Exhibit 10(b)
Annual Report to shareholders for 2002
See attachment.
Note: the Annual Report to Shareholders for 2002, consisting of the Management
Report and the Financial Statements and Analysis, is furnished to the Securities
and Exchange Commission for information only and is not filed except for such
specific portions that are expressly incorporated by reference in this report on
Form 20-F.
[PICTURE]
The world's entire production of small-signal transistors and power transistors
(120 billion pieces) can be contained on one 300 mm semiconductor wafer.
[PICTURE]
In Philips' R&D labs more than 20 inventions are made every day.
[PICTURE]
Philips has developed a technology that makes it possible to 'paint' a display
on any carrier.
[PICTURE]
Philips generates more than 10 patents every day.
'SAFE HARBOR' STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
This document contains certain forward-looking statements with respect to the
financial condition, results of operations and business of Philips and certain
of the plans and objectives of Philips with respect to these items (including,
but not limited to, cost savings), in particular the outlook paragraph of the
'Report on the performance of the Philips Group' in this 'Management Report'
booklet. By their nature, forward-looking statements involve risk and
uncertainty because they relate to events and 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, levels of consumer and business spending in major economies, changes in
consumer tastes and preferences, changes in law, the performance of the
financial markets, pension costs, the levels of marketing and promotional
expenditures by Philips and its competitors, raw materials and employee costs,
changes in future exchange and interest rates (in particular changes in the euro
and the US dollar can materially affect results), changes in tax rates and
future business combinations, acquisitions or dispositions and the rate of
technological changes.
Market share estimates contained in this report are based on outside sources
such as specialized research institutes, industry and dealer panels, etc. in
combination with management estimates. Rankings are based on sales unless
otherwise stated.
CONTENTS
2 Graphs
3 Financial highlights
4 Message from the President
10 Profile 2003
22 Lighting
24 Consumer Electronics
26 Domestic Appliances and Personal Care
27 Components
28 Semiconductors
30 Medical Systems
32 Technology & Design
35 Report on the performance of the Philips Group
56 Board of Management
57 Group Management Committee
58 Supervisory Board
59 Supervisory Board Report
Selected Financial Information
65 Introduction
65 Auditors' Report
65 Accounting policies
66 Condensed statements of income of the Philips Group
67 Condensed balance sheets of the Philips Group
68 Condensed statements of cash flows of the Philips Group
69 Condensed statements of changes in stockholders' equity
of the Philips Group
70 The Philips Group in the last nine years
72 Shareholder information/Payment of distribution to
shareholders/Important dates
This Management Report and the separate booklet entitled 'Financial Statements
and Analysis' together comprise the full Annual Report for the year 2002 of
Koninklijke Philips Electronics N.V. ('Royal Philips Electronics'). This
Management Report comprises a summary of the Operating and Financial Review and
Prospects entitled 'Report on the Performance of the Philips Group'. The
selected financial information included in this Management Report is derived
from the Philips Group's full annual financial statements including notes. The
Financial Statements and Analysis booklet also contains additional financial
information and further statutory and other information. For a full
understanding of the results of the Group and the state of affairs, both
booklets should be consulted.
1
GRAPHS
[SALES]
[GRAPH CHART]
[NET INCOME (LOSS)]
[GRAPH CHART]
[NET DEBT TO GROUP EQUITY]
[GRAPH CHART]
[INCOME (LOSS) FROM OPERATIONS]
[GRAPH CHART]
[CASH FLOWS FROM OPERATING ACTIVITIES]
[GRAPH CHART]
[EMPLOYEES]
[GRAPH CHART]
2
FINANCIAL HIGHLIGHTS
all amounts in millions of euros unless otherwise stated
2002 2001
Sales 31,820 32,339
Income (loss) from operations 420 (1,395)
As a % of sales 1.3 (4.3)
As a % of net operating capital (RONA) 3.2 (9.3)
Net income (loss) (3,206) (2,475)
Per common share - basic (2.51) (1.94)
- diluted (2.51) (1.94)
Dividend paid per common share in euros
(related to prior financial year) 0.36 0.36
Cash flows before financing activities 1,980 (3,316)
Stockholders' equity 13,919 19,160
Per common share 10.91 15.04
Net debt:group equity 27:73 26:74
Employees 170,087 188,643
Excluding special items*:
Income (loss) from operations 460 (160)
As a % of sales 1.4 (0.5)
As a % of net operating capital (RONA) 3.5 (1.1)
Net income (loss) 208 (779)
Philips has applied US GAAP in its reporting from January 1, 2002 onwards.
Previous periods have been restated accordingly.
* Special items relate to income and expenses resulting from business
operations, which, because of their nature, are disclosed separately to
give a better understanding of the underlying result for the
period. Special items include items such as restructuring and
impairment charges, acquisition-related charges and gains and losses on
the disposal of businesses or participations and real estate. However,
the reader should note that net income excluding special items is not a
measure of financial performance as defined by US GAAP or Dutch GAAP.
3
MESSAGE FROM THE PRESIDENT
Dear shareholder,
Philips had to contend with a very difficult operating environment in
2002. Nevertheless, we made definite advances in most areas of our
business that we can control - by simplifying our organization and
driving down costs, improving the quality and cycle time of our
operational processes, lowering inventories and reducing debt.
With sales virtually flat, this has resulted in income from operations
of EUR 420 million and a very strong operational cash flow of over EUR
2.2 billion. Our net income, however, was heavily impacted by non-cash
impairment charges of over EUR 3.2 billion that we took in respect of
securities (Vivendi Universal) and equity investments (LG.Philips
Displays and Atos Origin).
Looking at our individual businesses, our consumer and professional
divisions did particularly well. Domestic Appliances and Personal Care
(DAP) achieved good growth and record profits, demonstrating innovative
marketing and product leadership. We also delivered on our promise to
tackle the problems at Consumer Electronics by intensifying our
customer and market focus. We are encouraged by the progress that has
been made in the United States, where the actions to establish Philips
as a premium brand are beginning to show early signs of success, while
in Europe we were able to regain the No. 1 position in the industry.
Despite tough market conditions, Lighting outpaced the
competition, maintaining strong margins through continued innovation
and customer focus. Medical Systems implemented a demanding integration
plan and is well positioned for growth following a number of new
product introductions.
Weaknesses persisted in our Components and Semiconductors
divisions, requiring us to take drastic measures. We dissolved
Components and repositioned its respective businesses, changing the
business model to improve profitability. At Semiconductors, while
maintaining the focus on product innovation, we addressed the
unaffordably high cost structure with a number of measures, including
the planned closure of the Albuquerque facility at the end of 2003.
4
[PICTURE OF THE PRESIDENT]
Our drive for change is based upon a management framework that
comprises five key elements - financial strength, portfolio
management, organizational effectiveness, customer intimacy and product
& technology momentum. I will now review our progress in each of these
areas for you.
FINANCIAL STRENGTH
To achieve our longer-term objectives we are committed to maintaining a
strong balance sheet. In the course of 2002 we reduced our net debt by
EUR 1,725 million while maintaining a debt-to-invested-capital ratio
of better than 30:70, despite heavy impairment and restructuring
charges. Debt reduction will continue to be high on our agenda for 2003
as we value the access we have to the capital markets and will do
everything within our power to safeguard it.
PORTFOLIO MANAGEMENT
In 2002 we made significant progress in bringing our portfolio in line
with our ambitions, in terms of market share, profitability and growth
potential.
We are well on track with our divestment program. Of the low-growth
low-return businesses earmarked by us, 16 have been divested. In 2002
we also carried out a comprehensive review of our Components division.
This led to the dissolution of the division and a restructuring program
to bring Philips Optical Storage back to profitability. The new
organizational structure, which became effective on January 1, 2003,
will streamline innovation and create more value through alignment of
related businesses previously grouped in different divisions.
At Semiconductors, despite very difficult market conditions, we have
continued to invest in innovation and R&D to drive future growth, and
in 2002 we made a few add-on acquisitions to strengthen our product
portfolio. We also concluded a landmark partnership with
STMicroelectronics, Motorola and TSMC to develop 300 mm technology
through a joint venture in Crolles (France).
5
We strengthened our patent and licensing position in the field of
Digital Rights Management (DRM) by acquiring Intertrust together with
Sony and other investors.
BUILDING A MORE EFFECTIVE ORGANIZATION
A key element of our drive to create a better, simpler, faster and more
cost-effective organization is our program Transforming into One
Philips (TOP). It is designed to streamline our business support
functions by standardizing processes and introducing a shared way of
working in the areas of IT, HRM, Finance and Purchasing.
In 2002 this approach enabled us to reduce overhead costs by EUR 257
million. We intend to increase our total savings to EUR 1 billion by
the end of 2003; this figure will include the post-merger integration
savings at Medical Systems and the savings delivered by other
initiatives to reduce indirect costs.
TOP is not just a method of cost control. It is our vehicle for
fundamental and lasting change in the way we operate this company - a
simpler organization, with greater transparency and clearly defined
accountabilities. The move to shared services means that the businesses
will be able to focus on the real value drivers - technology, design
and marketing - which will enhance our ability to innovate. With the
successful implementation of TOP, we will have a `plug and play'
support infrastructure, allowing new businesses to be launched quickly
and easily.
CUSTOMER INTIMACY AND PRODUCT & TECHNOLOGY MOMENTUM - THE DRIVERS OF
GROWTH
We made good progress in making our organization leaner and more
agile. However, that is not enough. Real business successes come from
getting close to our customers and understanding what they want. Here
too we can report a number of successes in 2002.
In March we signed a 5-year USD 5 billion global strategic alliance
with Dell, making us a preferred partner for the supply of computer
peripherals to Dell.
6
[PICTURE] [PICTURE]
In May our Lighting division won an exclusive 5-year contract for the
supply of lamps to Home Depot, the world's largest home-improvement
retailer. We were able to capture this deal - which has made Philips
the only branded light bulb supplier to Home Depot - by demonstrating
an understanding of both Home Depot's requirements and the needs of the
consumer.
Our focus on customer requirements also resulted in a series of
important technological design wins in 2002: many of the world's top
electronics brands are now using Philips Semiconductors' Nexperia
platform, and our Mobile Display Systems business realized major
color-screen design wins for handsets produced by some of the world's
leading mobile phone manufacturers.
In September we launched, together with Nike, a range of stunning
portable sports audio products, underscoring how the impact of
customer-focused technology can be maximized through co-branding and
co-marketing.
The launch of the new Sonicare toothbrush, our fastest-growing
product, provides a further illustration of what can be achieved by
combining customer insight and product and technology innovation.
The successful introduction of the DVD+RW and the PixelPlus TV range
shows that we understand what customers value, and that such an
understanding can lead to strong market share gains.
THE WAY FORWARD - ONE COMPANY, ONE BRAND, ONE CULTURE
In 2002 we devoted considerable energy to establishing our vision of
who we are and where we're going. Besides the portfolio adjustments and
cost-base reductions outlined above, this involved strengthening the
Philips brand and taking tougher steps to create a single, unified
company.
7
Early in the year, we identified our mission as being to enhance the
quality of life for all our customers by providing them with meaningful
technological innovations at the right time. In the deepest sense, we
see our business as technology for people. In doing so, we are focusing
on the application areas of lighting, entertainment, communication,
personal care and healthcare, leveraging our core competencies in
digital technologies, specifically displays, optical storage, wireless
connectivity and digital video.
And in 'ambient intelligence'- the application of interconnected,
anticipatory and responsive technologies distributed throughout the
home, the workplace, etc. - we saw the context for an effective,
meaningful convergence of these technologies and at the same time the
driving force for Philips as one company.
Working together for a common goal is also a question of personal
commitment. That's why we are placing strong emphasis on our company
values: Delight customers, Deliver on commitments, Develop people and
Depend on each other. 'Living' these values will form a significant
part of employee performance appraisals in our new People Performance
Management system. This has already been applied in the appraisal
process for the top 1,000 managers within the Company and is now being
cascaded down, so that the system is fully embedded in the organization
by the end of 2003.
LOOKING AHEAD
In all these ways, we are moving to establish the basis for long-term
margin expansion and growth - work that will continue in 2003.
Given the uncertain outlook for the economy we are directing our
efforts primarily towards cash flow generation and economic profit.
8
For the year 2003 our agenda is to:
- - complete the TOP program
- - achieve the cost-saving target of EUR 1 billion
- - restore Semiconductors to profitability by lowering the break-even
point
- - bring Consumer Electronics in the USA to full profitability from the
fourth quarter onward
- - move Medical Systems forward to achieve 14% EBITA in 2004
- - make Philips a truly market-driven company.
Consistent with our Long-Term Incentive Plan, we are targeting, with
these initiatives, a Total Shareholder Return (TSR) that is in the top
quintile of our defined peer group of 24 companies.
In conclusion, I would like to thank you, our shareholders, for the
confidence you have continued to show in the Company. I would also like
to express my thanks to all our employees throughout the world for
their efforts over the past year. Also on behalf of my colleagues on
the Board of Management, I can assure you that we are committed to
delivering solid financial performance and continued product and market
leadership in the years to come.
/s/ Gerard Kleisterlee
-----------------------
Gerard Kleisterlee, President
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[PICTURE]
[PICTURE]
LIGHTING
- - Lamps
- - Luminaires
- - Lighting Electronics
- - Automotive & Special Lighting
[PICTURE]
CONSUMER ELECTRONICS
- - CE (TV, audio, VCR, DVD, monitors,
GSM, set-top boxes, remote control systems, etc.)
- - Licenses
[PICTURE]
DOMESTIC APPLIANCES AND PERSONAL CARE
- - Shaving & Beauty
- - Oral Healthcare
- - Food & Beverage
- - Home Environment Care
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[PICTURE]
We want to be perceived as an innovative company that truly enhances the quality
of life - a company that conducts business in a responsible and sustainable
manner, with delighted customers, motivated employees and satisfied
shareholders.
For over 100 years, since its founding as a manufacturer of
incandescent lamps and other electrical products in 1891, Philips has
been leading the way, setting new standards and pushing technology to
new heights. Throughout the 20th century Philips continued to improve
people's lives with pioneering innovations, e.g. in the fields of
television, medical X-ray, transistors, integrated circuits and optical
technology. And today, in the digital era, we are committed to building
upon this heritage to make things better for people all over the world.
Few companies touch as many lives, in as many different ways, as we
do. True to our heritage, we will use our understanding of how people
experience technology to provide them with innovations that enrich
their lives at home, at work and on the move. Driven on by a shared
understanding of the Philips brand and what it stands for, we will
harness the passion and capability for innovation across the company by
empowering our employees, encouraging cooperation and fostering
value-adding relationships with our suppliers.
In 2002 we embarked a comprehensive change program - TOP, Transforming
into One Philips - with the aim of building a better, simpler, faster
and more cost-effective organization. A company of many parts acting as
one. TOP is all about designing and implementing new ways of working
together and sharing resources, e.g. by standardizing many services
(IT, Purchasing, HRM, Finance). Besides the obvious financial benefits
that this delivers, it allows business managements to concentrate their
energies fully on the real value drivers - innovation, technology,
design, marketing - and to foster the spirit of collaboration required
to unlock the full potential of the Philips brand.
[PICTURE]
SEMICONDUCTORS
- - MultiMarket Semiconductors
- - Digital Consumer Systems
- - Display Solutions
- - Mainstream Consumer Systems
- - Mobile Communications
- - Networking
- - Identification
- - Mobile Display Systems
[PICTURE]
MEDICAL SYSTEMS
- - X-ray Equipment
- - Computed Tomography
- - Magnetic Resonance
- - Ultrasound
- - Nuclear Medicine
- - Imaging IT
- - Cardiac and Monitoring Systems
[PICTURE]
TECHNOLOGY & DESIGN
- - Philips Research
- - Intellectual Property & Standards
- - Centre for Industrial Technology
- - Philips Design
- - Corporate Investments
- - Optical Storage
11
[PICTURE]
As we turn to face the challenges that lie ahead, it is also important to
celebrate the successes we achieved in 2002.
12
[PICTURE]
MILESTONE CONTRACT
In 2002 Philips Lighting secured the biggest deal in its history: a long-term
contract to be the exclusive supplier of branded lighting products to the
US-based company Home Depot, the world's leading home-improvement retailer. This
alliance illustrates how Philips Lighting's focus on marketing, innovation and
delivery reliability is creating new opportunities with its leading global
customers.
RECOGNITION FOR SUSTAINED CONTRIBUTION
Further underlining our achievements in the TV domain, Philips received the
prestigious Technological/Engineering Emmy Award for its 'lifelong contribution'
to the development and commercialization of widescreen television.
EXCELLENCE IN DESIGN
In 2002 Philips Design received no fewer than 45 prestigious international
awards, from, among others, iF (International Forum Design), the American CES
2002, the Hong Kong Designers Association and the Singapore Designers
Association.
NEXPERIA
Philips Semiconductors' Nexperia Multimedia Solutions provide reconfigurable and
re-usable solutions for full digital television. Indeed, three of the world's
top five TV makers use Nexperia solutions in their digital TV products.
Furthermore, over 70% of the world's DVD+RW recorders made in 2002 contained a
Philips Nexperia solution.
TOP RATINGS
In October 2002, market outlook reports issued by MD Buyline, an independent
healthcare research company, gave top standings to our Medical Systems division.
Setting an unprecedented record, Philips received the highest ratings in 15 out
of 26 categories among eight medical technology companies, ranking number one in
every modality that it offers. In December 2002, Medical Systems grabbed top
honors for `overall service performance' in eight different categories in IMV
Limited's annual Service Track Imaging survey, the first company ever to do so
for such a wide array of medical technology disciplines.
EXCELLENCE IN CUSTOMER SERVICE
Philips Advance, our Lighting Electronics business in North America, has been
recognized as Supplier of the Year by three of North America's leading
electrical distributor partners. Grainger, the leading supplier of maintenance,
repair and operating products, presented Advance with their prestigious CFQ1
Award in July, as well as their elite Supplier of the Year award. In September,
Advance was presented with the 2001-2002 Supplier of the Year award by
Affiliated Distributors, the largest network of independent electrical and
industrial product distributors in North America. Then in October, it was
recognized as Supplier of the Year by IMARK, North America's second-largest
consortium of electrical distributors.
SETTING THE STANDARD
With its proprietary PixelPlus technology Philips has set a new industry
standard in TV picture quality. Impressive image-processing improvements have
been achieved, bringing incredible sharpness, detail and depth to the TV
picture. In recognition of this, the European Imaging and Sound Association
(EISA) named our PixelPlus TV set 32PW9527 European Television of the Year
2002-2003. Our DVD Recorder DVDR890 also won an EISA Award.
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[PICTURE]
[PICTURE]
HOMELAB
In April 2002, Philips opened the HomeLab, a fully functional home built to help
Philips researchers to better understand people's need for and use of
technology, and to test Ambient Intelligence prototypes - interconnected,
anticipatory and responsive technologies that make home/work life more
convenient, efficient and enjoyable.
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[PICTURE]
People interact with technology practically every second, often without even
realizing. By appreciating how these interactions take place, we can enhance our
customers' experience of them.
[PICTURE]
iPRONTO - REDESIGNING CONTROL OF THE DIGITAL HOME
Enabling users to control home theater components, lighting, home networks,
climate control and other IR/RF/Ethernet applications, the iPronto is set to
revolutionize the connected digital home. Featuring a high-resolution LCD
touch-screen, a customizable user interface and exterior hard buttons, the
iPronto allows consumers to control their entire home at the touch of a button
from anywhere in the building. Its upgradability allows users to personalize the
interface with their own designs, icons down-loaded from the Internet, etc.
[PICTURE]
VITAL TECHNOLOGY
In 2002 Philips received FDA clearance for its HeartStart Home Defibrillator for
the treatment of sudden cardiac arrest. Published studies show that over 70% of
arrests happen in the home and the majority of those are witnessed. The
HeartStart - recognized as a Best Product of 2002 by Business Week/USA Today -
offers unrivaled ease of use for in-home responders with a range of abilities, a
potentially significant gap in time between device training and first use, and a
possibly stress-compounding emotional connection to the victim.
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[PICTURE]
Our brand - the result of more than 100 years' investment in research and
design, in technology, creativity and marketing - is what defines Philips as a
company.
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[PICTURE]
[PICTURE]
WHO WE ARE
The year 2002 saw the completion and roll-out of our Brand Foundation, the
culmination of a long and exhaustive process of defining exactly what the
Philips brand stands for, thus revitalizing our brand focus. To ensure a
consistent, shared understanding of this brand focus, we disseminated the
Philips Brand Book throughout the company. Besides articulating the underlying
ethos of the Brand Foundation, the Brand Book also provides guidelines to be
followed when giving expression to the Philips brand, for instance via
sponsorship.
[PICTURE]
HEART FOR SPORTS
The Philips brand is reaching out to new audiences in a broad range of
settings. For example under the Heart for Sports program, student athletes can
undergo free heart screening by doctors using a Philips OptiGo hand-carried
ultrasound system. Advance detection of potential problems helps to give every
sports event a happy ending.
[PICTURE]
LIVING TECHNOLOGY
The 'living technology' advertising campaign for Philips' semiconductor
solutions is based on the premise that Philips improves the lives of consumers
through the deployment of technology. Technology that is constantly evolving and
growing with the needs of those consumers. The 'living technology'
advertisements hold out the promise that the flexibility, innovation,
future-proofness and speed-to-market offered by our semiconductor solutions will
enable our customers to secure a competitive edge and grow their business.
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[PICTURE]
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WINNING ALLIANCE WITH NIKE
In March 2002 Philips and Nike announced a strategic alliance to merge their
athletic and digital technology expertise to develop innovative audio/video
sports products that create a richer, more motivating environment for physical
activity. Both Nike and Philips bring unique strengths to the venture. The first
range of Nike-Philips digital audio products, featuring solid-state MP3, MP3-CD
and FM radio, was introduced in September 2002.
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[PICTURE]
We have invested aggressively in marketing competence to achieve market
leadership in key growth areas, capitalizing on the company's extensive
portfolio of innovative technologies and bringing products to the market that
capture the consumer's imagination.
[PICTURE]
SUCCESSFUL TURNAROUND
The turnaround of Consumer Electronics' business in the key US market is
proceeding with success, thanks to our intensified focus on product innovation
and customer intimacy coupled with stronger brand and channel management. In
2002 this approach paid off with 142% sales growth in up-market retailers and
55% year-on-year growth in the branded TV segment. We also secured placement for
our DVD Recorder in over 4,000 retail selling floors, both cases reflecting the
successful development of Philips as a premium brand.
[PICTURE]
DIE ANOTHER DAY
The new James Bond film Die Another Day featured prominently in the advertising
and promotional campaigns for Sensotec, the new Philishave electric shaver with
Personal Comfort Control.
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[PICTURE]
We are nurturing a spirit of passion and commitment to make change happen.
20
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WINNING COMBINATION
Liquid Crystal on Silicon (LCoS) technology is an essential element of future
display devices, offering sublime picture quality - natural-looking colors and
crystal-clear definition - in sleek designs at lower cost. The development of
LCoS has been a cross-divisional effort involving Research, UHP Special
Lighting, Semiconductors, the LCoS group, Creative Display Solutions and
Consumer Electronics. With Philips holding all the basic patents, LCoS is a
supreme example of how the businesses can work together to create a complete
product, taking advantage of their unique - combined - ability to cover the
entire value chain.
[PICTURE]
TEAM BUILDING
Through multicultural, multidisciplinary teams, Philips Medical Systems focuses
on serving the needs of its customers worldwide. A host of projects are well
under way to integrate the acquired companies into the organization, creating
one effective team, facilitating cultural change and sharing best practices.
[PICTURE]
HUMAN EXPERIENCES
In 2002, Philips Design presented the results of a European Commission research
project called Multiple Intimate Media Environments (MiME), which was carried
out together with Xerox Research Centre and Nottingham University. MiME focuses
on the relationship between computer technology and people's experience of their
'intimate media' - the things they use to store items that have personal meaning
or value, such as photos, souvenirs and diaries. As computers move into every
aspect of personal life, MiME proposes that instead of allowing intimate media
to disappear into the computer, artefacts and systems should be designed to
promote human experiences around the collection, storage and sharing of intimate
media.
21
LIGHTING
Philips Lighting is No. 1 in the global lighting market. The division consists
of four lines of business - Lamps, Luminaires, Lighting Electronics and
Automotive & Special Lighting. Across Europe, North America, Latin America and
Asia Pacific, Philips Lighting employs some 47,000 people.
Our ambition is to achieve profitable growth in developing markets, in key
accounts with leading global customers, in innovative new application segments
and in our existing markets. Innovation, marketing excellence and customer
service - specifically delivery reliability - are the three cornerstones of our
business as it moves forward. Focusing on these areas at the same time as
pursuing a policy of continuous improvement and strict control of costs and
assets will confirm our leadership position as a pace-setter in the lighting
industry.
[PICTURE]
COLORFUL ENHANCEMENT
To enable people to see buildings in all their beauty without disturbing the
atmosphere for those inside, Philips Lighting has created LEDline, a new concept
to enhance the texture of walls with colored LEDs.
HUMANIZING LIGHTING
At Philips we are constantly asking ourselves how lighting can do more for
people in their daily lives. How can it create the right atmosphere at home, in
shops, offices, etc? How can it be used to have a positive effect on their moods
and feelings? On their productivity? These questions are at the heart of our new
consumer communication approach launched in 2002, which involves talking to
consumers and developing an understanding of their needs and desires. This
dialogue has prompted a shift in accent from selling lighting to selling visual
emotion. Such 'humanization' of lighting reinforces the strength of our brand
and, for our customers, enhances our value as a partner.
GROUND-BREAKING DEAL
In 2002 we announced the biggest deal in the history of Philips Lighting:a
long-term contract to be the exclusive supplier of branded lighting products to
Home Depot, the US company that is the world's leading home-improvement
retailer. This alliance exemplifies how Philips Lighting's focus on marketing,
innovation and delivery reliability is opening up new opportunities with its
leading global customers.
ON THE RIGHT ROAD
People expect cars to have ever-higher levels of quality, reliability and
design. Philips' HiPerVision car lamps represent a clear response to this trend.
HiPerVision lamps last the lifetime of the car, use less energy, are recyclable
and small, and offer greater design freedom. That's why major car producers like
Mercedes, Audi, Volkswagen and Opel are already using this technology in some of
their cars. HiPerVision - a new lighting concept developed by Philips using
picture-tube technology to achieve an excellent sealing of the bulb - is ideal
on the road when one needs to be seen.
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[PICTURE]
DYNAMIC LIGHT AND COLOR
Light-emitting diodes (LEDs) offer enormous potential for existing and new
applications requiring dynamics in light level and color. Their small size, long
life, instant response, increasingly powerful light output, durability and
semiconductor-based nature set them apart from other lamp technologies. The
Luxeon V LED has made it possible to create special color effects in shops,
offices and the home. Luxeon technology provides a colorwash alternative that
combines high light output with long lamp life, energy savings and other
benefits of solid-state lighting. Luxeon V generates a record-shattering 120
lumens of light from a single emitter - by far the highest-power LED on the
market. Philips Lighting, along with LumiLeds Lighting (our joint venture with
Agilent Technologies), is spearheading this development.
THE POWER OF COOPERATION
Virtually every aspect of life is being impacted by computers offering
ever-rising performance levels at lower cost thanks to increasingly complex ICs.
Further progress in IC technology is heavily dependent on new projection methods
to etch the finest details onto silicon. EUV (extreme ultraviolet), a radiation
with a wavelength at around 13 nm, is the technology widely expected to
revolutionize semiconductor lithography from about 2007.
In this area, collaboration is the key to achieving technological breakthroughs
and bringing innovations to market in time. At the cutting edge of projection
technology, Philips Lighting is combining its century-long experience in
lighting innovation with the expertise of the Fraunhofer Institute in Germany
and Philips Research's unique knowledge of light-giving plasma technology. In
less than 15 months the output power of the EUV lamp was increased by a factor
of nearly 20, and at the end of 2002 the company shipped the first prototype to
its major customer and partner, ASML, clearly demonstrating how much can be
achieved by working together.
[PICTURE]
NATURAL RHYTHM OF DAYLIGHT
Recreating the natural rhythm of daylight can subtly enhance the atmosphere in a
shop or office, putting people more at ease. Such dynamic light ambience is
reality with Carpe Diem, Philips' spectacular new luminaire concept based on TL5
fluorescent lamps and digital electronic controls.
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CONSUMER ELECTRONICS
As a true top-three global player, Philips Consumer Electronics offers products
designed to bring consumers the benefits of the latest digital technologies at
any time and any place:at home, at work or on the move. The product range
encompasses:widescreen and Flat TV; optical disc products including DVD
recorders and Super Audio CD; digital television systems and Internet-connected
devices including audio systems; other audio products such as portable audio
products, mini and micro audio systems; PC peripherals such as PC monitors and
DVD+RW data drives; and personal communication products including cellular
phones and DECT phones. Philips Consumer Electronics has some 20,000 employees
worldwide.
Digital Networks spearheads Philips' involvement in the emerging world of
convergent digital content delivery, transforming the way we access television
and the Internet at home or on the move. This business is creating the
technologies to fulfill the promise of digital broadband via set-top boxes for
consumers and end-to-end standards-based software solutions with which content
providers and operators can create and deliver digital services.
Building upon Philips' world-leading technology competences in display, storage
and connectivity, Philips Consumer Electronics contributes to the Philips brand
experience by enhancing consumers' everyday lives through innovative top-class
products. Our aim is to be 'the brand people think of first' when it comes to
digital entertainment, communication and information. Philips Consumer
Electronics plans to achieve this ambition by focusing on the strength of the
Philips brand, maintaining category leadership in display, storage and
connectivity, managing costs and maximizing asset productivity.
In display, our leadership is based on creating the best picture quality and a
natural viewing experience with flat, slim and wide displays. Storage means
high-capacity, low-cost, robust storage solutions that allow consumers to easily
store and access content, including high-quality video, audio, pictures and
data. Connectivity enables the consumer to interact intuitively - anytime,
anywhere - with wireless devices.
The pace at which the consumer electronics market is shifting from analog to
digital is picking up fast. Digital products currently represent around 30% of
the audio/video market and will increase to about 60% in 2005. Our strategy is
to pro-actively manage the transition of our product portfolio from analog to
digital and to shift even faster than the market. Examples include our
outstanding LCD monitors and our range of DVD recorders, which we extended in
2002, bringing DVD recording within the reach of a broader, mass market
audience.
[PICTURE]
DIGITAL DELIGHTS
Philips' new LX8000SA DVD/SACD Digital Home Entertainment System has an
integrated DVD player and 6-channel digital sound receiver for movie playback
with superb digital picture and sound quality. In addition, it also features
playback of Super Audio CD discs - the latest evolution of the CD that takes a
significant step forward in sound quality.
OPERATIONAL ADVANCES
In 2002 we further improved our operating performance. In our industry we are
among the leaders in 'asset-light' performance. We are continuously minimizing
the assets needed for our business through optimized supply chain management, an
ODM business philosophy and outsourcing. In addition, we continue to optimize
our manufacturing base, as evidenced by the divestment of our Contract
Manufacturing Services group.
US IMPROVEMENT PROGRAM
A key area of attention is the performance of our US business, and an extensive
turnaround program is being deployed. Enhancing our product offering and
increasing our visibility in high-tier retail shops are key elements of this
program. The new management team also decided to split the Philips brand from
Magnavox, with Philips targeting the high-value consumer segments and Magnavox
focusing on consumers looking for a value-for-money proposition. Significant
steps have already been made in the Flat TV category, where surveys show
spontaneous awareness of the Philips brand has gone up considerably. Also, our
US field sales force has been expanded and upskilled. And in order to improve
our supply chain management, we have outsourced our warehousing and all
transportation to US retail customers from cross-border operations in Mexico.
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[PICTURE]
THE WORLD IS YOURS
With the introduction of new Internet-enabled products such as the MC-i200
Streamium micro hi-fi system, Philips is opening up an exciting new chapter in
home entertainment, offering ultra-convenient access to online content.
THE CONSUMER EXPERIENCE
Consumers are not interested in products as such, but rather in the experiences
they deliver. Accordingly, we have adapted our business strategy to the concept
of the 'Consumer Experience', comprising three domains - Home Entertainment,
Personal Expression and Productivity. The first two are totally
consumer-focused, while the third covers a broad range of professional,
semi-professional, small-office and business-to-business applications.
HOME ENTERTAINMENT - CUSTOMIZED SOLUTIONS FOR THE HOME
The Home Entertainment experience targets consumers who desire customized and
intuitive solutions for their homes, allowing them to enjoy watching and
listening to their preferred choice of digital audio and video content. Our
solutions offer these consumers the ideal combination of convenience, excitement
and design.
[PICTURE]
A WHOLE NEW WAY TO LISTEN
The design and performance innovations of Nike have been combined with the
technology and research of Philips to create the first of a new generation of
portable audio - FM, CD and MP3 players built specifically for runners and
riders. Wearable, skip-free, sport ready.
PERSONAL EXPRESSION - ENJOYING DIGITAL AUDIO/VIDEO ANYWHERE
The Personal Expression experience is based on giving consumers - predominantly
young people, who have a natural affinity with today's Internet-centric
lifestyle - the freedom to enjoy the digital audio and video content of their
choice, wherever they go.
PRODUCTIVITY - MAKING PROFESSIONALS MORE EFFICIENT
The Productivity experience focuses on delivering solutions that enable
professionals - at home or at work - to do their jobs more effectively, more
efficiently and more enjoyably. These include solutions for capturing
information, storing and displaying it and making it easy to access, distribute
and use, both for individual viewing and group presentations.
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DOMESTIC APPLIANCES AND PERSONAL CARE
Philips Domestic Appliances and Personal Care is engaged in developing,
manufacturing and marketing innovative appliances in the fields of male shaving
and grooming, oral healthcare, female beauty, food and beverage preparation,
garment care and floorcare. The division has just above 8,700 employees.
Philips Domestic Appliances and Personal Care (DAP) holds market leadership
positions through its portfolio of power brands in the personal care markets
(Philishave worldwide, Norelco and Sonicare in the USA) and a strong Philips
brand position in the domestic appliance markets, especially in Europe, Latin
America and Asia Pacific.
In 2002 we not only outpaced market growth and posted improved results quarter
by quarter, we also achieved an all-time high as a division in terms of sales,
profitability and No. 1 and 2 market positions. We continued our efforts to
drive down costs through cycle-time reduction, industrial relocation (to
low-wage countries and/or to limit currency exposure) and asset/inventory
management (diversity reduction). Further efficiencies were realized through
headcount reduction (e.g. in our Latin America organization) and streamlining
of the back offices in our Male Shaving & Grooming and Oral Healthcare sales
organizations in the USA.
[PICTURE]
SONICARE TOOTHBRUSH
INNOVATIVE PARTNERSHIPS, DELIGHTED CUSTOMERS
Marketing is a top priority for DAP, and the division is continuing to
strengthen this discipline, for instance through cooperation with major
fast-moving consumer goods (FMCG) companies. We are creating unique, branded
consumer value propositions by capability line-ups with best-of-breed FMCG
companies. In 2002 we continued to build upon our successful
co-branding/marketing initiatives, such as our Cool Skin shaver featuring Nivea
additives and the Senseo coffee maker, the latter developed in partnership with
Sara Lee|DE. Senseo represents a new and breakthrough consumable concept for the
traditional coffee segment. The current success and potential of Senseo as a
creator of value indicates yet again the importance of real innovations and
effective marketing partnerships. Such partnerships enable us to capitalize on
our differentiating capabilities (e.g. consumer insights, product design,
branding, application know-how, global market presence). In addition, they
provide access to new retail channels, industries and geographies. Consequently,
we are aligning our business model with the dynamics and economics of FMCG
manufacturers and the retail industry.
TECHNOLOGY MAKING THE DIFFERENCE
At DAP we are constantly striving to improve our products through a combined
effort in consumer intelligence and technology. New shaving technologies have
led to substantial improvements to the core functionality of male shavers and
female depilation products. And advanced surface treatments and coatings - for
our shavers and irons, for instance - make for a much more pleasant and
enjoyable user experience.
Through our acquisition of Optiva Corporation (Sonicare) in 2000, DAP has
captured the industrial scale and differentiating sonic technology that will
enable it to become an end-game player in the oral healthcare industry.
Particularly encouraging results were posted in the USA and the UK in 2002.
[PICTURE]
SENSOTEC
The new Philishave electric shaver with Personal Comfort Control for unsurpassed
skin comfort and an extremely close shave was introduced in September 2002.
[PICTURE]
WIN-WIN
The year 2002 saw the next chapter in the success story that is the Senseo
coffee maker, the breakthrough concept for the traditional coffee segment that
we developed in partnership with Sara Lee|DE. Such co-branding/marketing
initiatives enable the partners to capitalize on each other's distinctive
capabilities and offer consumers an exciting new proposition.
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COMPONENTS
Until year-end 2002 Philips Components was a major provider of integral digital
electronic solutions in the areas of displays, optical storage and connectivity.
With a global customer base covering the computing, consumer electronics,
telecommunications and automotive industries, it produced:modules for optical
storage in CD and DVD formats; mobile display systems for use in cellular phones
and other handheld devices; wireless connectivity modules; speaker systems,
tuners, remote control systems, multimedia projectors and digital display
systems (LCD TV, etc. ). In 2002 Philips Components employed some 13,000
persons.
COMPONENTS DIVISION DISSOLVED
As part of our ongoing portfolio management program to strengthen our focus on
digital technologies, downscale our involvement in more mature analog businesses
and reduce complexity, we carried out a comprehensive review of our Components
division in the course of 2002. This review resulted in measures to simplify the
structure of our electronics activities and reduce costs, leading to the
dissolution of the Components division and a restructuring program to bring
Philips Optical Storage back to profitability.
NEW CONFIGURATION
The new configuration, which became effective on January 1, 2003, will
streamline innovation and create more value through alignment of related
businesses previously grouped in different divisions. Our telecom speaker
activity has been combined with Mobile Display Systems and moved to Philips
Semiconductors, offering customers a single source for complete and integrated
solutions for the telecom and Personal Digital Assistant (PDA) markets.
Similarly, certain digital display and audio/video wireless connectivity
activities, including the Pronto remote controls group, have moved to Consumer
Electronics. Again, this move is designed to reduce organizational complexity
and duplication, and maximize synergies both for branded and OEM solutions. A
stand-alone activity, New Displays Business Development, has been formed in
order to strengthen our focus on new high-growth display opportunities,
including the Liquid Crystal on Silicon (LCoS) and PolyLED technologies.
RESTRUCTURING OF OPTICAL STORAGE
For Optical Storage, a comprehensive restructuring program is being carried out
to bring the activity back to profitability. The major part of the restructuring
will see the PC-related (Data) business line concentrated in Taiwan. The R&D
group in Eindhoven will be strengthened to concentrate on pre-development. The
concentration of our data activities in Taiwan and our collaboration with BenQ
will enhance Philips' focus on DVD+RW development. The turnaround in Data will
be accelerated by focusing on the more profitable, high-growth segment of DVD+RW
drives. By strengthening its position in DVD+RW applications and new or emerging
standards, Philips will remain a leading player in the OEM and aftermarket
optical storage industry with a solid basis for sustained profitability.
The consumer and automotive businesses of Philips Optical Storage are profitable
and developing according to plan. The consumer line is a leader in the
audio/video market and supplies drives for applications including DVD Recorders
(based on the DVD+RW standard) and games consoles (Microsoft's Xbox). The
Automotive line is a leader in its industry and growing significantly, mainly
due to the switch from tapes to CDs and DVDs and the increasing application of
navigation systems in cars.
WIRELESS SOLUTIONS MERGER
The wireless connectivity module activities of Components will be transferred to
the new joint venture with Accton Technology Corporation of Taiwan, in which
Philips will hold a 48% share. This joint venture was announced on January 8,
2003 and the deal is expected to be closed in the second quarter of 2003. The
joint venture will provide innovative wireless connectivity (802.11) products
for design-in (OEM) to, for example, the consumer electronics, enterprise, PC
and mobile phone industries. The new company will address the increasing market
requirements for advanced, easy-to-use and cost-effective wireless connectivity
solutions based on state-of-the-art technology in Wi-Fi (802.11), Bluetooth(TM)
and other industry standards.
As of 2003, the results of Optical Storage, the New Displays Business
Development group and the businesses that are transferred to Philips Corporate
Investments will be reported under Miscellaneous.
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SEMICONDUCTORS
Philips Semiconductors is one of the world's top ten semiconductor manufacturers
and a major supplier of innovative silicon solutions for consumer markets. These
solutions are designed to grow and evolve as the applications develop. The
division's multimarket approach maximizes the application scope for our
leading-edge products. Philips Semiconductors has over 31,000 employees and
operates in more than 50 countries.
Philips Semiconductors envisions a world in which our lives are enhanced by
technology that gives us anytime/anywhere access to information, entertainment
and services. Philips Semiconductors' mission is to become the leading provider
of semiconductor solutions for connected consumer applications. A cornerstone of
the strategy for achieving this goal is to become the partner of choice for
leading customers and content and service providers in these markets. 2002 was a
very difficult year, with the deepest and longest recession that the
semiconductor industry has seen in its fifty-year existence. Our 2002 revenues
were down on 2001, but in line with the general market developments. In response
to this situation we made significant cost savings during 2002, including
announcing the closure of our plant in Albuquerque, New Mexico, USA. However,
despite these adverse conditions we made progress on a number of fronts. Our
focus on customer intimacy resulted in a series of important design wins, and
many of the world's leading electronics brands are now using our Nexperia
Multimedia Solutions platform. We continue to invest in innovation to drive
growth and to move towards a more flexible cost structure in order to lower the
structural break-even point.
[PICTURE]
WINNING CUSTOMERS, WINNING PHILIPS
In 2002 the combination of our cutting-edge platform-based solutions and our
focus on leading customers started to take effect, with significant design wins
putting us in a good position to capitalize on the long-awaited upturn in the
world's electronics market.
NEXPERIA - LIVING TECHNOLOGY
Our Nexperia Multimedia Solutions provide customers with reconfigurable and
re-usable solutions for full digital television. Indeed, three of the world's
top five TV makers apply our Nexperia solutions in their digital TV products.
Over 70% of the world's DVD+RW recorders made in 2002 contained a Philips
Nexperia solution. Philips expects that over the next five to seven years a
significant proportion of the installed TV base in Europe and the US will be
replaced by new integrated digital TVs, and Philips Semiconductors is uniquely
positioned to take advantage of this new market. Over 60% of all TVs sold in
2002 contained a Philips Semiconductors product.
In 2002 we strengthened our position in the mobile phone market. By the end of
2003 we expect that one in every ten mobile phones made in the world will have a
Philips Nexperia system solution inside. This system solution enables mobile
phone makers to bring new mobile phone designs to market quickly. Our system
solutions are ready for all the new mobile phone technologies that will come
onto the market in 2003 and 2004 (GPRS, G2.5,G3,etc.).
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[PICTURE]
GETTING CLOSER
Our customer intimacy program has reinforced our relationship with key players
in the computing market. We are a leading provider of semiconductors to the
major producer of LCD monitors and have won important customer-specific designs
for a key printer manufacturer. Our customer-specific products are also used in
many PDAs, and Intel has chosen our power management system for their latest
motherboard designs.
During 2002, one of the world's leading clothing chains selected our
identification chip for incorporation in their garments. At first they will use
the chip for tracking throughout their manufacturing and logistics chain, and
then as a security device in shops. In the longer term it can also be used as
part of their customer relationship management.
TECHNOLOGY BREAKTHROUGHS
Philips continues to develop leading solutions for the wireless and wired
connectivity markets. Our acquisition of Systemonic will increase our ability to
hold leading positions in the 802.11 standard for wireless connectivity, and we
will be the first company to release silicon for the new ZigBee standard.
Philips maintained its leadership in Bluetooth(TM) by delivering over 10 million
units of low-power, low-cost system solutions targeting voice and data
applications. During 2002 we jointly announced with Sony a new standard for
secure Near-Field Communication (NFC). Near-Field Communication allows the
transfer of any kind of data between NFC-enabled devices such as mobile phones,
digital cameras, PDAs and PCs over a distance of up to twenty centimeters. NFC
will deliver speeds fast enough to transfer high-quality images in a secure and
seamless way. This will enable the development of several new markets, including
electronic toys, and easy uploading of music and software from main players to
portable machines.
Philips is in the forefront of new technologies for semiconductors. With our
partners Motorola and STMicroelectronics, our wafer fab in Crolles, France, will
start producing leading-edge 120 nm wafers for a number of new products in 2003.
The 90 nm development is proceeding very well, and we expect to commence pilot
production by the end of 2003. In January 2003 we demonstrated a world first -
functional memory cells in 65 nm technology. These new technologies will lead to
lower-power, higher-speed and smaller-area semiconductors, which are needed for
the next generation of mobile phones, PDAs and other portable devices.
FRAMEWORK IN PLACE
Philips Semiconductors has winning technologies, in winning products, with
winning customers throughout the world. Building upon our advanced silicon
processes, design gains and customer intimacy, we are determined to deliver
operating profitability by gaining sales and market share and by lowering costs.
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MEDICAL SYSTEMS
With approximately 31,000 employees and a presence in more than 100 countries
worldwide, Philips Medical Systems holds global No. 1 or 2 positions in most of
the markets it serves. The product range includes best-in-class technologies in
X-ray, ultrasound, magnetic resonance, computed tomography, nuclear medicine,
positron emission tomography, patient monitoring, clinical information
management and resuscitation products, as well as a comprehensive range of
customer support services.
Advancing its mission to become the industry leader in meeting the changing
needs of healthcare providers worldwide, Philips Medical Systems took
significant steps in 2002 to strengthen its position in its key markets. This
included an accelerated program of product innovations that have reinforced our
technology leadership in imaging, patient monitoring and IT. Major steps were
also taken to execute the program integrating the division's recently acquired
market- and technology-leading companies to form a strong, harmonized market
presence and an effective, competitive organization. The result is a significant
increase in the reach of the Philips brand to important target audiences, for
example with a 50% installed base in US hospitals in the critical care area.
[PICTURE]
HOLDING THE HEART IN YOUR HANDS
The SONOS 7500 Live 3D Echo ultrasound system provides real-time images of the
heart and the complex interactions between its valves, chambers and vessels with
such clarity and detail that is has been described as similar to "holding the
heart in your hands".
[PICTURE]
CONTINUING SERIES OF INNOVATIONS
The pursuit of clinical excellence is the driver behind a continuing series of
innovations in imaging technology and clinical information system applications.
These enhance both diagnostic capabilities and clinical efficiency. For example,
the Intellivue Patient Monitoring System gives physicians instant access to all
relevant patient information and diagnostic images at the patient's bedside.
Intellivue can help speed up treatment decisions and enhance the quality of care
by using web-based technology that provides vital information to clinicians at
the moment they need it most.
In the area of cardiac imaging, Philips' latest technology innovation, Live 3D
Echo, is revolutionizing echocardiography. Never before have clinicians been
able to view three-dimensional ultrasound images of the beating heart in real
time. Offering amazing clarity and detail, this powerful new tool enables
clinicians to observe complex interactions between valves, chambers and vessels
in 3D, as they happen. Live 3D will transform echocardiography by providing more
complete information to enhance and speed clinical decision-making.
And in the field of computed tomography, Philips was the first manufacturer to
obtain clearance from the US Food & Drug Administration (FDA) for sale of its
latest 16-slice CT scanner, the Mx8000 IDT. With its thinner image 'slices',
this new scanner allows physicians to see details that have never before been
visible, such as narrow arteries or tiny lesions. This capability brings the
promise of earlier and more precise diagnosis of a wide range of conditions,
including cardiac disease, cancer, stroke and trauma.
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[PICTURE]
TECHNOLOGY FOR LOWER COSTS AND GREATER EFFECTIVENESS
The commitment to clinical excellence also manifests itself in the drive to
enable healthcare providers to reduce their operating costs, while at the same
time improving patient treatment and outcomes. This includes applying technology
to allow earlier diagnosis, reducing the need for more costly treatment at a
later stage, as well as developing ways to make treatment more effective,
e.g.through virtual real-time monitoring of the efficacy of medication.
Key to the efficient and effective use of technology is the management of
clinical information. In 2002, Philips Medical Systems introduced Vequion,
Philips' family of clinical IT products, systems, solutions and services. Among
its customer benefits is the provision of a single user interface with the
system regardless of location - from the imaging modality exam room to the
physician's office or the nurse's station and across all of Philips' imaging
modalities. Vequion supports 'smart' applications that can be tailored to
individual users or departments, and uses IT standards that connect seamlessly
to legacy systems. This translates into less training time, less installation
time, faster diagnoses and faster treatment solutions.
PARTNERSHIPS DRIVING PRODUCTS AND SERVICES FORWARD
Partnerships are a key factor in driving product development and enhanced
clinical services. In 2002, Philips and Rabobank Group subsidiary De Lage Landen
International set up a joint venture to provide financing in the United States
for the full range of diagnostic imaging equipment produced by Philips Medical
Systems. The new venture, a fully consolidated subsidiary of De Lage Landen
(which owns 60%), is called Philips Medical Capital. The joint venture will
increase Philips' ability to provide financial services, including asset
management, to its customers, further strengthening its overall position in the
market.
Philips Medical Systems is also working in partnership with key academic
institutions to accelerate the transformation of new scientific discoveries into
cutting-edge clinical imaging systems. With Washington University in St. Louis,
Missouri, Philips is using so-called 'targeted nanoparticles' that attach to
specific parts of the body to detect the very early stage of a disease. For
example, using MR, ultrasound or nuclear imaging techniques, the aim is to
visualize inflamed arteries that are the cause of a heart attack or stroke. Or
to detect cancer at an early stage, when it can be treated using the same
nanoparticles that can carry therapeutic drugs or genes directly to the right
part of the body.
DEDICATED CUSTOMER FOCUS
At the core of all the division's technological and market developments is the
passion and dedication of our employees and their visible commitment to build a
single, strong, multidisciplinary Philips Medical Systems team with an
overriding focus on serving customers' needs - and ultimately making a
difference to people's lives. Illustrating the success of this approach, MD
Buyline - an independent US research company that advises healthcare providers
on buying and implementation decisions for medical technology - ranked Philips
number one in 15 out of 26 product categories.
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TECHNOLOGY & Design
Founded in 1914, Philips Research is one of the world's major private research
organizations, with main laboratories in the Netherlands, the United
Kingdom, Germany, the United States and China, together employing some 2,500
people.
Philips plays a leading role in shaping the world of digital electronics by
bringing meaningful technological innovations to people. Many of these
innovations have their roots in the laboratories of Philips Research. Creating
value and growth by generating new technologies for the various Philips
businesses is the main focus of Philips Research. Drawing upon our deep and
broad technology foundation, scientists at Philips Research are constantly
striving to break down the barriers between technology and application domains
in order to achieve the synergies that will lead to new product concepts and new
business.
At Philips Research, scientists from a wide range of disciplines and backgrounds
work together, influencing and broadening each other's views, thus enabling the
Philips businesses to reap the benefits of diversity, cross-fertilization of
ideas and synergy. To give just one example of the diversity of our
organizational fabric, more than 50% of all new employees at Philips Research in
the Netherlands are recruited from abroad.
[PICTURE]
PAINTING A DISPLAY
In the May 2002 issue of Nature, scientists from Philips Research described the
fabrication of liquid-crystal displays (LCDs) by simple coating techniques,
comparable to painting. This makes displays cheaper and thinner and provides
considerable design freedom. The displays can be made on a wide variety of
substrates, including plastic, enabling for example large, paintable displays on
walls or flexible displays integrated in clothing.
TINY GIANT
Having invented the Compact Disc, Philips continues to spearhead the efforts to
take optical recording forward to increased storage densities, higher recording
speeds and new applications. In 2002, Philips demonstrated a prototype of its
Small Form Factor Optical (SFFO) Storage solution, which is suitable for
portable applications such as notebooks, PDAs, mobile phones and digital
cameras. SFFO technology will meet the extra storage demands placed on such
devices by audio, video, gaming, imaging and data content. Using blue-laser
technology, up to 1 gigabyte of data can be stored on a 3 cm optical disc, more
than 1.4 times the storage capacity of a CD-ROM.
FRUITFUL COOPERATION
Almost immediately after the discovery of light-emitting polymers in 1990,
Philips Research began investigating the possibility of using these materials in
display devices. Encouraging results led to the opening of a pilot factory for
polymer organic light-emitting displays (PolyLEDs) by Philips Components in
1998. Since then, Research and the businesses have cooperated closely on the
optimization of materials, manufacturing and assembly and on the design of
modules and driver ICs. In 2002, Philips became the first supplier to start
shipping volume quantities of PolyLED modules. Meanwhile, Research is focusing
on technologies for next-generation PolyLED devices, including full-color
displays made by inkjet printing.
[PICTURE]
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Philips Design is dedicated to creating value by delivering innovative and
meaningful solutions that humanize technology. With 450 employees active in 12
locations around the world, Philips Design serves all Philips' businesses and a
select portfolio of external customers.
Philips Design's key objectives are to provide best-in-class, sustainable design
leadership, to offer competitive services to the Philips businesses, and to be
the custodian of Philips' brand identity design. Its proprietary High Design
process has made it an industry leader. This human-focused approach is based
upon in-depth research into people - their behavior, their relationship with
technology, socio-cultural dynamics, evolving lifestyles worldwide - and upon
applying the results of that research to the innovation process, thus fostering
cross-business and cross-company synergies and, wherever possible, opening up
new business opportunities for Philips.
[PICTURE] [PICTURE] [PICTURE]
CONSISTENTLY USER-FRIENDLY
As Philips Medical Systems' product portfolio expanded, so did the number of
different user interfaces. Philips Design helped the division to develop a
generic interface that enhances ease of use, communicates a consistent 'look and
feel' across product lines and facilitates efficient re-use.
Intellectual Property & Standards (IP&S), formed on January 1, 2002 through the
merger of Corporate Intellectual Property and System Standards & Licensing, is
the organization responsible for managing Philips' intellectual property. The
activities of IP&S include the creation of all intellectual property rights,
including patents, trademarks, designs, domain names and copyrights, as well as
the commercialization of these rights. In addition, IP&S plays a leading role in
establishing standards in specific technical fields, such as optical storage, in
cooperation with Philips Research and third parties. IP&S also exploits Philips'
technologies through the transfer of know-how and licensing of the associated
intellectual property rights to third parties.
