Philips 2006 Annual Report Download - page 32

Philips Annual Report 200632
Management summary
The year 2006
2006 was a landmark year in the history of Philips,
one that included the sale of a majority stake in the
Semiconductors division, the further disposal of cyclical,
non-core activities and a number of strategically-
aligned
acquisitions, targeted at high-growth, high-profi t areas.
Continuation of the share repurchase program resulted
in total cash returned to shareholders of over EUR 3.3
billion in 2006, including the annual dividend.
Full-year sales in 2006 increased by 5% nominally and
6% comparably to EUR 26,976 million.
EBIT amounted to EUR 1,183 million in 2006, compared
with EUR 1,472 million in 2005, refl ecting – amongst
other things – a EUR 256 million charge for asbestos-
related product liabilities, net of insurance recoveries,
in 2006 as well as a EUR 136 million gain on the TPV
transaction and a EUR 170 million release of a post -
retirement medical benefi ts provision, both in 2005.
Results relating to equity-accounted investees decreased
as the 2005 results included a EUR 1,545 million profi t
from the sale of several investments.
Income from discontinued operations of EUR 4,464
million included both Semiconductors’ operational result
and the EUR 4,283 million gain on the sale of the majority
stake in the division.
Net income amounted to EUR 5,383 million, compared
to EUR 2,868 million in 2005, primarily as a result of the
sale of a majority stake in the Semiconductors division.
Key data
in millions of euros unless otherwise stated
20041) 20051) 2006
Sales 24,855 25,775 26,976
% increase, nominal 3 4 5
% increase, comparable 8 4 6
EBITA 1,864 1,577 1,382
as a % of sales 7.5 6.1 5.1
EBIT 1,156 1,472 1,183
as a % of sales 4.7 5.7 4.4
Net income 2,836 2,868 5,383
Net operating capital (NOC) 4,524 5,679 8,724
Cash fl ows before fi nancing
activities 2,757 2,828 (2,469)
Employees (FTEs) 161,586 159,226 121,732
of which discontinued operations 35,116 37,417 −
1) Restated to present the Semiconductors division as a discontinued operation
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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 (CE) (+5%) and Lighting
(+8%) all posted signifi cant comparable sales growth.
Nominal sales growth of 5% was mainly driven by DAP
(+21%, boosted by the acquisitions of Lifeline and Avent)
and Lighting (+14%, boosted by the acquisition of
Lumileds). The overall sales increase in the main operating
sectors was partly offset by a 24% nominal sales decline
in Other Activities, affected by the divestments of
Optical Storage, Philips Business Communications and
Philips Enabling Technologies Group. On a comparable
basis, sales of Other Activities declined by 7%.
Gross margin of EUR 8,295 million increased by EUR 354
million compared to 2005, driven by the sales growth.
Gross margin as a percentage of sales slightly declined,
from 30.8% in 2005 to 30.7% in 2006. The sales-driven
improvement was partly offset by a EUR 256 million
charge, primarily related to an accrual for unasserted
potential future claims in respect of asbestos-related
product liabilities, net of insurance recoveries.
For further details on asbestos-related product liabilities,
see note 27 to the consolidated fi nancial statements in
this Annual Report.
As a percentage of sales, selling expenses (17.3%) and
research and development (R&D) expenses (6.2%) were
the same as in 2005. General and administrative (G&A)
expenses, however, increased both in nominal terms
(+ EUR 180 million) and as a percentage of sales, to 3.7%.
In 2006, additional implementation costs related to
compliance with section 404 of the US Sarbanes-Oxley
Act were required, while 2005 included a EUR 121 million
release of a postretirement medical benefi ts provision.
EBITA of EUR 1,382 million decreased by EUR 195 million
compared to 2005. Amortization charges of EUR 199 million
increased by EUR 94 million, mainly due to acquisitions
in Medical Systems (Intermagnetics and Witt Biomedical),
DAP (Lifeline and Avent) and Lighting (Lumileds).
EBIT decreased by EUR 289 million, impacted by the
following signifi cant incidental items:
in 2006, a EUR 256 million charge, primarily related
to an additional accrual for asbestos-related product
liabilities, net of insurance recoveries, included in the
EBIT of Other Activities;
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6 Financial highlights 8 Message from the President 14 Our leadership 20 The Philips Group
Management discussion
and analysis