Philips 2005 Annual Report Download - page 9

Philips Annual Report 2005 9
Dear shareholder,
2005 was a good year for your company. We made further
progress on our journey to transform Philips into a truly
market-driven healthcare, lifestyle and technology company.
Onethatiscapableofdeliveringsustainedprotablegrowth.
We took a number of decisive steps that have created
tangible value, and our market capitalization increased by
some EUR 7 billion.
We continued to focus our portfolio, exiting low-growth,
low-marginactivities,reducingournancialholdingsand
re-allocating resources to businesses that offer better
prospects for growth and higher returns. For example, we
further expanded our presence in healthcare, both through
strong organic growth and through the acquisition of the
healthcare IT company Stentor. We also increased the
proportion of revenue growth that is attributable to
innovativenewproducts,reectingourstrongermarket
focus.Andwemadesignicantprogressinstabilizingour
earnings performance, adapting our business models to
the changing requirements of the market, e.g. through
the TPV deal.
A very important step was our decision to create a separate
legal structure for Semiconductors. This will enable us to
pursue strategic options to strengthen the long-term
performance of this activity and as such represents good
news both for our customers and for our employees.
At the same time, it will help us to create more value
for Philips’ shareholders.
We also rolled out the second wave of our “sense and
simplicity” brand campaign, reinforcing our distinctive
positioning and taking in major new markets such as India
and Russia.
Our transformation has received external recognition with
higher rankings in brand, supplier and employer reputation
surveys. And yet we know we need to do more if we are
to achieve our ambition of generating a higher rate of
revenue-drivenprotablegrowth.
Financial performance in 2005
After a slow start to 2005, business picked up in the second
half of the year. Sales totaled EUR 30,395 million, up 4%,
with growth accelerating over the course of the year. All
our operating divisions except Semiconductors delivered
nominal growth of more than 5%, led by Medical Systems
with some 8%. Revenue in the sector Other Activities
declinedbyalmost18%,partlyreectingoureffortsto
further streamline our portfolio.
Earnings before interest and tax (EBIT) amounted to
EUR 1,779 million, compared with EUR 1,586 million in
2004, taking us from an EBIT margin of 5.4% in 2004 to
5.9%in2005.Withthisperformancewearecondent
that we will meet our goal of a 7-10% EBIT margin as
from the end of 2006.
Wealsotookfurtherstepstoreduceournancialholdings
(TSMC, LG.Philips LCD, NAVTEQ, Atos Origin, Great
Nordic), resulting in a gain of EUR 1,778 million. This was
partly offset by several charges related to the write-off of
our equity stake in LG.Philips Displays (EUR 458 million).
Altogether, this resulted in net income of EUR 2,868 million,
orEUR2.29pershare.Cashowfromoperatingactivities
was again strong at EUR 2,090 million. We spent a total
of EUR 1,187 million on acquisitions in 2005, the major
one being the purchase of Agilent’s remaining stake in
our Lumileds solid-state lighting venture.
Last but not least, we further focused on increasing
shareholder value by initiating two share repurchase
programs, worth a total of EUR 2.0 billion, for capital
reduction purposes. We are proposing to the upcoming
General Meeting of Shareholders to approve the
cancellation of the shares acquired up until then under
these share repurchase programs. This is expected to
reduce the number of shares outstanding by more than
6%. Also, we have adjusted our dividend policy, raising
the upper limit of the payout range to 35%, up from 30%,
and have increased the proposed dividend for the second
year in a row, by 10%, taking it to EUR 0.44 per share.