In 2002 the number of patent filings was about 3,000, the same high level as in
the record year 2001. As a result of the increased filings over the last two
years, the total worldwide patent portfolio grew by more than 10% in 2002 and
now comprises some 85,000 patent rights. The aim is to extract maximum value
from this portfolio through a structured process of identification and
verification of valuable patents.
Philips' Centre for Industrial Technology (CFT) is a renowned center of
competence supporting the product divisions and a number of external high-tech
companies in all aspects of technology and production, particularly in the
fields of mechatronics, electronics, process technology, assembly and industrial
support.
In 2002 CFT made a number of key contributions to the manufacture of innovative
new products. For example, it greatly simplified the production process for
PolyLED displays, as used in Philips' new Sensotec shaver, eliminating the
problem of water vapor ingress, which caused rapid degeneration of the PolyLED
material.
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34
REPORT ON THE PERFORMANCE OF THE PHILIPS GROUP
The following discussion is based on the consolidated financial
statements and should be read in conjunction with the other financial
information.
Starting January 1, 2002 the consolidated financial statements were
prepared in accordance with generally accepted accounting principles in
the United States of America (US GAAP). All previous periods have been
restated according to US GAAP.
This section of the Annual Report represents a summary of the Operating
and Financial Review and Prospects as included in the separate booklet
entitled 'Financial Statements and Analysis'.
In order to facilitate a better understanding of the underlying
business performance of our segments, we have analyzed the results of
operations with a discussion of special items. Special items, as
presented in the Report on the performance of the Philips Group, relate
to income and expenses resulting from business operations, which,
because of their nature, are disclosed separately to give a better
understanding of the underlying result for the period. These include
items such as restructuring and impairment charges, acquisition-related
charges and gains and/or losses on the disposal of businesses or
participations and real estate. This is consistent with how business
performance is evaluated by management. However, the reader should note
that net income excluding special items is not a measure of financial
performance as defined by US GAAP or Dutch GAAP. The reader is
encouraged to give equal attention to the reported GAAP measures and
the analysis excluding special items.
[PICTURE]
35
TIGHTENED FOCUS
[Sales per sector (as a % of total)]
[GRAPH CHART]
[Net operating capital per sector (as a % of total)]
[GRAPH CHART]
[Headcount per sector (as a % of total)]
[GRAPH CHART]
36
TIGHTENED FOCUS
Over the last five years, Philips has become a more focused, leaner and
more agile organization, better able to react to the continual changes
we are confronted with in today's business environment. In particular,
we have:
- - invested in businesses that are established or potential world leaders;
- - reduced our exposure to more volatile and unprofitable businesses and
industries;
- - limited our exposure to market fluctuations by outsourcing production,
reducing overcapacity and expanding partnering;
- - reduced our cost structure;
- - rationalized our portfolio by divesting businesses that were
unprofitable or did not fit with our long-term strategy;
- - further enhanced our strong position in two cash-generating
businesses, Lighting and DAP.
As a result of both significant acquisitions and organic growth,
Medical Systems now represents 22% of our total sales, compared with 6%
only five years ago. It accounts for 45% of our net operating capital
(NOC), compared with 9% in 1998. With our integration program on track,
Medical Systems is expected to deliver strong results going forward.
Semiconductors has closed old manufacturing facilities and built
capacity through expanded partnering (e.g. STM, Motorola,TSMC), while
positioning itself to participate in the future economic recovery by
increasing R&D on improved platform designs.
Increased outsourcing and more effective asset management have enabled
Consumer Electronics to reduce its net operating capital from EUR 1.5
billion in 1998 to virtually nil today.
Our exposure to volatile and often unprofitable industries has been
reduced by increasing partnering (e.g. in display, semiconductors),
closing unprofitable businesses and changing business models (e.g. for
set-top boxes, mobile phones, optical data storage). Over the last 5
years productivity per employee has improved through headcount
reductions and divestments, sales per employee increasing by 44%.
During the boom in the stock markets in the late 1990s we benefited by
selling parts of our non-strategic public holdings such as PolyGram,
ASML, JDS Uniphase and Origin, realizing book gains totaling almost EUR
11 billion, of which about EUR 9 billion was received in cash. When the
stock markets subsequently came down, we had to take non-cash
impairment charges of about EUR 3.5 billion on our remaining
shareholdings.
37
The year 2002
- - Income from operations of EUR 420 million
- - Net income: a loss of EUR 3,206 million; excluding special items a
profit of EUR 208 million
- - Further rationalization of manufacturing and cost base and progress in
overall cost-reduction programs
- - Components division dissolved January 1, 2003; a number of
non-strategic businesses sold
- - Positive cash flow from operating activities amounting to EUR 2,228
million, driven by tight working capital management
- - Net debt to group equity ratio 27:73
Impairments/value adjustments of shareholdings
and securities
in millions of euros 2000 2001 2002
----- ----- -------
Vivendi/Seagram 1,115 (440) (1,855)
JDS Uniphase 1,207 - (73)
Great Nordic - (86) (27)
----- ---- ------
2,322 (526) (1,955)
LG.Philips Displays - - (275)
Atos Origin 1,072 - (921)
Various unconsolidated companies - (119) (109)
----- ---- ------
1,072 (119) (1,305)
----- ---- ------
Total 3,394 (645) (3,260)
----- ---- ------
Net income excluding special items
in millions of euros
2000 2001 2002
----- ------ ------
As published 9,662 (2,475) (3,206)
Special items:
affecting income from operations 1,070 (1,235) (40)
affecting financial income and expenses 2,322 (526) (1,888)
affecting results relating to
unconsolidated companies 3,397 (248) (1,613)
income taxes related to special items (18) 313 127
----- ---- ------
Excluding special items 2,891 (779) 208
----- ---- ------
SUMMARY
Markets in 2002 were a repeat of the markets in 2001. The
telecommunications and PC-related markets and business investments in
IT products and services in general continued to suffer during 2002.
These markets seemed to be starting to recover in the first quarter,
but the improvements did not follow through during the rest of the
year. Philips' management focused its attention on managing those
activities it can control: costs, cash flow, tight asset control,
strengthening its innovation and other operational processes, and
reducing debt. As a result, margins in all our divisions improved
compared with 2001. Furthermore, 2002 net income was positively
impacted by savings resulting from our overhead cost reduction program
(EUR 257 million) and lower goodwill amortization (EUR 413 million),
and was adversely affected by a significant increase in pension costs
(EUR 541 million). Philips was able to generate a EUR 2,228 million
positive cash flow from operating activities. Gross capital
expenditures were scaled back compared with 2001, to EUR 1,161
million.
Special items
Main financial markets around the world closed with negative results
for the third year in a row, impacting the valuation of the Company's
financial assets. During 2002 the Company took charges of EUR 1,955
million for writing down the valuation of its securities (mainly
Vivendi Universal). Also, the Company took impairment charges totaling
EUR 1,305 million for its shareholdings in unconsolidated companies
(mainly Atos Origin and LG.Philips Displays). Other special items that
impacted the Company's income from operations were:
- - restructuring expenses and asset impairments of EUR 513 million in our
divisions and EUR 301 million with respect to our unconsolidated
companies;
- - acquisition-related charges of EUR 96 million, mainly at Philips
Medical Systems; and
- - gains from the sale of businesses or assets, which made a positive
contribution of EUR 569 million, reflecting the successful continuation
of the low-growth low-return divestment program.
Excluding all special items, net income would have been EUR 208
million.
38
Continued weak markets in 2002
2000 2001 2002*
---- ---- -----
PCs millions of units 136 130 132
% growth 16 (4) 1
Cellular phones millions of units 416 400 410
% growth 49 (4) 2
Cons. electronics value in billions of euros 96 91 87
% growth 20 (5) (4)
Semiconductors value in billions of euros 222 156 149
% growth 58 (30) (5)
* provisional data
Quarterly sales volume growth 2001-2002
[GRAPH CHART]
Income (loss) from operations
[GRAPH CHART]
GROUP SALES AND INCOME FROM OPERATIONS
Sales
Sales in 2002 totaled EUR 31,820 million, 2% lower than in 2001. Changes in
consolidation had a net positive effect of 3%, while the weakening of the dollar
and related currencies had a 4% negative effect, particularly in the second half
of the year. Sales volume grew by 6%, in contrast to a 6% decline in 2001. The
year-over-year growth trend improved every quarter in 2002. Price erosion eased
somewhat in 2002: 7% compared with 8% in 2001.
Growth was achieved in the sectors DAP, Components (predominantly in Mobile
Display Systems) and Medical Systems (42% growth, of which 5% was organic
growth). Sales were somewhat lower at Lighting and Semiconductors. The lower
sales in the Consumer Electronics sector were caused by lower volumes for mobile
phones and set-top box products (as a consequence of the changed business models
in 2001), which were not offset by solid growth in TV and DVD products in
particular.
Income from operations
Income from operations improved by EUR 1,815 million to a profit of EUR 420
million; excluding special items and goodwill amortization (the latter totaling
EUR 180 million in 2001), income improved by EUR 440 million to EUR 460 million
notwithstanding an increase of pension costs of EUR 541 million. The strong
improvement of margins in all sectors can be attributed to the close attention
the Company gave to margin and cost management during 2002. We announced
cost-saving programs intended to deliver a EUR 1 billion run-rate saving by the
end of 2003. With regard to the EUR 300 million overhead cost reduction program,
we realized savings of EUR 257 million in 2002 and achieved a run-rate saving of
EUR 324 million in the last quarter of 2002. Medical Systems already realized
savings of EUR 173 million in 2002. Detailed programs are in place to realize
the remainder of the EUR 350 million savings in 2003.
Income increased by more than EUR 425 million due to the effects of the 2001
restructuring program.
39
Income (loss) from operations per sector 2001-2002
[GRAPH CHART]
Income (loss) from operations
in millions of euros
2001 2002
------ ----
Income from operations
excluding special items
and amortization of goodwill 20 460
Special items (1,235) (40)
Amortization of goodwill (180) -
------ ----
Income (loss) from operations (1,395) 420
------ ----
Special items affecting income (loss) from operations
in millions of euros
2001 2002
------- -----
Sale of businesses and real estate 295 569
Restructuring and impairment charges (1,093) (513)
Acquisition-related charges (331) (84)
Write-off of acquired in-process R&D (106) (12)
------ ---
Total (1,235) (40)
------ ---
Net gains resulting from the sale of businesses and real estate amounted to EUR
569 million. The ongoing divestment program led to special gains of EUR 311
million, of which the gains from the sale of Analytical (EUR 85 million),
Philips Broadband Networks (EUR 49 million) and PCMS (EUR 83 million) were the
most significant. Other special gains related to the sale of real estate (EUR 65
million), an earn-out of JDS Uniphase shares ( EUR 113 million), the sale of
Components' glass activities: (EUR 40 million) and a currency translation gain
from the liquidation of certain Components activities in Japan (EUR 40 million).
Restructuring and impairment charges, net of releases, in 2001 totaled EUR 513
million; this included restructuring charges of EUR 96 million for the PCMS
factories. Prior to the sale of Health Care Products (HCP), an impairment charge
of EUR 47 million was taken in order to bring the value of the assets in line
with the sale price.
The major restructuring projects were at Components (dissolving the division and
reorganizing the optical storage activities) and Semiconductors (closure of the
Albuquerque plant). The future annual savings generated by the restructuring
projects, once fully implemented, are estimated at approximately EUR 325
million.
The Marconi and Agilent acquisitions and the integration of those
businesses into our Medical Systems division led to special charges of
EUR 84 million, far below the integration savings already realized in
2002.
40
[SALES PER GEOGRAPHIC AREA 2001-2002]
[BAR CHART]
Income (loss) from operations per geographic area
- ---------------------------------------------------------
in millions of euros 2000 2001 2002
------ ------- ------
Europe 3,246 (487) 881
North America 186 (851) (521)
Latin America 59 (13) 23
Asia Pacific 764 (34) 30
Africa 3 (10) 7
----- ------ -----
Total 4,258 (1,395) 420
----- ------ -----
Results relating to unconsolidated companies
- ------------------------------------------------------------------
in millions of euros 2000 2001 2002
------ ----- -------
Income (loss) excluding special items
and amortization of goodwill 683 (103) 291
Special items:
impairment charges - (119) (1,305)
other 3,397 (129) (308)
Amortization of goodwill (124) (257) (24)
----- ---- ------
Total 3,956 (608) (1,346)
----- ---- ------
SALES AND INCOME FROM OPERATIONS BY GEOGRAPHIC AREA
Sales
Sales in Europe declined by 5%, partly due to the unfavorable effect of
consolidation changes. Additionally, the weak economy in Germany had a downward
effect on sales. Sales in North America increased by 5%, lifted by the new
consolidations at Medical Systems, partly offset by a weaker US dollar and weak
semiconductor demand. Sales in Latin America were 21% lower, due, in particular,
to the economic downturn in Argentina and Venezuela. Sales growth in Asia
Pacific, at 1%, was hampered by the negative effect of deconsolidations and
weaker currencies. On a comparable basis, sales expanded by 8%. Strong growth
was posted in China (26%) and South Korea (22%), while sales declined in Japan.
Income from operations
The improvement in income from operations on a global level was also visible in
the performance of the various regions. All regions improved their
profitability, especially Europe and North America. However, despite the
considerable improvement in North America, this region was still loss-making,
mainly due to Semiconductors, Components, Consumer Electronics and
acquisition-related charges at Medical Systems.
RESULTS RELATING TO UNCONSOLIDATED COMPANIES
In general, the operating results excluding amortization of goodwill improved
compared to 2001. The operational performance of LG. Philips LCD improved due to
a strong overall LCD market with increased price levels, particularly in the
first half of 2002, and much higher volumes.
Taiwan Semiconductor Manufacturing Company (TSMC) maintained profitability but
suffered from declining markets in the second half of 2002. Its utitilization
rate slipped to 61% in the last quarter. TSMC still outperforms the
semiconductor industry as a whole, because of the increased outsourcing by
electronics companies.
LG.Philips Displays' operational performance improved compared to 2001.
Restructurings were carried out to relocate to lower cost regions and to dispose
of or shut down manufacturing sites, and lower operating costs were realized.
The restructuring
41
Results relating to unconsolidated companies
(EXCLUDING SPECIAL ITEMS AND AMORTIZATION OF GOODWILL)
- ------------------------------------------------
in millions of euros
2000 2001 2002
----- ----- -----
SSMC (31) (84) (54)
LG.Philips LCD 207 (125) 169
LG.Philips Displays - (86) 18
Others 507 192 158
---- ---- ---
Total 683 (103) 291
---- ---- ---
Estimated annualized future savings
- -----------------------------------------------------------------------------
in millions of euros
2001 2002
------------- ------- ------------- --------
Restructuring Savings RESTRUCTURING SAVINGS
------------- ------- ------------- --------
Lighting 18 13 13 10
Cons. Electronics 503 127 100 58
DAP 4 - 9 6
Components 156 93 165 127
Semiconductors 204 101 169 87
Medical Systems 75 22 43 -
Miscellaneous 96 75 14 33
Unallocated 37 6 - -
------------- ------- ------------- --------
Philips Group 1,093 437 513 321
------------- ------- ------------- --------
FINANCIAL INCOME AND EXPENSES
- -----------------------------------------------------
in millions of euros
2000 2001 2002
------ ----- -------
Interest expenses (net) (167) (391) (384)
Impairment of securities - (526) (1,955)
Sale of securities 2,173 - 67
Other (13) 2 45
----- ---- ------
Total 1,993 (915) (2,227)
----- ---- ------
and asset impairment charges negatively impacted net income by EUR 301
million.
Additionally, impairment charges of EUR 275 million were recognized in
connection with our investment in LG.Philips Displays; a EUR 921
million write-down of our investment in Atos Origin to its lower market
value was also recognized.
RESTRUCTURING AND ASSET IMPAIRMENT
In 2002 we made further progress in aligning our portfolio, and we took
measures to develop a more flexible cost base and to further improve
efficiency. This led to restructuring and impairment charges of EUR 513
million for various projects, net of releases of EUR 78 million. The
most significant restructuring and impairment charges in 2002 related
to:
- - the dissolution of Components (EUR 78 million);
- - rationalization of the product portfolio of Optical Storage (EUR 104
million);
- - reduction of excess capacity at Semiconductors (EUR 180 million);
- - reduction of PCMS manufacturing capacity at Louviers, Juarez and
Hasselt (EUR 96 million);
- - several programs at Lighting in the Netherlands (EUR 20 million);
- - closure of Monitors' production facilities in Mexico (EUR 11 million);
- - reduction of Research activities (EUR 12 million);
- - HCP asset and goodwill impairment (EUR 47 million).
The future annual savings from the above restructurings are estimated
at around EUR 325 million.
FINANCIAL INCOME AND EXPENSES
Net interest expenses were slightly lower in 2002 than in the previous
year due to lower interest rates.
Due to the lower share prices of some security investments, a value
adjustment of EUR 1,955 million was recognized, mainly in respect of
Vivendi Universal. The partial sale of our stake in ASML resulted in a
gain of EUR 67 million.
INCOME TAXES
Income taxes represented a charge of EUR 27 million in 2002, compared
to a benefit of EUR 428 million in
42
[EBITDA / NET INTEREST COVERAGE RATIO]
[LINE CHART]
[CASH FLOWS FROM OPERATING ACTIVITIES VERSUS NET CAPITAL EXPENDITURES]
[BAR CHART]
[CASH FLOWS FROM DIVESTMENTS AND ACQUISITIONS (EXCLUDING CAPITAL EXPENDITURES)]
[BAR CHART]
2001. For the coming year, the Company expects an effective tax rate of
approximately 25%.
MINORITY INTERESTS
In 2002 the share of third-party minority interests in the income of
group companies amounted to EUR 26 million, compared with a share in
the loss of EUR 15 million in 2001. The change is mainly attributable
to excess dividends received in 2001, relating to minority
shareholdings, which did not occur in 2002.
CASH FLOWS
Philips was able to generate an improved operating cash flow of EUR
2,228 million in 2002, compared to EUR 1,248 million in 2001. Our cash
conversion cycle improvement program continued to bear fruit and led
(excluding currency and consolidation effects) to lower inventories,
higher payables and lower receivables. Inventories at the end of 2002
reached an all-time low of 11.1% of sales, compared to 13.3% a year
earlier. Consumer Electronics in particular drastically reduced its
cash conversion cycle to a level close to nil.
Cash used for investing activities in 2002 mainly comprised:
- - net capital expenditures of EUR 940 million, which were scaled back by
approximately half compared to 2001 as we aligned our Components and
Semiconductors manufacturing facilities to the lower level of market
demand;
- - EUR 641 million that was used for acquisitions, of which the most
important were the settlement and capital injection in the joint
venture LG.Philips Displays of EUR 250 million, a final payment to
Agilent of EUR 90 million and a capital injection of EUR 69 million to
SSMC;
- - EUR 1,333 million cash proceeds. The sale of businesses, of which
Philips Contract Manufacturing Services (PCMS), Analytical and
Communication, Security and Imaging (CSI) were the most important,
generated EUR 813 million. In addition, EUR 422 million was received
from the resetting of currency swap transactions, while proceeds from
the sale of shares amounted to EUR 98 million (of which ASML shares of
EUR 72 million).
43
[NET DEBT TO GROUP EQUITY]
[BAR CHART]
[HEADCOUNT PER SECTOR AT YEAR-END 2002]
[PIE CHART]
[COMPOSITION OF CHANGES IN HEADCOUNT]
[BAR CHART]
In 2002, net cash used for financing activities amounted to EUR 897
million. Repayment of short-term debt was offset by EUR 300 million of
newly issued long-term debt. In 2002 a distribution in cash of EUR 459
million was made to Philips shareholders (2001: EUR 458 million).
FINANCING
At the end of 2002, Philips had a net debt position of EUR 5,251
million, which was EUR 1,725 million down from 2001. The net debt to
group equity ratio was 27:73, compared to 26:74 in 2001.
Stockholders' equity decreased by EUR 5,241 million to EUR 13,919
million at year-end 2002. This decrease was mainly due to the net loss
of EUR 3,206 million in 2002, negative currency translation effects,
unrealized losses related to available-for-sale securities and
adjustments for pension liabilities charged against equity.
Furthermore, EUR 459 million was paid to shareholders from retained
earnings.
EMPLOYMENT
The number of employees at the end of December 2002 totaled 170,087, a
decline of 18,556 from December 31, 2001. Part of the reduction (9,514)
was caused by consolidation changes. Excluding these changes, the
headcount reduction came to 9,042, mainly centered on Consumer
Electronics, Semiconductors and Corporate Investments. The headcount at
Medical Systems increased by 846 employees as a result of expansion of
the business. In geographical terms, Europe and Asia Pacific accounted
for most of the decrease. The headcount reduction was most significant
in the production and general administrative areas, while the R&D area
was less affected.
44
[MARKET CAPITALIZATION]
[BAR CHART]
[5-YEAR RELATIVE PERFORMANCE: PHILIPS, S&P 100, SOXX]
[LINE CHART]
DUTCH GAAP
The Group financial statements have been prepared in accordance with US GAAP
(Generally Accepted Accounting Principles in the United States), which differ in
certain respects from Dutch GAAP. As of January 1, 2002 the most important
difference relates to goodwill, which under Dutch GAAP is amortized, whereas
under US GAAP it is tested for impairment. Net income determined in accordance
with Dutch GAAP came to a loss of EUR 3,602 million in 2002, compared with a
loss of EUR 2,608 million in 2001. These aggregate amounts result in basic
earnings per common share of a loss of EUR 2.83 in 2002 and a loss of EUR 2.04
in 2001. For both years no dilution effects are taken into consideration. Please
refer to the specific section of the consolidated financial statements for a
description of the primary differences between US GAAP and Dutch GAAP.
PROPOSED DISTRIBUTION TO SHAREHOLDERS
Pursuant to article 38 of the Articles of Association, and with the approval of
the Supervisory Board and the Meeting of Priority Shareholders, a proposal will
be submitted to the General Meeting of Shareholders to make a distribution in
cash to shareholders of EUR 0.36 per common share, the same as last year.
45
LIGHTING
- - Best Q4 results ever:income from operations of 14.1%
- - Quality of income improved due to tight cost control and better product
mix
- - Strong cash contribution
- - Sales growth hampered by soft markets worldwide
- - Continued market leadership
[LIGHTING SALES AND NET OPERATING CAPITAL (NOC)]
[BAR CHART]
[LIGHTING INCOME FROM OPERATIONS (IFO)]
[BAR CHART]
Sales
Sales at Lighting totaled EUR 4,845 million and were 5% lower than in 2001.
Sales volume increased by 1%, while average prices were 3% lower. Luminaires in
particular suffered from difficult market conditions, while Automotive & Special
Lighting continued to show growth. Sales growth in Asia Pacific continued; Latin
American sales levels remained weak. The market slowdown in Europe and North
America adversely affected turnover.
Income from operations
Income from operations totaled EUR 602 million, or 12.4% of sales, and was above
the 11.4% of 2001, mainly due to focused marketing management, tight cost
control and more volume in high-end products. The 2002 result included net
restructuring charges of EUR 13 million for various activities in the
Netherlands, compared with EUR 16 million the year before.
Net operating capital
Lighting showed decreased net operating capital at the end of 2002, mainly due
to lower receivables and inventories.
Unconsolidated companies
In the LumiLeds Lighting 50/50 joint venture, Philips and Agilent have continued
to strengthen the product portfolio of light-emitting diodes (LEDs), one of the
key technologies which will drive the lighting business in the future.
46
CONSUMER ELECTRONICS
- - DVD+RW sales doubled and standard continues to gain market share
- - Improved earnings in television and audio; monitor markets still highly
competitive
- - USA situation improved, not yet profitable
- - Lower licensing income
- - Refocused strategy for Digital Networks led to cost reductions
- - PCMS divested
[CONSUMER ELECTRONICS SALES AND NET OPERATING CAPITAL (NOC)]
[BAR CHART]
[CONSUMER ELECTRONICS INCOME FROM OPERATIONS (IFO)]
[BAR CHART]
Sales
Sales in the Consumer Electronics sector (CE) decreased by 13% compared with
2001. A large part of the reduction (5%) is due to the shift of former CE
activities to the sector Miscellaneous. In addition, weaker currencies (3%) and
price erosion (10%) put pressure on sales. Sales volume grew by 5%. In Europe,
CE performed very well, while the performance in the USA improved compared with
2001. Television improved, driven by the introduction of PixelPlus and the
extension of the Flat TV product range. DVD, including DVD+RW, showed
double-digit growth, taking share from the VCR business. The monitor markets
experienced a severe price decline, especially in the second half of 2002. The
measures taken in 2001 to rescale both GSM and Digital Networks had a negative
effect on sales. For the second year in a row, the market for set-top boxes
showed a decline (33% in 2002, compared with 9% in 2001).
Income from operations
Income from operations at Consumer Electronics increased dramatically compared
with 2001, returning to the black. The main improvements came from TV, audio,
VCR and set-top boxes. The latter, however, was not yet profitable. The sale of
our PCMS activities resulted in a gain of EUR 83 million. Net restructuring
charges in 2002 amounted to EUR 100 million, of which EUR 96 million related to
PCMS. License income in 2002 decreased to EUR 188 million, a decline of EUR 163
million compared to 2001. The 2001 figure included an amount of EUR 82 million
of one-time payments for past use, considerably higher than the past-use
payments received in 2002. The decline was also attributable to the expiration
of basic CD patents in certain regions, which was only partly offset by
increased income from our DVD and CD-R/RW licensing programs. The lower US
dollar had a negative impact on income.
Net operating capital
CE is continually reducing the asset base required to support its business
operations through optimized supply chain management, an ODM (Original Design
Manufacturing) business model philosophy and outsourcing. In the year under
review this resulted in net operating capital of virtually zero.
47
DOMESTIC APPLIANCES AND PERSONAL CARE
- - Another record-breaking year for sales and income
- - Increased profitability driven by cost management and product mix
- - Strong position for Sonicare in the USA;starting to grow in Europe
[DAP SALES AND NET OPERATING CAPITAL (NOC)]
[BAR CHART]
[DAP INCOME FROM OPERATIONS (IFO)]
[BAR CHART]
Sales
Sales increased by 2%. After adjustment for currency effects, sales increased by
6%, comprising 8% volume growth offset by 2% lower prices. The expansion was
above the market growth, due to a number of exciting innovations in the various
markets coupled with successful regional market penetration (Senseo, Sonicare
toothbrush, the new Sensotec shaver). Repositioning of the shaver range in North
America had a positive effect on market share. The Senseo attained the number
one position in all countries where it is available.
Income from operations
Income from operations increased strongly by 20% to a new record high level of
EUR 401 million, compared with EUR 334 million in 2001. The improvement was
driven by sales expansion, margin improvement due to a better product mix and
successful cost reduction programs. The profitability improvement was
particularly visible in the businesses Oral Healthcare and Food & Beverage.
Restructuring charges in 2002 amounted to EUR 9 million.
Net operating capital
Net operating capital decreased considerably on a comparable basis. Strong focus
on efficient utilization of capital reduced working capital by 13% in 2002
compared to 2001. With increasing sales, the turnover rate came to 4.3 at the
end of 2002, up from 3.5 in 2001.
48
COMPONENTS
- - Components division dissolved January 1, 2003 to realign businesses and
enhance synergies
- - Restructuring charges of EUR 165 million; Optical Storage (Data)
strongly downsized
- - Sales growth driven by Mobile Display Systems; market share increased
by 7%
- - Improvement over 2001; not yet profitable
[COMPONENTS SALES AND NET OPERATING CAPITAL (NOC)]
[BAR CHART]
[COMPONENTS INCOME FROM OPERATIONS (IFO)]
[BAR CHART]
Sales
Components' sales totaled EUR 2,212 million for the year 2002, a decline of 20%
in nominal terms largely due to the deconsolidation of Display Components, which
was transferred to the LG.Philips Displays joint venture in mid-2001. Sales
volume increased by 21%, while average prices declined by 11%. On a comparable
basis, sales increased by 10% from 2001.
Mobile Display Systems recorded strong growth, attributable to an expanding
display market and leading to a 7% increase in market share. Sales volume grew
by more than 10%. The transition to color screens is being executed
successfully, and revenues from color displays were reaching close to 45% by the
end of the year. Optical Storage recorded positive sales growth in spite of
overcapacity in the industry caused by disappointing PC markets. Price erosion
intensified, especially in the commoditized data segment. Philips took the
decision to restructure and to remodel this business. The Audio/Video and
Automotive business lines will be continued. In Emerging Electronic Solutions,
sales grew marginally from 2001, mainly in Sound Solutions. However, performance
was weaker in the tuners and remote controls businesses.
Income from operations
Income from operations in 2002 came to a loss of EUR 329 million, which included
special charges amounting to EUR 85 million for the full year. Income from
operations, excluding special items, increased by EUR 266 million from 2001 and
was mainly visible in Mobile Display Systems. The improved product mix and shift
towards integrated modules had a positive effect on margins as well. Most of the
innovative businesses in the Digital Displays cluster are in the early stage of
the life cycle, with high R&D and capital expenditures impacting the
profitability of this segment. The most significant special items were the
charges taken for Optical Storage to exit the data segment (EUR 104 million) and
the charges related to the dissolution of the product division (EUR 78 million).
Net operating capital
Net operating capital was reduced due to inventory reduction, several asset
write-downs and restructuring provisions.
49
SEMICONDUCTORS
- - Another weak year for the industry, following a dramatic 2001; channel
inventories cleared
- - Distribution restocking in first half of 2002
- - PC and mobile phone markets still depressed; continued overcapacity
- - Rationalization of manufacturing capacity by closing of production
lines
[SEMICONDUCTORS SALES AND NET OPERATING CAPITAL (NOC)]
[BAR CHART]
[SEMICONDUCTORS INCOME FROM OPERATIONS (IFO)]
[BAR CHART]
Sales
After experiencing the worst downturn in semiconductor history in 2001, markets
more or less stabilized in 2002. For the second year in a row Semiconductors
showed a nominal sales decline in 2002, this time by 7%. The decline was
experienced across all businesses and consisted of a 7% increase in sales
volume, a 3% decline due to currency movements and an 11% decrease due to price
erosion. On a total available market (TAM) basis, market share declined by 0.1%
to 3.1% (Source: WSTS). Saturation in the PC and handset markets and a weak
financial position of telecom operators and service providers had an adverse
effect on semiconductor industry growth. Semiconductors maintained its position
in the profitable analog markets.
Income from operations
The year 2002 was yet another weak year for the industry. An initial improvement
in the first half of the year due to reloading of the inventory channels was not
sustained in the second half of the year. Coupled with inventory reductions by
our own organization, this resulted in a still loss-making 54% wafer fab
utilization.
Expressed as a percentage of segment revenues, income from operations was a loss
of 11.6%. Losses were incurred in growth areas such as digital consumer and
networking as a result of continued substantial R&D efforts. Excluding net
special charges of EUR 162 million, income from operations was a negative EUR
375 million. To reduce overcapacity, it was decided to further downscale
production capacity by closing the fab in Albuquerque; this closure will be
completed towards the end of 2003. R&D activities and overheads were further
streamlined. The total cost of these measures was EUR 169 million in 2002. A
further EUR 66 million will be recognized in 2003. The wafer capacity
restructurings announced over the last two years will reduce capacity by 15%.
Net operating capital
Capital expenditures were reduced as much as possible. To further limit our
exposure to capital commitments, cooperation with TSMC, SSMC and
STMicroelectronics will be continued, including a joint 12-inch pilot fab that
is being built with STM and Motorola, which is expected to be operational in
2003.
50
Medical Systems
- - Sales growth of 5% excluding acquisitions
- - Market position reinforced
- - Savings through integration synergies on track despite IT setbacks
- - Improved performance of X-ray, Customer Service and Computed
Tomography/Magnetic Resonance (CT/MR)
[MEDICAL SYSTEMS SALES AND NET OPERATING CAPITAL (NOC)]
[BAR CHART]
[MEDICAL SYSTEMS INCOME FROM OPERATIONS (IFO)]
[BAR CHART]
Sales
Sales at Medical Systems in 2002 totaled EUR 6,844 million, representing 42%
growth, mainly attributable to the effect of the acquisitions (41%). Currency
movements had a negative impact of 4%. Sales volume increased by 8%, while
average prices declined by 3%. X-ray, Computed Tomography, Nuclear Medicine,
Cardiac and Monitoring Systems and Customer Support drove the sales increase.
From a regional perspective, sales growth was strongest in North America.
Income from operations
Income from operations in 2002 included special charges of EUR 126 million,
including acquisition-related costs of EUR 84 million and impairment charges for
Health Care Products (HCP) amounting to EUR 47 million. Excluding these special
items and 2001 amortization of goodwill, income from operations in 2002 improved
by EUR 40 million to a record EUR 435 million. This increase mainly came from
the improved sales and performance of X-ray, Customer Service and CT/MR.
There were also a number of non-recurring charges totaling EUR 73 million,
mainly following the Marconi and Agilent acquisitions, and charges taken for the
exposure related to Argentina. In addition, IT costs were EUR 58 million higher
than in 2001, due to the new IT configuration in the acquired companies. Despite
a delay and the relatively high cost of integrating IT systems, the integration
of the new acquisitions and the related restructuring program are on schedule.
Positive synergy effects in 2002 amounted to EUR 173 million. The integration is
expected to yield significant savings of EUR 350 million during the full year
2003.
Net operating capital
Net operating capital was significantly lower due to the weaker dollar and the
sale of HCP.
51
MISCELLANEOUS
[MISCELLANEOUS SALES AND NET OPERATING CAPITAL (NOC)]
[BAR CHART]
[MISCELLANEOUS INCOME FROM OPERATIONS (IFO)]
[BAR CHART]
CORPORATE & REGIONAL OVERHEADS: KEY DATA
in millions of euros
2000 2001 2002
-------------------------
Corporate and regional overheads (495) (411) (332)
Pensions / post-retirement benefit costs 393 290 2
-------------------------
Income from operations (102) (121) (330)
- ---------------------------------------------------------------------
Number of employees (FTEs) 6,388 5,463 4,315
- ---------------------------------------------------------------------
CORPORATE INVESTMENTS
Our low-growth low-return divestment program continued successfully despite poor
M&A markets. Income from operations was positively impacted by the sale of
TechnoFusion, SMATV, Heat and Surface Treatment, Philips Broadband Networks,
Analytical and CSI, resulting in a gain of EUR 245 million. Furthermore, an
earn-out of JDS Uniphase shares lifted income by EUR 113 million. Moreover,
income improvements were recorded at Assembleon.
INTELLECTUAL PROPERTY & STANDARDS
In 2002 the slowdown of the world economy, currency effects and the expiration
of patents negatively impacted revenues. However, this was partly offset by
revenues from new licensing programs, e.g. in respect of digital audio and video
compression technologies. Moreover, the increased efforts to enforce our
intellectual property rights against companies that use our technology and to
force companies to comply with existing licenses started to bear fruit.
Significant efforts are being devoted to establishing the standards for the next
generation of high-density optical storage technology and to launching systems
for protecting and securing the distribution of digital audio and video content.
RESEARCH
In 2002, expenditures for R&D activities, which are mainly concentrated in
Semiconductors followed by Medical Systems, amounted to EUR 3,043 million,
representing 9.6 % of Group sales, compared to EUR 3,312 million, or 10.2% of
Group sales, in 2001.
CORPORATE & REGIONAL OVERHEADS
The costs of the corporate center - including the Company's initial funding of
e-business and global brand management programs - as well as country and
regional overhead costs are not attributable to the product sectors, but are
reported separately under the sector Unallocated. Income from operations
amounted to a loss of EUR 330 million, compared to a loss of EUR 121 million in
2001.
A sharp decrease in group overheads in 2002 was more than offset by
significantly higher pension costs.
52
OUTLOOK
Through operational and marketing excellence, we expect that the DAP and
Lighting divisions will again outperform their industries in 2003, whilst
Consumer Electronics is continuing to improve its overall performance,
especially in the USA, through a marketing focused approach and innovative
product mix. The integration of our Medical Systems division is on track to
achieve the targeted EUR 350 million in savings by year-end. Semiconductors is
lowering the break-even point as a result of capacity reduction and
restructuring savings. Restructuring programs undertaken by Philips during the
past two years are starting to pay off with more profitable, efficient and less
capital-intensive operations.
The Company will continue cost reduction initiatives, including the reduction in
overhead costs, which is on track, and ongoing supply-chain management, which
has reached best-in-class in a number of businesses, especially Consumer
Electronics.
Continued weakness of the US dollar would negatively impact sales and to a
lesser extent net income, whilst volatile stock markets can significantly impact
pension expense and the value of financial assets of the Company.
On the basis of the current economic and political uncertainties, Philips does
not anticipate any short-term improvement in economic conditions. As such, the
Company will continue its cautious stand on costs, capital spending, working
capital and employment, whilst maintaining a strong balance sheet and remaining
ready for any upturn in its markets.
February 7, 2003
Board of Management
53
GOVERNANCE
BUSINESS PRINCIPLES
The Philips General Business Principles govern the Company's business decisions
and actions throughout the world, applying equally to corporate actions as well
as the behavior of individual employees when on company business. They
incorporate the fundamental principles on which all Philips activity is or
should be based: integrity, fair trade, non-discrimination and equal
opportunities. The General Business Principles have been translated into the
local language in almost all countries. In most countries they are now an
integral part of the labor contract. In the countries where this is not the
case, the employees sign a document confirming that they have received a copy of
the General Business Principles. In order to further heighten awareness of the
issue of business ethics, our casebook for dilemma training has been updated and
expanded.
The responsibility for compliance with the Principles rests first and foremost
with the management of the business. In every product division and country
organization a Compliance Officer has been appointed. The Philips Intranet
provides information on how to contact the Compliance Officer. Our program -
building upon long-standing practice in the USA - to introduce
guaranteed-anonymity hotlines for reporting of suspected contraventions of the
General Business Principles passed a new milestone with the roll-out to the
entire Latin American region.
With a view to ensuring maximum transparency for shareholders and other
interested parties, a section of our Internet site (www.investor.philips.com) is
devoted to specific issues of business ethics, such as political payments,
military and defense contracts, and child labor. With regard to the latter, an
extensive inventory of group companies has confirmed that Philips does not
employ child labor. In 2002 this inventory was extended to major sub-contractors
and suppliers in high-risk regions. We have asked Nyenrode University of the
Netherlands to assist us in developing a blueprint for an improvement plan that
could be imposed upon suppliers or sub-contractors who do not fulfill the
criteria laid down in ILO Conventions 138 and 182. To ensure full awareness of
and compliance with the highest standards of transparency and accountability by
all employees performing important financial functions, and in view of the
recent US legislation in respect thereof, Philips is preparing a financial code
that will contain, among other things, standards to promote honest and ethical
conduct and full, accurate and timely disclosure procedures to avoid conflicts
of interest, as well as a procedure for whistleblowers to report potential
issues. All employees performing important financial functions will have to
confirm adherence to the financial code, which is expected to be introduced in
the first half of 2003.
SUSTAINABILITY
Philips is committed to sustainable growth. We recognize the need to perform not
only against a single financial bottom line, but also against the triple bottom
line. This involves the simultaneous pursuit not only of economic prosperity and
environmental quality, but of social equity as well. It's about living up to our
brand promise Let's make things better.
At Philips, we view sustainability in terms of overall corporate responsibility
- - economic responsibility, environmental responsibility, personal responsibility
(to our employees) and social responsibility (to our customers, the local
communities in which we operate and society at large).
The newly created Sustainability Board - chaired by a member of the Board of
Management and comprising representatives of the relevant functional disciplines
- - provides governance on the issue of sustainability and acts as an advisory
body to the Group Management Committee.
In addition to the environmental reporting already in place, we have begun
measuring and reporting on our health & safety performance around the world.
Both sets of results are presented in the separately published Philips
Sustainability Report 2002 - the next step towards comprehensive sustainability
reporting and an indication of our commitment to extend the dialogue with our
stakeholders.
CORPORATE GOVERNANCE
Being a global company and player in the international capital markets, Philips
has, over the last decades,
54
continuously improved its corporate governance as one of its most important
policy items in line with US, Netherlands and international codes of best
practises. The governance of the Company and the Philips Group was improved
substantially, in particular by simplifying its corporate structure and making
it more transparent and by strengthening the accountability of the Board of
Management as its executive management and the Supervisory Board as its board of
independent supervisory directors, as well as by increasing the rights and
powers of its shareholders and communication with investors. In this respect,
the consequences for the Company of the US Sarbanes-Oxley Act and the proposed
amendments to the listing rules of the New York Stock Exchange were discussed
and existing procedures reviewed and, where appropriate in response to these
regulations currently effective, changes effected and formalized. The Company
also disclosed its Policy on Auditor Independence, aligned with the new
regulations to the extent currently effective. Furthermore, the Company made
necessary preparations in view of the CEO and CFO certifications for the 2002
Annual Report on Form 20-F with the US Securities and Exchange Commission. This
certification process for Form 20-F (which incorporates parts of this Annual
Report) under US law is in addition to the Dutch legal provisions according to
which each member of the Supervisory Board and the Board of Management has
signed the 2002 financial statements for approval.
PROXY SOLICITATION
Philips attaches great value to its relations with its shareholders. For
instance, Philips was one of the key companies in the establishment of the
Shareholders' Communication Channel - a project of Euronext Amsterdam, banks in
the Netherlands and several major Dutch companies to simplify contacts between a
participating company and its shareholders.
Philips will use the Shareholders' Communication Channel to distribute the
Management Report booklet of its Annual Report and the Agenda for this year's
General Meeting of Shareholders as well as an instruction form to enable proxy
voting at said Meeting.
For the General Meeting of Shareholders on March 27, 2003, a record date (being
March 20, 2003,) will apply: those persons who on March 20, 2003, hold shares in
the Company and are registered as such in one of the registers designated by the
Board of Management for the General Meeting of Shareholders will be entitled to
participate and vote at the Meeting.
55
BOARD OF MANAGEMENT
[PICTURE]
GERARD KLEISTERLEE 1946, Dutch
President/CEO and Chairman of the Board of Management and the Group Management
Committee President/CEO and Chairman of the Board of Management since April
2001; member of the Board of Management since April 2000; member of the Group
Management Committee since January 1999
After graduating in electronic engineering at Eindhoven University of
Technology, Gerard Kleisterlee started his career with Philips in 1974 at
Medical Systems. In 1981 he became general manager of Professional Audio
Systems. In 1986 he joined Philips Components, and after becoming general
manager of Philips Display Components for Europe, he was appointed managing
director of Philips Display Components worldwide in 1994. He became president of
Philips Taiwan and regional manager for Philips Components in Asia Pacific in
1996. He was also responsible for the activities of the Philips Group in China
from September 1997 to June 1998. From January 1999 to September 2000 he was
President/CEO of Philips Components.
[PICTURE]
AD HUIJSER 1946, Dutch
Executive Vice-President and Chief Technology Officer Member of the Board of
Management since April 2002; Chief Technology Officer since May 2001; member of
the Group Management Committee since April 1999 and CEO of Philips Research
since 1998
After graduating from Eindhoven University of Technology, Ad Huijser gained a
Ph.D. in applied physics from the University of Twente. He joined Philips in
1970 and held various positions in the Research Laboratories before becoming
chief technology officer for the Consumer Electronics division in 1991. A year
later he became managing director of R&D for the Television business group. In
1994 he returned to the Research Laboratories as managing director and chairman
of the management committee, and in 1996 he was appointed senior adviser and
director of Philips Multimedia Center in California.
[PICTURE]
JAN HOMMEN 1943, Dutch
Vice-Chairman of the Board of Management and Chief Financial Officer
Vice-Chairman of the Board of Management since April 2002; member of the Board
of Management and the Group Management Committee and Chief Financial Officer
since March 1997
Jan Hommen studied business economics at Tilburg University, before beginning
his career as controller at Lips Aluminium in Drunen (The Netherlands) in 1970.
This company was taken over by Alcoa in 1975, where-upon he became financial
director of Alcoa Nederland. In 1978, Jan Hommen moved to Alcoa's head office in
Pittsburgh, USA, as assistant-treasurer, becoming vice-president and treasurer
in 1986 and executive vice-president and chief financial officer in 1991.
[PICTURE]
GOTTFRIED DUTINE 1952, German
Executive Vice-President
President/CEO of the Consumer Electronics division since January 2003; member of
the Board of Management since April 2002; member of the Group Management
Committee since February 2002
Gottfried Dutine holds a degree in electrical engineering and a Ph.D. in
communications technology from the University of Darmstadt, Germany. He began
his career at Rockwell-Collins in Frankfurt, where he was appointed director of
engineering. In 1984 he joined Motorola, and in 1989 he went to Robert Bosch,
where he held several positions before leaving for Alcatel in Paris at the end
of 1997. At Alcatel he was appointed vice-president of the Telecom Board
Committee and area president for Central & Eastern Europe and Russia.
[PICTURE]
ARTHUR VAN DER POEL 1948, Dutch
Executive Vice-President
Member of the Board of Management since May 1998; member of the Group Management
Committee since May 1996
Arthur van der Poel graduated in telecommunications engineering at Eindhoven
University of Technology and began his career with the Dutch PTT. He joined
Philips in 1984 and became a director of the Semiconductors division
(responsible for the Consumer ICs business group) in 1991. Three years later he
was appointed managing director of the Consumer ICs business group. He was CEO
of Philips Semiconductors from 1996 until 2001.
56
GROUP MANAGEMENT COMMITTEE
The Group Management Committee (GMC) is composed of the Board of Management and
the following senior officers:
[PICTURE]
AD VEENHOF 1945, Dutch
Member of the GMC since January 1996 and President/CEO of the Domestic
Appliances and Personal Care division since 1996
Ad Veenhof studied business administration at Nyenrode University and economics
at Groningen University. He joined Philips in 1971. Having held various
positions in the Netherlands, he moved to the Video division in 1983, becoming
corporate project leader for LCD products in 1986 and, three years later, also
for high-definition television within Consumer Electronics. In 1992 he was
appointed a managing director of the division, with responsibility for the Video
Equipment business. From September 1992 he was also chairman of iR3 Video
International, the Philips/Grundig joint venture.
[PICTURE]
TJERK HOOGHIEMSTRA 1956, Dutch
Member of the GMC since April 2000; responsible for Human Resources Management
since 2000
Tjerk Hooghiemstra graduated in economics from Erasmus University in Rotterdam
in 1982. He spent three years with the Amro Bank before joining the Hay Group in
1986, becoming a member of its European Executive Board and a partner of the Hay
Group Exempted Partnership. Joining Philips in 1996, he was appointed managing
director of HRM for the Consumer Electronics division.
[PICTURE]
SCOTT MCGREGOR 1956, American
Member of the GMC since January 2002 and president/CEO of the Semiconductors
division since 2001
Scott McGregor holds a B.A. in psychology and an M.Sc. in computer science and
computer engineering from Stanford University. He joined Philips Semiconductors
in 1998 with responsibility for the newly created unit Emerging Businesses,
focusing on creating fast-growing markets such as smart cards, networking,
digital media processing and computing. Prior to joining Philips, he held senior
management positions at the Xerox Palo Alto Research Center, Microsoft, Digital
Equipment and SCO.
[PICTURE]
GUY DEMUYNCK 1951, Belgian*
Member of the GMC since April 2000 and President/CEO of the Consumer Electronics
division since 2000
Guy Demuynck obtained degrees in applied economics and marketing from the
Universities of Antwerp and Gent respectively. He joined Philips Audio in 1976,
holding a number of positions within the division up to January 1992. He then
became chief executive officer of Philips Korea, but returned to Audio 18 months
later to head its global Portable Audio activities. The Hi-Fi business, Marantz
and a number of related businesses were added in 1997 to form the Audio business
group within Consumer Electronics.
* Mr Demuynck left the Company as of January 1, 2003.
[PICTURE]
ARIE WESTERLAKEN 1946, Dutch
Member of the GMC since May 1998, Secretary to the Board of Management since
1997 and Chief Legal Officer since 1996
Arie Westerlaken graduated in law from the University of Utrecht. He joined
Philips' legal department in the Netherlands in 1973 and was appointed general
counsel to Philips Japan in 1979. After six years in Japan and five years with
the Corporate Legal Department in Eindhoven, he left Philips in 1990 to become
director of legal affairs at DAF Trucks. Returning to Philips in 1994, he was
appointed director of legal affairs.
[PICTURE]
JOUKO KARVINEN 1957, Finnish
Member of the GMC since October 2002 and President/CEO of the Medical Systems
division since 2002
Jouko Karvinen holds an M.Sc. in electronics and industrial economics from
Tampere University of Technology in Finland.Before joining Philips in 2002, he
was responsible for the Automation Division of ABB Group Ltd. and was a member
of the ABB Group Executive Committee. Jouko Karvinen also served ABB Group in
several international positions, with business responsibilities in marketing and
sales, project management and operations. He has extensive experience in
integrating businesses after acquisitions.
[PICTURE]
JAN OOSTERVELD 1944, Dutch
Member of the GMC since May 1998; responsible for Corporate Strategy since 1997
Jan Oosterveld studied mechanical engineering and factory automation at
Eindhoven University of Technology and achieved an MBA at the Instituto de
Estudios Superiors de la Empresa in Barcelona. He joined Philips in 1972 and
held a variety of senior management positions in Spain and the Netherlands,
before becoming R&D and industrial director of the VCR business in 1983.
Appointed a director in 1984, Jan Oosterveld founded Philips Key Modules in
1989. He was appointed a managing director in 1995.
[PICTURE]
DAVID HAMILL 1957, British
Member of the GMC since May 2001 and President/CEO of the Lighting division
since 2001
David Hamill graduated from Strathclyde University with an honors degree in
production engineering and management. After working for Honeywell, General
Instruments and STC, he joined Philips Semiconductors in 1986. In 1993 he was
appointed senior vice-president of Philips Lighting Asia Pacific (responsible
for its activities in China/Hong Kong), becoming president in 1996. David Hamill
was appointed executive vice-president of Philips Lighting and CEO of the Lamps
business group in 1998 and chairman of the LumiLeds Board in 1999.
57
SUPERVISORY BOARD
[PICTURE]
L.C. VAN WACHEM 1931, Dutch** ***
Chairman
Member of the Supervisory Board since 1993; third term expires in 2005
Former Chairman of the Committee of Managing Directors of the Royal Dutch/Shell
Group and former Chairman of the Supervisory Board of Royal Dutch Petroleum
Company. Former member of the Supervisory Boards of Akzo Nobel, Bayer and BMW
and of the Board of IBM. Currently chairman of the Board of Directors of Zurich
Financial Services and member of the Board of Directors of ATCO
[PICTURE]
PROF.K.A.L.M. VAN MIERT 1942, Belgian*
Member of the Supervisory Board since 2000; first term expires in 2004
Former Vice-President of the European Commission and currently President of
Nyenrode University, member of the Supervisory Boards of Wolters Kluwer, RWE,
DHV, Agfa Gevaert, De Persgroep, Fraport, Munich and Anglo American
[PICTURE]
W. DE KLEUVER 1936, Dutch* ***
Vice-Chairman and Secretary
Member of the Supervisory Board since 1998; second term expires in 2006
Former Executive Vice-President of Royal Philips Electronics
[PICTURE]
L. SCHWEITZER 1942, French
Member of the Supervisory Board since 1997; second term expires in 2005
Chairman and Chief Executive Officer of Renault, President of Renault-Nissan and
member of the Boards of BNP Paribas, Electricite de France and Volvo
[PICTURE]
J.M. HESSELS 1942, Dutch*
Member of the Supervisory Board since 1999; first term expires in 2003
Former Chief Executive Officer of Royal Vendex KBB and currently Chairman of the
Supervisory Board of Euronext and member of the Supervisory Boards of Laurus,
Amsterdam Schiphol Group, Royal Vopak, Heineken, Barnesandnoble.com and Fortis
[PICTURE]
SIR RICHARD GREENBURY 1936, British**
Member of the Supervisory Board since 1998; second term expires in 2006
Former Chairman and Chief Executive Officer of Marks & Spencer and former
director of Lloyds TSB, British Gas, ICI and Zeneca, and currently member of the
Board of Electronics Boutique Plc.
* Member of the Audit Committee
** Member of the Remuneration Committee
*** Member of the Corporate Governance and Nomination & Selection Committee
58
SUPERVISORY BOARD REPORT
General
The oversight of the policies and actions of the executive management (the Board
of Management) of the Company is entrusted to the Supervisory Board, which, in
the applicable two-tier structure of Netherlands law, is a separate body and
completely independent from the Board of Management. This independency is also
reflected in the requirement that members of the Supervisory Board be neither a
member of the Board of Management, nor an employee of the Company.
The Supervisory Board, acting in the interests of the Company and the Philips
Group, supervises and advises the Board of Management in performing its
management tasks and setting the direction of the Group's business.
The Supervisory Board is empowered to recommend persons to be appointed as
members of the Supervisory Board or the Board of Management to the General
Meeting of Shareholders. Major management decisions, including the Group
strategy, require the approval of the Supervisory Board. The Supervisory Board
determines the remuneration of the members of the Board of Management.
Regarding the worldwide developments in the field of corporate governance, in
2002 the Supervisory Board discussed the possible consequences for the Company
of the US Sarbanes-Oxley Act and the proposed amendments to the listing rules of
the New York Stock Exchange several times. The Company has reviewed its existing
system of internal business controls and, where appropriate, formalized or
modified some procedures previously adhered to. The Supervisory Board has also
updated its 'Rules of Procedure', containing its own governance rules and the
charters of the three permanent committees that advise the full Board on certain
matters. The Rules of Procedure have been published on the Company's Internet
website. The same is true of the Policy on Auditor Independence, which has been
aligned to the new regulations. In light of the proposed changes to the NYSE
listing rules, the Supervisory Board has also decided to designate the existing
Nomination and Selection Committee as a corporate governance committee (under
the new name 'Corporate Governance and Nomination & Selection Committee'). The
Corporate Governance and Nomination & Selection Committee will review the
corporate governance principles applicable to the Company at least once a year,
and will advise the Supervisory Board on any changes to these principles as it
deems appropriate.
The other permanent Supervisory Board Committees are the Remuneration Committee
and the Audit Committee.
