and India we held dedicated training sessions about the EICC code of conduct, trainings about fire safety, electrical and machine safety, chemical management, and industry hygiene, which were attended by more than 380 supplier representatives for active and potential suppliers, including suppliers for recent acquisitions. In Shenzhen, China we also hosted a Health and Safety Training that was developed in joint effort by the EICC and GeSI.
In India, in a project initiated with the Dutch Ministry suppliers were coached by local consultants in the development and implementation of a sustainability strategy for their company, integrated in their business strategy. Three suppliers participated in this bottom-up approach, which helped suppliers to set their own objectives, based on their own priorities and values as responsible corporate citizens.
Sustainable Trade Initiative IDH
Philips is one of the ~~program.~~initiators of the IDH Electronics Program, an innovative multi-stakeholder initiative sponsored by the Sustainable Trade Initiative (IDH) together with Dell, HP, Philips and civil society organizations. The program will work with over 100 electronics suppliers in China to support innovative workforce management practices, sustainability and better business performance. The goal is to improve working conditions of more than 500,000 employees in the electronics sector.
The ~~table below sets forth~~program was formally kicked off end 2011 when the first suppliers entered the program, and in 2012 we continued the implementation phase in China’s Pearl River Delta. A total of 8 Philips suppliers are now involved in the program. Suppliers receive a so-called Entry Point Assessment to identify challenges common to factory management and workers such as worker-management communication, occupational health and safety, production, performance management and environmental issues. Based on this a tailor made action plan is developed with each supplier on the basis of improved dialogue between management and workers. Suppliers receive support over a period of up to 24 months, and the costs of the program are shared between the supplier, Philips, and the IDH.
Conflict minerals
Philips is concerned about the situation in the east of the Democratic Republic of the Congo (DRC) where proceeds from the extractives sector are used to finance rebel conflicts in the region. These minerals may end up in many different products such as cars, planes, chemicals, packaging, and electronics equipment. Philips is committed to address this issue, even though it does not directly source minerals from the DRC. The supply chain for the metals of concern consists of many tiers, including mines, traders, exporters, smelters, refiners, alloy producers and component manufacturers, before reaching Philips’ direct suppliers. Philips is working towards the following goals:
Minimize trade in conflict minerals that benefit armed groups in the DRC or an adjoining country
Enable legitimate minerals from the region to enter global supply chains, thereby supporting the Congolese economy and the local communities that depend on these exports.
What are conflict minerals?
Conflict minerals are defined in the US Dodd-Frank Act as tin, tantalum, tungsten and gold. They can come from many sources around the world, including mines in the DRC which are estimated to provide approximately 18% of global tantalum production, 4% of tin, 3% of tungsten, and 2% of gold. Some of the mines in the DRC are controlled by militias responsible for atrocities committed in the Congolese civil war.
Collaboration with different stakeholders
We believe that industry collaboration and stakeholder dialogue are key to creating impact at these deeper levels of our supply chain. Since 2008 Philips is actively contributing to the Extractives Work Group, a joint effort of the electronic and mobile phone industry organizations EICC and GeSI, to positively influence the social and environmental conditions in the metals extractives supply chain. See also http://www.eicc.info/extractives.htm.
As we have been doing for years, we continued our engagement with relevant stakeholders including the European Parliament, other industry organizations and local as well as international NGOs in Europe and the US to see how we can resolve the issue. To demonstrate our commitment we signed on to the multi-stakeholder statement from the Responsible Sourcing Network, urging stakeholders to continue the momentum on removing conflict minerals from the supply chain.
In September 2012, the Conflict Free Tin Initiative was launched, introducing a tightly controlled conflict-free supply chain of tin from a mine in Congo all the way down to an end-product. Philips is one of the industry partners brought together by the Dutch government that initiated this conflict-free sourcing program in eastern DRC. Although this region has a rich supply of minerals, its economy has collapsed due to decades of ongoing conflict. In an effort to prevent minerals from financing war, many companies worldwide have shielded away from purchasing minerals from the DRC, creating a de facto embargo and a collapse of the local economy. To overcome this issue and promote cooperation and economic growth in the region outside the control of the rebels, we launched the Conflict Free Tin initiative. In October 2012 an important milestone was reached when the first bags of tagged minerals left the mine. The first end-user products containing this conflict-free tin are expected mid 2013.
Supply chain due diligence
To assist in developing a due diligence standard for conflict minerals, we participated in the multi-stakeholder OECD-hosted pilot for the implementation of the ‘OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas’.
During 2012 we worked with 347 priority suppliers to raise awareness and start supply chain investigations into the country of origin for the metals. These suppliers cover more than 80% of the relevant purchasing spend. Using the EICC-GeSI Conflict Minerals Template we requested our suppliers to report back their progress and to disclose which smelters are used in their supply chains to produce the metals. For all four metals together we identified 127 smelters in our supply chain, of which the majority is located in Asia. By having published this smelter list on our internet we created transparency at deeper levels in our supply chain of those ~~expenses~~actors that we believe hold the key towards effectively addressing the concerns around conflict minerals.
222      Annual Report 2012
14 Sustainability statements 14.5 - 14.5
Number of identified smelters per region
Number of identified smelters per metal
Conflict-free smelter program
The smelter is at a key point in the supply chain to enforce responsible sourcing because at that stage minerals from many sources are processed to produce a refined metal. The EICC-GeSI Conflict-Free Smelter (CFS) program makes it possible to identify smelters that can demonstrate through an independent third party assessment that the ~~Agent paid directly~~minerals they procure did not originate from sources that contribute to ~~third parties~~conflict in the ~~year ended December 31, 2011.~~DRC. After having identified smelters in our supply chain, Philips started to invite these smelters to participate in the CFS program.
A list of CFS compliant smelters for tantalum and gold has been published, and audits for tin and tungsten smelters are under way. As sufficient conflict-free smelters for all four metals become available, Philips plans to direct its supply chain towards these smelters. See www.conflictfreesmelter.org for more details.
For more details, see www.philips.com/suppliers and the published Philips position paper on Conflict Minerals.
Annual Report 2012      223
14 Sustainability statements 14.6 - 14.6
~~Category~~14.6 Independent assurance report
To the Supervisory Board and Shareholders of ~~Expense paid directly~~Koninklijke Philips Electronics N.V.:
We were engaged by the Supervisory Board of Koninklijke Philips Electronics N.V. (further ‘Philips’) to ~~third parties~~provide assurance on the information in the chapter Sustainability statements in the Annual Report 2012 including the information referred to in the sections Social performance and Environmental performance (further ‘The Sustainability Information’). The Board of Management is responsible for the preparation and fair presentation of The Sustainability Information, including the identification of material issues. Our responsibility is to issue an assurance report based on the engagement outlined below.
Scope
Our assurance engagement was designed to provide reasonable assurance on whether The Sustainability Information is presented fairly, in ~~euros~~all material respects, in accordance with the reporting criteria.
We do not provide any assurance on the achievability of the objectives, targets and expectations of Philips.
Reporting criteria and assurance standard
Philips applies the Sustainability Reporting Guidelines G3.1 of the Global Reporting Initiative supported by internally developed guidelines as described in Approach to sustainability reporting in the chapter Sustainability statements, of this Annual Report. It is important to view the performance data in the context of this explanatory information. We believe these criteria are suitable in view of the purpose of our assurance engagement.
We conducted our engagement in accordance with the International Standard for Assurance Engagement (ISAE 3000): Assurance Engagement other than Audits or Reviews of Historical Financial Information, issued by the International Auditing and Assurance Standards Board. This standard requires, among others, that the assurance team possesses the specific knowledge, skills and professional competencies needed to provide assurance on sustainability information, and that they comply with the requirements of the Code of Ethics for Professional Accountants of the International Federation of Accountants to ensure their independence.
Work undertaken
Our procedures included assessing the appropriateness of the accounting policies used, evaluating the design and implementation, and testing the operating effectiveness of the systems and processes for collecting and processing the qualitative and quantitative information in The Sustainability Information (including the implementation of these at a number of sites), and evaluating the overall presentation of sustainability information within our scope. Also we held interviews with relevant management and evaluated documentation on a sample basis to determine whether the information is supported by sufficient evidence.
We have also reviewed, to the extent of our competence, whether the information on sustainability in the rest of the Annual Report 2012 is consistent with The Sustainability Information.
Opinion
In our opinion, The Sustainability Information is fairly presented, in all material respects, in accordance with the reporting criteria.
We also report, to the extent of our competence, that the information on sustainability in the rest of the Annual Report 2012 is consistent with The Sustainability Information.
Amsterdam, The Netherlands
February 25, 2013
KPMG Accountants N.V.
J.F.C. van Everdingen RA
224      Annual Report 2012
14 Sustainability statements 14.7 - 14.7
14.7 Global Reporting Initiative (GRI) table

~~amount in the year ended December 31, 2011~~
~~Reimbursement of Settlement Infrastructure Fees~~
   ~~11,297~~
~~Reimbursement of Proxy Process expenses~~
profile
disclosure    ~~6,026~~
~~Reimbursement of Legal Fee expenses~~
description    ~~1,806~~ cross-reference¹⁾
~~NYSE Listing Fee~~
Strategy and analysis    ~~55,388~~

1.1    Statement from the most senior decision- maker of the organization Message from the CEO
1.2 Description of key impacts, risks, and opportunities
~~Total~~Message from the CEO
section 7.2, Risk categories and factors
section 7.3, Strategic risks
section 7.4, Operational risks
section 7.5, Compliance risks
section 7.6, Financial risks
chapter 14, Sustainability statements
   ~~74,517~~profile
disclosure    description cross-reference¹⁾
Organizational profile
2.1 Name of the organization chapter 1, Our company
2.2 Primary brands, products, and/or services
chapter 1, Our company
chapter 2, Group strategic focus
2.3 Operational structure of the organization, including main divisions, operating companies, subsidiaries and joint ventures
chapter 2, Group strategic focus
chapter 6, Sector performance
2.4 Location of organization’s headquarters
chapter 1, Our company
section 17.7, Investor contact
2.5 Number of countries where the organization operates, and names of countries with either major operations or that are specifically relevant to the sustainability issues covered in the report ��
chapter 1, Our company
chapter 6, Sector performance
2.6 Nature of ownership and legal form chapter 11, Corporate governance
2.7 Markets served (including geographic breakdown, sectors served and types of customers/beneficiaries) Performance highlights
2.8 Scale of the reporting organization Performance highlights
2.9 Significant changes during the reporting period relating to size, structure, or ownership
section 17.2, Share information
section 17.5, Philips’ acquisitions
note 5, Discontinued operations and other assets classified as held for sale
note 7, Acquisitions and divestments
2.10 Awards received in the reporting period
Message from the CEO
section 4.1, The power to make a difference
section 14.2, EcoVision
profile
disclosure description cross-reference¹⁾
Report parameters
Report profile 3.1 Reporting period Performance highlights
3.2 Date of most recent previous report chapter 12, Group financial statements
3.3 Reporting cycle section 17.6, Financial calendar
3.4 Contact point for questions regarding the report or its contents section 17.7, Investor contact
Report scope and boundary 3.5 Process for defining report content
chapter 12, Group financial statements
section 12.1, Management’s report on internal control
section 12.2, Reports of the independent auditor
section 12.3, Auditors’ report on internal control over financial reporting
chapter 14, Sustainability statements
Under certain circumstances, including removal of the Agent or termination of the Program by Philips, Philips is required to repay the Agent certain amounts reimbursed and/or expenses paid to or on behalf of Philips.

Annual Report ~~2011      247~~2012      225
~~18 Definitions and abbreviations 18~~14 Sustainability statements 14.7 - 1814.7
profile
disclosure description cross-reference¹⁾
3.6 Boundary of the report
chapter 12, Group financial statements
section 12.1, Management’s report on internal control
section 12.2, Reports of the independent auditor
section 12.3, Auditors’ report on internal control over financial reporting
chapter 14, Sustainability statements
3.7 State any specific limitations on the scope or boundary of the report
chapter 12, Group financial statements
section 12.1, Management’s report on internal control
section 12.2, Reports of the independent auditor
section 12.3, Auditors’ report on internal control over financial reporting
chapter 14, Sustainability statements
3.8 Basis for reporting on joint ventures, subsidiaries, leased facilities, outsourced operations and other entities that can significantly affect comparability from period to period and/or between organizations
chapter 12, Group financial statements
section 12.1, Management’s report on internal control
section 12.2, Reports of the independent auditor
section 12.3, Auditors’ report on internal control over financial reporting
section 12.10, Significant accounting policies
chapter 14, Sustainability statements
3.9 Data measurement techniques and the bases of calculations
chapter 12, Group financial statements
section 12.1, Management’s report on internal control
section 12.2, Reports of the independent auditor
section 12.3, Auditors’ report on internal control over financial reporting
section 12.10, Significant accounting policies
chapter 14, Sustainability statements
3.10 Explanation of the effect of any re-statements
chapter 12, Group financial statements
section 12.1, Management’s report on internal control
section 12.2, Reports of the independent auditor
section 12.3, Auditors’ report on internal control over financial reporting
section 12.10, Significant accounting policies
chapter 14, Sustainability statements
Forward-looking statements
3.11 Significant changes from previous reporting periods
chapter 12, Group financial statements
section 12.1, Management’s report on internal control
section 12.2, Reports of the independent auditor
section 12.3, Auditors’ report on internal control over financial reporting
section 12.10, Significant accounting policies
chapter 14, Sustainability statements
Forward-looking statements
3.12 Table identifying the location of the Standard Disclosures in the report
Contents
Performance statements
Assurance
3.13 Policy and current practice with regard to seeking external assurance for the report
section 10.3, Report of the Audit Committee
chapter 11, Corporate governance
section 11.2, Supervisory Board
section 11.4, Logistics of the General Meeting of Shareholders
chapter 14, Sustainability statements
section 14.6, Independent assurance report
profile
disclosure description cross-reference¹⁾
Governance
Governance 4.1 Governance structure of the organization
chapter 11, Corporate governance
section 11.1, Board of Management
section 11.2, Supervisory Board
section 11.3, General Meeting of Shareholders
section 11.4, Logistics of the General Meeting of Shareholders
4.2 Indicate whether the Chair of the highest governance body is also an executive officer
section 11.1, Board of Management
section 11.2, Supervisory Board
4.3 For organizations that have a unitary board structure, state the number of members of the highest governance body that are independent and/or non-executive members Not relevant for Philips, see chapter 11, Corporate governance
226      Annual Report 2012
14 Sustainability statements 14.7 - 14.7
profile
disclosure description cross-reference¹⁾
4.4 Mechanisms for shareholders and employees to provide recommendations or direction to the highest governance body
chapter 11, Corporate governance
section 11.1, Board of Management
section 11.2, Supervisory Board
section 11.3, General Meeting of Shareholders
section 11.4, Logistics of the General Meeting of Shareholders
chapter 17, Investor Relations
4.5 Linkage between compensation for members of the highest governance body, senior managers and executives and the organization’s performance section 10.2, Report of the Remuneration Committee
4.6 Processes in place for the highest governance body to ensure, that conflicts of interest are avoided
chapter 10, Supervisory Board report
section 11.2, Supervisory Board
4.7 Process for determining the qualifications and expertise of the members of the highest governance body chapter 10, Supervisory Board report
4.8 Internally developed statements of mission or values, codes of conduct, and principles relevant to economic, environmental and social performance and the status of their implementation
chapter 1, Our company
chapter 2, Group strategic focus
section 7.1, Our approach to risk management and business control
4.9 Procedures of the highest governance body for overseeing the organization’s identification and management of performance, including relevant risks and opportunities, and adherence or compliance with internationally agreed standards, codes of conduct and principles
chapter 10, Supervisory Board report
chapter 11, Corporate governance
section 11.1, Board of Management
section 11.2, Supervisory Board
section 11.3, General Meeting of Shareholders
section 11.4, Logistics of the General Meeting of Shareholders
4.10 Processes for evaluating the highest governance body’s own performance
chapter 10, Supervisory Board report
chapter 11, Corporate governance
section 11.1, Board of Management
section 11.2, Supervisory Board
section 11.3, General Meeting of Shareholders
section 11.4, Logistics of the General Meeting of Shareholders
Commitments to external initiatives 4.11 Explanation of whether and how the precautionary approach or principle is addressed by the organization
section 7.1, Our approach to risk management and business control
chapter 11, Corporate governance
4.12 Externally developed economic, environmental and social charters, principles, or other initiatives to which the organization subscribes or endorses chapter 14, Sustainability statements
4.13 Memberships in associations (such as industry associations) chapter 14, Sustainability statements
Stakeholder engagement 4.14 List of stakeholder groups engaged by the organization chapter 14, Sustainability statements
4.15 Basis for identification and selection of stakeholders with whom to engage chapter 14, Sustainability statements
4.16 Approaches to stakeholder engagement, including frequency of engagement by type and by stakeholder group chapter 14, Sustainability statements
4.17 Key topics and concerns that have been raised through stakeholder engagement, and how the organization has responded to those key topics and concerns, including through its reporting
Message from the CEO
chapter 10, Supervisory Board report
chapter 14, Sustainability statements
Annual Report 2012      227
14 Sustainability statements 14.7 - 14.7
profile
disclosure
description cross-reference¹⁾
Economic
Economic performance Disclosure on management approach to economic aspects
Message from the CEO
chapter 7, Risk management
EC1 Direct economic value generated and distributed, including revenues, operating costs, employee compensation, donations and other community investments, retained earnings and payments to capital providers and governments
Performance highlights
section 14.1, Economic indicators
EC2 Financial implications and other risks and opportunities for the organization’s activities due to climate change chapter 14, Sustainability statements
EC3 Coverage of the organization’s defined-benefit plan obligations note 29, Pensions and other postretirement benefits
EC4 Significant financial assistance received from government Philips does not receive significant financial assistance from governments
EC6 Policy, practices and proportion of spending on locally-based suppliers at significant locations of operation
chapter 14, Sustainability statements
section 14.1, Economic indicators
section 14.5, Supplier indicators
EC7 Procedures for local hiring and proportion of senior management hired from the local community at significant locations of operation
sub-section 5.2.4, Employment
section 5.2, Social performance
EC8 Development and impact of infrastructure investments and services provided primarily for public benefit through commercial, in-kind or pro bono engagement
section 3.6, Enhancing urban life with light
section 4.1, The power to make a difference
sub-section 5.2.8, Social Investment Programs
EC9 Understanding and describing significant indirect economic impacts, including the extent of impacts
section 3.6, Enhancing urban life with light
section 4.1, The power to make a difference
sub-section 5.2.8, Social Investment Programs
section 14.1, Economic indicators
228      Annual Report 2012
14 Sustainability statements 14.7 - 14.7
profile
disclosure
description cross-reference¹⁾
Environment
Disclosure on management approach to environmental aspects
Message from the CEO
section 5.3, Environmental performance
Materials EN1 Materials used by weight or volume
section 14.2, EcoVision
section 14.3, Green Operations
EN2 Percentage of materials used that are recycled input materials
section 14.2, EcoVision
section 14.3, Green Operations
Energy EN3 Direct energy consumption by primary energy source
section 14.2, EcoVision
section 14.3, Green Operations
EN4 Indirect energy consumption by primary source
section 14.2, EcoVision
section 14.3, Green Operations
Water EN8 Total water withdrawal by source section 14.3, Green Operations
Biodiversity EN11 Location and size of land owned, leased, managed in or adjacent to protected areas and areas of high biodiversity value outside protected areas This indicator is not material to Philips because the company does not own land in protected areas and areas with high biodiversity
EN12 Description of significant impacts of activities, products and services on biodiversity in protected areas and areas of high biodiversity value outside protected areas chapter 14, Sustainability statements
Emissions, effluents, and waste EN16 Total direct and indirect greenhouse gas emissions by weight
section 14.2, EcoVision
section 14.3, Green Operations
EN17 Other relevant indirect greenhouse gas emissions by weight
section 14.2, EcoVision
section 14.3, Green Operations
EN19 Emissions of ozone-depleting substances by weight section 14.3, Green Operations
Commitments to external initiatives EN20 NOx, SOx and other significant air emissions by type and weight section 14.3, Green Operations
EN21 Total water discharge by quality and destination section 14.3, Green Operations
EN22 Total weight of waste by type and disposal method section 14.3, Green Operations
EN23 Total number and volume of significant spills section 14.3, Green Operations
EN26 Initiatives to mitigate environmental impacts of products and services, and extent of impact mitigation
section 4.1, The power to make a difference
section 5.2, Social performance
section 14.2, EcoVision
EN27 Percentage of products sold and their packaging materials that are reclaimed by category
section 5.2, Social performance
section 14.2, EcoVision
Compliance EN28 Monetary value of significant fines and total number of non-monetary sanctions for non- compliance with environmental laws and regulations section 14.3, Green Operations
Annual Report 2012      229
14 Sustainability statements 14.7 - 14.7
profile
disclosure
description cross-reference¹⁾
Labor practices and decent work
Disclosure on management approach to labor practices and decent work section 14.4, General Business Principles
Employment LA1 Total workforce by employment type, employment contract and region sub-section 5.2.4, Employment
LA2 Total number and rate of employee turnover by age group, gender and region
sub-section 5.2.3, Diversity and inclusion
sub-section 5.2.4, Employment
Labor/Management relations LA4 Percentage of employees covered by collective bargaining agreements See also www.philips.com/gbp
LA5 Minimum notice period(s) relating to significant operational changes, including whether it is specified in collective agreements See www.philips.com/gbp
Occupational health and safety LA7 Rates of injury, occupational diseases, lost days and absenteeism, and number of work- related fatalities by region sub-section 5.2.6, Health and Safety
LA8 Education, training, counseling, prevention and risk-control programs in place to assist workforce members, their families or community members in relation to serious diseases
section 4.2, Encouraging positive change
section 4.3, Embracing culture change
Training and education LA10 Average hours of training per year per employee by employee category
section 4.3, Embracing culture change
sub-section 5.2.5, Developing our people
Diversity and equal opportunity LA13 Composition of governance bodies and breakdown of employees per category according to gender, age group, minority group membership and other indicators of diversity
sub-section 5.2.3, Diversity and inclusion
chapter 8, Management
chapter 9, Supervisory Board
LA14 Ratio of basic salary of men to women by employee category See also www.philips.com/gbp
profile
disclosure description cross-reference¹⁾
Human rights
Disclosure on management approach to human rights
section 14.4, General Business Principles
section 14.5, Supplier indicators
Investment and procurement practices HR1 Percentage and total number of significant investment agreements that include human rights clauses or that have undergone human rights screening section 5.1, Financial performance
HR2 Percentage of significant suppliers and contractors that have undergone screening on human rights and actions taken section 14.5, Supplier indicators
Non-discrimination HR4 Total number of incidents of discrimination and actions taken section 14.4, General Business Principles
Freedom of association and collective bargaining HR5 Operations identified in which the right to exercise freedom of association and collective bargaining may be at significant risk, and actions taken to support these rights section 14.4, General Business Principles
Child labor HR6 Operations identified as having significant risk for incidents of child labor, and measures taken to contribute to the elimination of child labor section 14.4, General Business Principles
Forced and compulsory labor HR7 Operations identified as having significant risk for incidents of forced or compulsory labor, and measures to contribute to the elimination of forced or compulsory labor section 14.4, General Business Principles
230      Annual Report 2012
14 Sustainability statements 14.7 - 14.7
profile
disclosure
description cross-reference¹⁾
Society
Disclosure on management approach to society and community involvement
section 4.1, The power to make a difference
section 4.2, Encouraging positive change
section 4.3, Embracing culture change
Community SO1 Percentage of operations with implemented local community engagement, impact assessments, and development programs
section 4.3, Embracing culture change
section 5.2, Social performance
Ethics SO2 Percentage and total number of business units analyzed for risks related to ethics section 14.4, General Business Principles
SO3 Percentage of employees trained in organization’s anti-corruption policies and procedures section 14.4, General Business Principles
SO4 Actions taken in response to incidents of ethics section 14.4, General Business Principles
Public policy SO5 Public policy positions and participation in public policy development and lobbying chapter 14, Sustainability statements
Compliance SO8 Monetary value of significant fines and total number of non-monetary sanctions for non- compliance with laws and regulations
section 12.11, Notes
section 14.3, Green Operations
profile
disclosure description
cross-reference¹⁾
Product responsibility
Disclosure on management approach to product responsibility section 4.1, The power to make a difference
Customer health and safety PR1 Life cycle stages in which health and safety impacts of products and services are assessed for improvement, and percentage of significant products and services categories subject to such procedures
section 5.2, Social performance
section 14.2, EcoVision
Product and service labeling PR3 Type of product and service information required by procedures, and percentage of significant products and services subject to such information requirements section 4.1, The power to make a difference
Marketing communications PR6 Programs for adherence to laws, standards, and voluntary codes related to marketing communications, including advertising, promotion and sponsorship chapter 14, Sustainability statements
PR9 Monetary value of significant fines for non- compliance with laws and regulations relating to the provision and use of products and services
section 12.11, Notes
section 14.3, Green Operations
¹⁾
The sections referred to, except for the sections in chapter 14, Sustainability statements, are not included in the scope of the assurance engagement on Sustainability performance
Annual Report 2012      231
15 Reconciliation of non-GAAP information 15 - 15

~~18Definitions and abbreviations~~15 Reconciliation of non-GAAP information
~~Definitions~~Explanation of ~~key terms (including abbreviations)~~Non-GAAP measures
~~Brominated flame retardants (BFR)~~
~~Brominated flame retardants are a group~~Koninklijke Philips Electronics N.V. (the ‘Company’) believes that an understanding of ~~chemicals that have an inhibitory effect on~~sales performance is enhanced when the ~~ignition of combustible organic materials. Of the commercialized chemical flame retardants, the brominated variety are most widely used.~~
~~CAGR~~
~~Compound Annual Growth Rate~~
~~Carbon dioxide (CO~~₂)
~~Carbon dioxide (chemical formula CO~~₂) is a chemical compound composed of two oxygen atoms covalently bonded to a single carbon atom. It is a gas at standard temperature and pressure and exists in the Earth’s atmosphere in this state. CO2 is a trace gas comprising 0.039% of the atmosphere.
~~Cash flow before financing activities~~
~~The cash flow before financing activities is the sum of net cash flow from operating activities and net cash flow from investing activities.~~
~~Chlorofluorocarbon (CFC)~~
A chlorofluorocarbon is an organic compound that contains carbon, chlorine and fluorine, produced as a volatile derivative of methane and ethane. CFCs were originally developed as refrigerants during the 1930s.
~~Comparable sales~~
~~Comparable sales exclude the effect~~effects of currency movements and acquisitions and divestments (changes in consolidation)~~. Philips believes that~~ are excluded. Accordingly, in addition to presenting ‘nominal growth’, ‘comparable growth’ is provided.
Comparable sales exclude the effects of currency movements and changes in consolidation. As indicated in the Significant accounting policies, sales and income are translated from foreign currencies into the Company’s reporting currency, the euro, at the exchange rate on transaction dates during the respective years. As a result of significant currency movements during the years presented, the effects of translating foreign currency sales amounts into euros could have a material impact. Therefore, these impacts have been excluded in arriving at the comparable sales ~~information enhances understanding~~in euros. Currency effects have been calculated by translating previous years’ foreign currency sales amounts into euros at the following year’s exchange rates in comparison with the sales in euros as historically reported. Years under review were characterized by a number of acquisitions and divestments, as a result of which activities were consolidated or deconsolidated. The effect of consolidation changes has also been excluded in arriving at the comparable sales. For the purpose of calculating comparable sales ~~performance.~~
~~Continuing net income~~
~~This equals recurring net income~~growth, when a previously consolidated entity is sold or contributed to a venture that is not consolidated by the Company, relevant sales are excluded from ~~continuing operations, or net income excluding discontinued operations and excluding material non- recurring items.~~
~~Dividend yield~~impacted prior-year periods. Similarly, when an entity is acquired, relevant sales are excluded from impacted periods.
The ~~dividend yield is~~Company uses the ~~annual dividend payment divided by Philips’ market capitalization. All references~~term IFO and Adjusted IFO to ~~dividend yield are as of December 31~~evaluate the performance of the ~~previous year (the yield on~~Philips Group and its operating sectors. The term IFO has the ~~dividend paid in 2010 uses~~same meaning as Income from operations (IFO). Referencing Adjusted IFO will make the ~~market capitalization as~~underlying performance of ~~December 31, 2009).~~
~~EBITA~~
~~Earnings before interest, tax and~~our businesses more transparent by factoring out the amortization ~~(EBITA)~~of acquired intangible assets. Adjusted IFO represents income from ~~continuing~~ operations excluding results attributable to non-controlling ~~interest~~interests holders, results relating to investments in associates, income taxes, financial income and expenses, amortization and impairment on intangible assets (excluding software and capitalized ~~development expenses)~~product development). ~~Philips~~
The Company believes that ~~EBITA information makes~~an understanding of the ~~underlying performance of its businesses more transparent by factoring out the amortization of these intangible assets, which arises when acquisitions are consolidated.~~
~~EBITA per common share~~
~~EBITA divided~~Philips Group’s financial condition is enhanced by the ~~weighted average number~~disclosure of ~~shares outstanding (basic). The same principle~~net operating capital (NOC), as this figure is used by Philips’ management to evaluate the capital efficiency of the Philips Group and its operating sectors. NOC is defined as: total assets excluding assets classified as held for sale less: (a) cash and cash equivalents, (b) deferred tax assets, (c) other (non-)current financial assets, (d) investments in associates, and after deduction of: (e) provisions excluding deferred tax liabilities, (f) accounts and notes payable, (g) accrued liabilities, (h) current/non-current liabilities, and (i) trading securities.
232      Annual Report 2012
15 Reconciliation of non-GAAP information 15 - 15
Net debt is defined as the ~~definition~~sum of long- and short-term debt minus cash and cash equivalents. The net debt position as a percentage of the sum of group equity (shareholders’ equity and non-controlling interests) and net debt is presented to express the financial strength of the Company. This measure is widely used by management and investment analysts and is therefore included in the disclosure. Our net debt position is managed in such a way that we can meet our objective to retain an A3 rating (Moody’s) and A- rating (Standard and Poor’s). Furthermore, the Group’s objective when managing the net debt position is to fulfill our commitment to a stable dividend policy with a 40% to 50% pay-out of continuing net income.
Cash flows before financing activities, being the sum total of net ~~income per common share, replacing EBITA.~~
~~Electronic Industry Citizenship Coalition (EICC)~~
~~The Electronic Industry Citizenship Coalition was established in 2004 to promote a common code of conduct for the electronics~~cash from operating activities and ~~information~~net cash from investing activities, and ~~communications technology (ICT) industry. EICC now includes more than 40 global companies and their suppliers.~~
~~Employee Engagement Index (EEI)~~
The Employee Engagement Index (EEI) is the single measure of the overall level of employee engagement at Philips. It is a combination of perceptions and attitudes related to employee satisfaction, commitment and advocacy.
~~Energy-using Products (EuP)~~
An energy-using product is a product that uses, generates, transfers or measures energy (electricity, gas, fossil fuel). Examples are boilers, computers, televisions, transformers, industrial fans, industrial furnaces etc.
~~Free cash flow~~
~~Free~~free cash flow, ~~is the~~being net cash ~~flow~~ from operating activities minus net capital ~~expenditures.~~expenditures, are presented separately to facilitate the reader’s understanding of the Company’s funding requirements.
Net capital expenditures comprise of purchase of intangible assets, expenditures on development assets, capital expenditures on property, plant and equipment and proceeds from disposals of property, plant and equipment. This measure is widely used by management to calculate free cash flow.
~~Full-time equivalent~~Adjustments
Prior periods amounts have been revised to reflect certain voluntary adopted accounting policy changes, and immaterial adjustments (see section 12.10, Significant accounting policies, of this report).
Sales growth composition per sector
in %
   comparable growth currency effects consolidation changes nominal growth
2012 versus 2011
Healthcare
   6.4    6.4    —      12.8
Consumer Lifestyle
   1.7    3.8    0.5    6.0
Lighting
   3.8    4.6    2.1    10.5
Innovation, Group & Services
   (7.4 ) 0.1    (6.2 ) (13.5 )


