Philips 2006 Annual Report Download

Download and view the complete annual report

Please find the complete 2006 Philips annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 244

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133
  • 134
  • 135
  • 136
  • 137
  • 138
  • 139
  • 140
  • 141
  • 142
  • 143
  • 144
  • 145
  • 146
  • 147
  • 148
  • 149
  • 150
  • 151
  • 152
  • 153
  • 154
  • 155
  • 156
  • 157
  • 158
  • 159
  • 160
  • 161
  • 162
  • 163
  • 164
  • 165
  • 166
  • 167
  • 168
  • 169
  • 170
  • 171
  • 172
  • 173
  • 174
  • 175
  • 176
  • 177
  • 178
  • 179
  • 180
  • 181
  • 182
  • 183
  • 184
  • 185
  • 186
  • 187
  • 188
  • 189
  • 190
  • 191
  • 192
  • 193
  • 194
  • 195
  • 196
  • 197
  • 198
  • 199
  • 200
  • 201
  • 202
  • 203
  • 204
  • 205
  • 206
  • 207
  • 208
  • 209
  • 210
  • 211
  • 212
  • 213
  • 214
  • 215
  • 216
  • 217
  • 218
  • 219
  • 220
  • 221
  • 222
  • 223
  • 224
  • 225
  • 226
  • 227
  • 228
  • 229
  • 230
  • 231
  • 232
  • 233
  • 234
  • 235
  • 236
  • 237
  • 238
  • 239
  • 240
  • 241
  • 242
  • 243
  • 244

Driving change,
delivering value
Annual Report 2006

Table of contents

  • Page 1
    Driving change, delivering value Annual Report 2006

  • Page 2
    46 awards from across the world recognizing simplicity-led design The 14% increase in brand value 15% growth with top 7 key retailers 6% comparable sales growth

  • Page 3
    ... we can tighten our focus - addressing the need for better healthcare and well-being, the demand for energy-efficient solutions, particularly in lighting, and the desire for enjoyable consumer lifestyle experiences. 1,000,000+ Philips consumer products bought every day Philips Annual Report 2006 3

  • Page 4
    ... directly comparable US GAAP measures can be found in the chapter Reconciliation of non-US GAAP information. Fair value information In presenting the Philips Group's financial position, fair values are used for the measurement of various items in accordance with the applicable accounting standards...

  • Page 5
    ... statements of stockholders' equity Information by sectors and main countries Accounting policies Notes to the group financial statements 54 60 66 72 78 85 The Philips sectors Medical Systems Domestic Appliances and Personal Care Consumer Electronics Lighting Other Activities Unallocated 172 174...

  • Page 6
    ...tax as a % of sales Results relating to equity-accounted investees Net income per common share in euros - basic - diluted Dividend paid per common share in euros Net operating capital 2) Cash ï¬,ows before financing activities 2) Stockholders' equity per common share in euros Net debt: group equity...

  • Page 7
    ...2003 2004 2005 2006 18 % 18 % 19 % 19 % 19 % 44 % 47 % 47 % 45 % 45 % 5% 33 % 5% 30 % 6% 28 % 7% 29 % 7% 29 % Europe/Africa North America Latin America Earnings before interest and tax as a % of sales 6% 4.7 % 4% 5.7 % Group equity and net debt 2) in billions of euros 25 20 group equity net debt...

  • Page 8
    6 Financial highlights 8 Message from the President 14 Our leadership 20 The Philips Group Message from the President 8 Philips Annual Report 2006

  • Page 9
    ...of 2006. Philips today is a different company and a different value proposition for shareholders. Having adjusted our dividend policy last year, we are again increasing the average annual pay-out ratio this year, to 40-50% of continuing net income. Consistent with this revised Philips Annual Report...

  • Page 10
    ...venture in China - established in 2004 for the development and worldwide supply of economically priced imaging equipment - took place in 2006 with the release and shipment of dual and single-slice CT scanners, radiology systems and remote-control ï¬,uoroscopy systems. 10 Philips Annual Report 2006

  • Page 11
    ...in the right places and - via our talent pool - effective succession planning. Our leadership programs place heavy emphasis on business development, e.g. in emerging markets or our Incubators, which are an ideal environment for the development of entrepreneurial talent. Philips Annual Report 2006 11

  • Page 12
    ... resources to high-growth opportunities, leveraging our brand and competencies, expanding key account management, stimulating new business development, making value-creating acquisitions, growing in emerging markets, and innovating and marketing for further organic growth. 12 Philips Annual Report...

  • Page 13
    ... Philips sectors 86 Risk management 100 Report of the Supervisory Board 110 Financial Statements The 15 simplicity-led design concepts that were demonstrated illustrate the progress we are making across the company in designing and developing solutions that meet the everyday needs of end-users...

  • Page 14
    ... and Chief Financial Officer (CFO) CFO and member of the Board of Management and the Group Management Committee since June 2005 Corporate responsibilities: Control, Treasury, Fiscal, Mergers & Acquisitions, Investor Relations, Information Technology, Pensions, Real Estate, Corporate Investments...

  • Page 15
    ...Executive Vice-President Member of the Board of Management since April 2006 and member of the Group Management Committee since April 2003 and CEO of the Lighting division since 2003 Corporate responsibilities: Lighting, Quality Policy Board, Technology New Business Development Board Theo van Deursen...

  • Page 16
    ... 1, 2004. Steve Rusckowski 1957, American Member of the GMC and CEO of Philips Medical Systems since November 2006 Corporate responsibilities: Medical Systems, Healthcare New Business Development Board Steve Rusckowski holds a Bachelor of Science in Mechanical Engineering from Worcester Polytechnic...

  • Page 17
    54 The Philips sectors 86 Risk management 100 Report of the Supervisory Board 110 Financial Statements In an interview with CNN.com's World Business, Gerard Kleisterlee shared some insights into leadership, and how it is practiced at Philips. "We've tried to develop a vision for Philips that ...

  • Page 18
    ..., in the two-tier corporate structure under Dutch law, is a separate and independent body from the Board of Management. The Rules of Procedure of the Supervisory Board are published on the Company's website. The Supervisory Board will propose to the 2007 General Meeting of Shareholders to appoint Mr...

  • Page 19
    ...rst term expires in 2009 Chairman and CEO of Venture Corporation. Also serves on the boards of various listed and private companies, including DBS Bank and DBS Group Holdings and SIA Engineering Company. Chairman of the National University of Singapore Board of Trustees. Philips Annual Report 2006...

  • Page 20
    6 Financial highlights 8 Message from the President 14 Our leadership 20 The Philips Group The Philips Way The Philips Way Philips has been improving the quality of life with pioneering innovations for over 115 years, ever since the company was founded as a manufacturer of lamps in 1891. We ...

  • Page 21
    ... with input from other disciplines such as the human sciences, technology and business - and always with a clear people focus. It is our intention to design solutions based on in-depth user research, which harness technology to improve the quality of people's lives. Philips Annual Report 2006 21

  • Page 22
    ...Sustainability Social and environmental performance is a driver of innovation and value propositions, helping to keep our business sustainable in both the short and long term. In parallel and complementary to this Annual Report 2006, we have published our Sustainability Report 2006. Our strategy We...

  • Page 23
    ... support through shared service centers. Country management supports value creation, connecting Philips with key stakeholders, especially its employees, customers, government and society. At the end of 2006, Philips had approximately 130 production sites in 26 countries, sales and service outlets...

  • Page 24
    6 Financial highlights 8 Message from the President 14 Our leadership 20 The Philips Group The Philips Way Enhanc 70% of the top 50 US hospitals have chosen Philips cardiology solutions 4 major acquisitions 112% sales growth in Russia for Medical Systems 24 Philips Annual Report 2006

  • Page 25
    ...100 Report of the Supervisory Board 110 Financial Statements ing healthcare In the healthcare and wellness area in particular, Philips can have a direct positive impact on people's quality of life. That's why we are expanding our already highly successful healthcare business further. Our solutions...

