Philips 2005 Annual Report Download - page 73

Philips Annual Report 2005 73
The tax burden in 2005 corresponded to an effective
tax rate of 31.1% on the pre-tax income, compared to an
effective tax rate in 2004 of 19.9%. The effective tax rate
in 2005 was affected by tax-exempt items such as a total
gain of EUR 233 million from the sale of shares in Atos
Origin and Great Nordic, as well as part of the gain from
the sale and transfer of certain activities within Philips’
monitors and entry-level fl at TV business to TPV. Non-
taxable items in 2004 were the gains on the initial public
offering of NAVTEQ (EUR 635 million) and the sale of
shares of Vivendi Universal and ASML (EUR 440 million)
offset by the impairment charges of MedQuist of
EUR 590 million.
For 2006, an effective tax charge of 31% on pre-tax income
is expected.
Results relating to unconsolidated companies
The results from unconsolidated companies increased in
2005 by EUR 259 million to EUR 1,681 million, a breakdown
of which is shown in the table below.
in millions of euros 2004 2005
Company’s participation in income 983 440
Results on sales of shares 193 1,545
Gains arising from dilution effects 254 165
Investment impairment and guarantee charges (8 ) (469 )
1,422 1,681
The Company’s participation in the net income of
unconsolidated companies declined from EUR 983 million
to EUR 440 million, primarily as a result of lower results at
LG.Philips LCD. In addition, the sale of stakes led to reduced
shareholdings in the unconsolidated companies and,
consequently, a reduction in Philips’ share in their net income.
For LG.Philips LCD, the trend to replace cathode-ray
tube (CRT) displays with fl at displays was the key driver
leading to sales growth of 21% in 2005. As a result of
strong price erosion and the reduced shareholding, the
Company’s share in LG.Philips LCD’s operational result
was EUR 146 million, EUR 429 million below 2004.
The Company had a share in income and losses of various
other companies, primarily TSMC, Crolles2 and InterTrust.
TSMC started to achieve higher sales in the second half
of 2005 due to recovery of the market and increased
wafer shipments.
In 2005, the Crolles2 wafer-fab venture with
STMicroelectronics and Freescale for the advanced
development of silicon manufacturing technology unveiled
the ramp-up of three key 90 nm CMOS products. Philips’
share in the 2005 loss of this facility amounted to
EUR 59 million (2004: a loss of EUR 60 million).
In 2004, the license agreement between InterTrust
Technologies and Microsoft to settle all their outstanding
litigation contributed a net gain of EUR 100 million.
Results on the sale of shares in 2005 are primarily
attributable to the EUR 753 million gain on the sale of
the remaining 33 million shares in NAVTEQ. Additionally,
568 million shares in TSMC (EUR 460 million gain) were
sold, reducing the shareholding from 19.0% to 16.4%.
Furthermore, the Company sold 27.4 million shares in
LG.Philips LCD, resulting in a gain of EUR 332 million and
a 7.6% reduction in the shareholding from 40.5% to 32.9%.
Gains and losses arising from dilution effects in 2005 were
mainly due to a EUR 189 million dilution gain recorded
for LG.Philips LCD as a result of the secondary offering
of shares in 2005. As a consequence, the Company’s
shareholding in LG.Philips LCD decreased from 44.6%
to 40.5%. This dilution gain increased the book value of
Philips’ investment in LG.Philips LCD.
In accordance with TSMC’s Articles of Incorporation,
yearly bonuses to employees are granted partially in shares.
Generally, stock dividends will also be distributed. In 2005
and 2004, new shares were issued in grants to employees
and as a stock dividend. Because Philips only participates
in the stock dividend distribution, its shareholding in TSMC
was diluted as a result of shares issued to employees.
Accordingly, Philips recorded a dilution loss of EUR 24 million
in 2005. This dilution loss decreased the book value of
Philips’ investment in TSMC and was charged to results
relating to unconsolidated companies.
On December 21, 2005, Philips announced the write-off of
the book value of LG.Philips Displays due to the increased
pressure from fl at displays on demand and prices for CRTs.
The write-off of the remaining book value at the end of
November amounted to EUR 126 million for the investment
and EUR 290 million for the accumulated currency translation
losses related to the investment previously
accounted for
directly in Philips’ stockholders’ equity. The impairment
charges totaled EUR 416 million and were of a non-cash
nature. Philips also fully provided for the existing guarantee