Philips Group
   4.1    5.0    0.7    9.8
2011 versus 2010
Healthcare
   5.3    (2.5 ) 0.1    2.9
Consumer Lifestyle
   1.1    (1.8 ) 2.7    2.0
Lighting
   6.1    (2.3 ) (2.7 ) 1.1
Innovation, Group & Services
   (10.7 ) (0.1 ) (14.0 ) (24.8 )


Philips Group
   4.1    (2.2 ) (0.6 ) 1.3
2010 versus 2009
Healthcare
   3.9    6.0    (0.2 ) 9.7
Consumer Lifestyle
   0.4    4.9    1.5    6.8
Lighting
   8.7    6.0    0.7    15.4
Innovation, Group & Services
   13.9    2.0    (1.6 ) 14.2


Philips Group
   4.8    5.6    0.5    10.9
Annual Report 2012      233
15 Reconciliation of non-GAAP information 15 - 15
Sales growth composition per geographic cluster
in %
   comparable growth currency effects consolidation changes nominal growth
2012 versus 2011
Western Europe
   (2.9 ) 1.1    1.9    0.1
North America
   2.0    8.8    (0.8 ) 10.0
Other mature geographies
   11.5    9.2    (0.1 ) 20.6


Total mature geographies
   1.2    5.4    0.4    7.0
Growth geographies
   10.1    4.2    1.1    15.4


Philips Group
   4.1    5.0    0.7    9.8
2011 versus 2010
Western Europe
   (2.6 ) 0.3    (1.7 ) (4.0 )
North America
   2.9    (4.7 ) 0.3    (1.5 )
Other mature geographies
   7.0    2.7    (2.0 ) 7.7


Total mature geographies
   1.0    (1.8 ) (0.8 ) (1.6 )
Growth geographies
   11.1    (3.2 ) (0.2 ) 7.7


Philips Group
   4.1    (2.2 ) (0.6 ) 1.3
2010 versus 2009
Western Europe
   (1.5 ) 1.2    0.7    0.4
North America
   1.5    5.8    —      7.3
Other mature geographies
   12.6    14.5    3.2    30.3


Total mature geographies
   1.2    4.3    0.6    6.1
Growth geographies
   13.6    9.3    0.3    23.2


Philips Group
   4.8    5.6    0.5    10.9
Composition of net debt to group equity
   2010 2011    2012
Long-term debt
   2,818    3,278       3,725
Short-term debt
   1,840    582       809


Total debt
   4,658    3,860       4,534
Cash and cash equivalents
   5,833    3,147       3,834


Net debt (cash)¹⁾
   (1,175 ) 713       700
Shareholders’ equity
   15,007    12,316       11,140
Non-controlling interests
   46    34       34


Group equity
   15,053    12,350       11,174
Net debt and group equity
   13,878    13,063       11,874
Net debt divided by net debt and group equity (in %)
   (8 ) 5       6
Group equity divided by net debt and group equity (in %)
   108    95       94
¹⁾
Total debt less cash and cash equivalents
234      Annual Report 2012
15 Reconciliation of non-GAAP information 15 - 15
Composition of cash flows
   2010 2011 2012
Cash flows from operating activities
   2,074    768    2,198
Cash flows from investing activities
   (597 ) (1,293 ) (912 )


Cash flows before financing activities
   1,477    (525 ) 1,286
Cash flows from operating activities
   2,074    768    2,198
Net capital expenditures:
   (716 ) (872 ) (475 )
Purchase of intangible assets
   (53 ) (69 ) (39 )
Proceeds from sale of intangible assets
   —      —      160
Expenditures on development assets
   (220 ) (278 ) (347 )
Capital expenditures on property, plant and equipment
   (572 ) (653 ) (675 )
Proceeds from disposals of property, plant and equipment
   129    128    426


Free cash flows
   1,358    (104 ) 1,723
Adjusted IFO to Income from operations (or IFO )
   Philips Group Healthcare Consumer Lifestyle Lighting Innovation, Group
& Services
2012
Adjusted IFO
   1,502    1,322    663    188    (671 )
Amortization of intangible assets¹⁾
   (472 ) (200 ) (70 ) (194 ) (8 )


Income from operations (or IFO)
   1,030    1,122    593    (6 ) (679 )
2011
Adjusted IFO
   1,680    1,145    297    445    (207 )
Amortization of intangible assets¹⁾
   (594 ) (228 ) (80 ) (276 ) (10 )
Impairment of goodwill
   (1,355 ) (824 ) —      (531 ) —


Income from operations (or IFO)
   (269 ) 93    217    (362 ) (217 )
2010
Adjusted IFO
   2,556    1,186    487    863    20
Amortization of intangible assets¹⁾
   (482 ) (264 ) (38 ) (174 ) (6 )


Income from operations (or IFO)
   2,074    922    449    689    14
¹⁾
Excluding amortization of software and product development
NOC composition
   2008 2009 2010 2011 2012
Intangible assets
   11,757    11,523    12,233    11,012    10,679
Property, plant and equipment
   3,496    3,252    3,145    3,014    2,959
Remaining assets
   10,784    9,316    9,347    9,393    8,921
Provisions
   (2,894 ) (2,498 ) (2,394 ) (2,694 ) (2,969 )
Other liabilities
   (9,131 ) (8,992 ) (10,434 ) (10,353 ) (10,283 )


Net operating capital
   14,012    12,601    11,897    10,372    9,307
Annual Report 2012      235
15 Reconciliation of non-GAAP information 15 - 15
Net operating capital to total assets
   Philips Group    Healthcare    Consumer Lifestyle    Lighting    Innovation, Group
& Services
2012
Net operating capital (NOC)
   9,307       7,976       1,217       4,635       (4,521 )
Eliminate liabilities comprised in NOC:

- payables/liabilities
   10,283       2,760       1,741       1,695       4,087
- intercompany accounts
   —         71       45       37       (153 )
- provisions
   2,969       355       322       581       1,711
Include assets not comprised in NOC:

- investments in associates
   177       86       —         22       69
- other non-current financial assets
   549       —         —         —         549
- deferred tax assets
   1,917       —         —         —         1,917
- liquid assets
   3,834       —         —         —         3,834


   29,036       11,248       3,325       6,970       7,493
Assets classified as held for sale
   43



Total assets
   29,079
2011
Net operating capital (NOC)
   10,372       8,418       884       4,965       (3,895 )
Eliminate liabilities comprised in NOC:

- payables/liabilities
   10,353       2,697       2,309       1,593       3,754
- intercompany accounts
   —         103       87       51       (241 )
- provisions
   2,694       287       558       282       1,567
Include assets not comprised in NOC:

- investments in associates
   203       86       3       23       91
- other non-current financial assets
   346       —         —         —         346
- deferred tax assets
   1,729       —         —         —         1,729
- liquid assets
   3,147       —         —         —         3,147


   28,844       11,591       3,841       6,914       6,498
Assets classified as held for sale
   551



Total assets
   29,395
2010
Net operating capital (NOC)
   11,897       8,908       882       5,506       (3,399 )
Eliminate liabilities comprised in NOC:

- payables/ liabilities
   10,434       2,603       2,790       1,601       3,440
- intercompany accounts
   —         54       95       68       (217 )
- provisions
   2,394       321       342       302       1,429
Include assets not comprised in NOC:

- investments in associates
   181       76       1       18       86
- other current financial assets
   6       —         —         —         6
- other non-current financial assets
   479       —         —         —         479
- deferred tax assets
   1,367       —         —         —         1,367
- liquid assets
   5,832       —         —         —         5,832


   32,590       11,962       4,110       7,495       9,023
Assets classified as held for sale
   120



Total assets
   32,710
236      Annual Report 2012
16 Five-year overview 16 - 16
16 Five-year overview
all amounts in millions of euros unless otherwise stated
Prior periods amounts have been revised to reflect certain immaterial adjustments (see section 12.10, Significant accounting policies, of this report).
Due to factors such as acquisitions and divestments, the amounts, percentages and ratios are not directly comparable.
   2008
EUR 2009
EUR 2010
EUR 2011
EUR 2012
EUR 2012
USD¹⁾
General data

Sales
   21,682    20,092    22,287    22,579    24,788    32,693
Income from operations (IFO) (loss)
   287    667    2,074    (269 ) 1,030    1,358
Financial income and expenses - net
   87    (162 ) (121 ) (240 ) (246 ) (324 )
Income (loss) from continuing operations
   99    482    1,474    (776 ) 262    346
Income (loss) from discontinued operations
   (198 ) (52 ) (26 ) (515 ) (31 ) (41 )
Net income (loss)
   (99 ) 430    1,448    (1,291 ) 231    305
Total assets
   32,349    30,897    32,710    29,395    29,079    38,353
Net assets
   15,552    14,610    15,053    12,350    11,174    14,738
Financial structure

Debt
   4,188    4,267    4,658    3,860    4,534    5,980
Provisions
   2,894    2,498    2,394    2,694    2,969    3,916
Shareholders’ equity
   15,503    14,561    15,007    12,316    11,140    14,693
Non-controlling interests
   49    49    46    34    34    45
Key figures per share

Weighted average shares outstanding:

- basic²⁾
   993,374    927,435    941,417    952,536    921,828    921,828
- diluted²⁾
   997,780    930,991    949,281    957,019    926,949    926,949
Basic earnings per common share³⁾

Income (loss) from continuing operations per share
   0.10    0.52    1.57    (0.81 ) 0.28    0.37
Net income (loss)
   (0.10 ) 0.46    1.54    (1.36 ) 0.25    0.33
Diluted earnings per common share³⁾

Income (loss) from continuing operations
   0.10    0.52    1.55    (0.81 ) 0.28    0.37
Net income (loss)
   (0.10 ) 0.46    1.53    (1.36 ) 0.25    0.33
¹⁾
For the convenience of the reader, the euro amounts have been converted into US dollars at the exchange rate used for balance sheet purposes at December 31, 2012 (USD 1 = EUR 0.7582. The US dollar amounts are unaudited.)
²⁾
In thousands of shares
³⁾
In euros or US dollars as indicated in the header
Annual Report 2012      237
17 Investor Relations 17 - 17.1
17 Investor Relations
17.1 Key financials and dividend policy
Prior periods amounts have been revised to reflect certain immaterial adjustments (see section 12.10, Significant accounting policies, of this report).
Net income and EPS
Net income of the Philips Group showed a gain of EUR 231 million, or EUR 0.25 per common share, compared to a loss of EUR 1,291 million, or EUR 1.36 per common share, in 2011.
Net income (loss)
in millions of euros
IFO and Adjusted IFO¹⁾
in millions of euros
¹⁾
For a reconciliation to the most directly comparable GAAP measures, see chapter 15, Reconciliation of non-GAAP information, of this report
Operating cash flows
in millions of euros
¹⁾
For a reconciliation to the most directly comparable GAAP measures, see chapter 15, Reconciliation of non-GAAP information, of this report
Dividend policy
We are committed to a stable dividend policy with a 40% to 50% pay-out of continuing net income.
Continuing net income is the base figure used to calculate the dividend payout for the year. For 2012, the key exclusions from net income to arrive at continuing net income are the following: the results related to the Television business of Consumer Lifestyle that are shown as discontinued operations, the fine imposed by the European Commission related to alleged violation of competition rules in the Cathode-Ray Tubes (CRT) industry, an increase in legal provisions and the loss on the sale of industrial assets. Gains that were excluded relate to the sale of the Senseo trademark and the High Tech Campus, the divestment of the Speech Processing activities in Consumer Lifestyle as well as a one-time gain of prior service cost related to a medical retiree benefit plan. Restructuring and post-acquisition charges are also excluded.
Proposed distribution
A proposal will be submitted to the 2013 Annual General Meeting of Shareholders to declare a dividend of EUR 0.75 per common share (up to EUR 685 million), in cash or in shares at the option of the shareholder, against the net income for 2012 and the reserve retained earnings of the Company.
Shareholders will be given the opportunity to make their choice between cash and shares between May 10, 2013, and May 31, 2013. If no choice is made during this election period, the dividend will be paid in shares. On May 31,
238      Annual Report 2012
17 Investor Relations 17.1 - 17.1
2013 after close of trading, the number of share dividend rights entitled to one new common share will be determined based on the volume weighted average price of all traded common shares of Koninklijke Philips Electronics N.V. at Euronext Amsterdam on 29, 30 and 31 May, 2013. The Company will calculate the number of share dividend rights entitled to one new common share, such that the gross dividend in shares will be approximately 1.5% higher than the gross dividend in cash. Payment of the dividend and delivery of new common shares, with settlement of fractions in cash, if required, will take place from June 5, 2013. The distribution of dividend in cash to holders of New York registry shares will be made in USD at the USD/EUR rate fixed by the European Central Bank on June 3, 2013.
Dividend in cash is in principle subject to 15% Dutch dividend withholding tax, which will be deducted from the dividend in cash paid to the shareholders. Dividend in shares paid out of earnings and retained earnings is subject to 15% dividend withholding tax, but only in respect of the par value of the shares (EUR 0.20 per share). This withholding tax in the case of dividend in shares will be borne by Philips.
In 2012, a dividend of EUR 0.75 per common share was paid in cash or shares, at the option of the shareholder. Approximately 62.4% elected for a share dividend resulting in the issuance of 30,522,107 new common shares, leading to a 3.4% dilution. The remainder of the dividend (EUR 255 million) was paid in cash.
ex-dividend date record date payment date
Amsterdam shares
May 7, 2013 May 9, 2013 June 5, 2013
New York shares
May 7, 2013 May 9, 2013 June 5, 2013
Dividend and dividend yield per common share
¹⁾
Dividend yield % is as of December 31 of previous year
²⁾
Subject to approval by the 2013 Annual General Meeting of Shareholders
Information for US investors
Dividends and distributions per Common Share
The following table sets forth in euros the gross dividends on the Common Shares in the fiscal years indicated (from prior-year profit distribution) and such amounts as converted into US dollars and paid to holders of Shares of the New York registry:
   2008    2009    2010    2011    2012
in EUR
   0.70       0.70       0.70       0.75       0.75
in USD
   1.09       0.94       0.93       1.11       0.94
Exchange rates USD : EUR
The following two tables set forth, for the periods and dates indicated, certain information concerning the exchange rate for US dollars into euros based on the Noon Buying Rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York (the “Noon Buying Rate”). The Noon Buying Rate on February 15, 2013 was EUR 0.7484 per USD 1.
   period end    average    high    EUR per USD
low
2007
   0.6848       0.7259       0.7750       0.6729
2008
   0.7184       0.6844       0.8035       0.6246
2009
   0.6977       0.7187       0.7970       0.6623
2010
   0.7536       0.7579       0.8362       0.6879
2011
   0.7708       0.7186       0.7736       0.6723
2012
   0.7584       0.7782       0.8290       0.7428
   highest rate    lowest rate
August, 2012
   0.8231       0.7947
September, 2012
   0.7958       0.7609
October, 2012
   0.7766       0.7614
November, 2012
   0.7865       0.7686
December, 2012
   0.7734       0.7541
January, 2013
   0.7665       0.7362
Philips publishes its financial statements in euros while a substantial portion of its net assets, earnings and sales are denominated in other currencies. Philips conducts its business in more than 50 different currencies.
Unless otherwise stated, for the convenience of the reader the translations of euros into US dollars appearing in this report have been made based on the closing rate
Annual Report 2012      239
17 Investor Relations 17.1 - 17.2
on December 31, 2012 (USD 1 = EUR 0.7582). This rate is not materially different from the Noon Buying Rate on such date (USD 1 = EUR 0.7584).
The following table sets out the exchange rate for US dollars into euros applicable for translation of Philips’ financial statements for the periods specified.
         EUR per USD
   period end    average    high    low
2007
   0.6790       0.7272       0.7694       0.6756
2008
   0.7096       0.6832       0.7740       0.6355
2009
   0.6945       0.7170       0.7853       0.6634
2010
   0.7485       0.7540       0.8188       0.7036
2011
   0.7728       0.7192       0.7728       0.6721
2012
   0.7582       0.7776       0.8166       0.7500
17.2 Share information
Market capitalization
Philips’ market capitalization was EUR 18.2 billion at year-end 2012. The highest closing price for Philips’ shares during 2012 in Amsterdam was EUR 20.33 on December 11, 2012 and the lowest was EUR 13.76 on April 11, 2012. The highest closing price for Philips’ shares during 2012 in New York was USD 26.81 on December 20, 2012 and the lowest was USD 17.32 on June 1, 2012.
Market capitalization
in billions of euros
¹⁾
The year 2008 mainly reflects our shareholding in LG Display which was exited in 2009
Share capital structure
During 2012, Philips’ issued share capital decreased by approximately 52 million common shares to a level of 957 million common shares. The main reasons for this are the cancellation of 82,364,590 Philips shares acquired pursuant to the EUR 2 billion share repurchase program and the elective dividend, resulting in the issue of 30,522,107 new common shares. The basic shares outstanding decreased from 926 million at the end of December 2011 to 915 million at the end of 2012. As of December 31, 2012, the shares held in treasury amounted to 42.5 million shares, of which 28.7 million are held by Philips to cover long-term incentive and employee ~~(FTE)~~stock purchase plans.
The Dutch Financial Markets Supervision Act (Wet op het financieel toezicht) imposes a duty to disclose percentage holdings in the capital and/or voting rights in the Company when such holding reaches, exceeds or falls below 5%, 10%, 15%, 20%, 25%, 30%, 40%, 50%, 60%, 75% and 95%. Such disclosure must be made to the Netherlands Authority for the Financial Markets (AFM) without delay. The AFM then notifies the Company.
240      Annual Report 2012
17 Investor Relations 17.2 - 17.2
On May 2, 2012, the Company received notification from the AFM that it had received disclosures under the Financial Markets Supervision Act of a substantial holding of 5.42% by Barclays Plc in the Company’s common shares. This was reduced to below 5% on May 4, 2012. On June 12, 2012 the Company received notification from the AFM that it had received disclosures under the Financial Markets Supervision Act of a substantial holding of 10.02% by the Company in its own shares. This was reduced to below 5% on September 21, 2012. On November 27, 2012 the Company received notification from the AFM that it had received disclosures under the Financial Markets Supervision Act of a substantial holding of 5.02% by BlackRock, Inc. in the Company’s common shares.
Based on a survey in December 2012 and information provided by several large custodians, the following shareholder portfolio information is included in the graphs Shareholders by region and Shareholders by style.
Shareholders by region (estimated)¹⁾
~~Full-time equivalent~~in %
¹⁾
Split based on identified shares in shareholder identification
Shareholders by style (estimated)¹⁾
in %
¹⁾
Split based on identified shares in shareholder identification
²⁾
SWF: Sovereign Wealth Fund
³⁾
GARP: growth at reasonable price
Share repurchase programs for capital reduction purposes
On July 18, 2011, Philips announced a further EUR 2 billion share repurchase program to be completed within 12 months. Taking into consideration the volatility of the financial markets, it was decided to extend the program through the end of Q2 2013. By the end of 2012, Philips has completed 73% of the EUR 2 billion share buy-back program.
Further details on the share repurchase programs can be found on the Investor Relations website. For more information see chapter 11, Corporate governance, of this report.
Impact of share repurchases on share count
in millions of shares
   2008    2009    2010    2011    2012
Shares issued
   972       972       986       1,009       957
Shares in treasury
   49       45       39       83       42
Shares outstanding
   923       927       947       926       915
Shares repurchased
   146       —         —         48       47
Shares cancelled
   170       —         —         —         82
A total of 42,541,687 shares were held in treasury by the Company at December 31, 2012 (2011: 82,880,543 shares). As of that date, a total of 52,289,603 rights to acquire shares (under convertible personnel debentures, share rights programs and stock options) were outstanding (2011: 47,142,041).
Annual Report 2012      241
17 Investor Relations 17.2 - 17.3
Period    total number of shares
purchased
average price paid per share
in EUR
   total number of shares
purchased as part of publicly
announced programs    maximum EUR amount of
shares that may yet be
purchased under the
programs
January, 2012
   3,004,358       15.22       3,004,358       1,254,459,971
February, 2012
   3,849,302       15.68       3,849,302       1,194,096,499
March, 2012
   3,757,005       15.44       3,757,005       1,136,078,795
April, 2012
   2,421,544       14.55       2,421,544       1,100,844,958
May, 2012
   8,222,700       14.39       8,222,700       982,487,277
June, 2012
   6,738,465       14.60       6,736,989       884,137,601
July, 2012
   2,970,187       16.45       2,968,778       835,297,403
August, 2012
   2,413,941       18.47       2,413,941       790,700,971
September, 2012
   3,051,738       18.82       3,050,133       733,305,045
October, 2012
   5,369,200       18.78       5,369,000       632,473,872
November, 2012
   2,718,375       19.88       2,717,918       578,439,218
December, 2012
   2,353,817       20.06       2,353,817       531,215,106
17.3 Philips’ rating
Philips’ existing long-term debt is rated A3 (with negative outlook) by Moody’s and A- (with negative outlook) by Standard & Poor’s. It is Philips’ objective to manage its financial ratios to be in line with an A3/A- rating. There is no assurance that Philips will be able to achieve this goal. Ratings are subject to change at any time. Outstanding long-term bonds and credit facilities do not have a repetitive material adverse change clause, financial covenants or credit rating-related acceleration possibilities.
Credit rating summary
long-term short-term outlook
Standard and Poor’s
A- A-2 Negative ¹⁾
Moody’s
A3 P-2 Negative ²⁾
¹⁾
On February 3, 2012, Standard and Poor’s decided to change their outlook from stable to negative
²⁾
On February 3, 2012, Moody’s decided to change their outlook from stable to negative
242      Annual Report 2012
17 Investor Relations 17.4 - 17.4
17.4 Performance in relation to market indices
The Common Shares of the Company are listed on the stock market of Euronext Amsterdam. The New York Registry Shares of the Company, representing Common Shares of the Company, are listed on the New York Stock Exchange. The principal market for the Common Shares is Euronext Amsterdam. For the New York Registry Shares is the New York Stock Exchange.
The following table shows the high and low closing sales prices of the Common Shares on the stock market of Euronext Amsterdam as reported in the Official Price List and the high and low closing sales prices of the New York Registry Shares on the New York Stock Exchange:
      Euronext Amsterdam (EUR)    New York stock exchange (USD)
      high    low    high    low
2008
      28.94       12.09       42.34       14.79
2009
   1st quarter    16.05       10.95       20.78       13.98
   2nd quarter    14.77       11.52       20.30       15.45
   3rd quarter    17.65       12.59       25.82       17.52
   4th quarter    21.03       15.79       30.19       22.89
2010
   1st quarter    25.28       20.34       33.48       28.26
   2nd quarter    26.94       22.83       35.90       28.09
   3rd quarter    26.23       21.32       33.32       26.84
   4th quarter    24.19       20.79       33.90       27.10
2011
   1st quarter    25.34       21.73       33.81       29.81
   2nd quarter    22.84       16.33       32.44       23.36
   3rd quarter    17.84       12.23       25.74       16.87
   4th quarter    16.28       12.77       22.54       17.22
2012
   1st quarter    16.56       14.48       21.51       18.34
   2nd quarter    15.57       13.76       20.26       17.32
   3rd quarter    19.49       15.51       24.89       19.11
   4th quarter    20.33       18.27       26.81       23.52
August, 2012
      18.86       18.09       23.30       22.00
September, 2012
      19.49       18.16       24.89       22.99
October, 2012
      20.11       18.27       26.23       23.52
November, 2012
      20.21       19.47       26.01       24.80
December, 2012
      20.33       19.83       26.81       25.91
January, 2013
      23.13       20.26       31.16       26.54
Annual Report 2012      243
17 Investor Relations 17.4 - 17.4
Euronext Amsterdam
Share price development in Amsterdam
in euros
PHIA    Jan    Feb    Mar    Apr    May    Jun    Jul    Aug    Sep    Oct    Nov    Dec
2012

High
   16.56       16.42       16.26       15.32       15.26       15.57       17.90       18.86       19.49       20.11       20.21       20.33
Low
   14.48       15.45       14.95       13.76       14.00       13.87       15.51       18.09       18.16       18.27       19.47       19.83
Average
   15.31       15.80       15.55       14.51       14.49       14.67       16.47       18.46       18.80       18.95       19.95       20.05
Average daily volume¹⁾
   6.77       5.53       5.54       8.05       6.91       6.10       6.15       4.68       5.60       4.97       4.89       3.88
2011

High
   25.34       23.83       23.98       22.84       20.70       19.05       17.84       16.99       14.49       15.73       15.37       16.28
Low
   22.77       22.49       21.73       20.02       19.01       16.33       16.91       13.28       12.23       12.77       13.38       14.64
Average
   23.91       23.22       22.86       21.07       19.86       17.71       17.45       14.50       13.17       14.55       14.27       15.32
Average daily volume¹⁾
   10.64       6.53       8.30       9.23       8.54       12.10       8.45       12.08       10.75       8.06       7.10       5.76
New York Stock Exchange
Share price development in New York
in US dollars
PHG    Jan    Feb    Mar    Apr    May    Jun    Jul    Aug    Sep    Oct    Nov    Dec
2012

High
   21.47       21.36       21.51       20.26       20.00       19.67       22.11       23.30       24.89       26.23       26.01       26.81
Low
   18.34       20.24       19.58       17.98       17.68       17.32       19.11       22.00       22.99       23.52       24.80       25.91
Average
   19.73       20.85       20.57       19.10       18.53       18.41       20.26       22.84       24.20       24.48       25.51       26.27
Average daily volume¹⁾
   1.64       0.93       1.32       1.80       1.03       0.83       0.63       0.54       0.82       0.64       0.77       0.62
2011