  • Page 26
    ... The Philips Group The Philips Way New lifestyle 16 Philips CDs and DVDs sold every second 15 370 minutes of High-Definition video can be stored on Philips' recordable Blu-ray discs innovative lifestyle concepts demonstrated at Philips Simplicity Event in London 26 Philips Annual Report 2006

  • Page 27
    ...' - in both the lifestyle and health & wellness domains - to offer them novel, more satisfying experiences. >50% energy saving with Philips' CosmoPolis street lighting system compared with older mercury-vapor lamps 1,000,000+ Ambilight TVs sold worldwide to date Philips Annual Report 2006 27

  • Page 28
    6 Financial highlights 8 Message from the President 14 Our leadership 20 The Philips Group The Philips Way 955 external scientific publications up from 905 in 2005 Technology 10,000 Philips patents registered in China compared to 1,300 five years ago 28 Philips Annual Report 2006

  • Page 29
    ... sectors 86 Risk management 100 Report of the Supervisory Board 110 Financial Statements as value enabler Philips has a long and rich tradition of meaningful innovation. Today, advanced embedded technology is at the heart of our user-focused healthcare and lifestyle products. We are committed...

  • Page 30
    ... the comparable sales in euros. Currency effects have been calculated by translating previous years' 30 Philips Annual Report 2006 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...

  • Page 31
    ... The Philips sectors 86 Risk management 100 Report of the Supervisory Board 110 Financial Statements "The Simplicity Event is designed to exist just outside of our current realm of activity, and thus be slightly provocative, so that we are forced to ask ourselves the urgent questions that relate...

  • Page 32
    ... operating capital (NOC) Cash ï¬,ows before financing activities Employees (FTEs) of which discontinued operations 1) Sales in 2006 increased by 6% on a comparable basis compared to 2005 (5% nominally). Medical Systems (+7%), Domestic Appliances and Personal Care (DAP) (+11%), Consumer Electronics...

  • Page 33
    ... and our customers." Yujin Zheng, project leader Engaged talent is vital for an organization's success. The workforce of Philips Lighting has a passion for improvement, as evidenced by the annual Quality Improvement Competition. In 2006, over 2,600 teams from across the globe took part. The winners...

  • Page 34
    ... returning EUR 3.3 billion to shareholders including the annual dividend. 34 Philips Annual Report 2006 Medical Systems DAP Consumer Electronics Lighting Other Activities Philips Group 1) 7.3 11.2 5.4 8.3 (6.8) 6.1 Restated to present the Semiconductors division as a discontinued operation Sales...

  • Page 35
    ...-core activities within Corporate Investments. Earnings before interest and tax The following overview shows sales and EBIT per sector. Sales and EBIT 2006 in millions of euros unless otherwise stated sales Medical Systems DAP Consumer Electronics Lighting Other Activities Unallocated Philips Group...

  • Page 36
    ...-cost areas, the relocation in Mexico of all Juarez plant activities to the Monterrey plant and the relocation of the standard Lead in Wire business in Deurne, Netherlands, to Poland. The Company's remaining restructuring in 2006 covered a number of smaller projects. 36 Philips Annual Report 2006

  • Page 37
    ...the restructuring of the Mobile Infotainment business in CE. Furthermore, within Lighting, rationalization took place in Lamps through downsizing of excess capacity and the transfer of production to low-wage countries. Within Other Activities, a number of activities were prepared for disentanglement...

  • Page 38
    ... of the reduction in both the shareholding and the number of Philips board members. In India, Philips launched a pilot project for rural dwellers with limited access to electricity, involving two rechargeable lighting products - a weatherproof, portable lamp for general illumination and a hand-held...

  • Page 39
    54 The Philips sectors 86 Risk management 100 Report of the Supervisory Board 110 Financial Statements from changes in the fair value of TSMC stock and TPV bond options. Non-taxable items in 2005 were the sale of shares in Atos Origin and Great Nordic (in total EUR 233 million) and part of the ...

  • Page 40
    ...832 24,855 Motiva, a TV-based platform for remote patient management, was launched on the US and European markets in 2006. Besides vital-sign monitoring, Motiva engages patients with personalized interactive content, helping care managers reach more patients, inï¬,uence long-term behavior and lower...

  • Page 41
    54 The Philips sectors 86 Risk management 100 Report of the Supervisory Board 110 Financial Statements of Oral Healthcare products. Sales of CE and Medical Systems improved by 7% and 6% respectively, while Lighting posted 2% growth in comparable terms. Other Activities' sales declined, both ...

  • Page 42
    ...group's sales came from newly introduced products. A significant increase in sales from new products compared to 2005 was visible in CE, Lighting and DAP. Medical Systems' sales from new products remained well above the group level of 53%. Philips aims to increase the share of new products in total...

  • Page 43
    ... by DAP, Medical Systems and Lighting. Philips seeks to maintain constructive relationships with the labor unions. Average sales per employee in thousands of euros 300 Lighting 47,739 DAP 10,953 CE 14,486 1) Excluding discontinued operations 209 218 191 The main employee increase in 2006 was in...

  • Page 44
    ... capital-intensive sector in 2006, with EUR 319 million total expenditure. Restated to present the Semiconductors division as a discontinued operation. Please refer to the consolidated statements of cash ï¬,ows which are part of the chapter Group financial statements. 44 Philips Annual Report...

  • Page 45
    54 The Philips sectors 86 Risk management 100 Report of the Supervisory Board 110 Financial Statements In 2005, net capital expenditures amounted to EUR 506 million, mainly attributable to Lighting and Medical Systems. Continuing operations recorded a cash outï¬,ow from investing activities of ...

  • Page 46
    ... leadership 20 The Philips Group Liquidity and capital resources Financing The condensed balance sheet for the years 2006, 2005 and 2004 is presented below Condensed balance sheet in millions of euros 20041) Cash and cash equivalents Receivables Assets of discontinued operations Inventories Equity...

  • Page 47
    ...gain on the value of TSMC was partly offset by EUR 2,899 million due to the share repurchase programs for both capital reduction purposes and the hedging of long-term incentive and employee stock purchase programs, and by EUR 523 million due to the dividend payment to Philips Annual Report 2006 47

  • Page 48
    ... to TSMC and EUR 62 million related to JDS Uniphase. The Company also held a total of EUR 192 million of trading securities in TSMC based on quoted market prices as at December 31, 2006. Philips' shareholdings in its main listed equity-accounted investees had a fair value of EUR 2,803 million based...

  • Page 49
    ... as at December 31, 2006. The Company sponsors pension plans in many countries in accordance with 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. Contributions are made by...

  • Page 50
    ... by a higher spending per baby in both developed and emerging markets. In the professional lighting sector, the Company acquired Bodine, a leading manufacturer of emergency lighting applications. This acquisition will position Philips in the niche emergency ballast market, while enabling it to enter...

  • Page 51
    ... law, the Company has informed the Netherlands Authority for the Financial Markets of its holdings of Philips shares. All transactions in Philips shares under these share repurchase programs have been and will be reported on the Company's website. Capital reduction In 2006, the Company's issued...

  • Page 52
    ...financial year 2006 has been retained by way of reserve. The balance sheet presented in this report, as part of the consolidated financial statements for the period ended December 31, 2006, is before dividend, which is subject to shareholder approval after year-end. 52 Philips Annual Report 2006

  • Page 53
    ...Risk management 100 Report of the Supervisory Board 110 Financial Statements Outlook A strong performance in the last quarter of 2006 enabled us to meet our objectives for both profitability and sales growth, reinforcing our confidence that we will realize our targets - annual average top-line...

  • Page 54
    6 Financial highlights 8 Message from the President 14 Our leadership 20 The Philips Group Medical Systems In 2006, Philips unveiled the GEMINI PET/CT scanner with Truï¬,ight technology, which provides 20% better spatial and contrast resolution, resulting in faster and more sensitive scanning ...

  • Page 55
    ...management 100 Report of the Supervisory Board 110 Financial Statements Philips Medical Systems is a global provider of innovative healthcare solutions designed to address the needs of patients as well as healthcare professionals. It aims to improve access to healthcare with products and services...

