Philips 2005 Annual Report Download - page 164

Philips Annual Report 2005164
Environmental Remediation
The Company and its subsidiaries are subject to environmental laws and
regulations. Under these laws, the Company and/or its subsidiaries may
be required to remediate the effects of the release or disposal of
certain chemicals on the environment.
In the United States, subsidiaries of the Company have been named as
potentially responsible parties in state and federal proceedings for the
clean-up of various sites, including Superfund sites. The Company applies
the provisions of SOP 96-1, ‘Environmental Liabilities’, and SFAS No. 5,
‘Accounting for Contingencies’, and accrues for losses associated with
environmental obligations when such losses are probable and
reasonably estimable.
Generally, the costs of future expenditures for environmental remediation
obligations are not discounted to their present value since the amounts
and the timing of related cash payments are not reliably determinable.
Potential insurance recoveries are recognized when recoveries are
deemed probable.
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. Although the ultimate disposition of asserted
claims and proceedings cannot be predicted with certainty, it is the
opinion of the Company’s management that the outcome of any such
claims, either individually or on a combined basis, will not have a material
adverseeffectontheCompany’sconsolidatednancialposition,butcould
be material to the consolidated results of operations of the Company
for a particular period.
MedQuist
MedQuist, in which Philips holds approximately 70.1% of the common
stock, is the subject of an ongoing investigation by the U.S. Securities and
Exchange Commission relating to the company’s billing practices and
related matters and has received a subpoena from the US Department
of Justice relating to these practices and other matters. In addition
thereto, various plaintiffs, including current and former customers,
shareholdersandtranscriptionists,ledfourputativeclassaction
lawsuits arising from allegations of, among other things, inappropriate
billing by MedQuist for its transcription services. These matters are not
yet resolved and, on the basis of current knowledge, the Company’s
management has concluded that potential future losses cannot be
reliably estimated.
Asbestos
Judicial proceedings have been brought in the United States, relating
primarily to the activities of a subsidiary prior to 1981, involving
allegations of personal injury from 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 compensatory and punitive damages.
At December 31, 2005, there were 3,984 cases pending, representing
8,082 claimants (compared to 2,909 cases, representing 6,028 claimants
pending at December 31, 2004, and 1,081 cases, representing 2,753
claimants pending at December 31, 2003). Most of the claims are in
cases involving a number of defendants. During 2005, 2,052 cases,
representing 3,283 claimants, were served against the Company’s
subsidiaries (2,436 cases, representing 4,085 claimants were served in
2004). While management believes there are meritorious defenses to
these claims, certain of these cases were settled by the subsidiaries for
amounts considered reasonable given the facts and circumstances of
each case. A number of other cases have been dismissed. During 2005,
977 cases, representing 1,229 claimants, were settled or dismissed (608
cases, representing 810 claimants, were settled or dismissed in 2004).
In addition to the pending cases discussed above, a subsidiary of the
Company was one of approximately 160 defendants initially named in
acaseledinAugust1995inMorrisCounty,Texas.Sincethetimethe
case was brought in 1995, the subsidiary had not been involved in any
substantiveactivityinthecaseotherthanlingananswertothecomplaint
and had no information concerning the types of alleged diseases or
injuries involved. In the fourth quarter of 2005, plaintiffs’ counsel in this
matterledinformationconcerningtheallegeddiseasesandinjuries
and sought and received an order from the Court severing this matter
into 3 cases: (1) 283 malignant disease claims; (2) 325 nonmalignant
disease claims with alleged impairment; and (3) 3,078 claims that have
no impairment at this time. Management believes that plaintiffs’ counsel
will ask the Court to retain the malignant disease and nonmalignant
disease claims in Morris County and that the others will be transferred
to multidistrict litigation proceedings for asbestos cases in Harris
County, Texas.
In accordance with SFAS No. 5, an accrual for loss contingencies is
recorded when it is probable that a liability has been incurred and the
amount of such loss contingency can be reasonably estimated. The
subsidiary has established an accrual for loss contingencies with respect
to asserted claims for asbestos product liability based upon its recent
settlement experience of similar types of claims, taking into consideration
the alleged illnesses in pending cases. While it is believed that this
methodology provides a reasonable basis for estimating loss where
liability is probable, the resolution of each case is generally based upon
claimant-specicinformation,muchofwhichisnotavailableuntilshortly
before the scheduled trial date. At December 31, 2005 and 2004, the
subsidiary’s recorded accrual for loss contingencies for asbestos product
liability amounted to EUR 88 million and EUR 83 million respectively,
whichisreectedintheCompany’sconsolidatedbalancesheets.
Please refer to page 127.
ForledclaimsatDecember31,2005,wheretheexacttypeandextent
of the alleged illness is not yet known, the subsidiary established the
accrual for loss contingencies based upon a ‘low end of the range’
estimate using the average settlement experience for claims alleging only
less severe illnesses (i.e. non-malignancy). If it were determined that all
of such claims alleged malignant diseases (which is unlikely since non-
malignancies currently represent 56% of known alleged illnesses related
to pending claims), the estimated incremental exposure above the
subsidiary’s current provision for asbestos product liability, based upon
the weighted average settlement experience for claims alleging
malignant diseases, would be approximately EUR 65 million.
During 2005, subsidiaries incurred asbestos litigation and claim
administration costs of EUR 12 million (EUR 10 million in 2004 and
EUR 8 million in 2003).
The Company believes that its subsidiaries have a substantial amount
of insurance coverage for asbestos product liability. In 2002 and 2005,
a subsidiary commenced legal proceedings against certain third-party
insurance carriers who had provided various types of product liability
coverage. During 2004 and 2005, agreements were reached with certain
insurance carriers resolving disputes with respect to the interpretation
and available limits of the policies, amounts payable to the subsidiaries
and terms under which future settlements and related defense costs
are reimbursable. Pursuant to these settlements, insurers paid EUR 20
million and EUR 19 million in 2005 and 2004, respectively for asbestos-
related defense and indemnity costs. At December 31, 2005 and 2004,
the subsidiary recorded a receivable from insurance carriers, for which
settlement agreements have been reached, in the amount of EUR 48
million and EUR 24 million, respectively for the reimbursement of
incurred defense and indemnity costs as well as for probable recoveries
of accrued projected settlement costs with respect to pending claims,
whichisreectedintheCompany’sconsolidatedbalancesheets.
An additional EUR 49 million, for which a receivable has not been
recorded, is payable to the subsidiary over the next three years, provided
asbestos legislation in a certain form is not passed by the US Congress
by certain dates. The subsidiary plans to pursue its litigation against
non-settling insurance carriers and continue settlement discussions
with various insurance carriers in 2006.
Althoughthenal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 cases and
claimants, alleged illnesses where ascertainable, estimated probable
outcomes, reasonably anticipated costs and expenses, and uncertainties
regarding the availability and limits of insurance), management believes
thatthenaloutcomeofanyofthependingproceedings,orallofthem
combined, will not have a material adverse effect on the consolidated
Groupnancialstatements