Meetings of the Supervisory Board
The Supervisory Board met six times in the course of 2002, including a two-day
meeting on strategy. The members of the Board of Management were present at the
meetings of the Supervisory Board except in matters regarding the composition of
the Supervisory Board, the Board of Management and the Group Management
Committee, as well as the remuneration and performance of members of the Board
of Management and the Group Management Committee. During the course of the year
the Supervisory Board was informed and consulted by the Board of Management on
the course of business, important decisions and the Philips Group strategy. In
addition to the scheduled meetings, the Chairman of the Supervisory Board had
regular contact with the President/CEO throughout the year.
Composition and Remuneration of the Supervisory Board
Members of the Supervisory Board are appointed by the General Meeting of
Shareholders on the joint recommendation of the Supervisory Board and the
Meeting of Priority Shareholders. 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 the Company's businesses. Consequently the
Board aims for an appropriate level of experience in marketing, manufacturing,
financial, economic, social and legal aspects of international business and
government and public administration. The Supervisory Board further aims to have
available appropriate experience within Philips by having one or two former
Philips executives as members on its Board. Members are appointed for fixed
terms of four years and may be re-elected for two additional four-year terms.
The Supervisory Board currently consists of six members. At the General Meeting
of Shareholders held on March 28, 2002 Messrs W. de Kleuver and Sir Richard
Greenbury were re-elected. At the 2003 General Meeting of Shareholders the
present term of Mr J.M. Hessels shall end. In view of the knowledge, experience
and contribution he brings to the Board and in particular given his role as
Chairman of the Audit Committee, we, in agreement with the Meeting of Priority
Shareholders, will make a proposal at the General Meeting of Shareholders to be
held on March 27, 2003 to re-elect Mr Hessels.
In agreement with the Meeting of Priority Shareholders, we will also make a
proposal at the 2003 General Meeting of Shareholders to elect Messrs J.M.
Thompson and
59
C.J.A. van Lede to the Supervisory Board as from April 1, 2003. Mr Thompson
(1942) held a variety of management positions in IBM from 1966. Until September
2002 he was Vice-Chairman of the Board of Directors, in which capacity he
oversaw IBM's worldwide strategy, with specific focus on developing IBM's
leadership in important emerging marketplaces. Considering Mr Thompson's
knowledge and experience of the business the Company is in, as well as his
international experience, the Supervisory Board recommends to the General
Meeting of Shareholders to adopt the proposed appointment. The same applies to
the proposed appointment to the Supervisory Board of Mr Van Lede (1942). He is
currently Chairman of the Board of Management of Akzo Nobel, which company he
joined in 1991; Mr Van Lede will retire from this position on May 1, 2003. He
has held management positions in various companies and is the former Chairman of
the Federation of Netherlands Industries. Besides his managerial business
experience, the Supervisory Board bases its recommendation to the General
Meeting of Shareholders to appoint Mr Van Lede as a member of the Supervisory
Board on his experience with international business organizations.
In 2002 the statutory age limit for members of the Supervisory Board was
abolished under Dutch law. As a consequence, the age limit of 72 years as
provided for in the Articles of Association of the Company no longer applies. We
are pleased that our Chairman, Mr Van Wachem, will thus be able to continue his
membership of our Board and also is willing to do so.
The remuneration of the members of the Supervisory Board is determined by the
General Meeting of Shareholders of the Company. The Supervisory Board determines
the additional remuneration for its Chairman and the members of its committees.
Since 1998 the remuneration has been EUR 40,840 per year for members of the
Supervisory Board and EUR 74,874 for the Chairman. For each committee membership
the remuneration is EUR 4,538 per year; details are disclosed on pages 98 and 99
of the separate booklet entitled 'Financial Statements and Analysis'.
Selection and Nomination of Members of the Supervisory Board, the Board of
Management and the Group Management Committee
The Supervisory Board and the Meeting of Priority Shareholders jointly recommend
individuals to be elected by the General Meeting of Shareholders as members of
the Supervisory Board and of the Board of Management. Under its Rules of
Procedure, the Supervisory Board appoints members of the Group Management
Committee who are not members of the Board of Management. All such resolutions
are adopted upon the advice of the Corporate Governance and Nomination &
Selection Committee consisting of the Chairman, Vice-Chairman and Secretary of
the Supervisory Board (ex officio).
Mr J.W. Whybrow retired as Executive Vice-President and member of the Board of
Management on April 1, 2002. At the General Meeting of Shareholders on March 28,
2002 Messrs A. Huijser and G.H. Dutine were appointed as members of the Board of
Management and Executive Vice-Presidents effective April 1, 2002. In addition to
his responsibilities as Chief Financial Officer, the Supervisory Board has
appointed Mr J.H.M. Hommen as Vice-Chairman of the Board of Management effective
April 1, 2002.
Messrs S. McGregor, J. Karvinen and A. Ragnetti have been appointed as members
of the Group Management Committee and Senior Vice-Presidents effective January
1, 2002, October 1, 2002 and January 1, 2003 respectively.
Mr J.M. Barella retired as a member of the Group Management Committee and Senior
Vice-President as of October 1, 2002. With effect from November 1, 2002, Mr M.T.
Medeiros, and effective January 1, 2003, Mr G.J.M. Demuynck resigned as members
of the Group Management Committee to take up other interests outside the
Company.
Remuneration of the Board of Management
The remuneration of the members of the Board of Management is determined by the
Supervisory Board on the advice of the Remuneration Committee of the Supervisory
Board. The members of the Remuneration Committee are listed on page 58. The
President is responsible for providing necessary benchmark information and
proposals, except regarding his own remuneration, to the Remuneration Committee.
General remuneration policies
The objective of the remuneration policy for members of the Board of Management
is in line with that for Philips Executives throughout the Philips Group: to
focus them on improving the performance of the Company and enhancing the value
of the Group, to motivate and retain them, and to be able to attract other
highly qualified executives to enter into Philips' service, when required.
60
In determining the remuneration policy, the Remuneration Committee ensures that
a competitive remuneration package for Board-level executive talent is
maintained and benchmarked with other multinational companies operating in
global markets. For that purpose, benchmark research is carried out each year
with Dutch and other European companies in the general industry of comparable
size, complexity and international scope.
Additional market data is provided by a number of independent external advisers.
In the case of the appointment of non-European members of the Board of
Management, the Remuneration Committee may apply a broader benchmark with
non-European data.
In order to link executive remuneration to the Company's performance, the
remuneration package includes a significant variable part in the form of an
annual cash bonus incentive and a long-term incentive in the form of stock
options. The total cash pay-out in any year is the sum of the received base
salary in the year concerned and the bonus pay-out related to the previous year.
For those current Board members who were also Board members on April 1, 2001,
the total cash pay-out in 2002 decreased by 28% with regard to the year 2001.
Base salary
Base salaries are based on a function-related salary system. When first
appointed, an individual Board member's base salary will usually be below the
maximum function-related salary. Normally (and subject to the decision by the
Supervisory Board) the base salary will reach the maximum function-related
salary level over a 3-year period from appointment. In line with market
developments shown by benchmark studies, the maximum function-related salary
levels in 2002 have been increased by 2.5% compared with those of 2001. In 2002,
the (maximum) function-related salary of the President/CEO was EUR 1,012,000 and
that of the Vice-Chairman/CFO EUR 835,000; the (maximum) function-related salary
of the other Board members was EUR 651,000. In 2002, the annual salary review
period was brought in line with that of the Philips Executives. As a consequence
of this decision, the annual review date for the base salary is set at April 1.
Adjustment of individual salaries is influenced by the (annual) adjustment, if
any, of the function-related salary levels and the progress to the (maximum)
function-related salary level if this level has not yet been reached. The
individual salary levels are shown in the table on page 96 of the separate
booklet entitled 'Financial Statements and Analysis'.
Annual Incentive (bonus)
Each year, a variable cash bonus can be earned, based on the achievement of
specific targets. Bonus targets are set at a challenging level, taking into
account general trends in the relevant markets, and are partly (70%) linked to
the financial result of the Philips Group and partly (30%) to the areas of
responsibility monitored by the individual member of the Board of Management as
a derivative of the set team targets. The bonus criteria are 1) the financial
indicators of the Company: Cash Flow and Economic Profit Realized, and 2) team
goals. The related targets for the members of the Board of Management are
determined annually at the beginning of the year by the Remuneration Committee
on behalf of the Supervisory Board and hence are linked to the Company's
financial performance, as well as to the team targets.
In principle, the maximum cash bonus achievable is 90% of the annual base
salary. The Remuneration Committee may decide to grant a higher bonus percentage
if exceptional targets are met. The bonus pay-out in any year relates to the
achievements of the preceding financial year versus agreed targets. As a result,
bonuses paid in 2002 relate to the salary levels and the performance in the year
2001. Similarly, the bonuses payable in 2003 will be calculated on the basis of
the 2003 annual results.
The Board of Management decided not to take the bonus pay-out in 2002. This
decision was respected and accepted by the Supervisory Board with one exception.
Mr J.W. Whybrow left the Company on April 1, 2002, and taking into account the
considerable contribution he made to the Company, the Supervisory Board, on the
advice of the President, granted a discretionary bonus for the year 2001 to Mr
J.W. Whybrow in 2002.
Long-Term Incentive Plan (LTIP)
Subject to the approval of the Supervisory Board, Royal Philips Electronics
equity-based incentive plans may be introduced for the Board of Management,
Philips Executives, high-performing employees and other employees in key
positions. The Supervisory Board also approves the plan-related maximum
pool-size of the underlying equity as well as the respective terms and
conditions. In 2002, stock options were granted to the members of the Board of
Management under the approved Philips Stock Option Plan 2002 applicable to
Philips Executives in general.
61
The number of stock options granted was dependent on the long-term performance
of the Company relative to a defined group of peer companies throughout the
preceding three years, as explained in our report in 2001. The Supervisory Board
decided to grant the maximum number of stock options, given the relative Total
Shareholder Return performance (position in the upper quintile of the list)
during the period December 31, 1998 to December 31, 2001, as stated in the terms
& conditions of the 2002 plan. For details of the 2002 plan, see pages 91-94 of
the separate booklet entitled 'Financial Statements and Analysis'.
In 2000 and 2001, 50% of the granted stock options were awarded as fixed options
and 50% as performance-related options, linked to the long-term Company
performance relative to a defined group of peer companies. The Supervisory Board
has decided to fix vesting (as of February 17, 2003) at 75% of the
performance-related stock options 2000 given Philips' performance vis-a-vis the
defined peer group (positioned in second top quintile of the list) during the
observation period November 30, 1999 to November 30, 2002, as stated in the
terms & conditions of the 2000 plan.
For 2003 the LTIP will be a combination of stock options and restricted shares.
The introduction of restricted shares (vesting in three equal instalments over a
period of three years), and hence the combination of stock options and
restricted shares, is designed to lead to a compensation for Board of Management
members, Philips Executives and high-performing professionals which remains
linked to the change of the share price, but is less volatile than one that
relies exclusively on stock options. To stimulate the holding of shares among
the participants in the LTIP including (top) management of Philips, additional
premium shares will be awarded if the shares are kept for a period of three
years after each vesting date. The annual grant to members of the Board of
Management and the Group Management Committee will be brought in line with those
of the other grantees and therefore will shift to April 15, 2003 (i.e. Series
2). Although it is not a legal requirement to request shareholder approval for
the proposed LTIP, against the background of the continuous endeavors to improve
the Company's corporate govenance the LTIP will be submitted to the General
Meeting of Shareholders on March 27, 2003 for approval.
According to Philips' Rules of Conduct with respect to Inside Information,
members of the Board of Management (and the other members of the Group
Management Committee) are only allowed to trade in Philips securities (including
the exercise of stock options) during 'windows' of ten business days following
the publication dates of annual and quarterly results (provided the person
involved has no 'inside information' regarding Philips at that time).
Pensions
The pensions of members of the Board of Management are funded by the Stichting
Philips Pensioenfonds (the 'Philips Pension Fund') of the Netherlands. The
conditions contained in the by-laws of the Philips Pension Fund apply, with the
proviso that the pensionable age - from the point of view of pension accrual -
has been set at 60. If the employment agreement of members of the Board of
Management continues after the age of 60, the pension payments are postponed
accordingly, as provided for in the Philips Pension Fund by-laws. As the
retirement age is different from the date of commencement of the state pension,
the pension scheme provides for a bridging payment in order to compensate for
the adverse effect. The Board of Management members' own contribution comprises
4% of EUR 61,116 and 6% of the difference between the gross pensionable salary
minus the franchise and the above-mentioned amount of EUR 61,116. A different
arrangement resulting in additional pension benefits may apply in some cases as
a result of past policies.
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 allowances and medical cost insurance, accident
insurance and company car arrangements, are broadly in line with those for
Philips Executives in the Netherlands.
The Company's policy forbids personal loans to members of the Board of
Management, and no loans have been granted to such members in 2002, nor are
outstanding as of December 31, 2002.
Contracts of employment
Members of the Board of Management have a contract of employment with the
Company. The form of contract used for members of the Board of Management is in
line with the standard form used for other Philips Executives.
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.
62
REVIEW OF FINANCIAL STATEMENTS; AUDIT COMMITTEE
The Supervisory Board reviews the annual financial statements as presented by
the Board of Management and, upon approval, all individual members of the
Supervisory Board (together with the members of the Board of Management) will
sign these documents.
The Audit Committee, currently consisting of three members of the Supervisory
Board, 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, independence and performance, as well as the Company's
process for monitoring compliance with laws and regulations and the General
Business Principles. The Audit Committee reports its findings to the Supervisory
Board.
It reviews the Company's annual and interim financial statements, including
non-financial information, prior to publication and assesses the adequacy and
appropriateness of internal control policies and internal audit programs and
their findings. It 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 in order to allow
appropriate measures to be taken. With regard to internal audit, the Audit
Committee reviews 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 audit
function. With regard to the external audit, the Committee reviews the proposed
audit scope, approach and fees (refer to page 37 of the separate booklet
entitled 'Financial Statements and Analysis' for a summary of aggregate audit
fees), the independence of the external auditors, their performance and their
(re-)appointment, 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 Committee also considers the report of the external
auditors with respect to the annual financial statements. It also gives advice
about the Supervisory Board's statement to shareholders in the annual accounts.
The Audit Committee periodically discusses the Company's policy on business
controls, the General Business Principles including the deployment thereof, and
the Company's major areas of risk, including the internal auditor's reporting
thereon. The Company's internal and external auditors attended all Committee
meetings in 2002, and the Committee met separately on a quarterly basis with the
President/Chief Executive Officer, the Chief Financial Officer, the Internal
Auditor and the External Auditors.
2002 FINANCIAL STATEMENTS
The financial statements of Koninklijke Philips Electronics N.V. for 2002, as
presented by the Board of Management, have been audited by KPMG Accountants
N.V., independent auditors. Their report appears on page 127 of the separate
booklet entitled 'Financial Statements and Analysis'. We have approved these
financial statements.
We recommend to shareholders to adopt the 2002 financial statements as presented
in the full Annual Report for the year 2002. We likewise recommend to
shareholders to adopt the proposal of the Board of Management, approved by the
Supervisory Board and the Meeting of Priority Shareholders, to make a
distribution to shareholders of EUR 0.36 per common share from the other
reserves.
February 7, 2003
The Supervisory Board
63
64
Selected Financial Information
INTRODUCTION
This Management Report and the separate booklet entitled 'Financial Statements
and Analysis' together comprise the full Annual Report 2002 of Royal Philips
Electronics. Selected Financial Information is derived from the Philips Group's
full annual financial statements including notes as reported in the separate
booklet entitled 'Financial Statements and Analysis'. That separate booklet also
contains a comprehensive Operating and Financial Review and Prospects,
additional financial information and further statutory and other information.
For a full understanding of the results of the Group and the state of affairs,
both booklets should be consulted.
The following Selected Financial Information should be read in conjunction with
the Report on the performance of the Philips Group set out earlier in this
Management Report.
AUDITORS' REPORT
We have audited, in accordance with auditing standards generally accepted in the
United States of America and the Netherlands, the consolidated balance sheets of
Koninklijke Philips Electronics N.V. and subsidiaries as of December 31, 2002
and 2001, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2002 (not presented separately herein); and in our
report dated February 7, 2003, we expressed an unqualified opinion on those
consolidated financial statements.
In our opinion, the information set forth in the accompanying condensed
consolidated financial statements, appearing on pages 66 through 71, is fairly
stated, in all material respects, in relation to the consolidated financial
statements from which it has been derived.
Eindhoven, February 7, 2003
KPMG Accountants N.V.
ACCOUNTING POLICIES
The consolidated financial statements are prepared in accordance with generally
accepted accounting principles in the United States ('US GAAP').
65
Condensed consolidated statements of income of the Philips Group for
the years ended December 31
in millions of euros unless otherwise stated
2002 2001
SALES 31,820 32,339
Cost of sales (21,906) (23,240)
--------- ---------
GROSS MARGIN 9,914 9,099
Selling expenses (5,017) (5,027)
General and administrative expenses (1,404) (1,249)
Research and development expenses (3,043) (3,312)
Write-off of acquired in-process R&D (12) (106)
Impairment of goodwill (19) -
Restructuring and impairment charges (484) (786)
--------- ---------
(9,979) (10,480)
Other business income (expense) 485 (14)
--------- ---------
INCOME (LOSS) FROM OPERATIONS 420 (1,395)
Financial income and expenses:
- - interest (384) (391)
- - impairment charges (1,955) (526)
- - other 112 2
--------- ---------
(2,227) (915)
--------- ---------
INCOME (LOSS) BEFORE TAXES (1,807) (2,310)
Income tax (expense) benefit (27) 428
--------- ---------
INCOME (LOSS) AFTER TAXES (1,834) (1,882)
Results relating to unconsolidated companies:
- - income (loss) excluding impairment charges and amortization of
goodwill (17) (232)
- - impairment charges (1,305) (119)
- - amortization of goodwill (24) (257)
--------- ---------
(1,346) (608)
--------- ---------
GROUP INCOME (LOSS) (3,180) (2,490)
Minority interests (26) 15
--------- ---------
NET INCOME (LOSS) (3,206) (2,475)
Weighted average number of common shares outstanding
(after deduction of treasury stock) during the year
(in thousands) 1,274,950 1,278,077
BASIC EARNINGS PER COMMON SHARE IN EUROS:
Net income (loss) (2.51) (1.94)
DILUTED EARNINGS PER COMMON SHARE IN EUROS:*
Net income (loss) (2.51) (1.94)
Dividend paid per common share in euros
(related to prior financial year) 0.36 0.36
* The dilution effects on EPS are only taken into consideration
if this does not result in an improvement in income per share
or in a reduction in loss per share, as is the case in 2002
and 2001.
66
Condensed consolidated balance sheets of the Philips Group as of
December 31
in millions of euros
2002 2001
CURRENT ASSETS
Cash and cash equivalents 1,858 890
Receivables 5,068 5,812
Inventories 3,522 4,290
Other current assets 603 858
------ ------
Total current assets 11,051 11,850
NON-CURRENT ASSETS
Unconsolidated companies 6,089 7,552
Other non-current financial assets 1,306 3,481
Non-current receivables 219 306
Other non-current assets 2,553 2,774
Property, plant and equipment - net 6,137 7,718
Intangible assets excl. goodwill - net 1,742 1,964
Goodwill - net 3,192 3,557
------ ------
Total non-current assets 21,238 27,352
------ ------
TOTAL 32,289 39,202
CURRENT LIABILITIES
Accounts and notes payable 3,228 3,243
Accrued liabilities 3,314 3,966
Short-term provisions 1,276 1,443
Other current liabilities 691 813
Short-term debt 617 1,271
------ ------
Total current liabilities 9,126 10,736
NON-CURRENT LIABILITIES
Long-term debt 6,492 6,595
Long-term provisions 1,970 2,297
Other non-current liabilities 603 212
------ ------
Total non-current liabilities 9,065 9,104
GROUP EQUITY
Minority interests 179 202
Stockholders' equity 13,919 19,160
------ ------
TOTAL 32,289 39,202
67
Condensed consolidated statements of cash flows of the Philips Group
for the years ended December 31
in millions of euros
2002 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) (3,206) (2,475)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 2,184 2,671
Impairment of equity investments 3,260 645
Net gain on sale of assets (643) (337)
Loss from unconsolidated companies (net of dividends received) 54 501
Minority interests (net of dividends paid) 26 (21)
Decrease in working capital 815 752
Decrease (increase) in non-current receivables/other assets 86 (888)
(Decrease) increase in provisions (336) 313
Other items (12) 87
------ ------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,228 1,248
Cash flows from investing activities:
Purchase of intangible assets (software) (149) (234)
Capital expenditures on property, plant and equipment (1,161) (2,143)
Proceeds from disposals of property, plant and equipment 370 221
Cash from derivatives 422 -
Purchase of other non-current financial assets (15) (77)
Proceeds from other non-current financial assets 98 550
Purchase of businesses, net of cash acquired (626) (3,636)
Proceeds from sale of interests in businesses 813 755
------ ------
NET CASH USED FOR INVESTING ACTIVITIES (248) (4,564)
------ ------
CASH FLOWS BEFORE FINANCING ACTIVITIES 1,980 (3,316)
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in short-term debt (548) (73)
Principal payments on long-term debt (276) (554)
Proceeds from issuance of long-term debt 405 4,580
Treasury stock transactions (19) (336)
Dividends paid (459) (458)
------ ------
NET CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES (897) 3,159
------ ------
CASH PROVIDED BY (USED FOR) CONTINUING OPERATIONS 1,083 (157)
Effect of changes in exchange rates and consolidations on cash positions (115) (42)
Cash and cash equivalents at beginning of year 890 1,089
------ ------
CASH AND CASH EQUIVALENTS AT END OF YEAR 1,858 890
68
Condensed consolidated statements of changes in stockholders' equity of
the Philips Group
in millions of euros
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
------------------------------------------------------
COMMON CAPITAL IN currency available minimum
STOCK EXCESS OF RETAINED translation for sale pension cash flow
PAR VALUE EARNINGS differences securities liability hedges TOTAL
------ ---------- --------- ------------ ----------- ---------- ---------- -------
BALANCE AS OF DECEMBER 31, 2000 263 7 23,336 (868) 972 (13) (29) 62
Net income (loss) (2,475)
Net current period change 102 (932) (18) (18) (866)
Reclassifications into income 526 13 40 579
----------- ---------- --------- --------- ------
Total comprehensive income (loss),
net of tax 102 (406) (5) 22 (287)
Dividend paid (458)
Purchase of treasury stock
Re-issuance of treasury stock
Stock options accrual 6
------ ---------- -------- ----------- ---------- --------- --------- ------
BALANCE AS OF DECEMBER 31, 2001 263 13 20,403 (766) 566 (18) (7) (225)
Net income (loss) (3,206)
Net current period change (906) (2,189) (335) (28) (3,458)
Reclassifications into income (40) 1,888 46 1,894
----------- ---------- --------- --------- ------
Total comprehensive income (loss),
net of tax (946) (301) (335) 18 (1,564)
Dividend paid (459)
Purchase of treasury stock
Re-issuance of treasury stock
Stock options accrual 1
------ ---------- -------- ----------- ---------- --------- --------- ------
BALANCE AS OF DECEMBER 31, 2002 263 14 16,738 (1,712) 265 (353) 11 (1,789)
------ ---------- -------- ----------- ---------- --------- --------- ------
TREASURY TOTAL
SHARES AT STOCK-
COST HOLDERS'
EQUITY
---------- ---------
BALANCE AS OF DECEMBER 31, 2000 (961) 22,707
Net income (loss) (2,475)
Net current period change (866)
Reclassifications into income 579
--------
Total comprehensive income (loss),
net of tax (2,762)
Dividend paid (458)
Purchase of treasury stock (379) (379)
Re-issuance of treasury stock 46 46
Stock options accrual 6
--------- --------
BALANCE AS OF DECEMBER 31, 2001 (1,294) 19,160
Net income (loss) (3,206)
Net current period change (3,458)
Reclassifications into income 1,894
--------
Total comprehensive income (loss),
net of tax (4,770)
Dividend paid (459)
Purchase of treasury stock (103) (103)
Re-issuance of treasury stock 90 90
Stock options accrual 1
--------- --------
BALANCE AS OF DECEMBER 31, 2002 (1,307) 13,919
--------- --------
69
The Philips Group in the last nine years
all amounts in millions of euros unless otherwise stated
Due to factors such as consolidations and divestments, the amounts,
percentages and ratios are not directly comparable.
General data
US GAAP Dutch GAAP
------------------------------------------ ------------------------------------------
2002 2001 2000 1999 1998* 1998* 1997 1996 1995 1994
Sales 31,820 32,339 37,862 31,459 30,459 30,459 29,658 27,094 25,259 23,768
Percentage increase over previous
year (2) (15) 20 3 3 3 9 7 6 2
Income (loss) from continuing
operations(1) (3,206) (2,475) 9,577 1,595 1,025 541 1,231 126 971 683
Discontinued operations(2) - - - - 4,891 5,054 263 202 247 281
Cumulative effect of change in
accounting principle - - 85 - - - - - - -
Net income (loss) (3,206) (2,475) 9,662 1,590 5,900 6,053 2,602 (268) 1,143 964
Turnover rate of net operating
capital 2.43 2.15 3.12 3.20 2.95 2.91 2.84 2.70 2.88 2.95
Total employees at year-end
(in thousands) 170 189 219 227 234 234 252 250 253 241
Salaries, wages and social
costs paid 8,183 8,119 8,479 8,111 8,117 8,209 8,261 8,083 7,363 7,031
------ ------ ------ ------ ------ ------ ----- ----- ----- -----
Income
Income (loss) from operations 420 (1,395) 4,258 1,553 1,289 685 1,714 422 1,350 1,227
As a % of sales 1.3 (4.3) 11.2 4.9 4.2 2.2 5.8 1.6 5.3 5.2
As a % of net operating capital
(RONA) 3.2 (9.3) 35.1 15.8 12.5 6.5 16.4 4.2 15.4 15.2
Income taxes (27) 428 (563) (208) (162) (41) (276) 7 (74) (135)
As a % of income before taxes (1) 19 9 14 17 11 20 (40) 7 16
Income (loss) after taxes (1,834) (1,882) 5,688 1,238 816 332 1,119 25 964 696
As a % of sales (5.8) (5.8) 15.0 3.9 2.7 1.1 3.8 0.1 3.8 2.9
Income (loss) from continuing
operations (3,206) (2,475) 9,577 1,595 1,025 541 1,231 126 971 683
As a % of stockholders' equity
(ROE) (19.2) (11.9) 48.5 10.9 9.7 5.1 15.9 1.9 15.8 12.5
Per common share in euros (2.51) (1.94) 7.30 1.16 0.71 0.38 0.88 0.09 0.71 0.51
Net income (loss) (3,206) (2,475) 9,662 1,590 5,900 6,053 2,602 (268) 1,143 964
Per common share in euros (2.51) (1.94) 7.36 1.15 4.10 4.20 1.86 (0.20) 0.84 0.72
Dividend paid per common share
in euros (related to prior
financial year) 0.36 0.36 0.30 0.25 0.23 0.23 0.18 0.18 0.14 0.06
* The Company adopted application of US GAAP as from January 1, 2002.
The years from 1998 onwards have been restated accordingly. Previous
years have not been restated. For the convenience of the reader the
1998 figures are presented on the basis of both US and Dutch GAAP.
(1) Under Dutch GAAP, prior to 1999, certain material transactions, such
as disposals of lines of activities, were accounted for as
extraordinary items, whereas under US GAAP these would have been
recorded in income (loss) from (continuing) operations.
(2) Discontinued operations reflect the effect of the sale of PolyGram
N.V. in 1998 in order to present the Philips Group accounts on a
continuing basis.
DEFINITIONS
Net operating capital: intangible assets, property, plant and equipment, non-current receivables and current assets excl. cash
and cash equivalents, securities and deferred tax positions, after deduction of provisions and other
liabilities
RONA: income from operations as a % of average net operating capital
ROE: income from continuing operations as a % of average stockholders'
Net debt: long-term and short-term debt net of cash and cash equivalents
Net debt:group equity
ratio: the % distribution of net debt over group equity plus net debt
Average number of
outstanding shares: weighted average number of outstanding common shares based on monthly positions during the reporting year
The financial statements have been prepared in euros. Amounts previously reported in Dutch guilders are
reported in euros using the irrevocably fixed conversion rate which became effective on January 1, 1999
(EUR 1 = NLG 2.20371).
70
Capital employed
US GAAP Dutch GAAP
-------------------------------------- --------------------------------------
2002 2001 2000 1999 1998* 1998* 1997 1996 1995 1994
Cash and cash equivalents 1,858 890 1,089 2,331 6,553 6,553 1,397 785 932 940
Receivables 5,671 6,670 6,806 6,453 5,442 5,442 5,464 5,369 4,890 4,567
Inventories 3,522 4,290 5,279 4,268 4,017 4,274 4,522 4,334 5,083 4,330
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Current assets 11,051 11,850 13,174 13,052 16,012 16,269 11,383 10,488 10,905 9,837
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Non-current financial assets 7,395 11,033 11,306 7,400 2,871 2,836 1,451 1,618 1,358 1,257
Net assets discontinued operations - - - - - - 1,482 1,198 1,013 901
Non-current receivables 2,772 3,080 2,713 2,326 1,920 1,920 1,858 1,662 1,413 1,397
Property, plant and equipment (book value) 6,137 7,718 9,041 7,332 6,597 6,574 6,935 6,719 6,094 5,599
Intangible assets (book value) 4,934 5,521 3,290 1,563 609 554 213 222 198 105
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Non-current assets 21,238 27,352 26,350 18,621 11,997 11,884 11,939 11,419 10,076 9,259
Total assets 32,289 39,202 39,524 31,673 28,009 28,153 23,322 21,907 20,981 19,096
Property, plant and equipment:
Capital expenditures for the year 1,161 2,143 3,170 1,662 1,634 1,634 1,627 2,185 2,127 1,535
Depreciation for the year 1,782 1,969 1,789 1,548 1,615 1,615 1,492 1,437 1,218 1,270
Capital expenditures : depreciation 0.7 1.1 1.8 1.1 1.0 1.0 1.1 1.5 1.7 1.2
Inventories as a % of sales 11.1 13.3 13.9 13.6 13.2 14.0 15.2 16.0 20.1 18.2
Outstanding trade receivables, in months'
sales 1.3 1.5 1.5 1.4 1.3 1.3 1.3 1.3 1.5 1.5
------ ------- ----- ------ ------ ------ ------ ----- ------ -----
Financial structure
Other liabilities 7,836 8,234 8,764 8,262 6,751 6,779 6,328 5,768 5,643 5,373
Debt 7,109 7,866 4,027 3,314 3,587 3,587 4,030 5,855 4,756 3,875
Provisions 3,246 3,740 3,557 3,056 2,973 2,985 3,251 3,420 3,460 3,566
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total provisions and liabilities 18,191 19,840 16,348 14,632 13,311 13,351 13,609 15,043 13,859 12,814
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Issued, paid-up capital 263 263 263 339 1,672 1,672 1,655 1,600 1,566 1,536
Surplus and reserves 13,656 18,897 22,444 16,369 12,784 12,888 7,499 4,985 5,060 4,410
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Stockholders' equity 13,919 19,160 22,707 16,708 14,456 14,560 9,154 6,585 6,626 5,946
Minority interests 179 202 469 333 242 242 559 279 496 336
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Group equity 14,098 19,362 23,176 17,041 14,698 14,802 9,713 6,864 7,122 6,282
Total equity and liabilities 32,289 39,202 39,524 31,673 28,009 28,153 23,322 21,907 20,981 19,096
Net debt : group equity ratio 27:73 26:74 11:89 5:95 ** ** 21:79 42:58 35:65 32:68
Stockholders' equity per common share in
euros 10.91 15.04 17.69 12.55 10.02 10.09 6.39 4.74 4.85 4.41
Market price per common share at year-end 16.70 33.38 39.02 33.75 14.30 14.30 13.80 7.94 6.58 5.83
** Not meaningful: net cash in 1998 exceeded the debt level
71
SHAREHOLDER INFORMATION
Detailed information for shareholders is available on our website
WWW.INVESTOR.PHILIPS.COM. As well as financial reports and
presentations, the site also provides information on related issues,
such as governance, business ethics and sustainability.
[PICTURE]
PAYMENT OF DISTRIBUTION TO SHAREHOLDERS IMPORTANT DATES
Shares of Koninklijke Philips Electronics N.V. ('Royal Record date Annual General
Philips Electronics') will be listed ex-dividend as of March Meeting of Shareholders March 20,2003
28, 2003. In compliance with the listing requirements of the Annual General Meeting
New York Stock Exchange and the stock market of Euronext of Shareholders March 27,2003
Amsterdam, the record dates will be April 1, 2003 for First quarterly report 2003 April 15,2003
holders of American shares of New York Registry, and March Second quarterly report 2003 July 15,2003
27, 2003 for other Philips shares. Third quarterly report 2003 October 14,2003
The distribution in cash as proposed to the General Meeting Publication of 2003 results February 10,2004*
of Shareholders will be payable as of April 7, 2003 to all Publication of the Annual
shareholders. The USD distribution to holders of American Report 2003 February 10,2004*
shares will be made in at the USD/EUR rate fixed by the Annual General Meeting
European Central Bank on April 2, 2003. of Shareholders March 25,2004*
First quarterly report 2004 April 13,2004*
Second quarterly report 2004 July 13,2004*
Third quarterly report 2004 October 12,2004*
* These dates are subject to final confirmation.
72
[PICTURE]
Annual Report 2002
Financial Statements and Analysis
PHILIPS
'SAFE HARBOR' STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
This document contains certain forward-looking statements with respect to the
financial condition, results of operations and business of Philips and certain
of the plans and objectives of Philips with respect to these items (including,
but not limited to, cost savings), in particular the outlook paragraph of the
'Operating and Financial Review and Prospects' in this 'Financial Statements and
Analysis' booklet.
By their nature, forward-looking statements involve risk and uncertainty because
they relate to events and 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, levels of consumer
and business spending in major economies, changes in consumer tastes and
preferences, changes in law, the performance of the financial markets, pension
costs, the levels of marketing and promotional expenditures by Philips and its
competitors, raw materials and employee costs, changes in future exchange and
interest rates (in particular changes in the euro and the US dollar can
materially affect results), changes in tax rates and future business
combinations, acquisitions or dispositions and the rate of technological
changes.
Market share estimates contained in this report are based on outside sources
such as specialized research institutes, industry and dealer panels, etc. in
combination with management estimates. Rankings are based on sales unless
otherwise stated.
Contents
Financial Statements and Analysis
2 Financial highlights
3 Operating and Financial Review and Prospects
41 Auditors' Report
42 Consolidated statements of income of the Philips Group
44 Consolidated balance sheets of the Philips Group
46 Consolidated statements of cash flows of the Philips Group
48 Consolidated statements of changes in stockholders' equity
of the Philips Group
49 Accounting policies
58 Notes to the consolidated financial statements of the
Philips Group
Dutch GAAP information
110 Accounting principles
110 Presentation of financial statements
110 Changes in accounting principles and presentation
111 Application Dutch GAAP
112 Consolidated financial statements of the Philips Group
117 Notes to the consolidated financial statements of the
Philips Group
121 Balance sheets and statements of income of Koninklijke
Philips Electronics N.V. ('Royal Philips Electronics')
122 Notes to the financial statements of
Royal Philips Electronics
Other information
127 Auditors' Report
129 Proposed distribution to shareholders of Royal Philips
Electronics
129 Corporate governance of the Philips Group
132 The Philips Group in the last nine years
This Financial Statements and Analysis booklet and the separate booklet entitled
'Management Report' together comprise the full Annual Report for the year 2002
of Koninklijke Philips Electronics N.V. ('Royal Philips Electronics'). For a
full understanding of the results of the Philips Group and the state of affairs,
both booklets should be consulted.
1
Financial highlights
all amounts in millions of euros unless otherwise stated
2002 2001 2000
-------- -------- -------
Sales 31,820 32,339 37,862
Income (loss) from operations 420 (1,395) 4,258
As a % of sales 1.3 (4.3) 11.2
As a % of net operating capital (RONA) 3.2 (9.3) 35.6
Net income (loss) (3,206) (2,475) 9,662
Per common share - basic (2.51) (1.94) 7.36
- diluted (2.51) (1.94) 7.28
Dividend paid per common share in euros
(related to prior financial year) 0.36 0.36 0.30
Cash flows before financing activities 1,980 (3,316) 592
Stockholders' equity 13,919 19,160 22,707
Per common share 10.91 15.04 17.69
Net debt: group equity ratio 27:73 26:74 11:89
Employees 170,087 188,643 219,429
Excluding special items*:
Income (loss) from operations 460 (160) 3,188
As a % of sales 1.4 (0.5) 8.4
As a % of net operating capital (RONA) 3.5 (1.1) 26.6
Net income (loss) 208 (779) 2,891
Philips has applied US GAAP in its reporting from January 1, 2002 onwards.
Previous periods have been restated accordingly.
* Special items relate to income and expenses resulting from business
operations, which, because of their nature, are disclosed separately to
give a better understanding of the underlying result for the period.
Special items include items such as restructuring and impairment
charges, acquisition-related charges and gains and losses on the
disposal of businesses or participations and real estate. However, the
reader should note that net income excluding special items is not a
measure of financial performance as defined by US GAAP or Dutch GAAP.
2
Operating and Financial Review and Prospects
The following discussion is based on the consolidated financial
statements and should be read in conjunction with those statements and
the other financial information.
Starting January 1, 2002 the consolidated financial statements have
been prepared in accordance with accounting principles generally
accepted in the United States (US GAAP). These accounting principles
differ in some respects from generally accepted accounting principles
in the Netherlands (Dutch GAAP), which differences are explained in the
notes to the Dutch GAAP financial statements. All relevant reporting
periods have been restated according to US GAAP.
In order to facilitate a better understanding of the underlying
business performance of our segments, we have analyzed results of
operations with a discussion of special items. Special items, as
presented in the Operating and Financial Review and Prospects, relate
to income and expenses resulting from business operations which,
because of their nature, are disclosed separately to give a better
understanding of the underlying result for the period. These include
items such as restructuring and impairment charges, acquisition-related
charges and gains and losses on the disposal of businesses or
participations and real estate. This is consistent with how business
performance is evaluated by Management. However, the reader should note
that net income excluding special items is not a measure of financial
performance as defined by US GAAP or Dutch GAAP.
The reader is encouraged to give equal attention to the reported GAAP
measures and the analysis excluding special items.
THE YEAR 2002
SUMMARY
The Company's performance in 2002 was heavily impacted by poor
worldwide economic conditions and a continued decline in the main
financial markets around the world. Despite the challenging economy,
each of our sectors improved their operating performance compared to
2001. Lighting, Domestic Appliances and Personal Care (DAP) and Medical
Systems, which operate in less cyclical markets, delivered solid
results, with DAP recording its best year ever. Additionally, Consumer
Electronics returned to profitability. Semiconductors and Components
were significantly affected by the depressed telecommunications and
PC-related markets. Despite improving their performance compared to
2001, both sectors incurred losses for the year. The decline in the
financial markets had a significant negative effect on the value of
some of the Company's investments, causing significant write-downs.
3
In contrast to 2001, when the Company acquired several large
businesses, 2002 was characterized by the continued integration of the
recently acquired medical activities and a refinement of the portfolio
during the year, with the Company making only a few relatively minor
acquisitions. A number of businesses that were either low-growth
low-return or did not fit strategically were divested. Cash of EUR 187
million was generated from the divestments, net of acquisitions.
Additionally, during the year, the Company continued its focus on cost
control, asset management and cash flow. We introduced 'Transforming
into One Philips' (TOP), a program designed to streamline various
support functions by standardizing services and introducing a shared
way of working. This has resulted in significant cost savings.
Additionally, we continued to focus on optimizing asset management,
increasing the use of outsourcing, reducing working capital, shortening
the cash conversion cycle and reducing debt. In part aided by the
enhanced focus on these areas, the Company generated a positive cash
flow from operations of EUR 2,228 million in 2002, compared with EUR
1,248 million in 2001 and EUR 2,996 million in 2000.
Sales in 2002 totaled EUR 31,820 million, which is 2% lower than in
2001. Medical Systems recorded a 42% increase in sales (of which 5% was
organic growth), largely due to the effect of the 2001 acquisitions.
Further growth was achieved in the sectors DAP and Components
(predominantly in Mobile Display Systems). All other sectors registered
decreases, reflecting the softness in their markets. In particular,
Consumer Electronics' sales were significantly below 2001. The decline
was attributable not only to the general softness of the markets but
also to significantly lower sales of Digital Networks and GSM phones,
in part reflecting the strategy to change business models.
A net loss of EUR 3,206 million was incurred in 2002, compared with a
loss of EUR 2,475 million in 2001 and net income of EUR 9,662 in 2000.
A number of special items impacted the Company's financial performance
during 2002.
The major financial markets around the world declined for the third
year in a row. This had a significant negative effect on the value of
the Company's financial assets. During 2002, the Company recorded
non-cash impairment charges of EUR 1,955 million to recognize
other-than-temporary declines in the value of certain security
investments, the most significant of which was Vivendi Universal (EUR
1,855 million). Additionally, the Company recorded other non-cash
charges of EUR 1,305 million to write down its investment in certain
unconsolidated companies, mainly Atos Origin (EUR 921 million) and LG.
Philips Displays (EUR 275 million).
The non-cash impairment charges and value adjustments related to
securities and shareholdings included in income over the last three
years are summarized below:
amounts in millions of euros 2002 2001 2000
------- ------ -----
Vivendi/Seagram (1,855) (440) 1,115
JDS Uniphase (73) - 1,207
Great Nordic (27) (86) -
------ ----- -----
(1,955) (526) 2,322
LG.Philips Displays (275) - -
ATOS Origin (921) - 1,072
Various unconsolidated companies (109) (119) -
------ ----- -----
(1,305) (119) 1,072
------ ----- -----
Total (3,260) (645) 3,394
4
In 2002 the Company realized net gains of EUR 569 million from the sale
of certain businesses and fixed assets. However, the impact on income
from operations was offset by restructuring, impairment and
acquisition-related charges of EUR 609 million.
Presented below is a table that summarizes the special items affecting
net income for the years 2000 through 2002.
Net income (loss) excluding special items:
amounts in millions of euros
2002 2001 2000
-------- -------- --------
As published (3,206) (2,475) 9,662
Affecting income from operations:
Write-down of inventories in connection with
restructuring (cost of sales) (10) (307) (10)
Restructuring and impairment charges (503) (786) (187)
Acquisition-related costs incl. in-process R&D (96) (437) (114)
Gain on sale of participations/fixed assets 569 295 309
Atos Origin merger gain 1,072
Affecting financial income and expenses:
Gain on sale of JDS Uniphase shares 1,207
Gain on sale of ASML shares 67
Seagram/Vivendi share exchange gain, net 1,115
Impairment Vivendi/Great Nordic/Uniphase (1,955) (526)
Income taxes related to special items 127 313 (18)
Affecting results relating to unconsolidated companies:
Gain on sale of shares and participations 5 20 2,717
Restructuring and impairment charges (301) (89)
Dilution (losses) gains related to TSMC's equity
transactions (12) (60) 680
Impairment charges recorded by the Company (1,305) (119)
------- ------- -------
Excluding special items 208 (779) 2,891
Net cash provided by operating activities totaled EUR 2,228 million in
2002, compared with EUR 1,248 million in 2001 and EUR 2,996 million in
2000. The improvement compared to 2001 is primarily attributable to the
significant improvement in operating performance (excluding the
non-cash charges) and a decrease in working capital. The decrease in
working capital reflects a reduction of inventories, due in part to
supply chain improvement programs, as well as the success of the cash
conversion cycle program that was started three years ago. Consumer
Electronics in particular lowered its asset base to almost zero at
year-end 2002.
Net cash used for investing activities totaled EUR 248 million for the
year. EUR 626 million was used for the purchase of businesses and
investments in unconsolidated companies. The most significant related
to a settlement associated with the establishment of the joint venture
LG.Philips Displays and a subsequent cash injection (EUR 250 million),
a final payment to Agilent in respect of the business acquired in 2001
(EUR 90 million) and a capital injection of EUR 69 million to SSMC. In
2001, cash used for investing activities amounted to EUR 4,564 million,
of which EUR 3,636 million was for the purchase of businesses,
particularly for Medical Systems. In 2000, EUR 3,209 million was
related to the purchase of businesses.
5
Proceeds from the sale of businesses in 2002 totaled EUR 813 million,
of which the sale of Philips Contract Manufacturing Services (PCMS),
Analytical and Communication, Security and Imaging (CSI) were the most
significant. In 2001 the proceeds from the sale of businesses totaled
EUR 755 million. Of these, the most significant were the Glass
activities of Components, together with part of the shareholding in FEI
and Philips Broadcast.
Gross capital expenditures were scaled back by approximately half,
compared to 2001, to EUR 1,161 million as Philips aligned its component
and semiconductor manufacturing facilities to the lower level of market
demand. In 2001, cash requirements for capital expenditures totaled EUR
2,143 million, significantly below the level of EUR 3,170 million in
2000.
Net cash used for financing activities in 2002 amounted to EUR 897
million. EUR 300 million received from the issuance of long-term debt
in August was subsequently used to retire short-term debt. Philips
shareholders received distributions in cash totaling EUR 459 million.
In 2001 net cash provided by financing activities totaled EUR 3,159
million, compared to EUR 2,038 million of net cash used in 2000. The
financing needs in 2001 were met by the issuance of two tranches of two
eurobonds each, totaling EUR 4,250 million. The cash requirements for
financing activities in 2000 included capital repayments to
shareholders of EUR 1,673 million from the share reduction program.
At the end of 2002, Philips had a net debt position (debt, net of cash
and cash equivalents) of EUR 5,251 million, which was EUR 1,725 million
lower than the year before. The net debt to group equity ratio was
27:73 at the end of 2002, compared to 26:74 at year-end 2001.
Stockholders' equity decreased by EUR 5,241 million to EUR 13,919
million at year-end 2002. This decrease was mainly due to the net loss
of EUR 3,206 million in 2002, currency translation effects, declines in
the fair value of available-for-sale securities and increases in
pension liabilities in other comprehensive income. Furthermore, EUR 459
million was distributed in cash to shareholders from retained earnings.
GROUP SALES AND INCOME FROM OPERATIONS
amounts in millions of euros 2002 2001 2000
-------- -------- --------
Sales 31,820 32,339 37,862
% nominal (decrease) increase (2) (15) 20
Income (loss) from operations* 420 (1,395) 4,258
as a % of sales 1.3 (4.3) 11.2
Income (loss) from operations excl. special items* 460 (160) 3,188
as a % of sales 1.4 (0.5) 8.4
Net operating capital 10,539 14,309 14,370
Employees 170,087 188,643 219,429
------- ------- -------
*) Incl. amortization of goodwill - (180) (173)
6
In percentage terms the composition of the change in sales over 2001
and 2000 was as follows:
2002 versus 2001 versus
2001 2000
----------- -----------
Consolidation changes 2.6 (0.7)
Currency effects (3.5) 0.1
Prices (6.5) (8.2)
Volume 5.8 (5.8)
Nominal change (1.6) (14.6)
Sales
Sales in 2002 totaled EUR 31,820 million, 2% lower than the year
before. Consolidation changes had a positive effect of 3%, primarily
resulting from the 2001 medical acquisitions, partially offset by the
effect of various divestments as well as the deconsolidation of Display
Components mid-2001. Weaker currencies impacted nominal sales by 4%,
particularly as a result of the weaker US dollar and the weaker Asian
currencies. Sales volume increased by 6%, while average prices were 7%
lower than in the year before.
Excluding the effect of consolidations and currencies, increased sales
were achieved in the sectors DAP, Components and Medical Systems. On
the downside, comparable sales were lower in Lighting, Consumer
Electronics and Semiconductors. The sector Consumer Electronics was
particularly affected by lower sales of Digital Networks and GSM
phones, in part reflecting the strategy to change the business models.
Sales in 2001 totaled EUR 32,339 million, 15% lower than in 2000.
Changes in consolidations had a 1% negative effect. Sales volume
decreased by 6%, while average prices declined by 8%. Sales at
Semiconductors, Components and Consumer Electronics were affected by
the downturn in the respective markets. Sales at Lighting remained
virtually flat, while sales at DAP and Medical Systems increased
strongly, both organically and as a result of acquisitions.
Income from operations
Income from operations in 2002, a EUR 420 million profit, improved
considerably compared with the 2001 loss of EUR 1,395 million. All
sectors contributed to the improvement. Consumer Electronics returned
to profitability, with a significant improvement in income from
operations over 2001. Additionally, Medical Systems, whose performance
in 2001 was impacted by significant acquisition-related charges, also
returned to profitability.
Lighting and DAP once again delivered strong results. Although
Semiconductors and Components achieved improved results compared to
2001, both sectors incurred losses for the year. The results of both
sectors were influenced by restructuring charges. The year 2002
included lower amortization charges as a result of the change-over to
US GAAP. Excluding special items and goodwill amortization, income from
operations improved by EUR 440 million due to strong margin
improvements in all sectors as well as savings on overhead costs and
positive synergy effects at Medical Systems. These improvements were
achieved despite an increase in pension costs of EUR 541 million over
2001, which is primarily attributable to a decline in the value of
pension plan assets due to the major downturn experienced in the
financial markets. As a consequence of a continued decline in stock
markets, it is anticipated that pension expense will increase further
in 2003.
7
During the year 2002 the business portfolio was scrutinized and
rationalized as part of the low-growth low-return divestment program. A
number of businesses were sold in 2002, including the Fax business,
TechnoFusion, SMATV, Heat and Surface Treatment, Philips Broadband
Networks, Analytical, CSI, Philips Contract Manufacturing Services,
Health Care Products Group of Medical Systems and Payer. Together these
divestments resulted in cash proceeds totaling EUR 720 million and a
gain of EUR 311 million.
A gain of EUR 40 million related to the sale of the CRT glass
activities was recorded and a EUR 40 million currency translation gain
resulted from the liquidation of certain Components activities in
Japan. Furthermore, an earn-out of JDS Uniphase shares, received from
the sale of Philips Optoelectronics in 1998, resulted in a gain of EUR
113 million. Sale of real estate resulted in a EUR 65 million gain.
Other special items in 2002 related to EUR 96 million
acquisition-related charges in the Medical Systems and Semiconductors
sectors and major restructuring projects in PCMS (related to the
aforementioned sale, at various sites), Components, Semiconductors (old
CMOS lines), Consumer Electronics (Monitors site at Juarez) and DAP
(Hoogeveen site) for a total of EUR 513 million. This amount includes
impairment charges totaling EUR 47 million related to the sale of
Medical Systems' HCP.
Excluding all special items, 2002 income from operations came to a
positive EUR 460 million. Income from operations in 2001, excluding
special items, amounted to a EUR 160 million loss but included EUR 180
million amortization of goodwill. Major special items in 2001 were the
sale of FEI, charges related to the acquisition of Agilent and Marconi
at Medical Systems, several restructurings (among others at Consumer
Electronics' Le Mans site, Components, Semiconductors and
Miscellaneous) and non-recurring write-offs of inventories (mainly
Consumer Electronics).
SALES AND INCOME FROM OPERATIONS PER SECTOR
amounts in millions of euros 2002 2001 2000
------------------- -------------------- --------------------
income income income
(loss) (loss) (loss)
from from from
sales operations sales operations sales operations
Lighting 4,845 602 5,083 582 5,052 668
Consumer Electronics 9,600 230 11,052 (649) 13,060 410
DAP 2,273 401 2,224 334 2,107 287
Components 2,212 (329) 2,772 (667) 5,042 608
Semiconductors 4,089 (537) 4,389 (607) 5,879 1,346
Medical Systems 6,844 309 4,834 (163) 3,031 169
Miscellaneous 1,957 74 1,985 (104) 2,974 (191)
Unallocated - (330) - (121) - (102)
Origin - - - - 717 1,063
------ ------- ------ ------- ------ -------
31,820 420 32,339 (1,395) 37,862 4,258
8
LIGHTING
amounts in millions of euros 2002 2001 2000
------- ------- --------
Sales 4,845 5,083 5,052
% nominal (decrease) increase (5) 1 11
Income from operations* 602 582 668
as a % of sales 12.4 11.4 13.2
Income from operations excl. special items* 616 600 685
as a % of sales 12.7 11.8 13.6
Net operating capital 1,723 1,979 1,903
Employees 46,870 47,922 47,124
------ ------ ------
*) Incl. amortization of goodwill - (8) (9)
Sales
Sales at Lighting in 2002 totaled EUR 4,845 million and were on a
nominal basis 5% and on a comparable basis 2% lower than in 2001. Sales
volume increased by 1%, while average prices were 3% lower. This was
mainly due to the general softness of the market. Luminaires in
particular had to contend with difficult market conditions, while
Automotive & Special Lighting continued to show growth through
innovation. Sales growth in Asia Pacific continued, while Latin
American sales levels remained weak. The market slowdown in Europe and
North America had a negative impact on sales.
Sales at Lighting in 2001 totaled EUR 5,083 million, slightly higher
than in the year before. The level of the increase was affected by the
economic slowdown, particularly in USA/Canada, and the energy crisis in
Brazil. Adjusted for the divestment of the Batteries business, sales
growth was 2%. Sales growth was particularly strong at Automotive &
Special Lighting. Geographically, sales growth was strongest in Asia
Pacific. All businesses contributed to a slight improvement in overall
market share, reinforcing global market leadership.
Income from operations
Income from operations in 2002 totaled EUR 602 million, or 12.4% of
sales, and was above last year's 11.4%, mainly due to focused marketing
management, tight cost control and more volume in high-end products.
The 2002 result included net restructuring charges of EUR 13 million
for the discontinuation of various activities in the Netherlands.
Income from operations in 2001 totaled EUR 582 million, or 11.4% of
sales, and included restructuring charges of EUR 16 million. Income
from operations in 2001 was impacted by an unfavorable margin mix. In
addition, the stronger Polish currency put pressure on margins, as
Poland is an important supply base.
Net operating capital
Lighting showed decreased net operating capital at the end of 2002,
mainly due to lower receivables and inventories.