High
   33.81       32.70       33.32       32.44       30.53       27.15       25.74       24.20       20.58       22.54       21.35       20.95
Low
   29.81       30.99       29.94       29.27       26.79       23.36       23.79       18.94       16.87       17.22       17.59       18.90
Average
   31.93       31.75       32.01       30.49       28.47       25.49       24.92       20.81       18.19       20.03       19.37       20.13
Average daily volume¹⁾
   1.31       0.72       0.86       0.88       0.96       2.45       1.56       2.04       2.17       2.07       1.79       1.48
¹⁾
In millions of shares
244      Annual Report 2012
17 Investor Relations 17.4 - 17.4
5-year relative performance: Philips and AEX
base 100 = Dec 31, 2007
5-year relative performance: Philips and unweighted
TSR peer group indexbase 100 = Dec 31, 2007
3M, Electrolux, Emerson, GE, Hitachi, Honeywell, Johnson & Johnson, Panasonic, Schneider, Siemens, Toshiba,
5-year relative performance: Philips and Dow Jones
base 100 = Dec 31, 2007
Share listings
Amsterdam, New York
Ticker code
PHIA, PHG
No. of shares issued at Dec. 31, 2012
EUR 957 million
No. of shares outstanding issued at Dec. 31, 2012
EUR 915 million
Market capitalization at year-end 2012
EUR 18.2 billion
Industry classification
MSCI: Capital Goods
20105010
ICB: Diversified Industrials¹⁾
2727
Members of indices
AEX, NYSE, DJSI, and others
¹⁾
The change of ICB classification took place on June 18, 2012
Annual Report 2012      245
17 Investor Relations 17.5 - 17.5
17.5 Philips’ acquisitions
Philips made no announcements of acquisitions in 2012.
Acquisitions 2011 / Announcement dates
January 5, 2011
Optimum Lighting, LLC Professional Luminaires Expand portfolio with customized energy-efficient lighting solutions
January 20, 2011
Preethi¹⁾ Domestic Appliances Become a leading kitchen appliances company in India
March 9, 2011
Dameca A/S Patient Care & Clinical
Informatics Expand portfolio with integrated, advanced anesthesia care solutions
June 20, 2011
AllParts Medical Customer Services Expand capabilities in imaging equipment services, strengthening Philips’ Multi-Vendor Services business
June 27, 2011
Sectra Mamea AB²⁾ Imaging Systems Expand Women’s Healthcare portfolio with a unique digital mammography solution in terms of radiation dose
June 29, 2011
Indal Group Professional Luminaires Strengthen leading position in professional lighting within Europe
July 11, 2011
Povos Electric Appliance (Shanghai) Co., Ltd.²⁾ Domestic Appliances Expand product portfolio in China and continue to build business creation capabilities in growth geographies
¹⁾
Asset transaction
²⁾
Combined asset transaction / share transaction
Acquisitions 2010 / Announcement dates
February 11, 2010
Luceplan Consumer Luminaires Iconic brand in the premium design segment for residential applications
February 24, 2010
Somnolyzer¹⁾ Home Healthcare Somnolyzer 24x7 automated-scoring solution that can improve the productivity of sleep centers
March 26, 2010
Tecso Patient Care &
Clinical Informatics Strengthen clinical informatics portfolio with leading Brazilian provider of Radiology Information Systems (RIS)
July 13, 2010
Street Light Control Portfolio¹⁾ Lighting Electronics Strengthen outdoor lighting portfolio with acquisition control portfolio. Street Lighting controls activities of Amplex A/S
July 28, 2010
Apex Imaging Systems Strengthen portfolio of high-quality transducers aimed at the value segment in emerging markets
August 2, 2010
CDP Medical¹⁾ Patient Care &
Clinical Informatics Expand clinical informatics portfolio in high-growth markets in the area of PACS
August 20, 2010
Burton Professional
Luminaires Expand portfolio with leading provider of specialized lighting solutions for healthcare facilities
September 13, 2010
Wheb Sistemas Patient Care &
Clinical Informatics Strengthen clinical informatics portfolio with a leading Brazilian provider of clinical information systems
October 11, 2010
Discus Health & Wellness Expand oral healthcare portfolio with leading manufacturer of professional tooth whitening products
December 6, 2010
NCW Professional
Luminaires Expand global leadership position of professional lighting entertainment solutions
January 6, 2011
medSage Technologies¹⁾ Home Healthcare Strengthen portfolio by becoming a leading provider of patient interaction and management applications
¹⁾
Asset transaction
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17 Investor Relations 17.6 - 17.7
17.6 Financial calendar
Financial calendar
Annual General Meeting of Shareholders
Record date Annual General Meeting of Shareholders
April 5, 2013
Annual General Meeting of Shareholders
May 3, 2013
Quarterly reports 2013
First quarterly report 2013
April 22, 2013
Second quarterly report 2013
July 22, 2013
Third quarterly report 2013
October 21, 2013
Fourth quarterly report 2013
January 28, 2014¹⁾
Capital Markets Days 2013
Capital Markets Day (Healthcare)
March 19, 2013
Capital Markets Day (Consumer Lifestyle and Lighting)
September 17, 2013
¹⁾
Subject to final confirmation
17.7 Investor contact
Shareholder services
Holders of shares listed on Euronext
Philips offers a dynamic print manager that facilitates the creation of a customized PDF. Non-US shareholders and other non-US interested parties can make inquiries about the Annual Report 2012 to:
Royal Philips Electronics
Annual Report Office
Breitner Center, HBT 14
P.O. Box 77900
1070 MX Amsterdam, Netherlands
E-mail:annual.report@philips.com
Communications concerning share transfers, lost certificates, dividends and change of address should be directed to:
ABN AMRO Bank N.V.
Department Equity Capital Markets/Corporate Broking HQ7050
Gustav Mahlerlaan 10, 1082 PP Amsterdam, Netherlands
Telephone: +31-20-34 42000
Fax: +31-20-62 88481
Holders of New York Registry shares
Philips offers a dynamic print manager that facilitates the creation of a customized PDF. Holders of New York Registry shares and other interested parties in the US can make inquiries about the Annual Report 2012 to:
Citibank Shareholder Service
P.O. Box 43077 Providence, Rhode Island 02940-3077
Telephone: 1-877-CITI-ADR (toll-free)
Telephone: 1-781-575-4555 (outside of US)
Fax: 1-201-324-3284
Website: www.citi.com/dr
E-mail:citibank@shareholders-online.com
Communications concerning share transfers, lost certificates, dividends and change of address should be directed to Citibank. The Annual Report on Form 20-F is filed electronically with the US Securities and Exchange Commission.
International direct investment program
Philips offers a dividend reinvestment and direct stock purchase plan designed for the US market. This program provides existing shareholders and interested investors
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17 Investor Relations 17.7 - 7.7
with an economical and convenient way to purchase and sell Philips New York Registry shares and to reinvest cash dividends. Philips does not administer or sponsor the program and assumes no obligation or liability for the operation of the plan. For further information on this program and for enrollment forms, contact:
Citibank Shareholder Service
Telephone: 1-877-248-4237 (1-877-CITI-ADR)
Monday through Friday 8:30 AM EST
through 6:00 PM EST
Website www.citi.com/dr
or by writing to:
Citibank Shareholder Service
International Direct Investment Program
P.O. Box 2502, Jersey City, NJ 07303-2502
Shareholders Communication Channel
Philips is continually striving to improve relations with its shareholders. For instance, Philips was one of the key companies involved in the establishment of the Shareholders Communication Channel, a project of Euronext Amsterdam, banks in the Netherlands and several major Dutch companies to simplify contacts between participating companies and their shareholders.
Philips will use the Shareholders Communication Channel to distribute the Agenda for this year’s Annual General Meeting of Shareholders as well as an instruction form to enable proxy voting at that meeting.
For the Annual General Meeting of Shareholders on May 3, 2013, a record date of April 5, 2013, will apply. Those persons who on April 5, 2013 hold shares in the Company and are registered as such in one of the registers designated by the Board of Management for the Annual General Meeting of Shareholders will be entitled to participate in and vote at the meeting.
Investor relations activities
From time to time the Company engages in communications with investors via road shows, one-on-one meetings, group meetings, broker conferences and capital markets days. The purpose of these meetings is to inform the market on the results, strategy and decisions made, as well as to receive feedback from our shareholders. Also, the Company engages in bilateral communications with investors. These communications take place either at the initiative of the Company or at the initiative of individual investors. During these communications the Company is generally represented by its Investor Relations department. However, on a limited number of occasions the Investor Relations department is accompanied by one or more members of the Board of Management. The subject matter of the bilateral communications ranges from individual queries from investors to more elaborate discussions following disclosures that the Company has made such as its annual and quarterly reports. The Company is strict in its compliance with applicable rules and regulations on fair and non-selective disclosure and equal treatment of shareholders.
More information on the activities of Investor Relations can be found in chapter 11, Corporate governance, of this report.
Analysts’ coverage
Philips is covered by approximately 36 analysts who frequently issue reports on the company.
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17 Investor Relations 17.7 - 17.8
How to reach us
Investor Relations contact
Royal Philips Electronics
Breitner Center, HBT 14
P.O. Box 77900
1070 MX Amsterdam, Netherlands
Telephone: +31-20-59 77221
Website: www.philips.com/investor
E-mail:investor.relations@philips.com
Abhijit Bhattacharya
Executive Vice President – Investor Relations
Telephone: +31-20-59 77222
Vanessa Bruinsma-Kleijkers
Manager – Investor Relations
Telephone: +31-20-59 77447
The registered office of Royal Philips Electronics is
High Tech Campus 5
5656 AE Eindhoven, Netherlands
Switch board, telephone: +31-40-27 91111
Sustainability contact
Philips Corporate Sustainability Office
High Tech Campus 5 (room 2.56)
5656 AE Eindhoven, Netherlands
Telephone: +31-40-27 83651
Fax: +31-40-27 86161
Website: www.philips.com/sustainability
E-mail:philips.sustainability@philips.com
Corporate Communications contact
Royal Philips Electronics
Breitner Center, HBT 19
P.O. Box 77900
1070 MX Amsterdam, Netherlands
Telephone: +31-20-59 77411
E-mail:corporate.communications@philips.com
17.8 Taxation
Netherlands Taxation
The statements below are only a general summary of certain material Dutch tax consequences for holders of Common Shares that are non-residents of the Netherlands based on present Netherlands tax laws and the Tax Convention of December 18, 1992, as amended by the protocol that entered into force on December 28, 2004, between the United States of America and the Kingdom of the Netherlands (the U.S. 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 the 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 the Common Shares and this income received or capital gains derived are attributable to past, present or future employment activities of such holder, the income of which is taxable in the Netherlands, the Dutch tax position is not discussed in this summary.
Dividend withholding tax
In general, a distribution to shareholders by a company resident in the Netherlands (such as the Company) is subject to a withholding tax imposed by the Netherlands at a rate of 15%. Share dividends paid out of the Company’s paid-in share premium recognized for Netherlands tax purposes are not subject to the above mentioned withholding tax. Share dividends paid out of the Company’s retained earnings are subject to dividend withholding tax on the nominal value of the shares issued. Pursuant to the provisions of the U.S. Tax Treaty, a reduced rate may be applicable in respect of dividends paid by the Company to a beneficial owner holding directly 10% or more of the voting power of the Company, if such owner is a resident of the United States (as defined in the U.S. Tax Treaty) and entitled to the benefits of the U.S. 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 wholly or partly benefits from the dividends; (ii) whereby such other person retains, directly or indirectly, an interest similar to that in the Common Shares on which
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17 Investor Relations 17.8 - 17.8
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 U.S. 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 available; such exempt US organizations should apply for a refund of the 15% withholding tax withheld.
The Company may, with respect to certain dividends received from qualifying non-Netherlands subsidiaries, credit taxes withheld from those dividends against the Netherlands withholding tax imposed on certain qualifying dividends that are redistributed by the Company, up to a maximum of the lesser of:
3% of the amount of qualifying dividends redistributed by the Company; and
3% of the gross amount of certain qualifying dividends received by the Company.
The reduction is applied to the Dutch dividend withholding tax that the Company must pay to the Dutch tax authorities and not to the Dutch dividend withholding tax that the Company must withhold.
Income and capital gains
Income and capital gains derived from the Common Shares by a non-resident individual or non-resident corporate shareholder are generally not subject to Dutch income or corporation tax, unless (i) such income and gains are attributable to a (deemed) permanent establishment or (deemed) permanent representative in the Netherlands of the shareholder; or (ii) the shareholder is entitled to a share in the profits of an enterprise or (in 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 ~~measure~~which enterprise the Common Shares are attributable; or (iii) such income and capital gains are derived from a ~~worker’s involvement~~direct, indirect or deemed substantial participation in the share capital of a company (such substantial participation not being a business asset), and, in the case of a non-resident corporate shareholder only, it being held with the primary aim or one of the primary aims to avoid the levy of income tax or dividend withholding tax from another person; or (iv) in 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, while the profits of such shareholder are taxable in the Netherlands pursuant to article 17(3)(c) of the Dutch Corporate Income Tax Act 1969; or (v) in case of a non-resident individual, (a) 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 ordinary shares that exceed regular portfolio management; or (b) such individual has elected to be treated as a Dutch resident.
In general, a holder of Common Shares has a substantial participation if he holds either directly or indirectly and either independently or jointly with his partner (as defined in the Dutch Income Tax Act 2001), the ownership of, or certain other rights over, at least 5% of the total issued share capital or total issued particular class of shares of the Company or rights to acquire shares, whether or not already issued, that represent at any time 5% or more of the total issued capital (or the total issued particular class of shares) or the ownership of certain profit participating certificates that relate to 5% or more of the annual profit or to 5% or more of the liquidation proceeds. A shareholder will also have a substantial participation in the Company if one or more of certain relatives of the shareholder hold a substantial participation in the Company. A deemed substantial participation amongst others exists if (part of) a substantial participation has been disposed of, or is deemed to have been disposed of, on a non-recognition basis.
Estate and gift taxes
No estate, inheritance or gift taxes are imposed by the Netherlands on the transfer or deemed transfer of Common Shares by way of gift by or on the death of a shareholder if, at the time of the death of the shareholder or the gift of the Common Shares (as the case may be), such shareholder is not a resident of the Netherlands.
Inheritance or gift taxes (as the case may be) are due, however, if such shareholder:
has Dutch nationality and has been a resident of the Netherlands at any time during the ten years preceding the time of the death or gift; or
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17 Investor Relations 17.8 - 17.8
has no Dutch nationality but has been a resident of the Netherlands at any time during the twelve months preceding the time of the gift (for Netherlands gift taxes only)
United States Federal Taxation
This section describes the material United States federal income tax consequences to a US holder (as defined below) of owning Common Shares. It applies only if the Common Shares are held as capital assets for tax purposes. This section does not apply to a member of a special class of holders subject to special rules, including:
a dealer in securities,
a trader in securities that elects to use a mark-to-market method of accounting for securities holdings,
a tax-exempt organization,
a life insurance company,
a person liable for alternative minimum tax,
a person that actually or constructively owns 10% or more of our voting stock,
a person that holds Common Shares as part of a straddle or a hedging or conversion transaction,
a person that purchases or sells Common Shares as part of a wash sale for tax purposes, or
a person whose functional currency is not the US dollar.
This section is based on the Internal Revenue Code of 1986, as amended, its legislative history, existing and proposed regulations, published rulings and court decisions, all as currently in effect, as well as on the U.S. Tax Treaty. These laws and regulations are subject to change, possibly on a retroactive basis.
If a partnership 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 ~~project. An FTE~~partnership holding the Common Shares should consult its tax advisor with regard to the United States federal income tax treatment of ~~1.0 means~~an investment in the Common Shares.
A US holder is defined as a beneficial owner of Common Shares that is:
a citizen or resident of the United States,
a domestic corporation,
an estate whose income is subject to United States federal income tax regardless of its source, or
a trust if a United States court can exercise primary supervision over the trust’s administration and one or more United States persons are authorized to control all substantial decisions of the trust.
A US holder should consult its own tax advisor regarding the United States federal, state and local and other tax consequences of owning and disposing of Common Shares in its particular circumstances.
This discussion addresses only United States federal income taxation.
Taxation of Dividends
Under the United States federal income tax laws, the gross amount of any dividend paid out of our current or accumulated earnings and profits (as determined for United States federal income tax purposes) 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 a maximum tax rate of 20% provided that the ~~person~~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 meets other holding period requirements. Dividends paid with respect to the Common Shares generally will be qualified dividend income¹⁾. 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 ~~equivalent~~taxable to a ~~full-time worker, while an FTE~~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 ~~0.5 signals~~dividends received from other United States corporations. 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 is includible in its income, 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 income 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.
Subject to certain limitations, the Dutch tax withheld in accordance with the U.S. Tax Treaty and paid over to the Netherlands will be creditable or deductible against a US
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17 Investor Relations 17.8 - 17.8
holder’s United States federal income tax liability. Special rules apply in determining the foreign tax credit limitation with respect to dividends that are subject to the maximum 20% tax rate. To the extent a refund of the tax withheld is available under Dutch law, or under the U.S. Tax Treaty, the amount of tax withheld that is refundable will not be eligible for credit against United States federal income tax liability. Dividends will be income from sources outside the United States, and depending on a holder’s circumstances, will generally be either “passive” or “general” income for purposes of computing the foreign tax credit allowable to the holder.
Taxation of Capital Gains
A US holder that sells or otherwise disposes of its Common Shares will recognize capital gain or loss for United States federal income tax purposes equal to the difference between the US dollar value of the amount that it realizes and its tax basis, determined in US dollars, in its Common Shares. Capital gain of a non-corporate US holder is generally taxed at a maximum tax rate of 20% where the holder has a holding period greater than one year²⁾. The gain or loss will generally be income or loss from sources within the United States for foreign tax credit limitation purposes.
PFIC Rules
We do not believe that the ~~worker~~Common Shares will be treated as stock of a passive foreign investment company, or PFIC, for United States federal income tax purposes, but this conclusion is ~~only half-time.~~a factual determination that is made annually and thus is subject to change. If we are treated as a PFIC, unless a US holder elects to be taxed annually on a mark-to-market basis with respect to the Common Shares, gain realized on the sale or other disposition of the Common Shares would in general not be treated as capital gain. Instead a US holder would 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.
1) In addition, a US holder that is an individual or estate, or a trust that does not fall into a special class of trusts that is exempt from such tax, will be subject to a 3.8% tax on the lesser of (1) the US holder’s “net investment income” for the relevant taxable year and (2) the excess of the US holder’s modified adjusted gross income for the taxable year over a certain threshold (the “Medicare tax”). A US holder’s net investment income will generally include its dividend income.
2) In addition, the gain or loss will generally be included in a US holder’s net investment income, which may be subject to a 3.8% tax as described in the discussion of the Medicare tax under the heading “– Taxation of Dividends.”
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17 Investor Relations 17.9 - 17.9
~~Global Reporting Initiative (GRI)~~17.9 New York Registry Shares
Fees and Charges Payable by a Holder of New York Registry Shares
Citibank, N.A. as the US registrar, transfer agent, paying agent and shareholder servicing agent (“Agent”) under Philips’ New York Registry Share program (the “Program”), collects fees for delivery and surrender of New York Registry Shares directly from investors depositing ordinary shares or surrendering New York Registry Shares for the purpose of withdrawal or from intermediaries acting for them. The Agent collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of the distributable property to pay the fees.
The ~~Global Reporting Initiative (GRI) is~~charges of the Agent payable by investors are as follows:
The New York Transfer Agent charges shareholders a ~~network-based organization that pioneered~~fee of up to USD 5.00 per 100 shares for the ~~world’s most widely used sustainability reporting framework. GRI is committed to the framework’s continuous improvement~~exchange of New York Registry shares for ordinary shares and ~~application worldwide. GRI’s core goals include the mainstreaming of disclosure on environmental, social and governance performance.~~vice versa.
~~Green Innovation~~
~~Green Innovation comprise all R&D activities directly contributing to the development of Green Products or Green Technologies.~~
Green Products
A Green ~~Product is a product that offers~~Products offer a significant environmental improvement ~~compared to a reference product~~ in ~~at least~~ one or more Green Focal ~~Area:~~Areas: Energy efficiency, Packaging, Hazardous substances, Weight, Recycling and disposal and Lifetime reliability. The life cycle approach is used to determine a product’s overall environmental improvement. It calculates the environmental impact of a product over its total life cycle (raw materials, manufacturing, product use and disposal).
Green Products need to prove leadership in at least one Green Focal Area compared to industry standards, which is defined by a sector 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%, outperforming product-specific eco-requirements or by being awarded with a recognized eco-performance label. Because of different product portfolios, sectors have specified additional criteria for Green Products, including product-specific minimum requirements where relevant.
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14 Sustainability statements 14 - 14.1
Green Innovation
Green Innovation comprise all R&D activities directly contributing to the development of Green Products or Green Technologies. A wide set of additional criteria and boundaries have been defined as the basis for internal and external validation.
Environmental data
All environmental data from manufacturing operations are reported on a half-year basis in our sustainability reporting and validation tool, according to defined company guidelines that include definitions, procedures and calculation methods.
Internal validation processes are followed and audits performed to ensure consistent data quality and to assess the robustness of data reporting systems.
These environmental data from manufacturing are tracked and reported to measure progress against our Green operations program targets.
Reporting on ISO 14001 certification is based on manufacturing units reporting in the sustainability reporting system.
Operational carbon footprint
The Philips operational carbon footprint is calculated on a half-yearly 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
Logistics – air, sea and road transport
All emission factors used to transform input data (for example, amount of tonne-kilometers transported) into CO₂ emissions are from the Greenhouse Gas Protocol (GHGP), except for business travel, where the service providers supplied CO₂ data based on their own verified methodology. The GHGP distinguishes three scopes. It is mandatory to report on the first two to comply with the GHGP reporting standards.
•
Scope 1 – direct CO₂ emissions – is reported on with direct emissions from our industrial and non-industrial sites in full. Emissions from industrial sites, which consist of direct emissions resulting from processes and fossil fuel combustion on site, are reported in the sustainability reporting system. Energy use and CO₂ emissions from non-industrial sites are based on actual data whereavailable. If this is not the case, they are estimated based on square meters, taking the geographical location and building type of the site into account.
•
Scope 2 – CO₂ emissions resulting from the generation of purchased electricity for our premises – is reported on with electricity use from industrial and non-industrial sites in full. Indirect CO₂emissions resulting from purchased electricity, steam and heat are reported in the sustainability reporting system. Those emissions of industrial sites not yet reporting are calculated on the same basis as described in Scope 1. Indirect emissions of non-industrial sites are calculated in the same manner as described in Scope 1.
•
Scope 3 – other CO₂ emissions related to activities not owned or controlled by the Group is reported on for our business travel and distribution activities. Commuting by our employees, upstream distribution (before suppliers ship to us), outsourced activities and emissions resulting from product use by our customers are not included in our operational carbon footprint. The calculations for business travel by lease cars are based on actual fuel usage and for rental cars on distance traveled. Emissions from business travel by airplane are calculated by the supplier based on mileage flown and emission factors from DEFRA (UK Department of Environment, Food and Rural Affairs), distinguishing between short, medium and long flights. Further, emissions from air freight for distribution are calculated based on the amount of tonne-kilometers transported between airports (distinguishing between short, medium and long hauls), including an estimate (based on actual data of the lanes with the largest volumes) for trucking from sites and distribution centers to airports and vice versa. Express shipments are generally a mix of road and air transport, depending on the distance. Therefore the assumption is applied that shipments over less than 600 km are transported by road and the rest of the shipments by air (those emissions by air are calculated in the same way as air freight). For sea transport, only data on transported volume were available so an estimate had to be made about the average weight of a container. Transportation to and from ports is not registered. This fore and aft part of sea transport was estimated to be around 3% of the total distance (based on actual data of the lanes with the largest volumes), consisting of a mix of modalities, and was added to the total emissions accordingly. CO₂ emissions from road transport were also calculated based on tonne-kilometers. If data were incomplete, the emissions were estimated based on sales volumes. Return travel of vehicles is not included in the data for sea and road distribution.
Health and safety
Health and safety data are reported and validated monthly. The focus is on reporting work-related injuries, which predominantly occur in manufacturing operations. The annual number of cases leading to at least one lost workday is reported per 100 FTEs (full-time equivalents). Fatalities are reported for staff, contractors and visitors and include commuting accidents.
General Business Principles
Alleged GBP violations are registered in our intranet-based reporting and validation tool.
Supplier audits
Supplier audits are primarily focused on identified risk suppliers, based on identified risk countries and on spend of more than EUR 1 million (new suppliers EUR 100,000 and no threshold for high risk suppliers).
Based on the Maplecroft Human Rights Risk Indexes, risk countries for Supply Management in 2012 were: Belarus, Brazil, China, Dominican Republic, India, Indonesia, Mexico, the Philippines, Russia, and Ukraine.
Suppliers of new ventures are included to the extent that the integration process of these ventures has been finalized. Normative integration period is two years after closure of the new venture.
Sustainability governance
Sustainability is strongly embedded in our core business processes, like innovation (EcoDesign), sourcing (Supplier Sustainability Involvement Program), manufacturing (Green Manufacturing 2015) and Logistics (Green Logistics).
The Sustainability Board is the highest governing sustainability body in Philips, chaired by Jim Andrew, member of the Executive Committee. Three other Executive Committee members sit in the Sustainability Board jointly with sector and functional executives. The Sustainability Board convenes four times per year, defines Philips’ sustainability strategy and programs, monitors progress and takes corrective action where needed.
External assurance
KPMG has provided reasonable assurance on whether the information in chapter 14, Sustainability statements, of this report including the information referred to in section 5.2, Social performance, of this report and section 5.3, Environmental performance, of this report is, in all material respects, fairly presented in accordance with the reporting criteria. We refer to section 14.6, Independent assurance report, of this report.
14.1 Economic indicators
This section provides summarized information on contributions on an accruals basis to the most important economic stakeholders as a basis to drive economic growth. For a full understanding of each of these indicators, see the specific financial statements and notes in this report.
Distribution of direct economic benefits
in millions of euros
   2010    2011    2012
Suppliers: goods and services
   13,265       13,845       15,379
Employees: salaries and wages
   5,035       5,123       5,974
Shareholders: distribution from retained earnings
   650       711       687
Government: corporate income taxes
   497       283       308
Capital providers: net interest
   225       210       241
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14 Sustainability statements 14.1 - 14.3
Total purchased goods and services amounted to EUR 15.4 billion, representing 62% of total revenues of the Philips Group. Of this amount, 65% was spent with global suppliers, the remainder with local suppliers. Compared to 2011, spending increased in absolute terms as a result of higher sales volumes.
In 2012, the salaries and wages totaled EUR 6.0 billion. This amount is EUR 851 million higher than in 2011, mainly caused by restructuring costs. See note 1, Income from operations for more information.
Dividend distributed to shareholders amounted to EUR 687 million, EUR 24 million down compared to 2011.
Corporate income taxes increased slightly to EUR 308 million in 2012 from EUR 283 million in 2011, mainly attributable to higher taxable earnings. For a further understanding, see note 3, Income taxes.
14.2 EcoVision
Our latest EcoVision program, includes key performance indicators in relation to Green Product sales, Improving people’s lives, Green Innovation, Green Operations, Health & Safety, Employee Engagement and Supplier Sustainability.
Improving people’s lives
Philips products and solutions that directly can support the curative or preventive side of people’s health was one of the parameters of our EcoVision 5 program, labelled ‘Bringing care to people’, with a target of 500 million lives touched in 2015. In this category in 2012, we already touched over 570 million lives, driven by our Healthcare sector.
With the renewal of our company vision in 2012 we have extended that approach with our ‘well-being’ products that help people live a healthy life as well as our Green Products and solutions of all sectors that contribute to a healthy ecosystem. For the year 2012 we have established our total baseline of 1.7 billion people a year.
Examples of product categories contributing to the ‘care’ category are all healthcare products.
Examples of products in the ‘well-being’ category that help people live a healthier life are juicers, blenders, air fryers, but also mother and childcare products. Further details on this parameter and the methodology can be found in the document ‘Improving people’s lives’.
Operational carbon footprint and energy efficiency
Our operational carbon footprint decreased 9% in 2012.
Operational energy efficiency and carbon footprint: 2012 details
The 2012 results can be attributed to several factors:
•
Accounting for 44% of the total footprint, total CO₂ emissions from manufacturing increased due to acquisitions which were largely mitigated by continued energy efficiency improvement programs, our changing industrial footprint and the further increase of the share of purchased electricity from renewable sources to 47% of total purchased electricity.
•
CO₂ emissions from non-industrial operations (offices, warehouses, etc.) represent 9% of the total. The overall floor space decreased marginally. However, CO₂ emissions decreased 9% as we continued to centralize and re-allocate existing facilities, focusing on the most efficient use of facility space and increasing the share of purchased electricity from renewable sources.
•
The total CO₂ emissions related to business travel, accounting for 13% of our carbon footprint, decreased 15%. Our stringent in-house travel policy resulted in a significant decrease of CO₂ emissions from air travel and rental cars. Furthermore, the fleet oflease cars increased but the total CO₂ emissions decreased.
•
Overall CO₂ emissions from logistics, representing approximately one third of the total, decreased 17%. This decrease mainly resulted from the exclusion of TV business. However, results can also be attributed to an effective gatekeeping process to move freight from air to sea, as well as our continued focus on optimizing container utilization.
Operational carbon footprint for logistics
in kilotonnes CO₂-equivalent
   2008    2009    2010    2011    2012
Air transport
   305       308       345       328       309
Road transport
   211       174       160       176       105
Sea transport
   190       145       167       153       132




Philips Group
   706       627       672       657       546
14.3 Green Operations
In 2010, we decided to group all activities related to improving the environmental performance of our manufacturing facilities (including chemicals management) under the Green Manufacturing 2015 program, which we renamed to Green Operations. The program focuses on most contributors to climate change, but also addresses water, recycling of waste and chemical substances.
In the course of 2012 we implemented a new IT solution for our environmental reporting, thereby further improving the data quality and the accuracy of the reporting process. Next, we implemented a new process to monitor chemicals used in processes in more detail. Since Philips focuses its reduction efforts on the restricted and hazardous substances listed below, we decided to exclude the categories ‘Other restricted substances’ and ‘Other hazardous substances’ from our reporting in 2012. Based on the new insights gained through the new chemicals management process, we will define new reduction targets in 2013 for some of those chemicals.
Green Operations
in % unless otherwise stated
   2007 2012
   baseline year actual¹⁾    2015 target¹⁾
Total CO₂from manufacturing

865 kilotonnes CO₂-
equivalent
   -20       -25
Water
   4.2 million m ³ 15       -10
Materials provided for recycling via external contractor per total waste
   79    77       80
Restricted substances:

Benzene emission
   52 kg    -100       achieved
Mercury emission
   185 kg    -71       -100
CFCs, HCFCs
   156 kg    -100       achieved
Hazardous substances

Lead emission
   1,838 kg    -96       -100
PFCs
   1,534 kg    67       -35
Toluene emission
   2,210 kg    180       -90
Xylene emission
   4,506 kg    320       -90
Styrene
   80,526 kg    -47       -90
Antimony, Arsenic and their compounds
   18 kg    -99       -100
¹⁾
Against the base year 2007
Energy use in manufacturing
Total energy usage in manufacturing amounted to 14,421 terajoules in 2012, of which Lighting consumes about 80%. Compared to 2011, energy consumption at Philips went up by 3%. This was driven by new acquisitions reporting for the first time, organizational changes and energy efficiency improvements.
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14 Sustainability statements 14.3 - 14.3
Total energy consumption in manufacturing
in terajoules
   2008    2009    2010    2011    2012
Healthcare
   1,612       1,670       1,545       1,541       1,798
Consumer Lifestyle
   1,521       1,188       1,274       1,252       1,104
Lighting
   11,359       11,535       11,580       11,189       11,519
Innovation, Group & Services
   34       28       27       —         —


Philips Group
   14,526       14,421       14,426       13,982       14,421
Carbon emissions in manufacturing
The greenhouse gas emissions of our manufacturing operations totaled 691 kilotonnes CO₂-equivalent in 2012, 9% higher than 2011. Indirect CO₂ emissions increased, mainly as a result of new acquisitions reporting for the first time.
Total carbon emissions in manufacturing
in kilotonnes CO₂-equivalent
   2008    2009    2010    2011    2012
Direct CO₂¹⁾
   300       295       299       294       294
Indirect CO₂
   436       443       317       273       310
Other greenhouse gases
   61       54       34       40       60
From glass production
   28       24       25       28       27


Philips Group²⁾
   825       816       675       635       691
¹⁾
From energy
²⁾
Excluding new acquisitions therefore different from Operational carbon footprint
CO₂ emissions increased at Healthcare and CL due to new acquisitions reporting for the first time, mitigated by energy efficiency improvements and electricity generated by renewable sources. Lighting achieved additional reductions in CO₂ emissions due to changes in the industrial footprint.
Total carbon emissions in manufacturing per sector
in kilotonnes CO₂-equivalent
   2008    2009    2010    2011    2012
Healthcare
   120       118       57       54       70
Consumer Lifestyle
   70       53       42       39       38
Lighting
   633       644       575       542       583
Innovation, Group & Services
   2       1       1       —         —


Philips Group
   825       816       675       635       691
Restricted substances
Emissions of restricted substances totaled 55 kilos in 2012, a decrease of 50% versus 2011 mainly as a result of the successful phase-out of benzene in Lighting. With the Green Operations program we continue to focus on a selection of the most important substances in our processes.
Restricted substances
in kilos
   2008    2009    2010    2011    2012
Benzene and Benzene compounds
   1       136       101       55       —
Mercury and Mercury Compounds
   211       122       83       51       54
CFCs/HCFCs¹⁾
   213       14       4       5       1


Total
   425       272       188       111       55
¹⁾
Excluding cooling systems
Benzene
Lighting was the only sector that used benzene in manufacturing, but has been successful in 2012 in the phase-out of benzene.
Mercury
Mercury is used exclusively by Lighting. Emissions increased from 51 kg in 2011 to 54 kg in 2012, due to increased loads and a product mix change.
CFCs/HCFCs
In 2012 total emissions from CFCs/HCFCs reduced further to 1 kg.
Hazardous substances
Targets have been set on a selected number of hazardous substances.
Hazardous substances
in kilos
   2008    2009    2010    2011    2012
Lead and lead compounds
   684       1,958       108       44       73
PFCs (Per Fluorinated Compounds)
   1,858       2,535       1,507       1,842       2,560
Toluene
   2,524       2,160       6,745       5,745       6,184
Xylene
   3,684       4,619       30,491       37,889       18,947
Styrene
   37,454       21,567       22,920       19,920       42,329
Antimony, Arsenic and their compounds
   16       30       24       37       —


