Philips 2005 Annual Report Download - page 68

Philips Annual Report 200568
Introduction
The following discussion is based on the US GAAP
consolidated fi nancial statements and should be read in
conjunction with those statements and the other fi nancial
information contained herein, including the information
set forth in the chapter Information on the Philips Group
that begins on page 28 of this Annual Report.
Non-US GAAP measures
Koninklijke Philips Electronics N.V. (the ‘Company’)
believes that an understanding of sales performance is
enhanced when the effects of currency and acquisitions
and divestments (changes in consolidation) are excluded.
Accordingly, in addition to presenting ‘nominal growth’,
‘comparable growth’ is also provided. Comparable sales
exclude the effects of currency movements and changes in
consolidation. As indicated in the Accounting Policies, sales
and income are translated from foreign currencies into
the Company’s reporting currency, the euro, at weighted
average exchange rates during the respective years. As
a result of the signifi cant currency fl uctuations during the
years presented, the effects of translating foreign currency
sales amounts into euros had a material impact that has
been excluded in arriving at the comparable sales in euros.
Currency effects have been calculated by translating previous
years’ foreign currency sales amounts into euros at the
following year’s exchange rates in comparison with the sales
in euros as historically reported. Years under review were
characterized by a number of acquisitions and divestments,
as a result of which activities were consolidated or
deconsolidated as disclosed in note 2 to the consolidated
fi nancial statements of the Philips Group. The effect of
consolidation changes has also been excluded in arriving
at the comparable sales. The Company deconsolidates an
entity when it no longer maintains a direct or indirect
controlling interest through voting rights or other qualifying
variable interests. On sale of a controlling interest in a
subsidiary to unrelated parties, the sold entity is excluded
from the consolidated results retroactively from the date
of sale. On contribution of a previously consolidated
subsidiary to a (joint) venture, consolidation is discontinued
as of the formation of the (joint) venture.
The Company has changed the term ‘Income from
operations’ (IFO) into ‘Earnings before interest and tax’
(EBIT). EBIT represents income from continuing operations
excluding results attributable to minority interest holders,
results relating to unconsolidated companies, income
taxes and fi nancial income and expenses. In the past, the
Company used the term income from operations, which
had the same content.
The Company believes that an understanding of the
Philips Group’s fi nancial condition is enhanced by the
disclosure of net operating capital (NOC), as this fi gure
is used by Philips’ management to evaluate the capital
effi ciency of the Philips Group and its operating segments.
NOC is defi ned as: total assets excluding assets from
discontinued operations less: (a) cash and cash equivalents,
(b) deferred tax assets, (c) other non-current fi nancial
assets, (d) investments in unconsolidated companies, and
after deduction of: (e) provisions excluding deferred tax
liabilities, (f) accounts and notes payable, (g) accrued
liabilities and (h) current/non-current liabilities.
The total net debt position as a percentage of the sum
of total group equity (stockholders’ equity and minority
interests) and net debt is presented to express the fi nancial
strength of the Company. This measure is widely used by
investment analysts and therefore included in the disclosure.
Cash fl ows before fi nancing activities, being the sum total
of net cash from operating activities and net cash from
investing activities, are presented separately to facilitate the
reader’s understanding of the Company’s funding requirement.
A reconciliation of non-US GAAP information, as set out
above, to the most directly comparable US GAAP fi nancial
measure is given in the section Other Information that
begins on page 120 of this Annual Report.
Reclassifi cations
Total expenditures of the Philips Group related to the
global brand campaign have been reported in the sector
Unallocated in 2005. 2004 has been restated accordingly.
Mobile Display Systems’ (MDS) activities were reclassifi ed
from Semiconductors to Other Activities effective
January 1, 2005. At year-end 2005, MDS was reported
as a discontinued operation in anticipation of regulatory
approval of its merger with Toppoly Optoelectronics
Corporation of Taiwan. Previous years have been
restated accordingly.
Management discussion and analysis