Unconsolidated companies
In the LumiLeds Lighting 50/50 joint venture, Philips and Agilent have
continued to strengthen the product portfolio of LED-based lighting,
one of the key technologies that will drive the lighting business in
the future.
9
CONSUMER ELECTRONICS
amounts in millions of euros 2002 2001 2000
------- ------- -------
Sales 9,600 11,052 13,060
% nominal (decrease) increase (13) (15) 17
Income (loss) from operations* 230 (649) 410
as a % of sales 2.4 (5.9) 3.1
Income (loss) from operations excl. special items* 250 (146) 427
as a % of sales 2.6 (1.3) 3.3
Net operating capital 28 672 1,486
Employees 20,080 31,525 38,726
------ ------ ------
*) Incl. amortization of goodwill - (1) -
Sales
Sales in the Consumer Electronics sector (CE) decreased in 2002 by 13%
compared with 2001. A large part of the reduction was due to the shift
of former CE activities to the Miscellaneous sector. Sales volume
increased by 5%, while price erosion was 10%. The monitor markets
experienced a severe price decline, especially in the second half of
2002. The total value of the combined DVD and VCR market declined, DVD
(including DVD+RW) showing double-digit growth rates and VCR suffering
from being displaced by DVD. Television improved steadily, driven by
the introduction of PixelPlus and the extension of the Flat TV product
range. The GSM mobile phones business faced challenges in the
sell-through of the new product range. Sales at Digital Networks
decreased in 2002 by 59% compared to 2001, caused by refocusing the
business on a limited number of key accounts as well as poor market
conditions.
Sales at Consumer Electronics in 2001 totaled EUR 11,052 million, a
decrease of 15% compared with 2000. Sales at Digital Networks dropped
by 37% compared to the previous year. The refocus on key customers,
combined with a sharply declining market growth rate for set-top boxes,
accounted for most of this decrease. The sharp fall in Consumer
Communications' Sales reflected the scaling-down strategy for GSM
mobile phones, which particularly affected sales in Europe.
Income from operations
Income from operations at Consumer Electronics improved considerably in
2002 compared with 2001 and reached a positive level of EUR 230
million.
The total loss of Digital Networks amounted to EUR 71 million, a
substantial improvement compared to the loss of EUR 329 million in
2001. Although income from operations of Set-top Boxes showed a major
improvement, profitability was not achieved in 2002. The loss-making
Philips Broadband Networks was sold in 2002. Digital Transmission
Systems was transferred to Miscellaneous. The positive effects of these
portfolio changes were about EUR 50 million.
Net restructuring charges in 2002 amounted to EUR 100 million, compared
with EUR 503 million in 2001. Restructurings in 2002 included the
closure of Monitors' production facilities in Juarez, Mexico (EUR 11
million) and some sites of PCMS (EUR 96 million). The sale of our PCMS
activities resulted in a gain of EUR 83 million.
License income in 2002 decreased to EUR 188 million, a reduction of EUR
163 million compared to 2001. Included in 2001 was an amount of EUR 82
million of one-time payments for past use, considerably higher that
the past-use payments received in 2002. The decline can be further
attributed to the expiration of basic CD patents in certain countries
and regions, which was only partly offset by increased income from our
DVD and CD-R/RW licensing programs. The lower US dollar had a negative
impact on income.
10
Income from operations in 2001 decreased to a loss of EUR 649 million,
down from a profit of EUR 410 million in 2000. Other than Licenses,
which registered higher income due to receipt of prior-year royalties
on CD-R licenses, all businesses contributed to the significant decline
in income. Restructuring charges of EUR 503 million were recorded
during the year 2001. EUR 64 million related to the closure of the VCR
factory in Vienna, Austria, in conjunction with the Company's decision
to outsource production and to transfer monitor production from Taiwan
to China. The loss at Consumer Communications originated mainly from
the restructuring charges resulting from the refocusing of the mobile
handset business. Income in 2001 was positively impacted by a EUR 41
million insurance payment to compensate for business interruption
damage caused by a fire in the semiconductor factory in Albuquerque,
USA in 2000. The lower income at Digital Networks included special
items for the downsizing and write-off of the Internet and Personal TV
business in the USA, as well as restructuring charges at Broadband
Networks and Digital Transmission Systems and the cost of development
of new technologies at MP4Net, Softworks and CryptoTec.
Net operating capital
Consumer Electronics is continuously reducing the asset base needed for
its business operations through optimized supply chain management, an
Original Design Manufacturing (ODM) business model philosophy and
outsourcing. In the year under review this resulted in a turnover rate
of net operating capital of around 20, double the level of three years
ago. Inventories were reduced significantly.
DOMESTIC APPLIANCES AND PERSONAL CARE
amounts in millions of euros 2002 2001 2000
------ -------- --------
Sales 2,273 2,224 2,107
% nominal increase 2 6 18
Income from operations* 401 334 287
as a % of sales 17.6 15.0 13.6
Income from operations excl. special items* 413 338 300
as a % of sales 18.2 15.2 14.2
Net operating capital 529 652 752
Employees 8,766 9,257 10,111
----- ------- ------
*) Incl. amortization of goodwill - (12) (3)
Sales
Nominal sales increased by 2% in 2002. After adjusting for currency
movements, sales increased by 6%, comprising 8% volume growth offset by
2% lower prices. The expansion was above the market growth, due to new
product introductions in the various markets coupled with successful
regional market penetration (Senseo, Sonicare toothbrush and the new
Sensotec shaver). Repositioning of the shaver range in North America
had a positive impact on market share. The Senseo has attained the
number one position in all countries where it is available.
DAP sales in 2001 grew by 6%, mainly driven by Oral Healthcare in the
USA. Lower sales of Male Shaving & Grooming in the USA were offset by a
good performance in Europe and steep increases in China. The Food &
Beverage business was strongly affected by the adverse market
conditions in Latin America.
11
Income from operations
Income from operations in 2002 increased by 20% to another record
level. The improvement was driven by sales expansion, margin
improvement due to a better product mix and successful cost-reduction
programs. The improvement in profitability was particularly visible in
the businesses Oral Healthcare and Food & Beverage. In 2002, the
subsidiary Payer was sold. Payer had approximately 650 employees and
production facilities in Austria and Hungary. The effect on income was
a loss of EUR 3 million for the transaction.
Restructuring charges in 2002 amounted to EUR 9 million, compared with
EUR 4 million in 2001.
Income from operations in 2001 increased by 16% to EUR 334 million,
continuing the growth pattern of previous years and defying the adverse
market conditions. The successful integration of Optiva, which yielded
positive income in the first year after acquisition, contributed to the
increased profitability. The launch of Senseo, together with ongoing
portfolio rationalization and tight cost control, also contributed to
the improvement.
Net operating capital
Net operating capital decreased considerably on a comparable basis.
Lower fixed assets as well as a decline in working capital (currently
at 40% of the 2000 level) contributed the most to the lower capital
base. With increasing sales, the turnover rate came to 4.3 at the end
of 2002, up from 3.5 last year.
COMPONENTS
amounts in millions of euros 2002 2001(1) 2000
------- --------- -------
Sales 2,212 2,772 5,042
% nominal (decrease) increase (20) (45) 23
Segment revenues 2,450 3,705 6,920
Income (loss) from operations* (329) (667) 608
as a % of sales (14.9) (24.1) 12.1
as a % of segment revenues (13.4) (18.0) 8.8
Income (loss) from operations excl. special items* (244) (510) 382
as a % of sales (11.0) (18.4) 7.6
as a % of segment revenues (10.0) (13.8) 5.5
Net operating capital 118 397 2,158
Employees 13,005 15,107 43,546
------ ------ ------
*) Incl. amortization of goodwill - (1) (1)
As a result of the high level of sales of products and services to other Philips
product sectors, income from operations is also expressed as a percentage of
segment revenues. Segment revenues are the total of sales to third parties and
intersegment sales.
(1) The Display Components business has been deconsolidated effective July
1, 2001, due to the transfer to a joint venture with LG Electronics of
Korea.
12
The performance of Components over the past three years, excluding
Display Components, is presented in the following table:
amounts in millions of euros 2002 2001 2000
------ ------ ------
Sales 2,212 2,086 3,048
Segment revenues 2,450 2,458 3,757
Income (loss) from operations (329) (529) 448
as a % of sales (14.9) (25.4) 14.7
as a % of segment revenues (13.4) (21.5) 11.9
----- ----- -----
Sales
Components' sales totaled EUR 2,212 million for the year 2002. In
nominal terms sales decreased by 20% from 2001, largely due to the
deconsolidation of Display Components. On a comparable basis, sales
increased by 10%. Sales volume increased by 21%, while average prices
declined by 11%.
Mobile Display Systems (MDS) recorded strong growth and gained market
share (increased by 7%). The transition to color screens was
successfully executed as planned, and revenues from color displays
reached close to 45% of total sales by the end of the year. Optical
Storage also recorded growth in sales, in spite of overcapacity in the
industry as a result of disappointing PC markets. Price erosion
intensified and more than offset the volume growth, especially in the
commoditized data segment, which led to the decision to downsize this
activity. The Audio/Video and Automotive business lines will be
continued. Digital Displays had a stable 2002. Creative Display
Solutions strengthened its position in the market with expansion of its
product portfolio. Sales at Emerging Electronic Solutions grew
marginally from the level in 2001, mainly in Sound Solutions. However
the performance was weaker in tuners and remote controls.
Sales in 2001 were down at Optical Storage and Mobile Display Systems
as a result of the depressed telecommunication and PC-related markets.
Sales were negatively impacted by a volume reduction of 19% and price
erosion of 10%, as a result of the slowdown in key markets such as
personal computers and cellular phones. Sales at Mobile Display Systems
declined significantly due to an excess inventory build-up by customers
in 2000, which only started to improve in the third quarter of 2001.
The optical storage market experienced a severe decline of 32% in 2001.
Income from operations
Income from operations in 2002 came to a loss of EUR 329 million.
Special items amounted to a loss of EUR 85 million for the year. Income
from operations, excluding all special items, improved by EUR 266
million from the 2001 loss of EUR 510 million, mainly due to a better
performance by Mobile Display Systems. Most of the innovative
businesses in the Digital Displays cluster are in the early stage of
the life cycle, which requires high levels of R&D spending.
The most significant special item related to the charges taken for
Optical Storage to exit the data segment, which amounted to EUR 104
million. The decision to dissolve the product division resulted in
additional charges of EUR 78 million. Special items earlier in the year
were a gain of EUR 40 million relating to the sale of the Glass
activities of Display Components and a EUR 40 million currency
translation gain from the liquidation of certain activities in Japan.
13
The results in 2001 were impacted by special items comprising
restructuring costs (EUR 156 million), disentanglement costs related to
the transfer of Display Components to the joint venture with LG
Electronics (EUR 42 million) and a partial release of EUR 41 million of
the provision related to the sale of the Advanced Ceramics & Modules
(AC&M) activities in 2000. Restructuring actions at Mobile Display
Systems and Optical Storage were taken to realign the cost levels of
the organizations to the prevailing market conditions.
Excluding special items, income from operations amounted to a loss of
EUR 510 million in 2001, compared to a profit of EUR 382 million in
2000.
Net operating capital
Net operating capital was reduced due to inventory reduction, several
asset write-downs and restructuring provisions.
SEMICONDUCTORS
amounts in millions of euros 2002 2001 2000
------- ------- -------
Sales 4,089 4,389 5,879
% nominal (decrease) increase (7) (25) 55
Segment revenues 4,613 4,940 6,812
Income (loss) from operations* (537) (607) 1,346
as a % of sales (13.1) (13.8) 22.9
as a % of segment revenues (11.6) (12.3) 19.8
Income (loss) from operations excl. special items* (375) (403) 1,344
as a % of sales (9.2) (9.2) 22.9
as a % of segment revenues (8.1) (8.2) 19.7
Net operating capital 3,606 4,742 4,572
Employees 31,185 32,740 35,304
------ ------ ------
*) Incl. amortization of goodwill - (49) (55)
As a result of the high level of sales of products and services to other Philips
product sectors, income from operations is also expressed as a percentage of
segment revenues. Segment revenues are the total of sales to third parties and
intersegment sales.
Sales
After experiencing the worst downturn in the history of the
semiconductor industry in 2001, markets more or less stabilized,
although at very depressed levels, in 2002. For the second year in a
row, Semiconductors experienced a sales decline, amounting to a nominal
7% in 2002. The decline was experienced across all businesses and
consisted of a 7% increase in sales volume, a 3% decline due to
currency movements and an 11% decline due to price erosion. On a total
available market (TAM) basis, market share declined by 0.1% to 3.1%
(Source WSTS). Saturation in the PC and handset markets and a weak
financial position of telecom operators and service providers had an
adverse effect on semiconductor industry growth. Semiconductors
maintained its strong position in the profitable analog markets.
Sales in the Semiconductors sector in 2001 totaled EUR 4,389 million,
down 25% compared to the year 2000, despite the 3% positive effect of
the acquisition of MiCRUS as of June 1, 2000. Sales volume decreased by
18%, while average prices declined by 10%. The significant decline,
which occurred in all business lines and geographic regions, was caused
by the slowdown of the world's economies and the PC and telecom
markets.
14
Income from operations
The year 2002 was yet another weak year for the industry. An initial
improvement in the first half of the year due to reloading of the
inventory channels was not sustained in the second half of the year.
Coupled with inventory reductions by our own organizations, this
resulted in a still loss-making 54% wafer fab utilization. Expressed as
a percentage of segment revenues, income from operations was a loss of
11.6%. Losses were incurred in growth areas such as digital consumer
and networking as a result of continued substantial R&D efforts.
Excluding net special charges of EUR 162 million, income from
operations was a negative EUR 375 million. To reduce overcapacity, it
was decided to further downscale production capacity by closing the fab
in Albuquerque; this closure will be completed towards the end of 2003.
R&D activities and overheads were further streamlined. The total cost
of these measures was EUR 169 million in 2002, and a further EUR 66
million will be recognized in 2003. The wafer capacity restructurings
announced over the last two years will reduce capacity by 15%.
Income from operations in 2001 included special items of EUR 204
million, consisting of restructuring charges related to the closure of
a wafer fab in Albuquerque, USA, the closure of a fab in Caen, France,
the reduction of inventory levels and the streamlining of operational
costs. Factory utilization was at 40%. Income in 2001 also included EUR
39 million for the settlement of insurance claims for the Albuquerque
fire in 2000.
Net operating capital
Capital expenditures were reduced as much as possible. To further limit
our exposure to capital commitments, cooperation with TSMC, SSMC and
STMicroelectronics will be continued, including a joint 12-inch pilot
fab that is being built with STM and Motorola, which is expected to be
operational in 2003. Furthermore, net operating capital was reduced
mainly due to inventory reduction and several asset write-downs.
MEDICAL SYSTEMS
amounts in millions of euros 2002 2001 2000
------ ------- -------
Sales 6,844 4,834 3,031
% nominal increase 42 59 22
Income (loss) from operations* 309 (163) 169
as a % of sales 4.5 (3.4) 5.6
Income from operations excl. special items* 435 291 213
as a % of sales 6.4 6.0 7.0
Net operating capital 4,849 5,418 2,821
Employees 31,027 30,993 19,358
------ ------ ------
*) Incl. amortization of goodwill - (104) (54)
Sales
Sales at Medical Systems in 2002 totaled EUR 6,844 million,
representing 42% nominal growth. Excluding the effects of acquisitions
and exchange rate movements, sales increased by 5%. Sales volume
increased by 8%, while average prices declined by 3%. X-ray, Computed
Tomography, Nuclear Medicine, Cardiac and Monitoring Systems and
Customer Support drove the sales increase. From a regional perspective,
sales growth was strongest in North America, with modest increases in
Asia Pacific and Europe, led by higher sales in Eastern Europe.
15
Sales in the Medical Systems sector in 2001 totaled EUR 4,834 million,
representing 59% growth. Excluding the effects of acquisitions, sales
increased by 10%. This was made up of volume growth of 12%, partially
offset by price erosion of 3% and positive currency effects of 1%.
All regions achieved positive sales growth, most significantly North
America and Europe. In product terms, the main growth areas were
Magnetic Resonance, Computed Tomography, X-ray and the Customer Support
business.
Income from operations
Income from operations in 2002 amounted to EUR 309 million and included
special charges of EUR 126 million, including acquisition-related costs
of EUR 84 million and an asset and goodwill impairment charge for
Health Care Products (HCP) amounting to EUR 47 million. Excluding these
special items and 2001 amortization of goodwill, income from operations
in 2002 improved by EUR 40 million to a record EUR 435 million. This
increase mainly came from improved sales and performance at X-ray,
Customer Service and CT/MR.
Additionally, there were a number of non-recurring charges totaling EUR
73 million, mainly following the Marconi and Agilent acquisitions, and
charges taken for the exposure related to Argentina. In addition, IT
costs excluding special items were EUR 58 million higher than in 2001,
due to the new IT configuration in the acquired companies. Despite a
delay and the relatively high cost of integrating IT systems, the
integration of the new acquisitions and the related restructuring
program are on schedule. Positive synergy effects in 2002 amounted to
EUR 173 million. The integration is expected to yield significant
savings of EUR 350 million during the full year 2003.
EBITA, excluding special items, non-recurring charges and the HCP
activities, came to 9.9% of sales. This equates to 8.1% income from
operations as a % of sales excluding special items and non-recurring
charges.
Income from operations in 2001 included acquisition-related costs of
EUR 379 million, of which in-process R&D write-offs of EUR 106 million
and net restructuring charges of EUR 75 million. After the 2001
acquisitions, income included amortization costs for goodwill and other
intangibles for an amount of EUR 104 million. Excluding special items
and amortization charges, income from operations improved by EUR 128
million. This improvement mainly came from the increase in sales and
the success of the product ranges of the Magnetic Resonance and X-ray
businesses. MedQuist also contributed to the improvement.
Net operating capital
Net operating capital was significantly lower due to the weaker dollar
and the sale of HCP.
16
MISCELLANEOUS
amounts in millions of euros 2002 2001 2000
------- ------- -------
Sales 1,957 1,985 2,974
% nominal (decrease) increase (1) (33) 18
Income (loss) from operations* 74 (104) (191)
as a % of sales 3.8 (5.2) (6.4)
Income (loss) from operations excl. special items* (304) (246) (56)
as a % of sales (15.5) (12.4) (1.9)
Net operating capital (73) 314 819
Employees 14,839 15,366 18,872
------ ------ ------
*) Incl. amortization of goodwill - (3) (47)
This sector mainly comprises two groups of activities: the central
research and technology centers (such as Philips Research, Intellectual
Property & Standards, Philips Centre for Industrial Technology and
Philips Design) and Corporate Investments (such as Assembleon and
Philips Enabling Technologies Group). In addition, there are activities
that are being redesigned, or disentangled and readied for sale.
Sales
Sales in the Miscellaneous sector in 2002 came to EUR 1,957 million, a
1% decrease compared to last year. After adjustment for the effects of
deconsolidations and currencies, sales were 4% lower than the year
before.
Sales in 2001 came to EUR 1,985 million, a 33% decrease on 2000, mainly
due to the deconsolidation of FEI, Broadcast and Marantz.
Income from operations
Income from operations in 2002 amounted to EUR 74 million, compared to
a loss of EUR 104 million in the previous year. As a consequence of the
portfolio rationalization program, the following divestments were
effectuated in 2002:
TechnoFusion, SMATV, Heat and Surface Treatment, Philips Broadband
Networks, Analytical and CSI. The divestments had a positive effect of
EUR 245 million on income from operations and a positive effect of EUR
454 million on cash flow. Furthermore, an earn-out of JDS Uniphase
shares, related to the sale of Optoelectronics in 1998, resulted in a
gain of EUR 113 million.
Excluding special items, income deteriorated by EUR 58 million, mainly
due to a lower level of contract research commissioned by the product
divisions, while the long-term corporate funded research remained
unaffected. These higher losses were partly offset by improvements at
Assembleon and Navigation Technologies. In 2002, total expenditures for
R&D activities included in income of the product sectors, mainly
Semiconductors followed by Medical Systems, amounted to EUR 3,043
million, representing 9.6% of Group sales, compared to EUR 3,312
million, or 10.2% of Group sales, in 2001 and EUR 2,766 million, or
7.3% of Group sales in 2000.
Income in 2001 benefited from gains on the sale of part of the
investment in FEI (EUR 185 million) and the divestment of Philips
Broadcast to Thomson Multimedia (EUR 57 million), partly offset by
restructuring charges, mainly for PETG and Assembleon, and
acquisition-related costs. Excluding special items, income decreased
significantly due to operational losses at PETG and Assembleon, which
suffered from the downturn in the semiconductor equipment market.
17
UNALLOCATED
This product sector comprises the costs of the corporate center -
including the initial funding of e-business and global brand management
programs - as well as country and regional overhead costs. Income from
operations amounted to a loss of EUR 330 million in 2002, compared to a
loss of EUR 121 million in 2001.
A steep decrease in group overheads in 2002 was offset by significantly
higher pension and postretirement benefit costs of EUR 288 million.
Income from operations in 2001 amounted to a loss of EUR 121 million,
compared to a loss of EUR 102 million in 2000. A decline in group
overheads in 2001 was offset by higher pension and postretirement
benefit costs of almost EUR 103 million.
ORIGIN
amounts in millions of euros 2000
-------
Sales 717
% nominal (decrease) increase (32)
Segment revenues 1,164
Income from operations 1,063
as a % of sales .
as a % of segment revenues 91.3
Income (loss) from operations excl. special items (9)
as a % of sales (1.3)
------
As a result of the high level of sales of products and services to other product
sectors, income from operations is also expressed as a percentage of segment
revenues. Segment revenues are the total of sales to third parties and
intersegment sales.
In 2000, Origin was merged with Atos. Income in 2000 included a gain of
EUR 1,072 million related to this merger.
SALES AND INCOME FROM OPERATIONS BY GEOGRAPHIC AREA
amounts in millions of 2002 2001 2000
euros ------------------- -------------------- --------------------
income income income
(loss) from (loss) from from
sales operations sales operations sales operations
Europe 13,250 881 13,920 (487) 16,967 3,246
North America 9,804 (521) 9,296 (851) 9,565 186
Latin America 1,513 23 1,918 (13) 2,285 59
Africa 206 7 237 (10) 271 3
Asia Pacific 7,047 30 6,968 (34) 8,774 764
------ ------ ------ ------ ------ ------
31,820 420 32,339 (1,395) 37,862 4,258
18
Sales
Sales in Europe declined by 5%, partly due to the effect of
divestments. Additionally, sales were affected by the weak economy in
Germany and by the downsizing of GSM and Digital Networks activities.
Semiconductors' sales decreased following weak market demand. DAP and
Medical Systems recorded strong sales growth in Europe.
Sales in USA/Canada increased by 5%, attributable to the effect of new
consolidations. On the downside, sales suffered from the weaker US
dollar and the unfavorable semiconductor market. On a comparable basis,
sales developed positively at DAP, Components and Medical Systems.
Sales in Latin America were 21% lower, following the collapse of the
Argentinian and Venezuelan economies and the impact thereof on the
region. All sectors were affected. Sales in Asia Pacific increased by
1%, hampered by the negative effect of deconsolidations (2%) and weaker
currencies (5%). On a comparable basis, sales expanded by 8%, headed by
strong growth in China and South Korea of 26% and 22% respectively.
Excluding the effects of changes in consolidations and currencies,
sales developed positively at Lighting, Components, Semiconductors and
Medical Systems. Lower sales were posted in the Consumer Electronics
sector, especially in GSM and Licenses.
Income from operations
The improvement in income from operations on a global level was also
visible in the performance of the various regions. All regions improved
their profitability, especially Europe and North America.
Despite the considerable improvement in North America, this region is
still loss-making, due to restructuring charges at Semiconductors,
Components and CE and acquisition-related charges at Medical Systems.
All other regions were profitable.
RESTRUCTURING AND IMPAIRMENT CHARGES
The ongoing difficult operating environment in 2002, together with
overcapacity in certain business areas, required a number of
restructuring measures. In 2002 further progress was made in bringing
our portfolio into line with our ambitions and we took measures to
develop a more flexible cost base. This, combined with the ongoing
process of efficiency improvement, has led to restructuring and
impairment charges, for various projects, of EUR 513 million, net of
releases.
The most significant new projects in 2002 were:
- Dissolution of the Components division (EUR 78 million) in
order to reduce costs and simplify the organizational
structure. This will further streamline innovation and create
more value through better alignment of related businesses
currently positioned in different divisions.
- Rationalization of the product portfolio of Optical Storage
(EUR 104 million) to restore profitability by concentrating on
the areas where it can add most value, e.g. innovating,
defining and establishing new standards for data storage.
- Reduction of excess capacity at Semiconductors (EUR 180
million) in order to lower the break-even level and bring
capacity into line with demand.
- Reduction of manufacturing capacity of PCMS at Louviers,
Juarez and Hasselt (EUR 96 million).
- Closure of Consumer Electronics' monitor production facilities
in Mexico (EUR 11 million) and their transfer to Asia due to
continued price pressures in OEM and branded markets and a
rapidly declining CRT monitor market in North America and
Europe.
- Reduction of Research activities in France (EUR 12 million).
- Several programs at Lighting (EUR 20 million).
- HCP asset and goodwill impairment (EUR 47 million).
19
Restructuring and impairment charges in 2001 amounted to EUR 1,093
million, consisting of EUR 1,120 million for projects at Consumer
Electronics, Semiconductors, Components, Digital Networks, Medical
Systems and Miscellaneous, partly offset by releases of EUR 27 million.
In 2000, projects were started at Consumer Electronics, Components,
Lighting and Miscellaneous, for an amount of EUR 243 million, partly
offset by releases of EUR 46 million. Individually, the largest
projects in 2000 were the closure of the large-screen operations of
Hosiden and Philips Display (HAPD) in Kobe, Japan, and the Components
activities in Germany and Taiwan.
Total gross restructuring and impairment charges in 2002, 2001 and 2000
can be categorized as follows:
amounts in millions of euros 2002 2001 2000
------ ------ ------
Personnel lay-off costs 245 437 125
Write-down of assets 214 240 47
Other costs 103 136 26
----- ----- -----
Restructuring charges 562 813 198
Impairment goodwill 19 - 35
Write-down of inventories (in cost of sales) 10 307 10
----- ----- -----
Total restructuring and impairment 591 1,120 243
Release of restructuring provisions 78 27 46
In 2002, releases of surplus provisions amounted to EUR 78 million.
They were primarily related to Miscellaneous, Consumer Electronics,
Components, Semiconductors and Lighting, and were for the greater part
caused by reduced severance payments.
Releases of surplus restructuring provisions in 2001 totaled EUR 27
million. The releases were primarily related to Lighting and
Components.
In 2000, releases of surplus provisions amounted to EUR 46 million, due
to lower expenditures on completed projects, and were related to all
sectors except Domestic Appliances and Personal Care and Unallocated.
Restructuring projects started in 2002 will lead to a headcount
reduction of approximately 6,700, of which 3,900 relate to direct labor
and 2,800 to indirect labor (total lay-offs in 2001 approximately
10,800 persons, and in 2000 approximately 5,000 persons).
In general, restructuring plans lead to cash outflows in the year in
which they are recognized and in the following years, and are financed
from the normal cash flow from operations. Estimated cash outflows
relating to projects started in 2002 and previous years can be
summarized in the following table:
of which
total ---------------------------------------------------------
amounts in millions of euros charges non-cash cash 2000 cash 2001 cash 2002 cash 2003*
------- -------- --------- --------- --------- ----------
Restructuring 2002 562 316 21 225
Restructuring 2001 813 267 124 235 187
Restructuring 2000 198 47 106 45
* Future cash outflows are based on estimates.
20
Philips' share in restructuring and impairment charges recognized by
unconsolidated companies amounted to EUR 301 million and as such is
included in the results relating to unconsolidated companies.
For further details of restructuring charges, see notes 2 and 5 to the
consolidated financial statements.
FINANCIAL INCOME AND EXPENSES
Financial income and expenses amounted to a net expense of EUR 2,227
million in 2002, compared to an expense of EUR 915 million in 2001 and
income of EUR 1,993 million in 2000. Net interest expenses amounted to
EUR 384 million in 2002, compared with EUR 391 million in 2001 and EUR
167 million in 2000. The net interest expenses in 2002 were lower than
in 2001, mainly due to lower interest rates. In 2000, net interest
expenses were lower, mainly as a result of the lower net debt level of
the Group.
Financial income in 2002 included a gain of EUR 67 million from the
partial sale of shares in ASML. During the year 2000 the Company sold a
portion of the JDS Uniphase shares that had been received upon the sale
of Philips Optoelectronics in 1998. The gain from the sale amounted to
EUR 1,207 million. Moreover, in 2000, Seagram shares were exchanged for
shares of Vivendi Universal. The gain from the exchange of Seagram
shares amounted to EUR 1,115 million in 2000, net of US dollar hedge
and taxes.
In view of the extended period of time over which the market value of
security investments in Vivendi Universal, GN Great Nordic and JDS
Uniphase was below book value, these shares were written down to fair
value. The market value of these securities at year-end 2002 was EUR
589 million, EUR 19 million and EUR 117 million respectively. The
related recognized impairment losses were EUR 1,855 million, EUR 27
million and EUR 73 million respectively. In 2001, the impairment losses
came to EUR 440 million for Vivendi Universal and EUR 86 million for GN
Great Nordic.
In addition, as in 2001, in 2002 dividends totaling EUR 33 million were
received on the Vivendi Universal shares, while in 2000 dividends
totaling EUR 32 million were received on the Seagram shares.
INCOME TAX
The income tax expense totaled EUR 27 million in 2002, compared with a
tax benefit of EUR 428 million in 2001 and an expense of EUR 563
million in 2000. This corresponds to an effective tax rate of negative
1% in 2002, as compared to 18% in 2001 and 9% in 2000. Excluding the
non-deductible charges for impairment of securities, the effective tax
rate in 2002 would amount to 18%. For the coming year the Company
expects an effective tax rate of around 25%. The effective tax rate for
2001 was affected by non-deductible charges for impairment of
securities of 6%, whereas the effective tax rate for 2000 was
influenced by tax-exempt proceeds from the sale of various securities
(tax effect 13%). Please refer to note 4 of the consolidated financial
statements.
21
RESULTS RELATING TO UNCONSOLIDATED COMPANIES
Results relating to unconsolidated companies amounted to a loss of EUR
1,346 million in 2002, compared to a loss of EUR 608 million in 2001
and a profit of EUR 3,956 million in 2000. The composition of these
results is as follows:
amounts in millions of euros 2002 2001 2000
------- ------- -------
Income (loss) excl. amortization of goodwill and other
intangibles and special items 291 (103) 683
Amortization of goodwill and other intangibles (24) (257) (124)
Special items:
- - restructuring and impairment charges (1,606) (208) -
- - gain on sale of shares 5 20 2,717
- - equity dilution (losses) gains TSMC (12) (60) 680
------ ------ ------
(1,346) (608) 3,956
In general, operational results at unconsolidated companies in 2002
improved compared to 2001. The operational performance of LG.Philips
LCD improved due to a strong overall LCD market with significantly
better price levels, particularly in the first half of 2002, and much
higher volumes.
Taiwan Semiconductor Manufacturing Company (TSMC) maintained
profitability despite suffering from declining markets in the second
half of 2002. Its utitilization rate slipped to 61% in the last
quarter. TSMC still outperforms the semiconductor industry as a whole,
because of the increased outsourcing by electronics companies.
LG.Philips Displays' income was negatively impacted by restructuring
and asset impairment charges of EUR 301 million. These restructurings
were carried out to transfer operations to lower cost regions.
Furthermore, Philips has determined that the present value of the
future net cash flows of LG.Philips Displays is not sufficient to cover
the carrying value of the Philip's investment in the joint venture. An
impairment charge of EUR 275 million was recognized in this respect.
The investment in Atos Origin was also written down by EUR 921 million
as a consequence of the other-than-temporary decline of the Atos Origin
share price.
The results relating to unconsolidated companies included amortization
of goodwill of EUR 24 million that was related to Atos Origin's fourth
quarter 2001 due to the fact that their results are reported on a
three-month delay basis. Excluding amortization costs and special
items, Philips' share in the results of these companies improved by EUR
394 million.
The unfavorable results in 2001 compared to 2000 were primarily
attributable to a deterioration in the performance of virtually all of
our major unconsolidated companies. TSMC, LG.Philips LCD and LG.Philips
Displays were affected by overcapacity and the severely depressed
telecom and PC-related markets, resulting in sharp price erosion and
low sales volumes. Results in 2001 also reflect full-year goodwill
amortization of Atos Origin. Excluding special items and amortization
of goodwill and other intangibles, Philips' share in the 2001 results
of TSMC and the two joint ventures with LG Electronics of Korea
amounted to a profit of EUR 180 million and a loss of EUR 211 million
respectively.
22
The 2001 results were affected by several special items. The employee
bonus stock option program of TSMC had the effect of diluting Philips'
shareholding in the company, resulting in a loss of EUR 60 million.
Additionally, the results of TSMC included a charge for impairment of
EUR 82 million. Restructuring charges at LG.Philips Displays of EUR 89
million and the write-down of certain Corporate Venturing investments
totaling EUR 37 million also impacted earnings. That year's income was
positively affected by a gain of EUR 20 million resulting from the sale
of the Company's stake in Philips Matsushita Battery Corporation.
Income in 2000 contained a significant amount of special items, of
which the gain on the sale of a portion on ASML shares was the most
significant. Excluding these items, income of TSMC and ASML was
positively influenced by the favorable semiconductor market. LG.Philips
LCD also contributed to income. This was partly offset by losses of
SSMC and LumiLeds, both of which incurred high start-up costs.
COOPERATIVE BUSINESS ACTIVITIES AND UNCONSOLIDATED COMPANIES Philips
engages from time to time in cooperative activities with other
companies. Philip's principal cooperative business activities and
participating interests are set out below.
Taiwan Semiconductor Manufacturing Company Limited (TSMC) is a
semiconductor foundry operation in which Philips currently holds 21.7%
of the total number of outstanding common shares. In November 2000 the
Company purchased redeemable preferred shares, bringing its total
holding in TSMC to approximately 27.0%. These preferred shares are
redeemable in the second quarter of 2003. The principal reasons for
this shareholding are to secure a strategic supply of wafers, to share
and exchange technology and manufacturing knowledge, and to save
capital.
Systems on Silicon Manufacturing Company (SSMC) is a Singapore-based
wafer fabrication firm established by Philips (48%), TSMC (32%) and the
Economic Development Board of Singapore (20%). The principal reasons
for the shareholding are to secure a strategic supply of wafers and to
limit loading risks and save capital.
Atos Origin is a leader in end-to-end business and e-business
solutions. The company is operational in 30 countries. Philips
currently holds a 48.4% stake in Atos Origin. As from 2002, Philips may
reduce its stake in the combined entity to below 35%, subject to market
conditions being acceptable. There are no current plans to do so.
Philips has also received two tranches of stock warrants, each
representing approximately 2.4 million Atos Origin shares, which may be
exercised only on certain conditions, subject to the appreciation of
the Atos Origin share price to specified levels. The latter is not
likely to occur. One tranche of stock warrants expired in 2002.
LG.Philips LCD Co. is a 50/50 manufacturing joint venture with LG
Electronics of South Korea and is one of the top two suppliers of TFT
liquid-crystal displays in the world. This joint venture has enabled
Philips to become a leading company in the area of active-matrix LCDs,
a display technology that is rapidly migrating from notebook displays
to desktop monitors, and in the near future to other areas, including
television.
LG.Philips Displays is a 50/50 joint venture with LG Electronics of
South Korea and is a leading supplier in its line of business. The
joint venture combines the two companies' complementary strengths and
creates a strong synergy potential in the mature CRT display market.
The joint venture is in the midst of a large restructuring program
intended to reduce its operational costs.
23
In the LumiLeds Lighting 50/50 joint venture, Philips and Agilent have
the complementary strengths and positions to successfully develop the
market for LED-based lighting products. Both companies have expanded
the scope of their existing activities. Both parties hold equal shares
in the venture, whose product portfolio has been extended from LED
traffic signal products to a variety of other applications, including
automotive, signaling, contour lighting and signs, illumination and LCD
backlighting, demonstrating both parties' confidence in the technology.
At year-end 2002, the operations were located in the USA, Malaysia and
the Netherlands.
FEI Company is a US-based company in which Philips holds 26% of the
outstanding shares. FEI is the leading supplier of Structural Process
Management (TM) solutions to the world's technology leaders in the
fields of semiconductors, data storage and biological structures.
Philips Medical Capital is a joint venture with Rabobank Group's
subsidiary De Lage Landen International, in which Philips holds a 40%
interest. The venture provides financing for the purchase of diagnostic
imaging equipment produced by Philips Medical Systems throughout the
United States.
By year-end 2002 the Corporate Venturing portfolio comprised some 25
companies in which Philips has both a minority stake and a business
relationship. The Company has stopped acquiring interests in new
ventures.
MINORITY INTERESTS
In 2002, the share of minority interests in the income of group
companies amounted to EUR 26 million, compared with a share in the loss
of EUR 15 million in 2001 and a share in income of EUR 67 million in
2000. The change in income in 2002 is mainly attributable to excess
dividends received in 2001, relating to minority shareholdings, which
did not occur in 2002. The change in 2001 compared to 2000 is mainly
attributable to the consolidation of NavTech and deconsolidation of FEI
in 2001 and some buy-outs of minority shareholdings.
NET INCOME
Income before the cumulative effect of change in accounting principle
amounted to a loss of EUR 3,206 million (EUR 2.51 per common share -
basic), compared to a loss of EUR 2,475 million in 2001 (EUR 1.94 per
common share - basic) and income of EUR 9,577 million (EUR 7.30 per
common share - basic) in 2000.
There were no extraordinary items in the year under review or the
previous two years.
Income of EUR 85 million was recorded in 2000 as a cumulative effect of
change in accounting principle for derivative instruments, representing
the changes in value of foreign-exchange contracts relating to hedges
of securities.
Net income in 2002 amounted to a loss of EUR 3,206 million (EUR 2.51
per common share - basic), compared to a loss of EUR 2,475 million in
2001 (EUR 1.94 per common share - basic) and income of EUR 9,662
million (EUR 7.36 per common share - basic) in 2000.
24
LIQUIDITY AND CAPITAL RESOURCES
NET OPERATING CAPITAL PER SECTOR
2002 2001 2000
------- ------ -------
Lighting 1,723 1,979 1,903
Consumer Electronics 28 672 1,486
DAP 529 652 752
Components 118 397 2,158
Semiconductors 3,606 4,742 4,572
Medical Systems 4,849 5,418 2,821
Miscellaneous (73) 314 819
Unallocated (241) 135 (141)
------ ------ ------
Total 10,539 14,309 14,370
CASH FLOWS
Cash flows provided by operating activities totaled EUR 2,228 million
in 2002, compared with EUR 1,248 million in 2001 and EUR 2,996 million
in 2000. The increase in cash provided by operating activities is
attributable to the further reduction of working capital in relation to
sales. This reflects the success of the cash conversion cycle program
and effective supply chain management in most sectors. Expressed as a
percentage of sales, inventories ended at an all-time low of 11.1%,
compared with 13.3% at the end of 2001 and 13.9% at the end of 2000.
Outstanding trade receivables at year-end 2002 were the equivalent of
1.3 months' sales, compared to 1.5 months at the end of both 2001 and
2000. More standardized credit terms have been agreed with our
suppliers.
Cash flows from investing activities required EUR 248 million in 2002,
EUR 4,564 million in 2001 and EUR 2,404 million in 2000.
In 2002, gross capital expenditures were scaled back to EUR 1,161
million as we aligned our component and semiconductor manufacturing
facilities to the lower level of market demand. In 2001, capital
expenditures came to EUR 2,143 million and were significantly down from
the level of EUR 3,170 million in 2000. In 2002 the ratio of gross
investments to depreciation came to 0.7, compared to 1.1 in 2001 and to
1.8 in 2000.
During the year 2002, EUR 626 million was used for the purchase of
businesses and investment in unconsolidated companies. EUR 250 million
was used for a settlement associated with the establishment of the
joint venture LG.Philips Displays, including a subsequent cash
injection. Additionally, a final payment of EUR 90 million was made to
Agilent in respect of the 2001 acquisition of HSG. A capital injection
in Systems on Silicon Manufacturing Company (SSMC) of EUR 69 million
and also a number of smaller investments were made. These outflows were
fully offset by proceeds from the sale of various businesses in 2002
totaling EUR 813 million; primarily the sale of Philips Contract
Manufacturing Services (PCMS), Analytical, Communication, Security and
Imaging (CSI), the HCP group of Medical Systems, Philips Broadband
Networks and TechnoFusion. Furthermore, the final instalment of the
2001 sale of Philips Broadcast of EUR 63 million was collected. In
addition, EUR 422 million was received from the resetting of currency
swap transactions, while proceeds from the sale of shares (of which
ASML shares of EUR 72 million) amounted to EUR 98 million.
25
During the year 2001, Philips invested EUR 3,636 million in businesses
operating in strategic areas to further strengthen its global market
position. The investments included the purchase of the assets of the
Healthcare Solutions Group of Agilent (EUR 1,943 million) and the
acquisition of the medical systems activities of Marconi for EUR 1,245
million. In 2001, LG Electronics redeemed its 7.5% redeemable preferred
shares. This redemption resulted in a cash inflow of EUR 486 million.
In addition, EUR 200 million was generated by the sale of a portion of
the shares in FEI and the repayment by FEI of loans from Philips.
Furthermore, EUR 295 million was generated by the sale of the Glass
business to LG.Philips Displays.
During the year 2000, Philips invested EUR 3,209 million in businesses.
The investments included the purchase of a 71% majority interest in
MedQuist (EUR 1,339 million), the acquisition of Optiva Corporation
(EUR 291 million), payments for the acquisition of MiCRUS (EUR 228
million), the purchase of ADAC (EUR 437 million), the purchase of 3.5%
redeemable preferred shares in TSMC (EUR 458 million) and investments
in a number of smaller Corporate Venturing and other businesses (EUR
126 million and EUR 330 million respectively). Moreover, Philips
invested EUR 505 million in the purchase of 7.5% redeemable preferred
shares of LG Electronics. The divestment of Philips' AC&M business
yielded a net amount of EUR 658 million in cash. A positive cash flow
of EUR 2,710 million was generated by the sale of 16.5% of the shares
in ASML. Furthermore, an amount of EUR 1,272 million was generated by
the sale of a portion of the JDS Uniphase shares.
As a result of the items mentioned above, cash flows before financing
activities were a positive EUR 1,980 million in 2002 compared with a
negative EUR 3,316 million in 2001 and a positive EUR 592 million in
2000.
In 2002 net cash used for financing activities amounted to EUR 897
million. This included the issuance of a EUR 300 million eurobond in
August, the proceeds of which were used for repayment of short-term
debt. Philips shareholders were paid a distribution in cash totaling
EUR 459 million. Treasury stock was purchased for an amount of EUR 19
million.
In 2001 net cash flows provided by financing activities amounted to EUR
3,159 million. This includes EUR 4,250 million from the issuance of two
tranches of two bonds each and EUR 521 million from the issuance of
commercial paper. Philips shareholders received dividends of EUR 458
million. Treasury stock transactions totaled EUR 336 million.
In 2000 the net cash flows used for financing activities amounted to
EUR 2,038 million, of which EUR 1,673 million was used for a 3% share
reduction program. Additionally, EUR 612 million was used to repay
interest-bearing debt and EUR 399 million was used for the payment of
dividends to Philips shareholders. Furthermore, treasury stock
transactions required EUR 578 million.
26
FINANCING
Total debt outstanding at the end of 2002 was EUR 7,109 million,
compared with EUR 7,866 million at the end of 2001 and EUR 4,027
million at the end of 2000.
Changes in long-term debt are as follows:
amounts in millions of euros 2002 2001
------- -------
- - New borrowings 405 4,580
- - Repayments (276) (554)
- - (Decrease) increase current portion (15) 293
- - Consolidation and other effects (217) (8)
------ ------
(103) 4,311
In 2002, long-term debt was reduced by EUR 103 million to EUR 6,492
million. During 2002, Philips issued new long-term debt for EUR 300
million. During 2001, Philips issued four new bonds for a total amount
of EUR 4,250 million. Two outstanding bonds matured during 2001 for a
total amount of EUR 441 million.
Philips had two 'putable' USD bonds outstanding at year-end 2002 for a
total amount of EUR 256 million. The investors may require repayment in
one specific month during the lifetime of the respective bonds.
Assuming that investors require repayment at the relevant put dates,
the average remaining tenor of the total outstanding long-term debt was
4.2 years, compared to 5.2 years in 2001. However, assuming that the
'putable' bonds will be repaid at maturity, the average remaining tenor
at the end of 2002 was 4.9 years, compared to 6.1 years at the end of
2001. Long-term debt as a proportion of the total debt at the end of
2002 stood at 91%, compared to 84% at the end of 2001.
Changes in short-term debt are as follows:
amounts in millions of euros 2002 2001
------ ------
- - Net borrowings (repayments) (548) (73)
- - Increase (decrease) current portion
long-term debt 15 (293)
- - Consolidation and other effects (121) (106)
----- -----
(654) (472)
In July 2002, Philips closed a USD 3.5 billion revolving credit
facility. The facility, which has a five-year maturity, replaces an
existing USD 2.5 billion revolving credit facility, which had been in
place since July 1996 and was never drawn upon by the Company. The new
revolving credit facility also had no drawings in 2002. At the
beginning of 2001, Philips established a global commercial paper
program totaling USD 2.5 billion. Under this program the outstanding
amounts reached a maximum of EUR 734 million during the year, while at
year-end EUR 10 million was outstanding. Part of the previously
mentioned standby credit facility acts as a back-up for the global
commercial paper program.
Cash and cash equivalents increased by EUR 968 million in 2002 to EUR
1,858 million. Currency impacts and consolidation changes had a
negative effect of EUR 115 million. In 2001, cash and cash equivalents
declined by EUR 199 million to EUR 890 million at year-end. Currency
impacts and consolidation changes accounted for a EUR 42 million
decrease.
27
The Company had a net debt position (debt, net of cash and cash
equivalents) of EUR 5,251 million at the end of 2002. The net debt
position at the end of 2001 amounted to EUR 6,976 million and at the
end of 2000 to EUR 2,938 million. The net debt to group equity ratio
amounted to 27:73 at the end of 2002, compared to 26:74 at the end of
2001 and 11:89 at the end of 2000.
Stockholders' equity decreased by EUR 5,241 million to EUR 13,919
million at year-end 2002, which was mainly due to the net loss of EUR
3,206 million in 2002. Currency translation differences in equity
resulted in a decrease of EUR 946 million, while the deferred results -
net of taxes - of financial derivative transactions within equity
increased equity by EUR 18 million. Equity was also reduced by treasury
stock transactions of EUR 13 million and by payments to shareholders of
EUR 459 million from the retained earnings related to prior financial
year.
Insofar as not recognized as impairment charges under income, the lower
fair market value of securities available for sale compared to their
book value at the beginning of the year was recorded under other
comprehensive income and reduced equity by EUR 301 million.
Furthermore, the sharp decrease in the stock markets in 2002 resulted
in additional liabilities for pensions. A major part of these
additional pension liabilities had to be reported within other
comprehensive income as a reduction of equity. The charge to other
comprehensive income in 2002 (net of taxes) because of these additional
pension liabilities amounted to EUR 335 million for pension funds in
the USA and UK.
The EUR 3,547 million decrease in equity in 2001 was mainly due to the
2001 net loss of EUR 2,475 million.
The number of outstanding common shares of Royal Philips Electronics at
December 31, 2002 was 1,276 million (2001: 1,274 million shares).
At the end of 2002 the Group held 40.1 million shares in treasury to
cover the future delivery of shares in conjunction with the 67.0
million conversion and stock option rights outstanding at the end of
2002. At year-end 2001, 41.9 million shares were held in treasury
against a 50.1 million rights overhang. It has been the Company's
policy to hedge part of its option grants.
CAPITAL RESOURCES
Philips is of the opinion that it has adequate financial resources to
finance working capital needs. Furthermore, the Company has no material
commitments for capital expenditures. Of Philips' USD 2.5 billion
commercial paper program, EUR 10 million was outstanding as of December
31, 2002. Short-term bank borrowings, excluding the current portion of
long-term debt, totaled EUR 412 million as of that date. In July,
Philips closed a USD 3.5 billion revolving credit facility. The
facility, which has a five-year maturity, replaces an existing USD 2.5
billion revolving credit facility which had been in place since July
1996 and was never drawn upon by the Company. This syndicated bank
facility has not required financial covenants and does not have
credit-rating-related acceleration possibilities or any availability
restrictions. In June 2002 Philips filed a Shelf Registration Statement
(Form F-3) with the Securities and Exchange Commission. This filing
gives Philips the flexibility to issue debt securities and/or to set up
a US Medium Term Notes program for an amount up to USD 2.5 billion.
The Company's total debt as of year-end 2002 was EUR 7,109 million, of
which EUR 617 million was short-term. With year-end cash balances of
EUR 1,858 million, net debt was EUR 5,251 million. In view of the EUR
6.8 billion shareholdings in affiliates and other companies and the USD
3.5 billion revolving facility mentioned above, the Company's liquidity
position is strong.
28
OFF BALANCE SHEET ARRANGEMENTS
Philips has guaranteed up to USD 200 million debt of its subsidiary
LG.Philips Displays (with matching guarantee granted by the other
shareholder, LGE). The guarantee, expiring on December 31, 2004 or
earlier, is related to loans of LG.Philips Displays, which in turn have
provisions for acceleration linked to minimum financial ratio
covenants.
In November 2002, the Company and Jabil Circuit Inc., a global leader
in Electronic Manufacturing Services (EMS), agreed on the sale of most
of Philips Contract Manufacturing Services (PCMS). Under the terms of
the agreement, Jabil acquired the manufacturing operations on three
continents, including sites in Austria, Belgium, Brazil, China,
Hungary, India, Poland and Singapore. From these locations, Jabil will
continue to provide key components for the manufacture of a wide range
of Philips products, including televisions, DVD and audio systems,
storage and display products and set-top boxes under a four-year,
four-billion euro product supply agreement (refer to note 1).
Contractual obligations and commercial commitments
Contractual obligations and commercial commitments
Contractual cash obligations payments due to period
---------------------------------------------------------
less than
(in millions of euros) total 1 year 2-3 years 4-5 years after 5 years
----- --------- --------- --------- -------------
Long-term debt 6,679 193 2,994 397 3,095
Capital lease obligations 8 2 4 1 1
Short-term debt 422 422 - - -
Operating leases 879 166 277 205 231
----- --- ----- --- -----
Total contractual cash
obligations 7,988 783 3,275 603 3,327
N.B. Unconditional purchase obligations incurred in the normal course
of business have not been quantified.
Other commercial commitments expiration per period
-------------------------------------------------------
total amounts less than 1
(in millions of euros) committed year 2-5 years after 5 years
------------- ----------- --------- -------------
Stand-by letters of credit * 3,339 - 3,339 -
Guarantees** 906 278 577 51
----- --- ----- --
Total commercial commitments 4,245 278 3,916 51
* No amounts drawn
** Refer to note 25
PROPOSED DISTRIBUTION TO SHAREHOLDERS OF ROYAL PHILIPS ELECTRONICS
Pursuant to article 38 of the Articles of Association, and with the
approval of the Supervisory Board and the Meeting of Priority
Shareholders, a proposal will be submitted to the General Meeting of
Shareholders to make a distribution in cash to shareholders of EUR 0.36
per common share from the other reserves as indicated in the balance
sheet under Dutch GAAP (retained earnings under US GAAP) (2001: a
distribution was made of EUR 0.36 per common share).
The balance sheet presented in this report, as part of the consolidated
financial statements for the period ended December 31, 2002, is before
distribution, which is subject to shareholder approval after year-end.
Adoption of the proposal by the General Meeting of Shareholders will
result in a total cash payment in the year 2003 and a reduction of the
retained earnings by EUR 459 million (compared with EUR 459 million in
2002).
29
EMPLOYMENT
The number of employees at the end of December 2002 totaled 170,087, a
decline of 18,556 from December 31, 2001. Part of the reduction of
9,514 was caused by various consolidations changes. The largest ones
were PCMS (4,460), HCP (927), CSI (1,311), Analytical (790) and
Broadband Networks (438). On a comparable basis, the reduction was
9,042 employees, mainly centered on Consumer Electronics,
Semiconductors and Corporate Investments. The headcount at Medical
Systems increased by 846 persons as a result of expanding activities.
In geographic terms, Europe and Asia Pacific accounted for most of the
decrease. The headcount reduction was most significant in the
production and general administrative areas, while the R&D area was
affected to a lesser extent.
thousands of employees
2002 2001 2000
---- ---- ----
Nominal position, at year-end 170.1 188.6 219.4
Consolidation changes:
- - new consolidations 0.4 15.5 10.0
- - deconsolidations (9.9) (27.7) (20.7)
Comparable changes (9.0) (18.6) 3.2
OTHER ISSUES
New accounting standards becoming effective in 2003 are described in
detail on page 57.
RISK FACTORS
Philips is a global company, which means that it is affected by
economic developments in all regions of the world. In addition to the
risks inherent to its operations, Philips is exposed to specific market
and financial risks. In the following paragraphs, a summary of Philips'
approach towards risk management and a brief description of the nature
and the extent of its exposure to risks are given. The risk overview
provided is not exhaustive. Some risks, not yet known to Philips or
currently believed not to be material, could later turn out to have a
major impact on Philips' businesses, revenues, income, assets,
liquidity or capital resources.
The risk factors should be considered in connection with any
forward-looking statements.
Risk management approach
Risk management forms an integral part of business management. The
Company's risk and control policy 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 legal requirements and by safeguarding the
reliability of the financial reporting. It makes management responsible
for identifying the critical business risks and the implementation of
fit-for-purpose risk responses. Structured self-assessments are used
company-wide to identify, assess and effectively respond to business
risks and to monitor compliance with minimum control standards in order
to ensure reliable financial reporting. In addition, internal and
external auditors, as part of their annual financial statements audit,
review the quality of the control system and adherence to the Company's
risk and control policy.