Total
   46,220       32,869       61,795       65,477       70,093
Lead and lead compounds
The 66% increase in 2012 was mainly related to soldering activities and increased load in Lighting.
PFCs
The increase in 2012 to 2,560 kg was caused by one Lighting site where PFCs are used as process chemicals.
Toluene
The emission of toluene, mainly used in wet lacquers, increased by 8% in 2012 largely as a result of an increased number of reporting sites.
Xylene
Activities focused on the reduction of Xylene were successful as wet lacquers were replaced by powder coatings mainly at Consumer Lifestyle and Lighting.
Styrene
In 2012, the emission of styrene more than doubled compared to 2011 due to one new reporting site in Lighting.
Antimony, Arsenic and their compounds
Lighting was successful in phasing-out these substances.
ISO 14001 certification
In 2012, 71% of reporting manufacturing sites were certified. This decrease compared to the previous year is attributable to new acquisitions being included in the reporting for the first time, but not being certified yet. The sectors have programs in place to address this.
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14 Sustainability statements 14.3 - 14.4
ISO 14001 certification
as a % of all reporting organizations
   2008    2009    2010    2011    2012
Philips Group
   95       92       95       89       71
Environmental Incidents
In 2012, 2 incidents were reported by Healthcare related to water. There were no fines reported in our sustainability reporting tool in connection with one of the incidents.
14.4 General Business Principles
The analysis is based upon 374 reports submitted in 2012 relating to alleged violations of the General Business Principles (GBP), compared to 269 in 2011.
We see a considerable increase in number of complaints reported, which can be attributed mainly to an increase in number of complaints in North America, which accounted for 47% of all complaints (2011: 32%). This dominance in North America we believe is due to a corporate culture in which employees are very much aware of compliance issues, their rights and the opportunities for reporting potential violations. A considerable decrease in complaints reported is shown in Latin America (2012: 21%; 2011: 32%). The management attention and additional training in 2012 including the launch of a ‘Mutual Respect’ e-training in Brazil early 2012 we believe may have contributed to this decline. With 15% of the total number of reported complaints, Europe and the Middle East region show a relative decrease in comparison to 2011 (19%). A minor increase is witnessed in the Asia Pacific region, which accounted for 18% of all reports (2011: 17%).
Most common types of alleged violations
Treatment of employees
The most common alleged violations remain related to the Treatment of employees category, which represented 55% of all violations (2011: 49%).
As in 2011, the vast majority of the Treatment of employees complaints (almost 85%) remains related to two issues – Discrimination and Respectful treatment. The increase in number of complaints this year can be attributed to the increase related to these two issues.
Complaints regarding Discrimination mainly relate to discrimination based on gender and favoritism, and originated principally in the US and Brazil. Of the complaints reported in the US, 30% related to discrimination, and of the complaints reported in Brazil, 14% related to discrimination, whereas that figure was 19% for Philips. For Brazil, this is a notable decline in percentage in comparison to last year (23%).
Most complaints regarding lack of Respectful treatment – primarily verbal abuse, (sexual) harassment and unfair treatment- again come from the US and Brazil. Of the complaints reported in the US, 37% related to respectful treatment; of the complaints reported in Brazil, 32% related to respectful treatment; compared to 27% for Philips as a whole.
Business integrity
In second place, with 32% of the total number of complaints, are allegations in the Business integrity category (2011: 40%).
Supply Management
All employees who are performing (certain) purchasing functions should adhere to and fully comply with the Philips Supply Management Code of Ethics. As in the previous two years, we witnessed a low number of complaints in this regard in 2012, with only 3 complaints concerning alleged violations of the Code (2011: 3 complaints).
More information on these categories can be found in the GBP Directives on www.philips.com/gbp.
Breakdown of alleged violations GBP
   2008    2009    2010    2011    2012
Health & Safety
   10       6       3       2       11


Treatment of employees
   197       162       184       132       205
- Collective bargaining
   1       —         1       —         1
- Discrimination
   76       63       64       41       72
- Employee development
   8       3       1       —         —
- Employee privacy
   2       2       2       1       1
- Employee relations
   14       15       4       1       2
- Respectful treatment
   81       53       96       71       102
- Remuneration
   7       22       12       6       15
- Right to organize
   —         —         —         —         1
- Working hours
   8       4       4       2       —
- HR other
   —         —         —         10       11


Legal
   8       4       13       10       19


Business Integrity
   62       88       112       107       119


Supply management
   5       4       4       3       3


Other
   78       54       22       15       17


Total
   360       318       338       269       374
Actual violations versus not proven allegations
Although 76 of the 374 GBP complaints reported in 2012 are still pending (especially those lodged during the last three months of the year), the table of investigated complaints provides an initial indication of the number of substantiated violations compared to the number of complaints which, upon investigation, could not be substantiated.
Out of the 298 complaints investigated, it was found that roughly one quarter (26%) were justified, considerably lower than in 2011 (32%).
With regard to complaints regarding Treatment of employees, there was a considerable decrease in the number of justified complaints to 13% of the total number of complaints in this category (2011: 21%).
In the other major category, i.e. the investigated complaints in the Business integrity category, the percentage of complaints that were justified decreased slightly to 42% (2011: 43%).
A range of disciplinary and corrective measures have been implemented as a result of established violations of the General Business Principles, ranging from dismissal and written warnings to awareness training sessions and organizational measures.
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14 Sustainability statements 14.4 - 14.5
Classification of the complaints investigated
      2010       2011       2012
category    substantiated    unsubstantiated    substantiated    unsubstantiated    substantiated    unsubstantiated
Health & Safety
   1       2       —         2       2       7
Treatment of employees
   22       111       18       68       22       150
Legal
   4       7       —         5       5       8
Business Integrity
   39       45       33       43       37       51
Supply Management
   2       2       2       1       1       —
Other
   10       9       3       5       11       4


Total
   78       176       56       124       78       220
14.5 Supplier indicators
Philips has a direct business relationship with approximately 10,000 product and component suppliers and 30,000 service providers. Given the size and complexity of our supply chain we need to focus our efforts. Therefore, we developed an approach based on the supplier’s sustainability risk profile related to spend, country of production, business risk and type of supplier relationship. 594 supplier sites have been identified as risk suppliers, including 497 product and component suppliers, and 97 service providers. Different types of service providers are part of our audit program, including labor agencies and transportation companies. All risk suppliers are by definition part of our audit program.
Philips Supplier Sustainability Declaration
The Philips Supplier Sustainability Declaration is based on the EICC code of conduct and we added requirements on Freedom of Association and Collective Bargaining. The topics covered include labor and human rights, worker health and safety, environmental impact, ethics, and management systems. We monitor supplier compliance to the Declaration through a system of regular audits.
In 2012 we updated the Philips Supplier Sustainability Declaration and audit tools, to be in line with the new version of the EICC code of conduct that was recently issued. The updated Declaration includes 4 entirely new provisions, and 14 updates to existing provisions. The new provisions are related to responsible sourcing of minerals, protection of privacy, non-retaliation, and supplier responsibility to monitor code compliance at next tier suppliers. We begin to roll-out the updated Philips Supplier Sustainability Declaration via the purchasing contracts signed with suppliers, and via all trainings and audits conducted.
The Declaration requires suppliers to cascade the EICC Code of Conduct down to their next tier suppliers. This roll-out to deeper tiers in the supply chain is reviewed during the on-site audits. Risk suppliers with who we have a direct business relationship are included in the audit program, and most of these are tier 1 suppliers. However, sometimes Philips also selects and prescribes the tier 2 suppliers, in which case these tier 2 suppliers will also be included in the audit program.
We monitor supplier compliance with the Declaration through a system of regular audits. During these audits, an independent external party visits the supplier’s site for several man-days to hold interviews with workers and management, do a factory tour, and review documentation. Based on purchasing spend, production country and type of business, Philips selects suppliers for inclusion in the audit and supplier development program. 594 suppliers have been identified as risk suppliers and are included in the audit program; the majority of these are in China. During the audits, compliance with all sections of the Declaration is reviewed. In the event of non-compliance we require suppliers to make a corrective action plan, and we monitor its implementation until all major non-compliances are resolved. Full-scope audits are conducted in a 3-year cycle; to date we have audited 90% of all identified risk suppliers.
2012 supplier sustainability audits
In 2012 we audited 159 of our current risk suppliers, including 100 continual conformance audits with suppliers that we already audited in 2009. Risk suppliers from recently acquired companies are also included, and this year we audited 17 suppliers from the acquisitions of Indal, Povos, and Preethi. As in previous years, the majority of the audits were done in China. Also in Brazil and India audits were done, as well as a small number of audits in Mexico, Indonesia, Philippines, Russia, Belarus, Ukraine and the Dominican Republic. With these audits we directly or indirectly impacted over 124,000 workers employed at the production sites that were audited.
On top of the audits with current risk suppliers, we also audited 65 potential suppliers during the supplier selection process. Below we report on the findings at existing suppliers only; findings at potential suppliers are not included in this report since these suppliers are not (yet) part of Philips’ supply base.
To track our progress in improving compliance with risk suppliers we use the key performance indicator ‘compliance rate’, being the percentage of the risk suppliers that was audited in the last 3 years, and has resolved all major non compliances. During 2012 we achieved a compliance rate of 75% (2011: 72%).
Number of initial and continual conformance audits
Audit findings
Below table shows the results of the full scope audits done during 2012. On average we identified 18 major non-compliances per audit, 5 zero tolerance and 13 limited tolerance non-compliances, and we work with each supplier to resolve these non-compliances within 90 days where possible. The limited-tolerance non-compliances include all management systems related issues, accounting for an average of 8 non-compliances per audit. The continual conformance audits showed on average a better result than the initial audits with suppliers that went through the audit cycle for the first time.
When the audit reveals areas of non-compliance we request suppliers to implement corrective actions and we monitor the implementation during resolution audits. During the year a total of 1,375 corrective actions were implemented successfully by our suppliers to resolve major non-compliances. The results of the resolution audits are not shown in below table.
During 2012 for 2 supplier sites the phase-out decision was taken due to, amongst others, a lack of sustainability improvements.
The most frequently observed areas of major non-compliance are:
Working hours, wages and benefits: excessive overtime, continual seven-day working weeks, insufficient record keeping of standard and overtime working hours, no payment of overtime premiums
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14 Sustainability statements 14.5 - 14.5
Emergency preparedness: inadequate fire detection and suppression systems, blocked or insufficient emergency exits
Occupational safety: worker exposure to safety hazards, e.g. electrical shocks
Lack of adequate management systems to safeguard compliance to the EICC code for labor and ethics, health and safety and environment
Compared to 2011 we note on average per audit 8% more non-compliances for wages and benefits, and in particular full payment of all overtime premiums is an issue. Suppliers reported difficulties in implementing the yearly legal wage increases in China, especially in the current weak economic environment. For industrial hygiene and occupational safety non-compliances we observe a 9% and 7% increase respectively, which is mainly due to the application of new and stricter legislation in China.
Areas where we observe improvements compared to previous year are mainly related to environmental impact, especially for environmental permits and reporting, pollution prevention and resource reduction, and product content restrictions. These improvements are the result of increased enforcement and management awareness, and we believe that the Philips programs have contributed to this.
Excessive working hours
In China, there is a wide gap between legislated working hours and reality. Especially in regions with high shares of migrant workers a 72 hour working week is not uncommon. While this issue is not unique to Philips, we have decided to take a step-wise approach by working with our suppliers to reduce to a maximum of 60 work hours per week and at least one day off per week, except in emergency or unusual circumstances.
During the 2012 audits we identified 119 suppliers with working weeks exceeding 60 hours, and 88 cases where workers were not provided with one day off per week. In these cases we require suppliers to submit a corrective action plan taking into account factors like employee turnover, seasonality, workforce size, shift structure, productivity, demand planning, etc.
Management systems
There may be areas where our audits reveal compliance in actual practice, but the related underlying management systems to safeguard continued compliance may not be sufficient. Therefore, also management systems are reviewed during the audits. We see this area as a continued weak area at suppliers where further capacity building is necessary. Related to management systems the most frequently observed areas of non-compliance are insufficient risk assessment and self-audits, absence of performance objectives, and a lack of worker feedback and communication.
More information on the Supplier Sustainability Involvement Program, the Philips Supplier Sustainability Declaration and audit approach can be found at www.philips.com/suppliers.
220      Annual Report 2012
14 Sustainability statements 14.5 - 14.5
Summary of 2012 initial and continued conformance audit findings per region
suppliers with one or more major non-compliances per category (in % of suppliers audited in 2012)
   China Asia excl. China LATAM EMEA Total
No. of audits
   110    30    16    3    159
Initial audits
   37    12    9    1    59
Continued conformance audits
   73    18    7    2    100
Average number of non-compliance per audit
   19    16    16    7    18
Workers employed at sites audited
   102,494    12,789    6,163    2,788    124,234
Labor

Freely Chosen Employment¹⁾
   <10 % 25-50 % 10-25 % —      10-25 %
Child labor avoidance /young worker management²⁾
   <10 % —      —      —      <10 %
Working hours
   >75 % 50-75 % 25-50 % —      >75 %
Wages and Benefits
   50-75 % 25-50 % 10-25 % —      50-75 %
Humane Treatment
   —      —      —      —      —
Non-discrimination
   10-25 % —      10-25 % —      <10 %
Freedom of association
   —      10-25 % —      —      <10 %
Collective bargaining
   —      —      —      —      —
Health & Safety

Occupational Safety
   50-75 % 25-50 % 50-75 % 50-75 % 50-75 %
Emergency Preparedness
   50-75 % 50-75 % 50-75 % >75 % 50-75 %
Occupational Injury and Illness
   25-50 % 25-50 % <10 % 25-50 % 25-50 %
Industrial Hygiene
   50-75 % 25-50 % 10-25 % —      25-50 %
Physically demanding work
   <10 % —      10-25 % —      <10 %
Machine safeguarding
   10-25 % <10 % 10-25 % —      10-25 %
Dormitory and canteen
   10-25 % 10-25 % 10-25 % —      10-25 %
Environment

Environmental Permits and Reporting
   25-50 % 10-25 % 10-25 % —      10-25 %
Pollution prevention and resource reduction
   <10 % 10-25 % 10-25 % —      <10 %
Hazardous substances
   25-50 % 10-25 % 10-25 % —      25-50 %
Waste water and solid waste
   <10 % 10-25 % 10-25 % —      <10 %
Air emissions
   <10 % 10-25 % <10 % —      <10 %
Product content restrictions
   25-50 % 25-50 % 25-50 % —      25-50 %
Management systems

Company Commitment
   25-50 % 25-50 % 25-50 % 25-50 % 25-50 %
Management Accountability and responsibility
   50-75 % 25-50 % 50-75 % 25-50 % 50-75 %
Legal and Customer Requirements
�� 25-50 % 25-50 % 50-75 % 50-75 % 25-50 %
Risk Assessment and Risk Management
   50-75 % 50-75 % 50-75 % 25-50 % 50-75 %
Performance Objectives
   50-75 % 50-75 % 50-75 % 25-50 % 50-75 %
Training
   50-75 % 25-50 % 50-75 % —      50-75 %
Communication
   50-75 % 25-50 % 25-50 % 25-50 % 50-75 %
Worker feedback and participation
   50-75 % 50-75 % 50-75 % 25-50 % 50-75 %
Audits and assessments
   50-75 % 50-75 % 50-75 % 25-50 % 50-75 %
Corrective action process
   50-75 % 25-50 % 50-75 % 50-75 % 50-75 %
Documentation and records
   50-75 % 25-50 % 25-50 % —      25-50 %
Ethics

Business Integrity
   <10 % 10-25 % —      —      <10 %
No Improper Advantage
   <10 % 10-25 % <10 % —      <10 %
Disclosure of information
   —      —      —      —      —
Protection of Intellectual Property
   <10 % 10-25 % —      —      <10 %
Fair business, advertising and competition
   <10 % 10-25 % 10-25 % —      <10 %
Protection of identity
   10-25 % 10-25 % 10-25 % —      10-25 %
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14 Sustainability statements 14.5 - 14.5
China Asia excl. China LATAM EMEA Total
General
EICC Code
25-50 % >75 % 10-25 % 25-50 % 25-50 %
Compliance with law
—   —   —   —   —
¹⁾
Freely chosen employment: these cases are related to 1) workers having to pay a deposit for uniforms, safety equipment, and/or tools. We requested suppliers to return these deposits to the workers and provide these items without demanding a deposit, and 2) in some cases no labor contract was signed. We requested suppliers to take corrective actions and verified that contracts were in place for all workers.
²⁾
Child labor avoidance/young worker management: this is related to one case of historic child labor, where a supplier hired 2 workers prior to reaching the legal age, but they were no longer underage at the time of the audit. We requested the supplier to strengthen its management system and age verification procedure, and ensured that the workers were enrolled in the young worker management program.
Supplier training and capability building
Based on many years of experience with the audit program, we know that a combination of audits, capacity building, consequence management and structural attention from management is crucial to realize structural and lasting changes at supplier production sites. During 2012 we extended capacity building initiatives which are offered to help suppliers improve their practices. We organize classroom training sessions, Philips sustainability experts regularly visit suppliers to provide on-site consultancy and training, and we invite suppliers to participate trainings provided by the EICC. In China and India we held dedicated training sessions about the EICC code of conduct, trainings about fire safety, electrical and machine safety, chemical management, and industry hygiene, which were attended by more than 380 supplier representatives for active and potential suppliers, including suppliers for recent acquisitions. In Shenzhen, China we also hosted a Health and Safety Training that was developed in joint effort by the EICC and GeSI.
In India, in a project initiated with the Dutch Ministry suppliers were coached by local consultants in the development and implementation of a sustainability strategy for their company, integrated in their business strategy. Three suppliers participated in this bottom-up approach, which helped suppliers to set their own objectives, based on their own priorities and values as responsible corporate citizens.
Sustainable Trade Initiative IDH
Philips is one of the initiators of the IDH Electronics Program, an innovative multi-stakeholder initiative sponsored by the Sustainable Trade Initiative (IDH) together with Dell, HP, Philips and civil society organizations. The program will work with over 100 electronics suppliers in China to support innovative workforce management practices, sustainability and better business performance. The goal is to improve working conditions of more than 500,000 employees in the electronics sector.
The program was formally kicked off end 2011 when the first suppliers entered the program, and in 2012 we continued the implementation phase in China’s Pearl River Delta. A total of 8 Philips suppliers are now involved in the program. Suppliers receive a so-called Entry Point Assessment to identify challenges common to factory management and workers such as worker-management communication, occupational health and safety, production, performance management and environmental issues. Based on this a tailor made action plan is developed with each supplier on the basis of improved dialogue between management and workers. Suppliers receive support over a period of up to 24 months, and the costs of the program are shared between the supplier, Philips, and the IDH.
Conflict minerals
Philips is concerned about the situation in the east of the Democratic Republic of the Congo (DRC) where proceeds from the extractives sector are used to finance rebel conflicts in the region. These minerals may end up in many different products such as cars, planes, chemicals, packaging, and electronics equipment. Philips is committed to address this issue, even though it does not directly source minerals from the DRC. The supply chain for the metals of concern consists of many tiers, including mines, traders, exporters, smelters, refiners, alloy producers and component manufacturers, before reaching Philips’ direct suppliers. Philips is working towards the following goals:
Minimize trade in conflict minerals that benefit armed groups in the DRC or an adjoining country
Enable legitimate minerals from the region to enter global supply chains, thereby supporting the Congolese economy and the local communities that depend on these exports.
What are conflict minerals?
Conflict minerals are defined in the US Dodd-Frank Act as tin, tantalum, tungsten and gold. They can come from many sources around the world, including mines in the DRC which are estimated to provide approximately 18% of global tantalum production, 4% of tin, 3% of tungsten, and 2% of gold. Some of the mines in the DRC are controlled by militias responsible for atrocities committed in the Congolese civil war.
Collaboration with different stakeholders
We believe that industry collaboration and stakeholder dialogue are key to creating impact at these deeper levels of our supply chain. Since 2008 Philips is actively contributing to the Extractives Work Group, a joint effort of the electronic and mobile phone industry organizations EICC and GeSI, to positively influence the social and environmental conditions in the metals extractives supply chain. See also http://www.eicc.info/extractives.htm.
As we have been doing for years, we continued our engagement with relevant stakeholders including the European Parliament, other industry organizations and local as well as international NGOs in Europe and the US to see how we can resolve the issue. To demonstrate our commitment we signed on to the multi-stakeholder statement from the Responsible Sourcing Network, urging stakeholders to continue the momentum on removing conflict minerals from the supply chain.
In September 2012, the Conflict Free Tin Initiative was launched, introducing a tightly controlled conflict-free supply chain of tin from a mine in Congo all the way down to an end-product. Philips is one of the industry partners brought together by the Dutch government that initiated this conflict-free sourcing program in eastern DRC. Although this region has a rich supply of minerals, its economy has collapsed due to decades of ongoing conflict. In an effort to prevent minerals from financing war, many companies worldwide have shielded away from purchasing minerals from the DRC, creating a de facto embargo and a collapse of the local economy. To overcome this issue and promote cooperation and economic growth in the region outside the control of the rebels, we launched the Conflict Free Tin initiative. In October 2012 an important milestone was reached when the first bags of tagged minerals left the mine. The first end-user products containing this conflict-free tin are expected mid 2013.
Supply chain due diligence
To assist in developing a due diligence standard for conflict minerals, we participated in the multi-stakeholder OECD-hosted pilot for the implementation of the ‘OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas’.
During 2012 we worked with 347 priority suppliers to raise awareness and start supply chain investigations into the country of origin for the metals. These suppliers cover more than 80% of the relevant purchasing spend. Using the EICC-GeSI Conflict Minerals Template we requested our suppliers to report back their progress and to disclose which smelters are used in their supply chains to produce the metals. For all four metals together we identified 127 smelters in our supply chain, of which the majority is located in Asia. By having published this smelter list on our internet we created transparency at deeper levels in our supply chain of those actors that we believe hold the key towards effectively addressing the concerns around conflict minerals.
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14 Sustainability statements 14.5 - 14.5
Number of identified smelters per region
Number of identified smelters per metal
Conflict-free smelter program
The smelter is at a key point in the supply chain to enforce responsible sourcing because at that stage minerals from many sources are processed to produce a refined metal. The EICC-GeSI Conflict-Free Smelter (CFS) program makes it possible to identify smelters that can demonstrate through an independent third party assessment that the minerals they procure did not originate from sources that contribute to conflict in the DRC. After having identified smelters in our supply chain, Philips started to invite these smelters to participate in the CFS program.
A list of CFS compliant smelters for tantalum and gold has been published, and audits for tin and tungsten smelters are under way. As sufficient conflict-free smelters for all four metals become available, Philips plans to direct its supply chain towards these smelters. See www.conflictfreesmelter.org for more details.
For more details, see www.philips.com/suppliers and the published Philips position paper on Conflict Minerals.
Annual Report 2012      223
14 Sustainability statements 14.6 - 14.6
14.6 Independent assurance report
To the Supervisory Board and Shareholders of Koninklijke Philips Electronics N.V.:
We were engaged by the Supervisory Board of Koninklijke Philips Electronics N.V. (further ‘Philips’) to provide assurance on the information in the chapter Sustainability statements in the Annual Report 2012 including the information referred to in the sections Social performance and Environmental performance (further ‘The Sustainability Information’). The Board of Management is responsible for the preparation and fair presentation of The Sustainability Information, including the identification of material issues. Our responsibility is to issue an assurance report based on the engagement outlined below.
Scope
Our assurance engagement was designed to provide reasonable assurance on whether The Sustainability Information is presented fairly, in all material respects, in accordance with the reporting criteria.
We do not provide any assurance on the achievability of the objectives, targets and expectations of Philips.
Reporting criteria and assurance standard
Philips applies the Sustainability Reporting Guidelines G3.1 of the Global Reporting Initiative supported by internally developed guidelines as described in Approach to sustainability reporting in the chapter Sustainability statements, of this Annual Report. It is important to view the performance data in the context of this explanatory information. We believe these criteria are suitable in view of the purpose of our assurance engagement.
We conducted our engagement in accordance with the International Standard for Assurance Engagement (ISAE 3000): Assurance Engagement other than Audits or Reviews of Historical Financial Information, issued by the International Auditing and Assurance Standards Board. This standard requires, among others, that the assurance team possesses the specific knowledge, skills and professional competencies needed to provide assurance on sustainability information, and that they comply with the requirements of the Code of Ethics for Professional Accountants of the International Federation of Accountants to ensure their independence.
Work undertaken
Our procedures included assessing the appropriateness of the accounting policies used, evaluating the design and implementation, and testing the operating effectiveness of the systems and processes for collecting and processing the qualitative and quantitative information in The Sustainability Information (including the implementation of these at a number of sites), and evaluating the overall presentation of sustainability information within our scope. Also we held interviews with relevant management and evaluated documentation on a sample basis to determine whether the information is supported by sufficient evidence.
We have also reviewed, to the extent of our competence, whether the information on sustainability in the rest of the Annual Report 2012 is consistent with The Sustainability Information.
Opinion
In our opinion, The Sustainability Information is fairly presented, in all material respects, in accordance with the reporting criteria.
We also report, to the extent of our competence, that the information on sustainability in the rest of the Annual Report 2012 is consistent with The Sustainability Information.
Amsterdam, The Netherlands
February 25, 2013
KPMG Accountants N.V.
J.F.C. van Everdingen RA
224      Annual Report 2012
14 Sustainability statements 14.7 - 14.7
14.7 Global Reporting Initiative (GRI) table
profile
disclosure description cross-reference¹⁾
Strategy and analysis
1.1 Statement from the most senior decision- maker of the organization Message from the CEO
1.2 Description of key impacts, risks, and opportunities
Message from the CEO
section 7.2, Risk categories and factors
section 7.3, Strategic risks
section 7.4, Operational risks
section 7.5, Compliance risks
section 7.6, Financial risks
chapter 14, Sustainability statements
profile
disclosure description cross-reference¹⁾
Organizational profile
2.1 Name of the organization chapter 1, Our company
2.2 Primary brands, products, and/or services
chapter 1, Our company
chapter 2, Group strategic focus
2.3 Operational structure of the organization, including main divisions, operating companies, subsidiaries and joint ventures
chapter 2, Group strategic focus
chapter 6, Sector performance
2.4 Location of organization’s headquarters
chapter 1, Our company
section 17.7, Investor contact
2.5 Number of countries where the organization operates, and names of countries with either major operations or that are specifically relevant to the sustainability issues covered in the report ��
chapter 1, Our company
chapter 6, Sector performance
2.6 Nature of ownership and legal form chapter 11, Corporate governance
2.7 Markets served (including geographic breakdown, sectors served and types of customers/beneficiaries) Performance highlights
2.8 Scale of the reporting organization Performance highlights
2.9 Significant changes during the reporting period relating to size, structure, or ownership
section 17.2, Share information
section 17.5, Philips’ acquisitions
note 5, Discontinued operations and other assets classified as held for sale
note 7, Acquisitions and divestments
2.10 Awards received in the reporting period
Message from the CEO
section 4.1, The power to make a difference
section 14.2, EcoVision
profile
disclosure description cross-reference¹⁾
Report parameters
Report profile 3.1 Reporting period Performance highlights
3.2 Date of most recent previous report chapter 12, Group financial statements
3.3 Reporting cycle section 17.6, Financial calendar
3.4 Contact point for questions regarding the report or its contents section 17.7, Investor contact
Report scope and boundary 3.5 Process for defining report content
chapter 12, Group financial statements
section 12.1, Management’s report on internal control
section 12.2, Reports of the independent auditor
section 12.3, Auditors’ report on internal control over financial reporting
chapter 14, Sustainability statements
Annual Report 2012      225
14 Sustainability statements 14.7 - 14.7
profile
disclosure description cross-reference¹⁾
3.6 Boundary of the report
chapter 12, Group financial statements
section 12.1, Management’s report on internal control
section 12.2, Reports of the independent auditor
section 12.3, Auditors’ report on internal control over financial reporting
chapter 14, Sustainability statements
3.7 State any specific limitations on the scope or boundary of the report
chapter 12, Group financial statements
section 12.1, Management’s report on internal control
section 12.2, Reports of the independent auditor
section 12.3, Auditors’ report on internal control over financial reporting
chapter 14, Sustainability statements
3.8 Basis for reporting on joint ventures, subsidiaries, leased facilities, outsourced operations and other entities that can significantly affect comparability from period to period and/or between organizations
chapter 12, Group financial statements
section 12.1, Management’s report on internal control
section 12.2, Reports of the independent auditor
section 12.3, Auditors’ report on internal control over financial reporting
section 12.10, Significant accounting policies
chapter 14, Sustainability statements
3.9 Data measurement techniques and the bases of calculations
chapter 12, Group financial statements
section 12.1, Management’s report on internal control
section 12.2, Reports of the independent auditor
section 12.3, Auditors’ report on internal control over financial reporting
section 12.10, Significant accounting policies
chapter 14, Sustainability statements
3.10 Explanation of the effect of any re-statements
chapter 12, Group financial statements
section 12.1, Management’s report on internal control
section 12.2, Reports of the independent auditor
section 12.3, Auditors’ report on internal control over financial reporting
section 12.10, Significant accounting policies
chapter 14, Sustainability statements
Forward-looking statements
3.11 Significant changes from previous reporting periods
chapter 12, Group financial statements
section 12.1, Management’s report on internal control
section 12.2, Reports of the independent auditor
section 12.3, Auditors’ report on internal control over financial reporting
section 12.10, Significant accounting policies
chapter 14, Sustainability statements
Forward-looking statements
3.12 Table identifying the location of the Standard Disclosures in the report
Contents
Performance statements
Assurance
3.13 Policy and current practice with regard to seeking external assurance for the report
section 10.3, Report of the Audit Committee
chapter 11, Corporate governance
section 11.2, Supervisory Board
section 11.4, Logistics of the General Meeting of Shareholders
chapter 14, Sustainability statements
section 14.6, Independent assurance report
profile
disclosure description cross-reference¹⁾
Governance
Governance 4.1 Governance structure of the organization
chapter 11, Corporate governance
section 11.1, Board of Management
section 11.2, Supervisory Board
section 11.3, General Meeting of Shareholders
section 11.4, Logistics of the General Meeting of Shareholders
4.2 Indicate whether the Chair of the highest governance body is also an executive officer
section 11.1, Board of Management
section 11.2, Supervisory Board
4.3 For organizations that have a unitary board structure, state the number of members of the highest governance body that are independent and/or non-executive members Not relevant for Philips, see chapter 11, Corporate governance
226      Annual Report 2012
14 Sustainability statements 14.7 - 14.7
profile
disclosure description cross-reference¹⁾
4.4 Mechanisms for shareholders and employees to provide recommendations or direction to the highest governance body
chapter 11, Corporate governance
section 11.1, Board of Management
section 11.2, Supervisory Board
section 11.3, General Meeting of Shareholders
section 11.4, Logistics of the General Meeting of Shareholders
chapter 17, Investor Relations
4.5 Linkage between compensation for members of the highest governance body, senior managers and executives and the organization’s performance section 10.2, Report of the Remuneration Committee
4.6 Processes in place for the highest governance body to ensure, that conflicts of interest are avoided
chapter 10, Supervisory Board report
section 11.2, Supervisory Board
4.7 Process for determining the qualifications and expertise of the members of the highest governance body chapter 10, Supervisory Board report
4.8 Internally developed statements of mission or values, codes of conduct, and principles relevant to economic, environmental and social performance and the status of their implementation
chapter 1, Our company
chapter 2, Group strategic focus
section 7.1, Our approach to risk management and business control
4.9 Procedures of the highest governance body for overseeing the organization’s identification and management of performance, including relevant risks and opportunities, and adherence or compliance with internationally agreed standards, codes of conduct and principles
chapter 10, Supervisory Board report
chapter 11, Corporate governance
section 11.1, Board of Management
section 11.2, Supervisory Board
section 11.3, General Meeting of Shareholders
section 11.4, Logistics of the General Meeting of Shareholders
4.10 Processes for evaluating the highest governance body’s own performance
chapter 10, Supervisory Board report
chapter 11, Corporate governance
section 11.1, Board of Management
section 11.2, Supervisory Board
section 11.3, General Meeting of Shareholders
section 11.4, Logistics of the General Meeting of Shareholders
Commitments to external initiatives 4.11 Explanation of whether and how the precautionary approach or principle is addressed by the organization
section 7.1, Our approach to risk management and business control
chapter 11, Corporate governance
4.12 Externally developed economic, environmental and social charters, principles, or other initiatives to which the organization subscribes or endorses chapter 14, Sustainability statements
4.13 Memberships in associations (such as industry associations) chapter 14, Sustainability statements
Stakeholder engagement 4.14 List of stakeholder groups engaged by the organization chapter 14, Sustainability statements
4.15 Basis for identification and selection of stakeholders with whom to engage chapter 14, Sustainability statements
4.16 Approaches to stakeholder engagement, including frequency of engagement by type and by stakeholder group chapter 14, Sustainability statements
4.17 Key topics and concerns that have been raised through stakeholder engagement, and how the organization has responded to those key topics and concerns, including through its reporting
Message from the CEO
chapter 10, Supervisory Board report
chapter 14, Sustainability statements
Annual Report 2012      227
14 Sustainability statements 14.7 - 14.7
profile
disclosure
description cross-reference¹⁾
Economic
Economic performance Disclosure on management approach to economic aspects
Message from the CEO
chapter 7, Risk management
EC1 Direct economic value generated and distributed, including revenues, operating costs, employee compensation, donations and other community investments, retained earnings and payments to capital providers and governments
Performance highlights
section 14.1, Economic indicators
EC2 Financial implications and other risks and opportunities for the organization’s activities due to climate change chapter 14, Sustainability statements
EC3 Coverage of the organization’s defined-benefit plan obligations note 29, Pensions and other postretirement benefits
EC4 Significant financial assistance received from government Philips does not receive significant financial assistance from governments
EC6 Policy, practices and proportion of spending on locally-based suppliers at significant locations of operation
chapter 14, Sustainability statements
section 14.1, Economic indicators
section 14.5, Supplier indicators
EC7 Procedures for local hiring and proportion of senior management hired from the local community at significant locations of operation
sub-section 5.2.4, Employment
section 5.2, Social performance
EC8 Development and impact of infrastructure investments and services provided primarily for public benefit through commercial, in-kind or pro bono engagement
section 3.6, Enhancing urban life with light
section 4.1, The power to make a difference
sub-section 5.2.8, Social Investment Programs
EC9 Understanding and describing significant indirect economic impacts, including the extent of impacts
section 3.6, Enhancing urban life with light
section 4.1, The power to make a difference
sub-section 5.2.8, Social Investment Programs
section 14.1, Economic indicators
228      Annual Report 2012
14 Sustainability statements 14.7 - 14.7
profile
disclosure
description cross-reference¹⁾
Environment
Disclosure on management approach to environmental aspects
Message from the CEO
section 5.3, Environmental performance
Materials EN1 Materials used by weight or volume
section 14.2, EcoVision
section 14.3, Green Operations
EN2 Percentage of materials used that are recycled input materials
section 14.2, EcoVision
section 14.3, Green Operations
Energy EN3 Direct energy consumption by primary energy source
section 14.2, EcoVision
section 14.3, Green Operations
EN4 Indirect energy consumption by primary source
section 14.2, EcoVision
section 14.3, Green Operations
Water EN8 Total water withdrawal by source section 14.3, Green Operations
Biodiversity EN11 Location and size of land owned, leased, managed in or adjacent to protected areas and areas of high biodiversity value outside protected areas This indicator is not material to Philips because the company does not own land in protected areas and areas with high biodiversity
EN12 Description of significant impacts of activities, products and services on biodiversity in protected areas and areas of high biodiversity value outside protected areas chapter 14, Sustainability statements
Emissions, effluents, and waste EN16 Total direct and indirect greenhouse gas emissions by weight
section 14.2, EcoVision
section 14.3, Green Operations
EN17 Other relevant indirect greenhouse gas emissions by weight
section 14.2, EcoVision
section 14.3, Green Operations
EN19 Emissions of ozone-depleting substances by weight section 14.3, Green Operations
Commitments to external initiatives EN20 NOx, SOx and other significant air emissions by type and weight section 14.3, Green Operations
EN21 Total water discharge by quality and destination section 14.3, Green Operations
EN22 Total weight of waste by type and disposal method section 14.3, Green Operations
EN23 Total number and volume of significant spills section 14.3, Green Operations
EN26 Initiatives to mitigate environmental impacts of products and services, and extent of impact mitigation
section 4.1, The power to make a difference
section 5.2, Social performance
section 14.2, EcoVision
EN27 Percentage of products sold and their packaging materials that are reclaimed by category
section 5.2, Social performance
section 14.2, EcoVision
Compliance EN28 Monetary value of significant fines and total number of non-monetary sanctions for non- compliance with environmental laws and regulations section 14.3, Green Operations
Annual Report 2012      229
14 Sustainability statements 14.7 - 14.7
profile
disclosure
description cross-reference¹⁾
Labor practices and decent work
Disclosure on management approach to labor practices and decent work section 14.4, General Business Principles
Employment LA1 Total workforce by employment type, employment contract and region sub-section 5.2.4, Employment
LA2 Total number and rate of employee turnover by age group, gender and region
sub-section 5.2.3, Diversity and inclusion
sub-section 5.2.4, Employment
Labor/Management relations LA4 Percentage of employees covered by collective bargaining agreements See also www.philips.com/gbp
LA5 Minimum notice period(s) relating to significant operational changes, including whether it is specified in collective agreements See www.philips.com/gbp
Occupational health and safety LA7 Rates of injury, occupational diseases, lost days and absenteeism, and number of work- related fatalities by region sub-section 5.2.6, Health and Safety
LA8 Education, training, counseling, prevention and risk-control programs in place to assist workforce members, their families or community members in relation to serious diseases
section 4.2, Encouraging positive change
section 4.3, Embracing culture change
Training and education LA10 Average hours of training per year per employee by employee category
section 4.3, Embracing culture change
sub-section 5.2.5, Developing our people
Diversity and equal opportunity LA13 Composition of governance bodies and breakdown of employees per category according to gender, age group, minority group membership and other indicators of diversity
sub-section 5.2.3, Diversity and inclusion
chapter 8, Management
chapter 9, Supervisory Board
LA14 Ratio of basic salary of men to women by employee category See also www.philips.com/gbp
profile
disclosure description cross-reference¹⁾
Human rights
Disclosure on management approach to human rights
section 14.4, General Business Principles
section 14.5, Supplier indicators
Investment and procurement practices HR1 Percentage and total number of significant investment agreements that include human rights clauses or that have undergone human rights screening section 5.1, Financial performance
HR2 Percentage of significant suppliers and contractors that have undergone screening on human rights and actions taken section 14.5, Supplier indicators
Non-discrimination HR4 Total number of incidents of discrimination and actions taken section 14.4, General Business Principles
Freedom of association and collective bargaining HR5 Operations identified in which the right to exercise freedom of association and collective bargaining may be at significant risk, and actions taken to support these rights section 14.4, General Business Principles
Child labor HR6 Operations identified as having significant risk for incidents of child labor, and measures taken to contribute to the elimination of child labor section 14.4, General Business Principles
Forced and compulsory labor HR7 Operations identified as having significant risk for incidents of forced or compulsory labor, and measures to contribute to the elimination of forced or compulsory labor section 14.4, General Business Principles
230      Annual Report 2012
14 Sustainability statements 14.7 - 14.7
profile
disclosure
description cross-reference¹⁾
Society
Disclosure on management approach to society and community involvement
section 4.1, The power to make a difference
section 4.2, Encouraging positive change
section 4.3, Embracing culture change
Community SO1 Percentage of operations with implemented local community engagement, impact assessments, and development programs
section 4.3, Embracing culture change
section 5.2, Social performance
Ethics SO2 Percentage and total number of business units analyzed for risks related to ethics section 14.4, General Business Principles
SO3 Percentage of employees trained in organization’s anti-corruption policies and procedures section 14.4, General Business Principles
SO4 Actions taken in response to incidents of ethics section 14.4, General Business Principles
Public policy SO5 Public policy positions and participation in public policy development and lobbying chapter 14, Sustainability statements
Compliance SO8 Monetary value of significant fines and total number of non-monetary sanctions for non- compliance with laws and regulations
section 12.11, Notes
section 14.3, Green Operations
profile
disclosure description
cross-reference¹⁾
Product responsibility
Disclosure on management approach to product responsibility section 4.1, The power to make a difference
Customer health and safety PR1 Life cycle stages in which health and safety impacts of products and services are assessed for improvement, and percentage of significant products and services categories subject to such procedures
section 5.2, Social performance
section 14.2, EcoVision
Product and service labeling PR3 Type of product and service information required by procedures, and percentage of significant products and services subject to such information requirements section 4.1, The power to make a difference
Marketing communications PR6 Programs for adherence to laws, standards, and voluntary codes related to marketing communications, including advertising, promotion and sponsorship chapter 14, Sustainability statements
PR9 Monetary value of significant fines for non- compliance with laws and regulations relating to the provision and use of products and services
section 12.11, Notes
section 14.3, Green Operations
¹⁾
The sections referred to, except for the sections in chapter 14, Sustainability statements, are not included in the scope of the assurance engagement on Sustainability performance
Annual Report 2012      231
15 Reconciliation of non-GAAP information 15 - 15
15 Reconciliation of non-GAAP information
Explanation of Non-GAAP measures
Koninklijke Philips Electronics N.V. (the ‘Company’) believes that an understanding of sales performance is enhanced when the effects of currency movements and acquisitions and divestments (changes in consolidation) are excluded. Accordingly, in addition to presenting ‘nominal growth’, ‘comparable growth’ is provided.
Comparable sales exclude the effects of currency movements and changes in consolidation. As indicated in the Significant accounting policies, sales and income are translated from foreign currencies into the Company’s reporting currency, the euro, at the exchange rate on transaction dates during the respective years. As a result of significant currency movements during the years presented, the effects of translating foreign currency sales amounts into euros could have a material impact. Therefore, these impacts have been excluded in arriving at the comparable sales in euros. Currency effects have been calculated by translating previous years’ foreign currency sales amounts into euros at the following year’s exchange rates in comparison with the sales in euros as historically reported. Years under review were characterized by a number of acquisitions and divestments, as a result of which activities were consolidated or deconsolidated. The effect of consolidation changes has also been excluded in arriving at the comparable sales. For the purpose of calculating comparable sales growth, when a previously consolidated entity is sold or contributed to a venture that is not consolidated by the Company, relevant sales are excluded from impacted prior-year periods. Similarly, when an entity is acquired, relevant sales are excluded from impacted periods.
The Company uses the term IFO and Adjusted IFO to evaluate the performance of the Philips Group and its operating sectors. The term IFO has the same meaning as Income from operations (IFO). Referencing Adjusted IFO will make the underlying performance of our businesses more transparent by factoring out the amortization of acquired intangible assets. Adjusted IFO represents income from operations excluding results attributable to non-controlling interests holders, results relating to investments in associates, income taxes, financial income and expenses, amortization and impairment on intangible assets (excluding software and capitalized product development).
The Company believes that an understanding of the Philips Group’s financial condition is enhanced by the disclosure of net operating capital (NOC), as this figure is used by Philips’ management to evaluate the capital efficiency of the Philips Group and its operating sectors. NOC is defined as: total assets excluding assets classified as held for sale less: (a) cash and cash equivalents, (b) deferred tax assets, (c) other (non-)current financial assets, (d) investments in associates, and after deduction of: (e) provisions excluding deferred tax liabilities, (f) accounts and notes payable, (g) accrued liabilities, (h) current/non-current liabilities, and (i) trading securities.
232      Annual Report 2012
15 Reconciliation of non-GAAP information 15 - 15
Net debt is defined as the sum of long- and short-term debt minus cash and cash equivalents. The net debt position as a percentage of the sum of group equity (shareholders’ equity and non-controlling interests) and net debt is presented to express the financial strength of the Company. This measure is widely used by management and investment analysts and is therefore included in the disclosure. Our net debt position is managed in such a way that we can meet our objective to retain an A3 rating (Moody’s) and A- rating (Standard and Poor’s). Furthermore, the Group’s objective when managing the net debt position is to fulfill our commitment to a stable dividend policy with a 40% to 50% pay-out of continuing net income.
Cash flows before financing activities, being the sum total of net cash from operating activities and net cash from investing activities, and free cash flow, being net cash from operating activities minus net capital expenditures, are presented separately to facilitate the reader’s understanding of the Company’s funding requirements.
Net capital expenditures comprise of purchase of intangible assets, expenditures on development assets, capital expenditures on property, plant and equipment and proceeds from disposals of property, plant and equipment. This measure is widely used by management to calculate free cash flow.
Adjustments
Prior periods amounts have been revised to reflect certain voluntary adopted accounting policy changes, and immaterial adjustments (see section 12.10, Significant accounting policies, of this report).
Sales growth composition per sector
in %
   comparable growth currency effects consolidation changes nominal growth
2012 versus 2011
Healthcare
   6.4    6.4    —      12.8
Consumer Lifestyle
   1.7    3.8    0.5    6.0
Lighting
   3.8    4.6    2.1    10.5
Innovation, Group & Services
   (7.4 ) 0.1    (6.2 ) (13.5 )