  • Page 56
    ... President 14 Our leadership 20 The Philips Group Acute care Medical Systems continued to lead the market in state-of-the-art monitoring for acute care units with its IntelliVue portfolio, introducing highly advanced clinical decision-support applications. New functionality was also added to the...

  • Page 57
    54 The Philips sectors Medical Systems 86 Risk management 100 Report of the Supervisory Board 110 Financial Statements Medical Systems will maintain its high level of product innovation and strengthen its sales and distribution channels, with particular emphasis on North America, China, Japan ...

  • Page 58
    ...-cost countries, with bill of materials spending in these countries increasing by 7% in 2006. In support of Philips' strong position in sustainability, Medical Systems actively monitors existing and potential new suppliers in identified high-risk countries. Key data in millions of euros 2004 Sales...

  • Page 59
    ... portfolio through targeted allocation of resources toward products, applications and markets with highest value-creation potential • expanding selectively into care cycles today and in the future, aiming for sustainable differentiation from the competition. Sales and net operating capital...

  • Page 60
    ... The Philips Group Domestic Appliances and Personal Care Having revolutionized the way Europeans, Americans and Australians make and drink coffee at home, it's now Chinese consumers' turn. In July 2006, Philips and Sara Lee launched their Senseo coffee pad system in Shanghai - its first market in...

  • Page 61
    ... 100 Report of the Supervisory Board 110 Financial Statements Philips Domestic Appliances and Personal Care (DAP) offers consumers exciting experiences to help them look, feel and live better. It brings to market technologically advanced products that are designed around the consumer and easy to...

  • Page 62
    ... 2006, Philips completed the acquisition of Avent, a leading provider of baby and infant feeding products with sales in more than 60 countries. Avent is now the cornerstone of the Mother & Child Care product line within the Health & Wellness business. In Oral Healthcare, DAP holds a leading position...

  • Page 63
    ... The Philips sectors Domestic Appliances and Personal Care 86 Risk management 100 Report of the Supervisory Board 110 Financial Statements In the second quarter of 2006 the Consumer Healthcare Solutions (CHS) business was set up to deliver monitoring, treatment and care services for seniors and...

  • Page 64
    ... suppliers located in low-cost countries, dual sourcing to avoid supply risk and ensure price competition, a Supplier Relationship program, and early supplier involvement in the product creation process. Commodity products are leveraged through divisional or Philips Group-level commodity purchasing...

  • Page 65
    ...Domestic Appliances and Personal Care 86 Risk management 100 Report of the Supervisory Board 110 Financial Statements Materials and services that are not used in products or production are purchased through Philips General Purchasing, leveraging the significant buying power of the Philips Group...

  • Page 66
    ...President 14 Our leadership 20 The Philips Group Consumer Electronics The Cineos FlatTV adds a new dimension to the viewing experience with an improvement in perceived picture quality in terms of contrast, colors and detail. Having greatly enhanced television viewing with the original Pixel Plus...

  • Page 67
    ...consumer electronics services in the living room. Responding to these changes, CE has for a number of years been focusing on an asset-light strategy and on reducing its operating capital and organizational costs in order to drive sustainable performance and value creation. Philips Annual Report 2006...

  • Page 68
    ... up a growing portfolio of products that provide consumers with access to entertainment and information both at home and on the move. Philips has established itself as a leader in the emerging wireless home audio market, with consumers clearly recognizing the high value of this proposition. "We...

  • Page 69
    ... realized an annual EBIT margin of 3.9% of sales, just slightly below the 4% target set for the division. The EBIT margin in 2005, excluding the EUR 136 million gain on the sale of the monitor and low-end ï¬,at TV manufacturing business to TPV, was 3.6%. In value, the Philips Annual Report 2006 69

  • Page 70
    ..., EMS (Electronic Manufacturing Services), etc. Materials and services not used in products or production are sourced by Philips General Purchasing to ensure maximum leverage from the Philips Group's purchasing power. Distribution channels Leading industry awards In 2006, CE products won several...

  • Page 71
    ... significantly to Philips' brand value through products, services and the way CE interacts and communicates with its consumer and customer base. Strategy and 2007 objectives CE is committed to value creation. Creating value depends not only on leveraging the strength of CE's asset-light and agile...

  • Page 72
    ... bridge in Bangkok, which was inaugurated by the Royal Princess of Thailand to celebrate the 60th anniversary of her father's accession to the throne. The light-emitting diodes (LEDs) change color according to the time of day. 72 Philips Annual Report 2006

  • Page 73
    54 The Philips sectors Lighting 86 Risk management 100 Report of the Supervisory Board 110 Financial Statements Philips Lighting is the global market leader, with recognized expertise in the development, manufacturing and application of innovative lighting solutions. The sector pioneered many of...

  • Page 74
    ... resources to create products for both the Chinese market and other regions. Growth with leading key accounts In 2006, Lighting strengthened its relationship with global accounts in its OEM, wholesale and retail business. For its UHP (Ultra-High Power) lamp for digital projection, Lighting developed...

  • Page 75
    ...for mobile phones and car headlighting. The acquisition of Partners in Lighting International will further expand the home lighting portfolio to include solutions based on solid-state lighting. Lighting plans to further strengthen its position in the solid-state lighting market across the full value...

  • Page 76
    ...of critical lamp components. Commodity products, on the other hand, are sourced through divisional or Philips Group-wide commodity teams to maximize leverage. For non-product-related expenditures, Lighting again takes advantage of Group-wide general purchasing contracts. As well as price and quality...

  • Page 77
    54 The Philips sectors Lighting 86 Risk management 100 Report of the Supervisory Board 110 Financial Statements Distribution channels Lighting's customers are mainly in the professional market. The Lamps business operates its sales and marketing activities through the professional, OEM and ...

  • Page 78
    ...the market, Philips has in recent years adopted a more end-user-oriented approach to R&D, with expenditures directed at projects with more apparent short-term commercial prospects. Philips' R&D activities are spread over Corporate Technologies and the operating divisions. Philips CTO Office manages...

  • Page 79
    ... Activities 86 Risk management 100 Report of the Supervisory Board 110 Financial Statements Innovations are increasingly developed in close interaction with users and partners, in order to ensure that as well as being advanced, they are designed around users' needs and are easy to experience...

  • Page 80
    ... Scientific Program Director, Philips Research Simplicity is the key to translating advanced technology into human benefits. Some five years ago, Philips Research opened HomeLab, an experience and application research center supporting multidisciplinary teams of researchers and designers studying...

  • Page 81
    54 The Philips sectors Other Activities 86 Risk management 100 Report of the Supervisory Board 110 Financial Statements Stimulating end-user focus Philips has introduced the value proposition house to capture end-user insights and create meaningful innovations. Marketing, supply management and ...

  • Page 82
    ... The global support functions comprise Finance, Human Resources, Information Technology, non-product-related Supply Management, Real Estate and Facilities Management. By realizing the concept of company-wide standard services, Philips has become leaner and more focused on its business objectives and...

  • Page 83
    ... the business creation process, design services range from strategy, design direction and innovation, to identity, communication and marketing support. Philips Design has been widely recognized for its visionary explorations and its ability to humanize technology. Each year, Philips Design receives...

  • Page 84
    ... past years to over EUR 6 billion in 2006. To ensure the development of more strategic relationships, the number of preferred EMS (Electronic Manufacturing Services) suppliers has been reduced from 61 in 2004 to 8 in 2006. • Product creation process (PCP): more than 50% of total product costs are...

  • Page 85
    ...100 Report of the Supervisory Board 110 Financial Statements Unallocated Introduction The sector Unallocated comprises the activities of the corporate center including Philips' global brand management and sustainability programs, as well as country and regional overhead costs and costs of pension...

  • Page 86
    ... the areas of corporate governance, Philips General Business Principles and Philips Business Control Framework and in the actual periodic business planning and review cycles. Corporate governance Corporate governance is the system by which a company is directed and controlled. Philips believes that...

  • Page 87
    ...and financial reporting risks Corporate Governance Philips Business Control Framework Philips General Business Principles internal control standard which is based on the generally accepted standards control objectives for information and related technology (COBIT) and COSO. Furthermore, as part of...