30
Accountability is enforced through the formal issuance of a Statement
on Business Controls and a Letter of Representation by each business
unit, resulting, via a cascade process, in a statement by each product
division. The outcome of the self-assessment process and the reviews by
internal and external auditors, and the Statement on Business Controls
and Letter of Representation, are subject to review by the Board of
Management. From 2003 onwards, the existing internal assurance process
for business risk assessment will be further strengthened and the
review frequency will be upgraded to a quarterly review cycle, in line
with emerging best practices in this area.
Internal audit committees at product division and business level meet
on a regular basis to address weaknesses in the business control
infrastructure as reported by the internal and external auditors and to
take corrective action where necessary. They are also involved in
determining the desired internal audit coverage.
The Company's CEO and CFO personally review the establishment and
maintenance of proper internal controls in the product divisions and
major staff and service functions. The quality of the Company's system
of internal controls and the results of internal and external audits
are reported to and discussed in the Audit Committee of the Supervisory
Board.
Standard norms and values for `doing business' applicable to all our
employees and business partners are laid down in the Philips General
Business Principles and enforced by a global system of Compliance
Officers.
Market risks
Philips is active in more than 60 different businesses with different
risk profiles, which are geared to the business environment in which
they operate and the competitive advantage they aim to achieve.
Depending on the nature of the activity, the risk profile of Philips'
businesses is diverse. Some, like Lighting and Domestic Appliances and
Personal Care, are active in more stable markets. Others, like
Semiconductors, operate in highly cyclical markets and may experience
substantial period-to-period fluctuations in their results as a
consequence of changes in industry conditions, economic conditions or
other factors.
During 2002, Semiconductors continued to suffer from adverse economic
conditions, characterized by reduced product demand, high price erosion
and overcapacity in manufacturing. In line with the development of the
demand patterns, Semiconductors has undertaken considerable initiatives
to reduce capacity and to reduce operational costs in order to restore
profitability. These restructurings and cost-reduction targets will
continue to require management attention. To achieve sustainable
growth, in particular in the digital markets, effective and controlled
R&D is critical to the success of this business.
From 2003 onwards Components ceases to exist as a separate product
division. The former Components businesses will be partly integrated in
Consumer Electronics and Semiconductors and partly allocated to
Miscellaneous for redesign, redevelopment and/or sale. The complex
restructuring, integration and divestment process will require
substantial management attention in 2003.
31
The consumer electronics businesses in which Philips is engaged are
intensely competitive. Accordingly, Philips continually faces
competitive challenges such as rapid technological change, evolving
standards, shortening product life cycles and price erosion.
Initiatives to reduce assets through outsourcing will require increased
management focus with respect to the supply base. The realization of a
world-class performance in supply chain management is critical for
success in the global consumer electronics industry.
During 2002, Medical Systems undertook major efforts to integrate its
recent acquisitions into the existing businesses and reap the benefits.
Although we are seeing encouraging progress, the integration and the
alignment of business processes, systems, procedures and internal
controls will continue to require substantial management attention,
also during 2003. Continuous improvement of the delivery performance
for both system deliveries and customer services is a critical success
factor in meeting the challenges of competition.
Philips operates in high-tech markets with rapid technological
development which require the Company to make large financial
investments. Philips continues to utilize partnerships in order to
share the risks associated with large investments. These partnerships
take place through minority shareholdings, joint ventures and majority
shareholdings. Managing this growing number of strategic alliances, and
in particular bridging the international, legal and cultural
differences, is a growing risk in itself. In addition, Philips may face
conflicts of interests, loss of control over cash flows and loss of
proprietary technologies by participating in joint ventures.
Philips' longer-term success depends on technological innovation,
global standards and its ability to obtain and retain licenses and
other intellectual property rights covering its products and its design
and manufacturing processes. The process of seeking intellectual
property protection can be long and expensive. Competitors and other
third parties may also develop technologies that are protected by
patents and other intellectual property rights. These technologies may
therefore not be available to Philips or may be made available to
Philips only on unfavorable terms and conditions.
Further globalization and concentration of our customer and supply base
makes Philips increasingly dependent on a limited number of business
partners, posing challenges to existing management and control
structures in many of our businesses.
A critical risk area that has our attention is human resources. The
retention of highly specialized technical personnel as well as talented
employees in sales and marketing, research and development, finance and
general management, is critical for the success of the Company.
Being a global company, Philips has established subsidiaries in over 60
countries. The subsidiaries are exposed to changes in governmental
regulations and unfavorable political developments, which may limit the
realization of business opportunities or impair local Philips
investment.
Financial risks
Currency fluctuations may impact Philips' financial results.
Furthermore, Philips is exposed to interest rate risk, commodity price
risk, equity price risk and credit risk. For qualitative and
quantitative disclosure about financial risks, please refer to note 30
of the consolidated financial statements.
32
CRITICAL ACCOUNTING POLICIES
The preparation of Philips' financial statements requires us to make
estimates and judgments that affect the reported amounts of assets and
liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities at the date of our financial
statements. The policies that management considers both to be most
important to the presentation of Philips' financial condition and
results of operations and to place the most significant demands on
management's judgments and estimates about matters that are inherently
uncertain are discussed below. Management cautions that future events
often vary from forecasts and that estimates routinely require
adjustment. A complete description of Philips' accounting policies
appears on pages 49 through 57.
Intangible assets acquired in business combinations
Over the past few years the Company has acquired several other entities
in business combinations that have been accounted for by the purchase
method, resulting in recognition of substantial amounts of in-process
research and development, goodwill and other intangible assets. The
amounts assigned to the acquired assets and liabilities are based on
assumptions and estimates about their fair values. In making these
estimates, management typically consults independent qualified
appraisers. A change in assumptions and estimates would change the
purchase price allocation, which could affect the amount or timing of
charges to the income statement, such as write-offs of in-process
research and development and amortization of intangible assets.
In-process research and development is written off immediately upon
acquisition, whereas intangible assets (and prior to 2002 also
goodwill) are amortized over their economic lives. As a result of
Philips' adoption of US GAAP as of January 1, 2002, goodwill is no
longer amortized but instead is tested for impairment.
Changes in assumptions and estimates included in the purchase price
allocation could result in significantly different results than those
recorded in the financial statements.
Impairment
Philips reviews long-lived assets for impairment when events or
circumstances indicate that carrying amounts may not be recoverable.
Assets subject to this review include equity and security investments
and intangible and tangible fixed assets.
Impairment of equity and security investments results in a charge to
income when a loss in the value of an investment is deemed to be other
than temporary. Management regularly reviews each equity and security
investment for impairment based on the extent to which cost exceeds
market value, the duration of decline in market value and the financial
condition of the issuer.
In determining impairments of intangible and tangible fixed assets,
management must make significant judgments and estimates to determine
whether the undiscounted cash flows generated by those assets are less
than their carrying value. Determining undiscounted cash flows requires
the use of judgments and estimates that have been included in the
Company's strategic plans and long-range forecasts. The data necessary
for the execution of the impairment tests are based on management
estimates of future cash flows, which require estimating revenue growth
rates and profit margins.
33
Assets are written down to their fair value when the undiscounted cash
flows are less than the carrying value of the assets. The fair value of
impaired assets is determined by taking into account these estimated
cash flows and using a net present value technique based on discounting
these cash flows with the Business-specific Weighted Average Cost of
Capital (WACC), which ranged between 7.8% and 14.0% in 2002.
Changes in assumptions and estimates included within the impairment
reviews could result in significantly different results than those
recorded in the financial statements.
Valuation allowances for certain assets
The Company records its inventories at cost and provides for the risk
of obsolescence using the lower of cost or market principle. The
expected future use of inventory is based on estimates about future
demand and past experience with similar inventories and their usage.
The risk of uncollectibility of accounts receivable is primarily
estimated based on prior experience with, and the past due status of,
doubtful debtors, while large accounts are assessed individually based
on factors that include ability to pay, bankruptcy and payment history.
In addition, debtors in certain countries are subject to a higher
collectibility risk that is taken into account for assessing the
overall risk of uncollectibility. Should the outcome differ from the
assumptions and estimates, revisions to the estimated valuation
accounts would be required.
Accounting for income taxes
As part of the process of preparing consolidated financial statements,
the Company is required to estimate income taxes in each of the
jurisdictions. This process involves estimating actual current tax
expense and temporary differences between tax and financial reporting.
Temporary differences result in deferred tax assets and liabilities,
which are included in the consolidated balance sheet. The Company must
assess the likelihood that deferred tax assets will be recovered from
future taxable income. A valuation allowance is recognized to reduce
deferred tax assets if, and to the extent that, it is more likely than
not that all or some portion of the deferred tax assets will not be
realized. The Company has recorded a valuation allowance of EUR 1,249
million as of December 31, 2002, based on estimates of taxable income
by jurisdiction in which the Company operates and the period over which
deferred tax assets are recoverable. In the event that actual results
differ from these estimates in future periods, and depending on the tax
strategies that the Company may be able to implement, changes to the
valuation allowance could be required, which could impact our financial
position and net income.
Restructuring and other provisions
Contingent liabilities related to restructurings are dependent upon
estimates and assessments of whether the criteria for recognition of
exit costs have been met, including estimates as to the amount of the
potential costs for the employee termination packages and contract
terminations. The Company has implemented strict rules for
identification and recognition of such restructuring provisions in
accordance with US GAAP. These contingent liabilities are recognized by
charges against income when the Board of Management has approved a
restructuring project and changes are highly unlikely, the employee
benefit arrangement has been properly communicated in sufficient detail
and the number, functions and locations of employees that will be
terminated have been identified. The Company may consider other
restructuring projects that do not yet meet all these conditions and
which accordingly are not reflected in the financial statements.
34
Furthermore, the Company consults with legal counsel on matters related
to litigation and other experts both within and outside the Company
with respect to matters in the ordinary course of business. A liability
is accrued if an adverse outcome is probable and the amount can be
reasonably estimated. If either the likelihood of an adverse outcome is
only reasonably possible or an estimate is not determinable, the matter
is disclosed provided that it is material.
Warranty costs
The Company provides for warranty costs based on historical trends in
product return rates and the expected material and labor costs to
provide warranty services. If it were to experience an increase in
warranty claims compared with historical experience, or costs of
servicing warranty claims were greater than the expectations on which
the accrual had been based, gross income could be adversely affected.
Accounting for pensions and other postretirement benefits
Retirement benefits represent obligations that will be settled in the
future and require assumptions to project benefit obligations and fair
values of plan assets. Retirement benefit accounting is intended to
reflect the recognition of future benefit costs over the employee's
approximate service period, based on the terms of the plans and the
investment and funding decisions made by the Company. The accounting
requires management to make assumptions regarding variables such as
discount rate, rate of compensation increase, return on assets, and
future healthcare costs. Management consults with outside actuaries
regarding these assumptions at least annually. Changes in these key
assumptions can have a significant impact on the projected benefit
obligations, funding requirements and periodic cost incurred.
DUTCH GAAP
On March 28, 2002, Philips announced the transition to the application
of full US GAAP to its financial reporting as from 2002. The change to
US GAAP is in line with the Company's commitment to ensuring a fair and
suitable basis for comparison against its industry peers. In addition
to the US GAAP consolidated financial statements, Dutch GAAP financial
statements on a consolidated and single company basis are also
provided. A reconciliation of material differences between the two is
provided in the separate section entitled `Dutch GAAP information' on
page 110. For purposes of Dutch corporate law, the Company's balance
sheet under Dutch GAAP is determinative of the amount available for
distribution to shareholders.
The Group financial statements have been prepared on the basis of US
GAAP, which differs in certain respects from Dutch GAAP. From January
1, 2002, the most important difference represents goodwill
amortization, which is required under Dutch GAAP, whereas under US GAAP
goodwill is tested for impairment. Net income determined in accordance
with Dutch GAAP amounted to a loss of EUR 3,602 million in 2002,
compared with a loss of EUR 2,608 million in 2001. These aggregate
amounts result in basic earnings per common share of a loss of EUR 2.83
in 2002 and a loss of EUR 2.04 in 2001. Diluted earnings per common
share also amounted to a loss of EUR 2.83 in 2002 and a loss of EUR
2.04 in 2001.
Please refer to the Dutch GAAP section for a description of the primary
differences between Dutch GAAP and US GAAP and the Dutch GAAP earnings
per common share.
35
OUTLOOK
Through operational and marketing excellence, we expect that the DAP
and Lighting divisions will again outperform their industries in 2003,
whilst Consumer Electronics is continuing to improve its overall
performance, especially in the USA, through a marketing focused
approach and innovative product mix. The integration of our Medical
Systems division is on track to achieve the targeted EUR 350 million in
savings by year-end. Semiconductors is lowering the break-even point as
a result of capacity reduction and restructuring savings. Restructuring
programs undertaken by Philips during the past two years are starting
to pay off with more profitable, efficient and less capital-intensive
operations.
The Company will continue cost reduction initiatives, including the
reduction in overhead costs, which is on track, and ongoing
supply-chain management, which has reached best in class in a number of
businesses, especially Consumer Electronics.
Continued weakness of the US dollar would negatively impact sales and
to a lesser extent net income, whilst volatile stock markets can
significantly impact pension expense and the value of financial assets
of the Company.
On the basis of the current economic and political uncertainties,
Philips does not anticipate any short-term improvement in economic
conditions. As such, the Company will continue its cautious stand on
costs, capital spending, working capital and employment, whilst
maintaining a strong balance sheet and remaining ready for any upturn
in its markets.
February 7, 2003
Board of Management
36
CORPORATE GOVERNANCE
Being a global company and player in the international capital markets,
Philips, over the last decades, has continuously improved its corporate
governance as one of its most important policy items in line with US,
Netherlands and international best practises. The governance of the
Company and the Philips Group has been improved substantially, in
particular by simplifying, and making more transparent, its corporate
structure and by strengthening the accountability of the Board of
Management as its executive management and the Supervisory Board as its
board of independent supervisory directors, as well as by increasing
the rights and powers of its shareholders and communication with
investors. In this respect, the consequences for the Company of the US
Sarbanes-Oxley Act and the proposed amendments to the listing rules of
the New York Stock Exchange were discussed and existing procedures
reviewed and, where appropriate in response to these regulations
currently effective, changes were effected and formalized. The Company
also disclosed its Policy on Auditor Independence, aligned with the new
regulations to the extent currently effective. Furthermore, the Company
made necessary preparations in view of the CEO and CFO certifications
for the 2002 Annual Report on Form 20-F with the US Securities and
Exchange Commission. This certification process of the Form 20-F, which
incorporates part of this Annual Report, under US law is in addition to
the Dutch law provisions according to which each member of the
Supervisory Board and the Board of Management has signed the 2002
financial statements for approval.
AUDIT FEES
The aggregate fees billed by KPMG for professional services rendered
for the fiscal years 2002 and 2001 were as follows:
in millions of euros 2002 2001
---- ----
Audit fees 7.0 6.3
Audit-related fees 14.8 15.8
Tax fees 3.3 2.3
Other fees 0.8 11.9
---- ----
25.9 36.3
Audit fees consist of fees for the examination of the consolidated
financial statements. Audit-related fees primarily consist of fees for
statutory audits (EUR 4.8 million), fees in relation to audits of
acquisitions and divestments (EUR 5.4 million) and EDP audits (EUR 1.5
million). Tax fees mainly relate to tax compliance and expatriate tax
services. Other fees comprise consultancy fees. Meanwhile KPMG has
divested its consultancy business.
PROXY SOLICITATION
Philips attaches great value to its relations with its shareholders.
For instance, Philips was one of the key companies in the establishment
of the Shareholders' Communication Channel a project of Euronext
Amsterdam, banks in the Netherlands and several major Dutch companies
to simplify contacts between a participating company and its
shareholders.
Philips will use the Shareholders' Communication Channel to distribute
the Management Report booklet of its Annual Report and the Agenda for
this year's General Meeting of Shareholders as well as an instruction
form to enable proxy voting at said Meeting. For the General Meeting of
Shareholders on March 27, 2003 a record date (being March 20, 2003)
will apply: those persons who on March 20, 2003 hold shares in the
Company and are registered as such in one of the registers designated
by the Board of Management for the General Meeting of Shareholders will
be entitled to participate and vote at the meeting.
37
ENVIRONMENT
For results of the environmental performance of the Philips Group
please refer to the Philips Sustainability Report 2002, which will be
available before the Annual General Meeting of Shareholders 2003.
INFORMATION TECHNOLOGY
Philips is seeking to gain competitive advantage by leveraging the
synergy between its businesses. One contribution to this has been the
introduction of a comprehensive and consistent IT strategy at corporate
level. Consolidation of IT strategies across both product divisions and
the corporate functions has made the total portfolio of IT activities
across the Philips Group more transparent, led to the identification of
cross-organizational opportunities and promoted shared solutions.
In the field of IT, TOP (Transforming into One Philips) has already
delivered significant, lasting savings. A number of global task forces
have been set up to deliver sustainable structural change to the cost
base. In telecommunications this is already being realized through
improved vendor/contract management. In IT purchasing, results have
been delivered through contract renegotiation.
Philips is adopting a shared services model for corporate core
processes. An IT shared services organization has been set up and
commenced operations in January 2003. It offers a portfolio of `best in
class' IT services to support the non-business-specific IT requirements
of Philips organizations. Service tariffs will be market-competitive
and set at a level that contributes to structural cost savings at
corporate level.
Philips operates in a highly competitive industry. It recognizes that
loss, unauthorized disclosure or unavailability of information or IT
systems could impact not only cash flow and profitability, but also
legal compliance and Philips' respected company image. In 2002 Philips
continued to strengthen its IT security facilities.
HUMAN RESOURCES MANAGEMENT
In 2002 the labor markets slowed down further. In general, Philips held
back in its recruitment efforts. On a selective basis, however,
recruitment was continued in order to maintain the necessary inflow of
talent. The Company continues to hold a strong position on the labor
market: the international scope and the exciting and varied business
activities provide attractive opportunities for personal growth and
career progression.
The worldwide program HR Excellence 2002, which was launched in 2000,
was completed in September, resulting in a set of coherent policies,
processes and tools for Management Development across the Company. The
next program - World Class HR 2004 - was started in 2002. A key element
of this effort is the establishment of a company-wide open job market
on the Philips Intranet called the Philips Career Center. The Philips
Career Center provides employees with easy access to the internal labor
market across the Company. Another important improvement to HR in
Philips is the top-down roll-out of People Performance Management
(PPM). The PPM process strengthens the performance culture in the
Company, reinforces the implementation of the company values and
supports employee development.
38
In the context of the company-wide TOP program, a redesign of the HR
function was initiated in 2002. Following this redesign, Philips People
Services (PPS) will be established to provide HR support to employees
and managers based on the concept of shared services and self-service
over the Intranet. The objective of this multi-year program is to offer
enhanced levels of service on a more cost-effective footing.
Leadership development remains a high priority in HR management in
Philips. Across the organization a top-down 360(degree)-degree
assessment program combined with intensive coaching has been rolled-out
further into the executive population and beyond.
BUSINESS EXCELLENCE In 2002 we made further progress in implementing
BEST (Business Excellence through Speed and Teamwork). This initiative
is aimed at achieving world-class excellence in every aspect of the
business. Some 50,000 employees at all levels of the organization are
engaged - via cross-functional teams - in process and performance
improvements in a wide range of business areas, major objectives being
to increase customer satisfaction and operating efficiency, reduce
cycle time and improve working conditions and environmental
performance. In the course of 2002 the Board of Management stressed the
need to embed the Business Balanced Scorecard better in our management
processes and to use it as a key tool to focus improvement efforts.
Virtually 100% of our operations have been ISO 9000 certified, which
provides a solid foundation for our continued journey to excellence.
The use of the EFQM excellence model in annual assessments of our
global businesses and operations is effectively supplemented by regular
surveys of the key processes using dedicated tools.
39
40
Auditors' Report
We have audited the consolidated balance sheets of Koninklijke Philips
Electronics N.V. and subsidiaries as of December 31, 2002 and 2001, and
the related consolidated statements of income, changes in stockholders'
equity, and cash flows for each of the years in the three-year period
ended December 31, 2002, appearing on pages 42 through 109. These
consolidated financial statements are the responsibility of the
Company'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 auditing standards generally
accepted in the United States of America and the Netherlands. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated 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, 2002 and 2001, and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31,
2002, in accordance with accounting principles generally accepted in
the United States of America.
As discussed in the accounting policies section of these consolidated
financial statements, during 2002, the Company has given retroactive
effect to the change in its comprehensive accounting principles from
accounting principles generally accepted in the Netherlands to
accounting principles generally accepted in the United States of
America.
Eindhoven, February 7, 2003
KPMG Accountants N.V.
41
Consolidated statements of income of the Philips Group for the years
ended December 31
in millions of euros unless otherwise stated
2002 2001 2000
Sales 31,820 32,339 37,862
Cost of sales (21,906) (23,240) (25,803)
------- ------- -------
GROSS MARGIN 9,914 9,099 12,059
Selling expenses (5,017) (5,027) (4,960)
General and administrative expenses (1,404) (1,249) (1,321)
Research and development expenses (3,043) (3,312) (2,766)
Write-off of acquired in-process R&D (12) (106) (44)
Impairment of goodwill (19) - (35)
Restructuring and impairment charges (484) (786) (152)
------ ------ ------
(9,979) (10,480) (9,278)
Other business income (expense) 485 (14) 1,477
------- ------- -------
(2) INCOME (LOSS) FROM OPERATIONS 420 (1,395) 4,258
(3) Financial income and expenses:
- interest (384) (391) (167)
- impairment charges (1,955) (526) -
- other 112 2 2,160
------ ----- ------
(2,227) (915) 1,993
------- ------- -------
INCOME (LOSS) BEFORE TAXES (1,807) (2,310) 6,251
(4) Income tax (expense) benefit (27) 428 (563)
------- ------- -------
INCOME (LOSS) AFTER TAXES (1,834) (1,882) 5,688
(5) Results relating to unconsolidated companies:
- income (loss) excluding impairment charges and
amortization of goodwill (17) (232) 4,080
- impairment charges (1,305) (119) -
- amortization of goodwill (24) (257) (124)
------ ----- ------
(1,346) (608) 3,956
------- ------- -------
GROUP INCOME (LOSS) (3,180) (2,490) 9,644
(6) Minority interests (26) 15 (67)
------- ------- -------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE
(3,206) (2,475) 9,577
(7) Cumulative effect of change in accounting principle - - 85
------- ------- -------
(8) NET INCOME (LOSS) (3,206) (2,475) 9,662
The accompanying notes are an integral part of these consolidated financial
statements.
42
Earnings per share
2002 2001 2000
Weighted average number of common shares outstanding (after deduction
of treasury stock) during the year (in thousands) 1,274,950 1,278,077 1,312,859
BASIC EARNINGS PER COMMON SHARE IN EUROS:
Income (loss) before cumulative effect of change in accounting principle (2.51) (1.94) 7.30
Net income (loss) (2.51) (1.94) 7.36
DILUTED EARNINGS PER COMMON SHARE IN EUROS: *
Income (loss) before cumulative effect of change in accounting principle (2.51) (1.94) 7.22
Net income (loss) (2.51) (1.94) 7.28
Dividend paid per common share in euros (related to prior financial year) 0.36 0.36 0.30
* The dilution effects on EPS are only taken into consideration if this does not
result in an improvement in income per share or in a reduction in loss per
share, as is the case in 2002 and 2001.
The following table shows the comparable effects of adoption of SFAS No. 142
for the three years ended December 31, 2002, 2001 and 2000.
2002 2001 2000
REPORTED NET INCOME (3,206) (2,475) 9,662
Add back: Goodwill amortization - 180 138
Intangible amortization - 22 17
Amortization of excess of Company's investment over its
underlying equity in unconsolidated companies 24 257 124
------ ------ -----
ADJUSTED NET INCOME (3,182) (2,016) 9,941
Basic earnings per share:
As reported (2.51) (1.94) 7.36
As adjusted (2.50) (1.58) 7.57
Diluted earnings per share:
As reported (2.51) (1.94) 7.28
As adjusted (2.50) (1.58) 7.49
The accompanying notes are an integral part of these consolidated financial
statements.
43
Consolidated balance sheets of the Philips Group as of December 31
in millions of euros unless otherwise stated
ASSETS
2002 2001
CURRENT ASSETS
Cash and cash equivalents 1,858 890
(9) Receivables:
- Accounts receivable - net 4,517 5,298
- Accounts receivable from unconsolidated companies 63 122
- Other receivables 488 392
------ -------
5,068 5,812
(10) Inventories 3,522 4,290
(11) Other current assets 603 858
------ ------
Total current assets 11,051 11,850
NON-CURRENT ASSETS
(5) Unconsolidated companies:
- Investments 5,694 7,090
- Loans 395 462
------ -------
6,089 7,552
(12) Other non-current financial assets 1,306 3,481
(13) Non-current receivables:
- Accounts receivable - net 123 149
- Accounts receivable from unconsolidated companies - 1
- Other receivables 96 156
------ -------
219 306
(14) Other non-current assets 2,553 2,774
(15) Property, plant and equipment:
- At cost 16,015 18,069
- Less accumulated depreciation (9,878) (10,351)
------ -------
6,137 7,718
(16) Intangible assets excluding goodwill:
- At cost 2,529 2,585
- Less accumulated amortization (787) (621)
------ -------
1,742 1,964
(17) Goodwill 3,192 3,557
------ ------
Total non-current assets 21,238 27,352
------ ------
TOTAL 32,289 39,202
The accompanying notes are an integral part of these consolidated financial
statements.
44
Liabilities and stockholders' equity
2002 2001
CURRENT LIABILITIES
Accounts and notes
payable:
- Trade creditors 3,138 3,240
- Unconsolidated companies 90 3
------ ------
3,228 3,243
(18) Accrued liabilities 3,314 3,966
(19) (20) Short-term provisions 1,276 1,443
(21) Other current liabilities 691 813
(22) (23) Short-term debt 617 1,271
------ ------
Total current liabilities 9,126 10,736
NON-CURRENT LIABILITIES
(22) (23) Long-term debt 6,492 6,595
(19) (20) Long-term provisions 1,970 2,297
(24) Other non-current liabilities 603 212
------ ------
Total non-current liabilities 9,065 9,104
(25) Commitments and contingent liabilities - -
GROUP EQUITY
(6) Minority interests 179 202
(26) Stockholders' equity:
Priority shares, par value EUR 500 per share:
Authorized and issued: 10 shares
Preference shares, par value EUR 0.20 per share:
Authorized: 3,249,975,000 shares
Issued: none
Common shares, par value EUR 0.20 per share:
Authorized: 3,250,000,000 shares
Issued: 1,316,070,392 shares
(1,316,070,392 shares in 2001) 263 263
Capital in excess of par value 14 13
Retained earnings 16,738 20,403
Accumulated other comprehensive income (loss) (1,789) (225)
Treasury shares, at cost: 40,092,469 shares
(41,897, 949 shares in 2001) (1,307) (1,294)
------ ------
13,919 19,160
------ ------
TOTAL 32,289 39,202
The accompanying notes are an integral part of these consolidated financial
statements.
45
Consolidated statements of cash flows of the Philips Group for the
years ended December 31
in millions of euros unless otherwise stated
2002 2001 2000
Cash flows from operating activities:
NET INCOME (LOSS) (3,206) (2,475) 9,662
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 2,184 2,671 2,320
Impairment of equity investments 3,260 645 -
Net gain on sale of assets (643) (337) (6,384)
Loss (income) from unconsolidated companies (net of dividends received) 54 501 (1,173)
Minority interests (net of dividends paid) 26 (21) 56
Decrease (increase) in working capital 815 752 (1,063)
Decrease (increase) in non-current receivables/other assets 86 (888) (510)
(Decrease) increase in provisions (336) 313 396
Other items (12) 87 (308)
------ ------ ------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,228 1,248 2,996
Cash flows from investing activities:
Purchase of intangible assets (software) (149) (234) (140)
Capital expenditures on property, plant and equipment (1,161) (2,143) (3,170)
Proceeds from disposals of property, plant and equipment 370 221 178
Cash from derivatives 422 - -
Purchase of other non-current financial assets (15) (77) (560)
Proceeds from other non-current financial assets 98 550 911
Purchase of businesses - net of cash acquired (626) (3,636) (3,209)
Proceeds from sale of interests in businesses 813 755 3,586
------ ------ ------
NET CASH USED FOR INVESTING ACTIVITIES (248) (4,564) (2,404)
------ ------ ------
CASH FLOWS BEFORE FINANCING ACTIVITIES 1,980 (3,316) 592
Cash flows from financing activities:
(Decrease) increase in short-term debt (548) (73) 734
Principal payments on long-term debt (276) (554) (325)
Proceeds from issuance of long-term debt 405 4,580 203
Treasury stock transactions (19) (336) (578)
Capital repayment to shareholders - - (1,673)
Dividends paid (459) (458) (399)
------ ------ ------
NET CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES (897) 3,159 (2,038)
------ ------ ------
CASH PROVIDED BY (USED FOR) CONTINUING OPERATIONS 1,083 (157) (1,446)
Effect of changes in exchange rates and consolidations on cash positions (115) (42) 204
Cash and cash equivalents at beginning of year 890 1,089 2,331
------ ------ ------
CASH AND CASH EQUIVALENTS AT END OF YEAR 1,858 890 1,089
The accompanying notes are an integral part of these consolidated financial
statements.
46
Consolidated statements of cash flows of the Philips Group (continued)
Supplemental disclosures to consolidated statements of cash flows:
2002 2001 2000
DECREASE (INCREASE) IN WORKING CAPITAL:
Decrease (increase) in accounts receivable and prepaid expenses 97 1,207 (513)
Decrease (increase) in inventories 173 790 (979)
Increase (decrease) in accounts payable and accrued expenses 545 (1,245) 429
----- ------ ------
815 752 (1,063)
Net cash paid during the year for:
Interest 384 391 167
Income taxes 313 355 266
Net gain on sale of assets:
Cash proceeds from the sale of assets 1,281 1,526 4,675
Book value of these assets (625) (1,190) (875)
Deferred results sale-and lease-back transactions (95) (41) -
Non-cash gain or losses 82 42 2,584
----- ------ ------
643 337 6,384
Non-cash investing and financing information:
Assets received in lieu of cash:
Securities/shares 113 - 2,584
Receivables - 63 5
Treasury stock transactions:
Shares acquired (103) (379) (682)
Exercise stock options/warrants/convertible
personnel debentures 84 43 104
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.
The accompanying notes are an integral part of these consolidated
financial statements.
47
Consolidated statements of changes in stockholders' equity of the
Philips Group
in millions of euros unless otherwise stated
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
---------------------------------------------
Unrealized
gain
Outstanding (loss) on
number of CAPITAL IN Currency available
shares in COMMON EXCESS OF RETAINED translation for sale
thousands STOCK PAR VALUE EARNINGS differences securities
---------- ----- ---------- -------- ----------- ----------
BALANCE AS OF DECEMBER 31, 1999 1,331,601 339 1,631 14,073 (962) 2,163
Net income 9,662
Net current period change 94 982
Reclassifications into income (2,173)
---- ------
Total comprehensive income
(loss), net of tax 94 (1,191)
Dividend paid (399)
Issued upon exercise of:
- - Convertible debentures 458 6
Purchase of treasury stock (15,028)
Re-issuance of treasury stock 6,574
3% share reduction (39,710) (76) (1,630)
--------- --- ------ ------ ---- ------
BALANCE AS OF DECEMBER 31, 2000 1,283,895 263 7 23,336 (868) 972
Net income (loss) (2,475)
Net current period change 102 (932)
Reclassifications into income 526
---- ------
Total comprehensive income
(loss), net of tax 102 (406)
Dividend paid (458)
Purchase of treasury stock (12,678)
Re-issuance of treasury stock 2,955
Stock options accrual 6
--------- --- ------ ------ ---- ------
BALANCE AS OF DECEMBER 31, 2001 1,274,172 263 13 20,403 (766) 566
Net income (loss) (3,206)
Net current period change (906) (2,189)
Reclassifications into income (40) 1,888
---- ------
Total comprehensive income
(loss), net of tax (946) (301)
Dividend paid (459)
Purchase of treasury stock (3,128)
Re-issuance of treasury stock 4,934
Stock options accrual 1
--------- --- ------ ------ ------ ------
BALANCE AS OF DECEMBER 31, 2002 1,275,978 263 14 16,738 (1,712) 265
--------- --- ------ ------ ------ ------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
---------------------------------------------
Change
Additional in fair TOTAL
minimum value of TREASURY STOCK-
pension cash flow SHARES HOLDERS'
liability hedges TOTAL AT COST EQUITY
--------- --------- ----- -------- -------
BALANCE AS OF DECEMBER 31, 1999 - (113) 1,088 (423) 16,708
Net income 9,662
Net current period change 84 1,160 1,160
Reclassifications into income (13) (2,186) (2,186)
---- ---- ------ ---- -------
Total comprehensive income
(loss), net of tax (13) 84 (1,026) 8,636
Dividend paid (399)
Issued upon exercise of:
- - Convertible debentures 6
Purchase of treasury stock (682) (682)
Re-issuance of treasury stock 111 111
3% share reduction 33 (1,673)
---- ---- ------ ---- -------
BALANCE AS OF DECEMBER 31, 2000 (13) (29) 62 (961) 22,707
Net income (loss) (2,475)
Net current period change (18) (18) (866) (866)
Reclassifications into income 13 40 579 579
---- ---- ------ ---- -------
Total comprehensive income
(loss), net of tax (5) 22 (287) (2,762)
Dividend paid (458)
Purchase of treasury stock (379) (379)
Re-issuance of treasury stock 46 46
Stock options accrual 6
---- ---- ------ ---- -------
BALANCE AS OF DECEMBER 31, 2001 (18) (7) (225) (1,294) 19,160
Net income (loss) (3,206)
Net current period change (335) (28) (3,458) (3,458)
Reclassifications into income 46 1,894 1,894
---- ---- ------ ---- -------
Total comprehensive income
(loss), net of tax (335) 18 (1,564) (4,770)
Dividend paid (459)
Purchase of treasury stock (103) (103)
Re-issuance of treasury stock 90 90
Stock options accrual 1
---- ---- ------ ---- -------
BALANCE AS OF DECEMBER 31, 2002 (353) 11 (1,789) (1,307) 13,919
---- ---- ------ ------ -------
For the tax effect on the changes in stockholders' equity, refer to note 4.
The accompanying notes are an integral part of these consolidated
financial statements.
48
Accounting Policies
The consolidated financial statements are prepared in accordance with
generally accepted accounting principles in the United States of
America ('US GAAP'). The Company adopted application of US GAAP as of
January 1, 2002. All previous statements have been restated for this
effect, with recognition of the effect in stockholders' equity as of
the beginning of the earliest period presented. Historical cost is used
as the measurement basis unless otherwise indicated.
CONSOLIDATION PRINCIPLES
The consolidated financial statements include the accounts of
Koninklijke Philips Electronics N.V. ('Royal Philips Electronics') and
all of its subsidiaries in which a direct or indirect controlling
interest is maintained. All intercompany balances and transactions have
been eliminated in consolidation. Net income is reduced by the portion
of the earnings of subsidiaries applicable to minority interests. The
minority interests are disclosed separately in the consolidated
statements of income and in the consolidated balance sheets.
Investments in companies in which Royal Philips Electronics does not
have the ability to directly or indirectly control the financial and
operating decisions, but does possess the ability to exert significant
influence, are accounted for by the equity method. Generally,
significant influence is presumed to exist if at least 20% of the
voting stock is owned. The Company's share of the net income of these
companies is included in results relating to unconsolidated companies
in the consolidated statements of income. The Company recognizes an
impairment loss when an other-than-temporary decline in the value of an
investment occurs.
Foreign currencies
The financial statements of foreign operations are translated into
euros. Assets and liabilities are translated using the exchange rates
on the respective balance sheet dates. Income and expense items are
translated at weighted average exchange rates during the year. The
resulting translation adjustments are recorded as a separate component
of other comprehensive income (loss) within stockholders' equity.
Cumulative translation adjustments are recognized as income or expense
upon disposal or liquidation of a foreign operation.
The functional currency of foreign operations is generally the local
currency, unless the primary economic environment requires the use of
another currency. However, when foreign operations conduct their
business in economies considered to be highly inflationary, they record
transactions in a designated functional currency instead of their local
currency.
Gains and losses arising from the translation or settlement of foreign
currency-denominated monetary assets and liabilities into the local
currency are recognized in income in the period in which they arise.
However, currency differences on intercompany loans that have the
nature of a permanent investment are accounted for as translation
differences as a separate component of other comprehensive income
(loss) within stockholders' equity.
49
Derivative financial instruments
The Company uses derivative financial instruments principally in the
management of its foreign currency risks and to a more limited extent
for interest rate and commodity price risks. Applying Statement of
Financial Accounting Standards (SFAS) No. 133, 'Accounting for
Derivative Instruments and Hedging Activities', and SFAS No. 138,
'Accounting for Certain Derivative Instruments and Certain Hedging
Activities', the Company measures all derivative financial instruments
based on fair values derived from market prices of the instruments or
from option pricing models, as appropriate. Gains or losses arising
from changes in the fair value of the instruments are recognized in the
income statement during the period in which they arise to the extent
that the derivatives have been designated as a hedge of recognized
assets or liabilities, or to the extent that the derivatives have no
hedging designation or are ineffective. The gains and losses on the
designated derivatives substantially offset the changes in the values
of the recognized hedged items, which are also recognized as gains and
losses in the income statement.
Changes in the fair value of a derivative that is highly effective and
that is designated and qualifies as a fair value hedge, along with the
loss or gain on the hedged asset or liability or unrecognized firm
commitment of the hedged item that is attributable to the hedged risk,
are recorded in the income statement.
Changes in the fair value, resulting from the risk being hedged, of a
derivative that is highly effective and that is designated and
qualifies as a cash flow hedge, are recorded in accumulated other
comprehensive income, until earnings are affected by the variability in
cash flows of the designated hedged item. Changes in the fair value of
derivatives that are highly effective as hedges and that are designated
and qualify as foreign currency hedges are recorded in either earnings
or accumulated other comprehensive income, depending on whether the
hedge transaction is a fair value hedge or a cash flow hedge.
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 determined 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
determined that the derivative no longer qualifies as an effective
fair-value hedge, the Company continues to carry the derivative on the
balance sheet at its fair value, and no longer adjusts the hedged asset
or liability for changes in fair value. When hedge accounting is
discontinued because it is probable that a forecasted transaction will
not occur within a period of two months from the originally forecasted
transaction date, the Company continues to carry the derivative on the
balance sheet at its fair value, and gains and losses that were
accumulated in other comprehensive income are recognized immediately in
earnings. 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 earnings.
For interest rate swaps that are unwound, the gain or loss upon
unwinding is released to income over the remaining life of the
underlying financial instruments, based on the recalculated effective
yield.
50
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. They are
stated at face value.
Investments
The Company classifies its investments in equity securities that have
readily determinable fair values as either available-for-sale or for
trading purposes and investment in debt securities in one of three
categories: trading, available-for-sale or held-to-maturity. Trading
securities are bought and held principally for the purpose of selling
them in the short term. Held-to-maturity securities are those debt
securities in which the Company has the ability and intent to hold the
security until maturity. All securities not included in trading or
held-to-maturity are classified as available-for-sale.
Trading and available-for-sale securities are recorded at fair value.
Held-to-maturity debt securities are recorded at amortized cost,
adjusted for the amortization or accretion of premiums or discounts
using the effective interest method. Unrealized holding gains and
losses, net of the related tax effect, on available-for-sale securities
are excluded from earnings and are reported as a separate component of
other comprehensive income within stockholders' equity until realized.
Realized gains and losses from the sale of available-for-sale
securities are determined on a specific identification basis.
A decline in the market value of any available-for-sale security or
held-to-maturity security below cost that is deemed to be other than
temporary results in a reduction in carrying amount to fair value. The
impairment is charged to earnings and a new cost basis for the security
is established. Dividend and interest income are recognized when
earned. Gains or losses, if any, are recorded in financial income and
expenses.
For available-for-sale securities hedged under a fair value hedge, the
changes in the fair value that are attributable to the risk which is
being hedged are recognized in earnings rather than in other
comprehensive income.
Investments in privately-held companies are carried at cost, or
estimated fair value if an other-than-temporary decline in value
exists.
Receivables
Receivables are carried at face value, net of allowances for doubtful
accounts.
Inventories
Inventories are stated at the lower of cost or market, less advance
payments on work in process. The cost of inventories comprises all
costs of purchase, costs of conversion and other costs incurred
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. The cost of inventories is determined using the first-in,
first-out (FIFO) method. An allowance is made for the estimated cost of
obsolescence.
Other non-current financial assets
Loans receivable are stated at amortized cost, less the related
allowance for impaired loans receivable. Management, considering
current information and events regarding the borrowers' ability to
repay their obligations, considers a loan to be impaired when it is
probable that the Company will be unable to collect all amounts due
according to the contractual terms of the loan agreement. When a loan
is considered to be impaired, the amount of the impairment is measured
based on the present value of expected future cash flows discounted at
the loan's effective interest rate. Impairment losses are included in
the allowance for doubtful accounts through a charge to bad debt
expense. Cash receipts on impaired loans receivable are applied to
reduce the principal amount of such loans until the principal has been
recovered and are recognized as interest income thereafter.
51
Property, plant and equipment
Property, plant and equipment are stated at cost, less accumulated
depreciation. Assets manufactured by the Company include direct
manufacturing costs, production overheads and interest charges incurred
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 expected economic life of the asset.
Depreciation of special tooling is based either on the straight-line
method or on the expected future economic benefit of these tools. Gains
and losses on the sale of property, plant and equipment are included in
other business income. Costs related to major maintenance activities
are expensed in the period in which they are incurred. Plant and
equipment under capital leases are stated at the present value of
minimum lease payments. These assets and leasehold improvements are
amortized using the straight-line method over the shorter of the lease
term or estimated useful life of the asset.
Goodwill
The Company adopted the provisions of SFAS No. 141 as of July 1, 2001
and SFAS No. 142 as of January 1, 2002. Consequently, goodwill is no
longer amortized but instead tested for impairment annually or whenever
impairment indicators require so. Prior to adoption of SFAS No. 142,
the Company applied the straight-line method for amortization of
goodwill over the period expected to benefit, not exceeding 20 years.
SFAS No. 142 requires the Company to evaluate its existing intangible
assets and goodwill that were acquired in purchase business
combinations, and to make any necessary reclassifications in order to
conform with the new classification criteria in SFAS No. 141 for
recognition separate from goodwill. The Company re-assessed the useful
lives and residual values of all intangible assets acquired. No
amortization period adjustments were necessary.
In connection with SFAS No. 142's transitional goodwill impairment
evaluation, the Statement requires the Company to perform an assessment
of whether there is an indication that goodwill is impaired as of the
date of adoption. To accomplish this, the Company was required to
identify its reporting units and determine the carrying value of each
reporting unit by assigning the assets and liabilities, including the
existing goodwill and intangible assets, to those reporting units as of
January 1, 2002. Furthermore, the Company was required to determine the
fair value of each reporting unit and to compare it to the carrying
amount of the reporting unit. To the extent the carrying amount of a
reporting unit exceeded the fair value of the reporting unit, the
Company was required to perform the second step of the transitional
impairment test. In the second step, the Company must compare the
implied fair value of the reporting unit goodwill with the carrying
amount of the reporting unit goodwill, both of which would be measured
as of the date of adoption. The implied fair value of goodwill is
determined by allocating the fair value of the reporting unit to all of
the assets (recognized and unrecognized) and liabilities of the
reporting unit in a manner similar to a purchase price allocation, in
accordance with SFAS No. 141. The residual fair value after this
allocation is the implied fair value of the reporting unit goodwill.
The Company identified its reporting units and performed the
transitional goodwill impairment test for each of those reporting units
in the first quarter of 2002. No impairment arose from these tests.
In addition to the transitional goodwill impairment test the Company
performs its annual impairment tests in the second quarter. Fair value
of the reporting units was determined using expected discounted future
cash flows.
52
Intangible assets
Intangible assets arising from acquisitions are amortized using the
straight-line method over their estimated economic lives, unless the
revenues generated by these intangibles have a deviating pattern. In
that case, the revenue pattern dictates the amortization scheme.
Economic lives are evaluated every year.
In-process Research and Development (R&D) with no alternative use is
written off immediately upon acquisition.
Patents and trademarks acquired from third parties are capitalized and
amortized over their remaining lives.
Certain costs relating to the development and purchase of software for
internal use are capitalized and subsequently amortized over the
estimated useful life of the software in conformity with Statement of
Position 98-1, 'Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use'.
Research and development
All costs of research and development are expensed in the period in
which they are incurred, in conformity with SFAS No. 2, `Accounting for
Research and Development Costs'.
Advertising
Advertising costs are expensed when incurred.
Impairment or disposal of intangible assets other than goodwill and
tangible fixed assets
The Company accounts for intangible and tangible fixed assets in
accordance with the provisions of SFAS No. 144, `Accounting for the
Impairment or Disposal of Long-Lived Assets'. This Statement requires
that long-lived assets be 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
measured by a comparison of the carrying amount of an asset to future
net cash flows expected to be generated by the asset. If the carrying
amount of an asset exceeds its estimated future cash flows, an
impairment charge is recognized in the amount by which the carrying
amount of the asset exceeds the fair value of the asset. Assets held
for sale are reported at the lower of the carrying amount or fair
value, less costs to sell.
Provisions
The Company recognizes provisions for liabilities and probable losses
that have been incurred as of the balance sheet date and for which the
amount is uncertain but can be reasonably estimated.
The provision for restructuring relates to the estimated costs of
planned reorganizations that have been approved by the Board of
Management and publicly announced before the year-end, and which
involve the realignment of certain parts of the industrial and
commercial organization. When such reorganizations require
discontinuance and/or closure of lines of activities, the anticipated
costs of closure or discontinuance are included in restructuring
provisions.
Provisions for environmental liabilities resulting from past operations
or events are recognized when it is probable that a liability has been
incurred and the amount can be reasonably estimated. Measurement of
liabilities is based on current legal requirements and existing
technology. Liabilities and expected insurance recoveries, if any, are
recorded separately. The carrying amount of liabilities is regularly
reviewed and adjusted for new facts or changes in law or technology.
53
Provisions are stated at face value, with the exception of certain
long-term provisions, such as provisions for postretirement benefits
(including pensions) and severance payments in certain countries where
such payments are made in lieu of pension benefits; those provisions
are stated at the present value of the future obligations.
Debt and other liabilities
Debt and liabilities other than provisions are stated at amortized
costs. 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.
Revenue recognition
The Company recognizes revenue when persuasive evidence of an
arrangement exists, delivery has occurred, the sales price is fixed or
determinable, and collectibility is reasonably assured. Generally,
these criteria are met at the time the product is shipped or services
are rendered and acceptance, when required, has been obtained. For
products that require substantive installation activities by the
Company, revenue recognition occurs when the criteria for revenue
recognition have been met and the product is ready to be used by the
customer or has been accepted by the customer. Revenues are recorded
net of sales taxes, customer discounts, rebates and similar charges.
Shipping and handling costs billed to customers are recognized as
revenues. Expenses incurred for shipping and handling costs of internal
movements of goods are recorded as cost of sales. Those related to
sales to third parties are reported as selling expenses and disclosed
separately. Service revenue is recognized as services are rendered.
Provision for estimated contract losses, if any, is made in the period
that such losses are determined. Royalty income, which is generally
payable based upon a percentage of sales or a fixed amount per product
sold, is recognized on an accrual basis. Government grants, other than
those relating to assets, are recognized as income as qualified
expenditures are made.
Income taxes
Income taxes are accounted for under the asset and liability method.
Income tax is recognized in the income statement except to the extent
that it relates to an item recognized directly within stockholders'
equity, including other comprehensive income (loss), in which case the
related tax effect is also recognized there. Current tax is the
expected tax payable on the taxable income for the year, using tax
rates enacted at the balance sheet date, and any adjustment to tax
payable in respect of previous years. Deferred tax assets and
liabilities are recognized for the expected tax consequences of
temporary differences between the tax bases of assets and liabilities
and their reported amounts. Measurement of deferred tax assets and
liabilities is based upon the enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. Deferred tax assets, including
assets arising from loss carryforwards, are recognized if it is more
likely than not that the asset will be realized. Deferred tax assets
and liabilities are not discounted.
Deferred tax liabilities for withholding taxes are recognized for
subsidiaries, in situations where the income is to be paid out as
dividends in the foreseeable future, and for undistributed earnings of
minority shareholdings.
Changes in tax rates are reflected in the period that includes the
enactment date.
54
Benefit accounting
The Company accounts for the cost of pension plans and postretirement
benefits other than pensions in accordance with SFAS No. 87,
'Employers' Accounting for Pensions', and SFAS No. 106, 'Postretirement
Benefits other than Pensions', respectively.
Most of the Company's defined-benefit plans are funded with plan assets
that have been segregated and restricted in a trust to provide for the
pension benefits to which the Company has committed itself.
When plan assets have not been segregated by the Company or in such
cases in which the Company is required to make additional pension
payments, the Company recognizes a provision for such amounts.
Pension costs, in respect of defined-benefit pension plans, primarily
represent the increase in the actuarial present value of the obligation
for pension 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.
In the event that the accumulated benefit obligation, calculated as the
present value of the benefits attributed to employee service rendered
and based on current and past compensation levels, exceeds the market
value of the plan assets and existing accrued pension liabilities, this
difference and the existing prepaid pension asset are recognized as an
additional minimum pension liability.
Obligations for contributions to defined-contribution pension plans are
recognized as an expense in the income statement as incurred.
In certain countries, the Company also provides postretirement benefits
other than pensions. The cost relating to such plans consists primarily
of the present value of the benefits attributed on an equal basis to
each year of service, interest cost on the accumulated postretirement
benefit obligation, which is a discounted amount, and amortization of
the unrecognized transition obligation. This transition obligation is
being amortized through charges to earnings over a twenty-year period
beginning in 1993 in the USA and in 1995 for all other plans.
Unrecognized prior service costs related to pension plans and
postretirement benefits other than pensions are being amortized by
assigning a proportional amount to the income statements of a number of
years reflecting the average remaining service period of the active
employees.
Stock-based compensation
The Company accounts for stock-based compensation using the intrinsic
value method in accordance with US Accounting Principles Board (APB)
Opinion No. 25, 'Accounting for Stock Issued to Employees'. The Company
has adopted the pro forma disclosure requirements of SFAS No. 123,
'Accounting for Stock-Based Compensation'. The pro forma net income
(loss), basic earnings (loss) per share and diluted earnings (loss) per
share, calculated as if the fair value of options granted to option
holders would have been considered compensation costs, is (EUR 3,358
million), (2.63) and (2.63) respectively for 2002, (EUR 2,566 million),
(2.01) and (2.01) respectively for 2001, and EUR 9,570 million, 7.29
and 7.21 respectively for 2000. Please refer to note 28, Stock-based
compensation, for a reconciliation of reported and pro forma income
(loss) of earnings per share, as well as the underlying assumptions.
55
Discontinued operations
The Company has defined its Businesses as components of an entity for
the purpose of assessing whether or not operations and cash flows can
be clearly distinguished from the rest of the Company, in order to
qualify as a discontinued operation in the event of disposal of a
Business. Any gain or loss from disposal of a Business, together with
the results of these operations until the date of disposal, are
reported separately as discontinued operations in accordance with SFAS
No. 144. The financial information of a discontinued Business is
excluded from the respective captions in the consolidated financial
statements and related notes.
Cash flow statements
Cash flow statements have been prepared under the indirect method in
accordance with the requirements of SFAS No. 95, 'Statement of Cash
flows', as amended by SFAS No. 104. 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 derivative
instruments for which hedge accounting has been discontinued are
classified consistent with the nature of the instrument as from the
date of discontinuance.
Use of estimates
The preparation of financial statements requires management to make
estimates and assumptions that affect amounts reported in the
consolidated financial statements in order to conform with generally
accepted accounting principles. Actual results could differ from those
estimates.
56
NEW ACCOUNTING STANDARDS
In June 2001, the FASB issued SFAS No. 143, 'Accounting for Asset
Retirement Obligations'. This Statement requires that the fair value of
an asset retirement obligation be recognized in the period in which it
is incurred and that an equal amount be capitalized as part of the
carrying amount of the long-lived asset and subsequently depreciated
over the life of the asset. This Standard will become effective for
fiscal years beginning after June 15, 2002. Upon adoption, which is
required on January 1, 2003, the Company may be required to record a
cumulative effect adjustment related to the recognition of such
obligations. The Company made a preliminary investigation into the
existence of asset retirement obligations. This has revealed that in
several cases such obligations do exist. However, the Company has not
yet quantified the impact of the recognition of these obligations on
its statements of financial position, nor has it determined or
estimated what the cumulative effect adjustment in the income statement
will be.
In June 2002, the FASB issued SFAS No. 146, 'Accounting for Costs
Associated with Exit or Disposal Activities'. This statement nullifies
EITF Issue No. 94-3, 'Liability Recognition for Certain Employee
Termination Benefit and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)'. The principal difference
between Statement 146 and Issue 94-3 that will affect the Company
relates to the timing of the recognition of a liability for a cost
associated with an exit or disposal activity, including restructurings.
Statement 146 requires that a liability be recognized for those costs
only when the liability is incurred, i.e. when it meets the definition
of a liability. In contrast, under Issue 94-3 the Company recognized a
liability for an exit cost or recorded a restructuring provision when
it committed to an exit plan. Statement 146 also establishes fair value
as the objective for initial measurement of the liability. Liabilities
related to employee termination benefits must be recognized rateably
over the future service period when those employees are required to
render services to the Company, if that period exceeds 60 days or a
longer legal notification period. The Statement is effective for exit
or disposal activities that are initiated after December 31, 2002 and
will be adopted by the Company as of January 1, 2003. Consequently, the
accounting for exit or disposal activities initiated before January 1,
2003 will continue under Issue 94-3.
In December 2002, the FASB issued SFAS No. 148 'Accounting for
Stock-Based Compensation-Transition and Disclosure an amendment of FASB
Statement No. 123'. This Statement amends SFAS No. 123 to provide
alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation.
In addition, it requires more prominent disclosures in both annual and
interim financial statements. The Company adopted the disclosure
requirements as from 2002.