Philips Group
   4.1    5.0    0.7    9.8
2011 versus 2010
Healthcare
   5.3    (2.5 ) 0.1    2.9
Consumer Lifestyle
   1.1    (1.8 ) 2.7    2.0
Lighting
   6.1    (2.3 ) (2.7 ) 1.1
Innovation, Group & Services
   (10.7 ) (0.1 ) (14.0 ) (24.8 )


Philips Group
   4.1    (2.2 ) (0.6 ) 1.3
2010 versus 2009
Healthcare
   3.9    6.0    (0.2 ) 9.7
Consumer Lifestyle
   0.4    4.9    1.5    6.8
Lighting
   8.7    6.0    0.7    15.4
Innovation, Group & Services
   13.9    2.0    (1.6 ) 14.2


Philips Group
   4.8    5.6    0.5    10.9
Annual Report 2012      233
15 Reconciliation of non-GAAP information 15 - 15
Sales growth composition per geographic cluster
in %
   comparable growth currency effects consolidation changes nominal growth
2012 versus 2011
Western Europe
   (2.9 ) 1.1    1.9    0.1
North America
   2.0    8.8    (0.8 ) 10.0
Other mature geographies
   11.5    9.2    (0.1 ) 20.6


Total mature geographies
   1.2    5.4    0.4    7.0
Growth geographies
   10.1    4.2    1.1    15.4


Philips Group
   4.1    5.0    0.7    9.8
2011 versus 2010
Western Europe
   (2.6 ) 0.3    (1.7 ) (4.0 )
North America
   2.9    (4.7 ) 0.3    (1.5 )
Other mature geographies
   7.0    2.7    (2.0 ) 7.7


Total mature geographies
   1.0    (1.8 ) (0.8 ) (1.6 )
Growth geographies
   11.1    (3.2 ) (0.2 ) 7.7


Philips Group
   4.1    (2.2 ) (0.6 ) 1.3
2010 versus 2009
Western Europe
   (1.5 ) 1.2    0.7    0.4
North America
   1.5    5.8    —      7.3
Other mature geographies
   12.6    14.5    3.2    30.3


Total mature geographies
   1.2    4.3    0.6    6.1
Growth geographies
   13.6    9.3    0.3    23.2


Philips Group
   4.8    5.6    0.5    10.9
Composition of net debt to group equity
   2010 2011    2012
Long-term debt
   2,818    3,278       3,725
Short-term debt
   1,840    582       809


Total debt
   4,658    3,860       4,534
Cash and cash equivalents
   5,833    3,147       3,834


Net debt (cash)¹⁾
   (1,175 ) 713       700
Shareholders’ equity
   15,007    12,316       11,140
Non-controlling interests
   46    34       34


Group equity
   15,053    12,350       11,174
Net debt and group equity
   13,878    13,063       11,874
Net debt divided by net debt and group equity (in %)
   (8 ) 5       6
Group equity divided by net debt and group equity (in %)
   108    95       94
¹⁾
Total debt less cash and cash equivalents
234      Annual Report 2012
15 Reconciliation of non-GAAP information 15 - 15
Composition of cash flows
   2010 2011 2012
Cash flows from operating activities
   2,074    768    2,198
Cash flows from investing activities
   (597 ) (1,293 ) (912 )


Cash flows before financing activities
   1,477    (525 ) 1,286
Cash flows from operating activities
   2,074    768    2,198
Net capital expenditures:
   (716 ) (872 ) (475 )
Purchase of intangible assets
   (53 ) (69 ) (39 )
Proceeds from sale of intangible assets
   —      —      160
Expenditures on development assets
   (220 ) (278 ) (347 )
Capital expenditures on property, plant and equipment
   (572 ) (653 ) (675 )
Proceeds from disposals of property, plant and equipment
   129    128    426


Free cash flows
   1,358    (104 ) 1,723
Adjusted IFO to Income from operations (or IFO )
   Philips Group Healthcare Consumer Lifestyle Lighting Innovation, Group
& Services
2012
Adjusted IFO
   1,502    1,322    663    188    (671 )
Amortization of intangible assets¹⁾
   (472 ) (200 ) (70 ) (194 ) (8 )


Income from operations (or IFO)
   1,030    1,122    593    (6 ) (679 )
2011
Adjusted IFO
   1,680    1,145    297    445    (207 )
Amortization of intangible assets¹⁾
   (594 ) (228 ) (80 ) (276 ) (10 )
Impairment of goodwill
   (1,355 ) (824 ) —      (531 ) —


Income from operations (or IFO)
   (269 ) 93    217    (362 ) (217 )
2010
Adjusted IFO
   2,556    1,186    487    863    20
Amortization of intangible assets¹⁾
   (482 ) (264 ) (38 ) (174 ) (6 )


Income from operations (or IFO)
   2,074    922    449    689    14
¹⁾
Excluding amortization of software and product development
NOC composition
   2008 2009 2010 2011 2012
Intangible assets
   11,757    11,523    12,233    11,012    10,679
Property, plant and equipment
   3,496    3,252    3,145    3,014    2,959
Remaining assets
   10,784    9,316    9,347    9,393    8,921
Provisions
   (2,894 ) (2,498 ) (2,394 ) (2,694 ) (2,969 )
Other liabilities
   (9,131 ) (8,992 ) (10,434 ) (10,353 ) (10,283 )


Net operating capital
   14,012    12,601    11,897    10,372    9,307
Annual Report 2012      235
15 Reconciliation of non-GAAP information 15 - 15
Net operating capital to total assets
   Philips Group    Healthcare    Consumer Lifestyle    Lighting    Innovation, Group
& Services
2012
Net operating capital (NOC)
   9,307       7,976       1,217       4,635       (4,521 )
Eliminate liabilities comprised in NOC:

- payables/liabilities
   10,283       2,760       1,741       1,695       4,087
- intercompany accounts
   —         71       45       37       (153 )
- provisions
   2,969       355       322       581       1,711
Include assets not comprised in NOC:

- investments in associates
   177       86       —         22       69
- other non-current financial assets
   549       —         —         —         549
- deferred tax assets
   1,917       —         —         —         1,917
- liquid assets
   3,834       —         —         —         3,834


   29,036       11,248       3,325       6,970       7,493
Assets classified as held for sale
   43



Total assets
   29,079
2011
Net operating capital (NOC)
   10,372       8,418       884       4,965       (3,895 )
Eliminate liabilities comprised in NOC:

- payables/liabilities
   10,353       2,697       2,309       1,593       3,754
- intercompany accounts
   —         103       87       51       (241 )
- provisions
   2,694       287       558       282       1,567
Include assets not comprised in NOC:

- investments in associates
   203       86       3       23       91
- other non-current financial assets
   346       —         —         —         346
- deferred tax assets
   1,729       —         —         —         1,729
- liquid assets
   3,147       —         —         —         3,147


   28,844       11,591       3,841       6,914       6,498
Assets classified as held for sale
   551



Total assets
   29,395
2010
Net operating capital (NOC)
   11,897       8,908       882       5,506       (3,399 )
Eliminate liabilities comprised in NOC:

- payables/ liabilities
   10,434       2,603       2,790       1,601       3,440
- intercompany accounts
   —         54       95       68       (217 )
- provisions
   2,394       321       342       302       1,429
Include assets not comprised in NOC:

- investments in associates
   181       76       1       18       86
- other current financial assets
   6       —         —         —         6
- other non-current financial assets
   479       —         —         —         479
- deferred tax assets
   1,367       —         —         —         1,367
- liquid assets
   5,832       —         —         —         5,832


   32,590       11,962       4,110       7,495       9,023
Assets classified as held for sale
   120



Total assets
   32,710
236      Annual Report 2012
16 Five-year overview 16 - 16
16 Five-year overview
all amounts in millions of euros unless otherwise stated
Prior periods amounts have been revised to reflect certain immaterial adjustments (see section 12.10, Significant accounting policies, of this report).
Due to factors such as acquisitions and divestments, the amounts, percentages and ratios are not directly comparable.
   2008
EUR 2009
EUR 2010
EUR 2011
EUR 2012
EUR 2012
USD¹⁾
General data

Sales
   21,682    20,092    22,287    22,579    24,788    32,693
Income from operations (IFO) (loss)
   287    667    2,074    (269 ) 1,030    1,358
Financial income and expenses - net
   87    (162 ) (121 ) (240 ) (246 ) (324 )
Income (loss) from continuing operations
   99    482    1,474    (776 ) 262    346
Income (loss) from discontinued operations
   (198 ) (52 ) (26 ) (515 ) (31 ) (41 )
Net income (loss)
   (99 ) 430    1,448    (1,291 ) 231    305
Total assets
   32,349    30,897    32,710    29,395    29,079    38,353
Net assets
   15,552    14,610    15,053    12,350    11,174    14,738
Financial structure

Debt
   4,188    4,267    4,658    3,860    4,534    5,980
Provisions
   2,894    2,498    2,394    2,694    2,969    3,916
Shareholders’ equity
   15,503    14,561    15,007    12,316    11,140    14,693
Non-controlling interests
   49    49    46    34    34    45
Key figures per share

Weighted average shares outstanding:

- basic²⁾
   993,374    927,435    941,417    952,536    921,828    921,828
- diluted²⁾
   997,780    930,991    949,281    957,019    926,949    926,949
Basic earnings per common share³⁾

Income (loss) from continuing operations per share
   0.10    0.52    1.57    (0.81 ) 0.28    0.37
Net income (loss)
   (0.10 ) 0.46    1.54    (1.36 ) 0.25    0.33
Diluted earnings per common share³⁾

Income (loss) from continuing operations
   0.10    0.52    1.55    (0.81 ) 0.28    0.37
Net income (loss)
   (0.10 ) 0.46    1.53    (1.36 ) 0.25    0.33
¹⁾
For the convenience of the reader, the euro amounts have been converted into US dollars at the exchange rate used for balance sheet purposes at December 31, 2012 (USD 1 = EUR 0.7582. The US dollar amounts are unaudited.)
²⁾
In thousands of shares
³⁾
In euros or US dollars as indicated in the header
Annual Report 2012      237
17 Investor Relations 17 - 17.1
17 Investor Relations
17.1 Key financials and dividend policy
Prior periods amounts have been revised to reflect certain immaterial adjustments (see section 12.10, Significant accounting policies, of this report).
Net income and EPS
Net income of the Philips Group showed a gain of EUR 231 million, or EUR 0.25 per common share, compared to a loss of EUR 1,291 million, or EUR 1.36 per common share, in 2011.
Net income (loss)
in millions of euros
IFO and Adjusted IFO¹⁾
in millions of euros
¹⁾
For a reconciliation to the most directly comparable GAAP measures, see chapter 15, Reconciliation of non-GAAP information, of this report
Operating cash flows
in millions of euros
¹⁾
For a reconciliation to the most directly comparable GAAP measures, see chapter 15, Reconciliation of non-GAAP information, of this report
Dividend policy
We are committed to a stable dividend policy with a 40% to 50% pay-out of continuing net income.
Continuing net income is the base figure used to calculate the dividend payout for the year. For 2012, the key exclusions from net income to arrive at continuing net income are the following: the results related to the Television business of Consumer Lifestyle that are shown as discontinued operations, the fine imposed by the European Commission related to alleged violation of competition rules in the Cathode-Ray Tubes (CRT) industry, an increase in legal provisions and the loss on the sale of industrial assets. Gains that were excluded relate to the sale of the Senseo trademark and the High Tech Campus, the divestment of the Speech Processing activities in Consumer Lifestyle as well as a one-time gain of prior service cost related to a medical retiree benefit plan. Restructuring and post-acquisition charges are also excluded.
Proposed distribution
A proposal will be submitted to the 2013 Annual General Meeting of Shareholders to declare a dividend of EUR 0.75 per common share (up to EUR 685 million), in cash or in shares at the option of the shareholder, against the net income for 2012 and the reserve retained earnings of the Company.
Shareholders will be given the opportunity to make their choice between cash and shares between May 10, 2013, and May 31, 2013. If no choice is made during this election period, the dividend will be paid in shares. On May 31,
238      Annual Report 2012
17 Investor Relations 17.1 - 17.1
2013 after close of trading, the number of share dividend rights entitled to one new common share will be determined based on the volume weighted average price of all traded common shares of Koninklijke Philips Electronics N.V. at Euronext Amsterdam on 29, 30 and 31 May, 2013. The Company will calculate the number of share dividend rights entitled to one new common share, such that the gross dividend in shares will be approximately 1.5% higher than the gross dividend in cash. Payment of the dividend and delivery of new common shares, with settlement of fractions in cash, if required, will take place from June 5, 2013. The distribution of dividend in cash to holders of New York registry shares will be made in USD at the USD/EUR rate fixed by the European Central Bank on June 3, 2013.
Dividend in cash is in principle subject to 15% Dutch dividend withholding tax, which will be deducted from the dividend in cash paid to the shareholders. Dividend in shares paid out of earnings and retained earnings is subject to 15% dividend withholding tax, but only in respect of the par value of the shares (EUR 0.20 per share). This withholding tax in the case of dividend in shares will be borne by Philips.
In 2012, a dividend of EUR 0.75 per common share was paid in cash or shares, at the option of the shareholder. Approximately 62.4% elected for a share dividend resulting in the issuance of 30,522,107 new common shares, leading to a 3.4% dilution. The remainder of the dividend (EUR 255 million) was paid in cash.
ex-dividend date record date payment date
Amsterdam shares
May 7, 2013 May 9, 2013 June 5, 2013
New York shares
May 7, 2013 May 9, 2013 June 5, 2013
Dividend and dividend yield per common share
¹⁾
Dividend yield % is as of December 31 of previous year
²⁾
Subject to approval by the 2013 Annual General Meeting of Shareholders
Information for US investors
Dividends and distributions per Common Share
The following table sets forth in euros the gross dividends on the Common Shares in the fiscal years indicated (from prior-year profit distribution) and such amounts as converted into US dollars and paid to holders of Shares of the New York registry:
   2008    2009    2010    2011    2012
in EUR
   0.70       0.70       0.70       0.75       0.75
in USD
   1.09       0.94       0.93       1.11       0.94
Exchange rates USD : EUR
The following two tables set forth, for the periods and dates indicated, certain information concerning the exchange rate for US dollars into euros based on the Noon Buying Rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York (the “Noon Buying Rate”). The Noon Buying Rate on February 15, 2013 was EUR 0.7484 per USD 1.
   period end    average    high    EUR per USD
low
2007
   0.6848       0.7259       0.7750       0.6729
2008
   0.7184       0.6844       0.8035       0.6246
2009
   0.6977       0.7187       0.7970       0.6623
2010
   0.7536       0.7579       0.8362       0.6879
2011
   0.7708       0.7186       0.7736       0.6723
2012
   0.7584       0.7782       0.8290       0.7428
   highest rate    lowest rate
August, 2012
   0.8231       0.7947
September, 2012
   0.7958       0.7609
October, 2012
   0.7766       0.7614
November, 2012
   0.7865       0.7686
December, 2012
   0.7734       0.7541
January, 2013
   0.7665       0.7362
Philips publishes its financial statements in euros while a substantial portion of its net assets, earnings and sales are denominated in other currencies. Philips conducts its business in more than 50 different currencies.
Unless otherwise stated, for the convenience of the reader the translations of euros into US dollars appearing in this report have been made based on the closing rate
Annual Report 2012      239
17 Investor Relations 17.1 - 17.2
on December 31, 2012 (USD 1 = EUR 0.7582). This rate is not materially different from the Noon Buying Rate on such date (USD 1 = EUR 0.7584).
The following table sets out the exchange rate for US dollars into euros applicable for translation of Philips’ financial statements for the periods specified.
         EUR per USD
   period end    average    high    low
2007
   0.6790       0.7272       0.7694       0.6756
2008
   0.7096       0.6832       0.7740       0.6355
2009
   0.6945       0.7170       0.7853       0.6634
2010
   0.7485       0.7540       0.8188       0.7036
2011
   0.7728       0.7192       0.7728       0.6721
2012
   0.7582       0.7776       0.8166       0.7500
17.2 Share information
Market capitalization
Philips’ market capitalization was EUR 18.2 billion at year-end 2012. The highest closing price for Philips’ shares during 2012 in Amsterdam was EUR 20.33 on December 11, 2012 and the lowest was EUR 13.76 on April 11, 2012. The highest closing price for Philips’ shares during 2012 in New York was USD 26.81 on December 20, 2012 and the lowest was USD 17.32 on June 1, 2012.
Market capitalization
in billions of euros
¹⁾
The year 2008 mainly reflects our shareholding in LG Display which was exited in 2009
Share capital structure
During 2012, Philips’ issued share capital decreased by approximately 52 million common shares to a level of 957 million common shares. The main reasons for this are the cancellation of 82,364,590 Philips shares acquired pursuant to the EUR 2 billion share repurchase program and the elective dividend, resulting in the issue of 30,522,107 new common shares. The basic shares outstanding decreased from 926 million at the end of December 2011 to 915 million at the end of 2012. As of December 31, 2012, the shares held in treasury amounted to 42.5 million shares, of which 28.7 million are held by Philips to cover long-term incentive and employee stock purchase plans.
The Dutch Financial Markets Supervision Act (Wet op het financieel toezicht) imposes a duty to disclose percentage holdings in the capital and/or voting rights in the Company when such holding reaches, exceeds or falls below 5%, 10%, 15%, 20%, 25%, 30%, 40%, 50%, 60%, 75% and 95%. Such disclosure must be made to the Netherlands Authority for the Financial Markets (AFM) without delay. The AFM then notifies the Company.
240      Annual Report 2012
17 Investor Relations 17.2 - 17.2
On May 2, 2012, the Company received notification from the AFM that it had received disclosures under the Financial Markets Supervision Act of a substantial holding of 5.42% by Barclays Plc in the Company’s common shares. This was reduced to below 5% on May 4, 2012. On June 12, 2012 the Company received notification from the AFM that it had received disclosures under the Financial Markets Supervision Act of a substantial holding of 10.02% by the Company in its own shares. This was reduced to below 5% on September 21, 2012. On November 27, 2012 the Company received notification from the AFM that it had received disclosures under the Financial Markets Supervision Act of a substantial holding of 5.02% by BlackRock, Inc. in the Company’s common shares.
Based on a survey in December 2012 and information provided by several large custodians, the following shareholder portfolio information is included in the graphs Shareholders by region and Shareholders by style.
Shareholders by region (estimated)¹⁾
in %
¹⁾
Split based on identified shares in shareholder identification
Shareholders by style (estimated)¹⁾
in %
¹⁾
Split based on identified shares in shareholder identification
²⁾
SWF: Sovereign Wealth Fund
³⁾
GARP: growth at reasonable price
Share repurchase programs for capital reduction purposes
On July 18, 2011, Philips announced a further EUR 2 billion share repurchase program to be completed within 12 months. Taking into consideration the volatility of the financial markets, it was decided to extend the program through the end of Q2 2013. By the end of 2012, Philips has completed 73% of the EUR 2 billion share buy-back program.
Further details on the share repurchase programs can be found on the Investor Relations website. For more information see chapter 11, Corporate governance, of this report.
Impact of share repurchases on share count
in millions of shares
   2008    2009    2010    2011    2012
Shares issued
   972       972       986       1,009       957
Shares in treasury
   49       45       39       83       42
Shares outstanding
   923       927       947       926       915
Shares repurchased
   146       —         —         48       47
Shares cancelled
   170       —         —         —         82
A total of 42,541,687 shares were held in treasury by the Company at December 31, 2012 (2011: 82,880,543 shares). As of that date, a total of 52,289,603 rights to acquire shares (under convertible personnel debentures, share rights programs and stock options) were outstanding (2011: 47,142,041).
Annual Report 2012      241
17 Investor Relations 17.2 - 17.3
Period    total number of shares
purchased
average price paid per share
in EUR
   total number of shares
purchased as part of publicly
announced programs    maximum EUR amount of
shares that may yet be
purchased under the
programs
January, 2012
   3,004,358       15.22       3,004,358       1,254,459,971
February, 2012
   3,849,302       15.68       3,849,302       1,194,096,499
March, 2012
   3,757,005       15.44       3,757,005       1,136,078,795
April, 2012
   2,421,544       14.55       2,421,544       1,100,844,958
May, 2012
   8,222,700       14.39       8,222,700       982,487,277
June, 2012
   6,738,465       14.60       6,736,989       884,137,601
July, 2012
   2,970,187       16.45       2,968,778       835,297,403
August, 2012
   2,413,941       18.47       2,413,941       790,700,971
September, 2012
   3,051,738       18.82       3,050,133       733,305,045
October, 2012
   5,369,200       18.78       5,369,000       632,473,872
November, 2012
   2,718,375       19.88       2,717,918       578,439,218
December, 2012
   2,353,817       20.06       2,353,817       531,215,106
17.3 Philips’ rating
Philips’ existing long-term debt is rated A3 (with negative outlook) by Moody’s and A- (with negative outlook) by Standard & Poor’s. It is Philips’ objective to manage its financial ratios to be in line with an A3/A- rating. There is no assurance that Philips will be able to achieve this goal. Ratings are subject to change at any time. Outstanding long-term bonds and credit facilities do not have a repetitive material adverse change clause, financial covenants or credit rating-related acceleration possibilities.
Credit rating summary
long-term short-term outlook
Standard and Poor’s
A- A-2 Negative ¹⁾
Moody’s
A3 P-2 Negative ²⁾
¹⁾
On February 3, 2012, Standard and Poor’s decided to change their outlook from stable to negative
²⁾
On February 3, 2012, Moody’s decided to change their outlook from stable to negative
242      Annual Report 2012
17 Investor Relations 17.4 - 17.4
17.4 Performance in relation to market indices
The Common Shares of the Company are listed on the stock market of Euronext Amsterdam. The New York Registry Shares of the Company, representing Common Shares of the Company, are listed on the New York Stock Exchange. The principal market for the Common Shares is Euronext Amsterdam. For the New York Registry Shares is the New York Stock Exchange.
The following table shows the high and low closing sales prices of the Common Shares on the stock market of Euronext Amsterdam as reported in the Official Price List and the high and low closing sales prices of the New York Registry Shares on the New York Stock Exchange:
      Euronext Amsterdam (EUR)    New York stock exchange (USD)
      high    low    high    low
2008
      28.94       12.09       42.34       14.79
2009
   1st quarter    16.05       10.95       20.78       13.98
   2nd quarter    14.77       11.52       20.30       15.45
   3rd quarter    17.65       12.59       25.82       17.52
   4th quarter    21.03       15.79       30.19       22.89
2010
   1st quarter    25.28       20.34       33.48       28.26
   2nd quarter    26.94       22.83       35.90       28.09
   3rd quarter    26.23       21.32       33.32       26.84
   4th quarter    24.19       20.79       33.90       27.10
2011
   1st quarter    25.34       21.73       33.81       29.81
   2nd quarter    22.84       16.33       32.44       23.36
   3rd quarter    17.84       12.23       25.74       16.87
   4th quarter    16.28       12.77       22.54       17.22
2012
   1st quarter    16.56       14.48       21.51       18.34
   2nd quarter    15.57       13.76       20.26       17.32
   3rd quarter    19.49       15.51       24.89       19.11
   4th quarter    20.33       18.27       26.81       23.52
August, 2012
      18.86       18.09       23.30       22.00
September, 2012
      19.49       18.16       24.89       22.99
October, 2012
      20.11       18.27       26.23       23.52
November, 2012
      20.21       19.47       26.01       24.80
December, 2012
      20.33       19.83       26.81       25.91
January, 2013
      23.13       20.26       31.16       26.54
Annual Report 2012      243
17 Investor Relations 17.4 - 17.4
Euronext Amsterdam
Share price development in Amsterdam
in euros
PHIA    Jan    Feb    Mar    Apr    May    Jun    Jul    Aug    Sep    Oct    Nov    Dec
2012