  • Page 88
    ..., including a Supply Management Code of Ethics and a Financial Code of Ethics (www.philips.com/about/investor). The GBP Directives were updated in 2006, reï¬,ecting ongoing developments in codes of conduct and business integrity legislation. The main updates related to Philips' endorsement of the...

  • Page 89
    ... production, sourcing and design center for Philips. Philips faces strong competition to attract the best talent in tight labor markets and intense competition from local Asian companies as well as other global players for market share in Asia. Philips needs to be part of the growth of emerging...

  • Page 90
    ...and/or increased speed in innovationto-market may hamper Philips' profitable growth ambitions. Further improvements in Philips' product creation process, ensuring timely delivery of new products at lower cost and upgrading of customer service levels to create sustainable competitive advantages, are...

  • Page 91
    ...risks presented on the pages hereafter. Philips has defined-benefit pension plans in a number of countries. The funded status and the cost of maintaining these plans is inï¬,uenced by financial market and demographic developments, creating volatility in Philips' results. The majority of employees...

  • Page 92
    ... Our leadership 20 The Philips Group of Philips' businesses. Imperfections in the disclosures could create uncertainty regarding the reliability of the data presented. Compliance procedures are adopted by management to ensure that the resource use is consistent with laws, regulations and policies...

  • Page 93
    ...Report of the Supervisory Board 110 Financial Statements Strategic business risks Market/Business environment risks Operational risks Financial risks - Treasury - Pensions - Fiscal Compliance and financial reporting risks Corporate Governance Philips Business Control Framework Philips General...

  • Page 94
    ... 69% one year earlier. At year-end, the Company held EUR 6,023 million in cash and short-term deposits and total debt of EUR 3,869 million. The Company partially hedges the interest-rate risk inherent in the external debt. As of year-end 2006, the company had six USD 94 Philips Annual Report 2006

  • Page 95
    ... short-term financing requirements that would normally be satisfied through the Commercial Paper Program and EUR 9,524 million of investments in its main available-for-sale securities, trading securities and listed equity-accounted investees at market value per December 31, 2006. The Company has...

  • Page 96
    ... per year. For general and product liability claims the captive will retain EUR 1.5 million per claim and EUR 5 million in the aggregate. New contracts were signed on December 31, 2006 for the coming year whereby the re-insurance captive will retain EUR 2.5 million per 96 Philips Annual Report 2006...

  • Page 97
    ... of its assets is still largely invested in equities and (direct) real estate. This, combined with the size of the fund, explains the major part of its contribution to total risk. Funding and de-risking the UK pension fund have significantly lowered the contribution of the fund to total risk. The...

  • Page 98
    ... of the transfer pricing directives. Tax uncertainties on general service agreements Due to the centralization of certain activities in a limited number of countries (such as research and development costs, centralized costs for IT, and costs for corporate functions and head office) costs are also...

  • Page 99
    54 The Philips sectors 86 Risk management 100 Report of the Supervisory Board 110 Financial Statements Tax uncertainties due to disentanglements and acquisitions When a subsidiary of Philips is disentangled, or a new company is acquired, related tax uncertainties arise. Philips creates merger ...

  • Page 100
    ...and monitoring of internal controls over financial reporting. As in 2005, Philips addresses its overall corporate governance structure in the chapter Corporate governance of this Annual Report. Meetings and activities of the Supervisory Board The Supervisory Board met 10 times in the course of 2006...

  • Page 101
    ... of knowledge and experience among its members in relation to the global and multi-product character of the Company's businesses. Consequently the Supervisory Board aims for an appropriate level of experience in marketing, technological, manufacturing, financial, economic, social and legal aspects...

  • Page 102
    ... as global head of Human Resources Management and was appointed as member of the Group Management Committee on the same date. Report of the Remuneration Committee The Remuneration Committee, currently consisting of four members, who are listed in the chapter Our leadership of this Annual Report, is...

  • Page 103
    ...the team targets pursue value creation as the main business objective and are set aiming for a year-over-year improvement, taking into account general trends in the relevant markets. The related targets for the individual members of the Board of Management are determined annually at the beginning of...

  • Page 104
    ...longer term as shareholders of the Company. The actual number of long-term incentives that will be granted to members of the Board of Management, the other members of the Group Management Committee, executives and other key employees depends on the team and/or individual performance and on the share...

  • Page 105
    ... of the Long-Term Incentive Plan, see note 33 of this Annual Report. 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...

  • Page 106
    ... is presented in the next table. Total cash pay-out in euros 1) Pensions As of January 1, 2006, a new pension plan is in force for all Philips executives in the Dutch pension fund born after January 1, 1950. This includes members of the Board of Management and other members of the Group Management...

  • Page 107
    ...the Board of Management and the other members of the Group Management Committee, the term of the contract is set at four years. In case the Company terminates the contract of employment, the maximum severance payment is in principle limited to one year of base salary in line with the Dutch Corporate...

  • Page 108
    ..., review and monitoring of internal controls that are effective as of the financial year 2006. It also discussed tax issues, IT, litigation (including asbestos) and related provisions, environmental exposures and financial exposures in the area of treasury, real estate policy and pensions...

  • Page 109
    54 The Philips sectors 86 Risk management 100 Report of the Supervisory Board 110 Financial Statements Philips Annual Report 2006 109

  • Page 110
    ... of income Statement of equity Accounting policies Notes to the company financial statements Auditors' report 224 Reconciliation of non-US GAAP information 226 Corporate governance 234 The Philips Group in the last ten years 236 Investor information 110 Philips Annual Report 2006

  • Page 111
    ... assets Investments in affiliated companies Other non-current financial assets Property, plant and equipment Other current liabilities Short-term debt Provisions Long-term debt Stockholders' equity Net income Employees Obligations not appearing in the balance sheet Philips Annual Report 2006...

  • Page 112
    ... The Board of Management of Koninklijke Philips Electronics N.V. (the 'Company') is responsible for establishing and maintaining an adequate system of internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the US Securities Exchange Act). Internal control over...

  • Page 113
    ... with the policies or procedures may deteriorate. Koninklijke Philips Electronics N.V. and subsidiaries acquired Lifeline Systems, Witt Biomedical Corporation, Intermagnetics General Corporation, Avent, Bodine and PowerSentry (together "the Acquired Companies") during 2006, and management excluded...

  • Page 114
    ... statements Consolidated statements of income 172 IFRS information 218 Company financial statements Consolidated statements of income of the Philips Group for the years ended December 31 in millions of euros unless otherwise stated 2004 2005 2006 Sales Cost of sales 24,855 (16,925) 25,775...

  • Page 115
    ... of non-US GAAP information 226 Corporate governance 234 The Philips Group in the last ten years 236 Investor information Earnings per share 2004 2005 2006 Weighted average number of common shares outstanding (after deduction of treasury stock) during the year (in thousands) Adjusted weighted...

  • Page 116
    ... 17 Goodwill 2,535 3,820 Total non-current assets 18,821 23,535 33,905 The year 2005 is restated to present the Semiconductors division as discontinued operation. The accompanying notes are an integral part of these consolidated financial statements. 38,497 116 Philips Annual Report 2006

  • Page 117
    ... of non-US GAAP information 226 Corporate governance 234 The Philips Group in the last ten years 236 Investor information Liabilities and stockholders' equity 2005 2006 Current liabilities 32 Accounts and notes payable: - Trade creditors - Accounts payable to related parties 3,159 298 3,457...

  • Page 118
    ... assets Purchase of businesses, net of cash acquired Proceeds from sale of interests in businesses Net cash provided by (used for) investing activities Cash ï¬,ows from financing activities (Decrease) increase in short-term debt Principal payments on long-term debt Proceeds from issuance of long...

  • Page 119
    ... Group in the last ten years 236 Investor information Supplemental disclosures to the consolidated statements of cash ï¬,ows 2004 2005 2006 Net cash paid during the year for Interest Income taxes 281 323 178 302 211 632 Net gain on sale of assets Cash proceeds from the sale of assets Book value...