The Company has decided to adopt the fair value recognition provisions
of SFAS No. 123 'Accounting for Stock-Based Compensation' as from
January 1, 2003 prospectively to all employee awards granted, modified
or settled after January 1, 2003. Under these provisions, the Company
will recognize the estimated fair value of equity instruments granted
to employees as compensation expense over the vesting period.
57
Notes to the consolidated financial statements of the Philips Group
all amounts in millions of euros unless otherwise stated
(1) ACQUISITIONS AND DIVESTMENTS
During 2002 the Company engaged in a number of transactions, of each
which was relatively small. However, in the aggregate the cash flows
involved represented a net cash inflow of EUR 187 million. A gain of
EUR 504 million was recognized on the divestments. Sales and income
from operations related to the divested activities amounted to EUR
1,115 million and a loss of EUR 85 million respectively in 2002 and EUR
997 million and a loss of EUR 17 million respectively in 2001.
Below a summary is given of the most important acquisitions and
divestments during 2002.
Ishoni Networks
In February, the Company acquired a 51% majority interest in Ishoni
Networks, a company based in Santa Clara, California, USA, at a
purchase price of EUR 24 million. Ishoni Networks is a silicon and
software solution provider for broadband Customer Premise Equipment
(CPE) and devices. It employs approximately 160 people. The investment
is expected to advance Philips Semiconductors' efforts in Broadband
Silicon and Software solutions and to expand a portfolio of silicon
system solutions for broadband CPE with advanced networking, voice and
security functionality. The investment includes agreements for joint
product development, joint sales and marketing activities, and
manufacturing. The Company has a call option to acquire the remaining
49% at the current price of EUR 65 million before June 2003.
Based upon an independent appraisal, EUR 10 million was assigned to
specific intangible assets acquired. Of this amount, EUR 4 million,
representing the value of in-process R&D that has not yet reached
technological feasibility and has no alternative use, was charged to
expense as of the date of acquisition. Additionally, EUR 9 million,
representing the excess of cost over the fair value of the net assets
acquired, has been recorded as goodwill. Ishoni has been consolidated
in the Semiconductors segment as from February 2002.
Medical glassware business of Richardson Electronics
In February, the Company completed the acquisition of 100% of
Richardson Electronics' medical glassware business. Under the terms of
the agreement, Philips acquired the net assets and employees of the
business, including the reloading and distribution of X-ray, CT and
Image Intensifier tubes. The glassware business has operations in
Arlington, Texas and Richmond, Virginia and employs approximately 25
people. The investment expands the portfolio of Philips' Dunlee medical
tube business, which was acquired in 2001 from Marconi Medical Systems
and integrated in the Medical Systems segment. The medical glassware
business has been consolidated in this segment as from March 2002.
Fax business
In March, Philips sold its Fax business to Groupe SAGEM of France. The
main activities of this business were located in Vienna. Approximately
390 employees were involved within Europe. The reason for this disposal
is that strategically the fax market and related printing technologies
no longer fit within Philips.
58
TechnoFusion
In May, the Company completed the sale of TechnoFusion GmbH, a leading
maker of power generation systems for automotive electronics, to
International Rectifier (IR) for EUR 60 million in cash.
TechnoFusion manufactures high-quality integrated regulator
micro-electronic modules for the global automotive industry. With 2001
sales of USD 50 million, TechnoFusion employed approximately 375 people
worldwide.
SMATV
The Company and Fracarro Radioindustrie Spa of Italy agreed on the sale
of Philips' business unit Satellite Master Antenna Television (SMATV).
The deal closed by the end of May. Philips SMATV has been 100% acquired
by Fracarro France, a new company of Gruppo Fracarro. All employees,
approximately 50, of Philips SMATV have been taken over by Fracarro.
Marantz
Marantz is a leading branded manufacturer of premium home theatre and
Audio/Video products in which the Company had a 49% stake. In May,
Marantz and DENON, Ltd. merged operations into D&M Holdings, Inc.,
maintaining the established Marantz and DENON brands. After the merger
Philips' share in D&M Holdings, Inc. is 14.7% and accordingly is no
longer accounted for under the equity method.
Heat and Surface Treatment
The Company sold its Heat and Surface Treatment (H&ST) activities to
Aalberts Industries of the Netherlands in July. H&ST, with sales of EUR
10 million, is located in Acht, the Netherlands, and had around 70
employees.
X-Ray Analytical
In September, the Company sold the major part of its X-ray Analytical
Business to Spectrics plc of Egham, United Kingdom, a precision
instrumentation and controls company, for EUR 150 million. Philips
Analytical's X-ray activities employed approximately 850 people around
the world and had sales of EUR 160 million in 2001.
Philips Broadband Networks
In September, C-COR.net of State College, PA, USA, a global provider of
broadband communications technology systems and services, acquired
Philips Broadband Networks (PBN) for a cash payment of approximately
EUR 75 million. Philips Broadband Networks employed approximately 500
people.
Philips Medical Capital
Philips Medical Systems and Rabobank Group's subsidiary De Lage Landen
International set up a venture to provide financing for the purchase of
the full range of diagnostic imaging equipment produced by Philips
Medical Systems throughout the United States. The new venture is called
Philips Medical Capital and is based in Wayne, Pennsylvania (United
States). De Lage Landen owns a majority stake (60%) in the venture and
has operational control. The venture became operative in the 4th
quarter of 2002 and is accounted for in accordance with the equity
method.
Payer shavers
At the end of October, the Company concluded the sale of Payer
Elektroprodukte to Hui Holding Sdn. Bhd. of Malaysia. Payer
Elektroprodukte is an Austria-based leading original equipment
manufacturer (OEM) of electric foil shavers and was part of Philips'
Domestic Appliance and Personal Care (DAP) division. The business had
approximately 650 employees, with production facilities in Austria and
Hungary.
59
Communication, Security and Imaging business
In October, the Company and Robert Bosch GmbH concluded the sale of
Philips' business unit Communication, Security and Imaging (CSI).
Philips CSI is headquartered in Eindhoven, the Netherlands, operating
in 35 countries worldwide and employing approximately 1300 people, all
of whom have transferred to Bosch. CSI designs, manufactures, sells and
supports a broad range of professional communication and security
products and systems, including closed-circuit video surveillance
(CCTV), congress and public address systems. CSI was profitable with
sales of over EUR 300 million in 2001.
Philips Contract Manufacturing Services
In November, the Company and Jabil Circuit Inc., a global leader in
Electronic Manufacturing Services (EMS), agreed on the sale of most of
Philips Contract Manufacturing Services (PCMS). In connection with this
transaction, the Company has agreed to restructure four manufacturing
operations. The transaction has resulted in cash inflows in 2002 of EUR
170 million, while in 2003 cash outflows of EUR 87 million will be
involved. A loss of EUR 13 million, including a provision to
restructure the above-mentioned operations, was recorded on this
transaction.
PCMS, with Philips Consumer Electronics as its largest customer, has
grown from a specialist in printed circuit board assembly into a full
service provider addressing both the internal and external EMS markets
as a stand-alone Philips business. This agreement is in line with our
strategy to focus on selected activities that fully support the
long-term ambitions of the Consumer Electronics division, and the
industry trend towards outsourcing.
Under the terms of the agreement, Jabil acquired the manufacturing
operations on three continents, including sites in Austria, Belgium,
Brazil, China, Hungary, India, Poland and Singapore. From these
locations, Jabil will continue to provide key components for the
manufacture of a wide range of Philips products, including televisions,
DVD and audio systems, storage and display products and set-top boxes
under a four-year, four-billion euro product supply agreement.
Jabil will provide design and engineering services, new product
introduction, prototype and test services, procurement, PCB assembly,
and final assembly and integration. The agreement also covers
outsourcing requirements for additional PCMS customers outside Philips.
Health Care Products Group
At the end of November, the sale of the Health Care Products Group to
Platinum Equity Holdings was concluded. Final settlement is expected to
occur in the first quarter of 2003. The Health Care Products Group
(HCP), based in Cleveland, Ohio is active in the distribution and sale
of consumable medical film and devices to hospitals and healthcare
centers.
HCP, part of Philips Medical Systems, was acquired as part of the
Marconi Medical Systems acquisition in 2001. With more than 900
employees and a customer base of over 20,000 healthcare providers in
the United States, the company had annual revenues in excess of EUR 600
million.
Systemonic
On December 31, the Company completed the acquisition of Systemonic, a
leading developer of complete silicon system solutions. This
acquisition adds high-speed wireless connectivity technology to the
Philips portfolio. Systemonic has operations in the USA and Germany and
employs approximately 90 people. Based on a preliminary valuation, a
goodwill amount of EUR 28 million has been recognized. In-process R&D
that had no alternative future use amounting to EUR 8 million has been
charged to income.
60
THE MOST SIGNIFICANT ACQUISITIONS AND DIVESTMENTS DURING 2001 AND 2000
WERE AS FOLLOWS:
Marconi
In October 2001, Philips acquired all the shares of Marconi's Medical
Systems business, which comprised two businesses, the core Medical
Imaging Equipment business, a global participant in the medical
diagnostic imaging equipment industry, and the Marconi Health Care
Products Group (HCP), one of the largest distributors of radiology
imaging supplies in the USA. Philips divested HCP in 2002. The
acquisition price of Marconi Medical Systems was EUR 1.2 billion in
cash. The primary reasons for the acquisition were to enhance Medical
Systems' computed tomography (CT) portfolio and to acquire an
additional CT installed base whose service and maintenance is the most
profitable area of the diagnostic imaging industry. The cost of the
acquisition has been allocated on the basis of the fair value of the
assets acquired and liabilities assumed. The 2001 preliminary
allocation was finalized in 2002.
Lighting
In September 2001, Philips acquired the fluorescent lighting ballast
operation of Lumisistemas (Mexico) and all lighting ballast activities
of Helfont (Brazil). The acquisition price was EUR 72 million. As from
the beginning of September 2001, Philips consolidated these newly
acquired businesses; EUR 53 million has been recorded as goodwill.
Agilent
In August 2001, Philips completed the acquisition of the net assets of
Agilent Technologies Inc.'s Healthcare Solutions Group (HSG) for a
total purchase price of EUR 2.0 billion in cash. HSG is active in the
field of pervasive cardiology and monitoring solutions, and is a
leading global provider of medical products and services to hospitals,
healthcare clinics, physicians' offices, airlines and others. The
primary reason for the acquisition was to enhance our existing business
and to provide Medical Systems with a strong position in the cardiac
sector. Additionally, the acquisition enables Medical Systems to enter
certain new, high-growth segments such as home care technology enabling
remote diagnostics. The cost of the acquisition was allocated on the
basis of the fair value of the assets acquired and liabilities assumed.
The 2001 preliminary allocation was finalized in 2002.
LG.Philips Displays
In June 2001, Philips and LG Electronics (LGE) completed a definitive
agreement through which the two companies merged their respective
cathode ray tube (CRT) businesses into a new joint venture company. LGE
and Philips share equal control of the joint venture. The joint venture
remitted USD 1.1 billion in cash to LGE and USD 0.3 billion to Philips
to close the difference in the valuation of the net assets contributed.
The investment is accounted for using the equity method. The excess of
the Company's investment over its underlying equity in the recognized
net assets has been recorded as goodwill in the caption investments in
unconsolidated companies. In accordance with the joint venture
agreement between Philips and LGE, Philips paid LGE USD 105 million in
2002, which amount has been included under investments in
unconsolidated companies.
Philips Consumer Communications
In October 2001, Philips announced it had signed a definitive agreement
with respect to a transfer of Philips' mobile handset activities to
China Electronics Corporation (CEC). Under the agreement, Philips
contributed part of the research & development and manufacturing
activities of Philips Consumer Communications (PCC) into a partnership
with CEC. Philips maintained a focused sales and marketing activity in
mobile telephony under the Philips brand name.
61
In December 2001, 65% of the shares in the manufacturing company in
China were transferred to the CEC group, bringing their ownership to
75%. Therefore this company was deconsolidated at year-end 2001. The
transfer of 100% of the shares in the development company in France was
completed in the first quarter of 2002.
Part of the Le Mans manufacturing operations that remained after the
restructuring of PCC was sold to European Telecom plc; the transaction
was closed on December 31, 2001, therefore the operations were
deconsolidated as of December 31, 2001.
FEI
In May 2001, Philips reduced its stake in FEI Company to 26% through a
public offering of FEI shares and through the sale of approximately 6
million shares owned by Philips. The cash proceeds were EUR 200
million, resulting in a gain of EUR 185 million included in other
business income.
Following the offering, Philips no longer consolidates the financial
data of FEI, previously included in the product sector Miscellaneous.
The remaining investment is accounted for as an equity investment from
May 2001 onwards.
Philips Broadcast
In February 2001, Philips sold its Broadcast group to Thomson
Multimedia of France for a cash amount of EUR 165 million, of which EUR
63 million was received in 2002. In relation to this sale a gain was
recognized, net of cost of disposal, of EUR 57 million, which is
included in other business income.
Other
In May 2001, Philips sold its investment in Philips Matsushita Battery
Corporation to its joint venture partner for EUR 42 million, resulting
in a gain of EUR 20 million, which is presented under results relating
to unconsolidated companies.
In May 2001, Marantz Japan Inc. (MJI) bought the Marantz trademark and
the European and American sales organizations from Philips. In
addition, Philips sold 1.5% of its shareholding in MJI, reducing its
share from 50.5% to 49%. As a result, these activities are no longer
consolidated in Philips but are accounted for as an equity investment.
Cash proceeds amounted to EUR 40 million, and the gain from this
transaction was EUR 3 million.
Early in 2001, Philips became the majority shareholder in NavTech as a
result of a conversion of debt into equity. As a consequence, Philips
started to consolidate the financial figures of NavTech.
TSMC preferred stock
In November 2000, the Company purchased 1.3 billion redeemable
preferred shares in Taiwan Semiconductor Manufacturing Company (a
publicly listed Taiwanese company in which the Philips Group has a
substantial shareholding) for 13 billion Taiwanese dollars (EUR 458
million). The preferred shares are redeemable in 2003. The dividend
yield on these preferred shares is 3.5%. The preferred shares carry the
same voting rights as TSMC's common shares. The preferred shares are
carried at cost (redemption value) in the accompanying consolidated
balance sheet. The redeemable preferred shares result in a
concentration of credit risks. However, based on historical results,
the Company is of the opinion that TSMC will have sufficient means to
redeem the shares at the redemption date in 2003.
62
ADAC
In December 2000, Philips acquired substantially all of ADAC
Laboratories' common stock for USD 18.50 per share for each outstanding
share. The total purchase price was EUR 483 million. The cost of the
acquisition was allocated on the basis of the fair value of the assets
acquired and the liabilities assumed. In 2002, goodwill was increased
by EUR 6 million, representing the amount originally recognized for the
assembled workforce intangible asset, which is no longer allowed to be
recognized separately under SFAS No. 141.
MedQuist
During 2000, in a series of transactions, Philips acquired
approximately 71% of the outstanding shares in MedQuist, a provider of
electronic medical transcription services in the United States, for a
total aggregate cash purchase price of EUR 1,339 million. The cost of
the acquisition was allocated on the basis of the fair value of the
assets acquired and liabilities assumed. In 2002, goodwill was
increased by EUR 6 million, representing the amount initially
recognized as an intangible asset for an assembled workforce, which is
no longer allowed to be recognized separately under SFAS No. 141.
Optiva
In October 2000, Philips acquired all of the outstanding shares of
Optiva Corporation, the manufacturer of the Sonicare toothbrush, at a
cost of EUR 291 million. The cost of the acquisition was allocated on
the basis of the fair value of the assets acquired and liabilities
assumed. In 2002, goodwill was increased by EUR 3 million, representing
the amount initially recognized as an intangible asset for an assembled
workforce, which is no longer allowed to be recognized separately under
SFAS No. 141.
MiCRUS
In June 2000, Philips purchased IBM's MiCRUS 8-inch wafer fab in the
USA, a semiconductor activity, for which the results of operations have
been included in the consolidated financial statements as from June 1,
2000. The acquisition price was EUR 378 million, of which approximately
EUR 340 million was paid through December 31, 2001.
Atos Origin
In October 2000, Philips and Atos of France, a leading European IT
services provider, merged Atos and Origin, Philips' IT services
subsidiary. Under this transaction, Philips received 21.3 million newly
issued Atos shares based on Atos' closing price on August 25, 2000 of
EUR 122 per share, representing 48.7% of the shares in the combined
entity Atos Origin.
Additionally, Philips received two tranches of warrants, each
representing approximately 2.4 million Atos Origin shares. These
warrants may be exercised in the event the weighted average share price
of Atos Origin exceeds EUR 156 per share for twelve consecutive
business days within 20 months following the closing date for the first
tranche (which has expired), and EUR 208 per share within 32 months for
the second tranche. Due to Atos Origin's different reporting cycle,
Philips' share in Atos Orgin's earnings can only be accounted for on a
three-month delay basis.
AC&M
In May 2000, Philips reached agreement with Yageo Corporation of Taiwan
to sell its AC&M (Advanced Ceramics & Modules) business to Yageo
Corporation.
The transaction was completed in August 2000, and the Company received
cash proceeds of EUR 658 million.
63
(2) INCOME FROM OPERATIONS
For information on sales and income from operations on a geographical
and segmental basis, see note 31.
Salaries and wages
2002 2001 2000
Salaries and wages 6,862 7,292 7,631
Pension costs 130 (411) (422)
Other social security and similar charges:
- - Required by law 995 1,049 1,009
- - Voluntary 196 189 261
- -------------------------------------------- ----- ----- -----
TOTAL 8,183 8,119 8,479
See note 20 to the financial statements for further information on
pension costs.
Employees
The average number of employees during 2002 was 183,395 (2001: 205,870,
2000: 231,161). The number of employees by category is summarized as
follows:
2002 2001 2000
------------------------------
beginning end
of year* of year average** average average
Production 111,472 97,233 105,897 124,306 124,473
Research & Development 23,218 22,306 22,877 23,661 22,201
Other 39,062 35,175 37,750 39,345 60,484
- ---------------------- ------- ------- ------- ------- -------
Permanent employees 173,752 154,714 166,524 187,312 207,158
Temporary employees 14,916 15,373 16,871 18,558 24,003
- ---------------------- ------- ------- ------- ------- -------
TOTAL 188,668 170,087 183,395 205,870 231,161
* including changes in consolidation at January 1, 2002
** (de)consolidation changes have not been taken into consideration in
determining the average number of employees
The number of employees at year-end 2002 decreased by 18,581 as
compared to the beginning of the year.
Remuneration of the Board of Management and Supervisory Board
Please refer to note 29.
Depreciation and amortization
Depreciation of property, plant and equipment and amortization of
intangibles are as follows:
2002 2001 2000
Depreciation of property, plant and equipment 1,814 1,994 1,808
Amortization of software 174 146 86
Amortization of goodwill and other intangibles:
- - Amortization of other intangible assets 165 155 125
- - Impairment of goodwill 19 - 35
- - Amortization of goodwill relating to consolidated
companies acquired before July 1, 2001 - 180 138
Write-off of in-process R&D 12 106 44
----- ----- -----
2,184 2,581 2,236
64
Depreciation of property, plant and equipment and amortization of
software are primarily included in cost of sales.
Included in the table above is an amount of EUR 233 million (2001: EUR
240 million, 2000: EUR 47 million) that is reported under restructuring
and impairment charges.
Depreciation of property, plant and equipment includes an additional
write-off in connection with the retirement of property, plant and
equipment amounting to EUR 32 million in 2002 (2001: EUR 25 million,
2000: EUR 19 million).
Amortization of other intangible assets increased since it includes a
full-year of amortization with respect to acquisitions occurring in the
second half of 2001, mainly the medical systems businesses of Marconi
and Agilent. Goodwill is no longer amortized but is tested for
impairment as Philips applies SFAS No. 142 as from January 1, 2002.
Rent
Rent expenses amounted to EUR 451 million in 2002 (2001: EUR 388
million).
Selling expenses
Advertising and sales promotion costs incurred during 2002 totaled EUR
952 million (2001: EUR 988 million, 2000: EUR 1,039 million) and are
included in selling expenses. Moreover, shipping and handling costs of
EUR 605 million are also included (2001: EUR 582 million).
General and administrative expenses
General and administrative expenses include the costs related to
management and staff departments in the corporate center, product
divisions and country/regional organizations, amounting to EUR 1,406
million in 2002 (2001: EUR 1,539 million, 2000: EUR 1,714 million).
Additionally, the pension costs and costs of other postretirement
benefit plans not attributable to product divisions amounted to a net
benefit of EUR 2 million in 2002 (2001: benefit of EUR 290 million,
2000: benefit of EUR 393 million). Lower pension costs in the
Netherlands and higher pension costs, predominantly in the United
States and the United Kingdom, resulted in a lower benefit in 2002
compared to 2001.
Research and development expenses
Expenditures for research and development activities amounted to EUR
3,043 million, representing 9.6% of Group sales (2001: EUR 3,312
million, 10.2% of sales, 2000: EUR 2,766 million, 7.3% of Group sales).
Write-off of acquired in-process Research and Development
The write-off of acquired in-process R&D in 2002 related to the
acquisition of Semiconductors' businesses Ishoni and Systemonic (EUR 12
million); in 2001 it related to the acquisitions of the medical systems
businesses of Agilent and Marconi (EUR 106 million); in 2000 it related
to the acquisition of ADAC (EUR 44 million).
65
Restructuring and impairment charges
The following table presents the changes in the restructuring provision
from December 31, 1999 to December 31, 2002:
balance balance
December 31, other December 31,
2001 additions utilized releases changes 2002
Personnel costs 326 245 (235) (61) (18) 257
Write-down of assets 6 214 (194) (7) (4) 15
Other costs 110 103 (44) (10) (4) 155
--- --- ---- --- --- ---
TOTAL 442 562 (473) (78) (26)* 427
* other changes primarily related to translation differences
balance balance
December 31, other December 31,
2000 additions utilized releases changes 2001
Personnel costs 67 437 (166) (12) 326
Write-down of assets 22 240 (253) (3) 6
Other costs 11 136 (66) (12) 41 110
--- --- ---- --- -- ---
TOTAL 100 813 (485) (27) 41* 442
* relates to transferred provisions to the joint venture LG.Philips
Displays and restructuring recorded in conjunction with the acquisition
of Marconi
balance balance
December 31, other December 31,
1999 additions utilized releases changes 2000
Personnel costs 84 125 (115) (27) 67
Write-down of assets 13 47 (28) (10) 22
Other costs 18 26 (24) (9) 11
--- --- ---- --- --- ---
Total 115 198 (167) (46) - 100
In 2002, asset write-downs are mainly related to Consumer Electronics,
Components, Semiconductors and Medical Systems, while in 2001 they were
primarily related to Digital Networks and Consumer Communications (as
part of Consumer Electronics), Components and Semiconductors. In 2000,
asset write-downs were recorded primarily in the Components and
Miscellaneous sectors.
Inventory write-downs as part of restructuring projects are recorded in
the cost of sales and amount to EUR 10 million (2001: EUR 307 million;
2000: EUR 10 million), which are not included in the tables above.
The movements in the provision for restructuring costs in 2002 are
presented by sector as follows:
balance balance
December 31, other December 31,
2001 additions utilized releases changes 2002
Lighting 16 20 (11) (7) (2) 16
Consumer Electronics 137 116 (124) (16) (1) 112
DAP 1 9 (4) 6
Components 61 180 (104) (19) (5) 113
Semiconductors 41 178 (126) (11) (6) 76
Medical Systems 116 28 (93) (4) (6) 41
Miscellaneous 67 31 (11) (21) (6) 60
--- --- --- ---
TOTAL 442 562 (473) (78) (26) 427
66
Additions of EUR 562 million are presented by sector as follows:
write-
down
personnel of fixed other
costs assets costs total
Lighting 20 20
Consumer Electronics 83 27 6 116
DAP 7 2 9
Components 78 43 59 180
Semiconductors 38 112 28 178
Medical Systems 28 28
Miscellaneous 19 2 10 31
--- --- --- ---
Total 245 214 103 562
The movements in the provision for restructuring costs in 2001 are
presented by sector as follows:
balance balance
December 31, other December 31,
2001 additions utilized releases changes 2002
Lighting 25 24 (25) (8) 16
Consumer Electronics 5 271 (138) (1) 137
DAP 6 4 (9) 1
Components 51 132 (105) (11) (6) 61
Semiconductors 167 (126) 41
Medical Systems 79 (6) (4) 47 116
Miscellaneous 8 99 (37) (3) 67
Unallocated 5 37 (39) 3
--- --- ---- --- -- ---
Total 100 813 (485) (27) 41* 442
* relates to transferred provisions to the joint venture LG.Philips
Displays and restructuring recorded in conjunction with the acquisition of
Marconi
Additions of EUR 813 million are presented by sector as follows:
write-
down
personnel of fixed other
costs assets costs total
Lighting 20 4 24
Consumer Electronics 147 74 50 271
DAP 2 2 4
Components 51 53 28 132
Semiconductors 53 91 23 167
Medical Systems 70 9 79
Miscellaneous 71 8 20 99
Unallocated 23 14 37
--- --- --- ---
Total 437 240 136 813
67
The movements in the provision for restructuring costs in 2000 are
presented by sector as follows:
balance balance
December 31, other December 31,
1999 additions utilized releases changes 2000
Lighting 43 31 (35) (14) 25
Consumer Electronics 21 27 (33) (10) 5
DAP 12 (6) 6
Components 3 82 (22) (12) 51
Semiconductors 6 (4) (2)
Miscellaneous 20 38 (42) (8) 8
Unallocated 22 8 (25) 5
--- --- ---- --- --- ---
Total 115 198 (167) (46) - 100
Additions of EUR 198 million are presented by sector as follows:
write-
down
personnel of fixed other
costs assets costs total
Lighting 27 4 31
Consumer Electronics 18 3 6 27
DAP 7 1 4 12
Components 53 17 12 82
Miscellaneous 17 21 38
Unallocated 3 5 8
--- -- -- ---
Total 125 47 26 198
The projects initiated in 2002 will ultimately reduce direct labor by
approximately 3,900 persons and indirect labor by approximately 2,800
persons.
As in 2001, the release of surplus in 2002 was primarily attributable
to reduced severance due to a transfer of employees, who were scheduled
to be laid off, to other positions in the Company. The release in 2000
related to a change in severance as well as lower expenditures than
originally planned.
The remaining prior-year provisions available at December 31, 2002
relate primarily to personnel costs. The Company expects to make cash
expenditures of EUR 412 million in 2003 under existing restructuring
programs.
Other business income (expense)
Other business income in 2002 consists of results on disposal of fixed
assets, results on disposal of businesses and acquisition-related
costs. An amount of EUR 504 million relates to the net gain from the
disposal of certain business interests (2001: EUR 287 million, 2000:
EUR 1,429 million). In 2002, income primarily related to the sale of
PCMS, CSI, PBN and Analytical amounting to EUR 83 million, EUR 71
million, EUR 49 million and EUR 85 million respectively. Furthermore,
the earn-out of JDS Uniphase shares, related to the sale of Philips
Optoelectronics in 1998, resulted in a gain of EUR 113 million. Various
other disposals of businesses resulted in a gain of EUR 103 million. In
2001, EUR 185 million arose from the sale of a portion of Philips'
share in FEI Company. In 2000, the gain primarily related to the Atos
Origin merger (EUR 1,072 million) and the sale of AC&M (EUR 309
million).
Other business income also includes gains of EUR 65 million from the
sale of fixed assets (2001: EUR 30 million, 2000: EUR 48 million) and
acquisition-related costs of EUR 84 million primarily related to the
integration of the Medical Systems acquisitions in 2001 (EUR 331
million).
68
(3) FINANCIAL INCOME AND EXPENSES
2002 2001 2000
Interest income 36 66 99
Interest expense (420) (457) (266)
- ------------------------------------------------ ------ ---- -----
TOTAL INTEREST EXPENSE, NET (384) (391) (167)
Impairment loss on available for sale securities (1,955) (526) -
Income from non-current financial assets 107 67 2,230
Foreign exchange results 16 (64) (81)
Miscellaneous financing costs (11) (1) 11
- ------------------------------------------------ ------ ---- -----
Total other income and expense 112 2 2,160
- ------------------------------------------------ ------ ---- -----
TOTAL (2,227) (915) 1,993
- ------------------------------------------------ ------ ---- -----
Impairment losses in 2002 resulted from the other-than-temporary
decline in the value of Vivendi Universal (EUR 1,855 million), GN Great
Nordic (EUR 27 million) and JDS Uniphase shares (EUR 73 million) and
totaled EUR 1,955 million (see note 12). In 2001, Vivendi Universal and
GN Great Nordic shares were impaired for an amount of EUR 440 million
and EUR 86 million respectively.
Income from non-current financial assets in 2002 includes a portion of
ASML shares which were sold, resulting in a gain of EUR 67 million. In
2001, no securities were sold. The year 2000 includes the gain on the
sale of JDS Uniphase shares of EUR 1,207 million. Additionally, 2000
includes the gain on the exchange of Seagram shares for Vivendi
Universal shares, amounting to EUR 1,115 million, net of a US dollar
hedge result and taxes.
Dividends received in 2002 on shares of Vivendi Universal of EUR 33
million (2001: EUR 33 million) are classified under income from
non-current financial assets. In 2000, dividends received from Seagram
of EUR 32 million were classified under income from non-current
financial assets.
Miscellaneous financing costs in 2002 mainly reflect the commitment
fees (EUR 10 million) for the USD 3.5 billion revolving credit
facility, which was closed during the year.
(4) INCOME TAXES
The tax expense on income before tax amounted to EUR 27 million in 2002
(2001: tax benefit EUR 428 million, 2000: tax expense EUR 563 million).
The components of income before taxes are as follows:
2002 2001 2000
Netherlands (1,434) (646) 4,620
Foreign (373) (1,664) 1,631
- ---------------------------------------------------- ------ ------ -----
INCOME (LOSS) BEFORE TAXES (1,807) (2,310) 6,251
The components of income tax expense are as follows:
Netherlands:
Current taxes 14 63 (120)
Deferred taxes 48 130 (277)
------ ------ -----
62 193 (397)
Foreign:
Current taxes (244) (288) (342)
Deferred taxes 155 523 176
------ ------ -----
(89) 235 (166)
- ---------------------------------------------------- ------ ------ -----
INCOME TAX (EXPENSE) BENEFIT (27) 428 (563)
69
Philips' operations are subject to income taxes in various foreign
jurisdictions with statutory income tax rates varying from 16% to 42%,
which causes a difference between the weighted average statutory income
tax rate and the Netherlands' statutory income tax rate of 34.5%.
A reconciliation of the weighted average statutory income tax rate as a
percentage of income before taxes and the effective income tax rate is
as follows:
2002 2001 2000
Weighted average statutory income tax rate 34.1 31.7 34.2
Tax effect of:
Utilization of previously unrecognized loss
carryforwards 3.1 3.9 (2.5)
New loss carryforwards not recognized (8.0) (4.8) 1.4
Changes in the valuation allowance (3.2) (1.2) (2.9)
Non-tax deductible impairment charges (37.3) (8.0) -
Non-taxable income 14.1 7.4 (22.3)
Non-tax deductible expenses (2.8) (7.0) 3.0
Withholding and other taxes (1.2) (2.9) 1.3
Tax incentives and other (0.3) (0.6) (3.2)
---- ---- -----
EFFECTIVE TAX RATE (1.5) 18.5 9.0
The tax effects of transactions recorded as other comprehensive income
(loss) within stockholders' equity are recognized on a net-of-tax
basis. The amounts recorded in 2002 include a tax benefit of EUR 179
million related to the minimum pension liability. Additionally, a tax
charge relating to the deferred results on hedge transactions of EUR 9
million was recorded (2001: EUR 16 million; 2000: EUR 85 million).
Other items affecting other comprehensive income do not have tax
consequences.
Deferred tax assets and liabilities
Deferred tax assets and deferred tax liabilities are as follows:
2002 2001
--------------------------- ------------------------
assets liabilities assets liabilities
Intangible assets 140 (250) 70 (480)
Property, plant and equipment 90 (130) 240 (150)
Inventories 150 (30) 220 (40)
Receivables 250 (10) 70 (10)
Provisions:
- - Pensions 100 - 100 (140)
- - Restructuring 140 - 150 -
- - Guarantees 40 - 10 -
- - Other 620 (10) 600 (10)
Other assets 190 (410) 220 (430)
Other liabilities 190 (132) 220 (313)
----- ---- ----- ------
Total deferred tax assets/liabilities 1,910 (972) 1,900 (1,573)
----- ---- ----- ------
Net deferred tax position 938 327
Tax loss carryforwards (including tax
credit carryforwards) 1,725 1,927
Valuation allowances (1,249) (1,258)
--------- ------
NET DEFERRED TAX ASSETS 1,414 996
70
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary
differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income
and tax strategies in making this assessment. In order to fully realize
the deferred tax asset, the Company will need to generate future
taxable income in the countries where the net operating losses were
incurred. Based upon the level of historical taxable income and
projections for future taxable income over the periods in which the
deferred tax assets are deductible, management believes it is more
likely than not that the Company will realize the benefits of these
deductible differences, net of the existing valuation allowance at
December 31, 2002.
The valuation allowance for deferred tax assets as of December 31, 2002
and 2001 was EUR 1,249 million and EUR 1,258 million respectively. The
net change in the total valuation allowance for the years ended
December 31, 2002 and 2001 was a decrease of EUR 9 million and an
increase of EUR 293 million respectively.
The portion of the valuation allowance relating to deferred tax assets,
for which subsequently recognized tax benefits will be allocated to
reduce goodwill or other non-current intangible assets of an acquired
entity or directly to contributed capital, amounts to EUR 53 million
(2001: EUR 52 million).
At December 31, 2002, operating loss carryforwards expire as follows:
Total 2003 2004 2005 2006 2007 2008/2012 later unlimited
4,520 140 120 40 40 240 170 480 3,290
The Company also has tax credit carryforwards of EUR 302 million, which
are available to offset future tax, if any, and which expire as
follows:
Total 2003 2004 2005 2006 2007 2008/2012 later unlimited
302 9 3 2 14 7 10 22 235
Classification of the deferred tax assets and liabilities takes place
at a fiscal entity level as follows:
2002 2001
Deferred tax assets grouped under other non-current assets 1,152 980
Deferred tax assets grouped under other current assets 346 516
Deferred tax liabilities grouped under provisions (84) (500)
----- ----
1,414 996
Classification of the income tax payable and receivable is as follows:
2002 2001
Income tax receivable grouped under non-current receivables 67 101
Income tax receivable grouped under current receivables 136 42
Income tax payable grouped under current liabilities (268) (206)
Income tax payable grouped under non-current liabilities (114) (122)
The amount of the unrecognized deferred income tax liability for
temporary differences, EUR 167 million (2001: EUR 145 million), relates
to unremitted earnings in foreign Group companies, which are considered
to be permanently re-invested. Under current Dutch tax law, no
additional taxes are payable. However, in certain jurisdictions,
withholding taxes would be payable.
71
(5) UNCONSOLIDATED COMPANIES
Results relating to unconsolidated companies
2002 2001 2000
Results relating to unconsolidated companies:
- - income (loss) excluding impairment charges and
amortization of goodwill (17) (232) 4,080
- - impairment charges (1,305) (119) -
- - amortization of goodwill (24) (257) (124)
- ------------------------------------------------ ------ ---- -----
Total (1,346) (608) 3,956
The results relating to unconsolidated companies for 2002 are affected
by a number of special items. The results include the Company's share
(EUR 301 million) of restructuring and impairment charges recorded by
LG.Philips Displays, in connection with a structural reduction of fixed
costs. Additionally, the Company recognized impairment charges of EUR
1,305 million. These related to the investment in LG.Philips Displays
(EUR 275 million), a write-down of the investment in Atos Origin (EUR
921 million) to its lower market value, and write-downs of several
smaller investments (EUR 109 million). Philips' share in net income of
LG.Philips LCD resulted in a profit of EUR 169 million. Various other
unconsolidated companies (primarily TSMC, LG.Philips Displays, SSMC and
Atos Origin) contributed on balance a profit of EUR 103 million. The
dilution effect of Philips' shareholding in TSMC amounted to a loss of
EUR 12 million, reducing Philips' shareholding by 0.12%.
In 2001, Philips sold its ownership in Philips Matsushita Battery
Corporation, resulting in a gain of EUR 20 million. The results of
LG.Philips Displays include a restructuring charge of EUR 89 million.
The employee stock option program of TSMC had a dilution effect on
Philips' shareholding in the company, amounting to a loss of EUR 60
million. Additionally, results of TSMC included a special charge of EUR
82 million for impairment at a TSMC subsidiary, partly offset by a gain
of EUR 41 million related to a reduction in the provision for
withholding tax.
The results for 2000 included several special items. A gain of EUR 680
million was recorded in conjunction with issuance of shares by TSMC at
a price in excess of the Company's per share carrying value.
Additionally, the sale of ASM Lithography shares in June 2000 resulted
in a gain of EUR 2,595 million. Furthermore, the exchange of Philips'
approximately 33% equity interest in Beltone Electronics Inc. for
shares of GN Great Nordic A/S resulted in a gain of EUR 122 million.
Results relating to unconsolidated companies included the amortization
of the excess of the Company's investment over its underlying equity in
the net assets of unconsolidated companies (2001: EUR 90 million, 2000:
EUR 84 million) and the Company's share of amortization recorded by the
unconsolidated companies (2001: EUR 167 million, 2000: EUR 40 million).
As from January 1, 2002 (from June 30, 2001 for goodwill on business
combinations after that date), goodwill recorded by the unconsolidated
companies is no longer amortized but instead tested for impairment at
least annually. Also, the amortization of the excess of the Company's
investment over its underlying equity in the net assets of
unconsolidated companies ceased as from January 1, 2002. Instead the
Company has tested its investments for impairment whenever there are
indications of impairment, which resulted in the above mentioned
impairment charges in 2002.
72
Included in amortization of goodwill in 2002 is EUR 24 million relating
to the fourth quarter of 2001 of Atos Origin, as their results are
reported on a three-month delay basis. Income from unconsolidated
companies accounted for under the cost method includes EUR 2 million
(2001: EUR 1 million) representing dividends received.
Investments in, and loans to, unconsolidated companies
The changes during 2002 are as follows:
total investments loans
Balance as of January 1, 2002 7,552 7,090 462
Changes:
Acquisitions/additions 272 256 16
Sales/redemptions (68) (48) (20)
Goodwill 162 162 -
Impairments (1,305) (1,305) -
Share in income (34) (34) -
Dividend received (7) (7) -
Changes in consolidations (1) (1) -
Translation and exchange rate differences (482) (419) (63)
- ----------------------------------------- ------ ----- ---
BALANCE AS OF DECEMBER 31, 2002 6,089 5,694 395
Included in investments is EUR 1,761 million (2001: EUR 1,874 million)
of goodwill representing the excess of the Company's investment over
its underlying equity in the net assets of the unconsolidated
companies.
Loans to unconsolidated companies include redeemable preferred shares
of TSMC for an amount of EUR 374 million (2001: EUR 431 million), which
will be redeemed in 2003. The investments in unconsolidated companies
at December 31, 2002 include EUR 121 million (2001: EUR 204 million)
for companies accounted for under the cost method.
The total carrying value of investments in, and loans to,
unconsolidated companies is summarized as follows:
2002 2001
-------------------------- -----
shareholding % amount
Philips' joint ventures with LGE (Korea) 50 2,918 3,062
Taiwan Semiconductor Manufacturing Co. (Taiwan) 21.7 2,228 2,476
Atos Origin (France) 48.4 495 1,388
Other 448 626
- ---------------------------------------------- ----- -----
TOTAL 6,089 7,552
The fair values of Philips' shareholdings in TSMC and Atos Origin,
based on quoted market prices at December 31, 2002, were EUR 4,738
million and EUR 495 million respectively.
73
Summarized financial information for the Company's equity investments
in unconsolidated companies on a combined basis is presented below:
January-December
-------------------------------
2002 2001 2000
Net sales 16,742 12,697 9,039
Income before taxes 667 (911) 2,572
Income taxes (274) 38 (4)
------ ------ -----
Income after taxes 393 (873) 2,568
Net income 140 (1,091) 2,594
Total share in net income of unconsolidated companies
recognized in the consolidated statements of income (36) (482) 648
December 31,
-----------------
2002 2001
Current assets 7,714 7,740
Non-current assets 18,546 18,882
------ ------
26,260 26,622
Current liabilities (5,671) (6,397)
Non-current liabilities (5,406) (4,924)
------ ------
Net asset value 15,183 15,301
Investment in and loans to unconsolidated companies, excl. goodwill 4,328 5,678
Goodwill related to unconsolidated companies 1,761 1,874
------ ------
Investments in and loans to unconsolidated companies included in the
consolidated balance sheet 6,089 7,552
(6) MINORITY INTERESTS
The share of minority interests in the income of Group companies in
2002 amounted to EUR 26 million, compared with their share in the loss
in 2001 of EUR 15 million and their share in income of EUR 67 million
in 2000.
Minority interests in consolidated companies, totaling EUR 179 million
(2001: EUR 202 million), are based on the third-party shareholding in
the underlying net assets. The change in 2002 is mainly attributable to
translation differences.
(7) CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
In 2000, the Company adopted SFAS No. 133. The cumulative effect of
this change in accounting principle for derivative instruments resulted
in a gain of EUR 85 million, representing the changes in the value of
foreign exchange contracts relating to hedges of securities.
74
(8) EARNINGS PER SHARE
The earnings per share data have been calculated in accordance with
SFAS No. 128, `Earnings per Share', as per the following schedule:
2002 2001 2000
WEIGHTED AVERAGE NUMBER OF SHARES 1,274,950,373 1,278,076,537 1,312,859,102
Basic EPS computation
Income (loss) before cumulative effect of change in
accounting principle available to holders of common
shares (3,206) (2,475) 9,577
Cumulative effect of change in accounting principles - - 85
- ---------------------------------------------------- ------------- ------------- -------------
NET INCOME (LOSS) AVAILABLE TO HOLDERS OF
COMMON SHARES (3,206) (2,475) 9,662
Diluted EPS computation
Income (loss) before cumulative effect of change in
accounting principle available to holders of common
shares (3,206) (2,475) 9,577
Plus interest on assumed conversion of convertible
debentures, net of taxes - 1 1
------------- ------------- -------------
Income available to holders of common shares (3,206) (2,474) 9,578
Cumulative effect of change in accounting principle - - 85
- --------------------------------------------------- ------------- ------------- -------------
NET INCOME (LOSS) AVAILABLE TO HOLDERS OF COMMON
SHARES PLUS EFFECT OF ASSUMED CONVERSIONS (3,206) (2,474) 9,663
WEIGHTED AVERAGE NUMBER OF SHARES 1,274,950,373 1,278,076,537 1,312,859,102
Plus shares applicable to:
Options 2,628,259 6,420,978 9,961,410
Convertible debentures 1,423,643 2,046,122 3,717,651
------------- ------------- -------------
Dilutive potential common shares 4,051,902 8,467,100 13,679,061
------------- ------------- -------------
ADJUSTED WEIGHTED AVERAGE NUMBER OF SHARES 1,279,002,275 1,286,543,637 1,326,538,163
EARNINGS PER SHARE:
- - Basic earnings (2.51) (1.94) 7.36
- - Diluted earnings * (2.51) (1.94) 7.28
* The dilution effects on EPS are only taken into consideration if this
does not result in an improvement in income per share or in a reduction
in loss per share, as is the case in 2002 and 2001.
(9) RECEIVABLES
Trade accounts receivable include instalment accounts receivable EUR 60
million (2001: EUR 69 million).
Income taxes receivable (current portion) totaling EUR 136 million
(2001: EUR 42 million) are included under other receivables.
The changes in the allowance for doubtful accounts are as follows:
2002 2001 2000
Balance as of January 1, 281 181 278
Additions charged to income 72 43 59
Deductions from allowance * (89) (37) (182)
Other movements ** (39) 94 26
- --------------------------- --- --- ---
BALANCE AS OF DECEMBER 31, 225 281 181
* Write-offs for which an allowance was previously provided
** Including the effect of translation differences and consolidation
changes
75
(10) INVENTORIES
Inventories are summarized as follows:
2002 2001
Raw materials and supplies 1,164 1,507
Work in process 565 762
Finished goods 1,881 2,187
Advance payments on work in process (88) (166)
- ----------------------------------- ----- -----
TOTAL 3,522 4,290
The amounts recorded above are net of the reserve for obsolescence. The
changes in the reserve for obsolescence of inventories are as follows:
2002 2001 2000
Balance as of January 1, 909 754 630
Additions charged to income 229 397 302
Deductions from reserve (363) (351) (243)
Other movements * (74) 109 65
- --------------------------- ---- ---- ----
BALANCE AS OF DECEMBER 31, 701 909 754
* Including the effect of translation differences and consolidation
changes
(11) OTHER CURRENT ASSETS
Other current assets primarily consist of a current deferred tax asset
of EUR 346 million (2001: EUR 516 million) and prepaid expenses.
76
(12) OTHER NON-CURRENT FINANCIAL ASSETS
The changes during 2002 are as follows:
RESTRICTED
SECURITY LIQUID
TOTAL INVESTMENTS LOANS ASSETS
Balance as of January 1, 2002 3,481 3,088 95 298
Changes:
Acquisitions/additions 226 113 21 92
Sales/redemptions (127) (5) (12) (110)
Value adjustments (2,257) (2,254) (1) (2)
Translation and exchange differences (17) - (11) (6)
- ------------------------------------ ------ ------ --- ----
BALANCE AS OF DECEMBER 31, 2002 1,306 942 92 272
Security investments at December 31 consisted of the following
available-for-sale securities:
2002 2001
Total cost 680 2,527
Net unrealized gains 262 561
Net unrealized losses - -
--- -----
Total fair value 942 3,088
Included in security investments are shares in Vivendi Universal
(38,265,561 in 2002 and 2001), ASML (2002: 27,250,000, 2001:
30,000,000), JDS Uniphase (2002: 49,715,996, 2001: 10,477,168) and GN
Great Nordic (6,830,687 in 2002 and 2001).
During 2002, the number of JDS Uniphase shares increased by 39,238,828
million as a result of the earn-out arising from the sale of Philips
Optoelectronics in 1998. A net gain of EUR 113 million was recorded
under other business income, which is in accordance with the original
classification of the gain on the divestment of Philips
Optoelectronics. Additionally, the Company sold 2,750,000 shares in
ASML at a gain of EUR 67 million (refer to note 3), which has been
recorded under financial income and expenses.
During the year, the Company recognized impairment losses totaling EUR
1,955 million in financial income and expenses related to investments
in Vivendi Universal (EUR 1,855 million), JDS Uniphase (EUR 73 million)
and GN Great Nordic (EUR 27 million).
(13) 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 67 million (2001: EUR 101 million).
(14) OTHER NON-CURRENT ASSETS
Other non-current assets in 2002 are primarily comprised of prepaid
pension costs of EUR 1,384 million (2001: EUR 1,740 million) and
deferred tax assets of EUR 1,152 million (2001: EUR 980 million).
77
(15) PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment and the changes during
2002 were as follows:
Property, plant and equipment
prepayments
land machinery and no longer
and and other construction productively
total buildings installations lease assets equipment in progress employed
Balance as of January 1, 2002:
Cost 18,069 3,732 10,297 159 2,796 1,048 37
Accumulated depreciation (10,351) (1,708) (6,486) (109) (2,016) - (32)
- ----------------------------- ------- ------ ------ ---- ------ ----- ---
Book value 7,718 2,024 3,811 50 780 1,048 5
Changes in book value:
Capital expenditures 1,161 152 721 27 295 (40) 6
Retirements and sales (213) (58) (121) (2) (13) (18) (1)
Depreciation (1,753) (153) (1,203) (23) (373) - (1)
Write-downs and impairments (29) (2) (20) (6) (1) - -
Translation differences (645) (187) (313) (6) (68) (68) (3)
Changes in consolidation (102) (16) (43) - (41) (2) -
- ----------------------------- ------- ------ ------ ---- ------ ----- ---
Total changes (1,581) (264) (979) (10) (201) (128) 1
Balance as of December 31, 2002:
Cost 16,015 3,328 9,237 155 2,343 920 32
Accumulated depreciation (9,878) (1,568) (6,405) (115) (1,764) - (26)
- ----------------------------- ------- ------ ------ ---- ------ ----- ---
BOOK VALUE 6,137 1,760 2,832 40 579 920 6
Land (with a book value of EUR 194 million) is not depreciated.
The expected service lives as of December 31, 2002 were as follows:
Buildings from 14 to 50 years
Machinery and installations from 5 to 10 years
Lease assets from 3 to 5 years
Other equipment from 3 to 5 years
Property, plant and equipment includes EUR 8 million (2001: EUR 15
million) for capital leases and other beneficial rights of use, such as
building rights and hire purchase agreements. The financial obligations
arising from these contractual agreements are reflected in long-term
debt. Capital expenditures includes capitalized interest related to the
construction in progress amounting to EUR 8 million.
78
(16) INTANGIBLE ASSETS EXCLUDING GOODWILL
The changes during 2002 were as follows:
other
intangible
total assets software
Balance as of January 1, 2002:
Acquisition cost 2,585 1,909 676
Accumulated amortization (621) (359) (262)
- -------------------------------- ----- ----- ----
Book value 1,964 1,550 414
Changes in book value:
Reclassifications (32) (32) -
Acquisitions/additions 403 254 149
Amortization (351) (177) (174)
Impairments - - -
Translation differences (239) (208) (31)
Changes in consolidation (3) (1) (2)
- -------------------------------- ----- ----- ----
Total changes (222) (164) (58)
Balance as of December 31, 2002:
Acquisition cost 2,529 1,813 716
Accumulated amortization (787) (427) (360)
- -------------------------------- ----- ----- ----
BOOK VALUE 1,742 1,386 356
At December 31, 2002, other intangible assets included EUR 181 million
which was recorded in conjunction with the recognition of a minimum
pension liability. Also included are other intangible assets consisting
of:
accumulated
gross amortization net
Marketing-related 63 (50) 13
Customer-related 546 (72) 474
Contract-based 14 (3) 11
Technology-based 848 (261) 587
Patents and trademarks 161 (41) 120
- -------------------------------- ----- ----- -----
Total 1,632 (427) 1,205
The estimated amortization expense for these other intangible assets
for each of the five succeeding years are:
2003 131
2004 130
2005 129
2006 98
2007 86
The final appraisal value of other intangible assets related to certain
acquisitions in 2001, resulted in an adjustment to the amount
originally assigned on a provisional basis. The reallocation of the
purchase price to other intangibles is reflected under
'reclassifications' (see note 17).
Additionally, amounts previously recognized as intangible assets with
respect to acquired assembled workforces, which are no longer allowed
to be recognized separately under SFAS No. 141, have been included
under reclassifications.
79
(17) GOODWILL
The changes during 2002 were as follows:
Book value as of January 1, 2002: 3,557
Changes in book value:
Reclassifications (16)
Acquisitions 80
Impairment losses (19)
Translation differences (409)
Changes in consolidation (1)
- -------------------------------- -----
BOOK VALUE AS OF DECEMBER 31, 2002: 3,192
The final appraisal value of goodwill, with respect to certain
acquisitions in 2001, resulted in an adjustment to the amount
originally assigned on a provisional basis. The reallocation of the
purchase price to goodwill is reflected under 'reclassifications'.
Additionally, amounts previously recognized as intangible assets with
respect to acquired assembled workforce, which are no longer allowed to
be recognized separately under SFAS No. 141, have been included under
reclassifications (see also note 16).
The sale of the Health Care Products Group, a former Marconi entity in
the Medical Systems sector, resulted in a write-off of previously
allocated goodwill for an amount of EUR 19 million.
Refer to note 31 for a specification of goodwill by product sector.
(18) ACCRUED LIABILITIES
Accrued liabilities are summarized as follows:
2002 2001
Personnel-related costs:
- - Salaries and wages payable 610 493
- - Accrued holiday rights 219 215
- - Other 123 90
Taxes:
- - Income tax payable 268 206
- - Other taxes payable 16 30
Commission, freight, interest and rent payable 475 531
Deferred income 402 294
Advertising costs payable 118 110
IT costs payable 111 47
Warranties 5 30
Other liabilities 967 1,920
- ---------------------------------------------- ----- -----
Total 3,314 3,966
80
(19) PROVISIONS
Provisions are summarized as follows:
2002 2001
----------------------- ------------------------
long-term short-term long-term short-term
Pensions for defined-benefit plans (see note 20) 730 77 699 87
Other postretirement benefits (see note 20) 405 50 417 56
Post-employment benefits 93 36 85 26
Deferred tax liabilities (see note 4) 45 39 418 82
Restructuring (see note 2) 33 394 58 384
Obligatory severance payments 112 57 100 55
Replacement and guarantees 58 319 83 359
Other provisions 494 304 437 394
- ------------------------------------------------ ----- ----- ----- -----
TOTAL 1,970 1,276 2,297 1,443
Obligatory severance payments
The provision for obligatory severance payments cover the Company's
commitment to pay employees a lump sum upon reaching retirement age,
or upon the employees' dismissal or resignation. In the event that a
former employee has passed away, the Company may have a commitment to
pay a lump sum to the deceased employee's relatives.
Post-employment benefits
The provision for post-employment benefits covers benefits provided to
former or inactive employees after employment but before retirement,
including salary continuation, supplemental unemployment benefits and
disability related benefits.
Replacement and guarantees
The provision for replacement and guarantees reflects the estimated
costs of replacement and free-of-charge services that will be incurred
by the Company with respect to products sold. The changes in the
provision for replacement and guarantees are as follows:
2002 2001 2000
Balance as of January 1, 442 428 413
Changes:
Additions 382 349 322
Utilizations (447) (335) (307)
---- ---- ----
Balance as of December 31, 377 442 428
Other provisions
Other provisions include provisions for expected losses on existing
projects/orders totaling EUR 35 million (2001: EUR 32 million), for
employee jubilee funds totaling EUR 104 million (2001: EUR 107 million)
and environmental provisions of EUR 225 million (2001: EUR 238
million).
Certain of the Company's subsidiaries are parties to proceedings in
connection with the clean-up of environmental matters, mostly related
to closure of plants of the discontinued chemical operations.