High
   16.56       16.42       16.26       15.32       15.26       15.57       17.90       18.86       19.49       20.11       20.21       20.33
Low
   14.48       15.45       14.95       13.76       14.00       13.87       15.51       18.09       18.16       18.27       19.47       19.83
Average
   15.31       15.80       15.55       14.51       14.49       14.67       16.47       18.46       18.80       18.95       19.95       20.05
Average daily volume¹⁾
   6.77       5.53       5.54       8.05       6.91       6.10       6.15       4.68       5.60       4.97       4.89       3.88
2011

High
   25.34       23.83       23.98       22.84       20.70       19.05       17.84       16.99       14.49       15.73       15.37       16.28
Low
   22.77       22.49       21.73       20.02       19.01       16.33       16.91       13.28       12.23       12.77       13.38       14.64
Average
   23.91       23.22       22.86       21.07       19.86       17.71       17.45       14.50       13.17       14.55       14.27       15.32
Average daily volume¹⁾
   10.64       6.53       8.30       9.23       8.54       12.10       8.45       12.08       10.75       8.06       7.10       5.76
New York Stock Exchange
Share price development in New York
in US dollars
PHG    Jan    Feb    Mar    Apr    May    Jun    Jul    Aug    Sep    Oct    Nov    Dec
2012

High
   21.47       21.36       21.51       20.26       20.00       19.67       22.11       23.30       24.89       26.23       26.01       26.81
Low
   18.34       20.24       19.58       17.98       17.68       17.32       19.11       22.00       22.99       23.52       24.80       25.91
Average
   19.73       20.85       20.57       19.10       18.53       18.41       20.26       22.84       24.20       24.48       25.51       26.27
Average daily volume¹⁾
   1.64       0.93       1.32       1.80       1.03       0.83       0.63       0.54       0.82       0.64       0.77       0.62
2011

High
   33.81       32.70       33.32       32.44       30.53       27.15       25.74       24.20       20.58       22.54       21.35       20.95
Low
   29.81       30.99       29.94       29.27       26.79       23.36       23.79       18.94       16.87       17.22       17.59       18.90
Average
   31.93       31.75       32.01       30.49       28.47       25.49       24.92       20.81       18.19       20.03       19.37       20.13
Average daily volume¹⁾
   1.31       0.72       0.86       0.88       0.96       2.45       1.56       2.04       2.17       2.07       1.79       1.48
¹⁾
In millions of shares
244      Annual Report 2012
17 Investor Relations 17.4 - 17.4
5-year relative performance: Philips and AEX
base 100 = Dec 31, 2007
5-year relative performance: Philips and unweighted
TSR peer group indexbase 100 = Dec 31, 2007
3M, Electrolux, Emerson, GE, Hitachi, Honeywell, Johnson & Johnson, Panasonic, Schneider, Siemens, Toshiba,
5-year relative performance: Philips and Dow Jones
base 100 = Dec 31, 2007
Share listings
Amsterdam, New York
Ticker code
PHIA, PHG
No. of shares issued at Dec. 31, 2012
EUR 957 million
No. of shares outstanding issued at Dec. 31, 2012
EUR 915 million
Market capitalization at year-end 2012
EUR 18.2 billion
Industry classification
MSCI: Capital Goods
20105010
ICB: Diversified Industrials¹⁾
2727
Members of indices
AEX, NYSE, DJSI, and others
¹⁾
The change of ICB classification took place on June 18, 2012
Annual Report 2012      245
17 Investor Relations 17.5 - 17.5
17.5 Philips’ acquisitions
Philips made no announcements of acquisitions in 2012.
Acquisitions 2011 / Announcement dates
January 5, 2011
Optimum Lighting, LLC Professional Luminaires Expand portfolio with customized energy-efficient lighting solutions
January 20, 2011
Preethi¹⁾ Domestic Appliances Become a leading kitchen appliances company in India
March 9, 2011
Dameca A/S Patient Care & Clinical
Informatics Expand portfolio with integrated, advanced anesthesia care solutions
June 20, 2011
AllParts Medical Customer Services Expand capabilities in imaging equipment services, strengthening Philips’ Multi-Vendor Services business
June 27, 2011
Sectra Mamea AB²⁾ Imaging Systems Expand Women’s Healthcare portfolio with a unique digital mammography solution in terms of radiation dose
June 29, 2011
Indal Group Professional Luminaires Strengthen leading position in professional lighting within Europe
July 11, 2011
Povos Electric Appliance (Shanghai) Co., Ltd.²⁾ Domestic Appliances Expand product portfolio in China and continue to build business creation capabilities in growth geographies
¹⁾
Asset transaction
²⁾
Combined asset transaction / share transaction
Acquisitions 2010 / Announcement dates
February 11, 2010
Luceplan Consumer Luminaires Iconic brand in the premium design segment for residential applications
February 24, 2010
Somnolyzer¹⁾ Home Healthcare Somnolyzer 24x7 automated-scoring solution that can improve the productivity of sleep centers
March 26, 2010
Tecso Patient Care &
Clinical Informatics Strengthen clinical informatics portfolio with leading Brazilian provider of Radiology Information Systems (RIS)
July 13, 2010
Street Light Control Portfolio¹⁾ Lighting Electronics Strengthen outdoor lighting portfolio with acquisition control portfolio. Street Lighting controls activities of Amplex A/S
July 28, 2010
Apex Imaging Systems Strengthen portfolio of high-quality transducers aimed at the value segment in emerging markets
August 2, 2010
CDP Medical¹⁾ Patient Care &
Clinical Informatics Expand clinical informatics portfolio in high-growth markets in the area of PACS
August 20, 2010
Burton Professional
Luminaires Expand portfolio with leading provider of specialized lighting solutions for healthcare facilities
September 13, 2010
Wheb Sistemas Patient Care &
Clinical Informatics Strengthen clinical informatics portfolio with a leading Brazilian provider of clinical information systems
October 11, 2010
Discus Health & Wellness Expand oral healthcare portfolio with leading manufacturer of professional tooth whitening products
December 6, 2010
NCW Professional
Luminaires Expand global leadership position of professional lighting entertainment solutions
January 6, 2011
medSage Technologies¹⁾ Home Healthcare Strengthen portfolio by becoming a leading provider of patient interaction and management applications
¹⁾
Asset transaction
246      Annual Report 2012
17 Investor Relations 17.6 - 17.7
17.6 Financial calendar
Financial calendar
Annual General Meeting of Shareholders
Record date Annual General Meeting of Shareholders
April 5, 2013
Annual General Meeting of Shareholders
May 3, 2013
Quarterly reports 2013
First quarterly report 2013
April 22, 2013
Second quarterly report 2013
July 22, 2013
Third quarterly report 2013
October 21, 2013
Fourth quarterly report 2013
January 28, 2014¹⁾
Capital Markets Days 2013
Capital Markets Day (Healthcare)
March 19, 2013
Capital Markets Day (Consumer Lifestyle and Lighting)
September 17, 2013
¹⁾
Subject to final confirmation
17.7 Investor contact
Shareholder services
Holders of shares listed on Euronext
Philips offers a dynamic print manager that facilitates the creation of a customized PDF. Non-US shareholders and other non-US interested parties can make inquiries about the Annual Report 2012 to:
Royal Philips Electronics
Annual Report Office
Breitner Center, HBT 14
P.O. Box 77900
1070 MX Amsterdam, Netherlands
E-mail:annual.report@philips.com
Communications concerning share transfers, lost certificates, dividends and change of address should be directed to:
ABN AMRO Bank N.V.
Department Equity Capital Markets/Corporate Broking HQ7050
Gustav Mahlerlaan 10, 1082 PP Amsterdam, Netherlands
Telephone: +31-20-34 42000
Fax: +31-20-62 88481
Holders of New York Registry shares
Philips offers a dynamic print manager that facilitates the creation of a customized PDF. Holders of New York Registry shares and other interested parties in the US can make inquiries about the Annual Report 2012 to:
Citibank Shareholder Service
P.O. Box 43077 Providence, Rhode Island 02940-3077
Telephone: 1-877-CITI-ADR (toll-free)
Telephone: 1-781-575-4555 (outside of US)
Fax: 1-201-324-3284
Website: www.citi.com/dr
E-mail:citibank@shareholders-online.com
Communications concerning share transfers, lost certificates, dividends and change of address should be directed to Citibank. The Annual Report on Form 20-F is filed electronically with the US Securities and Exchange Commission.
International direct investment program
Philips offers a dividend reinvestment and direct stock purchase plan designed for the US market. This program provides existing shareholders and interested investors
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17 Investor Relations 17.7 - 7.7
with an economical and convenient way to purchase and sell Philips New York Registry shares and to reinvest cash dividends. Philips does not administer or sponsor the program and assumes no obligation or liability for the operation of the plan. For further information on this program and for enrollment forms, contact:
Citibank Shareholder Service
Telephone: 1-877-248-4237 (1-877-CITI-ADR)
Monday through Friday 8:30 AM EST
through 6:00 PM EST
Website www.citi.com/dr
or by writing to:
Citibank Shareholder Service
International Direct Investment Program
P.O. Box 2502, Jersey City, NJ 07303-2502
Shareholders Communication Channel
Philips is continually striving to improve relations with its shareholders. For instance, Philips was one of the key companies involved in the establishment of the Shareholders Communication Channel, a project of Euronext Amsterdam, banks in the Netherlands and several major Dutch companies to simplify contacts between participating companies and their shareholders.
Philips will use the Shareholders Communication Channel to distribute the Agenda for this year’s Annual General Meeting of Shareholders as well as an instruction form to enable proxy voting at that meeting.
For the Annual General Meeting of Shareholders on May 3, 2013, a record date of April 5, 2013, will apply. Those persons who on April 5, 2013 hold shares in the Company and are registered as such in one of the registers designated by the Board of Management for the Annual General Meeting of Shareholders will be entitled to participate in and vote at the meeting.
Investor relations activities
From time to time the Company engages in communications with investors via road shows, one-on-one meetings, group meetings, broker conferences and capital markets days. The purpose of these meetings is to inform the market on the results, strategy and decisions made, as well as to receive feedback from our shareholders. Also, the Company engages in bilateral communications with investors. These communications take place either at the initiative of the Company or at the initiative of individual investors. During these communications the Company is generally represented by its Investor Relations department. However, on a limited number of occasions the Investor Relations department is accompanied by one or more members of the Board of Management. The subject matter of the bilateral communications ranges from individual queries from investors to more elaborate discussions following disclosures that the Company has made such as its annual and quarterly reports. The Company is strict in its compliance with applicable rules and regulations on fair and non-selective disclosure and equal treatment of shareholders.
More information on the activities of Investor Relations can be found in chapter 11, Corporate governance, of this report.
Analysts’ coverage
Philips is covered by approximately 36 analysts who frequently issue reports on the company.
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17 Investor Relations 17.7 - 17.8
How to reach us
Investor Relations contact
Royal Philips Electronics
Breitner Center, HBT 14
P.O. Box 77900
1070 MX Amsterdam, Netherlands
Telephone: +31-20-59 77221
Website: www.philips.com/investor
E-mail:investor.relations@philips.com
Abhijit Bhattacharya
Executive Vice President – Investor Relations
Telephone: +31-20-59 77222
Vanessa Bruinsma-Kleijkers
Manager – Investor Relations
Telephone: +31-20-59 77447
The registered office of Royal Philips Electronics is
High Tech Campus 5
5656 AE Eindhoven, Netherlands
Switch board, telephone: +31-40-27 91111
Sustainability contact
Philips Corporate Sustainability Office
High Tech Campus 5 (room 2.56)
5656 AE Eindhoven, Netherlands
Telephone: +31-40-27 83651
Fax: +31-40-27 86161
Website: www.philips.com/sustainability
E-mail:philips.sustainability@philips.com
Corporate Communications contact
Royal Philips Electronics
Breitner Center, HBT 19
P.O. Box 77900
1070 MX Amsterdam, Netherlands
Telephone: +31-20-59 77411
E-mail:corporate.communications@philips.com
17.8 Taxation
Netherlands Taxation
The statements below are only a general summary of certain material Dutch tax consequences for holders of Common Shares that are non-residents of the Netherlands based on present Netherlands tax laws and the Tax Convention of December 18, 1992, as amended by the protocol that entered into force on December 28, 2004, between the United States of America and the Kingdom of the Netherlands (the U.S. 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 the 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 the Common Shares and this income received or capital gains derived are attributable to past, present or future employment activities of such holder, the income of which is taxable in the Netherlands, the Dutch tax position is not discussed in this summary.
Dividend withholding tax
In general, a distribution to shareholders by a company resident in the Netherlands (such as the Company) is subject to a withholding tax imposed by the Netherlands at a rate of 15%. Share dividends paid out of the Company’s paid-in share premium recognized for Netherlands tax purposes are not subject to the above mentioned withholding tax. Share dividends paid out of the Company’s retained earnings are subject to dividend withholding tax on the nominal value of the shares issued. Pursuant to the provisions of the U.S. Tax Treaty, a reduced rate may be applicable in respect of dividends paid by the Company to a beneficial owner holding directly 10% or more of the voting power of the Company, if such owner is a resident of the United States (as defined in the U.S. Tax Treaty) and entitled to the benefits of the U.S. 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 wholly or partly benefits from the dividends; (ii) whereby such other person retains, directly or indirectly, an interest similar to that in the Common Shares on which
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17 Investor Relations 17.8 - 17.8
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 U.S. 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 available; such exempt US organizations should apply for a refund of the 15% withholding tax withheld.
The Company may, with respect to certain dividends received from qualifying non-Netherlands subsidiaries, credit taxes withheld from those dividends against the Netherlands withholding tax imposed on certain qualifying dividends that are redistributed by the Company, up to a maximum of the lesser of:
3% of the amount of qualifying dividends redistributed by the Company; and
3% of the gross amount of certain qualifying dividends received by the Company.
The reduction is applied to the Dutch dividend withholding tax that the Company must pay to the Dutch tax authorities and not to the Dutch dividend withholding tax that the Company must withhold.
Income and capital gains
Income and capital gains derived from the Common Shares by a non-resident individual or non-resident corporate shareholder are generally not subject to Dutch income or corporation tax, unless (i) such income and gains are attributable to a (deemed) permanent establishment or (deemed) permanent representative in the Netherlands of the shareholder; or (ii) the shareholder is entitled to a share in the profits of an enterprise or (in 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 a company (such substantial participation not being a business asset), and, in the case of a non-resident corporate shareholder only, it being held with the primary aim or one of the primary aims to avoid the levy of income tax or dividend withholding tax from another person; or (iv) in 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, while the profits of such shareholder are taxable in the Netherlands pursuant to article 17(3)(c) of the Dutch Corporate Income Tax Act 1969; or (v) in case of a non-resident individual, (a) 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 ordinary shares that exceed regular portfolio management; or (b) such individual has elected to be treated as a Dutch resident.
In general, a holder of Common Shares has a substantial participation if he holds either directly or indirectly and either independently or jointly with his partner (as defined in the Dutch Income Tax Act 2001), the ownership of, or certain other rights over, at least 5% of the total issued share capital or total issued particular class of shares of the Company or rights to acquire shares, whether or not already issued, that represent at any time 5% or more of the total issued capital (or the total issued particular class of shares) or the ownership of certain profit participating certificates that relate to 5% or more of the annual profit or to 5% or more of the liquidation proceeds. A shareholder will also have a substantial participation in the Company if one or more of certain relatives of the shareholder hold a substantial participation in the Company. A deemed substantial participation amongst others exists if (part of) a substantial participation has been disposed of, or is deemed to have been disposed of, on a non-recognition basis.
Estate and gift taxes
No estate, inheritance or gift taxes are imposed by the Netherlands on the transfer or deemed transfer of Common Shares by way of gift by or on the death of a shareholder if, at the time of the death of the shareholder or the gift of the Common Shares (as the case may be), such shareholder is not a resident of the Netherlands.
Inheritance or gift taxes (as the case may be) are due, however, if such shareholder:
has Dutch nationality and has been a resident of the Netherlands at any time during the ten years preceding the time of the death or gift; or
250      Annual Report 2012
17 Investor Relations 17.8 - 17.8
has no Dutch nationality but has been a resident of the Netherlands at any time during the twelve months preceding the time of the gift (for Netherlands gift taxes only)
United States Federal Taxation
This section describes the material United States federal income tax consequences to a US holder (as defined below) of owning Common Shares. It applies only if the Common Shares are held as capital assets for tax purposes. This section does not apply to a member of a special class of holders subject to special rules, including:
a dealer in securities,
a trader in securities that elects to use a mark-to-market method of accounting for securities holdings,
a tax-exempt organization,
a life insurance company,
a person liable for alternative minimum tax,
a person that actually or constructively owns 10% or more of our voting stock,
a person that holds Common Shares as part of a straddle or a hedging or conversion transaction,
a person that purchases or sells Common Shares as part of a wash sale for tax purposes, or
a person whose functional currency is not the US dollar.
This section is based on the Internal Revenue Code of 1986, as amended, its legislative history, existing and proposed regulations, published rulings and court decisions, all as currently in effect, as well as on the U.S. Tax Treaty. These laws and regulations are subject to change, possibly on a retroactive basis.
If a partnership 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:
a citizen or resident of the United States,
a domestic corporation,
an estate whose income is subject to United States federal income tax regardless of its source, or
a trust if a United States court can exercise primary supervision over the trust’s administration and one or more United States persons are authorized to control all substantial decisions of the trust.
A US holder should consult its own tax advisor regarding the United States federal, state and local and other tax consequences of owning and disposing of Common Shares in its particular circumstances.
This discussion addresses only United States federal income taxation.
Taxation of Dividends
Under the United States federal income tax laws, the gross amount of any dividend paid out of our current or accumulated earnings and profits (as determined for United States federal income tax purposes) 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 a maximum tax rate of 20% 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 meets other holding period requirements. Dividends paid with respect to the Common Shares generally will be qualified dividend income¹⁾. 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. 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 is includible in its income, 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 income 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.
Subject to certain limitations, the Dutch tax withheld in accordance with the U.S. Tax Treaty and paid over to the Netherlands will be creditable or deductible against a US
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17 Investor Relations 17.8 - 17.8
holder’s United States federal income tax liability. Special rules apply in determining the foreign tax credit limitation with respect to dividends that are subject to the maximum 20% tax rate. To the extent a refund of the tax withheld is available under Dutch law, or under the U.S. Tax Treaty, the amount of tax withheld that is refundable will not be eligible for credit against United States federal income tax liability. Dividends will be income from sources outside the United States, and depending on a holder’s circumstances, will generally be either “passive” or “general” income for purposes of computing the foreign tax credit allowable to the holder.
Taxation of Capital Gains
A US holder that sells or otherwise disposes of its Common Shares will recognize capital gain or loss for United States federal income tax purposes equal to the difference between the US dollar value of the amount that it realizes and its tax basis, determined in US dollars, in its Common Shares. Capital gain of a non-corporate US holder is generally taxed at a maximum tax rate of 20% where the holder has a holding period greater than one year²⁾. The gain or loss will generally be income or loss from sources within the United States for foreign tax credit limitation purposes.
PFIC Rules
We do not believe that the Common Shares will be treated as stock of a passive foreign investment company, or PFIC, for United States federal income tax purposes, but this conclusion is a factual determination that is made annually and thus is subject to change. If we are treated as a PFIC, unless a US holder elects to be taxed annually on a mark-to-market basis with respect to the Common Shares, gain realized on the sale or other disposition of the Common Shares would in general not be treated as capital gain. Instead a US holder would 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.
1) In addition, a US holder that is an individual or estate, or a trust that does not fall into a special class of trusts that is exempt from such tax, will be subject to a 3.8% tax on the lesser of (1) the US holder’s “net investment income” for the relevant taxable year and (2) the excess of the US holder’s modified adjusted gross income for the taxable year over a certain threshold (the “Medicare tax”). A US holder’s net investment income will generally include its dividend income.
2) In addition, the gain or loss will generally be included in a US holder’s net investment income, which may be subject to a 3.8% tax as described in the discussion of the Medicare tax under the heading “– Taxation of Dividends.”
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17 Investor Relations 17.9 - 17.9
17.9 New York Registry Shares
Fees and Charges Payable by a Holder of New York Registry Shares
Citibank, N.A. as the US registrar, transfer agent, paying agent and shareholder servicing agent (“Agent”) under Philips’ New York Registry Share program (the “Program”), collects fees for delivery and surrender of New York Registry Shares directly from investors depositing ordinary shares or surrendering New York Registry Shares for the purpose of withdrawal or from intermediaries acting for them. The Agent collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of the distributable property to pay the fees.
The charges of the Agent payable by investors are as follows:
The New York Transfer Agent charges shareholders a fee of up to USD 5.00 per 100 shares for the exchange of New York Registry shares for ordinary shares and vice versa.
Fees and Payments made by the Agent to Philips
The Agent has agreed to reimburse certain expenses of Philips related to the Program and incurred by Philips in connection with the Program. In the year ended December 31, 2012 the Agent reimbursed to Philips, or paid amounts on Philips behalf to third parties, a total sum of EUR 502,298.
The table below sets forth the types of expenses that the Agent has agreed to reimburse and the amounts reimbursed in the year ended December 31, 2012:
Category of Expense Reimbursed to Philips
in euros
amount Reimbursed in the year ended December 31, 2012
Program related expenses such as investor relations activities, legal fees and New York Stock Exchange listing fees
73,256
A portion of the issuance and cancellation fees actually received by the Agent from holders of New York Registry Shares, net of Program-related expenses already reimbursed by the Agent to Philips.
429,042 ¹⁾
Total
502,298
¹⁾
Translated at USD/EUR exchange rate of actual date(s) of reimbursement(s) during 2012
The Agent has also agreed to waive certain fees for standard costs associated with the administration of the program.
The table below sets forth those expenses that the Agent paid directly to third parties in the year ended December 31, 2012.
Category of Expense paid directly to third parties
in euros
amount in the year ended December 31, 2012
Reimbursement of Settlement Infrastructure Fees
7,000
Reimbursement of Proxy Process expenses
7,043
Reimbursement of Legal Fee expenses
1,945
NYSE Listing Fee
57,248
Fullfillment
20
Total
73,256
Under certain circumstances, including removal of the Agent or termination of the Program by Philips, Philips is required to repay the Agent certain amounts reimbursed and/or expenses paid to or on behalf of Philips.
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18 Definitions and abbreviations 18 - 18
18 Definitions and abbreviations
Definitions of key terms (including abbreviations)
BMC
Business Market Combination - As a diversified technology group, Philips has a wide portfolio of categories/business innovation units which are grouped in business groups based primarily on technology or customer needs. Philips has physical market presence in over 100 countries, which are grouped into 17 market clusters. Our primary operating modus is the Business Market matrix comprising Business Groups and Markets. These Business Market Combinations (BMCs) drive business performance on a granular level at which plans are agreed between global businesses and local market teams.
Brominated flame retardants (BFR)
Brominated flame retardants are a group of chemicals that have an inhibitory effect on the ignition of combustible organic materials. Of the commercialized chemical flame retardants, the brominated variety are most widely used.
CAGR
Compound Annual Growth Rate.
Carbon dioxide (CO₂)
Carbon dioxide (chemical formula CO₂) is a chemical compound composed of two oxygen atoms covalently bonded to a single carbon atom. It is a gas at standard temperature and pressure and exists in the Earth’s atmosphere in this state. CO₂ is a trace gas comprising 0.039% of the atmosphere.
CO₂-equivalent
CO₂-equivalent or carbon dioxide equivalent is a quantity that describes, for a given mixture and amount of greenhouse gas, the amount of CO₂ that would have the same global warming potential (GWP), when measured over a specified timescale (generally 100 years).
Cash flow before financing activities
The cash flow before financing activities is the sum of net cash flow from operating activities and net cash flow from investing activities.
Chlorofluorocarbon (CFC)
A chlorofluorocarbon is an organic compound that contains carbon, chlorine and fluorine, produced as a volatile derivative of methane and ethane. CFCs were originally developed as refrigerants during the 1930s.
Comparable sales
Comparable sales exclude the effect of currency movements and acquisitions and divestments (changes in consolidation). Philips believes that comparable sales information enhances understanding of sales performance.
Continuing net income
This equals recurring net income from continuing operations, or net income excluding discontinued operations and excluding material non-recurring items.
Dividend yield
The dividend yield is the annual dividend payment divided by Philips’ market capitalization. All references to dividend yield are as of December 31 of the previous year.
EBITA
Earnings before interest, tax and amortization (EBITA) represents income from continuing operations excluding results attributable to non-controlling interest holders, results relating to investments in associates, income taxes, financial income and expenses, amortization and impairment on intangible assets (excluding software and capitalized development expenses). Philips believes that EBITA information makes the underlying performance of its businesses more transparent by factoring out the amortization of these intangible assets, which arises when acquisitions are consolidated. In our Annual Report on form 20-F this definition is referred to as Adjusted IFO.
EBITA per common share
EBITA divided by the weighted average number of shares outstanding (basic). The same principle is used for the definition of net income per common share, replacing EBITA.
Electronic Industry Citizenship Coalition (EICC)
The Electronic Industry Citizenship Coalition 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 40 global companies and their suppliers.
Employee Engagement Index (EEI)
The Employee Engagement Index (EEI) is the single measure of the overall level of employee engagement at Philips. It is a combination of perceptions and attitudes related to employee satisfaction, commitment and advocacy.
Energy-using Products (EuP)
An energy-using product is a product that uses, generates, transfers or measures energy (electricity, gas, fossil fuel). Examples are boilers, computers, televisions, transformers, industrial fans, industrial furnaces etc.
Free cash flow
Free cash flow is the net cash flow from operating activities minus net capital expenditures.
Full-time equivalent employee (FTE)
Full-time equivalent is a way to measure a worker’s involvement in a project. An FTE of 1.0 means that the person is equivalent to a full-time worker, while an FTE of 0.5 signals that the worker is only half-time.
Global Reporting Initiative (GRI)
The Global Reporting Initiative (GRI) is a network-based organization that pioneered the world’s most widely used sustainability reporting framework. GRI is committed to the framework’s continuous improvement and application worldwide. GRI’s core goals include the mainstreaming of disclosure on environmental, social and governance performance.
Green Innovation
Green Innovation comprise all R&D activities directly contributing to the development of Green Products or Green Technologies.
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18 Definitions and abbreviations 18 -18
Green Products
Green Products offer a significant environmental improvement in one or more Green Focal Areas: Energy efficiency, Packaging, Hazardous substances, Weight, Recycling and disposal and Lifetime reliability. The life cycle approach is used to determine a product’s overall environmental improvement. It calculates the environmental impact of a product over its total life cycle (raw materials, manufacturing, product use and disposal).
Green Products need to prove leadership in at least one Green Focal Area compared to industry standards, which is defined by a sector 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%, outperforming product specific eco-requirements or by being awarded with a recognized eco-performance label. Because of different product portfolios, sectors have specified additional criteria for Green Products, including product specific minimum requirements where relevant.
Growth geographies
Growth geographies are the developing geographies comprising of Asia Pacific (excluding Japan, South Korea, Australia and New Zealand), Latin America, Central & Eastern Europe, the Middle East (excluding Israel) and Africa.
Hydrochlorofluorocarbon (HCFC)
Hydrochlorofluorocarbon is a fluorocarbon that is replacing chlorofluorocarbon as a refrigerant and propellant in aerosol cans.
Income as % of shareholders’ equity (ROE)
This ratio measures income from continuing operations as a percentage of average shareholders’ equity. ROE rates Philips’ overall profitability by evaluating how much profit the company generates with the money shareholders have invested.
Income from continuing operations
Net income from continuing operations, or net income excluding discontinued operations.
Initiatief Duurzame Handel (IDH)
IDH is the Dutch Sustainable Trade Initiative. It brings together government, frontrunner companies, civil society organizations and labor unions to accelerate and up-scale sustainable trade in mainstream commodity markets from the emerging countries to Western Europe.
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International Standardization Organization (ISO)
The International Standardization Organization (ISO)is the world’s largest developer and publisher of International Standards. ISO is a network of the national standards institutes of more than 160 countries, one member per country, with a Central Secretariat in Geneva, Switzerland, that coordinates the system. ISO is a ~~non- governmental~~nongovernmental organization that forms a bridge between the public and private sectors.
Light-Emitting Diode (LED)
Light-Emitting Diode (LED), in electronics, is a semiconductor device that emits infrared or visible light when charged with an electric current. Visible LEDs are used in many electronic devices as indicator lamps, in automobiles as rear-window and brake lights, and on billboards and signs as alphanumeric displays or even full-color posters. Infrared LEDs are employed in autofocus cameras and television remote controls and also as light sources in fiber-optic telecommunication systems.
Lives improved by Philips
To calculate how many lives we are improving, market intelligence and statistical data on the number of people touched by the products contributing to the social or ecological dimension over the lifetime of a product are multiplied by the number of those products delivered in a year. After elimination of double counts – multiple different product touches per individual are only counted once – the number of lives improved by our innovative solutions is calculated. In 2012 we established our baseline at 1.7 billion a year.
Mature geographies
Mature geographies are the highly developed markets comprising of Western Europe, North America, Japan, South Korea, Israel, Australia and New Zealand.
Millennium Development Goals (MDG)
Adopted by world leaders in the year 2000 and set to be achieved by 2015, the Millennium Development Goals (MDGs) provide concrete, numerical benchmarks for tackling extreme poverty in its many dimensions. The MDGs also provide a framework for the entire international community to work together towards a common end – making sure that human development reaches everyone, everywhere. Goals include for example eradicating extreme poverty and hunger, achieving universal primary education and ensuring environmental sustainability.
Net debt : group equity ratio
The % distribution of net debt over group equity plus net debt.
~~Net Promoter Score (NPS)~~
The Net Promoter Score is a tool to measure the loyalty of Philips’ customers to its products. It is measured through one question: “Based on your experience with this product, how likely are you to recommend your Philips product to a friend, relative or colleague?” Philips categorizes the answers as ‘Promoters’, ‘Passives’ or ‘Detractors’. The NPS is measured by deducting the percentage of Detractors (score 0 to 6) from the percentage of customers who are Promoters (score 9 to 10).
Non-Governmental Organization (NGO)
A non-governmental organization (NGO) is any non-profit, voluntary citizens’ group which is organized at a local, national or international level.
OEM
Original Equipment Manufacturer.
Operational carbon footprint
A carbon footprint is the total set of greenhouse gas emissions caused by an organization, event, product or person; usually expressed in ~~kilotons CO2-equivalent.~~kilotonnes CO₂-equivalent. The Philips operational carbon footprint is calculated on a half-year basis and includes industrial sites (manufacturing and assembly sites), non-industrial sites (offices, warehouses, IT centers and R&D facilities), business travel (lease and rental cars and airplane travel) and logistics (air, sea and road transport).
Perfluorinated compounds (PFC)
A perfluorinated compound (PFC) is an organofluorine compound with all hydrogens replaced by fluorine on a carbon chain—but the molecule also contains at least one different atom or functional group. PFCs have unique properties to make materials stain, oil, and water resistant, and are widely used in diverse applications. PFCs persist in the environment as persistent organic pollutants, but unlike PCBs, they are not known to degrade by any natural processes due to the strength of the carbon–fluorine bond.
Polyvinyl chloride (PVC)
Polyvinyl chloride, better known as PVC or vinyl, is an inexpensive plastic so versatile it has become completely pervasive in modern society. The list of products made from polyvinyl chloride is exhaustive, ranging from phonograph records to drainage and potable piping, water bottles, cling film, credit cards and toys. More uses include window frames, rain gutters, wall paneling, doors, wallpapers, flooring, garden furniture, binders and even pens.
Productivity
Philips uses Productivity internally and as mentioned in this annual report as a non-financial indicator of efficiency that relates the added value, being income from operations adjusted for certain items such as restructuring and acquisition-related charges etc. plus salaries and wages (including pension costs and other social security and similar charges), depreciation of property, plant and equipment, and amortization of intangibles, to the average number of employees over the past 12 months.
~~Registration, Evaluation, Authorization and Restriction of Chemical substances (REACH)~~
REACH is the European Community Regulation on chemicals and their safe use (EC 1907/2006). It deals with the Registration, Evaluation, Authorisation and Restriction of Chemical substances. The law entered into force on June 1, 2007. The aim of REACH is to improve the protection of human health and the environment through the better and earlier identification of the intrinsic properties of chemical substances.
Regulation on Hazardous Substances (RoHS)
The RoHS Directive prohibits all new electrical and electronic equipment placed on the market in the European Economic Area from containing lead, mercury, cadmium, hexavalent chromium, ~~poly- brominated~~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.
Annual Report 2012      255
18 Definitions and abbreviations 18 -18
Return on equity (ROE)
Income from continuing operations as a % of average shareholders’ equity (calculated on the quarterly balance sheet positions).
Turnover rate of net operating capital
Sales divided by average net operating capital (calculated on the quarterly balance sheet positions).
Waste Electrical and Electronic Equipment (WEEE)
The Waste Electrical and Electronic Equipment Directive (WEEE Directive) is the European Community directive on waste electrical and electronic equipment which became European Law in February 2003, setting collection, recycling and recovery targets for all types of electrical goods. The directive imposes the responsibility for the disposal of waste electrical and electronic equipment on the manufacturers of such equipment.
Weighted Average Statutory Tax Rate (WASTR)
The reconciliation of the effective tax rate is based on the applicable statutory tax rate, which is a weighted average of all applicable jurisdictions. This weighted average statutory tax rate (WASTR) is the aggregation of the result before tax multiplied by the applicable statutory tax rate without adjustment for losses, divided by the group result before tax.