  • Page 120
    ...-sale securities common stock capital in excess of par value retained earnings currency translation differences additional minimum pension liability change in pensions fair value of (SFAS cash ï¬,ow hedges No. 158) total treasury shares at cost total stockholders' equity Balance...

  • Page 121
    ... Informatics and Customer Services. DAP: Markets a wide range of products in the areas of Shaving & Beauty, Domestic Appliances, Health & Wellness and Oral Healthcare. CE: Provider of Connected Displays, Entertainment Solutions, Peripherals & Accessories, Home Networks, Mobile Phones and Optical...

  • Page 122
    ... and main countries 172 IFRS information 218 Company financial statements Sectors net operating capital total liabilities excl. debt capital expenditures depreciation of property, plant and equipment total assets long-lived assets 2006 Medical Systems DAP Consumer Electronics Lighting Other...

  • Page 123
    ...of non-US GAAP information 226 Corporate governance 234 The Philips Group in the last ten years 236 Investor information Main countries net operating capital capital expenditures depreciation of property, plant and equipment sales total assets long-lived assets 2006 Netherlands United States...

  • Page 124
    ..., the sales price is fixed or determinable, and collectibility is reasonably assured. For consumer-type products in the segments Lighting, DAP and CE these criteria are generally met at the time the product is shipped and delivered to the customer and, depending on 124 Philips Annual Report 2006

  • Page 125
    ... 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. Actuarial gains and losses arise mainly from changes in...

  • Page 126
    ... 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 unconsolidated companies. Changes in tax rates are reï¬,ected in the period in which such change is enacted. 126 Philips Annual Report 2006

  • Page 127
    ... of non-US GAAP information 226 Corporate governance 234 The Philips Group in the last ten years 236 Investor information retaining control or substantially all risks and rewards of the asset. Purchases and sales of financial instruments are accounted for at trade date, i.e., the date that the...

  • Page 128
    ... the asset. Plant and equipment under capital leases are initially recorded at the present value of future minimum lease payments. These assets and leasehold improvements are amortized using the straight-line method over the shorter of the lease term or the estimated useful life of the asset. Under...

  • Page 129
    ... between plan assets at fair value and the defined-benefit pension obligation - in its balance sheet. The offset of recognizing the funded status is recorded in accumulated other comprehensive income (within stockholders' equity). Actuarial gains or losses and prior-service costs or credits that...

  • Page 130
    ... investment is accounted for as a cost-method investment. Philips and NXP will have continuing relationships through shared research and development activities and through license agreements. The existing global service agreements for - amongst others - payroll, network and purchase facilities cover...

  • Page 131
    ... Solutions, part of the Domestic Appliances and Personal Care sector. April 26, 2006 Total purchase price (net of cash) 110 Allocated to: Property, plant and equipment Working capital Deferred tax Provisions Intangible assets In-process R&D Goodwill 1 10 4 (24) 25 4 90 110 Philips Annual Report...

  • Page 132
    ... date of acquisition Avent has been consolidated within the Domestic Appliances and Personal Care sector. The following table summarizes the initial fair value of the assets acquired and liabilities assumed with respect to the acquisition of the Avent shares on August 31, 2006: Total purchase price...

  • Page 133
    ... net assets divested1) recognized gain Sales Income from operations Net income Basic earnings per share - in euros 1) 25,775 1,472 2,868 2.29 415 (22) (10) 26,190 1,450 2,858 2.29 Connected Displays (Monitors) Philips Pension Competence Center LG.Philips LCD TSMC NAVTEQ Atos Origin Great Nordic...

  • Page 134
    ...-December 2005 November 28, 2005 Total purchase price (net of cash) 788 Philips Group pro forma adjustments1) pro forma Philips Group Allocated to: Property, plant and equipment Goodwill Working capital Deferred tax assets Other intangible assets In-process R&D Long-term debt 62 554 (78) 17...

  • Page 135
    224 Reconciliation of non-US GAAP information 226 Corporate governance 234 The Philips Group in the last ten years 236 Investor information a gain on the sales of shares of EUR 332 million, which has been reported as Results relating to equity-accounted investees. As a result of these ...

  • Page 136
    ..., 6.5% of Group sales). For information related to research and development expenses on a segmental basis, see the section Information by sectors and main countries of the chapter Group financial statements of this Annual Report. Salaries and wages Pension costs Other social security and similar...

  • Page 137
    ... and some releases of provisions. The result on disposal of businesses in 2005 related mainly to the sale of certain activities within the Company's monitors and ï¬,at TV business to TPV at a gain of EUR 136 million, and the sale of asset management and pension administration activities to Merrill...

  • Page 138
    ... 31, 2006. Additions in 2005 of EUR 155 million are presented by sector as follows: personnel costs writedown of assets other costs total Medical Systems DAP CE Lighting Other Activities 1 3 54 32 16 106 âˆ' âˆ' âˆ' 6 25 31 1 1 13 3 âˆ' 18 2 4 67 41 41 155 138 Philips Annual Report 2006

  • Page 139
    ... 32.0 11.3 The weighted average statutory tax rate declined due to changes in tax rates in certain countries, primarily due to a decrease in the tax rate in the Netherlands reï¬,ected in Tax incentives and other. Non-taxable income mainly relates to TSMC dividend. Philips Annual Report 2006 139

  • Page 140
    ...differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. In order to fully realize the deferred tax assets arising from net operating losses, the Company will need to...

  • Page 141
    ... to employees, in 2004 by 0.2%. Also in 2004, the TSMC Board of Management decided to withdraw some share capital, increasing Philips' shareholding by 0.1%. FEI Company NAVTEQ TSMC LG.Philips LCD Atos Origin Others 151 34 185 âˆ' 753 460 332 âˆ' âˆ' 1,545 76 3 79 Philips Annual Report 2006...

  • Page 142
    ... fair value of Philips' shareholdings in the publicly listed company LG.Philips LCD, based on quoted market prices at December 31, 2006 was EUR 2,673 million. The investments in equity-accounted investees are mainly included in the sector Other Activities. Summarized information of equity-accounted...

  • Page 143
    224 Reconciliation of non-US GAAP information 226 Corporate governance 234 The Philips Group in the last ten years 236 Investor information 8 Earnings per share The earnings per share (EPS) data have been calculated in accordance with SFAS No. 128, 'Earnings per Share', as per the following ...

  • Page 144
    ...and positive analyst reports and expectations, the Company does not consider this investment to be other-than-temporarily impaired as of December 31, 2006. Included in other non-current financial assets is a convertible bond issued to the Company by TPV Technology Limited with a total fair value of...

  • Page 145
    ...years 236 Investor information 15 Property, plant and equipment prepayments and construction in progress land and buildings machinery and installations lease assets other equipment no longer productively employed total Balance as of January 1, 2006: Cost Accumulated depreciation Book value...

  • Page 146
    ... other intangible assets intangible pension assets 2008 2009 total 2010 2011 Balance as of January 1, 2006 Cost Accumulated amortization Book value 516 (378) 138 1,569 (553) 1,016 86 âˆ' 86 2,171 (931) 1,240 The expected weighted average remaining life of other intangibles is 7 years as of...

  • Page 147
    ... 226 Corporate governance 234 The Philips Group in the last ten years 236 Investor information 18 Accrued liabilities Accrued liabilities are summarized as follows: Product warranty The provision for product warranty reï¬,ects the estimated costs of replacement and free-of-charge services that...

  • Page 148
    ... and the local situation in the countries involved. The majority of employees in Europe and North America are covered by defined-benefit pension plans. The benefits provided by these plans are based on employees' years of service and compensation levels. The measurement date for all defined-bene...

  • Page 149
    ...-US GAAP information 226 Corporate governance 234 The Philips Group in the last ten years 236 Investor information The table below provides a summary of the changes in the pension benefit obligations and defined pension plan assets for 2006 and 2005 and a reconciliation of the funded status of...

  • Page 150
    ... Notes to the group financial statements 172 IFRS information 218 Company financial statements 2005 Netherlands other total Netherlands other 2006 total Amounts recognized in the consolidated balance sheet Prepaid pension costs under other non-current assets Accrued pension costs under other...