Philips does not believe, based upon the information available at this
time, that the outcome of these matters will result in additional
liability which would have a material adverse effect upon the Company's
consolidated financial position.
81
The changes in the provisions for post-employment benefits, obligatory
severance payments and other provisions are as follows:
Balance as of January 1, 2002 1,097
Changes:
Additions 251
Utilization (252)
- ------------------------------------------------ -----
BALANCE AS OF DECEMBER 31, 2002 1,096
(20) PENSIONS AND POSTRETIREMENT BENEFITS OTHER THAN 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 majority of employees in Europe and
North America are covered by defined-benefit plans. The benefits
provided by these plans are based primarily on employees' years of
service and compensation near retirement.
In addition to providing pension benefits, the Company provides other
postretirement benefits, primarily retiree healthcare benefits, in
certain countries.
Contributions are made by the Company, as necessary, to provide assets
sufficient to meet the benefits payable to defined-benefit pension plan
participants. These contributions are determined based upon various
factors, including funded status, legal and tax considerations as well
as local customs. The Company funds certain defined-benefit pension
plans and other postretirement benefit plans as claims are incurred.
The projected benefit obligation, accumulated benefit obligation and
fair value of plan assets for both funded and unfunded defined-benefit
pension plans with accumulated benefit obligations in excess of plan
assets were EUR 5,769 million, EUR 5,353 million and EUR 4,233 million
respectively as of December 31, 2002 (2001: EUR 1,063 million, EUR 970
million and EUR 179 million respectively).
Provided below is a table with a summary of the changes in the pension
benefit obligations and defined pension plan assets for 2002 and 2001,
and a reconciliation of the funded status of these plans to the amounts
recognized in the consolidated balance sheets.
82
Also provided below is a table with a summary of the changes in the
accumulated postretirement benefit obligations and plan assets for 2002
and 2001, and a reconciliation of the obligations to the amounts
recognized in the consolidated balance sheets.
2002 2001 2002 2001
------------------ -----------------------
pension benefits postretirement benefits
BENEFIT OBLIGATION
Benefit obligation at beginning of year 19,064 18,523 657 632
Service cost 387 351 16 12
Interest cost 1,158 1,105 48 43
Employee contributions 27 28 - -
Actuarial (gains) and losses (110) (51) 168 34
Plan amendments 33 6 - -
Settlements (41) (8) (2) -
Changes in consolidations 518 3 10 (29)
Benefits paid (1,070) (1,015) (46) (47)
Exchange rate differences (731) 125 (87) 14
Miscellaneous 2 (3) - (2)
- ----------------------------------------- ------ ------ --- ---
BENEFIT OBLIGATION AT END OF YEAR 19,237 19,064 764 657
PLAN ASSETS
Fair value of plan assets at beginning of
year 20,594 22,505 - 17
Actual return on plan assets (2,112) (996) - 1
Employee contributions 27 28 - -
Employer contributions (refunds) 88 (205) - 2
Settlements (36) (11) - -
Changes in consolidations 493 54 - (15)
Benefits paid (1,001) (923) - (3)
Exchange rate differences (651) 143 - (2)
Miscellaneous - (1) - -
- ----------------------------------------- ------ ------ --- ---
FAIR VALUE OF PLAN ASSETS AT END OF YEAR 17,402 20,594 - -
Funded status (1,835) 1,530 (764) (657)
Unrecognized net transition (asset)
obligation (15) (82) 103 122
Unrecognized prior service cost 169 161 3 6
Unrecognized net (gain) loss 2,619 (688) 203 56
- ----------------------------------------- ------ ------ --- ---
NET BALANCES 938 921 (455) (473)
CLASSIFICATION OF THE NET BALANCES IS AS
FOLLOWS:
- - Prepaid pension costs under other
non-current assets 1,384 1,740
- - Accrued pension costs under other
non-current liabilities (352) (52)
- - Provisions for pensions under
provisions (807) (786)
- - Intangible assets 181 1
- - Accumulated other comprehensive
income 532 18
----- -----
938 921
83
The weighted average assumptions underlying the pension computation
were as follows:
2002 2001
Discount rate 5.7% 6.1%
Rate of compensation increase 2.9% 3.4%
Expected return on plan assets 6.5% 7.2%
The components of net periodic pension costs of major defined-benefit
plans were as follows:
2002 2001 2000
Service cost-benefits earned during the period 387 351 366
Interest cost on the projected benefit obligation 1,158 1,105 1,090
Expected return on plan assets (1,341) (1,625) (1,535)
Net amortization of unrecognized net transition assets (67) (68) (98)
Net actuarial gain recognized (133) (265) (231)
Amortization of prior service cost 32 31 21
Settlement (gain) loss 4 4 (106)
Curtailment loss 1 1 1
- ----------------------------------------------------- ----- ----- ---
NET PERIODIC PENSION COST 41 (466) (492)
The Company also sponsors defined-contribution and similar-type plans
for a significant number of salaried employees. The total cost of these
plans amounted to EUR 89 million in 2002 (2001: EUR 55 million, 2000:
EUR 70 million).
The components of the net periodic cost of postretirement benefits
other than pensions are:
2002 2001 2000
Service cost-benefits earned during the period 16 12 13
Interest cost on accumulated postretirement benefit
obligation 48 43 43
Expected return on plan assets - (1) (2)
Amortization of unrecognized transition obligation 11 11 13
Net actuarial loss recognized 7 1 1
Curtailment loss - - 22
-- -- --
NET PERIODIC COST 82 66 90
The accumulated postretirement benefit obligation was determined using
a weighted average discount rate of 6.4% (2001: 7.0%) and an assumed
compensation increase, where applicable, of 4.6% (2001: 4.6%). For
measurement purposes, the rate of increase in per capita healthcare
costs is assumed to be on average 7.8% for 2003, reaching 5.5% by the
year 2006. Healthcare cost trend assumptions have a significant effect
on the amounts reported for other postretirement benefits. Increasing
the assumed healthcare cost trend rate by 1 percentage point would
increase the accumulated postretirement benefit obligation as of
December 31, 2002 by approximately 81 million and increase the net
periodic postretirement benefit cost for 2002 by EUR 10 million.
Conversely, decreasing the assumed healthcare cost trend by 1
percentage point would decrease the accumulated postretirement benefit
obligation as of December 31, 2002 by approximately EUR 66 million and
decrease the net periodic postretirement benefit cost for 2002 by EUR 9
million.
84
(21) OTHER CURRENT LIABILITIES
Other current liabilities are summarized as follows:
2002 2001
Advances received from customers on orders not covered by work in
process 116 192
Other taxes including social security premiums payable 290 381
Other short-term liabilities 285 240
- ----------------------------------------------------------------- --- ---
TOTAL 691 813
(22) SHORT-TERM DEBT
2002 2001
Short-term bank borrowings 352 552
Commercial paper 10 521
Other short-term loans 60 18
Current portion of long-term debt 195 180
- --------------------------------- --- -----
TOTAL 617 1,271
During 2002 the weighted average interest rate on the bank borrowings
was 4.2% (2001: 5.5% and 2000: 5.7%), and on commercial paper 3.5%
(2001 : 3.9%).
In July 2002, Philips entered into a USD 3.5 billion revolving credit
facility with a consortium of banks; no drawings have been made under
this facility. The facility, which has a five-year maturity, replaces
an existing USD 2.5 billion revolving credit facility which had been in
place since July 1996 and was never drawn upon by the Company. The
commitment fees amounted to EUR 10 million and were charged to
financial income and expenses.
(23) LONG-TERM DEBT
average amount
range of average remaining out-
interest rate amount due in due after due after term standing
rates of interest outstanding 2003 2003 2007 in years) 2001
Convertible debentures 1.1 1.1 145 - 145 - 3.0 134
Other debentures 4.2-8.8 5.9 6,219 139 6,080 2,973 5.0 6,253
Private financing 2.5-3.0 2.8 2 1 1 - 4.0 2
Bank borrowings 1.3-14.0 7.5 156 46 110 91 4.4 200
Liabilities arising from capital lease
transactions 1.8-10.4 6.5 8 2 6 - 2.5 15
Other long-term debt 2.0-10.2 5.1 157 7 150 32 3.8 171
- -------------------------------------- ----- --- ----- ----- -----
TOTAL 5.8 6,687 195 6,492 3,096 6,775
Corresponding data previous year 6.0 6,775 180 6,595 3,197
The following amounts of long-term debt as of December 31, 2002 are due
in the next five years:
2003 195
2004 2,386
2005 612
2006 325
2007 73
-----
3,591
Corresponding amount previous year 3,578
85
In the Netherlands, Philips issues personnel debentures with a 5-year
right of conversion into common shares of Royal Philips Electronics.
Personnel debentures which were issued after December 31, 1998 may not
be converted within a period of 3 years after the date of issue. These
personnel debentures are available to most employees and are purchased
by them with their own funds. The personnel debentures are redeemable
on demand, but in practice are considered to be a form of long-term
financing. The personnel debentures become non-convertible debentures
at the end of the conversion period. At such time, they will be
reported as other long-term debt.
At December 31, 2002 an amount of EUR 145 million (2001: EUR 134
million) of personnel debentures was outstanding, with an average
conversion price of EUR 29.21 and an average interest rate of 1.1%. The
conversion price varies between EUR 13.84 and EUR 49.50, with various
conversion periods ending between January 1, 2003 and December 31,
2007.
Philips had two 'putable' USD bonds outstanding at year-end 2002 for a
total amount of EUR 256 million. The investors may require repayment in
one specific month during the lifetime of the respective bonds.
Assuming that investors require repayment at the relevant put dates,
the average remaining tenor of the total outstanding long-term debt was
4.2 years, compared to 5.2 years in 2001. However, assuming that the
'putable' bonds will be repaid at maturity, the average remaining tenor
at the end of 2002 was 4.9 years, compared to 6.1 years at the end of
2001. Long-term debt as a proportion of the total debt at the end of
2002 stood at 91%, compared to 84% at the end of 2001.
During 2002, Philips placed a eurobond issue for a total amount of EUR
300 million, maturing in August 2005.
Secured liabilities
Certain portions of long-term and short-term debt have been secured by
collateral as follows:
amount of
the debt collateral
-----------------------------
tangible other assets
fixed assets
Institutional financing 17 35 13
Other debts 3 5 -
- ----------------------- -- -- --
TOTAL 20 40 13
Previous year 37 65 90
(24) OTHER NON-CURRENT LIABILITIES
Other non-current liabilities are summarized as follows:
2002 2001
Accrued pension costs 352 52
Sale and lease-back deferred income 108 38
Income tax payable 114 122
Other liabilities 29 -
--- ---
603 212
86
(25) COMMITMENTS AND CONTINGENT LIABILITIES
Long-term operating lease commitments totaled EUR 879 million in 2002
(2001: EUR 768 million). These leases expire at various dates during
the next 20 years. The payments that fall due in connection with these
obligations during the coming five years are:
2003 166
2004 140
2005 137
2006 125
2007 80
Later 231
The long-term operating leases are mainly related to the rental of
buildings. A number of these leases originate from sale-and-lease-back
arrangements. In 2002 the Company entered into two sale and operational
lease-back arrangements in the Netherlands for office buildings. These
buildings were sold for an aggregate amount of EUR 166 million. In 2001
there were two sale and operational lease-back arrangements for an
aggregate amount of EUR 89 million in the Netherlands and the USA. The
rental periods are 8 and 5 years for those in 2002 and 10 and 20 years
for those in 2001 but can be prolonged for all contracts. The rental
payments are fixed. The rental payments for 2002 totaled EUR 26 million
(2001: EUR 0.2 million, as both transactions took place in the second
half of December 2001).
The remaining minimum payments in millions of euros are as follows:
2003 27
2004 24
2005 22
2006 18
2007 13
Later 70
The Company has subleases with total expected revenues of EUR 52
million during the coming five years as follows:
2003 9
2004 9
2005 8
2006 7
2007 7
Later 12
Philips has no commitment or involvement with previously owned property
other than the lease agreements.
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46 'Consolidation of Variable Interest Entities'.
Based on this Interpretation it is reasonably possible that the entity
which is being used for the first phase of the High Tech Campus will
qualify as a Variable Interest Entity to be consolidated under this
Interpretation. This Interpretation requires that such entity be
consolidated, if the Company is the primary beneficiary of the expected
residual returns if they occur, as from the third quarter of 2003.
87
GUARANTEES
During 1999 the Company entered into agreements for the construction of
the first phase of the High Tech Campus in the Netherlands. Upon
completion of the first phase, the buildings will be leased to Philips
until 2007. Commitments have been entered into, and a guarantee has
been issued, for all present and future monetary payment obligations of
the lessee, Philips Electronics Nederland B.V., with a maximum amount
of EUR 130 million. The actual contingent liability outstanding at
year-end from this guarantee is EUR 115 million (2001: EUR 99 million),
which is the amount spent so far. The first lease payments were due in
2001, when the first premises became available for use.
Guarantees given with regard to unconsolidated companies and third
parties amounted to EUR 906 million (2001: EUR 792 million). The amount
of conditional liabilities was EUR 127 million (2001: EUR 8 million).
The guarantees expire as follows:
In 2003 278
In 2004-2007 577
After 2007 51
A guarantee amounting to USD 200 million issued to the financing
parties for the facility agreement they issued to our unconsolidated
joint venture LG.Philips Displays in the amount of USD 2 billion. The
guarantee has been issued in May 2002 and expires on December 31, 2004
or earlier if the joint venture meets the covenants of the facility
agreement. Under the guarantee the Company guarantees and shall pay,
upon failure to pay by the joint venture, all principal, interest and
fees payable by the joint venture for an amount of USD 100 million, and
agrees to indemnify and hold harmless the financing parties on demand
from any loss in respect of principal, interest and fees payable by the
joint venture under the facility agreement for an amount of USD 100
million. The guaranteed amount of USD 200 million will be reduced by an
amount of USD 50 million, maximum, for the sum of (a) any subordinated
debt that has been advanced by the Company to the joint venture, and
(b) the amount by which an equity injection in the joint venture paid
by the Company exceeds USD 125 million.
A guarantee in the amount of USD 80 million is related to a loan by the
European Investment Bank to Philips Semiconductor Philippines
Incorporated, a Philips' subsidiary incorporated in the Philippines.
The guarantee is for commercial risk only and is to be amortized in 10
equal semi-annual payments, commencing in January 2005. The guarantee
further requires the Company to provide a bank guarantee from an
A2-rated bank, to replace the Company's commercial guarantee, in the
event of downgrading to BBB+ (or equivalent Baa1) by any of S&P,
Moody's or Fitch IBCA rating agencies for the most recent Koninklijke
Philips Electronics N.V. unsecured and unsubordinated medium or
long-term capital market securities, provided only that the downgrading
is simultaneous with a negative outlook statement from the same agency,
or, in another case, if the Company's securities cease to be rated by
all of S&P, Moody's and Fitch IBCA rating agencies.
88
LITIGATION
Royal Philips Electronics and certain of its Group companies are
involved as plaintiff. or defendant in litigation relating to such
matters as competition issues, commercial transactions, product
liability, participations and environmental pollution. One pending
litigation includes claims by Volumetrics, Inc. relating to the
decision of a Philips Ultrasound business not to collaborate with or
acquire Volumetrics in view of Philips Medical Systems' acquisition of
Agilent Technologies, Inc.'s Healthcare Solutions Group. On January 22,
2003, a jury in Raleigh, North Carolina delivered a verdict of
approximately USD 152 million against a Philips subsidiary. The
judgment is subject to review by the trial judge, which is expected in
March 2003. Philips believes that the facts of the case do not support
the verdict.
While an ultimate unfavorable judgment could have a material effect on
the Company's consolidated results of operations in the period of
resolution, Management does not believe that an ultimate unfavorable
judgment will have a material adverse effect on the Company's
consolidated financial position.
Further judicial proceedings are pending in the United States, relating
primarily to the activities of a Philips' subsidiary prior to 1981,
involving allegations of personal injury relating to alleged asbestos
exposure. The claims generally relate to asbestos used in the
manufacture of unrelated companies' products in the United States and
frequently involve claims for substantial general and punitive damages.
The number of pending claims involving the Company's subsidiary
increased from approximately 50 at the end of 2001 to approximately 500
at the end of January 2003. While management believes there are
meritorious defenses to these claims, certain of these cases have been
settled for amounts management considered reasonable given the facts
and circumstances of each case. Further, although the final outcome of
matters in litigation cannot be determined due to a number of
variables, after reviewing the proceedings that are currently pending
(including the provisions made, number of claims, estimated probable
outcomes, reasonably anticipated costs and expenses, and uncertainties
regarding the availability and limits of insurance), management
believes that the final outcome of any of the pending proceedings, or
all of them combined, will not have a material adverse effect on the
consolidated financial position or results of operations of the
Company. If the general trends towards (i) higher costs of resolving
individual asbestos personal injury cases, (ii) increasing numbers of
cases, or (iii) the naming of more peripheral defendants, such as the
Company's subsidiary in such cases continue, or if insurance coverage
is ultimately less than anticipated, the Company's consolidated
financial position and results of operations could be materially and
adversely affected.
89
(26) STOCKHOLDERS' EQUITY
Priority shares
There are ten priority shares. During 2002, Messrs. F.J. Philips and
H.A.C. van Riemsdijk each sold one priority share to the Dr. A.F.
Philips Stichting, as a result of which it now holds all ten priority
shares.
The issuance of shares or rights to shares, cancellation of shares,
amendments to the Articles of Association and the liquidation of the
Company need approval of the priority shareholders, who also make a
binding recommendation for the appointment of members of the Board of
Management and the Supervisory Board.
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.
Option rights
The Company has granted stock options on shares of Royal Philips
Electronics at original exercise prices equal to market prices of the
shares at the date of grant (see note 28).
Treasury shares
Royal Philips Electronics' shares which have been repurchased and are
held in treasury for delivery upon exercise of options and convertible
personnel debentures are accounted for in stockholders' equity.
Treasury shares are recorded at cost, representing the market price on
the acquisition date. When issued, shares are removed from treasury
stock on a FIFO basis. In order to reduce potential dilution effects, a
total of 3,128,353 shares were acquired during 2002 at an average
market price of EUR 32.97 per share, totaling EUR 103 million, and a
total of 4,933,833 shares were delivered at an average exercise price
of EUR 18.11, totaling EUR 90 million.
A total of 40,092,469 shares were being held by Group companies at
December 31, 2002 (2001: 41,897,949 shares), acquired at an aggregate
cost of EUR 1,307 million.
Retained earnings
A cash distribution of EUR 0.36 per common share will be proposed to
the General Meeting of Shareholders, which will result in a reduction
of retained earnings by EUR 459 million.
(27) RELATED PARTY TRANSACTIONS
In the normal course of business, Philips purchases and sells goods and
services to various related parties in which Philips holds a 50% or
less equity interest. These transactions are generally conducted on an
arm's length basis with terms comparable to transactions with third
parties. In 2002, purchases of goods and services from related parties
totaled EUR 559 million, whereas sales of goods and services to related
parties totaled EUR 209 million. At December 31, 2002, receivables from
related parties were EUR 63 million; payables to related parties were
EUR 109 million.
As of December 31, 2002, Philips held redeemable preferred shares of
TSMC for an amount of EUR 374 million or 1.3 billion shares. These will
be redeemed in the second quarter of 2003.
In November 2002, Picker Financial Group, an affiliate acquired in the
Marconi acquisition in 2001, sold approximately EUR 140 million
receivables to Philips Medical Capital, in which the Company has a 40%
equity interest.
90
(28) STOCK-BASED COMPENSATION
The Company has granted stock options on its common shares to members
of the Group Management Committee, Philips Executives and certain
non-executives. The purpose of the stock option plans is to align the
interests of management with those of shareholders by providing
additional incentives to improve the Company's performance on a
long-term basis, thereby increasing shareholder value. Under the
Company's plans, options are granted at fair market value on the date
of grant. Exercise of all options is restricted by the Company's rules
on insider trading.
In 2002, the Company granted fixed stock options that expire after 10
years. Generally, the options vest after 3 years; however, a limited
number of options granted to certain employees of acquired businesses
contain accelerated vesting.
In prior years, fixed and variable (performance) options were issued
with terms of five or ten years, vesting one to three years after
grant.
The actual number of variable (performance) stock options granted in
2000 and 2001 that are ultimately eligible to vest is dependent upon
Total Shareholder Return of Philips, as defined, in comparison with a
peer group of multinationals over a three-year period. During the year
it was determined that 25% of the variable (performance) options that
were issued in 2000 will not be eligible for vesting in 2003.
In contrast to the years 2000 and 2001, when variable (performance)
stock options were issued, the number of options granted in 2002,
already consider the performance of the Company versus a peer group of
multinationals.
USD-denominated stock options are granted to employees in the USA only.
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 shares of
Philips stock at discounted prices through payroll withholdings, of
which the maximum ranges from 8.5% to 10% of total salary. Generally,
the discount provided to the employees is 15%. In the USA, the purchase
price equals the lower of 85% of the closing price at the beginning or
end of quarterly stock purchase periods. A total of 1,722,575 shares
were sold in 2002 under the plan at an average price of EUR 23.69
(2001: 955,668 shares, at a price of EUR 24.29, 2000: 54,034 shares, at
a price of EUR 39.23).
In the Netherlands, Philips issued personnel debentures with a 5-year
right of conversion into common shares of Royal Philips Electronics. In
2002, 515,309 shares were issued in conjunction with conversions at an
average price of EUR 14.52 (2001: 415,038 shares at an average price of
EUR 9.08, 2000: 949,312 shares at an average price of EUR 11.44).
The shares subject to the stock option and stock purchase plans are
partly covered by shares held in treasury.
The Company accounts for stock-based compensation using the intrinsic
value method. Accordingly, no compensation has been recorded for the
fixed stock options granted, nor for the US stock purchase plan.
Compensation income of EUR 5 million in 2002 (2001: expense of EUR 5
million, 2000: nil) was recognized for the performance stock options
granted based on the market value of the shares at December 31, 2002.
Additionally, approximately EUR 1 million was recorded as an expense
for shares purchased through certain compensatory stock purchase plans.
91
The pro forma net income and earnings per share data, calculated as if
the fair value of the options granted to option holders would have been
considered as compensation costs, is as follows:
2002 2001 2000
Net income(loss):
As reported (3,206) (2,475) 9,662
Add: Stock-based compensation expense included in
reported net income, net of related tax (5) 5 -
Deduct: Stock-based compensation expense
determined under the fair-value-based method, net of
related tax (147) (96) (92)
------ ------ -----
Pro forma (3,358) (2,566) 9,570
Basic earnings per share:
As reported (2.51) (1.94) 7.36
Pro forma (2.63) (2.01) 7.29
Diluted earnings per share:
As reported (2.51) (1.94) 7.28
Pro forma (2.63) (2.01) 7.21
As noted above, the actual number of performance stock options (granted
in 2000 and 2001) that are ultimately eligible to vest is dependent
upon Total Shareholder Return of Philips, as defined in comparison with
a peer group of multinationals over a three-year period. To the extent
that the number of stock options that ultimately vest differs from the
assumptions underlying the pro forma results presented above, future
pro forma net income will be adjusted. Pro forma net income may not be
representative of that to be expected in future years.
In accordance with SFAS No. 123, the fair value of stock options
granted is required to be based upon a statistical option valuation
model. Since the Company's stock options are not traded on any
exchange, employees can receive no value nor derive any benefit from
holding these stock options without an increase in the market price of
Philips' stock. Such an increase in stock price would benefit all
shareholders commensurately.
The fair value of the Company's 2002, 2001 and 2000 option grants was
estimated using a Black-Scholes option pricing model and the following
assumptions:
2002 2001 2000
------------------------------------
(EUR -denominated)
Risk-free interest rate 4.70% 4.66% 5.06%
Expected dividend yield 1.2% 1.2% 0.7%
Expected option life 5 yrs 5 yrs 4 yrs
Expected stock price volatility 53% 49% 46%
2002 2001 2000
------------------------------------
(USD-denominated)
Risk-free interest rate 4.65% 4.77% 6.26%
Expected dividend yield 1.2% 1.2% 0.9%
Expected option life 5 yrs 5 yrs 5 yrs
Expected stock price volatility 49% 49% 43%
The assumptions were used for these calculations only and do not
necessarily represent an indication of Management's expectations of
future developments.
92
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 highly subjective assumptions, including
the expected stock price volatility. The Company's employee stock
options have characteristics significantly different from those of
traded options, and changes in the subjective input assumptions can
materially affect the fair value estimate.
The following table summarizes information about the stock options
outstanding at December 31, 2002:
Fixed option plans
options outstanding options exercisable
------------------------------------------ ------------------------------
weighted
number average number weighted
outstanding exercise remaining exercisable average exercise
at Dec. 31, price per contractual at Dec. 31, price per
2002 share life (years) 2002 share
(price in EUR) (price in EUR)
1998 1,753,800 11.57 - 21.02 0.2 1,753,800 16.49
1999 2,863,800 15.76 - 23.01 1.2 2,863,800 16.12
2000 3,284,700 42.03 - 53.75 7.3 -
2001 5,147,197 24.35 - 37.60 8.3 -
2002 10,242,613 17.19 - 34.78 9.2 -
(price in USD) (price in USD)
1998 1,261,211 12.94 - 23.59 5.3 1,261,211 17.38
1999 1,952,943 22.24 - 35.34 6.4 1,952,010 23.10
2000 2,930,660 36.65 - 49.71 7.4 -
2001 5,359,487 22.12 - 34.50 8.4 931,605 34.50
2002 11,098,230 16.88 - 30.70 9.3 -
---------- ---------
45,894,641 8,762,426
Variable plans
(price in EUR) (price in EUR)
2000 2,461,575 42.03 - 53.75 7.3 -
2001 4,749,847 24.35 - 37.60 8.2 -
(price in USD) (price in USD)
1995-1997 1,151,004 7.50 - 14.20 2.0 1,151,004 7.81
2000 2,172,495 36.65 - 49.71 7.4 -
2001 3,451,187 22.12 - 34.50 8.3 -
---------- ---------
13,986,108 1,151,004
93
A summary of the status of the Company's stock option plans as of
December 31, 2002, 2001 and 2000 and changes during the years then
ended is presented below:
Fixed option plans
2002 2001 2000
-------------------------- --------------------------- --------------------------
weighted weighted weighted
average average average
exercise exercise exercise
(price in (price in (price in
shares EUR) shares EUR) shares EUR)
Outstanding at the beginning of the year 16,091,485 27.20 12,305,150 22.75 13,261,600 14.27
Granted 10,511,828 31.95 5,282,385 33.22 3,445,850 43.52
Exercised (2,172,300) 12.86 (1,330,000) 9.82 (4,172,484) 13.56
Forfeited (1,138,903) 25.67 (166,050) 27.46 (229,816) 11.61
---------- ---------- ----------
Outstanding at the end of the year 23,292,110 30.76 16,091,485 27.20 12,305,150 22.75
Weighted average fair value of options
granted during the year in EUR 14.90 14.75 17.42
(price in USD) (price in USD) (price in USD)
Outstanding at the beginning of the year 13,009,155 29.14 7,865,003 31.17 4,996,988 20.66
Granted 11,697,253 29.58 6,261,103 26.99 4,015,797 42.25
Exercised (325,688) 19.58 (183,325) 19.21 (665,900) 19.06
Forfeited (1,778,189) 31.26 (933,626) 33.71 (481,882) 32.76
---------- ---------- ----------
Outstanding at the end of the year 22,602,531 29.34 13,009,155 29.14 7,865,003 31.17
Weighted average fair value of options
granted during the year in USD 13.01 11.90 18.38
Variable plans
weighted weighted weighted
average average average
exercise exercise exercise
(price in (price in (price in
shares EUR) shares EUR) shares EUR)
Outstanding at the beginning of the year 8,256,085 37.87 3,426,350 43.53 - -
Granted - - 4,899,485 33.91 3,445,850 43.52
Exercised - - - - - -
Forfeited (224,138) 38.67 (69,750) 37.55 (19,500) 42.92
Canceled * (820,525)
--------- --------- ---------
Outstanding at the end of the year 7,211,422 37.20 8,256,085 37.87 3,426,350 43.53
Weighted average fair value of options
granted during the year in EUR N.A. 14.75 17.42
(price in USD) (price in USD) (price in USD)
Outstanding at the beginning of the year 8,784,189 29.48 5,363,954 31.97 2,787,200 7.14
Granted - - 4,225,903 26.97 4,015,797 42.25
Exercised (328,348) 4.47 (72,262) 6.54 (1,174,348) 7.28
Forfeited (956,990) 34.43 (733,406) 35.36 (264,695) 36.09
Canceled * (724,165)
--------- --------- ---------
Outstanding at the end of the year 6,774,686 33.15 8,784,189 29.48 5,363,954 31.97
Weighted average fair value of options
granted during the year in USD N.A. 11.90 18.38
* During the year it was determined that 75% of the 2000 performance stock
options will be eligible for vesting in 2003.
94
(29) INFORMATION ON REMUNERATION OF THE INDIVIDUAL MEMBERS OF THE BOARD OF
MANAGEMENT AND THE SUPERVISORY BOARD
Remuneration
BOARD OF MANAGEMENT
Remuneration and pension charges relating to the members of the Board
of Management amounted to EUR 3,984,436 (2001: EUR 3,043,533, 2000: EUR
4,442,733). An additional amount of EUR 298,258 was paid in the form of
special allowances in 2002. When pension rights are granted to (former)
members of the Board of Management, necessary payments (if insured) and
all necessary provisions are made (also for the self-administered
pensions) in accordance with the applicable accounting principles.
In 2002, no (additional) pension benefits were granted to former
members of the Board of Management.
In 2002, the present members of the Board of Management were granted
489,600 stock option rights (2001: 360,000 stock option rights, 2000:
500,000 stock option rights). At year-end 2002, the members of the
Board of Management held 1,410,940 stock option rights (year-end 2001:
1,564,000) at a weighted average exercise price of EUR 30.06
(year-end 2001: EUR 24.20).
95
The remuneration in euros of the individual members of the Board of
Management was as follows:
2002
----------------------------------------------------
other
compensation
salary bonus* total cash (6)
--------- ------- ---------- ------------
G.J. Kleisterlee 807,069 - 807,069 25,576
J.H.M. Hommen 672,573 - 672,573 28,643
G.H.A. Dutine (4), (7) 375,000 - 375,000 208,686
A. Huijser (4) 337,500 - 337,500 12,692
A.P.M. van der Poel 642,439 - 642,439 17,231
J.W. Whybrow (5) 158,823 149,802 308,625 5,430
--------- ------- --------- -------
TOTAL 2,993,404 149,802 3,143,206 298,258
2001
----------------------------------------
salary bonus* total cash
--------- --------- ----------
G.J. Kleisterlee (1) 721,775 248,520 970,295
J.H.M. Hommen 635,292 370,625 1,005,917
A.P.M. van der Poel 635,292 355,310 990,602
J.W. Whybrow 635,292 354,927 990,219
C. Boonstra (2) 313,826 562,687 876,513
A. Baan (3) 153,349 79,638 232,987
--------- --------- ---------
TOTAL 3,094,826 1,971,707 5,066,533
2000
----------------------------------------
salary bonus* total cash
--------- ---------- ----------
G.J. Kleisterlee(1) 400,839 - 400,839
J.H.M. Hommen 612,603 432,906 1,045,509
A.P.M. van der Poel 612,603 318,327 930,930
J.W. Whybrow 612,603 302,671 915,274
C. Boonstra 907,560 900,300 1,807,860
A. Baan 612,603 218,382 830,985
--------- --------- ---------
Subtotal 3,758,811 2,172,586 5,931,397
--------- --------- ---------
Former member - 70,336 70,336
--------- --------- ---------
TOTAL 3,758,811 2,242,922 6,001,733
* The bonuses paid are related to the level of performance achieved in the
previous year.
(1) Bonus figures 2001 relate to period April-December 2000; salary figure 2000
related to period April-December 2000.
(2) Salary figures 2001 relate to period January-April 2001.
(3) Salary figures 2001 relate to period January-March 2001.
(4) Salary figures 2002 relate to period April-December 2002.
(5) Salary figures 2002 relate to period January-March 2002.
(6) The Company paid social security premiums totaling EUR 18,716 (EUR 3,940
per person per year).
The stated amounts concern (share of) allowances to members of the Board of
Management that can be considered as remuneration. In a situation where
such a share of an allowance can be considered as (indirect) remuneration
(for example, private use of the company car), then this 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.
7) Includes relocation and school costs for Mr Dutine and his family: EUR
185,237.
96
The table below gives an overview of the interests of the members of
the Board of Management under the stock option plans of Royal Philips
Electronics.
number of options amounts in euros
------------------------------------------------------------- ---------------------------------
share
as of granted exercised cancel- as of price on
Jan.1, during during led * Dec.31, exercise exercise expiry
2002 2002 2002 2002 price date date
-------- ------- --------- ------ -------------- -------- -------- ----------
G.J. Kleisterlee 12,000(b) 12,000 9.40 29.35(c) 13.02.2002
12,000(b) 12,000(b) 16.66 12.02.2003
60,000(b) 60,000(b) 15.97 11.02.2004
60,000(a/b) 7,500 52,500(b) 42.24 17.02.2010
120,000(a) 120,000(a) 37.60 08.02.2011
- 115,200 115,200 30.17 07.02.2012
J.H.M. Hommen 480,000 480,000 - 9.84 29.35(c) 13.02.2002
80,000 80,000 17.10 12.02.2003
80,000 80,000 16.41 11.02.2004
80,000(a) 10,000 70,000 42.24 17.02.2010
80,000(a) 80,000(a) 37.60 08.02.2011
- 96,000 96,000 30.17 07.02.2012
G.H.A. Dutine -(b/d) 124,800 124,800(b/d) 30.17 07.02.2012
A. Huijser 21,840(b) 21,840(b) 9.87 21.12.2004
16,000(b) 16,000(b) 16.45 12.02.2003
24,000(b) 24,000(b) 15.76 11.02.2004
40,000(a/b) 5,000 35,000(b) 42.03 17.02.2010
40,000(a/b) 40,000(a/b) 37.60 08.02.2011
76,800 76,800 30.17 07.02.2012
A.P.M. van der Poel 20,000 20,000 - 17.10 32.10 12.02.2003
80,000 80,000 16.41 11.02.2004
80,000(a) 10,000 70,000 42.24 17.02.2010
80,000(a) 80,000(a) 37.60 08.02.2011
- 76,800 76,800 30.17 07.02.2012
- ------------------- --------- ------- ------- ------ --------
TOTAL 1,465,840 489,600 512,000 32,500 1,410,940
(a) 50% fixed options and 50% performance-related options
(b) awarded before date of appointment as a member of the Board of Management
(c) shares (partly) not sold but (partly) retained in depot with bank
(d) partly sign-on bonus
* During the year it was determined that 75% of the 2000 performance
related stock options will be eligible for vesting in 2003.
The Supervisory Board and the Board of Management have decided to adjust
upwards the exercise price of all options granted to, but not yet exercised
by, members of the Board of Management as of May 29, 1999 by EUR 0.437 and
as of July 31, 2000 by EUR 0.21 per common share in connection with the 8%
share reduction program and the 3% share reduction program effected
mid-1999 and mid-2000 respectively. This increase is incorporated in the
above table.
97
The total pension charges of the members of the Board of Management in
2002 amount to EUR 841,230 (pension credits in 2001 and 2000 of EUR
2,023,000 and EUR 1,559,000 respectively).
The vested pension benefits of individual members of the Board of
Management are as follows (in euros):
accumulated
increase annual pension pension pension
age at ultimate in accrued as at premium 2002 premium 2002 pension
December 31, retirement pension December 31, paid by paid by charges
2002 age during 2002 2002 employer(1) employee 2002
-------- ------------- ----------- ------------- ------------ ------------ ----------
G.J. Kleisterlee 56 62 97,648 414,492 0 44,988 33,942
J.H.M. Hommen 59 62 23,379 118,363 0 24,821 428,460(3)
G.H.A. Dutine 50 62 9,495 9,495 0 28,869 231,794(3)
A. Huijser 56 62 84,903 248,276 0 22,872 9,479
A.P.M. van der Poel 54 62 16,228 254,307 0 36,540 64,079
---------
TOTAL 767,754(2)
(1) Due to pension premium holiday no contribution was made.
(2) Mr J.W. Whybrow for the period January - March 2002 EUR 73,476 not
included.
(3) Relatively high pension charges due to unfunded conditional pension rights
that were granted at the start of the employment to compensate unvested
pension rights with the former employer and the relatively low number of
service years. In 2003 these pension liabilities will be transferred to an
insurance company.
See note 28 to the financial statements for further information on stock
options.
SUPERVISORY BOARD
The remuneration of the members of the Supervisory Board amounted to EUR
315,378 (2001: EUR 331,260, 2000: EUR 376,637); former members received no
remuneration.
The annual remuneration for individual members is EUR 40,840 and for the
Chairman EUR 74,874. Additionally, the membership of committees of the
Supervisory Board is compensated by an amount of EUR 4,538 per year per
committee. At year-end 2002, the present members of the Supervisory Board
held no stock options.
During 2002 the individual members of the Supervisory Board received, by
virtue of the positions they held, the following remuneration (in euros):
2002
---------------------------------
membership committees total
---------- ---------- -------
L.C. van Wachem 74,874 9,076 83,950
W. de Kleuver 40,840 9,076 49,916
L. Schweitzer 40,840 4,538 45,378
R. Greenbury 40,840 4,538 45,378
J.M. Hessels 40,840 4,538 45,378
K.A.L.M. van Miert 40,840 4,538 45,378
------- ------ -------
279,074 36,304 315,378
98
2001
----------------------------------------
membership committees total
---------- ---------- ------
L.C. van Wachem 74,874 9,076 83,950
W. de Kleuver 40,840 9,076 49,916
W. Hilger (Jan./March) 20,420 2,269 22,689
L. Schweitzer 40,840 - 40,840
R. Greenbury 40,840 4,538 45,378
J.M. Hessels 40,840 4,538 45,378
K.A.L.M. van Miert 40,840 2,269 43,109
------- ------ -------
299,494 31,766 331,260
2000
----------------------------------------
membership committees total
--------- ---------- -------
L.C. van Wachem 74,874 9,076 83,950
W. de Kleuver 40,840 9,076 49,916
W. Hilger 40,840 9,076 49,916
L. Schweitzer 40,840 - 40,840
R. Greenbury 40,840 4,538 45,378
J.M. Hessels 40,840 3,403 44,243
K.A.L.M. van Miert 40,840 - 40,840
C.J. Oort (Jan./March) 20,420 1,134 21,554
------- ------ -------
340,334 36,303 376,637
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 take any interests in derivative Philips securities.
number of shares
-----------------------------
as of as of
December 31, December 31,
2002 2001
----------- -----------
L.C. van Wachem 17,848 17,848
W. de Kleuver 4,131 -
L. Schweitzer 1,070 1,070
G.J. Kleisterlee 41,137 27,200
J.H.M. Hommen 314,131 -
A. Huijser 25,227 23,260
The above statement does not specify ownership of convertible personnel
debentures, which are held under a scheme that since 1998 has no longer
been applicable to members of the Board of Management.
99
(30) FINANCIAL INSTRUMENTS AND RISKS
Currency fluctuations may impact Philips' financial results.
Furthermore, Philips is exposed to interest rate risk, equity price
risk, commodity price risk, credit risk and country risk.
The Company does not purchase or hold derivative financial instruments
for trading purposes.
Currency risk
The Company has a structural currency mismatch between costs and
revenues, as a substantial proportion of its production, administration
and research & development costs is denominated in euros, while a
substantial proportion of its revenues is denominated in US dollars.
Consequently, fluctuations in the exchange rate of the US dollar
against the euro can have a material impact on Philips' financial
results. In particular, a relatively strong US dollar during any
reporting period will improve Philips' income from operations, while a
weaker US dollar will worsen it.
The Company is exposed to currency risk in the following areas:
- transaction exposures, such as both existing and forecasted sales and
purchases and payables/receivables resulting from such transactions;
- translation exposure of investments in foreign entities (including
results);
- exposure of non-functional-currency-denominated debt;
- exposure of non-functional-currency-denominated equity investments.
All businesses must identify and measure their exposures from material
transactions denominated in currencies other than their own functional
currency. It is Philips' policy that significant transaction exposures
are hedged by the businesses. Generally, the maximum tenor of these
hedges is 12 months. Translation exposure on investments in
consolidated foreign entities is not hedged.
Financing of subsidiaries is generally done in the functional currency
of the borrowing entity. If the financing currency is not the
functional currency of the business, then in principle the entity's
exposure to foreign exchange risks is hedged, unless it is restricted
for regulatory reasons.
Philips does not currently hedge the foreign exchange exposure arising
from equity investments.
The Company uses foreign exchange derivatives to manage its currency
risk. The inherent risk related to the use of these derivatives is
outlined below.
An instantaneous 10% strengthening or weakening of non-euro currencies
against the euro from their levels at December 31, 2002, with all other
variables held constant, would result in an estimated change in the
fair value of the Company's financial instruments of EUR 71 million,
compared with EUR 43 million in 2001. For the purpose of this analysis,
financial instruments consist of debt, liquid assets and derivative
financial instruments, leading to the following sensitivity:
Sensitivity to a 10% increase in
the euro versus non-euro
currencies
Debt (329)
Liquid assets 0
Derivatives 400
---
Total 71
100
The US dollar and the pound sterling account for a significant
percentage of the above exposure. An instantaneous 10% increase of the
euro against the US dollar from their levels at December 31, 2002, with
all other variables held constant, and an instantaneous 10% increase of
the euro against the pound sterling from their levels at December 31,
2002, with all other variables held constant, would result in the
following changes in the fair value of the Company's financial
derivatives.
Sensitivity to a 10% increase in Sensitivity to a 10% increase in
the euro versus the US dollar the euro versus the pound
sterling
Derivatives related to debt/liquid assets 291 -
Derivatives related to transactions 26 27
--- --
Total 317 27
Further, the Company is exposed to movements of the Taiwanese dollar
relative to the US dollar. An instantaneous 10% increase of the
Taiwanese dollar against the US dollar from their levels at December
31, 2002, with all other variables held constant, would result in the
following changes in the fair value of the Company's financial
derivatives.
Sensitivity to a 10%
increase in the Taiwanese
dollar versus the US dollar
Derivatives related to debt/liquid assets (50)
Derivatives related to transactions (1)
----
Total (51)
The derivatives related to transactions can be further split into
hedges of accounts receivable/payable and forecasted sales and
purchases. These forecasted transactions are not financial instruments
and therefore are not recorded in the accounts of the Company. The
hedges related to these forecasted transactions are recorded as cash
flow hedges. The results from such hedges are deferred in equity and
amounted to a profit of EUR 18 million. This profit will be released to
the income statement in 2003 when the related hedged transactions
affect the income statement.
Virtually all transaction hedges that were outstanding at December 31,
2002 were forward foreign exchange contracts that will expire in 2003.
During 2002 no results were recorded in the income statement as a
result of ineffectiveness of these hedges.
Changes in fair value of hedges related to accounts payable,
receivable, external debt and intercompany loans are recognized in the
income statement. The changes in fair value of these hedges are to a
large extent offset by changes in fair value of the hedged items in the
income statement. All hedges related to debt and liquid assets are
forward exchange contracts or cross currency basis swaps.
Interest rate risk
At year-end 2002, Philips had a ratio of fixed-rate debt to total
outstanding debt of approximately 73%, compared to 69% one year
earlier. The Company partially hedges the interest rate risk inherent
in the external debt. As of year-end 2002, the Company hedged a
notional amount of EUR 300 million compared to outstanding EUR-
denominated fixed-rate public debt of EUR 5,103 million.
101
The Company also entered into three interest rate swaps, paying fixed
interest on EUR 50 million and receiving fixed interest on EUR 14
million for general asset and liability management purposes. The
results on these interest rate swaps are recognized in the income
statement.
Interest rate swaps hedge the Company against adverse movements of
long-term interest rates. The interest rate hedges related to bonds are
fair value hedges; thus profits resulting from the hedges (EUR 7
million in 2002) are offset by equal and opposite losses recorded on
the underlying financial instruments in the income statement. Some
interest rate hedges related to bonds were unwound during 2002. The
fair value adjustments to the bonds will be amortized to the income
statement based on the recalculated effective yield. In 2003 we expect
to release a gain of EUR 14 million. As the fixed flows of the swaps
match exactly the coupons of the underlying financial instruments, the
hedges have been effective. No results were released to the income
statement as a result of ineffectiveness of interest rate hedges in
2002.
As of December 31, 2002 the majority of debt consisted of bonds. Of the
EUR 6,118 million of outstanding bonds, 4% have a so-called `embedded
put' feature, which allows the investor to ask for redemption of the
bonds in one specific month prior to their final maturity date.
A sensitivity analysis shows that if long-term interest rates were to
decrease instantaneously by 1% from their level of December 31, 2002,
with all other variables (including foreign exchange rates) held
constant, the fair value of the long-term debt would increase by EUR
273 million. The fair value of long-term debt plus the fair value of
related interest rate swaps would increase by EUR 265 million (compared
to EUR 267 million in 2001). This increase is based on the assumption
that the `putable' bonds will be repaid at their final maturity date.
If the bondholders required payment at their respective put dates and
there was an increase in interest rates by 1%, this would reduce the
market value of the long-term debt by EUR 249 million. In this case,
the fair value of long-term debt plus the fair value related to
interest rate swaps would decrease by EUR 241 million (compared to EUR
221 million in 2001).
If interest rates were to increase instantaneously by 1% from their
level of December 31, 2002, with all other variables held constant, the
interest expense would increase by EUR 4 million in 2003.
Other financial risks
Other financial risks include the equity price risk, commodity price
risk, credit risk and country risk.
The rating of the Company's debt by major rating services may improve
or deteriorate. As a result, the Company's borrowing capacity may be
influenced and its financing costs may fluctuate.
Equity price risk
In 2002, an impairment loss of EUR 1,955 million was recognized on the
security investments in Vivendi Universal, GN Great Nordic and JDS
Uniphase in view of the extended period of time during which the market
value of these shares was below cost. In addition to Vivendi, GN Great
Nordic and JDS Uniphase, Philips is a shareholder of other publicly
listed companies such as TSMC, Atos Origin, ASML, FEI and MedQuist and
therefore is exposed to the equity price risk through movements in the
share prices of these companies. The aggregate market value of all
these equity investments amounted to EUR 6,798 million at year-end 2002
(2001: EUR 16,201 million).
102
In November 2000, Philips purchased 1.3 billion redeemable preferred
shares in Taiwan Semiconductor Manufacturing Company (a publicly listed
Taiwanese company in which the Philips Group has a substantial
shareholding) for 12,999 million Taiwanese dollars (at closing rate
December 31, 2002; EUR 374 million). The preferred shares are
redeemable in the second quarter of 2003.
The dividend yield on these preferred shares is 3.5%. The preferred
shares confer the same voting rights as TSMC's common shares. The
preferred shares are carried at cost in the accompanying consolidated
balance sheet. The redeemable preferred shares result in a
concentration of credit risks. However, the Company is of the opinion
that TSMC will have sufficient means to redeem the preferred shares at
the redemption date.
Commodity price risk
The Company is a purchaser of certain base metals (such as copper),
precious metals and energy. The Company hedges certain commodity price
risks using derivative instruments to minimize significant,
unanticipated earnings fluctuations caused by commodity price
volatility. The commodity price derivatives that the Company enters
into are concluded as cash flow hedges to offset forecasted purchases.
Credit risks
The Company invests available cash and cash equivalents with various
financial institutions. The Company is also exposed to credit risks in
the event of non-performance by counterparties with respect to
derivative financial instruments. The Company measures on a daily basis
the potential loss, should a financial counterparty default. These
worst-case scenario losses are monitored and limited by the Company. As
of December 31, 2002 the Company had credit risk of over 25 million
euro to
1 AAA/ Aaa-rated bank counterparties
6 AA/ Aa-rated bank counterparties
2 A/ A-rated bank counterparties
2 lower-rated bank counterparties in China.
The Company does not enter into any derivative financial instruments to
protect against default of financial counterparties. However, the
Company requires all financial counterparties with whom it deals in
derivative transactions to complete legally enforceable set-off
agreements prior to trading and, whenever possible, to have a strong
credit rating from Standard & Poor's and Moody's Investor Services. It
is the Company's policy to conclude financial transactions, where
possible, under an ISDA (International Swap Dealers Association) master
agreement. Wherever possible, cash is invested and financial
transactions are concluded with financial institutions with strong
credit ratings.
Credit risk represents the loss that would be recognized at the
reporting date if counterparties failed completely to perform as
contracted. As of December 31, 2002, the Company identified 4 customers
with significant outstanding receivables. This exposure amounts to EUR
247 million in total and ranges from EUR 53 million to EUR 72 million
per customer. To reduce exposure to credit risk, the Company performs
ongoing credit evaluations of the financial condition of its customers
and adjusts payment terms when appropriate.
Country risk
The Company is exposed to country risk by the very nature of running a
global business. The country risk per country is defined as the sum of
equity of all subsidiaries and associated companies in country
cross-border transactions such as intercompany loans, guarantees
(unless country risk is explicitly excluded in the guarantee), accounts
receivables and intercompany accounts. The country risk is monitored on
a regular basis.
103
As of December 31, 2002 the Company had country risk exceeding EUR 500
million in each of the following countries:
the Netherlands, Germany, France, Belgium, USA, Taiwan and Korea. At
year-end exposure to Argentina was less than EUR 50 million and
exposure to Venezuela less than EUR 20 million.
The degree of risk of a country is taken into account when new
investments are considered. The Company does not, however, enter into
derivative financial instruments to hedge country risk.
Other insurable risks
The Philips Group is covered for financial losses by global insurance
policies. To reduce risks, Philips has a worldwide property damage and
business interruption loss prevention program in place.
Factories are inspected on a regular basis against predefined risk
engineering standards. Status information on the existing prevention
levels is monitored centrally and presented to financial/industrial
product division management.
Inconsistencies with these standards are reported to product division
management, and budgets are made available for further improvement of
the loss-prevention levels.
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 the Company could realize in a current
market exchange or the value that will ultimately be realized by the
Company upon maturity or disposal. Additionally, because of the variety
of valuation techniques permitted under SFAS No. 107, 'Disclosures
about Fair Value of Financial Instruments', comparisons of fair values
between entities may not be meaningful. The use of different market
assumptions and/or estimation methods may have a material effect on the
estimated fair value amounts.
DECEMBER 31, 2002 December 31, 2001
---------------------- ---------------------
carrying estimated carrying estimated
amount fair value amount fair value
Assets:
Cash and cash equivalents 1,858 1,858 890 890
Accounts receivable - current 5,068 5,068 5,812 5,812
Other financial assets 1,306 1,306 3,481 3,481
Accounts receivable - non-current 219 195 306 272
Derivative instruments 176 176 237 237
Liabilities:
Accounts payable (3,228) (3,228) (3,243) (3,243)
Debt (7,109) (7,443) (7,866) (7,945)
The following methods and assumptions were used to estimate the fair
value of financial instruments:
Cash, accounts receivable and accounts payable
The carrying amounts approximate fair value because of the short
maturity of these instruments.
104
Cash equivalents
The fair value is based on the estimated market value.
Other financial assets
For other financial assets, fair value is based upon the estimated
market prices.
Debt
The fair value is estimated on the basis of the quoted market prices
for certain issues, or on the basis of discounted cash flow analyses
based upon Philips' incremental borrowing rates for similar types of
borrowing arrangements with comparable terms and maturities.
(31) INFORMATION RELATING TO PRODUCT SECTORS AND MAIN COUNTRIES
Philips has made significant progress in strategic refocusing of its
portfolio of businesses. At present, rather than acquiring businesses
in new areas, Philips is focusing on strengthening its existing core
activities, including the use of selected acquisitions, and the
disposal of activities that are under-performing or not essential from
a strategic viewpoint. Philips' internal organization and internal
reporting structure is organized in compliance with SFAS No. 131. As a
result, the following 8 product sectors are distinguished as reportable
segments: Lighting, Consumer Electronics, Domestic Appliances and
Personal Care, Components, Semiconductors, Medical Systems,
Miscellaneous and Unallocated. On October 9, 2002 it was announced that
the Components division will be dissolved as from 2003. Part of the
division's activities will be moved to Semiconductors (Mobile Display
Systems and the telecom speakers activity). Another part will be moved
to Consumer Electronics (LCD TV, multimedia projectors, LCoS TV,
wireless connectivity modules and parts of remote control systems). The
Optical Storage business will be restructured and transferred to the
Miscellaneous sector. The remaining activities will be transferred to
the Corporate Investments group (in the Miscellaneous sector) for
potential sale or merger.
Furthermore, the activities belonging to Digital Networks will be
relocated within the Consumer Electronics sector and partly to the
Miscellaneous sector from 2003 onwards.
Lighting
Philips is the leader in the world lighting market. A wide variety of
applications are served by a full range of incandescent and halogen
lamps, automotive lamps, high-intensity gas-discharge and special
lamps, QL induction lamps, fixtures, ballasts and lighting electronics.
Philips Lighting, along with LumiLeds Lighting, the joint venture with
Agilent Technologies, is spearheading the development of new
application segments for the latest LED technology, both in the home
and in the wider outside environment.
Consumer Electronics
This division markets a wide range of products in the following areas:
video products (Consumer TV, VCR, TV-VCR, DVD Video and DVD+RW), audio
products (audio systems, portable products), computer monitors (CRT-
and LCD-based), consumer communications (mobile phones, cordless
digital phones) and set-top boxes.
Domestic Appliances and Personal Care
This division markets a wide range of products in the following areas:
male shaving and grooming (shavers, trimmers, etc.), beauty, health and
suncare (depilators, hair dryers, suncare, skincare, etc.), oral
healthcare (electric toothbrushes), food and beverage (mixers, coffee
makers, toasters, etc.) and home environment care (vacuum cleaners, air
cleaners, steam irons, fans, etc.).
105
Components
Until year-end 2002 Philips Components was a major provider of
integrated digital electronic solutions in the areas of displays,
storage and connectivity. Its global customer base covered the
computing, consumer electronics, telecommunications and automotive
industries. It produced modules for optical storage in CD and DVD
formats and mobile display systems for use in cellular phones and other
handheld devices. It also produced wireless connectivity modules to
address the digital, Internet-driven, 24/7 world. It also encompassed
speaker systems, multimedia projectors and digital display systems
(LCoS panels, LCD TV, etc).