256      Annual Report ~~2011      249~~2012
19 Exhibits ~~19.1~~19 - ~~19.2~~19.1

~~19Exhibits~~19 Exhibits
~~19.1Index~~19.1 Index of exhibits

Exhibit 1 English translation of the Articles of Association of the Company (incorporated by reference to Exhibit 1 of the Company’s Annual Report on Form 20-F for the fiscal year ended December 31, 2008, File No. 001-05146-01).
Exhibit 2 (b) (1) The total amount of long-term debt securities of the Company and its subsidiaries authorized under any one instrument does not exceed 10% of the total assets of Philips and its subsidiaries on a consolidated basis. Philips agrees to furnish copies of any or all such instruments to the Securities and Exchange Commission upon request.
Exhibit 4 Employment contracts of the members of the Board of Management (incorporated by reference to Exhibit 4 of the Company’s Annual Report on Form 20-F for the fiscal year ended December 31, ~~2010,~~2011, File No. 001-05146-01).
Exhibit 4 (a) Employment contract between the Company and F.A. van ~~Houten.~~Houten (incorporated by reference to Exhibit 4 (a) of the Company’s Annual Report on Form 20-F for the fiscal year ended December 31, 2011, File No. 001-05146-01).
Exhibit 4 (b) Employment contract between the Company and R.H. ~~Wirahadiraksa.~~Wirahadiraksa (incorporated by reference to Exhibit 4 (b) of the Company’s Annual Report on Form 20-F for the fiscal year ended December 31, 2011, File No. 001-05146-01).
Exhibit 4 (c) Employment contract between the Company and ~~G.H.A. Dutiné~~P.A.J. Nota (incorporated by reference to Exhibit 4 ~~(c)~~(d) of the Company’s Annual Report on Form 20-F for the fiscal year ended December 31, ~~2010,~~2011, File No. 001-05146-01).
~~Exhibit 4 (d)~~ ~~Employment contract between the Company and P.A.J. Nota.~~
~~Exhibit 4 (e)~~ Employment contract between the Company and S.H. Rusckowski (incorporated by reference to Exhibit 4 (f) of the Company’s Annual Report on Form 20-F for the fiscal year ended December 31, 2010, File No. 001-05146-01).
~~Exhibit 7~~ ~~Ratio of earnings to fixed charges~~
Exhibit 8 List of Subsidiaries.
Exhibit 12 (a) Certification of F.A. van Houten filed pursuant to 17 CFR 240. 13a-14(a).
Exhibit 12 (b) Certification of R.H. Wirahadiraksa filed pursuant to 17 CFR 240. 13a-14(a).
Exhibit 13 (a) Certification of F.A. van Houten furnished pursuant to 17 CFR 240. 13a-14(b).
Exhibit 13 (b) Certification of R.H. Wirahadiraksa furnished pursuant to 17 CFR 240. 13a-14(b).
Exhibit 15 (a) Consent of independent registered public accounting firm.
Exhibit 15 (b) Description of industry terms.

~~250~~      Annual Report ~~2011~~2012      257
19 Exhibits 19.1 - 19.2

~~19.2Signatures~~19.2 Signatures
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
KONINKLIJKE PHILIPS ELECTRONICS N.V.
(Registrant)

/s/ F.A. van Houten    /s/ R.H. Wirahadiraksa
F.A. van Houten    R.H. Wirahadiraksa
(CEO, Chairman of the Board of Management and the Executive Committee)    (Executive Vice-President, Chief Financial Officer, member of the Board of Management and the Executive Committee)
Date: February ~~23, 2012~~25, 2013

258      Annual Report ~~2011      251~~2012
19 Exhibits 19.2 - 19.3

19.3 Exhibits

Exhibit 1    English translation of the Articles of Association of the Company (incorporated by reference to Exhibit 1 of the Company’s Annual Report on Form 20-F for the fiscal year ended December 31, 2008, File No. 001-05146-01).
Exhibit 2 (b) (1)    The total amount of long-term debt securities of the Company and its subsidiaries authorized under any one instrument does not exceed 10% of the total assets of Philips and its subsidiaries on a consolidated basis. Philips agrees to furnish copies of any or all such instruments to the Securities and Exchange Commission upon request.
Exhibit 4    Employment contracts of the members of the Board of Management (incorporated by reference to ~~Exihibit~~Exhibit 4 of the Company’s Annual Report on Form 20-F for the fiscal year ended December 31, ~~2010,~~2011, File No. 001-05146-01).
Exhibit 4 (a)    Employment contract between the Company and F.A. van Houten. (incorporated by reference to Exhibit 4 (a) of the Company’s Annual Report on Form 20-F for the fiscal year ended December 31, 2011, File No. 001-05146-01).
Exhibit 4 (b)    Employment contract between the Company and R.H. Wirahadiraksa. (incorporated by reference to Exhibit 4 (b) of the Company’s Annual Report on Form 20-F for the fiscal year ended December 31, 2011, File No. 001-05146-01).
Exhibit 4 (c)    Employment contract between the Company and ~~G.H.A. Dutiné~~P.A.J. Nota (incorporated by reference to Exhibit 4 ~~(c)~~(d) of the Company’s Annual Report on Form 20-F for the fiscal year ended December 31, ~~2010,~~2011, File No. 001-05146-01).
~~Exhibit 4 (d)~~ ~~Employment contract between the Company and P.A.J. Nota.~~
~~Exhibit 4 (e)~~ Employment contract between the Company and S.H. Rusckowski (incorporated by reference to Exhibit 4 (f) of the Company’s Annual Report on Form 20-F for the fiscal year ended December 31, 2010, File No. 001-05146-01).
~~Exhibit 7~~ ~~Ratio of earnings to fixed charges.~~
Exhibit 8    List of Subsidiaries.
Exhibit 12 (a)    Certification of F.A. van Houten filed pursuant to 17 CFR 240. 13a-14(a).
Exhibit 12 (b)    Certification of R.H. Wirahadiraksa filed pursuant to 17 CFR 240. 13a-14(a).
Exhibit 13 (a)    Certification of F.A. van Houten furnished pursuant to 17 CFR 240. 13a-14(b).
Exhibit 13 (b)    Certification of R.H. Wirahadiraksa furnished pursuant to 17 CFR 240. 13a-14(b).
Exhibit 15 (a)    Consent of independent registered public accounting firm.
Exhibit 15 (b)    Description of industry terms.

~~252~~      Annual Report ~~2011~~2012      259


Title of each class				Name of each exchange on which registered
Common Shares – par value				New York Stock Exchange

Euro (EUR) 0.20 per share


Class		Outstanding at December 31, ~~2011~~2012
Koninklijke Philips Electronics N.V.		957,132,962 shares, including
Common Shares par value EUR 0.20 per share		~~1,008,975,445 shares, including~~ ~~82,880,543~~42,541,687 treasury shares


12	~~Group financial statements~~		~~138~~
~~12.1~~	~~Management’s report on internal control~~		~~138~~
~~12.2~~	~~Reports of the independent auditor~~		~~139~~
~~12.3~~	~~Auditors’ report on internal control over financial reporting~~		~~139~~
~~12.4~~	~~Consolidated statements of income~~		~~140~~
~~12.5~~	~~Consolidated statements of comprehensive income~~		~~141~~
~~12.6~~	~~Consolidated balance sheets~~		~~142~~
~~12.7~~	~~Consolidated statements of cash flows~~		~~144~~
~~12.8~~	~~Consolidated statements of changes in equity~~		~~146~~
~~12.9~~	~~Information by sector and main country~~		~~147~~
~~12.10~~	~~Significant accounting policies~~		~~150~~
~~12.11~~	~~Notes~~		~~158~~

		~~Income from operations~~	~~158~~
		~~Financial income and expenses~~	~~159~~
		~~Income taxes~~	~~160~~
		~~Investments in associates~~	~~163~~
		~~Discontinued operations and other assets classified as held for sale~~	~~163~~
		~~Earnings per share~~	~~165~~
		~~Acquisitions and divestments~~	~~165~~
		~~Property, plant and equipment~~	~~167~~
		~~Goodwill~~	~~168~~
		~~Intangible assets excluding goodwill~~	~~169~~
		~~Non-current receivables~~	~~171~~
		~~Other non-current financial assets~~	~~171~~
		~~Other non-current assets~~	~~171~~
		~~Inventories~~	~~171~~
		~~Current financial assets~~	~~171~~
		~~Other current assets~~	~~172~~
		~~Current receivables~~	~~172~~
		~~Shareholders’ equity~~	~~172~~
		~~Long-term debt and short-term debt~~	~~173~~
		~~Provisions~~	~~174~~
		~~Other non-current liabilities~~	~~176~~
		~~Accrued liabilities~~	~~176~~
		~~Other current liabilities~~	~~176~~
		~~Contractual obligations~~	~~176~~
		~~Contingent liabilities~~	~~177~~
		~~Cash from (used for) derivatives and securities~~	~~179~~
		~~Proceeds from non-current financial assets~~	~~179~~
		~~Assets in lieu of cash from sale of businesses~~	~~179~~
		~~Pensions and other postretirement benefits~~	~~179~~
		~~Share-based compensation~~	~~183~~
		~~Related-party transactions~~	~~186~~
		~~Information on remuneration~~	~~186~~
		~~Fair value of financial assets and liabilities~~	~~191~~
		~~Details of treasury risks~~	~~192~~
		~~Subsequent events~~	~~195~~

~~12.12~~	~~Independent auditors’ report – Group~~		~~196~~

13	~~Company financial statements~~		~~197~~
~~13.1~~	~~Balance sheets before appropriation of results~~		~~198~~
~~13.2~~	~~Statements of income~~		~~199~~
~~13.3~~	~~Statement of changes in equity~~		~~199~~
~~13.4~~	~~Notes~~		~~200~~

		~~Investments in affiliated companies~~	~~200~~
		~~Other non-current financial assets~~	~~200~~
		~~Receivables~~	~~200~~
		~~Shareholders’ equity~~	~~200~~
		~~Long-term debt and short-term debt~~	~~202~~
		~~Other current liabilities~~	~~202~~
		~~Net income~~	~~202~~
		~~Employees~~	~~202~~
		~~Contingent liabilities~~	~~202~~
		~~Audit fees~~	~~202~~
		~~Subsequent events~~	~~202~~

~~13.5~~	~~Independent auditor’s report - Company~~		~~203~~

14	~~Sustainability statements~~		~~204~~
~~14.1~~	~~Economic indicators~~		~~207~~
~~14.2~~	~~EcoVision~~		~~207~~
~~14.3~~	~~Green Manufacturing 2015~~		~~209~~
~~14.4~~	~~Social indicators~~		~~211~~
~~14.5~~	~~General Business Principles~~		~~213~~
~~14.6~~	~~Supplier indicators~~		~~214~~
~~14.7~~	~~Independent assurance report~~		~~218~~
~~14.8~~	~~Global Reporting Initiative (GRI) table~~		~~219~~

15	~~Reconciliation of non-GAAP information~~		~~226~~

16	~~Five-year overview~~		~~231~~

17	~~Investor Relations~~		~~232~~
~~17.1~~	~~Key financials and dividend policy~~		~~232~~
~~17.2~~	~~Share information~~		~~234~~
~~17.3~~	~~Philips’ rating~~		~~236~~
~~17.4~~	~~Performance in relation to market indices~~		~~237~~
~~17.5~~	~~Philips’ acquisitions~~		~~240~~
~~17.6~~	~~Financial calendar~~		~~241~~
~~17.7~~	~~Investor contact~~		~~241~~
~~17.8~~	~~Taxation~~		~~243~~
~~17.9~~	~~New York Registry Shares~~		~~246~~

18	~~Definitions and abbreviations~~		~~248~~

19	~~Exhibits~~		~~250~~
~~19.1~~	~~Index of exhibits~~		~~250~~
~~19.2~~	~~Signatures~~		~~251~~
~~19.3~~	~~Exhibits~~		~~252~~
~~19.4~~	~~Exhibit 4 (a)~~		~~253~~
~~19.5~~	~~Exhibit 4 (b)~~		~~258~~
~~19.6~~	~~Exhibit 4 (d)~~		~~263~~
~~19.7~~	~~Exhibit 7 Ratio of earnings to fixed charges~~		~~268~~


Item	Form 20-F caption	Location in this document	Page
Part 1
1	Identity of directors, senior management and advisors	Not applicable
2	Offer statistics and expected timetable	Not applicable
3	Key information

	A Selected financial data	16. Five-year overview		~~231~~237
		17.1. Key financials and dividend policy - Proposed distribution		~~232~~238
		17.1. Key financials and dividend policy - Information for US investors		~~233~~238

	B Capitalization and indebtedness	Not applicable

	C Reason for the offer and use of proceeds	Not applicable

	D Risk factors	7.2. Risk categories and factors -Second ~~and third~~ paragraphs		~~103~~110
		7.3. Strategic risks		~~104~~111
		7.4. Operational risks		~~105~~112
		7.5. Compliance risks		~~107~~114
		7.6. Financial risks		~~109~~116
4	Information on the Company

	A History and development of the company	~~5.1.9.~~5.1.11. Discontinued operations		5257
		~~5.1.11.~~5.1.13. Acquisitions and divestments		5357
		~~5.2.1.~~5.1.15. Cash flows provided by continuing operations		5559
		6. Sector performance - Our structure		7684
		11. Corporate governance - Corporate governance of the Philips group		~~126~~131
		Note 5 Discontinued operations and other assets classified as held for sale		~~163~~169
		Note 7 Acquisitions and divestments		~~165~~171
		Note 35 Subsequent events		~~195~~203
		17.5. Philips’ acquisitions		~~240~~246
		17.7. Investor contact - How to reach us		~~243~~247

	B Business Overview	~~5.1. Management discussion and analysis~~Introduction - Third-party market share data		445
		~~5.3. Other performance measures~~5.1. Financial performance- from 5.1.1. to 5.1.14.		6347
		5.1.24. Supply management		66
		5.2.11. Conflict minerals: issues further down the chain		74
		6. Sector performance - Our structure		7684
		6.1.3. About Philips Healthcare		87


Item	Form 20-F caption	Location in this document	Page
		6.1.5. 2012 financial performance		89
		6.2.3. About Consumer Lifestyle		93
		6.2.5. 2012 financial performance		95
		6.3.3. About Philips Lighting		98
		6.3.5. 2012 financial performance		100
		6.4.1. Philips Group Innovation		104
		6.4.2. 2012 financial performance		105
		7.1. Our approach to risk management and business control		~~100~~107
		~~14.6.~~7.4. Operational risks - Third paragraph		112
		14.5. Supplier indicators - ‘Conflict’ minerals		~~217~~219
		18. Definitions and abbreviations		~~248~~254

	C Organizational structure	~~Introduction- Third-party market share data~~6. Sector performance - Our structure		584
		~~6. Sector~~12.9. Information by sector and main country		152
		19.4. Exhibit 8 List of subsidiaries		260


	D Property, plant and equipment	12.9. Information by sector and main country		152
		Note 8 Property, plant and equipment		173
		Note 20 Provisions		181
		Note 24 Contractual obligations		183
		Note 25 Contingent liabilities		184
4A	Unresolved staff comments	Not applicable
5	Operating and financial review and prospects
	A Operating results	Use of non-GAAP information		7
		5.1. Financial performance - from Management summary to 5.1.2 and from 5.1.4 to 5.1.14		47
		6.1.3. About Philips Healthcare - Regulatory requirements		87
		6.1.5. 2012 financial performance		7689
		6.2.3. About Consumer Lifestyle - Regulatory requirements		93
		6.2.5. 2012 financial performance		95
		6.3.3. About Philips Lighting - Regulatory requirements		98
		6.3.5. 2012 financial performance		100
		6.4.2. 2012 financial performance		105
		5.6. Critical accounting policies		81
		Note 2 Financial income and expenses		165
		Note 5 Discontinued operations and other assets classified as held for sale		169
		Note 7 Acquisitions and divestments		171
		Note 9 Goodwill		174
		Note 10 Intangible assets excluding goodwill		175
		7.3. Strategic risks		111
		7.5. Compliance risks		114
		7.6. Financial risks		116
		15. Reconciliation of non-GAAP information		232

	B Liquidity and capital resources	5.1. Financial performance - from 5.1.15 to 5.1.23		47
		Note 19 Long-term debt and short-term debt		180
		Note 24 Contractual obligations		183
		Note 18 Equity		178
		Note 34 Details of treasury risks		200

	C Research and development, patents and licenses, etc.	5.1.4. Research and development		52
		6.4.1. Philips Group Innovation		104

	D Trend information	5.5. Outlook		81


	Introduction	5	Introduction	5
	Forward-looking statements	6	Forward-looking statements	6
	Use of non-GAAP information	7	Use of non-GAAP information	7

	Form 20-F cross reference table	8	Form 20-F cross reference table	8

	Performance highlights	13	Performance highlights	14

	Message from the CEO	15	Message from the CEO	16

1	Our company	19	Our company	19

2	Our strategic focus	21	Group strategic focus	22

3	Our strategy in action	23	Our strategy in action	26
3.1	Philips’ China journey – a dynamic partnership	24	Driving progressive health care	27
3.2	COPD home care solutions: Philips delivers	26	Transforming critical care delivery	29
3.3	Global leadership through local relevance	28	End-to-end journey with Wal-Mart	31
3.4	Building a global oral healthcare brand	30	A recipe for profitable growth	33
3.5	Innovation bringing city lighting to life	32	Re-inventing lighting for consumers	35
3.6	Customer-centric innovation shaping the future of motoring	34	Enhancing urban life with light	37

4	Our planet, our partners, our people	36	Our planet, our partners, our people	39
4.1	Optimizing our ecological footprint	37	The power to make a difference	40
4.2	Partnering to drive change	39	Encouraging positive change	42
4.3	Our people – making a difference	41	Embracing culture change	44

5	Group performance	43	Group performance	46
5.1	Management discussion and analysis	44	Financial performance	47
5.2	Liquidity and capital resources	55	Social performance	67
5.3	Other performance measures	63	Environmental performance	75
5.4	Sustainability	66	Proposed distribution to shareholders	80
5.5	Proposed distribution to shareholders	72	Outlook	81
5.6	Outlook	73	Critical accounting policies	81
5.7	Critical accounting policies	73

6	Sector performance	76	Sector performance	84
6.1	Healthcare	78	Healthcare	86
6.2	Consumer Lifestyle	85	Consumer Lifestyle	92
6.3	Lighting	90	Lighting	97
6.4	Group Management & Services	96	Innovation, Group & Services	103

7	Risk management	100	Risk management	107
7.1	Our approach to risk management and business control	100	Our approach to risk management and business control	107
7.2	Risk categories and factors	103	Risk categories and factors	110
7.3	Strategic risks	104	Strategic risks	111
7.4	Operational risks	105	Operational risks	112
7.5	Compliance risks	107	Compliance risks	114
7.6	Financial risks	109	Financial risks	116

8	Management	111	Management	118

9	Supervisory Board	113	Supervisory Board	120

10	Supervisory Board report	115	Supervisory Board report	122
10.1	Report of the Corporate Governance and Nomination & Selection Committee	118	Report of the Corporate Governance and Nomination & Selection Committee	124
10.2	Report of the Remuneration Committee	119	Report of the Remuneration Committee	125
10.3	Report of the Audit Committee	124	Report of the Audit Committee	129

11	Corporate governance	126	Corporate governance	131
11.1	Board of Management	126	Board of Management	131
11.2	Supervisory Board	128	Supervisory Board	133
11.3	General Meeting of Shareholders	130	General Meeting of Shareholders	135
11.4	Logistics of the General Meeting of Shareholders	131	Logistics of the General Meeting of Shareholders	136
11.5	Investor Relations	132	Investor Relations	137
11.6	Additional information	133	Additional information	138



12	Group financial statements		143
12.1	Management’s report on internal control		143
12.2	Reports of the independent auditor		143
12.3	Auditors’ report on internal control over financial reporting		144
12.4	Consolidated statements of income		145
12.5	Consolidated statements of comprehensive income		146
12.6	Consolidated balance sheets		147
12.7	Consolidated statements of cash flows		149
12.8	Consolidated statements of changes in equity		151
12.9	Information by sector and main country		152
12.10	Significant accounting policies		155
12.11	Notes		164

		Income from operations	164
		Financial income and expenses	165
		Income taxes	166
		Investments in associates	169
		Discontinued operations and other assets classified as held for sale	169
		Earnings per share	171
		Acquisitions and divestments	171
		Property, plant and equipment	173
		Goodwill	174
		Intangible assets excluding goodwill	175
		Non-current receivables	176
		Other non-current financial assets	177
		Other non-current assets	177
		Inventories	177
		Current financial assets	177
		Other current assets	177
		Current receivables	177


		Equity	178
		Long-term debt and short-term debt	180
		Provisions	181
		Other non-current liabilities	183
		Accrued liabilities	183
		Other current liabilities	183
		Contractual obligations	183
		Contingent liabilities	184
		Cash from (used for) derivatives and securities	186
		Proceeds from non-current financial assets	186
		Assets in lieu of cash from sale of businesses	186
		Pensions and other postretirement benefits	186
		Share-based compensation	191
		Related-party transactions	194
		Information on remuneration	195
		Fair value of financial assets and liabilities	198
		Details of treasury risks	200
		Subsequent events	203

12.12	Independent auditors’ report – Group		204

13	Company financial statements		205
13.1	Balance sheets before appropriation of results		206
13.2	Statements of income		207
13.3	Statement of changes in equity		207
13.4	Notes		208

		Investments in affiliated companies	208
		Other non-current financial assets	208
		Receivables	208
		Shareholders’ equity	209
		Long-term debt and short-term debt	210
		Other current liabilities	210
		Net income	210
		Employees	210
		Contingent liabilities	210
		Audit fees	210
		Subsequent events	210

13.5	Independent auditor’s report - Company		211

14	Sustainability statements		212
14.1	Economic indicators		215
14.2	EcoVision		216
14.3	Green Operations		216
14.4	General Business Principles		218
14.5	Supplier indicators		219
14.6	Independent assurance report		224
14.7	Global Reporting Initiative (GRI) table		225

15	Reconciliation of non-GAAP information		232

16	Five-year overview		237

17	Investor Relations		238
17.1	Key financials and dividend policy		238
17.2	Share information		240
17.3	Philips’ rating		242
17.4	Performance in relation to market indices		243
17.5	Philips’ acquisitions		246
17.6	Financial calendar		247
17.7	Investor contact		247
17.8	Taxation		249
17.9	New York Registry Shares		253

18	Definitions and abbreviations		254

19	Exhibits		257
19.1	Index of exhibits		257
19.2	Signatures		258
19.3	Exhibits		259
19.4	Exhibit 8 List of subsidiaries		260
19.5	Exhibit 12 (a) Certification		268
19.6	Exhibit 12 (b) Certification		269
19.7	Exhibit 13 (a)		270
19.8	Exhibit 13 (b)		271


19.8	Exhibit 8 List of subsidiaries	269
19.9	Exhibit 12 (a) Certification	278
19.10	Exhibit 12 (b) Certification	279
19.11	Exhibit 13 (a)	280
19.12	Exhibit 13 (b)	281
19.13	Exhibit 15 (a)	282
19.14	Exhibit 15 (b)	283


~~Item~~	~~Form 20-F caption~~	~~Location in this document~~	~~Page~~118
		9. Supervisory Board	~~113~~120
		11.1. Board of Management - Introduction	~~126~~131
		11.1. Board of Management - (Term of) Appointment and conflicts of interest	~~126~~131
		11.2. Supervisory Board - (Term of) Appointment, individual data and conflicts of interests	~~129~~133

	B Compensation	Note 29 Pensions and other postretirement benefits	~~179~~186
		Note 30 Share-based compensation	~~183~~191
		Note 32 Information on remuneration	~~186~~195
		10.2. Report of the Remuneration Committee	~~119~~125

	C Board practices	8. Management	~~111~~118
		9. Supervisory Board	~~113~~120
		10. Supervisory Board report	~~115~~122
		11.1. Board of Management	~~126~~131
		11.2. Supervisory Board	~~128~~133
		11.4. Logistics of the General Meeting of Shareholders - Internal controls and disclosure policies	~~132~~136
		11.4. Logistics of the General Meeting of Shareholders - Auditor information	~~132~~136

	D Employees	~~5.1.13.~~5.2.4. Employment	5469
		Note 1 Income from operations –- Employees	~~158~~
		~~Note 19 Long-term debt and short-term debt~~	~~173~~164