  • Page 151
    ... The Philips Group in the last ten years 236 Investor information The weighted-average assumptions used to calculate the net periodic pension cost for the years ended December 31 were as follows: 2005 Netherlands other Netherlands 2006 other Discount rate Expected returns on plans assets Rate of...

  • Page 152
    .... The long-term rate of return on total plan assets is expected to be 5.7% per annum, based on expected long-term returns on equity securities, debt securities, real estate and other investments of 8.0%, 4.2%, 7% and 5%, respectively. Plan assets in other countries The Company's pension plan asset...

  • Page 153
    ... no plan asset disclosures are presented. Netherlands other total 2006 Accumulated postretirement benefit obligation Projected benefit obligation at beginning of year Service cost Interest cost Actuarial gains Curtailments Benefits paid Translation differences Miscellaneous Projected bene...

  • Page 154
    ... 5.6% âˆ' âˆ' 7.2% 5.6% The weighted average assumptions used to calculate the net cost for years ended December 31: 2005 Netherlands other Netherlands 2006 other Discount rate Compensation increase (where applicable) 4.5% âˆ' 6.6% 5.3% âˆ' âˆ' 6.9% 5.6% 154 Philips Annual Report 2006

  • Page 155
    ... also be used for general corporate purposes. Philips did not use the commercial paper program or the revolving credit facility during 2006. Advances received from customers on orders not covered by work in process Other taxes including social security premiums Other short-term liabilities 141 401...

  • Page 156
    ...to put Due 5/15/25, put date 5/15/07; 7 1/8 % Due 6/01/26, put date 6/1/06; 7 1/5 % Adjustments 1) 7.361% 7.426% 87 140 (3) 224 1) 78 âˆ' (1) 77 Adjustments relate to issued bond discounts, transaction costs and fair value adjustments for interest rate derivatives. 156 Philips Annual Report 2006

  • Page 157
    .... Long-term operating lease commitments totaled EUR 803 million at December 31, 2006 (2005: EUR 861 million). These leases expire at various dates during the next 20 years. The long-term operating leases are mainly related to the rental of buildings. A number of these leases originate from sale-and...

  • Page 158
    ... 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...

  • Page 159
    ...as an offset against the future purchase of goods and services from MedQuist. MedQuist's board authorized the company to make accommodation credit offers up to an additional USD 8.7 million beyond the original cash payment program of USD 65 million. As of December 31, 2006, MedQuist has entered into...

  • Page 160
    ... share programs and employee share purchase programs and (ii) capital reduction purposes, are accounted for as a reduction of stockholders' equity. Treasury shares are recorded at cost, representing the market price on the acquisition date. When issued, shares are removed from treasury stock...

  • Page 161
    ... 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...

  • Page 162
    ... tables summarize information about Philips stock options as of December 31, 2006 and changes during the year: Fixed option plans EUR-denominated weighted average exercise price weighted average remaining contractual term (in years) aggregate intrinsic value (in millions) shares Outstanding at...

  • Page 163
    ...US GAAP information 226 Corporate governance 234 The Philips Group in the last ten years 236 Investor information Fixed option plans USD-denominated weighted average exercise price weighted average remaining contractual term (in years) aggregate intrinsic value (in millions) shares Outstanding...

  • Page 164
    ... information 218 Company financial statements The aggregate intrinsic value in the tables above represents the total pretax intrinsic value (the difference between the Company's closing stock price on the last trading day of 2006 and the exercise price, multiplied by the number of in-the-money...

  • Page 165
    ..., will be paid between 2008 and 2011. The following table summarizes information about the Lumileds stock options during 2006. shares weighted average exercise (price in USD) weighted average remaining contractual term (in years) aggregate intrinsic value (in millions of USD) Outstanding at...

  • Page 166
    ...,765 stock options (year-end 2005: 923,551; 2004: 1,099,539) at a weighted average exercise price of EUR 27.70 (year-end 2005: EUR 28.33; 2004: EUR 30.44). Remuneration individual members Board of Management in euros salary annual incentive1) special payment2) total cash other compensation3) 2006...

  • Page 167
    ... 2003 Awarded before date of appointment as a member of the Board of Management The tables below give an overview of the interests of the members of the Board of Management under the restricted share plans and the stock option plans of Royal Philips Electronics: 34 Philips Annual Report 2006 167

  • Page 168
    ...sign-on bonus 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 July 31, 2000 by EUR 0.21 per common share in connection with the 3% share reduction program...

  • Page 169
    ... information 226 Corporate governance 234 The Philips Group in the last ten years 236 Investor information See note 33 to the financial statements for further information on stock options and restricted share rights. The total pension charges of the members of the Board of Management in 2006...

  • Page 170
    ... Main listed investments in equity-accounted investees Derivative instruments assets Trading securities 5,293 4,638 5,293 4,638 6,023 4,773 6,023 4,773 • transaction exposures, such as forecasted sales and purchases, and receivables or payables resulting from such transactions; • translation...

  • Page 171
    ... assets comprise: amount amortization period in years Customer relationships Trademarks and trade names 153 61 214 20 20 Share repurchase On January 22, 2007, Philips initiated a EUR 1,633 million share repurchase program for capital reduction purposes to complete the planned return of a total...

  • Page 172
    ... 10,576 5,466 1,547 26,976 Income from operations in millions of euros 2004 2005 2006 Medical Systems DAP Consumer Electronics Lighting Other Activities Unallocated 51 342 359 588 391 (626) 1,105 690 374 527 556 (206) (522) 1,419 842 387 402 574 (475) (791) 939 172 Philips Annual Report 2006

  • Page 173
    ... Reconciliation of non-US GAAP information 226 Corporate governance 234 The Philips Group in the last ten years 236 Investor information Net operating capital in millions of euros 2004 2005 2006 Medical Systems DAP Consumer Electronics Lighting Other Activities Unallocated 2,761 474 (71) 1,549...

  • Page 174
    ...nancial statements 172 IFRS information Consolidated statements of income 218 Company financial statements IFRS Consolidated statements of income of the Philips Group for the years ended December 31 in millions of euros unless otherwise stated 2004 2005 2006 Sales Cost of sales 24,855 (16...

  • Page 175
    ... of non-US GAAP information 226 Corporate governance 234 The Philips Group in the last ten years 236 Investor information Earnings per share 2004 2005 2006 Weighted average number of common shares outstanding (after deduction of treasury stock) during the year (in thousands) 1,280,251...

  • Page 176
    ...500 49 Goodwill 2,174 Total non-current assets 19,044 22,277 33,646 The year 2005 is restated to present the Semiconductors divisions as a discontinued operation. The accompanying notes are an integral part of these consolidated financial statements. 36,730 176 Philips Annual Report 2006

  • Page 177
    ... of non-US GAAP information 226 Corporate governance 234 The Philips Group in the last ten years 236 Investor information Liabilities and stockholders' equity 2005 2006 Current liabilities 32 Accounts and notes payable: - Trade creditors - Accounts payable to related parties 3,159 298 3,457...

  • Page 178
    ... other non-current assets Purchase of businesses, net of cash acquired Proceeds from sale of interests in businesses Net cash provided by (used for) investing activities Cash ï¬,ows from financing activities Increase (decrease) in short-term debt Principal payments on long-term debt Proceeds from...

  • Page 179
    ... Group in the last ten years 236 Investor information Supplemental disclosures to the consolidated statements of cash ï¬,ows 2004 2005 2006 Net cash paid during the year for Interest Income taxes 281 323 178 302 211 612 Net gain on sale of assets Cash proceeds from the sale of assets Book value...

  • Page 180
    ... equity of the Philips Group in millions of euros unless otherwise stated outstanding number of shares in thousands common stock capital in excess of par value retained earnings revaluation reserve other reserves treasury shares at cost total stockholders' equity minority interests1) total...

  • Page 181
    ... GAAP information 226 Corporate governance 234 The Philips Group in the last ten years 236 Investor information Changes in other reserves in millions of euros currency translation differences unrealized gain (loss) on available for-sale securities change in fair value of cash ï¬,ow hedges total...