Semiconductors
Philips Semiconductors is a major supplier of integrated circuits (ICs)
and discrete semiconductors to the consumer electronics,
telecommunications, automotive, PC and PC peripherals industries.
Medical Systems
Philips Medical Systems is one of the world's leading suppliers of
medical imaging modalities and patient monitoring systems. It is a
global leader in the product segments X-ray, ultrasound, nuclear
medicine and patient monitoring. It holds also strong positions in
magnetic resonance, computed tomography medical IT and customer support
services.
Miscellaneous
This sector comprises various activities and businesses not belonging
to a product sector. It consists mainly of two groups of activities:
the central research and technology centers (such as Philips Research,
Intellectual Property and Standards, Philips Centre for Industrial
Technology and Philips Design) and Corporate Investments (such as
Assembleon and Philips Enabling Technologies Group (PETG)). It also
comprises various (remaining) activities that have been sold,
discontinued, phased out or deconsolidated in earlier years. NavTech
was consolidated for the first time in 2001 and included in the
Miscellaneous sector. Until its deconsolidation in May 2001 FEI Company
was included in the consolidated figures of the Miscellaneous sector.
Also included are some remaining former businesses from the Consumer
Electronics and Components sectors and the equity investment in Atos
Origin.
Unallocated
The sector Unallocated includes general and administrative expenses in
the corporate center and the regional and country organizations.
The sales volumes of the various business activities and the associated
income from operations by product sector and by geographic area are set
forth in the following tables. Segment revenues represent the total of
sales to third parties ('sales') and sales of products and services
between the product sectors ('intersegment revenues').
Included in segment revenues by geographic area is the total revenue
from worldwide sales to third parties and unconsolidated companies by
consolidated companies located within that geographic area ('sales'),
as well as the total value of sales to consolidated companies in other
geographic areas ('interregional revenues'). The transfer prices
charged for all intersegment (including interregional) sales are based
on the arm's length principle as set forth in internationally accepted
transfer pricing policies and guidelines.
Origin
Origin is a global IT service company delivering systems and a full
range of services that facilitate total business solutions for clients.
It is represented in more than 30 countries. In October 2000, Philips
sold its 98% interest in Origin to Atos and received a 48.7% interest
in Atos Origin. This investment is accounted for under the equity
method. As a result of the merger, as from October 1, 2001 Philips no
longer consolidates Origin as a separate division but includes its
share of Atos Origin's earnings in results relating to unconsolidated
companies beginning January 1, 2001, with a delay of three months.
106
Product sectors
2002
---------------------------------------------------------------
results
sales (to segment income as a % of relating to
third revenues (loss) from segment unconsolidated
parties) operations revenues companies
Lighting 4,845 4,873 602 12.4 (23)
Consumer Electronics 9,600 9,669 230 2.4 (23)
DAP 2,273 2,294 401 17.5 --
Components 2,212 2,450 (329) (13.4) (386)
Semiconductors 4,089 4,613 (537) (11.6) 75
Medical Systems 6,844 6,855 309 4.5 (44)
Miscellaneous 1,957 2,399 74 3.1 (946)
Unallocated -- -- (330) 1
------ ------ ------ -----
TOTAL 31,820 33,153 420 (1,346)
INTERSEGMENT REVENUES (1,333)
------
SALES 31,820
INCOME FROM OPERATIONS AS A % OF SALES 1.3
2001
---------------------------------------------------------------
Lighting 5,083 5,122 582 11.4 (13)
Consumer Electronics 11,052 11,233 (649) (5.8) --
DAP 2,224 2,246 334 14.9 --
Components 2,772 3,705 (667) (18.0) (395)
Semiconductors 4,389 4,940 (607) (12.3) (118)
Medical Systems 4,834 4,836 (163) (3.4) 1
Miscellaneous 1,985 2,154 (104) (4.8) (79)
Unallocated -- -- (121) (4)
------ ------ ------ -----
Total 32,339 34,236 (1,395) (608)
Intersegment revenues (1,897)
------
Sales 32,339
Income from operations as a % of sales (4.3)
2000
----------------------------------------------------------------
Lighting 5,052 5,097 668 13.1 (33)
Consumer Electronics 13,060 13,277 410 3.1 (4)
DAP 2,107 2,130 287 13.5 --
Components 5,042 6,920 608 8.8 211
Semiconductors 5,879 6,812 1,346 19.8 1,137
Medical Systems 3,031 3,047 169 5.5 (3)
Miscellaneous 2,974 3,378 (191) (5.7) 2,647
Unallocated -- -- (102) 3
Origin 717 1,164 1,063 91.3 (2)
------ ------ ------ -----
Total 37,862 41,825 4,258 3,956
Intersegment revenues (3,963)
------
Sales 37,862
Income from operations as a % of sales 11.2
107
Product sectors
2002
-----------------------------------------------------------------------------
net total
total operating liabilities long-lived capital
assets capital excl. debt assets expenditures depreciation
Lighting 2,608 1,723 866 1,290 183 180
Consumer Electronics 2,553 28 2,489 317 99 160
DAP 961 529 432 501 83 89
Components 3,799 118 759 330 87 152
Semiconductors 6,898 3,606 892 3,441 441 954
Medical Systems 6,780 4,849 1,886 4,199 85 84
Miscellaneous 1,862 (73) 1,296 656 130 125
Unallocated 6,828 (241) 2,462 337 53 38
------ ------ ------ ------ ----- -----
TOTAL 32,289 10,539 11,082 11,071 1,161 1,782
2001
----------------------------------------------------------------------------
Lighting 2,936 1,979 929 1,473 224 179
Consumer Electronics 3,429 672 2,660 551 202 265
DAP 1,084 652 432 571 105 81
Components 4,193 397 730 485 475 267
Semiconductors 8,329 4,742 927 4,431 956 943
Medical Systems 7,962 5,418 2,471 4,880 86 75
Miscellaneous 2,734 314 837 427 95 86
Unallocated 8,535 135 2,988 421 -- 73
------ ------ ------ ------ ----- -----
Total 39,202 14,309 11,974 13,239 2,143 1,969
2000
----------------------------------------------------------------------------
Lighting 2,944 1,903 947 1,367 258 171
Consumer Electronics 4,643 1,486 3,092 644 335 195
DAP 1,131 752 379 564 96 77
Components 5,740 2,158 1,499 2,157 639 332
Semiconductors 8,497 4,572 1,283 4,233 1,631 692
Medical Systems 3,982 2,821 1,157 2,429 58 47
Miscellaneous 3,361 819 1,057 531 153 231
Unallocated 9,226 (141) 2,907 406 -- 44
------ ------ ------ ------ ----- -----
Total 39,524 14,370 12,321 12,331 3,170 1,789
Goodwill assigned to product sectors
2002
------------------------------------------------------------------------------------------
goodwill
amortization translation
related to differences carrying value
carrying value sale of and other at December
at January 1 acquisitions business impairment changes 31
Lighting 116 (30) 86
Consumer Electronics 5 (1) 4
DAP 166 (25) 141
Semiconductors 217 37 (26) 228
Medical Systems 3,019 31 (19) (339) 2,692
Miscellaneous 3 (3) --
Unallocated 31 12 (2) 41
-------------- ------------ ------------ ------- --------- --------------
TOTAL 3,557 80 -- (19) (426) 3,192
108
Main countries
2002
----------------------------------------------------------------------------
sales (to net
third total operating long-lived capital
parties) assets capital assets expenditures depreciation
Netherlands 1,507 5,694 2,724 1,596 238 345
United States 9,409 9,259 5,303 5,633 127 544
Germany 2,333 1,670 303 664 115 109
France 1,893 2,194 32 426 214 110
United Kingdom 1,503 629 251 293 18 32
China 2,510 1,311 (323) 378 112 157
Other countries 12,665 11,532 2,249 2,081 337 485
------ ------ ------ ------ ----- -----
TOTAL 31,820 32,289 10,539 11,071 1,161 1,782
2001
----------------------------------------------------------------------------
Netherlands 1,555 5,818 2,799 1,767 403 333
United States 8,901 10,640 6,902 6,838 386 516
Germany 2,648 1,831 508 711 226 123
France 1,990 4,794 85 377 157 182
United Kingdom 1,560 752 448 210 46 48
China 2,205 1,428 213 523 224 171
Other countries 13,480 13,939 3,354 2,813 701 596
------ ------ ------ ------ ----- -----
Total 32,339 39,202 14,309 13,239 2,143 1,969
2000
-------------------------------------------------------------------------
Netherlands 1,696 9,555 2,932 1,885 638 369
United States 9,126 8,802 5,820 5,051 573 349
Germany 3,272 1,644 128 672 194 132
France 2,333 2,749 222 474 205 120
United Kingdom 2,179 951 526 337 89 61
China 2,683 2,113 783 814 295 156
Other countries 16,573 13,710 3,959 3,098 1,176 602
------ ------ ------ ------ ----- -----
Total 37,862 39,524 14,370 12,331 3,170 1,789
109
DUTCH GAAP INFORMATION
ACCOUNTING PRINCIPLES APPLIED FOR DUTCH GAAP PURPOSES
The financial statements of Koninklijke Philips Electronics N.V. and
the consolidated financial statements that are included in this section
are prepared on a basis consistent with generally accepted accounting
principles in the Netherlands (`Dutch GAAP').
These accounting principles are largely in conformity with the
accounting policies that are applied in the Company's primary
consolidated financial statements as prepared under United States
Generally Accepted Accounting Principles ('US GAAP'). The reader is
referred to these accounting policies on pages 49 through 57 of this
report.
The notes to the consolidated financial statements as prepared under US
GAAP are an integral part of the financial statements as prepared under
Dutch regulations in this section. Material differences based on
deviations between US GAAP and Dutch GAAP are disclosed separately in
this section.
Goodwill, which represents the excess of purchase price over fair value
of net assets acquired, is amortized on a straight-line basis over the
expected periods to be benefited, not exceeding 20 years under Dutch
GAAP. The Company assesses the recoverability by determining whether
the unamortized balance of goodwill can be recovered from future
operating cash flows of the acquired operation. The amount of goodwill
impairment, if any, is measured based on projected discounted future
operating cash flows using a business-specific Weighted Average Cost of
Capital.
PRESENTATION OF FINANCIAL STATEMENTS
The balance sheet presentation in the Dutch GAAP section is different
from the one used under Dutch regulations and is more in line with
common practice in the United States in order to achieve optimal
transparency for Dutch and US shareholders.
Under this format, the order of presentation of assets and liabilities
is based on the degree of liquidity which is common practice in the
United States.
CHANGES IN ACCOUNTING PRINCIPLES AND PRESENTATION
As of January 1, 2002 the Company adopted US GAAP as accounting
principles for its primary accounts. Changes have been made to the
Dutch GAAP accounting principles and presentation applied by the
Company as from January 1, 2002, for which the primary reason is
harmonization to US GAAP.
Securities that are designated as available-for-sale are classified
under other non-current financial assets and are stated at their fair
values. Changes in the fair values are recognized in the revaluation
reserve within stockholders' equity. Other-than-temporary declines in
the fair value below cost price are charged to financial income and
expenses.
Gains or losses resulting from sale and operational lease-back
transactions are deferred over the term of the lease in proportion to
the rental payments.
For comparability reasons, the previous-year statements have been
restated for this effect, with recognition of the effect in
stockholders' equity as of the beginning of the year 2000.
110 DUTCH GAAP INFORMATION
APPLICATION OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN THE
NETHERLANDS
The accounting principles applied in the preparation of the US GAAP
consolidated financial statements differ in some respects from those
generally accepted in the Netherlands.
For the determination of net income and stockholders, equity in
accordance with generally accepted accounting principles in the
Netherlands (Dutch GAAP), the following difference with US GAAP has
been taken into account:
Under US GAAP, SFAS No. 142, goodwill is no longer amortized but tested
for impairment on an annual basis and whenever indicators of impairment
arise. Under Dutch GAAP, goodwill is amortized on a straight-line basis
not exceeding 20 years. As a consequence, impairment charges under
Dutch GAAP may be different from US GAAP.
Reconciliation of net income according to Dutch GAAP versus US GAAP
2002 2001
Net income (loss) as per the consolidated statements of
income on a US GAAP basis (3,206) (2,475)
Adjustments to Dutch GAAP:
Goodwill amortization net of taxes (743) (133)
Lower impairment charges due to amortization of goodwill 347 -
- -------------------------------------------------------- ------ ------
NET INCOME (LOSS) IN ACCORDANCE WITH DUTCH GAAP (3,602) (2,608)
BASIC EARNINGS PER COMMON SHARE IN EUR:
Net income (loss) (2.83) (2.04)
DILUTED EARNINGS PER COMMON SHARE IN EUR:
Net income (loss) (2.83) (2.04)
Reconciliation of stockholders' equity according to Dutch GAAP versus
US GAAP
2002 2001
Stockholders' equity as per the consolidated balance
sheets on a US GAAP basis 13,919 19,160
Equity adjustments that affect net income:
Goodwill amortization net of taxes (876) (133)
Lower impairment charges due to amortization of goodwill 347 -
Equity adjustments not affecting net income under Dutch GAAP:
Translation differences 17 -
- ------------------------------------------------------------- ------- ------
STOCKHOLDERS' EQUITY IN ACCORDANCE WITH DUTCH GAAP 13,407 19,027
DUTCH GAAP INFORMATION 111
Consolidated statements of income of the PhilipsGroup
for the years ended December 31
in millions of euros unless otherwise stated
2002 2001*
Sales 31,820 32,339
Cost of sales (22,209) (23,276)
------- -------
GROSS MARGIN 9,611 9,063
Selling expenses (5,017) (5,027)
General and administrative expenses (1,404) (1,249)
Research and development expenses (3,043) (3,312)
Write-off of acquired in-process R&D (12) (106)
Impairment of goodwill (19) -
Restructuring and impairment charges (484) (786)
------ ------
(9,979) (10,480)
Other business income (expense) 485 (14)
------- -------
(32) INCOME (LOSS) FROM OPERATIONS 117 (1,431)
(3) Financial income and expenses:
- interest (384) (391)
- impairment charges (1,955) (526)
- other 112 2
------ ------
(2,227) (915)
------- -------
INCOME (LOSS) BEFORE TAXES (2,110) (2,346)
(33) Income taxes benefits 7 441
------- -------
INCOME (LOSS) AFTER TAXES (2,103) (1,905)
(34) Results relating to unconsolidated companies:
- income (loss) excluding impairment charges and
amortization of goodwill (17) (232)
- impairment charges (958) (119)
- amortization of goodwill (498) (367)
------ ------
(1,473) (718)
------- -------
GROUP INCOME (LOSS) (3,576) (2,623)
(6) Minority interests (26) 15
------- -------
NET INCOME (LOSS) (3,602) (2,608)
* Restated
The accompanying notes are an integral part of these consolidated financial
statements.
112 DUTCH GAAP INFORMATION
Earnings per share
2002 2001*
Weighted average number of common shares outstanding (after deduction of
treasury stock) during the year (in thousands) 1,274,950 1,278,077
BASIC EARNINGS PER COMMON SHARE IN EUROS:
Net income (loss) (2.83) (2.04)
DILUTED EARNINGS PER COMMON SHARE IN EUROS: **
Net income (loss) (2.83) (2.04)
Dividend paid per common share in euros (related to prior financial year) 0.36 0.36
* Restated
** The dilution effects on EPS are only taken into consideration if this does
not result in an improvement in income per share or in a reduction in loss
per share, as is the case in 2002 and 2001.
DUTCH GAAP INFORMATION 113
Consolidated balance sheets of the Philips Group
as of December 31
in millions of euros unless otherwise stated
The consolidated balance sheets are presented before appropriation of profit
ASSETS
- -------------------------------------------------------------------------------
2002 2001*
CURRENT ASSETS
Cash and cash equivalents 1,858 890
(9) Receivables:
- Accounts receivable -- net 4,517 5,298
- Accounts receivable from unconsolidated companies 63 122
- Other receivables 488 392
------ -------
5,068 5,812
(10) Inventories 3,522 4,290
(11) Other current assets 603 858
------ -------
Total current assets 11,051 11,850
NON-CURRENT ASSETS
(34) Unconsolidated companies:
- Goodwill 1,584 1,784
- Equity investments 3,873 5,196
- Loans 395 462
------ -------
5,852 7,442
(12) Other non-current financial assets 1,306 3,481
(13) Non-current receivables:
- Accounts receivable - net 123 149
- Accounts receivable from unconsolidated companies -- 1
- Other receivables 96 156
------ -------
219 306
(35) Other non-current assets 2,600 2,787
(15) Property, plant and equipment:
- At cost 16,015 18,069
- Less accumulated depreciation (9,878) (10,351)
------ -------
6,137 7,718
(16) Intangible assets excluding goodwill:
- At cost 2,529 2,585
- Less accumulated amortization (787) (621)
------ -------
1,742 1,964
(36) Goodwill consolidated companies:
- At cost 3,602 3,978
- Less accumulated amortization (732) (457)
------ -------
2,870 3,521
------ ------
Total non-current assets 20,726 27,219
------ -------
TOTAL 31,777 39,069
* Restated
The accompanying notes are an integral part of these consolidated financial
statements.
114 DUTCH GAAP INFORMATION
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------
2002 2001*
CURRENT LIABILITIES
Accounts and notes payable:
- Trade creditors 3,138 3,240
- Unconsolidated companies 90 3
------ ------
3,228 3,243
(18) Accrued liabilities 3,314 3,966
(19)(20) Short-term provisions 1,276 1,443
(21) Other current liabilities 691 813
(22)(23) Short-term debt 617 1,271
------ ------
Total current liabilities 9,126 10,736
NON-CURRENT LIABILITIES
(22)(23) Long-term debt 6,492 6,595
(19)(20) Long-term provisions 1,970 2,297
(24) Other non-current liabilities 603 212
------ ------
Total non-current liabilities 9,065 9,104
(25) Commitments and contingent liabilities - -
GROUP EQUITY
(6) Minority interests 179 202
(37) Stockholders' equity:
Common shares, par value EUR 0.20 per share:
Authorized: 3,250,000,000 shares
Issued: 1,316,070,392 shares
(1,316,070,392 shares in 2001) 263 263
Share premium 14 13
Other reserves 17,774 22,087
Revaluation reserves 265 566
Net income (loss) (3,602) (2,608)
Treasury shares, at cost: 40,092,469 shares
(41,897,949 in 2001) (1,307) (1,294)
------ ------
13,407 19,027
------ ------
TOTAL 31,777 39,069
* Restated
The accompanying notes are an integral part of these consolidated financial
statements.
DUTCH GAAP INFORMATION 115
Consolidated statements of changes in
stockholders' equity of the Philips Group
in millions of euros unless otherwise stated
number of shares issued,
----------------------------- paid-up share other revaluation treasury
outstanding issued capital premium reserves reserve shares total
------------- ------------- ------- ------ ------- --------- ------ ------
BALANCE AS OF DECEMBER 31, 2000 1,283,894,733 1,316,070,392 263 7 22,427 -- (961) 21,736
Changes in accounting policies (1) 972 971
Net income (loss) (2,608) (2,608)
Net current period change (406) (406)
Dividend paid (458) (458)
Stock options accrual 6 6
Minimum pension liability (5) (5)
Treasury stock transactions (333) (333)
Translation differences and other
changes 124 124
------------- ------------- ----- ---- ------- --------- ------ ------
BALANCE AS OF DECEMBER 31, 2001 1,274,172,443 1,316,070,392 263 13 19,479 566 (1,294) 19,027
Net income (loss) (3,602) (3,602)
Net current period change (301) (301)
Dividend paid (459) (459)
Stock options accrual 1 1
Minimum pension liability (335) (335)
Treasury stock transactions (13) (13)
Translation differences and other
changes (911) (911)
------------- ------------- ----- ---- ------- --------- ------ ------
BALANCE AS OF DECEMBER 31, 2002 1,275,977,923 1,316,070,392 263 14 14,172 265 (1,307) 13,407
116 DUTCH GAAP INFORMATION
Notes to the consolidated financial statements
of the Philips Group
all amounts in millions of euros unless otherwise stated
The reader is referred to the notes to the consolidated financial
statements based on US GAAP. The differences between Dutch GAAP and US
GAAP are disclosed in the notes below.
(32) INCOME FROM OPERATIONS
See note 2 to the consolidated financial statements based on US GAAP.
Depreciation and amortization
The difference of EUR 303 million in 2002 (2001: EUR 36 million) in
depreciation and amortization between Dutch and US GAAP is caused by
the fact that goodwill is no longer amortized under US GAAP for
acquisitions after June 30, 2001 and completely ceased to apply as from
January 1, 2002.
Depreciation of property, plant and equipment and amortization of
intangibles are as follows:
2002 2001
Depreciation of property, plant and equipment 1,814 1,994
Amortization of software 174 146
Amortization of goodwill and other intangibles:
- - Amortization of other intangible assets 165 155
- - Amortization of goodwill relating to consolidated companies 303 216
- - Impairment of goodwill 19 -
Write-off of in-process R&D 12 106
----- -----
2,487 2,617
Amortization of goodwill relating to consolidated companies and other
intangible assets increased because of full-year amortization of
acquisitions in 2001.
(33) INCOME TAXES
See note 4 to the consolidated financial statements based on US GAAP.
The difference in income taxes based on Dutch GAAP and income taxes
based on US GAAP relates to the different accounting treatment under
Dutch GAAP of amortization of tax-deductible goodwill, which is charged
to income under Dutch GAAP and no longer recognized under US GAAP.
The effect for 2002 is a tax benefit of EUR 34 million (2001: EUR 13
million).
DUTCH GAAP INFORMATION 117
(34) UNCONSOLIDATED COMPANIES
See note 5 to the consolidated financial statements based on US GAAP.
Results relating to unconsolidated companies
The difference of EUR 127 million in 2002 (2001: EUR 110 million) in
results relating to unconsolidated companies between Dutch and US GAAP
is caused by the fact that goodwill is no longer amortized under US
GAAP for acquisitions after June 30, 2001 and completely ceased to
apply as from January 1, 2002.
As the results related to Atos Origin are reported on a three-month
delay basis, amortization of goodwill of EUR 24 million referring to
the fourth quarter of 2001 was included in the year 2002 results for
both US and Dutch GAAP.
2002 2001
Results relating to unconsolidated companies:
- - income (loss) excluding amortization of goodwill
and impairment charges (17) (232)
- - impairment charges (958) (119)
- - amortization of goodwill (498) (367)
------ ----
TOTAL (1,473) (718)
For the Company's investment in two unconsolidated companies,
LG.Philips Displays and Atos Origin, impairment charges were recognized
in the US GAAP accounts. For Dutch GAAP the related impairment charge
is reduced by the goodwill amortization recognized in the course of the
year and in previous periods amounting to EUR 275 million and EUR 72
million respectively.
Amortization of goodwill includes the amortization of the excess of the
Company's investment over its underlying equity in the net assets of
unconsolidated companies of EUR 458 million in 2002 (2001: EUR 180
million) and the Company's share of amortization recorded by the
unconsolidated companies of EUR 40 million in 2002 (2001: EUR 187
million).
Amortization of goodwill in 2002 amounting to EUR 197 million was
substantially higher than the previous year because of full-year
amortization of goodwill related to LG.Philips Displays (2001: EUR 90
million).
Investments in, and loans to, unconsolidated companies
Investments in, and loans to, unconsolidated companies amounted to EUR
5,457 million and EUR 395 million respectively at December 31, 2002
(2001: EUR 6,980 million and EUR 462 million respectively).
The difference in 2002 between Dutch and US GAAP in investments in
unconsolidated companies of EUR 237 million (2001: EUR 110 million)
results from the accumulated effect of amortization of goodwill under
Dutch GAAP.
118 DUTCH GAAP INFORMATION
Goodwill relating to unconsolidated companies
goodwill
relating to
unconsolidated
companies
Balance as of January 1, 2002:
Acquisition cost 2,095
Accumulated amortization (311)
-----
Book value 1,784
Changes in book value:
Acquisitions 162
Amortization and write-downs (362)
-----
Total changes (200)
Balance as of December 31, 2002:
Acquisition cost 2,257
Accumulated amortization (673)
-----
BOOK VALUE 1,584
(35) OTHER NON-CURRENT ASSETS
See note 14 to the consolidated financial statements based on US GAAP.
The difference in other non-current assets between Dutch and US GAAP in
2002 of EUR 47 million (2001: EUR 13 million) results from the tax
effect on the amortization of tax-deductible goodwill under Dutch GAAP.
(36) GOODWILL - CONSOLIDATED COMPANIES
See note 17 to the consolidated financial statements based on US GAAP.
The difference in 2002 between Dutch and US GAAP of EUR 322 million
(2001: EUR 36 million) results from the accumulated effect of
amortization of goodwill under Dutch GAAP.
goodwill
relating to
consolidated
companies
Balance as of January 1, 2002:
Acquisition cost 3,978
Accumulated amortization (457)
-----
Book value 3,521
Changes in book value:
Reclassifications (16)
Acquisitions 80
Amortization and write-downs (303)
Impairment losses (19)
Translation differences (392)
Changes in consolidation (1)
-----
Total changes (651)
Balance as of December 31, 2002:
Acquisition cost 3,602
Accumulated amortization (732)
-----
BOOK VALUE 2,870
DUTCH GAAP INFORMATION 119
(37) STOCKHOLDERS' EQUITY
As of January 1, 2002 the opening balance of stockholders' equity was
adjusted in connection with the change in accounting principles as
referred to on page 110. Stockholders' equity determined in accordance
with Dutch GAAP amounted to EUR 13,407 million as of December 31, 2002
(2001: EUR 19,027 million), compared to EUR 13,919 million (2001: EUR
19,160 million) under US GAAP. The deviation is caused by the fact that
for both years goodwill under Dutch GAAP has to be amortized and
charged to income, whereas under US GAAP it is no longer amortized but
instead tested for impairment.
120 DUTCH GAAP INFORMATION
Balance sheets and statements of income of Koninklijke Philips
Electronics N.V.('Royal Philips Electronics')
in millions of euros
* Restated
The balance sheets are presented before appropriation of profit
Balance sheets as of December 31
2002 2001*
ASSETS
Current assets:
Cash and cash equivalents 1,114 25
(A) Receivables 3,338 2,186
------ ------
4,452 2,211
Non-current assets:
(B) Investments in affiliated companies 18,257 23,580
(C) Other non-current financial assets 952 3,112
(D) Tangible fixed assets - net 1 1
(E) Intangible assets - net 1,135 1,196
------ ------
20,345 27,889
------ ------
TOTAL 24,797 30,100
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
(F) Other liabilities 468 364
(G) Short-term debt 4,489 4,109
(H) Short-term provisions 48 7
------ ------
5,005 4,480
Non-current liabilities:
(I) Long-term debt 6,364 6,368
(H) Long-term provisions 21 225
------ ------
6,385 6,593
(J) Stockholders' equity:
Priority shares, par value EUR 500 per share:
Authorized and issued: 10 shares
Preference shares, par value EUR 0.20 per share:
Authorized: 3,249,975,000 shares
Issued: none
Common shares, par value EUR 0.20 per share:
Authorized: 3,250,000,000 shares
Issued: 1,316,070,392 shares
(1,316,070,392 shares in 2001) 263 263
Share premium 14 13
Other reserves 17,774 22,087
Revaluation reserves 265 566
Net income (loss) (3,602) (2,608)
Treasury shares, at cost: 40,092,469 shares
(41,897,949 shares in 2001) (1,307) (1,294)
------ ------
13,407 19,027
------ ------
TOTAL 24,797 30,100
Statements of income
Income (loss) after taxes from affiliated companies (2,063) (1,933)
Other income after taxes (1,539) (675)
------ ------
(L) NET INCOME (LOSS) (3,602) (2,608)
DUTCH GAAP INFORMATION 121
Notes to the financial statements of
Royal Philips Electronics
all amounts in millions of euros unless otherwise stated
INTRODUCTION
The financial statements of Koninklijke Philips Electronics N.V.
('Royal Philips Electronics'), the parent company of the Philips Group,
are included in the consolidated statements of the Philips Group.
Therefore the unconsolidated statements of income of Royal Philips
Electronics only reflect the net after-tax income of affiliated
companies and other income after taxes.
With respect to the accounting principles, see page 110 of the Dutch
GAAP consolidated financial statements, which form part of these notes.
(A) RECEIVABLES
2002 2001
Trade accounts receivable 199 250
Group companies 2,915 1,646
Unconsolidated companies 14 30
Other receivables 29 30
Advances and prepaid expenses 5 3
Deferred tax assets 81 283
Income tax receivable 7 10
Derivative instruments 88 (66)
----- -----
TOTAL 3,338 2,186
An amount of EUR 63 million included in receivables is due after one
year (2001: EUR 185 million).
(B) INVESTMENTS IN AFFILIATED COMPANIES
The investments in affiliated companies are included in the balance
sheet based on either their net asset value in conformity with the
aforementioned accounting principles of the consolidated financial
statements or their purchase price. Moreover, goodwill is included for
an amount of EUR 1,580 million (2001: EUR 1,781 million).
The amortization period of goodwill ranges between 5 and 15 years.
total investments loans
Balance as of January 1, 2002 23,580 15,417 8,163
Changes:
Acquisitions/additions 2,592 1,524 1,068
Sales/redemptions (3,050) (553) (2,497)
After-tax income (loss) from affiliated companies:
- - Amortization of goodwill (665) (665) -
- - Impairment losses (958) (958) -
- - Remaining income (loss) (440) (440) -
Dividends received (805) (805) -
Translation differences/other changes (1,997) (1,047) (950)
------ ------ -----
BALANCE AS OF DECEMBER 31, 2002 18,257 12,473 5,784
A list of affiliated companies, prepared in accordance with the
relevant legal requirements, is deposited at the Commercial Register in
Eindhoven, the Netherlands.
122 DUTCH GAAP INFORMATION
(C) OTHER NON-CURRENT FINANCIAL ASSETS
security other
total investments receivables
Balance as of January 1, 2002 3,112 3,088 24
Changes:
Acquisitions/additions 113 113 -
Sales/redemptions (18) (5) (13)
Value adjustments (2,255) (2,254) (1)
------ ------ -----
BALANCE AS OF DECEMBER 31, 2002 952 942 10
Included in other non-current financial assets are participations and
securities that generate income unrelated to the normal business
operations.
(D) TANGIBLE FIXED ASSETS -- NET
Balance as of January 1, 2002: 1
Cost -
Accumulated depreciation -
---
Book value 1
Changes in book value:
Capital expenditures -
Retirements and sales -
Depreciation and write-downs -
---
Total changes -
Balance as of December 31, 2002:
Cost 1
Accumulated depreciation -
---
BOOK VALUE 1
Tangible fixed assets consist of fixed assets other than land and
buildings.
(E) INTANGIBLE FIXED ASSETS - NET
Balance as of January 1, 2002:
Acquisition cost 1,334
Accumulated amortization (138)
-----
Book value 1,196
Changes in book value:
Acquisitions 44
Amortization and write-downs (105)
-----
Total changes (61)
Balance as of December 31, 2002:
Acquisition cost 1,378
Accumulated amortization (243)
-----
BOOK VALUE 1,135
The intangible fixed assets represent goodwill and other intangibles
arising from acquisitions and expenditures for patents and trademarks.
Acquisitions comprise various small investments.
The amortization period ranges between 5 and 15 years.
DUTCH GAAP INFORMATION 123
F OTHER LIABILITIES
2002 2001
Other short-term liabilities 97 65
Deferred income and accrued expenses 371 299
- --------------------------------------------------------
TOTAL 468 364
G SHORT-TERM DEBT
Short-term debt includes outstanding commercial paper for an amount of
EUR 10 million, the current portion of outstanding long-term debt
amounting to EUR 145 million (2001: EUR 160 million), debt to other
Group companies totaling EUR 4,305 million (2001: EUR 3,206 million)
and institutional financing totaling EUR 29 million (2001: EUR 222
million).
H PROVISIONS
2002 2001
Pensions 18 19
Deferred tax liabilities - 191
Other 51 22
- --------------------------------------------------------
TOTAL 69 232
Of which long-term 21 225
Of which short-term 48 7
As almost all obligations in connection with pension plans have been
covered by separate pension funds or third parties, the provision for
pensions refers to additional payments which the Company intends to
make in the future.
I LONG-TERM DEBT
AVERAGE AMOUNT
RANGE OF AVERAGE REMAINING OUT-
INTEREST RATE AMOUNT DUE DUE AFTER DUE AFTER TERM STANDING
RATES OF INTEREST OUTSTANDING IN 2003 2003 2007 (IN YEARS) 2001
Convertible debentures 1.1 1.1 145 - 145 - 3.0 134
Other debentures 4.2-8.8 5.9 6,218 139 6,079 2,972 5.0 6,249
Intercompany financing 1.3-3.2 2.9 1,475 1,475 - - - 1,119
Other long-term debt 4.6-10.20 5.1 146 6 140 29 3.8 145
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL 5.7 7,984 1,620 6,364 3,001 7,647
Corresponding data previous year 5.5 7,647 1,279 6,368 3,090
The following amounts of the long-term debt as of December 31, 2002 are
due in the next five years:
2003 1,620
2004 2,371
2005 602
2006 319
2007 71
------
4,983
Corresponding amount previous year 4,557
Included in convertible debentures are Philips personnel debentures,
for which the reader is referred to the related note in the Group
accounts.
124 DUTCH GAAP INFORMATION
J STOCKHOLDERS' EQUITY
See the Group financial statements and related notes under Dutch GAAP.
No legal reserve for undistributed income from affiliated companies is
required on the basis of the `collective method', taking into account
dividend distributions by affiliated companies, the receipt of which
can be effected without restrictions.
Priority shares
There are ten priority shares.
The issuance of shares or rights to shares, cancellation of shares,
amendments to the Articles of Association and the liquidation of the
Company need approval of the priority shareholders, who also make a
binding recommendation for the appointment of members of the Board of
Management and the Supervisory Board (see also page 131).
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 (see also page 131 ).
Option rights
The Company has granted stock options on shares of Royal Philips
Electronics at original exercise prices equal to market prices of the
shares at the date of grant (see note 28).
Treasury shares
Royal Philips Electronics' share which have been repurchased and are
held in treasury for delivery upon exercise of options and convertible
personnel debentures are accounted for in stockholders' equity.
Treasury shares are recorded at cost, representing the market price on
the acquisition date.
In order to reduce potential dilution effects, a total of 3,128,353
shares were acquired during 2002 at an average market price of EUR
32.97 per share, totaling EUR 103 million, and a total of 4,933,833
shares were delivered at an average exercise price of EUR 18.11,
totaling EUR 90 million.
A total of 40,092,469 shares were being held by Group companies at
December 31, 2002 (2001: 41,897,949 shares), acquired at an aggregate
cost of EUR 1,307 million.
Other reserves
A cash distribution of EUR 0.36 per common share will be proposed to
the General Meeting of Shareholders, which will result in a reduction
of other reserves by EUR 459 million.
L NET INCOME
Net income in 2002 amounted to a loss of 3,602 million (2001: a loss of
2,608 million).
For the remuneration of past and present members of both the Board of
Management and the Supervisory Board, please refer to note 29 of the
consolidated financial statements.
M EMPLOYEES
The number of persons employed by Royal Philips Electronics at year-end
2002 was 12 (2001: 13) and included the members of the Board of
Management and most members of the Group Management Committee.
125
N OBLIGATIONS NOT APPEARING IN THE BALANCE SHEET
General guarantees as defined in Book 2, Section 403 of the Netherlands
Civil Code have been given by Royal Philips Electronics on behalf of
several Group companies in the Netherlands. The liabilities of these
companies to third parties and unconsolidated companies totaled EUR
1,172 million as of year-end 2002 (2001: EUR 1,309 million). Guarantees
totaling EUR 621 million (2001: EUR 679 million) have also been given
on behalf of other Group companies, and guarantees totaling EUR 667
million (2001: EUR 506 million) on behalf of unconsolidated companies
and third parties.
February 7, 2003
The Supervisory Board
The Board of Management
126 DUTCH GAAP INFORMATION
AUDITORS' REPORT
Introduction
We have audited the 2002 financial statements of Koninklijke Philips
Electronics N.V. appearing on pages 110 through 126. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
based on our audit.
Scope
We conducted our audit in accordance with auditing standards generally
accepted in the Netherlands and the United States of America. 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 audit provides a reasonable basis for our opinion.
Opinion
In our opinion, the financial statements present fairly, in all
material respects, the financial position of the Company as of December
31, 2002 and the results of its operations for the year then ended in
accordance with accounting principles generally accepted in the
Netherlands and comply with the financial reporting requirements
included in Part 9, Book 2 of the Netherlands Civil Code.
Eindhoven, February 7, 2003
KPMG Accountants N.V.
127
128
PROPOSED DISTRIBUTION TO SHAREHOLDERS OF ROYAL PHILIPS
ELECTRONICS
Pursuant to article 38 of the Articles of Association, and with the
approval of the Supervisory Board and the Meeting of Priority
Shareholders, a proposal will be submitted to the General Meeting of
Shareholders to make a distribution in cash to shareholders of EUR 0.36
per common share from the other reserves (2001: a distribution was made
of EUR 0.36 per common share). This will result in a reduction of other
reserves of the Company by EUR 459 million.
CORPORATE GOVERNANCE OF THE PHILIPS GROUP
General
Koninklijke Philips Electronics N.V. (the 'Company') is the parent
company of the Philips Group. Its shares are listed on the stock market
of Euronext Amsterdam, the New York Stock Exchange, the London Stock
Exchange and several other stock exchanges.
The management of the Company is entrusted to the Board of Management
under the supervision of the Supervisory Board. The activities of the
Philips Group are organized in product divisions, which are responsible
for the worldwide business policy. Philips has more than 150 production
sites in 35 countries and sales and service outlets in some 150
countries. It delivers products, systems and services in the fields of
lighting, consumer electronics and communications, domestic appliances
and personal care, components, semiconductors and medical systems. 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 (The Netherlands
Civil Code, Book 2, Articles 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. 1910).
In recent years the governance of the Company and the Philips Group has
been improved, in particular in respect of the supervisory function,
the rights of shareholders and transparency. These improvements were in
response to developments in the international capital markets, such as
the United States, where the Company's shares have been traded since
1962 and listed on the New York Stock Exchange since 1987. Philips also
generally endorses the recommendations of the Committee of the
Amsterdam Exchanges of October 1997 on best practices in corporate
governance.
Board of Management and Supervisory Board
The Board of Management is responsible for the effective management of
the business. It is required to keep the Supervisory Board informed of
developments, to consult it on important matters and to submit certain
important decisions to it for its prior approval. The Board of
Management consists of at least three members (currently five), who are
elected for an indefinite period by the General Meeting of
Shareholders. Individual data on the members of the Board of Management
are printed on page 56 of the separate booklet entitled `Management
Report'. The president is appointed by the General Meeting of
Shareholders. Members of the Board of Management may be suspended by
the Supervisory Board and the General Meeting of Shareholders and
dismissed by the latter. The remuneration of the members of the Board
of Management is determined by the Supervisory Board upon a proposal
from the President and on the advice of the Remuneration Committee of
the Supervisory Board.
129
The Supervisory Board is independent of the Board of Management and is
responsible for supervising both the policies of the Board of
Management and the general direction of the Group's business. It is
also required to advise the Board of Management. The supervisory Board
consists of at least five members (currently six). They elect a
Chairman, Vice-Chairman and Secretary from their midst. The Board has
three permanent committees: an Audit Committee, a Remuneration
Committee and a Corporate Governance and Nomination & Selection
Committee. These committees advise the plenary Supervisory Board. The
Supervisory Board has adopted Rules of Procedure to consolidate its own
governance rules. The profile for the Supervisory Board's composition
and additional data on the individual members are given on page 58 of
the separate booklet entitled `Management Report'. Member of the
supervisory Board are appointed by the General Meeting of Shareholders
for fixed terms of four years, and may be re-elected for two additional
four-year terms. In exceptional cases, however, the Supervisory Board
and the Meeting of Priority Shareholders may deviate from this rule.
Members of the Supervisory Board may be suspended or dismissed by the
General Meeting of Shareholders. Their remuneration is fixed by the
General Meeting of Shareholders.
The appointment of the members of the Board of Management and the
Supervisory Board by the General Meeting of Shareholders is upon a
binding recommendation from the Supervisory Board and the Meeting of
Priority Shareholders. However, this binding recommendation may be
overruled by a resolution of the General Meeting of Shareholders taken
by a majority of at least 2/3 of the votes cast and representing more
than half of the issued share capital.
Group Management Committee
The Group Management Committee consists of the members of the Board of
Management, certain Chairmen of product divisions and certain key
officers. Members other than members of the Board of Management are
appointed by the Supervisory Board. The task of the Group Management
Committee, the highest consultative body within Philips, is to ensure
that business issues and practices are shared across the Company and to
define and implement common policies.
General Meeting of Shareholders
A General Meeting of Shareholders is held at least once a year to
discuss and resolve on the report of the Board of Management, the
annual accounts with explanation and appendices, the report of the
Supervisory Board, any proposal concerning dividends or other
distributions, and any other matters proposed by the Supervisory Board,
the Board of Management, the Meeting of Priority Shareholders or
shareholders in accordance with the provisions of the Company's
Amsterdam, Rotterdam or The Hague no later than six months after the
end of the financial year. Meetings are convened by public notice and
mailed to registered shareholders. Extraordinary General Meetings may
be convened by the Supervisory Board or the Board of Management if
deemed necessary and must be held if the Meeting of Priority
Shareholders or shareholders jointly representing at least 10% of the
outstanding 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, the Supervisory Board or the Meeting of
Priority Shareholders. Requests from shareholders for items to be
included on the agenda will be honored, provided that such requests are
made to the Board of Management and the Supervisory Board by
shareholders representing at least 1% of the Company's outstanding
capital at least 60 days before a General Meeting of Shareholders and
provided that the Board of Management and the Supervisory Board are of
the opinion that such requests are not detrimental to the serious
interests of Philips.
130
The main powers of the General Meeting of Shareholders are to appoint,
suspend and dismiss members of the Board of Management and the
Supervisory Board, to adopt the financial statements and to discharge
the Board of Management and the Supervisory Board from responsibility
for performing their respective duties for the previous financial year,
to adopt amendments to the Articles of Association and proposals to
dissolve or liquidate the Company, to issue shares or rights to shares,
to restrict or pass pre-emptive rights of shareholders and to
repurchase or cancel outstanding shares. Following common practice, the
Company each year requests limited authorization to issue (rights to)
shares, to pass pre-emptive rights and to repurchase shares.
Meeting of Priority Shareholders and the Dr. A.F. Philips-Stichting
There are ten priority shares held by the Dr. A.F. Philips-Stichting.
The self-electing Board of the Dr. A.F. Philips-Stichting consists of
the Chairman and the Vice-Chairman and Secretary of the Supervisory
Board, certain other members of the Supervisory Board, and the
President of the Company. At present, the Board consists of Messrs L.C.
van Wachem, W. de Kleuver, J.M. Hessels, K.A.L.M. van Miert and G.J.
Kleisterlee.
A Meeting of Priority Shareholders is held at least once a year, at
least thirty days before the General Meeting of Shareholders. Approval
of the Meeting of Priority Shareholders is required for resolutions of
the General Meeting of Shareholders regarding the issue of shares or
rights to shares, the cancellation of shares, amendments to the
Articles of Association, and the liquidation of the Company. Acting in
agreement with the Supervisory Board, the Meeting also makes a binding
recommendation to the General Meeting of Shareholders for the
appointment of members of the Board of Management and the Supervisory
Board, which can be overruled by the General Meeting of Shareholders as
set out before.
Preference shares and the Stichting Preferente Aandelen Philips
The authorized share capital of the Company consists of ten priority
shares, 3,250,000,000 ordinary shares and 3,249,975,000 preference
shares. The Stichting Preferente Aandelen Philips (`the Foundation')
has been 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 to gain a controlling
interest in 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. 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 Philips Group, such 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.
The members of the self-electing Board of the Foundation are Messrs
J.R. Glasz, S.D. de Bree, W.E. Scherpenhuijsen Rom, L.C. van Wachem and
G.J. Kleisterlee. As Chairman of the Supervisory Board and the Board of
Management respectively, Messrs Van Wachem and Kleisterlee are members
of the Board ex officio. Mr Kleisterlee is not entitled to vote. The
Board of Management of the Company and the Board of the Stichting
Preferente Aandelen Philips declare that they are jointly of the
opinion that the Stichting Preferente Aandelen Philips is independent
of the Company as required by the Listing Requirements of Euronext
Amsterdam N.V.'s stock market.
131
The Philips Group in the last nine years
all amounts in millions of euros unless otherwise stated
Due to factors such as consolidations and divestments, the amounts,
percentages and ratios are not directly comparable.
General data
US GAAP
------------------------------------------------------
2002 2001 2000 1999 1998*
Sales 31,820 32,339 37,862 31,459 30,459
Percentage increase over previous year (2) (15) 20 3 3
Income (loss) from continuing operations (1) (3,206) (2,475) 9,577 1,595 1,025
Discontinued operations (2) - - - - 4,891
Cumulative effect of change in accounting
principle - - 85 - -
Net income (loss) (3,206) (2,475) 9,662 1,590 5,900
Turnover rate of net operating capital 2.43 2.15 3.12 3.20 2.95
Total employees at year-end (in thousands) 170 189 219 227 234
Salaries, wages and social costs paid 8,183 8,119 8,479 8,111 8,117
- --------------------------------------------------------------------------------------------------------
Income
Income (loss) from operations 420 (1,395) 4,258 1,553 1,289
As a % of sales 1.3 (4.3) 11.2 4.9 4.2
As a % of net operating capital (RONA) 3.2 (9.3) 35.1 15.8 12.5
Income taxes (27) 428 (563) (208) (162)
As a % of income before taxes (1) 19 9 14 17
Income (loss) after taxes (1,834) (1,882) 5,688 1,238 816
As a % of sales (5.8) (5.8) 15.0 3.9 2.7
Income (loss) from continuing operations (3,206) (2,475) 9,577 1,595 1,025
As a % of stockholders' equity (ROE) (19.2) (11.9) 48.5 10.9 9.7
Per common share in euros (2.51) (1.94) 7.30 1.16 0.71
Net income (loss) (3,206) (2,475) 9,662 1,590 5,900
Per common share in euros (2.51) (1.94) 7.36 1.15 4.10
Dividend paid per common share in euros
(related to prior financial year) 0.36 0.36 0.30 0.25 0.23
- ----------------------------------------------------------------------------------------------------
General data
Dutch GAAP
--------------------------------------------------
1998* 1997 1996 1995 1994
Sales 30,459 29,658 27,094 25,259 23,768
Percentage increase over previous year 3 9 7 6 2
Income (loss) from continuing operations (1) 541 1,231 126 971 683
Discontinued operations (2) 5,054 263 202 247 281
Cumulative effect of change in accounting
principle - - - - -
Net income (loss) 6,053 2,602 (268) 1,143 964
Turnover rate of net operating capital 2.91 2.84 2.70 2.88 2.95
Total employees at year-end (in thousands) 234 252 250 253 241
Salaries, wages and social costs paid 8,209 8,261 8,083 7,363 7,031
- ----------------------------------------------------------------------------------------------------
Income
Income (loss) from operations 685 1,714 422 1,350 1,227
As a % of sales 2.2 5.8 1.6 5.3 5.2
As a % of net operating capital (RONA) 6.5 16.4 4.2 15.4 15.2
Income taxes (41) (276) 7 (74) (135)
As a % of income before taxes 11 20 (40) 7 16
Income (loss) after taxes 332 1,119 25 964 696
As a % of sales 1.1 3.8 0.1 3.8 2.9
Income (loss) from continuing operations 541 1,231 126 971 683
As a % of stockholders' equity (ROE) 5.1 15.9 1.9 15.8 12.5
Per common share in euros 0.38 0.88 0.09 0.71 0.51
Net income (loss) 6,053 2,602 (268) 1,143 964
Per common share in euros 4.20 1.86 (0.20) 0.84 0.72
Dividend paid per common share in euros
(related to prior financial year) 0.23 0.18 0.18 0.14 0.06
* The Company adopted application of US GAAP as from January 1, 2002.
The years from 1998 onwards have been restated accordingly. Previous
years have not been restated. For the convenience of the reader the
1998 figures are presented on the basis of both US and Dutch GAAP.
(1) Under Dutch GAAP, prior to 1999, certain material transactions, such
as disposals of lines of activities, were accounted for as
extraordinary items, whereas under US GAAP these would have been
recorded in income (loss) from (continuing) operations.
(2) Discontinued operations reflect the effect of the sale of PolyGram
N.V. in 1998 in order to present the Philips Group accounts on a
continuing basis.
DEFINITIONS
Net operating capital: intangible assets, property, plant and equipment, non-current receivables and current
assets excl. cash and cash equivalents, securities and deferred tax positions, after
deduction of provisions and other liabilities
RONA: income from operations as a % of average net operating capital
ROE: income from continuing operations as a % of average stockholders' equity
Net debt: long-term and short-term debt net of cash and cash equivalents
Net debt: group equity ratio: the % distribution of net debt over group equity plus net debt
Average number of outstanding shares: weighted average number of outstanding common shares based on monthly positions during
the reporting year
The financial statements have been prepared in euros. Amounts previously reported in
Dutch guilders are reported in euros using the irrevocably fixed conversion rate which
became effective on January 1, 1999 (EUR 1 = NLG 2.20371).
132
Capital employed
US GAAP
---------------------------------------------------
2002 2001 2000 1999 1998*
Cash and cash equivalents 1,858 890 1,089 2,331 6,553
Receivables 5,671 6,670 6,806 6,453 5,442
Inventories 3,522 4,290 5,279 4,268 4,017
------ ------ ------ ------ -------
Current assets 11,051 11,850 13,174 13,052 16,012
------ ------ ------ ------ ------
Non-current financial assets 7,395 11,033 11,306 7,400 2,871
Net assets discontinued operations - - - - -
Non-current receivables 2,772 3,080 2,713 2,326 1,920
Property, plant and equipment (book value) 6,137 7,718 9,041 7,332 6,597
Intangible assets (book value) 4,934 5,521 3,290 1,563 609
------ ------ ------ ------ ------
Non-current assets 21,238 27,352 26,350 18,621 11,997
Total assets 32,289 39,202 39,524 31,673 28,009
Property, plant and equipment:
Capital expenditures for the year 1,161 2,143 3,170 1,662 1,634
Depreciation for the year 1,782 1,969 1,789 1,548 1,615
Capital expenditures: depreciation 0.7 1.1 1.8 1.1 1.0
Inventories as a % of sales 11.1 13.3 13.9 13.6 13.2
Outstanding trade receivables, in months' sales 1.3 1.5 1.5 1.4 1.3
Financial structure
Other liabilities 7,836 8,234 8,764 8,262 6,751
Debt 7,109 7,866 4,027 3,314 3,587
Provisions 3,246 3,740 3,557 3,056 2,973
------ ------ ------ ------ ------
Total provisions and liabilities 18,191 19,840 16,348 14,632 13,311
------ ------ ------ ------ ------
Issued, paid-up capital 263 263 263 339 1,672
Surplus and reserves 13,656 18,897 22,444 16,369 12,784
------ ------ ------ ------ ------
Stockholders' equity 13,919 19,160 22,707 16,708 14,456
Minority interests 179 202 469 333 242
------ ------ ------ ------- ------
Group equity 14,098 19,362 23,176 17,041 14,698
Total equity and liabilities 32,289 39,202 39,524 31,673 28,009
Net debt: group equity ratio 27:73 26:74 11:89 5:95 **
Stockholders' equity per common share
in euros 10.91 15.04 17.69 12.55 10.02
Market price per common share at year-end 16.70 33.38 39.02 33.75 14.30
Dutch GAAP
------------------------------------------------------------------
1998* 1997 1996 1995 1994
Cash and cash equivalents 6,553 1,397 785 932 940
Receivables 5,442 5,464 5,369 4,890 4,567
Inventories 4,274 4,522 4,334 5,083 4,330
------ ------- ------ ------ ------
Current assets 16,269 11,383 10,488 10,905 9,837
------ ------- ------ ------ ------
Non-current financial assets 2,836 1,451 1,618 1,358 1,257
Net assets discontinued operations - 1,482 1,198 1,013 901
Non-current receivables 1,920 1,858 1,662 1,413 1,397
Property, plant and equipment (book value) 6,574 6,935 6,719 6,094 5,599
Intangible assets (book value) 554 213 222 198 105
------ ------- ------ ------ ------
Non-current assets 11,884 11,939 11,419 10,076 9,259
Total assets 28,153 23,322 21,907 20,981 19,096
Property, plant and equipment:
Capital expenditures for the year 1,634 1,627 2,185 2,127 1,535
Depreciation for the year 1,615 1,492 1,437 1,218 1,270
Capital expenditures: depreciation 1.0 1.1 1.5 1.7 1.2
Inventories as a % of sales 14.0 15.2 16.0 20.1 18.2
Outstanding trade receivables, in months' sales 1.3 1.3 1.3 1.5 1.5
Financial structure
Other liabilities 6,779 6,328 5,768 5,643 5,373
Debt 3,587 4,030 5,855 4,756 3,875
Provisions 2,985 3,251 3,420 3,460 3,566
------ ------- ------ ------ ------
Total provisions and liabilities 13,351 13,609 15,043 13,859 12,814
------ ------- ------ ------ ------
Issued, paid-up capital 1,672 1,655 1,600 1,566 1,536
Surplus and reserves 12,888 7,499 4,985 5,060 4,410
------ ------- ------ ------ ------
Stockholders' equity 14,560 9,154 6,585 6,626 5,946
Minority interests 242 559 279 496 336
------ ------- ------ ------ ------
Group equity 14,802 9,713 6,864 7,122 6,282
Total equity and liabilities 28,153 23,322 21,907 20,981 19,096
Net debt:group equity ratio ** 21:79 42:58 35:65 32:68
Stockholders' equity per common share
in euros 10.09 6.39 4.74 4.85 4.41
Market price per common share at year-end 14.30 13.80 7.94 6.58 5.83
** Not meaningful: net cash in 1998 exceeded the debt level
133