	E Share ownership	11.1. Board of Management- Amount and composition of the remuneration of the Board of Management	~~126~~
		~~11.4. Logistics of the General Meeting of Shareholders - Auditor policy~~	~~132~~131
		Note 19 Long-term debt and short-term debt - Short-term debt	~~173~~180
		Note 18 ~~Shareholders’ equity~~Equity	~~172~~178
		Note 30 Share-based compensation	~~183~~191
		Note 32 Information on remuneration	~~186~~195
7	Major shareholders and related party transactions

	A Major shareholders	11.5. Investor Relations - Major shareholders and other information for shareholders	~~133~~137

	B Related party transactions	11.1. Board of Management	~~126~~131
		Note 4 Investments in associates	~~163~~169
		Note 25 Contingent liabilities - Guarantees	~~177~~184
		Note 31 Related-party transactions	~~186~~194

	C Interests of experts and counsel	Not applicable
8	Financial information

	A Consolidated statements and other ~~financial information~~	12. Group financial statements	~~138~~143
	financial information


	2009		2010		2011			2010		2011			2012
Sales		20,092		22,287		22,579			22,287		22,579			24,788

Adjusted IFO¹⁾		1,096		2,562		1,680			2,556		1,680			1,502
as a % of sales		5.5		11.5		7.4			11.5		7.4			6.1

IFO		660		2,080		(269	)		2,074		(269	)		1,030
as a % of sales		3.3		9.3		(1.2	)		9.3		(1.2	)		4.2

Net income (loss)		424		1,452		(1,291	)		1,448		(1,291	)		231

per common share in euros
per common share in euros:
- basic		0.46		1.54		(1.36	)		1.54		(1.36	)		0.25
- diluted		0.46		1.53		(1.36	)		1.53		(1.36	)		0.25

Net operating capital¹⁾		12,649		11,951		10,427			11,897		10,372			9,307

Free cash flows¹⁾		763		1,356		(108	)		1,358		(104	)		1,723

Shareholders’ equity		14,595		15,046		12,355			15,007		12,316			11,140

Employees at December 31²⁾		116,153		119,775		125,241
Employees at December 31									119,775		125,241			118,087
of which discontinued operations		4,764		3,610		3,353			3,610		3,353			—


	comparable growth			currency effects		consolidation changes			nominal growth
Healthcare		6.4			6.4		—			12.8
Consumer Lifestyle		1.7			3.8		0.5			6.0
Lighting		3.8			4.6		2.1			10.5
IG&S¹⁾		(7.4	)		0.1		(6.2	)		(13.5	)

Philips Group		4.1			5.0		0.7			9.8


	sales		IFO			%			Adjusted IFO¹⁾			%
Healthcare		8,852		93			1.1			1,145			12.9
Consumer Lifestyle		5,823		392			6.7			472			8.1
Lighting		7,638		(362	)		(4.7	)		445			5.8
GM&S		266		(392	)		—			(382	)		—

Philips Group		22,579		(269	)		(1.2	)		1,680			7.4


	2009¹⁾		2010¹⁾		2011
Western Europe		34,174		33,557		33,515
North America		27,055		27,881		28,249
Other mature geographies		3,094		3,045		3,234

Total mature geographies		64,323		64,483		64,998
Growth geographies		47,066		51,682		56,890

		111,389		116,165		121,888
Discontinued operations		4,764		3,610		3,353

		116,153		119,775		125,241


	payments due by period										payments due by period
			less										less
			than 1		1-3		3-5		after 5				than 1		1-3		3-5		after 5
		total		year		years		years		years	total		year		years		years		years

Long term debt		3,213		80		923		1		2,209
Long-term debt²⁾												3,733		186		253		2		3,292
Finance lease obligations		218		60		90		33		35		298		73		97		40		88
Short-term debt		443		443		—		—		—		558		558		—		—		—
Operating leases		1,017		242		371		224		180		1,219		240		368		236		375
Derivative liabilities		749		208		474		67		—		544		138		143		138		125
Interest on debt²⁾		1,737		138		268		215		1,116
Purchase obligations³⁾		505		242		211		29		23
Interest on debt³⁾												2,802		201		376		360		1,865
Purchase obligations⁴⁾												289		133		105		36		15
Trade and other payables		3,346		3,346		—		—		—		2,839		2,839		—		—		—

		11,228		4,759		2,337		569		3,563		12,282		4,368		1,342		812		5,760


	total								total
	amounts		less than 1						amounts		less than 1
	committed		year		1-5 years		after 5 years		committed		year		1-5 years		after 5 years
2012
Business-related guarantees		297		99		126		72		295		113		114		68
Credit-related guarantees		39		22		—		17		27		11		—		16

		336		121		126		89		322		124		114		84
2011
Business-related guarantees										297		99		126		72
Credit-related guarantees										39		22		—		17

										336		121		126		89


	2008		2009		2010		2011		2012
Core Curriculum programs		10,000		5,500		20,000		39,500		43,000


					Costs in the year
	annual				realized		stock		restricted		pension		other
	base salary		base salary		annual incentive		options		share rights		costs		compensation
F.A. van Houten²⁾		1,100,000		825,000		363,000		125,957		253,926		297,179		39,709
R.H. Wirahadiraksa²⁾		600,000		450,000		148,500		105,477		180,686		170,299		72,125
G.H.A. Dutiné		650,000		650,000		214,500		462,263		334,186		245,018		143,774
P.A.J. Nota²⁾		600,000		450,000		148,500		131,159		255,159		168,532		67,067
S.H. Rusckowski		700,000		687,500		231,000		211,915		341,856		254,975		336,773


					Costs in the year²⁾
	annual				realized		stock		restricted		pension		other
	base salary		base salary		annual incentive		options		share rights		costs		compensation
F.A. van Houten		1,100,000		1,100,000		1,279,520		209,589		315,760		422,845		47,154
R.H. Wirahadiraksa		600,000		600,000		523,440		149,067		217,020		243,438		34,961
P.A.J. Nota		600,000		600,000		556,200		188,029		253,836		247,883		60,754


	realized annual		as a % of base
	incentive		salary (2011)
F.A. van Houten²⁾		363,000		44.0	%
R.H. Wirahadiraksa²⁾		148,500		33.0	%
G.H.A. Dutiné		214,500		33.0	%
P.A.J. Nota²⁾		148,500		33.0	%
S.H Rusckowski		231,000		33.0	%


Philips’ position ranking	1	2	3	4	5	6
restricted share rights	2.0	1.8	1.6	1.4	1.2	1.0
stock options	1.2	1.2	1.2	1.2	1.0	1.0


			number of stock							value at end of lock				number of stock							value at end of lock
	grant date		options			value at grant date		end of lock up period		up period		grant date		options			value at grant date		end of lock up period		up period
F.A. van Houten		2010		20,400	¹⁾		103,428		2013		n.a.		2010		20,400	¹⁾		103,428		2013		n.a.
		2011		75,000			366,000		2014		n.a.		2011		75,000			366,000		2014		n.a.
													2012		75,000			212,550		2015		n.a.
R.H. Wirahadiraksa		2008		10,800	¹⁾		59,616		2011		38,238		2009		12,000	¹⁾		33,240		2012		34,399
		2009		12,000	¹⁾		33,240		2012		n.a.
		2010		16,500	¹⁾		81,675		2013		n.a.
		2011		51,000			248,880		2014		n.a.
G.H.A. Dutiné		2008		38,403			211,985		2011		135,970
		2009		38,400			106,368		2012		n.a.		2010		16,500	¹⁾		81,675		2013		n.a.
		2010		40,800			201,960		2013		n.a.		2011		51,000			248,880		2014		n.a.
		2011		51,000			248,880		2014		n.a.		2012		51,000			144,534		2015		n.a.
P.A.J. Nota		2010		40,800	¹⁾		206,856		2013		n.a.		2010		40,800	¹⁾		206,856		2013		n.a.
		2011		51,000			248,880		2014		n.a.		2011		51,000			248,880		2014		n.a.
S.H. Rusckowski		2008		38,403			211,985		2011		135,970
		2009		38,400			106,368		2012		n.a.		2012		51,000			144,534		2015		n.a.
		2010		40,800			201,960		2013		n.a.
		2011		75,000			366,000		2014		n.a.


			originally granted					number of restricted						originally granted					number of restricted
			number of restricted					share rights released		value at release date				number of restricted					share rights released		value at release date
	grant date		share rights			value at grant date		in 2011		in 2011		grant date		share rights			value at grant date		in 2012		in 2012
F.A. van Houten		2010		5,100	¹⁾		116,688		1,700		24,939		2010		5,100	¹⁾		116,688		1,700		32,691
		2011		20,001			418,021		n.a.		n.a.		2011		20,001			418,021		6,667		94,605
													2012		20,001			296,415		n.a.		n.a.
R.H. Wirahadiraksa		2008		3,600	¹⁾		83.196		1,200		25,644		2009		3,200	¹⁾		40,416		1,067		14,714
		2009		3,200	¹⁾		40,416		1,067		22,802
		2010		4,125	¹⁾		102,713		1,375		27,954
		2011		13,602			284,282		n.a.		n.a.
G.H.A. Dutiné		2008		12,801			295,831		4,267		91,186
		2009		10,242			129,356		3,414		72,957		2010		4,125	¹⁾		102,713		1,375		19,250
		2010		10,200			253,980		3,400		69,122		2011		13,602			284,282		4,534		64,337
		2011		13,602			284,282		n.a.		n.a.		2012		13,602			201,582		n.a.		n.a.
P.A.J. Nota		2010		10,200	¹⁾		233,376		3,400		49,878		2010		10,200	¹⁾		233,376		3,400		65,382
		2011		13,602			284,282		n.a.		n.a.		2011		13,602			284,282		4,534		64,337
S.H. Rusckowski		2008		12,801			295,831		4,267		91,186
		2009		10,242			129,356		3,414		72,957		2012		13,602			201,582		n.a.		n.a.
		2010		10,200			253,980		3,400		69,122
		2011		20,001			418,021		n.a.		n.a.


	Chairman		Member
Supervisory Board		110,000		65,000

Audit Committee		15,000		10,000

Remuneration Committee		12,500		8,000

Corporate Governance and Nomination & Selection Committee		12,500		6,000

Fee for intercontinental traveling per trip		3,000		3,000

Entitlement Philips product arrangement		2,000		2,000


		Group financial statements

		Income from operations			~~158~~164
		Financial income and expenses			~~159~~165
		Income taxes			~~160~~166
		Investments in associates			~~163~~169
		Discontinued operations and other assets classified as held for sale			~~163~~169
		Earnings per share			~~165~~171
		Acquisitions and divestments			~~165~~171
		Property, plant and equipment			~~167~~173
		Goodwill			~~168~~174
		Intangible assets excluding goodwill			~~169~~175
		Non-current receivables			~~171~~176
		Other non-current financial assets			~~171~~177
		Other non-current assets			~~171~~177
		Inventories			~~171~~177
		Current financial assets			~~171~~177
		Other current assets			~~172~~177
		Current receivables			~~172~~177
		~~Shareholders’ equity~~Equity			~~172~~178
		Long-term debt and short-term debt			~~173~~180
		Provisions			~~174~~181
		Other non-current liabilities			~~176~~183
		Accrued liabilities			~~176~~183
		Other current liabilities			~~176~~183
		Contractual obligations			~~176~~183
		Contingent liabilities			~~177~~184
		Cash from (used for) derivatives and securities			~~179~~186
		Proceeds from non-current financial assets			~~179~~186
		Assets in lieu of cash from sale of businesses			~~179~~186
		Pensions and other postretirement benefits			~~179~~186
		Share-based compensation			~~183~~191
		Related-party transactions			~~186~~194
		Information on remuneration			~~186~~195
		Fair value of financial assets and liabilities			~~191~~198
		Details of treasury risks			~~192~~200
		Subsequent events			~~195~~203

		Company financial statements

		Investments in affiliated companies			~~200~~208
		Other non-current financial assets			~~200~~208
		Receivables			~~200~~208
		Shareholders’ equity			~~200~~209
		Long-term debt and short-term debt			~~202~~210
		Other current liabilities			~~202~~210
		Net income			~~202~~210
		Employees			~~202~~210
		Contingent liabilities			~~202~~210
		Audit fees			~~202~~210
		Subsequent events			~~202~~210


Consolidated statements of income of the Philips Group for the years ended December 31
	2009			2010			2011
Sales		20,092			22,287			22,579
Cost of sales		(12,519	)		(13,191	)		(13,932	)


Gross margin		7,573			9,096			8,647

Selling expenses		(4,703	)		(4,876	)		(5,160	)
General and administrative expenses		(721	)		(713	)		(841	)
Research and development expenses		(1,542	)		(1,493	)		(1,610	)
Impairment of goodwill		—			—			(1,355	)
Other business income		95			93			125
Other business expenses		(42	)		(27	)		(75	)


Income from operations		660			2,080			(269	)

Financial income		225			214			112
Financial expenses		(387	)		(335	)		(352	)


Income before taxes		498			1,959			(509	)

Income tax expense		(99	)		(499	)		(283	)


Income (loss) after taxes		399			1,460			(792	)
Results relating to investments in associates:
- Company’s participation in income		23			14			18
- Other results		54			4			(2	)


Income (loss) from continuing operations		476			1,478			(776	)

Discontinued operations - net of income tax		(52	)		(26	)		(515	)


Net income (loss)		424			1,452			(1,291	)

Attribution of net income (loss)
Net income (loss) attributable to shareholders		410			1,446			(1,295	)
Net income (loss) attributable to non-controlling interests		14			6			4

Earnings per common share attributable to shareholders
		2009			2010			2011
Basic earnings per common share in euros
Income (loss) from continuing operations attributable to shareholders		0.50			1.57			(0.82	)
Net income (loss) attributable to shareholders		0.44			1.54			(1.36	)

Diluted earnings per common share in euros
Income (loss) from continuing operations attributable to shareholders		0.50			1.55			(0.82	)
Net income (loss) attributable to shareholders		0.44			1.52			(1.36	)


Consolidated balance sheets of the Philips Group as of December 31

Assets
			2010					2011

Non-current assets
Property, plant and equipment:
- At cost	8,112	¹⁾				7,828
- Less accumulated depreciation	(4,967	)¹⁾				(4,814	)
				3,145					3,014
Goodwill				8,035					7,016
Intangible assets excluding goodwill:
- At cost	7,197					7,663
- Less accumulated amortization	(2,999	)				(3,667	)
				4,198					3,996
Non-current receivables				88					127
Investments in associates				181					203
Other non-current financial assets				479					346
Deferred tax assets				1,351					1,713
Other non-current assets				75					71


Total non-current assets				17,552					16,486
Current assets
Inventories - net				3,865					3,625
Current financial assets				5					—
Other current assets				348					351
Derivative financial assets				112					229
Income tax receivable				79					162
Receivables:
- Accounts receivable - net	4,104					4,171
- Accounts receivable from related parties	20					19
- Other current receivables	231					225
				4,355					4,415
Assets classified as held for sale				120	¹⁾				551
Cash and cash equivalents				5,833					3,147

Total current assets				14,717					12,480
				32,269					28,966


Equity and liabilities
			2011				2012
Equity

Shareholders’ equity:
Preference shares, par value EUR 0.20 per share:
- Authorized: 2,000,000,000 shares (2011: 2,000,000,000 shares), issued none
Common shares, par value EUR 0.20 per share:
- Authorized: 2,000,000,000 shares (2011: 2,000,000,000 shares)
- Issued and fully paid: 957,132,962 shares (2011: 1,008,975,445 shares)	202				191
Capital in excess of par value	813				1,304
Retained earnings	12,878				10,713
Revaluation reserve	70				54
Other reserves	43				(19	)
Treasury shares, at cost 42,541,687 shares (2011: 82,880,543 shares)	(1,690	)			(1,103	)
				12,316				11,140

Non-controlling interests				34				34

Group equity				12,350				11,174
Non-current liabilities
Long-term debt				3,278				3,725
Long-term provisions				1,907				2,132
Deferred tax liabilities				77				92
Other non-current liabilities				1,999				2,001

Total non-current liabilities				7,261				7,950

Current liabilities
Short-term debt				582				809
Derivative financial liabilities				744				517
Income tax payable				191				200
Accounts and notes payable:
- Trade creditors	3,340				2,835
- Accounts payable to related parties	6				4
				3,346				2,839
Accrued liabilities				3,026				3,171
Short-term provisions				787				837
Liabilities directly associated with assets held for sale				61				27
Other current liabilities				1,047				1,555

Total current liabilities				9,784				9,955
Contractual obligations and contingent liabilities

				29,395				29,079


Consolidated statements of cash flows of the Philips Group for the years ended December 31
	2009			2010			2011
Cash flows from operating activities
Net (loss) income		424			1,452			(1,291	)
Loss from discontinued operations		52			26			515
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		1,395			1,356			1,456
Impairment of goodwill, other non-current financial assets and investments in associates		2			5			1,387
Net gain on sale of assets		(139	)		(204	)		(88	)
Income from investments in associates		(23	)		(18	)		(14	)
Dividends received from investments in associates		35			19			44
Dividends paid to non-controlling interests		(4	)		(4	)		(4	)
Decrease (increase) in receivables and other current assets		337			(241	)		(339	)
(Increase) decrease in inventories		516			(498	)		(81	)
(Decrease) increase in accounts payable and accrued and other current liabilities		(203	)		755			(259	)
Increase in non-current receivables, other assets and other liabilities		(365	)		(297	)		(596	)
Decrease (increase) in provisions		(667	)		(211	)		6
Other items		31			(19	)		100

Net cash provided by operating activities		1,391			2,121			836

Cash flows from investing activities
Purchase of intangible assets		(96	)		(80	)		(116	)
Expenditures on development assets		(162	)		(193	)		(231	)
Capital expenditures on property, plant and equipment		(495	)		(621	)		(725	)
Proceeds from disposals of property, plant and equipment		125			129			128
Cash from (used for) derivatives and securities		(38	)		(25	)		26
Purchase of other non-current financial assets		(6	)		(16	)		(43	)
Proceeds from other non-current financial assets		718			268			87
Purchase of businesses, net of cash acquired		(295	)		(225	)		(509	)
Proceeds from sale of interests in businesses, net of cash disposed of		84			117			19

Net cash used for investing activities		(165	)		(646	)		(1,364	)

Cash flows from financing activities
Proceeds from (payments on) issuance of short-term debt		(201	)		143			(217	)
Principal payments on short-term portion of long-term debt		(50	)		(78	)		(1,097	)
Proceeds from issuance of long-term debt		312			71			457
Treasury shares transaction		29			65			(671	)
Dividends paid		(634	)		(296	)		(259	)

Net cash used for financing activities		(544	)		(95	)		(1,787	)

Net cash (used for) provided by continuing operations		682			1,380			(2,315	)



Supplemental disclosures to the Consolidated statements of cash flows
		2010			2011			2012
	Net cash paid during the year for:
	Pensions		(474	)		(639	)		(610	)
	Interest		(226	)		(231	)		(239	)
	Income taxes		(206	)		(582	)		(359	)
	Net gain on sale of assets:
	Cash proceeds from the sale of assets		514			234			622
	Book value of these assets		(667	)		(164	)		(434	)
	Deferred results on sale and leaseback transactions		(4	)		—			(25	)
	Non-cash proceeds		361			18			—

			204			88			163
	Non-cash investing and financing information
	Assets in lieu of cash from the sale of businesses:
	Shares/share options/convertible bonds (continuing operations)		3			18			—
	Shares/share options/convertible bonds (discontinued operations)		—			—			17
	Conversion of convertible personnel debentures		6			—			4
	Treasury shares transaction:
	Shares acquired		—			(751	)		(816	)
	Exercise of stock options		65			80			48


	outstanding number of shares in thousands			common share		capital in excess of par value			retained earnings			revaluation reserve			other re- serves			treasury shares at cost			sharehold- ers’ equity			non-con- trolling in- terests			group equity			outstanding number of shares in thousands			common share			capital in excess of par value			retained earnings			revaluation reserve			other reserves			treasury shares at cost			shareholders’ equity			non-controlling interests			group equity
Balance as of Jan. 1, 2009		922,982			194		—			17,101			117			(580	)		(1,288	)		15,544			49			15,593
Total comprehensive income (loss)										(508	)		(15	)		119						(404	)		13			(391	)
Dividend distributed										(647	)											(647	)					(647	)
Non-controlling interests movement																						—			(13	)		(13	)
Purchase of treasury shares		(2	)																			—						—
Re-issuance of treasury shares		4,477					(70	)		1									101			32						32
Share-based compensation plans							65															65						65
Income tax share-based compensation plans							5															5						5

		4,475			—		—			(1,154	)		(15	)		119			101			(949	)		—			(949	)

Balance as of Dec. 31, 2009		927,457			194		—			15,947			102			(461	)		(1,187	)		14,595			49			14,644
Balance as of Jan. 1, 2010																															927,457			194			—			15,912			102			(461	)		(1,187	)		14,560			49			14,609
Total comprehensive income (loss)										116			(16	)		530						630			6			636												112			(16	)		530						626			6			632
Dividend distributed		13,667			3		343			(650	)											(304	)					(304	)		13,667			3			343			(650	)											(304	)					(304	)
Non-controlling interests movement										(6	)											(6	)		(9	)		(15	)											(6	)											(6	)		(9	)		(15	)
Purchase of treasury shares		(15	)																			—						—			(15	)																				—						—
Re-issuance of treasury shares		5,397					(49	)		9									111			71						71			5,397						(49	)		9									111			71						71
Share-based compensation plans							55															55						55									55															55						55
Income tax share-based compensation plans							5															5						5									5															5						5

		19,049			3		354			(531	)		(16	)		530			111			451			(3	)		448			19,049			3			354			(535	)		(16	)		530			111			447			(3	)		444

Balance as of Dec. 31, 2010		946,506			197		354			15,416			86			69			(1,076	)		15,046			46			15,092			946,506			197			354			15,377			86			69			(1,076	)		15,007			46			15,053
Total comprehensive income (loss)										(1,726	)		(16	)		(26	)					(1,768	)		4			(1,764	)											(1,726	)		(16	)		(26	)					(1,768	)		4			(1,764	)
Dividend distributed		22,897			5		443			(711	)											(263	)					(263	)		22,897			5			443			(711	)											(263	)					(263	)
Non-controlling interests movement										(5	)											(5	)		(16	)		(21	)											(5	)											(5	)		(16	)		(21	)
Purchase of treasury shares		(47,508	)							(51	)								(700	)		(751	)					(751	)		(47,508	)								(51	)								(700	)		(751	)					(751	)
Re-issuance of treasury shares		4,200					(34	)		(6	)								86			46						46			4,200						(34	)		(6	)								86			46						46
Share-based compensation plans							56															56						56									56															56						56
Income tax share-based compensation plans							(6	)														(6	)					(6	)								(6	)														(6	)					(6	)

		(20,411	)		5		459			(2,499	)		(16	)		(26	)		(614	)		(2,691	)		(12	)		(2,703	)		(20,411	)		5			459			(2,499	)		(16	)		(26	)		(614	)		(2,691	)		(12	)		(2,703	)

Balance as of Dec. 31, 2011		926,095			202		813			12,917			70			43			(1,690	)		12,355			34			12,389			926,095			202			813			12,878			70			43			(1,690	)		12,316			34			12,350
Total comprehensive income (loss)																																								(164	)		(16	)		(62	)					(242	)		5			(237	)
Dividend distributed																															30,522			6			422			(687	)											(259	)					(259	)
Non-controlling interests movement																																								—												—			(5	)		(5	)
Cancellation of treasury shares																																		(17	)					(1,221	)								1,238			—						—
Purchase of treasury shares																															(46,871	)								(47	)								(769	)		(816	)					(816	)
Re-issuance of treasury shares																															4,845						(22	)		(46	)								118			50						50
Share-based compensation plans																																					84															84						84
Income tax share-based compensation plans																																					7															7						7

																															(11,504	)		(11	)		491			(2,165	)		(16	)		(62	)		587			(1,176	)		—			(1,176	)

Balance as of Dec. 31, 2012																															914,591			191			1,304			10,713			54			(19	)		(1,103	)		11,140			34			11,174


	sales		sales including intercompany			research and development expenses			income from operations			income from operations as a % of sales			cash flow before financing activities
2011
Healthcare		8,852		8,866			(740	)		93			1.1			770
Consumer Lifestyle		5,823		5,834			(313	)		392			6.7			(38	)
Lighting		7,638		7,652			(409	)		(362	)		(4.7	)		254
Group Management & Services		266		517			(148	)		(392	)		—			(1,514	)
Inter-sector eliminations				(290	)

		22,579		22,579			(1,610	)		(269	)		(1.2	)		(528	)
2010
Healthcare		8,601		8,611			(698	)		922			10.7			1,139
Consumer Lifestyle		5,775		5,788			(282	)		679			11.8			493
Lighting		7,552		7,563			(355	)		695			9.2			590
Group Management & Services		359		530			(158	)		(216	)		—			(747	)
Inter-sector eliminations				(205	)

		22,287		22,287			(1,493	)		2,080			9.3			1,475

2009
Healthcare		7,839		7,850			(679	)		593			7.6			889
Consumer Lifestyle		5,370		5,386			(300	)		436			8.1			574
Lighting		6,546		6,554			(351	)		(16	)		(0.2	)		624
Group Management & Services		337		455			(212	)		(353	)		—			(861	)
Inter-sector eliminations				(153	)

		20,092		20,092			(1,542	)		660			3.3			1,226


																	total assets		net operating capital			total liabilities excl. debt		current accounts receivable, net		tangible and intangible assets		depreciation and amortization¹⁾			capital expenditures
2012
Healthcare																		11,248		7,976			3,185		1,967		7,130		(543	)		135
Consumer Lifestyle																		3,325		1,217			2,108		892		1,699		(234	)		146
Lighting																		6,970		4,635			2,313		1,364		4,293		(543	)		290
Innovation, Group & Services																		7,493		(4,521	)		5,738		111		516		(113	)		104

																		29,036		9,307			13,344		4,334		13,638		(1,433	)		675
Assets classified as held for sale																		43					27

	total assets		net operating capital			total liabilities excl. debt		current accounts receivable, net		tangible and intangible assets		depreciation and amortization^1,2)			capital expenditures¹⁾			29,079					13,371
2011
Healthcare		11,591		8,418			3,087		1,882		7,479		(540	)		224		11,591		8,418			3,087		1,882		7,479		(538	)		153
Consumer Lifestyle		3,616		887			2,726		1,111		1,755		(224	)		148		3,841		884			2,954		1,339		1,755		(224	)		148
Lighting		6,771		5,020			1,729		1,119		4,320		(570	)		279		6,914		4,965			1,927		1,261		4,320		(570	)		279
Group Management & Services		6,437		(3,898	)		5,114		59		472		(122	)		74
Innovation, Group & Services																		6,498		(3,895	)		5,156		102		472		(122	)		73

		28,415		10,427			12,656		4,171		14,026		(1,456	)		725		28,844		10,372			13,124		4,584		14,026		(1,454	)		653
Assets classified as held for sale		551					61											551					61

		28,966					12,717											29,395					13,185
2010
Healthcare		11,962		8,908			2,978		1,848		8,194		(563	)		179		11,962		8,908			2,978		1,848		8,194		(549	)		130
Consumer Lifestyle		3,858		911			2,946		1,085		1,525		(195	)		115		4,110		882			3,227		1,335		1,525		(195	)		115
of which Television		893		(299	)		1,188		377		70							1,010		(305	)		1,315		494		70
Lighting		7,379		5,561			1,800		1,072		5,014		(458	)		273		7,495		5,506			1,972		1,188		5,014		(458	)		273
Group Management & Services		8,950		(3,429	)		4,795		99		645		(140	)		54
Innovation, Group & Services																		9,023		(3,399	)		4,822		158		645		(141	)		54

		32,149		11,951			12,519		4,104		15,378		(1,356	)		621		32,590		11,897			12,999		4,529		15,378		(1,343	)		572
Assets classified as held for sale³⁾		120
Assets classified as held for sale																		120

		32,269																32,710
2009
Healthcare		10,969		8,434			2,464		1,572		7,766		(584	)		164
Consumer Lifestyle		3,286		625			2,660		1,099		1,383		(173	)		107
of which Television		599		(386	)		984		334		61
Lighting		6,748		5,104			1,633		909		4,860		(503	)		165
Group Management & Services		9,524		(1,514	)		4,859		89		766		(135	)		59

		30,527		12,649			11,616		3,669		14,775		(1,395	)		495


																		carrying value at January 1		acquisitions			divestments			impairment			transfer to assets classified as held for sale			translation differences and other changes			carrying value at December 31
2012
Healthcare																			4,703		(1	)		—			—			—			(129	)		4,573
Consumer Lifestyle																			674		(1	)		(6	)		—			—			1			668
Lighting																			1,639		100			—			—			—			(32	)		1,707
Innovation, Group & Services																			—		—			—			—			—			—			—

	carrying value at January 1		acquisitions		divestments			impairment			transfer to assets classified as held for sale			translation differences and other changes		carrying value at December 31			7,016		98			(6	)		—			—			(160	)		6,948
2011
Healthcare		5,381		64		(3	)		(824	)		(2	)		87		4,703		5,381		64			(3	)		(824	)		(2	)		87			4,703
Consumer Lifestyle		532		131		(5	)		—			(3	)		19		674		532		131			(5	)		—			(3	)		19			674
Lighting		2,122		30		—			(531	)		—			18		1,639		2,122		30			—			(531	)		—			18			1,639
Group Management & Services		—		—		—			—			—			—		—
Innovation, Group & Services																			—		—			—			—			—			—			—

		8,035		225		(8	)		(1,355	)		(5	)		124		7,016		8,035		225			(8	)		(1,355	)		(5	)		124			7,016
2010
Healthcare		4,923		21		—			—			—			437		5,381
Consumer Lifestyle		463		49		—			—			—			20		532
Lighting		1,976		14		—			—			—			132		2,122
Group Management & Services		—		—		—			—			—			—		—

		7,362		84		—			—			—			589		8,035


						sales¹⁾		tangible and intangible assets
2012
Netherlands							669		886
United States							7,018		8,007
China							2,705		1,114
Germany							1,456		271
Japan							1,208		537
France							1,051		90
India							777		147
Other countries							9,904		2,586

							24,788		13,638
Assets classified as held for sale									6
		000000000000000000		000000000000000000
	sales^1,2)		tangible and intangible assets						13,644
2011
Netherlands		691		908			691		908
United States		6,373		8,473			6,373		8,473
China		2,102		1,126			2,102		1,126
Germany		1,431		252			1,431		252
Japan							911		618
France		1,046		97			1,046		97
Japan		911		618
Brazil		694		119
India							678		161
Other countries		9,331		2,433			9,347		2,391

		22,579		14,026			22,579		14,026
Assets classified as held for sale				287					287

				14,313					14,313
2010
Netherlands		661		1,109	³⁾		661		1,109
United States		6,430		9,693			6,430		9,693
China		1,864		785			1,864		785
Germany		1,436		282			1,436		282
Japan							856		568
France		1,134		100			1,134		100
Japan		856		568
Brazil		654		148
India							596		81
Other countries		9,252		2,693			9,310		2,760

		22,287		15,378			22,287		15,378
Assets classified as held for sale³⁾				120
Assets classified as held for sale									120

				15,498					15,498
2009
Netherlands		727		1,193
United States		6,106		9,198
China		1,442		684
Germany		1,416		288
France		1,151		111
Japan		678		489
Brazil		595		128
Other countries		7,977		2,684

		20,092		14,775