  • Page 182
    ... Informatics and Customer Services. DAP: Markets a wide range of products in the areas of Shaving & Beauty, Domestic Appliances, Health & Wellness and Oral Healthcare. CE: Provider of Connected Displays, Entertainment Solutions, Peripherals & Accessories, Home Networks, Mobile Phones and Optical...

  • Page 183
    ... The Philips Group in the last ten years 236 Investor information Sectors net operating capital total liabilities excl. debt capital expenditures depreciation of property, plant and equipment total assets long-lived assets 2006 Medical Systems DAP Consumer Electronics Lighting Other Activities...

  • Page 184
    112 Group financial statements 172 IFRS information IFRS accounting policies 218 Company financial statements Main countries net operating capital capital expenditures depreciation of property, plant and equipment sales total assets long-lived assets 2006 Netherlands United States Germany ...

  • Page 185
    ... in the Medical Systems segment for arrangements that require subsequent installation and training activities in order to become operable for the customer. However, since payment for the equipment is typically contingent upon the completion of the installation process, Philips Annual Report 2006 185

  • Page 186
    ... required by IAS 39 'Financial Instruments: Recognition and Measurement'. Also, the Company measures all derivative financial 1) 2) 10% of the present value of the defined-benefit obligation at that date; or, 10% of the fair value of any plan asset at that date. 186 Philips Annual Report 2006

  • Page 187
    ...-sale. Available-for-sale securities are recorded at fair value. Unrealized holding gains and losses, net of the related tax effect, on available-for-sale securities are excluded from the income statement and are reported as a separate component of equity until realized. Philips Annual Report 2006...

  • Page 188
    ... are initially recorded at the lower of their fair value or 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 the estimated useful life of the asset. The gain realized on sale and...

  • Page 189
    ...of non-US GAAP information 226 Corporate governance 234 The Philips Group in the last ten years 236 Investor information this level are substantially independent from other cash ï¬,ows and this is the lowest level at which goodwill is monitored by the Board of Management. In accordance with IFRS...

  • Page 190
    ...of capitalized product development cost - Reversal of pensions and other postretirement benefits - Goodwill amortization (until January 1, 2004) - Goodwill capitalization (acquisition-related) - Acquisition-related intangibles - Equity-accounted investees - Reversal of result on recognition of sale...

  • Page 191
    ... investment is accounted for as a cost-method investment. Philips and NXP will have continuing relationships through shared research and development activities and through license agreements. The existing global service agreements for -amongst others- payroll, network and purchase facilities cover...

  • Page 192
    ... of Lifeline, a leader in personal emergency response services. Philips acquired a 100% interest in Lifeline by offering USD 47.75 per share in cash. The business is included in Consumer Healthcare Solutions, part of the Domestic Appliances and Personal Care sector. The condensed balance sheet...

  • Page 193
    ... of the purchase price to the net assets acquired had not yet been finalized as of December 31, 2006, as further information related to intangible asset valuations remained outstanding. Other intangible assets comprise: In-process research and development Developed and core technology Customer...

  • Page 194
    ...) Philips Group The allocation of the purchase price to the net assets acquired had not yet been finalized as of December 31, 2006, as further information related to intangible asset valuations remained outstanding. Other intangible assets comprised of the following: Unaudited Sales Income...

  • Page 195
    ...the Company acquired all shares of Stentor, a USbased company. The related cash outï¬,ow was EUR 194 million. Stentor was founded in 1998 to provide a solution for enterprise-wide medical image and information management. The business is included in the Medical Systems sector. Philips Annual Report...

  • Page 196
    ... relating to equity-accounted investees (EUR 23 million after tax) and remaining adjustments of EUR 6 million after tax. goodwill Connected Displays (Monitors) In September 2005, Philips sold certain activities within its monitors and ï¬,at TV business to TPV Technologies, a Hong Kong listed...

  • Page 197
    ... for further information on pension costs. For remuneration details of the members of the Board of Management and the Supervisory Board see note 34. For information on share-based compensation, see note 33. The Company applies IFRS 2 for recognition and measurement of share-based payments, which are...

  • Page 198
    ...2004 2005 2006 Philips Sound Solutions CryptoTec Connected Displays (Monitors) Philips Pension Competence Center Initial public offering NAVTEQ Other 654 âˆ' 654 âˆ' âˆ' 158 43 âˆ' (3) 198 12 26 23 âˆ' âˆ' 3 64 2006 The result on disposal of businesses in 2006 is related mainly to the sale of...

  • Page 199
    ...EUR 50 million during 2006, mainly as a result of higher interest costs related to hedging of the Group's foreign currency denominated cash balances and inter-company funding positions. In 2006, income from non-current financial assets totaled EUR 334 million and included a cash dividend of EUR 223...

  • Page 200
    ...deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning 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...

  • Page 201
    ... shares issued to employees in 2004 and by 0.2%, the TSMC Board of Management decided to withdraw some share capital, increasing Philips' shareholding by 0.1%. FEI Company NAVTEQ TSMC LG.Philips LCD Atos Origin Others 196 34 230 âˆ' 768 551 435 _ _ 1,754 103 3 106 Philips Annual Report 2006...

  • Page 202
    ...The fair value of Philips' shareholdings in the publicly listed company LG.Philips LCD, based on quoted market prices at December 31, 2006, was EUR 2,673 million respectively. The investments in equity-accounted investees are mainly included in the sector Other Activities. Summarized information of...

  • Page 203
    ... trading securities of EUR 192 million (2005: EUR nil) and prepaid expenses. 46 Other non-current assets Other non-current assets in 2006 are comprised of prepaid pension costs of EUR 343 million (2005: EUR 95 million) and prepaid expenses of EUR 47 million (2005: EUR 32 million). Philips Annual...

  • Page 204
    ... installations Lease assets Other equipment from 14 to 50 years from 4 to 15 years from 3 to 10 years from 3 to 10 years Capital expenditures include capitalized interest related to construction in progress amounting to EUR 9 million in 2006 (2005: EUR 10 million). 204 Philips Annual Report 2006

  • Page 205
    ... 226 Corporate governance 234 The Philips Group in the last ten years 236 Investor information 48 The additions relate to the following categories: Intangible assets excluding goodwill The changes during 2006 were as follows: other intangible product assets development software total other...

  • Page 206
    ... and main countries in the chapter IFRS information of this Annual Report for a specification of goodwill by sector. 50 Product warranty The provision for product warranty reï¬,ects the estimated costs of replacement and free-of-charge services that will be incurred by the Company with respect...

  • Page 207
    ...obligations at end of year Present value of unfunded obligations at end of year 20,075 1,059 19,532 878 - Accrued pension costs related to discontinued operations - Provision for pensions under provisions - Provision for pensions related to discontinued operations Philips Annual Report 2006 207

  • Page 208
    ... occupied by the Philips Group with a fair value of EUR 42 million (2005: EUR 42 million). The Company also sponsors defined-contribution and similar types of plans for a significant number of salaried employees. The total cost of these plans amounted to EUR 91 million in 2006 (2005: EUR 68...

  • Page 209
    ... pension cost for years ended December 31: Benefits paid Exchange rate differences Miscellaneous 2005 Netherlands other Netherlands 2006 other Projected benefit obligation at end of year Present value of funded obligations at end of year Discount rate Expected returns on plan assets Rate...

  • Page 210
    ... for general corporate purposes. Philips did not use the commercial paper program or the revolving credit facility during 2006. âˆ' 5.0% âˆ' 5.0% âˆ' 2013 âˆ' 2014 Sensitivity analysis Assumed healthcare trend rates have a significant effect on the amounts reported for the healthcare plans...

  • Page 211
    224 Reconciliation of non-US GAAP information 226 Corporate governance 234 The Philips Group in the last ten years 236 Investor information 54 Long-term debt average remaining term (in years) amount outstanding 2005 range of interest rates average rate of interest amount outstanding due in ...

  • Page 212
    .... Long-term operating lease commitments totaled EUR 794 million at the end of 2006 (2005: EUR 881 million). These leases expire at various dates during the next 20 years. The long-term operating leases are mainly related to the rental of buildings. A number of these leases originate from sale-and...

  • Page 213
    ... stand by other forms of support. At the end of 2006, the total fair value of guarantees recognized by the Company was EUR 4 million.The following table outlines the total outstanding off-balance sheet credit-related guarantees and business-related guarantees provided by Philips for the benefit of...

  • Page 214
    ... recorded, is payable to the subsidiary over the next two years, provided asbestos legislation in a certain form is not passed by the US Congress by certain dates. The subsidiary has not recorded a receivable from non-settling insurance carriers. 214 Philips Annual Report 2006 The subsidiary plans...

  • Page 215
    ...236 Investor information ("accommodation credits") that can be used as an offset against the future purchase of goods and services from MedQuist. MedQuist's board authorized the company to make accommodation credit offers up to an additional USD 8.7 million beyond the original cash payment program...

  • Page 216
    ...Annual Report 2006 amount amortization period in years Customer relationships Trademarks and trade names 153 61 214 20 20 Share repurchase On January 22, 2007 Philips initiated a EUR 1,633 million share repurchase program for capital reduction purposes to complete the planned return of a total...

  • Page 217
    ...Philips Group in the last ten years 236 Investor information Auditors' report To the Supervisory Board and Shareholders of Koninklijke Philips Electronics N.V.: Report on the consolidated financial statements We have audited the accompanying consolidated financial statements 2006 which are part...

  • Page 218
    ... - Balance sheets - Statements of income - Statement of equity Company financial statements Balance sheets of Koninklijke Philips Electronics N.V. as of December 31 in millions of euros unless otherwise stated 2005 2006 Assets Current assets: Cash and cash equivalents 1,574 13,825 âˆ' 15...

  • Page 219
    ... 3,683 million has been presented under Other income after taxes Statement of changes in equity of Koninklijke Philips Electronics N.V. in millions of euros unless otherwise stated outstanding number of shares in thousands total stockholders' equity common stock capital in excess of revaluation...

  • Page 220
    ... included in receivables is due after one year (2005: EUR 4 million). B Other current assets In July 2006, Philips transferred the TSMC shares related to the received stock dividend in 2006 from available-for-sale to trading securities. These shares are intended to be sold after the expiration...

  • Page 221
    ...Balance as of January 1, 2006: Cost Accumulated depreciation Book value 1 1 Pensions Deferred tax liabilities Other Total provisions Changes in book value: Capital expenditures Retirements and sales Depreciation and write-downs Total changes of which long-term of which short-term 6 274 5 285 229 56...

  • Page 222
    ... market price of EUR 27.38 per share, totaling EUR 2,899 million, and a total of 11,479,410 222 Philips Annual Report 2006 Employees The number of persons employed by the Company at year-end 2006 was 10 (2005: 12) and included the members of the Board of Management and most members of the Group...

  • Page 223
    ... The Philips Group in the last ten years 236 Investor information Auditors' report To the Supervisory Board and Shareholders of Koninklijke Philips Electronics N.V.: Report on the Company financial statements We have audited the accompanying Company financial statements 2006 which are part of...

  • Page 224
    ...%) Group equity divided by net debt and group equity (in %) 2004 159 14,860 15,019 15,183 1 99 2005 159 16,666 16,825 16,019 (5) 105 2006 131 22,997 23,128 20,974 (10) 110 Sales growth composition in % 2006 versus 2005 Medical Systems DAP Consumer Electronics Lighting Other Activities Philips Group...

  • Page 225
    ...information 226 Corporate governance 234 The Philips Group in the last ten years 236 Investor information EBITA to Income from operations or EBIT 2006 EBITA Eliminate amortization of intangibles Income from operations (or EBIT) Philips Group Medical Systems DAP Consumer Electronics Lighting...

  • Page 226
    ...Company's website (www.philips.com/investor). In this report, the Company addresses its overall corporate governance structure and states to what extent it applies the provisions of the Dutch Corporate Governance Code of December 9, 2003 (the 'Dutch Corporate Governance Code'). The Supervisory Board...

  • Page 227
    ... and variables are described in more detail in the Annual Report. Within Philips, 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...

  • Page 228
    ... a Long-Term Incentive Plan ('LTIP' or the 'Plan') consisting of a mix of restricted shares and stock options for members of the Board of Management, the Group Management Committee, Philips executives and other key employees. This Plan was approved by the 2003 General Meeting of Shareholders. Future...

  • Page 229
    ... the Supervisory Board. There is no age limit applicable, and members may be re-elected twice. The date of expiration of the terms of Supervisory Board members is put on the Company's website. Individual data on the members of the Supervisory Board are published in the Annual Report, and updated on...

  • Page 230
    ... and the General Business Principles (GBP). It reviews the Company's annual and interim financial statements, including non-financial information, prior to publication and advises the Supervisory Board on the adequacy and appropriateness of internal control policies and internal audit programs and...

  • Page 231
    ... to shareholders in the annual accounts. The Audit Committee periodically discusses the Company's policy on business controls, the GBP including the deployment thereof, overviews on tax, IT, litigation, environmental exposures, financial exposures in the area of treasury, real estate, pensions, and...

  • Page 232
    ... provisions of company law and securities law applicable to the Company, is placed and updated on the Company's website, or hyperlinks are established. The Board of Management and Supervisory Board shall ensure that the General Meeting of Shareholders is informed by means of a 'shareholders circular...

  • Page 233
    ... the carrying-out of research for analysts' reports or for the production or publication of analysts' reports, with the exception of credit-rating agencies. Major shareholders and other information for shareholders As per December 31, 2006, no person is known to the Company to be the owner of more...

  • Page 234
    ... directly comparable. General data Dutch GAAP 1997 Sales % increase over previous year Income (loss) from continuing operations 2) Discontinued operations 3) 4) 5) Cumulative effect of a change in accounting principle Net income (loss) Turnover rate of net operating capital Total employees at year...

  • Page 235
    ... share Dutch GAAP 1997 Sales per common share Income from continuing operations per share Dividend paid per common share Total shareholder return per common share Stockholders' equity per common share Price/Earnings ratio Share price at year-end Highest share price during the year Lowest share price...

  • Page 236
    ... of the New York Stock Exchange and the stock market of Euronext Amsterdam, the record date will be April 3, 2007. The dividend as proposed to the General Meeting of Shareholders will be payable as of April 10, 2007 to all shareholders.The dividend payment to holders of American shares will be made...

  • Page 237
    ... 226 Corporate governance 234 The Philips Group in the last ten years 236 Investor information Listings Philips' shares are listed on Euronext Amsterdam (PHIA) and the New York Stock Exchange (PHG), the latter in ADR (American Depositary Receipt) form. Euronext Amsterdam Share price development...

  • Page 238
    ... 172 IFRS information 218 Company financial statements Performance in relation to market indices 5-year relative performance: Philips and AEX base 100 = Jan 1, 2002 Philips Amsterdam closing share price 150 AEX 5-year relative performance: Philips and Current TSR peer group index base...

  • Page 239
    ... the Investor Relations website you can find the status of the current and previous share repurchase programs. For more information see the section Other information of the chapter The Philips Group of this Annual Report. Financial calendar Annual General Meeting of Shareholders Record date Annual...

  • Page 240
    ... Report on Form 20-F (which incorporates major parts of the Annual Report) is filed electronically with the US Securities and Exchange Commission. International direct investment program Philips offers a dividend reinvestment and direct stock purchase plan designed for the US market. This program...

  • Page 241
    ...non-US GAAP information 226 Corporate governance 234 The Philips Group in the last ten years 236 Investor information Investor Relations activities Philips is in contact with its shareholders via roadshows, one-on-one meetings, group meetings, broker conferences and analysts days. The purpose of...

  • Page 242

  • Page 243
    ... Customer Services Domestic Appliances and Personal Care Shaving & Beauty Domestic Appliances Health & Wellness Oral Healthcare Consumer Electronics Connected Displays Entertainment Solutions Peripherals & Accessories Home Networks Mobile Phones Optical Licenses Lighting Lamps Luminaires Lighting...

  • Page 244
    © 2007 Koninklijke Philips Electronics N.V. All rights reserved. 9922 130 09137